<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19772
HF FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 46-0418532
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 South Main Avenue, Sioux Falls, SD 57104
- --------------------------------------------------------------------------------
(Address of principal executive office) (ZIP Code)
(605) 333-7556
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months(or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of May 10, 2000 there were 3,664,105 issued and outstanding shares
of the Registrant's Common Stock, with $.01 par value.
<PAGE>
HF FINANCIAL CORP.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition
As of March 31, 2000 and June 30, 1999 1
Consolidated Statements of Income for the Three and Nine
Months Ended March 31, 2000 and 1999 2
Consolidated Statement of Stockholders' Equity
for the Nine Months Ended March 31, 2000 3
Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2000 and 1999 4-5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Default upon Senior Securities 23
Item 4. Submission of Matters to a Vote
of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
<PAGE>
Item 1.
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
-------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 21,379 $ 16,671
Securities available for sale 60,387 61,023
Mortgage-backed securities available for sale 54,243 41,583
Loans receivable 530,281 492,302
Loans held for sale 3,323 11,755
Accrued interest receivable 4,944 4,831
Office properties and equipment, at cost, net of
accumulated depreciation 13,851 14,408
Foreclosed real estate and other properties 1,501 1,762
Prepaid expenses and other assets 2,158 2,509
Mortgage servicing rights 2,036 1,739
Deferred income taxes 4,651 5,094
Cost in excess of net assets acquired 5,126 4,945
--------------------------------
$ 703,880 $ 658,622
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 524,262 $ 510,730
Advances from Federal Home Loan Bank
and other borrowings 113,725 81,613
Advances by borrowers for taxes and insurance 9,372 6,170
Accrued interest payable 6,349 5,870
Other liabilities 4,661 5,681
--------------------------------
Total liabilities 658,369 610,064
--------------------------------
Stockholders' Equity
Preferred stock, $.01 par value, 500,000 shares authorized,
none outstanding - - - - - - - -
Series A Junior Participating Preferred Stock, $1.00 stated value,
50,000 shares authorized, none outstanding - - - - - - - -
Common stock, $.01 par value, 10,000,000 shares authorized,
4,769,314 and 4,755,632 shares issued at March 31, 2000 and
June 30, 1999 48 47
Additional paid-in capital 15,260 15,128
Retained earnings, substantially restricted 48,874 46,101
Unearned compensation (226) (226)
Accumulated other comprehensive income (loss) (2,320) (1,236)
Less cost of treasury stock, March 31, 2000 1,105,209 shares,
June 30, 1999 683,572 shares (16,125) (11,256)
--------------------------------
45,511 48,558
--------------------------------
$ 703,880 $ 658,622
================================
</TABLE>
See Notes to Consolidated Financial Statements
Page 1
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
------------------------------ -----------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans receivable $ 11,616 $ 9,973 $ 33,875 $ 30,118
Mortgage-backed securities 950 710 2,458 1,996
Investment securities and interest-bearing deposits 927 714 2,612 2,021
-------- -------- -------- --------
13,493 11,397 38,945 34,135
-------- -------- -------- --------
Interest expense:
Deposits 6,054 4,933 16,946 15,233
Advances from Federal Home Loan Bank
and other borrowings 1,574 1,207 4,507 3,063
-------- -------- -------- --------
7,628 6,140 21,453 18,296
-------- -------- -------- --------
Net interest income 5,865 5,257 17,492 15,839
Provision for losses on loans 874 2,041 4,412 5,299
-------- -------- -------- --------
Net interest income after provision
for losses on loans 4,991 3,216 13,080 10,540
-------- -------- -------- --------
Noninterest income:
Credit card fee income 1,245 2,647 5,968 7,808
Fees on deposits 643 557 1,982 1,721
Loan servicing income 347 329 1,015 947
Loan fees and service charges 202 234 789 840
Gain on sale of loans, net 127 184 523 484
Other 612 (90) 1,569 1,180
-------- -------- -------- --------
3,176 3,861 11,846 12,980
-------- -------- -------- --------
Noninterest expense:
Compensation and employee benefits 3,320 2,770 9,446 8,010
Credit card processing expense 647 2,195 3,100 6,057
Other general and administrative expenses 1,183 1,109 3,425 3,187
Occupancy and equipment 807 719 2,259 2,103
Federal insurance premiums 31 75 196 226
Other 146 31 396 158
-------- -------- -------- --------
6,134 6,899 18,822 19,741
-------- -------- -------- --------
Income before income taxes 2,033 178 6,104 3,779
Income tax expense 716 131 2,143 1,352
-------- -------- -------- --------
Net income $ 1,317 $ 47 $ 3,961 $ 2,427
======== ======== ======== ========
Earnings per share:
Basic $ 0.35 $ 0.01 $ 1.01 $ 0.57
======== ======== ======== ========
Diluted $ 0.34 $ 0.01 $ 1.00 $ 0.56
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
Page 2
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 2000
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Unearned Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
---------- ---------- ---------- -------------- ---------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1999 $ 47 $ 15,128 $ 46,101 $ (226) $ (1,236) $ (11,256) $ 48,558
Comprehensive income:
Net income - - - - - - - - 3,961 - - - - - - - - - - - - 3,961
Change in unrealized loss on
securities available for sale, net
of deferred taxes - - - - - - - - - - - - - - - - (1,084) - - - - (1,084)
