<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
------------------
Securities and Exchange Commission File Number 0-25722
HF BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0576146
(State or other jurisdiction (I.R.S. Employer I.D. No.)
Of incorporation or organization)
445 E. Florida Avenue, Hemet, California 92543
(Address of principal executive offices)
Registrant's telephone number, including area code: (909) 658-4411
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
There were 6,281,875 shares of the Registrant's common stock outstanding
as of November 8, 1996.
<PAGE> 2
HF BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
--------------------- ----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition as of
September 30, 1996, (unaudited) and June 30, 1996 3
Consolidated Statements of Operations (unaudited) for the
Three Months ended September 30, 1996 and 1995 4-5
Changes in Stockholders Equity (unaudited) 6
Consolidated Statements of Cash Flows (unaudited) for the
Three Months ended September 30, 1996 and 1995 7-8
Notes to Consolidated Financial Statements (unaudited) 9-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-24
---------------------------------------------
PART II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25-26
Signature Page 27
2
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<TABLE>
<CAPTION>
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Sept 30, June 30,
1996 1996
---- ----
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 29,773 $100,633
Investment securities held to maturity (estimated fair value of $33,855
and 33,842 at September 30, 1996 and June 30, 1996,
respectively) 34,428 34,666
Investment securities available for sale (amortized cost of $ 195,903
and $177,487 at September 30, 1996 and June 30, 1996, respectively) 192,597 173,171
Loans receivable (net of allowance for estimated loan losses of $6,113
and $3,068 at September 30, 1996 and June 30, 1996, respectively) 438,573 225,161
Mortgage-backed securities held to maturity (estimated fair value of
$164,889 and $152,521 at September 30, 1996 and June 30, 1996,
respectively) 169,187 159,262
Mortgage-backed securities available for sale (amortized cost of $86,249
and $99,888 at September 30, 1996 and June 30, 1996, respectively) 87,105 100,259
Accrued interest receivable 7,438 6,260
Investment in capital stock of the Federal Home Loan Bank, at cost 5,934 4,436
Premises and equipment, net 8,226 6,578
Real estate owned, net
Acquired through foreclosure 3,134 1,079
Acquired for sale or investment 758 996
Other assets 27,221 14,415
---------- --------
Total assets $1,004,374 $826,916
========== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deposit accounts $ 836,132 $669,725
Advances from the Federal Home Loan Bank 70,000 70,000
Accounts payable and other liabilities 11,434 5,278
Income taxes 6,999 842
---------- --------
Total liabilities 924,565 745,845
Stockholders' equity
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 15,000,000 shares authorized; 6,612,500 issued
and 6,281,875 outstanding at September 30, 1996 and June 30,1996 66 66
Additional paid-in capital 51,146 51,113
Retained earnings, substantially restricted 38,618 40,957
Net unrealized loss on securities available for sale, net of taxes (1,431) (2,309)
Deferred stock compensation (5,242) (5,408)
Treasury stock, 330,625 shares (3,348) (3,348)
---------- --------
Total stockholders' equity 79,809 81,071
---------- --------
Total liabilities and stockholders' equity $1,004,374 $826,916
========== ========
</TABLE>
See notes to consolidated financial statements
3
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<TABLE>
<CAPTION>
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1995
---- -----
(dollars in thousands)
<S> <C> <C>
INTEREST INCOME:
Interest on loans $ 5,009 $4,172
Interest on mortgage-backed securities 4,655 4,783
Interest and dividends on investment securities 4,735 2,162
------- -------
Total interest income 14,399 11,117
INTEREST EXPENSE:
Interest on deposit accounts 8,138 5,863
Interest on advances from the Federal Home Loan Bank
and other borrowings 915 918
Net interest expense of hedging transactions 780 825
------- -------
Total interest expense 9,833 7,606
------- -------
NET INTEREST INCOME BEFORE PROVISION FOR
ESTIMATED LOAN LOSSES 4,566 3,511
PROVISION FOR ESTIMATED LOAN LOSSES 179 145
------- -------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOAN LOSSES 4,387 3,366
OTHER INCOME (EXPENSE):
Loan and other fees 51 49
Loss from real estate operations, net (52) (78)
Gain on sale of mortgage-backed securities available for sale 365 --
Savings Fees 171 15
Other income 121 148
Amortization of intangible assets (237) --
------- -------
Total other income (expense) 419 134
</TABLE>
See notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS(CONTINUED)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
----------------------
1996 1995
---- ----
(dollars in thousands except
earnings per share)
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits $ 1,997 $ 1,636
Occupancy and equipment expense 630 521
FDIC insurance and other assessments 5,079 338
Legal and professional services 168 112
Data processing service costs 292 215
Marketing 158 66
Savings Expense 101 67
Other 350 174
-------- --------
Total general and administrative expenses 8,775 3,129
EARNINGS (LOSS) BEFORE INCOME TAXES EXPENSE (BENEFIT) (3,969) 371
INCOME TAX EXPENSE (BENEFIT) (1,630) 157
-------- --------
NET EARNINGS(LOSS) (2,339) 214
======== ========
Net earnings (loss) per share ($.41) $.03
Weighted average common shares outstanding 5,700,619 6,157,340
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
<TABLE>
<CAPTION>
HF BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
Three Months Ended September 30, 1996
(Unaudited)
Common Additional Retained Unrealized Deferred stock Treasury Total
stock paid-in earnings loss on compensation stock
capital securities
available
for sale
-----------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 $66 $51,113 $40,957 ($2,309) ($5,408) ($3,348) $81,071
Net loss for the three months
ended September 30, 1996 -- -- (2,339) -- -- -- (2,339)
Change in net unrealized loss on
securities available for sale, net --
of taxes -- -- -- 878 -- -- 878
Deferred stock compensation -- 33 -- -- 166 -- 199
------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $66 $51,146 $38,618 ($1,431) ($5,242) ($3,348) $79,809
================================================================================================
</TABLE>
6
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<TABLE>
<CAPTION>
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings(loss) (2,339) $ 214
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:
Provisions for estimated loan and real estate losses 209 156
Direct write-offs from real estate operations 2 22
Depreciation and amortization 217 192
Amortization of deferred loan fees (118) (74)
(Accretion) amortization of (discounts) premiums on loans
and investment and mortgage-backed securities, net 68 76
Amortization of intangible assets 237 --
Federal Home Loan Bank stock dividend (89) (51)
