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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ____________________ TO _________________________
COMMISSION FILE NUMBER 0-19972
HF FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 46-0418532
- ---------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 South Main Avenue, Sioux Falls, South Dakota 57104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (605) 333-7556
-------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
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 requirements for
the past 90 days.
YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 23, 1999 there were 4,762,884 issued and outstanding shares of
the Registrant's Common Stock.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the bid and asked price of
such stock as of September 23, 1999 was $53.2 million (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the registrant that such person is an affiliate of the
Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the Proxy Statement for 1999 Annual Meeting
of Stockholders.
1
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PART I
ITEM 1. BUSINESS
THE COMPANY
HF Financial Corp. (the "Company") was formed in November 1991, for the purpose
of owning all of the outstanding stock of Home Federal Savings Bank ("Home
Federal" or the "Bank") issued in the mutual to stock conversion of Home Federal
(the "Conversion"). The Company acquired all of the outstanding stock of the
Bank on April 8, 1992. In October 1994, the Company acquired and began operating
a mortgage subsidiary as HomeFirst Mortgage Corp. ("Mortgage Corp."). This
subsidiary ceased operations in fiscal year 1998. 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 Company became the
owner of 100% of HF Card Services effective as of July 1998. At June 30, 1999,
the Company had total assets of $658.6 million and consolidated stockholders'
equity of $48.6 million (or 7.37% of assets).
The Company is incorporated under the laws of the State of Delaware and
generally is authorized to engage in any activity that is permitted by the
Delaware General Corporation Law. The activities of the Company itself have no
significant impact on the results of operations on a consolidated basis. Unless
otherwise indicated, all matters discussed herein relate to the Company, and its
direct and indirect subsidiaries, including without limitation, the Bank,
Mortgage Corp. and HF Card Services.
The executive offices of the Company, the Bank, the Mortgage Corp. and HF Card
Services are located at 225 South Main Avenue, Sioux Falls, South Dakota 57104.
The Company's telephone number at that address is (605) 333-7556.
THE BANK
Home Federal is a federally chartered stock savings bank headquartered in Sioux
Falls, South Dakota. Its deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF"), administered by the Federal Deposit
Insurance Corporation ("FDIC"). Originally chartered in 1929, Home Federal
serves 19 cities in eastern South Dakota through its main office in Sioux Falls
and its network of 24 retail banking offices located throughout eastern South
Dakota and one internet branch which is located at www.homefederal.com.
The Bank attracts deposits from the general public and uses such deposits,
together with borrowings and other funds, to originate one- to four-family
residential, consumer, multi-family, commercial real estate, construction,
agricultural, credit card and commercial business loans. The Bank's consumer
loan portfolio includes, among other things, mobile home loans, automobile
loans, home equity loans, credit card loans, loans secured by deposit accounts
and student loans.
The Bank also purchases mortgage-backed securities and invests in U.S.
Government and agency obligations and other permissible investments. Home
Federal does not rely on any brokered deposits and does not hold any
non-investment grade bonds (i.e., "junk bonds").
At June 30, 1999, the Bank's loan portfolio totalled $524.6 million, which
consisted of $138.2 million of one- to four- family residential mortgage loans,
$47.3 million of multi-family real estate loans, $59.1 million of commercial
real estate loans, $19.7 million of construction and development loans, $168.4
million of consumer loans, $29.6 million of agricultural loans and $62.3 million
of commercial business loans. On such date, the Bank had $41.6 million of
mortgage-backed securities and $61.0 million of investment securities.
MORTGAGE CORP.
HomeFirst Mortgage Corp. is a South Dakota Corporation which had an office in
Omaha, Nebraska. The Company ceased operations of the Mortgage Corp. during the
first quarter of fiscal 1998. 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 Mortgage Corp. had no activity
during fiscal year 1999.
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HF CARD SERVICES
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 the
membership interest of this entity. The Company became the owner of 100% of HF
Card Services effective as of July 1998. HF Card Services was established to
provide secured, partially-secured and unsecured credit cards nationwide to
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 credit card issuers.
OTHER SUBSIDIARIES
Home Federal, through its wholly-owned subsidiaries, Hometown Insurors, Inc. and
Mid-America Service Corporation, offers mortgage life, hazard and other
insurance products and appraisal services. See "Subsidiary Activities." In
addition, Home Federal's subsidiary, PMD, Inc., engages in the business of
buying, selling and managing repossessed real estate properties of Home Federal.
PMD, Inc. had no activity during fiscal year 1999.
SEGMENTS
The Company's reportable segments are banking, credit card and other. The
"banking" segment is conducted through the Bank and the "credit card" segment is
conducted through HF Card Services. The "other" segment is composed of smaller
nonreportable segments, the Company and inter-segment eliminations. See "Note 16
of the Notes to Consolidated Financial Statements".
MARKET AREA
Based on total assets at June 30, 1999, Home Federal is the largest thrift
institution headquartered in South Dakota. During its 70-year existence, among
its other lending activities, Home Federal served its customers located in
eastern and central South Dakota, including the cities of Sioux Falls, Brandon,
Pierre, Winner, Freeman, Dell Rapids, Hartford, Canton, Parker, Lennox,
Aberdeen, Mobridge, Brookings, Redfield, Dakota Dunes, Colman, Crooks, Chester
and Wentworth, and the communities surrounding such communities through its
network of 25 full service offices and one internet branch. The Bank's immediate
market area features a variety of agri-business, banking, financial services,
health care and light manufacturing firms.
HF Card Services provides services to customers nationwide.
LENDING ACTIVITIES
GENERAL. Historically, the Bank has originated fixed-rate one- to four-family
mortgage loans. Since 1984, however, the Bank has emphasized the origination of
adjustable-rate mortgage ("ARM") loans and short-term loans for retention in its
portfolio in order to increase the percentage of loans in its portfolio with
more frequent repricing or shorter maturities, and in some cases higher yields,
than fixed-rate mortgage loans. The Bank has continued to originate fixed-rate
mortgage loans in response to customer demand. While the Bank sold fixed-rate
loans with maturities of 15 years or greater and conventional ARM loans into the
secondary market, during fiscal 1999 the Bank sold the majority of the loans
with servicing released.
While the Bank primarily focuses its lending activities on the origination of
loans secured by first mortgages on owner-occupied one- to four-family
residences as well as consumer loans, the Bank also originates multi-family
residential and commercial real estate, construction, agricultural and
commercial business loans in its primary market area. In addition, the Bank
makes credit card loans to customers on a nationwide basis. The Bank originates
residential and non-owner occupied construction loans that are presold to
borrowers or held for sale by local builders and, on few occasions, makes land
acquisition and development loans. The Bank's one- to four-family loans are
primarily secured by homes located in its market area in South Dakota. At June
30, 1999, the Bank's net loan portfolio totalled $504.1 million.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowance for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family................ $138,238 26.35% $131,062 29.13% $165,573 36.50%
Multi-family....................... 47,283 9.01 54,560 12.12 59,971 13.22
Commercial......................... 59,061 11.26 38,002 8.44 34,252 7.55
Construction and development....... 19,696 3.76 12,804 2.85 5,315 1.17
------ ---- ------ ---- ----- ----
Total real estate loans ........... 264,278 50.38 236,428 52.54 265,111 58.44
------- ----- ------- ----- ------- -----
OTHER LOANS:
Consumer Loans:
Mobile home........................ 8,115 1.55 11,152 2.48 15,571 3.43
Automobiles........................ 74,255 14.16 66,044 14.67 66,483 14.66
Deposit account.................... 2,117 0.40 2,167 0.48 2,299 0.51
Student............................ 6,996 1.33 6,986 1.55 6,409 1.41
Junior liens....................... 46,556 8.87 41,599 9.24 38,736 8.54
Credit cards....................... 18,062 3.44 12,335 2.74 2,310 0.51
Other (1).......................... 12,304 2.35 15,944 3.54 20,934 4.61
------ ---- ------ ---- ------ ----
Total consumer loans............... 168,405 32.10 156,227 34.70 152,742 33.67
------- ----- ------- ----- ------- -----
Commercial business.................... 62,315 11.88 41,068 9.13 27,534 6.07
------ ----- ------ ---- ------ ----
Agricultural........................... 29,610 5.64 16,327 3.63 8,261 1.82
------ ---- ------ ---- ----- ----
Total other loans................ 260,330 49.62 213,622 47.46 188,537 41.56
------- ----- ------- ----- ------- -----
Total gross loans................ 524,608 100.00% 450,050 100.00% 453,648 100.00%
------- ------- ------- ------- ------- -------
------- ------- -------
LESS:
Loans in process................... (7,487) (5,199) (4,272)
Deferred fees and discounts........ (1,073) (1,514) (1,348)
Allowance for losses............... (11,991) (7,199) (4,526)
-------- ------- -------
Total loans receivable, net...... $504,057 $436,138 $443,502
-------- -------- --------
-------- -------- --------
<CAPTION>
At June 30,
-----------------------------------------
1996 1995
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family................ $178,198 41.12% $163,379 42.99%
Multi-family....................... 62,932 14.52 73,516 19.34
Commercial......................... 26,130 6.03 22,400 5.89
Construction and development....... 20,823 4.81 12,522 3.30
------ ---- ------ ----
Total real estate loans ........... 288,083 66.48 271,817 71.52
------- ----- ------- -----
OTHER LOANS:
Consumer Loans:
Mobile home........................ 20,031 4.62 25,462 6.70
Automobiles........................ 48,181 11.12 32,583 8.57
Deposit account.................... 2,210 0.51 2,761 0.73
Student............................ 5,729 1.32 2,884 0.76
Junior liens....................... 24,298 5.60 22,613 5.95
Credit cards....................... - - - 0.00 - - - 0.00
Other (1).......................... 25,475 5.88 10,784 2.84
------ ---- ------ ----
Total consumer loans............... 125,924 29.05 97,087 25.55
------- ----- ------ -----
Commercial business.................... 13,913 3.21 11,129 2.93
------ ---- ------ ----
Agricultural........................... 5,461 1.26 - - - 0.00
------ ---- ------ ----
Total other loans................ 145,298 33.52 108,216 28.48
------- ----- ------- -----
Total gross loans................ 433,381 100.00% 380,033 100.00%
------- ------- ------- -------
------- -------
LESS:
Loans in process................... (7,349) (10,934)
Deferred fees and discounts........ (1,480) (914)
Allowance for losses............... (4,129) (4,039)
------- -------
Total loans receivable, net...... $420,423 $364,146
-------- --------
-------- --------
</TABLE>
(1) Includes primarily second mortgage loans.
4
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The following table shows the composition of the Bank's loan portfolio by fixed-
and adjustable-rate loans at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS: (Dollars In Thousands)
Real Estate:
One- to four-family.............. $95,228 18.15% $69,679 15.48% $72,198 15.91%
Multi-family, commercial & 30,954 5.90 19,729 4.38 18,463 4.07
construction................... ------ ---- ------ ---- ------ ----
Total real estate loans........ 126,182 24.05 89,408 19.86 90,661 19.98
------- ----- ------ ----- ------ -----
Consumer (including mobile home loans).. 121,814 23.22 116,409 25.87 124,054 27.35
Agricultural............................ 6,402 1.22 982 0.22 1,293 0.29
Commercial business..................... 16,675 3.18 9,323 2.07 8,516 1.88
------ ---- ----- ---- ----- ----
Total fixed-rate loans......... 271,073 51.67 216,122 48.02 224,524 49.50
------- ----- ------- ----- ------- -----
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family............... 43,010 8.20 61,383 13.64 93,375 20.58
Multi-family, commercial &
construction.................... 95,086 18.13 85,637 19.03 81,075 17.87
------ ----- ------ ----- ------ -----
Total real estate loans........ 138,096 26.33 147,020 32.67 174,450 38.45
------- ----- ------- ----- ------- -----
Consumer (including mobile home loans).. 46,591 8.88 39,818 8.85 28,688 6.32
Agricultural............................ 23,208 4.42 15,345 3.41 6,968 1.54
Commercial business..................... 45,640 8.70 31,745 7.05 19,018 4.19
------ ---- ------ ---- ------ ----
Total adjustable-rate loans.... 253,535 48.33 233,928 51.98 229,124 50.50
------- ----- ------- ----- ------- -----
Total loans.................... 524,608 100.00% 450,050 100.00% 453,648 100.00%
------- ------- ------- ------- ------- -------
------- ------- -------
LESS:
Loans in process.................... (7,487) (5,199) (4,272)
Deferred fees and discounts......... (1,073) (1,514) (1,348)
Allowance for loan losses........... (11,991) (7,199) (4,526)
-------- ------- -------
Total loans receivable, net.... $504,057 $436,138 $443,502
-------- -------- --------
-------- -------- --------
<CAPTION>
At June 30,
-----------------------------------------
1996 1995
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
FIXED-RATE LOANS: (Dollars In Thousands)
Real Estate:
One- to four-family.............. $82,108 18.95% $ 73,460 19.33%
Multi-family, commercial &
construction................... 24,706 5.70 18,821 4.95
------ ---- ------ ----
Total real estate loans........ 106,814 24.65 92,281 24.28
------- ----- ------ -----
Consumer (including mobile home loans).. 114,434 26.40 94,955 24.99
Agricultural............................ - - - 0.00 - - - 0.00
Commercial business..................... 960 0.22 3,602 .95
--- ---- ----- ---
Total fixed-rate loans......... 222,208 51.27 190,838 50.22
------- ----- ------- -----
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family............... 105,389 24.32 96,213 25.32
Multi-family, commercial &
construction.................... 75,880 17.51 83,323 21.92
------ ----- ------ -----
Total real estate loans........ 181,269 41.83 179,536 47.24
------- ----- ------- -----
Consumer (including mobile home loans).. 16,951 3.91 2,132 .56
Agricultural............................ - - - 0.00 - - - 0.00
Commercial business..................... 12,953 2.99 7,527 1.98
------ ---- ----- ----
Total adjustable-rate loans.... 211,173 48.73 189,195 49.78
------- ----- ------- -----
Total loans.................... 433,381 100.00% 380,033 100.00%
------- ------- ------- -------
------- -------
LESS:
Loans in process.................... (7,349) (10,934)
Deferred fees and discounts......... (1,480) (914)
Allowance for loan losses........... (4,129) (4,039)
------- -------
Total loans receivable, net.... $420,423 $364,146
-------- --------
-------- --------
</TABLE>
5
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The following schedule illustrates the scheduled principal contractual
repayments of the Bank's loan portfolio at June 30, 1999. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------------
Due during years ending June 30, One- to Four- Multi-
Family Family Commercial (2)
------ ------ --------------
(Dollars in Thousands)
<S> <C> <C> <C>
2000 (1)......................... $ 4,071 $ 2,234 $ 8,047
2001............................. 4,384 2,423 8,741
2002............................. 4,723 2,627 9,496
2003 and 2004.................... 10,571 5,936 17,812
2005 to 2009..................... 34,462 19,805 33,919
2010 and following .............. 80,027 14,258 742
-------- -------- --------
Total............................ $138,238 $47,283 $ 78,757
-------- -------- --------
-------- -------- --------
<CAPTION>
Non-Real Estate
------------------------------------------------------------
Due during years ending June 30, Credit Commercial
Consumer Cards Agricultural Business Total
-------- ----- ------------ -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
2000 (1)......................... $ 36,413 $ 18,062 $ 13,950 $ 35,478 $118,255
2001............................. 36,980 - - - 2,645 5,642 60,815
2002............................. 36,438 - - - 2,886 6,164 62,334
2003 and 2004.................... 28,377 - - - 4,300 13,243 80,239
2005 to 2009..................... 12,135 - - - 5,432 1,788 107,541
2010 and following .............. - - - - - - 397 - - - 95,424
-------- -------- -------- -------- --------
Total............................ $150,343 $ 18,062 $29,610 $ 62,315 $524,608
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- --------------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
(2) Includes construction loans.
The total amount of loans due after June 30, 2000 which have predetermined
interest rates is $226.3 million, while the total amount of loans due after such
date which have floating or adjustable interest rates is $180.0 million.
Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of loans is substantially less than their
average contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare a conventional
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan rates are substantially higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgages are
substantially higher than current mortgage loan rates.
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ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. Residential loan originations
of this type are generated by the Company's marketing efforts, its present
customers, walk-in customers and referrals from real estate brokers and
builders. Historically, the Bank has focused its lending efforts primarily on
the origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences. At June 30, 1999, the Company's one- to four-family
residential mortgage loans totalled $138.2 million, or approximately 26.4% of
the Company's gross loan portfolio.
Historically, the Company has emphasized the origination of conventional ARM
loans for retention in its portfolio and fixed-rate conforming loans suitable
for sale in the secondary market. However, during fiscal 1999 the Company sold
conventional ARM loans into the secondary market. Presently, the Company follows
the practice of generally selling fixed rate conventional mortgage loans with
maturities of 15 years or greater. See "Originations, Purchases, Sales and
Servicing of Loans and Mortgage-Backed Securities." During the year ended June
30, 1999, the Company originated $24.5 million of adjustable-rate real estate
loans, the majority of which were secured by one- to four-family residential
real estate. During the same period, the Company originated $130.1 million of
fixed-rate real estate loans, the majority of which were secured by one- to
four-family residential real estate. The Bank's one- to four-family residential
mortgage originations are primarily in its market area.
The Company currently makes 15- and 30-year fixed- and adjustable-rate one- to
four-family residential mortgage loans in amounts up to 95% of the appraised
value of the collateral property provided that private mortgage insurance is
obtained in an amount sufficient to reduce the Company's exposure at or below
the 80% level. The Company currently offers an ARM loan which has a fixed rate
for the initial three years and converts to a one-year ARM loan for the
remainder of the life of the loan. The Company also offers a one-year ARM loan
with a rate below the Company's then current fixed-rate loan for a comparable
15- or 30-year term loan. These loans provide for up to a 2.0% annual cap and a
lifetime cap of 6.0% over the fully-indexed rate. These ARM products have an
interest rate margin generally 2.9% over the one-year Treasury Bill rate. These
loans provide for up to a 2.0% annual cap and a lifetime cap of 6.0% over the
fully-indexed rate calculated at the date of origination. As a consequence of
using caps, the interest rates on these loans are not as rate sensitive as is
the Company's cost of funds. The initial rate used for the loan is usually below
the fully-indexed rate and is determined by the Company in accordance with
market and competitive factors.
In addition, the Company offers a 30-year balloon loan which has a fixed-rate
for the first five or seven years of the loan term. At the end of the five- or
seven-year period, the loan converts to a 23- or 25-year fixed-rate loan at the
then current market rate provided that the borrower qualifies at the new rate.
If the borrower fails to qualify at the new rate, the loan becomes payable in
full. These loans are underwritten to conform to the Federal Home Loan Mortgage
Corporation's ("FHLMC") secondary market standards.
The Company also offers fixed-rate 15- through 30-year mortgage loans that
conform to secondary market standards (i.e., Federal National Mortgage Bank
("FNMA"), Government National Mortgage Bank ("GNMA") and FHLMC standards).
Interest rates charged on these fixed-rate loans are competitively priced on a
daily basis according to market conditions. Residential loans generally do not
include prepayment penalties. Most of these loans with maturities of 30 years
are held for sale or sold in the secondary market. While the Company has
generally retained servicing rights on such loans whenever possible, during
fiscal 1999 the Company sold the majority of its loans with servicing released.
The Bank also originates fixed-rate one- to four-family mortgage loans through
the South Dakota Housing Development Authority ("SDHDA") program. These loans
generally have terms not to exceed 30 years and are either insured by the FHA/VA
or private mortgage insuror or must have no more than a 80% loan to value ratio.
The Bank receives an origination fee of one percent of the loan amount from the
borrower and a servicing fee generally three-eighths of one percent from the
SDHDA for these services. The Bank is the largest servicer of loans for the
SDHDA. At June 30, 1999, the Bank serviced $344.1 million of mortgage loans for
the SDHDA.
In underwriting one- to four-family residential real estate loans, Home Federal
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan. These criteria are also applied to loans
purchased. Most property securing real estate loans made by Home Federal is
appraised by an appraiser employed by Mid-America Service Corporation, Home
Federal's wholly-owned subsidiary. Other appraisals are performed by independent
appraisers selected by Home Federal. Home Federal requires borrowers to obtain
title, fire and casualty
7
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insurance in an amount not less than the amount of the loan. Real estate loans
originated by the Bank contain a "due-on-sale" clause allowing the Bank to
declare the unpaid principal balance due and payable upon the sale of the
collateral property.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Bank engages in
multi-family and commercial real estate lending primarily in South Dakota and
the adjoining mid-western states. These lending activities may include existing
property or new construction development.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
multi-family and commercial real estate properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced (for example, if leases are not
obtained or renewed), the borrower's ability to repay the loan may be impaired.
The Bank presently originates adjustable-rate, short-term balloon payment,
fixed-rate multifamily and commercial real estate loans. The Bank's multi-family
and commercial real estate loan portfolio is secured primarily by apartment
buildings and, to a lesser extent, churches, motels, office buildings, strip
shopping centers and nursing homes. The terms of such loans are negotiated on a
case by case basis. Commercial real estate loans generally have terms that do
not exceed 25 years. The Bank has a variety of rate adjustment features, call
provisions and other terms in its multi-family and commercial real estate loan
portfolio. Generally, the loans are made in amounts up to 75% of the appraised
value of the collateral property and with debt service coverage ratios of 115%
or higher. The debt service coverage is the ratio of net cash from operations
before payment of debt service. However, these percentages may vary depending on
the type of security and the guarantor. Such loans provide for a negotiated
margin over a designated index which is generally the one-year Treasury Bill
Rate. Fixed-rate loans are generally made when advances from the Federal Home
Loan Bank ("FHLB") of Des Moines can be used to fund the loan. The Bank analyzes
the financial condition of the borrower, the borrower's credit history, the
borrower's prior record for producing sufficient income from similar loans,
references and the reliability and predictability of the net income generated by
the property securing the loan. The Bank generally requires personal guaranties
of borrowers. Depending on the circumstances of the security of the loan or the
relationship with the borrower, the Bank may decide to sell participations in
the loan. The sale of participation interests in a loan are necessitated by the
amount of the loan or the Loans to One Borrower requirements which would require
the sale of the loan. In return for servicing these loans for the participants,
the Bank generally receives a fee of one-fourth to three-eighths of one percent.
Also, income is received at loan closing from loan fees and discount points.
Appraisals on properties securing multi-family and commercial real estate loans
originated by the Bank are performed by independent appraisers selected by Home
Federal and reviewed by Bank employees.
At June 30, 1999, the Bank had $47.3 million of multi-family and $59.1 million
of commercial real estate loans, which represented 9.0% and 11.3%, respectively,
of the Bank's gross loan portfolio. See "Nonperforming Assets and Classified
Loans" for a discussion of the Bank's largest nonperforming assets and items of
concern and the allowance established for each.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") includes a provision that limits the Bank's non-residential real
estate lending (i.e., commercial real estate lending, other than lending on
certain multi-family residences) to no more than four times its total capital.
This maximum limitation, which at June 30, 1999 was $176.8 million, has not
materially limited the Bank's lending practices. See "Regulation-Regulatory
Capital Requirements."
Under FIRREA, the maximum amount which Home Federal may lend to any one borrower
is 15% of Home Federal's unimpaired capital and surplus or $7.7 million at June
30, 1999. Loans in an amount equal to an additional 10% of unimpaired capital
and surplus may be made to the same borrower if such loans are fully secured by
readily marketable collateral. See "Regulation" for a discussion of the
loans-to-one borrower rule. On June 30, 1999, the Bank did not have any loans
exceeding the Loans to One Borrower requirements.
8
<PAGE>
At June 30, 1999, Home Federal had no loans in excess of its present legal
lending limit. On such date, the Bank had loans in excess of $1.0 million to 54
borrowers or groups of affiliated borrowers.
CONSTRUCTION AND DEVELOPMENT LENDING. The Bank makes construction loans to
individuals for the construction of their residences as well as to builders and,
to a lesser extent, developers for the construction of one- to four-family
residences and condominiums and the development of one- to four-family lots in
the Bank's primary market area.
Construction loans to individuals for their residences are structured to be
converted to permanent loans at the end of the construction phase, which
typically runs 6 to 12 months. These construction loans have rates and terms
which match the one- to four-family permanent loans offered by the Bank.
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans. At June 30, 1999,
the Bank had $9.3 million of residential construction loans to borrowers
intending to live in the properties upon completion of construction.
The Bank has a line of credit for qualified builders. This product provides the
builder flexibility while the Bank maintains its credit standards. The line of
credit does not advance more than 75% of the approved value or cost on a
construction project and a mortgage is filed on each construction project and
interest is collected monthly. These lines provide for the payment of interest
and loan fees, with interest rates of 1% to 2.5% over the prime rate adjusted on
a monthly basis.
The Bank also makes loans to developers for the purpose of developing one- to
four-family lots. These loans typically have terms of one year and carry
interest rates which float monthly based on a national designated index such as
the prime rate. Loan commitment and partial release fees are charged. These
loans generally provide for the payment of interest and loan fees from loan
proceeds. The principal balance of these loans is typically paid down as lots
are sold. At June 30, 1999, the Bank had $6.3 million of development loans.
Builder construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from the Bank as well as broker referrals and direct solicitations of developers
and builders. The application process includes a submission to the Bank of
accurate plans, specifications and costs of the project to be constructed or
developed. These items are used as a basis to determine the appraised value of
the subject property. Loans are based on the lesser of current appraised value
and/or the cost of construction (land plus building).
The Bank makes loans for the construction of multi-family residential
properties. Such loans are generally made at adjustable rates which adjust
annually based upon a national designated index. At June 30, 1999, the Bank had
$2.5 million of multi-family residential construction loans. At June 30, 1999,
all of the Bank's construction loans were performing in accordance with their
terms.
Construction loans are generally originated with a maximum loan-to-value ratio
of 75% and land development loans are generally originated with a maximum
loan-to-value ratio of 60%, based upon an independent appraisal. Because of the
uncertainties inherent in estimating development and construction costs and the
market for the project upon completion, it is relatively difficult to evaluate
accurately the total loan funds required to complete a project, the related
loan-to-value ratios and the likelihood of ultimate success of the project.
Construction and development loans to borrowers other than owner occupants also
involve many of the same risks discussed above regarding multi-family and
commercial real estate loans and tend to be more sensitive to general economic
conditions than many other types of loans.
Prior to making a commitment to fund a construction loan, the Bank requires an
appraisal of the property, or for larger projects, both an appraisal and a study
of the feasibility of the proposed project. The Bank's construction loan policy
provides for the inspection of properties by in-house and independent inspectors
at the commencement of construction and prior to disbursement of funds during
the term of the construction loan.
9
<PAGE>
CONSUMER LENDING. Management considers its consumer loan products to be an
important component of its lending strategy. Specifically, consumer loans
generally have shorter terms to maturity and carry higher rates of interest than
do one- to four-family residential mortgage loans. In addition, management
believes that the offering of consumer loan products helps to expand and create
stronger ties to its existing customer base, by increasing the number of
customer relationships and providing cross-marketing opportunities. For these
reasons, Home Federal has continued to focus on the origination of consumer
loans.
Home Federal offers a variety of secured consumer loans, including home
improvement and second mortgage loans, loans secured by savings deposits, home
equity loans, mobile home loans and automobile loans. In addition, Home Federal
offers student loans, boat and vacation loans and other secured and unsecured
consumer loans. All secured consumer loans over $100,000 must be approved by the
Bank's loan committee except for loans over $250,000 which must be approved by
the Bank's Board of Directors. The Bank originates consumer loans on both a
direct and indirect basis. Direct loans are made when the Bank extends credit
directly to the borrower. Indirect loans are obtained when the Bank purchases
loan contracts from retailers of goods or services which have extended credit to
their customers. The only indirect lending by Home Federal, described below, is
with selected automobile dealers located in the Bank's lending area.
Most of the Bank's mobile home loans have been originated with fixed rates of
interest and are generally made in amounts of up to a maximum of the lesser of
125% of the net invoice or 90% of the buyer's cost. The buyer's cost can include
such items as freight, itemized set-up charges, physical damage insurance, sales
tax and filing and recording fees. Home Federal is permitted by regulation to
make mobile home loans for terms of up to 20 years, although most of the Bank's
mobile home loans are for terms of 15 years or less. At June 30, 1999, mobile
home loans amounted to $8.1 million or 1.6% of the Bank's gross loan portfolio.
Home Federal currently purchases automobile conditional sales contracts from
selected dealers within its market area as well as originating automobile loans
directly. At June 30, 1999, automobile loans amounted to $74.3 million or 14.2%
of the Bank's gross loan portfolio.
Loans secured by second mortgages, together with loans secured by all prior
liens, are limited to 100% or less of the appraised value of the property
securing the loan and generally have maximum terms that do not exceed seven to
ten years. As of June 30, 1999, such loans amounted to $46.6 million or 8.9% of
the Bank's gross loan portfolio.
The student loans originated by Home Federal are guaranteed as to principal and
interest by the South Dakota Education Assistance Corporation. Upon the student
nearing graduation, Home Federal sells such student loans with servicing rights
released. At June 30, 1999, student loans amounted to $7.0 million or 1.3% of
the Bank's gross loan portfolio.
At June 30, 1999, the Bank's consumer loan portfolio totalled $168.4 million, or
32.1% of its gross loan portfolio. Of the consumer loan portfolio at June 30,
1999, 27.7% were adjustable-rate loans.
Consumer loan terms vary according to the type of collateral, length of contract
and creditworthiness of the borrower. Home Federal offers both open- and
closed-end credit. Overdraft lending is extended through lines of credit that
are tied to a negotiated order of withdrawal ("NOW") account. The credit lines
generally bear interest at 18% and are generally limited to no more than $5,000.
Loans secured by deposit accounts at the Bank are currently originated for up to
90% of the account balance (although historically the Bank has loaned up to 100%
of the account balance), with a hold placed on the account restricting the
withdrawal of the account balance. The interest rate on such loans is typically
equal to 2% above the contract rate.
The underwriting standards employed by the Bank for consumer loans, including
mobile home loans, include an application, a determination of the applicant's
payment history on other debts, and an assessment of the ability to meet
existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
10
<PAGE>
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as mobile homes, automobiles or
boats. In such cases, any repossessed collateral for a defaulted consumer loan
may not provide an adequate source of repayment of the outstanding loan balance
as a result of the greater likelihood of damage, loss or depreciation. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. At June 30, 1999, the Bank had $1.7 million consumer
loans, including mobile home loans, delinquent more than 30 days. Not included
in this amount was $98,000 of repossessed consumer and mobile home collateral.
Although management believes that the level of delinquencies in the Bank's
consumer loan portfolio, including mobile home loans, has generally been low and
only 0.3% of the consumer loan portfolio was nonperforming, there can be no
assurance that delinquencies will not increase in the future. See "Nonperforming
Assets and Classified Loans" for further discussion.
CREDIT CARD LENDING. During fiscal year 1991, the Bank began offering
VISA/Mastercard card credit card services on an agency basis to its customers.
The Bank does not retain or have any credit liability related to the credit
which is extended in connection with such cards. The Bank is paid a fee for each
card issued and receives a fee for each transaction completed on these cards.
During fiscal 1997, the Company made a strategic decision to enter the credit
card business more directly and took a 51% majority position in a newly formed
subsidiary, HF Card Services. The Company became the owner of 100% of HF Card
Services effective as of July 1998. The target market for credit cards in this
line of business was sub-prime credit customers who have either an insufficient
credit history or a negative credit history and were unable to obtain a credit
card from more traditional card issuers. Credit card processing is being
provided by independent third parties. The Company had approximately $18.1
million in credit card loans at June 30, 1999. The Company ceased processing
subprime credit card applications in March 1999.
COMMERCIAL BUSINESS LENDING. In order to serve the needs of the local business
community and improve the interest rate sensitivity and yield of its assets, the
Bank originates commercial loans to local businesses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability and Risk Management." At June 30, 1999, approximately $62.3
million or 11.9% of the Bank's total loan portfolio was comprised of commercial
business loans. Home Federal's commercial business lending activities encompass
loans with a variety of purposes and security, including loans to finance
accounts receivable, inventory, equipment and business expansion within the
Bank's market area. Virtually all of Home Federal's commercial business loans
have been to borrowers in its primary lending areas. The Bank originates
commercial business loans directly and through programs sponsored by the Small
Business Administration ("SBA") of which a portion of such loans are also
guaranteed in part by the SBA. The Bank generally originates commercial business
loans for its portfolio and retains the servicing with respect to such loans. In
the future, Home Federal intends to continue to expand its commercial business
lending, subject to market conditions. Interest rates on commercial business
loans adjust or float with a designated national index plus a specified margin.
Unlike residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Bank's commercial business loans are sometimes, but not
always, secured by business assets, such as accounts receivable, equipment and
inventory. However, the collateral securing the loans may depreciate over time,
may be difficult to appraise and may fluctuate in value based on the success of
the business. Virtually all of the Bank's commercial business loans include
personal guarantees. At June 30, 1999, four of the Bank's commercial business
loans totaling $111,000 were nonperforming.
AGRICULTURAL LOANS. In order to serve the needs of the local business community
and improve the interest rate sensitivity and yield of its assets, the Company
established an agricultural lending department in fiscal year 1996. The Company
employed experienced lenders to establish this department and to ensure a high
quality portfolio. The agricultural division offers four types of loans to its
consumers: (1) operating loans which are used to fund operating expenses which
typically have a one year term and are indexed to the national prime rate; (2)
term loans on
11
<PAGE>
machinery, equipment and breeding stock that may have a term up to seven years
and require annual payments; (3) agricultural farmland term loans which are used
to fund land purchases or refinances; (4) specialized livestock loans fund
facilities and equipment for confinement enterprises. These loans typically will
have personal guarantees, a first lien on the real estate, interest rates
adjustable to the national prime rate, and require quarterly or monthly
payments. All loans are secured by the operating assets of the borrower. The
Bank had approximately $29.6 million of its loan portfolio in agricultural loans
which was 5.6% of its loan portfolio at June 30, 1999.
Loan customers are required to supply current financial statements, tax returns
for the past three to five years, and cash flow projections which are updated on
an annual basis. In addition, on major loans the loan officer will perform an
annual farm visit, obtain financial statements and perform a financial review of
the loan.
At June 30, 1999, three of the Bank's agricultural loans totaling $307,000 were
nonperforming.
