<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 December 31, 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 February 10, 1997.
<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
December 31, 1996, (unaudited) and June 30, 1996 3
Consolidated Statements of Operations (unaudited) for the
Three and Six Months ended December 31, 1996, and 1995 4-5
Changes in Stockholders Equity (unaudited) 6
Consolidated Statements of Cash Flows (unaudited) for the
Six Months ended December 31, 1996 and 1995 7-8
Notes to Consolidated Financial Statements (unaudited) 9-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16-31
---------------------------------------------
PART II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
Signature Page 34
2
<PAGE> 3
<TABLE>
<CAPTION>
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Dec. 31 June 30,
1996 1996
---- ----
(unaudited)
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $100,396 $100,633
Investment securities held to maturity (estimated fair value of $27,072
and $ 33,842 at December 31, 1996 and June 30, 1996, respectively) 27,317 34,666
Investment securities available for sale (amortized cost of $166,381
and $ 177,487 at December 31, 1996 and June 30, 1996, respectively 164,451 173,171
Loans receivable (net of allowance for estimated loan losses of $5,710
and $3,068 at December 31, 1996 and June 30, 1996, respectively) 453,547 225,161
Mortgage-backed securities held to maturity (estimated fair value of $159,738
and $152,521 at December 31, 1996 and June 30, 1996, respectively) 162,466 159,262
Mortgage-backed securities available for sale (amortized cost of $54,088
and $99,888 at December 31, 1996 and June 30, 1996, respectively) 54,561 100,259
Accrued interest receivable 7,154 6,260
Investment in capital stock of the Federal Home Loan Bank, at cost 6,044 4,436
Premises and equipment, net 8,607 6,578
Real estate owned, net
Acquired through foreclosure 3,422 1,079
Acquired for sale or investment 418 996
Other assets 24,416 14,415
---------- ---------
Total assets $1,012,799 $826,916
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 846,117 $ 669,725
Advances from the Federal Home Loan Bank 70,000 70,000
Accounts payable and other liabilities 8,063 5,278
Income taxes 7,418 842
---------- --------
Total liabilities 931,598 745,845
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 December 31, 1996 and June 30, 1996 66 66
Additional paid-in capital 51,188 51,113
Retained earnings, substantially restricted 39,320 40,957
Net unrealized loss on securities available for sale, net of taxes (855) (2,309)
Deferred stock compensation (5,170) (5,408)
Treasury stock, 330,625 shares (3,348) (3,348)
---------- --------
Total stockholders' equity 81,201 81,071
---------- --------
Total liabilities and stockholders' equity $1,012,799 $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 FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $9,078 $4,273 $14,088 $8,446
Interest on mortgage-backed securities 4,357 4,972 9,012 9,755
Interest and dividends on investment securities 4,459 3,228 9,193 5,390
------ ------ ------- ------
Total interest income 17,894 12,473 32,293 23,591
INTEREST EXPENSE:
Interest on deposit accounts 9,988 5,914 18,127 11,777
Interest on advances from the Federal Home Loan
Bank and other borrowings 915 1,684 1,830 2,602
Net interest expense of hedging transactions 777 817 1,556 1,642
------ ------ ------- ------
Total interest expense 11,680 8,415 21,513 16,021
------ ------ ------- ------
NET INTEREST INCOME BEFORE PROVISION
FOR ESTIMATED LOAN LOSSES 6,214 4,058 10,780 7,570
PROVISION FOR ESTIMATED LOAN LOSSES 29 58 208 203
------ ------ ------- ------
NET INTEREST INCOME AFTER PROVISION
FOR ESTIMATED LOAN LOSSES 6,185 4,000 10,572 7,367
OTHER INCOME (EXPENSE):
Loan and other fees 96 45 148 93
Loss from real estate operations, net (135) (189) (187) (268)
Gain on sale of mortgage-backed and investment
securities available for sale 664 -- 1,030 --
Gain on sale of loans held for sale 10 -- 10 --
Savings fees 412 166 582 313
Other income 30 55 151 80
Amortization of intangible assets (575) -- (812) --
------ ----- ------- ------
Total other income (expense) 502 77 922 218
</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 FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands except earnings per share)
<S> <C> <C> <C> <C>
GENERAL AND ADMINISTRATIVE
EXPENSES:
Salaries and employee benefits $2,654 $1,656 $4,651 $3,304
Occupancy and equipment expense 906 481 1,536 991
FDIC insurance and other assessments 504 357 824 694
SAIF special assessment 0 0 4,759 0
Legal and professional services 240 125 408 237
Data processing service costs 461 179 753 395
Marketing 150 103 308 170
Savings expense 141 63 243 124
Other 433 182 783 369
------ ------ ------ ------
Total general and administrative expenses 5,489 3,146 14,265 6,284
EARNINGS(LOSS) BEFORE INCOME TAXES
EXPENSE (BENEFIT) 1,198 931 (2,771) 1,301
INCOME TAX EXPENSE (BENEFIT) 496 386 (1,134) 543
------ ------ ------ ------
NET EARNINGS (LOSS) 702 545 (1,637) 758
====== ====== ====== ======
Net earnings (loss) per share $ 0.12 $ 0.09 ($ 0.29) $ 0.12
Weighted average common shares outstanding 5,773,874 6,180,484 5,722,405 6,168,912
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
<TABLE>
<CAPTION>
HF BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
Six Months Ended December 31, 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 June 30, 1996 $66 $51,113 $40,957 ($2,309) ($5,408) ($3,348) $81,071
Net loss for the six months ended
December 31, 1996 -- -- (1,637) -- -- -- (1,637)
Change in net unrealized loss on
securities available for sale, net
of taxes -- -- -- 1,454 -- -- 1,454
Deferred stock compensation -- 75 -- -- 238 -- 313
-------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $66 $51,188 $39,320 ($855) ($5,170) ($3,348) $81,201