--------- --------- -------- --------- --------- --------- --------
Comprehensive income - - - - - - - - 3,961 - - - - (1,084) - - - - 2,877
7,252 shares issued under Director
Restricted Stock Plan 1 97 - - - - - - - - - - - - - - - - 98
Exercise of stock options for 6,430 shares - - - - 35 - - - - - - - - - - - - - - - - 35
Cash dividends paid ($0.30 per share)
on common stock - - - - - - - - (1,188) - - - - - - - - - - - - (1,188)
Purchase of treasury stock - - - - - - - - - - - - - - - - - - - - (4,869) (4,869)
--------- --------- -------- --------- --------- --------- --------
Balance, March 31, 2000 $ 48 $ 15,260 $ 48,874 $ (226) $ (2,320) $ (16,125) $ 45,511
========= ========= ======== ========= ========= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements
Page 3
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------
2000 1999
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,961 $ 2,427
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on loans 4,412 5,299
Depreciation 1,199 1,181
Amortization of premiums and discounts on
securities available for sale, net (13) 2
Amortization of intangible assets 262 - - - -
Amortization of mortgage servicing rights 231 202
Noncash compensation 98 - - - -
Increase (decrease) in deferred loan fees (767) 254
Loans originated for resale (51,289) (60,901)
Proceeds from the sale of loans 60,244 59,928
(Gain) on sale of loans, net (523) (484)
Mortgage servicing rights capitalized (112) (296)
Realized (gain) on sale of securities, net (90) (3)
Losses and provision for losses on sales of
foreclosed real estate and other properties, net 41 25
Loss on disposal of office properties
and equipment, net 7 29
(Increase) decrease in accrued interest receivable (113) 303
(Increase) decrease in prepaid expenses and other assets 351 (1,659)
(Increase) decrease in deferred income taxes 999 (729)
(Decrease) in accrued interest payable and other liabilities (541) (1,037)
--------- ---------
Net cash provided by operating activities $ 18,357 $ 4,541
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans purchased (19,931) (27,114)
Loans originated and held (173,478) (140,855)
Principal collected on loans 142,555 131,224
Sale of participation interests in loans 8,650 2,500
Mortgage-backed securities available for sale:
Sales 3,202 4,489
Purchases (23,157) (21,430)
Repayments 6,333 11,210
Securities available for sale:
Sales and maturities 15,141 29,590
Purchases (15,080) (35,176)
Proceeds from sale of office properties and equipment 4 44
Purchase of office properties and equipment (653) (1,091)
Purchase of mortgage servicing rights (416) (168)
Purchase of intangible assets (443) - - - -
Proceeds from sale of foreclosed real estate
and other properties, net 800 423
--------- ---------
Net cash (used in) investing activities $ (56,473) $ (46,354)
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
Page 4
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
----------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts $ 13,532 $ (2,879)
Proceeds of advances from Federal Home Loan
Bank and other borrowings 195,500 62,600
Payments on advances from Federal Home Loan
Bank and other borrowings (163,388) (24,359)
Increase in advances by borrowers for
taxes and insurance 3,202 4,014
Purchase of treasury stock (4,869) (6,434)
Proceeds from issuance of common stock 35 243
Cash dividends paid (1,188) (1,144)
---------------- ----------------
Net cash provided by financing activities $ 42,824 $ 32,041
---------------- ----------------
Increase (decrease) in cash and cash equivalents $ 4,708 $ (9,772)
Cash and Cash Equivalents
Beginning 16,671 25,458
---------------- ----------------
Ending $ 21,379 $ 15,686
================ ================
</TABLE>
See Notes to Consolidated Financial Statements
Page 5
<PAGE>
HF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Months Ended March 31, 2000 and 1999
(Dollars in Thousands)
(Unaudited)
NOTE 1. SELECTED ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The foregoing consolidated financial statements are unaudited. However,
in the opinion of management, all adjustments (which consist of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Results for any interim period are not
necessarily indicative of results to be expected for the year. The interim
consolidated financial statements include the accounts of HF Financial Corp.
(the "Company"), its subsidiaries, HomeFirst Mortgage Corp. (formerly known as
HF Mortgage Corp.), HF Card Services L.L.C. (HF Card Services) and Home Federal
Savings Bank, (the "Bank") and the Bank's subsidiaries.
NOTE 2. REGULATORY CAPITAL
The following table sets forth the Bank's compliance with its capital
requirements at March 31, 2000:
<TABLE>
<CAPTION>
Amount Percent
------ -------
<S> <C> <C>
Tier I (core) capital:
Required ...................... $20,971 3.00%
Actual ........................ 41,229 5.90
Excess ........................ 20,258 2.90
Risk-based capital:
Required ...................... $39,011 8.00%
Actual ........................ 47,354 9.71
Excess ........................ 8,343 1.71
</TABLE>
NOTE 3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common stockholders (the numerator) by the weighted-average number of common
shares outstanding (the denominator) during the period. Shares issued during the
period and shares reacquired during the period are weighted for the portion of
the period that they were outstanding. The weighted average number of common
shares outstanding for the three month period ended March 31, 2000 and 1999 as
adjusted was 3,773,687 and 4,114,774 respectively. The weighted average number
of common shares outstanding for the nine month period ended March 31, 2000 and
1999 as adjusted was 3,905,150 and 4,239,648 respectively.
