SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19772
HF FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Delaware 46-0418532
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 South Main Avenue, Sioux Falls, SD 57102
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(Address of principal executive office) (ZIP Code)
(605) 333-7556
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months(or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of October 30, 1997 there were outstanding 2,937,715 common shares, net
of 170,315 shares of treasury stock, with $.01 par value, of the registrant.
HF FINANCIAL CORP.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition
As of September 30, 1997 and June 30, 1997 1
Consolidated Statements of Income for the Three
Months Ended September 30, 1997 and 1996 2
Consolidated Statement of Stockholders' Equity
for the Three months ended September 30, 1997 3
Consolidated Statements of Cash Flows for the
Three months ended September 30, 1997 and 1996 4-5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operationns 7-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Default upon Senior Securities 19
Item 4. Submission of Matters to a Vote
of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
(Unaudited)
ASSETS September 30, 1997 June 30, 1997
------------------ ------------------
Cash and cash equivalents $ 20,309 $ 17,957
Securities available for sale 59,627 46,940
Loans receivable, net 433,260 440,019
Loans held for sale 9,677 3,483
Mortgage-backed securities available for sale 29,015 30,340
Accrued interest receivable 4,219 4,136
Foreclosed real estate and other properties 320 593
Office properties and equipment, at cost, net of accumulated
depreciation 14,794 15,070
Prepaid expenses and other assets 1,026 870
Loan servicing rights, net 1,168 1,134
Deferred income taxes 1,471 1,569
Intangible assets, net 3 3
------------------ ------------------
$ 574,889 $ 562,114
------------------ ------------------
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 434,582 $ 418,186
Advances from Federal Home Loan Bank
and other borrowings 67,719 74,743
Advances by borrowers for taxes and insurance 6,775 4,074
Accrued interest payable 6,087 6,560
Other liabilities 5,541 5,577
------------------ ------------------
TOTAL LIABILITIES 520,704 509,140
------------------ ------------------
Stockholders' Equity
Preferred stock, $.01 par value, 500,000 shares authorized,
none outstanding ---- ----
Series A Junior Participating Preferred Stock, $1.00 stated value,
50,000 shares authorized none outstanding ---- ----
Common stock, $.01 par value, 5,000,000 shares authorized,
2,973,715 shares outstanding at September 30, 1997
and 2,986,215 shares outstanding at June 30, 1997 31 31
Additional paid-in capital 14,817 14,695
Retained earnings, substantially restricted 42,706 41,336
Unearned compensation (453) (453)
Net unrealized (loss) on securities available for sale (15) (222)
Less cost of 170,315 and 148,315 shares
of treasury stock at September 30, 1997 and June 30, 1997 (2,901) (2,413)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 54,185 52,974
------------------ ------------------
$ 574,889 $ 562,114
------------------ ------------------
------------------ ------------------
See Notes to Consolidated Financial Statements.
Page 1
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Data)
(Unaudited)
Three months ended
September 30,
-------------------------------------------
1997 1996
------------------ ------------------
Interest and dividend income:
Loans receivable $ 10,475 $ 9,685
Mortgage-backed securities 477 870
Investment securities and other interest bearing deposits 1,052 592
------------------ ------------------
12,004 11,147
------------------ ------------------
Interest expense:
Deposits 5,664 5,036
Advances from FHLB and other borrowed money 996 1,246
------------------ ------------------
6,660 6,282
------------------ ------------------
Net interest income 5,344 4,865
Provision for losses on loans 526 90
------------------ ------------------
Net interest income after provision for losses on loans 4,818 4,775
------------------ ------------------
Noninterest income:
Loan servicing income 266 238
Loan fees and service charges 550 175
Fees on deposits 535 390
Commission and insurance income 208 183
Appraisal and inspection fees 79 166
Gain on sale of securies, net 5 2
Gain on sales of loans 216 131
Credit card fee income 598 --
Other 72 105
------------------ ------------------
2,529 1,390
------------------ ------------------
Noninterest expense:
Compensation and employee benefits 2,481 2,338
Occupancy and equipment 653 724
Federal insurance premiums and assessment 68 2,877
Credit card processing expense 345 --
Other general and administrative expenses 1,081 854
Losses, provision for losses and expenses on foreclosed
real estate and other properties, net 153 35
------------------ ------------------
4,781 6,828
------------------ ------------------
Income (loss) before income taxes 2,566 (663)
Income tax expense (credit) 882 (285)
------------------ ------------------
Net income (loss) $ 1,684 $ (378)
------------------ ------------------
------------------ ------------------
Earnings (loss) per share:
Net income (loss) per share $ 0.55 $ (0.12)
------------------ ------------------
------------------ ------------------
See Notes to Consolidated Financial Statements
Page 2
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended September 30, 1997
(Dollars In Thousands)
(Unaudited)
Additional Unrealized
Common Paid-In Retained Unearned (Loss) Treasury
