**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

| **ý**                                            |   | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                  |   |                                                                                          |
| **For the quarterly period ended  December 31, 2001** |
|                                                  |   |                                                                                          |
| **OR**                                                |
|                                                  |   |                                                                                          |
| **o**                                                 |   | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile Number 0-19772**

 

**HFFINANCIAL CORP.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                |   | **46-0418532**       |
|---------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of            |   | (I.R.S. Employer     |
| incorporation or  organization)             |   | Identification  No.) |
|                                        |   |                 |
| **225  South Main Avenue, Sioux Falls, SD** |   | **57104**            |
| (Address of  principal executive office)    |   | (ZIP Code)           |

 

**(605)333-7556**

(Registrant’stelephone number, including area code)

 

**Not Applicable**

(Former name,former address and former fiscal year, if changed since last report)

 

                Indicateby check mark whether the registrant (1)  has filed all reportsrequired to be filed  by Section 13 or15  (d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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  ý  No  o

 

                Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

                As of February 14, 2002 therewere 3,351,207 issued and outstanding shares of the Registrant’s Common Stock,with $.01 par value.

 

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HF FINANCIAL CORP.

 

FORM 10-Q

INDEX

 
| PART  I. | Financial  Information |
|----------|------------------------|
|     |                   |   |
|     | Item  1.               | Financial  Statements (Unaudited): |
|     |                   |   |
|     |                   | Consolidated  Statements of Financial Condition As of December 31, 2001 and June 30, 2001 |
|     |                   |   |
|     |                   | Consolidated  Statements of Income for the Three and Six Months Ended December 31, 2001 and  2000 |
|     |                   |   |
|     |                   | Consolidated  Statement of Stockholders’ Equity for the Six Months Ended December 31, 2001 |
|     |                   |   |
|     |                   | Consolidated  Statements of Cash Flows for the Six Months Ended December 31, 2001 and 2000 |
|     |                   |   |
|     |                   | Notes to Consolidated  Financial Statements |
|     |                   |   |
|     | Item  2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|     |                   |   |
|     | Item  3.               | Quantitative  and Qualitative Disclosures about Market Risk |
|     |                   |   |
| PART II. | Other Information      |
|     |                   |   |
|     | Item 1.                | Legal Proceedings |
|     |                   |   |
|     | Item 2.                | Changes in Securities |
|     |                   |   |
|     | Item 3.                | Defaults upon Senior  Securities |
|     |                   |   |
|     | Item  4.               | Submission  of Matters to a Vote of Security Holders |
|     |                   |   |
|     | Item 5.                | Other Information |
|     |                   |   |
|     | Item 6.                | Exhibits and Reports  on Form 8-K |
|     |                   |   |
|     | Signatures             |   |

 

 

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Item1.

HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands)

 
| **ASSETS**                                                                                                                                               |   |                  |    |              |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|-------------------|--------|
|                                                                                                                                                     |   | **December 31, 2001** |    | **June 30, 2001** |   |
|                                                                                                                                                     |   | **(Unaudited)**       |    |              |   |
| Cash and cash equivalents                                                                                                                                |   | $                     | 66,151  |              | $      | 84,913 |   |
| Securities available for sale                                                                                                                            |   | 59,588                |    | 49,969            |   |
| Mortgage-backed securities available for  sale                                                                                                           |   | 32,135                |    | 43,750            |   |
| Loans and leases receivable                                                                                                                              |   | 515,829               |    | 563,836           |   |
| Loans held for sale                                                                                                                                      |   | 22,534                |    | 7,270             |   |
| Accrued interest receivable                                                                                                                              |   | 4,646                 |    | 5,412             |   |
| Office properties and equipment, net of  accumulated depreciation                                                                                        |   | 13,264                |    | 13,756            |   |
| Foreclosed real estate and other properties                                                                                                              |   | 2,050                 |    | 1,608             |   |
| Prepaid expenses and other assets                                                                                                                        |   | 9,190                 |    | 2,720             |   |
| Mortgage servicing rights                                                                                                                                |   | 3,268                 |    | 2,775             |   |
| Deferred income taxes                                                                                                                                    |   | 2,058                 |    | 2,230             |   |
| Cost in excess of net assets acquired                                                                                                                    |   | 5,513                 |    | 5,763             |   |
|                                                                                                                                                     |   | $                     | 736,226 |              | $      | 784,002 |   |
|                                                                                                                                                     |   |                  |    |              |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                            |   |                  |    |              |   |
| Liabilities                                                                                                                                              |   |                  |    |              |   |
| Deposits                                                                                                                                                 |   | $                     | 581,490 |              | $      | 601,207 |   |
| Advances from Federal Home Loan Bank and  other borrowings                                                                                               |   | 70,021                |    | 108,376           |   |
| Company obligated mandatorily redeemable  preferred securities of subsidiary trust that solely holds subordinated  debentures                            |   | 10,000                |    | —            |   |
| Advances by borrowers for taxes and  insurance                                                                                                           |   | 8,987                 |    | 7,337             |   |
| Accrued interest payable                                                                                                                                 |   | 4,759                 |    | 7,901             |   |
| Other liabilities                                                                                                                                        |   | 6,937                 |    | 6,656             |   |
| Total liabilities                                                                                                                                        |   | 682,194               |    | 731,477           |   |
|                                                                                                                                                     |   |                  |    |              |   |
|                                                                                                                                                     |   |                  |    |              |   |
| Stockholders’ Equity                                                                                                                                |   |                  |    |              |   |
| Preferred stock, $.01 par value, 500,000  shares authorized, none outstanding                                                                            |   | —                |    | —            |   |
| Series A Junior Participating Preferred  Stock, $1.00 stated value, 50,000 shares authorized, none outstanding                                           |   | —                |    | —            |   |
| Common stock, $.01 par value, 10,000,000  shares authorized, 4,800,837 and 4,786,005 shares issued at December 31, 2001  and June 30, 2001, respectively |   | 48                    |    | 48                |   |
| Additional paid-in capital                                                                                                                               |   | 15,525                |    | 15,378            |   |
| Retained earnings, substantially restricted                                                                                                              |   | 54,333                |    | 52,886            |   |
| Accumulated other comprehensive income                                                                                                                   |   | 618                   |    | 338               |   |
| Less cost of treasury stock, 1,135,609 and  1,105,209 shares at  December 31, 2001 and June 30, 2001, respectively                                       |   | (16,492               | )       | (16,125           | )      |
|                                                                                                                                                     |   | 54,032                |    | 52,525            |   |
|                                                                                                                                                     |   | $                     | 736,226 |              | $      | 784,002 |   |

 

See Notes to Consolidated FinancialStatements.

 

 

1

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HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except Per Share Data)

(Unaudited)

 
|                                                                |   | **Three  Months Ended December 31,** |   | **Six Months Ended December 31,** |   |
|---------------------------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------|--------|
|                                                                |   | **2001**                             |   | **2000**                          |   | **2001** |   | **2000** |   |
| Interest and dividend income:                                       |   |                                 |   |                              |   |   |   |   |   |
| Loans and leases receivable                                         |   | $                                    | 10,831 |                              | $      | 13,050 |   | $ | 22,736 |   | $ | 25,973 |   |
| Mortgage-backed securities                                          |   | 602                                  |   | 865                               |   | 1,297 |   | 1,768 |   |
| Investment securities and interest-bearing  deposits                |   | 847                                  |   | 1,192                             |   | 1,954 |   | 2,126 |   |
|                                                                |   | 12,280                               |   | 15,107                            |   | 25,987 |   | 29,867 |   |
| Interest expense:                                                   |   |                                 |   |                              |   |   |   |   |   |
| Deposits                                                            |   | 5,090                                |   | 7,412                             |   | 11,364 |   | 14,279 |   |
| Advances from Federal Home Loan Bank and  other borrowings          |   | 1,290                                |   | 1,822                             |   | 2,793 |   | 3,576 |   |
|                                                                |   | 6,380                                |   | 9,234                             |   | 14,157 |   | 17,855 |   |
| Net interest income                                                 |   | 5,900                                |   | 5,873                             |   | 11,830 |   | 12,012 |   |
| Provision for losses on loans and leases                            |   | 843                                  |   | 486                               |   | 1,905 |   | 1,264 |   |
| Net interest income after provision for  losses on loans and leases |   | 5,057                                |   | 5,387                             |   | 9,925 |   | 10,748 |   |
|                                                                |   |                                 |   |                              |   |   |   |   |   |
| Noninterest income:                                                 |   |                                 |   |                              |   |   |   |   |   |
| Fees on deposits                                                    |   | 1,023                                |   | 914                               |   | 1,984 |   | 1,788 |   |
| Credit card fee income                                              |   | 286                                  |   | 673                               |   | 679 |   | 1,671 |   |
| Loan servicing income                                               |   | 412                                  |   | 405                               |   | 1,038 |   | 767 |   |
| Commission and insurance income                                     |   | 328                                  |   | 331                               |   | 631 |   | 695 |   |
| Loan fees and service charges                                       |   | 390                                  |   | 284                               |   | 662 |   | 492 |   |
| Gain on sale of loans, net                                          |   | 407                                  |   | 202                               |   | 891 |   | 353 |   |
| Other                                                               |   | 302                                  |   | 246                               |   | 1,256 |   | 491 |   |
|                                                                |   | 3,153                                |   | 3,055                             |   | 7,146 |   | 6,257 |   |
| Noninterest expense:                                                |   |                                 |   |                              |   |   |   |   |   |
| Compensation and employee benefits                                  |   | 3,880                                |   | 3,345                             |   | 7,780 |   | 6,821 |   |
| Other general and administrative expenses                           |   | 1,303                                |   | 1,106                             |   | 2,720 |   | 2,345 |   |
| Occupancy and equipment                                             |   | 817                                  |   | 829                               |   | 1,710 |   | 1,676 |   |
| Credit card processing expense                                      |   | 339                                  |   | 705                               |   | 716 |   | 1,448 |   |
| Amortization of intangible assets                                   |   | 125                                  |   | 128                               |   | 250 |   | 225 |   |
| Federal insurance premiums                                          |   | 30                                   |   | 66                                |   | 55 |   | 131 |   |
| Other                                                               |   | 79                                   |   | 29                                |   | 150 |   | 57 |   |
|                                                                |   | 6,573                                |   | 6,208                             |   | 13,381 |   | 12,703 |   |
| Income before income taxes                                          |   | 1,637                                |   | 2,234                             |   | 3,690 |   | 4,302 |   |
| Income tax expense                                                  |   | 645                                  |   | 884                               |   | 1,430 |   | 1,692 |   |
| Net income                                                          |   | $                                    | 992    |                              | $      | 1,350 |   | $ | 2,260 |   | $ | 2,610 |   |
|                                                                |   |                                 |   |                              |   |   |   |   |   |
| Earnings per share:                                                 |   |                                 |   |                              |   |   |   |   |   |
| Basic                                                               |   | $                                    | 0.27   |                              | $      | 0.37 |   | $ | 0.61 |   | $ | 0.71 |   |
| Diluted                                                             |   | $                                    | 0.26   |                              | $      | 0.36 |   | $ | 0.60 |   | $ | 0.70 |   |

 

See Notes to Consolidated FinancialStatements.

