<PAGE>
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 March 31, 1998
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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 South Main Avenue, Sioux Falls, SD 57102
- --------------------------------------------------------------------------------
(Address of principal executive office) (ZIP Code)
(605) 333-7556
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(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 April 30, 1998 there were outstanding 2,937,885 common shares, net of
212,815 shares of treasury stock, with $.01 par value, of the registrant.
<PAGE>
HF FINANCIAL CORP.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition
As of March 31, 1998 and June 30, 1997 1
Consolidated Statements of Income for the Three and
Nine months ended March 31, 1998 and 1997 2
Consolidated Statement of Stockholders' Equity
for the Nine months ended March 31, 1998 3
Consolidated Statements of Cash Flows for the Nine months
ended March 31, 1998 and 1997 4-5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Default upon Senior Securities 21
Item 4. Submission of Matters to a Vote
of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS March 31, June 30,
1998 1997
-------------------------
<S> <C> <C>
Cash and cash equivalents $ 22,245 $ 17,957
Securities available for sale 53,413 46,940
Loans receivable, net 420,739 440,019
Loans held for sale 12,571 3,483
Mortgage-backed securities available for sale 38,877 30,340
Accrued interest receivable 4,014 4,136
Foreclosed real estate and other properties 508 593
Office properties and equipment, at cost, net of accumulated
depreciation 14,639 15,070
Prepaid expenses and other assets 643 870
Loan servicing rights, net 1,344 1,134
Deferred income taxes 1,427 1,569
Intangible assets, net ---- 3
-------------------------
$ 570,420 $ 562,114
-------------------------
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 436,237 $ 418,186
Advances from Federal Home Loan Bank
and other borrowings 60,607 74,743
Advances by borrowers for taxes and insurance 7,557 4,074
Accrued interest payable 6,541 6,560
Other liabilities 4,026 5,577
-------------------------
Total Liabilities 514,968 509,140
-------------------------
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 March 31, 1998
and 3,134,530 shares outstanding at June 30, 1997 31 31
Additional paid-in capital 14,835 14,695
Retained earnings, substantially restricted 45,119 41,336
Unearned compensation (453) (453)
Net unrealized gain (loss) on securities available for sale 69 (222)
Less cost of 212,815 and 148,315 shares
of treasury stock at March 31, 1998 and June 30, 1997 (4,149) (2,413)
-------------------------
Total Stockholders' Equity 55,452 52,974
-------------------------
$ 570,420 $ 562,114
-------------------------
-------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 1
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31, Nine months ended March 31,
---------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans receivable $ 9,855 $ 9,468 $ 30,399 $ 28,822
Mortgage-backed securities 468 602 1,403 2,162
Investment securities and other interest bearing deposits 1,079 743 3,224 1,932
-------- -------- -------- --------
11,402 10,813 35,026 32,916
-------- -------- -------- --------
Interest expense:
Deposits 5,296 5,089 16,468 15,192
Advances from FHLB and other borrowed money 899 1,037 2,867 3,406
-------- -------- -------- --------
6,195 6,126 19,335 18,598
-------- -------- -------- --------
Net interest income 5,207 4,687 15,691 14,318
Provision for losses on loans 898 166 2,228 320
-------- -------- -------- --------
Net interest income after provision for losses on loans 4,309 4,521 13,463 13,998
-------- -------- -------- --------
Noninterest income:
Loan servicing income 309 370 863 852
Loan fees and service charges 253 188 930 636
Fees on deposits 518 410 1,623 1,191
Commission and insurance income 165 156 575 535
Appraisal and inspection fees 90 90 269 357
Gain on sale of securities, net ---- 148 10 150
Gain on sales of loans 193 47 480 328
Credit card fee income 1,533 ---- 3,517 ----
Other (6) 325 131 577
-------- -------- -------- --------
3,055 1,734 8,398 4,626
-------- -------- -------- --------
Noninterest expense:
Compensation and employee benefits 2,590 2,347 7,522 7,019
Occupancy and equipment 689 721 1,990 2,178
Federal insurance premiums and assessment 68 43 205 3,156
Credit card processing expense 799 173 1,655 173
Other general and administrative expenses 1,064 1,030 3,126 2,831
Losses, provision for losses and expenses on foreclosed
real estate and other properties, net 42 82 265 156
-------- -------- -------- --------
5,252 4,396 14,763 15,513
-------- -------- -------- --------