Dilutive earnings per share is similar to the computation of basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
dilutive options outstanding had been exercised. The weighted average number of
common and dilutive potential common shares outstanding for the three month
period ended March 31, 2000 and 1999 as adjusted was 3,824,280 and 4,276,486
respectively. The weighted average number of common and dilutive potential
common shares outstanding for the nine month period ended March 31, 2000 and
1999 as adjusted was 3,961,331 and 4,343,678 respectively.
Page 6
<PAGE>
NOTE 4. NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ("SFAS")
The Financial Accounting Standards Board ("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 or 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.
Page 7
<PAGE>
NOTE 5. 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. Total assets for the credit card segment decreased
$5.3 million from $13.1 million at June 30, 1999 to $7.8 million at March 31,
2000. The decrease in assets was due to the Company's decision to cease
processing credit card applications in March 1999.
<TABLE>
<CAPTION>
Nine Months Ended March 31, 2000
- -----------------------------------------------------------------------------------------------------------------
Credit
Banking Card Other Total
------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net interest income $ 16,771 304 417 17,492
Provision for losses on loans (1,033) (3,379) - - - - (4,412)
Noninterest income 5,144 5,956 746 11,846
Noninterest expense (14,449) (3,352) (1,021) (18,822)
------------- ------------ ------------- -------------
Income (loss) before income taxes $ 6,433 $ (471) $ 142 $ 6,104
============= ============ ============= =============
------------- ------------ ------------- -------------
Total assets $ 693,949 $ 7,757 $ 2,174 $ 703,880
============= ============ ============= =============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1999
- -----------------------------------------------------------------------------------------------------------------
Credit
Banking Card Other Total
------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net interest income $ 14,624 $ 919 $ 296 $ 15,839
Provision for losses on loans (900) (4,399) - - - - (5,299)
Noninterest income 4,336 7,923 721 12,980
Noninterest expense (12,307) (6,367) (1,067) (19,741)
------------- ------------ ------------- -------------
Income (loss) before income taxes $ 5,753 $ (1,924) $ (50) $ 3,779
============= ============ ============= =============
------------- ------------ ------------- -------------
Total assets $ 587,963 $14,680 $ 1,542 $ 604,185
============= ============ ============= =============
</TABLE>
Page 8
<PAGE>
Item 2.
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 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 HomeFirst Mortgage Corp. ("Mortgage Corp.").
HF Card Services was established to provide secured, partially-secured
and unsecured credit cards nationwide. The target market for HF Card Services
was subprime credit customers who have either an insufficient credit history or
a negative credit history and are unable to obtain a credit card from more
traditional card issuers.
The Company's net income is primarily dependent upon the difference (or
"spread") between the average yield earned on loans, mortgage-backed securities
and investments and the average rate paid on deposits and borrowings, as well as
the relative amounts of such assets and liabilities. The interest rate spread is
affected by regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flows. The Company, like other financial
institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets. To better insulate itself
from such risk, the Company has, over the last few years, attempted to increase
both numerically and on a percentage basis its holding of consumer and
commercial loans. The Company has also decreased its ratio of fixed-rate to
adjustable-rate loans. The Company's net income is also affected by, among other
things, gains and losses on sales of foreclosed property, loans, mortgage-backed
securities and securities available for sale, provisions for 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.
Page 9
<PAGE>
FINANCIAL CONDITION DATA
At March 31, 2000, the Company had total assets of $703.9 million, an
increase of $45.3 million from the level at June 30, 1999. The increase in
assets was due primarily to an increase in loans receivable of $38.0 million and
mortgage-backed securities of $12.7 million. The increase in loans receivable
and mortgage-backed securities was funded primarily by an increase in deposits
of $13.5 million and advances from Federal Home Loan Bank ("FHLB") and other
borrowings of $32.1 million from the levels at June 30, 1999. In addition,
stockholders' equity decreased from $48.6 million at June 30, 1999 to $45.5
million at March 31, 2000, primarily due to the purchase of treasury stock of
$4.9 million and the payment of cash dividends of $1.2 million which was
partially offset by net income of $4.0 million.
The increase in loans receivable of $38.0 million was due primarily to
purchases and originations of principal exceeding amortization and prepayments
of principal.
The increase in mortgage-backed securities of $12.7 million was
primarily the result of purchases exceeding sales, amortization and prepayments
of principal. The Bank purchased thirty year, fixed-rate mortgage-backed
securities in the amount of $23.2 million during the nine months ended March 31,
2000.