ORIGINATIONS, PURCHASES, SALES AND SERVICING OF LOANS AND MORTGAGE-BACKED
SECURITIES
Real estate loans are originated by Home Federal's staff of salaried loan
officers working in the Bank's retail banking offices. Loan applications are
taken in each office, submitted to the main office for processing, for
underwriting, and then, if the amount requested requires, to the loan committee
for approval. Walk-in customers and referrals from real estate brokers and
builders are important sources of loan originations.
The Company originates both adjustable-rate and fixed-rate loans. Its ability to
originate loans is dependent upon the relative customer demand for fixed-rate or
ARM loans in its market, which is affected by the term structure (short-term
compared to long-term) of interest rates as well as the current and expected
future level of interest rates. Virtually all newly originated fixed-rate
residential mortgage loans with maturities of 15 years or greater are originated
pursuant to prior commitments for immediate sale in the secondary market. The
Company sells loans to private investors as well as to FNMA and FHLMC. At June
30, 1999, the Company had $11.8 million of loans secured by one- to four-family
residential real estate which were held for sale. See "Notes 3 and 4 of the
Notes to Consolidated Financial Statements." These loans are originated to
satisfy customer demand and to generate fee income and are sold to achieve the
goals in the Bank's asset/liability management program. During fiscal 1999 the
Bank sold the majority of these fixed-rate mortgage loans with servicing
released. The Bank also occasionally sells loan participations in order to
diversify risk and to comply with loans-to-one borrower requirements.
Home Federal has had a substantial portfolio of fixed-rate and adjustable-rate
mortgage-backed securities which it uses for investment and liquidity
management. During fiscal 1999, the Bank purchased $21.4 million of
mortgage-backed securities. At June 30, 1999, mortgage-backed securities
totalled $41.6 million, or 7.3% of Home Federal's gross loans and
mortgage-backed securities portfolio. Such mortgage-backed securities can serve
as collateral for borrowings and, through repayments, as a source of liquidity.
For information regarding the carrying and market values of Home Federal's
mortgage-backed securities portfolio, see "Note 2 of the Notes to Consolidated
Financial Statements." Under the risk-based capital requirement, GNMA
mortgage-backed securities have a risk-weighting of 0% and FNMA and FHLMC
mortgage-backed securities and mortgage-backed securities issued by U.S.
Government sponsored agencies have a risk weighting of 20%, in contrast to the
50% risk weight carried by residential loans. While the Bank could exchange its
long-term, fixed-rate mortgage loans for FHLMC participation certificates in
order to achieve the same benefit of increased liquidity, to date, it has not
elected to do so because of adequate liquidity.
Since 1982, the Bank has purchased mortgage servicing rights from other
originators on loans of the SDHDA, a state agency that provides low-interest
residential housing financing for first time home buyers in South Dakota. In
return for servicing such portfolio, the Bank generally receives a fee of
three-eighths of one percent from the SDHDA. At June 30, 1999, the Bank serviced
$408.1 million in loans for others (primarily the SDHDA).
The contractual right to service mortgage loans has an economic value. The value
results from the future income stream of the servicing fees, the availability of
the cash balances associated with escrow funds collected monthly for real estate
taxes and insurance, the availability of the cash from monthly principal and
interest payments from the collection date to the remittance date, and the
ability of the servicer to cross-sell other products and services. The actual
value of a servicing portfolio is dependent upon such factors as the age and
maturity of the loans in the portfolio,
12
<PAGE>
the average dollar balance of the loans, the location of the collateral
property, the average amount of escrow funds held, the interest rates and
delinquency experience on the loans, the types of loans and other factors.
The unamortized cost of loan servicing rights was $1.7 million at June 30, 1999.
Home Federal had no long-term capitalized excess servicing fees receivable as of
that date. Home Federal is amortizing these rights in proportion to and over the
period of estimated net servicing income. Management reviews its amortization
schedules at least quarterly to assure that the carrying value of mortgage
servicing is fairly stated.
From time to time, Home Federal has purchased whole loans and loan
participations in accordance with its ongoing asset/liability management
objectives.
The following table shows the loan and mortgage-backed securities origination,
purchase and repayment activities of the Company for the years indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
Adjustable-rate:................................
Real estate................................. $ 24,476 $ 25,580 $ 44,899
Non-real estate............................. 21,637 32,659 29,554
--------- --------- ---------
Total adjustable-rate.................. 46,113 58,239 74,453
--------- --------- ---------
Fixed-rate:.....................................
Real estate................................. 130,108 89,582 16,601
Non-real estate............................. 106,092 93,869 104,217
--------- --------- ---------
Total fixed-rate....................... 236,200 183,451 120,818
--------- --------- ---------
Total loans originated............... 282,313 241,690 195,271
--------- --------- ---------
PURCHASES:
Loan participations............................. 36,489 21,510 13,813
Mortgage-backed securities...................... 21,430 16,573 - - -
Loans acquired in commercial
bank purchase.............................. 29,204 - - - - - -
Mortgage-backed securities
acquired in commercial bank purchase....... 518 - - - - - -
--------- --------- ---------
Total purchased...................... 87,641 38,083 13,813
--------- --------- ---------
SALES:
Real estate loans............................... 82,507 106,397 53,250
Mortgage-backed securities...................... 4,486 477 12,184
--------- --------- ---------
Total sales.......................... 86,993 106,874 65,434
PRINCIPAL REPAYMENTS 199,914 165,509 147,954
--------- --------- ---------
Total reductions..................... 286,907 272,383 213,388
--------- --------- ---------
Other, net...................................... (12,239) (5,622) (1,938)
-------- ------- -------
Net increase (decrease).............. $ 70,808 $ 1,768 $ (6,242)
--------- --------- ---------
--------- --------- ---------
</TABLE>
13
<PAGE>
NONPERFORMING ASSETS AND CLASSIFIED LOANS
When a borrower fails to make a required payment on real estate secured loans
within 10 to 15 days after the payment is due, the Bank generally institutes
collection procedures by issuing a late notice. The customer is contacted again
when the payment is 30 days past due. In the case of consumer loans, the
borrower is sent a notice when a loan is 10 days past due and is contacted by
telephone when a loan is 30 days past due. In most cases, delinquencies are
cured promptly; however, if a loan has been delinquent for more than 30 days,
the Bank attempts additional written as well as verbal contacts and, if
necessary, personal contact with the borrower in order to determine the reason
for the delinquency and to effect a cure, and, where appropriate, reviews the
condition of the property and the financial circumstances of the borrower. Based
upon the results of any such investigation, the Bank may: (i) accept a repayment
program which under appropriate circumstances could involve an extension in the
case of consumer loans for the arrearage from the borrower, (ii) seek evidence,
in the form of a listing contract, of efforts by the borrower to sell the
property if the borrower has stated that he is attempting to sell, or (iii)
initiate foreclosure proceedings. When a loan payment is delinquent for 90 days,
the Bank generally will initiate foreclosure proceedings unless management is
satisfied the credit problem is correctable.
Generally, when a loan becomes delinquent 90 days or more, except for credit
card loans, the Bank will place the loan on a nonaccrual status and, as a
result, accrued interest income on the loan is taken out of income. Income is
subsequently recognized only to the extent cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is no longer in doubt, in which case the loan is returned to
accrual status. Credit card loans remain in accrual status until 120 days, when
accrued interest income on the loan is taken out of income.
For the year ended June 30, 1999, gross interest income which would have been
recorded had the nonaccruing loans been current in accordance with their
original terms amounted to approximately $180,000. Income that was recorded on
these nonaccrual loans amounted to approximately $108,000 for the year ended
June 30, 1999.
NONACCRUING LOANS. As of June 30, 1999, the Bank had $1.0 million in net book
value of nonaccruing loans. Included in nonaccruing loans at June 30, 1999 were
five loans totaling $209,000 secured by one- to four-family real estate, one
loan in the amount of $46,000 secured by commercial real estate, two mobile home
loans totaling $13,000, four commercial business loans totaling $111,000, three
agriculture loans totaling $307,000 and twenty-three consumer loans (excluding
mobile home loans) totaling $359,000.
ACCRUING LOANS DELINQUENT MORE THAN 90 DAYS. At June 30, 1999, the Bank had $1.6
million accruing credit card loans delinquent more than 90 days and $5.2 million
of credit card loans delinquent 30 days. Management has determined that
increased delinquencies were primarily due to a change in loan underwriting
criteria during the fourth quarter of fiscal 1998 that had the impact of
reducing the overall quality of credit card loans that were originated from the
fourth quarter of fiscal 1998 through the first nine months of fiscal 1999.
Management reviewed the increased level of credit card delinquencies, and the
loan underwriting criteria and collection procedures in the credit card
portfolio and ceased processing credit card applications under the current
underwriting criteria in March 1999. Net charge-offs for the year ended June 30,
1999 were $6.5 million. Using historical stratification data on the current
product, management expects credit card loan write-offs not to exceed $7.6
million in the next six months. Of this amount about 75% will be a charge-off
against allowance for credit card loan losses, of which the Company currently
maintains an allowance for credit card loan losses equal to 41% of the
outstanding credit card loan balance, or about $7.5 million. The remaining 25%
will be charged against deferred credit card fee income, interest income and
credit card fee income in future periods. Based upon lack of performance, the
Company ceased processing subprime credit card applications in March 1999.
FORECLOSED ASSETS. As of June 30, 1999, the Bank had $464,000 of foreclosed
assets. The balance of foreclosed assets at June 30, 1999 consisted of $49,000
in consumer collateral (excluding mobile home loans), $49,000 in mobile homes
and $366,000 in single-family residences.
OTHER LOANS OF CONCERN. In addition to the nonperforming assets set forth in the
table on page 17 of this report, as of June 30, 1999 there were also an
aggregate of $10.5 million in net book value of loans classified by the Bank
with
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<PAGE>
respect to which known information about the possible credit problems of the
borrowers or the cash flows of the security properties have caused management to
have some doubts as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the nonperforming asset categories.
CLASSIFIED ASSETS. Federal regulations provide for the classification of loans
and other assets such as debt and equity securities considered by the Office of
Thrift Supervision ("OTS") to be of lesser quality as "substandard," "doubtful"
or "loss." An asset is considered "substandard" if it is inadequately protected
by the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the savings association will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the thrift institution to sufficient risk to
warrant classification in one of the aforementioned categories, but possess
weaknesses, are required to be designated "Special Mention" by management.
When a thrift institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in amounts deemed
prudent by management. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a thrift institution classifies problem assets
as "loss, " it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge-off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the
association's Regional Director at the regional OTS office, who may order the
establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's monthly review of its assets, at June 30, 1999, the Bank had
classified $5.6 million of its assets as special mention (including certain
loans discussed herein), $6.2 million as substandard (including certain loans
discussed herein), and approximately $1.8 million as doubtful. Classified assets
at June 30, 1999 consisted of the $3.2 million of nonperforming assets, and the
$10.5 million of other loans of concern discussed above.
15
<PAGE>
The Company includes all loans considered impaired in nonaccrual loans. The
amount of impaired loans was not material at June 30, 1999.
The following table sets forth information concerning delinquent mortgage and
other loans at June 30, 1999. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
amounts which are overdue.
<TABLE>
<CAPTION>
At June 30, 1999
(Dollars in Thousands)
----------------------------------------------------
REAL ESTATE
----------------------------------------------------
One- to four-family Commercial
----------------------------------------------------
Percent of Percent of
Total Total
Number Amount Loans Number Amount Loans
<S> <C> <C> <C> <C> <C> <C>
------ ------ ----- ------ ------ -----
Loans delinquent for:
30-59 days......... 15 $ 623 0.12% 1 $ 33 0.01%
60-89 days......... 2 111 0.02 0 - - - 0.00
90 days and over... 6 258 0.05 1 46 0.01
--- ----- ---- --- ----- ----
Total delinquent loans.. 23 $ 992 0.19% 2 $ 79 0.02%
--- ----- ---- --- ----- ----
--- ----- ---- --- ----- ----
<CAPTION>
At June 30, 1999
(Dollars in Thousands)
----------------------------------------------------------------------------------------------------------
NON REAL ESTATE
----------------------------------------------------------------------------------------------------------
Consumer Credit Card Business Agricultural
----------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of
Total Total Total Total
Number Amount Loans Number Amount Loans Number Amount Loans Number Amount Loans
------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ -----
Loans delinquent for:
30-59 days......... 152 $ 983 0.19% 4,316 $1,670 0.32% 10 $1,074 0.20% 5 $82 0.02%
60-89 days......... 38 361 0.07 4,237 1,848 0.35 6 253 0.05 0 - - - 0.00
90 days and over... 30 384 0.07 3,404 1,648 0.31 3 58 0.01 3 159 0.03
--- ------ ----- ------ ------ ---- --- ----- ---- --- ----- ----
Total delinquent loans.. 220 $1,728 0.33% 11,957 $5,166 0.98% 19 $1,385 0.26% 8 $241 0.05%
--- ------ ----- ------ ------ ---- --- ----- ---- --- ----- ----
--- ------ ----- ------ ------ ---- --- ----- ---- --- ----- ----
</TABLE>
- --------------------
There were no construction and development loans delinquent at June 30, 1999.
There were no multi-family loans delinquent at June 30, 1999.
16
<PAGE>
The following table sets forth the amounts and categories of the Bank's
nonperforming assets. Loans are placed on nonaccrual status when the collection
of principal and/or interest become doubtful. Foreclosed assets include assets
acquired in settlement of loans. The Bank did not have any material troubled
debt restructurings at any of the dates presented.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
One- to four-family.................... $ 209 $ 623 $ 618 $ 682 $ 169
Commercial............................. 46 719 154 556 710
Multi-family........................... - - - - - - - - - - - - 1,611
Commercial business.................... 111 396 - - - 427 - - -
Consumer(1)............................ 359 482 428 340 23
Agricultural........................... 307 - - - - - - - - - - - -
Credit cards........................... - - - - - - - - - - - - - - -
Mobile homes........................... 13 31 52 58 198
----- ----- ----- ----- -----
Total.............................. 1,045 2,251 1,252 2,063 2,711
----- ----- ----- ----- -----
Accruing loans delinquent more than 90 days
One- to four-family.................... - - - - - - - - - - - - 143
Commercial............................. - - - - - - - - - - - - - - -
Multi-family........................... - - - - - - - - - - - - - - -
Commercial business.................... - - - - - - - - - - - - - - -
Consumer(1)............................ - - - - - - - - - - - - 2
Agricultural........................... - - - - - - - - - - - - - - -
Credit cards........................... 1,648 530 - - - - - - - - -
Mobile homes........................... - - - - - - - - - - - - 7
----- ----- ----- ----- -----
Total.............................. 1,648 530 - - - - - - 152
----- ----- ----- ----- -----
Foreclosed assets:
One- to four-family.................... 366 22 311 52 108
Commercial............................. - - - - - - - - - 1 3
Multi-family........................... - - - - - - - - - - - - - - -
Commercial business.................... - - - - - - - - - - - - - - -
Consumer(1)............................ 49 140 158 87 54
Agricultural........................... - - - - - - - - - - - - - - -
Credit cards........................... - - - - - - - - - - - - - - -
Mobile homes........................... 49 67 124 88 38
----- ----- ----- ----- -----
Total.............................. 464 229 593 228 203
----- ----- ----- ----- -----
Total nonperforming assets(2)............... $ 3,157 $ 3,010 $ 1,845 $2,291 $3,066
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Ratio of nonperforming assets to total assets(3) 0.48% 0.53% 0.33% 0.41% 0.57%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Ratio of nonperforming loans to total loans(4) 0.52% 0.63% 0.28% 0.49% 0.79%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
- --------------------
(1) Consists of nonperforming consumer loans exclusive of mobile home loans and
credit card loans.
(2) Nonperforming assets include nonaccruing loans, accruing loans delinquent
more than 90 days and foreclosed assets.
(3) Percentage is calculated based upon total assets of the Company, the Bank,
HF Card Services L.L.C. and the Mortgage Corp. on a consolidated basis.
(4) Nonperforming loans includes nonaccruing loans and accruing loans
delinquent more than 90 days.
17
<PAGE>
ALLOWANCE FOR LOAN LOSSES. The current level of the allowance for loan losses is
a result of management's assessment of the risks within the portfolio based on
the information revealed in credit reporting processes. The Company utilizes a
risk-rating system on all commercial business, agricultural, construction,
multi-family and commercial real estate loans, including purchased loans, that
exceed $250,000. A monthly credit review is performed on all types of loans to
establish the necessary reserve based on the estimated risk within the
portfolio. This assessment of risk takes into account the composition of the
loan portfolio, historical loss experience for each loan category, previous loan
experience, concentrations of credit, current economic conditions and other
factors that in management's judgment deserve recognition. In regard to credit
card loans, the Company is providing a reserve of 41% of the loan balance until
the credit card portfolio becomes seasoned. As of June 30, 1999, $7.5 million of
the $12.0 million allowance for loan losses was reserved for the credit card
loan portfolio. Regulators have reviewed the Company's methodology for
determining allowance requirements on the Company's loan portfolio and have made
no recommendations for increases in the allowances during the five year period
ended June 30, 1999. The Company has historically maintained a positive variance
from the minimum estimated allowance for loan losses based on the analyses that
are conducted by Bank management and corporate credit personnel. Real estate
properties acquired through foreclosure are recorded at the lower of cost or
fair value (less a deduction for disposition costs). Valuations are periodically
updated by management and a specific provision for losses on such properties is
established by a charge to operations if the carrying values of the properties
exceed their estimated net realizable values.
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings being significantly affected if circumstances
differ substantially from the assumptions used in making the final
determinations. Future additions to the Bank's allowances result from periodic
loan, property and collateral reviews and thus cannot be predicted in advance.
At June 30, 1999, the Bank had a total allowance for loan losses of $12.0
million, or 2.32% of total loans. See "Note 1 of the Notes to Consolidated
Financial Statements" for a description of the Bank's policy regarding the
provision for losses on loans.
18
<PAGE>
The following table sets forth information with respect to activity in the
Bank's allowance for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............. $7,199 $4,526 $4,129 $4,039 $4,899
CHARGE-OFFS:
One- to four-family.................... (56) (95) (104) (23) (34)
Commercial............................. (11) (147) (15) (35) - - -
Multi-family........................... - - - - - - - - - - - - (400)
Commercial Business.................... (124) (1,065) (757) (487) (264)
Consumer............................... (914) (26) - - - - - - - - -
Agriculture............................ (487) - - - - - - - - - - - -
Credit cards........................... (7,040) (906) (59) - - - - - -
Mobile homes........................... (84) (184) (186) (305) (265)
-------- --------- --------- -------- --------
Total charge-offs...................... (8,716) (2,423) (1,121) (850) (963)
-------- --------- --------- -------- --------
RECOVERIES:
One- to four-family.................... 16 12 24 51 16
Commercial............................. 46 - - - 493 58 90
Multi-family........................... - - - - - - 46 6 398
Commercial Business.................... 72 - - - 1 43 - - -
Consumer............................... 227 184 194 100 54
Agriculture............................ - - - - - - - - - - - - - - -
Credit cards........................... 515 179 19 - - - - - -
Mobile homes........................... 48 32 48 92 60
-------- --------- --------- -------- --------
Total recoveries....................... 924 407 825 350 618
-------- --------- --------- -------- --------
Net (charge-offs).................. (7,792) (2,016) (296) (500) (345)
-------- --------- --------- -------- --------
Additions (recoveries) charged to operations 12,120 4,689 693 590 (515)
Additions from acquisition.................. 464 - - - - - - - - - - - -
-------- --------- --------- -------- --------
Balance at end of period.................... $11,991 $7,199 $4,526 $4,129 $4,039
-------- --------- --------- -------- --------
-------- --------- --------- -------- --------
Ratio of net (charge-offs) during the
period to average loans outstanding during the
period...................................... (1.68)% (0.45)% (0.07)% (0.12)% (0.10)%
-------- --------- --------- -------- --------
-------- --------- --------- -------- --------
Ratio of allowance for loan losses to total
loans at end of period...................... 2.32% 1.62% 1.02% 0.98% 1.11%
-------- --------- --------- -------- --------
-------- --------- --------- -------- --------
Ratio of allowance for loan losses to
nonperforming loans at end of period(1)..... 445.27% 258.86% 361.50% 200.15% 141.08%
-------- --------- --------- -------- --------
-------- --------- --------- -------- --------
</TABLE>
- --------------------
(1) Nonperforming loans include nonaccruing loans and accruing loans delinquent
more than 90 days.
19
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates indicated
is summarized as follows:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to four-family(1)............ $1,233 26.35% $1,203 29.12% $1,540 36.50%
Commercial and multi-family real
estate(1)........................ 1,124 24.03 967 23.41 926 21.94
Commercial business.............. 556 11.88 377 9.13 255 6.07
Consumer(2)...................... 1,268 27.11 1,219 29.49 1,254 29.73
Agricultural..................... 264 5.64 150 3.63 77 1.82
Credit cards..................... 7,474 3.44 3,181 2.74 329 0.51
Mobile homes..................... 72 1.55 102 2.48 145 3.43
-------- ------- ------ ------ ------ ------
Total....................... $ 11,991 100.00% $7,199 100.00% $4,526 100.00%
-------- ------- ------ ------ ------ ------
-------- ------- ------ ------ ------ ------
<CAPTION>
At June 30,
------------------------------------------------
1996 1995
---- ----
Percent of Percent of
Loans in Loans in
Each Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
One-to four-family(1)............ $1,789 43.27% $ 910 44.64%
Commercial and multi-family real
estate(1)........................ 957 23.21 1,743 26.88
Commercial business.............. 132 3.21 134 2.93
Consumer(2)...................... 1,060 25.69 644 18.85
Agricultural..................... - - - 0.00 - - - 0.00
Credit cards..................... - - - 0.00 - - - 0.00
Mobile homes..................... 191 4.62 608 6.70
------ ------ ------ ------
Total....................... $4,129 100.00% $4,039 100.00%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- --------------------
(1) Includes construction loans.
(2) Excludes allowance for loan losses relating to mobile home loans and credit
card loans .
20
<PAGE>
MORTGAGE-BACKED SECURITIES
The Bank maintains a substantial portfolio of mortgage-backed securities which
it holds for investment and liquidity purposes. Such mortgage-backed securities
can serve as collateral for borrowings and, through repayments and sales, as a
source of liquidity. During fiscal year 1999, the Bank had $4.5 million of sales
and repayments of $14.6 million. The Bank had $21.4 million of purchases of
mortgage-backed securities during fiscal year 1999. For information regarding
the carrying and market values of the Bank's mortgage-backed securities
portfolio, see "Note 2 of the Notes to Consolidated Financial Statements." Under
the Bank's risk-based capital requirement, mortgage-backed securities have a
risk weight of 20% (or 0% in the case of GNMA securities) in contrast to the 50%
risk weight carried by residential loans. See "Regulation." In order to reduce
its risk-based capital requirement, the Bank may consider securitizing a portion
of its fixed-rate mortgage loan portfolio. However, securitizing mortgage loans
may result in a reduction in yield.
21
<PAGE>
The following table sets forth the contractual maturities (without any
prepayment assumptions) of the Bank's mortgage-backed securities at June 30,
1999, at amortized cost.
<TABLE>
<CAPTION>
DUE IN
-------------------------------------------------------------------------
6 Months 6 Months 1 to 3 3 to 5 5 to 10 Over 10 Total at
or Less to 1 Year Years Years Years Years June 30, 1999
------- --------- ----- ----- ----- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED-RATE:
Federal Home Loan Mortgage Corporation $ 458 $- - - $- - - $4,811 $3,758 $ - - - $9,027
Federal National Mortgage Association 308 - - - - - - 4,969 3,126 - - - 8,403
Government National Mortgage Association - - - - - - 2 28 178 14,597 14,805
Real Estate Mortgage Investment Conduit - - - - - - - - - - - - - - - 1,399 1,399
--- ----- ----- ----- ----- ------- ------
Total Fixed-Rate 766 - - - 2 9,808 7,062 15,996 33,634
--- ----- ------ ----- ----- ------- ------
VARIABLE-RATE:
Resolution Trust Corporation - - - - - - - - - - - - - - - 548 548
Resolution Funding Mortgage Security - - - - - - - - - - - - - - - 919 919
Government National Mortgage Association 267 267
Real Estate Mortgage Investment Conduit - - - - - - - - - - - - - - - 4,446 4,446
Federal Home Loan Mortgage Corporation - - - - - - - - - - - - - - - 1,413 1,413
Federal National Mortgage Association - - - - - - - - - - - - - - - 1,365 1,365
----- ----- ------ ------- ----- ------- -----
Total Variable-Rate - - - - - - - - - - - - - - - 8,958 8,958
----- ----- ------ ------- ----- ----- -----
Total $766 $- - - $ 2 $9,808 $7,062 $24,954 $ 42,592
----- ----- --- ------- ----- ------- --------
----- ----- --- ------- ----- ------- --------
</TABLE>
Based on historical experience, Home Federal believes that its mortgage-backed
securities will be prepaid significantly in advance of the date of maturity as
reflected in the table above. For information regarding prepayment assumptions,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations and Asset/Liability and Risk Management."
22
<PAGE>
INVESTMENT ACTIVITIES
Home Federal is required under OTS regulation to maintain minimum levels of
investments that qualify as liquid assets. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has maintained its
liquid assets above the minimum requirements imposed by the OTS regulations and
at a level believed by management adequate to meet requirements of normal daily
activities, repayment of maturing debt and potential deposit outflows. As of
June 30, 1999, the Bank's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 6.0%. See "Regulation
- - Liquidity."
Federally chartered savings institutions have the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank is to invest funds among various
categories of investments and maturities based upon the Bank's asset/liability
management policies, investment quality and marketability, liquidity needs and
performance objectives.
At June 30, 1999, the Company had $2.0 million in interest-bearing deposits, and
investment securities totalled $56.6 million, or 8.6% of its total assets. As of
such date, the Bank also had a $5.3 million investment in the stock of the FHLB
of Des Moines in order to satisfy the FHLB of Des Moines' requirement for
membership. It is the Bank's general policy to purchase investment securities
which are U.S. Government securities and federal agency obligations and other
issues rated investment grade. At June 30, 1999, the average term to maturity or
repricing of the investment securities portfolio was 1.13 years.
23
<PAGE>
The following table sets forth the composition of the Company's and the Bank's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
---- ----- ---- ----- ---- -----
(Dollar in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits............................. $ 2,000 3.13% $ 12,000 21.36% $6,000 11.32%
------- ------- -------- -------- ------ ------
Investment securities:................................
U.S. government obligations...................... 4,099 6.41 2,994 5.33 7,019 13.24
Federal agency obligations....................... 28,465 44.56 24,492 43.59 21,428 40.41
Federal Home Loan Bank debt securities........... 20,748 32.48 11,997 21.35 11,999 22.63
FHLMC preferred stock............................ - - - 0.00 500 0.89 500 0.94
FNMA common stock ............................... 8 0.01 8 0.01 8 0.02
Redwood Financial common stock................... - - - 0.00 - - - 0.00 462 0.87
Federal Agricultural Mortgage common stock....... 7 0.01 - - - 0.00 - - - 0.00
Tax free bonds................................... 3,297 5.16 540 0.96 385 0.73
----- ---- --- ---- --- ----
Subtotal..................................... 56,624 88.63 40,531 72.13 41,801 78.84
------ ----- ------ ----- ------ -----
FHLB stock............................................ 5,263 8.24 3,657 6.51 5,222 9.84
----- ---- ----- ---- ----- ----
Total investment portfolio....................... $63,887 100.00% $56,188 100.00% $53,023 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
Average remaining life or term to repricing on
investment securities, excluding FHLB stock,
FHLMC Preferred Stock, FNMA common stock and
Federal Agricultural Mortgage common stock 1.13 years .54 years .58 years
</TABLE>
24
<PAGE>
The composition and maturities of the investment securities portfolio, excluding
equity securities are indicated in the following table.
<TABLE>
<CAPTION>
At June 30, 1999
-----------------------------------------------------------------------------------------------
Less than 1 1 to 5 5 to 10 Over 10 Total Investment Securities
Year Years Years Years ----------------------------------
Cost Cost Cost Cost Cost Market Value
---- ---- ---- ---- ---- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government obligations.... $ 4,099 $ - - - $ - - - $ - - - $4,099 $4,111
Federal agency obligations..... 3,000 42,237 3,976 - - - 49,213 48,329
Tax free bonds................. 391 1,560 1,046 300 3,297 3,305
-------- -------- -------- -------- ------- -------
Total investment securities.... $7,490 $43,797 $5,022 $ 300 $56,609 $55,745
-------- -------- -------- -------- ------- -------
-------- -------- -------- -------- ------- -------
Weighted average yield......... 5.32% 5.73% 5.88% 6.50% 5.69%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
The Company's investment securities portfolio at June 30, 1999 contained no
tax-exempt securities in excess of 10% of the Company's stockholders' equity,
excluding those issued by the United States Government or its agencies. The
Company's investment securities portfolio also contained no non-investment grade
or other corporate debt securities (i.e., "junk bonds"). In addition, the
Company does not invest in derivatives as defined by SFAS #119.
Home Federal's investment security portfolio is managed in accordance with a
written investment policy adopted by the Board of Directors. Investments may be
made by the Bank's officers within specified limits and approved in advance by
the Board of Directors for transactions over these limits. At the present time,
the Bank does not have any investments that are held for trading purposes. At
June 30, 1999, the Company has $61.0 million of securities available for sale,
including FHLB stock of $5.3 million. See "Note 2 in the Notes to Consolidated
Financial Statements."
SOURCES OF FUNDS
GENERAL. The Bank's primary sources of funds are deposits, amortization and
repayments of loan principal (including mortgage-backed securities), and, to a
lesser extent, sales of mortgage loans, sales or maturities of investment
securities, mortgage-backed securities, and short term investments.
Borrowings, presently all from the FHLB of Des Moines, may be used on a
short-term basis to compensate for seasonal reductions in deposits or deposit
inflows at less than projected levels, and may be used on a longer-term basis to
support expanded lending activities. The Bank in recent years has not relied on
outside borrowings other than FHLB borrowings. The availability of funds from
loan sales is influenced by general interest rates.
DEPOSITS. The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank's deposits consist of statement savings
accounts, NOW and checking accounts, money market and certificate accounts
ranging in terms from 30 days to five years. The Bank's deposit products also
include IRA certificates and Keogh plan retirement certificates. The Bank only
solicits deposits from its market area and does not use brokers to obtain
deposits. The Bank relies primarily on competitive pricing policies,
advertising, and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market and prevailing interest rates and competition.
The variety of deposit accounts offered by the Bank has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. In recent years, the Bank has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its statement savings, money market, NOW and
checking accounts are stable sources of deposits. However, the ability of the
Bank to attract and maintain certificates of deposit, and the rates paid on
these deposits, has been and will continue to be significantly affected by
market conditions.
25
<PAGE>
The following table sets forth the dollar amount of deposits in the various
types of deposit accounts offered by the Company as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------
1999 1998 1997
----------------------- -------------------- ---------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
TRANSACTION ACCOUNTS:
Savings accounts weighted average rates of 3.58%, 2.02% and
2.44% at June 30, 1999, 1998 and 1997......................... $ 68,173 13.35% $ 61,266 13.72% $ 28,968 6.93%
NOW accounts weighted average rates of 1.71%, 1.51% and
1.44% at June 30, 1999, 1998 and 1997......................... 29,327 5.74 24,659 5.52 24,614 5.88
Noninterest bearing accounts.................................. 44,542 8.72 33,403 7.48 20,973 5.02
Money market accounts weighted average rates of 4.21%, 4.03%
and 2.90% at June 30, 1999, 1998 and 1997..................... 78,961 15.46 43,868 9.84 34,421 8.23
------ ----- ------ ---- ------ ----
Total transaction accounts.................................... 221,003 43.27 163,196 36.56 108,976 26.06
------- ----- ------- ----- ------- -----
CERTIFICATES OF DEPOSIT:
0.00 - 3.99%............................................. 88 0.02 - - - 0.00 322 0.08
4.00 - 4.99%............................................. 91,472 17.91 9,891 2.22 6,230 1.49
5.00 - 5.99%............................................. 133,061 26.05 150,856 33.79 175,399 41.94
6.00 - 6.99%............................................. 59,981 11.74 97,386 21.81 100,314 23.99
7.00 - 7.99%............................................. 4,789 0.94 23,983 5.37 25,819 6.17
8.00 - 8.99%............................................. 336 0.07 1,055 0.24 1,114 0.27
9.00% and greater........................................ - - - 0.00 57 0.01 12 0.00
------- ----- ------- ----- ------- ------
Total certificates of deposit................................. 289,727 56.73 283,228 63.44 309,210 73.94
------- ------ ------- ------- ------- ------
Total deposits................................................ $510,730 100.00% $446,424 100.00% $418,186 100.00%
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
</TABLE>
26
<PAGE>
The following table sets forth the savings flows at the Company during the
periods indicated. Net increase refers to the amount of deposits during a period
less the amount of withdrawals during the period. The net deposits (withdrawals)
before interest credited during the years ended June 30, 1999, 1998, and 1997
reflect management's strategy of pricing deposits to control the Bank's cost of
funds. The Bank generally prices its deposits to remain competitive with other
financial institutions, but does not necessarily seek to match the highest rates
paid by competing institutions in its market area. Deposit flows at savings
associations, however, may also be influenced by external factors such as
governmental credit policies and, particularly in recent periods, depositors'
perceptions of the adequacy of federal insurance of accounts.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance............... $446,424 $418,186 $398,166
Net deposits (withdrawals).... 977 6,039 (763)
Deposits acquired in
commercial bank purchase... 42,636 - - - - - -
Interest credited............. 20,693 22,199 20,783
------ ------ ------
Ending balance................ $510,730 $446,424 $418,186
-------- -------- --------
-------- -------- --------
Net increase.................. $64,306 $28,238 $20,020
------- ------- -------
------- ------- -------
Percent increase.............. 14.40% 6.75% 5.03%
------ ----- -----
------ ----- -----
</TABLE>
27
<PAGE>
The following table shows rate and repricing information for the Company's
certificates of deposit as of June 30, 1999.