Loss (Gain) on sales of real estate, net 10 (19)
Gain on sale of mortgage-backed securities, available for sale (365) --
Gain on sale of premises and equipment (10) --
Increase in accrued interest receivable (1,178) (771)
Increase(Decrease) in accounts payable and other liabilities 5,621 (27,004)
Increase in other assets (2,188) (3,053)
Other, net 1,340 51
-------- --------
Net cash provided by (used in) operating activities 1,417 (30,261)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable (50,597) (117)
Purchases of mortgage-backed securities held to maturity (15,039) --
Purchases of mortgage-backed securities available for sale (9,888) (16,154)
Principal repayments on mortgage-backed securities held to maturity 5,058 5,851
Principal repayments on mortgage-backed securities available for sale 3,576 2,707
Purchases of investment securities held to maturity -- (32,804)
Purchases of investment securities available for sale (34,970) --
Principal repayments on investment securities held to maturity 247 171
Principal repayments on investment securities available for sale 1,577 1,735
Proceeds from sales of mortgage-backed securities available for sale 21,150 --
Proceeds from sales of real estate owned 365 1,053
Additions to real estate owned (5) (62)
Proceeds from sale of premises and equipment 5 4
Additions to premises and equipment (703) (53)
Maturities of investment securities available for sale 19,930 --
Cash payment for acquisition, net of cash received (14,707) --
-------- --------
Net cash used in investing activities (74,001) (37,669)
</TABLE>
See notes to consolidated financial statements
7
<PAGE> 8
<TABLE>
<CAPTION>
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificate accounts 2,424 1,186
Net decrease in NOW, passbook, money market investment and
non-interest -bearing accounts (700) (3,235)
-------- -------
Net cash used in financing activities 1,724 (2,049)
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (70,860) (69,979)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 100,633 88,642
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 29,773 $ 18,663
======== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES-
Cash paid during the period for:
Interest on deposit accounts and other borrowings $ 1,403 $ 698
======== ========
Income Taxes -- --
======== ========
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure $ 21 $ 901
Common stock acquired by ESOP -- $ 92
Loans to facilitate sale of real estate through foreclosure $ 99 $ 91
Purchase of Palm Springs Savings Bank:
Fair value of assets purchased, excluding cash $184,321 --
Fair value of liabilities assumed $169,614 --
--------
Cash payment for acquisition, net of cash received $ 14,707 --
===========
</TABLE>
8
<PAGE> 9
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. Company Description and Basis of Presentation
---------------------------------------------
HF Bancorp, Inc. is a savings and loan holding company incorporated in the
State of Delaware that was organized for the purpose of acquiring all of the
capital stock of Hemet Federal Savings and Loan Association (the Association)
upon its conversion from a federally chartered mutual savings association to a
federally chartered stock savings association. On June 30, 1995, HF Bancorp,
Inc. completed its sale of 6,612,500 shares of its common stock through
subscription and community offerings to the Association's depositors, Board of
Directors, management, employees and the public and used approximately 50% of
the net proceeds from such sales to purchase all of the Association's common
stock issued in the Association's conversion to stock form. Net proceeds of the
initial offering were $51.1 million and $25.5 million was used for purchase of
the Association's common stock. Such business combination was accounted for at
historical cost in a manner similar to a pooling of interests.
The consolidated financial statements include the accounts of HF Bancorp,
Inc. and its wholly-owned subsidiary Hemet Federal Savings and Loan Association
and its wholly-owned subsidiaries, HF Financial Corporation, Coachella Valley
Financial Services Corporation ("CVFSC"), PSSB Insurance Services, Inc.
("PSSBI") and H.F Financial Corporation's subsidiary, First Hemet Corporation
(collectively, the Company). CVFSC served as the trustee on deeds of trust held
by Palm Springs Savings Bank ("PSSB"). This service will be transferred to First
Hemet Corporation. PSSBI was formed to offer life insurance and other investment
products to customers of PSSB. In September of 1994 PSSBI discontinued marketing
debt and equity securities, including mutual funds, to the general public and
the PSSB customer base. First Hemet Corporation provides trustee services for
the Association, is engaged in real estate development, and receives commissions
from the sale of mortgage life insurance, fire insurance and annuities. All
material intercompany transactions, profits and balances have been eliminated.
The Company is subject to regulation by the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities
and Exchange Commission ("SEC"). Headquartered in Hemet, California, the
Association conducts business from its main office and three branch offices
located in Hemet, California, three branches in Riverside, California and from
its other twelve branch offices located in Sun City, San Jacinto, Canyon Lake,
Idyllwild, Murrieta, Vista, Oceanside, Rancho Bernardo, Palm Springs, Desert Hot
Springs, Cathedral City and Rancho Mirage, California. Its deposits are insured
up to the applicable limits under the Savings Association Insurance Fund
("SAIF") of the FDIC. The Association is also a member of the Federal Home Loan
Bank of San Francisco ("FHLB"). The Association is primarily engaged in the
business of attracting funds in the form of deposits and supplementing such
deposits with FHLB and other borrowings, and investing such funds in loans
secured by real estate, primarily one-
9
<PAGE> 10
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
to-four family residential mortgage loans. The Association has, in recent years,
invested in mortgage-backed and related securities, including collateralized
mortgage obligations. To a lesser extent, the Association invests in
multi-family mortgage loans, commercial real estate loans, construction loans,
acquisition, development and land loans, consumer loans, and commercial business
loans. The Association's revenues are derived principally from interest on its
mortgage loans, consumer loans, mortgage-backed securities portfolio and
interest and dividends on its investment securities. The Association's primary
sources of funds are deposits, principal and interest payments on loans and
mortgage-backed securities, FHLB advances, and other borrowings.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management all necessary adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation have been included. The results of operations for the three month
period ended September 30, 1996, are not necessarily indicative of the results
that may be expected for the entire fiscal year.
