<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-20956
HFB FINANCIAL CORPORATION
A Tennessee Corporation I.R.S. Employer
Identification
No. 61-1228266
Address Telephone Number
- ------- ----------------
1602 Cumberland Avenue (606) 248-1095
Middlesboro, Kentucky 40965
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the
preceding twelve 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 .
--- ---
The number of shares of the registrant's $1 par value common stock outstanding
at December 31, 1996 was 627,836.
There are a total of 18 pages filed in this document.
1
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HFB FINANCIAL CORPORATION
I N D E X
---------
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Earnings 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
PART II - OTHER INFORMATION 17
SIGNATURES 18
2
<PAGE>
HFB FINANCIAL CORPORATION
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1996 1996
------------------ -----------------
<S> <C> <C>
Cash and equivalents $5,058,951 $4,744,672
Trading securities, at fair value 594,479 246,500
Investment securities, available for sale, at market value
(amortized cost of $14,438,590 and $13,245,033 at Dec. 31, 1996
and June 30, 1996, respectively) 14,426,027 13,160,481
Investment securities, held to maturity, at amortized cost
(including unrealized gain of $27,598 at Dec. 31, 1996, market value of
$10,060,198 and $9,405,221 at Dec 31, 1996 and June 30, 1996, respectively) 10,146,497 9,611,689
Loans receivable, net 99,657,063 95,973,650
Mortgage-backed securities, available for sale, at market value
(amortized cost of $7,391,421 and $7,857,319 at Dec. 31, 1996
and June 30, 1996, respectively) 7,312,587 7,677,022
Mortgage-backed securities, held to maturity, at amortized cost
(market value of $11,572,465 and $10,979,790 at Dec. 31, 1996
and June 30, 1996, respectively) 11,677,111 11,312,956
Accrued interest receivable 926,527 954,626
Real estate owned 215,971 -
Premises and equipment, net 2,278,734 2,370,438
Other assets (including prepaid income taxes of $-0- and $13,893
at Dec. 31, 1996 and June 30, 1996, respectively) 130,037 195,763
------------------ -----------------
Total assets $152,423,984 $146,247,797
================== =================
Liabilities and Stockholders' Equity
Deposits $130,870,591 $126,742,237
Accrued interest on deposits 567,051 534,298
Advances from Federal Home Loan Bank 4,548,598 2,650,348
Advances from borrowers for taxes and insurance 103,672 137,152
Accrued expenses and other liabilities 642,652 570,077
Income taxes payable 166,449 41,418
------------------ -----------------
Total liabilities 136,899,013 130,675,530
------------------ -----------------
Commitments and contingencies - -
Stockholders' Equity
Preferred stock, $1 par value, authorized: 1,000,000 shares; none issued - -
Common stock, $1 par value; authorized: 5,000,000 shares: issued
and outstanding: 749,064 and 746,064 shares at Dec. 31, 1996 and
June 30, 1996, respectively 749,064 746,064
Additional paid-in capital 6,339,189 6,297,130
Less: Common stock acquired by ESOP with borrowed funds (167,543) (209,428)
Common stock acquired by Management Recognition Plan and
Supplemental Executive Retirement Plan (121,250) (121,250)
Common stock acquired by Rabbi trusts for deferred compensation plans (258,290) (258,290)
Treasury stock, at cost, 121,228 and 112,378 shares at Dec. 31, 1996 and
June 30, 1996, respectively (2,030,955) (1,826,405)
Net unrealized gain (loss) on securities available for sale (40,882) (149,320)
Retained earnings - substantially restricted 11,055,638 11,093,766
------------------ -----------------
Total stockholders' equity 15,524,971 15,572,267
------------------ -----------------
Total liabilities and stockholders' equity $152,423,984 $146,247,797
================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HFB FINANCIAL CORPORATION
Consolidated Statements of Earnings
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1996 1995 1996 1995
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $2,105,916 $1,914,389 $4,140,969 $3,756,274
Mortgage-backed securities 300,924 312,272 594,996 621,514
Trading account securities 1,516 - 2,976 -
Investment securities 394,711 267,033 775,591 531,590
Other interest-earning assets 36,145 33,448 79,493 82,018