<TABLE>
<CAPTION>
0.00- 4.00- 5.00- 6.00- 7.00- 8.00- Percent
3.99% 4.99% 5.99% 6.99% 7.99% 8.99% Total of Total
----- ----- ----- ----- ----- ----- ----- --------
(Dollars in Thousands)
Certificates of Deposit
Maturing in Quarter Ending:
- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
September 30, 1999...... $31 $ 21,613 $ 24,407 $ 27,854 $ 1,357 $ 68 $75,330 26.00%
December 31, 1999....... - - - 17,724 23,588 16,128 1,832 78 59,350 20.48
March 31, 2000.......... 57 16,421 12,206 5,896 1,188 101 35,869 12.38
June 30, 2000........... - - - 16,025 11,408 1,876 362 - - - 29,671 10.24
September 30, 2000...... - - - 3,408 10,872 1,808 - - - 36 16,124 5.57
December 31, 2000....... - - - 6,760 11,151 714 3 53 18,681 6.45
March 31, 2001.......... - - - 3,054 5,166 645 26 - - - 8,891 3.07
June 30, 2001........... - - - 3,984 8,314 978 - - - - - - 13,276 4.58
September 30, 2001...... - - - 1 3,934 617 21 - - - 4,573 1.58
December 31, 2001....... - - - 190 11,389 615 - - - - - - 12,194 4.21
March 31, 2002.......... - - - 268 558 341 - - - - - - 1,167 0.40
June 30, 2002........... - - - 295 297 864 - - - - - - 1,456 0.50
Thereafter.............. - - - 1,729 9,771 1,645 - - - - - - 13,145 4.54
------ -------- -------- --------- -------- ------- ------ -------
Total................... $88 $91,472 $133,061 $59,981 $4,789 $336 $289,727 100.00%
------ -------- -------- --------- -------- ------- -------- -------
------ -------- -------- --------- -------- ------- -------- -------
Percent of total........ 0.03% 31.57% 45.93% 20.70% 1.65% 0.12% 100.00%
------ -------- -------- --------- -------- ------- --------
------ -------- -------- --------- -------- ------- --------
</TABLE>
28
<PAGE>
The following table sets forth the amount of the Company's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1999.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
------- ------ ------ --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than
$100,000.......................... $57,670 $44,290 $53,052 $78,185 $233,197
Certificates of deposit of
$100,000 or more ................. 10,566 7,158 8,329 10,985 37,038
Public funds(1)................... 7,094 7,902 4,159 337 19,492
------- ------- ------- ------- --------
Total certificates of deposit ..... $75,330 $59,350 $65,540 $89,507 $289,727
------- ------- ------- ------- --------
------- ------- ------- ------- --------
</TABLE>
- --------------------
(1) Includes certificates of deposit of $100,000 or more from governmental and
other public entities.
The Bank solicits certificates of deposit of $100,000 or greater ("jumbo
certificates") from various state, county and local government units which carry
rates which are negotiated at the time of deposit. See "Note 6 of Notes to
Consolidated Financial Statements." Deposits at June 30, 1999 and 1998 include
$46.8 million and $38.3 million, respectively of deposits from one local
governmental entity, the majority of which are demand accounts.
BORROWINGS. Although deposits are the Bank's primary source of funds, the Bank's
policy has been to utilize borrowings when they are a less costly source of
funds or can be invested at a positive rate of return.
The Bank's borrowings consist primarily of advances from the FHLB of Des Moines
upon the security of its capital stock of the FHLB of Des Moines and certain of
its mortgage loans and mortgage-backed securities. Such advances can be made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. At June 30, 1999, the Bank's FHLB
advances totalled $80.1 million, representing 13.1% of total liabilities.
In addition, the Bank obtained a $15.0 million letter of credit from the FHLB of
Des Moines in order to collateralize public fund deposits at June 30, 1999. The
letter of credit expired on August 30, 1999 and management did not extend it at
that time. See "Financial Condition Data" for further discussion.
The Company's other borrowings primarily consist of a contract for deed in the
amount of $1.0 million due to the purchase of land held for future development
during the first quarter of fiscal 1999. See "Note 7 of Notes to Consolidated
Financial Statements."
29
<PAGE>
The following table sets forth the maximum month-end balances and average
balances of FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
MAXIMUM BALANCE:
FHLB advances......... $90,260 $74,219 $87,516
Other borrowings...... 1,535 524 600
AVERAGE BALANCE:
FHLB advances......... $77,078 $63,532 $77,629
Other borrowings...... 1,292 524 562
</TABLE>
The following table sets forth certain information as to the Bank's FHLB
advances and other borrowings of the Company at the dates indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances.............. $80,078 $50,111 $74,219
Other borrowings........... 1,535 524 524
-------- -------- --------
Total borrowings........... $81,613 $50,635 $74,743
-------- -------- --------
-------- -------- --------
Weighted average interest
rate of FHLB advances...... 5.30% 5.69% 5.69%
</TABLE>
SUBSIDIARY ACTIVITIES
As a federally chartered thrift institution, Home Federal is permitted by OTS
regulations to invest up to 2% of its assets, or $13.2 million at June 30, 1999,
in the stock of, or loans to, service corporation subsidiaries. As of such date,
the net book value of Home Federal's investment in and loans to its service
corporations was approximately $27,000. Home Federal may invest an additional 1%
of its assets in service corporations where such additional funds are used for
inner-city or community development purposes. In addition to investments in
service corporations, federal associations are permitted to invest an unlimited
amount in operating subsidiaries engaged solely in activities which a federal
association may engage in directly.
Home Federal has three subsidiary corporations, Hometown Insurors, Inc.
("Hometown"), Mid-America Service Corporation ("Mid-America") and PMD, Inc.
("PMD").
Hometown, located in Sioux Falls, South Dakota, provides a full line of
insurance products to customers of Home Federal and members of the general
public in Home Federal's market area. Insurance products offered by Hometown
include annuities and life, health, homeowners, and auto insurance and, to a
lesser extent, certain commercial-related insurance products. Home Federal had a
negative investment in Hometown of $116,000 at June 30, 1999. Hometown had a
loss before tax of $298,000 for the 1999 fiscal year. During fiscal year 1999,
Home Federal infused capital of $200,000 into Hometown.
Mid-America is an appraisal company located in Sioux Falls, South Dakota, that
provides residential appraisal services to Home Federal and other lenders in the
Bank's market area. At June 30, 1999, the Bank had a $143,000 investment in
Mid-America. Mid-America had income before tax of $39,000 for the 1999 fiscal
year.
PMD, located in Sioux Falls, South Dakota, is engaged in the business of buying,
selling and managing repossessed real estate properties. At June 30, 1999, the
Bank had a $1,000 investment in PMD. PMD had no activity during fiscal year
1999.
30
<PAGE>
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 the
membership interest of this entity. The Company became the owner of 100% of HF
Card Services effective as of July 1998. HF Card Services was established to
provide secured, partially-secured and unsecured credit cards nationwide. At
June 30, 1999, the Company had a negative investment in HF Card Services of $5.9
million. HF Card Services had a net loss of $5.9 million for the 1999 fiscal
year. Based upon lack of performance, the Company ceased processing subprime
credit card applications in March 1999.
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. At June 30, 1999, the Company had a $1,000 investment in the
Mortgage Corp. The Company ceased operations of the Mortgage Corp. during the
first quarter of fiscal 1998. The Mortgage Corp. had no activity during fiscal
year 1999.
COMPETITION
Home Federal faces strong competition, both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other commercial banks, credit unions and mortgage bankers
making loans secured by real estate located in the Bank's market areas.
Commercial banks and finance companies provide vigorous competition in consumer
lending. The Bank competes for real estate and other loans principally on the
basis of the quality of services it provides to borrowers, interest rates and
loan fees it charges and the types of loans it originates.
The Bank attracts all of its deposits through its retail banking offices,
primarily from the communities in which those retail banking offices are
located; therefore, competition for those deposits is principally from other
commercial banks and credit unions located in the same communities. The Bank
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours, and convenient branch locations
with interbranch deposit and withdrawal privileges at each. There are
approximately 26 financial institutions which compete for deposits in Minnehaha
County. According to information contained in reports prepared by the FDIC, the
Bank is the third largest financial institution based on total deposits in
Minnehaha County, excluding Citibank and Hurley State Bank. Management estimates
that its deposit market share in Minnehaha County, where the majority of its
deposits are located, is approximately 13%, excluding Citibank and Hurley State
Bank.
EMPLOYEES
At June 30, 1999, the Bank had a total of 316 employees including 17 employees
of the Bank's service corporations.
The Bank's employees are not represented by any collective bargaining group.
Management considers its relations with its employees to be good.
REGULATION
GENERAL. The Bank is a federally chartered thrift institution, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. The Bank is a member
of the FHLB of Des Moines and is subject to certain limited regulation by the
Federal Reserve Board. As the savings and loan holding company of the Bank, the
Company also is subject to federal regulation and oversight. The purpose of the
regulation of the Company and other holding companies is to protect subsidiary
savings associations where deposits are federally insured.
The Bank is a member of the Savings Association Insurance Fund (the "SAIF") and
the deposits of the Bank are insured by the FDIC. Certain of these regulatory
requirements and restrictions are discussed below or elsewhere in this document.
The following discussion is intended to be a summary of the material statutes,
regulations and policies applicable to savings associations and their holding
companies, and it does not purport to be a comprehensive discussion of such
statutes, regulations and policies.
31
<PAGE>
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS. As an office of the Department of
the Treasury, the OTS has extensive authority over the operations of federal
savings associations, such as the Bank. Pursuant to this authority, the Bank is
required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. The last examination of the Bank by the
OTS concluded on June 15, 1998. Examiners may require a federal savings
association to provide for higher general or specific loan loss-reserves.
ASSESSMENTS. The OTS has established a schedule for the assessment of fees upon
all savings associations to fund the operations of the OTS. A schedule of fees
has also been established for the various types of applications and filings made
by savings associations with the OTS. In addition, the general assessment, paid
on a semi-annual basis, is computed based upon the savings association's total
assets, including consolidated subsidiaries, as reported in the association's
latest quarterly thrift financial report. Savings associations (unlike the Bank)
that are classified as "troubled" are required to pay a 50% premium over the
standard assessment. The Bank's OTS assessment (standard assessment) for the
fiscal year ended June 30, 1999 was approximately $119,000.
The OTS has proposed amendments to its regulations that are intended to assess
savings associations on a more equitable basis. The proposed regulations would
base the assessment for an individual savings association on three components:
the size of the association, on which the basic assessment would be based; the
association's supervisory condition, which would result in percentage increases
for any savings institution with a composite rating of 3, 4 or 5 in its most
recent safety and soundness examination; and the complexity of the association's
operations, which would result in percentage increases for a savings association
that managed over $1 billion in trust assets, serviced for others loans
aggregating more than $1 billion, or had certain off-balance sheet assets
aggregating more than $1 billion. In order to avoid a disproportionate impact on
the smaller savings institutions, the OTS is proposing to permit the portion of
the assessment based on assets size either under the current regulations or
under the amended regulations. Management believes that, assuming the proposed
regulations are adopted as proposed, any change in its rate of OTS assessments
will not be material.
ENFORCEMENT. Under the Federal Deposit Insurance Act (the "FDI Act"), the OTS
has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any stockholder, attorney,
appraiser or accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1 million per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship, or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings association. If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.
BUSINESS ACTIVITIES. The Bank derives its lending and investment powers from the
Home Owners' Loan Act, as amended (the "HOLA"), and the regulations of the OTS
thereunder. Under these laws and regulations, the Bank may invest in mortgage
loans secured by residential and commercial real estate, commercial and consumer
loans, certain types of debt securities and certain other assets. The Bank may
also establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. These investment powers are subject to
various limitations, including (a) a prohibition against the acquisition of any
corporate debt security that is not rated in one of the four highest rating
categories; (b) a limit of 400% of an association's capital on the aggregate
amount of loans secured by non-residential real estate property; (c) a limit of
20% of an association's assets on the aggregate amount of commercial loans, with
the amount of commercial loans in excess of 10% of assets being limited to small
business loans; (d) a limit of 35% of an association's assets on the aggregate
amount of consumer loans and acquisitions of certain debt securities; (e) a
limit of 5% of assets on non-conforming loans (loans in excess of the specific
limitations of the HOLA); and (f) a limit of the greater of 5% of assets or an
association's capital on certain construction loans made for the purpose of
financing what is or is expected to become residential property.
32
<PAGE>
Under the HOLA, savings associations are generally subject to the same limits on
Loans to One Borrower as are imposed on national banks. Generally, under these
limits, a savings association may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of the association's unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily-marketable collateral. Such collateral is defined to include
certain debt and equity securities and bullion, but generally does not include
real estate. At June 30, 1999, the Bank's lending limit under this restriction
was $7.7 million. In addition, the Bank may provide purchase money financing for
the sale of any asset without regard to the loans-to-one borrower limitation so
long as no new funds are advanced and the Bank is not placed in a more
detrimental position than if it had held the asset. Home Federal is in
compliance with the loans-to-one-borrower limitation.
SAFETY AND SOUNDNESS STANDARDS. Pursuant to the FDI Act, as amended by FDICIA
and the Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Community Development Act"), the OTS and the federal bank regulatory agencies
have adopted, effective August 9, 1995, a set of guidelines prescribing safety
and soundness standards pursuant to FDICIA, as amended. The guidelines establish
general standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal stockholder. In addition, the
OTS adopted regulations that authorize, but do not require, the OTS to order an
institution that has been given notice by the OTS that it is not satisfying any
of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
FDICIA. If an institution fails to comply with such an order, the OTS may seek
to enforce such order in judicial proceedings and to impose civil money
penalties.
ACCOUNTING STANDARDS. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") requires the OTS to establish accounting
standards to be applicable to all savings associations for purposes of complying
with regulations, except to the extent otherwise specified in the capital
standards. Such standards must incorporate generally accepted accounting
standards to the same degree as is prescribed by federal banking agencies for
banks, or may be more stringent than such requirements.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member of the
SAIF, which is administered by the FDIC. Savings deposits are insured up to
$100,000 per insured member (as defined by law and regulation) by the FDIC and
such insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged or is engaging in unsafe or unsound practices, or is in
an unsafe or unsound condition.
On September 30, 1996, Congress passed and President Clinton signed into law The
Deposit Insurance Funds Act of 1996 ("Funds Act") to resolve the deposit
insurance premium disparity. The Funds Act also included extensive regulatory
relief for banks and thrifts. The Funds Act included a one-time special
assessment on SAIF deposits to be imposed to bring the fund's reserve ratio to
the statutory required 1.25 percent. The assessment rate was 65.7 basis points
on deposits as of March 31, 1995 resulting in an assessment of $2.6 million on
the Bank's deposits as recorded of March 31, 1995 which was paid on November 29,
1996. In addition, the Funds Act includes the following items which affect SAIF
members: (1) Pro-rata sharing of the Financing Corporation ("FICO") obligation
among Bank Insurance Fund ("BIF") and SAIF members will begin by January 1,
2000. From 1997 through 1999, partial sharing will occur, with SAIF deposits
assessed 6.44 basis points and BIF deposits 1.29 basis points (2) The FDIC is
prohibited from setting the semi-annual assessment at a rate in excess of that
needed to maintain or meet the
33
<PAGE>
required reserve ratio. Until the funds are merged, the FDIC is permitted to
rebate or credit excess premiums to BIF members only (3) For a three-year
period, the banking regulators are authorized to prevent SAIF insured
institutions from "facilitating or encouraging" customers to shift their
deposits to BIF-insured affiliates for the purpose of evading the SAIF premium
and (4) Pro-rata FICO sharing will begin and the ban on deposit shifting will
end on the earlier of January 1, 2000 or when the last savings association
ceases to exist. As a result of these changes in the Funds Act, the Bank's
deposit assessment was decreased. The 1997 decrease in the SAIF deposit
assessment from 23 basis points to 6.44 basis points is a savings of
approximately 72% to the Bank on an annual basis, exclusive of the one-time
assessment, which will impact net income for the Bank and the Company on an
ongoing basis in the future.
FDICIA also authorizes the FDIC to implement a risk-based deposit insurance
assessment system. Pursuant to this requirement, the FDIC adopted a transitional
risk-based assessment system, effective January 1, 1993, under which all insured
depository institutions are placed into one of nine categories and assessed
insurance premiums, ranging from .23% to .31% of deposits, based upon their
level of capital and supervisory evaluation. The permanent system, adopted in
June 1993 and effective January 1, 1994, continues the risk classification
system established under the transitional rule. Under this system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based
capital") of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy would pay the lowest premium while institutions that are less
than adequately capitalized (i.e., core and Tier 1 risk-based capital ratios of
less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Assessments
currently range from 0.0% of deposits for institutions in the highest category
to 0.27% of deposits for institutions in the lowest category. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.
The financing corporations created by FIRREA and the Competitive Equality
Banking Act of 1987 are also empowered to assess premiums on savings
associations to help fund the liquidation or sale of troubled savings
associations. Such premiums cannot, however, exceed the amount of SAIF
assessments and are paid in lieu thereof.
The FDIC has adopted regulations that generally prohibit payments to directors,
officers and employees contingent upon termination of their affiliation with an
FDIC-insured institution or its holding company (i.e., "golden parachute
payments") if the payment is received after or in contemplation of, among other
things, insolvency, or a determination that the institution or holding company
is in "troubled condition." Certain types of employee benefit plans are not
subject to the prohibition. The regulations would also generally prohibit
certain indemnification payments for civil money penalties or other enforcement
action.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations, such as
the Bank, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital not less than 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained income, and certain noncumulative
perpetual preferred stock and related earnings on withdrawable accounts and
deposits that qualify as core capital. In addition, all intangible assets, other
than a limited amount of purchased mortgage servicing rights and other
categories must be deducted from tangible capital. The OTS has proposed a rule
which would limit the amount of purchased mortgage servicing rights, together
with purchased credit card receivables, includable as tangible and core capital
to 50% of such capital. No assurance can be given as to the final form of such
regulation or the date of its effectiveness. At June 30, 1999, Home Federal had
$1.7 million of unamortized loan servicing rights, none of which were required
to be deducted from tangible capital.
The OTS regulations establish special capitalization requirements for savings
associations that own subsidiaries. Under these regulations certain subsidiaries
are consolidated for capital purposes and others are excluded from assets and
capital. In determining compliance with the capital requirements, all
subsidiaries engaged solely in activities permissible for national banks or
engaged in certain other activities solely as agent for its customers such as
mortgage banking activities are "includable" subsidiaries that are consolidated
for capital purposes in proportion to the
34
<PAGE>
association's level of ownership, including the assets of includable
subsidiaries in which the association has a minority interest that is not
consolidated for GAAP purposes. All subsidiaries of the Bank are includable
subsidiaries.
At June 30, 1999, the Bank had Tier I (Core) capital equal to $40.5 million, or
6.18% of adjusted total assets, which is $19.7 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
The capital standards also require core capital equal to at least 3% of adjusted
total assets (as defined by regulation). Core capital generally consists of
tangible capital plus certain intangible assets, and up to 25% of other
intangibles which meet certain separate salability and market valuation tests.
At June 30, 1999, the Bank had $4.9 million in intangible assets which were
subject to these tests. The amount of servicing rights includable as core
capital is limited to 50% of such capital.
Effective December 31, 1990, national banks were required to maintain a ratio of
core capital to adjusted total assets not less than 3%. Only those national
banks that receive a composite rating of one (the highest rating) under the
"CAMELS" rating system for commercial banks and that, in general, are considered
strong banking organizations will qualify for the 3% requirement. All other
national banks must maintain a core capital ratio of 3% plus an additional 100
to 200 basis points that would be established on a case-by-case basis. As
required by federal law, the OTS has proposed a rule revising its minimum core
capital requirement to be no less stringent than that imposed on national banks.
The OTS has proposed that only those savings associations rated a composite one
(the highest rating) under the MACRO rating system for savings associations will
be permitted to operate at or near the regulatory minimum leverage ratio of 3%.
All other savings associations will be required to maintain a minimum leverage
ratio of 3% plus at least an additional 100 to 200 basis points. The OTS will
assess each individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can be
given as to the final form of any such regulation, the date of its effectiveness
or the requirement applicable to the Bank.
The OTS risk-based capital requirement requires savings associations to have
total capital of at least 8% of risk-weighted asseTotal capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital up to
100% of core capital. At June 30, 1999, Home Federal had no capital instruments
that qualified as supplementary capital and $12.0 million of general loss
reserves, which was in excess of 1.25% of risk-weighted assets by $6.2 million.
35
<PAGE>
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital, in addition to the adjustments required
for calculating core capital. Such exclusions consist of equity investments (as
defined by regulation) and that portion of land loans and nonresidential
construction loans in excess of an 80% loan-to-value ratio and reciprocal
holdings of qualifying capital instruments. Home Federal had no such exclusions
from capital and assets at June 30, 1999.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by the appropriate risk weight based
on the risks inherent in the type of assets. The risk weights assigned by the
OTS for principal categories of assets are (i) 0% for cash and securities issued
by the U.S. Government or unconditionally backed by the full faith and credit of
the U.S. Government, (ii) 20% for securities (other than equity securities)
issued by U.S. Government sponsored agencies, high quality mortgage-backed
securities and mortgage-backed securities issued by, or fully guaranteed as to
principal and interest by, the FNMA or the FHLMC except for those classes with
residual characteristics or stripped mortgaged-related securities, (iii) 50% for
prudently underwritten permanent one- to four-family first lien mortgage loans
not more than 90 days delinquent and having a loan-to-value ratio of not more
than 80% at origination unless insured to such ratio by an insurer approved by
FNMA or FHLMC, and (iv) 100% for all other loans and investments, including
consumer loans, commercial loans, repossessed and loans more than 90 days past
due.
On June 30, 1999, the Bank had total risk based capital of $46.3 million
(including $40.5 million in core capital and $5.8 million in qualifying
supplementary capital) and risk-weighted assets of $459.2 million (including
$2.8 million in converted off-balance sheet assets), or total capital of 10.09%
of risk-weighted assets. This amount was $9.6 million above the 8.0% requirement
in effect on that date.
The following table sets forth Home Federal's compliance with its capital
requirements at June 30, 1999.
<TABLE>
<CAPTION>
PERCENT OF
APPLICABLE
AMOUNT(2) ASSETS(1)
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
GAAP capital..................................... $44,203 6.70%
------- -----
------- -----
Tier I (Core) capital............................ $40,494 6.18%
Required(3)...................................... 19,658 3.00
------- -----
Excess over requirement.......................... $20,836 3.18%
------- -----
------- -----
Risk based capital(4)............................ $46,311 10.09%
Required......................................... 36,734 8.00
------- -----
Excess over requirement.......................... $ 9,577 2.09%
------- -----
------- -----
</TABLE>
- ---------------------
(1) Tier I (Core) capital figures are determined as a percentage of total
adjusted assets; risk-based capital figures are determined as a percentage
of risk-weighted assets.
(2) The Bank's investment in its subsidiaries is included for purposes of
calculating regulatory capital.
36
<PAGE>
(3) The OTS is expected to adopt a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective December 31, 1990. The OTS core capital requirement is
anticipated to be at least 3% of total adjusted assets for thrifts that
receive the highest supervisory rating for safety and-soundness, with a 4%
to 5% core capital requirement for all other thrifts. No prediction can be
made as to the exact nature of any new OTS core capital regulation, or the
date of its effectiveness, and the core capital requirement to be
applicable to the Bank under such regulation.
(4) Includes qualifying supplementary capital of $5.8 million.
Under FDICIA all the Federal banking agencies, including the OTS, must revise
their risk-based capital requirements to ensure that such requirements account
for interest rate risk, concentration of credit risk and the risks of
non-traditional activities, and that they reflect the actual performance of and
expected loss on multi-family loans.
The OTS has adopted a final rule which requires every savings association with
more than normal interest rate risk to deduct from total capital an amount equal
to 50% of its interest-rate risk exposure multiplied by the market value of its
assets. This exposure is a measure of the potential decline in the market value
of portfolio equity of a savings association greater than 2%, based upon a
hypothetical 200 basis point increase or decrease in interest rates (whichever
results in a greater decline) affecting on- and off-balance sheet assets and
liabilities. Given Home Federal's capital position, this rule is not expected to
have a material impact on its financial condition or results of operations. The
OTS has delayed implementation of this Rule as of June 30, 1999.
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.
PROMPT CORRECTIVE ACTION STANDARDS. The OTS and the FDIC are authorized and,
under certain circumstances, required to take certain actions against any
association that fails to meet its capital requirements. The OTS is generally
required to take action to restrict the activities of an "undercapitalized
association" (generally defined to be one with less than either a 4% core ratio,
a Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions, discussed below that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be subject
to one or more of the additional specified actions and operating restrictions
mandated by FDICIA. These actions and restrictions include requiring the
issuance of additional voting securities; limitations on asset growth; mandated
asset reduction; changes in senior management; divestiture, merger or
acquisition of the association; restrictions on executive compensation; and any
other action the OTS deems appropriate.
An association that becomes "critically undercapitalized" (i.e., a tangible
capital ratio of 2% or less) is subject to further restrictions on its
activities in addition to those applicable to significantly undercapitalized
associations. The FDIC must restrict the activities of a critically
undercapitalized association and, among other things, prohibit any material
transaction outside the ordinary course of business or engaging in certain
transactions with affiliates, without the approval of the FDIC. The OTS must
appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
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Any undercapitalized association is also subject to other possible enforcement
actions by the OTS or the FDIC. Such actions could include a capital directive,
a cease-and-desist order, civil money penalties, the establishment of
restrictions on all aspects of the association's operations or the appointment
of a receiver or conservator or a forced merger into another institution. The
grounds for appointment of a conservator or receiver include substantially
insufficient capital and losses or likely losses that will deplete substantially
all capital with no reasonable prospect for replenishment of capital without
federal assistance.
If the OTS determines that an association is in an unsafe or unsound condition
or is engaged in an unsafe or unsound practice it is authorized to reclassify a
well-capitalized association as an adequately capitalized association and if the
association is adequately capitalized, to impose the restrictions applicable to
an undercapitalized association.
The imposition by the OTS or the FDIC of any of these measures on the Bank may
have a substantial adverse effect on the Bank's and the Company's operations and
profitability and the value of the Company's Common Stock. The Company's
shareholders do not have preemptive rights, and therefore, if the Company is
directed by the OTS or the FDIC to issue additional shares of Common Stock, such
issuance may result in the dilution in the percentage of ownership of the
Company of those persons owning shares of the Company's Common Stock.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS regulations impose
various restrictions or requirements on associations with respect to their
ability to pay dividends or make other distributions of capital. OTS regulations
prohibit an association from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the regulatory capital of the
association would be reduced below the amount required to be maintained for the
liquidation account established in connection with its mutual to stock
conversion.
The OTS utilizes a three-tiered approach to permit associations, based on their
capital level and supervisory condition, to make capital distributions which
include dividends, stock redemptions or repurchases, cash-out mergers, and other
transactions charged to the capital account. See "Regulatory Capital
Requirements."
Generally, Tier I associations, which are associations that before and after the
proposed distribution meet their fully phased-in capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its fully
phased-in capital requirement for such capital component, as measured at the
beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination.
Tier 2 associations, which are associations that before and after the proposed
distribution meet their current minimum capital requirements, may make capital
distributions of up to 75% of net income over the most recent four-quarter
period.
Tier 3 associations (which are associations that do not meet current minimum
capital requirements) that propose to make any capital distribution and Tier 2
associations that propose to make a capital distribution in excess of the noted
safe harbor level must obtain OTS approval written prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. The Bank is classified as a Tier I association.
As a subsidiary of the Company, the Bank is required to give the OTS 30 days'
notice prior to declaring any dividend on its stock. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
The OTS has proposed regulations that would simplify the existing procedures
governing capital distributions by savings associations. Under the proposed
regulations, the approval of the OTS would be required only for capital
distributions by an association that is deemed to be in troubled condition or
that is undercapitalized or would be undercapitalized after the capital
distribution. A savings association would be able to make a capital distribution
without notice to or approval of the OTS if it is not held by a savings
association holding company, is not deemed to be in troubled condition, has
received either of the two highest composite supervisory ratings and would
continue to be
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adequately capitalized after such distribution. Notice would have to be given to
the OTS by any association that is held by a savings association holding company
or that had received a composite supervisory rating below the highest two
composite supervisory ratings. An association's capital rating would be
determined under the prompt corrective action regulations.
LIQUIDITY. All savings associations, including Home Federal, are required to
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances, specified United State Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) in each calendar quarter equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. Furthermore, every savings
association must maintain sufficient liquidity to ensure its safe and sound
operation. For a discussion of what the Bank includes in liquid assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." This liquid asset ratio
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 4%.
Monetary penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At June 30, 1999, the Bank was in compliance with the
liquidity requirements, with the overall liquid asset ratio at 5.96%.
ACCOUNTING FOR INVESTMENTS. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
Generally Accepted Accounting Principles "GAAP." Under the policy statement,
management must support its classification of and accounting for loans and
securities (i.e., whether held for investment, sale or trading) with appropriate
documentation. The Bank is in compliance with these rules.
The OTS has adopted an amendment to its accounting regulations, which may be
made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
BRANCHING. Subject to certain limitations, the HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such branches is
available (a) in states that expressly authorize branches of savings
associations located in another state or (b) to an association that qualifies as
a "domestic building and loan association" under the Internal Revenue Code of
1986, which imposes qualification requirements similar to those for a "qualified
thrift lender" under the HOLA. See "QTL Test." The authority for a federal
savings association to establish an interstate branch network would facilitate a
geographic diversification of the association's activities. This authority under
the HOLA and the OTS regulations preempts any state law purporting to regulate
branching by federal savings associations.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the "CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings association,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Association received an "Outstanding" CRA
rating in its most recent examination.
The CRA regulations rate an institution based on its actual performance in
meeting community needs. In particular, the rating system focuses on three
tests: (a) a lending test, to evaluate the institution's record of making loans
in its assessment areas; (b) an investment test, to evaluate the institution's
record of investing in community development projects, affordable housing, and
programs benefiting low or moderate income individuals and businesses; and (c) a
service test, to evaluate the institution's delivery of services through its
branches, ATMs and other offices. The
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amended CRA regulations also clarify how an institution's CRA performance would
be considered in the application process.
QUALIFIED THRIFT LENDER TEST. All savings associations, including the Bank, are
required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. This test requires a savings association to
have at least 65% of its portfolio assets (which consists of total assets less
the sum of goodwill and other intangible assets, properties used to conduct the
savings association's business and specified liquid assets not exceeding 20% of
total assets) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. At June 30, 1999, the Bank maintained
81.53% of its portfolio assets in qualified thrift investments, and thus met the
test. The Bank has always met the QTL test since its inception.
Loans and mortgage-backed securities secured by domestic residential housing,
FHLB stock, credit card loans, educational loans and certain small business
loans as well as certain obligations of the Federal Savings and Loan Insurance
Corporation ("FSLIC"), the FDIC and certain other related entities may be
included in qualifying thrift investments without limit. FHLMC and FNMA stock
and certain other housing-related and non-residential real estate loans and
investments, including loans to develop churches, nursing homes, hospitals and
schools, and consumer loans and investments in subsidiaries engaged in
housing-related activities may also be included, in varying amounts, not to
exceed 20% of portfolio assets.
Any savings association that fails to meet the QTL test must either convert to a
national bank charter or operate under certain restrictions on its activities,
unless it requalifies as a QTL and thereafter remains a QTL. If an association
does not requalify and converts to a national bank charter, it must remain
SAIF-insured until the FDIC permits it to transfer to the Bank Insurance Fund.
If an association that fails the test has not yet requalified and has not
converted to a national bank, its new investments and activities are limited to
those permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities and dispose
of any investments not permissible for a national bank. In addition, it must
repay promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. A savings association that has failed the QTL test may requalify
under the QTL test and be free of such limitations, but it may do so only once.
If any association that fails the QTL test is controlled by a holding company,
then within one year after the failure, the holding company must register as a
bank holding company and become subject to all restrictions on bank holding
companies. See "Holding Company Regulation."
TRANSACTIONS WITH AFFILIATES. The Bank's authority to engage in transactions
with its "affiliates" is limited by the OTS regulations and by Sections 23A and
23B of the Federal Reserve Act (the "FRA"). In general, an affiliate of the
Association is any company that controls the Association or any other company
that is controlled by a company that controls the Association, excluding the
Association's subsidiaries other than those that are insured depository
institutions. The OTS regulations prohibit a savings association (a) from
lending to any of its affiliates that is engaged in activities that are not
permissable for bank holding companies under Section 4(c) of the BHC Act and (b)
from purchasing the securities of any affiliate other than a subsidiary. Section
23A limits the aggregate amount of transactions with any individual affiliate to
10% of the capital and surplus of the savings association and also limits the
aggregate amount of transactions with all affiliates to 20% of the savings
association's capital and surplus. Extensions of credit to affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the association as those prevailing at the time for comparable
transactions with non-affiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to non-affiliated companies.
The Association's authority to extend credit to its directors, executive
officers, and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the FRB thereunder. Among other things, these
provisions require that extensions of credit to insiders (a) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not
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less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of the association's capital. In addition, extensions
of credit in excess of certain limits must be approved by the association's
board of directors.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These conflict
of interest regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must be
made on terms substantially the same as those for loans to unaffiliated
individuals.
REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking agencies
adopted regulations to prescribe standards for extensions of credit that (a) are
secured by real estate or (b) are made for the purpose of financing the
construction of improvements on real estate. The OTS regulations require each
savings association to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans. Associations are also permitted to make a
limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standards are justified.
HOLDING COMPANY REGULATION. The Company is a unitary savings and loan holding
company subject to regulatory oversight by the OTS. As such, the Company is
registered with and files reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries which also permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the OTS
prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"Qualified Thrift Lender Test."
FEDERAL SECURITIES LAW. The stock of the Company is registered with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers, directors
and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). The FRB regulations generally require that reserves be
maintained in the amount of 3% of the aggregate of transaction accounts up to
$41.6 million. The amount of aggregate transaction accounts in excess of $41.6
million are currently subject to a reserve ratio of 10%, which ratio the FRB may
adjust between 8% and 12%. The FRB regulations currently exempt $4.9 million of
otherwise reservable balances from the reserve requirements, which exemption is
adjusted by the FRB at the end of each year. At June 30, 1999, the Bank was in
compliance with these reserve requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve
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Board may be used to satisfy liquidity requirements that may be imposed by the
OTS. See "Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
("FRB")"discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the FRB. This requirement has been waived
for Year 2000 liquidity purposes only.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Des Moines,
which is one of 12 regional FHLBs, that administers the home financing credit
function of savings associations. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established by the board of directors of the FHLB. These policies and procedures
are subject to the regulation and oversight of the Federal Housing Finance
Board. All advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing.