Stock Capital Earnings Compensation Net of tax Stock
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1997 $ 31 $ 14,695 $ 41,336 $ (453) $ (222) $ (2,413)
Net income ---- ---- 1,684 ---- ---- ----
Exercise of stock options for 9,500 shares ---- 122 ---- ---- ---- ----
Cash dividends ($0.105 per share)
on common stock ---- ---- (314) ---- ---- ----
Adjustment to unrealized gains (losses)
on available for sale securities,
net of tax ---- ---- ---- ---- 207 ----
Purchase of Treasury Stock ---- ---- ---- ---- ---- (488)
Amortization of unearned compensation ---- ---- ---- ---- ---- ----
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 1997 $ 31 $ 14,817 $ 42,706 $ (453) $ (15) $ (2,901)
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
See Notes to Consolidated Financial Statements
Page 3
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three months ended September 30,
-------------------------------------------
1997 1996
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,684 $ (378)
Adjustments to reconcile net income(loss) cash provided
by operating activities:
Provision for losses on loans 526 90
Depreciation 360 336
Amortization of premiums and discounts, net:
Securities (101) 23
Loans, loans held for sale and mortgage-backed securities 12 (42)
Reduction in cost of intangible assets ---- 7
Reduction in loan mortgage servicing rights 51 30
Amortization of unearned compensation ---- 1
(Decrease) in deferred loan fees (323) (498)
Loans originated for resale (24,675) (10,637)
Proceeds from the sale of loans 24,891 10,742
(Gain) on sale of loans (216) (105)
(Gain) loss on sale of securities (5) (2)
Losses and provisions for losses on sales of foreclosed
real estate and other properties, net 116 7
(Increase)decrease in accrued interest receivable (83) 188
(Increase) decrease in prepaid expenses and other assets (156) (383)
(Gain) loss on disposal of property and equipment 2 (1)
Increase (decrease) in other liabilities (509) 1,158
(Increase) decrease in deferred income tax 98 (33)
------------------ ------------------
Net cash provided by operating activities $ 1,672 $ 503
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Sales and maturities $ 6,033 $ 1,000
Purchases (18,558) ----
Proceeds from sale of property and equipment 46 36
Purchase of property and equipment: (132) (396)
Purchase of mortgage servicing rights (85) (68)
Loans purchased (4,199) (5,067)
Loans made to customers (40,833) (28,875)
Sale of participating interests in loans 2,345 ----
Principal collected on loans 43,206 24,770
Proceeds from sale of foreclosed real estate
and other properties, net ---- 118
Proceeds from sale/maturities of mortgage-backed securities ---- 8,117
Repayment of mortgage-backed securities 1,464 8,306
------------------ ------------------
Net cash provided by (used in) investing activities $ (10,713) $ 7,941
------------------ ------------------
See Notes to Consolidated Financial Statements
Page 4
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
Three months ended September 30,
-------------------------------------------
1997 1996
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 16,396 $ 9,652
Proceeds of advances from Federal Home Loan Bank and other
borrowings 5,000 5,000
Payments on advances from Federal Home Loan Bank and other
borrowings (12,024) (17,098)
Increase in advances by borrowers for taxes and insurance 2,701 2,222
Proceeds from issuance of common stock 122 102
Purchase of treasury stock (488) (845)
Cash dividends paid (314) (271)
------------------ ------------------
Net cash provided by (used in) financing activities $ 11,393 $ (1,238)
------------------ ------------------
Increase in cash and cash equivalents $ 2,352 $ 7,206
Cash and cash equivalents:
Beginning 17,957 11,145
------------------ ------------------
Ending $ 20,309 $ 18,351
------------------ ------------------
------------------ ------------------
See Notes to Consolidated Financial Statements.
Page 5
HF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three months ended September 30, 1997 and 1996
(Dollars in thousands)
(unaudited)
NOTE 1. SELECTED ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The foregoing consolidated financial statements are unaudited. However, in
the opinion of management, all adjustments (which consist of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Results for any interim period are not
necessarily indicative of results to be expected for the year. The interim
consolidated financial statements include the accounts of HF Financial Corp.
(the "Company"), its subsidiaries, HomeFirst Mortgage Corp.(formerly known as HF
Mortgage Corp. ), HF Card Services L.L.C. and Home Federal Savings Bank, (the
"Bank") and the Bank's subsidiaries.
NOTE 2. REGULATORY CAPITAL
The following table sets forth the Bank's compliance with its capital
requirements at September 30, 1997:
Amount Percent
------- -------
Tier I (Tangible) capital:
Required. . . . . . . . . . . . $17,213 3.00%
Actual. . . . . . . . . . . . . 42,881 7.47
Excess. . . . . . . . . . . . . 25,668 4.47%
Risk-based capital:
Required. . . . . . . . . . . . $30,162 8.00%
Actual. . . . . . . . . . . . . 47,594 12.62
Excess. . . . . . . . . . . . . 17,432 4.62%
NOTE 3. EARNINGS PER SHARE
Earnings per share is calculated by dividing net income by the weighted
average number of common and common equivalent shares outstanding, including
shares issuable upon exercise of dilutive options outstanding. The weighted
average number of common and common equivalent shares outstanding for the three
month period ended September 30, 1997 and 1996 as adjusted was 3,065,435 and
3,167,438 respectively.