------------ ------------ ------------ ------------
Total interest income 2,839,212 2,527,142 5,594,025 4,991,396
------------ ------------ ------------ ------------
Interest expense:
Deposits 1,569,499 1,445,937 3,145,191 2,817,110
Borrowed funds 45,003 38,302 81,427 95,400
------------ ------------ ------------ ------------
Total interest expense 1,614,502 1,484,239 3,226,618 2,912,510
------------ ------------ ------------ ------------
Net interest income 1,224,710 1,042,903 2,367,407 2,078,886
Provision for loan losses 8,812 17,458 86,559 19,408
------------ ------------ ------------ ------------
Net interest income after provision for
loan losses 1,215,898 1,025,445 2,280,848 2,059,478
------------ ------------ ------------ ------------
Noninterest income:
Loan service charges 16,291 6,242 24,924 15,160
Service charges on NOW accounts 75,999 65,397 148,228 130,665
Gain (loss) on trading account securities 67,463 - 120,633 -
Gain (loss) on sale of investment securities
available for sale 8,665 - 8,665 (625)
Gain (loss) on sale of premises and equipment 338 - 338 (2,590)
Other 14,292 14,774 30,571 27,703
------------ ------------ ------------ ------------
Total noninterest income 183,048 86,413 333,359 170,313
------------ ------------ ------------ ------------
Noninterest expense:
Compensation and benefits 348,538 404,680 737,948 791,645
Occupancy expense 54,869 46,085 103,751 82,374
Equipment and data processing expense 102,749 91,620 214,599 169,116
SAIF deposit insurance premium 56,712 61,776 127,381 123,442
SAIF special assessment - - 705,859
Professional services 60,198 54,807 110,905 88,914
Kentucky savings and loan tax 32,500 26,250 65,000 52,500
Other 165,080 175,981 290,464 293,356
------------ ------------ ------------ ------------
Total noninterest expense 820,646 861,199 2,355,907 1,601,347
------------ ------------ ------------ ------------
Earnings before income taxes 578,300 250,659 258,300 628,444
------------ ------------ ------------ ------------
Income taxes:
Current 168,675 56,259 60,250 180,859
Deferred 34,400 40,400 34,950 40,000
------------ ------------ ------------ ------------
Total income taxes 203,075 96,659 95,200 220,859
------------ ------------ ------------ ------------
Net earnings $375,225 $154,000 $163,100 $407,585
============ ============ ============ ============
Earnings per share $0.57 $0.23 $0.25 $0.61
============ ============ ============ ============
Dividends per share $0.00 $0.00 $0.32 $0.32
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HFB FINANCIAL CORPORATION
Consolidated Statement of Stockholders' Equity
Six months ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Additional MRP
Common Paid-in ESOP* and Rabbi Treasury
Stock Capital Debt SERP** Trusts Stock
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $746,064 $6,297,130 ($209,428) ($121,250) ($258,290) ($1,826,405)
Net earnings - - - - - -
Stock issued upon exercise
of stock options 3,000 38,854 - - - -
Dividends declared - - - - - -
Treasury stock-
8,850 shares purchased - - - - - (204,550)
Reduction of ESOP debt - 3,205 41,885 - - -
Net change in unrealized gain (loss)
on securities available for sale - - - - - -
--------------------------------------------------------------------------
Balance at December 31, 1996 $749,064 $6,339,189 ($167,543) ($121,250) ($258,290) ($2,030,955)
==========================================================================
<CAPTION>
Net Unrealized
Gain (Loss) on
Securities Total
Retained Available Stockholders'
Earnings for Sale Equity
---------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1996 $11,093,766 ($149,320) $15,572,267
Net earnings 163,100 - 163,100
Stock issued upon exercise
of stock options - - 41,854
Dividends declared (201,228) - (201,228)
Treasury stock-
8,850 shares purchased - - (204,550)
Reduction of ESOP debt - - 45,090
Net change in unrealized gain (loss)
on securities available for sale - 108,438 108,438
---------------------------------------------------
Balance at December 31, 1996 $11,055,638 ($40,882) $15,524,971
===================================================
</TABLE>
* Employees Stock Ownership Plan (ESOP)
** Management Recognition Plan (MRP) and Supplemental Executive Retirement Plan
(SERP)
See accompanying notes to consolidated financial statements.
