HF Financial Corp. (Nasdaq: HFFC), reported earnings for the fiscal third quarter ended March 31, 2008 of $1.6 million, or $0.40 in diluted earnings per share, versus $1.0 million, or $0.25 in diluted earnings per share, in the comparable period in 2007, a 60 percent increase in diluted earnings per share.
Net interest income for the quarter totaled $7.7 million, an increase of $1.3 million, or 20.2 percent over the same period last year. Net interest margin expressed on a fully taxable equivalent basis for the quarter was 3.32 percent, compared to 2.87 percent in the third quarter last year. A component of the interest margin increase included $88,000 in accelerated accretion earnings on investments called during the quarter by the issuing authority, which were originally purchased at a discounted price.
"A steeper yield curve, as a result of declining treasury rates, contributed to lower funding costs, resulting in improved net interest margin. We are pleased with the expansion in net interest income as the yield curve assumed a more positive slope in the third quarter. Our balance sheet was structured to benefit from the change in interest rates," said Curt Hage, HF Financial's Chairman, President and CEO.
The company has added to its investment portfolio, increasing to $216.0 million from $138.7 million since March 31, 2007. A widening of spreads over the treasury market provided an opportunity to add AAA-rated Agency mortgage-backed securities, and an occasion to leverage capital from the discontinued origination and reduction of indirect auto portfolio balances.
"These are unusual times in the credit markets," Hage said. "During the quarter we saw an opportunity to build our investment portfolio, taking advantage of historically wide spreads and lower cost short- and intermediate-term funding. This effort gives the company an opportunity to leverage its capital base without significant interest rate or market risk to our balance sheet."
For the quarter, non-interest income increased $194,000, to $2.8 million, up 7.4 percent over the comparable period in fiscal year 2007. A gain of $77,000 in non-interest income was attributable to the mandatory partial redemption of VISA Inc. class B common stock. Non-interest expense grew $83,000, or 1.1 percent, over last year's third quarter. Net healthcare costs decreased $432,000 over the prior year quarter, and year-to-date these costs have decreased $595,000 from the prior year.
Home Federal's provision for loan losses totaled $551,000 versus $34,000 for the third quarter last year. Year-to-date provision of $1.2 million compares to $786,000 last year. The ratio of nonperforming loans and leases to total loans and leases at the end of the third quarter was 0.50%, compared to 0.46% at the end of the third quarter in the prior year period. Net loan charge offs totaled $405,000 for the quarter ended March 31, 2008 compared to $125,000 for the same period last year. Net loan charge offs for the first nine months of the fiscal year totaled $1.5 million, compared to $665,000 for the first nine months of last fiscal year.
"During the quarter, we continued to employ our systematic approach to determining the allowance for loan and lease losses," said Darrel Posegate, President of Home Federal Bank. "Our model, which has served us well for a considerable time now, is built upon a loan risk rating system and a combination of historical and expected performance to estimate the inherentlosses in our loan portfolio. We continue to be comfortable with our allocations of reserves across loan types and believe our model reasonably reflects current economic conditions."
The company used its stock buyback program again during the third quarter, repurchasing 23,092 shares at an average price of $16.24 per share. Under the current program, the company is authorized to repurchase up to 300,049 additional shares of common stock through April 30, 2008.
The Board of Directors authorized a 10 percent stock buyback plan for the period May 1, 2008 to April 30, 2009. This represents the 13th consecutive year of authorized buybacks for the company.
Nine Month Results
For the nine months ended March 31, 2008, the company reported earnings of $4.2 million, or $1.05 in diluted earnings per share, versus $4.2 million, or $1.05 in diluted earnings per share, for the comparable period in fiscal year 2007. Fiscal year 2007 second quarter net income included a non-recurring after-tax gain on sale of branches of $1.7 million, or $0.42 diluted earnings per share.
Net interest income for the first nine months of the fiscal year totaled $21.4 million, an increase of $2.5 million, or 13.1 percent over the same period last year.
Net interest margin on a fully taxable equivalent basis for the nine months ended March 31, 2008, was 3.08 percent compared to 2.80 percent for the comparable period last year. Lower interest rates and reduced expensing of unamortized debt issuance costs lessened interest expense by $421,000 on the company's trust preferred securities for the nine months ended March 31, 2008, compared to the nine months ended March 31, 2007.
Non-interest income for the nine months ended March 31, 2008, totaled $8.6 million, down $1.8 million, or 17.3 percent, versus the comparable period last year, a result primarily attributable to the company's branch sales in fiscal 2007. In addition, loan servicing income, fees on deposits and net gain on sale of loans increased $341,000, $318,000 and $276,000, respectively.
Non-interest expense during the first nine months of fiscal 2008 increased $335,000, or 1.5 percent, over the comparable period last year. Compensation and employee benefits increased $816,000, primarily due to performance-related variable pay programs. Check and data processing expense increased $118,000, while marketing expense decreased $581,000.
Balance Sheet Performance
Total loans and leases receivable at March 31, 2008 totaled $759.6 million, a decrease of $7.8 million from the balance at June 30, 2007. As previously announced, the company made a decision to cease origination of indirect automobile loans. During the nine-month period, consumer indirect loans decreased $30.3 million to $52.8 million, while other lines of business produced an increase of $22.4 million in loan and lease receivables from June 30, 2007.
Total nonperforming assets increased $195,000, or 4.7 percent, at March 31, 2008 compared to the same period last year. The increase in nonperforming assets was primarily attributable to an increase of $340,000 in accruing loans and leases delinquent more than 90 days to $1.9 million at March 31, 2008 from $1.5 million at March 31, 2007, offset by a decrease in non-accruing loans and leases of $17,000, from $2.0 million at March 31, 2007 to $2.0 million at March 31, 2008 and a decrease of $128,000 in foreclosed assets.
Deposits at March 31, 2008 totaled $744.2 million, a decrease of $71.6 million, or 8.8 percent from the balance at June 30, 2007. During the nine-month period, out-of-market certificates of deposit decreased from $71.5 million to $11.0 million, money market accounts decreased from $212.5 million to $173.0 million and savings accounts decreased from $66.2 million to $60.9 million, offset by an increase in in-market certificates of deposit from $291.9 million to $327.3 million. The decrease in out-of-market certificates of deposit is attributed to a decision to pursue other sources of lower cost wholesale funds in the period. Public fund deposits decreased $31.9 million during the first nine months of fiscal 2008 due to seasonal fluctuations typical for these accounts, primarily affecting the certificate of deposit and checking account balances, with smaller decreases in the savings and money market accounts.
Quarterly Dividend Declared
The company announced it will pay a quarterly cash dividend of 10.75 cents per share for the third quarter of the 2008 fiscal year. The dividend will be paid on May 15, 2008 to stockholders of record on May 8, 2008.
Third Quarter Fiscal 2008 Conference Call and Webcast
The company plans to begin hosting regular quarterly conference calls and webcasts to discuss its quarterly financial and operational results. The first such conference call and webcast is scheduled for Tuesday, April 29, 2008 at 9:00 am CT (10:00 am ET) at which the company will discuss its third quarter fiscal 2008 earnings results.
Curtis L. Hage, Chairman of the Board, President and Chief Executive Officer, and Darrel L. Posegate, Executive Vice President, Chief Financial Officer and Treasurer, will recap the company's third quarter. -- HF Financial Corp.
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