=================================================================================================
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
<TABLE>
<CAPTION>
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED DECEMBER 31,
------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) (1,637) $ 758
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:
Origination of loans held for sale (457) --
Proceeds of sale of loans held for sale 467 --
Provisions for estimated loan and real estate losses 317 320
Direct write-offs from real estate operations 49 42
Depreciation and amortization 551 382
Amortization of deferred loan fees (347) (161)
(Accretion) amortization of (discounts) premiums on loans
and investment and mortgage-backed securities, net (64) (8)
Amortization of intangible assets 812 --
Federal Home Loan Bank stock dividend (199) (131)
Gain on sales of loans held for sale (10) --
Loss (gain) on sales of real estate, net (59) (69)
Gain on sale of mortgage-backed and investment securities, available for sale (1,030) --
Gain on sale of premises and equipment (14) --
Increase in accrued interest receivable (894) (1,945)
Increase (decrease) in accounts payable and other liabilities 2,250 (26,520)
(Increase) decrease in other assets 42 (2,141)
Other, net 445 397
------- -------
Net cash provided by (used in) operating activities 222 (29,076)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable (66,362) (14,938)
Purchases of mortgage-backed securities held to maturity (15,039) --
Purchases of mortgage-backed securities available for sale (14,272) (16,154)
Principal repayments on mortgage-backed securities held to maturity 9,379 12,928
Principal repayments on mortgage-backed securities available for sale 6,148 5,836
Purchases of investment securities held to maturity -- (90,800)
Purchases of investment securities available for sale (37,968) (50,000)
Principal repayments on investment securities held to maturity 363 310
Principal repayments on investment securities available for sale 2,992 3,491
Proceeds from sales of mortgage-backed and investment securities
available for sale 71,381 --
Matured/called investment securities held to maturity 9,535 6,000
Maturities of investment securities available for sale 35,428 --
Proceeds from sales of real estate owned 2,301 1,803
Additions to real estate owned 62 (93)
Proceeds from sale of premises and equipment (3) 4
Additions to premises and equipment (1,406) (150)
Cash payment for acquisition, net of cash received (14,707) --
Purchase of FHLB stock -- (1,618)
------- -------
Net Cash used in investing activities (12,168) (143,381)
</TABLE>
7
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<TABLE>
<CAPTION>
HF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE SIX MONTHS
ENDED DECEMBER 31,
------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from FHLB -- $50,000
Proceeds from other borrowings -- 49,438
(Decrease)increase in certificate accounts (43) 9,808
Net Increase (decrease) in NOW, passbook, money market investment and
non-interest -bearing accounts 11,752 (2,635)
---------- -------
Net cash provided by financing activities 11,709 106,611
---------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (237) (65,846)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 100,633 88,642
---------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 100,396 $ 22,796
========== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES-
Cash paid during the period for:
Interest on deposit accounts and other borrowings $ 3,648 $ 3,942
========== =========
Income taxes paid -- 303
========== =========
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure $ 1,022 $ 1,628
Loans to facilitate sale of real estate through foreclosure $ 481 $ 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 --
=========
Transfer of investment securities held to maturity to
available for sale classification $59,022
Transfer of mortgage backed securities held to maturity to
available for sale classification $24,321
</TABLE>
See notes to consolidated financial statements
8
<PAGE> 9
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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.
On September 27, 1996, Hemet Federal Savings and Loan Association
consummated the acquisition of Palm Springs Saving 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%.
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 HF 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,
9
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HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
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 borrowing, and investing such funds in loans secured by real
estate, primarily one-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, commercial
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, investment securities and 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 six month
period ended December 31, 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.
10
<PAGE> 11
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
2. Earnings Per Share
------------------
Earnings per share("EPS") for the three and six months ended December
31, 1996 are based on weighted average common shares outstanding calculated as
follows:
<TABLE>
<CAPTION>
3 Months 6 Months
Ended Ended
12/31/96 12/31/96
-------- --------
<S> <C> <C>
Total shares issued 6,612,500 6,612,500
Less:
Weighted average unallocated shares under the ESOP plan 366,030 373,253
Reduction in shares for the stock compensation plan 189,155 196,092
Shares of treasury stock 330,625 330,625
Plus:
Increase in shares for the Stock Option Plan 47,184 9,875
Weighted average shares outstanding for EPS calculations 5,773,874 5,722,405
(See Note 6)
</TABLE>
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 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 December 31, 1996 the remaining deferred
amount was $1,864,000.
