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 December 31, 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.
- -------------------------------------------------------------------------------
(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 January 26, 1998 there were outstanding 2,977,365 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 December 31, 1997 and June 30, 1997 1
Consolidated Statements of Income for the Three and
Six Months Ended December 31, 1997 and 1996 2
Consolidated Statement of Stockholders' Equity
for the Six months ended December 31, 1997 3
Consolidated Statements of Cash Flows for the
Six months ended December 31, 1997 and 1996 4-5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-19
PART II. Other Information
--------------------------------
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Default upon Senior Securities 20
Item 4. Submission of Matters to a Vote
of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
(Unaudited)
ASSETS December 31, June 30,
1997 1997
--------------------------
Cash and cash equivalents $ 25,612 $ 17,957
Securities available for sale 66,241 46,940
Loans receivable, net 427,498 440,019
Loans held for sale 10,521 3,483
Mortgage-backed securities available for sale 27,913 30,340
Accrued interest receivable 4,355 4,136
Foreclosed real estate and other properties 358 593
Office properties and equipment, at cost, net of
accumulated depreciation 14,789 15,070
Prepaid expenses and other assets 746 870
Loan servicing rights, net 1,233 1,134
Deferred income taxes 1,402 1,569
Intangible assets, net --- 3
-
-----------------------
$ 580,668 $ 562,114
-----------------------
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 444,613 $ 418,186
Advances from Federal Home Loan Bank
and other borrowings 65,694 74,743
Advances by borrowers for taxes and insurance 4,488 4,074
Accrued interest payable 6,360 6,560
Other liabilities 3,905 5,577
-----------------------
Total Liabilities 525,060 509,140
-----------------------
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,
3,147,680 shares outstanding at December 31, 1997 and
3,134,530 shares outstanding at June 30, 1997 31 31
Additional paid-in capital 14,835 14,695
Retained earnings, substantially restricted 43,976 41,336
Unearned compensation (453) (453)
Net unrealized gain (loss) on securities available for sale 120 (222)
Less cost of 170,315 and 148,315 shares of treasury stock at
December 31, 1997 and June 30, 1997 (2,901) (2,413)
-----------------------
Total Stockholders' Equity 55,608 52,974
-----------------------
$ 580,668 $ 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 Six months
ended December 31, ended December 31,
------------------------ ---------------------------
1997 1996 1997 1996
-------- -------- --------- ---------
Interest and dividend income:
Loans receivable $ 10,069 $ 9,669 $ 20,544 $ 19,354
Mortgage-backed securities 458 690 935 1,560
Investment securities and other interest bearing deposits 1,093 597 2,145 1,189
--------- -------- --------- ---------
11,620 10,956 23,624 22,103
--------- -------- --------- ---------
Interest expense:
Deposits 5,508 5,067 11,172 10,103
Advances from FHLB and other borrowed money 972 1,123 1,968 2,369
--------- -------- --------- ---------
6,480 6,190 13,140 12,472
--------- -------- --------- ---------
Net interest income 5,140 4,766 10,484 9,631
Provision for losses on loans 804 64 1,330 154
--------- -------- --------- ---------
Net interest income after provision for losses on loans 4,336 4,702 9,154 9,477
--------- -------- --------- ---------
Noninterest income:
Loan servicing income 288 244 554 482
Loan fees and service charges 127 273 677 448
Fees on deposits 570 391 1,105 781
Commission and insurance income 202 196 410 379
Appraisal and inspection fees 100 101 179 267
Gain on sale of securities, net 5 ---- 10 2
Gain on sales of loans 71 150 287 281
Credit Card fee income 1,386 ---- 1,984 ----
Other 65 147 137 252
--------- -------- --------- ---------
2,814 1,502 5,343 2,892
--------- -------- --------- ---------
Noninterest expense:
Compensation and employee benefits 2,451 2,334 4,932 4,672
Occupancy and equipment 648 733 1,301 1,457
Federal insurance premiums and assessment 69 236 137 3,113
Credit card processing expense 511 ---- 856 ----
Other general and administrative expenses 981 947 2,062 1,801
Losses, provision for losses and expenses on foreclosed
real estate and other properties, net 70 39 223 74
--------- -------- --------- ---------
4,730 4,289 9,511 11,117