These consolidated financial statements and the information under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" should be read in conjunction with the audited consolidated
financial statements and notes thereto of HF Bancorp, Inc. for the year ended
June 30, 1996 included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996.
2. Earnings Per Share
------------------
Earnings per share for the three months ended September 30, 1996 are based
on weighted average common shares outstanding of 5,700,619. The total issued
shares of 6,612,500 have been adjusted for the weighted average unallocated
shares under the ESOP plan of 382,881, for the reduction of outstanding shares
purchased for the stock compensation plan of 198,375 and acquisition of shares
of treasury stock of 330,625 for the three months ended September 30, 1996.
(See Note 6)
3. Termination of Swap Agreements
------------------------------
On July 10, 1995, the Company terminated four interest rate swap
agreements with an aggregate outstanding notional amount of $60,000,000. At June
30, 1995, the weighted average fixed payment rate and variable payment received
rate were 9.53% and 6.11%, respectively. The Company paid a termination fee of
$4,856,000 which has been deferred and is being amortized over
10
<PAGE> 11
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
the remaining terms of the respective swap agreements. The expected future
annual amortization is as follows: $1,811,000, $798,000 and $272,000 for the
years ended June 30, 1997, 1998 and 1999 respectively. As of September 30, 1996
the remaining deferred amount was $2,373,000.
4. Loans Receivable
----------------
The Association adopted Statement of Financial Accounting Standards (SFAS)
No. 114, Accounting by Creditors for Impairment of a Loan." as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures," as of July 1, 1995. These statements generally require all
creditors to account for impaired loans, except those loans that are accounted
for at fair value or at the lower of cost or fair value, at the present value of
the expected future cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. SFAS No. 114
indicates that a creditor should evaluate the collectability of both contractual
interest and contractual principal when assessing the need for loss recognition.
The Association applies the provisions of SFAS No. 114 to all loans in its
portfolio. In applying the provisions of SFAS No. 114, the Association considers
a loan to be impaired when it is probable that the Association will be unable to
collect all contractual principal and interest in accordance with the terms of
the loan agreement. However, in determining when a loan is impaired, management
also considers the loan documentation, current loan to value ratios, and the
borrowers current financial position. The Association considers all loans
delinquent 90 days or more and all loans that have a specific loss allowance
applied to adjust the loan to fair value as impaired.
As of September 30, 1996, the Association had impaired loans totaling
$10.7 million which have related specific reserves of $1.6 million; there were
$4.9 million of impaired loans as of September 30, 1996 for which no specific
reserves had been recorded. The average recorded investment in impaired loans
during the three months ended September 30, 1996 was $11.4 million. The accrual
of interest on impaired loans is discontinued when, in managements opinion, the
borrower may be unable to meet payments as they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized to the extent of full cash payments received
and accepted. As of September 30, 1996 accrued interest on impaired loans was $
70,000 and interest of $ 153,000 was received in cash for the three months then
ended. Interest not recognized due to non-accrual status was $ 101,000 for the
three months ended September 30, 1996. Of the $10.7 million of impaired loans
which have specific reserves established in the amount of $1.6 million, 52.6%,
or $5.6 million are paid current.
11
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HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
5. Change in Accounting Principles
-------------------------------
During 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" and SFAS No.
122, "Accounting for Mortgage Servicing Rights." Management does not believe
that either of these statements will have a material impact on the financial
condition or results of operations of the Company.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which became effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share.
(See note 6)
6. Stock Plans
-----------
The Company established for eligible employees an Employee Stock Ownership
Plan and Trust ("ESOP") which became effective upon the conversion of the
Association from a mutual to a stock association (the "Conversion"). The ESOP
subscribed for 7% of the shares of common stock issued in the Conversion
pursuant to the subscription rights granted under the ESOP plan. On June 30,
1995, the ESOP borrowed $3,703,000 from the Company in order to fund the
purchase of common stock. The loan to the ESOP will be repaid principally from
the Company's contributions to the ESOP over a period of ten years and the
collateral for the loan is the common stock purchased by the ESOP. The interest
rate for the ESOP loan is 9%. As of September 30, 1996 a total of 46,288 shares
of common stock was allocated to employee accounts, leaving a remainder of
416,587 shares to be allocated over the next nine years.
At the Company's Annual Meeting of Shareholders on January 11, 1996, the
shareholders approved the HF Bancorp, Inc. 1995 Master Stock Option Plan ("Stock
Option Plan") and the Hemet Federal Savings and Loan Association Master Stock
Compensation Plan (the "Stock Compensation Plan") (collectively the "Plans").
These Plans became effective as of the date of approval. The Stock Compensation
Plan was authorized to acquire 198,375 shares of common stock in the open
market. The Association contributed funds to the Stock Compensation Plan to
enable the Stock Compensation Plan trustees to acquire the necessary shares of
the common stock. On February 28, 1996, the Association acquired 198,375 shares
in the open market at a price of
12
<PAGE> 13
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
$10.00 per share. Stock shares are held in trust. The plan allocated 34,700
shares to directors with the remaining shares allocated to employees as follows:
75% as a base grant and 25% as a performance grant to employees (provided goals
are met) which will vest over a 5 year period. The total shares authorized were
awarded to directors and employees in key management positions in order to
provide them with a proprietary interest in the Company in a manner designed to
encourage such employees to remain with the Company. The amount contributed to
the Stock Compensation Plan will be amortized to compensation expense as the
Association's employees and directors become vested in those shares. During the
three months ended September 30, 1996, $98,000 was amortized to expense.