The $636,000 decrease in securities available for sale was primarily
the result of sales, maturities and calls of $15.1 million exceeding purchases
of $15.0 million. 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 decrease in loans held for sale of $8.4 million was due to a
decline in loans originated for sale into the secondary market at March 31,
2000.
The $13.5 million increase in deposits was primarily due to an increase
in demand accounts of $7.0 million, money market accounts of $26.8 million and
certificates of deposit of $8.4 million offset by a decrease in savings accounts
of $28.7 million. As of March 31, 2000, the Bank had total deposits from local
governmental entities of $76.8 million compared to $86.4 million at June 30,
1999.
Advances from the FHLB and other borrowings increased $32.1 million for
the nine month period ended March 31, 2000 primarily due to the Company
obtaining new advances in the amount of $195.5 million which were partially
offset by payments of $163.4 million on advances and other borrowings during the
nine month period ended March 31, 2000.
Page 10
<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 three
and nine months ended March 31, 2000 and 1999 include fees which are considered
adjustments to yield.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------
2000 1999
------------------------------------ ----------------------------------
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) $532,996 $11,616 8.77% $470,401 $ 9,973 8.60%
Mortgage-backed securities 56,919 950 6.71% 47,448 710 6.07%
Other investment securities (2) 57,550 826 5.77% 44,817 645 5.84%
FHLB stock 6,130 101 6.63% 4,433 69 6.31%
----------- ---------- ---------- ------------ ---------- --------
Total interest-earning assets $653,595 $13,493 8.30% $567,099 $11,397 8.15%
---------- ---------- ---------- --------
Noninterest-earning assets 37,722 30,623
----------- ------------
Total assets $691,317 $597,722
=========== ============
Interest-bearing liabilities:
Deposits:
Checking and money market $167,243 $ 1,438 3.46% $112,987 $ 723 2.60%
Savings 45,681 412 3.63% 49,961 381 3.09%
Certificates of deposit 299,224 4,204 5.65% 274,878 3,829 5.65%
----------- ---------- ---------- ------------ ---------- --------
Total deposits $512,148 $ 6,054 4.75% $437,826 $ 4,933 4.57%
FHLB advances and other borrowings 111,801 1,574 5.66% 89,394 1,207 5.48%
----------- ---------- ---------- ------------ ---------- --------
Total interest-bearing liabilities $623,949 $ 7,628 4.92% $527,220 $ 6,140 4.72%
---------- ---------- ---------- --------
Other liabilities 21,786 18,614
----------- ------------
Total liabilities $645,735 $545,834
Equity 45,582 51,888
----------- ------------
Total liabilities and equity $691,317 $597,722
=========== ============
Net interest income; interest rate spread $ 5,865 3.39% $ 5,257 3.43%
========== ========== ========== ========
Net interest margin (3) 3.61% 3.76%
========== ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest on accruing loans past due 90 days or more.
(2) Includes primarily U.S. government securities.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
Page 11
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------
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) $523,416 $ 33,875 8.61% $456,806 $ 30,118 8.78%
Mortgage-backed securities 50,655 2,458 6.46% 44,929 1,996 5.92%
Other investment securities (2) 54,995 2,330 5.64% 41,597 1,825 5.84%
FHLB stock 5,821 282 6.45% 4,019 196 6.50%
----------- ---------- ---------- ------------ ---------- --------
Total interest-earning assets $634,887 $ 38,945 8.16% $547,351 $ 34,135 8.31%
---------- ---------- ---------- --------
Noninterest-earning assets 38,620 30,072
----------- ------------
Total assets $673,507 $577,423
=========== ============
Interest-bearing liabilities:
Deposits:
Checking and money market $156,894 $ 3,635 3.08% $106,621 $ 2,049 2.56%
Savings 44,972 1,096 3.24% 47,360 1,112 3.13%
Certificates of deposit 295,676 12,215 5.50% 278,236 12,072 5.78%
----------- ---------- ---------- ------------ ---------- --------
Total deposits $497,542 $ 16,946 4.53% $432,217 $ 15,233 4.69%
FHLB advances and other borrowings 107,757 4,507 5.57% 73,744 3,063 5.53%
----------- ---------- ---------- ------------ ---------- --------
Total interest-bearing liabilities $605,299 $ 21,453 4.72% $505,961 $ 18,296 4.82%
---------- ---------- ---------- --------
Other liabilities 21,197 17,779
----------- ------------
Total liabilities $626,496 $523,740
Equity 47,011 53,683
----------- ------------
Total liabilities and equity $673,507 $577,423
=========== ============
Net interest income; interest rate spread $ 17,492 3.45% $ 15,839 3.49%
========== ========== ========== ========
Net interest margin (3) 3.67% 3.85%
========== ========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest on accruing loans past due 90 days or more.
(2) Includes primarily U.S. government securities.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
Page 12
<PAGE>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the increases
and decreases due to fluctuating outstanding balances that are due to the levels
and volatility of interest rates. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (i.e., changes in volume multiplied by old
rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume).