--------- -------- --------- ---------
Income before income taxes 2,420 1,915 4,986 1,252
Income tax expense 798 650 1,680 365
--------- -------- --------- ---------
Net income $ 1,622 $ 1,265 $ 3,306 $ 887
--------- -------- --------- ---------
--------- -------- --------- ---------
Earnings per share:
Basic $ 0.57 $ 0.42 $ 1.11 $ 0.29
--------- -------- --------- ---------
--------- -------- --------- ---------
Diluted $ 0.55 $ 0.41 $ 1.08 $ 0.29
--------- -------- --------- ---------
--------- -------- --------- ---------
See Notes to Consolidated Financial Statements
Page 2
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended December 31, 1997
(Dollars In Thousands)
(Unaudited)
Additional Unrealized
Common Paid-In Retained Unearned Treasury Gain (Loss)
Stock Capital Earnings Compensation Stock Net of tax
------- --------- --------- ------------ --------- -----------
Balance, June 30, 1997 $ 31 $ 14,695 $ 41,336 $ (453) $(2,413) $ (222)
Net income ---- ---- 3,306 ---- ---- ----
Exercise of stock options for 13,150 shares ---- 140 ---- ---- ---- ----
Cash dividends ($0.21 per share)
on common stock ---- ---- (666) ---- ---- ----
Adjustment to unrealized gains (losses) on
available for sale securities, net of tax ---- ---- ---- ---- ---- 342
Purchase of Treasury Stock ---- ---- ---- ---- (488) ----
Amortization of unearned compensation ---- ---- ---- ---- ---- ----
------- --------- --------- -------- -------- --------
Balance, December 31, 1997 $ 31 $ 14,835 $ 43,976 $ (453) $(2,901) $ 120
------- --------- --------- -------- -------- --------
------- --------- --------- -------- -------- --------
See Notes to Consolidated Financial Statements
Page 3
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended December 31,
-----------------------------
1997 1996
-------- ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,306 $ 887
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on loans 1,330 154
Depreciation 727 682
Amortization of premiums and discounts, net:
Securities (6) (44)
Mortgage-backed securities and loans (144) (79)
Reduction in cost of intangible assets 3 15
Reduction in loan servicing rights 101 61
Amortization of unearned compensation ---- 3
(Decrease) in deferred loan fees (371) (444)
Loans originated for resale (40,953) (23,031)
Proceeds from the sale of loans 41,240 23,245
(Gain) on sale of loans (287) (214)
(Gain) on sale of securities (10) (2)
Losses and provisions for losses on sales of foreclosed
real estate and other properties, net 152 7
(Gain) on disposal of equipment (5) (1)
(Increase) decrease in accrued interest receivable (219) 234
(Increase) decrease in prepaid expenses and
other assets 124 (425)
(Decrease) in other liabilities (1,872) (1,036)
Decrease in deferred income tax 167 155
-------- ------
Net cash provided by operating activities $ 3,283 $ 167
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans purchased (7,506) (8,319)
Loans made to customers (99,213) (66,372)
Principal collected on loans 94,205 51,703
Sale of participating interest in loans 16,550 5,000
Proceeds from sale/maturities of mortgage-
backed securities --- 8,276
Repayment of mortgage-backed securities 2,632 11,042
Securities available for sale:
Sales and maturities 14,054 3,000
Purchases (33,058) ---
Proceeds from sale of property and equipment 49 70
Purchase of property and equipment: (490) (830)
Purchase of Loan servicing rights (200) (156)
Proceeds from sale of foreclosed real estate
and other properties, net 571 192
-------- ------
Net cash provided by (used in)
investing activities $(12,406) $3,606
-------- ------
See Notes to Consolidated Financial Statements
Page 4
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
Six Months Ended December 31,
-----------------------------
1997 1996
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 26,427 $ 15,520
Proceeds of advances from Federal Home Loan Bank 25,000 22,000
Payments on advances from Federal Home Loan Bank (34,049) (38,021)
Increase (decrease) in advances by borrowers for
taxes and insurance 414 (306)
Purchase of treasury stock (488) (845)
Proceeds from issuance of common stock 140 114
Cash dividends paid (666) (542)
-------- ----------
Net cash provided by (used in) financing
activities $ 16,778 $ (2,080)
-------- ----------
Increase in cash and cash equivalents $ 7,655 $ 1,693
Cash and cash equivalents:
Beginning 17,957 11,145
-------- ----------
Ending $ 25,612 $ 12,838
-------- ----------
-------- ----------
See Notes to Consolidated Financial Statements.