The Stock Option Plan provides for the grant of up to 661,250 shares of
Common Stock to employees in key management positions and directors and similar
to the Stock Compensation Plan, it is intended to provide key management and
directors with a proprietary interest in the Company and therefore an incentive
to remain with the Company.
7. Recent Developments
-------------------
Deposit Insurance Funds Act of 1996
- -----------------------------------
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposes a special
one-time assessment on SAIF member institutions, including the Association, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996. The special assessment was recognized as an
expense in the third quarter of 1996 and is tax deductible. The Association took
a pre-tax charge of $4.8 million as a result of the FDIC special assessment.
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and Bank Insurance Fund ("BIF")
members. Beginning on January 1, 1997, BIF deposits will be assessed for FICO
payments at a rate of 20% of the rate assessed on SAIF deposits. Based on
current estimates by the FDIC, BIF deposits will be assessed a FICO payment of
1.3 basis points, while SAIF deposits will pay an estimated 6.5 basis points on
the FICO bonds. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on
January 1, 1999 provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the higher FICO payments described above. Management
13
<PAGE> 14
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
Palm Springs Savings Bank Acquisition
- -------------------------------------
On September 27, 1996, Hemet Federal Savings and Loan Association
consummated the acquisition of Palm Springs Savings Bank (PSSB) by purchasing
their 1,131,446 shares of common stock for $16.3 million. The purchase included
acquiring a net loan portfolio of $160.7 million with an average weighted rate
of 8.47% and savings account deposits of $164.7 million with an average weighted
rate of 4.09%.
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
General
- -------
HF Bancorp, Inc. ("Bancorp" or the "Company") was organized by Hemet Federal
Savings and Loan Association ("Association" or "Hemet Federal") for the purpose
of acquiring all of the capital stock of the Association to be issued in
connection with the Association's conversion from mutual to stock form, which
was consummated on June 30, 1995, (the "Conversion"). The Company was
incorporated under Delaware law. The Company is a savings and loan holding
company and is subject to regulation by the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities
and Exchange Commission ("SEC"). Headquartered in Hemet, California, the Company
conducts business from its main office and three branch offices located in
Hemet, California, three branches in Riverside, California and from its other
twelve branch offices located in Sun City, San Jacinto, Canyon Lake, Idyllwild,
Murrieta, Vista, Oceanside, Rancho Bernardo, Palm Springs, Cathedral City,
Rancho Mirage and Desert Hot Springs, California. The Association is regulated
by the OTS and the FDIC and its deposits are insured up to the applicable limits
under the Savings Association Insurance Fund ("SAIF") of the FDIC. The
Association is also a member of the Federal Home Loan Bank of San Francisco
("FHLB").
The Company is primarily engaged in the business of attracting funds in the form
of deposits and supplementing such deposits with FHLB and other borrowings, and
investing such funds in loans secured by real estate, primarily one to four
family residential mortgage loans. The Company had in past recent years, when
mortgage demand was not as high as presently exists, made investments in U.S.
agency backed investment securities and mortgage-backed and related securities,
including collateralized mortgage obligations ("CMOs") that generally are either
guaranteed by a Federal agency, a government sponsored entity, or are private
issuer securities that have an investment grade of AAA. The current direction is
to serve the loan demand in our expanded market areas that have grown with the
branch acquisitions in northern San Diego County from Hawthorne Savings, F.S.B.
and through the purchase-acquisition of Palm Springs Savings Bank that serves
the Coachella Valley communities. To a lesser extent, the Company invests in
multi-family mortgage loans, commercial real estate loans, construction loans,
acquisition, development and land loans, commercial business loans and consumer
loans.
The Company's revenues are derived principally from interest on its mortgage
loan and mortgage-backed securities portfolio and interest and dividends on its
investment securities. The Company's primary sources of funds are deposits and
principal and interest payments on loans and mortgage-backed securities, FHLB
advances, and other borrowings. Through subsidiaries, the Company also engages
in residential real estate development and receives commissions from the sale of
mortgage life insurance, fire insurance, annuities, mutual funds and derives
income from trustee services.
Changes in Financial Condition from June 30, 1996 to September 30, 1996
- -----------------------------------------------------------------------
Total assets of the Company increased $ 177.5 million, or 21.5 %, from $ 826.9
million at June 30, 1996 to $1.004 billion at September 30, 1996, primarily as a
result of the acquisition of Palm Springs Savings Bank (PSSB). (See Note # 7,
Palm Springs Savings Bank Acquisition). Loans
15
<PAGE> 16
receivable net; increased $213.4 million, or 94.8% from $225.2 million at June
30, 1996 to $438.6 million at September 30, 1996 primarily as a result of net
loans acquired in the PSSB acquisition totalling $160.7 million and the
remainder as a result of increased lending activity at the Association level,
which included $36.9 million in whole loan, adjustable rate residential loans
purchased in the secondary market. Mortgage-backed and other investment
securities increased by only $16.0 million, from $467.4 million at June 30, 1996
to $483.3 million at September 30, 1996. Investment in capital stock of the FHLB
increased from $4.4 million to $5.9 million when comparing the balances at June
30, 1996 to September 30, 1995; primarily as a result of acquiring $1.4 million
in stock previously owned by PSSB and dividends credited as stock for $93,000.
Deposit account balances increased $166.4 million or 24.8%, from $669.7 million
at June 30, 1996 to $836.1 million at September 30, 1996, primarily due to the
PSSB acquisition that added accounts totalling $164.7 million in deposit
accounts. Total equity decreased $1.3 million from $81.1 million at June 30,
1996 to 79.8 million at September 30, 1996, or 1.6% primarily due to the $2.3
million net loss for the three months ended September 30, 1996 which includes
the $2.8 million after tax impact of the one-time SAIF assessment accrual at
September 30, 1996, which was partially offset by improvement in the net
unrealized loss position on securities available for sale that added $878,000,
net of taxes, to equity at September 30, 1996.