Income before income taxes 2,112 1,859 7,098 3,111
Income tax expense 696 551 2,376 916
-------- -------- -------- --------
Net income $ 1,416 $ 1,308 $ 4,722 $ 2,195
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share:
Basic $ 0.48 $ 0.43 $ 1.59 $ 0.73
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ 0.46 $ 0.43 $ 1.54 $ 0.71
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements
Page 2
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended March 31, 1998
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional Unrealized
Common Paid-In Retained Unearned Treasury Gain (Loss)
Stock Capital Earnings Compensation Stock Net of tax
------------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $ 31 $ 14,695 $ 41,336 $ (453) $ (2,413) $ (222)
Net income ---- ---- 4,722 ---- ---- ----
Exercise of stock options for 13,150 shares ---- 140 ---- ---- ---- ----
Cash dividends ($0.315 per share)
on common stock ---- ---- (939) ---- ---- ----
Adjustment to unrealized gain (loss) on
available for sale securities, net of tax ---- ---- ---- ---- ---- 291
Purchase of Treasury Stock ---- ---- ---- ---- (1,736) ----
Amortization of unearned compensation ---- ---- ---- ---- ---- ----
-------- -------- -------- -------- -------- -------------
Balance, March 31, 1998 $ 31 $ 14,835 $ 45,119 $ (453) $ (4,149) $ 69
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements
Page 3
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,722 $ 2,195
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans 2,228 320
Depreciation 1,127 1,043
Amortization of premiums and discounts, net:
Securities (10) 58
Mortgage-backed securities and loans (101) (34)
Reduction in cost of intangible assets 3 21
Reduction in loan servicing rights 155 97
Amortization of unearned compensation ---- 3
(Decrease) in deferred loan fees (93) (361)
Loans originated for resale (62,080) (32,715)
Proceeds from the sale of loans 62,560 33,043
(Gain) on sale of loans (480) (328)
(Gain) loss on sale of securities (10) (150)
Losses and provisions for losses on sales of foreclosed
real estate and other properties, net 156 31
(Gain) on disposal of equipment (9) (3)
Decrease in accrued interest receivable 122 305
(Increase) decrease in prepaid expenses and other assets 227 (359)
(Decrease) increase in other liabilities (1,570) 615
Decrease in deferred income tax 142 35
---------- ----------
Net cash provided by operating activities $ 7,089 $ 3,816
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans purchased (11,535) (10,594)
Loans made to customers (122,888) (94,658)
Principal collected on loans 125,125 90,503
Sale of participating interest in loans 16,550 6,124
Purchase of mortgage-backed securities (12,507) ----
Proceeds from sale/maturities of mortgage-backed securities ---- 13,236
Repayment of mortgage-backed securities 4,051 14,103
Securities available for sale:
Sales and maturities 39,975 11,048
Purchases (46,117) (20,446)
Proceeds from sale of property and equipment 55 70
Purchase of property and equipment: (742) (1,885)
Purchase of Loan servicing rights (365) (252)
Proceeds from sale of foreclosed real estate
and other properties, net 734 192
---------- ----------
Net cash provided by (used in) investing activities $ (7,664) $ 7,441
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
Page 4
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 18,051 $ 20,060
Proceeds of advances from Federal Home Loan Bank
and other borrowings 25,000 22,000
Payments on advances from Federal Home Loan Bank
and other borrowings (39,136) (38,355)
Increase (decrease) in advances by borrowers for
taxes and insurance 3,483 1,969
Purchase of treasury stock (1,736) (1,219)
Proceeds from issuance of common stock 140 114
Cash dividends paid (939) (813)
---------- ----------
Net cash provided by financing activities $ 4,863 $ 3,756
---------- ----------
Increase in cash and cash equivalents $ 4,288 $ 15,013
Cash and cash equivalents:
Beginning 17,957 11,145
---------- ----------
Ending $ 22,245 $ 26,158
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 5
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Nine months ended March 31, 1998 and 1997
(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 March 31, 1998:
<TABLE>
<CAPTION>
Amount Percent
------ -------
<S> <C> <C>
Tier I (Tangible) capital:
Required . . . . . . . . . . . $17,085 3.00%
Actual. . . . . . . . . . . . . 43,455 7.63
Excess. . . . . . . . . . . . . 26,370 4.63%
Risk-based capital:
Required. . . . . . . . . . . . $30,051 8.00%
Actual. . . . . . . . . . . . . 48,150 12.82
Excess. . . . . . . . . . . . . 18,099 4.82%
</TABLE>
NOTE 3. EARNINGS PER SHARE
The Company adopted the Financial Accounting Standards Board ("FASB")
Statement No. 128, "Earnings Per Share" for the period ending March 31, 1998.