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
11
<PAGE> 12
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
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 December 31, 1996, the Association had impaired loans totaling $
9.7 million which have related specific reserves of $1.4 million; there were
$10.2 million of impaired loans as of December 31, 1996 for which no specific
reserves had been recorded. Impaired loans at June 30, 1996 totalled $8.9
million. The average recorded investment in impaired loans during the six months
ended December 31, 1996 was $15.9 million. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized
to the extent of full cash payments received and accepted. As of December 31,
1996 accrued interest on impaired loans was $95,000 and interest of $363,000 was
received in cash for the six months then ended. Interest not recognized due to
non-accrual status was $121,000 for the six months ended December 31, 1996,
compared to $64,000 for the six months period ended December 31, 1995 Of the
$9.7 million of impaired loans which have specific reserves established in the
amount of $1.4 million, 60.3 %, or $5.8 million are paid current. Of the $10.2
million of impaired loans for which no specific reserves had been recorded as of
December 31, 1996, 32.7% or $3.3 million are paid current.
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." The Company adopted
both of these statements beginning July 1, 1996 with no 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
12
<PAGE> 13
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
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)
In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125") which was amended by SFAS No. 127. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it no
longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not meet
the criteria for a sale, the transfer is accounted for as a secured borrowing
with pledge of collateral. The Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996. Retroactive application of this Statement is not permitted.
The Company does not anticipate that the implementation of SFAS No. 125 will
have a material impact on its results of operations or financial condition.
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 December 31, 1996 a total of 104,069 shares
of common stock was allocated to employee accounts, leaving a remainder of
358,806 shares to be allocated over the next eight 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
13
<PAGE> 14
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
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 $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 six months
ended December 31, 1996, $209,000 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. As of December 31,1996, options
representing a total of 618,250 shares had been granted. The first vesting of
such options will occur on January 11, 1997, when options representing 112,850
shares will become exercisable at an exercise price of $10.05.
7. Recent Developments
-------------------
Thrift Rechartering Legislation.
- -------------------------------
The Deposit Insurance Funds Act provides that the BIF and SAIF will
merge on January 1, 1999 if there are no more savings associations as of that
date. That legislation also requires that the Department of Treasury submit a
report to Congress by March 31, 1997 that makes recommendations regarding a
common financial institutions charter, including whether the separate charters
for thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date (January 1, 1998 in one bill, June 30, 1998 in the
other) or they would automatically become national banks. Converted federal
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Company is unable to
14
<PAGE> 15
HF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
predict whether such legislation would be enacted, the extent to which the
legislation would restrict or disrupt its operations or whether the BIF and SAIF
funds will eventually merge.
Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA")
- -------------------------------------------------------------------------
On November 27, 1996, the OTS issued an interim final rule
implementing the provisions of the EGRPRA. Among other actions, EGRPRA expands
and clarifies federal thrifts' lending and investment authority and amends the
Qualified Thrift Lender ("QTL") test. In general the provisions of the EGRPRA
provide greater lending and marketing flexibility and enhanced market scope to
federal thrifts such as the Association.
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 during the fiscal quarter ended September 30, 1996.
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 lowered SAIF general
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. The Association's invoice for FDIC
deposit insurance for the quarter commencing January 1, 1997 was assessed at a
rate of 6.5 basis points (FICO related) on SAIF assessable deposits. Management
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.
15
<PAGE> 16
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").
On September 27, 1996, Hemet Federal Savings and Loan Association
consummated the acquisition of Palm Springs Saving 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%.
The Company is primarily engaged in the business of attracting funds
in the form of deposits and supplementing such deposits with FHLB and other
borrowing, 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 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
loan and mortgage-backed securities portfolios and interest and dividends on its
investment securities. The Company's primary sources of funds are deposits and
principal and interest payments on investment securities, 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
16
<PAGE> 17
derives income from trustee services.
Changes in Financial Condition from June 30, 1996 to December 31, 1996
- ----------------------------------------------------------------------
Total assets of the Company increased $185.9 million, or 22.5 %, from
$826.9 million at June 30, 1996 to $1.013 billion at December 31, 1996,
primarily as a result of the acquisition of Palm Springs Savings Bank (PSSB).
Loans receivable net increased $228.3 million, or 101.4% from $225.2 million at
June 30, 1996 to $453.5 million at December 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 by the Association, which
included $36.9 million in whole loan, adjustable rate residential loans
purchased in the secondary market. Mortgage-backed and other investment
securities decreased by $58.6 million, from $467.4 million at June 30, 1996 to
$408.8 million at December 31, 1996, primarily as a result of the December sale
of $34.0 million in long term, fixed rate, U.S. Agency mortgage-backed
securities and $15.6 million in shares associated with a mutual fund
concentrated in shorter duration mortgage backed securities. The sales were
conducted to build liquidity for loan funding and for prepaying (in January
1997) $20 million in borrowings carrying an interest rate of 5.78%; and to
moderate the company's exposure to increases in general market interest rates.
Investment in capital stock of the FHLB increased from $4.4 million to $6.0
million when comparing the balances at June 30, 1996 to December 31, 1996;
primarily as a result of acquiring $1.4 million in stock previously owned by
PSSB and dividends credited as stock for $0.2 million.
