<PAGE>
<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, 1997
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, 1997 was 1,083,626.
There are a total of 18 pages filed in this document.<PAGE>
<PAGE>
HFB FINANCIAL CORPORATION
I N D E X
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statement of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
PART II - OTHER INFORMATION 17
SIGNATURES 18
<PAGE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 5,014,345 $ 3,794,637
Trading account securities 1,085,200 795,555
Investment securities
Available for sale 26,050,140 25,112,540
Held to maturity 18,816,975 20,206,502
------------ ------------
Total investment securities 44,867,115 45,319,042
Loans 110,632,365 105,694,555
Allowance for loan losses (846,095) (710,168)
------------ ------------
Net loans 109,786,270 104,984,387
Premises and equipment 2,085,978 2,167,393
Federal Home Loan Bank stock 1,212,100 1,169,100
Interest receivable 1,280,515 1,074,282
Other assets 217,346 152,571
------------ ------------
Total assets 165,548,869 159,456,967
============ ============
LIABILITIES
Deposits
Interest bearing $135,018,409 $131,130,405
Non-interest bearing 2,383,515 2,072,137
------------ ------------
Total 137,401,924 133,202,542
Short-term borrowings 8,500,000 7,500,000
Long-term debt 691,769 720,753
Interest payable 538,018 548,233
Other liabilities 1,119,177 918,412
------------ ------------
Total liabilities 148,250,888 142,889,940
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value
Authorized and unissued
-- 1,000,000 shares -- --
Common stock, $1 par value
Issued and outstanding
-- 1,285,673 shares 1,285,673 1,285,673
Additional paid-in capital 6,098,357 6,094,551
Less: Common stock acquired by ESOP (83,620) (125,422)
Common stock acquired by Management
Recognition Plan and Supplemental
Executive Retirement Plan (93,950) (100,950)
Common stock acquired by Rabbi trusts
for deferred compensation plans (294,410) (283,259)
Treasury stock, at cost, 202,047 shares (2,030,955) (2,030,955)
Retained earnings 12,279,378 11,717,514
Net unrealized gain on securities available
for sale 137,508 9,875
------------ ------------
Total stockholders' equity 17,297,981 16,567,027
------------ ------------
Total liabilities and stockholders' equity $165,548,869 $159,456,967
============ ============
</TABLE>
See notes to consolidated financial statements.
3<PAGE>
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $2,385,871 $2,163,827 $4,780,783 $4,258,188
Investment securities 717,012 676,114 1,428,552 1,331,879
Other dividend income 16,063 22,526 43,117 42,664
Deposits with financial
institutions 49,168 34,659 85,020 78,514
---------- ---------- ---------- ----------
Total interest income 3,168,114 2,897,125 6,337,472 5,711,244
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 1,650,570 1,569,498 3,254,719 3,145,191
Short term borrowings 123,203 29,846 231,445 50,819
Long term debt 14,020 15,157 28,333 30,608
---------- ---------- ---------- ----------
Total interest expense 1,787,794 1,614,501 3,514,498 3,226,618
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,380,320 1,282,625 2,822,974 2,484,627
Provision for loan losses 67,972 9,430 135,927 87,177
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,312,348 1,273,194 2,687,047 2,397,449
---------- ---------- ---------- ----------
OTHER INCOME
Service charges for deposit accounts 104,862 76,758 204,380 149,518
Other customer fees 16,400 21,902 27,437 32,089
Net gain on trading securities 38,539 67,463 206,362 120,633
Net realized gain (loss) on sales
of available for sale securities 1,254 8,665 8,877 8,665
Other income 11,425 11,745 21,188 24,878
---------- ---------- ---------- ----------
Total other income 172,479 186,534 468,243 335,784
---------- ---------- ---------- ----------
OTHER EXPENSES
Salaries and employee benefits 469,849 398,379 963,867 840,275
Net occupancy expenses 43,374 60,510 81,050 115,151
Equipment expenses 69,228 56,338 141,819 107,779
Data processing fees 63,197 54,888 125,030 103,349
Deposit insurance expense 20,969 56,712 42,073 127,381
SAIF special assessment 705,859
Legal and professional fees 47,276 60,198 84,834 110,905
Advertising 49,325 35,838 69,893 60,336
State franchise and deposit taxes 30,920 35,170 62,289 75,030
Other expenses 143,948 123,396 260,715 228,869
---------- ---------- ---------- ----------
Total other expenses 938,085 881,428 1,831,569 2,474,933
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX 546,742 578,300 1,323,721 258,300
Income tax expense 207,765 203,075 534,294 95,200
---------- ---------- ---------- ----------
NET INCOME $ 338,977 $ 375,225 $ 789,427 $ 163,100
========== ========== ========== ==========
NET INCOME PER SHARE
Basic $ .31 $ .36 $ .73 $ .16
Diluted $ .30 $ .34 $ .71 $ .15
</TABLE>
See notes to consolidated financial statements.