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 March 31, 1997 which
increased basic earnings per share by 1 cent. The Company restated the nine
months ended March 31, 1997 which increased basic earnings per share by 3 cents.
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 March 31, 1998 and 1997 as
adjusted was 2,975,126 and 3,008,189 respectively. The weighted average number
of common shares outstanding for the nine month period ended March 31, 1998 and
1997 as adjusted was 2,972,863 and 3,014,497 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 March 31, 1998 and 1997 as adjusted was 3,065,626 and 3,074,739
respectively. The weighted average number of common and dilutive potential
common equivalent shares outstanding for the nine month period ended March 31,
1998 and 1997 as adjusted was 3,058,612 and 3,084,387 respectively. The Company
restated the three and nine months ended March 31, 1997 which increased diluted
earnings per share by 1 cent for each period.
Page 6
<PAGE>
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 March 31, 1998, the Company had total assets of $570.4 million, an
increase of $8.3 million from the level at June 30, 1997. The increase in
assets was due primarily to an increase in loans held for sale of $9.1 million,
mortgage-backed securities of $8.5 million, securities available for sale of
$6.5 million and cash and cash equivalents of $4.3 million. The increase in
loans held for sale, mortgage-backed securities, securities available for sale
and cash and cash equivalents was funded primarily by a decrease in loans
receivable of $19.3 million and an increase in deposits of $18.1 million from
the levels at June 30, 1997. The remaining excess funds received from the
deposits were used to paydown advances from Federal Home Loan Bank and other
borrowings by $14.1 million from levels at June 30, 1997. In addition,
stockholders' equity increased from $53.0 million at June 30, 1997 to $55.0
million at March 31, 1998, primarily due to net income of $4.7 million and the
change in the net unrealized gain (loss) on securities available for sale of
$291,000, which was offset by the payment of cash dividends of $939,000 to the
Company's stockholders and the purchase of treasury stock of $1.7 million.
Page 7
<PAGE>
The decrease in loans receivable of $19.3 million was primarily the result
of amortizations, sales and prepayments of principal exceeding originations. The
Company had an increase in principal collected on loans of $34.6 million and an
increase in the sale of participating interests in loans of $10.4 million as
compared to the same period in the prior fiscal year which was partially offset
by an increase in originations and purchases of loans of $29.1 million in the
nine months ended March 31, 1998 as compared to the same period in the prior
fiscal year. The increase in the principal collected on loans resulted primarily
from the demand of consumers who are refinancing to obtain lower interest rate
loans in the current rate environment. The Company has attempted to maintain its
yield on new originations and has been reluctant to match competitors' lower
interest rates on certain loan types such as multi-family loans and consumer
loans which has resulted in funds being available to invest in mortgage-backed
securities and securities available for sale.
The increase in mortgage-backed securities of $8.5 million was primarily
the result of purchases exceeding amortizations and prepayments of principal.
The Bank purchased mortgage-backed securities in the amount of $12.5 million
during the nine months ended March 31, 1998. The purchased mortgage-backed
securities were issued by US Government Agencies which have a balloon feature of
five or seven years.
The increase in securities from the level at June 30, 1997 is primarily due
to purchases of $46.0 million exceeding sales and maturities of securities
available for sale of $40.0 million during the nine months ended March 31, 1998.