 

 

2

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HFFINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OFSTOCKHOLDERS' EQUITY

SixMonths Ended December 31, 2001 

(DollarsIn Thousands, Except Per Share Data)

(Unaudited)

 
|                                                                                   |   |       |   |           |   |         |   | **Accumulated**   |   |         |   |      |   |
|----------------------------------------------------------------------------------------|--------|------------|--------|----------------|--------|--------------|--------|-------------------|--------|--------------|--------|-----------|--------|
|                                                                                   |   |       |   | **Additional** |   |         |   | **Other**         |   |         |   |      |   |
|                                                                                   |   | **Common** |   | **Paid-In**    |   | **Retained** |   | **Comprehensive** |   | **Treasury** |   |      |   |
|                                                                                   |   | **Stock**  |   | **Capital**    |   | **Earnings** |   | **Income**        |   | **Stock**    |   | **Total** |   |
| Balance, June 30, 2001                                                                 |   | $          | 48     |           | $      | 15,378       |   | $                 | 52,886 |         | $      | 338       |   | $ | (16,125 | ) | $ | 52,525 |   |
|                                                                                   |   |       |   |           |   |         |   |              |   |         |   |      |   |
| Comprehensive income:                                                                  |   |       |   |           |   |         |   |              |   |         |   |      |   |
| Net income                                                                             |   | —     |   | —         |   | 2,260        |   | —            |   | —       |   | 2,260     |   |
| Net change in unrealized  gain on securities available for sale, net of deferred taxes |   | —     |   | —         |   | —       |   | 280               |   | —       |   | 280       |   |
| Comprehensive income                                                                   |   | —     |   | —         |   | 2,260        |   | 280               |   |         |   | 2,540     |   |
|                                                                                   |   |       |   |           |   |         |   |              |   |         |   |      |   |
| 7,560 shares issued under  Director Restricted Stock Plan                              |   | —     |   | 104            |   | —       |   | —            |   | —       |   | 104       |   |
|                                                                                   |   |       |   |           |   |         |   |              |   |         |   |      |   |
| Exercise of stock options  for 7,272 shares                                            |   | —     |   | 43             |   | —       |   | —            |   | —       |   | 43        |   |
|                                                                                   |   |       |   |           |   |         |   |              |   |         |   |      |   |
| Cash dividends paid ($0.22  per share) on common stock                                 |   | —     |   | —         |   | (813         | )      | —            |   | —       |   | (813      | )      |
|                                                                                   |   |       |   |           |   |         |   |              |   |         |   |      |   |
| Purchase of treasury stock                                                             |   | —     |   | —         |   | —       |   | —            |   | (367         | )      | (367      | )      |
|                                                                                   |   |       |   |           |   |         |   |              |   |         |   |      |   |
| Balance, December 31, 2001                                                             |   | $          | 48     |           | $      | 15,525       |   | $                 | 54,333 |         | $      | 618       |   | $ | (16,492 | ) | $ | 54,032 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

 

3

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HF FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 
|                                                                                                   |   | **Six Months Ended December 31,** |    |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                   |   | **2001**                          |    | **2000** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                   |   |                              |    |   |   |
| Net income                                                                                             |   | $                                 | 2,260   |   | $ | 2,610 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities:           |   |                              |    |   |   |
| Provision for losses on loans and leases                                                               |   | 1,905                             |    | 1,264 |   |
| Depreciation                                                                                           |   | 817                               |    | 942 |   |
| Amortization of premiums and discounts on  securities available for sale, net                          |   | (9                                | )       | (24 | ) |
| Amortization of intangible assets                                                                      |   | 250                               |    | 225 |   |
| Amortization of mortgage servicing rights                                                              |   | 164                               |    | 134 |   |
| Noncash issuance of common stock                                                                       |   | 104                               |    | 100 |   |
| (Decrease) in deferred loan fees                                                                       |   | (185                              | )       | (73 | ) |
| Loans originated for resale                                                                            |   | (38,218                           | )       | (33,611 | ) |
| Proceeds from the sale of loans                                                                        |   | 23,845                            |    | 36,771 |   |
| (Gain) on sale of loans, net                                                                           |   | (891                              | )       | (353 | ) |
| Mortgage servicing rights capitalized                                                                  |   | (326                              | )       | (87 | ) |
| Realized (gain) on sale of securities, net                                                             |   | (5                                | )       | — |   |
| Losses (gains)  and provision for losses on sales of foreclosed  real estate and other properties, net |   | 75                                |    | (1 | ) |
| Loss (gain) on disposal of office  properties and equipment, net                                       |   | 8                                 |    | (11 | ) |
| Decrease (increase) in accrued interest  receivable                                                    |   | 766                               |    | (560 | ) |
| (Increase) decrease in prepaid expenses and  other assets                                              |   | (6,470                            | )       | 33 |   |
| (Increase) in deferred income taxes                                                                    |   | (1                                | )       | (42 | ) |
| (Decrease) in accrued interest payable and  other liabilities                                          |   | (2,861                            | )       | (158 | ) |
| Net cash (used in) provided by operating  activities                                                   |   | $                                 | (18,772 | ) | $ | 7,159 |   |
|                                                                                                   |   |                              |    |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                   |   |                              |    |   |   |
| Loans and leases purchased                                                                             |   | $                                 | (7,379  | ) | $ | (11,341 | ) |
| Loans originated and held                                                                              |   | (74,666                           | )       | (86,415 | ) |
| Principal collected on loans and leases                                                                |   | 127,366                           |    | 88,766 |   |
| Mortgage-backed securities available for  sale:                                                        |   |                              |    |   |   |
| Sales                                                                                                  |   | 3,948                             |    | — |   |
| Purchases                                                                                              |   | (2,027                            | )       | — |   |
| Repayments                                                                                             |   | 10,385                            |    | 4,744 |   |
| Securities available for sale:                                                                         |   |                              |    |   |   |
| Sales and maturities                                                                                   |   | 23,495                            |    | 1,325 |   |
| Purchases                                                                                              |   | (33,338                           | )       | (201 | ) |
| Proceeds from sale of office properties and  equipment                                                 |   | 1                                 |    | 17 |   |
| Purchase of office properties and equipment                                                            |   | (334                              | )       | (704 | ) |
| Purchase of mortgage servicing rights                                                                  |   | (331                              | )       | (262 | ) |
| Purchase of intangible assets                                                                          |   | —                            |    | (726 | ) |
| Proceeds from sale of foreclosed real  estate and other properties, net                                |   | 449                               |    | 442 |   |
| Net cash provided by (used in) investing  activities                                                   |   | $                                 | 47,569  |   | $ | (4,355 | ) |

 

SeeNotes to Consolidated Financial Statements.

 

 

4

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|                                                                   |   | **Six Months Ended December 31,** |    |
|------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                   |   | **2001**                          |    | **2000** |   |
|                                                                   |   |                              |    |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                   |   |                              |    |   |   |
| Net (decrease) increase in deposit accounts                            |   | $                                 | (19,717 | ) | $ | 33,973 |   |
| Proceeds of advances from Federal Home Loan  Bank and other borrowings |   | 900                               |    | 227,081 |   |
| Proceeds from issuance of preferred  securities of subsidiary trust    |   | 10,000                            |    | — |   |
| Payments on advances from Federal Home Loan  Bank and other borrowings |   | (39,255                           | )       | (225,299 | ) |
| Increase in advances by borrowers for taxes  and insurance             |   | 1,650                             |    | 360 |   |
| Purchase of treasury stock                                             |   | (367                              | )       | — |   |
| Proceeds from issuance of common stock                                 |   | 43                                |    | 18 |   |
| Cash dividends paid                                                    |   | (813                              | )       | (772 | ) |
| Net cash (used  in) provided by financing activities                   |   | $                                 | (47,559 | ) | $ | 35,361 |   |
|                                                                   |   |                              |    |   |   |
| (Decrease) increase in cash and cash  equivalents                      |   | $                                 | (18,762 | ) | $ | 38,165 |   |
|                                                                   |   |                              |    |   |   |
| Cash and Cash Equivalents                                              |   |                              |    |   |   |
| Beginning                                                              |   | 84,913                            |    | 26,417 |   |
| Ending                                                                 |   | $                                 | 66,151  |   | $ | 64,582 |   |

 

SeeNotes to Consolidated Financial Statements.

 

 

5

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HF FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

For The Three andSix Months Ended December 31, 2001 and 2000

(Dollars inThousands)

(Unaudited)

NOTE 1. SELECTEDACCOUNTING POLICIES

 

*Basisof presentation:*

 

                Theforegoing consolidated financial statements are unaudited.  However, in the opinion of management, alladjustments (which consist of normal recurring accruals) necessary for a fairpresentation of the consolidated financial statements have been included.  Results for any interim period are notnecessarily indicative of results to be expected for the year.  The interim consolidated financialstatements include the accounts of HF Financial Corp. (the “Company”), itssubsidiaries, HomeFirst Mortgage Corp. (the “Mortgage Corp.”), HF Card ServicesL.L.C. (HF Card Services) and Home Federal Bank (formerly known as Home FederalSavings Bank), (the “Bank”) and the Bank’s subsidiaries.  During the quarter ended December 31, 2001,the Company formed a new subsidiary named HF Financial Capital Trust I (the“Trust”).  See Note 5.