For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
------------------------------------------- --------------------------------------------
2000 vs 1999 2000 vs 1999
------------------------------------------- --------------------------------------------
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)
-------------- ------------ ------------ ------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $1,392 $ 251 $ 1,643 $ 4,367 $ (610) $ 3,757
Mortgage-backed securities 153 87 240 267 195 462
Other investment securities (2) 187 (6) 181 579 (74) 505
FHLB stock 28 4 32 88 (2) 86
-------------- ------------ ------------ ------------- ------------- -------------
Total interest-earning assets $1,760 $ 336 $ 2,096 $ 5,301 $ (491) $ 4,810
============== ============ ============ ============= ============= =============
Interest-bearing liabilities:
Deposits:
Checking and money market $ 411 $ 304 $ 715 $ 1,067 $ 519 $ 1,586
Savings (34) 65 31 (57) (41) (16)
Certificates of deposit 358 17 375 744 (601) 143
-------------- ------------ ------------ ------------- ------------- -------------
Total deposits 735 386 1,121 1,754 (41) 1,713
FHLB advances and other borrowings 315 52 367 1,420 24 1,444
-------------- ------------ ------------ ------------- ------------- -------------
Total interest-bearing liabilities $1,050 $ 438 $ 1,488 $ 3,174 $ (17) $ 3,157
============== ============ ============ ============= ============= =============
Net interest income increase $ 608 $ 1,653
============ =============
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest on accruing loans past due 90 days or more.
(2) Includes primarily U. S. government securities.
Page 13
<PAGE>
ASSET QUALITY
In accordance with the Bank's internal classification of assets policy,
management evaluates the loan portfolio on a monthly basis to identify loss
potential and determine the adequacy of the allowance for loan losses. The
following table sets forth the amounts and categories of the Bank's
nonperforming assets for the periods indicated.
<TABLE>
<CAPTION>
Nonperforming Assets As Of
-------------------------------------------
March 31, 2000 June 30, 1999
------------------ ------------------
(Dollars in Thousands)
<S> <C> <C>
Nonaccruing loans:
One- to four-family $ 174 $ 209
Commercial 27 46
Multi-family - - - - - - - -
Commercial business 1,134 111
Consumer 237 359
Agriculture 22 307
Credit cards - - - - - - - -
Mobile homes 13 13
------------------ ------------------
Total $ 1,607 $ 1,045
------------------ ------------------
Accruing loans delinquent more than 90 days:
One- to four-family $ - - - - $ - - - -
Commercial - - - - - - - -
Multi-family - - - - - - - -
Commercial business - - - - - - - -
Consumer - - - - - - - -
Agriculture - - - - - - - -
Credit cards 651 1,648
Mobile homes - - - - - - - -
------------------ ------------------
Total $ 651 $ 1,648
------------------ ------------------
Foreclosed assets: (2)
One- to four-family $ 169 $ 366
Commercial - - - - - - - -
Multi-family - - - - - - - -
Commercial business - - - - - - - -
Consumer 25 49
Agriculture - - - - - - - -
Credit cards - - - - - - - -
Mobile homes 9 49
------------------ ------------------
Total $ 203 $ 464
------------------ ------------------
Total nonperforming assets $ 2,461 $ 3,157
================== ==================
Ratio of nonperforming assets to total assets 0.35% 0.48%
================== ==================
Ratio of nonperforming loans to total loans (1) 0.42% 0.52%
================== ==================
- -----------------------------------------------------------------------------------------------------------
</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.
Page 14
<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 decreased from $3.2 million at June 30, 1999 to
$2.5 million at March 31, 2000, a decrease of $696,000. In addition, the ratio
of nonperforming assets to total assets, which is one indicator of credit risk
exposure, decreased to 0.35% at March 31, 2000 from 0.48% at June 30, 1999.
Nonaccruing loans increased from $1.0 million at June 30, 1999 to $1.6
million at March 31, 2000, an increase of $562,000. Included in nonaccruing
loans at March 31, 2000 were four loans totaling $174,000 secured by one- to
four-family real estate, one loan in the amount of $27,000 secured by commercial
real estate, eight loans totaling $1.1 million secured by commercial business,
two mobile home loans totaling $13,000, twenty-two consumer loans totaling
$237,000 and three agriculture loans totaling $22,000. For the nine months ended
March 31, 2000, gross interest income of $132,000 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 $241,000 was
recognized as income on loans accounted for on a nonaccrual basis.
Accruing credit card loans delinquent more than 90 days decreased from
$1.6 million at June 30, 1999 to $651,000 at March 31, 2000. Additionally, $1.6
million of credit card loans were delinquent 30 days at March 31, 2000 as
compared to $5.2 million at June 30, 1999. Management reviewed the 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 nine months ended March 31, 2000 were $7.5 million as
compared to $3.2 million for the same period in fiscal 1999. Using historical
stratification data on the current product, management expects credit card loan
write-offs not to exceed $3.0 million in the next six months. Of this amount
about 79% 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 32% of the outstanding credit card loan balance, or about $3.4 million.
The remaining 21% will be charged against deferred credit card fee income,
interest income and credit card fee income in future periods.
Foreclosed assets decreased from $464,000 at June 30, 1999 to $203,000
at March 31, 2000, a decrease of $261,000.