The purchased securities available for sale were issued by US Government
Agencies with a final maturity of three years or less.
The $18.1 million increase in deposits was primarily due to an increase in
savings accounts of $17.7 million, an increase in checking accounts of $12.9
million, and an increase in money market accounts of $7.7 million which were
partially offset by a decrease in certificates of deposit of $20.2 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 March 31, 1998, the Bank had total
deposits from local governmental entities of $45.3 million.
Advances from the FHLB and other borrowings decreased $14.1 million for the
nine month period ended March 31, 1998 primarily due to the repayment of $39.1
million on advances and other borrowings during the nine month period ended
March 31, 1998. 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
<PAGE>
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 nine months ended March 31, 1998 and 1997 include fees which are considered
adjustments to yield.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------------------
1998 1997
------------------------------------ -------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- ----------- ------ ----------- ----------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) . . . . . . . . . . $ 440,438 $ 9,855 8.95% $ 439,435 $ 9,468 8.62%
Mortgage-backed securities . . . . . . . 29,598 468 6.32% 37,062 602 6.50%
Other investment securities (2). . . . . 69,203 995 5.75% 45,988 651 5.66%
FHLB stock . . . . . . . . . . . . . . . 5,222 84 6.43% 5,222 92 7.05%
----------- ----------- ------ ----------- ----------- ------
Total interest-earning assets . . . . . . . $ 544,461 $ 11,402 8.38% $ 527,707 $ 10,813 8.20%
----------- ------ ----------- ------
----------- ------ ----------- ------
Non-interest earning assets. . . . . . . 28,783 27,704
----------- -----------
Total assets. . . . . . . . . . . . . . . . $ 573,244 $ 555,411
----------- -----------
----------- -----------
Interest-bearing liabilities:
Deposits:
Now and money market accounts. . . . . . $ 91,174 $ 567 2.49% $ 69,954 $ 445 2.54%
Savings accounts . . . . . . . . . . . . 53,510 468 3.50% 30,407 153 2.01%
Certificates of deposit. . . . . . . . . 291,067 4,261 5.86% 311,472 4,491 5.77%
----------- ----------- ------ ----------- ----------- ------
Total deposits. . . . . . . . . . . . $ 435,751 $ 5,296 4.86% $ 411,833 $ 5,089 4.94%
FHLB Advances and other borrowings . . . 63,276 899 5.68% 74,494 1,037 5.57%
----------- ----------- ------ ----------- ----------- ------
Total interest-bearing liabilities. . . . . $ 499,027 $ 6,195 4.97% $ 486,327 $ 6,126 5.04%
----------- ------ ----------- ------
----------- ------ ----------- ------
Other liabilities. . . . . . . . . . . 18,296 17,610
----------- -----------
Total liabilities . . . . . . . . . . . . . $ 517,323 $ 503,937
Equity . . . . . . . . . . . . . . . . . 55,921 51,474
----------- -----------
Total liabilities and equity. . . . . . . . $ 573,244 $ 555,411
----------- -----------
----------- -----------
Net interest income; interest rate spread . $ 5,207 3.41% $ 4,687 3.16%
----------- ------ ----------- ------
----------- ------ ----------- ------
Net interest margin (3) . . . . . . . . . . 3.83% 3.55%
------ ------
------ ------
</TABLE>
Page 9
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended March 31,
----------------------------------------------------------------------------------
1998 1997
----------------------------------- ----------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- --------- ------ ----------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 446,817 $ 30,399 9.07% $ 436,976 $ 28,822 8.79%
Mortgage-backed securities 29,370 1,403 6.37% 44,281 2,162 6.51%
Other investment securities (2) 67,761 2,956 5.82% 39,974 1,655 5.52%
FHLB stock 5,222 268 6.84% 5,222 277 7.07%
----------- --------- ------ ----------- ---------- -------
Total interest-earning assets 549,170 35,026 8.50% 526,453 32,916 8.34%
--------- ------ ---------- -------
Non-interest earning assets. 29,753 27,757
----------- -----------
Total assets $ 578,923 $ 554,210
----------- -----------
----------- -----------
Interest-bearing liabilities:
Deposits:
Now and money market accounts $ 86,890 $ 1,641 2.52% $ 69,634 $ 1,338 2.56%
Savings accounts 54,765 1,492 3.63% 30,530 472 2.06%
Certificates of deposit 297,657 13,335 5.97% 304,853 13,382 5.85%
----------- --------- ------ ----------- ---------- -------
Total deposits 439,312 16,468 5.00% 405,017 15,192 5.00%
FHLB Advances and other borrowings 66,234 2,867 5.77% 80,619 3,406 5.63%
----------- --------- ------ ----------- ---------- -------
Total interest-bearing liabilities 505,546 19,335 5.10% 485,636 18,598 5.11%
--------- ------ ---------- -------
Other liabilities 18,491 17,600
----------- -----------
Total liabilities 524,037 503,236
Equity 54,886 50,974
----------- -----------
Total liabilities and equity $ 578,923 $ 554,210
----------- -----------
----------- -----------
Net interest income; interest rate spread $ 15,691 3.40% $ 14,318 3.23%
--------- ------ ---------- -------
--------- ------ ---------- -------
Net interest margin (3) 3.81% 3.63%
------ -------
------ -------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE>
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.