5
<PAGE>
HFB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
1996 1995
------------------ ----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $163,100 $407,585
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment 115,419 72,258
Amortization of cost of ESOP 41,885 41,886
Distribution of Rabbi Trusts assets - 5,179
Amortization of cost of Management Recognition Plan - 18,300
Amortization of premiums and discounts on investment
securities and mortgage-backed securities 11,486 22,534
FHLB stock dividend (38,600) (36,100)
Deferred income taxes 34,950 40,000
Provision for loan losses 86,559 19,408
Loss (gain) on trading account securities (120,633) -
Sales of trading account securities 911,675 -
Purchases of trading account securities (1,139,021) -
Loss (gain) on sale of premises and equipment (338) 2,590
Loss (gain) on sale of investment securities
available for sale (8,665) 625
Decrease (increase) in accrued interest receivable 28,099 (67,275)
Decrease (increase) in other assets 51,833 10,129
Increase (decrease) in accrued interest on deposits 32,753 93,045
Increase (decrease) in accrued expenses and other liabilities 72,575 45,642
Increase (decrease) in income taxes payable 58,248 9,859
------------------ ----------------
Net cash provided by (used in) operating activities 301,325 685,665
------------------ ----------------
Cash flows from investing activities:
Principal collected on investment securities
available for sale 305,568 309,255
Proceeds from sales of investment securities
available for sale 2,504,062 1,999,375
Purchases of investment securities
available for sale (3,992,032) (2,475,156)
Proceeds from investment securities matured 1,002,776 2,653,352
Purchases of investment securities (1,500,000) (3,500,000)
Principal collected on mortgage-backed securities
available for sale 454,093 42,648
Purchases of mortgage-backed securities - (1,509,567)
available for sale
Principal collected on mortgage-backed securities 625,560 1,247,840
Purchases of mortgage-backed securities (996,012) -
Mortgage loans originated, net of principal collected (3,565,946) (4,023,603)
Purchases of, net of principal collected on, mortgage loans
serviced by other institutions 111,020 536,996
(Increase) decrease in consumer loans (630,104) (789,600)
Proceeds from sales of real estate owned - 93,307
Proceeds from sales of premises and equipment 901 4,200
Acquisition of premises and equipment used in
Bank's business (24,278) (575,553)
------------------ ----------------
Net cash provided by (used in) investing activities ($5,604,392) ($5,986,506)
------------------ ----------------
</TABLE>
(continued)
6
<PAGE>
HFB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows - Continued
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
1996 1995
----------------- ------------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from sale of common stock $30,000 $40,000
Purchase of treasury stock (204,550) (248,250)
Dividends paid to stockholders (201,228) (208,175)
Proceeds from advances from Federal Home Loan Bank 5,800,000 -
Repayment of advances from Federal
Home Loan Bank (3,901,750) (1,899,688)
Net increase (decrease) in deposits 4,128,354 7,473,999
Net increase (decrease) in advances from borrowers
for taxes and insurance (33,480) (49,031)
----------------- ------------------
Net cash provided by (used in) financing
activities 5,617,346 5,108,855
----------------- ------------------
Net increase (decrease) in cash and cash
equivalents 314,279 (191,986)
Cash and cash equivalents at beginning of
the period 4,744,672 4,010,205
----------------- ------------------
Cash and cash equivalents at end of
the period $5,058,951 $3,818,219
================= ==================
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $3,191,906 $2,825,257
================= ==================
Income taxes $2,002 $171,000
================= ==================
Noncash activity:
Acquisition of real estate in settlement of
loans $215,971 -
================= ==================
Transfer of investment securities, available for sale,
to held to maturity - $1,475,985
================= ==================
Transfer of investment securities, held to maturity,
to available for sale - $8,307,712
================= ==================
Transfer of mortgage-backed securities, held to maturity
to available for sale - $7,082,419
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
HFB FINANCIAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation:
The unaudited consolidated financial information for the three and six
month periods ended December 31, 1996 and 1995 includes the results of
operations of HFB Financial Corporation (the "Corporation") and its
wholly owned subsidiary Home Federal Bank, Federal Savings Bank ("Home
Federal" or the "Bank"). HFB Financial Corporation acquired 100 percent
of the Bank's stock during the completion of the Bank's conversion from
mutual to stock form on December 28, 1992. The accompanying unaudited
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q. It is suggested that these
statements and notes be read in conjunction with the financial
statements and notes thereto included in the Bank's annual report for
the year ended June 30, 1996 on Form 10-K filed with the Securities and
Exchange Commission.
In the opinion of management, the financial information reflects all
adjustments (consisting only of normal recurring adjustments) which are
necessary for a fair presentation of the results of operations for such
periods but should not be considered as indicative of results for a
full year.