4<PAGE>
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
ADDITIONAL MRP
COMMON PAID-IN ESOP AND RABBI
STOCK CAPITAL DEBT SERP TRUSTS
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCES, JUNE 30, 1997 $1,285,673 $6,094,551 $(125,422) $(100,950) $ 283,259
Net earnings
Dividends Declared
Reduction of ESOP debt 41,802
Stock issued under MRP 7,000
Stock purchased by Rabbi
trusts (11,151)
Net change in unrealized
gain on securities
available for sale
Tax benefit of employee
benefit plans 3,806
---------- ---------- ---------- ---------- ---------
BALANCES, DECEMBER 31, 1997 $1,285,673 $6,098,357 $ (83,620) $ (93,950) $(294,410)
========== ========== ========== ========== =========
<CAPTION>
NET UNREALIZED
GAIN ON
SECURITIES TOTAL
TREASURY RETAINED AVAILABLE STOCKHOLDERS'
STOCK EARNINGS FOR SALE EQUITY
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCES, JUNE 30, 1997 $(2,030,955) $11,717,514 $ 9,875 $16,567,027
Net earnings 789,427 789,427
Dividends Declared (227,563) (227,563)
Reduction of ESOP debt 41,802
Stock issued under MRP 7,000
Stock purchased by Rabbi
trusts (11,151)
Net change in unrealized
gain on securities
available for sale 127,633 127,633
Tax benefit of employee
benefit plans 3,806
----------- ----------- ---------- -----------
BALANCES, DECEMBER 31, 1997 $(2,030,955) $12,279,378 $ 137,508 $17,297,981
=========== =========== ========== ===========
</TABLE>
__________
* Employees Stock Ownership Plan (ESOP)
** Management Recognition Plan (MRP) and Supplemental Executive
Retirement Plan (SERP)
See notes to consolidated financial statements.
5<PAGE>
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 789,427 $ 163,100
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 135,927 87,177
Depreciation and amortization
Property and equipment 122,033 115,419
Cost of ESOP and MRP 48,802 41,885
Investment securities 10,177 11,486
FHLB stock dividend (43,000) (38,600)
Deferred income tax 7,000 34,950
Net change in
Trading account securities (289,645) (347,979)
Interest receivable (206,233) 28,099
Interest payable (10,215) 32,753
Other assets (64,776) 51,833
Other liabilities 125,032 96,725
Other (9,003)
---------- ----------
Net cash provided by operating
activities 624,529 267,845
---------- ----------
INVESTING ACTIVITIES
Purchases of securities available for sale (3,168,965) (3,992,032)
Purchases of securities held to maturity (1,621,117) (2,496,012)
Proceeds from maturities of securities
available for sale 663,911 759,661
Proceeds from sales of securities available
for sale 1,784,398 2,504,062
Proceeds from maturities of securities
held to maturity 3,001,694 1,628,336
Net change in loans (4,937,809) (3,985,030)
Purchases of premises and equipment (40,618) (23,377)
---------- ----------
Net cash used by investing activities (4,336,506) (5,604,392)
---------- ----------
</TABLE>
(continued)
6<PAGE>
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
FINANCING ACTIVITIES
Net change in
Non interest-bearing, interest-bearing
and savings deposits $ (171,037) $ 540,710
Certificates of deposit 4,370,420 3,587,644
Short term borrowings 1,000,000 1,871,500
Repayment of long-term debt (28,984) 26,750
Cash dividends (227,563) (201,228)
Purchase of stock -- (204,550)
Sale of common stock -- 30,000
Common stock acquired by Rabbi trusts (11,151) --
---------- ----------
Net cash used by financing activities 4,931,685 5,650,826
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,219,708 314,279
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,794,637 4,744,672
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 5,014,345 5,058,951
========== ==========
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $3,524,713 $3,191,906
Income tax paid 530,196 2,002
</TABLE>
See notes to consolidated financial statements.