Page 5
HF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six months ended December 31, 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 December 31, 1997:
Amount Percent
------- -------
Tier I (Tangible) capital:
Required . . . . . . . . . . . . . . . . $17,391 3.00%
Actual . . . . . . . . . . . . . . . . . 43,298 7.47
Excess . . . . . . . . . . . . . . . . . 25,907 4.47%
Risk-based capital:
Required . . . . . . . . . . . . . . . . $30,065 8.00%
Actual . . . . . . . . . . . . . . . . . 47,996 12.77
Excess . . . . . . . . . . . . . . . . . 17,931 4.77%
NOTE 3. EARNINGS PER SHARE
The Company adopted the Financial Accounting Standards Board ("FASB")
Statement No. 128, "Earnings Per Share" for the period ending December 31,
1997. This Statement establishes standards for computing and presenting
earnings per share ("EPS"). It replaced 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 requires restatement of all prior-
period EPS data presented. The Company restated the three months ended
December 31, 1996 which reduced earnings per share by 1 cent. The six months
ended December 31, 1996 had no impact on the previously reported earnings per
share for the Company as a result of the adoption of the new standard.
Basic earnings per share is computed by dividing income available to
common stockholders (the numerator) by the weighted-average number of common
shares outstanding (the denominator) during the period. Shares issued during
the period and shares reacquired during the period are weighted for the portion
of the period that they were outstanding. The weighted average number of common
shares outstanding for the three month period ended December 31, 1997 and 1996
as adjusted was 2,856,386 and 3,023,325 respectively. The weighted average
number of common shares outstanding for the six month period ended December 31,
1997 and 1996 as adjusted was 2,972,320 and 3,011,511 respectively.
Dilutive earnings per share is similar to the computation of basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
dilutive options outstanding had been exercised. The weighted average number of
common and dilutive potential common shares outstanding for the three month
period ended December 31, 1997 and 1996 as adjusted was 2,939,093 and 3,079,589
respectively. The weighted average number of common and dilutive potential
common equivalent shares outstanding for the six month period ended December
31, 1997 and 1996 as adjusted was 3,051,023 and 3,069,421 respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Page 6
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 December 31, 1997, the Company had total assets of $580.7 million,
an increase of $18.6 million from the level at June 30, 1997. The increase in
assets was due primarily to an increase in securities available for sale of
$19.3 million, cash and cash equivalents of $7.7 million and loans held for
sale of $7.0 million. The increase in securities available for sale, cash and
cash equivalents and loans held for sale was funded primarily by a decrease in
loans receivable of $12.5 million, mortgage-backed securities of $2.4 million,
and an increase in deposits of $26.4 million from the levels at June 30, 1997.
The remaining excess funds received from the mortgage-backed securities, and
deposits were used to paydown advances from Federal Home Loan Bank and other
borrowings by $9.0 million from levels at June 30, 1997. In addition,
stockholders' equity increased from $53.0 million at June 30, 1997 to $55.6
million at December 31, 1997, primarily due to net income of $3.3 million and
the change in the net unrealized gain (loss) on securities available for sale
of $342,000, which was offset by the payment of cash dividends of $666,000 to
the Company's stockholders and the purchase of treasury stock of $488,000.