2. Nonperforming Loans and Problem Assets
Management reviews the Bank's loans on a regular basis. After
residential mortgage loans become past due more that 90 days, the Bank
generally establishes an allowance for uncollectible interest for the
amount by which the principal balance and uncollected interest exceeds
90% of the appraised value of the property. Commercial and multi-family
real estate loans generally are placed on non-accrual status if the
borrower is placed in bankruptcy proceedings, or management concludes
that payment in full is not likely. Consumer and commercial loans
generally are charged off, or an allowance is established for any
expected loss after they become more than 90 days past due. The Bank
accrues interest on delinquent loans past due more than 90 days without
establishing a reserve when management concludes such action is
warranted, such as in the event the loan is exceptionally well
collateralized or the borrower establishes the temporary nature of the
delinquency. Loans are charged off when management concludes that they
are uncollectible.
The Bank's collection procedures provide that when a loan becomes past
due 30 days, the borrower is contacted in person or by telephone or
mail, and payment is requested. If payment is not promptly received,
the borrower is contacted again, and efforts are made to formulate an
affirmative plan to cure the delinquency. After a loan becomes past due
90 days the Bank generally initiates legal proceedings. Loans
delinquent 90 days or greater and still accruing are managed based on a
work out plan developed by the Bank. Interest accrues based on the work
out plan and the value of the collateral when collateral value is more
than sufficient to fully cover the loan balance. Interest is not
accrued on loans in the process of foreclosure.
8
<PAGE>
The following sets forth information with respect to the Bank's non-performing
assets at December 31, 1996 and June 30, 1996:
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ --------
<S> <C> <C>
Loans accounted for on a nonaccrual basis (1) $- $-
--- ---
Accruing loans which are contractually past due
90 days or more: (1)
Real estate $206 $657
Consumer 3 3
Commercial - -
---- ----
$209 $660
==== ====
Total of nonaccrual and 90 days or more
past due loans $209 $660
Real estate owned 216 -
---- ----
Total non-performing assets $425 $660
==== ====
Nonaccrual and 90 days or more past due loans
as a percentage of total loans, net .21% .69%
==== ====
Nonaccrual and 90 days or more past due loans
as a percentage of total assets .14% .45%
==== ====
Non-performing assets as a percentage of total assets .28% .45%
==== ====
</TABLE>
(1) Interest on delinquent loans is accrued to income to the extent
considered collectible. Nonaccrual loans did not have a material
effect on the Bank's interest income for the periods ended December
31, 1996 and June 30, 1996.
The Bank has a potential problem commercial real estate loan at December 31,
1996. The carrying amount of the loan is approximately $1.4 million. The
property is not generating sufficient cash flow to fund debt service payments.
The borrower was unable to fund the January, 1997 payment due and the Bank
funded $131,000 in working capital loans secured by a second mortgage on the
properties.
9
<PAGE>
The following sets forth the activity in the Bank's allowance for loan losses
for the six months ended December 31, 1996:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Balance at June 30, 1996 $671
Charge offs:
Domestic:
Commercial, financial and agricultural 68
Real estate-construction -
Real estate-mortgage -
Installment loans to individuals 2
---
70
---
Recoveries:
Domestic:
Commercial, financial and agricultural -
Real estate-construction -
Real estate-mortgage -
Installment loans to individuals -
---
-
---
Net charge offs (Recoveries): 70
Additions charged to operations 87
---
Balance December 31, 1996 $688
====
Ratio of net charge offs during the period to average
loans outstanding during the period .07%
====
</TABLE>
10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General:
HFB Financial Corporation, a Tennessee Corporation, was formed in September
1992 at the direction of Home Federal Bank, Federal Savings Bank for the purpose
of becoming a holding company for the Bank as part of its conversion from mutual
to stock form ("the "Conversion"). Prior to the Conversion, the Corporation did
not engage in any material operations and at December 31, 1996, its primary
operation was its investment in the common stock of the Bank.
The Bank is principally engaged in the business of accepting deposits from
the general public and originating permanent loans which are secured by one-to-
four family residential properties located in its market area. The Bank also
originates consumer loans and commercial real estate loans, and maintains a
substantial investment portfolio of mortgage-backed and other investment
securities.