7<PAGE>
<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, 1997 and
1996 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, 1997 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 than
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.
Real estate acquired by the Bank as a result of foreclosure
is classified as real estate owned until such time as it is
sold. When such property is acquired, it is recorded at
the lower of the unpaid principal balance or its fair value
less estimated selling cost. Any required write-down of
the loan to its fair market value upon foreclosure is
charged against the allowance for loan losses.
The accrual of interest on impaired loans is discontinued
when, in Management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual
is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the
extent cash payments are received.
8<PAGE>
<PAGE>
The following sets forth information with respect to the Bank's
non-performing assets at December 31, 1997 and June 30, 1997:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Accruing loans which are contractually
past due 90 days or more:
Real estate $ 292 $ 365
Consumer 32 3
------ ------
$ 327 $ 660
Real estate owned 53 58
------ ------
Total non-performing assets $ 377 $ 426
====== ======
Nonaccrual and 90 days or more past due loans
as a percentage of total loans, net (1) .30% .35%
====== ======
Nonaccrual and 90 days or more past due loans
as a percentage of total assets .20% .23%
====== ======
Non-performing assets as a percentage of total
assets .23% .27%
====== ======
</TABLE>
_______________
(1) The Bank had no nonaccrual loans at December 31, 1997 and
June 30, 1997.
The Bank has several potential problem commercial real estate
loans to one borrower at December 31, 1997. The carrying amount
of these loans is approximately $1.3 million, including a
$131,000 working capital loan funded in January 1997. The
properties securing these loans are not generating sufficient
cash flow to fund debt service payments and the borrower has
been 30 to 60 days in arrears on the loan during the quarter.
The borrower has obtained funds from another source to make the
most recent payments on this indebtedness. The loans were
current on December 31, 1997. Management is currently
evaluating the collectibility of these loans and assessing the
possibility of any losses the Bank could incur.
The following sets forth the activity in the Bank's allowance
for loan losses for the six months ended December 31, 1997 and
1996:
1997 1996
------ ------
(Dollars in thousands)
Balance at July 1 $ 710 $ 671
Charge offs -- 70
Provision for loan losses 136 87
------ ------
Balance December 31 $ 846 $ 688
Ratio of net charge offs during
the period to average loans
outstanding during the period .00% .07%
====== ======
9<PAGE>
<PAGE>
3. EARNINGS PER SHARE
Earnings per share were computed as follows:
<TABLE>
<CAPTION>
Weighted
Average Per Share
Income Shares Amount
-------- ---------- ---------
<S> <C> <C> <C>
Three Months Ended December 31, 1997
Net Income $ 339
------
Basic Earnings Per Share $ .31
Income available to common
stockholder 339 1,083,626
Effect of Diluted Securities
Stock options -- 27,010
---------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $ 339 1,110,636 $ .30
====== ========= ======
Six Months Ended December 31, 1997
Net Income $ 789
------
Basic Earnings Per Share $ .73
Income available to common
stockholder 789 1,109,669
Effect of Diluted Securities
Stock options 26,043
------ ---------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $ 789 1,135,712 $ .71
====== ========= ======
Three Months Ended December 31, 1996
Net Income $ 375
------
Basic Earnings Per Share $ .36
Income available to common
stockholder 375 1,044,998
Effect of Diluted Securities
Stock options 44,696
---------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $ 375 1,089,694 $ .34
====== ========= ======
Six Months Ended December 31, 1996
Net Income $ 163
------
Basic Earnings Per Share $ .16
Income available to common
stockholder 1,048,385
Effect of Diluted Securities
Stock options 46,372
------ ---------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $ 163 1,094,757 $ .15
====== ========= ======
</TABLE>
10<PAGE>
<PAGE>
4. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued
Statement No. 128, "Earnings Per Share." This statement
simplifies the computation of earnings per share and
requires dual presentation of basic and diluted earnings
per share on the face of the income statement. The
statement is effective for financial statements issued for
periods ending after December 15, 1997, with earlier
application not permitted. The application of this
standard did not have a significant impact on the Companies
earnings per share presentation in this report.