The decrease in mortgage-backed securities of $2.4 million was primarily
the result of amortizations and prepayments of principal exceeding purchases.
The Bank had no purchases of mortgage-backed securities during the six months
ended December 31, 1997.
Page 7
The decrease in loans receivable of $12.5 million was primarily the result
of amortizations, sales and prepayments of principal exceeding originations.
The increase in securities from the level at June 30, 1997 is primarily
due to purchases of $33.0 million exceeding sales and maturities of securities
available for sale of $14.0 million during the six months ended December 31,
1997.
The $26.4 million increase in deposits was primarily due to an increase in
savings accounts of $27.2 million, an increase in checking accounts of $11.1
million, and an increase in money market accounts of $5.7 million which were
partially offset by a decrease in certificates of deposit of $17.6 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. As of December 31, 1997, the Bank had
total deposits from local governmental entities of $50.8 million.
Advances from the FHLB and other borrowings decreased $9.0 million for the
six month period ended December 31, 1997 primarily due to the repayment of
$34.0 million on advances and other borrowings during the six month period
ended December 31, 1997. These advances were partially offset by the Company
obtaining $25.0 million of additional advances and borrowings for liquidity
management and to fund loans.
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
and six months ended December 31, 1997 and 1996 include fees which are
considered adjustments to yield.
Three Months Ended December 31,
------------------------------------------------------------------------------
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) $ 445,892 $ 10,069 9.03% $ 439,512 $ 9,669 8.80%
Mortgage-backed securities 28,611 458 6.40% 42,011 690 6.57%
Other investment securities (2) 68,038 1,001 5.88% 37,102 505 5.44%
FHLB stock 5,222 92 7.05% 5,222 92 7.05%
---------- --------- -------- ---------- -------- -------
Total interest-earning assets 547,763 $ 11,620 8.49% 523,847 10,956 8.37%
--------- -------- -------- -------
Non-interest earning assets. 31,081 26,901
---------- ----------
Total assets $ 578,844 $ 550,748
---------- ----------
---------- ----------
Interest-bearing liabilities:
Deposits:
Now and money market accounts $ 88,354 $ 567 2.57% $ 70,917 $ 461 2.60%
Savings accounts 49,992 445 3.56% 30,497 160 2.10%
Certificates of deposit 299,702 4,496 6.00% 302,126 4,446 5.89%
---------- --------- -------- ---------- -------- -------
Total deposits 438,048 5,508 5.03% 403,540 5,067 5.02%
FHLB Advances and other borrowings 66,960 972 5.81% 79,256 1,123 5.67%
---------- --------- -------- ---------- -------- -------
Total interest-bearing liabilities 505,008 6,480 5.13% 482,796 6,190 5.13%
--------- -------- -------- -------
Other liabilities 18,760 17,300
---------- ---------
Total liabilities 523,768 500,096
Equity 55,076 50,652
---------- ---------
Total liabilities and equity $ 578,844 $ 550,748
---------- ---------
---------- ---------
Net interest income; interest rate spread $ 5,140 3.36% $ 4,766 3.24%
--------- -------- -------- -------
--------- -------- -------- -------
Net interest margin (3) 3.75% 3.64%
-------- -------
-------- -------
Page 9
Six Months Ended December 31,
------------------------------------------------------------------------------
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) $ 450,008 $ 20,544 9.13% $ 436,051 $ 19,354 8.88%
Mortgage-backed securities 29,256 935 6.39% 47,891 1,560 6.51%
Other investment securities (2) 67,039 1,961 5.85% 36,769 1,002 5.45%
FHLB stock 5,222 184 7.05% 5,222 187 7.16%
---------- --------- -------- --------- -------- -----
Total interest-earning assets 551,525 23,624 8.57% 525,933 22,103 8.41%
--------- -------- -------- -----
Non-interest earning assets. 30,139 27,783
---------- ---------
Total assets $ 581,664 $ 553,716
---------- ---------
---------- ---------
Interest-bearing liabilities:
Deposits:
Now and money market accounts $ 84,648 $ 1,074 2.54% $ 68,951 $ 893 2.59%
