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 December 31, 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 February 11, 2000 was 1,106,818.
There are a total of 14 pages filed in this document.
<PAGE>
HFB FINANCIAL CORPORATION
I N D E X
---------
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 9-12
PART II - OTHER INFORMATION 13
SIGNATURES 14
2
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 7,457,465 $ 3,573,139
Trading securities 970,690 1,014,808
Investment securities
Available for sale 35,564,528 37,298,664
Held to maturity 26,012,253 21,997,870
------------- -------------
Total investment securities 61,576,781 59,296,534
Loans 122,089,487 121,953,392
Allowance for loan losses (614,574) (1,211,594)
------------- -------------
Net loans 121,474,913 120,741,798
Premises and equipment 3,157,654 2,432,475
Real estate owned 136,641 --
Federal Home Loan Bank stock 1,371,400 1,346,800
Interest receivable 1,896,168 1,821,970
Goodwill 427,380 --
Other Assets 171,368 188,876
------------- -------------
Total assets 198,640,460 190,416,400
============= =============
LIABILITIES
Deposits
Interest bearing $ 163,982,916 $ 152,971,687
Non-interest bearing 1,353,798 1,016,069
------------- -------------
Totals 165,336,714 153,987,756
Short term borrowings 3,375,000 6,500,000
Long term debt 10,563,472 10,597,501
Interest payable 710,465 733,041
Other liabilities 533,289 847,055
------------- -------------
Total liabilities 180,518,940 172,665,353
------------- -------------
STOCKHOLDERS' EQUITY
Issued and outstanding - 1,308,864 shares 1,308,864 1,303,031
Additional paid-in capital 6,332,584 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 14,209,550 13,501,715
Accumulated other comprehensive income (1,087,194) (686,396)
------------- -------------
Total stockholders' equity 18,121,520 17,751,047
------------- -------------
Total liabilities and stockholders' equity $ 198,640,460 $ 190,416,400
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED SIX-MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans receivable $ 2,510,638 $ 2,587,023 $ 5,058,302 $ 5,095,308
Investment securities 1,014,096 729,819 1,935,231 1,500,728
Other dividend income 32,218 28,425 66,985 56,047
Deposits with financial institutions 39,086 50,961 41,496 70,582
----------- ----------- ----------- -----------
Total interest income 3,596,038 3,396,228 7,102,014 6,722,665
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 1,878,221 1,809,488 3,645,903 3,640,239
Short term borrowings 23,990 94,795 104,614 189,720
Long term debt 142,461 84,497 285,266 168,634
----------- ----------- ----------- -----------
Total interest expense 2,044,672 1,988,780 4,035,783 3,998,593
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,551,366 1,407,448 3,066,231 2,724,072
Provision for loan losses (2) 66,160 (474,488) 134,459
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,551,368 1,341,288 3,540,719 2,589,613
----------- ----------- ----------- -----------
OTHER INCOME
Service charges for deposit accounts 98,009 86,535 192,040 179,841
Other customer fees 23,716 23,023 37,636 42,800
Net gain (loss) on trading securities (18,532) 2,830 (74,039) (197,279)
Net realized gain (loss) on sales of
available for sale securities -- 2,827 -- 2,827
Other income 2,185 (3,050) 8,802 3,292
----------- ----------- ----------- -----------
Total other income 105,378 112,165 164,439 31,481
----------- ----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits 530,138 395,854 1,021,659 835,326
Net occupancy expenses 74,085 51,138 128,514 97,919
Equipment expenses 63,839 49,809 114,775 102,676
Data processing fees 97,667 51,843 141,292 119,229
Deposit insurance expense 22,824 20,995 45,251 42,649
Legal and professional fees 43,467 47,513 104,264 99,658
Advertising 69,226 35,171 123,741 61,333
State franchise and deposit taxes 35,710 39,350 74,290 71,075
Other expenses 245,283 177,343 483,791 339,961
----------- ----------- ----------- -----------
Total other expenses 1,182,239 869,016 2,237,577 1,769,826
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 474,507 584,437 1,467,581 851,268
Income tax expense 119,858 192,005 528,435 294,492
----------- ----------- ----------- -----------
=========== =========== =========== ===========
NET INCOME $ 354,649 $ 392,432 $ 939,146 $ 556,776
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.32 $ 0.36 $ 0.85 $ 0.51
DILUTED EARNINGS PER SHARE 0.31 0.35 0.84 0.50
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six-months ended December 31, 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 $939,146 939,146 939,146