The Financial Accounting Standards Board has also issued
Statement No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of
comprehensive income and its components. In addition, the
Financial Accounting Standards Board has issued Statement
No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes standards for
disclosing information about operating segments in interim
and annual financial statements. The Company will comply
with the new disclosure requirements beginning in fiscal
1999. The application of these pronouncements will not
have a material impact on the Company's financial condition
or results of operations.
ITEM 2 - 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 Corporation's primary operation is 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,
1997, 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.
YEAR 2000 ISSUES
The Bank has an ongoing program to insure that its
operational and financial systems will not be adversely affected
by Year 2000 software failures. While the Bank believes it is
taking all appropriate steps to assure Year 2000 compliance, it
is dependent on vendor compliance to some extent. The Bank is
requiring its systems and software vendors to represent that the
products and services provided are, or will be, Year 2000
compliant, and has planned a program for testing compliance.
The Bank estimates that the cost to redevelop, replace or repair
its technology will not be material.
11<PAGE>
<PAGE>
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 3.76% to $165.5
million at December 31, 1997 compared to $159.5 million at June
30, 1997. The majority of this increase is reflected in cash
and due from banks and loans receivable, which was primarily
funded by an increase in deposits.
Cash and cash equivalents increased by $1.2 million to $5.0
million at December 31, 1997 from $3.8 million at June 30, 1997.
This increase was primarily the result of a decrease in
investment securities and an increase in deposits during the
six month period ended December 31, 1997.
The Company maintains a portfolio of trading account
securities which is comprised of common stock of other financial
institutions. The portfolio was $1.1 million at December 31,
1997 compared to $796,000 at June 30, 1997. Most of this
increase was attributable to market appreciation of the
underlying stocks.
The Bank's asset composition continues to change due to
volatility in interest rates and a strong loan demand. In the
current interest rate environment, a substantial portion of
loans originated were adjustable-rate residential mortgages.
During the six months ended December 31, 1997, the Bank
originated $24.0 million in mortgages. Total loans receivable,
net increased 4.57% to $109.8 million at December 31, 1997
compared to $105.0 million at June 30, 1997.
At December 31, 1997, allowance for loan losses was
$846,000 or .76% of loans receivable compared to $710,000 or
.67% of loans receivable at June 30, 1997. During the six
months ended December 31, 1997, the provision for loan losses
was $136,000. The Bank has several problem real estate loans to
one borrower at December 31, 1997. The carrying amount of these
loans is approximately $1.3 million including a $131,000 working
capital loan which was funded in January 1997. The properties
securing these loans are not generating sufficient cash flow to
fund debt service payments and the borrower has been 30 to 60
days in arrears on these loans during the six months ended
December 31, 1997. The borrower obtained funds from another
source to make the most recent payments on this indebtedness.
These loans were brought current on December 31, 1997. There
has been no improvement in cash flows since June 30, 1997 and
Management continues to closely monitor this credit as to its
collectibility and any possible losses the Bank could incur.
12<PAGE>
<PAGE>
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, 1997, management purchased $4.8 million in
investment securities and MBSs. These purchases were primarily
funded by proceeds from called and maturing investment
securities, principal collected on MBSs and investments, and the
sale of investment securities. At December 31, 1997, the Bank
held $26.1 million in investment securities, available for sale
with a net unrealized gain of $138,000 and $18.8 million in
investment securities held to maturity.
Accrued interest receivable increased by $207,000 from
$1.074 million at June 30, 1997 to $1.281 million at December
31, 1997 due to a higher volume of interest-earning assets and
the timing of interest payments.
Total deposits increased by $4.2 million to $137.4 million
at December 31, 1997 from $133.2 million at June 30, 1997.
During the six months ended December 31, 1997, certificates of
deposit increased $4.4 million and NOW accounts increased
$468,000, while passbook savings and money market deposit
accounts decreased by $637,000.
Federal Home Loan Bank advances increased by $1.0 million
during the six months ended December 31, 1997. These increases
were primarily used to fund increases in lending activities.
