<PAGE>
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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, 1998
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
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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, 1998 was 1,099,503.
1<PAGE>
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HFB FINANCIAL CORPORATION
I N D E X
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PAGE NO.
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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
Notes to Consolidated Financial Statements 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-14
PART II - OTHER INFORMATION 15
SIGNATURES 16
2<PAGE>
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,930,346 $ 6,947,148
Trading securities 893,481 835,307
Investment securities
Available for sale 27,997,070 26,904,517
Held to maturity 21,112,805 20,546,634
------------ ------------
Total investment securities 49,109,875 47,451,151
Loans 122,724,288 117,143,613
Allowance for loan losses (1,090,943) (972,859)
------------ ------------
Net loans 121,633,345 116,170,754
Premises and equipment 2,278,375 2,220,548
Real estate owned 155,469
Federal Home Loan Bank stock 1,278,800 1,255,900
Interest receivable 1,769,926 1,407,901
Other assets 93,747 148,077
------------ ------------
Total assets $183,143,364 $176,436,786
============ ============
LIABILITIES
Deposits
Interest bearing $147,994,633 $144,622,466
Non-interest bearing 1,894,110 258,952
------------ ------------
Totals 149,888,743 144,881,418
Short-term borrowings 7,500,000 6,500,000
Long-term debt 5,630,192 5,661,598
Interest payable 631,469 580,621
Other liabilities 1,348,096 825,950
------------ ------------
Total liabilities 164,998,500 158,449,587
------------ ------------
STOCKHOLDERS' EQUITY
Issued and outstanding -- 1,301,549 shares 1,301,549 1,291,694
Additional paid-in capital 6,245,224 6,195,948
Less: Common stock acquired by ESOP -- (41,545)
Common stock acquired by Rabbi trusts
for deferred compensation plans (644,440) (313,059)
Treasury stock, at cost, 202,046 shares (2,030,955) (2,030,955)
Retained earnings 13,071,237 12,754,183
Accumulated other comprehensive income,
net unrealized gain on securities available
for sale 202,249 130,933
------------ ------------
Total stockholders' equity 18,144,864 17,987,199
------------ ------------
Total liabilities and stockholders' equity $183,143,364 $176,436,786
============ ============
</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,
---------------------- ------------------
1998 1997 1998 1997
---------- ---------- ------- ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $2,587,023 $2,385,871 $5,095,308 $4,780,783
Investment securities 729,819 717,012 1,500,728 1,428,552
Other dividend income 28,425 16,063 56,047 43,117
Deposits with financial
institutions 50,961 49,168 70,582 85,020
---------- ---------- ---------- ----------
Total interest income 3,396,228 3,168,114 6,722,665 6,337,472
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 1,809,488 1,650,570 3,640,239 3,254,719
Short term borrowings 94,795 123,203 189,720 231,445
Long term debt 84,497 14,021 168,634 28,333
---------- ---------- ---------- ----------
Total interest expense 1,988,780 1,787,794 3,998,593 3,514,498
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,407,448 1,380,320 2,724,072 2,822,974
Provision for loan losses 66,160 67,972 134,459 135,927
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,341,288 1,312,348 2,589,613 2,687,047
---------- ---------- ---------- ----------
OTHER INCOME
Service charges for deposit accounts 86,535 104,862 179,841 204,380
Other customer fees 22,682 16,400 55,024 27,437
Net gain on trading securities 2,830 38,539 (197,280) 206,362
Net realized gain (loss) on sales of
available for sale securities 2,827 1,254 2,827 8,877
Other income (3,050) 11,425 3,292 21,188
---------- ---------- ---------- ----------
Total other income 111,824 172,480 43,704 468,244
---------- ---------- ---------- ----------
OTHER EXPENSES
Salaries and employee benefits 411,622 445,349 835,326 914,967
Net occupancy expenses 48,068 55,468 97,919 106,774
Equipment expenses 49,809 57,104 102,676 116,095
Data processing fees 51,843 63,197 119,229 125,030
Deposit insurance expense 20,995 20,969 42,649 42,073
Legal and professional fees 47,512 47,276 99,658 84,834
Advertising 35,170 49,325 61,333 69,893
State franchise and deposit taxes 39,350 30,920 71,075 62,289
Other expenses 164,306 168,448 352,184 309,615
---------- ---------- ---------- ----------
Total other expenses 868,675 938,086 1,782,049 1,831,570
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX 584,437 546,742 851,268 1,323,721
Income tax expense 192,005 207,765 294,492 534,294
---------- ---------- ---------- ----------
NET INCOME $ 392,432 $ 338,977 $ 556,776 $ 789,427
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.36 $ 0.36 $ 0.51 $ 0.73
DILUTED EARNINGS PER SHARE $ 0.35 $ 0.34 0.50 0.71
</TABLE>
See notes to consolidated financial statements.