Other Comprehensive
income - net change in
unrealized loss on
securities available for sale (400,798) (400,798) (400,798)
--------
Comprehensive Income $538,348
========
Stock issued upon exercise of
stock options 5,833 29,165 34,998
Dividends declared (231,311) (231,311)
Net change in fair value of
rabbi trust shares 28,438 28,438
----------------------------------------------- ---------------------------------------
BALANCES, DECEMBER 31, 1999 $1,308,864 $6,332,584 $(611,329) $(2,030,955) $14,209,550 $(1,087,194) $18,121,520
=============================================== =======================================
</TABLE>
5
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTHS ENDED
DECEMBER 31,
1999 1998
OPERATING ACTIVITIES
<S> <C> <C>
Net cash provided by operating activities $ 810,825 $ 479,027
----------- -----------
INVESTING ACTIVITIES
Purchases of securities available for sale (6,332,482) (5,045,830)
Proceeds from maturities of securities available for sale 7,451,963 3,531,208
Purchases of securities held to maturity (7,874,038) (3,503,625)
Proceeds from sales of securities available for sale 520,648
Proceeds from maturities of securities held to maturity 3,862,471 2,950,085
Net change in loans (733,115) (5,597,051)
Purchases of premises and equipment (835,491) (179,310)
Proceeds from sale of fixed assets -- 13,000
Acquisition of deposits (net of cash acquired) (459,423) --
----------- -----------
Net cash used by investing activities (4,920,115) (7,310,875)
----------- -----------
FINANCING ACTIVITIES
Net change in
Non interest-bearing, interest-bearing and
savings deposits 3,291,172 1,771,182
Certificates of deposit 8,057,786 3,247,511
Short term borrowings (3,125,000) 1,000,000
Repayment of long-term debt (34,029) (31,406)
Cash dividends (231,311) (239,723)
Proceeds from exercise of options on common stock 34,998 59,130
Common stock acquired by Rabbi trusts -- 8,352
----------- -----------
Net cash used by financing activities 7,993,616 5,815,046
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,884,326 (1,016,802)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,573,139 6,947,148
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,457,465 $ 5,930,346
=========== ===========
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 3,668,567 $ 3,589,906
Income tax paid 600,505 95,864
</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 and
six-month periods ended December 31, 1999 and 1998 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, 1999 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. HARLAN BRANCH ACQUISITION
On October 15, 1999, the Bank acquired the deposits of the National
City Bank of Kentucky's Harlan, Kentucky branch office. In the
acquisition, the Bank purchased $17.1 million in deposits and $12,000
in fixed assets. The purchase premium was $459,000 and was calculated
on 3% of core deposits. This premium will be amortized over 84 months
on a declining balance method. The Bank is currently in the process of
purchasing the office building and real estate of this branch bank from
National City and expects to complete the transfer of title by June 30,
2000. In the interim period, the bank has placed $438,000 in escrow for
the purchase of this branch and rents the building from National City
for $3,600 per month. The Bank has opted to continue operating this
branch as a separate office and has retained the 7 persons previously
employed by National City.
3. NON-PERFORMING 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, 1999 and 1998:
(Dollars in thousands)
1999 1998
---- ----
Balance July 1 $1,212 $973
Charge offs (125) (16)
Recoveries 2 -
Provision for loan losses (474) 134
----- -----
Balance December 31 $615 $1,091
Ratio of net charge offs during
the period to average
loans outstanding during the period .10% .00%
========= =========
7
<PAGE>
Information on impaired loans is summarized below
AT DECEMBER 31 1999
----
Impaired loans with an allowance $275
Allowance for impaired loans (included in the Company's
allowance for loan losses) $99
SIX-MONTHS ENDED DECEMBER 31 1999
----
Average balance of impaired loans $749
Interest income recognized on impaired loans 86
Cash-basis interest received 83
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 regulatory
authorities influence the Bank's operations, so are its liquidity levels and
capital resources. As of December 31, 1999, 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.