As a member, Home Federal is required to purchase and maintain stock in the FHLB
of Des Moines. At June 30, 1999, Home Federal had $5.3 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five fiscal
years such dividends have averaged 7.34% and were 6.41% for fiscal year 1999.
Under federal law, the FHLBs are required to provide funds for the resolution of
troubled savings associations and to contribute to low and moderately-priced
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have affected adversely the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value of the
Bank's FHLB stock may result in a corresponding reduction in Home Federal's
capital.
For the fiscal year ended June 30, 1999, dividends paid by the FHLB of Des
Moines to Home Federal totalled approximately $271,000, which constitute a
$66,000 decrease in the amount of dividends received in fiscal 1998. The $76,000
dividend received for the quarter ended June 30, 1999 reflects an annualized
rate of 6.24% or 8.10% decrease from the rate for the same period in fiscal
1998.
FEDERAL AND STATE TAXATION
The Company and subsidiaries file a consolidated federal income tax return on a
fiscal year basis. The Bank is allowed bad debt deductions based on actual
charge-offs.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
To the extent earnings appropriated to a savings association's bad debt reserves
for "qualifying real property loans" and deducted for federal income tax
purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 1999, the Bank's Excess for tax purposes totalled
approximately $4.8 million.
The Bank and its consolidated subsidiaries have been audited by the IRS with
respect to consolidated federal income tax returns through 1985. With respect to
years examined by the IRS, either all deficiencies have been satisfied or
sufficient reserves have been established to satisfy asserted deficiencies. In
the opinion of management, any
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examination of still open returns (including returns of subsidiaries and
predecessors of, or entities merged into, the Bank) would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Bank and its consolidated subsidiaries.
SOUTH DAKOTA TAXATION. The Bank is subject to the South Dakota franchise tax to
the extent that such corporations are engaged in business in the state of South
Dakota. South Dakota does not have a corporate income tax. The franchise tax
will be imposed at a rate of 6% on franchise taxable income which is computed in
the same manner as federal taxable income with some minor variations to comply
with South Dakota law, other than the carryover of net operating losses which is
not permitted under South Dakota law. A South Dakota return of franchise tax
must be filed annually.
NEBRASKA TAXATION. The Mortgage Corp. is subject to the Nebraska Corporate
Income tax to the extent that such corporations are engaged in business in the
state of Nebraska. The Corporate Income tax is imposed at rates of 5.58% to
7.81% on corporate taxable income which is computed in the same manner as
federal taxable income with some minor variations to comply with Nebraska law. A
Nebraska return of Corporate Income tax must be filed annually.
DELAWARE TAXATION. As a Delaware holding company, the Company is exempted from
Delaware corporate income tax but is required to file an annual report with and
pay an annual fee to the State of Delaware. The Company is also subject to an
annual franchise tax imposed by the State of Delaware.
EXECUTIVE OFFICERS OF THE COMPANY
The following information as to the business experience during the past five
years is supplied with respect to executive officers of the Company and the
Bank.
CURTIS L. HAGE - Mr. Hage, age 53, is Chairman, President and Chief Executive
Officer of the Bank. He was elected Chairman of the Board of Directors of the
Bank in September 1996 and has held the position of President and Chief
Executive Officer of the Bank since February 1991. Prior to such time, Mr. Hage
served as Executive Vice President of the Bank since 1986. Since joining the
Association in 1968, he served in various capacities prior to being elected
Executive Vice President. Mr. Hage received his M.B.A. from the University of
South Dakota and attended the Graduate School of Savings Institution Management
at the University of Texas.
GENE F. UHER - Mr. Uher, age 51, is Executive Vice President/Chief Operations
Officer/Secretary, a position he has held since March 1997. He was employed as
Executive Vice President for Packers Bank, Omaha, Nebraska from 1996 until
joining Home Federal. Prior to that time, he was employed as Executive Vice
President/Chief Operating Officer for Conservative Savings Bank, F.S.B., Omaha,
Nebraska from 1989 to 1996. Mr. Uher received his B.A. degree from Lincoln
School of Commerce, Lincoln, Nebraska. He is a graduate of the School of
Executive Development at University of Connecticut.
BRENT E. JOHNSON - Mr. Johnson, age 36, is Senior Vice President/Chief Financial
Officer/Treasurer, a position he has held since November 1998. Mr. Johnson
served as Chief Financial Officer and Cashier with Mercantile Bank of Western
Iowa and as Chief Financial Officer of Hawkeye Bancorporation in Des Moines,
Iowa, from 1986 to 1998. Mr. Johnson received his B.S. degree from Northwest
Missouri State University, and is also a Certified Public Accountant.
MARY F. HITZEMANN - Ms. Hitzemann, age 46, is Senior Vice President/Human
Resources, a position she has held since October 1993. Ms. Hitzemann joined Home
Federal in January 1993. Prior to that time, she was employed as Vice President
of Human Resources for Rapid City Regional Hospital from May 1989 to May 1992.
Ms. Hitzemann received her B.A. degree from Augustana College.
TERRY L. KAPPES - Mr. Kappes, age 45, is Senior Vice President/Retail Banking, a
position he has held since June 1998. Prior to that time, he was employed with
Bank One - Colorado, Grand Junction, Colorado from 1993 until joining Home
Federal with his most recent position being Senior Vice President/Retail Market
Manager. Mr. Kappes served as Senior Vice President for First Bank System,
Billings, Montana from 1988 to 1991 and First Bank of South Dakota, Sioux Falls,
South Dakota from 1977 to 1988. Mr. Kappes received his B.A. degree from Oral
Roberts University, Tulsa, Oklahoma.
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JOHN B. "JACK" NEUROTH - Mr. Neuroth, age 64, is Senior Vice President/Senior
Commercial Lending Officer, a position he has held since September 1996. Mr.
Neuroth joined Home Federal in 1966. He is responsible for commercial real
estate lending. Mr. Neuroth received his B.S. from the University of South
Dakota.
JOHN E. ROERS - Mr. Roers, age 52, is Senior Vice President/Agricultural
Lending, a position he has held since joining Home Federal on October 31, 1995.
Prior to that time, he was employed as Agricultural Loan Officer and Department
Manager for Western Bank, Sioux Falls (then First Bank) from June 1981 to
October 1996 and for Western Bank, Marshall, Minnesota from February 1974 to May
1981. Mr. Roers received his Bachelor of Science and Masters of Science from
North Dakota State University.
MARK S. SIVERTSON - Mr. Sivertson, age 41, is Senior Vice President/Trust
Officer, a position he has held since July 1996. He joined Home Federal in
February 1995 as Vice President/Trust Officer. Prior to joining Home Federal,
Mr. Sivertson was Vice President and Trust Officer in charge of the Investment
Management and Trust Department at Western Bank. He holds a law degree from the
University of North Dakota and the Certified Trust Financial Advisor designation
from the American Bankers Association.
GARY L. SMITH - Mr. Smith, age 45, is Senior Vice President/Information Systems,
a position he has held since July 1998. Mr. Smith joined Home Federal in 1979
and was promoted to Vice President in 1988. He received his B.S. from the
University of South Dakota.
MICHAEL H. ZIMMERMAN - Mr. Zimmerman, age 46, is Senior Vice President/Senior
Retail Lending Officer, a position he has held since joining Home Federal in
August 1996. Prior to that time, he was employed as Vice President/Mortgage Loan
Manager for First Trust and Savings Bank, Cedar Rapids, Iowa from October 1995
to August 1996 and as Vice President/Eastern Regional Manager for Homeland
Savings Bank FSB, Waterloo, Iowa from May 1995 to October 1995; and as Vice
President/ Manager Real Estate Lending for Homeland Bank, N.A., Waterloo, Iowa
from August 1992 to April 1995. Mr. Zimmerman received his B.A. from Dana
College, Blair, Nebraska.
RICHARD H.C. BEVERLEY - Mr. Beverley, age 56, is Vice President/Sales, a
position he has held since joining the Bank in June 1996. Prior to that time, he
was employed by Hauge Associates, Inc. as Director of Sales from September 1993
to May 1996 and Sears Roebuck and Co. from May 1966 to June 1993. Mr. Beverley
attended Bradley University, Peoria, Illinois.
ROXANNE R. BOBOLZ - Ms. Bobolz, age 43, is Vice President/Market Manager for the
Bank. She joined Home Federal in January 1999 as Bank Market Manager and was
promoted to her current position in March 1999. Ms. Bobolz is responsible for
the Dakota Dunes market area.
CARTER V. BROTON - Mr. Broton, age 45, is Vice President/General Auditor, a
position he has held since joining the Bank in February 1993. Prior to that time
he was employed by Norwest Corporation as Professional Practices Manager of the
Audit Department from 1990 to 1993, and by Citibank from 1983 to 1990. Mr.
Broton received his MBA degree from the University of South Dakota.
MICHAEL J. ECHOLS - Mr. Echols, age 55, is Vice President/Loan Service, a
position he has held since joining the Bank in June 1996. Prior to that time he
was employed by South Dakota Housing Development Authority as Executive Director
from 1974 to 1996.
THEODORE R. "TED" ELLINGER - Mr. Ellinger, age 51, is Vice President/Bank
Coordinator. He joined Home Federal in July 1974 and was promoted to his present
position in October 1993. Mr. Ellinger is responsible for the Brookings, Dell
Rapids, Canton, Freeman, Lennox and Parker branches.
RANDALL D. FINK - Mr. Fink, age 45, is Vice President/Mortgage Loan Production
Manager, a position he has held since October 1995. In January 1983, Mr. Fink
joined Home Federal and in 1989 was promoted to Vice President/Single Family
Lending.
44
<PAGE>
THERESA L. "TERRY" FLAMBOE - Ms. Flamboe, age 47, is Vice President/Market
Manager. She joined Home Federal in September 1998 and was promoted to her
present position in March 1999. Ms. Flamboe is responsible for the Aberdeen
Downtown, Aberdeen East and Redfield market areas. Ms. Flamboe received her B.A.
from the University of Wyoming.
IRA D. FRERICKS - Mr. Frericks, age 39, is Vice President/Controller of the
Bank. He joined Home Federal in 1988 as an Internal Auditor and was promoted to
Assistant Vice President/Internal Auditor in January 1990, Assistant Vice
President/Controller in March 1991 and Vice President in January 1992. Prior to
joining Home Federal, Mr. Frericks was employed by McGladrey & Pullen, a public
accounting firm, from 1984 to 1988. He is a certified public accountant. Mr.
Frericks received his B.S. Degree from the University of South Dakota and is a
graduate of the University of Wisconsin Graduate School of Banking.
ANNE M. FUEHRER - Ms. Fuehrer, age 38, is Vice President/Marketing, a position
she has held since joining the Bank in October 1998. She was employed by First
National Bank in Sioux Falls as Marketing/Compliance Officer from 1988 to 1998.
Ms. Fuehrer received her B.S. from St. Cloud State University.
JACK P. HEARST - Mr. Hearst, age 47, is Vice President/Credit Cards, a position
he has held since March 1999. He was employed by Citicorp-Corporate Control and
Risk Assessment as the Audit Director for Citicorp. Bankcards. Mr. Hearst
received a B.S. from the University of Missouri.
DIANE K. HOVDA - Ms. Hovda, age 54, is Vice President/Financial Management, a
position she has held since June of 1997. She joined Home Federal in May 1995 as
Vice President/Bank Coordinator. Prior to that time, she was employed by Western
Bank, Sioux Falls from 1974 to 1995, and for First National Bank and National
Bank of South Dakota from 1966 to 1974.
PAUL S. JORDAHL - Mr. Jordahl, age 50, is Vice President/Commercial Business
Lending. He joined Home Federal in December 1993 and was promoted to his present
position in March 1999. He was employed by First Savings Bank as Senior Credit
Officer from 1983 to 1993. From 1973 to 1983, Mr. Jordahl was a Farm Real Estate
Lender for the Federal Land Bank. Mr. Jordahl received his B.S. from South
Dakota State University.
DAVID C. KALIL - Mr. Kalil, age 43, is Vice President/Market Manager. He joined
Home Federal in March 1997 and was promoted to his present position in March
1999. Mr. Kalil is responsible for the Pierre, Mobridge and Winner market areas.
He received his B.S. from North Dakota State University.
FAYE A. LEE - Ms. Lee, age 41, is Vice President/Retail Loan Processing. She
joined Home Federal in 1984, and has held various positions within the Bank
during that time. Ms. Lee was promoted to her present position in July 1998.
SHARON A. MANUEL - Ms. Manuel, age 49, is Vice President/Electronic Banking. She
joined Home Federal in April 1994. Ms. Manuel is responsible for managing
technology-oriented projects such as automated telephone banking, debit card,
bill payment services and home banking. Prior to joining Home Federal, she was
employed by Citibank for 13 years.
GARY G. SIEVERDING - Mr. Sieverding, age 35, is Vice President/Commercial
Business Lending. He joined Home Federal in 1996 and was promoted to his present
position in 1997. Prior to joining Home Federal, he was with First Savings Bank
- - Sioux Falls, First Bank of South Dakota, N.A. and Western Bank in various
management capacities. Mr. Sieverding received his education from South Dakota
State University, Brookings, SD and his ABA from the National Commercial Lending
School, Norman, OK.
NATALIE A. SOLBERG - Ms. Solberg, age 36, is Vice President/ Retail Support, a
position she has held since 1997. She joined Home Federal in February 1994 and
was promoted to Vice President/In-Touch Banking in October 1995. Prior to
joining Home Federal, she was the Customer Service Manager and various other
positions for Bank of New York from October 1989 to October 1993. She received
her BS from Northern State University.
MARK S. SWENSON - Mr. Swenson, age 35, is Vice President/Bank Manager, a
position he has held since joining Home Federal in May 1995. Prior to that time,
he was employed as Managing Officer, Senior Personal Banking
45
<PAGE>
Officer, Marketing Specialist for Western Bank Northeast, Sioux Falls from 1986
to May 1996. Mr. Swenson received his BS from South Dakota State University and
his MBA from the University of South Dakota.
KIRK L. WAUGH - Mr. Waugh, age 32, is Vice President/Secondary Market, a
position he has held since July 1998. He joined Home Federal in June 1987, and
has held various positions within the Bank during that time, most recently
serving as the Secondary Market Manager.
KENT F. WIGG - Mr. Wigg, age 52, is Vice President/Financial Management, a
position he has held since joining Home Federal in September 1995. Prior to that
time, he was employed by Western Bank, Sioux Falls (then First Bank) from August
1985 to September 1995. And for First National Bank, Sioux City, Iowa from May
1974 to August 1985. He received his BS from Iowa State University and his MBA
from University of South Dakota. Additionally, he is a Graduate of Colorado
School of Banking, a Certified Trust Specialist (CTS), a Certified Investment
Specialist (CIS) and a Certified Financial Planner (CFS).
ITEM 2. PROPERTIES
The Company and the Bank conduct their business at their main office located at
225 S. Main at 11th, Sioux Falls, South Dakota, 57104. The Bank also conducts
business from 24 other retail banking locations located in its primary market
area.
The Bank owns each of its branch offices, except for three offices that it
leases. The total net book value of the Company's premises and equipment
(including land, building and leasehold improvements and furniture, fixtures and
equipment) at June 30, 1999 was $14.4 million. See "Note 5 of Notes to
Consolidated Financial Statements."
ITEM 3. LEGAL PROCEEDINGS
The Company, Home Federal and its subsidiaries are involved as plaintiff or
defendant in various legal actions arising in the normal course of their
businesses. While the ultimate outcome of these proceedings cannot be predicted
with certainty, it is the opinion of management, after consultation with counsel
representing Home Federal and the Company in the proceedings, that the
resolution of these proceedings should not have a material effect on the
Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended June 30, 1999.
46
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK LISTING
The Company's Common stock is traded under the symbol "HFFC" on the NASDAQ
National Market System.
The following table sets forth the range of high and low sale prices for the
Company's Common Stock for each of the fiscal quarters of the two years ended
June 30, 1999 and 1998. Quotations for such periods are as reported by NASDAQ
for National Market System issues. On April 24, 1998, the Company declared a
three-for-two stock split in the form of a stock dividend on one-half share of
common stock for each one share outstanding, payable to shareholders of record
on May 8, 1998. The quotations for the periods listed below have been
retroactively adjusted based upon the new shares outstanding after the effect of
the three-for-two stock split for all periods presented.
<TABLE>
<CAPTION>
FISCAL 1999 HIGH LOW
------------------------------------------
<S> <C> <C>
1st Quarter $23.50 $14.50
2nd Quarter $18.63 $12.00
3rd Quarter $18.38 $15.50
4th Quarter $13.75 $12.13
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
------------------------------------------
<S> <C> <C>
1st Quarter $18.00 $14.17
2nd Quarter $18.17 $16.50
3rd Quarter $20.00 $18.00
4th Quarter $24.16 $19.75
</TABLE>
As of September 15, 1999, the Company had 583 holders of record of its Common
Stock.
The transfer agent for the Company's Common Stock is ChaseMellon Shareholder
Services, Bank Window, Church Street Station, New York, NY, 10015-4000.
DIVIDENDS
HF Financial Corp. paid quarterly cash dividends of $0.09 per share throughout
fiscal year 1999. In addition, HF Financial Corp. paid quarterly cash dividends
of $0.07 throughout fiscal year 1998. The Board of Directors intends to continue
the payment of quarterly cash dividends, dependent on the results of operations
and financial condition of HF Financial Corp., tax considerations, industry
standards, economic conditions, general business practices and other factors the
board of directors deems relevant. On July 21, 1999, the Board of Directors
approved an increase in cash dividends to $0.10 per share and HF Financial Corp.
paid the respective cash dividends on August 26, 1999 to shareholders of record
on August 12, 1999. HF Financial Corp.'s ability to pay dividends is dependent
on the dividend payments it receives from its subsidiary, Home Federal Savings
Bank (the "Bank"), which are subject to federal and state regulations.
SALES OF UNREGISTERED STOCK
The Company has had no sales of unregistered stock within the last three fiscal
years.
47
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data with respect to the
Company for the periods indicated. This information should be read in
conjunction with the Financial Statements and related notes appearing elsewhere
herein and "Management's Discussion and Analysis of Financial Condition and
results of Operations." The Company's selected financial statement and
operations data for each of the years set forth below have been derived from
financial statements which have been audited by McGladrey & Pullen LLP,
independent public accountants.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Statement of Financial Condition Data:
Total assets $ 658,622 $ 570,979 $ 562,114 $ 554,659 $ 535,682
Loans receivable, net 492,302 426,522 440,019 413,143 360,007
Loans held for sale 11,755 9,616 3,483 7,280 4,139
Mortgage-backed securities - - - - - - - - - - - - - - - - 83,384
Mortgage-backed securities available for sale 41,583 39,647 30,340 59,495 - - - -
Investment securities - - - - - - - - - - - - - - - - 28,932
Securities available or held for sale 61,023 44,232 46,940 41,168 33,402
Deposits 510,730 446,424 418,186 398,166 400,675
Advances from FHLB of Des Moines
and other borrowings 81,613 50,635 74,743 90,123 73,695
Stockholders' equity 48,558 56,601 52,974 51,263 48,354
</TABLE>
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Interest and dividend income $ 46,119 $ 46,201 $ 44,012 $ 43,465 $ 38,126
Interest expense 24,658 25,449 24,832 25,761 24,008
-------- -------- -------- -------- --------
Net interest income 21,461 20,752 19,180 17,704 14,118
Provision (recoveries) for losses on loans 12,120 4,689 693 590 (515)
-------- -------- -------- -------- --------
Net interest income after provision (recoveries)
for losses on loans 9,341 16,063 18,487 17,114 14,633
Credit card fee income 12,064 6,163 613 - - - - - - - -
Loan servicing income 1,263 1,187 1,150 689 754
Loan fees and service charges 1,231 1,184 946 791 586
Gain on sale of securities, net 1 226 150 500 164
Other noninterest income 4,462 4,871 3,613 3,668 2,626
Noninterest expense (26,387) (19,983) (19,703) (15,147) (13,855)
-------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of accounting changes 1,975 9,711 5,256 7,615 4,908
Income tax expense 924 3,238 1,582 2,893 1,803
-------- -------- -------- -------- --------
Income before cumulative effect of
accounting changes 1,051 6,473 3,674 4,722 3,105
Cumulative effect of accounting changes - - - - - - - - - - - - - - - - 93
-------- -------- -------- -------- --------
Net income $ 1,051 $ 6,473 $ 3,674 $ 4,722 $ 3,198
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings per share: (4)
Income before cumulative effect of accounting changes
Basic $ 0.25 $ 1.46 $ 0.81 $ 1.03 $ 0.66
Diluted $ 0.24 $ 1.42 $ 0.79 $ 1.00 $ 0.66
Net Income
Basic $ 0.25 $ 1.46 $ 0.81 $ 1.03 $ 0.68
Diluted $ 0.24 $ 1.42 $ 0.79 $ 1.00 $ 0.68
Dividends per share (5) $ 0.37 $ 0.28 $ 0.24 $ 0.22 $ 0.20
Dividends payout ratio 143.77% 19.28% 29.48% 21.41% 29.41%
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Other Data:
Interest rate spread information:
Average during period 3.50% 3.40% 3.24% 2.88% 2.40%
End of period 3.50 3.41 3.36 3.01 2.36
Net interest margin (1) 3.84 3.80 3.64 3.31 2.80
Average interest-earning assets to average
interest-bearing liabilities 1.08 1.09 1.08 1.09 1.08
Equity to total assets (end of period) 7.37 9.91 9.42 9.24 9.03
Equity-to-assets ratio (ratio of average equity
to average total assets) 8.96 9.59 9.25 8.97 8.94
Nonperforming assets to total assets
(end of period) (2) 0.48 0.53 0.33 0.41 0.57
Allowance for loan losses to nonperforming
loans (end of period) (3) 445.27 258.86 361.50 200.15 141.08
Allowance for loan losses to total loans
(end of period) 2.32 1.62 1.02 0.98 1.11
Nonperforming loans to total loans
(end of period) (3) 0.52 0.63 0.28 0.49 0.79
Other noninterest expense to average total assets 4.48 3.47 3.55 2.71 2.64
Net interest income after provision (recoveries) for losses on
loans to noninterest expense (end of period) 35.40 80.38 93.83 112.99 105.62
Return on assets (ratio of net income to average
total assets) 0.18 1.13 0.66 0.85 0.61
Return on equity (ratio of net income to average
equity) 1.99% 11.73% 7.17% 9.43% 6.81%
Number of full-service offices 25 19 19 19 18
</TABLE>
1) Net interest income divided by average interest-earning assets.
2) Nonperforming assets include nonaccruing loans, accruing loans delinquent
more than 90 days and foreclosed assets.
3) Nonperforming loans include nonaccruing loans and accruing loans delinquent
more than 90 days.
4) Earnings per share are retroactively adjusted for the two-for-one stock
split in the form of a stock dividend payable to shareholders of record on
January 10, 1996 and for the three-for-two stock split in the form of a
stock dividend payable to shareholders of record on May 8, 1998.
5) Dividends per share are retroactively adjusted for the two-for-one stock
split in the form of a stock dividend payable to shareholders of record on
January 10, 1996 and for the three-for-two stock split in the form of a
stock dividend payable to shareholders of record on May 8, 1998.
49
<PAGE>
ITEM 7. 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."). The Company ceased
operation of the Mortgage Corp. during fiscal 1998. 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 Company became the
owner of 100% of HF Card Services effective as of July 1998. 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.
The Bank has been, and intends to continue to be, a financial institution that
offers a variety of financial services to meet the needs of families in the
communities it serves. The Bank has focused on serving families located in its
market area, generally defined as eastern South Dakota and including the cities
and the communities surrounding the cities of Sioux Falls, Brandon, Pierre,
Winner, Freeman, Dell Rapids, Canton, Parker, Lennox, Aberdeen, Mobridge,
Brookings, Hartford, Redfield, Dakota Dunes, Colman, Crooks, Chester, and
Wentworth, South Dakota. The Bank attracts deposits from the general public and
uses such deposits, together with borrowings and other funds, to originate one-
to four-family residential, consumer, multi-family, commercial real estate,
agricultural, construction and commercial business loans. The Bank's consumer
loan portfolio includes, among other things, mobile home loans, automobile
loans, home equity loans, credit card loans, loans secured by deposit accounts
and student loans.
The Bank also purchases mortgage-backed securities and invests in U.S.
Government and agency obligations and other permissible investments. The Bank
does not rely on any brokered deposits and does not hold any non-investment
grade bonds (i.e. "junk bonds"). The Bank also receives loan servicing income on
loans serviced for others and commission income from credit-life. The Bank,
through its wholly-owned subsidiaries, offers annuities, health, life, hazard
and other insurance products and appraisal services.
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.
On May 27, 1999 the Bank acquired 100% of the outstanding capital stock of
Dakota State Bank ("DSB") for cash consideration. The new locations along the
Interstate 29 highway corridor between Sioux Falls and Brookings support the
Company's expansion into commercial and agricultural markets. The acquisition
was accounted for as a purchase.
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 losses on loans,
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 June 30, 1999, the Company had total assets of $658.6 million, an increase of
$87.6 million from the level at June 30, 1998. The increase in assets was due
primarily to an increase in loans receivable of $65.8 million, securities
available for sale of $16.8 million, foreclosed real estate and other properties
of $1.5 million and intangible assets of $4.9 million. The increase in loans
receivable,
50
<PAGE>
securities available for sale, foreclosed real estate and other properties and
intangible assets was funded primarily by a decrease in cash and cash
equivalents of $8.8 million, an increase in deposits of $64.3 million and an
increase in advances from Federal Home Loan Bank ("FHLB") and other borrowings
of $31.0 million from the levels at June 30, 1998. In addition, stockholders'
equity decreased from $56.6 million at June 30, 1998 to $48.6 million at June
30, 1999, primarily due to the purchase of treasury stock of $6.7 million, the
payment of cash dividends of $1.5 million and the change in net unrealized loss
on securities available for sale of $1.2 million which was partially offset by
net income of $1.1 million.
The increase in loans receivable of $65.8 million was due primarily to purchases
and originations of principal exceeding amortizations and prepayments of
principal. Included in the $65.8 million increase were loans receivable of $29.2
million due to the acquisition of DSB.
The increase in securities available for sale of $16.8 million was primarily the
result of purchases of $36.3 million exceeding sales, amortizations and
prepayments of principal. Of the $16.8 million increase in securities available
for sale, an increase of $12.0 million resulted from the DSB acquisition by the
Bank. The Bank's purchases of securities available for sale were comprised
primarily of U.S. Government agency securities which have a maturity of five
years or less that have a call feature that varies from three months to two
years.
The increase in foreclosed real estate and other properties was primarily the
result of the Company's purchase of land for future development in the amount of
$1.3 million during the first quarter of fiscal 1999.
The increase in intangible assets of $4.9 million was the direct result of the
acquisition of DSB during the fourth quarter of fiscal 1999.
The increase in deferred tax assets of $1.9 million is due primarily to the
increase in the allowance for credit card loan losses from $3.2 million at June
30, 1998 to $7.5 million at June 30, 1999, an increase of $4.3 million which is
not currently deductible. When tax effected, this temporary difference resulted
in an increase in deferred tax assets of $1.7 million. See "Notes to
Consolidated Financial Statements Note 8" for further discussion on income
taxes.
The $64.3 million increase in deposits was primarily due to an increase in
savings accounts of $6.9 million, an increase in NOW accounts and demand
accounts of $15.8 million, an increase in money market accounts of $35.1 million
and an increase in certificates of deposit of $6.5 million. These increases were
primarily the result of a focused marketing campaign during the fiscal year and
the acquisition of DSB. Of the $64.3 million increase in deposits, $42.6 million
was the direct result of the acquisition of DSB.
Advances from the FHLB and other borrowings increased $31.0 million for the year
ended June 30, 1999 primarily due to the Company obtaining new advances in the
amount of $89.6 million which were partially offset by payments of $59.7 million
on advances and other borrowings during the fiscal year.
51
<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 rates 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 years ended June 30,
1999, 1998 and 1997 include fees which are considered adjustments to yield.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------------
1999 1998
------------------------------------------------------------------
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) $465,002 $40,616 8.73% $445,511 $40,154 9.01%
Mortgage-backed securities 44,735 2,664 5.96% 32,213 2,023 6.28%
Other investment securities (2) 44,357 2,568 5.79% 62,931 3,687 5.86%
FHLB stock 4,232 271 6.40% 4,940 337 6.82%
----------- ---------- -------- ----------- --------- --------
Total interest-earning assets $558,326 $ 46,119 8.26% $545,595 $46,201 8.47%
Noninterest-earning assets 30,824 ---------- -------- 29,712 --------- --------
------------ ------------
Total assets $589,150 $575,307
------------ ------------
------------ ------------
Interest-bearing liabilities:
Deposits:
Checking and money market $111,899 $ 2,942 2.63% $89,429 $ 2,273 2.54%
Savings 48,958 1,533 3.13% 53,260 1,904 3.57%
Certificates of deposit 278,256 15,878 5.71% 294,797 17,554 5.95%
------------ ---------- -------- ------------ ---------- --------
------------ ---------- -------- ------------ ---------- --------
Total deposits $439,113 $20,353 4.64% $437,486 $21,731 4.97%
FHLB advances and other
borrowings 78,797 4,305 5.46% 64,350 3,718 5.78%
------------ ---------- -------- ------------ ---------- --------
Total interest-bearing liabilities $517,910 $24,658 4.76% $501,836 $25,449 5.07%
---------- -------- ---------- --------
Other liabilities 18,435 18,278
------------ ------------
Total liabilities $536,345 $520,114
Equity 52,805 55,193
------------ ------------
Total liabilities and equity $589,150 $575,307
------------ ------------
------------ ------------
Net interest income; interest rate
spread $ 21,461 3.50% $ 20,752 3.40%
---------- -------- ---------- --------
---------- -------- ---------- --------
Net interest margin (3) 3.84% 3.80%
-------- --------
-------- --------
<CAPTION>
Years Ended June 30,
----------------------------------
1997
----------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
----------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 437,230 $ 38,596 8.83%
Mortgage-backed securities 41,119 2,668 6.49%
Other investment securities (2) 42,953 2,380 5.54%
FHLB stock 5,222 368 7.05%
----------- ---------- ------
Total interest-earning assets $ 526,524 $ 44,012 8.36%
Noninterest-earning assets 27,762 ---------- ------
-----------
Total assets $ 554,286
-----------
-----------
Interest-bearing liabilities:
Deposits:
Checking and money market $ 71,323 $ 1,794 2.52%
Savings 30,227 626 2.07%
Certificates of deposit 306,085 17,969 5.87%
------------- ------------ -------
------------- ------------ -------
Total deposits $ 407,635 $ 20,389 5.00%
FHLB advances and other
borrowings 77,644 4,443 5.72%
------------- ------------ -------
Total interest-bearing liabilities $ 485,279 $ 24,832 5.12%
------------ -------
Other liabilities 17,740
-------------
Total liabilities $ 503,019
Equity 51,267
-------------
Total liabilities and equity $ 554,286
-------------
-------------
Net interest income; interest rate
spread $ 19,180 3.24%
------------ -------
------------ -------
Net interest margin (3) 3.64%
-------
-------
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
52
<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>
Years Ended June 30, Years Ended June 30,
-------------------------------------------- ------------------------------------------------
1999 vs. 1998 1998 vs. 1997
-------------------------------------------- ------------------------------------------------
(Dollars in Thousands)
Increase Increase Increase Increase
(Decrease) (Decrease) Total (Decrease) (Decrease) Total
Due to Due to Increase Due to Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------------ -------------- -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 1,730 $ (1,268) $ 462 $ 746 $ 812 $ 1,558
Mortgage-backed securities 766 (125) 641 (559) (86) (645)
Other investment securities (2) (1,081) (38) (1,119) 1,170 137 1,307
FHLB stock (46) (20) (66) (19) (12) (31)
------------ -------------- -------------- -------------- ------------ --------------
Total interest-earning assets $ 1,369 $ (1,451) $ (82) $ 1,338 $ 851 $ 2,189
------------ -------------- -------------- -------------- ------------ --------------
------------ -------------- -------------- -------------- ------------ --------------
Interest-bearing liabilities:
Deposits:
Checking and money market $ 581 $ 88 $ 669 $ 460 $ 19 $ 479
Savings (145) (226) (371) 823 455 1,278
Certificates of deposit (964) (712) (1,676) (672) 257 (415)
------------ -------------- -------------- -------------- ------------ --------------
Total deposits (528) (850) (1,378) 611 731 1,342
FHLB advances and other borrowings 812 (225) 587 (768) 43 (725)
------------ -------------- -------------- -------------- ------------ --------------
Total Interest-bearing liabilities $ 284 $ (1,075) $ (791) $ (157) $ 774 $ 617
------------ -------------- -------------- -------------- ------------ --------------
------------ -------------- -------------- -------------- ------------ --------------
Net interest income increase $ 709 $ 1,572
-------------- -------------
-------------- -------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest on loans past due 90 days or more.
(2) Includes primarily U.S. Government securities.
53
<PAGE>
The following table presents the yields received on loans, investments, and
other interest-earning assets, the rates paid on savings deposits and borrowings
and the resultant rate spreads at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable 8.74% 9.07% 8.85%
Mortgage-backed securities 5.95 6.10 6.32
Other investment securities (1) 5.79 6.21 5.82
FHLB stock 6.41 6.79 6.75
Combined weighted average yield on
interest-earning assets 8.26 8.47 8.45
Weighted average rate paid on:
Deposits 4.63 4.95 4.99
FHLB advances 5.49 5.85 5.69
Combined weighted average rate paid on
interest-bearing liabilities 4.76 5.06 5.09
Spread 3.50% 3.41% 3.36%
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes primarily U.S. Government and agency securities.