 

NOTE 2.REGULATORY CAPITAL

 

The following table sets forth the Bank’s compliancewith its capital requirements at December 31, 2001:

 

|                    |   | **Amount** |   | **Percent** |   |
|-------------------------|--------|------------|--------|-------------|--------|
| Tier I (core)  capital: |   |       |   |        |   |
| Required                |   | $          | 29,113 |        | 4.00   | % |
| Actual                  |   | 46,747     |   | 6.42        |   |
| Excess                  |   | 17,634     |   | 2.42        |   |
| Risk-based  capital:    |   |       |   |        |   |
| Required                |   | $          | 43,779 |        | 8.00   | % |
| Actual                  |   | 53,054     |   | 9.69        |   |
| Excess                  |   | 9,275      |   | 1.69        |   |

 

Subsequent to December31, 2001, the Company injected capital of $2.0 million into the Bank whichraised the Bank’s actual risk-based capital percentage above 10.00%.

 

 

NOTE 3. EARNINGSPER SHARE

 

                Basic earnings per share iscomputed by dividing income available to common stockholders (the numerator) bythe weighted-average number of common shares outstanding  (the denominator) during the period.  Shares issued during the period and sharesreacquired during the period are weighted for the portion of the period thatthey were outstanding. The weighted average number of common shares outstandingfor the three month period ended December 31, 2001 and 2000 was 3,682,487 and3,677,943, respectively.  The weightedaverage number of common shares outstanding for the six month period endedDecember 31, 2001 and 2000 were 3,687,183 and 3,677,041, respectively.

 

                Dilutiveearnings per share is similar to the computation of basic earnings per shareexcept that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if the dilutive optionsoutstanding had been exercised. The weighted average number of common anddilutive potential common shares outstanding for the three month period endedDecember 31, 2001 and 2000 was 3,756,865 and 3,727,426, respectively.  The weighted average number of common anddilutive potential common shares outstanding for the six month period endedDecember 31, 2001 and 2000 were 3,768,561 and 3,726,721, respectively.

 

 

6

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NOTE 4. SEGMENTINFORMATION

 

                Themanagement approach is used as the conceptual basis for identifying reportablesegments and is based on the way that management organizes the segments withinthe Company for making operating decisions, allocating resources and monitoringperformance.

 

                TheCompany’s reportable segments are banking, credit card and other.  The “banking” segment is conducted throughthe Bank, and the “credit card” segment is conducted through, HF Card Services.  The “other” segment is composed of smallernonreportable segments, the Company and inter-segment eliminations.

 
| **Three Months Ended December 31, 2001**  |   |
|-------------------------------------------|--------|
|                                      |   |   |   |   |   |   |   |   |   |
|                                      |   |   |   | **Credit** |   |   |   |   |   |
|                                      |   | **Banking** |   | **Card** |   | **Other** |   | **Total** |   |
|                                      |   | **(Dollars in Thousands)** |   |
| Net interest income                       |   | $ | 5,795 |   | $ | 4 |   | $ | 101 |   | $ | 5,900 |   |
| Provision for losses on loans and leases  |   | (543 | ) | (300 | ) | — |   | (843 | ) |
| Noninterest income                        |   | 2,661 |   | 283 |   | 209 |   | 3,153 |   |
| Noninterest expense                       |   | (5,834 | ) | (373 | ) | (366 | ) | (6,573 | ) |
| Income (loss) before income taxes         |   | $ | 2,079 |   | $ | (386 | ) | $ | (56 | ) | $ | 1,637 |   |
|                                      |   |   |   |   |   |   |   |   |   |
| Total assets                              |   | $ | 730,251 |   | $ | 4,169 |   | $ | 1,806 |   | $ | 736,226 |   |
|                                      |   |   |   |   |   |   |   |   |   |
|                                      |   |   |   |   |   |   |   |   |   |
|                                      |   |   |   |   |   |   |   |   |   |
| **Three Months Ended  December 31, 2000** |   |
|                                      |   |   |   |   |   |   |   |   |   |
|                                      |   |   |   | **Credit** |   |   |   |   |   |
|                                      |   | **Banking** |   | **Card** |   | **Other** |   | **Total** |   |
|                                      |   | **(Dollars in Thousands)** |   |
| Net interest income                       |   | $ | 5,494 |   | $ | 109 |   | $ | 270 |   | $ | 5,873 |   |
| Provision for losses on loans and leases  |   | (282 | ) | (178 | ) | (26 | ) | (486 | ) |
| Noninterest income                        |   | 2,019 |   | 698 |   | 338 |   | 3,055 |   |
| Noninterest expense                       |   | (4,902 | ) | (758 | ) | (548 | ) | (6,208 | ) |
| Income (loss) before income taxes         |   | $ | 2,329 |   | $ | (129 | ) | $ | 34 |   | $ | 2,234 |   |
|                                      |   |   |   |   |   |   |   |   |   |
| Total assets                              |   | $ | 745,591 |   | $ | 6,723 |   | $ | 12,255 |   | $ | 764,569 |   |
|                                      |   |   |   |   |   |   |   |   |   |

 

 

7

----

 
| **Six Months Ended December 31, 2001**   |   |
|------------------------------------------|--------|
|                                     |   |   |   |   |   |   |   |   |   |
|                                     |   |   |   | **Credit** |   |   |   |   |   |
|                                     |   | **Banking** |   | **Card** |   | **Other** |   | **Total** |   |
|                                     |   | **(Dollars in Thousands)** |   |
|                                     |   |   |   |   |   |   |   |   |   |
| Net interest income                      |   | $ | 11,617 |   | $ | 2 |   | $ | 211 |   | $ | 11,830 |   |
| Provision for losses on loans and leases |   | (1,066 | ) | (839 | ) | — |   | (1,905 | ) |
| Noninterest income                       |   | 5,305 |   | 1,373 |   | 468 |   | 7,146 |   |
| Noninterest expense                      |   | (11,815 | ) | (826 | ) | (740 | ) | (13,381 | ) |
| Income (loss) before income taxes        |   | $ | 4,041 |   | $ | (290 | ) | $ | (61 | ) | $ | 3,690 |   |
|                                     |   |   |   |   |   |   |   |   |   |
| Total assets                             |   | $ | 730,251 |   | $ | 4,169 |   | $ | 1,806 |   | $ | 736,226 |   |
|                                     |   |   |   |   |   |   |   |   |   |
|                                     |   |   |   |   |   |   |   |   |   |
|                                     |   |   |   |   |   |   |   |   |   |
| **Six Months Ended December  31, 2000**  |   |
|                                     |   |   |   |   |   |   |   |   |   |
|                                     |   |   |   | **Credit** |   |   |   |   |   |
|                                     |   | **Banking** |   | **Card** |   | **Other** |   | **Total** |   |
|                                     |   | **(Dollars in Thousands)** |   |
|                                     |   |   |   |   |   |   |   |   |   |
| Net interest income                      |   | $ | 11,320 |   | $ | 171 |   | $ | 521 |   | $ | 12,012 |   |
| Provision for losses on loans and leases |   | (694 | ) | (527 | ) | (43 | ) | (1,264 | ) |
| Noninterest income                       |   | 3,909 |   | 1,665 |   | 683 |   | 6,257 |   |
| Noninterest expense                      |   | (10,081 | ) | (1,557 | ) | (1,065 | ) | (12,703 | ) |
| Income (loss) before income taxes        |   | $ | 4,454 |   | $ | (248 | ) | $ | 96 |   | $ | 4,302 |   |
|                                     |   |   |   |   |   |   |   |   |   |
| Total assets                             |   | $ | 745,591 |   | $ | 6,723 |   | $ | 12,255 |   | $ | 764,569 |   |
|                                     |   |   |   |   |   |   |   |   |   |

 

 

NOTE 5.                                COMPANY OBLIGATED MANDATORILY REDEEMABLEPREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBENTURES

 

On November 28, 2001, the Company issued 10,000 sharestotaling $10.0 million of Company Obligated Mandatorily Redeemable PreferredSecurities of HF Financial Capital Trust I. The Trust exists for the sole purpose of issuing trust preferredsecurities and investing the proceeds in subordinated debentures of theCompany.  These subordinated debenturesconstitute the sole asset of the Trust. The securities provide for cumulative cash distributions calculated at arate based on six-month LIBOR plus 3.75%. The Company may, at one or more times, defer interest payments on thecapital securities for up to 10 consecutive semi-annual periods, but not beyondDecember 8, 2031.  At the end of thedeferral period, all accumulated and unpaid distributions will be paid.  The capital securities will be redeemed onDecember 8, 2031; however, the Company has the option to shorten the maturitydate to a date not earlier than December 8, 2006.  Holders of the capital securities have no voting rights, areunsecured, and rank junior in priority of the payment to all of the Company’sindebtedness and senior to the Company’s capital stock.

 

 

8

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Item 2.

**MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL**

**CONDITION AND RESULTS OF OPERATIONS**

 

**General**

 

                TheCompany was incorporated under the laws of the State of Delaware in November1991 for the purpose of owning all of the outstanding stock of the Bank issuedin the mutual to stock conversion of the Bank. The Company acquired all of the outstanding stock of the Bank on April8, 1992.  In May 1996, the Company formed  HF Card Services and became the owner of 51%of this entity. The Company became the owner of 100% of HF Card Serviceseffective as of July 1998.  In November2001, the Company formed HF Capital Trust I and became the owner of 100% ofthis entity (see Note 5).  Theactivities of the Company itself have no significant impact on the results ofoperations on a consolidated basis. Unless otherwise indicated, all activities discussed herein relate tothe Company, and its direct and indirect subsidiaries, including withoutlimitation, the Bank, HF Card Services and the Mortgage Corp.

 

                HFCard Services was established to provide secured, partially-secured andunsecured credit cards nationwide.  Thetarget market for HF Card Services was subprime credit customers who haveeither an insufficient credit history or a negative credit history and areunable to obtain a credit card from more traditional card issuers.  The Company ceased credit card applicationsin March 1999.

 

              The Company’s net income isprimarily dependent upon the difference (or “spread”) between the average yieldearned on loans, mortgage-backed securities and investments and the averagerate paid on deposits and borrowings, as well as the relative amounts of suchassets and liabilities.  The interestrate spread is affected by regulatory, economic and competitive factors thatinfluence interest rates, loan demand and deposit flows.  The Company, like other financialinstitutions, is subject to interest rate risk to the degree that itsinterest-bearing liabilities mature or reprice at different times, or on adifferent basis, than its interest-earning assets.  To better insulate itself from such risk, the Company has, overthe last few years, attempted to increase both numerically and on a percentagebasis its holding of consumer and commercial loans.  The Company has also decreased its ratio of fixed-rate toadjustable-rate loans. The Company’s net income is also affected by, amongother things, gains and losses on sales of foreclosed property, loans,mortgage-backed securities and securities available for sale, provisions forlosses on loans and leases, service charge fees, subsidiary activities,operating expenses and income taxes.