Page 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
HF Financial Corp. ("Company") was incorporated under the laws of the State
of Delaware in November 1991 for the purpose of owning all of the outstanding
stock of Home Federal Savings Bank ("Bank") issued in the mutual to stock
conversion of the Bank. The Company acquired all of the stock of the Bank on
April 8, 1992. In October 1994, the Company acquired and began operating a new
mortgage subsidiary as HomeFirst Mortgage Corp. ("Mortgage Corp."). In May, 1996
the Company formed a Limited Liability Company named HF Card Services L.L.C.
("HF Card Services") and became the owner of 51% of this entity. The activities
of the Company itself have no significant impact on the results of operations on
a consolidated basis. Unless otherwise indicated, all activities discussed
herein relate to the Company, and its direct and indirect subsidiaries,
including without limitation, the Bank, HF Card Services and the Mortgage Corp.
HomeFirst Mortgage Corp. is a South Dakota Corporation which had an office
in Omaha, Nebraska. The Mortgage Corp. was a mortgage banking operation that
originated one-to-four family residential loans which were sold into the
secondary market and to the Bank. The Company ceased operation of Homefirst
Mortgage Corp. during the first quarter of fiscal 1998.
HF Card Services was established to provide secured, partially-secured and
unsecured credit cards nationwide. The target market for HF Card Services is
sub-prime credit customers who have either an insufficient credit history or a
negative credit history and are unable to obtain a credit card from more
traditional card issuers.
The Company's net income is primarily dependent upon the difference (or
"spread") between the average yield earned on loans, mortgage-backed securities
and investments and the average rate paid on deposits and borrowings, as well as
the relative amounts of such assets and liabilities. The interest rate spread
is affected by regulatory, economic and competitive factors that influence
interest rates, loan demand and deposit flows. The Company, like other
financial institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets. To better insulate itself
from such risk, the Company has, over the last few years, attempted to increase
both numerically and on a percentage basis its holding of consumer and
commercial loans. The Company has also decreased its ratio of fixed-rate to
adjustable-rate loans. The Company's net income is also affected by, among other
things, gains and losses on sales of foreclosed property, loans, mortgage-backed
securities and securities available for sale, provisions for loan losses,
service charge fees, subsidiary activities, operating expenses and income taxes.
THIS DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING TERMINOLOGY
SUCH AS "BELIEVES," "ANTICIPATES," "WILL," AND "INTENDS," OR COMPARABLE
TERMINOLOGY. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED.
POTENTIAL PURCHASERS OF THE COMPANY'S SECURITIES ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS WHICH ARE QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONS AND RISKS DESCRIBED HEREIN AND IN OTHER REPORTS FILED
BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
FINANCIAL CONDITION DATA
At September 30, 1997, the Company had total assets of $574.9
million, an increase of $12.8 million from the level at June 30, 1997. The
increase in assets was due primarily to an increase in securities available
for sale of $12.7 million and cash and cash equivalents of $2.4 million. The
increase in securities available for sale, and cash and cash equivalents was
funded primarily by a decrease in mortgage-backed securities of $1.3 million,
an increase in deposits of $16.4 million and an increase in advances by
borrowers for taxes and insurance of $2.7 million from the levels at June 30,
1997. The remaining excess funds received from the mortgage-backed
securities, deposits and advances by borrowers for taxes and insurance were
used to paydown advances from Federal Home Loan Bank and other borrowings by
$7.0 million from levels at June 30, 1997. In addition, stockholders'
equity increased from $53.0 million at June 30,
Page 7
1997 to $54.2 million at September 30, 1997, primarily due to net income of
$1.7 million and the change in the net unrealized loss on securities
available for sale of $207,000, which was offset by the payment of cash
dividends of $314,000 to the Company's stockholders and an increase in
treasury stock of $488,000.
The decrease in mortgage-backed securities of $1.3 million was primarily
the result of amortizations and prepayments of principal exceeding purchases.
The Bank had no purchases of mortgage-backed securities during the three months
ended September 30, 1997.
The increase in securities of $12.7 million from the level at June 30, 1997
is primarily due to purchases of $18.6 million exceeding sales and maturities of
securities available for sale of $6.0 million during the three months ended
September 30, 1997.