The total investment in REO, net of valuation reserves, increased from
$1.1 million at June 30, 1996 to $3.4 million at December 31, 1996 primarily due
to an inflow of foreclosed properties and loans in the process of foreclosure
from Palm Springs Savings Bank. Management anticipated this increase as a result
of its due diligence process in conjunction with the acquisition, requiring Palm
Springs Savings Bank to record additional loan and real estate loss provisions
totalling $2.2 million prior to the consummation of the acquisition.
Other assets increased $14.4 million at June 30, 1996 to $24.4 million
at December 31, 1996 primarily due to the loan premium and core deposit
intangible recorded in conjunction with the acquisition of Palm Springs Savings
Bank (see "Acquisition Of Palm Springs Savings Bank").
Deposit account balances increased $176.4 million or 26.3%, from
$669.7 million at June 30, 1996 to $846.1 million at December 31, 1996,
primarily due to the PSSB acquisition that added accounts totalling $164.7
million in deposit accounts. Total equity increased $0.1 million from $81.1
million at June 30, 1996 to $81.2 million at December 31, 1996, or 0.2%, as the
$1.6 million net loss for the six months ended December 31, 1996 (which includes
a $2.8 million after tax impact of the one-time SAIF assessment) was offset by
improvement in the net unrealized loss position, net of taxes, on securities
available for sale.
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.
17
<PAGE> 18
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.
During the quarter ended December 31, 1996 the Company sold $34.0
million in long term, fixed rate, U.S. Agency mortgage backed securities held as
"available for sale" in order to reduce the Company's exposure to increases in
general market interest rates.
The Company has also utilized a variety of financial instruments and
strategies to manage the 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 December 31, 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 December 31, 1996
the deferred loss for termination fees was $1.9 million. During the six months
ended December 31, 1996 the Association amortized $1.0 million of the deferred
loss to interest expense and charged interest expense for $0.5 million relating
to the $35.0 million of current existing interest rate swaps.
18
<PAGE> 19
Acquisitions
- ------------
The following tables provides information concerning the acquisition
of three branches from Hawthorne Savings, FSB and the acquisition of Palm
Springs Savings Bank. Each of these transactions generated intangible assets
which reduce regulatory capital and which are being amortized against income, as
detailed below.
<TABLE>
<CAPTION>
Acquisition of Three Hawthorne Savings Branches
- -----------------------------------------------
<S> <C>
Transaction Date 06/21/96
Deposits Acquired $185,189,446
Core Deposit Intangible Created $6,642,079
Book Amortization Method / Term Straight Line / 7 Years
Tax Return amortization Method / Term Straight Line / 15 Years
Monthly Pre-Tax Charge To Book Income $79,072
Monthly Book Amortization Reported As Non Operating Expense
Core Deposit Intangible Balance As Of 12/31/96 $6,167,644
Reduction in Regulatory Capital As Of 12/31/96 $6,167,644
Reduction in Tangible Book Value As Of 12/31/96 $6,167,644
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Acquisition of Palm Springs Savings Bank ("PSSB")
- -------------------------------------------------
Transaction Date 09/27/96
Nature of Transaction Non Taxable Acquisition
Accounting Methodology Employed Purchase Accounting
<S> <C> <C>
Total Purchase Price $16,264,536
Less: Net Book Value of Assets & Liabilities Acquired $ 9,287,912
-----------
Premium Paid Over Net Book Value $ 6,976,624
Accounting For The Acquisition Debits Credits
------ -------
Loan Premium Created $2,441,000
Core Deposit Intangible Created $9,445,475
Deferred Tax Liability On Loan Premium $1,008,284
Deferred Tax Liability On Core Deposit Intangible $3,901,567
Cash Payment For PSSB Shares Above Net Book Value $6,976,624
----------- -----------
Total $11,886,475 $11,886,475
----------- -----------
Book Amortization Method/Term
Loan Premium Effective Yield / Life Of Loans Acquired
Core Deposit Intangible Straight Line / Seven Years
Tax Return Amortization Method / Term
Loan Premium Not Tax Deductible Due To Non Taxable Acquisition
Core Deposit Intangible Not Tax Deductible Due To Non Taxable Acquisition
Monthly Pre-Tax Charge To Book Income
Loan Premium variable based upon loan amortization
Core Deposit Intangible: Gross / Net $112,446 / $65,999
Monthly Book Amortization Reported As
Loan Premium Reduction In Interest Income
Core Deposit Intangible Non Operating Expense
Nominal Deferred
Balances As Of 12/31/96 Assets Tax Liabilities Net
------ --------------- ---
Loan Premium $ 2,331,244 $ 962,948 $1,368,296
Core Deposit Intangible $ 9,108,137 $3,762,225 $5,345,912
----------- ---------- ----------
Total $11,439,381 $4,725,173 $6,714,208
Reduction In Regulatory Capital As Of 12/31/96
Loan Premium None
Core Deposit Intangible, Net $5,345,912
Reduction in Tangible Book Value As Of 12/31/96
Loan Premium None
Core Deposit Intangible, Net $5,345,912
</TABLE>
20
<PAGE> 21
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, principal and
interest payments on loans, mortgage-backed and investment securities, retained
earnings and FHLB advances and other borrowings. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
prepayments from mortgage related assets 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 14.3% at December 31, 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, commercial, and consumer related investments. The
ratio at June 30, 1996 appeared 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. The ratio at December 31,
1996 appeared high due to the settlement from the sale of $34.0 million in long
term, fixed rate mortgage-backed securities on December 11, 1996, held as
available for sale, and from the December 4, 1996 settlement from the sale of
$15.6 million on mutual fund shares, also 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
six months ended December 31, 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
and investment securities.