4<PAGE>
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six months ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ESOP RABBI TREASURY
STOCK CAPITAL DEBT* TRUSTS STOCK
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1998 $1,291,694 $6,195,948 $ (41,545) $(313,059) $(2,030,955)
Net income
Other comprehensive income -
net change in unrealized
gain on securities available
for sale
Comprehensive income
Stock issued upon exercise of
stock options 9,855 49,276
Dividends declared
Reduction of ESOP debt 41,545
Distribution of rabbi trust shares 40,434
Transitional fair value
adjustment of rabbi
trust shares (371,815)
---------- ---------- --------- --------- -----------
BALANCES, DECEMBER 31, 1998 $1,301,549 $6,245,224 $ -- $(644,440)$(2,030,955)
========== ========== ========= ========= ===========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE RETAINED COMPREHENSIVE STOCKHOLDERS'
INCOME EARNINGS INCOME EQUITY
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
BALANCES, JUNE 30, 1998 $12,754,183 $ 130,933 $17,987,199
Net income $ 556,776 556,776 556,776
Other comprehensive income -
net change in unrealized
gain on securities available
for sale 71,316 71,316 71,316
-----------
Comprehensive income $ 628,092
===========
Stock issued upon exercise
of stock options 59,131
Dividends declared (239,722) (239,722)
Reduction of ESOP debt 41,545
Distribution of rabbi trust
shares 40,434
Transitional fair value
adjustment of rabbi
trust shares (371,815)
----------- ---------- -----------
BALANCES, DECEMBER 31, 1998 $13,071,237 $ 202,249 $18,144,864
=========== ========== ===========
<FN>
__________
* Employees Stock Ownership Plan (ESOP)
</FN>
</TABLE>
See notes to consolidated financial statements.
5<PAGE>
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 479,027 $ 624,529
------------ ----------
INVESTING ACTIVITIES
Purchases of securities available for sale (5,045,830) (3,186,965)
Proceeds from maturities of securities
available for sale 3,531,208 (1,621,117)
Purchases of securities held to maturity (3,503,625) 663,911
Proceeds from sales of securities
available for sale 520,648 1,784,398
Proceeds from maturities of securities
held to maturity 2,950,085 3,001,694
Net change in loans (5,597,051) (4,937,809)
Purchases of premises and equipment (179,310) (40,618)
Proceeds from sale of fixed assets 13,000 --
----------- -----------
Net cash used by investing activities (7,310,875) (4,336,506)
----------- -----------
FINANCING ACTIVITIES
Net change in
Non interest-bearing, interest-bearing
and savings deposits 1,771,182 (171,037)
Certificates of deposit 3,247,511 4,370,420
Short term borrowings 1,000,000 1,000,000
Repayment of long-term debt (31,406) (28,984)
Cash dividends (239,723) (227,563)
Proceeds from exercise of options on common
stock 59,130 --
Common stock acquired by Rabbi trusts 8,352 (11,151)
----------- ----------
Net cash used by financing activities 5,815,046 4,931,685
----------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,016,802) 1,219,708
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,947,148 3,794,637
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,930,346 $5,014,345
=========== ==========
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 3,589,906 $3,524,713
Income tax paid 95,864 530,196
</TABLE>
See notes to consolidated financial statements.
6<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, 1998 and 1997 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"). 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,
1998 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. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging
activities", which requires companies to record derivatives on
the balance sheet at their fair value. Statement No. 133 will
be effective for the Company beginning in fiscal 2000 and is not
expected to have a material impact on the Company's financial
position or results of operations.