The $16.4 million increase in deposits was primarily due to an increase in
savings accounts of $20.2 million, an increase in checking accounts of $6.3
million, and an increase in money market accounts of $3.0 million which were
partially offset by a decrease in certificates of deposit of $13.1 million. In
July and August 1997, the Bank received deposits of approximately $38.0 million
from local governmental entities which requires a pledge of collateral of 110%
of the deposits. The Bank subsequently pledged debt and mortgage-backed
securities to meet this requirement.
Advances from the FHLB and other borrowings decreased $7.0 million for the
three month period ended September 30, 1997 primarily due to the payment of
$12.0 million on advances and other borrowings during the three month period
ended September 30, 1997. These advances were partially offset by the Company
obtaining $5.0 million of advances and borrowings for liquidity management and
to fund loans.
The $2.7 million increase in advances by borrowers for taxes and insurance
was due primarily to the receipt of escrow payments in excess of amounts paid
out. The major escrow payments are primarily paid semiannually in April and
October.
Page 8
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
AVERAGE BALANCES, INTEREST RATES AND YIELDS. The following table presents
for the periods indicated the total dollar amount of interest income from
average interest-earning assets and the resulting yields, as well as the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates, and the net interest margin. The table does not reflect any
effect of income taxes. All average balances are monthly average balances and
include the balances of nonaccruing loans. The yields and costs for
the three month period September 30, 1997 and 1996 include fees which are
considered adjustments to yield.
Three Months Ended September 30,
---------------------------------------------------------------------------------------
1997 1996
------------------------------------------ ------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1). . . . . . . . $ 453,790 $ 10,475 9.23% $ 432,550 $ 9,685 8.96%
Mortgage-backed securities. . . . . 29,901 477 6.38% 53,771 870 6.47%
Other investment securities (2) . . 66,040 960 5.81% 36,436 497 5.46%
FHLB stock. . . . . . . . . . . . . 5,222 92 7.05% 5,222 95 7.28%
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets. . . . . $ 554,953 $ 12,004 8.65% $ 527,979 $ 11,147 8.45%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Non-interest earning assets . . . . 29,241 28,664
------------ ------------
Total assets . . . . . . . . . . . . . $ 584,194 $ 556,643
------------ ------------
------------ ------------
Interest-bearing liabilities:
Deposits:
Now and money market accounts . . . $ 80,989 $ 507 2.50% $ 68,203 $ 432 2.53%
Savings accounts. . . . . . . . . . 60,794 579 3.81% 30,685 159 2.07%
Certificates of deposit . . . . . . 302,201 4,578 6.06% 300,960 4,445 5.91%
------------ ------------ ------------ ------------ ------------ ------------
Total deposits. . . . . . . . . . $ 443,984 $ 5,664 5.10% $ 399,848 $ 5,036 5.04%
FHLB Advances and other
borrowings. . . . . . . . . . . . 68,135 996 5.85% 88,108 1,246 5.66%
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities . . $ 512,119 $ 6,660 5.20% $ 487,956 $ 6,282 5.15%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Other liabilities . . . . . . . . . 18,417 17,889
------------ ------------
Total liabilities. . . . . . . . . . . $ 530,536 $ 505,845
Equity. . . . . . . . . . . . . . . 53,658 50,798
------------ ------------
Total liabilities and equity . . . . . $ 584,194 $ 556,643
------------ ------------
------------ ------------
Net interest income; interest
rate spread . . . . . . . . . . . . $ 5,344 3.45% $ 4,865 3.30%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net interest margin (3). . . . . . . . 3.85% 3.69%
------------ ------------
------------ ------------
(1) Includes interest on accruing loans past due 90 days or more.
(2) Includes primarily U.S. government securities.
(3) Net interest margin is net interest income divided by average interest-
earning assets.
Page 9
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increases and
decreases due to fluctuating outstanding balances that are due to the levels and
volatility of interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
Three months ended September 30,
----------------------------------------
1997 vs 1996
----------------------------------------
Increase Increase
(Decrease) (Decrease) Total
Due to Due to Increase
Volume Rate (Decrease)
---------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $ 483 $ 307 $ 790
Mortgage-backed securities (383) (10) (393)
Other investment securities (2) 417 46 463
FHLB stock -- (3) (3)
---------- ---------- ----------
Total interest-earning assets $ 517 $ 340 $ 857
---------- ---------- ----------
---------- ---------- ----------
Interest-bearing liabilities:
Deposits:
Now and money markets $ 81 $ (6) $ 75
Savings accounts 222 199 421
Certificates of deposit 20 112 132
---------- ---------- ----------
Total Deposits $ 323 $ 305 $ 628
---------- ---------- ----------
FHLB Advances and other borrowings $ (287) $ 37 $ (250)
---------- ---------- ----------
Total Interest-bearing liabilities $ 36 $ 342 $ 378
---------- ---------- ----------
---------- ---------- ----------
Net interest income increase $ 479
----------
----------
(1) Includes interest on loans past due 90 days or more
(2) Includes primarily U. S. Government Securities
Page 10
ASSET QUALITY
In accordance with the Bank's internal classification of assets policy,
management evaluates the loan portfolio on a monthly basis to identify loss
potential and determine the adequacy of the allowance for possible loan losses.