 

**Forward-Looking Statements**

 

This Form 10-Q andother reports issued by the Company, including reports filed with theSecurities and Exchange Commission, may contain “forward-looking” statementsthat deal with future results, expectations, plans or performance.  In addition, the Company’s management maymake such statements orally to the media, securities analysts, investors orothers. Forward-looking statements deal with matters that do not relatestrictly to historical facts.  Theseforward-looking statements might include one or more of the following:

 

·                                          Projectionsof income, revenues, earnings per share, dividends, capital expenditures,capital structure or other financial items.

·                                          Descriptionsof plans or objectives of management for future operations, products orservices.

·                                          Forecastsof future economic performance.

·                                          Descriptionsof assumptions underlying or relating to such matters.

 

Forward-lookingstatements can be identified by the fact that they do not relate strictly tohistorical or current facts.  They ofteninclude words such as “believe,” “expect,” “anticipate,” “intend,” “plan,”“estimate,” or words of similar meaning, or future or conditional verbs such as“will,” “would,” “should,” “could” or “may.”

 

The Company’s futureresults may differ materially from historical performance, and forward-lookingstatements about the Company’s expected financial results or other plans aresubject to a number of risks and uncertainties.  These include but are not limited to possible legislative changesand adverse economic, business and competitive developments such as shrinkinginterest margins; deposit outflows; reduced demand for financial services andloan products; changes in accounting policies or guidelines, or in monetary andfiscal policies of the federal government; changes in credit and other risksposed by the Company’s loan portfolios; technological, computer-related oroperational difficulties; adverse changes in securities markets; results oflitigation; or other significant uncertainties.

 

Forward-lookingstatements speak only as of the date they are made.  The Company does not undertake to update forward-lookingstatements to reflect circumstances or events that occur after the date theforward-looking statements are made.

** **

 

9

----

** **

**Financial Condition Data**

 

            At December 31, 2001, the Companyhad total assets of $736.2 million, a decrease of $47.8 million from the levelat June 30, 2001.  The decrease inassets was due primarily to a decrease in loans and leases receivable of $48.0million, a decrease in cash and cash equivalents of $18.8 million and adecrease in mortgage-backed securities of $11.6 million offset by increases inloans held for sale of $15.3 and securities available for sale of $9.6million.  The decrease in liabilitieswas due primarily to decreases in advances from Federal Home Loan Bank (“FHLB”)and other borrowings of $28.4 million, accrued interest payable of $3.1 millionand deposits of $20.0 million, which was partially offset by the increase inadvances by borrowers for taxes and insurance of $1.7 million from the levelsat June 30, 2001.  In addition,stockholders’ equity increased from $52.5 million at June 30, 2001 to $54.0million at December 31, 2001, primarily due to net income of $2.3 million and theincrease in net unrealized gain on securities available for sale of $280,000which was partially offset by the payment of cash dividends of $813,000.

 

            The decrease in loans and leasesreceivable of $48.0 million was due primarily to sales, amortization andprepayments of principal exceeding purchases and originations.

 

The increase insecurities available for sale of $9.6 million was primarily the result ofpurchases of $33.0 million exceeding maturities, sales and calls of $23.5million.  In addition, the Companypurchased $2.9 million in certificates of deposit during the quarter endedDecember 31, 2001

 

Thedecrease in mortgage-backed securities of $11.6 million was primarily theresult of maturities, sales, calls, amortization and repayments of principal of$14.3 million exceeding purchases of $2.0 million.

 

The$15.3 million increase in loans held for sale was primarily due to an increasein loans originated for sale into the secondary market during the six monthsended December 31, 2001.

 

The$20.0 million decrease in deposits was primarily due to a decrease in savingsaccounts of $8.0 million and certificates of deposit of $50.1 million offset byan increase in demand accounts of $14.3 million and money market accounts of$24.1 million.

 

Advances from the FHLBand other borrowings decreased $38.4 million for the six month period endedDecember 31, 2001 primarily due to the paydown of $39.3 million in advances andother borrowings which was offset by additional draws on other borrowings of$900,000.

 

The liability for companyobligated mandatorily redeemable preferred securities of subsidiary trust thatsolely holds subordinated debentures increased $10.0 million for the six monthperiod  ended December 31, 2001.  See Note 5.

 

 

10

----

 

**Analysisof Net Interest Income**

 

                Netinterest income represents the difference between income on interest-earningassets and expense on interest-bearing liabilities.  Net interest income depends upon the volume of interest-earningassets and interest-bearing liabilities and the interest rates earned or paidon them.

 

*                Average Balances, Interest Ratesand Yields.*  The following table presents for the periodsindicated the total dollar amount of interest income from averageinterest-earning assets and the resulting yields, as well as the interestexpense on average interest-bearing liabilities, expressed both in dollars andrates, and the net interest margin.  Thetable does not reflect any effect of income taxes.  All average balances are monthly average balances and include thebalances of nonaccruing loans.  Theyields and costs for the three and six months ended December 31, 2001 and 2000include fees which are considered adjustments to yield.

 
|                                          |   | **Three  Months Ended December 31,** |    |
|-----------------------------------------------|--------|--------------------------------------|---------|
|                                          |   | **2001**                             |    | **2000** |   |
|                                          |   | **Average**                          |    | **Interest** |   |   |   | **Average** |   | **Interest** |   |   |   |
|                                          |   | **Outstanding**                      |    | **Earned/** |   | **Yield/** |   | **Outstanding** |   | **Earned/** |   | **Yield/** |   |
|                                          |   | **Balance**                          |    | **Paid** |   | **Rate** |   | **Balance** |   | **Paid** |   | **Rate** |   |
|                                          |   | **(Dollars  in Thousands)**          |    |
| Interest-earning assets:                      |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Loans and leases receivable(1)                |   | $                                    | 548,117 |   | $ | 10,831 |   | 7.84 | % | $ | 566,385 |   | $ | 13,050 |   | 9.14 | % |
| Mortgage-backed securities                    |   | 37,857                               |    | 602 |   | 6.31 | % | 51,549 |   | 865 |   | 6.66 | % |
| Other investment securities(2)                |   | 100,630                              |    | 784 |   | 3.09 | % | 71,504 |   | 1,079 |   | 5.99 | % |
| FHLB stock                                    |   | 6,332                                |    | 63 |   | 3.95 | % | 6,322 |   | 113 |   | 7.09 | % |
|                                          |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                 |   | $                                    | 692,936 |   | $ | 12,280 |   | 7.03 | % | $ | 695,760 |   | $ | 15,107 |   | 8.61 | % |
| Noninterest-earning assets                    |   | 49,267                               |    |   |   |   |   | 39,332 |   |   |   |   |   |
| Total assets                                  |   | $                                    | 742,203 |   |   |   |   |   | $ | 735,092 |   |   |   |   |   |
|                                          |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                 |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                     |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Checking and money market                     |   | $                                    | 232,144 |   | $ | 963 |   | 1.65 | % | $ | 192,937 |   | $ | 2,017 |   | 4.15 | % |
| Savings                                       |   | 35,944                               |    | 115 |   | 1.27 | % | 36,259 |   | 357 |   | 3.91 | % |
| Certificates of deposit                       |   | 299,554                              |    | 4,012 |   | 5.31 | % | 318,063 |   | 5,038 |   | 6.28 | % |
| Total deposits                                |   | $                                    | 567,642 |   | $ | 5,090 |   | 3.56 | % | $ | 547,259 |   | $ | 7,412 |   | 5.37 | % |
| FHLB advances and other borrowings            |   | 99,034                               |    | 1,290 |   | 5.17 | % | 117,105 |   | 1,822 |   | 6.17 | % |
|                                          |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities            |   | $                                    | 666,676 |   | $ | 6,380 |   | 3.80 | % | $ | 664,364 |   | $ | 9,234 |   | 5.51 | % |
| Other liabilities                             |   | 21,510                               |    |   |   |   |   | 21,232 |   |   |   |   |   |
| Total liabilities                             |   | $                                    | 688,186 |   |   |   |   |   | $ | 685,596 |   |   |   |   |   |
| Equity                                        |   | 54,017                               |    |   |   |   |   | 49,496 |   |   |   |   |   |
| Total liabilities and equity                  |   | $                                    | 742,203 |   |   |   |   |   | $ | 735,092 |   |   |   |   |   |
|                                          |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Net interest income; interest rate  spread(4) |   |                                 |    | $ | 5,900 |   | 3.23 | % |   |   | $ | 5,873 |   | 3.10 | % |
|                                          |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Net interest margin(3)(4)                     |   |                                 |    |   |   | 3.38 | % |   |   |   |   | 3.35 | % |

 

----

(1) Includes interest on accruing loans past due 90 days or more.

(2) Includes primarily U.S. Government and agency securities and FHLB dailytime.

(3) Net interest margin is net interest income divided by averageinterest-earning assets.

(4) Percentages for the three months ended December 31, 2001 and December31, 2000 have been annualized.