3. NONPERFORMING LOANS AND PROBLEM ASSETS
The following sets forth the activity in the Bank's allowance
for loan losses for the six months ended December 31, 1998 and
1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997
----- ----
<S> <C> <C>
Balance July 1 $ 973 $710
Charge offs 16 --
Provision for loan losses 134 136
------ ----
Balance December 31 $1,091 $846
Ratio of net charge offs during the period to
average loans outstanding during the period .00% .00%
====== ====
</TABLE>
7<PAGE>
<PAGE>
Information on impaired loans is summarized below
AT DECEMBER 31 1998
----
Impaired loans with an allowance $1,304
Allowance for impaired loans (included in the
Company's allowance for loan losses) $ 371
SIX MONTHS ENDED DECEMBER 31 1998
----
Average balance of impaired loans $1,288
Interest income recognized on impaired loans 3
Cash-basis interest received --
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report on Form 10-Q
are "forward-looking statements" intended to qualify for the
safe harbors from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the
context of the statement will include words such as the Company
"believes", "anticipates", "expects", "estimates" or words of
similar import. Similarly, statements that describe the
Company's future plans, objectives or goals are also
forward-looking statements. Such forward-looking statements are
subject to certain risks and uncertainties which are described
in close proximity to such statements and which could cause
actual results to differ materially from those anticipated as of
the date of this report. Shareholders, potential investors and
other readers are urged to consider these factors in evaluating
the forward-looking statements and are cautioned not to place
undue reliance on such forward-looking statements. The
forward-looking statements included herein are only made as of
the date of this report and the Company undertakes no obligation
to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
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,
1998, management is not aware of any current recommendations
8<PAGE>
<PAGE>
by the regulatory authorities, which if implemented, would have
a material effect on the Bank's operations, liquidity or
resources.
FINANCIAL CONDITION
The Corporation's assets increased by 3.80% to $183.1 million at
December 31, 1998 compared to $176.4 million at June 30, 1998.
The majority of this increase is reflected in increases in
investment securities and loans offset by decreases in cash and
cash equivalents, increases in deposits and increases in short
term borrowings.
Cash and cash equivalents decreased by $1.0 million to $5.9
million at December 31, 1998 from $6.9 million at June 30,
1998. This increase was primarily the result of funding
increased loan volume during the six month period ended December
31, 1998.
The Company maintains a portfolio of trading account securities
which is comprised of common stock of other financial
institutions. The portfolio was $893,000 at December 31, 1998
compared to $835,000 at June 30, 1998. Most of this increase
was attributable to increased investment activity in the
portfolio.
The loan portfolio increased by $5.6 million to $122.7 million
at December 31, 1998 from $117.1 million at June 30, 1998 due to
lower 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, 1998, the Bank originated
$21.8 million in mortgages.
At December 31, 1998, the allowance for loan losses was $1.091
million or .89% of loans receivable compared to $973,000 or .83%
of loans receivable at June 30, 1998. During the six months
ended December 31, 1998, the provision for loan losses was
$134,000. Total nonperforming assets were $2.1 million or 1.73%
of total loans, net at December 31, 1998 as compared to $717,000
or .62% of total loans, net at June 30, 1998. Most of the
increase in nonperforming loans was due to several problem real
estate loans to one borrower totaling $1.3 million, which became
over 90 days past due during the six months ended December 31,
1998. The properties securing these loans are not generating
sufficient cash flow to fund debt service payments and the
borrower was 271 days in arrears on the loans at December 31,
1998. Foreclosure proceedings were initiated in December 1998
and subsequently postponed in January due to the receipt of
$346,000 in payment. The source of the payment was from another
lender and a substantial portion of the remaining balance is
currently being considered for refinancing by the same lender.
If payment for a substantial portion of the remaining balance is
not received by mid February, foreclosure proceedings will be
resumed. Management has continually evaluated the
collectability of these loans and feels that any potential loss
on these loans has been adequately reserved for.
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, 1998, management purchased $8.5 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, 1998, the Bank
held $28.0 million in investment securities, available for sale
with a net unrealized gain of $202,000 and $21.1 million in
investment securities held to maturity.
Total deposits increased by $5.0 million to $149.9 million at
December 31, 1998 from $144.9 million at June 30, 1998. During
the six months ended December 31, 1998, certificates of deposit
increased $3.2 million. NOW accounts and savings deposits
increased $1.8 million, primarily due a large amount of loan
disbursement checks included in non-interest bearing deposits
which were issued and outstanding at December 31, 1998. Deposit
growth was slow during the three months ended September 30, 1998
primarily due to premium rates offered by a competing
institution during the period, but growth increased during the
second quarter due to a lower level of interest-rate
competitiveness.