The following table sets forth the amounts and categories of the Bank's
nonperforming assets for the periods indicated.
September 30, June 30,
------------------ ------------------
1997 1997
------------------ ------------------
(Dollars in Thousands)
Non-accruing loans:
One to four Family $ 1,454 $ 618
Commercial real estate ---- 154
Multi-family ---- ----
Mobile Homes 135 52
Credit Cards ---- ----
Consumer 514 428
Commercial Business 353 ----
------------------ ------------------
Total $ 2,456 $ 1,252
------------------ ------------------
Accruing loans delinquent more than 90 days:
One to four Family $ ---- $ ----
Commercial real estate ---- ----
Multi-family ---- ----
Mobile Homes ---- ----
Credit Cards ---- ----
Consumer ---- ----
Commercial Business ---- ----
------------------ ------------------
Total $ ---- $ ----
------------------ ------------------
Foreclosed Assets:
One to four Family $ 177 $ 311
Commercial real estate ---- ----
Multi-family ---- ----
Mobile Homes 13 124
Credit Cards ---- ----
Consumer 130 158
Commercial Business ---- ----
------------------ ------------------
Total $ 320 $ 593
------------------ ------------------
Total non-performing assets $ 2,776 $ 1,845
------------------ ------------------
------------------ ------------------
Total as a percentage of total assets 0.48% 0.41%
------------------ ------------------
------------------ ------------------
Total Non-performing loans as a percentage of total loans 0.55% 0.49%
------------------ ------------------
------------------ ------------------
(1) Nonperforming loans includes nonaccruing loans and loans delinquent
more than 90 days.
(2) Percentage is calculated based upon total assets of the Company, the
Bank, HF Card Services and the Mortgage Corp. on a consolidated basis.
Page 11
(3) Nonperforming assets includes nonaccruing loans, accruing loans
delinquent more than 90 days and foreclosed assets.
When a loan becomes 90 days delinquent, the Bank places the loan on a
non-accrual status and, as a result, accrued interest income on the loan is
taken out of income. Future interest income is recognized on a cash basis. The
loan will remain on a non-accrual status until the borrower has brought the loan
current.
Nonperforming assets increased to $2.8 million at September 30, 1997 from
$1.8 million at June 30, 1997, an increase of $931,000. In addition, the ratio
of nonperforming assets to total assets, which is one indicator of credit risk
exposure, increased to 0.48% at September 30, 1997 from 0.41% at June 30, 1997.
Nonaccruing loans increased to $2.5 million at September 30, 1997 from $1.3
million at June 30, 1997, an increase of $1.2 million. Included in nonaccruing
loans at September 30, 1997 were 39 loans totaling $1.5 million secured by one-
to four-family real estate, nine mobile home loans totaling $135,000, four
commercial business loans totaling $353,000 and forty-five consumer loans
totaling $514,000. For the three months ended September 30, 1997, gross
interest income of $160,000 would have been recognized on loans accounted for on
a non-accrual basis had such loans been current in accordance with their
original terms. Gross interest income of $5,000 was recognized as income on
loans accounted for on a non-accrual basis.
Foreclosed assets decreased to $320,000 at September 30, 1997 from $593,000
at June 30, 1997, a decrease of $273,000.
At September 30, 1997, the Bank had approximately $7.1 million of other
loans of concern that management has determined need to be closely monitored
because of possible credit problems of the borrowers or the cash flows of the
secured properties. These loans were considered in determining the adequacy of
the allowance for possible loan losses. The allowance for possible loan losses
is established based on management's evaluation of the risks inherent in the
loan portfolio and changes in the nature and volume of loan activity. Such
evaluation, which includes a review of all loans for which full collectability
may not be reasonably assured, considers the estimated fair market value of the
underlying collateral, economic conditions, historical loan loss experience and
other factors that warrant recognition in providing for an adequate loan loss
allowance. Although the Bank's management believes that the September 30, 1997
recorded allowance for loan losses was adequate to provide for potential losses
on the related loans, there can be no assurance that the allowance existing at
September 30, 1997 will be adequate in the future.
Page 12
The following table sets forth information with respect to activity in the
Bank's allowance for losses on loans during the periods indicated.
