UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 November 8, 1999 was 1,100,985.
There are a total of 14 pages filed in this document.
<PAGE>
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 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-12
ITEM 3. ASSET/LIABILITY MANAGEMENT - QUALITATIVE AND
QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. 12
PART II - OTHER INFORMATION 13
SIGNATURES 14
2
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
ASSETS
<S> <C> <C>
Cash and cash equivalents $4,096,818 $3,573,139
Trading securities 980,047 1,014,808
Investment securities
Available for sale 37,285,150 37,298,664
Held to maturity 22,423,486 21,997,870
------------ ------------
Total investment securities 59,708,636 59,296,534
Loans 118,375,035 121,953,392
Allowance for loan losses (647,403) (1,211,594)
------------ ------------
Net loans 117,727,632 120,741,798
Premises and equipment 2,908,447 2,432,475
Federal Home Loan Bank stock 1,346,800 1,346,800
Interest receivable 1,872,573 1,821,970
Other Assets 284,840 188,876
------------ ------------
Total assets $188,925,793 $190,416,400
============ ============
LIABILITIES
Deposits
Interest bearing $150,368,686 $152,971,687
Non-interest bearing 1,964,521 1,016,069
------------ ------------
Totals 152,333,207 153,987,756
Short term borrowings 5,525,000 6,500,000
Long term debt 10,580,657 10,597,501
Interest payable 1,359,226 733,041
Other liabilities 1,201,436 847,055
------------ ------------
Total liabilities 170,999,526 172,665,353
------------ ------------
STOCKHOLDERS' EQUITY
Issued and outstanding - 1,303,031 shares 1,303,031 1,303,031
Additional paid-in capital 6,303,419 6,303,419
Less: Common stock acquired by Rabbi trusts for deferred
Compensation plans (611,329) (639,767)
Treasury stock, at cost, 202,046 shares (2,030,955) (2,030,955)
Retained earnings 13,855,005 13,501,715
Accumulated other comprehensive income, net unrealized
gain on securities available for sale (892,904) (686,396)
------------ ------------
Total stockholders' equity 17,926,267 17,751,047
------------ ------------
Total liabilities and stockholders' equity $188,925,793 $190,416,400
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE-MONTHS ENDED
SEPTEMBER 30,
1999 1998
INTEREST INCOME
Loans receivable $2,547,663 $2,508,285
Investment securities 945,746 770,909
Other dividend income 10,156 27,622
Deposits with financial institutions 2,411 19,621
----------- -----------
Total interest income 3,505,976 3,326,437
----------- -----------
INTEREST EXPENSE
Deposits 1,767,682 1,830,751
Short term borrowings 80,624 94,925
Long term debt 142,805 84,137
----------- -----------
Total interest expense 1,991,111 2,009,813
----------- -----------
NET INTEREST INCOME 1,514,865 1,316,624
Provision for loan losses (474,486) 68,299
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,989,351 1,248,325
----------- -----------
OTHER INCOME
Service charges for deposit accounts 94,031 93,306
Other customer fees 13,919 19,777
Net gain on trading securities (55,506) (200,110)
Other income 6,617 6,342
----------- -----------
Total other income 59,061 (80,685)
----------- -----------
OTHER EXPENSES
Salaries and employee benefits 491,522 439,473
Net occupancy expenses 54,429 46,781
Equipment expenses 50,936 52,867
Data processing fees 43,625 67,386
Deposit insurance expense 22,427 21,654
Legal and professional fees 60,797 52,146
Advertising 54,515 26,163
State franchise and deposit taxes 38,580 31,725
Other expenses 238,507 162,614
----------- -----------
Total other expenses 1,055,338 900,809
----------- -----------
INCOME BEFORE INCOME TAX 993,074 266,831
Income tax expense 408,577 102,487
----------- -----------
NET INCOME $584,497 $164,344
=========== ===========
BASIC EARNINGS PER SHARE $0.53 $0.15
DILUTED EARNINGS PER SHARE $0.53 $0.15
See notes to consolidated financial statements.