The Bank's regulatory liquidity ratio was 24.87% at
December 31, 1997 as compared to 21.5% at June 30, 1997. At
December 31, 1997 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 23.3%
respectively at December 31, 1997 as compared to 9.7%, 9.7% and
20.7% at June 30, 1997.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31,
1997 AND 1996
Net earnings decreased by $36,000 to $339,000 for the three
month period ended December 31, 1997 from $375,000 for the three
month period ended December 31, 1996. The primary reasons for
the increase were a $97,000 increase in net interest income
offset by, a $59,000 increase in provision for loan losses, a
decrease of $14,000 in noninterest income, a $57,000 increase in
noninterest expense and a $5,000 increase in income tax expense.
Net interest income increased by $97,000 for the three
month period ended December 31, 1997 as compared to the three
month period ended December 31, 1996. Interest income increased
during the quarter, primarily as the result of a higher level of
interest-earning assets.
Interest on loans increased by $222,000 to $2.386 million
for the three month period ended December 31, 1997 as compared
to $2.164 million for the three month period ended December 31,
1996. This increase is mainly attributable to a higher weighted
average balance of loans receivable outstanding.
Interest on investment securities increased by $41,000 to
$717,000 during the three month period ended December 31, 1997
from $676,000 for the three month period ended December 31,
1996, primarily due to higher yields.
Other dividend income decreased by $7,000 to $16,000 for
the three month period ended December 31, 1997 compared to
$23,000 for the three months ended December 31, 1996, due to the
timing of dividend payments.
<PAGE>
Interest on deposits with other financial institutions
increased by $14,000 to $49,000 for the three month period ended
December 31, 1997 from $35,000 for the three month period ended
December 31, 1996 due to a higher level of interest-bearing cash
balances.
Interest on deposits increased by $81,000 to $1.651 million
for the three month period ended December 31, 1997 from $1.570
million for the three month period ended December 31, 1996 as a
result of higher volume and a change in the overall deposit
mix. Lower rate savings accounts declined, while Certificates
of Deposits increased.
13<PAGE>
<PAGE>
Interest on short term borrowings and long term debt
increased by $92,000 to $137,000 for the three month period
ended December 31, 1997 from $45,000 for the three month period
ended December 31, 1996 due to higher levels of borrowing.
The provision for loan losses was $68,000 for the three
month period ended December 31, 1997 as compared to $9,000 for
the three month period ended December 31, 1996. The provision
was the 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, 1997 was
.76%.
The Banks non-interest income decreased by $14,000 to
$173,000 for the three month period ended December 31, 1997 as
compared to $187,000 for the same period in 1996. The decrease
was attributable to a decrease in realized and unrealized gains
on trading account securities and realized gains on sales of
investment securities, available for sale of $36,000, a decrease
of $6,000 in other customer fees, and an increase of $28,000 in
deposit service charge income. Trading account securities are
equity securities, which are subject to market fluctuations.
Non-interest expense increased by $57,000 to $938,000 for
the three month period ended December 31, 1997 as compared to
$881,000 for the same period in 1996. Compensation and benefits
increased by $72,000 to $470,000 for the three month period
ended December 31, 1997 as compared to $398,000 for the same
period in 1996. This increase is primarily attributable to a
general increase in salaries and wages and performance bonuses
paid during the quarter ended December 31, 1997.
Occupancy expense decreased by $18,000 to $43,000 for the
three month period ended December 31, 1997 compared to $61,000
for the same period in 1996. This decrease was mainly the result
of decreased property taxes and depreciation expense.
Equipment expense increased by $13,000 to $69,000 for the
three month period ended December 31, 1997 from $56,000 for the
three month period ended December 31, 1996 primarily due to
higher depreciation expense.
Data processing expense increased by $8,000 to $63,000 for
the three month period ended December 31, 1997 from $55,000 for
the three month period ended December 31, 1996 primarily due to
an increased level of data processing services. In addition,
the Bank has entered into an agreement with a new vendor for
data processing services beginning in March 1998. As a result,
the Bank will incur additional expenses during the conversion
from its present system to the new system. The Bank also
expects to be penalized for breaking its' present contract for
ATM processing services. Management expects these expenses to
be immaterial to the Company's consolidated financial
statements.