Savings accounts 55,393 1,024 3.70% 30,591 319 2.09%
Certificates of deposit 300,952 9,074 6.03% 301,542 8,891 5.90%
---------- --------- -------- --------- -------- -----
Total deposits 440,993 11,172 5.07% 401,084 10,103 5.04%
FHLB Advances and other borrowings 67,714 1,968 5.81% 83,682 2,369 5.66%
---------- --------- -------- --------- -------- -----
Total interest-bearing liabilities 508,707 13,140 5.17% 484,766 12,472 5.15%
--------- -------- -------- -----
Other liabilities 18,589 17,594
---------- ---------
Total liabilities 527,296 502,360
Equity 54,368 51,356
---------- ---------
Total liabilities and equity $ 581,664 $ 553,716
---------- ---------
---------- ---------
Net interest income; interest rate spread $ 10,484 3.40% $ 9,631 3.26%
--------- -------- -------- -----
--------- -------- -------- -----
Net interest margin (3) 3.80% 3.66%
-------- -----
-------- -----
- -----------------------------------------------------------------------------------------------------------------------------
(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 10
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 December 31, Six months ended December 31,
--------------------------------- ------------------------------------
1997 vs 1996 1997 vs 1996
--------------------------------- ------------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Due to Increase Due to Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- --------- ---------- -------- --------- ---------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $ 142 $ 258 $ 400 $ 637 $ 553 $ 1,190
Mortgage-backed securities (217) (15) (232) (596) (29) (625)
Other investment securities (2) 438 58 496 883 73 956
------ ------ ------ ------ ------ --------
Total interest-earning assets $ 363 $ 301 $ 664 $ 924 $ 597 $ 1,521
------ ------ ------ ------ ------ --------
------ ------ ------ ------ ------ --------
Interest-bearing liabilities:
Deposits:
Now and money markets $ 113 $ (7) $ 106 $ 199 $ (18) $ 181
Savings accounts 139 148 287 458 247 705
Certificates of deposit (35) 83 48 (18) 201 183
------ ------ ------ ------ ------ --------
Total Deposits 217 224 441 639 430 1,069
------ ------ ------ ------ ------ --------
FHLB Advances and other
borrowings (176) 25 (151) (464) 63 (401)
------ ------ ------ ------ ------ --------
Total Interest-bearing liabilities $ 41 $ 249 $ 290 $ 175 $ 493 $ 668
------ ------ ------ ------ ------ --------
------ ------ ------ ------ ------ --------
Net interest income increase $ 374 $ 853
------ --------
------ --------
- ----------------------------------------------------------------------------------------------------------------------------
(1) Includes interest on loans past due 90 days or more
(2) Includes primarily U. S. Government Securities
Page 11
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.
Nonperforming Assets As Of
--------------------------
December 31, June 30,
------------ --------
1997 1997
------------ --------
(Dollars in Thousands)
Non-accruing loans:
One to four Family $ 680 $ 618
Commercial real estate ---- 154
Multi-family ---- ----
Mobile Homes 83 52
Credit Cards ---- ----
Consumer 512 428
Commercial Business 280 ----
---------- ----------
Total $ 1,555 $ 1,252
---------- ----------
Accruing loans delinquent more than 90 days:
One to four Family $ ---- $ ----
Commercial real estate ---- ----
Multi-family ---- ----
Mobile Homes ---- ----
Credit Cards 179 ----
Consumer ---- ----
Commercial Business ---- ----
---------- ----------
Total $ 179 $ ----
---------- ----------
Foreclosed Assets:
One to four Family $ 194 $ 311
Commercial real estate ---- ----
Multi-family ---- ----
Mobile Homes 109 124
Credit Cards ---- ----
Consumer 55 158
Commercial Business ---- ----
---------- ----------
Total $ 358 $ 593
---------- ----------
Total non-performing assets $ 2,092 $ 1,845
---------- ----------
---------- ----------
Total as a percentage of total assets 0.36% 0.33
---------- ----------
---------- ----------
Total Non-performing loans as a percentage
of total loans 0.39% 0.28%
---------- ----------
---------- ----------
(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.