At March 31, 2000, the Bank had approximately $11.2 million of other
loans of concern that management has determined need to be closely monitored
because of possible credit problems of the borrowers or the cash flows of the
secured properties. These loans were considered in determining the adequacy of
the allowance for possible loan losses. The allowance for possible loan losses
is established based on management's evaluation of the risks inherent in the
loan portfolio and changes in the nature and volume of loan activity. Such
evaluation, which includes a review of all loans for which full collectability
may not be reasonably assured, considers the estimated fair market value of the
underlying collateral, economic conditions, historical loan loss experience and
other factors that warrant recognition in providing for an adequate loan loss
allowance. Although the Bank's management believes that the March 31, 2000
recorded allowance for loan losses was adequate to provide for potential losses
on the related loans, there can be no assurance that the allowance existing at
March 31, 2000 will be adequate in the future.
Page 15
<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>
Nine Months Ended March 31,
-------------------------------------
2000 1999
---------------- ---------------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of period $ 11,991 $ 7,199
CHARGE-OFFS:
One- to four-family (31) (48)
Commercial - - - - - - - -
Multi-family - - - - - - - -
Commercial business (20) (93)
Consumer (644) (700)
Agriculture (11) (487)
Credit cards (8,412) (3,356)
Mobile homes (30) (53)
---------------- ---------------
Total charge-offs $ (9,148) $ (4,737)
---------------- ---------------
RECOVERIES:
One- to four-family $ 11 $ 13
Commercial 6 - - - -
Multi-family - - - - - - - -
Commercial business - - - - 72
Consumer 219 156
Agriculture - - - - - - - -
Credit cards 935 178
Mobile homes 29 41
---------------- ---------------
Total recoveries $ 1,200 $ 460
---------------- ---------------
Net (charge-offs) $ (7,948) $ (4,277)
Additions charged to operations 4,412 5,299
---------------- ---------------
Balance at end of period $ 8,455 $ 8,221
================ ===============
Ratio of net (charge-offs) during the period to
average loans outstanding during the period (1.52)% (0.94)%
================ ===============
Ratio of allowance for loan losses to total loans at end
of period 1.56% 1.73%
================ ===============
Ratio of allowance for loan losses to nonperforming
loans at end of period (1) 374.45% 233.09%
================ ===============
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Nonperforming loans include nonaccruing loans and accruing loans delinquent
more than 90 days.
Page 16
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates indicated
is summarized as follows:
<TABLE>
<CAPTION>
At March 31, 2000 At June 30, 1999
------------------------------ ----------------------------
Percent of Percent of
Loans in Loans in
Each Each
Category to Category to
Amount Total Loans Amount Total Loans
-------------- ------------------------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
One- to four-family $1,239 23.93% $ 1,233 26.35%
Commercial and multi-family real estate (1) 1,271 24.53% 1,124 24.03%
Commercial business 695 13.41% 556 11.88%
Consumer (2) 1,502 29.01% 1,268 27.11%
Agricultural 312 6.03% 264 5.64%
Credit cards 3,376 1.94% 7,474 3.44%
Mobile homes 60 1.15% 72 1.55%
-------------- ------------- ------------ ------------
Total $8,455 100.00% $11,991 100.00%
============== ============= ============ ============
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes construction loans.
(2) Excludes allowance for loan losses relating to mobile home loans and
credit card loans.
The allowance for loan losses was $8.5 million at March 31, 2000 as
compared to $12.0 million at June 30, 1999. The ratio of the allowance for loan
losses to total loans was 1.56% at March 31, 2000 and 2.32% at June 30, 1999.
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. As of March 31, 2000,
$3.4 million of the $8.5 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 nine month
period ended March 31, 2000 and year 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.
Page 17
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
GENERAL. The Company's net income increased $1.5 million to $4.0 million
for the nine months ended March 31, 2000 as compared to $2.4 million for the
nine months ended March 31, 1999. As discussed in more detail below, this
increase was due primarily to an increase in net interest income of $1.7
million, a decrease in noninterest expense of $919,000 and a decrease in
provision for losses on loans of $887,000 which were partially offset by a
decrease in noninterest income of $1.1 million and an increase in income tax
expense of $791,000.
INTEREST INCOME. Interest income increased $4.8 million to $38.9
million for the nine months ended March 31, 2000 from $34.1 million for the nine
months ended March 31, 1999. This increase was primarily due to an increase in
the average balance of interest-earning assets and was partially offset by a
decrease in the average yield of interest-earning assets. The average balance of
interest-earning assets increased $87.5 million when comparing the nine months
ended March 31, 2000 to the same period in the prior fiscal year. The average
yield on interest-earning assets decreased from 8.31% to 8.16% for the nine
months ended March 31, 1999 and March 31, 2000, respectively.
INTEREST EXPENSE. Interest expense increased $3.2 million to $21.5
million for the nine months ended March 31, 2000 from $18.3 million for the nine
months ended March 31, 1999. This increase was largely attributable to an
increase in the average balance of interest-bearing liabilities of $99.3 million
and was partially offset by a decrease in the average rate paid on
interest-bearing liabilities. The average rates on interest-bearing liabilities
decreased from 4.82% to 4.72% for the nine months ended March 31, 1999 and March
31, 2000, respectively.