The operations of Home Federal, and savings institutions generally, are
significantly influenced by general economic conditions and the monetary and
fiscal policies of government regulatory agencies. Deposit flows and costs of
funds are influenced by interest rates on competing investments and prevailing
market rates of interest. Lending activities are affected by the demand for
financing real estate and other types of loans, which in turn are influenced by
the interest rates at which such financing may be offered and other factors
related to loan demand and the availability of funds. Just as the Bank's
operations are influenced by regulatory authorities, so are its liquidity levels
and capital resources. As of December 31, 1996, management is not aware of any
current recommendations by the regulatory authorities, which if implemented,
would have a material effect on the Bank's operations, liquidity or resources.
Asset/Liability Management
Key components of a successful asset/liability strategy are the monitoring
and managing of interest rate sensitivity of both the interest-earning asset and
interest-bearing liability portfolios. Home Federal has employed various
strategies intended to minimize the adverse affect of interest rate risk on
future operations by providing a better match between the interest rate
sensitivity of its assets and liabilities. In particular, the Bank's strategies
are intended to stabilize net interest income for the long-term by protecting
its interest rate spread against increases in interest rates. Such strategies
include the origination of adjustable-rate mortgage loans secured by one-to-four
family residential real estate and the origination of consumer and other loans
with greater interest rate sensitivities than long-term, fixed-rate residential
mortgage loans. Although customers typically prefer fixed-rate mortgage loans
in a low interest rate environment, Home Federal has been successful in
originating adjustable-rate loans in recent years. In addition, the Bank has
used excess funds to invest in various short-term investments including
mortgage-backed securities with terms of seven years or less, U.S. Government
Treasury and Agency securities with terms of ten years or less and other short-
term investments.
Asset/liability management in the form of structuring cash instruments
provides greater flexibility to adjust exposure to interest rates. During
periods of high interest rates, management believes it is prudent to offer
competitive rates on short-term deposits and less competitive rates for long-
term liabilities. This posture allows the Bank to benefit quickly from declines
in interest rates. Likewise, offering more competitive rates on long-term
deposits during the low interest rate periods allows the Bank to extend the
repricing and/or maturity of its liabilities thus reducing its exposure to
rising interest rates.
Financial Condition
The Corporation's assets increased by 4.22% to $152.4 million at
December 31, 1996 compared to $146.2 million at June 30, 1996. The majority of
this increase is reflected in investment securities and loans receivable,
11
<PAGE>
which was primarily funded by an increase in deposits and short term borrowings.
Cash and cash equivalents increased by $300,000 to $5.0 million at
December 31, 1996 from $4.7 million at June 30, 1996. This increase was
primarily funded by increased deposits and borrowings in the quarter ended
December 31, 1996.
The Bank's asset composition continues to change due to volatility in
interest rates, aggressive competition and loan demand. The most significant
change in the asset mix is reflected in the Bank's loan portfolio. In the
current interest rate environment, a substantial portion of loans originated
were adjustable-rate residential mortgages. During the six months ended
December 31, 1996, the Bank originated $6.9 million in mortgages. Total loans
receivable, net increased 3.84% to $99.7 million at December 31, 1996 compared
to $96.0 million at June 30, 1996.
The Bank augments its lending activities and increases its asset yields by
investing in mortgage-backed securities "MBSs " and U.S. Government securities.
During the six months ended December 31, 1996, the investment and MBS
portfolio's increased $1.8 million to $43.6 million from $41.8 million at
June 30, 1996. During this period, management purchased $6.5 million in
investment securities and MBSs funded primarily by proceeds from called,
maturing and the sale of investment securities and principal collected on MBSs.
The remaining increase of $1.8 million was funded with excess liquidity. In
order to effectively manage these portfolios, the available for sale "AFS"
portfolios are maintained at approximately 50% of the total investment and MBS
portfolios. At December 31, 1996, investment securities, AFS and MBSs, AFS were
$21.7 million with a net unrealized loss of $91,000.
At December 31, 1996, the balance in real estate owned was $216,000
compared to $0 at June 30, 1996. The $216,000 balance represents an interest in
a commercial building in Nicholasville, Kentucky, which was obtained through
foreclosure during the quarter ended December 31, 1996. Management expects to
sell this property within the next six months with no loss.
Total deposits increased by $4.2 million to $130.9 million at December 31,
1996 from $126.7 million at June 30, 1996. The deposit mix continues to change
with low cost savings and money market deposit accounts shifting into higher
rate certificates of deposit ("CDs"). During the six months ended December 31,
1996, CDs increased $3.2 million and NOW accounts increased $1.3 million, while
passbook savings and money market deposit accounts decreased by $248,000.
Advances from borrowers for taxes and insurance decreased by $33,000 for the
six months ended December 31, 1996 due to the timing of tax and insurance
payments.