The Bank's regulatory liquidity ratio was 31.34% at December 31,
1998 as compared to 26.2% at June 30, 1998. At December 31,
1998 the Bank met all the fully phased-in regulatory capital
requirements under FIRREA. Tangible,
9<PAGE>
<PAGE>
core and risk-based capital ratios were 9.0%, 9.0% and 20.4%
respectively at December 31, 1998 as compared to 9.1%, 9.1% and
22.5% at June 30, 1998.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31,
1998 AND 1997
Net income increased by $53,000 to $392,000 for the three month
period ended December 31, 1998 from $339,000 for the three month
period ended December 31, 1997. The primary reasons for the
increase were a $27,000 increase in net interest income, a
$2,000 decrease in provision for loan losses, a decrease of
$69,000 in noninterest expense and a $15,000 decrease in income
tax expense offset by a decrease of $60,000 in noninterest
income.
Net interest income increased by $27,000 for the three month
period ended December 31, 1998 as compared to the three month
period ended December 31, 1997, primarily as the result of a
higher net interest margin and higher volume.
Interest on loans increased by $201,000 to $2.587 million for
the three month period ended December 31, 1998 as compared to
$2.386 million for the three month period ended December 31,
1997. This increase is mainly attributable to a higher
weighted-average balance of loans receivable outstanding.
Interest on investment securities increased by $13,000 to
$730,000 for the three month period ended December 31, 1998 from
$717,000 for the three month period ended December 31, 1997.
This increase is primarily the result of higher weighted average
balances during the period.
Interest on deposits with other financial institutions increased
by $2,000 to $51,000 for the three month period ended December
31, 1998 from $49,000 for the three month period ended December
31, 1997 primarily due to a higher level of interest-bearing
cash balances.
Other dividend income increased by $12,000 for the three months
ended December 31, 1998 as compared to the three months ended
December 31, 1997 primarily due to a higher level of investment
in Federal Home Loan Bank stock.
Interest on deposits increased by $159,000 to $1.809 million for
the three month period ended December 31, 1998 from $1.650
million for the three month period ended December 31, 1997 as a
result of higher volume and a change in the overall deposit mix.
Lower rate savings accounts declined, while more costly
certificates of deposit increased.
Interest on short term borrowings and long term debt increased
by $42,000 to $179,000 for the three month period ended December
31, 1998 from $137,000 for the three month period ended December
31, 1997 due to higher levels of borrowing.
The provision for loan losses decreased $2,000 for the three
month period ended December 31, 1998 as compared to the same
period in 1997. 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, net at December 31, 1998 was .89%.
The Banks non-interest income decreased by $60,000 to $112,000
for the three month period ended December 31, 1998 as compared
to $172,000 for the same period in 1997. The decrease was
attributable to a net decrease in realized and unrealized gains
(losses) on trading account securities and realized gains on
available for sale securities of $34,000, a decrease of $12,000
in customer fees and service charges and a decrease of $14,000
in other income. The decrease in other income was primarily due
to a gain on real estate sold realized in 1997 and the loss of
rental income due to the sale of properties.
Non-interest expense decreased by $69,000 to $869,000 for the
three month period ended December 31, 1998 as compared to
$938,000 for the same period in 1997. Compensation and benefits
decreased by $34,000 to $411,000
10<PAGE>
<PAGE>
for the three month period ended December 31, 1998 as compared
to $445,000 for the same period in 1997. This decrease is
primarily attributable to an increase in salaries and wages that
are being deferred as loan origination costs.
Occupancy expense decreased by $7,000 to $48,000 for the three
month period ended December 31, 1998 compared to $55,000 for the
same period in 1997 due to lower depreciation and amortization
expense.
Equipment expense decreased by $7,000 to $50,000 for the three
month period ended December 31, 1998 from $57,000 for the three
month period ended December 31, 1997. The decrease was
primarily due to lower depreciation expense.
Data processing fees decreased by $11,000 to $52,000 for the
three month period ended December 31, 1998 from $63,000 for the
three month period ended December 31, 1997 primarily due to
increased efficiencies realized from a change in the Bank's
primary provider of data processing services.
Advertising expense decreased by $14,000 to $35,000 for the
quarter ended December 31, 1998 compared to $49,000 for the
quarter ended December 31, 1997 primarily due to a lower level
of advertising activity in the current period.
Other expenses decreased by $4,000 to $164,000 for the three
month period ended December 31, 1998 from $168,000 for the three
month period ended December 31, 1997 as the result of a net
decrease in various other expense categories.
Income tax expense decreased by $15,000 to $192,000 for the
three month period ended December 31, 1998 compared to $207,000
for the three months ended December 31, 1997 due to an over
accrual in 1997.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
AND 1997
Net income decreased by $232,000 to $557,000 for the six month
period ended December 31, 1998 from $789,000 for the six month
period ended December 31, 1997. The primary reasons for the
decrease were a $99,000 decrease in net interest income, a
$410,000 decrease in net gains on trading account securities and
realized and unrealized gains on investment securities available
for sale and a $14,000 decrease in other income offset by a
$1,000 decrease in provision for loan losses, a decrease of
$50,000 in noninterest expense and a $240,000 decrease in income
tax expense.