8
<PAGE>
FINANCIAL CONDITION
The Corporation's assets increased by 4.32% to $198.6 million at December 31,
1999 compared to $190.4 million at June 30, 1999. The majority of this increase
is reflected in increases in cash and cash equivalents, investment securities,
loans and fixed assets. These increases are financed primarily by the net of an
increase in deposits and a decrease in short-term borrowings.
Cash and cash equivalents increased by $3.9 million to $7.5 million at December
31, 1999 from $3.6 million at June 30, 1999. This increase was primarily the
result of anticipated cash needs related to general concerns about potential
operational problems in the banking industry as a result of the year 2000.
The Company maintains a portfolio of trading account securities, which is
comprised of common stock of other financial institutions. The portfolio was
$971,000 at December 31, 1999 compared to $1.015 million at June 30, 1999. Most
of this decrease was attributable to a decrease in the fair market value of the
portfolio.
The loan portfolio increased by $800,000 to $121.5 million at December 31, 1999
from $120.7 million at June 30, 1999. During the past 2 quarters, the rate of
loan production has decreased due to higher interest rates and increasing
competition in the overall marketplace. A substantial portion of loans
originated during the last six-month period were adjustable-rate residential
mortgages.
At December 31, 1999, the allowance for loan losses was $615,000 or .50% of
loans receivable compared to $1.2 million or .99% of loans receivable at June
30, 1999. During the six-months ended December 31, 1999, management reduced the
allowance, due to the repayment of $904,000 on impaired loans. Total
non-performing assets were $893,000 or .73% of total loans at December 31, 1999
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 reduction and reduced the borrowers outstanding debt to $455,000. At
December 31, 1999, $99,000 was included in the allowance for loan losses,
specifically as a reserve for the remaining loans to this borrower.
The Bank augments its lending activities and increases its asset yields by
investing in mortgage-backed securities and U.S. Government securities. During
the six-months ended December 31, 1999, management purchased $14.2 million in
investment and mortgage-backed securities. These purchases were primarily funded
by proceeds from the acquisition of the deposits in the Harlan transaction,
called and maturing investment securities, principal collected on
mortgage-backed securities and investments, and the sale of securities available
for sale. At December 31, 1999, the Bank held $35.6 million in securities,
available for sale with a net unrealized loss of $1.1 million and $26.0 million
in securities held to maturity with a fair market value of $24.9 million.
Premises and equipment increased by $725,000 $3.2 million at December 31, 1999
from $2.4 million at June 30, 1999 primarily as the result of progress payments
made on the Bank's new operations center which is presently under construction.
The final cost is estimated at approximately $1.0 million, including furniture
and fixtures.
The unamortized core deposit intangible resulting from the Harlan transaction
was $427,000 at December 31, 1999, with 81 months of amortization remaining.
Total deposits increased by $11.3 million to $165.3 million at December 31, 1999
from $154.0 million at June 30, 1999. During the six-months ended December 31,
1999, certificates of deposit increased $8.1 million. NOW accounts and savings
deposits increased $3.2 million, primarily due to the acquisition of the
deposits in Harlan on October 15, 1999. Excluding the $17.1 million in deposits
acquired in the Harlan transaction, NOW accounts and savings decreased by $1.0
million and certificates of deposit decreased by $4.9 million. The decline in
these deposits was primarily attributable to aggressive competition in the form
of premium rates offered by other institutions in our market area.
9
<PAGE>
At December 31, 1999, the Bank met all regulatory capital requirements.
Tangible, core and risk-based capital ratios were 8.8%, 8.8% and 20.6%
respectively at December 31, 1999 as compared to 9.0%, 9.0% and 21.4% at June
30, 1999.
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED DECEMBER 31, 1999 AND 1998
Net income decreased by $38,000 to $354,000 for the three-month period ended
December 31, 1999 from $392,000 for the three-month period ended December 31,
1998. The primary reasons for the decrease were a decrease of $7,000 in
non-interest income and an increase of $313,000 in non-interest expense. These
items were offset by a $144,000 increase in net interest income a $66,000
decrease in the provision for loan losses and a $72,000 decrease in income tax
expense.