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 loan losses. The
following table sets forth the amounts and categories of the Bank's
nonperforming assets for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------
1999 1998 1996
----------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Total nonaccruing loans $ 1,045 $ 2,251 $ 1,252
Total accruing loans delinquent more than 90 days 1,648 530 - - - -
Total foreclosed assets (2) 464 229 593
------- ------- -------
Total nonperforming assets $ 3,157 $ 3,010 $ 1,845
------- ------- -------
------- ------- -------
Ratio of nonperforming assets to total assets 0.48% 0.53% 0.33%
----- ----- -----
----- ----- -----
Ratio of nonperforming loans to total loans (1) 0.52% 0.63% 0.28%
----- ----- -----
----- ----- -----
- -----------------------------------------------------------------------------------
</TABLE>
(1) Nonperforming loans include nonaccruing loans and loans delinquent more
than 90 days.
(2) Total foreclosed assets does not include land held for development.
54
<PAGE>
When a loan becomes 90 days delinquent, except for credit card loans, the Bank
places the loan on a nonaccrual status and, as a result, accrued interest income
on the loan is taken out of income. Income is subsequently recognized only to
the extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is no longer
in doubt, in which case the loan is returned to accrual status. Credit card
loans remain in accrual status until 120 days, when accrued interest income on
the loan is taken out of income.
Nonperforming assets increased to $3.2 million at June 30, 1999 from $3.0
million at June 30, 1998, an increase of $147,000. In addition, the ratio of
nonperforming assets to total assets, which is one indicator of credit risk
exposure, decreased to 0.48% at June 30, 1999 from 0.53% at June 30, 1998.
Nonaccruing loans decreased to $1.0 million at June 30, 1999 from $2.3 million
at June 30, 1998, a decrease of $1.2 million. Included in nonaccruing loans at
June 30, 1999 were five loans totaling $209,000 secured by one- to four-family
real estate, one loan in the amount of $46,000 secured by commercial real
estate, two mobile home loans totaling $13,000, four commercial business loans
totaling $111,000, three agriculture loans totaling $307,000 and twenty-three
consumer loans totaling $359,000. For the year ended June 30, 1999, gross
interest income of $180,000 would have been recognized on loans accounted for on
a nonaccrual basis had such loans been current in accordance with their original
terms. Gross interest income of $108,000 was recognized as income on loans
accounted for on a nonaccrual basis.
Accruing credit card loans delinquent more than 90 days increased to $1.6
million at June 30, 1999 from $530,000 at June 30, 1998. Additionally, $5.2
million of credit card loans were delinquent 30 days at June 30, 1999 as
compared to $2.4 million at June 30, 1998. Management has determined that
increased delinquencies were primarily due to a change in loan underwriting
criteria during the fourth quarter of fiscal 1998 that had the impact of
reducing the overall quality of credit card loans that were originated from the
fourth quarter of fiscal 1998 through the first nine months of fiscal 1999.
Management reviewed the increased level of credit card delinquencies, and the
loan underwriting criteria and collection procedures in the credit card
portfolio and ceased processing credit card applications under the current
underwriting criteria in March 1999. Net charge-offs for the year ended June 30,
1999 were $6.5 million as compared to $727,000 for the same period in fiscal
1998. Using historical stratification data on the current product, management
expects credit card loan write-offs not to exceed $7.6 million in the next six
months. Of this amount about 75% will be a charge-off against allowance for
credit card loan losses, of which the Company currently maintains an allowance
for credit card loan losses equal to 41% of the outstanding credit card loan
balance, or about $7.5 million. The remaining 25% will be charged against
deferred credit card fee income, interest income and credit card fee income in
future periods. Based upon lack of performance, the Company ceased processing
subprime credit card applications in March 1999.
Foreclosed assets increased to $464,000 at June 30, 1999 from $229,000 at June
30, 1998, an increase of $235,000.
At June 30, 1999, the Bank had approximately $10.5 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 June 30, 1999
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
June 30, 1999 will be adequate in the future.
55
<PAGE>
The following table sets forth information with respect to activity in the
Bank's allowance for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 7,199 $ 4,526 $ 4,129
Total charge-offs (8,716) (2,423) (1,121)
Total recoveries 924 407 825
-------- -------- --------
Net (charge-offs) (7,792) (2,016) (296)
Additions charged to operations 12,120 4,689 693
Additions from acquisition 464 ------ ------
-------- -------- --------
Balance at end of period $ 11,991 $ 7,199 $ 4,526
-------- -------- --------
-------- -------- --------
Ratio of net (charge-offs) during the period
to average loans outstanding during the period (1.68)% (0.45)% (0.07)%
------- ------- -------
------- ------- -------
Ratio of allowance for loan losses to total loans at end
of period 2.32% 1.62% 1.02%
----- ----- -----
----- ----- -----
Ratio of allowance for loan losses to nonperforming
loans at end of period 445.27% 258.86% 361.50%
------- ------- -------
------- ------- -------
- ---------------------------------------------------------------------------------------
</TABLE>
The allowance for loan losses was $12.0 million at June 30, 1999 as compared to
$7.2 million at June 30, 1998. The ratio of the allowance for loan losses to
total loans was 2.32% at June 30, 1999 and 1.62% at June 30, 1998. The Bank's
management has considered nonperforming assets and other assets of concern in
establishing the allowance for loan losses. The Bank continues 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.
The current level of the allowance for loan losses is a result of management's
assessment of the risks within the portfolio based on the information revealed
in credit reporting processes. The Company utilizes a risk-rating system on all
commercial business, agricultural, construction and multi-family and commercial
real estate loans, including purchased loans, that exceed $250,000. A monthly
credit review is performed on all types of loans to establish the necessary
reserve based on the estimated risk within the portfolio. This assessment of
risk takes into account the composition of the loan portfolio, historical loss
experience for each loan category, previous loan experience, concentrations of
credit, current economic conditions and other factors that in management's
judgment deserve recognition. In regard to credit card loans, the Company is
providing a reserve of 41% of the loan balance until the credit card portfolio
becomes seasoned. As of June 30, 1999, $7.5 million of the $12.0 million
allowance for loan losses was reserved for the credit card loan portfolio.
Regulators have reviewed the Company's methodology for determining allowance
requirements on the Company's loan portfolio and have made no recommendations
for increases in the allowances during the three year period ended June 30,
1999. The Company has historically maintained a positive variance from the
minimum estimated allowance for loan losses based on the analyses that are
conducted by Bank management and corporate credit personnel.
56
<PAGE>
COMPARISON OF THE YEARS ENDED JUNE 30, 1999 AND JUNE 30, 1998
GENERAL. The Company's net income decreased $5.4 million to $1.1 million for the
year ended June 30, 1999 as compared to $6.5 million for the year ended June 30,
1998. As discussed in more detail below, this decrease was due primarily to an
increase in noninterest expense of $6.4 million and an increase in provision for
losses on loans of $7.4 million. These increases were partially offset by an
increase in noninterest income of $5.4 million and a reduction in income tax
expense of $2.3 million.
INTEREST INCOME. Interest income decreased $82,000 from $46.2 million for the
year ended June 30, 1998 to $46.1 million for the year ended June 30, 1999. This
decrease was primarily due to the falling interest rate environment during the
first quarter of fiscal 1999. The decrease in interest earned on investment
securities was primarily due to a decrease in the average balance of investment
securities of $18.6 million. During this period the average yield on investment
securities decreased from 5.86% to 5.79% due to current market rates being at a
lower rate on new purchases as compared to the rates of matured investment
securities. The decrease in the average balance of investment securities was
primarily due to the call, maturity and sales of U.S. Government securities and
tax exempt municipals in the amount of $30.6 million during fiscal 1999. The
decrease in interest earned on investment securities was partially offset by an
increase in interest earned on loans and mortgage-backed securities. The average
balance of loans increased $19.5 million during this period due to originations
and purchases exceeding amortizations, prepayments and sales and the acquisition
of DSB during the year ended June 30, 1999 while the average yield on loans
decreased from 9.01% to 8.73%. The Company continues to manage yields by
changing the types of loans that comprise the portfolio to loans that have a
higher yield than single-family real estate loans. Commercial business loans and
agricultural loans comprise 17.52% of the total loan portfolio at June 30, 1999
as compared to 12.76% at June 30, 1998. In addition, one-to four-family loans
comprise 26.35% of the total loan portfolio at June 30, 1999 as compared to
29.13% at June 30, 1998. The decrease in the average yield on loans was due to
lower market rates than in the prior fiscal year. The increase in interest
earned on mortgage-backed securities was primarily due to an increase of the
average balance of $12.5 million from the prior fiscal year resulting from
purchases exceeding sales and repayments.
INTEREST EXPENSE. Interest expense decreased $791,000 from $25.4 million for the
year ended June 30, 1998 to $24.7 million for the year ended June 30, 1999. This
decrease was largely attributable to a decrease in the average rate paid on
savings, certificates of deposit and FHLB advances and other borrowings and due
to an increase in the average balance of demand, NOW and money market accounts
and FHLB advances and other borrowings. The average balance of demand, NOW and
money market accounts increased $22.5 million during the year ended June 30,
1999 while the average balance of FHLB advances and other borrowings increased
$14.4 million during fiscal year 1999. The increase in average balances of
demand, NOW and money market accounts and FHLB advances and other borrowings was
used to offset the decrease in average balances of savings by $4.3 million and
certificates of deposit by $16.5 million from the levels at June 30, 1998. In
addition, the average rate paid on savings accounts decreased from 3.57% for the
year ended June 30, 1998 to 3.13% for the year ended June 30, 1999. The average
rate paid on certificates of deposit decreased from 5.95% for the year ended
June 30, 1998 to 5.71% for the year ended June 30, 1999 while the average rate
paid on FHLB advances and other borrowings decreased from 5.07% to 4.76% for the
years ended June 30, 1998 and 1999 respectively. See "Financial Condition Data"
for further discussion.
NET INTEREST INCOME. The Company's net interest income for the year ended June
30, 1999 increased $709,000, or 3.42%, to $21.5 million compared to $20.8
million for the same period ended June 30, 1998. The increase in net interest
income reflects an overall increase in the net interest spread on average
interest-earning assets to 3.50% for the period ended June 30, 1999 from 3.40%
for the same period in 1998. The increase in the net interest spread is due
primarily to a decrease in the rates paid on interest-bearing liabilities from
5.07% for the year ended June 30, 1998 to 4.76% for the year ended June 30,
1999.
During the fiscal years ended June 30, 1999 and 1998, the Company increased its
average balances of commercial, agricultural and credit card loans. The Company
anticipates activity in this type of lending to continue in future years subject
to market demand except for subprime credit card loans which the Company ceased
processing applications in March 1999. In addition, the Company sells the
majority of conventional single-family residential real estate loan originations
into the secondary market. Net interest income is expected to trend upward as a
result of this lending activity as interest rate yields are generally higher on
these types of loans compared to the yield provided by conventional
single-family residential real estate loans. This lending activity is considered
to carry a higher level of risk due to the nature of the collateral and the size
of the individual loans. As such, the Company anticipates continued increases in
its allowance for loan losses.
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 year ended June 30, 1999, the Company recorded a provision for losses
on loans of $12.1 million compared to $4.7 million for the year ended June 30,
1998, an increase of $7.4 million. A majority of the increase is related to
growth of the subprime credit card loan portfolio from $12.3 million for the
year ended June 30, 1998 to $18.1 million at June 30, 1999. The increased
57
<PAGE>
provision for losses on loans is primarily to provide for future expected
write-offs on credit card loans and due to management's continued evaluation of
the loan portfolio in light of general economic conditions. See "Asset Quality"
for further discussion.
The allowance for loan losses at June 30, 1999 was $12.0 million. The allowance
increased from the June 30, 1998 balance primarily as a result of the provision
for losses on loans of $12.1 million which was reduced by charge-offs exceeding
recoveries by $7.8 million. In addition, an additional $464,000 allowance for
loan losses was acquired as a result of the purchase of DSB. The ratio of
allowance for loan losses to nonperforming loans at June 30, 1999 was 445.27%
compared to 258.86% at June 30, 1998. The allowance for loan losses to total
loans at June 30, 1999 was 2.32% compared to 1.62% at June 30, 1998. The Bank's
management believes that the June 30, 1999 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 $19.0 million for the year ended June
30, 1999 as compared to $13.6 million for the year ended June 30, 1998.
The increase in credit card fee income of $5.9 million for the year ended June
30, 1999 as compared to the same period in fiscal 1998 is primarily due to an
increase in fees received on unsecured credit cards. This is a result of the
credit card loan portfolio increasing from $12.3 million at June 30, 1998 to
$18.1 million at June 30, 1999. The fee income represents processing fees,
interchange fees, annual fees, late fees and other miscellaneous fees. This
credit card program was initiated in fiscal 1997. The Company ceased processing
subprime credit card applications in March 1999. This will decrease the level of
these fees. Interest income on credit card loans is included in interest income
on loans.
Gain on the sale of loans decreased $412,000 to $673,000 for the year ended June
30, 1999 from $1.1 million for the year ended June 30, 1998. Loans originated
for resale and sales of participation interest in loans that were sold during
the year ended June 30, 1999 were $82.5 million as compared to $106.4 million in
the year ended June 30, 1998.
Gain on sale of securities decreased $225,000 for the year ended June 30, 1999
as compared to the same period in the prior fiscal year. This decrease was due
to current market rates being lower than amortized cost at the time of sale as
compared to sales in the prior year.
NONINTEREST EXPENSE. Noninterest expense increased $6.4 million from $20.0
million for the year ended June 30, 1998 to $26.4 million for the year ended
June 30, 1999. This increase was primarily from an increase in compensation and
employee benefits of $896,000, an increase in other general and administrative
expenses of $491,000, and an increase in credit card processing expense of $5.1
million which were partially offset by a decrease in losses and provision for
losses and expenses on foreclosed real estate and other properties of $167,000.
The increase in compensation and employee benefits was due primarily to an
increase in employee compensation of $1.0 million due to merit raises, an
increase in health insurance of $116,000, an increase in pension costs of
$81,000, an increase in payroll taxes of $71,000 and an increase in recruiting
costs of $71,000, which were partially offset by a reduction in incentive
compensation of $566,000.
The increase in other general and administrative expenses was due primarily due
to an increase in check and data processing costs of $265,000, an increase in
consultant services of $86,000, an increase in legal services of $71,000 and an
increase in postage of $93,000.
There was an increase of $5.1 million in the cost of third party processors of
credit cards. This included $1.4 million of nonrecurring expenses associated
with the decision to stop marketing subprime credit cards. This expense
represents costs for processing of applications, collecting loans, and marketing
costs for the acquisition of credit cards for the unsecured credit card program.
The increase in expense is due primarily to an increase of credit card loans
from $12.3 million as of June 30, 1998 to $18.1 million as of June 30, 1999. The
Company began offering credit cards in the second quarter of fiscal 1997 and
ceased processing subprime credit card applications in March 1999.
INCOME TAX EXPENSE. The Company's income tax expense for the year ended June 30,
1999 was $924,000 compared to $3.2 million for the year ended June 30, 1998, a
decrease of $2.3 million. This decrease was primarily due to the decrease in the
Company's income before income tax.
COMPARISON OF THE YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997
GENERAL. The Company's net income increased $2.8 million to $6.5 million for the
year ended June 30, 1998 as compared to $3.7 million for the year ended June 30,
1997. As discussed in more detail below, this increase was due primarily to the
increase in noninterest income of $7.2 million and an increase in net interest
income of $1.6 million which were partially offset by an increase in the
provision for losses on loans of $4.0 million and an increase in income tax
expense of $1.7 million.
58
<PAGE>
INTEREST INCOME. Interest income increased $2.2 million from $44.0 million for
the year ended June 30, 1997 to $46.2 million for the year ended June 30, 1998.
This increase was primarily due to an increase in interest earned on loans and
investment securities. The average yield on loans increased from 8.83% to 9.01%
while the average balance of loans increased $8.3 million during this period due
to originations and purchases exceeding amortizations, prepayments and sales
during the year ended June 30, 1998. The increase in the yield is due primarily
to the changing types of loans that comprise the portfolio of the Company to
loans that have a higher yield than single-family real estate loans. Commercial
business loans, agricultural loans and credit card loans comprise 15.50% of the
total loan portfolio at June 30, 1998 as compared to 8.40% at June 30, 1997. In
addition, one-to four-family loans comprise 29.13% of the total loan portfolio
at June 30, 1998 as compared to 36.50% at June 30, 1997. The increase in
interest earned on investment securities was primarily due to an increase in the
average balance of investment securities of $20.0 million. During this period
the average yield on investment securities increased from 5.54% to 5.86% due to
current market rates being at a higher rate on new purchases as compared to the
rates of matured investment securities. The increase in the average balance of
investment securities was due to the Company's purchase of primarily U.S.
Government securities which have a maturity of three years or less that have a
call feature that varies from three months to one year. The increase in interest
earned on loans and investment securities was partially offset by a decrease in
interest earned on mortgage-backed securities primarily due to a decrease in the
average balance of $8.9 million from the prior fiscal year.
INTEREST EXPENSE. Interest expense increased $617,000 from $24.8 million for the
year ended June 30, 1997 to $25.4 million for the year ended June 30, 1998. This
increase was primarily due to an increase in the average balance of savings,
demand, NOW and money market account balances and due to an increase in the
average rate paid on savings which were partially reduced by a decrease in the
average balance of certificates of deposit and FHLB advances and other
borrowings. The average balance of savings accounts increased $23.0 million
during the year ended June 30, 1998. In addition, the average rate paid on
savings accounts increased from 2.07% for the year ended June 30, 1997 to 3.57%
for the year ended June 30, 1998. The average balance of demand, NOW and money
market accounts increased $18.1 million during the year ended June 30, 1998. The
increase in the average balance of savings, demand, NOW and money market
accounts of $41.1 million was used to reduce the average balance of FHLB
advances by $13.3 million and to reduce the average balance of certificates of
deposit by $11.3 million. The majority of the increase in savings, demand, NOW
and money market accounts were from deposits from local governmental entities
and commercial customers. See "Financial Condition Data" for further discussion.
NET INTEREST INCOME. The Company's net interest income for the year ended June
30, 1998 increased $1.6 million, or 8.19%, to $20.8 million compared to $19.2
million for the same period ended June 30, 1997. The increase in net interest
income reflects an overall increase in average net interest-earning assets
during the period resulting from internal increases in the portfolio of loans
and securities. The net interest spread on average interest-earning assets
increased to 3.40% for the period ended June 30, 1998 from 3.24% for the same
period in 1997. The increase in the net interest spread is due primarily to the
increased yield on interest-earning assets due to a change in the loan portfolio
mix during fiscal year 1998.
During the fiscal years ended June 30, 1998 and 1997, the Company increased its
origination of commercial, agricultural, credit card and consumer loans. The
Company anticipates activity in this type of lending to continue in future
years, subject to market demand. In addition, the Company sold the majority of
conventional single-family residential real estate loan originations into the
secondary market. Net interest income is expected to trend upward as a result of
this lending activity as interest rate yields are generally higher on these
types of loans compared to the yield provided by conventional single-family
residential real estate loans. This lending activity is considered to carry a
higher level of risk due to the nature of the collateral and the size of the
individual loans. As such, the Company anticipates continued increases in its
allowance for loan losses.
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 year ended June 30, 1998, the Company recorded a provision for losses
on loans of $4.7 million compared to $693,000 for the year ended June 30, 1997.
The provision for losses on loans of $4.7 million for the year ended June 30,
1998 compared to the same period in fiscal 1997 is primarily to provide for
future expected write-offs on credit card loans and to management's continued
evaluation of the loan portfolio in light of general economic conditions. See
"Asset Quality" for further discussion.
The allowance for loan losses at June 30, 1998 was $7.2 million. The allowance
increased from the June 30, 1997 balance primarily as a result of the provision
for losses on loans of $4.7 million which was reduced by charge-offs exceeding
recoveries by $2.0 million. The ratio of allowance for loan losses to
nonperforming loans at June 30, 1998 was 258.86% compared to 361.50% at June 30,
1997. The allowance for loan losses to total loans at June 30, 1998 was 1.62%
compared to 1.02% at June 30, 1997. The Bank's management believes that the June
30, 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.
59
<PAGE>
NONINTEREST INCOME. Noninterest income was $13.6 million for the year ended June
30, 1998 as compared to $6.5 million for the year ended June 30, 1997.
Loan fees and service charges increased by $238,000 for the year ended June 30,
1998 as compared to the same period in the prior fiscal year. This increase was
primarily due to an increase in mortgage loan activity of $53.7 million from
$61.5 million during the year ended June 30, 1997 to $115.2 million for the year
ended June 30, 1998.
Gain on the sale of loans increased $733,000 to $1.1 million for the year ended
June 30, 1998 from $352,000 for the year ended June 30, 1997. Loans originated
for resale and sales of participation interest in loans that were sold during
the year ended June 30, 1998 were $106.4 million as compared to $53.3 million in
the year ended June 30, 1997.
Fees on deposits increased $557,000 for the year ended June 30, 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 $5.6 million for the year ended June 30,
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 $280,000 from $19.7 million
for the year ended June 30, 1997 to $20.0 million for the year ended June 30,
1998. This increase was primarily from an increase in compensation and employee
benefits of $494,000, an increase in other general and administrative expenses
of $146,000, an increase in advertising of $252,000, and an increase in credit
card processing expense of $2.4 million which were partially offset by a
decrease in federal insurance premiums and assessments of $2.9 million.
The increase in compensation and employee benefits was due primarily to an
increase in health insurance of $89,000, an increase in incentive compensation
of $139,000, an increase in pension costs of $98,000, and an increase in
compensation of $332,000 due to merit raises, which were partially offset by a
reduction in temporary personnel costs of $118,000 and other employee benefits
of $34,000.
The decrease in the federal insurance premiums of $2.9 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 $2.4 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 increase in expense is due primarily to an increase of
credit card loans from $2.3 million as of June 30, 1997 to $12.3 million as of
June 30, 1998. The Company began offering credit cards in the second quarter of
fiscal 1997.
INCOME TAX EXPENSE. The Company's income tax expense for the year ended June 30,
1998 was $3.2 million compared to $1.6 million for the year ended June 30, 1997,
an increase of $1.7 million. This increase was primarily due to the increase in
the Company's income before income tax.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, FHLB advances, amortization
and prepayments of loan principal (including mortgage-backed securities) and, to
a lesser extent, sales of mortgage loans, sales and/or maturities of securities,
mortgage-backed securities, and short-term investments. While scheduled loan
payments and maturing securities are relatively predictable, deposit flows and
loan prepayments are more influenced by interest rates, general economic
conditions, and competition. The Bank attempts to price its deposits to meet its
asset/liability objectives consistent with local market conditions. Excess
balances are invested in overnight funds.
Federal regulations have historically required the Bank to maintain minimum
levels of liquid assets. The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 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 June 30, 1999, the
Bank's regulatory liquidity ratio was 5.96%.
60
<PAGE>
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 fiscal 1999, the Bank
required funds beyond its ability to generate funds internally. Thus it used its
borrowing capacity with the FHLB by obtaining advances, which increased its
borrowings with the FHLB by $30.0 million. The Bank also obtained a letter of
credit in the amount of $15.0 million in order to collateralize public fund
deposits at June 30, 1999. The letter of credit expired on August 30, 1999 and
management did not extend it at that time. See "Financial Condition Data" for
further discussion.
The Bank anticipates that it will have sufficient funds available to meet
current loan commitments. At June 30, 1999, the Bank had outstanding commitments
to originate or purchase loans of $46.0 million and to sell loans of $21.8
million. The Bank had no commitments to purchase or sell securities.
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.
The Company has had in effect a series of annual stock buy back programs since
1996 in which the Company purchases shares of its common stock from the market.
The current program is in effect through April 30, 2000 and authorizes the
Company to purchase up to 10% of the shares of its common stock outstanding as
of April 21, 1999. Since inception of the program through June 30, 1999, a total
of 683,772 shares of common stock have been purchased. A total of 349,350 shares
of common stock were purchased pursuant to this program during the year ended
June 30, 1999.
On April 24, 1998, the Company 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. Earnings and
dividends per share have been retroactively adjusted based upon the new shares
outstanding after the effect of the three-for-two stock split for all periods
presented. The stockholders' equity of the Company was adjusted for the effect
of the three-for-two stock split and $16,000 was transferred from additional
paid-in capital to common stock.
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 three 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 June
30, 1999, 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 6.18% at June 30, 1999.
Pursuant to the Federal Deposit Insurance Corporation Insurance Act ("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.
At June 30, 1999 and 1998, securities with a fair value of $78.0 million and
$64.6 million, respectively, were pledged as collateral for public deposits and
other purposes. Deposits at June 30, 1999 and 1998 include $46.8 million and
$38.3 million, respectively, of deposits from one local governmental entity, the
majority of which are demand accounts.
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 Financial Accounting Standards Board ("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
61
<PAGE>
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 other equity components in the equity section of a statement of financial
position. All prior period disclosures have been reclassified to conform to the
provisions of this Statement.
The FASB issued SFAS No. 131, "Disclosures about Segments of an 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. The adoption of
Statement No. 131 did not affect results of operations or financial position,
but did affect the disclosure of segment information.
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. All prior
period disclosures have been restated to conform to the provisions of this
Statement.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted transaction, or (c)
a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The effective date of this
Statement was deferred by SFAS No. 137 to require its application for all fiscal
quarters of fiscal years beginning after June 15, 2000. Initial application of
this Statement should be as of the beginning of an entity's fiscal quarter; on
that date, hedging relationships must be designated anew and documented pursuant
to the provisions of this Statement. Earlier application of all of the
provisions of this Statement is encouraged, but it is permitted only as of the
beginning of any fiscal quarter that begins after issuance of this Statement.
This Statement should not be applied retroactively to financial statements of
prior periods. Management is evaluating the impact of this Statement on the
Company's consolidated financial statements.
62
<PAGE>
YEAR 2000
The Year 2000 issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Bank is heavily dependent on computer processing in its
business activities and the Year 2000 issue creates risk for the Bank from
unforeseen problems in the Bank's computer system and from third parties with
whom the Bank processes financial information. Such failures of the Bank's
computer system and/or third parties' computer systems could have a material
impact on the Bank's ability to conduct its business.
In May 1997, the Company developed a five-step plan that follows the guidelines
as specified by the Federal Financial Institutions Examination Councils. As this
council provides new requirements, the plan is modified to reflect the new
requirements. Management of the Company is updated at least monthly on the
status of the plan and the Bank's Information Systems Steering Committee has
changed from a quarterly meeting to a bi-monthly meeting to be more proactive on
Year 2000. In addition, the Board of Directors of the Company is updated on the
status of the Year 2000 project on a quarterly basis at its regularly scheduled
meetings or as circumstances may change requiring new information to be shared
with the Board of Directors. The five stages of the plan are as follows:
awareness, assessment, renovation, validation and implementation. The awareness
and assessment phases were completed by December 31, 1997. The assessment phase
included hardware, software and third party vendors that provide a service to
the Company (i.e. utility companies, alarm companies, payroll providers,
electronic funds transfer providers, insurance providers, loan participation
companies, mortgage loan secondary market agencies, and governmental agencies).
The renovation, validation and implementation phases are completed as planned.
All mission critical systems known to be non-compliant with Year 2000 have been
renovated as of June 30, 1999. In May 1996, the Bank installed new hardware and
operations systems software that the vendor has represented to be Year 2000
compliant. Testing has been completed and verified for the Bank's core
processing system for the dates of September 9, 1999, December 31, 1999, January
2, 2000, February 29, 2000, March 31, 2000 and December 31, 2000. All mission
critical PC software applications have been tested for all specific dates as
determined by the Federal Financial Institution Examination Council's
guidelines. In addition, testing will be performed with service providers that
are providing the capability to test with the Bank. The Company will continue
its Year 2000 plan in 1999 by continually monitoring updates as provided by
vendors.
The Bank has in place Board of Director approved contingency plans for all
software and hardware providers. In addition, contingency plans are also written
for all outside service providers. These contingency plans are now under review
for adequacy and if applicable, will be tested. The Bank is also involved in a
customer awareness and employee education program regarding Year 2000.
The Bank completed a Board of Director approved cash liquidity plan. This plan
contains various strategies to meet the projected cash demands as the millennium
nears.
The cost of the corrections to make the systems Year 2000 compliant was less
than $65,000. Approximately $20,000 was incurred in fiscal 1998 with an
additional $45,000 incurred in fiscal 1999. In addition, approximately 2,000
man-hours were incurred during fiscal 1999 by Bank personnel related to Year
2000 issues that had an estimated cost of $60,000. In management's opinion,
additional man-hours expected to be incurred by Bank personnel related to Year
2000 are immaterial and will be charged against income as they are incurred. The
Bank sees no further major expenditures that are Year 2000 related.
63
<PAGE>
ASSET/LIABILITY AND RISK MANAGEMENT
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities. The Bank, like other thrift institutions, is subject to
interest rate risk to the extent that its interest-bearing liabilities with
short- and medium-term maturities mature or reprice more rapidly than its
interest-earning assets. The Company does not currently engage in trading
activities or use derivative instruments to control interest rate risk. Even
though such activities may be permitted with the approval of the Board of
Directors, the Company does not intend to engage in such activities in the
immediate future.
As a continuing part of its financial strategy, the Bank considers methods of
managing this asset/liability mismatch consistent with maintaining acceptable
levels of net interest income. In order to properly monitor interest rate risk,
the Board of Directors has created an Asset/Liability Committee whose principal
responsibilities are to assess the Bank's asset/liability mix and recommend
strategies to the Board that will enhance income while managing the Bank's
vulnerability to changes in interest rates.
In managing market risk and the asset/liability mix, the Bank has placed its
emphasis on developing a portfolio in which, to the extent practicable, assets
and liabilities reprice within similar periods. The effect of this policy will
generally be to reduce the Bank's one-year gap and sensitivity to interest rate
changes. The goal of this policy is to provide a relatively consistent level of
net interest income in varying interest rate cycles and to minimize the
potential for significant fluctuations from period to period.
One approach used to quantify interest rate risk is the net portfolio value
("NPV") analysis. In essence, this analysis calculates the difference between
the present value of the liabilities and the present value of expected cash
flows from assets and off-balance sheet contracts. The following table sets
forth, at June 30, 1999, an analysis of the Company's interest rate risk as
measured by the estimated changes in NPV resulting from instantaneous and
sustained parallel shifts in the yield curve (+ or -300 basis points, measured
in 100 basis point increments).
The data in the following tables is based on assumptions utilized by the OTS in
assessing interest rate risk of thrift institutions and published in "Selected
Asset and Liability Price Tables as of June 30, 1999". Even if interest rates
change in the designated amounts, there can be no assurance that the Company's
assets and liabilities would perform as set forth below. In addition, a change
in U.S. Treasury rates in the designated amounts accompanied by a change in the
shape of the Treasury yield curve would cause significantly different changes to
the NPV than indicated below.
<TABLE>
<CAPTION>
Estimated
(Decrease) in NPV
----------------------------
Estimated
Change in NPV
Interest Rates Amount Amount Percent
-------------- ------ ------ -------
Basis Points (Dollars in thousands)
<S> <C> <C> <C>
+300 $ 61,861 $ (4,846) (7)%
+200 64,282 (2,425) (4)
+100 66,083 (624) (1)
- - - 66,707 - - - - - -
-100 65,966 (741) (1)
-200 65,709 (998) (1)
-300 65,977 (729) (1)
</TABLE>
The following table sets forth the scheduled repricing or maturity of the Bank's
assets and liabilities which mature or reprice within one year. In preparing the
following table, it has been assumed, consistent with the assumptions used by
the OTS, that: (i) adjustable-rate first mortgage loans will prepay at a rate of
10% per year; (ii) fixed-maturity deposits will not be withdrawn prior to
maturity; and (iii) escrow accounts are assumed to reprice or be withdrawn in
the first three month period. Savings accounts and transaction accounts are
expected to reprice 100% within the first year.
64
<PAGE>
Using these classifications, fixed-rate mortgage loans and mortgage-backed
securities are assumed to prepay annually as follows:
<TABLE>
<CAPTION>
Weighted Average Prepayment
Interest Rate Assumption
-------------- ----------
<S> <C>
Less than 8.00% 9.00%
8.00 to 9.00% 22.00
9.00 to 10.00% 22.00
10.00% to 11.00% 19.00
11.00% and over 16.00
</TABLE>
The effect of these assumptions is to quantify the dollar amount of items that
are interest-sensitive and can be repriced within each of the periods specified.
Such repricing can occur in one of three ways: (i) the rate of interest to be
paid on an asset or liability may adjust periodically on the basis of an index;
(ii) an asset or liability such as a mortgage loan may amortize, permitting
reinvestment of cash flows at the then-prevailing interest rates; or (iii) an
asset or liability may mature, at which time the proceeds can be reinvested at
current market rates. The following table does not necessarily indicate the
impact of general interest rate movements on the Bank's net interest yield
because the repricing of certain categories of assets and liabilities is subject
to competitive and other pressures beyond the Bank's control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period, may, in fact, mature or reprice at different times and
at different volumes. The table does not include redeployment of funds from
contractual amortization and the possible impact of annual ceilings on
adjustable-rate loans and securities.
At June 30, 1999, the Bank's cumulative one-year gap as a percentage of total
assets was a negative 18.17% and its one- to three-year gap as a percentage of
total assets was a negative 16.15%.
65
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
----------------------------------------------------------------------------------
Within Over 1-3 Over 3-5 Over
One Year Years Years 5 Years Total
----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans (including mortgage-
backed securities) $ 149,421 $ 46,351 $ 73,895 $ 36,194 $ 305,861
Consumer loans 83,842 30,295 23,600 30,668 168,405
Commercial business and agriculture loans 69,676 9,861 11,333 1,055 91,925
Investment securities and other 12,765 25,258 17,879 5,121 61,023
----------------------------------------------------------------------------------
Total interest-earning assets $ 315,704 $ 111,765 $ 126,707 $ 73,038 $ 627,214
----------------------------------------------------------------------------------
Interest-bearing liabilities:
Transaction accounts $ 152,830 $ - $ - $ - $ 152,830
Savings accounts 68,173 - - - 68,173
Certificates of deposit 200,220 76,362 13,039 106 289,727
FHLB advances and other borrowings 14,192 22,113 22,006 23,302 81,613
----------------------------------------------------------------------------------
Total interest-bearing liabilities $ 435,415 $ 98,475 $ 35,045 $ 23,408 $ 592,343
----------------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities $ (119,711) $ 13,290 $ 91,662 $ 49,630 $ 34,871
----------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap $ (119,711) $ (106,421) $ (14,759) $ 34,871
------------------------------------------------------------------
Cumulative gap as a percent of
interest-earning assets (19.09)% (16.97)% (2.35)% 5.56%
------------------------------------------------------------------
Cumulative gap as a percent of
total assets (18.17)% (16.15)% (2.24)% 5.29%
------------------------------------------------------------------
</TABLE>
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<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk Management
The Company's net income is dependent on its net interest income.