Net interest income decreased by $99,000 for the six month
period ended December 31, 1998 as compared to the three month
period ended December 31, 1997, primarily as the result of a
lower net interest margin and higher volume.
Interest on loans increased by $315,000 to $5.095 million for
the six month period ended December 31, 1998 as compared to
$4.781 million for the six month period ended December 31, 1997.
This increase is mainly attributable to a higher
weighted-average balance of loans receivable outstanding.
<PAGE>
Interest on investment securities increased by $72,000 to $1.501
million for the six month period ended December 31, 1998 from
$1.429 million for the six month period ended December 31, 1997.
This increase is primarily the result of higher weighted-average
balances during the period.
Interest on deposits with other financial institutions decreased
by $14,000 to $71,000 for the six month period ended December
31, 1998 from $85,000 for the six month period ended December
31, 1997 primarily due to a lower level of interest-bearing cash
balances and lower interest rates.
Other dividend income increased by $13,000 for the six months
ended December 31, 1998 as compared to the six months ended
December 31, 1997 primarily due to a higher level of investment
in Federal Home Loan Bank stock.
11<PAGE>
<PAGE>
Interest on deposits increased by $385,000 to $3.640 million for
the six month period ended December 31, 1998 from $3.255 million
for the six month period ended December 31, 1997 as a result of
higher volume and a change in the overall deposit mix. Lower
rate savings accounts declined, while more costly certificates
of deposit increased.
Interest on short term borrowings and long term debt increased
by $99,000 to $358,000 for the six month period ended December
31, 1998 from $259,000 for the six month period ended December
31, 1997 due to higher levels of borrowing.
The provision for loan losses decreased $1,000 for the six month
period ended December 31, 1998 as compared to the same period in
1997. 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, net at December 31, 1998 was .89%.
The Banks non-interest income decreased by $424,000 to $44,000
for the six month period ended December 31, 1998 as compared to
$468,000 for the same period in 1997. The decrease was
attributable to a net decrease in realized and unrealized gains
(losses) on trading account securities of $404,000, realized
losses on available for sale securities of $6,000, a $4,000
increase in customer fees and service charges and a decrease of
$18,000 in other income. The decrease in realized and
unrealized gains on trading account securities was primarily the
result of a reduction in the market value of equity securities
included in the trading account portfolio. The trading account
portfolio is comprised of common stocks of other financial
institutions, which were adversely affected by the recent
decline in the equities market and have not rebounded as quickly
as the overall market. The decrease in other income was mainly
attributable to a gain on real estate sold in 1997 and the loss
of rental income from properties sold.
Non-interest expense increased by $50,000 to $1.782 million for
the six month period ended December 31, 1998 as compared to
$1.832 million for the same period in 1997. Compensation and
benefits decreased by $80,000 to $835,000 for the six month
period ended December 31, 1998 as compared to $915,000 for the
same period in 1997. This decrease is primarily attributable to
an increase in salaries and wages that are being deferred as
loan origination costs.
Occupancy expense decreased by $9,000 to $98,000 for the six
month period ended December 31, 1998 compared to $107,000 for
the same period in 1997 primarily due to lower depreciation
expense.
Equipment expense decreased by $13,000 to $103,000 for the six
month period ended December 31, 1998 from $116,000 for the six
month period ended December 31, 1997. These decreases were
primarily due to lower depreciation expense.
Data processing fees decreased by $6,000 to $119,000 for the six
month period ended December 31, 1998 from $125,000 for the six
month period ended December 31, 1997 primarily due to an
increased level of efficiency resulting from a change in the
Bank's core provider of data processing services.
Legal and professional fees increased by $15,000 for the six
month period ended December 31, 1998 primarily due to higher
consulting fees.
Advertising expense decreased by $9,000 to $61,000 for the
quarter ended December 31, 1998 compared to $70,000 for the
quarter ended December 31, 1997 primarily due to a lower level
of advertising activity.
State franchise and deposit taxes increased by $9,000 for the
six month period ended December 31, 1998 due to a higher level
of taxable capital and deposits.
12<PAGE>
<PAGE>
Other expenses increased by $42,000 to $352,000 for the six
month period ended December 31, 1998 from $310,000 for the six
month period ended December 31, 1997 primarily as the result of
a $25,000 loss resulting from employee theft. The remaining
increases were comprised of various other expense categories.