(3) Nonperforming assets includes nonaccruing loans, accruing loans
delinquent more than 90 days and foreclosed assets.
Page 12
On all loans except credit cards loans, 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. Credit card loans
accrue interest income until 120 days delinquent, at that time the loans is
charged off to the allowance for loan loss.
Nonperforming assets increased to $2.1 million at December 31, 1997 from
$1.8 million at June 30, 1997, an increase of $247,000. In addition, the ratio
of nonperforming assets to total assets, which is one indicator of credit risk
exposure, increased to 0.36% at December 31, 1997 as compared to 0.33% at June
30, 1997.
Nonaccruing loans increased to $1.6 million at December 31, 1997 from $1.3
million at June 30, 1997, an increase of $303,000. Included in nonaccruing
loans at December 31, 1997 were 21 loans totaling $680,000 secured by one- to
four-family real estate, six mobile home loans totaling $83,000, four
commercial business loans totaling $280,000 and forty consumer loans totaling
$512,000. For the six months ended December 31, 1997, gross interest income of
$195,092 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 $40,326 was recognized as income on loans accounted
for on a non-accrual basis.
Accruing loans delinquent more than 90 days increased by $179,311 due to
credit card loans. The Company began issuing credit cards in fiscal 1997.
Foreclosed assets decreased to $358,000 at December 31, 1997 from $593,000
at June 30, 1997, a decrease of $235,000.
At December 31, 1997, the Bank had approximately $8.5 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 December 31, 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
December 31, 1997 will be adequate in the future.
Page 13
The following table sets forth information with respect to activity in the
Bank's allowance for losses on loans during the periods indicated.
Six Months Ended
----------------------
12/31/97 12/31/96
-------- --------
(Dollars in Thousands)
BALANCE AT BEGINNING OF PERIOD $ 4,526 $ 4,129
CHARGE-OFFS:
One- to four-family (77) (48)
Commercial ---- ----
Multi-family ---- ----
Consumer (541) (222)
Credit Cards (330) ----
Mobile homes (117) (113)
-------- ---------
Total charge-offs $ (1,065) $ (383)
-------- ---------
RECOVERIES:
One- to four-family $ 10 $ 14
Commercial ---- 493
Multi-family ---- 46
Commercial business ---- 1
Consumer 87 83
Credit Cards 141 ----
Mobile homes 15 27
-------- ---------
Total recoveries $ 253 $ 664
-------- ---------
Net (charge-offs) recoveries $ (812) $ 281
Additions charged to operations 1,330 154
-------- ---------
Balance at end of period $ 5,044 $ 4,564
-------- ---------
-------- ---------
Ratio of net (charge-offs) recoveries during
the period to average loans outstanding
during the period (0.18)% 0.06%
-------- ---------
-------- ---------
Ratio of allowance for loan losses to total
loans at end of period 1.14% 1.03%
-------- ---------
-------- ---------
Ratio of allowance for loan losses to non-performing
loans at end of period (1) 290.89% 169.73%
-------- ---------
-------- ---------
(1) Nonperforming loans includes nonaccruing loans and accruing loans
delinquent more than 90 days.
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 14
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
At December 31, 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 $ 1,381 33.53% $ 1,540 36.50%
Commercial and multi-family real estate (1) 884 21.46% 926 21.94%
Mobile homes 136 3.29% 145 3.43%
Consumer 1,291 31.35% 1,254 29.73%
Credit Cards 960 0.85% 329 0.51%
Agricultural 106 2.58% 77 1.82%
Commercial business 286 6.94% 255 6.07%
-------- ------ -------- --------
Total $ 5,044 100.00% $ 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
losses on loans charged to expense.