Net interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest
income. Similarly, when interest-earning assets mature or reprice more
quickly than interest-bearing liabilities, falling interest rates could
result in a decrease in net income.
In an attempt to manage its exposure to change in interest rates,
management monitors the Company's interest rate risk. Since 1991,
management's Asset-Liability Committee has met monthly to review the
Company's interest rate risk position and profitability, and to recommend
adjustments for consideration by the Board of Directors. Management also
reviews the Bank's securities portfolio, formulates investment strategies,
and oversees the timing and implementation of transactions to assure
attainment of the Board 's objectives in the most effective manner.
Notwithstanding the Company's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that can have an
adverse effect on net income.
In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. At times, depending on the level of general interest
rates, the relationship between long and short-term interest rates, market
conditions and competitive factors, the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to
increase its net interest margin. The Company's results of operations and net
portfolio values remain vulnerable to increases in interest rates and to
fluctuations in the difference between long- and short-term interest rates.
Consistent with the asset/liability management philosophy described
above, the Company has taken several steps to manage its interest rate risk.
First, the Company has structured the security portfolio to shorten the lives
of its interest-earning assets. The Company's recent purchases of
mortgage-backed securities and securities available for sale have had either
short or medium terms to maturity or adjustable interest rates. At June 30,
1999, the Company had securities available for sale of $56.3 million with
contractual maturities of five years or less and adjustable rate
mortgage-backed securities of $9.0 million. Mortgage-backed securities
amortize and experience prepayments of principal; the Company has received
average cash flows from principal paydowns, maturities, sales and calls of
securities of $52.5 million annually over the past three fiscal years. The
Company also controls interest rate risk reduction by emphasizing
non-certificate depositor accounts. The Board and management believe that
such accounts carry a lower cost than certificate accounts, and that a
material portion of such accounts may be more resistant to changes in
interest rates than are certificate accounts. At June 30, 1999, the Company
had $68.2 million of regular savings accounts, $79.0 million of money market
accounts and $73.9 million of NOW and demand accounts, representing 43.3% of
total depositor accounts.
One approach used to quantify interest rate risk is the net
portfolio value ("NPV") analysis. In essence, this analysis calculates the
difference between the present value of liabilities and the present value of
expected cash flows from assets and off-balance sheet contracts. See Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Asset/Liability and Risk Management" for further discussion.
The Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, the
Company does not intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company as of June 30, 1999 and
1998, together with the Independent Auditor's Report are included in this
Form 10-K on the pages indicated below.
HF FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
-----------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT ......................................69
-----------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Statements of financial condition ..............................70-71
Statements of income ...........................................72-73
Statements of stockholders' equity .............................74-75
Statements of cash flows .......................................76-78
Notes to consolidated financial statements ....................79-112
68
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
HF Financial Corp.
Sioux Falls, South Dakota
We have audited the accompanying consolidated statements of financial condition
of HF Financial Corp. and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HF Financial Corp.
and subsidiaries as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1999, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Sioux Falls, South Dakota
August 18, 1999
69
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 16,671 $ 25,458
Securities available for sale (Note 2) 61,023 44,232
Mortgage-backed securities available for sale (Note 2) 41,583 39,647
Loans receivable (Notes 3 and 7) 492,302 426,522
Loans held for sale (Note 3) 11,755 9,616
Accrued interest receivable 4,831 4,338
Office properties and equipment, at cost, net of
accumulated depreciation (Note 5) 14,408 14,317
Foreclosed real estate and other properties 1,762 229
Prepaid expenses and other assets 2,509 1,999
Mortgage servicing rights (Note 4) 1,739 1,423
Deferred income taxes (Note 8) 5,094 3,198
Cost in excess of net assets acquired 4,945 -
---------------------
$658,622 $570,979
---------------------
---------------------
</TABLE>
See Notes to Consolidated Financial Statements.
70
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities
Deposits (Note 6) $ 510,730 $ 446,424
Advances from Federal Home Loan Bank and other
borrowings (Note 7) 81,613 50,635
Advances by borrowers for taxes and insurance 6,170 4,792
Accrued interest payable 5,870 5,898
Other liabilities 5,681 6,629
------------------------
TOTAL LIABILITIES 610,064 514,378
------------------------
Commitments and Contingencies (Notes 18 and 19)
Stockholders' Equity (Notes 8, 9, 10, 14 and 15)
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, 1999 10,000,000 shares
authorized, 4,755,632 shares issued; 1998 5,000,000
shares authorized, 4,730,276 shares issued 47 47
Additional paid-in capital 15,128 14,863
Retained earnings, substantially restricted 46,101 46,561
Unearned compensation (226) (340)
Accumulated other comprehensive income (loss) (1,236) (9)
Less cost of treasury stock, 1999 683,572 shares,
1998 334,222 shares (11,256) (4,521)
------------------------
48,558 56,601
------------------------
$ 658,622 $ 570,979
------------------------
------------------------
</TABLE>
71
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Loans receivable $40,616 $40,154 $38,596
Mortgage-backed securities 2,664 2,023 2,668
Investment securities and
interest-bearing deposits 2,839 4,024 2,748
-------------------------------
46,119 46,201 44,012
-------------------------------
Interest expense:
Deposits 20,353 21,731 20,389
Advances from Federal Home Loan Bank
and other borrowings 4,305 3,718 4,443
-------------------------------
24,658 25,449 24,832
-------------------------------
NET INTEREST INCOME 21,461 20,752 19,180
Provision for losses on loans 12,120 4,689 693
-------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOSSES ON LOANS 9,341 16,063 18,487
-------------------------------
Noninterest income:
Credit card fee income 12,064 6,163 613
Fees on deposits 2,185 2,190 1,633
Loan servicing income 1,263 1,187 1,150
Loan fees and service charges 1,231 1,184 946
Commission and insurance income 694 749 699
Gain on sale of loans, net 673 1,085 352
Appraisal and inspection fees 363 369 461
Trust income 251 201 112
Gain on sale of securities, net 1 226 150
Other 296 277 356
-------------------------------
19,021 13,631 6,472
-------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
72
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest expense:
Compensation and employee benefits $11,048 $10,152 $ 9,658
Credit card processing expense 7,937 2,827 465
Other general and administrative expenses 3,560 3,069 2,923
Occupancy and equipment 2,843 2,701 2,705
Advertising 567 650 398
Federal insurance premiums (Note 6) 268 278 3,199
Losses and provision for losses and
expenses on foreclosed real estate
and other properties, net 136 303 206
Amortization of intangible assets 28 3 149
-------------------------------
26,387 19,983 19,703
-------------------------------
INCOME BEFORE INCOME TAXES 1,975 9,711 5,256
Income tax expense (Note 8) 924 3,238 1,582
-------------------------------
NET INCOME $ 1,051 $ 6,473 $ 3,674
-------------------------------
-------------------------------
Earnings per share (Note 11):
Basic $ 0.25 $ 1.46 $ 0.81
Diluted $ 0.24 $ 1.42 $ 0.79
</TABLE>
73
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1996 $ 31 $ 14,480 $ 38,745
Comprehensive income:
Net income - - 3,674
Net change in unrealized loss on securities
available for sale, net of deferred taxes - - -
Comprehensive income - - -
Exercise of stock options (Note 15) - 215 -
Cash dividends paid ($0.24 per share) on common stock - - (1,083)
Purchase of treasury stock (Note 10) - - -
Amortization of unearned compensation - - -
---------------------------------------
Balance, June 30, 1997 31 14,695 41,336
Comprehensive income:
Net income - - 6,473
Net change in unrealized loss on securities
available for sale, net of deferred taxes - - -
Comprehensive income - - -
Exercise of stock options (Note 15) - 184 -
Cash dividends paid ($0.28 per share) on common stock - - (1,248)
Stock split in the form of a stock dividend 16 (16) -
Purchase of treasury stock (Note 10) - - -
Amortization of unearned compensation - - -
---------------------------------------
Balance, June 30, 1998 47 14,863 46,561
Comprehensive income:
Net income - - 1,051
Net change in unrealized loss on securities
available for sale, net of deferred taxes - - -
Comprehensive income (loss) - - -
Exercise of stock options (Note 15) - 265 -
Cash dividends paid ($0.37 per share) on common stock - - (1,511)
Purchase of treasury stock (Note 10) - - -
Amortization of unearned compensation - - -
---------------------------------------
Balance, June 30, 1999 $ 47 $ 15,128 $ 46,101
---------------------------------------
---------------------------------------
See notes to Consolidated Financial Statements.
74
<PAGE>
<CAPTION>
Accumulated
Other
Unearned Comprehensive Treasury
Compensation Income (Loss) Stock Total
- ----------------------------------------------------------
<S> <C> <C> <C>
$ (569) $ (622) $ (802) $ 51,263
- - -
- 400 -
- - - 4,074
- - - 215
- - - (1,083)
- - (1,611) (1,611)
116 - - 116
- ----------------------------------------------------------
(453) (222) (2,413) 52,974
- - -
- 213 -
- - - 6,686
- - - 184
- - - (1,248)
- - - -
- - (2,108) (2,108)
113 - - 113
- ----------------------------------------------------------
(340) (9) (4,521) 56,601
- - -
- (1,227) -
- - - (176)
- - - 265
- - - (1,511)
- - (6,735) (6,735)
114 - - 114
- ----------------------------------------------------------
$ (226) $ (1,236) $(11,256) $ 48,558
- ----------------------------------------------------------
- ----------------------------------------------------------
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,051 $ 6,473 $ 3,674
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans 12,120 4,689 693
Depreciation 1,637 1,653 1,378
Amortization of premiums and discounts on
securities available for sale, net (2) 12 109
Amortization of intangible assets 28 3 149
Amortization of mortgage servicing rights 277 216 139
Amortization of unearned compensation 114 113 116
Increase (decrease) in deferred loan fees (441) 166 282
Loans originated for resale (80,007) (89,777) (45,553)
Proceeds from the sale of loans 80,680 90,862 45,905
(Gain) on sale of loans, net (673) (1,085) (352)
Mortgage servicing rights capitalized (Note 4) (204) (224) (200)
Realized (gain) on sale of securities, net (1) (226) (150)
Losses and provision for losses on sales of
foreclosed real estate and other properties, net 26 194 53
(Gain) loss on disposal of office properties and
equipment, net 28 (7) 22
Change in other assets and liabilities (Note 20) (3,217) (2,659) 1,659
--------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,416 10,403 7,924
--------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
76
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Investing Activities
Loans purchased $ (36,489) $(21,510) $(13,813)
Loans originated and held (202,306) (151,913) (149,718)
Principal collected on loans 185,360 158,563 130,717
Sale of participation interests in loans 2,500 16,620 7,697
Securities available for sale:
Sales and maturities 35,088 56,411 27,240
Purchases (57,696) (69,433) (20,446)
Repayments 14,565 6,939 17,234
Purchase of a commercial bank, net of cash and
cash equivalents acquired (4,866) - -
Proceeds from sale of office properties and equipment 46 55 709
Purchase of office properties and equipment (1,311) (948) (2,133)
Purchase of mortgage servicing rights (389) (281) (135)
Proceeds from sale of foreclosed real estate
and other properties, net 548 919 645
Purchase of land for development (261) - -
--------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (65,211) (4,578) (2,003)
--------------------------------------------
Cash Flows From Financing Activities
Net increase in deposit accounts 21,670 28,238 20,020
Proceeds of advances from Federal Home Loan
Bank and other borrowings 89,600 29,000 34,000
Payments on advances from Federal Home Loan
Bank and other borrowings (59,659) (53,108) (49,380)
Increase (decrease) in advances by borrowers for taxes
and insurance 1,378 718 (593)
Payment on other liabilities for purchase of property
and equipment - - (677)
Purchase of treasury stock (6,735) (2,108) (1,611)
Proceeds from issuance of common stock 265 184 215
Cash dividends paid (1,511) (1,248) (1,083)
--------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 45,008 1,676 891
--------------------------------------------
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (8,787) $ 7,501 $ 6,812
Cash and Cash Equivalents
Beginning 25,458 17,957 11,145
--------------------------------------------
Ending $ 16,671 $ 25,458 $ 17,957
--------------------------------------------
--------------------------------------------
Supplemental Disclosures of Cash Flows Information
Cash payments for interest $ 24,686 $ 26,111 $ 24,125
Cash payments for income and franchise taxes, net 3,966 4,376 1,576
Supplemental Schedule of Noncash Investing and Financing Activities
Purchase of land for development financed by contract for deed $ 1,037 $ - $ -
Foreclosed real estate and other properties acquired in
settlement of loans 702 749 1,295
Loans made in connection with the sale of foreclosed real
estate and other properties 108 30 41
Stock split in the form of a stock dividend 16
Change in unrealized loss on securities available for sale (1,861) 302 604
Deferred income taxes related to change in unrealized loss
on securities available for sale 634 (89) (204)
Purchase of a commercial bank, net of cash and
cash equivalents acquired, allocated to:
Assets
Securities $ 12,542
Loans receivable 29,204
Accrued interest receivable 507
Foreclosed real estate and other properties 268
Office properties and equipment 491
Cost in excess of net assets acquired 4,973
Liabilities assumed
Deposits (42,636)
Accrued interest payable (416)
Other liabilities (67)
-----------
Purchase of a commercial bank, net of cash and
cash equivalents acquired $ 4,866
-----------
-----------
</TABLE>
See Notes to Consolidated Financial Statements.
78
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of HF Financial Corp. (the Company) and
subsidiaries conform to generally accepted accounting principles and to general
practice within the industry. The following is a description of the more
significant of those policies that the Company follows in preparing and
presenting its consolidated financial statements.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of the Company, HF Card Services, L.L.C. (HF Card) (a
wholly-owned subsidiary of the Company at June 30, 1999 and a 51% owned
subsidiary at June 30, 1998), and the Company's wholly-owned subsidiaries,
HomeFirst Mortgage Corp. and Home Federal Savings Bank (the Bank) and the Bank's
wholly-owned subsidiaries, Hometown Insurors, Inc., Mid-America Service
Corporation and PMD, Inc. All intercompany balances and transactions have been
eliminated in consolidation.
The Company ceased operations of HomeFirst Mortgage Corp. during the first
quarter of 1998, with no material affect on the consolidated financial
statements.
BASIS OF FINANCIAL STATEMENT PRESENTATION: The financial statements have been
prepared in conformity with generally accepted accounting principles. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the statement of financial condition and revenues and expenses for the
year. Actual results could differ significantly from those estimates. A material
estimate that is particularly susceptible to significant change in the near-term
relates to the determination of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize possible losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination.
CASH AND CASH EQUIVALENTS: For purposes of reporting the statements of cash
flows, the Company includes as cash equivalents all cash accounts, which are not
subject to withdrawal restrictions or penalties and time deposits with original
maturities of 90 days or less. The Company had $2,000 of cash equivalents at
June 30, 1999 and $12,000 at June 30, 1998.
TRUST ASSETS: Assets of the trust department, other than trust cash on deposit
at the Bank, are not included in these financial statements because they are not
assets of the Bank.
79
<PAGE>
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES: Management determines the appropriate classification of securities
at the date individual securities are acquired and evaluates the appropriateness
of such classifications at each statement of financial condition date.
Securities available for sale are those debt or equity securities that the
Company intends to hold for an indefinite period of time but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value and unrealized gains or losses are
reported as increases or decreases in other comprehensive income, net of the
related deferred tax effect.
Premiums and discounts on securities are amortized over the contractual lives of
those securities, except for mortgage-backed securities, for which prepayments
are probable and predictable, which are amortized over the estimated expected
repayment terms of the underlying mortgages. The method of amortization results
in a constant effective yield on those securities (the interest method).
Interest on debt securities is recognized in income as accrued. Realized gains
and losses on the sale of securities are determined using the specific
identification method.
LOANS HELD FOR SALE: Loans receivable which the Bank may sell or intends to sell
prior to maturity are carried at the lower of net book value or fair value on an
aggregate basis. Such loans held for sale include loans receivable that
management intends to use as part of its asset/liability strategy, or that may
be sold in response to changes in interest rates, changes in prepayment risk or
other similar factors.
LOANS RECEIVABLE: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, and net of deferred loan origination fees, costs
and discounts.
Discounts and premiums on loans are amortized to income using the interest
method over the remaining period to contractual maturity, adjusted for
prepayments.
Uncollectible interest on loans that are impaired or contractually past due is
charged off based on management's periodic evaluation. The charge to interest
income is equal to all interest previously accrued, and income is subsequently
recognized only to the extent cash payments are received until, in management's
judgment, the borrower's ability to make periodic interest and principal
payments is no longer in doubt, in which case the loan is returned to accrual
status.
80
<PAGE>
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE (CONTINUED): The Company includes all loans considered impaired
in its evaluation of the adequacy of the allowance for loan losses. A loan is
impaired when it is probable the Bank will be unable to collect all contractual
principal and interest payments due in accordance with the terms of the loan
agreement. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. The amount of impaired loans
was not material at June 30, 1999 and 1998.
The allowance for loan losses is increased by provisions charged to income and
reduced by charge-offs, net of recoveries. Management's periodic evaluation of
the adequacy of the allowance for loan losses is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
LOAN ORIGINATION FEES AND RELATED DISCOUNTS: Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for prepayments.
Credit card fees include acceptance, annual, late, over limit, returned check,
cash advance, and other miscellaneous fees. These fees are assessed according to
agreements with customers. Accrued credit card fees on charged-off accounts are
deducted from credit card fee income. Annual credit card fees and acceptance
fees, net of loan origination costs, are deferred and amortized on a
straight-line basis over the one-year period to which they pertain. Unearned
annual fees are included in other liabilities in the consolidated financial
statements of financial condition, while unearned acceptance fees (net of loan
origination costs) are net against the related loan balances in the consolidated
financial statements of financial condition.
Commitment fees and costs relating to commitments, the likelihood of exercise of
which is remote, are recognized over the commitment period on a straight-line
basis. If the commitment is subsequently exercised during the commitment period,
the remaining unamortized commitment fee at the time of exercise is recognized
over the life of the loan as an adjustment of yield.
LOAN SERVICING: The cost allocated to mortgage servicing rights purchased or
retained has been recognized as a separate asset and is being amortized in
proportion to and over the period of estimated net servicing income. Mortgage
servicing rights are periodically evaluated for impairment based on the fair
value of those rights. Fair values are estimated using discounted cash flows
based on current market rates of interest. For purposes of measuring impairment,
the rights are stratified by one or more predominant risk characteristics of the
underlying loans. The Bank stratifies its capitalized mortgage servicing rights
based on the interest rate of the underlying loans. The amount of impairment
recognized is the amount, if any, by which the amortized cost of the rights for
each stratum exceed their fair value.
81
<PAGE>
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST IN EXCESS OF NET ASSETS ACQUIRED: On May 27, 1999, the Bank acquired 100%
of the outstanding capital stock of a local commercial bank for cash
consideration of $9,540 and accounted for the acquisition under the purchase
method of accounting. Accordingly, the results of operations of the acquired
bank since the date of acquisition are included in the consolidated financial
statements. The excess of cash paid and fair value of liabilities assumed over
the fair value of net assets acquired of $4,973 is being amortized to expense by
the straight-line method over 15 years.
Unaudited proforma consolidated results of operations for the years ended June
30, 1999 and 1998 as though the bank had been acquired as of July 1, 1997
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------
1999 1998
---------------------------------
<S> <C> <C>
Interest and dividend income $ 49,576 $ 50,141
Net income 626 6,629
Earnings per share:
Basic $ 0.15 $ 1.49
Diluted 0.14 1.45
</TABLE>
FORECLOSED REAL ESTATE AND OTHER PROPERTIES: Real estate and other properties
acquired through, or in lieu of, loan foreclosure are initially recorded at
lower of cost or fair value less estimated costs to sell at the date of
foreclosure. Costs relating to improvement of property are capitalized, whereas
costs relating to the holding of property are expensed. Valuations are
periodically performed by management, and charge-offs to operations are made if
the carrying value of a property exceeds its estimated fair value less estimated
costs to sell.
Land held for development is carried at the lower of cost, including cost of
improvements and amenities incurred subsequent to acquisition, or fair value
less cost to sell. Costs relating to development and improvement of property are
capitalized, whereas costs relating to holding property are expensed. The
portion of interest costs relating to development of real estate is capitalized.
The carrying amount of land held for development was $1,298 at June 30, 1999.
OFFICE PROPERTIES AND EQUIPMENT: Land is carried at cost. All other office
properties and equipment are carried at cost, less accumulated depreciation and
amortization. Buildings and improvements and leasehold improvements are
depreciated primarily on the straight-line method over the estimated useful
lives of the assets which is five to fifty years. Furniture, fixtures, equipment
and automobile are depreciated using both the straight-line and declining
balance methods over the estimated useful lives of the assets which is three to
twelve years.
82
<PAGE>
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
EARNINGS PER SHARE: Earnings per share has been computed on the basis of the
weighted-average number of common shares outstanding during each period
presented. On April 24, 1998, the Company 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. All data
related to common shares has been retroactively adjusted based upon the new
shares outstanding after the effect of the three-for-two stock split for all
periods presented. The stockholders' equity of the Company was adjusted for the
effect of the three-for-two stock split and $16 was transferred from additional
paid-in capital to common stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were
used by the Company in estimating the fair value of its financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the statements
of financial condition for cash and cash equivalents approximate their fair
values.
SECURITIES: Fair values for investment securities are based on quoted
market prices, except for stock in the Federal Home Loan Bank for which
fair value is assumed to equal cost.
LOANS: Approximately 48% and 52% of loans at June 30, 1999 and 1998,
respectively, are variable-rate loans that reprice frequently and have no
significant change in credit risk. Fair values on these loans are based on
carrying values. The fair values for fixed-rate loans are estimated using
discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers with similar credit quality or
from quoted market prices of similar loans sold, adjusted for differences
in loan characteristics.
ACCRUED INTEREST RECEIVABLE: The carrying value of accrued interest
receivable approximates its fair value.
83
<PAGE>
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
MORTGAGE SERVICING RIGHTS: Fair values are estimated using discounted cash
flows based on current market rates of interest.
OFF-STATEMENT-OF-FINANCIAL-CONDITION INSTRUMENTS: Fair values for the
Company's off-statement-of- financial-condition instruments (unused lines
of credit and letters of credit), which are based upon fees currently
charged to enter into similar agreements taking into account the remaining
terms of the agreements and counterparties' credit standing, are not
significant.
DEPOSITS: The fair values for deposits with no defined maturities equal
their carrying amounts which represent the amount payable on demand. Fair
values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on certificates of deposit.
BORROWED FUNDS: The carrying amounts reported for variable rate advances
approximate their fair values. Fair values for fixed-rate advances and
other borrowings are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on advances and
borrowings with corresponding maturity dates.
ACCRUED INTEREST PAYABLE AND ADVANCES BY BORROWERS FOR TAXES AND INSURANCE:
The carrying values of accrued interest payable and advances by borrowers
for taxes and insurance approximate their fair values.
STOCK-BASED COMPENSATION: In fiscal year 1997, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based
Compensation". The Statement established standards for accounting for
stock-based compensation, but also allows companies to continue to account for
stock-based compensation under the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and make
certain additional disclosures in the notes to the financial statements. The
Company continues to account for stock-based compensation in accordance with APB
Opinion No. 25.
NEW ACCOUNTING STANDARDS: Effective July 1, 1998, the Company adopted FASB
Statement No. 130, which established new rules for the reporting and display of
comprehensive income and its components, but has no effect on the Company's net
income or total stockholders' equity. Statement No. 130 requires unrealized
gains and losses on securities available for sale, which prior to adoption were
reported separately in stockholders' equity, to be included in comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement No. 130.
84
<PAGE>
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS (CONTINUED): Effective July 1, 1998, the Company
adopted FASB Statement No. 131, Disclosures About Segments of an Enterprise and
Related Information. Statement No. 131 superseded FASB Statement No. 14,
Financial Reporting for Segments of a Business Enterprise. Statement No. 131
established 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. Statement No. 131 also established standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of Statement No. 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information.
During fiscal year 1999, the Company also adopted FASB Statement No. 132. This
Statement revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The Statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures.
Prior year financial statement disclosures have been conformed to the
requirements of Statement No. 132.
85
<PAGE>
- -------------------------------------------------------------------------------
NOTE 2. INVESTMENTS IN SECURITIES
The amortized cost and fair values of investments in securities at June 30,
1999, all of which are classified as available for sale according to
management's intent, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury issues $ 4,099 $ 12 $ - $ 4,111
U.S. government agencies
and corporations 28,465 11 (537) 27,939
Federal Home Loan Bank 20,748 2 (360) 20,390
Municipal bonds 3,297 32 (24) 3,305
------------------------------------------------------
56,609 57 (921) 55,745
------------------------------------------------------
Equity securities:
Stock in Federal Home Loan
Bank of Des Moines 5,263 - - 5,263
FNMA common stock 8 - - 8
Federal Agricultural Mortgage
common stock 7 - - 7
------------------------------------------------------
5,278 - - 5,278
------------------------------------------------------
Mortgage-backed securities:
GNMA 15,071 23 (666) 14,428
REMIC 4,160 - (217) 3,943
FHLMC 10,441 23 (118) 10,346
Resolution Trust Corporation 548 - (2) 546
FNMA 9,768 27 (67) 9,728
Other triple A rated mortgage-backed
securities 2,604 3 (15) 2,592
------------------------------------------------------
42,592 76 (1,085) 41,583
------------------------------------------------------
$ 104,479 $ 133 $ (2,006) $ 102,606
------------------------------------------------------
------------------------------------------------------
</TABLE>
86
<PAGE>
- -------------------------------------------------------------------------------
NOTE 2. INVESTMENTS IN SECURITIES (CONTINUED)
The amortized cost and fair values of debt securities as of June 30, 1999, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because the borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
----------------------------------
<S> <C> <C>
Due in one year or less $ 7,490 $ 7,487
Due after one year through five years 43,797 43,137
Due after five years through ten years 5,022 4,802
Due after ten years 300 319
----------------------------------
56,609 55,745
Mortgage-backed securities 42,592 41,583
----------------------------------
$ 99,201 $ 97,328
----------------------------------
----------------------------------
</TABLE>
Equity securities have been excluded from the maturity table above because they
do not have contractual maturities associated with debt securities. The Bank, as
a member of the Federal Home Loan Bank system, is required to maintain an
investment in capital stock of the Federal Home Loan Bank. No ready market
exists for the Bank stock, and it has no quoted market value. For disclosure
purposes, such stock is assumed to have a fair value which is equal to cost.
The components of other comprehensive income (loss) - net change in unrealized
(loss) on securities available for sale are as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gain (loss) arising during the period $ (1,860) $ 528 $ 754
Less reclassification adjustment for net gains
realized in net income
(1) (226) (150)
--------------------------------------------------
Net change in unrealized (loss) before income taxes (1,861) 302 604
Income (taxes) benefit 634 (89) (204)
--------------------------------------------------
Other comprehensive income - net change
in unrealized (loss) on securities $ (1,227) $ 213 $ 400
--------------------------------------------------
--------------------------------------------------
</TABLE>
Proceeds from the sale of securities available for sale in 1999 were $4,678 and
resulted in gross gains of $76 and gross losses of $(75). Proceeds from the sale
of securities during 1998 and 1997 were $7,436 and $12,240, respectively, and
resulted in gross gains of $226 and $150, respectively, with no gross losses
either year.
87
<PAGE>
- -------------------------------------------------------------------------------
NOTE 2. INVESTMENTS IN SECURITIES (CONTINUED)
At June 30, 1999 and 1998, securities with a fair value of $78,029 and $64,596,
respectively, were pledged as collateral for public deposits and other purposes.
The amortized cost and fair values of investments in securities at June 30,
1998, all of which are classified as available for sale according to
management's intent, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury issues $ 2,994 $ 24 $ - $ 3,018
U.S. government agencies
and corporations 24,492 46 (37) 24,501
Federal Home Loan Bank 11,997 4 (29) 11,972
Municipal bonds 540 34 (1) 573
------------------------------------------------------
40,023 108 (67) 40,064
------------------------------------------------------
Equity securities:
FHLMC preferred stock 500 3 - 503
Stock in Federal Home Loan
Bank of Des Moines 3,657 - - 3,657
FNMA common stock 8 - - 8
------------------------------------------------------
4,165 3 - 4,168
------------------------------------------------------
Mortgage-backed securities:
GNMA 102 8 - 110
REMIC 9,296 - (225) 9,071
FHLMC 10,022 65 (19) 10,068
Resolution Trust Corporation 733 - (3) 730
FNMA 15,112 163 (27) 15,248
Other triple A rated mortgage-backed
securities 4,438 3 (21) 4,420
------------------------------------------------------
39,703 239 (295) 39,647
------------------------------------------------------
$ 83,891 $ 350 $ (362) $ 83,879
------------------------------------------------------
------------------------------------------------------
</TABLE>
88
<PAGE>
- -------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE AND LOANS HELD FOR SALE
Loans receivable at June 30, 1999 and 1998 consist of the following:
<TABLE>
1999 1998
--------------------------
<S> <C> <C>
Loans secured by real estate:
Residential:
One-to-four family $ 126,483 $ 121,446
Multi-family 47,283 54,560
Commercial 59,061 38,002
Construction and development 19,696 12,804
Consumer and other loans:
Automobile 74,255 66,044
Commercial business 62,315 41,068
Junior liens on mortgages 46,556 41,599
Agriculture 29,610 16,327
Credit card 18,062 12,335
Mobile home 8,115 11,152
Education 6,996 6,986
Loans on savings accounts 2,117 2,167
Other loans 12,304 15,944
--------------------------
512,853 440,434
Less:
Undisbursed portion of loans in process 7,487 5,199
Deferred loan fees and unearned discounts and premiums, net 1,073 1,514
Allowance for loan losses 11,991 7,199
--------------------------
$ 492,302 $ 426,522
--------------------------
--------------------------
</TABLE>
Loans held for sale totaling $11,755 and $9,616 at June 30, 1999 and 1998,
respectively, consist of one-to-four family fixed-rate loans.
89
<PAGE>
- -------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE AND LOANS HELD FOR SALE (CONTINUED)
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
<TABLE>
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 7,199 $ 4,526 $ 4,129
Provision charged to income 12,120 4,689 693
Allowance related to assets acquired, net 464 - -
Charge-offs (8,716) (2,423) (1,121)
Recoveries 924 407 825
-----------------------------------------------------
Balance, ending $ 11,991 $ 7,199 $ 4,526
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
Nonaccrual loans for which interest has been reduced totaled approximately
$1,045, $2,251 and $1,252 at June 30, 1999, 1998 and 1997, respectively.
Interest income that would have been recorded under the original terms of such
loans and the interest income actually recognized for the years ended June 30
are summarized below:
<TABLE>
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been recorded $ 288 $ 479 $ 266
Interest income recognized (108) (250) (88)
-----------------------------------------------------
Interest income foregone $ 180 $ 229 $ 178
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
90
<PAGE>
- --------------------------------------------------------------------------------
NOTE 4. LOAN SERVICING
Mortgage loans serviced for others (primarily the South Dakota Housing
Development Authority) are not included in the accompanying consolidated
statements of financial condition. The unpaid principal balances of mortgage
loans serviced for others was $408,078 and $364,288 at June 30, 1999 and 1998,
respectively.
Custodial balances maintained in connection with the foregoing loan servicing,
and included in deposits and advances by borrowers for taxes and insurance, were
approximately $1,580 and $2,231 at June 30, 1999 and 1998, respectively.
The carrying values of mortgage servicing rights were $1,739 and $1,423 at June
30, 1999 and 1998, respectively. The fair values of these rights were $4,330 and
$3,205 at June 30, 1999 and 1998, respectively. The fair values of the mortgage
servicing rights were estimated as the present value of the expected future cash
flows using a discount rate of 15.0% for both periods. The Company recognized
expense for amortization of the cost of mortgage servicing rights in the amount
of $277 and $216 for the years ended June 30, 1999 and 1998, respectively.
No valuation allowances were provided for mortgage servicing rights capitalized
during the years ended June 30, 1999 and 1998.
NOTE 5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at June 30, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
----------------------------------
<S> <C> <C>
Land $ 1,938 $ 1,920
Buildings and improvements 15,776 15,189
Leasehold improvements 643 303
Furniture, fixtures, equipment and automobile 8,818 8,241
----------------------------------
27,175 25,653
Less accumulated depreciation and amortization (12,767) (11,336)
----------------------------------
$ 14,408 $ 14,317
----------------------------------
----------------------------------
</TABLE>
91
<PAGE>
- --------------------------------------------------------------------------------
NOTE 6. DEPOSITS
Deposits at June 30, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------------------------------
<S> <C> <C>
Noninterest bearing accounts $ 44,542 $ 33,403
NOW accounts 29,327 24,659
Money market accounts 78,961 43,868
Savings accounts 68,173 61,266
Certificates of deposit 289,727 283,228
----------------------------------
$ 510,730 $ 446,424
----------------------------------
----------------------------------
Scheduled maturities of savings certificates are as follows:
Maturing in fiscal year:
- --------------------------------------------------------------------------------
<S> <C>
2000 $ 200,220
2001 56,972
2002 19,390
2003 10,348
2004 2,691
Thereafter 106
---------------
$ 289,727
---------------
---------------
</TABLE>
Eligible savings accounts are insured up to $100 by the Savings Association
Insurance Fund (SAIF) under management of the Federal Deposit Insurance
Corporation (FDIC). The aggregate amount of jumbo certificates of deposit with a
minimum denomination of $100 was approximately $54,384 and $51,612 at June 30,
1999 and 1998, respectively. Deposits at June 30, 1999 and 1998 include $46,827
and $38,250, respectively, of deposits from one local governmental entity, the
majority of which are demand accounts.