<TABLE>
<CAPTION>
Three months ended March 31, Nine months ended March 31,
---------------------------------------- ----------------------------------------
1998 vs 1997 1998 vs 1997
---------------------------------------- ----------------------------------------
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)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 22 $ 365 $ 387 $ 670 $ 907 $ 1,577
Mortgage-backed securities (120) (14) (134) (712) (47) (759)
Other investment securities (2) 331 13 344 1,212 89 1,301
FHLB stock ---- (8) (8) ---- (9) (9)
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets $ 233 $ 356 $ 589 $ 1,170 $ 940 $ 2,110
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities:
Deposits:
Now and money markets $ 134 $ (12) $ 122 $ 326 $ (23) $ 303
Savings accounts 160 156 315 660 360 1,020
Certificates of deposit (296) 66 (230) (322) 275 (47)
---------- ---------- ---------- ---------- ---------- ----------
Total Deposits (3) 210 207 664 612 1,276
---------- ---------- ---------- ---------- ---------- ----------
FHLB Advances and other
borrowings (158) 20 (138) (623) 84 (539)
---------- ---------- ---------- ---------- ---------- ----------
Total Interest-bearing liabilities $ (161) $ 230 $ 69 $ 41 $ 696 $ 737
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Net interest income increase
$ 520 $ 1,373
---------- ----------
---------- ----------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest on loans past due 90 days or more
(2) Includes primarily U. S. Government Securities
Page 11
<PAGE>
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.
<TABLE>
<CAPTION>
Nonperforming Assets As Of
------------------------------
March 31, 1998 June 30, 1997
-------------- -------------
(Dollars in Thousands)
<S> <C> <C>
Non-accruing loans:
One to four Family $ 729 $ 618
Commercial real estate ---- 154
Multi-family ---- ----
Mobile Homes 100 52
Credit Cards ---- ----
Consumer 570 428
Agriculture 250 ----
Commercial Business 365 ----
---------- ----------
Total $ 2,014 $ 1,252
---------- ----------
Accruing loans delinquent more than 90 days:
One to four Family $ ---- $ ----
Commercial real estate ---- ----
Multi-family ---- ----
Mobile Homes ---- ----
Credit Cards 291 ----
Consumer ---- ----
Agriculture ---- ----
Commercial Business ---- ----
---------- ----------
Total $ 291 $ ----
---------- ----------
Foreclosed Assets:
One to four Family $ 123 $ 311
Commercial real estate ---- ----
Multi-family ---- ----
Mobile Homes 86 124
Credit Cards ---- ----
Consumer 299 158
Agriculture ---- ----
Commercial Business ---- ----
---------- ----------
Total $ 508 $ 593
---------- ----------
Total non-performing assets (3) $ 2,813 $ 1,845
---------- ----------
---------- ----------
Total as a percentage of total assets (2) 0.49% 0.33%
---------- ----------
---------- ----------
Total Non-performing loans as a percentage
of total loans 0.53% 0.28%
---------- ----------
---------- ----------
</TABLE>
(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
<PAGE>
On all loans except credit card 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 related
accrued interest and deferred fees are reversed out of current year earnings.