 

 

11

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** **
|                                           |   | **Six  Months Ended December 31,** |    |
|------------------------------------------------|--------|------------------------------------|---------|
|                                           |   | **2001**                           |    | **2000** |   |
|                                           |   | **Average**                        |    | **Interest** |   |   |   | **Average** |   | **Interest** |   |   |   |
|                                           |   | **Outstanding**                    |    | **Earned/** |   | **Yield/** |   | **Outstanding** |   | **Earned/** |   | **Yield/** |   |
|                                           |   | **Balance**                        |    | **Paid** |   | **Rate** |   | **Balance** |   | **Paid** |   | **Rate** |   |
|                                           |   | **(Dollars  in Thousands)**        |    |
| Interest-earning assets:                       |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Loans and leases receivable(1)                 |   | $                                  | 559,764 |   | $ | 22,736 |   | 8.06 | % | $ | 565,053 |   | $ | 25,973 |   | 9.12 | % |
| Mortgage-backed securities                     |   | 40,409                             |    | 1,297 |   | 6.37 | % | 52,704 |   | 1,768 |   | 6.65 | % |
| Other investment securities(2)                 |   | 100,470                            |    | 1,826 |   | 3.61 | % | 63,661 |   | 1,904 |   | 5.93 | % |
| FHLB stock                                     |   | 6,332                              |    | 128 |   | 4.01 | % | 6,226 |   | 222 |   | 7.07 | % |
|                                           |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                  |   | $                                  | 706,975 |   | $ | 25,987 |   | 7.30 | % | $ | 687,644 |   | $ | 29,867 |   | 8.62 | % |
| Noninterest-earning assets                     |   | 46,897                             |    |   |   |   |   | 37,214 |   |   |   |   |   |
| Total assets                                   |   | $                                  | 753,872 |   |   |   |   |   | $ | 724,858 |   |   |   |   |   |
|                                           |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                  |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                      |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Checking and money market                      |   | $                                  | 225,017 |   | $ | 2,332 |   | 2.06 | % | $ | 188,426 |   | $ | 3,841 |   | 4.04 | % |
| Savings                                        |   | 38,497                             |    | 369 |   | 1.90 | % | 40,489 |   | 814 |   | 3.99 | % |
| Certificates of deposit                        |   | 308,911                            |    | 8,663 |   | 5.56 | % | 309,907 |   | 9,624 |   | 6.16 | % |
| Total deposits                                 |   | $                                  | 572,425 |   | $ | 11,364 |   | 3.94 | % | $ | 538,822 |   | $ | 14,279 |   | 5.26 | % |
| FHLB advances and other borrowings             |   | 104,910                            |    | 2,793 |   | 5.28 | % | 115,818 |   | 3,576 |   | 6.12 | % |
|                                           |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities             |   | $                                  | 677,335 |   | $ | 14,157 |   | 4.15 | % | $ | 654,640 |   | $ | 17,855 |   | 5.41 | % |
| Other liabilities                              |   | 22,773                             |    |   |   |   |   | 21,479 |   |   |   |   |   |
| Total liabilities                              |   | $                                  | 700,108 |   |   |   |   |   | $ | 676,119 |   |   |   |   |   |
| Equity                                         |   | 53,764                             |    |   |   |   |   | 48,739 |   |   |   |   |   |
| Total liabilities and equity                   |   | $                                  | 753,872 |   |   |   |   |   | $ | 724,858 |   |   |   |   |   |
|                                           |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Net interest income; interest rate spread  (4) |   |                               |    | $ | 11,830 |   | 3.15 | % |   |   | $ | 12,012 |   | 3.21 | % |
|                                           |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Net interest margin(3)(4)                      |   |                               |    |   |   | 3.32 | % |   |   |   |   | 3.47 | % |

 

----

(1) Includes interest on accruing loans past due 90 days or more.

(2) Includes primarily U.S. Government and agency securities and FHLB dailytime.

(3) Net interest margin is net interest income divided by averageinterest-earning assets.

(4) Percentages for the six months ended December 31, 2001 and December 31,2000 have been annualized.

 

 

12

----

 

**Rate/VolumeAnalysis of Net Interest Income**

 

                Thefollowing schedule presents the dollar amount of changes in interest income andinterest expense for major components of interest-earning assets andinterest-bearing liabilities.  Itdistinguishes between the increases and decreases due to fluctuatingoutstanding balances that are due to the levels and volatility of interestrates.  For each category ofinterest-earning assets and interest-bearing liabilities, information isprovided on changes attributable to (i) changes in volume (i.e., changes involume multiplied by old rate) and (ii) changes in rate (i.e., changes in ratemultiplied by new volume).  For purposesof this table, changes attributable to both rate and volume, which cannot besegregated, have been allocated proportionately to the change due to volume andthe change due to rate.

 

 

 
|                                |   | **Three Months Ended December 31,** |   | **Six Months Ended December 31,** |   |
|-------------------------------------|--------|-------------------------------------|--------|-----------------------------------|--------|
|                                |   | **2001 vs 2000**                    |   | **2001 vs 2000**                  |   |
|                                |   | **Increase**                        |   |                              |   |   |   | **Increase** |   |   |   |   |   |
|                                |   | **(Decrease)**                      |   | **(Decrease)**                    |   |   |   | **(Decrease)** |   | **(Decrease)** |   |   |   |
|                                |   | **Due to**                          |   | **Due to**                        |   | **Total** |   | **Due to** |   | **Due to** |   | **Total** |   |
|                                |   | **Volume**                          |   | **Rate**                          |   | **(Decrease)** |   | **Volume** |   | **Rate** |   | **(Decrease)** |   |
|                                |   | **(Dollars in Thousands)**          |   |
| Interest-earning assets:            |   |                                |   |                              |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable(1)     |   | $                                   | (391   | )                                 | $      | (1,828 | ) | $ | (2,219 | ) | $ | (243 | ) | $ | (2,994 | ) | $ | (3,237 | ) |
| Mortgage-backed securities          |   | (224                                | )      | (39                               | )      | (263 | ) | (412 | ) | (59 | ) | (471 | ) |
| Other investment  securities(2)     |   | 334                                 |   | (629                              | )      | (295 | ) | 1,101 |   | (1,179 | ) | (78 | ) |
| FHLB stock                          |   | -                                   |   | (50                               | )      | (50 | ) | 4 |   | (98 | ) | (94 | ) |
|                                |   |                                |   |                              |   |   |   |   |   |   |   |   |   |
| Total interest-earning  assets      |   | $                                   | (281   | )                                 | $      | (2,546 | ) | $ | (2,827 | ) | $ | 450 |   | $ | (4,330 | ) | $ | (3,880 | ) |
|                                |   |                                |   |                              |   |   |   |   |   |   |   |   |   |
|                                |   |                                |   |                              |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:      |   |                                |   |                              |   |   |   |   |   |   |   |   |   |
| Deposits:                           |   |                                |   |                              |   |   |   |   |   |   |   |   |   |
| Checking and money market           |   | $                                   | 287    |                              | $      | (1,341 | ) | $ | (1,054 | ) | $ | 746 |   | $ | (2,255 | ) | $ | (1,509 | ) |
| Savings                             |   | (1                                  | )      | (240                              | )      | (241 | ) | (40 | ) | (405 | ) | (445 | ) |
| Certificates of deposit             |   | (271                                | )      | (756                              | )      | (1,027 | ) | (31 | ) | (930 | ) | (961 | ) |
| Total deposits                      |   | 15                                  |   | (2,337                            | )      | (2,322 | ) | 675 |   | (3,590 | ) | (2,915 | ) |
| FHLB advances and other  borrowings |   | (258                                | )      | (274                              | )      | (532 | ) | (337 | ) | (446 | ) | (783 | ) |
|                                |   |                                |   |                              |   |   |   |   |   |   |   |   |   |
| Total interest-bearing  liabilities |   | $                                   | (243   | )                                 | $      | (2,611 | ) | $ | (2,854 | ) | $ | 338 |   | $ | (4,036 | ) | $ | (3,698 | ) |
|                                |   |                                |   |                              |   |   |   |   |   |   |   |   |   |
|                                |   |                                |   |                              |   |   |   |   |   |   |   |   |   |
| Net interest income  (decrease)     |   |                                |   |                              |   | $ | 27 |   |   |   |   |   | $ | (182 | ) |

 

----

(1)  Includes interest on accruing loans and leases past due 90 daysor more.

(2)  Includes primarily U. S. Government andagency securities and FHLB daily time.

 

 

13

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**Asset Quality**

 

                In accordance with the Company’sinternal classification of assets policy, management evaluates the loan andlease portfolio on a monthly basis to identify loss potential and determine theadequacy of the allowance for loan and lease losses.  The following table sets forth the amounts and categories of theCompany’s nonperforming assets for the periods indicated.

 
|                                                                  |   | **Nonperforming  Assets As Of** |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                  |   | **December 31,**                |   | **June 30,** |   |
|                                                                  |   | **2001**                        |   | **2001** |   |
|                                                                  |   | **(Dollars in Thousands)**      |   |
| Nonaccruing loans and leases:                                         |   |                            |   |   |   |
| One- to four-family                                                   |   | $                               | 363    |   | $ | 723 |   |
| Commercial real estate                                                |   | 1,279                           |   | 385 |   |
| Multi-family                                                          |   | 294                             |   | — |   |
| Commercial  business                                                  |   | 3,259                           |   | 3,223 |   |
| Equipment finance leases                                              |   | —                          |   | — |   |
| Consumer                                                              |   | 732                             |   | 518 |   |
| Agriculture                                                           |   | 250                             |   | 373 |   |
| Credit cards                                                          |   | —                          |   | — |   |
| Mobile homes                                                          |   | 43                              |   | 88 |   |
| Total                                                                 |   | $                               | 6,220  |   | $ | 5,310 |   |
|                                                                  |   |                            |   |   |   |
| Accruing loans and leases delinquent more than 90 days:               |   |                            |   |   |   |
| One- to four-family                                                   |   | $                               | — |   | $ | — |   |
| Commercial real  estate                                               |   | 37                              |   | — |   |
| Multi-family                                                          |   | —                          |   | 304 |   |
| Commercial  business                                                  |   | 24                              |   | — |   |
| Equipment finance leases                                              |   | —                          |   | — |   |
| Consumer                                                              |   | —                          |   | — |   |
| Agriculture                                                           |   | —                          |   | 23 |   |
| Credit cards                                                          |   | 249                             |   | 283 |   |
| Mobile homes                                                          |   | —                          |   | — |   |
| Total                                                                 |   | $                               | 310    |   | $ | 610 |   |
|                                                                  |   |                            |   |   |   |
| Foreclosed assets:(2)                                                 |   |                            |   |   |   |
| One- to four-family                                                   |   | $                               | 595    |   | $ | 203 |   |
| Commercial real estate                                                |   | —                          |   | — |   |
| Multi-family                                                          |   | —                          |   | — |   |
| Commercial  business                                                  |   | —                          |   | — |   |
| Equipment finance leases                                              |   | —                          |   | — |   |
| Consumer                                                              |   | 134                             |   | 105 |   |
| Agriculture                                                           |   | —                          |   | — |   |
| Credit cards                                                          |   | —                          |   | — |   |
| Mobile homes                                                          |   | 23                              |   | 2 |   |
| Total                                                                 |   | $                               | 752    |   | $ | 310 |   |
|                                                                  |   |                            |   |   |   |
| Total nonperforming assets                                            |   | $                               | 7,282  |   | $ | 6,230 |   |
|                                                                  |   |                            |   |   |   |
| Ratio of nonperforming assets to total  assets                        |   | 0.99                            | %      | 0.79 | % |
|                                                                  |   |                            |   |   |   |
| Ratio of nonperforming loans and leases to  total loans and leases(1) |   | 1.20                            | %      | 1.02 | % |
|                                                                  |   |                            |   |   |   |

 

----

(1) Nonperforming loans and leases include both nonaccruing and accruingloans and leasesdelinquent more than 90 days.