The Company has other sources of liquidity if a need for additional
funds arises including FHLB advances. At December 31, 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
December 31, 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.
21
<PAGE> 22
The Association must maintain capital standards as set forth by
federal regulations. As of December 31, 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 December
31, 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 $56,582 5.71%
Minimum required 14,858 1.50
------ -----
Excess $41,724 4.21%
======= =====
Core Capital
- ------------
Actual capital $56,582 5.71%
Minimum required 29,716 3.00
------- -----
Excess $26,866 2.71%
======= =====
PERCENT OF RISK-
AMOUNT WEIGHTED ASSETS
------ ---------------
Risk-based Capital
- ------------------
Actual capital $60,928 16.18%
Minimum required 30,123 8.00
------- ------
Excess $30,805 8.18%
======= =====
</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. The Association's Tier 1 risk based capital ratio as of December 31,
1996 was 15.03%. At December 31, 1996, the Association's regulatory capital
levels exceed the thresholds required to be classified as a "well capitalized"
institution.
22
<PAGE> 23
On January 10, 1997, the Office Of Thrift Supervision ("OTS") issued
Thrift Bulletin #69: "REVISED RATING SYSTEM; DISCLOSURE OF COMPONENT RATINGS".
This Bulletin presented the adoption by the OTS of an updated Uniform Financial
Institutions Rating System ("UFIRS"). The revised rating system is effective for
all examinations that begin after January 31, 1997. The OTS will also commence
disclosing individual component ratings for safety and soundness examinations to
thrift management and directors at the same time. The UFIRS has historically
been referred to as the CAMEL rating system, which produced a composite rating
of an institution's overall condition and performance by assessing five rating
components: Capital adequacy, Asset quality, Management, Earnings, and
Liquidity. The revised rating system places additional emphasis on management's
effectiveness in identifying, measuring, monitoring, and controlling risk by
adding a sixth rating component: "Sensitivity to market risk", thereby changing
the common acronym to CAMELS. The new "S" component rating will address the
degree that changes in interest rates, commodity prices, and equity prices could
adversely affect an institution's earnings or economic capital. Management
believes that the new rating system will not materially impact the Company, as
the primary market price sensitivity maintained by the Company is interest rate
risk, which has been previously and regularly reviewed in conjunction with OTS
examinations.
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, could adversely affect future earnings and,
consequently, the ability of the Association to meet its future minimum capital
requirements.
23
<PAGE> 24
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>
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual mortgage loans delinquent 90 days or
more $5,519 $1,301
Non-accrual consumer loans delinquent 90 days or
more -- --
-------- ---------
Total nonperforming loans 5,519 1,301
Total investment in REO before valuation reserves 4,301 1,460
-------- ---------
Total nonperforming assets $9,820 $2,761
======== =========
Nonperforming loans to gross loans 1.16% .56%
Non performing assets to total assets 0.97% .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 December 31, 1996 the Association had impaired loans totalling $9.7
million, which have related specific reserves of $1.4 million and there were
$10.2 million of impaired loans as of December 31, 1996 for which no specific
reserves had been recorded. Total impaired loans as of June 30, 1996 were $8.9
million. The average recorded investment in impaired loans during the six month
period ended December 31, 1996 was $15.9 million. The Association's impaired
loans increased by $11.0 million during the six months ended December 31, 1996,
primarily due to $11.2 million in impaired loans obtained through the
acquisition of PSSB. The impaired credits obtained through the acquisition of
PSSB include concentrations on residential construction, land / lots, and
commercial real estate loans. As a result of its due diligence process in
conjunction with the acquisition of PSSB, management required PSSB to recognize
$2.2 million in additional loan and real estate loss provisions prior to the
consummation of the acquisition.
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 six months
24
<PAGE> 25
ended December 31, 1996, accrued interest on impaired loans was $95,000 and
interest of $363,000 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 $121,000 during the six month period ended December 31, 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.
25
<PAGE> 26
The following tables set forth activity in the Association's
allowances for estimated loan losses and estimated real estate losses during the
six months ended December 31, 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 --
Net Chargeoffs:
One to four family (345) (250)
Commercial real estate (69) (304)
Construction loans (16) (10)
Land/acquisition and development (119) (20)
Consumer 20 --
------ -------
Total chargeoffs (529) (584)
Provision for estimated loan losses 208 203
------ -------
Balance at December 31 $5,710 $ 2,313
====== =======
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Allowance for Losses: Real Estate Foreclosure
- ---------------------------------------------
Balance at June 30 $ 381 $ 532
Allowance acquired from PSSB 491 0
Net Chargeoffs (53) (23)
Provision for estimated real estate losses 60 11
------ ------
Balance at December 31 $ 879 $ 520
Allowance for Losses: Real Estate-Development
- ---------------------------------------------
Balance at June 30 $1,536 $1,395
Allowance acquired from PSSB 0 0
Net Chargeoffs (1,008) 0
Provision for estimated losses 49 107
------ ------
Balance at December 31 $577 $1,502
Total Allowances For Real Estate Losses $1,456 $2,022
====== ======
</TABLE>
The ratio of allowance for estimated loan losses to gross loans decreased from
1.33% at June 30, 1996 to 1.20% at December 31, 1996 due to an increase in gross
loans over the six month period as a result of increased fundings, whole loan
purchases, 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 103.46%
at December 31, 1996 due primarily to an increase in non performing loans, from
$1.3 million at June 30, 1996 to $5.5 million at December 31, 1996. The increase
in non-performing loans was largely attributable to loans acquired from Palm
Springs Savings Bank; as $3.3 million of the $5.5 million in non performing
loans as of December 31, 1996 were originated by Palm Springs Savings Bank prior
to its acquisition by Hemet Federal.