Three Months Ended
-------------------------------------------
9/30/97 9/30/96
------------------ ------------------
(Dollars in Thousands)
BALANCE AT BEGINNING OF PERIOD $ 4,526 $ 4,129
CHARGE-OFFS:
One- to four-family (16) (27)
Commercial ---- ----
Multi-family ---- ----
Consumer (172) (72)
Credit Cards (175) ----
Mobile homes (64) (41)
------------------ ------------------
Total charge-offs $ (427) $ (140)
------------------ ------------------
RECOVERIES:
One- to four-family $ 6 $ ----
Commercial ---- ----
Multi-family ---- 46
Commercial business ---- 1
Consumer 45 46
Credit Cards 137 ----
Mobile homes 9 9
------------------ ------------------
Total recoveries $ 197 $ 104
------------------ ------------------
Net (charge-offs) recoveries $ (230) $ (36)
Additions charged to operations 526 90
------------------ ------------------
Balance at end of period $ 4,822 $ 4,183
------------------ ------------------
------------------ ------------------
Ratio of net (charge-offs) recoveries during the period to
average loans outstanding during the period (0.05)% (0.01)%
------------------ ------------------
------------------ ------------------
Ratio of allowance for loan losses to total loans at end
of period 1.08% 0.98%
------------------ ------------------
------------------ ------------------
Ratio of allowance for loan losses to non-performing
loans at end of period (1) 196.32% 200.15%
------------------ ------------------
------------------ ------------------
(1) Non-performing loans includes non-accruing loans
and accruing loans delinquent more than 90 days.
The allowance for loan losses was $4.8 million at September 30, 1997 as
compared to $4.2 million at September 30, 1996. The ratio of the allowance
for losses on loans to total loans was 1.08% at September 30, 1997 and 0.98% at
September 30, 1996. The Bank's management has considered nonperforming assets
and other assets of concern in establishing the allowance for losses on loans.
The Bank will continue to monitor its allowance for possible loan losses and
make future additions or reductions in light of the level of loans in its
portfolio and as economic conditions dictate.
Page 13
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
At September 30, 1997 At June 30, 1997
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
------------ ------------ ------------ ------------
(Dollars in Thousands)
One- to four- family $ 1,405 33.53% $ 1,540 36.50%
Commercial and multi-family real estate (1) 899 21.46% 926 21.94%
Mobile homes 138 3.29% 145 3.43%
Consumer 1,314 31.35% 1,254 29.73%
Credit Cards 667 0.86% 329 0.51%
Agricultural 108 2.58% 77 1.82%
Commercial business 291 6.94% 255 6.07%
------------ ------------ ------------ ------------
Total $ 4,822 100.00% $ 4,526 100.00%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
(1) Includes construction loans.
The allowance for possible losses on loans is maintained at a level which
is considered by management to be adequate to absorb possible loan losses on
existing loans that may become uncollectible, based on an evaluation of the
collectability of loans and prior loan loss experience. The evaluation takes
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay. The
allowance for possible loan losses is established through a provision for
possible loan losses charged to expense.
Page 14
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
GENERAL. The Company's net income increased $2.1 million to $1.7 million
for the three months ended September 30, 1997 as compared to a loss of $378,000
for the three months ended September 30, 1996. As discussed in more detail
below, this increase was due primarily to the decrease in noninterest expense of
$2.0 million and an increase in noninterest income of $1.1 million which were
partially offset by an increase in income tax expense of $1.2 million.
INTEREST INCOME. Interest income increased $857,000 from $11.1 million for
the three months ended September 30, 1996 to $12.0 million for the three months
ended September 30, 1997. This increase was primarily due to an increase in
interest earned on interest earning assets and an increase in the average
balance of interest earnings assets. The average yield on interest earning
assets increased from 8.45% to 8.65% and the average balance of interest
earning assets increased $27.0 million when comparing the three months ended
Septemer 30, 1997 to the same period in the prior fiscal year.
INTEREST EXPENSE. Interest expense increased $378,000 from $6.3 million
for the three months ended September 30, 1996 to $6.7 million for the three
months ended September 30, 1997. This increase was largely attributable to an
increase in average rates paid on interest bearing liabilities and an increase
in the average balance of interest bearing liabilities. The average rates on
interest bearing liabilities increased from 5.15% for the three months ended
September 30, 1996 to 5.20% for the three months ended September 30, 1997. The
average balance of interest bearing liabilities increased $24.2 million for the
three months ended September 30, 1997 as compared to the same period in the
prior fiscal year.
NET INTEREST MARGIN. The Company's net interest margin for the three months
ended September 30, 1997 as compared to September 30, 1996 increased 16 basis
points to 3.85%. As discussed above, the yields on interest earning assets
increased more than the rates paid on interest-bearing liabilities, resulting in
an increase in net interest margin. Because the Company's interest-bearing
liabilities reprice faster than its interest-earning assets, when interest rates
decrease, the Company generally experiences an increase in its net interest
margin. The opposite is generally true during a period of increasing interest
rates.
PROVISION FOR LOSSES ON LOANS. The allowance for possible losses on loans
is maintained at a level which is considered by management to be adequate to
absorb possible loan losses on existing loans that may become uncollectible,
based on an evaluation of the collectability of loans and prior loan loss
experience. The evaluation takes into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans, and current economic conditions that may affect the
borrower's ability to pay. The allowance for possible loan losses is
established through a provision for possible loan losses charged to expense.