Managing Interest Rate Risk and Hedging Activities
- --------------------------------------------------
In an effort to manage the Company's vulnerability to interest rate changes,
management closely monitors interest rate risk on an ongoing basis.
The Company has limited its exposure to interest rate risk, in part, through the
origination and purchase of ARM loans and shorter-term fixed-rate loans.
Management believes that, although investment in ARM loans may reduce short-term
earnings below amounts obtainable through investments in fixed-rate mortgage
loans, an ARM loan portfolio reduces the Company's exposure to adverse interest
rate fluctuations and enhances longer term profitability. During the quarter
ended September 30, 1996 the Association purchased adjustable rate residential
whole loans in the secondary market totalling $36.9 million with a net weighted
average coupon of 7.0% . Within this group $22.8 million are indexed to the one
year constant maturity treasury index adjusting on an annual basis and $14.1
million were structured as three/one adjustable rate loans whereby the rate is
fixed for the first three years of the loan's life and then reverts to a one
year adjustable based on the one year constant maturity treasury index. There
can be no assurance that any substantial amount of ARM loans meeting the
Association's underwriting standards will be available for origination in the
future. The overall investment policy of the Company is designed to manage the
interest rate sensitivity of its overall assets and liabilities, to generate a
favorable return without incurring undue interest rate risk, to supplement the
Company's lending activities, and to provide and maintain liquidity. The
Company's objective is to control interest rate risk through investments in
instruments with shorter terms to maturity or average lives to better match the
repricing of liabilities. As of June 30, 1996, pursuant to the results of the
OTS Risk Management Model, the Association's Net Portfolio Value was $71.1
million compared to its book value of $ 60.7 million.
The Company has also utilized a variety of financial instruments and strategies
to manage the
16
<PAGE> 17
interest rate risk associated with its interest rate sensitive assets and
liabilities, including off-balance sheet transactions, such as interest rate
agreements, including swaps, caps and floors, which the Company originally
entered into to synthetically adjust the duration of the Company's liabilities
to more closely match that of its assets. At September 30, 1996, the Company had
two interest swap agreements with an aggregate notional amount of $35.0 million.
One swap will mature on January 6, 1999 in the notional amount of $20.0 million,
and the other will mature on January 30, 1999 in the notional amount of $15.0
million. On July 10, 1995 the Association terminated four interest rate swap
contracts with an aggregate notional amount of $60.0 million invoking a
termination fee of $4.9 million which is being amortized to expense over the
individual remaining contract lives of each swap. At September 30, 1996 the
deferred loss for termination fees was $2.4 million. During the three months
ended September 30, 1996 the Association amortized $509,000 of the deferred loss
to interest expense and charged interest expense for $270,000 relating to the
$35.0 million of current existing interest rate swaps.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and related securities, retained earnings and
FHLB advances and other borrowings. While maturities and scheduled amortization
of loans are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Association has continued to maintain the
required minimum levels of liquid assets as defined by OTS regulations. This
requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio is currently 5%. The Association's
liquidity ratio was 11.8 % at September 30, 1996 compared to 12.0 % at June 30,
1996. It is the Association's intent to maintain liquidity in a 5-6% range to
take advantage of higher interest income opportunities from mortgage and
consumer related investments. The ratio at June 30 and September 30, 1996 appear
high because the Association was still in the process of deploying funds on a
more permanent basis that were acquired in the purchase of three branch offices
from Hawthorne Savings, F.S.B. on June 21, 1996 that provided cash in the amount
of $177.9 million, and from $15.6 million derived on September 24, 1996 through
the sale of three GNMA adjustable rate Mortgage-backed security pools, held as
available for sale.
The Company's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing activities.
See Statements of Cash Flows in the Consolidated Financial Statements included
herein. The Company's primary sources of funds during the three months ended
September 30, 1996 were its excess liquidity at the beginning of the period,
principal repayments on loans and mortgage-backed and investment securities, and
proceeds from the sales of available for sale mortgage-backed securities.
The Company has other sources of liquidity if a need for additional funds arises
including FHLB advances. At September 30, 1996, the Association had $70.0
million in advances outstanding from the FHLB; no change from the amount
outstanding at June 30, 1996. The Company had no other debt outstanding at
September 30, 1996. The Association has available collateral in the form of
mortgage loans, mortgage backed and related securities and U.S. Government
Agency Notes and Bonds that may be used as collateral in securing financing for
cash needs.
17
<PAGE> 18
The Association must maintain capital standards as set forth by federal
regulations. As of September 30, 1996, these requirements are: 1) tangible
capital of 1.5 % of adjusted assets; 2) core capital of 3% of adjusted assets;
and 3) risk-based capital of 8.0 % of risk-weighted assets. At September 30,
1996, the Association exceeded all minimum regulatory capital requirements as
shown in the table below:
<TABLE>
<CAPTION>
PERCENT OF
ADJUSTED
AMOUNT TOTAL ASSETS
------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible Capital
- ----------------
Actual capital $53,476 5.46%
Minimum required 14,702 1.50
------ -----
Excess $38,774 3.96%
======= =====
Core Capital
- ------------
Actual capital $53,476 5.46%
Minimum required 29,405 3.00
------- -----
Excess $24,071 2.46%
======= =====
AMOUNT PERCENT OF RISK-
------
WEIGHTED ASSETS
---------------
Risk-based Capital
- ------------------
Actual capital $57,981 15.32%
Minimum required 30,276 8.00
------- -----
Excess $27,705 7.32%
======= =====
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
contains "prompt corrective action" provisions under which insured depository
institutions are to be classified into one of five categories based primarily
upon capital adequacy. The categories range from "well capitalized" to
"critically under capitalized." OTS guidelines define a "well capitalized"
institution as follows: A savings institution is "well capitalized" if it has a
total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based
capital ratio (Tier 1 capital to total assets) of 6% or greater, has a core
capital ratio of 5% or greater and is not subject to any written capital order
or directive to meet and maintain a specific capital level of any capital
measure. At September 30, 1996, the Association's regulatory capital levels
exceed the thresholds required to be classified as a "well capitalized"
institution. The OTS issued final regulations which set forth the methodology
for calculating an interest rate risk component that is being incorporated into
the OTS regulatory
18
<PAGE> 19
capital rules. Under the new regulations, only savings institutions with "above
normal" interest rate risk exposure are required to maintain additional capital.