Net interest income increased by $144,000 for the three-month period ended
December 31, 1999 as compared to the three-month period ended December 31, 1998,
primarily as the result of higher volume.
Interest on loans decreased by $76,000 to $2.511 million for the three-month
period ended December 31, 1999 as compared to $2.587 million for the three-month
period ended December 31, 1998. This decrease is mainly attributable to a lower
yield on the weighted-average balance of loans receivable outstanding.
Interest on investment securities increased by $284,000 to $1.014 million for
the three-month period ended December 31, 1999 from $730,000 for the three-month
period ended December 31, 1998. This increase is primarily the result of higher
weighted-average balances during the period.
Interest on deposits increased by $69,000 to $1.878 million for the three-month
period ended December 31, 1999 from $1.809 million for the three-month period
ended December 31, 1998 as a result of higher volume.
Interest on short-term borrowings and long-term debt decreased by $13,000 to
$166,000 for the three-month period ended December 31, 1999 from $179,000 for
the three-month period ended December 31, 1998 due to lower levels of short-term
borrowing.
The provision for loan losses decreased $66,000 for the three-month period ended
December 31, 1999 as compared to the same period in 1998. 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, 1999 was .50%.
Non-interest income decreased by $7,000 to $105,000 for the three-month period
ended December 31, 1999 as compared to $112,000 for the same period in 1998. 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 $24,000 offset by an increase of $11,000 in service charges on
deposits and an increase of $6,000 in other income.
Non-interest expense increased by $313,000 to $1.182 million for the three-month
period ended December 31, 1999 as compared to $869,000 for the same period in
1998. Compensation and benefits increased by $134,000 to $530,000 for the
three-month period ended December 31, 1999 as compared to $396,000 for the same
period in 1998. This increase is primarily attributable to a decrease of $35,000
in salaries and wages that are being deferred as loan origination costs and an
increase of $35,000, which was attributable to the addition of 7 employees from
the Harlan transaction.
Data processing fees increased by $46,000 to $98,000 for the three-month period
ended December 31, 1999 from $52,000 for the three-month period ended December
31, 1998 primarily due to one time costs associated with the acquisition of the
branch office in Harlan.
10
<PAGE>
Advertising expense increased by $34,000 to $69,000 for the quarter ended
December 31, 1999 compared to $35,000 for the quarter ended December 31, 1998
primarily due to a higher level of advertising activity in the current period.
Other expenses increased by $68,000 to $245,000 for the three-month period ended
December 31, 1999 from $177,000 for the three-month period ended December 31,
1998, primarily due to the addition of $32,000 in core deposit intangible
amortization expense related to the Harlan transaction.
Income tax expense decreased by $72,000 to $120,000 for the three-month period
ended December 31, 1999 compared to $192,000 for the three-months ended December
31, 1998 due a lower level of income.
RESULTS OF OPERATIONS FOR THE SIX -MONTHS ENDED DECEMBER 31, 1999 AND 1998
Net income increased by $382,000 to $939,000 for the six-month period ended
December 31, 1999 from $557,000 for the six-month period ended December 31,
1998. The primary reasons for the increase were a $342,000 increase in net
interest income, a $609,000 decrease in provision for loan losses, a $133,000
increase non-interest income offset by a $468,000 increase in non-interest
expense and a $234,000 increase in income tax expense.
Net interest income increased by $342,000 for the six-month period ended
December 31, 1999 as compared to the six-month period ended December 31, 1998,
primarily as the result of a higher volumes and the recognition of interest
income on several non-accrual loans, which were paid off.
Interest on loans decreased by $37,000 to $5.058 million for the six-month
period ended December 31, 1999 as compared to $5.095 million for the six-month
period ended December 31, 1998. This decrease is mainly attributable to lower
yields on the weighted-average balance of loans receivable outstanding.
Interest on investment securities increased by $434,000 to $1.935 million for
the six-month period ended December 31, 1999 from $1.501 million for the
six-month period ended December 31, 1998. This increase is primarily the result
of higher weighted-average balances during the period.