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
GENERAL. The Company's net income increased $357,000 to $1.6 million for
the three months ended December 31, 1997 as compared to $1.3 million for the
three months ended December 31, 1996. As discussed in more detail below, this
increase was due primarily to the increase in noninterest income $1.3 million,
and an increase in net interest income of $374,000 which were partially offset
by an increase in noninterest expense of $441,000 and an increase in the
provision for losses on loans of $740,000.
INTEREST INCOME. Interest income increased $664,000 from $11.0 million
for the three months ended December 31, 1996 to $11.6 million for the three
months ended December 31, 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 8.37% to 8.49% and the average balance of interest
earning assets increased $23.9 million when comparing the three months ended
December 31, 1997 to the same period in the prior fiscal year.
Page 15
INTEREST EXPENSE. Interest expense increased $290,000 from $6.2 million
for the three months ended December 31, 1996 to $6.5 million for the three
months ended December 31, 1997. This increase was largely attributable to an
increase in the average balance of interest bearing liabilities. The average
rates on interest bearing liabilities remained stable at 5.13% for the three
months ended December 31, 1996 and December 31, 1997, respectively. The
average balance of interest bearing liabilities increased $22.2 million for the
three months ended December 31, 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 December 31, 1997 as compared to December 31, 1996 increased 11
basis points to 3.75%. 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. During the three months ended December
31, 1997, the Company recorded a provision for losses on loans of $804,000 as
compared to $64,000 for the three months ended December 31, 1996. The
provision for loan losses of $804,000 for the three months ended December 31,
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.
NONINTEREST INCOME. Noninterest income was $2.8 million for the three
months ended December 31, 1997 as compared to $1.5 million for the three months
ended December 31, 1996, an increase of $1.3 million.
Fees on deposits increased $179,000 for the three months ended December
31, 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 $1.4 million for the three months
ended December 31, 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, late fees and other
miscellaneous fees. This credit card program was initiated in fiscal 1997.
Interest income on credit card loans is included in interest income on loans.
NONINTEREST EXPENSE. Noninterest expense increased $441,000 from $4.3
million for the three months ended December 31, 1996 to $4.7 million for the
three months ended December 31, 1997.
There was an increase of $511,000 in the cost of third party processors
of credit cards. 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 December 31, 1997 was $798,000 compared to $650,000 for the
three months ended December 31, 1996, an increase of $148,000. 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.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
GENERAL. The Company's net income increased $2.4 million to $3.3 million for
the six months ended December 31, 1997 as compared to $887,000 for the six
months ended December 31, 1996. As discussed in more detail below, this
increase was due primarily to the increase in noninterest income $2.5 million,
an increase in net interest income of $853,000 and a decrease in noninterest
expense of $1.6 million which were partially offset by an increase in the
provision for losses on loans of $1.2 million and an increase in income tax
expense of $1.3 million.
INTEREST INCOME. Interest income increased $1.5 million from $22.1
million for the six months ended December 31, 1996 to $23.6 million for the six
months ended December 31, 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 8.41% to 8.57% and the average balance of interest
earning assets increased $25.6 million when comparing the six months ended
December 31, 1997 to the same period in the prior fiscal year.
Page 16
INTEREST EXPENSE. Interest expense increased $668,000 from $12.5 million
for the six months ended December 31, 1996 to $13.1 million for the six months
ended December 31, 1996. The increase was primarily due to an increase in
average rates paid on interest-bearing liabilities and an increase in the
average balance of interest bearing liabilities. The average cost of funds
paid on interest bearing liabilities increased from 5.15% for the six months
ended December 31, 1996 to 5.17% for the six months ended December 31, 1996 and
the average balance of interest earnings assets increased $23.9 million when
comparing the six months ended December 31, 1997 to the same period in the
prior fiscal year.