Accrued expenses and other liabilities increased by $73,000 during the six
months ended December 31, 1996 primarily as the result of the timing of payments
of Kentucky saving and loan taxes and other expenses.
Income taxes payable increased by $125,000 for the six months ended
December 31, 1996, due to the timing of tax payments.
Certain components of stockholders' equity increased during the six months
ended December 31, 1996 as the result of employee stock options exercised and a
reduction of the Employee Stock Ownership Plan debt. Also, 8,850 shares of
treasury stock were purchased at a cost of $205,000 during the six month period
ended December 31, 1996.
The Bank's regulatory liquidity ratio was 21.13% at December 31, 1996 as
compared to 21.29% at June 30, 1996. At December 31, 1996 the Bank met all the
fully phased-in regulatory capital requirements under FIRREA. Tangible, core
and risk-based capital ratios were 9.7%, 9.7% and 25.4% respectively at
December 31, 1996 as compared to 10.2%, 10.2% and 23.3% at June 30, 1996.
12
<PAGE>
Results of Operations for the Three Months Ended December 31, 1996 and 1995
Net earnings increased by $221,000 to $375,000 for the three months ended
December 31, 1996 from $154,000 for the three months ended December 31, 1995.
The primary reasons for the increase were a $182,000 increase in net interest
income, a $8,000 decrease in provision for loan losses, a $97,000 increase in
noninterest income and a $56,000 decrease in compensation and benefits offset by
a $16,000 increase in other non-interest expenses and a $106,000 increase in
income tax expense.
Net interest income increased by $182,000 for the three month period ended
December 31, 1996 as compared to the three month period ended December 31, 1995.
Interest income increased during the quarter as the result of an increase in
volume of net interest-earning assets.
Interest on loans increased by $192,000 to $2.106 million for the three month
period ended December 31, 1996 as compared to $1.914 million for the three month
period ended December 31, 1995. This increase is attributable to a higher
weighted average balance of loans receivable outstanding at a higher yield.
Interest on MBSs decreased by $11,000 to $301,000 during the three month
period ended December 31, 1996 from $312,000 for the three month period ended
December 31, 1995, primarily due to a lower weighted average balance
outstanding during the period ending December 31, 1996.
Interest on investment securities increased by $128,000 to $395,000 for the
three month period ended December 31, 1996 from $267,000 for the three month
period ended December 31, 1995. This increase was primarily due to increased
volume and higher rates on new purchases.
Interest on other interest-earning assets increased by $3,000 to $36,000 for
the three month period ended December 31, 1996 from $33,000 for the three month
period ended December 31, 1995 due to a higher level of interest-bearing cash
balances at higher yields.
Interest on deposits increased by $123,000 to $1.569 million for the three
month period ended December 31, 1996 from $1.446 million for the three month
period ended December 31, 1995 as a result of higher interest rates, higher
volume and a change in the overall deposit mix. Lower rate savings accounts
declined, while CDs increased.
Interest on borrowed funds increased by $7,000 to $45,000 for the three month
period ended December 31, 1996 from $38,000 for the three month period ended
December 31, 1995 due to higher levels of borrowing.
Provision for loan losses was $9,000 for the three month period ended
December 31, 1996 as compared to $17,000 for the three month period ended
December 31,1995. The decrease in the provision was a result of Management's
evaluation of the adequacy of the allowance for loan losses including
consideration of recoveries of loans previously charged off, the perceived risk
exposure among loan types, actual loss experience, delinquency rates, and
current economic conditions. The Bank's allowance for loan losses as a percent
of total loans at December 31, 1996 was .69%.
The Banks non-interest income increased by $97,000 to $183,000 for the three
month period ended December 31, 1996 as compared to $86,000 for the same period
in 1995. Service charges on deposit accounts increased by $11,000, loan service
charges increased by $10,000, gain on the sale of investment securities "AFS"
increased by $9,000 and gains on trading account securities increased by
$67,000.
Non-interest expense decreased by $40,000 to $821,000 for the three month
period ended December 31, 1996 as compared to $861,000 for the same period in
1995. Compensation and benefits decreased by $56,000 to $349,000 for the three
month period ended December 31, 1996 as compared to $405,000 for the same period
in 1995. This decrease is primarily attributable to a reduction in the funding
of the Bank's retirement plan.