Interest on deposits with other financial institutions decreased by $30,000 to
$41,000 for the six-month period ended December 31, 1999 from $71,000 for the
six-month period ended December 31, 1998 primarily due to a lower level of
interest-bearing cash balances.
Interest on short term borrowings and long term debt increased by $32,000 to
$390,000 for the six-month period ended December 31, 1999 from $358,000 for the
six-month period ended December 31, 1998 due to higher levels of long-term
borrowing and higher interest rates on short-term borrowings.
The provision for loan losses decreased $609,000 for the six-month period ended
December 31, 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,
net at December 31, 1999 was .50%.
The Bank's non-interest income increased by $133,000 to $164,000 for the
six-month period ended December 31, 1999 as compared to $31,000 for the same
period in 1998. The increase was attributable to a net decrease in realized and
unrealized losses on trading account securities of $123,000, a decrease in
realized gains on available for sale securities of $3,000, a $7,000 increase in
customer fees and service charges and an increase of $6,000 in other income. The
decrease in realized and unrealized losses on trading account securities was
primarily the result of an decrease 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.
11
<PAGE>
Non-interest expense increased by $468,000 to $2.238 million for the six-month
period ended December 31, 1999 as compared to $1.770 million for the same period
in 1998. Compensation and benefits increased by $187,000 to $1.022 million for
the six-month period ended December 31, 1999 as compared to $835,000 for the
same period in 1998. This increase is primarily attributable to a decrease of
$84,000 in salaries and wages that are being deferred as loan origination costs
and an increase of $17,000 in employee benefits. The decrease in salaries and
wages deferred as loan origination costs decreased due to a decrease in loan
production. The remainder of increases in wages and benefits were a result of
annual wage increases and, a $35,000 increase attributable to the addition of
seven employees from the Harlan transaction.
Occupancy expense increased by $31,000 to $129,000 for the six-month period
ended December 31, 1999 compared to $98,000 for the same period in 1998. This
increase was primarily due to $9,000 in rent expense for the newly acquired
branch in Harlan, an increase of $10,000 in repairs and maintenance expense and
an increase of $5,000 in depreciation expense.
Data processing fees increased by $22,000 to $141,000 for the six-month period
ended December 31, 1999 from $119,000 for the six-month period ended December
31, 1998 primarily due to one time conversion expenses incurred for the Harlan
branch acquisition.
Advertising expense increased by $63,000 to $124,000 for the six-month period
ended December 31, 1999 compared to $61,000 for the six-month period ended
December 31, 1998 primarily due to a new advertising campaign launched in the
quarter ended December 31, 1999.
Other expenses increased by $144,000 to $484,000 for the six-month period ended
December 31, 1999 from $340,000 for the six-month period ended December 31, 1998
primarily as the result of $32,000 in core deposit intangible amortization for
the Harlan transaction, a $14,000 increase in printing and stationary expense, a
$41,000 increase in other real estate expense, a $15,000 increase in ATM and
other processing fees and a $9,000 increase in telephone expense.
Income tax expense increased by $234,000 to $528,000 for the six-month period
ended December 31, 1999 compared to $294,000 for the six-months ended December
31, 1998 due to a higher level of taxable income.
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.
12
<PAGE>
HFB FINANCIAL CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
a. The Corporation held its annual meeting of Stockholders on
October 19, 1999
b. Not Applicable
c. At the Annual Meeting, shareholders voted on the following
matters:
(1) The election of the following persons to three-year terms
as directors of the Corporation:
Nominee For Withheld
------- --- --------
Frank W. Lee 913,130 3,000
Charles A. Harris 913,130 3,000
Frances Coffey Rasnic 910,175 5,811
As a result, all were elected as directors of the Corporation for
terms to expire in 2002.
d. Not Applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibit is filed as part of this Form 10-QSB
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
None
13
<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 14, 2000
14
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
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<INT-BEARING-DEPOSITS> 0
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<DEPOSITS> 165,336,714
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0
0
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<EXPENSE-OTHER> 2,237,577
<INCOME-PRETAX> 1,467,581
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<NET-INCOME> 939,146
<EPS-BASIC> 0.85
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