On September 30, 1996, the President signed into law Savings Association
Insurance Fund legislation which assessed a one time charge of approximately
$2,600 to the Bank. An assessment was imposed on the Bank and other member
institutions of the SAIF in order to recapitalize the SAIF and facilitate the
future merger of the Bank Insurance Fund (BIF) and SAIF into the Deposit
Insurance Fund.
92
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
Maturities of advances from the Federal Home Loan Bank of Des Moines
at June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------
<S> <C> <C>
Fixed-rate advances (with rates ranging from 4.4% to 6.6%):
Due in one year or less $ 14,150 $ 23,000
Due after one through two years 7,214 10,000
Due after two years through five years 36,178 11,666
Due after five years 22,536 1,445
-----------------------------------
Total fixed-rate advances 80,078 46,111
-----------------------------------
Variable-rate advance (with a rate of 5.7%)
Due in one year or less - 4,000
-----------------------------------
$ 80,078 $ 50,111
-----------------------------------
-----------------------------------
</TABLE>
Aggregate maturities of advances are as follows: 2000 $14,150; 2001 $7,214; 2002
$14,280; 2003 $13,936; 2004 $7,962; and thereafter $22,536.
Advances are secured by stock in the Federal Home Loan Bank of Des Moines and
first mortgage loans with balances exceeding 117% of the amount of the advances.
The Bank has a $15,000 letter of credit from the Federal Home Loan Bank of Des
Moines, on which nothing was drawn at June 30, 1999. This letter of credit is
pledged as collateral for public deposits.
Other borrowings consist of the following at June 30, 1999 and 1998:
During fiscal year 1994, the South Dakota Housing Development Authority loaned
$600 to the Bank at 0% interest rate per annum to be used by the Bank to
originate $600 in qualified home improvement loans. The note had a balance of
$524 at June 30, 1999 and 1998, and is due on August 31, 2000.
On August 20, 1998, the Company entered into a Real Estate Purchase Agreement to
purchase land for future development for $1,298, with a down payment of $261,
and the remainder financed under a contract for deed requiring monthly payments
of $9, plus interest at 7.0%, to October 2013. The contract for deed had a
balance of $1,011 at June 30, 1999. Aggregate maturities of the contract for
deed are as follows: 2000 $42; 2001 $46, 2002 $49; 2003 $52; 2004 $56; and
thereafter $766.
93
<PAGE>
- --------------------------------------------------------------------------------
NOTE 8. INCOME TAX MATTERS
The Company and subsidiaries file a consolidated federal income tax return on a
fiscal year basis. The Bank is allowed bad debt deductions based on actual
charge-offs.
The consolidated provision for income taxes consists of the following for the
years ended June 30:
<TABLE>
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,596 $ 4,424 $ 1,577
State 590 532 226
Deferred:
Federal (benefit) (1,262) (1,718) (221)
---------------------------------------------------
$ 924 $ 3,238 $ 1,582
---------------------------------------------------
---------------------------------------------------
Income tax expense is different from that calculated at the statutory federal
income tax rate. The reasons for this difference in the tax expense are as
follows:
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 691 $ 3,399 $ 1,840
Increase (decrease) in income taxes
resulting from:
Tax exempt interest income (64) (55) (58)
State taxes, net of federal benefit 384 346 149
Benefit of income taxed at lower rates (20) (100) (53)
Other, net (67) (352) (296)
---------------------------------------------------
$ 924 $ 3,238 $ 1,582
---------------------------------------------------
---------------------------------------------------
</TABLE>
94
<PAGE>
- --------------------------------------------------------------------------------
NOTE 8. INCOME TAX MATTERS (CONTINUED)
The components of the net deferred tax asset as of June 30, 1999 and 1998 are as
follows:
<TABLE>
1999 1998
-----------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 3,981 $ 2,326
Deferred loan fees 189 260
Deferred credit card fees 557 881
Discounts on loans from acquired associations 105 147
Accrued expenses 185 171
Net unrealized loss on securities available for sale 637 3
Other 148 28
-----------------------------------
5,802 3,816
Less valuation allowance (239) (239)
-----------------------------------
5,563 3,577
-----------------------------------
Deferred tax liabilities:
FHLB stock dividends 148 148
Office properties and equipment 241 226
Other 80 5
-----------------------------------
469 379
-----------------------------------
$ 5,094 $ 3,198
-----------------------------------
-----------------------------------
</TABLE>
Retained earnings at June 30, 1999 and 1998, include approximately $4,805
related to the pre-1987 allowance for loan losses for which no deferred federal
income tax liability has been recognized. These amounts represent an allocation
of income to bad debt deductions for tax purposes only. If the Bank no longer
qualifies as a bank, or in the event of a liquidation of the Bank, income would
be created for tax purposes only, which would be subject to the then current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amounts for financial statement purposes was approximately $1,634 at June
30, 1999 and 1998.
95
<PAGE>
- --------------------------------------------------------------------------------
NOTE 9. REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and Tier I capital (as defined) to total
assets (as defined). Management believes, as of June 30, 1999, that the Bank
meets all capital adequacy requirements to which it is subject.
As of June 30, 1999, the most recent notification from the Office of Thrift
Supervision (OTS) categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I (core) capital ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
96
<PAGE>
- --------------------------------------------------------------------------------
NOTE 9. REGULATORY CAPITAL (CONTINUED)
The following table summarizes the Bank's compliance with its regulatory capital
requirements at June 30, 1999:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Tier I (core) capital (to
adjusted total assets) $ 40,494 6.18% $ 19,658 3.00% $ 32,764 5.00%
Total risk-based capital (to
risk-weighted assets) 46,311 10.09 36,734 8.00 45,917 10.00
Tangible capital (to
tangible assets) 40,494 6.18 9,829 1.50 N/A N/A
Tier 1 (core) capital
(to risk-weighted assets) 40,494 8.82 N/A N/A 27,550 6.00
As of June 30, 1998:
Tier I (core) capital (to
adjusted total assets) 44,201 7.75 17,113 3.00 28,522 5.00
Total risk-based capital
(to risk-weighted assets) 49,036 12.76 30,754 8.00 38,443 10.00
Tangible capital (to
tangible assets) 44,201 7.75 8,557 1.50 N/A N/A
Tier 1 (core) capital (to
risk-weighted assets) 44,201 11.50 N/A N/A 23,066 6.00
</TABLE>
97
<PAGE>
- --------------------------------------------------------------------------------
NOTE 10. STOCKHOLDERS' EQUITY
The Company has continued a stock buy back program in which up to 10% of the
common stock of the Company may be acquired in each series of buy-backs. The
current program is in effect through April 30, 2000. Since inception of the
program through June 30, 1999, a total of 683,572 shares of common stock have
been purchased. A total of 349,350 shares of common stock were purchased
pursuant to this program during the year ended June 30, 1999.
During 1996, the Company approved the creation of 50,000 shares of Preferred
Stock, designated as "Series A Junior Participating Preferred Stock" with a
stated value of $1.00 per share. Outstanding shares of the Junior Preferred
Stock are entitled to cumulative dividends. Such shares have voting rights of
100 votes per share and a preference in liquidation. The shares are not
redeemable after issuance.
During 1996, the Company also declared a dividend of one preferred share
purchase right (Right) for each outstanding share of common stock of the
Company. The dividend was paid on November 13, 1996 to the stockholders of
record on such date. Each Right entitles the registered holder to purchase from
the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock at a price of $65 per one-hundredth of a preferred share,
subject to the complete terms as stated in the Rights Agreement. The Rights
become exercisable immediately after the earlier of (i) ten business days
following a public announcement that a person or group has acquired beneficial
ownership of 20% or more of the outstanding common shares of the Company
(subject to certain exclusions), (ii) ten business days following the
commencement or announcement of an intention to make a tender offer or exchange
offer, the consummation of which would result in the beneficial ownership by a
person or group of 20% or more of such outstanding common shares. The Rights
expire on October 22, 2006, which date may be extended subject to certain
additional conditions.
Under current regulations, the Bank is not permitted to pay dividends on its
stock if its regulatory capital would reduce below (i) the amount required for
the liquidation account established to provide a limited priority claim to the
assets of the Bank to qualifying depositors (Eligible Account Holders) at March
31, 1992 who continue to maintain deposits at the Bank after its conversion from
a Federal mutual savings and loan association to a Federal stock savings bank
pursuant to its Plan of Conversion adopted August 21, 1991, or (ii) the Bank's
regulatory capital requirements. As a "Tier 1" institution (an institution with
capital in excess of its capital requirements, both immediately before the
proposed capital distribution and after giving effect to such distribution), the
Bank may make capital distributions without the prior consent of the OTS in any
calendar year. The capital distribution is equal to the greater of 100% of net
income for the year to date plus 50% of the amount by which the lesser of the
institution's tangible, core or risk-based capital exceeds its capital
requirement for such capital commitment, as measured at the beginning of the
calendar year or up to 75% of net income over the most recent four quarter
period. On July 29, 1999, the Bank mailed written notification to the OTS of its
intention to pay 75% of the Bank's net income for the quarter ending September
30, 1999, to the Company.
98
<PAGE>
- --------------------------------------------------------------------------------
NOTE 11. Earnings Per Share
A reconciliation of the income and common stock share amounts used in the
calculation of basic and diluted earnings per share (EPS) for the fiscal years
ended June 30, 1999, 1998 and 1997 follow.
<TABLE>
<CAPTION>
Per Share
Net Income Shares Amount
----------------------------------------
<S> <C> <C> <C>
1999:
Basic EPS $ 1,051 4,197,485 $ 0.25
Effect of dilutive securities:
Exercise of stock options - 98,381 (0.01)
----------------------------------------
Diluted EPS $ 1,051 4,295,866 $ 0.24
----------------------------------------
----------------------------------------
1998:
Basic EPS $ 6,473 4,447,543 $ 1.46
Effect of dilutive securities:
Exercise of stock options - 120,197 (0.04)
----------------------------------------
Diluted EPS $ 6,473 4,567,740 $ 1.42
----------------------------------------
----------------------------------------
1997:
Basic EPS $ 3,674 4,537,319 $ 0.81
Effect of dilutive securities:
Exercise of stock options - 94,591 (0.02)
----------------------------------------
Diluted EPS $ 3,674 4,631,910 $ 0.79
----------------------------------------
----------------------------------------
</TABLE>
NOTE 12. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued certain Statements of
Financial Accounting Standards which have required effective dates occurring
after the Company's June 30, 1999 year end. The Company's financial statements,
including the disclosures therein, are not expected to be materially affected by
those accounting pronouncements.
NOTE 13. DEFINED BENEFIT PLAN
The Company has a noncontributory defined benefit pension plan covering all
employees of the Company and its wholly-owned subsidiaries who have attained the
age of twenty-one and have completed one year of service. The benefits are based
on years of service and the employee's compensation of the highest five out of
the past ten years. The Company's funding policy is to make the minimum annual
required contribution plus such amounts as the Company may determine to be
appropriate from time to time. One hundred percent vesting occurs after five
years, and retirement with age 65.
99
<PAGE>
- --------------------------------------------------------------------------------
NOTE 13. DEFINED BENEFIT PLAN (CONTINUED)
Information relative to the Company's defined benefit plan is presented below:
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
Changes in benefit obligations:
Benefit obligations, beginning $ 1,931 $ 1,742
Service cost 310 277
Interest cost 137 125
Benefits paid (236) (196)
Actuarial (gain) - (17)
------------------------
Benefit obligations, ending $ 2,142 $ 1,931
------------------------
------------------------
Changes in plan assets:
Fair value of plan assets, beginning $ 2,014 $ 1,651
Actual return on plan assets 325 239
Company contributions 328 320
Benefits paid (236) (196)
------------------------
Fair value of plan assets, ending $ 2,431 $ 2,014
------------------------
------------------------
Funded status at end of years:
Plan assets in excess of obligations $ 289 $ 83
Unrecognized losses 355 536
Unrecognized prior service cost (benefit) (263) (312)
Unrecognized transition obligation 1 97
------------------------
Prepaid asset included in the accompanying
statements of financial condition $ 382 $ 404
------------------------
------------------------
</TABLE>
The components of pension cost for the years ended June 30 consist of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Service cost $ 310 $ 277 $ 193
Interest cost 137 125 102
Net asset gain 234 96 49
Expected return on plan assets (161) (132) (120)
Amortization of prior losses 31 47 43
Amortization of prior service cost (49) (49) (49)
Recognized net actuarial losses (164) (107) (56)
Amortization of transition obligation 12 12 12
----------------------------------
Total costs recognized in expense $ 350 $ 269 $ 174
----------------------------------
----------------------------------
</TABLE>
100
<PAGE>
- --------------------------------------------------------------------------------
NOTE 13. DEFINED BENEFIT PLAN (CONTINUED)
The weighted-average post-retirement and pre-retirement discount rates used in
determining the actuarial present value of the benefit obligations were 6.0% and
7.5%, respectively, for both fiscal years 1999 and 1998. The rate of increase in
future compensation levels used to determine the actuarial present value of the
benefit obligations was 5.5% for both fiscal years 1999 and 1998. The expected
long-term rate of return on plan assets was 8.0% for both fiscal years 1999 and
1998.
NOTE 14. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan (ESOP) covering all full-time
employees of the Company who have attained age 21 and completed one year of
service during which they worked at least 1,000 hours. The ESOP includes an
employee savings plan feature which provides for voluntary contributions by
eligible employees on a tax-deferred basis with no matching contribution by the
Company. All shares owned by the ESOP are included in earnings per share
computations, with shares being allocated to eligible employees as the
corresponding ESOP debt is repaid. At June 30, 1999, the ESOP holds 255,996
shares comprised of 193,549 shares which have been allocated to eligible
employees and 62,447 shares remaining unallocated. Dividends on unallocated
shares are used to fund the release of unallocated shares annually. Annual
contributions are limited to the maximum tax-deductible amount and amounts
necessary to ensure continued compliance with the Bank's regulatory capital
requirements. During 1994, the Company made payments to the ESOP trust in the
amount of $906 to enable the trust to pay off the ESOP debt. The Company
recorded a receivable equal to the amounts paid which is reflected as a
deduction from stockholders' equity (unearned compensation) in the accompanying
consolidated statements of financial condition. The receivable is reduced as the
Bank makes contributions to the Plan which in turn are used to repay the Company
and the corresponding compensation expense is recorded.
For financial statement purposes, expense for the ESOP is determined on the
percentage of shares allocated to participants each period (allocations are
based on principal and interest payments) times the original amount of the debt
plus the interest incurred. The compensation cost charged to expense was $112,
$121 and $129 for 1999, 1998 and 1997, respectively.
The Company has elected not to adopt the accounting treatment for the ESOP
shares provided by AICPA Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans", as all ESOP shares were held by the ESOP as of
December 31, 1992 and are allowed to be accounted for under previously existing
accounting standards.
101
<PAGE>
- --------------------------------------------------------------------------------
NOTE 15. STOCK-BASED COMPENSATION PLANS
The Company has stock-based compensation plans which are described below. The
Company applies APB Opinion No. 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for grants
under the fixed stock option plan. Had compensation cost for the Company's
stock-based compensation plans been determined based on the grant date fair
values of awards (the method described in Statement No. 123), reported net
income and earnings per common share would have been reduced to the pro forma
amounts shown below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------
<S> <C> <C> <C>
Net income:
As reported $1,051 $6,473 $3,674
Pro forma 956 6,383 3,630
Basic earnings per share:
As reported 0.25 1.46 0.81
Pro forma 0.23 1.43 0.80
Diluted earnings per share:
As reported 0.24 1.42 0.79
Pro forma 0.22 1.40 0.78
</TABLE>
The pro forma effects of applying Statement No. 123 are not indicative of future
amounts since, among other reasons, the pro forma requirements of the Statement
have been applied only to options granted after June 30, 1995.
Under the Company's stock option and incentive plan (Option Plan), stock options
of 828,000 common shares may be granted to directors and officers of the Bank.
Options granted under the Option Plan may be either options that qualify as
Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the Code), or options that do not qualify. The Option Plan
also provides for the award of stock appreciation rights, limited stock
appreciation rights and restricted stock. In fiscal year 1997, the Option Plan
was amended to increase the number of shares of the Company's common stock
reserved for issuance under the Option Plan from 453,000 to 828,000.
At June 30, 1999, 612,798 shares of common stock were reserved for issuance
under the Option Plan. The options granted under the Option Plan expire ten
years from the date of grant.
102
<PAGE>
- --------------------------------------------------------------------------------
NOTE 15. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in fiscal years 1999, 1998 and 1997, respectively: a
dividend rate as a percentage of stock price of 2.69%, 1.30% and 1.85%; price
volatility of 28.00%, 18.00% and 12.00%, risk-free interest rates of 5.09%,
6.34% and 6.79%, and expected lives of seven years for all three years.
A summary of the status of the plan and changes during the years ended June 30
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 253,516 $ 9.48 207,883 $ 6.68 197,820 $ 5.13
Granted 84,723 15.38 69,629 16.25 54,727 10.75
Forfeited (36,957) 14.43 (1,899) 13.95 - -
Exercised (21,310) 7.98 (22,097) 4.09 (44,664) 4.83
--------------------------------------------------------------------------
Outstanding at end of year 279,972 $ 10.72 253,516 $ 9.48 207,883 $ 6.68
------- ------- -------
------- ------- -------
</TABLE>
Options for 174,373, 157,298 and 144,975 were exercisable at June 30, 1999, 1998
and 1997, respectively. The weighted average fair value of options granted was
$4.00, $5.21 and $5.59 for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
103
<PAGE>
- --------------------------------------------------------------------------------
NOTE 15. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Fixed options outstanding at June 30, 1999 are summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------
Remaining
Number Number Contractual Exercise
Outstanding Exercisable Life Price
--------------------------------------------------------
<S> <C> <C> <C> <C>
63,324 63,324 2 years $ 3.33
10,191 10,191 5 years 5.04
4,773 4,773 4 years 7.33
23,934 23,934 5 years 8.17
10,191 10,191 3 years 8.75
420 300 6 years 9.92
33,642 20,428 7 years 10.21
336 269 6 years 11.17
10,770 4,308 7 years 13.00
68,166 13,930 9 years 15.38
54,225 22,725 8 years 16.25
-----------------------
279,972 174,373
-----------------------
-----------------------
</TABLE>
Under the Management Recognition and Retention Plan (MRP), restricted stock
awards covering shares representing an aggregate of up to two and one-half
percent of outstanding common shares may be granted to directors and officers of
the Bank. Further information concerning the MRP restricted stock awards is as
follows:
<TABLE>
<CAPTION>
Outstanding
Awards
-----------
<S> <C>
June 30, 1997 750
Awards granted -
Awards canceled -
Awards vested (750)
-----------
June 30, 1998 -
Awards granted -
Awards canceled -
Awards vested -
-----------
June 30, 1999 -
-----------
-----------
</TABLE>
104
<PAGE>
- --------------------------------------------------------------------------------
NOTE 15. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Awards vested at the rate of 25% per year of continuous service with the Bank.
The unearned compensation under the MRP was recorded as a reduction of
stockholders' equity and was amortized to operations as the shares vested.
During the year ended June 30, 1997, the Company approved a Director Restricted
Stock Plan (Plan) which provides that awards of restricted shares of the
Company's common stock be made to outside directors of the Company. The Plan is
designed to allow for payment of the annual retainer fee in shares of the
Company's common stock, with the inclusion of an annual cost of living
adjustment based on the Consumer Price Index. Each outside director is entitled
to all voting, dividend and distribution rights during the restriction period.
The effective date of the Plan is July 1, 1997. The Plan has 75,000 shares
allocated to it and is in effect for a period of ten years. During fiscal years
1999 and 1998, 4,046 and 6,405 shares were awarded and $95 and $94 of expense
was incurred under the Plan as the annual retainer for the Company's Board of
Directors for the years ending June 30, 1999 and 1998, respectively. On July 1,
1999, 7,252 shares were awarded under the Plan as the annual retainer for the
year ended June 30, 2000.
NOTE 16. SEGMENT INFORMATION
The management approach is used as the conceptual basis for identifying
reportable segments and is based on the way that management organizes the
segments within the enterprise for making operating decisions, allocating
resources, and monitoring performance.
The Company's reportable segments are banking, credit card, and other. The
"banking" segment is conducted through the subsidiary, Home Federal Savings
Bank, and the "credit card" segment is conducted through the subsidiary, HF Card
Services, L.L.C. The "other" segment is composed of smaller nonreportable
segments, the parent company, and inter-segment eliminations.
For expense allocation purposes, income tax expense is allocated only to the
Company and the Bank.
<TABLE>
<CAPTION>
Credit
1999 Banking Card Other Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 19,821 $ 1,264 $ 376 $ 21,461
Provision for losses on loans (1,300) (10,820) - (12,120)
Noninterest income 5,981 12,046 994 19,021
Noninterest expense (16,661) (8,375) (1,351) (26,387)
-------------------------------------------------------
Income (loss) before income taxes $ 7,841 $ (5,885) $ 19 $ 1,975
-------------------------------------------------------
-------------------------------------------------------
Total assets $ 645,658 $ 13,103 $ (139) $ 658,622
-------------------------------------------------------
-------------------------------------------------------
105
<PAGE>
- --------------------------------------------------------------------------------
NOTE 16. SEGMENT INFORMATION (CONTINUED)
<CAPTION>
Credit
1998 Banking Card Other Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 19,745 $ 472 $ 535 $ 20,752
Provision for losses on loans (1,110) (3,579) - (4,689)
Noninterest income 5,956 6,163 1,512 13,631
Noninterest expense (15,627) (2,958) (1,398) (19,983)
-------------------------------------------------------
Income before income taxes $ 8,964 $ 98 $ 649 $ 9,711
-------------------------------------------------------
-------------------------------------------------------
Total assets $ 561,412 $ 8,618 $ 949 $ 570,979
-------------------------------------------------------
-------------------------------------------------------
<CAPTION>
Credit
1997 Banking Card Other Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 18,474 $ 94 $ 612 $ 19,180
Provision for losses on loans (360) (333) - (693)
Noninterest income 4,570 613 1,289 6,472
Noninterest expense (17,368) (346) (1,989) (19,703)
-------------------------------------------------------
Income (loss) before income taxes $ 5,316 $ 28 $ (88) $ 5,256
-------------------------------------------------------
-------------------------------------------------------
Total assets $ 559,232 $ 1,719 $ 1,163 $ 562,114
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
106
<PAGE>
- --------------------------------------------------------------------------------
NOTE 17. FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit and
financial guarantees. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
consolidated statements of financial condition. The contract or notional amounts
of those instruments reflect the extent of the Bank's involvement in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, standby
letters of credit, and financial guarantees written is represented by the
contractual notional amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other security
to support financial instruments with credit risk.
Estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------
1999 1998
---------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 16,671 $ 16,671 $ 25,458 $ 25,458
Securities 102,606 102,606 83,879 83,879
Loans 504,057 502,332 436,138 439,146
Accrued interest receivable 4,831 4,831 4,338 4,338
Mortgage servicing rights 1,739 4,330 1,423 3,205
Financial Liabilities
Deposits 510,730 510,522 446,424 445,368
Borrowed funds 81,613 78,931 50,635 50,303
Accrued interest payable and advances
by borrowers for taxes and insurance 12,040 12,040 10,690 10,690
</TABLE>
107
<PAGE>
- --------------------------------------------------------------------------------
NOTE 18. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
The Bank originates first mortgage and consumer loans primarily in eastern South
Dakota and holds residential and commercial real estate loans which were
purchased from other originators of loans located throughout the United States.
The Bank issues primarily unsecured credit cards through third parties
nationwide to a target customer market consisting of sub-prime credit customers
who have either an insufficient credit history or a negative credit history. The
Bank has established specific underwriting standards for credit card loans.
Collateral for substantially all noncredit card consumer loans are security
agreements and/or Uniform Commercial Code (UCC) filings on the purchased asset.
At June 30, 1999 and 1998, the Bank has approximately $209 and $344 of loans
sold with recourse to the Federal National Mortgage Association (FNMA). The
collateral securing these loans are one-to-four family mortgage loans which are
seasoned. Unused lines of credit amounted to $66,720 and $38,359 at June 30,
1999 and 1998, respectively. Unused letters of credit amounted to $2,571 and
$1,918 at June 30, 1999 and 1998, respectively. The lines of credit and letters
of credit are collateralized in substantially the same manner as loans
receivable.
The Bank had outstanding commitments to originate or purchase loans of $45,989
and sell loans of approximately $21,801 at June 30, 1999. The portion of
commitments to originate or purchase fixed rate loans totaled $25,272 with a
range in interest rates of 4.85% to 9.63%. No losses are expected to be
sustained in the fulfillment of any of these commitments.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based upon
consultation with legal counsel, the ultimate disposition of these matters will
not have a material adverse effect on the Company's consolidated financial
position.
NOTE 19. YEAR 2000 ISSUE
The Year 2000 issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company is heavily dependent on computer processing in its
business activities and the Year 2000 issue creates risk for the Company from
unforeseen problems in the Company's computer system and from third parties with
whom the Company processes financial information. Such failures of the Company's
computer system and/or third parties' computer systems could have a material
impact on the Company's ability to conduct its business.
Based on the Company's review of its computer systems, management believes the
remaining cost of the remediation effort to make the systems year 2000 compliant
will not be material.
108
<PAGE>
- --------------------------------------------------------------------------------
NOTE 20. CASH FLOW INFORMATION
Changes in other assets and liabilities at June 30, 1999, 1998 and 1997 consist
of:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
(Increase) decrease in accrued interest receivable $ 14 $ (202) $ (134)
(Increase) in prepaid expenses
and other assets (510) (1,129) (360)
(Increase) in deferred income taxes (1,262) (1,718) (221)
Increase (decrease) in accrued interest
payable and other liabilities (1,459) 390 2,374
--------------------------------------
$ (3,217) $ (2,659) $ 1,659
--------------------------------------
--------------------------------------
</TABLE>
NOTE 21. FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY)
The Company's condensed balance sheets as of June 30, 1999 and 1998 and related
condensed statements of income and cash flows for each of the years in the three
year period ended June 30, 1999 are as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
---------------------
<S> <C> <C>
Assets
Cash, all with Home Federal Savings Bank $ 5,920 $ 11,711
Income taxes receivable 769 -
Note receivable, HF Card Services, L.L.C. 2,430 -
Investments, marketable securities 517 503
Investments in subsidiaries 38,518 44,518
Land held for development 1,298 -
Other 156 8
---------------------
$ 49,608 $ 56,740
---------------------
---------------------
Liabilities
Other borrowings $ 1,011 $ -
Other liabilities 39 139
Stockholders' equity 48,558 56,601
---------------------
$ 49,608 $ 56,740
---------------------
---------------------
</TABLE>
109
<PAGE>
- --------------------------------------------------------------------------------
NOTE 21. FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY) (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Interest income $ 435 $ 543 $ 495
Equity in earnings (loss) of subsidiaries (639) 6,038 3,531
Other income 31 491 58
Expenses (447) (321) (314)
Income tax (expense) benefit 1,671 (278) (96)
------------------------------------
Net income $ 1,051 $ 6,473 $ 3,674
------------------------------------
------------------------------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,051 $ 6,473 $ 3,674
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of unearned compensation 114 113 116
Equity in (earnings) loss of subsidiaries 639 (6,038) (3,531)
Cash dividends received from subsidiaries 4,122 4,765 2,839
Realized (gain) on sale of securities, net - (194) -
Increase (decrease) in liabilities (100) (310) 7
Other, net (902) 123 93
------------------------------------
Net cash provided by operating
activities 4,924 4,932 3,198
------------------------------------
------------------------------------
</TABLE>
110
<PAGE>
- --------------------------------------------------------------------------------
NOTE 21. FINANCIAL INFORMATION OF HF FINANCIAL CORP. (PARENT ONLY) (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Cash Flows From Investing Activities
Disbursements on note receivable from HF Card $ (3,473) $ - $ -
Repayments on note receivable from HF Card 1,043 - -
Purchase of securities (517) - -
Proceeds from maturities and sales of securities 500 656 1,056
Purchase of land for development (261) - -
Investment in HF Card Services, L.L.C. - - (43)
---------------------------------------
Net cash provided by (used in) investing activities (2,708) 656 1,013
---------------------------------------
Cash Flows From Financing Activities
Purchase of treasury stock (6,735) (2,108) (1,611)
Cash dividends paid (1,511) (1,248) (1,083)
Proceeds from issuance of common stock 265 184 215
Payments on other borrowings (26) - -
---------------------------------------
Net cash (used in) financing activities (8,007) (3,172) (2,479)
---------------------------------------
Increase (decrease) in cash (5,791) 2,416 1,732
Cash at Beginning of Period 11,711 9,295 7,563
---------------------------------------
Cash at End of Period $ 5,920 $ 11,711 $ 9,295
---------------------------------------
---------------------------------------
</TABLE>
111
<PAGE>
- --------------------------------------------------------------------------------
NOTE 22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Fiscal year 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 11,166 $ 11,572 $ 11,397 $ 11,984
Net interest income 5,167 5,415 5,257 5,622
Provision for losses on loans 1,562 1,696 2,041 6,821
Net income (loss) 1,293 1,087 47 (1,376)
Earnings (loss) per share:
Basic 0.30 0.25 0.01 (0.34)
Diluted 0.29 0.25 0.01 (0.34)
<CAPTION>
Fiscal year 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 12,004 $ 11,620 $ 11,402 $ 11,175
Net interest income 5,344 5,140 5,207 5,061
Provision for losses on loans 526 804 898 2,461
Net income 1,684 1,622 1,416 1,751
Earnings per share:
Basic 0.38 0.36 0.32 0.40
Diluted 0.37 0.35 0.31 0.38
</TABLE>
* Includes additional provision charged to income of $3,500 for allowance for
loan losses related to credit card loans.
112
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the Company's two most recent fiscal years there have been no
disagreements with our accountant on any matter of accounting principle or
financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding untimely filings pursuant to Section 16 of the Securities
Exchange Act of 1934, as amended, is incorporated herein by reference from the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held in 1999, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
DIRECTORS
Information concerning Directors of the Company is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1999, a copy of which will be filed not later than
120 days after the close of the fiscal year.
EXECUTIVE OFFICERS
Information regarding the business experience of the executive officers of the
Company and the Bank contained in Part I of this Form 10-K is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1999, except for information contained under the
headings "Board Compensation Committee Report on Executive Compensation" and
"Stockholder Return Performance Presentation", a copy of which will be filed not
later than 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1999, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1999, except for information
contained under the headings "Board Compensation Committee Report on Executive
Compensation" and "Stockholder Return Performance Presentation", a copy of which
will be filed not later than 120 days after the close of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed with this report.
(1) See index to consolidated financial statements on page 68 of this
report.
(2) All supplemental schedules are omitted because of the absence of
conditions under which they are required or because the information is
shown in the Consolidated Financial Statements or notes thereto.
113
<PAGE>
<TABLE>
<CAPTION>
(a) (3) EXHIBITS
REFERENCE TO SEQUENTIAL PAGE
PRIOR FILING NUMBER WHERE
OR EXHIBIT ATTACHED EXHIBITS
REGULATION NUMBER ARE LOCATED IN THIS
S-K EXHIBIT ATTACHED FORM 10-K
NUMBER DOCUMENT HERETO REPORT
<S> <C> <C> <C>
3(i) Articles of Incorporation (1) Not Applicable
3(ii) By-Laws (1) Not Applicable
4.0 Rights Agreement (5) Not Applicable
10.1 Employment Contracts between the Bank and (1) Not Applicable
Curtis L. Hage
10.2 Amendment to Employment Contract between the Bank (4) Not Applicable
and Curtis L. Hage
10.4 1991 Stock Option and Incentive Plan (2) Not Applicable
10.5 Articles of Incorporation of HF Card Services L.L.C. (4) Not Applicable
10.6 Amendment to 1991 Stock Option and Incentive Plan (6) Not Applicable
10.7 1996 Director Restricted Stock Plan (6) Not Applicable
10.8 Employment Contract between the Bank and Gene F. Uher (6) Not Applicable
10.9 Employment Contract between the Bank and Mark (7) Not Applicable
S. Sivertson
10.10 Employment Contract between the Bank and Michael (7) Not Applicable
H. Zimmerman
10.11 Change in Control Contract between the Bank and (7) Not Applicable
Gene F. Uher
10.12 Change in Control Contract between the Bank and Mark (7) Not Applicable
S. Sivertson
10.13 Change in Control Contract between the Bank and (7) Not Applicable
Michael H. Zimmerman
10.14 Amendment to Employment Contract between the Bank 10.14 Page 1
and Gene F. Uher
10.15 Employment Contract between the Bank and 10.15 Pages 1-6
Brent E. Johnson
10.16 Change in Control Contract between the Bank and 10.16 Pages 1-6
Brent E. Johnson
21 Subsidiaries of Registrant 21 Page 1
23 Consents of Experts and Counsel 23 Page 1
27 Financial Data Schedule 27 Page 1
</TABLE>
- -------------
(1) Filed as exhibits to the Company's Form S-1 registration statement filed on
December 6, 1991 (File No. 33-44383) pursuant to Section 5 of the
Securities Act of 1933.
114
<PAGE>
(2) Filed as exhibits to the Company's Annual Report on Form 10K for the fiscal
year ended June 30, 1993.
(3) Filed as exhibits to the Company's Annual Report on Form 10K for the fiscal
year ended June 30, 1994.
(4) Filed as exhibits to the Company's Annual Report on Form 10K for the fiscal
year ended June 30, 1996.
(5) Filed as Exhibit I to the Company's filing on Form 8-A, filed on October
28, 1996.
(6) Filed as exhibits to the Company's Annual Report on Form 10K for the fiscal
year ended June 30, 1997.
(7) Filed as exhibits to the Company's Annual Report on Form 10K for the fiscal
year ended June 30, 1998.
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(b) REPORTS ON FORM 8-K
No current reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1999.