(2) Total foreclosed assets does not include land held for development.

 

 

14

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                Loansare generally classified as nonaccrual when there are reasonable doubts as tothe collectibility of principal and/or interest and/or when payment becomes 90days past due, except loans which are well secured and in the process ofcollection.  Interest collections onnonaccrual loans, for which the ultimate collectability of principal isuncertain, are applied as principal reductions.  Credit card loans remain in accrual status until 120 days, whenaccrued interest income on the loan is taken out of income.

 

                Nonperformingassets increased to $7.3 million at December 31, 2001 from $6.2 million at June30, 2001, an increase of $1.1 million. In addition, the ratio of nonperforming assets to total assets, which isone indicator of credit risk exposure, increased slightly to 0.99% at December31, 2001 as compared to 0.79% at June 30, 2001.

 

                Nonaccruingloans and leases increased to $6.2 million at December 31, 2001 from $5.3million at June 30, 2001, an increase of $910,000.  Included in nonaccruing loans at December 31, 2001 were eightloans totaling $363,000 secured by one- to four-family real estate, one loan inthe amount of $294,000 secured by multi-family real estate, three commercialloans totaling $1.3 million, nineteen loans totaling $3.3 million secured bycommercial business, six mobile home loans totaling $43,000, fifty consumerloans totaling $732,000 and one agriculture loan totaling $250,000.  For the three and six months ended December31, 2001, an additional $60,000 and $169,000 of interest income, respectively,would have been recognized on loans accounted for on a nonaccrual basis hadsuch loans been current in accordance with their original terms.

 

                AtDecember 31, 2001, the Bank had approximately $11.6 million of other loans ofconcern that management has determined need to be closely monitored because ofpossible credit problems of the borrowers or the cash flows of the securedproperties.  These loans were consideredin determining the adequacy of the allowance for possible loan losses.  The allowance for possible loan losses isestablished based on management’s evaluation of the risks inherent in the loanportfolio and changes in the nature and volume of loan activity.  Such evaluation, which includes a review ofall loans for which full collectability may not be reasonably assured,considers the estimated fair market value of the underlying collateral,economic conditions, historical loan loss experience and other factors thatwarrant recognition in providing for an adequate loan loss allowance.  Although the Company’s management believesthat the December 31, 2001 recorded allowance for loan and lease losses wasadequate to provide for potential losses on the related loans and leases, therecan be no assurance that the allowance existing at December 31, 2001 will beadequate in the future.

** **

 

15

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                Thefollowing table sets forth information with respect to activity in the Company’sallowance for loan and lease losses during the periods indicated.

 
|                                                                                                    |   | **Six Months Ended**       |   |
|---------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                                                    |   | **12/31/2001**             |   | **12/31/2000** |   |
|                                                                                                    |   | **(Dollars in Thousands)** |   |
| Balance at beginning of period                                                                          |   | $                          | 6,544  |   | $ | 8,475 |   |
| Charge-offs:                                                                                            |   |                       |   |   |   |
| One- to four-family                                                                                     |   | (34                        | )      | (18 | ) |
| Commercial                                                                                              |   | (50                        | )      | — |   |
| Commercial business                                                                                     |   | (236                       | )      | — |   |
| Equipment finance leases                                                                                |   | (35                        | )      | (20 | ) |
| Consumer                                                                                                |   | (620                       | )      | (584 | ) |
| Agriculture                                                                                             |   | (58                        | )      | — |   |
| Credit cards                                                                                            |   | (1,123                     | )      | (2,014 | ) |
| Mobile homes                                                                                            |   | (37                        | )      | (27 | ) |
| Total charge-offs                                                                                       |   | $                          | (2,193 | ) | $ | (2,663 | ) |
|                                                                                                    |   |                       |   |   |   |
| Recoveries:                                                                                             |   |                       |   |   |   |
| One- to four-family                                                                                     |   | $                          | 2      |   | $ | — |   |
| Commercial                                                                                              |   | 2                          |   | — |   |
| Equipment finance leases                                                                                |   | 38                         |   | — |   |
| Consumer                                                                                                |   | 170                        |   | 145 |   |
| Agriculture                                                                                             |   | 8                          |   | — |   |
| Credit cards                                                                                            |   | 80                         |   | 134 |   |
| Mobile homes                                                                                            |   | 1                          |   | 3 |   |
| Total recoveries                                                                                        |   | $                          | 301    |   | $ | 282 |   |
|                                                                                                    |   |                       |   |   |   |
| Net (charge-offs)                                                                                       |   | $                          | (1,892 | ) | $ | (2,381 | ) |
|                                                                                                    |   |                       |   |   |   |
| Additions charged to operations                                                                         |   | 1,905                      |   | 1,264 |   |
| Additions from acquisition                                                                              |   | —                     |   | 97 |   |
|                                                                                                    |   |                       |   |   |   |
| Balance at end of period                                                                                |   | $                          | 6,557  |   | $ | 7,455 |   |
|                                                                                                    |   |                       |   |   |   |
| Ratio of net (charge-offs) during the  period to average loans and leases outstanding during the period |   | (0.34                      | )%     | (0.42 | )% |
|                                                                                                    |   |                       |   |   |   |
| Ratio of allowance for loan and lease  losses to total loans and leases at end of period                |   | 1.20                       | %      | 1.32 | % |
|                                                                                                    |   |                       |   |   |   |
| Ratio of allowance for loan losses to  nonperforming loans and leases at end of period(1)               |   | 100.41                     | %      | 217.60 | % |

 

----

(1) Nonperforming loans and leases includeboth nonaccruing and accruing loans and leases delinquent more than 90 days.

 

 

16

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The distribution of the Company’s allowance for loanand lease losses at the dates indicated is summarized as follows:

 
|                                       |   | **At December 31, 2001**   |   | **At June 30, 2001** |   |
|--------------------------------------------|--------|----------------------------|--------|----------------------|--------|
|                                       |   |                       |   | **Percent of**       |   |   |   | **Percent of** |   |
|                                       |   |                       |   | **Loans in**         |   |   |   | **Loans in** |   |
|                                       |   |                       |   | **Each**             |   |   |   | **Each** |   |
|                                       |   |                       |   | **Category to**      |   |   |   | **Category to** |   |
|                                       |   | **Amount**                 |   | **Total Loans**      |   | **Amount** |   | **Total Loans** |   |
|                                       |   | **(Dollars in Thousands)** |   |
| One- to four-family                        |   | $                          | 1,016  |                 | 17.60  | % | $ | 1,196 |   | 21.48 | % |
|                                       |   |                       |   |                 |   |   |   |   |   |
| Commercial and multi-family real estate(1) |   | 1,297                      |   | 22.46                | %      | 1,402 |   | 25.19 | % |
|                                       |   |                       |   |                 |   |   |   |   |   |
| Commercial   business                 |   | 1,170                      |   | 20.25                | %      | 932 |   | 16.74 | % |
|                                       |   |                       |   |                 |   |   |   |   |   |
| Equipment finance leases                   |   | 154                        |   | 2.67                 | %      | 101 |   | 1.81 | % |
|                                       |   |                       |   |                 |   |   |   |   |   |
| Consumer(2)                                |   | 1,705                      |   | 29.52                | %      | 1,523 |   | 27.36 | % |
|                                       |   |                       |   |                 |   |   |   |   |   |
| Agricultural                               |   | 349                        |   | 6.04                 | %      | 317 |   | 5.70 | % |
|                                       |   |                       |   |                 |   |   |   |   |   |
| Credit cards                               |   | 833                        |   | 0.89                 | %      | 1,036 |   | 1.05 | % |
|                                       |   |                       |   |                 |   |   |   |   |   |
| Mobile homes                               |   | 33                         |   | 0.57                 | %      | 37 |   | 0.67 | % |
|                                       |   |                       |   |                 |   |   |   |   |   |
| Total                                      |   | $                          | 6,557  |                 | 100.00 | % | $ | 6,544 |   | 100.00 | % |
|                                       |   |                       |   |                 |   |   |   |   |   |
|                                            |        |                            |        |                      |        |  |  |  |  |  |  |  |

 

----

(1) Includes construction loans.

(2) Excludes allowance for loan lossesrelating to mobile home loans and credit card loans.

 

                Theallowance for loan and lease losses was $6.6 million at December 31, 2001 ascompared to $6.5 million at June 30, 2001.   The ratio of the allowance for loan and lease losses to total loans andleases was 1.20% at December 31, 2001 and 1.13% at June 30, 2001.  The Company’s management has considerednonperforming assets and other assets of concern in establishing theallowance.  The Company continues tomonitor its allowance for possible loan and lease losses and make futureadditions or reductions in light of the level of loans and leases in itsportfolio and as economic conditions dictate.

 

                The current level of theallowance for loan and lease losses is a result of management’s assessment ofthe risks within the portfolio based on the information revealed in creditreporting processes. The Company utilizes a risk-rating system on allcommercial business, agricultural, construction and multi-family and commercialreal estate loans, including purchased loans. A monthly credit review is performed on all types of loans to establishthe necessary reserve based on the estimated risk within the portfolio. Thisassessment of risk takes into account the composition of the loan portfolio,historical loss experience for each loan category, previous loan experience,concentrations of credit, current economic conditions and other factors that inmanagement’s judgment deserve recognition.

 

 

17

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**Comparisonof the Six Months Ended December 31, 2001 and December 31, 2000**

 

*                General*.  The Company’s net income decreased $350,000for the six months ended December 31, 2001 as compared to the six months endedDecember 31, 2000. As discussed in more detail below, this decrease was dueprimarily to a decrease in net interest income of $182,000, an increase in theprovision for losses on loans of $641,000 and an increase in noninterestexpense of $678,000 which were partially offset by an increase in noninterestincome of $889,000 and a decrease in income tax expense of $262,000.