During the three months ended September 30, 1997, the Company recorded a
provision for losses on loans of $526,000 as compared to $90,000 for the three
months ended September 30, 1996. The provision for loan losses of $526,000 for
the three months ended September 30, 1997 compared to the same period in fiscal
1996 is primarily related to management's continued evaluation of the loan
portfolio in light of general economic conditions. The Bank increased its
provision for losses on loans to aid in absorbing possible loan losses from the
credit card loan program. See "Asset Quality" for further discussion.
The allowance for loan losses at September 30, 1997 was $4.8 million. The
allowance increased approximately $296,000 from the June 30, 1997 balance
primarily as a result of the provision for loan losses of $526,000 exceeding net
charge-offs of $230,000. The ratio of allowance for loan losses to nonperforming
loans at September 30, 1997 was 196.32% compared to 200.15% at September 30,
1996. The allowance for losses on loans to total loans at September 30, 1997
was 1.08% compared to 0.98% at September 30, 1996. The Bank's management
believes that the September 30, 1997 recorded allowance for loan losses was
adequate to provide for potential losses on the related loans, based on its
evaluation of the collectability of loans and prior loss experience.
NONINTEREST INCOME. Noninterest income was $2.5 million for the three
months ended September 30, 1997 as compared to $1.4 million for the three months
ended September 30, 1996, an increase of $1.1 million.
Page 15
Loan fees and service charges increased by $375,000 for the three months
ended September 30, 1997 as compared to the same period in the prior fiscal
year. The majority of the increase was from late charges on credit cards loans
of $223,000. The credit card program began in the second quarter of fiscal
1997.
Fees on deposits increased $145,000 for the three months ended September
30, 1997 as compared to the same period in the prior fiscal year. This increase
was due to an increase in the number of transaction accounts that customers have
with the bank. See "Financial Condition Data" for further discussion.
The increase in credit card income of $598,000 for the three months ended
September 30, 1997 as compared to the same period in fiscal 1996 is primarily
due to an increase in fees received on unsecured credit cards. This represents
processing fees, interchange fees, annual fees and other miscellaneous fees.
This credit card program was initiated in fiscal 1997.
NONINTEREST EXPENSE. Noninterest expense decreased $2.0 million from $6.8
million for the three months ended September 30, 1996 to $4.8 million for the
three months ended September 30, 1997. This decrease was primarily from a
decrease in federal insurance premiums and assessments of $2.8 million, which
was partially offset by an increase in compensation and employee benefits of
$143,000, and an increase in losses, provision for losses and expenses on
foreclosed real estate and other properties, net.
The decrease in the federal insurance premiums of $2.8 million is the
result of the passage by Congress and the President of the United States of the
Savings Association Insurance Fund "SAIF" legislation which resulted in a one
time assessment of $2.6 million to the Bank in order to recapitalize the SAIF
during the first quarter of fiscal 1997. This one time assessment was charged
to the Bank on September 30, 1996.
There was an increase of $345,000 in the cost of third party processors of
credit cards of $345,000. This represents costs for processing of applications,
collecting loans, and marketing costs for the acquisition of credit cards for
the unsecured credit card program. The Company began processing credit cards in
the second quarter of fiscal 1997.
INCOME TAX EXPENSE. The Company's income tax expense for the three months
ended September 30, 1997 was $882,000 compared to a credit of $285,000 for the
three months ended September 30, 1996, an increase of $2.1 million. This
increase was proportionate to the increase in the Company's income before income
tax as compared to the same period in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, amortization and
prepayments of loan principal (including mortgage-backed securities) and, to a
lesser extent, sales of mortgage loans, sales and/or maturities of securities,
mortgage-backed securities, and short-term investments. While scheduled loan
payments and maturing securities are relatively predictable, deposit flows and
loan prepayments are more influenced by interest rates, general economic
conditions, and competition. The Bank attempts to price its deposits to meet its
asset/liability objectives consistent with local market conditions. Excess
balances are invested in overnight funds.
Federal regulations have historically required the Bank to maintain minimum
levels of liquid assets. The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and current borrowings. Liquid assets for
purposes of this ratio include cash, certain time deposits, U. S. Government
and corporate securities and other obligations generally having remaining
maturities of less than five years. The Bank has historically maintained its
liquidity ratio at a level in excess of that required by these regulations. At
September 30, 1997, the Bank's regulatory liquidity ratio was 5.89%.
Liquidity management is both a daily and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected loan sales,
(iii) expected deposit flows, (iv) yields available on interest-bearing
deposits, and (v) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-bearing overnight deposits
and other short-term government and agency obligations. During the three months
ended September 30, 1997, the Bank generated funds internally that allowed it to
pay down FHLB advances. The Bank renewed its open line of credit with the FHLB
in January 1997 at an amount of $20.0 million which will expire in January 1998.