Income tax expense decreased by $240,000 to $294,000 for the six
month period ended December 31, 1998 compared to $534,000 for
the six months ended December 31, 1997 due to a lower level of
taxable income.
YEAR 2000 READINESS DISCLOSURE
The Company has completed an assessment of its computer systems,
including its information and non-information systems, and
identified those systems that it believes could be affected by
the Year 2000 issue. It has also developed an implementation
plan to address the issue and is in the process of testing its
internal mission critical hardware and software systems to
determine if they are Year 2000 compliant. While the Company
has exposure to several risks related to Year 2000, the primary
risk to the Company of not complying with Year 2000 is the
potential inability to correctly process and record customer
loan and deposit transactions.
The Company believes that it has met the majority of the
requirements that have been established for the banking industry
by the Federal Financial Institution Examination Council
"FFIEC". These standards require that a series of procedures be
performed by financial institutions within established time
frames to reduce the risk of noncompliance with the Year 2000
issue. While the Company believes that it will meet all of the
FFIEC requirements and that its mission critical systems will be
in compliance with Year 2000, it can give no assurance that this
will occur.
The Company is currently developing a business resumption
contingency plan that would take effect if its internal systems,
or the systems of those material vendors on which it is reliant,
would not be compliant with Year 2000 requirements.
The Company outsources a significant portion of its data
processing to an outside provider. A worst case scenario for
the Company would likely involve non-compliance with Year 2000
by its primary data processor in such a manner that would leave
the Company in a position where it could not correctly process
and record customer loan and deposit transactions. While the
Company has successfully tested its primary data processing
system for compliance with Year 2000, it cannot guarantee that
the systems of this and other companies on which the Company's
systems rely will be timely converted and not have a material
effect on the Company.
The Company has, through December 31, 1998, incurred certain
costs related to Year 2000. A portion of these costs were
incurred in connection with the recent conversion of the
Company's primary data processing system. Costs incurred
through December 31, 1998 total approximately $326,000 and
include $205,000 for equipment, $65,000 for software, $12,000
for de-conversion fees that were paid to the previous data
processing provider, $38,000 for training and $6,000 for the
initial assessment. At December 31, 1998, the Company expects
to incur additional costs associated with testing but does not
expect these costs to be material to the Company's financial
condition or results of operations.
The Company does not have, at December 31, 1998, any material
commitments to purchase new equipment, software or to incur
material costs to modify its existing system for year 2000
compliance and does not believe that any material amounts of its
existing computer hardware or software is impaired. The Company
does have commitments, at December 31, 1998, to purchase
$131,000 of check imaging equipment. The process of imaging
checks will be a new process for the Company. The related costs
do not reflect costs that are being incurred in response to the
Year 2000 issue. The Company has assessed the impact of Year
2000 on its commercial-lending customers, and believes that the
impact, in terms of potential credit exposure, is not material.
The majority of the Company's commercial lending portfolio
consists of commercial real estate loans that are made to
companies that are not highly technology intensive.
13<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.
14<PAGE>
<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
Exhibit 27 - Financial Data Schedule
15<PAGE>
<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 5, 1999
16
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,411,426
<INT-BEARING-DEPOSITS> 1,418,920
<FED-FUNDS-SOLD> 100,000
<TRADING-ASSETS> 893,481
<INVESTMENTS-HELD-FOR-SALE> 27,997,070
<INVESTMENTS-CARRYING> 21,112,805
<INVESTMENTS-MARKET> 21,269,656
<LOANS> 122,724,288
<ALLOWANCE> 1,090,943
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<DEPOSITS> 149,888,743
<SHORT-TERM> 7,500,000
<LIABILITIES-OTHER> 1,979,565
<LONG-TERM> 5,630,192
<COMMON> 4,871,378
0
0
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<INTEREST-TOTAL> 6,722,665
<INTEREST-DEPOSIT> 3,640,239
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<INTEREST-INCOME-NET> 2,724,072
<LOAN-LOSSES> 134,459
<SECURITIES-GAINS> (194,453)
<EXPENSE-OTHER> 1,782,049
<INCOME-PRETAX> 851,268
<INCOME-PRE-EXTRAORDINARY> 851,268
<EXTRAORDINARY> 0
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<NET-INCOME> 556,776
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
<YIELD-ACTUAL> 3.11
<LOANS-NON> 1,579
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<ALLOWANCE-CLOSE> 1,090,943
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