The ratio of allowance for total estimated losses to total non-performing assets
decreased from 94.18% at June 30, 1996 to 67.10% at December 31, 1996, primarily
due to an increase in the level of non-performing assets of $7.1 million. Such
increase is primarily a result of higher levels of non-performing loans of $4.2
million and real estate owned from foreclosure of $2.9 million. At December 31,
1996, 41.4% of the net (of valuation reserves) real estate owned through
foreclosure balance consisted of raw land and developed lots. The Association
accounts for real estate owned through foreclosure (REO-F) at fair market value
upon acquisition, and management believes that
27
<PAGE> 28
adequate valuation reserves have been established.
Comparison of Operating Results for the Three Months and Six Months Ended
- --------------------------------------------------------------------------------
December 31, 1996 and 1995
- --------------------------
GENERAL: The Company reported net earnings of $702,000 or $0.12 per share for
- -------
the three months ended December 31, 1996 compared to net earnings of $545,000 or
$0.09 per share for the same quarter last year. The quarter ended December 31,
1996 represents the first full quarter in which the Company realized the full
benefit of the increased asset base which resulted from both the September 27,
1996 acquisition of Palm Springs Savings Bank and the June 21, 1996 acquisition
of three Hawthorne Savings, F.S.B. branches. While net interest income, other
income and expense, and general and administrative expenses increased as a
result of both acquisitions, certain non recurring expenses were realized during
the most recent two quarters attributable to incorporating acquired assets,
liabilities, employees, and customers into the Association.
For the six months ended December 31, 1996, the Company reported a net loss of
$1.6 million or ($0.29) per share. This loss stems primarily from a $4.8 million
pre-tax charge, or $2.8 million charge on an after-tax basis, associated with
the one-time SAIF assessment realized by the Company during the quarter ended
September 30, 1996. Exclusive of this charge, the Company's earnings for the six
months ended December 31, 1996 would have been $1.2 million or $0.20 per share.
For the six months ended December 31, 1995, net earnings of $758,000 or $0.12
per share were realized. With the expanded asset base experienced during the two
most recent quarters, net interest income increased $3.2 million or 42.4% from
$7.6 million for the six months ended December 31, 1995 to $10.8 million for the
six months ended December 31, 1996. During this same time frame, general and
administrative expenses, exclusive of the one-time SAIF assessment, rose $3.2
million or 51.3%.
NET INTEREST INCOME: Net interest income increased $2.2 million or 53.1% from
- --------------------
$4.1 million for the quarter ended December 31, 1995 to $6.2 million for the
quarter ended December 31, 1996. The quarterly increase in net interest income
is primarily due to the increase in average interest earning assets which rose
$263.6 million or 38.8% from $679.1 million for the quarter ended December 31,
1995 to $942.7 million for the quarter ended December 31, 1996. In addition to
the Company's expanding asset base, the net interest margin increased 25 basis
points from 2.39% for the quarter ended December 31, 1995 to 2.64% for the
quarter ended December 31, 1996. While the net interest margin (which is the
ratio of net interest income to average interest earning assets) rose by 25
basis points, the interest rate spread (which is the average yield earned on
interest earning assets less the average cost of interest bearing liabilities )
increased by 55 basis points from the quarter ended December 31, 1995 to 2.30%
for the quarter ended December 31, 1996. The Company's ratio of interest earning
assets to interest bearing liabilities declined from 1.13x for the quarter ended
December 31, 1995 to 1.07x for the quarter ended December 31, 1996, in part due
to the acquisition of branches from Hawthorne Savings, FSB and the purchase of
Palm Springs Savings Bank.
For the six months ended December 31, 1996 net interest income rose $3.2 million
or 42.4% from $7.6 million for the six months ended December 31, 1995 to $10.8
million for the six months ended December 31, 1996. The increase was primarily
attributed to a 32.3% increase in the average
28
<PAGE> 29
balance of interest earning assets during the 1996 period. In addition, on a
semiannual basis, the net interest margin rose 18 basis points from 2.31% for
the six months ended December 31, 1995 to 2.49% for the six months ended
December 31, 1996.