Nonperforming assets increased to $2.8 million at March 31, 1998 from $1.8
million at June 30, 1997, an increase of $968,000. In addition, the ratio of
nonperforming assets to total assets, which is one indicator of credit risk
exposure, increased to 0.49% at March 31, 1998 as compared to 0.33% at June 30,
1997.
Nonaccruing loans increased to $2.0 million at March 31, 1998 from $1.3
million at June 30, 1997, an increase of $762,000. Included in nonaccruing loans
at March 31, 1998 were nineteen loans totaling $729,000 secured by one- to
four-family real estate, eight mobile home loans totaling $100,000, nine
commercial business loans totaling $365,000, thirty-four consumer loans totaling
$570,000 and one agriculture loan totaling $250,000. For the nine months ended
March 31, 1998, gross interest income of $203,311 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 $61,660 was
recognized as income on loans accounted for on a non-accrual basis.
Accruing loans delinquent more than 90 days increased by $290,528 due to
credit card loans. The Company began investing in credit cards in fiscal 1997.
Foreclosed assets decreased to $508,000 at March 31, 1998 from $593,000 at
June 30, 1997, a decrease of $85,000.
At March 31, 1998, the Bank had approximately $9.5 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 March 31, 1998
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
March 31, 1998 will be adequate in the future.
Page 13
<PAGE>
The following table sets forth information with respect to activity in the
Bank's allowance for losses on loans during the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
3/31/98 3/31/97
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of period $ 4,526 $ 4,129
CHARGE-OFFS:
One- to four-family (77) (78)
Commercial ---- ----
Multi-family ---- ----
Consumer (797) (484)
Agriculture ---- ----
Credit Cards (519) ----
Mobile homes (154) (155)
---------- ----------
Total charge-offs $ (1,547) $ (717)
---------- ----------
RECOVERIES:
One-to four-family $ 12 $ 14
Commercial ---- 493
Multi-family ---- 46
Commercial business ---- 1
Consumer 134 170
Agriculture ---- ----
Credit Cards 161 ----
Mobile homes 25 37
---------- ----------
Total recoveries $ 332 $ 761
---------- ----------
Net (charge-offs) recoveries $ (1,215) $ 44
Additions charged to operations 2,228 320
---------- ----------
Balance at end of period $ 5,539 $ 4,493
---------- ----------
---------- ----------
Ratio of net (charge-offs) recoveries during the period to
average loans outstanding during the period (0.27)% 0.01%
---------- ----------
---------- ----------
Ratio of allowance for loan losses to total loans at end
of period 1.26% 1.04%
---------- ----------
---------- ----------
Ratio of allowance for loan losses to non-performing
loans at end of period (1) 240.30% 224.76%
---------- ----------
---------- ----------
</TABLE>
(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
<PAGE>
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
At March 31, 1998 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)
<S> <C> <C> <C> <C>
One- to four- family $ 1,333 31.64% $ 1,540 36.50%
Commercial and multi-family real estate (1) 905 21.48% 926 21.94%
Mobile homes 119 2.82% 145 3.43%
Consumer 1,302 30.91% 1,254 29.73%
Credit Cards 1,389 1.51% 329 0.51%
Agricultural 130 3.08% 77 1.82%
Commercial business 361 8.56% 255 6.07%
---------- ----------- ---------- -----------
Total $ 5,539 100.00% $ 4,526 100.00%
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
(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 MARCH 31, 1998 AND MARCH 31, 1997
GENERAL. The Company's net income increased $108,000 to $1.4 million for
the three months ended March 31, 1998 as compared to $1.3 million for the three
months ended March 31, 1997. As discussed in more detail below, this increase
was due primarily to the increase in noninterest income of $1.3 million, and an
increase in net interest income of $520,000 which were partially offset by an
increase in noninterest expense of $856,000, an increase in the provision for
losses on loans of $732,000 and an increase in income tax expense of $145,000.