SAIF deposit insurance premiums decreased by $36,000 to
$21,000 for the three month period ended December 31, 1997 as
compared to $57,000 for the three month period ended December
31, 1996 due to lower SAIF premiums.
Professional services decreased by $13,000 for the three
month period ended December 31, 1997 primarily due to lower
accounting and consulting fees. Most of this decrease was
attributable to fees paid to consultants for recommendations to
improve the Bank's operational procedures during the quarter
ended December 31, 1996.
Advertising expense increased by $13,000 to $49,000 for the
quarter ended December 31, 1997 compared to $36,000 for the
quarter ended December 31, 1996 primarily due to the Bank's new
logo campaign launched in the quarter ended December 31, 1997.
14<PAGE>
<PAGE>
State franchise and deposit taxes decreased by $4,000 to
$31,000 for the three month period ended December 31, 1997
compared to $35,000 for the three month period ended December
31, 1996 due to a change in the Bank's estimated liability.
Other expense increased by $21,000 to $144,000 for three
the month period ended December 31, 1997 from $123,000 for the
three month period ended December 31, 1996 as the result of
small increases in several expense categories.
Income taxes increased by $5,000 to $208,000 for the three
month period ended December 31, 1997 compared to $203,000 for
the three months ended December 31, 1996 due to higher earnings.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
AND 1996
Net earnings increased by $626,000 to $789,000 for the six
month period ended December 31, 1997 from $163,000 for the six
month period ended December 31, 1996. The primary reasons for
the decrease were a $338,000 increase in net interest income, an
increase of $132,000 in noninterest income, a decrease of
$644,000 in noninterest expense offset by an increase of $49,000
in the provision for loan losses and an increase of $439,000 in
income tax expense.
Net interest income increased by $338,000 for the six month
period ended December 31, 1997 as compared to the six month
period ended December 31, 1996. During the six months ended
December 31, 1997, the Bank's net interest income increased
primarily as the result of a higher volume of net
interest-earning assets.
Interest on loans increased by $523,000 to $4.781 million
for the six month period ended December 31, 1997 as compared to
$4.258 million for the six month period ended December 31, 1996.
This increase is mainly attributable to a higher weighted
average balance of loans receivable outstanding.
Interest on investment securities increased by $97,000 to
$1.429 million during the six month period ended December 31,
1997 from $1.332 million for the six month period ended December
31, 1996 primarily due to higher yields.
Interest on deposits with other financial institutions
increased by $6,000 to $85,000 for the six month period ended
December 31, 1997 from $79,000 for the six month period ended
December 31, 1996 due to higher levels of interest-bearing cash
balances.
Interest on deposits increased by $110,000 to $3.255
million for the six month period ended December 31, 1997 from
$3.145 million for the six month period ended December 31, 1996
as a result of higher volume and a change in the overall deposit
mix. Lower rate savings accounts declined, while Certificates
of Deposits increased.
Interest on short term borrowings and long term debt
borrowed funds increased by $179,000 to $260,000 for the six
month period ended December 31, 1997 from $81,000 for the six
month period ended December 31, 1996 due to higher levels of
borrowing.
The provision for loan losses increased by $49,000 for the
six month period ended December 31, 1997 compared to the six
month period ended December 31, 1996. 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. The Bank's allowance for loan
losses as a percent of total loans at December 31, 1997 was
.76%.
The Banks non-interest income increased by $132,000 to
$468,000 for the six month period ended December 31, 1997 as
compared to $336,000 for the same period in 1996. Gains from
the sale of trading account securities and
15<PAGE>
<PAGE>
investment securities, available for sale increased by $86,000
for the six months ended December 31, 1997 as compared to the
six month period ended December 31, 1996. Service charges on
deposit accounts increased by $54,000 and other customer fees
decreased by $5,000. Other noninterest income decreased by
$4,000 for the six months ended December 31, 1997 with no
significant change in any other single category.
Non-interest expense increased by $643,000 to $1.832
million for the six month period ended December 31, 1997 as
compared to $2.475 million for the same period in 1996.
Compensation and benefits increased by $124,000 to $964,000 for
the six month period ended December 31, 1997 as compared to
$840,000 for the same period in 1996. This increase is
primarily due to a general increase in salaries and wages and
performance bonuses paid in the quarter ended December 31, 1997.