This additional capital would increase the amount of a savings institution's
otherwise required risk-based capital requirement. The final rule became
effective January 1, 1994 however OTS has delayed implementation until further
notice. Had the regulation been in effect as of June 30, 1996 the Associations'
additional capital contribution for the risk based capital requirement would
have been $8.1 million; raising the requirement to $38.3 million which would
reflect an excess of actual capital over the required risk- based requirement by
$19.5 million.
Management believes that, under the current regulations, the Association will
continue to meet its minimum capital requirements in the coming year. However,
events beyond the control of the Association, such as changing interest rates or
a further downturn in the economy in the areas where the Association has most of
its loans and real estate projects, could adversely affect future earnings and,
consequently, the ability of the Association to meet its future minimum capital
requirements.
Nonperforming and Classified Assets
- -----------------------------------
The following table sets forth information regarding non-accrual loans
delinquent 90 days or more and real estate acquired through foreclosure (REO).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 JUNE 30, 1996
------------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual mortgage loans delinquent 90 days or
more $4,897 $1,301
Non-accrual consumer loans delinquent 90 days or
more 50 --
------ ------
Total nonperforming loans 4,947 1,301
Total investment in REO 4,028 1,460
------ ------
Total nonperforming assets $8,975 $2,761
====== ======
Nonperforming loans to gross loans 1.06% .56%
Non performing assets to total assets .89% .33%
</TABLE>
The Association adopted SFAS 114, as amended by SFAS 118 as of July 1, 1995 and
recognized no impact upon adoption. A loan is considered impaired when it is
probable that the Association will be unable to collect all contractual
principal and interest in accordance with the terms of the loan agreement, when
a loan is ninety days or more past due, or when the loan has been classified as
"substandard" by an internal review process.
At September 30, 1996 the Association had impaired loans totalling $10.7
million, which have
19
<PAGE> 20
related specific reserves of $1.6 million and there were $4.9 million of
impaired loans as of September 30, 1996 for which no specific reserves had been
recorded. The average recorded investment in impaired loans during the three
month period ended September 30, 1996 was $11.4 million. With the acquisition of
Palm Springs Savings Bank on September 27, 1996 the Association's impaired loans
increased by a gross outstanding loan amount of $6.2 million.
Interest is accrued on impaired loans on a monthly basis except for those loans
that are 90 days or more delinquent (non-accrual loans). When a loan becomes 90
days or more delinquent, the accrual of interest ceases and all previously
accrued interest is reversed. For the three months ended September 30, 1996,
accrued interest on impaired loans was $70,000 and interest of $153,000 was
received in cash.
If all non-accrual loans had been performing in accordance with their original
loan terms and had been outstanding from the earlier of the beginning of the
period or origination, the Association would have recorded interest income of
$101,000 during the three month period ended September 30, 1996.
The allowance for loan losses is established through a provision for loan losses
based on management's evaluation of the risks inherent in its loan portfolio and
the general economy. Management reviews the Association's loan loss allowance on
a monthly basis. In determining levels of risk, management considers a variety
of factors, including asset classifications, economic trends, industry
experience and trends, geographic concentrations, estimated collateral values,
management's assessment of the credit risk inherent in the portfolio, historical
loan loss experience, and the Association's underwriting policies. The allowance
for loan losses is maintained at an amount management considers adequate to
cover losses in loans receivable which are deemed probable and estimable.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Association's allowance for loan
losses. Such agencies may require the Association to recognize additions to the
allowance based on judgments different from those of management.
While management uses the best information available to make these estimates,
future adjustments to the allowances may be necessary due to economic,
operating, regulatory and other conditions that may be beyond the Association's
control.
20
<PAGE> 21
The following tables set forth activity in the Association's allowances for
estimated loan losses and estimated real estate losses during the three months
ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Allowance for loan losses:
- --------------------------
Balance at June 30 $3,068 $2,694
Allowance Acquired from PSSB 2,963 --
Chargeoffs:
One to four family (11) (64)
Commercial real estate -- --
Construction loans -- (16)
Land/acquisition and development (86) --
Consumer -- (45)
------ ------
Total chargeoffs (97) (125)
Provision for estimated loan losses 179 145
------ -------
Balance at September 30 $6,113 $ 2,714
====== =======
Allowance for real estate losses:
- ---------------------------------
Balance at June 30 $1,917 $ 1,927
Allowance acquired from PSSB 491 --
Chargeoffs (8) (45)
Provision for estimated real estate losses 29 11
------- -------
Balance at September 30 $2,429 $1,893
======= =======
</TABLE>
The ratio of allowance for estimated loan losses to gross loans decreased from
1.33% at June 30, 1996 to 1.31% at September 30, 1996 due to an increase in
gross loans over the three month period as a result of increased fundings and
the acquisition of $175.9 million in gross loans associated with Palm Springs
Savings Bank. The ratio of allowance for estimated loan losses to gross
non-performing loans decreased from 235.75 % at June 30, 1996, to 123.56 % at
September 30, 1996 due primarily to an increase in non-performing loans, from
$1.3 million at June 30, 1996 to $4.9 million at September 30, 1996. The
increase in non-performing loans was due primarily to the
21
<PAGE> 22
acquisition of $2.5 million in nine loans associated with Palm Springs Savings
Bank and an increase of $1.0 million within the Association's portfolio,
excluding the loans acquired from PSSB, of non-performing loans totalling $2.4
million. The ratio of allowance for total estimated losses to total
non-performing assets decreased from 94.18% at June 30, 1996 to 78.06% at
September 30, 1996, primarily due to an increase in the level of non-performing
assets of $6.2 million. Such increase is primarily a result of increased levels
of non-performing loans of $2.5 million and real estate owned from foreclosure
in the amount of $2.7 million acquired with Palm Springs Savings Bank. The
$97,000 of allowance for loan loss charge-offs was primarily attributable to
non-performing loans that converted to real estate owned through foreclosure
(REO-F) during the three months ended September 30, 1996. The Association
accounts for REO-F at fair market value upon acquisition and management believes
that adequate loss provisions have been established.