NET INTEREST INCOME. The Company's net interest income for the nine
months ended March 31, 2000 increased $1.7 million, or 10.4%, to $17.5 million
compared to $15.8 million for the same period in fiscal 1999. The net interest
spread on average interest-earning assets remained relatively stable at 3.45%
and 3.49% for the periods ended March 31, 2000 and March 31, 1999, respectively.
The increase in the net interest income is primarily due to the $87.5 million
increase in interest-earning assets at March 31, 2000 as compared to the same
period in the prior fiscal year.
During the nine months ended March 31, 2000, the Company increased its
average balances of commercial 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 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. During the nine months ended March 31,
2000, the Company recorded a provision for losses on loans of $4.4 million as
compared to $5.3 million for the nine months ended March 31, 1999. The provision
for losses on loans of $4.4 million for the nine months ended March 31, 2000
compared to the same period in fiscal 1999 is primarily due to management's
continued evaluation of the loan portfolio in light of general economic
conditions. See "Asset Quality" for further discussion.
NONINTEREST INCOME. Noninterest income was $11.8 million for the nine
months ended March 31, 2000 as compared to $13.0 million for the nine months
ended March 31, 1999, a decrease of $1.1 million.
The decrease in credit card fee income of $1.8 million for the nine
months ended March 31, 2000 as compared to the same period in fiscal 1999 is
primarily due to a decrease in fees received on unsecured credit cards. This is
a result of the credit card portfolio decreasing from to $20.0 million at March
31, 1999 as compared to $12.9 million at March 31, 2000. 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 credit card applications in March 1999. This will
continue to decrease the level of these fees. Interest income on credit card
loans is included in interest income on loans.
The increase in other income of $389,000 for the nine months ended
March 31, 2000 as compared to the same period in fiscal 1999 was primarily due
to an increase in commission and insurance income of $303,000.
NONINTEREST EXPENSE. Noninterest expense decreased $919,000 for the
nine months ended March 31, 2000 as compared to the same period in fiscal 1999
primarily due to a decrease in credit card processing expenses of $3.0 million
which was partially offset by an increase in compensation and employee benefits
of $1.4 million and other general and administrative expenses of $238,000.
Page 18
<PAGE>
There was a decrease of $3.0 million in the cost of third party
processors of 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 compensation and employee benefits was due primarily to
an increase of $838,000 paid to employees from new bank branches opened or
acquired since the last quarter of fiscal 1999.
INCOME TAX EXPENSE. The Company's income tax expense for the nine
months ended March 31, 2000 was $2.1 million as compared to $1.4 million for the
nine months ended March 31, 1999, an increase of $791,000. This increase was
primarily due to the increase in the Company's income before income tax.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
GENERAL. The Company's net income increased $1.3 million to $1.3 million
for the three months ended March 31, 2000 as compared to $47,000 for the three
months ended March 31, 1999. As discussed in more detail below, this increase
was due primarily to an increase in net interest income of $608,000 and a
decrease in noninterest expense of $765,000 which were partially offset by a
decrease in noninterest income of $685,000 and an increase in income tax expense
of $585,000.
INTEREST INCOME. Interest income increased $2.1 million to $13.5
million for the three months ended March 31, 2000 from $11.4 million for the
three months ended March 31, 1999. This increase was primarily due to an
increase in the average balance of interest-earning assets and an increase in
the average yield of interest-earning assets. The average balance of
interest-earning assets increased $86.5 million when comparing the three months
ended March 31, 2000 to the same period in the prior fiscal year. The average
yield on interest-earning assets increased from 8.15% to 8.30% for the three
months ended March 31, 1999 and March 31, 2000, respectively.
INTEREST EXPENSE. Interest expense increased $1.5 million to $7.6
million for the three months ended March 31, 2000 from $6.1 million for the
three months ended March 31, 1999. This increase was largely attributable to an
increase in the average balance of interest-bearing liabilities of $96.7 million
and an increase in the average rate paid on interest-bearing liabilities. The
average rates on interest-bearing liabilities increased from 4.72% to 4.92% for
the three months ended March 31, 1999 and March 31, 2000, respectively.
NET INTEREST INCOME. The Company's net interest income for the three
months ended March 31, 2000 increased $608,000, or 11.6%, to $5.9 million
compared to $5.3 million for the same period in fiscal 1999. The net interest
spread on average interest-earning assets decreased from 3.43% to 3.39% for the
periods ended March 31, 1999 and March 31, 2000, respectively. The increase in
the net interest income is primarily due to the $86.5 million increase in
interest-earning assets at March 31, 2000 as compared to the same period in the
prior fiscal year.
During the three months ended March 31, 2000, the Company increased its
average balances of commercial 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 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. During the three months ended March 31,
2000, the Company recorded a provision for losses on loans of $874,000 compared
to $2.0 million for the three months ended March 31, 1999. The provision for
losses on loans of $874,000 million for the three months ended March 31, 2000
compared to the same period in fiscal 1999 is primarily due to management's
continued evaluation of the loan portfolio in light of general economic
conditions. See "Asset Quality" for further discussion.