*InterestIncome.*  Interest income decreased $3.9 million from$29.9 million for the six months ended December 31, 2000 to $26.0 million forthe six months ended December 31, 2001.  A $4.3 million decrease in interest income was the result of the  average yield on interest-earning assetsdecreasing from 8.62% to 7.30% for the six months ended December 31, 2000 andDecember 31, 2001, respectively.  Inaddition, the average balance of interest-earning assets increased $19.3million at December 31, 2001 as compared to the same period in the prior fiscalyear, which resulted in a $450,000 increase in interest income.

 

                *InterestExpense.*  Interest expensedecreased $3.7 million from $17.9 million for the six months ended December 31,2000 to $14.2 million for the six months ended December 31, 2001.  A $4.0 million decrease in interest expensewas the result of the decrease in the average rate paid on interest-bearingliabilities from 5.41% to 4.15% for the six months ended December 31, 2000 andDecember 31, 2001, respectively.  Inaddition, the average balance of interest-bearing liabilities increased $22.7million at December 31, 2001 as compared to the same period in the prior fiscalyear.

 

                *Net InterestIncome.* The Company’s net interest income for the six months endedDecember 31, 2001 decreased $182,000 to $11.8 million compared to $12.0 millionfor the same period in fiscal 2000.  Thedecrease in net interest income reflects a decrease in the net interest spreadon average earning assets to 3.15% for the six months ended December 31, 2001from 3.21% for the same period in fiscal 2000.

 

                Duringthe six months ended December 31, 2001, the Company increased its averagebalances of commercial and consumer loans. The Company anticipates activity inthis type of lending to continue in future years, subject to marketdemand.  In addition, the Company sellsthe majority of conventional single-family residential real estate loanoriginations into the secondary market. Net interest income is expected to trend upward as a result of thislending activity as interest rate yields are generally higher on these types ofloans compared to the yield provided by conventional single-family residentialreal estate loans.  This lending activityis considered to carry a higher level of risk due to the nature of thecollateral and the size of the individual loans.  As such, the Company anticipates continued increases in itsallowance for loan losses.

 

                *Provisionfor Losses on Loans.*During the six months ended December 31, 2001,the Company recorded a provision for losses on loans of $1.9 million ascompared to $1.3 million for the six months ended December 31, 2000, anincrease of $641,000.  See “AssetQuality” for further discussion.

 

*                Noninterest Income.* Noninterest income was $7.1 million for the six months ended December31, 2001 as compared to $6.3 million for the six months ended December 31,2000, an increase of $889,000.

 

                Thedecrease in credit card fee income of $992,000 for the six months endedDecember 31, 2001 as compared to the same period in fiscal 2000 is primarilydue to a decrease in fees received on unsecured credit cards. This is a resultof the credit card portfolio decreasing from $7.9 million at December 31, 2000as compared to $4.8 million at December 31, 2001. The fee income representsinterchange fees, annual/monthly fees, late fees and other miscellaneous fees.This credit card program was initiated in fiscal 1997. The Company ceasedcredit card applications in March 1999. This decreased the level of these fees. Interest income on credit card loans is included in interest income onloans.

 

                Othernoninterest income increased $765,000 compared to the same period in the priorfiscal year primarily due to a one-time payment of $700,000 in full settlementof an insurance claim for recovery of prior losses.

 

                *NoninterestExpense.*  Noninterest expenseincreased $678,000 as compared to the same period in the prior fiscal yearprimarily due to increases in compensation and employee benefits of $959,000,general and administrative expenses of $375,000 and other noninterest expenseof $93,000 (increases primarily related to four new banking centers openedsince September of 2000) offset by a decrease in credit card processingexpenses of $732,000. This expense represents costs for collecting loans andservicing credit cards for the unsecured credit card program.

 

 

18

----

 

              *Income tax expense.*  The Company’s income tax expense for the sixmonths ended December 31, 2001 was $1.4 million as compared to $1.7 million forthe six months ended December 31, 2000, a decrease of $262,000. This decreasewas primarily due to the decrease in the Company’s pretax income from $4.3million to $3.7 million and the decrease in the effective tax rate from 39.33%to 38.75% for the six months ended December 31, 2000 and December 31, 2001,respectively.

 

 

**Comparisonof the Three Months Ended December 31, 2001 and December 31, 2000**

 

*                General*.  The Company’s net income decreased $358,000for the three months ended December 31, 2001 as compared to the three monthsended December 31, 2000.  As discussedin more detail below, this decrease was due primarily to an increase inprovision for losses on loans and leases of $357,000 and an increase in noninterestexpense of $365,000 offset by an increase in net interest income of $27,000, anincrease in noninterest income of $98,000 and a decrease in income tax expenseof $239,000.

 

                *InterestIncome.*  Interest incomedecreased $2.8 million from $15.1 million for the three months ended December31, 2000 to $12.3 million for the three months ended December 31, 2001.  A $2.5 million decrease in interest incomewas the result of the  average yield oninterest-earning assets decreasing from 8.61% to 7.03% for the three monthsended December 31, 2000 and December 31, 2001, respectively.  In addition, the average balance ofinterest-earning assets decreased $2.8 million at December 31, 2001 as comparedto the same period in the prior fiscal year, which resulted in a $281,000decrease in interest income.

 

                *InterestExpense.*  Interest expensedecreased $2.8 million from $9.2 million for the three months ended December31, 2000 to $6.4 million for the three months ended December 31, 2001.  A $2.6 million decrease in interest expensewas the result of the decrease in the average rate paid on interest-bearingliabilities from 5.51% to 3.80% for the three months ended December 31, 2000and December 31, 2001, respectively.  Inaddition, the average balance of interest-bearing liabilities increased $2.3million at December 31, 2001 as compared to the same period in the prior fiscalyear.  This increase consisted of a$39.3 million increase in lower cost checking and money marked accounts offsetby a $18.5 million decrease in certificates of deposit and a $18.1 milliondecrease in advances and other borrowed funds. The resulting change in the mix of the borrowings had the effect ofreducing interest expense by $243,000.

 

                *Net InterestIncome.* The Company’s net interest income for the three months endedDecember 31, 2001 increased $27,000 as compared to the same period in fiscal2001.  The increase in net interestincome reflects an increase in the net interest spread on average earning assetsto 3.23% for the three months ended December 31, 2001 from 3.10% for the sameperiod in the prior fiscal year.

 

                Duringthe three months ended December 31, 2001, the Company increased its averagebalances of commercial and consumer loans. The Company anticipates activity inthis type of lending to continue in future years, subject to marketdemand.  In addition, the Company sellsthe majority of conventional single-family residential real estate loanoriginations into the secondary market. Net interest income is expected to trend upward as a result of thislending activity as interest rate yields are generally higher on these types ofloans compared to the yield provided by conventional single-family residentialreal estate loans.  This lendingactivity is considered to carry a higher level of risk due to the nature of thecollateral and the size of the individual loans.  As such, the Company anticipates continued increases in itsallowance for loan losses.

 

                *Provisionfor Losses on Loans.*During the three months ended December 31,2001, the Company recorded a provision for losses on loans of $843,000 ascompared to $486,000 for the three months ended December 31, 2000, an increaseof $357,000.  See “Asset Quality” forfurther discussion.

 

*                Noninterest Income.* Noninterest income was $3.2 million for the three months ended December31, 2001 as compared to $3.1 million for the three months ended December 31,2000, a increase of $98,000.

 

                Thedecrease in credit card fee income of $387,000 for the three months endedDecember 31, 2001 as compared to the same period in fiscal 2001 is primarilydue to a decrease in fees received on unsecured credit cards. This is a resultof the credit card portfolio decreasing from $7.9 million at December 31, 2000as compared to $4.8 million at December 31, 2001. The fee income representsinterchange fees, annual/monthly fees, late fees and other miscellaneous fees.This credit card program was initiated in fiscal 1997. The Company ceasedcredit card applications in March 1999. This decreased the level of these fees. Interest income on credit card loans is included in interest income onloans.

 

                *NoninterestExpense.*  Noninterest expenseincreased $365,000 as compared to the same period in the prior fiscal yearprimarily due to increases in compensation and employee benefits of $535,000and other general and administrative expenses of $197,000 (increases primarilyrelated to four new banking centers opened since September of 2000) offset by adecrease in credit card processing expenses of $366,000.

 

 

19

----

 

                *Income taxexpense.*  The Company’sincome tax expense for the three months ended December 31, 2001 was $645,000 ascompared to $884,000 for the three months ended December 31, 2000, a decreaseof $239,000. This decrease was primarily due to a decrease in the Company’spretax income from $2.2 million to $1.6 million and the decrease in theeffective tax rate from 39.33% to 38.75% for the three months ended December31, 2000 and December 31, 2001, respectively.

 

 

**Liquidityand Capital Resources**

 

                TheBank’s primary sources of funds are deposits, FHLB advances, amortization andprepayments of loan principal (including mortgage-backed securities) and, to alesser extent, sales of mortgage loans, sales and/or maturities of securities,mortgage-backed securities, and short-term investments.  While scheduled loan payments and maturingsecurities are relatively predictable, deposit flows and loan prepayments aremore influenced by interest rates, general economic conditions and competition.The Bank attempts to price its deposits to meet its asset/liability objectivesconsistent with local market conditions. Excess balances are invested in overnight funds.

 

                Liquiditymanagement is both a daily and long-term responsibility of management.  The Bank adjusts its investments in liquidassets based upon management’s assessment of (i) expected loan demand, (ii)projected loan sales, (iii) expected deposit flows, (iv) yields available oninterest-bearing deposits, and (v) the objectives of its asset/liabilitymanagement program. Excess liquidity is invested generally in interest-bearingovernight deposits and other short-term government and agency obligations.  During the six months ended December 31, 2001,the Bank paid down FHLB advances and decreased its borrowings with the FHLB by$31.6 million.  See “Financial ConditionData” for further discussion.

 

                TheBank anticipates that it will have sufficient funds available to meet currentloan commitments.  At December 31, 2001,the Bank had outstanding commitments to originate or purchase loans of $65.5million and to sell loans of $36.7 million. At December 31, 2001, the Bank had outstanding commitments to sellsecurities of $3.5 million.  There wereno commitments to purchase securities available for sale.

 

                Althoughdeposits are the Bank’s primary source of funds, the Bank’s policy has been toutilize borrowings where the funds can be invested in either loans orsecurities at a positive rate of return or to use the funds for short termliquidity purposes.  See “FinancialCondition Data” for further analysis.