INTEREST INCOME: Interest income increased $5.4 million, or 43.5% from $12.5
- ----------------
million for the quarter ended Decmeber 31, 1995 to $17.9 million for the quarter
ended December 31, 1996. Interest on loans increased by $4.8 million or over
100% combined with an increase in interest and dividends on investment
securities which rose $1.2 million or 38.1% from the second quarter last year to
the second quarter of the current fiscal year. Offsetting the rise in loan and
investment interest and dividends, mortgage-backed securities interest income
fell $615,000 or 12.4% from $5.0 million for the three months ended December 31,
1995 to $4.4 million for the quarter ended December 31, 1996. For the quarter
ended December 31, 1996 the average balance of interest earning assets exceeded
the average balances for the same quarter of the prior year by $263.6 million or
38.8% The weighted average yield on interest earning assets for the quarter
ended December 31, 1996 rose 24 basis points from 7.35% for the quarter ended
December 31, 1995 to 7.59% for the quarter ended December 31, 1996.
For the six months ended December 31, 1996, interest income is $8.7 million or
36.9% more than the same period of the prior year with $23.6 million of interest
income realized in the first six months of the prior year compared to $32.3
million realized in the same period of the current year. On a semiannual basis
for the six months ended December 31, 1996 the trend of significant increases
experienced in interest income related to loans and investment securities being
offset by reductions in interest income related to mortgage-backed securities
continued as had been experienced on a quarterly basis. The average balance of
interest earning assets rose $211.4 million or 32.3% from $654.5 million for the
six months ended December 31, 1995 to $865.9 for the six months ended December
31, 1996. Over this same time period, yields on these interest earning assets
rose 25 basis points from 7.21% to 7.46%.
INTEREST EXPENSE: Interest paid or accrued on deposit accounts increased $4.1
- -----------------
million, or 68.9 % from $5.9 million for the three months ended December 31,
1995 to $10.0 million for the same period in the current year, primarily due to
the increase in quarterly balances of deposit accounts which increased over 70%
from the quarter ended December 31, 1995 to the same quarter in 1996. Interest
on advances from the FHLB and other borrowings decreased $769,000 from the
quarter ended December 31, 1995 to the same quarter in the current year due
primarily to the reduction in average FHLB advances and other borrowings from
$132.2 million for the quarter ended December 31, 1995 to $70.0 million for the
quarter ended December 31, 1996. Interest expense of hedging transactions
decreased $40,000 or 4.9% from $817,000 for the quarter ended December 31, 1995
to $777,000 for the quarter ended December 31, 1996. The average weighted cost
of all interest bearing liabilities decreased 31 basis points from 5.60% for the
three months ended December 31, 1995 to 5.29% for the quarter ended December 31,
1996.
As was the trend in the quarterly period, the trend continued into the six
months ended December 31, 1996 with deposit account balances increasing
significantly over comparable period of the prior year due to the acquisitions
while at the same time FHLB advances and other borrowings were repaid. Combining
the rise in interest expense due to liability balance increases with decreasing
interest expense due to lower interest rates paid on liabilities results in an
overall net increase in
29
<PAGE> 30
interest expense of $5.5 million or 34.3% from the six months ended December 31,
1995 to the six months ended December 31, 1996. The weighted average cost of
funds was 5.34% and 5.59% for the six month period ended December 31, 1996 and
1995, respectively.
PROVISION FOR ESTIMATED LOAN LOSSES: The provision for estimated loan losses
- -------------------------------------
decreased by $29,000 or 50% from $58,000 for the quarter ended December 31, 1995
to $29,000 for the quarter ended December 31, 1996. The provision for estimated
loan losses for the six month period ended December 31, 1996 increased $5,000 or
2.5% from $203,000 to $208,000 when comparing the six month periods of 1995 and
1996, respectively. The balance of allowance for estimated loan losses increased
from $2.3 million at December 31, 1995 to $5.7 million at December 31, 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
Company's allowances. 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 December
31, 1995 to $5.5 million at December 31, 1996. Non-performing loans (gross of
the allowance of estimated loss) acquired from Palm Springs Savings Bank
totalled $3.3 million at December 31, 1996. The ratio of non-performing loans to
gross loans receivable increased from .79% at December 31, 1995 to 1.16% as of
December 31, 1996 while the ratio of allowances for estimated loan losses to
non-performing loans decreased from 132.55% at December 31, 1995 to 103.46% at
December 31, 1996.
OTHER INCOME AND EXPENSE: Other income and expense increased from $77,000 to
- ------------------------
$502,000 due to gains on sale of $664,000 realized from the sale of
mortgage-backed securities and a mutual fund investment during the quarter ended
December 31, 1996 for which no comparable amounts were realized during the same
quarter of the prior year. The Company sold long term fixed rate mortgage-backed
securities, with the intent to repay certain FHLB advances and reinvesting the
remainder of the proceeds in adjustable rate loans or other assets that are more
responsive to changes in general market interest rates. Fee revenues generated
from deposit accounts rose $246,000 or 148.2% from $166,000 for the quarter
ended December 31, 1995 to $412,000 for the quarter ended December 31, 1996. The
increase in savings fees is primarily attributable to deposit related fees
earned on the expanded deposit base. The increases in gains from the sale of
securities and deposit related fees is partially offset by the $575,000
amortization of intangible assets for the quarter ended December 31, 1996 for
which no amount was incurred during the same quarter of the previous year. The
intangible assets and the resultant periodic amortization were created in
conjunction with the branch acquisition from Hawthorne Savings, F.S.B. and the
acquisition of Palm Springs Savings Bank.