NONINTEREST INCOME. Noninterest income was $3.2 million for the three
months ended March 31, 2000 as compared to $3.9 million for the three months
ended March 31, 1999, a decrease of $685,000.
The decrease in credit card fee income of $1.4 million for the three
months ended March 31, 2000 as compared to the same period in fiscal 1999 is
primarily due to a decrease in fees received on unsecured credit cards. This is
a result of the credit card portfolio decreasing from $20.0 million at March 31,
1999 as compared to $12.9 million at March 31, 2000. The fee
Page 19
<PAGE>
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 credit card applications in March 1999. This will
continue to decrease the level of these fees. Interest income on credit card
loans is included in interest income on loans.
The increase in other income of $702,000 for the three months ended
March 31, 2000 as compared to the same period in fiscal 1999 was primarily due
to a change in minority interest of $472,000 and an increase in commission and
insurance income of $107,000.
NONINTEREST EXPENSE. Noninterest expense decreased $765,000 for the
three months ended March 31, 2000 as compared to the same period in fiscal 1999
primarily due to a decrease in credit card processing expenses of $1.5 million
and increases in compensation and employee benefits of $550,000 and occupancy
and equipment of $88,000.
There was a decrease of $1.5 million in the cost of third party
processors of 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 compensation and employee benefits was due primarily to
an increase of $277,000 paid to employees from new bank branches opened or
acquired since the last quarter of fiscal 1999.
INCOME TAX EXPENSE. The Company's income tax expense for the three
months ended March 31, 2000 was $716,000 as compared to $131,000 for the three
months ended March 31, 1999, an increase of $585,000. 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 March 31, 2000, the
Bank's liquidity ratio was 6.41%.
Liquidity management is both a daily and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected loan sales,
(iii) expected deposit flows, (iv) yields available on interest-bearing
deposits, and (v) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-bearing overnight deposits
and other short-term government and agency obligations. During the nine months
ended March 31, 2000, 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 $32.1 million. See
"Financial Condition Data" for further discussion.
The Bank anticipates that it will have sufficient funds available to
meet current loan commitments. At March 31, 2000, the Bank had outstanding
commitments to originate or purchase loans of $31.2 million and to sell loans of
$8.2 million. At March 31, 2000, 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.
Page 20
<PAGE>
The Company currently has in effect a stock buy back program in which up
to 10% of the common stock of the Company outstanding on March 26, 2000 may be
acquired through March 31, 2001. No shares of common stock have been purchased
pursuant to this current program. Pursuant to a series of stock buy back
programs initiated by the Company since 1996 the Company has purchased an
aggregate of 1,105,209 shares of common stock through March 31, 2000.
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 March 31, 2000, 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 5.90% at March 31, 2000.
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.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Page 21
<PAGE>
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
The composition of the Bank's balance sheet results in maturity
mismatches between interest-earning assets and interest-bearing liabilities. The
scheduled maturities of the Bank's fixed rate interest-earning assets are longer
than the scheduled maturities of its fixed rate interest-bearing liabilities.
This mismatch exposes the Bank to interest rate risk. In a rising rate scenario,
as measured by the OTS interest rate risk exposure simulation model, the
estimated market or portfolio value ("PV") of the Bank's assets would decline in
value to a greater degree than the change in the PV of the Bank's liabilities,
thereby reducing net portfolio value ("NPV"), the estimated market value of its
shareholders' equity.
As of September 30, 1999, under a rate shock scenario of plus 200 basis
points ("bp"), the Bank's pre-shock NPV ratio (NPV as a % of PV of assets) was
estimated in the OTS model to be 9.82%. The post-shock NPV ratio was estimated
to be 9.28%, a decline of 54bp. As of December 31, 1999, the most recent report
available, the Bank's sensitivity to interest rate changes remained comparative.
The post-shock ratio for a 200 bp decrease in market interest rates as of
December 31, 1999 was estimated to be 9.05%, a decrease of 52bp from the
pre-shock NPV ratio estimate of 9.57%.
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 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.
Page 22
<PAGE>
HF FINANCIAL CORP.
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS None
Item 2. CHANGES IN SECURITIES None
Item 3. DEFAULTS UPON SENIOR SECURITIES None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
Item 5. OTHER INFORMATION None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27.1 and Exhibit 27.2 are attached.
b. Refer to Form 8-K filed on March 24, 2000.
- --------------------------------------------------------------------------------
No other information is required to be filed under Part II of the form.
Page 23
<PAGE>
HF FINANCIAL CORP.
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HF Financial Corp.
----------------------------
(Registrant)
Date: May 10, 2000 by /s/ Curtis L. Hage
------------------------- --------------------------------------
Curtis L. Hage, Chairman, President
And Chief Executive Officer
(Duly Authorized Officer)
Date: May 10, 2000 by /s/ Brent E. Johnson
------------------------- --------------------------------------
Brent E. Johnson, Senior Vice
President, Chief Financial Officer
And Treasurer (Principal Financial
and Accounting Officer)
Page 24
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