INTEREST INCOME. Interest income increased $589,000 from $10.8 million for
the three months ended March 31, 1997 to $11.4 million for the three months
ended March 31, 1998. 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 8.20% to 8.38% and the average balance of interest
earning assets increased $16.8 million when comparing the three months ended
March 31, 1998 to the same period in the prior fiscal year.
Page 15
<PAGE>
INTEREST EXPENSE. Interest expense increased $69,000 from $6.1 million for
the three months ended March 31, 1997 to $6.2 million for the three months ended
March 31, 1998. This increase was largely attributable to an increase in the
average balance of interest bearing liabilities. The average rates on interest
bearing liabilities remained relatively stable at 5.04% and 4.97% for the three
months ended March 31, 1997 and March 31, 1998, respectively. The average
balance of interest bearing liabilities increased $12.7 million for the three
months ended March 31, 1998 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 March 31, 1998 as compared to March 31, 1997 increased 28 basis points to
3.83%. 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 March 31,
1998, the Company recorded a provision for losses on loans of $898,000 as
compared to $166,000 for the three months ended March 31, 1997. The provision
for loan losses of $898,000 for the three months ended March 31, 1998 compared
to the same period in fiscal 1997 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 $3.1 million for the three
months ended March 31, 1998 as compared to $1.7 million for the three months
ended March 31, 1997, an increase of $1.3 million.
Fees on deposits increased $108,000 for the three months ended March 31,
1998 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 $1.5 million for the three months
ended March 31, 1998 as compared to the same period in fiscal 1997 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 $856,000 from $4.4
million for the three months ended March 31, 1997 to $5.3 million for the three
months ended March 31, 1998.
There was an increase of $626,000 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 March 31, 1998 was $696,000 compared to $551,000 for the three months
ended March 31, 1997, an increase of $145,000. 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 33.0% for the three months ended March 31,
1998 as compared to 29.6% for the same period in the prior fiscal year.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
GENERAL. The Company's net income increased $2.5 million to $4.7 million for
the nine months ended March 31, 1998 as compared to $2.2 million for the nine
months ended March 31, 1997. As discussed in more detail below, this increase
was due primarily to the increase in noninterest income of $3.8 million, an
increase in net interest income of $1.4 million and a decrease in noninterest
expense of $750,000 which were partially offset by an increase in the provision
for losses on loans of $1.9 million and an increase in income tax expense of
$1.5 million.
INTEREST INCOME. Interest income increased $2.1 million from $32.9 million
for the nine months ended March 31, 1997 to $35.0 million for the nine months
ended March 31, 1998. 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
Page 16
<PAGE>
earning assets increased from 8.34% to 8.50% and the average balance of interest
earning assets increased $22.7 million when comparing the nine months ended
March 31, 1998 to the same period in the prior fiscal year.
INTEREST EXPENSE. Interest expense increased $737,000 from $18.6 million
for the nine months ended March 31, 1997 to $19.3 million for the nine months
ended March 31, 1998. This increase was primarily due to an increase in the
average balance of interest bearing liabilities. The average rates on interest
bearing liabilities remained stable at 5.11% and 5.10% for the nine months ended
March 31, 1997 and March 31, 1998, respectively. The average balance of
interest bearing liabilities increased $19.9 million when comparing the nine
months ended March 31, 1998 to the same period in the prior fiscal year.
NET INTEREST MARGIN. The Company's net interest margin for the nine months
ended March 31, 1998 as compared to March 31, 1997 increased 18 basis points to
3.81%. 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 nine months ended March 31, 1998, the Company recorded a
provision for losses on loans of $2.2 million compared to $320,000 for the nine
months ended March 31, 1997. The provision for loan losses of $2.2 million for
the nine months ended March 31, 1998 compared to the same period in fiscal 1997
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 March 31, 1998 was $5.5 million. The
allowance increased from the June 30, 1997 balance primarily as a result of the
provision for loan losses of $2.2 million which was reduced by charge-offs
exceeding recoveries by $1.2 million. The ratio of allowance for loan losses to
non-performing loans at March 31, 1998 was 240.30% compared to 224.76% at March
31, 1997. The allowance for losses on loans to total loans at March 31, 1998
was 1.26% compared to 1.04% at March 31, 1997. The Bank's management believes
that the March 31, 1998 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 $8.4 million for the nine
months ended March 31, 1998 as compared to $4.6 million for the nine months
ended March 31, 1997.