Occupancy expense decreased by $34,000 to $81,000 for the
six month period ended December 31, 1997 compared to $115,000
for the same period in 1996. This decrease was mainly the result
of decreased repairs and maintenance and depreciation expenses.
Equipment expense increased by $34,000 to $142,000 for the
six month period ended December 31, 1997 from $108,000 for the
six month period ended December 31, 1996 primarily due to
increased depreciation expense associated with the New Tazewell
branch.
Data processing expense increased by $8,000 to $63,000 for
the three month period ended December 31, 1997 from $55,000 for
the three month period ended December 31, 1996 primarily due to
an increased level of data processing services. In addition,
the Bank has entered into an agreement with a new vendor for
data processing services beginning in March 1998. As a result,
the Bank will incur additional expenses during the conversion
from its present system to the new system. The Bank also
expects to be penalized for breaking its' present contract for
ATM processing services. Management expects these expenses to
be immaterial to the Company's consolidated financial
statements.
Deposit insurance expense decreased by $85,000 to $42,000
for the six month period ended December 31, 1997 from $127,000
for the six month period ended December 31, 1996 due to lower
premium rates. This was this was the result of the legislation
enacted to recapitalize the SAIF, which required the Bank to pay
an additional one time special assessment of $706,000 during the
quarter ended December 31, 1996.
Professional services decreased by $26,000 to $85,000 for
the six month period ended December 31, 1997 compared to
$111,000 for the same period in 1996. Most of this decrease was
attributable to fees paid to consultants for recommendations to
improve the Banks operational procedures in six month period
ended December 31, 1996.
Advertising expense increased by $10,000 to $70,000 for the
six months ended December 31, 1997 compared to $60,000 for the
six months ended December 31, 1996 primarily due to the Bank's
new logo campaign launched in the quarter ended December 31,
1997.
State franchise and deposit taxes decreased by $13,000 to
$62,000 for the six month period ended December 31, 1997 from
$75,000 for the six month period ended December 31, 1996 due to
a change in the Bank's estimated liability.
Other expense increased by $32,000 to $261,000 for six the
month period ended December 31, 1997 from $229,000 for the six
month period ended December 31, 1996. The principal components
of this increase were attributable to employee education
expense, printing supplies and expenses associated with
automated teller machines.
Income taxes increased by $439,000 to $534,000 for the six
month period ended December 31, 1997 compared to $95,000 for the
six month period ended December 31, 1996 due to higher 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
<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, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,014,345
<INT-BEARING-DEPOSITS> 135,018,409
<FED-FUNDS-SOLD> 100,000
<TRADING-ASSETS> 1,085,200
<INVESTMENTS-HELD-FOR-SALE> 26,050,140
<INVESTMENTS-CARRYING> 18,816,974
<INVESTMENTS-MARKET> 18,689,341
<LOANS> 110,632,365
<ALLOWANCE> 846,095
<TOTAL-ASSETS> 165,548,869
<DEPOSITS> 137,401,924
<SHORT-TERM> 8,500,000
<LIABILITIES-OTHER> 1,119,177
<LONG-TERM> 691,769
<COMMON> 1,285,673
0
0
<OTHER-SE> 16,012,308
<TOTAL-LIABILITIES-AND-EQUITY> 165,548,869
<INTEREST-LOAN> 2,385,871
<INTEREST-INVEST> 733,025
<INTEREST-OTHER> 49,168
<INTEREST-TOTAL> 3,168,114
<INTEREST-DEPOSIT> 1,650,670
<INTEREST-EXPENSE> 1,787,794
<INTEREST-INCOME-NET> 1,380,320
<LOAN-LOSSES> 67,972
<SECURITIES-GAINS> 39,793
<EXPENSE-OTHER> 938,085
<INCOME-PRETAX> 546,742
<INCOME-PRE-EXTRAORDINARY> 546,742
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 338,977
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 3.71
<LOANS-NON> 0
<LOANS-PAST> 377,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,600,000
<ALLOWANCE-OPEN> 710,000
<CHARGE-OFFS> 0
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<ALLOWANCE-CLOSE> 846,000
<ALLOWANCE-DOMESTIC> 846,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 476,000
</TABLE>