NET INTEREST MARGIN. The Company's net interest margin for the six months
ended December 31, 1997 as compared to December 31, 1996 increased 14 basis
points to 3.80%. 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 six months ended December 31, 1997, the Company recorded a
provision for losses on loans of $1.3 million compared to $154,000 for the six
months ended December 31, 1996. The provision for loan losses of $1.3 million
for the six months ended December 31, 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 primarily to provide for future expected write-
offs on credit card loans. See "Asset Quality" for further discussion.
The allowance for loan losses at December 31, 1997 was $5.0 million. The
allowance increased from the June 30, 1997 balance primarily as a result of the
provision for loan losses of $1.3 million which was reduced by charge-offs
exceeding recoveries by $812,000. The ratio of allowance for loan losses to non-
performing loans at December 31, 1997 was 290.89% compared to 169.73% at
December 31, 1996. The allowance for losses on loans to total loans at
December 31, 1997 was 1.14% compared to 1.03% at December 31, 1996. The Bank's
management believes that the December 31, 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 $5.3 million for the six
months ended December 31, 1997 as compared to $2.9 million for the six months
ended December 31, 1996.
Fees on deposits increased $324,000 for the six months ended December 31,
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 $2.0 million for the six months
ended December 31, 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, late fees and other
miscellaneous fees. This credit card program was initiated in fiscal 1997.
Interest income on credit card loans is included in interest income on loans.
NONINTEREST EXPENSE. Noninterest expense decreased $1.6 million from
$11.1 million for the six months ended December 31, 1996 to $9.5 million for
the six months ended December 31, 1997. This decrease was primarily from a
decrease in federal insurance premiums and assessments of $3.0 million, which
was partially offset by an increase in compensation and employee benefits of
$260,000, an increase in other general and administrative expenses of $261,000,
and an increase in credit card processing expense of $856,000.
The decrease in the federal insurance premiums of $3.0 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
Page 17
assessment was charged to the Bank on September 30, 1996. In addition, the
quarterly assessment rate of the Bank was reduced from 23 basis points to 6.5
basis points which has resulted in a lower assessment expense to the Bank.
There was an increase of $856,000 in the cost of third party processors of
credit cards. 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 six months
ended December 31, 1996 was $1.7 million compared to $365,000 for the six
months ended December 31, 1996, a decrease of $1.3 million. This increase was
proportionate to the increase in the Company's income before income tax and due
to the increase in the effective tax rate to 33.7% for the six months ended
December 31, 1996 as compared to 29% for 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) Advances
from the Federal Home Loan Bank 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 4% 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
December 31, 1997, the Bank's regulatory liquidity ratio was 8.79%.
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 six months
ended December 31, 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 1998 at an amount of $10.0 million which will expire in January
1999. Management expects this line of credit to be renewed at that time.
There were no outstanding advances on this line of credit at December 31, 1997.
The Bank anticipates that it will have sufficient funds available to meet
current loan commitments. At December 31, 1997, the Bank had outstanding
commitments to originate or purchase loans of $25.6 million and to sell loans
of $22.0 million. The Bank had no commitments to purchase or sell 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 December 31, 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
Page 18
and submit a recapitalization plan. Under these capital
requirements, at December 31, 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 December 31, 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, 1996. 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, 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, 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
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.
HF FINANCIAL CORP.
FORM 10-Q
Page 19
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
The Annual Meeting of Stockholders of the Company was held on
November 19, 1997.
The individuals named below were declared to be duly elected directors of the
Company for terms to expire in 2000. The following is a record of the votes
cast in the election of Board of Directors of the Company:
For Withheld Non-Voters
--------- -------- ----------
Paul J. Hallem 2,877,956 17,141 78,618
JoEllen G. Koerner, Ph.D. 2,852,022 43,075 78,618
Wm. G. Pederson 2,875,664 19,433 78,618
The following is a record of votes cast in respect to the proposal to ratify
the appointment of McGladrey & Pullen, LLP as the Company's auditors fo fiscal
year ending June 30, 1998.
For 2,879,721 96.84%
Against 3,975 0.13%
Abstain 11,401 0.38%
Non-Voters 78,618 2.64%
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 20
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 21