4
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three-months ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RABBI TREASURY COMPREHENSIVE RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL TRUSTS STOCK INCOME EARNINGS INCOME EQUITY
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1999 $1,303,031 $6,303,419 $(639,767) $(2,030,955) $13,501,715 $(686,396) $17,751,047
Net income $584,497 584,497 584,497
Other Comprehensive
income -
Net change in
unrealized gain
on securities
Available for sale (206,508) (206,508) (206,508)
--------
Comprehensive Income $377,989
========
Dividends declared (231,207) (231,207)
Net change in fair
value of rabbi
trust shares 28,438 28,438
-------------------------------------------------- ---------------------------------------
BALANCES,
SEPTEMBER 30, 1999 $1,303,031 $6,303,419 $(611,329) $(2,030,955) $13,855,005 $(892,904) $17,926,267
================================================== =======================================
</TABLE>
5
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTHS ENDED
SEPTEMBER 30,
1999 1998
OPERATING ACTIVITIES
<S> <C> <C>
Net cash provided by operating activities $1,658,218 $1,362,107
------------ -----------
INVESTING ACTIVITIES
Purchases of securities available for sale (1,433,217) (1,506,953)
Proceeds from maturities of securities available for sale 1,107,699 1,713,380
Purchases of securities held to maturity (1,490,313) (505,144)
Proceeds from sales of securities available for sale -- 520,648
Proceeds from maturities of securities held to maturity 1,071,853 1,156,924
Net change in loans 3,014,166 (4,243,426)
Purchases of premises and equipment (527,127) (80,683)
------------ ------------
Net cash used by investing activities 1,743,061 (2,945,254)
------------- ------------
FINANCING ACTIVITIES
Net change in
Non interest-bearing, interest-bearing and
saving deposits 264,855 75,858
Certificates of deposit (1,919,404) 505,033
Short term borrowings (975,000) --
Repayment of long-term debt (16,844) (15,545)
Cash dividends (231,207) (239,723)
------------ ------------
Net cash provided by financing activities (2,877,600) 325,623
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 523,679 (1,257,524)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,573,139 6,947,148
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $4,096,818 $5,689,624
============ ============
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $1,141,498 $1,066,203
Income tax paid 130,505 21,000
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
HFB FINANCIAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial information for the three month
periods ended September 30, 1999 and 1998 includes the results of
operations of HFB Financial Corporation (the "Company") 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-QSB. These statements and notes should be read
in conjunction with the financial statements and notes thereto included
in the Company's annual report for the year ended June 30, 1999 on Form
10-KSB 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 was to be effective for the Company
beginning in fiscal 2000, but was amended by SFAS No. 137. SFAS No.
137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133 an
amendment of FASB Statement No. 133" deferred the effective date of
the adoption of SFAS No. 133 to fiscal years beginning after June 15,
2000. SFAS No. 137 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 three-months ended September 30, 1999 and 1998:
(Dollars in thousands)
1999 1998
---- ----
Balance July 1 $1,212 $973
Charge offs (92) (3)
Recoveries 1
Provision for loan losses (474) 68
----- --
Balance September 30 $647 $1,038
Information on impaired loans is summarized below
AT SEPTEMBER 30 1999
----
Impaired loans with an allowance $467
Allowance for impaired loans (included in the Company's $214
Allowance for loan losses)
7
<PAGE>
THREE-MONTHS ENDED SEPTEMBER 1999
----
Average balance of impaired loans $1,224
Interest income recognized on impaired loans $55
Cash-basis interest received $55
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-QSB 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 is the holding company of Home Federal Bank, Federal
Savings Bank a federal stock savings bank located in Middlesboro, Kentucky. The
Corporation's primary operation is its' investment in the common stock of the
Bank. All references to the Corporation include 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.