Comparison of Operating Results for the Three Months Ended September 30, 1996
- --------------------------------------------------------------------------------
and 1995
- --------
GENERAL: The Company reported a net loss of $2.3 million for the three months
- --------
ended September 30, 1996 compared to a net profit of $214,000 for the three
months ended September 30, 1995, primarily as a result of the pre-tax accrued
charge of $4.8 million, that represented the amount the Association recognized
for the SAIF recapitalization legislation enacted on September 30, 1996.
Exclusive of such charge, the Company's profit for the quarter ended September
30, 1996 would have been $453,000. Net interest income increased $1.1 million or
30.0% from $3.5 million for the quarter ended September 30, 1995 to $4.6 million
for the quarter ended September 30, 1996, primarily due to an increase in the
weighted average yield on interest earning assets of 12 basis points, from 7.18%
to 7.30% for the quarter ended September 30, 1995 and 1996, respectively.
Additionally the weighted average cost of interest bearing liabilities decreased
29 basis points from 5.68% to 5.39% for the same comparable period. Overall the
effect was an improvement of 41 basis points in interest rate spread for the
quarter ended September 30, 1996 compared to the same period in 1995. Other
income increased from $134,000 to $419,000 primarily due to a gain on sale of
mortgage-backed securities available for sale, in the amount of $365,000. This
was partially offset by the addition of amortization of intangible assets
expense of $237,000 for September 30, 1996 related to branch deposits acquired
from Hawthorne Savings, FSB on June 21, 1996.
The Company's reported net loss of $2.3 million equated to ($0.41) per share
compared to net income of $214,000 or $0.03 per share for the same period of
1995. Total interest expense increased by $2.2 million to $9.8 million for the
three months ended September 30, 1996 compared to $7.6 million for the three
month period ended September 30, 1995 primarily due to a 41.7% increase in
average deposit accounts from $465.9 million to $660.1 million for the quarters
ending September 30, 1995 and September 30, 1996, respectively.
INTEREST INCOME: Interest income increased $3.3 million, or 29.5% from $11.1
- -----------------
million to $14.4 million for the three months ended September 30, 1995 and 1996,
respectively, with interest and dividends on investment securities making up
$2.6 million of the increase, primarily due to the additional funds invested
from the purchase of deposits in three branches from Hawthorne Savings F.S.B.
whereby the proceeds were invested on a short term basis until more permanent
loan funding was arranged. Interest on loans also increased by $837,000, or
20.1% from $4.2 million to $5.0 million for the comparable quarters ending
September 30, 1995 and September 30, 1996, respectively, due to the increase in
average balances of net loans receivable from $201.9 to $238.5
22
<PAGE> 23
for the comparable periods and the improvement of 14 basis points in average
yield from 8.26% to 8.40%. Average balances of total interest earning assets for
the quarter ended September 30, 1996 exceeded the average balances for the same
quarter of 1995 by $170.0 million and the average weighted yield increased by 12
basis points from 7.18% for the quarter ended September 30, 1995 to 7.30 % for
the quarter ended September 30, 1996.
INTEREST EXPENSE: Interest expense increased $2.2 million, or 29.3 % from $7.6
- -----------------
million for the three months ended September 30, 1995 to $9.8 million for the
same period in 1996, primarily due to an increase in interest on deposit
accounts of $2.3 million from $5.9 million to $8.1 million for the quarter ended
September 30, 1995 and 1996, respectively. Interest on advances from the FHLB
and other borrowing reflected no appreciable change for the comparative quarter,
while interest expense of hedging transactions decreased $45,000 from $825,000
for the quarter ended September 30, 1995 to $780,000 for the quarter ended
September 30, 1996. The average weighted cost of interest bearing liabilities
decreased 29 basis points from 5.68% for the three months ended September 30,
1995 to 5.39% for the quarter ended September 30, 1996.
NET INTEREST INCOME: Net interest income before provision for estimated loan
- ---------------------
losses increased $1.1 million or 30.0%, from $3.5 million for the quarter ended
September 30, 1995 to $4.6 million for the quarter ended September 30, 1996
primarily due to a 41 basis point increase in the spread between average
weighted yield on interest earning assets and interest bearing liabilities from
1.50% to 1.91% when comparing the quarter ended September 30, 1995 and September
30, 1996, even though the average balances of interest bearing liabilities
increased $194.2 million and the average balances of interest earning assets
increased $170.0 million from September 30, 1995 to September 30, 1996.
PROVISION FOR ESTIMATED LOAN LOSSES: The provision for estimated loan losses
- --------------------------------------
increased by $34,000 from $145,000 for the quarter ended September 30, 1995 to
$179,000 for the quarter ended September 30, 1996. The balance of provision for
estimated loan losses increased from $2.7 million at September 30, 1995 to $6.1
million at September 30, 1996 primarily due to the acquisition of Palm Springs
Savings Bank whereby the acquired allowance for estimated loan losses of $3.0
million was added to the outstanding total. Such allowances include valuation
reserves provided for specifically identified loan losses as well as general
valuation allowances for loan losses. Total non-performing loans increased from
$1.7 million at September 30, 1995 to $4.9 million at September 30, 1996,
whereby $2.5 million of non-performing loans are included that were recognized
in the Palm Springs Savings Bank acquisition that culminated on September 27,
1996. The ratio of non-performing loans to gross loans receivable increased from
.80% at September 30, 1995 to 1.06% as of September 30, 1996 and the ratio of
allowances for estimated loan losses to non-performing loans decreased from
161.45% at September 30, 1995 to 123.56% at September 30, 1996.