 

                The Company currently has ineffect a stock buy back program in which up to 10% of the common stock of theCompany outstanding on April 22, 2001 may be acquired through April 30,2002.  A total of 30,400 shares ofcommon stock were purchased pursuant to this current program during the threemonths ended December 31, 2001. Pursuant to a series of stock buy back programs initiated by the Companysince 1996, the Company has purchased an aggregate of 1,135,609 shares ofcommon stock through December 31, 2001. Subsequent to December 31, 2001, theCompany announced that it repurchased a block of 340,421 shares of its commonstock in a private transaction completed on February 13, 2002.

 

                OnNovember 28, 2001, the Company issued 10,000 shares totaling $10.0 million ofCompany Obligated Mandatorily Redeemable Preferred Securities of HF FinancialCapital Trust I.  The Trust exists forthe sole purpose of issuing trust preferred securities and investing theproceeds in subordinated debentures of the Company.  These subordinated debentures constitute the sole asset of theTrust.  The securities provide forcumulative cash distributions calculated at a rate based on six-month LIBORplus 3.75%.  The Company may, at one ormore times, defer interest payments on the capital securities for up to 10consecutive semi-annual periods, but not beyond December 8, 2031.  At the end of the deferral period, allaccumulated and unpaid distributions will be paid.  The capital securities will be redeemed on December 8, 2031;however, the Company has the option to shorten the maturity date to a date notearlier than December 8, 2006.  Holdersof the capital securities have no voting rights, are unsecured, and rank juniorin priority of the payment to all of the Company’s indebtedness and senior tothe Company’s capital stock.

 

                Savings institutions insured bythe Federal Deposit Insurance Corporation are required by the FinancialInstitutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) to meetthree regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal oradministrative actions, including restrictions on growth or operations or, inextreme cases, seizure.  Institutionsnot in compliance may apply for an exemption from the requirements and submit arecapitalization plan.  Under thesecapital requirements, at December 31, 2001, the Bank met all current capitalrequirements.

 

 

20

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                TheOffice of Thrift Supervision (“OTS”) has adopted a core capital requirement forsavings institutions comparable to the requirement for national banks.  The OTS core capital requirement is 4% oftotal adjusted assets.  The Bank hadcore capital of 6.42% at December 31, 2001.

 

                Pursuantto the Federal Deposit Insurance Corporation Insurance Act (“FDICIA”), thefederal banking agencies, including the OTS, have also proposed regulationsauthorizing the agencies to require a depository institution to maintainadditional total capital to account for concentration of credit risk and therisk of non-traditional activities.  Noassurance can be given as to the final form of any such regulation.

 

**Impact of Inflation and ChangingPrices**

 

                TheConsolidated Financial Statements and Notes thereto presented herein have beenprepared in accordance with accounting principles generally accepted in theUnited States of America, which require the measurement of financial positionand operating results in terms of historical dollars without considering thechange in the relative purchasing power of money over time due toinflation.  The impact of inflation isreflected in the increased cost of the Bank’s operations. Unlike mostindustrial companies, nearly all the assets and liabilities of the Bank aremonetary in nature.  As a result,interest rates have a greater impact on the Bank’s performance than do theeffects of general levels of inflation. Interest rates do not necessarily move in the same direction or to thesame extent as the prices of goods and services.

 

**RecentAccounting Pronouncements**

 

                In July, 2001, the Financial Accounting StandardsBoard (FASB) issued two statements — Statement 141, *Business Combinations,*and Statement 142, *Goodwill and Other Intangible Assets,*whichwill impact the Company’s accounting for its reported goodwill.  The provisions of FASB Statement 141 applyto all business combinations initiated after June 30, 2001 and all businesscombinations accounted for by the purchase method for which the date ofacquisition is July 1, 2001, or later. The provisions of FASB Statement 142 will be implemented by the Companyfor the first quarter of its fiscal year 2003 financial statements.  The Company has not yet completed its fullassessment of the effects of these new pronouncements on its financialstatements and is uncertain as to the impact.

 

Item 3.

 

**Quantitativeand Qualitative Disclosures about Market Risk**

 

Interest rate risk is themost significant market risk affecting the Company.  Other types of market risk, such as foreign exchange rate riskand commodity price risk, do not arise in the normal course of the Company’sbusiness activities.

 

The composition of theBank’s balance sheet results in maturity mismatches between interest-earningassets and interest-bearing liabilities. The scheduled maturities of the Bank’s fixed rate interest-earningassets are longer than the scheduled maturities of its fixed rateinterest-bearing liabilities.  Thismismatch exposes the Bank to interest rate risk.  In a rising rate scenario, as measured by the OTS interest raterisk exposure simulation model, the estimated market or portfolio value (“PV”)of the Bank’s assets would decline in value to a greater degree than the changein the PV of the Bank’s liabilities, thereby reducing net portfolio value(“NPV”), the estimated market value of its shareholders’ equity.

 

As of June 30, 2001,under a rate shock scenario of plus/minus 200 basis points (“bp”), the Bank’spre-shock NPV ratio (NPV as a % of PV of assets) was estimated in the OTS modelto be 10.06%.  The post-shock NPV ratio(worst case scenario being a decrease of 200 bp in market interest rates) wasestimated to be 9.57%, a decline of 49bp. As of September 30, 2001, the most recent report available, thepost-shock NPV ratio (worst case scenario being a decrease of 200 bp in marketinterest rates) was estimated to be 8.92%, a decrease of 88bp from thepre-shock NPV ratio estimate of 9.80%.

 

In managing market riskand the asset/liability mix, the Bank has placed its emphasis on developing aportfolio in which, to the extent practicable, assets and liabilities repricewithin similar periods. The effect of this policy will generally be to reducethe Bank’s sensitivity to interest rate changes.  The goal of this policy is to provide a relatively consistentlevel of net interest income in varying interest rate cycles and to minimizethe potential for significant fluctuations from period to period.

 

 

21

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HF FINANCIAL CORP.

 

FORM 10-Q

PART II.  OTHER INFORMATION

 

Item 1.    LegalProceedings

                                                                                                                None

 

Item 2.    Changes inSecurities

 

On November 28, 2001, theCompany issued 10,000 shares totaling $10.0 million of Company ObligatedMandatorily Redeemable Preferred Securities of HF Financial Capital TrustI.  This issuance was completed throughthe Company’s placement agent, Sandler O’Neill & Partners, L.P., and wasexempt from registration pursuant to Section 4(2) of the Securities Act of1933.

 

The Trust exists for thesole purpose of issuing trust preferred securities and investing the proceedsin subordinated debentures of the Company. The subordinated debenturesconstitute the sole asset of the Trust. The securities provide for cumulativecash distributions calculated at a rate based on six-month LIBOR plus 3.75%.The Company may, at one or more times, defer interest payments on the capitalsecurities for up to 10 consecutive semi-annual periods, but not beyondDecember 8, 2031. At the end of the deferral period, all accumulated and unpaiddistributions will be paid. The capital securities will be redeemed on December8, 2031; however, the Company has the option to shorten the maturity date to adate not earlier than December 8, 2006. Holders of the capital securities haveno voting rights, are unsecured, and rank junior in priority of the payment toall of the Company's indebtedness and senior to the Company's capital stock.

 

Item 3.    Defaultsupon Senior Securities

                                                                                                                None

 

Item 4.    Submissionof Matters to a Vote of Security Holders

 

The following matters were submitted to a voteby the stockholders of HF Financial Corp. at the Annual Meeting of Stockholderson November 14, 2001:

 

a.                             Electionof Board of Directors of the Company.

 
| Robert L. Hanson*      |   | For:   3,016,681 |   | Vote Withheld:  400,440 |
|------------------------|--------|-----------------------|--------|------------------------------|
| Kevin T. Kirby*        |   | For:   3,069,538 |   | Vote Withheld:  347,583 |
| *Terms to expire 2004. |   |                  |   |                         |

 

Continuing Board ofDirectors — Curtis L. Hage, Paul J. Hallem, JoEllen Koerner, Jeffrey G. Parker,Wm. G. Pederson and Thomas L. VanWyhe.

 

 

b.                            Ratification of the re-appointment ofMcGladrey & Pullen, LLP as the Company’s auditors for fiscal year endingJune 30, 2002.
|    |   |                |   | **Percentage of Votes** |   |
|---------|--------|---------------------|--------|-------------------------|--------|
|    |   | **Number of Votes** |   | **Actually  Cast**      |   |
|    |   |                |   |                    |   |
| For     |   | 3,397,105           |   | 99.41                   | %      |
| Against |   | 12,843              |   | 0.38                    | %      |
| Abstain |   | 7,173               |   | 0.21                    | %      |

 

 

Item 5.    OtherInformation

                                                                                                                None

 

Item 6.    Exhibitsand Reports on Form 8-K

 

                a.             Documents filed with this report.

                                (1)           Exhibits

 
| **Regulation  S-K** |                                                                                                        |
|---------------------|-------------------------------------------------------------------------------------------------------------|
| **Exhibit  Number** | **Document**                                                                                                |
| 10.1                | Guarantee Agreement dated November 28, 2001 by and  between HF Financial Corp. and Wilmington Trust Company |
|                |                                                                                                        |
| 10.2                | Indenture Agreement dated November 28, 2001 by and  between HF Financial Corp. and Wilmington Trust Company |

 

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No other information isrequired to be filed under Part II of the form.

 

 

22

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HF FINANCIAL CORP.

 

FORM 10-Q

SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 

|   |   |                     |   |   |                   | HF Financial Corp.                           |
|--------|--------|--------------------------|--------|--------|------------------------|----------------------------------------------|
|   |   |                     |   |   |                   |
|   |   |                     |   |   |                   | (Registrant)                                 |
|   |   |                     |   |   |                   |                                         |
| Date:  |   | February 14,   2002 |   | by     | /s/ Curtis L. Hage     |
|   |   |                     |   |   |                   | Curtis L. Hage, Chairman, President          |
|   |   |                     |   |   |                   | And Chief Executive Officer                  |
|   |   |                     |   |   |                   | (Duly Authorized Officer)                    |
|   |   |                     |   |   |                   |                                         |
| Date:  |   | February 14,   2002 |   | by     | /s/ Darrel L. Posegate |
|   |   |                     |   |   |                   | Darrel L. Posegate, Senior Vice President    |
|   |   |                     |   |   |                   | And Chief Financial Officer                  |
|   |   |                     |   |   |                   | (Principal Financial and Accounting Officer) |
|        |        |                          |        |        |                        |                                              |  |

 

 

 

23

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