For the cumulative six months ended December 31, 1996, other income and expense
rose $701,000 or more than 300% from the prior year to the current year.
Mortgage-backed and investment securities sales generated net gains of $1.0
million during the first and second quarter of the current fiscal year whereas
no activity occurred during the same period of the prior year. The amortization
of intangible assets was $812,000 for the six months ended December 31, 1996 for
which no comparable amount existed during the same period of the prior year. The
amortization of intangible assets on a semiannual basis represents six months
amortization resulting from the Hawthorne Savings, F.S.B. branch acquisition and
three months amortization resulting from the Palm Springs Savings Bank
acquisition.
30
<PAGE> 31
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
- --------------------------------------
increased by $2.3 million or 74.4% from $3.1 million to $5.5 million for the
quarters ended December 31, 1995 and 1996, respectively. Salaries and employee
benefits increased from $1.7 million to $2.7 million for the quarter ended
December 31, 1995 and 1996, respectively, and represented 48.4% of the total
general and administrative expenses for the three months ended December 31,
1996. Occupancy and equipment expenses also increased from $0.5 million to $0.9
million for the quarter ended December 31, 1995 and 1996, respectively The
primary reason for the 74.4% increase in total general and administrative
expenses is an increase in employees, facilities, and other costs related to
incorporating and servicing the assets, liabilities, and customer bases acquired
from both Hawthorne Savings F.S.B. and Palm Springs Savings Bank. General and
administrative expenses stated as a percentage of average assets were 2.18% and
1.79% for the three months ended December 31, 1996 and 1995, respectively.
Certain non recurring expenses, such as employee and data processing costs, were
incurred during the most recent quarter as a result of the September 27, 1996
Palm Springs Savings Bank acquisition and the resulting data processing
conversion associated with this acquisition.
General and administrative expenses for the six months ended December 31, 1996
are significantly higher due to an increase in FDIC insurance and other
assessments as the result of the one-time assessment to recapitalize the SAIF
which amounted to $4.8 million . This charge was incurred at September 30, 1996.
Excluding the one-time SAIF assessment, total general and administrative costs
were $9.5 million and $6.3 million for the six months ended December 31, 1996
and 1995, respectively. General and administrative expenses (excluding the
one-time SAIF assessment) stated as a percentage of average assets were 2.08%
and 1.85% for the six months ended December 31, 1996 and 1995, respectively. The
ratio of general and administrative expense to average assets, inclusive of the
one-time SAIF assessment, is 3.12% for the six months ended December 31, 1996.
INCOME TAXES: Income tax expense increased by $110,000 due to an increase of
- -------------
$267,000 pre- tax earnings from the quarter ended December 31, 1995 to the
quarter ended December 31, 1996. For the six month period ended December 31,
1996, the income tax benefit of $1.1 million was a primary result of the $2.0
million tax benefit associated with the $4.8 million one-time SAIF assessment.
Exclusive of the tax benefit from the one time SAIF assessment, the tax expense
for the six months ended December 31, 1996 would have been $830,000.
31
<PAGE> 32
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>
The following individuals are continuing as Directors:
J. Robert Eichinger
Harold L. Fuller
Robert K. Jabs
Patricia A. Larson
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 Not Voted
--- ------- ------- ---------
<C> <C> <C> <C>
5,649,257 25,448 20,749 347
</TABLE>
32
<PAGE> 33
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
(3) (I) Articles of Incorporation*
(ii) 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.
33
<PAGE> 34
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: February 10, 1997 By: /s/ J. Robert Eichinger
-----------------------
J. Robert Eichinger
Chairman/President
Chief Executive Officer
Date: February 10, 1997 By: /s/ Mark R. Andino
------------------
Mark R. Andino
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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 22,157
<INT-BEARING-DEPOSITS> 329
<FED-FUNDS-SOLD> 77,910
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 219,012
<INVESTMENTS-CARRYING> 189,783
<INVESTMENTS-MARKET> 186,810
<LOANS> 453,547
<ALLOWANCE> 6,589
<TOTAL-ASSETS> 1,012,799
<DEPOSITS> 846,117
<SHORT-TERM> 0
<LIABILITIES-OTHER> 15,481
<LONG-TERM> 70,000
0
0
<COMMON> 66
<OTHER-SE> 81,135
<TOTAL-LIABILITIES-AND-EQUITY> 1,012,799
<INTEREST-LOAN> 14,088
<INTEREST-INVEST> 18,205
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 32,293
<INTEREST-DEPOSIT> 18,127
<INTEREST-EXPENSE> 21,513
<INTEREST-INCOME-NET> 10,780
<LOAN-LOSSES> 208
<SECURITIES-GAINS> 1,030
<EXPENSE-OTHER> 14,265
<INCOME-PRETAX> (2,771)
<INCOME-PRE-EXTRAORDINARY> (1,637)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,637)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
<YIELD-ACTUAL> 2.49
<LOANS-NON> 5,519
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,223
<LOANS-PROBLEM> 14,382
<ALLOWANCE-OPEN> 3,068
<CHARGE-OFFS> 529
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 5,710
<ALLOWANCE-DOMESTIC> 5,710
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,347
</TABLE>