115
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
By /s/ Curtis L. Hage
----------------------------------
Curtis L. Hage, Chairman, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
/s/ Curtis L. Hage /s/ Brent E. Johnson
- -------------------------------------- ---------------------------------------
Curtis L. Hage, Chairman, President Brent E. Johnson, Senior Vice President
and Chief Executive Officer (PRINCIPAL and Chief Financial Officer (PRINCIPAL
EXECUTIVE AND OPERATING OFFICER) FINANCIAL AND ACCOUNTING OFFICER)
Date: September 24, 1999 Date: September 24, 1999
------------------------------- --------------------------------
/s/ Thomas L. Van Wyhe /s/ Paul J. Hallem
- -------------------------------------- ---------------------------------------
Thomas L. Van Wyhe, Director Paul J. Hallem, Director
Date: September 24, 1999 Date: September 24, 1999
------------------------------- --------------------------------
/s/ Jeffrey G. Parker /s/ Robert L. Hanson
- -------------------------------------- ---------------------------------------
Jeffrey G. Parker, Director Robert L. Hanson, Director
Date: September 24, 1999 Date: September 24, 1999
------------------------------- --------------------------------
/s/ William G. Pederson /s/ Joellen G. Koerner
- -------------------------------------- ---------------------------------------
William. G. Pederson, Director JoEllen G. Koerner, Ph.D., Director
Date: September 24, 1999 Date: September 23, 1999
------------------------------- --------------------------------
/s/ Kevin T. Kirby
- --------------------------------------
Kevin T. Kirby, Director
Date: September 24, 1999
-------------------------------
116
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
--------
10.14 Amendment to Employment Contract between the Bank and Gene F. Uher
10.15 Employment Contract between the Bank and Brent E. Johnson
10.16 Change in Control Contract between the Bank and Brent E. Johnson
21 Subsidiaries of Registrant
23 Consents of Experts and Counsel
27 Financial Data Schedule
117
<PAGE>
HOME FEDERAL SAVINGS BANK
NOTICE OF MODIFICATION TO
CHANGE-IN-CONTROL AGREEMENT
Pursuant to the terms of the Change-in-Control Agreement (Agreement)
entered by and between Home Federal Savings Bank (Bank) and Gene F. Uher as of
March 3, 1997, this Notice is provided to inform you of a change in the terms of
the Agreement.
Under Section 1 of the Agreement, upon each anniversary of the
Agreement date the Agreement shall automatically be extended for one additional
year unless notice is provided to the contrary no less than 90 days prior to the
annual extension date. Pursuant to this Notice of Modification to the Agreement,
the terms of Section 1 of the agreement shall be modified so that the annual
extension date of the agreement shall be April 8 instead of March 3, effective
as of April 8, 1999. Accordingly, the Agreement will be extended for a term of
one month only this upcoming March 3, 1999, (instead of the default 1 year
extension), and will be extended again for 1 year pursuant to the otherwise
existing terms of Section 1 of the Agreement on April 8, 1999, and on each April
8th thereafter.
This modification to the Agreement is for the administrative and
reporting convenience of the Bank and has been approved by the Board of
Directors of the Bank through the action of its Personnel, Compensation &
Benefits Committee. Please keep a copy of this Notice of Modification with your
copy of the Agreement. If you have any questions, please contact Curtis L. Hage
or Mary F. Hitzemann.
HOME FEDERAL SAVINGS BANK
/s/ Curtis L. Hage
------------------------------
Curtis L. Hage
Date: December 2, 1998
-------------------------
I have received this Notice of Modification to the Change-in-Control Agreement
and consent to it.
EMPLOYEE
/s/ Gene F. Uher
------------------------------
Gene F. Uher
Date: December 2, 1998
-------------------------
1
<PAGE>
HOME FEDERAL SAVINGS BANK
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 8th day of April, 1999, contemporaneously with the Change-in-Control
Agreement, by and between HOME FEDERAL SAVINGS BANK, a South Dakota corporation
(hereinafter referred to as the "Bank"), P. O. Box 5000, Sioux Falls, South
Dakota 57117-5000 and Brent E. Johnson (the "Employee"), 801 E. 61st Street,
Sioux Falls, South Dakota 57108.
RECITALS
A. The Employee is currently serving as Senior Vice President/Chief
Financial Officer.
B. The Board of Directors of the Bank recognizes the important service
that the Employee provides and will continue to provide for the Bank.
C. The Board of Directors of the Bank has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 4 hereof.
D. The Board of Directors of the Bank has approved and authorized the
execution of a Change-in-Control Agreement with the Employee on contemporaneous
basis with this Agreement.
COVENANTS
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained and further contained
in the Change-in-Control Agreement between the parties executed
contemporaneously herewith, the parties agree as follows:
1. EMPLOYMENT.
(a) The Employee will be employed by the Bank as Senior Vice
President/Chief Financial Officer. As Senior Vice President, Employee shall have
all such authority, powers, duties and responsibilities customarily afforded to
the office of Senior Vice President/Chief Financial Officer. The Employee shall
continue to devote his best efforts and substantially all his business time and
attention to the business and affairs of the Bank and its subsidiaries and
affiliated companies, if any. The Employee shall not, during the term of this
Agreement, engage in any other business activity without the Bank's prior
written consent.
(b) Nothing in the preceding paragraph shall preclude the Employee
from (i) serving on the Boards of Directors of other for-profit or of non-profit
corporations, as long as service on the same does not conflict with the
Employee's obligations to provide his full-time, best efforts employment to the
Bank, and (ii) devoting time to "passive investments" not related to service
performed on behalf of the Bank. "Passive investments" shall mean investments
which do not require any substantial services on behalf of the Employee to the
entity which constitutes the investment, which will not detract from the
Employee's performance under this Agreement and in which the Employee will
invest only his personal funds and/or those of his family.
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2. COMPENSATION.
(a) BASE SALARY. The Bank agrees to pay the Employee a base salary
of ONE HUNDRED THOUSAND AND 00/100 DOLLARS ($100,000) per year during the term
of this Agreement subject to any increases as provided below ("Base Salary").
The Employee's base salary shall be reviewed annually.
(b) SHORT-TERM INCENTIVE BONUS. Employee shall be entitled to
participate in the Bank's Value-Added Short-Term Incentive Plan and shall
receive whatever award is provided for Employee under that Plan.
(c) EXPENSES. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement of all reasonable
expenses incurred by him (in accordance with the policies and procedures at
least as favorable to the Employee as those presently applicable to the Bank's
Executive Officers) in performing services hereunder, provided that the Employee
properly accounts therefor in accordance with the Bank policy.
3. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. The
Employee shall be entitled while employed hereunder to participate equitably in,
and receive benefits under, all plans relating to stock options, stock
purchases, pension, salary deferral, thrift, profit-sharing, group life
insurance, medical coverage, tuition reimbursement, annual bonus, disability,
and other retirement or employee benefits or combinations thereof, that are now
or hereafter maintained for the benefit of the Bank's Executive Officers of the
same ranking or for its employees generally.
(b) FRINGE BENEFITS. The Employee shall be eligible while employed
hereunder to participate in, and receive benefits under, any other fringe
benefits, which are or may become applicable to the Bank's Executive Officers of
the same ranking or to its employees generally.
4. TERM.
The term of employment under this Agreement shall be a period of
three (3) years commencing on the date this Agreement was executed by both
parties (the "Commencement Date"), subject to earlier termination as provided
herein. The term of employment under this Agreement shall be extended under the
same terms for a period of one year unless at least three months prior to the
expiration of the initial term or any renewal term, either the Employee gives
written notice to the Chief Executive Officer or the Chief Executive Officer
gives notice to the Employee that it intends to terminate the Agreement at the
end of its initial term or renewal thereof. Such notice shall be in writing.
Reference herein to the term of this Agreement shall refer to both such initial
term and any extensions thereof.
5. PERSONAL TIME OFF.
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The Employee shall be entitled, without loss of pay, to absent
himself voluntarily from the performance of his employment under this Agreement,
all such voluntary absences to count as Personal Time Off ("PTO"), provided
that:
(a) The Employee shall be entitled to PTO, in the amount accrued
under the Home Federal Savings Bank's Personal Time Off Policy and Procedures
(the "PTO Policy").
(b) The Employee shall utilize any PTO benefit in accordance with
the PTO Policy.
(c) The Employee shall schedule the timing of PTO in a manner,
which does not interfere with the Bank's ability to effectively deliver quality
service.
6. TERMINATION OF EMPLOYMENT.
(a) TERMINATION FOR CAUSE. The Chief Executive Officer may
terminate the Employee's employment at any time for Cause. Upon Termination for
Cause, Employee shall be entitled to compensation and benefits up to the date of
employment termination, but shall be entitled to no additional compensation or
benefits.
CAUSE. Termination by the Bank of Employee's employment for
"Cause" shall mean termination upon (i) the willful and continued failure by
Employee to substantially perform Employee's duties with the Bank (other than
any such failures resulting from Employee's disability or from Employee's
termination for Good Reason), after a demand for substantial performance is
delivered to Employee which specifically identifies the manner in which the Bank
believes that Employee has not substantially performed his duties, and Employee
has failed to resume substantial performance of those duties on a continuous
basis within 14 days of receiving such demand; (ii) Employee's willful engaging
in conduct which is demonstrably and materially injurious to the Bank,
monetarily or otherwise; (iii) Employee's conviction of a felony which impairs
his ability substantially to perform Employee's duties with the Bank; (iv) the
Employee's personal dishonesty, incompetence, breach of fiduciary duty for
personal profit or willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease and desist order; or (v)
the Employee's material breach of this Agreement. For purposes of this
Subsection, no act, or failure to act, on the part of the Employee shall be
deemed "willful" unless done, or omitted to be done, by Employee not in good
faith and without reasonable belief that Employee's action or omission was in
the best interest of the Bank. Failure to perform duties with the Bank during
any period of disability shall not constitute Cause.
(b) EMPLOYMENT AT WILL. Both parties recognize that the Employee
is an "at will" employee and that either party may terminate the employment
relationship at any time with or without reason. To terminate the
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employment relationship, either party shall give one month written notice of
such termination, or in the alternative, pay the Employee compensation at his
normal rate of pay for the notice period.
If the employment of the Employee is involuntarily terminated, and
such termination is not for Cause, the Employee shall be entitled to receive
compensation and benefits through the last day of active employment.
7. REIMBURSEMENT OF ATTORNEY'S FEES.
(a) TERMINATION FOR CAUSE. In the event the Bank purports to
terminate the Employee for Cause, but it is determined by a court of competent
jurisdiction that Cause did not exist for such termination, or if in any event
it is determined by any such court that the Bank has failed to make timely
payment of any amounts owed to the Employee under this Agreement, the Employee
shall be entitled to reimbursement for all reasonable costs, including
attorneys' fees, incurred in challenging such termination or collecting such
amounts. Such reimbursement shall be in addition to all rights to which the
Employee is otherwise entitled under this Agreement.
8. COVENANT NOT TO COMPETE. The Employee covenants and agrees that in
the event he voluntarily terminates his employment under Section 6(b) hereof,
for a period commencing at the Date of Termination and continuing for a period
of 12 months thereafter, the Employee will not: (a) disclose any trade secrets
owned by the Bank and learned by the Employee as a result of such employment;
(b) solicit any customers who were customers of the Bank within the 12 months
immediately preceding the Date of Termination for the benefit of any company or
business described in (c) below; or (c) own any part of a Competitor(1) (other
than a public company as to which Employee owns five percent or less of the
outstanding Common Stock) or work on a full-time, part-time or consulting basis
for any corporation, partnership, sole proprietorship, or any other legal entity
which is a Competitor (irrespective of the actual location of the Competitor)
within the continental United States. For purposes of this Agreement, the
Employee's obligations of nonuse and nondisclosure set forth in this Section 8
shall not apply to any information which: (a) is or becomes part of the public
domain otherwise than as a consequence of a breach by the Employee of his
obligations under this Agreement; (b) was already known to the Employee prior to
receipt from the Bank; (c) is lawfully disclosed by the Bank to any third party
without restriction; or (d) is disclosed by a third party to the Employee
without restriction. This covenant not to compete shall not apply to the
Employee if his employment is terminated by the Bank for Cause.
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(1)For purposes of this Section 8, "Competitor" shall be defined as a business
enterprise which competes with the Bank in offering the same products or
services which, in the Bank's fiscal year ended prior to the Date of Termination
generated 10% or more of the Bank's total revenues as reflected in the Bank's
most recent annual audited financial statements.
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9. CONFIDENTIAL INFORMATION.
Employee acknowledges that as a result of employment with the Bank he
has access to and knowledge of confidential, trade secret and proprietary
information of the Bank. In exchange for the consideration set forth herein and
for the consideration set forth in the Change-in-Control Agreement
contemporaneously executed, Employee agrees not to disclose to anyone inside or
outside the Bank or use for his own benefit or the benefit of others, any of
this information without the express written consent of the Bank. Employee
acknowledges an unauthorized disclosure or use of this information would be
unfair and would cause the Bank irreparable harm.
10. NO SETOFF; MITIGATION; ATTORNEYS' FEES. The Bank's obligation to
make the payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action which the Bank may have
against the Employee or others without the Employee's consent. In no event shall
the Employee be obligated to seek other employment or take any other action by
way of mitigation of the amounts payable to the Employee under any of the
provisions of this Agreement. The Bank agrees to pay, to the full extent
permitted by law, all legal fees and expenses which the Employee may reasonably
incur as a result of any contest (regardless of the outcome thereof) by the Bank
or others of the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance thereunder
(including as a result of any payment pursuant to Section 6(b) of this
Agreement), plus in each case interest at the applicable Federal rate provided
for in Section 7872(f)(2) of the Code.
11. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Bank, by an assumption
agreement in form and substance satisfactory to the Employee in his sole
discretion, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Bank would be required to perform it if
no such succession or assignment had taken place. Failure of the Bank to obtain
such an assumption agreement prior to the effective date of any such succession
or assignment shall be a breach of this Agreement.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
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12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed to the attention of the Chief Executive
Officer of the Bank with a copy to the Secretary of the Bank), or to such other
address as either party may have furnished to the other in writing in accordance
herewith. Notices shall be effective upon receipt.
13. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
15. ENTIRE AGREEMENT/WAIVERS. This Agreement represents the entire
agreement between the parties and supersedes all previous communications,
representations, understandings and agreements, either oral or written, between
the Bank and the Employee with respect to the employment of the Employee by the
Bank. No waiver of the terms of this Agreement shall be binding upon either
party unless in writing, signed by both parties. The waiver or failure of either
party to enforce the terms of this Agreement in one instance shall not
constitute a waiver of that party's rights under this Agreement with respect to
other violations.
16. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. GOVERNING LAW. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
South Dakota.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
EMPLOYEE HOME FEDERAL SAVINGS BANK
/s/ Brent E. Johnson /s/ Curtis L. Hage
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Brent E. Johnson By: Curtis L. Hage
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Its: Chairman, President and
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Chief Executive Officer
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HOME FEDERAL SAVINGS BANK
CHANGE-IN-CONTROL AGREEMENT
This Change-in-Control Agreement (the "Agreement") is entered into as
of this 8th day of April, 1999, by and between Home Federal Savings Bank, a
federally-chartered savings bank (the "Bank") and Brent E. Johnson (the
"Employee").
WHEREAS, the Employee is currently serving as a senior vice president
of the Bank, holding the title of Senior Vice President/Chief Financial Officer;
and
WHEREAS, the Bank is a wholly-owned subsidiary of HF Financial Corp.,
(the Holding Company"), and the Holding Company offers its common stock for sale
to the public and is subject to supervision by the Securities and Exchange
Commission ("SEC"); and
WHEREAS, both the Bank and the Holding Company are subject to
supervision by the Office of Thrift Supervision (the "OTS"); and
WHEREAS, the Board of Directors of the Bank recognizes that, as is the
case with publicly held corporations generally, the possibility of a
change-in-control of the Holding Company may exist and that such possibility,
and the uncertainty and questions which it may raise among management, may
result in the departure or distraction of key management personnel to the
detriment of the Bank, the Holding Company and its stockholders; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change-in-control of the Holding Company, although no
such change is now known of; and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 1 hereof.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is agreed as
follows:
1. TERM OF AGREEMENT. This Agreement will commence on the date hereof
and shall continue in effect until the third anniversary of the date hereof;
and, commencing on the first anniversary of the date hereof and on each
anniversary thereafter, the term of this Agreement shall automatically be
extended for one additional year unless, not later than 90 days prior to any
such date of automatic extension of this Agreement, the Bank shall have given
notice that the Agreement will not be so extended; provided, however, if a
Change-in-Control shall have occurred during the original or any extended term
of this Agreement, this Agreement shall in all events continue in effect for a
period of 24 months following a Change-in-Control; provided, further, that if
Employee becomes entitled to payments in accordance with Section 4 of this
Agreement (or assert a claim for such payments) during the term of this
Agreement as heretofore described, this Agreement will thereafter survive
indefinitely to ensure that Employee receives all payments and benefits to which
Employee is entitled pursuant to the terms hereof.
2. CHANGE-IN-CONTROL. No benefits shall be payable hereunder unless
there shall have been a Change-in-Control, as set forth below. For purposes of
this Agreement, a "Change-in-Control" shall mean:
a. a change-in-control of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not the Holding Company is then subject to such reporting
requirement; or
b. the public announcement (which, for purposes of this
definition, shall include, without limitation, a report filed pursuant to
Section 13(d) of the Exchange Act) by the Holding Company or any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act) that such
person has become the "beneficial owner" (as defined in Rule 13d-3 promulgated
under the Exchange Act), directly or indirectly, of securities of the Holding
Company (i)
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representing 20% or more, but not more than 50%, of the combined
voting power of the Holding Company's then outstanding securities unless the
transaction resulting in such ownership has been approved in advance by the
Continuing Directors (as hereinafter defined); or (ii) representing more than
50% of the combined voting power of the Holding Company's then outstanding
securities (regardless of any approval by the Continuing Directors); provided,
however, that notwithstanding the foregoing, no Change-in-Control shall be
deemed to have occurred for purposes of this Agreement by reason of the
ownership of 20% or more of the total voting capital stock of the Holding
Company then issued and outstanding by the Holding Company, any subsidiary of
the Holding Company or any employee benefit plan of the Holding Company or of
any subsidiary of the Holding Company or any entity holding shares of the Common
Stock organized, appointed or established for, or pursuant to the terms of, any
such plan (any such person or entity described in this clause is referred to
herein as a "Company Entity"); or
c. any acquisition of control as defined in 12 Code of Federal
Regulations Section 574.4, or any successor regulation, of the Holding Company
which would require the filing of an application for acquisition of control or
notice of change in control in a manner which is set forth in 12 CFR Section
574.3, or any successor regulation; or
d. the Continuing Directors (as hereinafter defined), cease to
constitute a majority of the Holding Company's Board of Directors; or
e. the shareholders of the Holding Company approve (i) any
consolidation or merger of the Holding Company in which the Holding Company is
not the continuing or surviving Holding Company or pursuant to which shares of
Holding Company stock would be converted into cash, securities or other
property, other than a merger of the Holding Company in which shareholders
immediately prior to the merger have the same proportionate ownership of stock
of the surviving Holding Company immediately after the merger; (ii) any sale,
lease, exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the Holding Company;
or (iii) any plan of liquidation or dissolution of the Holding Company.
For purposes of this definition, "Continuing Director" shall mean any
person who is a member of the Board of Directors of the Holding Company, while
such person is a member of the Board of Directors, who is not an Acquiring
Person (as defined below) or an Affiliate or Associate (as defined below) of an
Acquiring Person, or a representative of an Acquiring Person or of any such
Affiliate or Associate, and who (i) was a member of the Board of Directors on
the date of this Agreement as first written above; or (ii) subsequently becomes
a member of the Board of Directors, if such person's initial nomination for
election or initial election to the Board of Directors is recommended or
approved by a majority of the Continuing Directors. For purposes of this
definition, "Acquiring Person" shall mean any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) who or which, together with all
Affiliates and Associates of such person, is the "beneficial owner" (as defined
in Rule 13d-3 promulgated under the Exchange Act) directly or indirectly, of
securities of the Holding Company representing 20% or more of the combined
voting power of the Holding Company's then outstanding securities, but shall not
include the Investors or any Holding Company Entity; and "Affiliate" and
Associate" shall have their respective meanings ascribed to such terms in Rule
12b-2 promulgated under the Exchange Act.
3. TERMINATION FOLLOWING A CHANGE-IN-CONTROL. If a Change-in-Control
shall have occurred, Employee shall be entitled to the benefits provided in
Section 4(a) hereof upon any termination of Employee's employment during the
term of this Agreement unless such termination is (i) because of Employee's
death; (ii) by the Bank for Cause (as defined below); or (iii) by Employee other
than for Good Reason (as defined below):
a. CAUSE. Termination by the Bank of Employee's employment for
"Cause" shall mean termination upon (i) the willful and continued failure by
Employee to substantially perform Employee's duties with the Bank (other than
any such failures resulting from Employee's disability or from Employee's
termination for Good Reason), after a demand for substantial performance is
delivered to Employee which specifically identifies the manner in which the Bank
believes that Employee has not substantially performed his duties, and Employee
has failed to resume substantial performance of those duties on a continuous
basis within 14 days of receiving such demand; (ii) Employee's willful engaging
in conduct which is demonstrably and materially injurious to the Bank,
monetarily or otherwise; (iii) Employee's conviction of a felony which impairs
his ability substantially to perform Employee's duties with the Bank; (iv) the
Employee's personal dishonesty, incompetence, breach of fiduciary duty for
personal profit or willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease and desist order; or (v)
the Employee's material breach of this Agreement. For purposes of this
Subsection, no act, or failure to act, on the part of the Employee shall be
deemed "willful" unless done, or omitted to be done, by Employee not in good
faith and without
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reasonable belief that Employee's action or omission was in
the best interest of the Bank. Failure to perform duties with the Bank during
any period of disability shall not constitute Cause.
b. GOOD REASON. Employee's termination of employment for "Good
Reason" shall mean termination by the Employee upon the occurrence, without his
express written consent, within 24 months following a Change-in-Control of any
one or more of the following:
i) the assignment to the Employee of any duties
inconsistent in any respect with Employee's position (including status,
offices, titles, and reporting requirements), authorities, duties, or other
responsibilities as in effect immediately prior to the Change-in-Control or
any other action of the Bank which results in a diminishment in such
position, authority, duties, or responsibilities, other than an insubstantial
and inadvertent action which is remedied by the Bank promptly after receipt
of notice thereof given by Employee;
ii) a reduction by the Bank in Employee's base
salary as in effect on the date hereof or as the same shall be increased from
time to time;
iii) the Bank's requiring Employee to be based
at a location outside of Sioux Falls, South Dakota;
iv) the failure by the Bank to (a) continue in
effect any material compensation or benefit plan, program, policy or practice
in which Employee was participating at the time of the Change-in-Control, or
(b) provide the Employee with compensation and benefits at least equal (in
terms of benefit levels and/or reward opportunities) to those provided for
under each employee benefit plan, program, policy and practice as in effect
immediately prior to the Change-in-Control (or as in effect following the
Change-in-Control, if greater);
v) the failure of the Bank to obtain a
satisfactory agreement from any successor to the Bank to assume and agree to
perform this Agreement, as contemplated in Section 7 hereof; and
vi) any purported termination by the Bank of
the Employee's employment that is not effected pursuant to a Notice of
Termination (as defined below);
The Bank's right to terminate Employee's employment pursuant to this
Subsection shall not be affected by the Employee's incapacity due to physical or
mental illness. The Employee's continued employment shall not constitute consent
to, or a waiver of rights with respect to, any circumstance constituting Good
Reason hereunder. Employee's termination of employment for Good Reason as
defined in this Subsection 3(b) shall constitute termination for Good Reason for
all purposes of this Agreement, notwithstanding that the Employee may also
thereby be deemed to have "retired" under any applicable retirement programs of
the Bank.
c. NOTICE OF TERMINATION. Any purported termination of the
Employee's employment by the Bank or by the Employee (other than by reason of
the Employee's death) within 24 months following the month in which a
Change-in-Control occurs, shall be communicated by Notice of Termination to the
other party hereto in accordance with Section 8 hereof. No purported termination
of the Employee's employment by the Bank shall be effective if it is not
pursuant to a Notice of Termination. Failure by the Employee to provide Notice
of Termination shall not limit any of the Employee's rights under this Agreement
except to the extent the Bank can demonstrate that it suffered actual damages by
reason of such failure. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which shall indicate the specific
termination provision in this Agreement relied upon and the Date of Termination
(as defined below) and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Employee's
employment under the provision so indicated.
d. DATE OF TERMINATION. "Date of Termination" shall mean the
date specified in the Notice of Termination (except in the case of the
Employee's death, in which case Date of Termination shall be the date of death);
provided, however, that if the Employee's employment is terminated by the Bank,
the date specified in the Notice of
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Termination shall be at least 30 days from the date the Notice of Termination is
given to the Employee and if the Employee terminates his employment for Good
Reason, the date specified in the Notice of Termination shall not be more than
60 days from the date the Notice of Termination is given to the Bank.
4. COMPENSATION UPON TERMINATION. Following a Change-in-Control, upon
termination of employment during the term of this Agreement the Employee shall
be entitled to the following benefits:
a. If employment by the Bank shall be terminated (A) by the Bank for
any reason other than Cause, or (B) by the Employee for Good Reason, the
Employee shall be entitled to the benefits, to be funded from the general assets
of the Bank, provided below;
i) the Bank shall pay the Employee full base salary
through the Date of Termination at the rate in effect at the time Notice of
Termination is given;
ii) the Bank will pay as severance benefits to the
Employee, not later than 30 days following the Date of Termination, a lump
sum severance payment equal to 1.5 times the sum of (A) the Employee's annual
base salary in effect at the time Notice of Termination is given or
immediately prior to the date of the Change-in-Control, whichever is greater,
and (B) annual incentive compensation payments which were potentially
available to the Employee at the time Notice of Termination is given or
immediately prior to the date of the Change-in-Control, whichever is greater
(or if there is no such incentive payment, the amount earned in the last
fiscal year prior to the Change-in-Control);
iii) for a 18-month period after the Date of
Termination, the Bank will arrange to provide the Employee with welfare
benefits (including life and health insurance benefits), perquisites and
other employee benefits of substantially similar design and cost to the
Employee as the welfare benefits, perquisites and other employee benefits
available to the Employee immediately prior to the Notice of Termination; but
benefits otherwise receivable by the Employee pursuant to this Subsection
(iii) shall be discontinued if the Employee obtains full-time employment
providing welfare benefits during the 18-month period following the Date of
Termination;
iv) the full amount of any long-term cash incentive
award for any plan periods then in progress to the extent not provided for in
such plan or plans; and
v) the Bank shall pay for individual out-placement
counseling services for the Employee.
b. The payments provided for in Section 4(a) above shall be made not
later than 30 days following the Date of Termination; provided, however, that if
the amounts of such payments cannot be finally determined, on or before such
day, the Bank shall pay to the Employee on such day an estimate as determined in
good faith by the Bank of the minimum amount of such payments and shall pay the
remainder of such payments (together with interest from the date of such
estimated payment at the rate provided in Section 1274(b)(2)(B) of the Internal
Revenue Code of 1986, as amended (the "Code")) as soon as the amount thereof can
be determined but in no event later than 45 days after the Date of Termination.
In the event that the amount of the estimated payment exceeds the
amount subsequently determined to have been due, such excess shall constitute a
loan by the Bank to the Employee payable no later than 30 days after demand by
the Bank (together with interest from the date of such estimated payment at the
rate provided in Section 1274(b)(2)(B) of the Code.
c. The Bank shall also pay to the Employee any legal fees and expenses
incurred by the Employee (i) as a result of successful litigation against the
Bank for nonpayment of any benefit hereunder, or (ii) in connection with any
dispute with any Federal, state or local governmental agency with respect to
benefits claimed under this Agreement. If the Employee utilizes arbitration to
resolve any such dispute, the Bank will pay any legal fees and expenses incurred
by the Employee in connection therewith.
d. The Employee shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Section 4 be reduced by
any compensation earned by the Employee as the result of employment by another
employer after the Date of Termination, or otherwise, except as set forth in
Section 4a(iii) hereof.
4
<PAGE>
e. Notwithstanding anything in this Agreement to the contrary, no
payments may be made pursuant to Section 4 hereof without the prior approval
of the OTS if following such payment the Bank would not be in compliance with
its fully phased-in capital requirements as defined in OTS regulations.
Further, any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 USC
Section 1828(k) and any regulations promulgated thereunder.
5. CERTAIN REDUCTION OF PAYMENTS BY THE BANK. Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Code, then the aggregate present value of amounts payable or
distributable to or for the benefit of the Employee pursuant to this Agreement
(such amounts payable or distributable pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed
in present value which maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by the Bank because of
Section 280G of the Code. For purposes of this Section 5, present value shall be
determined in accordance with Section 280G(d)(4) of the Code.
6. NONEXCLUSIVITY RIGHTS. Nothing in this Agreement shall prevent or
limit the Employee's continuing or future participation in any benefit, bonus,
incentive, retirement or other plan or program provided by the Bank and for
which the Employee may qualify, nor, except as provided in Section 13, shall
anything herein limit or reduce such rights as the Employee may have under any
other agreement with, or plan, program, policy or practice of, the Bank. Amounts
which are vested benefits or which the Employee is otherwise entitled to receive
under any agreement with, or plan, program, policy or practice of, the Bank
(including, without limitation, the cashout of unused vacation days upon
termination of employment) shall be payable in accordance with such agreement,
plan, program, policy or practice, except as explicitly modified by this
Agreement.
7. SUCCESSORS
a. The Bank will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Bank or of any division
or subsidiary thereof employing the Employee to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the Bank
would be required to perform if no such succession had taken place. Failure of
the Bank to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Employee to compensation from the Bank in the same amount and on the same terms
as he would be entitled hereunder if his employment were terminated for Good
Reason following a Change-in-Control, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination and Notice of Termination shall be deemed to have
been given on such date.
b. This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and legatees. If the
Employee should die while any amount would still be payable to him hereunder if
he had continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement, to his devisee,
legatee or other designee or, if there is no such designee, to his estate or, if
no estate, in accordance with applicable law.
8. NOTICE. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, postage prepaid, addressed to the other party as follows:
IF TO THE BANK, TO:
Home Federal Savings Bank
Attention: Corporate Secretary
225 South Main Avenue
Sioux Falls, SD 57117
5
<PAGE>
IF TO EMPLOYEE, TO:
Brent E. Johnson
801 E. 61st Street
Sioux Falls, SD 57108
Either party to this Agreement may change its address for purposes
of this Section 8 by giving 15 days' prior notice to the other party hereto.
9. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Employee and such officer as may be specifically
designated by the Board to sign on behalf of the Bank. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of South Dakota.
10. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
11. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
12. ARBITRATION. If the Employee so elects, any dispute or controversy
arising under or in connection with this Agreement shall be settled exclusively
by arbitration in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction; provided, however, that the Employee shall be
entitled to seek specific performance of his right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement. If the Employee does not elect arbitration,
he may pursue any and all legal remedies available to him.
13. EMPLOYMENT AGREEMENT. Reference is hereby made to that certain
Agreement, dated contemporaneously with this Agreement, by and between the Bank
and the Employee. The termination of the Employment Agreement shall have no
effect on the term of this Agreement. All terms and conditions of the Employment
Agreement shall continue in full force and effect (until termination of the
Employment Agreement in accordance with its terms), including following a
Change-in-Control, except as expressly modified by this Section. The mutual
promises in this Agreement and in the Employment Agreement shall serve as
consideration for each agreement contemporaneously executed.
14. EFFECTIVE DATE. This Agreement shall become effective as of the
date first set forth above.
15. EMPLOYMENT. This Agreement does not constitute a contract of
employment or impose on the Bank any obligation to retain the Employee as an
employee, to continue his current employment status or to change any employment
policies of the Bank.
16. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
17. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or unenforceability of the other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
HOME FEDERAL SAVINGS BANK
/s/ Curtis L. Hage
-------------------------------
By: Curtis L. Hage
----------------------------
Its: Chairman, President and
---------------------------
Chief Executive Officer
-----------------------
EMPLOYEE
/s/ Brent E. Johnson
-------------------------------
Brent E. Johnson
6
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENTAGE STATE OF INCORPORATION
PARENT SUBSIDIARY OF OWNERSHIP OR ORGANIZATION
<S> <C> <C> <C>
HF Financial Corp. Home Federal Savings Bank 100% Delaware
HF Financial Corp. HomeFirst Mortgage Corp. 100% South Dakota
HF Financial Corp. HF Card Services L.L.C. 100% South Dakota
Home Federal Savings Bank Hometown Insurors, Inc. 100% South Dakota
Home Federal Savings Bank Mid-America Service Corporation 100% South Dakota
Home Federal Savings Bank PMD, Inc. 100% South Dakota
</TABLE>
The financial statements of HF Financial Corp. are consolidated with those of
its subsidiaries.
<PAGE>
EXHIBIT 23.0
ACCOUNTANT'S CONSENT
We consent to the incorporation by reference in the Registration Statements on
Form S-8 of HF Financial Corp., pertaining to the HF Financial Corp. 1991 Stock
Option and Incentive Plan and the 1996 Director Restricted Stock Plan, of our
report dated August 18, 1999, accompanying the consolidated financial
statements included in the Form 10-K Annual Report of HF Financial Corp. for the
fiscal year ended June 30, 1999.
/s/ McGladrey & Pullen, LLP
McGLADREY & PULLEN, LLP
Sioux Falls, South Dakota
September 27, 1999
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 14,671
<INT-BEARING-DEPOSITS> 2,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 102,606
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 516,048
<ALLOWANCE> 11,991
<TOTAL-ASSETS> 658,622
<DEPOSITS> 510,730
<SHORT-TERM> 0
<LIABILITIES-OTHER> 17,721
<LONG-TERM> 81,613
0
0
<COMMON> 15,175
<OTHER-SE> 33,383
<TOTAL-LIABILITIES-AND-EQUITY> 658,622
<INTEREST-LOAN> 40,616
<INTEREST-INVEST> 5,503
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 46,119
<INTEREST-DEPOSIT> 20,353
<INTEREST-EXPENSE> 24,658
<INTEREST-INCOME-NET> 21,461
<LOAN-LOSSES> 12,120
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 26,387
<INCOME-PRETAX> 1,975
<INCOME-PRE-EXTRAORDINARY> 1,975
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,051
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.24
<YIELD-ACTUAL> 8.26
<LOANS-NON> 1,045
<LOANS-PAST> 1,648
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,199
<CHARGE-OFFS> 8,716
<RECOVERIES> 924
<ALLOWANCE-CLOSE> 11,991<F1>
<ALLOWANCE-DOMESTIC> 11,991
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> INCLUDES $464 DUE TO ADDITIONS FROM ACQUISITIONS.
</FN>
</TABLE>