Home Federal Bank has branch offices in Harlan, Kentucky and Tazewell,
Tennessee. On October 15, 1999, the Bank successfully acquired a National City
Bank branch location in Harlan, Kentucky from National City Bank of Kentucky for
a premium of $459,000. The acquisition included approximately $17.1 million in
deposits.
8
<PAGE>
FINANCIAL CONDITION
The Corporation's assets decreased by .78% to $188.9 million at September 30,
1999 compared to $190.4 million at June 30, 1999.
Cash and cash equivalents increased by $524,000 to $4.097 million at September
30, 1999 from $3.573 million at June 30, 1999. This increase was primarily due
to anticipated cash needs for the year 2,000.
The Corporation maintains a portfolio of trading-account securities which is
comprised of common stock of other financial institutions. The balance of the
portfolio was $980,000 at September 30, 1999 compared to $1.014 million at June
30, 1999. Most of this decrease was attributable to a decline in the market
value of the underlying securities.
The Corporation's loan portfolio decreased by $3.6 million to $118.4 million at
September 30, 1999 from $122.0 million at June 30, 1999 due to a decline in loan
demand and the repayment of $904,000 of impaired loans. The Corporation
continues to maintain a high percentage of its loan portfolio in adjustable-rate
residential mortgages.
At September 30, 1999, the allowance for loan losses was $647,000 or .55% of
loans receivable compared to $1.2 million or .99% of loans receivable at June
30, 1999. During the three-months ended September 30, 1999, Management reduced
the allowance by $474,000 due to the repayment of $904,000 on impaired loans.
Total non-performing assets were $973,000 or .82% of total loans at the end of
the same period as compared to $1.9 million or 1.56% of total loans at June 30,
1999. The decrease in non-performing loans was primarily due to the repayment of
$874,000 on several problem real estate loans to one borrower that totaled $1.4
million. Over the past year, Management has aggressively worked to help this
borrower find new financing with another lender. This refinancing was the source
of the $874,000 principal reduction and reduced the borrowers outstanding debt
to $455,000. At September 30, 1999, $99,000 was included in the allowance for
loan losses, specifically as a reserve for the remaining loans to this borrower.
Premises and equipment increased by $476,000 to $2.908 million at September 30,
1999 compared to $2.432 million at June 30, 1999, primarily due to progress
payments made on the Bank's new operations center, which is currently under
construction.
Total deposits decreased by $1.7 million to $152.3 million at September 30, 1999
from $154.0 million at June 30, 1999. During the three-months ended September
30, 1999, certificates of deposit decreased $1.9 million, primarily due to a
higher degree of competitiveness in the local market. NOW accounts and savings
deposits increased $200,000.
Short- term borrowings decreased $975,000 to $5.525 million at September 30,
1999 from $6.5 million at June 30, 1999 primarily due to the decrease in the
loan portfolio during the period.
The Bank's regulatory liquidity ratio was 39.3% at September 30, 1999 as
compared to 27.4% at June 30, 1999. At September 30, 1999 the Bank met all the
regulatory capital requirements to be considered "well capitalized" under bank
regulations. Tangible, core and risk-based capital ratios were 9.4%, 9.4% and
23.3% respectively at September 30, 1999 as compared to 9.1%, 9.1% and 22.5%
respectively, at June 30, 1999.
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net income increased by $420,000 to $584,000 for the three-month period ended
September 30, 1999 from $164,000 for the three-month period ended September 30,
1998. The primary reasons for the increase were a $198,000 increase in net
interest income, a $543,000 decrease in provision for loan losses, an increase
of $140,000 in non-interest income, an increase of $155,000 in non-interest
expense, and a $306,000 increase in income tax expense.
Net interest income increased by $198,000 for the three-month period ended
September 30, 1999 as compared to the three-month period ended September 30,
1998, as the result of a higher volumes and the recognition of interest income
on several non-accrual loans.
9
<PAGE>
Interest on loans increased by $39,000 to $2.547 million for the three-month
period ended September 30, 1999 as compared to $2.508 million for the
three-month period ended September 30, 1998. This increase is mainly
attributable to the collection of $55,000 in interest income on non-accrual
loans.