13
<PAGE>
Occupancy expense increased by $9,000 to $55,000 for the three month period
ended December 31, 1996 compared to $46,000 for the same period in 1995. This
increase was mainly the result of expenses associated with the new branch office
in New Tazewell.
Equipment and data processing expense increased by $11,000 to $103,000 for
the three month period ended December 31, 1996 from $92,000 for the three month
period ended December 31, 1995 primarily due to increased data processing fees
and depreciation expense identifiable with the New Tazewell branch.
SAIF deposit insurance premiums decreased by $6,000 to $57,000 for the three
month period ended December 31, 1996 as compared to the three month period ended
December 31, 1995 due to lower premiums as a result of the recapitalization of
Savings Association Insurance Fund in September 1996. Professional services
increased by $5,000 to $60,000 for the quarter ended December 31, 1996 from
$55,000 for the same period in 1995 due to the cost of consultants used during
the period. That project was completed in November and the associated expense
ended at that point.
Kentucky savings and loan tax increased by $6,000 to $32,000 for the three
month period ended December 31, 1996 from $26,000 for the three month period
ended December 31, 1995 due to a higher level of deposits.
Other expense decreased by $11,000 to $165,000 for the three month period
ended December 31, 1996 from $176,000 for the three month period ended
December 31, 1995 as the result of small reductions in several expense
categories.
Income taxes increased by $106,000 to $203,000 for the three month period
ended December 31, 1996 compared to $97,000 for the three months ended
December 31, 1995 due to higher earnings.
Results of Operations for the Six Months Ended December 31, 1996 and 1995
Net earnings decreased by $245,000 to $163,000 for the six months ended
December 31, 1996 from $408,000 for the six months ended December 31, 1995. The
primary reasons for the decrease were a $289,000 increase in net interest
income, an increase of $163,000 in non-interest income and decrease of $126,000
in income tax expense offset by a $68,000 increase in provision for loan losses,
a $49,000 increase in non-interest expense and a one time SAIF special
assessment of $706,000.
Net interest income increased by $289,000 for the six month period ended
December 31, 1996 as compared to the six month period ended December 31, 1995.
During the six months ended December 31, 1996, the Bank's net interest income
increased primarily as a result of higher volume of net interest-earning assets.
Interest on loans increased by $385,000 to $4.141 million for the six month
period ended December 31, 1996 as compared to $3.756 million for the six month
period ended December 31, 1995. This increase is mainly attributable to a
higher volume of loans receivable outstanding.
Interest on MBSs decreased by $27,000 to $595,000 during the six month
period ended December 31, 1996 from $622,000 on for the six month period ended
December 31, 1995 primarily due to a lower weighted average balance.
Interest on investment securities increased by $244,000 to $776,000 for the
six month period ended December 31, 1996 from $532,000 for the six month period
ended December 31, 1995. This increase was primarily due to increased volume
and higher yields on new purchases.
Interest on deposits increased by $328,000 to $3.145 million for the six
month period ended December 31, 1996 from $2.817 million for the six month
period ended December 31, 1995 as a result of higher interest rates,
14
<PAGE>
higher volume and a change in the overall deposit mix. Lower rate NOW accounts
and savings accounts declined, while CDs increased.
Interest on borrowed funds decreased by $14,000 to $81,000 for the six month
period ended December 31, 1996 from $95,000 for the six month period ended
December 31, 1995 due to lower levels of borrowing.
Provision for loan losses increased by $68,000 to $87,000 for the six month
period ended December 31, 1996 compared $19,000 for the six month period ended
December 31, 1995. This level of provision was a result of Management's
evaluation of the adequacy of the allowance for loan losses including
consideration of recoveries of loans previously charged off, the perceived risk
exposure among loan types, actual loss experience, delinquency rates, and
current economic conditions. During the quarter ended September 30, 1996, a
provision of $68,000 was made to cover possible losses on a participation loan
secured by commercial real estate. The Bank's allowance for loan losses as a
percent of total loans at December 31, 1996 was .69%.
The Banks non-interest income increased by $163,000 to $333,000 for the six
month period ended December 31, 1996 as compared to $170,000 for the same period
in 1995. Loan service charges increased by $10,000, service charges on deposit
accounts increased by $18,000, a net gain on the sale of trading account
securities increased by $121,000, and a net gain on the sale of investment
securities AFS, accounting for most of the increase. There were no significant
changes in any other single category of non-interest income.