Fees on deposits increased $432,000 for the nine months ended March 31,
1998 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 $3.5 million for the nine months
ended March 31, 1998 as compared to the same period in fiscal 1997 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 $750,000 from $15.5
million for the nine months ended March 31, 1997 to $14.8 million for the nine
months ended March 31, 1998. 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 $503,000, an
increase in other general and administrative expenses of $295,000 and an
increase in credit card processing expense of $1.5 million.
Page 17
<PAGE>
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 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 $1.5 million 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 nine months
ended March 31, 1998 was $2.4 million compared to $916,000 for the nine months
ended March 31, 1997, an increase of $1.5 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 33.5% for the nine months ended
March 31, 1998 as compared to 29.0% 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
March 31, 1998, the Bank's regulatory liquidity ratio was 8.94%.
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 nine months
ended March 31, 1998, 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 March 31, 1998.
The Bank anticipates that it will have sufficient funds available to meet
current loan commitments. At March 31, 1998, the Bank had outstanding
commitments to originate or purchase loans of $37.2 million and to sell loans of
$26.6 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 74,500 shares of common stock as of March 31, 1998. In
April of 1998, the Company initiated a third stock buy back program in which up
to 10% of the common
Page 18
<PAGE>
stock of the Company may be acquired beginning May 1, 1998 through April 30,
1999. No shares of common stock have been purchased pursuant to this program.
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 March 31, 1998, 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 7.63% at March 31, 1998
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 March 31, 1997. 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.
Page 19
<PAGE>
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.
The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits". This Statement standardizes the disclosure
requirements for pensions and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer useful. This
Statement also permits reduced disclosures for nonpublic entities. This
Statement supersedes the disclosure requirements in FASB Statements No. 87,
"Employers' Accounting for Pensions, No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". This Statement is effective for financial
statements for periods beginning after December 15, 1997.
Page 20
<PAGE>
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
On April 24, 1998 the Board of Directors declared a three-for-two
stock split in the form of a stock dividend of one-half share of
common stock for each one share outstanding, payable to shareholders
of record on May 8, 1998. The Payment Date will be on or about May
29, 1998.
Item 6. EXHIBITS AND REPORTS OF FORM 8-K
a. Exhibit 27 is attached
b. A Report Form 8-K was filed on 4-15-98.
- --------------------------------------------------------------------------------
No other information is required to be filed under Part II of the form
Page 21
<PAGE>
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: 4/30/98 by /s/ Curtis L. Hage
---------------------- ------------------------------------
Curtis L. Hage, Chairman, President
and Chief Executive Officer
(Duly Authorized Officer)
Date: 4/30/98 by /s/ Donald F. Bertsch
---------------------- ------------------------------------
Donald F. Bertsch, Senior
Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
Page 22
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997
<PERIOD-START> JUL-01-1997 JUL-01-1996
<PERIOD-END> MAR-31-1998 MAR-31-1997
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<INT-BEARING-DEPOSITS> 11,000 12,000
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<ALLOWANCE> 5,539 4,493
<TOTAL-ASSETS> 570,420 561,287
<DEPOSITS> 436,237 418,226
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0 0
0 0
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<TOTAL-LIABILITIES-AND-EQUITY> 570,420 561,287
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<INTEREST-OTHER> 0 0
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<INTEREST-DEPOSIT> 16,468 15,192
<INTEREST-EXPENSE> 19,335 18,598
<INTEREST-INCOME-NET> 15,691 14,318
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<EXPENSE-OTHER> 14,763 15,513
<INCOME-PRETAX> 7,098 3,111
<INCOME-PRE-EXTRAORDINARY> 7,098 3,111
<EXTRAORDINARY> 0 0
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<NET-INCOME> 4,722 2,195
<EPS-PRIMARY> 1.59 0.73
<EPS-DILUTED> 1.54 0.71
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