Interest on investment securities and other dividend income increased by
$157,000 to $956,000 for the three-month period ended September 30, 1999 from
$799,000 for the three-month period ended September 30, 1998. This increase is
primarily the result of higher average balances during the period.
Interest on deposits with other financial institutions decreased by $18,000 to
$2,000 for the three-month period ended September 30, 1999 from $20,000 for the
three-month period ended September 30, 1998 primarily due to a lower level of
interest-bearing cash balances.
Interest on deposits decreased by $63,000 to $1.768 million for the three-month
period ended September 30, 1999 from $1.831 million for the three-month period
ended September 30, 1998 as a result of a lower cost of funds.
Interest on short term borrowings and long term debt increased by $44,000 to
$223,000 for the three-month period ended September 30, 1999 from $179,000 for
the three-month period ended September 30, 1998 primarily due to higher levels
of long-term borrowing. Long-term borrowings increased $5.0 million during the
quarter ended March 31, 1999.
The provision for loan losses decreased $543,000 for the three-month period
ended September 30, 1999 as compared to the same period in 1998. During the
quarter ended September 30, 1999, a total of $904,000 of impaired loans were
paid off. The amount charged off for those loans was significantly less than
what was specifically reserved for these loans and resulted in a $474,000
reduction in the overall allowance. 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 September 30, 1999 was .55%.
The Corporation's non-interest income increased by $140,000 to $59,000 for the
three-month period ended September 30, 1999 as compared to $(81,000) for the
same period in 1998. The increase was primarily attributable to a decrease in
trading account realized and unrealized losses of $145,000 and a decrease of
$6,000 in other fee income. The Corporation has a portfolio of approximately
$1.0 million in common stock of other financial institutions. The market value
of these stocks has fluctuated substantially during the past year, due to market
volatility.
Non-interest expense increased by $155,000 to $1.055 million for the three-month
period ended September 30, 1999 as compared to $900,000 for the same period in
1998. Compensation and benefits increased by $52,000 to $491,000 for the
three-month period ended September 30, 1999 as compared to $439,000 for the same
period in 1998. This increase is primarily attributable to a decrease of $49,000
in the portion of salaries and wages that are being deferred as loan origination
costs net of amortization, an increase in compensation of $30,000 and a decrease
of $27,000 in employee retirement expense.
Occupancy expense increased by $7,000 to $54,000 for the three-month period
ended September 30, 1999 compared to $47,000 for the same period in 1998
primarily due to higher maintenance expense.
Data processing fees decreased by $23,000 to $44,000 for the three-month period
ended September 30, 1999 from $67,000 for the three-month period ended September
30, 1998, primarily due to conversion expenses incurred during the quarter ended
September 30, 1998.
Advertising expense increased by $29,000 to $55,000 for the three-month period
ended September 30, 1999 as compared to $26,000 for the three-months ended
September 30, 1998, primarily due to a higher level of advertising during the
period.
10
<PAGE>
State franchise and deposit taxes increased by $7,000 to $39,000 for the quarter
ended September 30, 1999 compared to $32,000 for the quarter ended September 30,
1998 primarily due to a higher level of deposits.
Other expenses increased by $76,000 to $239,000 for the three-month period ended
September 30, 1999 from $163,000 for the three-month period ended September 30,
1998 primarily as the result of an increase of $35,000 in other real estate
owned expense. The remaining net increase was due to increases in various other
expense categories, primarily postage expense, telephone expense and check
imaging services.
Income tax expense increased by $306,000 to $408,000 for the three-month period
ended September 30, 1999 compared to $102,000 for the three-months ended
September 30, 1998 due to higher earnings.
YEAR 2000
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 has tested the majority of 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 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 has met all of the FFIEC requirements and that its mission critical systems
are in compliance with Year 2000, it can give no assurance that this will occur.