Non-interest expense increased by $755,000 to $2.356 million for the six
month period ended December 31, 1996 as compared to $1.601 million for the same
period in 1995. Compensation and benefits decreased by $54,000 to $738,000 for
the six month period ended December 31, 1996 as compared to $792,000 for the
same period in 1995. This decrease is primarily due to a reduction in the cost
funding the Bank's retirement plan.
Occupancy expense increased by $22,000 to $104,000 for the six month period
ended December 31, 1996 compared to $82,000 for the same period in 1995. This
increase was mainly the result of expenses associated with the new branch office
in New Tazewell, which started operations in October 1996.
Equipment and data processing expense increased by $46,000 to $215,000 for
the six month period ended December 31, 1996 from $169,000 for the six month
period ended December 31, 1995 primarily due to increased data processing fees
and depreciation expense identifiable with the New Tazewell branch.
The Banks Federal deposit insurance premium increased by $4,000 to $127,000
for the six month period ended December 31, 1996 from $123,000 for the six
month period ended December 31, 1995 due to a higher level of deposits. As a
result of the legislation enacted to recapitalize the SAIF, the Bank's federal
deposit insurance premium will be effectively reduced by approximately $18,000
per month beginning January 1, 1997. In addition to the Bank's regular deposit
insurance assessment, a one time special assessment of $706,000 in accordance
with legislation enacted on September 30, 1996 for the recapitalizion of the
SAIF was expensed during the six months ended December 31, 1996.
Professional services increased by $22,000 to $111,000 for the six month
period ended December 31, 1996 compared to $89,000 for the same period in 1995.
Most of this increase consisted of $18,000 in consulting fees. The Bank employed
consultants to improve its operations during the six months ended December 31,
1996. The project was completed in November 1996 and the associated expense
ended at that point.
Kentucky savings and loan tax increased by $12,000 to $65,000 for the six
month period ended December 31, 1996 from $53,000 for the six month period ended
December 31, 1995 due to a higher level of deposits.
Other expense decreased by $3,000 to $290,000 for six the month period ended
December 31, 1996 from $293,000 for the six month period ended December 31,
1995. There were no major deviations in any one category of other expenses
during the six months ended December 31, 1996 as compared to the six months
ended December
15
<PAGE>
31, 1995.
Income taxes decreased by $126,000 to $95,000 for the six month period ended
December 31, 1996 compared to $221,000 for the six months ended December 31,
1995 due to lower earnings.
16
<PAGE>
HFB FINANCIAL CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults in 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. Exhibits
None
17
<PAGE>
HFB FINANCIAL CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned, thereunto duly authorized.
HFB FINANCIAL CORPORATION
By: /s/ David B. Cook
-------------------------------
David B. Cook
President and
Chief Executive Officer
By: /s/ Stanley Alexander, Jr.
-------------------------------
Stanley Alexander, Jr.
Chief Financial Officer
Dated: February 10, 1997
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 2,234,458
<INT-BEARING-DEPOSITS> 2,624,493
<FED-FUNDS-SOLD> 200,000
<TRADING-ASSETS> 594,479
<INVESTMENTS-HELD-FOR-SALE> 21,738,614
<INVESTMENTS-CARRYING> 21,823,608
<INVESTMENTS-MARKET> 21,632,663
<LOANS> 100,345,131
<ALLOWANCE> 688,068
<TOTAL-ASSETS> 152,423,984
<DEPOSITS> 130,780,591
<SHORT-TERM> 3,800,000
<LIABILITIES-OTHER> 1,569,824
<LONG-TERM> 748,598
0
0
<COMMON> 4,469,333
<OTHER-SE> 11,055,638
<TOTAL-LIABILITIES-AND-EQUITY> 152,423,984
<INTEREST-LOAN> 4,140,969
<INTEREST-INVEST> 1,373,563
<INTEREST-OTHER> 79,493
<INTEREST-TOTAL> 5,594,025
<INTEREST-DEPOSIT> 3,145,191
<INTEREST-EXPENSE> 3,226,618
<INTEREST-INCOME-NET> 2,367,407
<LOAN-LOSSES> 86,559
<SECURITIES-GAINS> 8,665
<EXPENSE-OTHER> 2,355,907
<INCOME-PRETAX> 258,300
<INCOME-PRE-EXTRAORDINARY> 258,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 163,100
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<YIELD-ACTUAL> 3.33
<LOANS-NON> 0
<LOANS-PAST> 209,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,400,000
<ALLOWANCE-OPEN> 671,000
<CHARGE-OFFS> 70,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 688,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 688,000
</TABLE>