Management expects this line of credit to be renewed at this time. There were
no outstanding advances on this line of credit at September 30, 1997.
Page 16
The Bank anticipates that it will have sufficient funds available to meet
current loan commitments. At September 30, 1997, the Bank had outstanding
commitments to originate or purchase loans of $44.7 million and to sell loans of
$27.0 million. In addition, the Bank had committments to purchase $3.5 million
securities available for sale. There was no commitment to purchase or sell
mortgage-backed securities, or securities to be held to maturity.
Although deposits are the Bank's primary source of funds, the Bank's policy
has been to utilize borrowings where the funds can be invested in either loans
or securities at a positive rate of return or to use the funds for short term
liquidity purposes. See "Financial Condition Data" for further analysis.
In April of 1996, the Company initiated a stock buy back program in which
up to 10% of the common stock of the Company may be acquired beginning May 1,
1996 through April 30, 1997. A total of 138,315 shares of common stock were
purchased pursuant to this program. In April of 1997, the Company initiated
another stock buy back program in which up to 10% of the common stock of the
Company may be acquired beginning May 1, 1997 through April 30, 1998. In
accordance with the provisions of the current stock buy back program, the
Company had purchased 32,000 shares of common stock as of September 30, 1997.
Savings institutions insured by the Federal Deposit Insurance Corporation
are required by the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") to meet prescribed regulatory capital requirements. If a
requirement is not met, regulatory authorities may take legal or administrative
actions, including restrictions on growth or operations or, in extreme cases,
seizure. Institutions not in compliance may apply for an exemption from the
requirements and submit a recapitalization plan. Under these capital
requirements, at September 30, 1997, the Bank met all current capital
requirements.
The Office of Thrift Supervision ("OTS") has adopted a core capital
requirement for savings institutions comparable to the requirement for national
banks. The OTS core capital requirement is 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and soundness.
The Bank had core capital of 7.47% at September 30, 1997
Pursuant to FDICIA, the federal banking agencies, including the OTS, have
also proposed regulations authorizing the agencies to require a depository
institution to maintain additional total capital to account for concentration of
credit risk and the risk of non-traditional activities. No assurance can be
given as to the final form of any such regulation or its effect of the Bank.
During the first quarter of fiscal 1997, the Small Business Job
Protection Act of 1996 was signed into law which repealed the percentage of
taxable income method of computing the bad debt deduction for savings
institutions for tax years beginning after December 31, 1995. Beginning in
fiscal year 1997, the Bank is required to recapture into income the excess of
its June 30, 1997 loan loss reserves for "qualifying" and "nonqualifying"
loans over its June 30, 1988 loan loss reserves for "qualifying" and
"nonqualifying" loans. This excess which was $720,000 at June 30, 1997 and
September 30, 1997, is required to be recaptured ratably over a six year
period. The onset of recapture can be delayed for one or two years if the
Bank meets a residential loan originations requirement in effect in 1996 and
1997. To qualify for a deferral each year, the Bank will be required to lend
as much in dollar terms on residential real estate as in the average of the
most recent six years. The residential loan calculation does not include
refinancing and home equity loans. At June 30, 1997 and September 30, 1997,
the Bank's recorded deferred tax liability of $245,000 provides for the
recapture of the loan loss reserves.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Bank's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
EFFECT OF NEW ACCOUNTING STANDARDS
Page 17
The Financial Accounting Standards Board ("FASB") issued Statement No. 128,
"Earnings Per Share". This Statement establishes standards for computing and
presenting earnings per share ("EPS"). It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. This Statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. This Statement requires restatement of
all prior-period EPS data presented.
The FASB issued SFAS No. 130, " Reporting Comprehensive Income". This
Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
Statement is effective for fiscal years beginning after December 15, 1997.
The FASB issued SFAS No. 131, "Disclosures about Segments of Enterprise and
Related Information". This Statement establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This Statement
supersedes FASB Statement No.14, "Financial Reporting for Segments of a Business
Enterprise", but retains the requirement to report information about major
customers. It amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries", to remove the special disclosure requirements for previous
unconsolidated subsidiaries. This Statement does not apply to nonpublic
business enterprises or to not-for-profit organizations. This Statement is
effective for financial statements for periods beginning after December 15,
1997.
Page 18
HF FINANCIAL CORP.
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS OF FORM 8-K
a. No exhibits on Form 8-K are required to filed.
b. No reports were filed.
- --------------------------------------------------------------------------------
No other information is required to be filed under Part II of the form
Page 19
HF FINANCIAL CORP.
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HF Financial Corp.
---------------------------------
(Registrant)
Date: by
- --------------------------------- ---------------------------------
Curtis L. Hage, Chairman,
President and Chief Executive
Officer
(Duly Authorized Officer)
Date: by
- --------------------------------- ---------------------------------
Donald F. Bertsch, Senior
Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
Page 20