The Company has developed 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. Other parties whose year 2000 compliance may effect the
Company include the Federal Home Loan Bank of Cincinnati, the Federal Reserve
Bank of Cincinnati, vendors who support loan and deposit documentation software,
the operations of the Company's ATM network, and these third parties have
indicated their compliance or intended compliance. Where it is possible to do
so, the Company has performed testing with these third parties. Where testing is
not possible, the Company will rely on certifications from vendors and service
providers. A failure to resolve year 2000 issues by governmental agencies,
utilities and telecommunications companies on whom the Company is dependent
could also adversely effect the Company. There can be no assurances that the
Company's year 2000 plan will effectively address the year 2000 issue, or that
the impact of any failure of the Company's third-party vendors and service
providers to be year 2000 compliant will not have a material effect on the
Company's business, financial condition or results of operations.
The Company has, through September 30, 1999, incurred certain costs, not
including salary expense, 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 September 30, 1999 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 September 30,
1999, the
11
<PAGE>
Company expects to incur additional costs associated with Year 2000
preparedness, 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 September 30, 1999, 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
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.
ASSET/LIABILITY MANAGEMENT - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
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 effect 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 fifteen 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 re-pricing and/or maturity
of its liabilities thus reducing its exposure to rising interest rates.
The Bank, other than its investment securities trading account, does not have a
trading account for any class of financial instrument nor does it engage in
hedging activities or purchase high-risk derivative instruments. Furthermore,
the Bank is not subject to foreign currency exchange rate risk or commodity
price risk.
The Bank uses interest rate sensitivity analysis to measure its interest rate by
computing changes in net portfolio value of its cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. Net portfolio value represents the market
value of portfolio equity and is equal to the market value of assets minus the
market value of liabilities, with adjustments made for off-balance sheet items.
This analysis assesses the risk of loss in market risk sensitive instruments in
the event of a sudden and sustained 100 to 400 basis point increase or decrease
in market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Using data compiled
by the OTS, the Bank receives a report that measures interest rate risk by
modeling the change in net portfolio value over a variety of interest rate
scenarios. The most recent interest sensitivity analysis the Bank received from
the OTS measured the Bank's interest risk at June 30, 1999.
12
<PAGE>
HFB FINANCIAL CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
13
<PAGE>
HFB FINANCIAL CORPORATION
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on 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: November 5, 1999
14
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<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,096,818
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 980,047
<INVESTMENTS-HELD-FOR-SALE> 37,285,150
<INVESTMENTS-CARRYING> 22,423,486
<INVESTMENTS-MARKET> 21,820,170
<LOANS> 118,375,035
<ALLOWANCE> 647,403
<TOTAL-ASSETS> 188,925,793
<DEPOSITS> 152,333,207
<SHORT-TERM> 5,525,000
<LIABILITIES-OTHER> 2,560,662
<LONG-TERM> 10,580,657
0
0
<COMMON> 4,964,166
<OTHER-SE> 12,962,101
<TOTAL-LIABILITIES-AND-EQUITY> 188,925,783
<INTEREST-LOAN> 2,547,663
<INTEREST-INVEST> 955,902
<INTEREST-OTHER> 2,411
<INTEREST-TOTAL> 3,505,976
<INTEREST-DEPOSIT> 1,767,682
<INTEREST-EXPENSE> 1,991,111
<INTEREST-INCOME-NET> 1,514,865
<LOAN-LOSSES> 474,486
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,055,338
<INCOME-PRETAX> 993,074
<INCOME-PRE-EXTRAORDINARY> 993,074
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 584,497
<EPS-BASIC> 0.53
<EPS-DILUTED> 0.53
<YIELD-ACTUAL> 3.10
<LOANS-NON> 456,974
<LOANS-PAST> 532,632
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 1,211,594
<CHARGE-OFFS> 91,261
<RECOVERIES> 1,555
<ALLOWANCE-CLOSE> 647,403
<ALLOWANCE-DOMESTIC> 256,103
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<ALLOWANCE-UNALLOCATED> 391,300
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