OTHER INCOME AND EXPENSE: Other income and expense increased by $285,000 to
- ---------------------------
$419,000 for the quarter ended September 30, 1996 from $134,000 for the quarter
ended September 30, 1995. The three month period increase was primarily
attributable to a net gain on the sale of mortgage-backed securities from the
available for sale portfolio in the pre-tax amount of $365,000 during the
quarter ended September 30, 1996 whereas no activity in this category occurred
for the quarter ended September 30, 1995. Savings fees increased $156,000 from
$15,000
23
<PAGE> 24
to $171,000 for the comparable periods primarily due to the growth in savings
deposit accounts occurring with the purchase of three branches from Hawthorne
Savings F.S.B. An offsetting affect to the increase in total other income
(expense) was a charge of $237,000 for the quarter ended September 30, 1996
resulting from the amortization of intangible assets (core deposit intangible)
associated with the branches purchased from Hawthorne Savings, F.S.B..
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
- ---------------------------------------
increased by $5.6 million or 180.4% from $3.1 million to $8.8 million for the
quarters ended September 30, 1995 and 1996 respectively, primarily attributable
to the increase in FDIC insurance and other assessments as a result of the
one-time assessment to recapitalize the S.A.I.F. which amounted to $4.8 million
that was accrued at September 30, 1996 and an increase in salaries and employee
benefits which increased from $1.6 million to $2.0 million for the quarter
September 30, 1995 and 1996, respectively. This increase of $361,000 for the
quarter ended September 30, 1996 over the quarter ended September 30, 1995
reflects an increase in staff employees acquired with the purchase of three
branches from Hawthorne Savings F.S.B. and approximately $98,000 of accrued
employee benefit expense associated with the Company's Master Stock Compensation
Plan. All other categories of general and administrative expense reflected an
aggregate increase of $544,000 over the comparable period ending September 30,
1995 primarily as a result of the growth in offices and the market services
area.
INCOME TAXES: Income tax expense (benefit) changed $1.8 million from an expense
- -------------
of $157,000 for the quarter ended September 30, 1995 to a benefit of $1.6
million for the quarter ended September 30, 1996 primarily as a result of the
SAIF assessment fee imposed by the FDIC and accrued as of on September 30, 1996.
The net after tax effect of the SAIF assessment charge of $4.8 million was $2.8
million.
24
<PAGE> 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not involved in any material pending legal proceedings
other than routine legal proceedings occurring in the ordinary course of
business. Such other routine legal proceedings in the aggregate are
believed by management to be immaterial to the Company's financial
condition or results of operations.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
a) The Company's Annual Meeting of Stockholders was held on October 28,
1996.
b) Not Applicable.
c) At such meeting its stockholders approved the following:
1. The election of the following individuals as Directors for the term
of three years each
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Leonard E. Searl 5,653,343 42,458
Norman M. Coulson 5,652,118 43,683
</TABLE>
2. The appointment of Deloitte & Touche, L.L.P. as independent auditors
of the Company for the fiscal year ending June 30, 1997 was ratified and
approved in all respects.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
5,649,604 25,448 20,749
</TABLE>
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
25
<PAGE> 26
(3) (I) Articles of Incorporation*
By-laws*
(4) Stock Certificate*
B. Reports on Form 8-K
(1) A report on Form 8-K was filed with the Securities and Exchange
Commission on September 4, 1996 under commission file number 0-25722
reflecting the pro forma financial information required by Article 11
of Regulation S-X regarding the purchase of three branches with
deposit accounts totalling $185.2 million from Hawthorne Savings
F.S.B. which was consummated on June 21,1996.
(2) A report on form 8-K was filed with the Securities and Exchange
Commission on October 1, 1996 under commission file number 0-25722
stating in summary that as of September 27, 1996 the consummation of
the acquisition of Palm Springs Savings Bank was completed and noting
that pro forma financial statements would be filed as soon as
practicable.
(3) A report on Form 8-K was filed with the Securities and Exchange
Commission on November 8, 1996, under commission file number 0-25722
reflecting the pro forma financial information required by Article 11
of Regulation S-X regarding the acquisition of Palm Springs Savings
Bank which was completed as of the close of business on September 27,
1996.
- ------------------------------------
*Incorporated herein by reference into this document from the Exhibits to Form
S-1 Registration Statement and any amendments thereto, filed March 14, 1994,
Registration No. 33-90286.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
HF BANCORP INC.
(Registrant)
Date: November 8, 1996 By: /s/ J. Robert Eichinger
------------------------
J. Robert Eichinger
Chairman/President
Chief Executive Officer
Date: November 8, 1996 By: /s/ Alex J. Neil
-----------------
Alex J. Neil
Vice President/Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000941547
<NAME> HF BANCORP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 17,862
<INT-BEARING-DEPOSITS> 518
<FED-FUNDS-SOLD> 11,393
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 279,702
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0
0
<COMMON> 66
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<INTEREST-DEPOSIT> 8,138
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<EXPENSE-OTHER> 8,775
<INCOME-PRETAX> (3,969)
<INCOME-PRE-EXTRAORDINARY> (2,339)
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<NET-INCOME> (2,339)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
<YIELD-ACTUAL> 2.31
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<ALLOWANCE-CLOSE> 6,113
<ALLOWANCE-DOMESTIC> 6,113
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,503
</TABLE>
