HF Financial Corp. Continues Loan Growth and Earns $5.7 Million in Fiscal 2010; Reports Strong Capital, Maintains Asset Quality and Uninterrupted Dividends

SIOUX FALLS, S.D., July 26 /PRNewswire-FirstCall/ -- HF Financial Corp. (Nasdaq: HFFC) reported earnings of $5.7 million, or $1.00 per diluted share in fiscal 2010, on 6.9 million shares outstanding. In the fourth fiscal quarter, net income totaled $1.1 million, or $0.16 per diluted share. A year ago, HF Financial Corp. earned $6.5 million, or $1.61 per diluted share for fiscal 2009 and $848,000 or $0.21 per diluted share in its fourth fiscal quarter.

Financial Highlights (at or for the period ended June 30, 2010)

• HF Financial Corp. reported its 18th consecutive year of positive earnings, a record of consistent profitability since its initial public offering in 1992.
• The Company has paid a cash dividend for over 17 years, with the current dividend of $0.1125 per share yielding 4.50% at current market prices.
• The return on average equity was 6.82% for the year ended June 30, 2010, while the return on average assets was 0.48% for the same period.
• Nonperforming assets (NPAs) declined $1.6 million from the third quarter and $3.3 million over the past year. The level of NPAs remained well below regional and national averages, totaling $9.2 million or 0.73% of total assets.
• Total risk-based capital to risk weighted assets was 11.68%, Tier 1 capital to risk-weighted assets was 10.79% and Tier 1 capital to total adjusted assets was 8.69%. These ratios all exceed the regulatory required levels of 10%, 6% and 5%, respectively, to meet the well-capitalized requirement of regulators.
• HF Financial Corp. generated 5.2% year-over-year loan growth without regard to planned indirect auto loan portfolio decline, with agricultural loans increasing 17.0%.
• Deposit levels increased 9.1% over the past year with money market deposits increasing 30.7% to 20.8% of total deposits.
• Core earnings, as measured by net income before taxes less the impact of the investment portfolio activities and excluding the goodwill write-off, expanded 16.9% over the past year.

"Our franchise continues to perform above the industry norm and is well positioned to take advantage of growth opportunities as they are presented," stated Curt Hage, Chairman, President and Chief Executive Officer. "We are taking advantage of lending opportunities that we believe are being neglected by our competitors. Additionally, we are adding highly experienced personnel who are expected to contribute to the Company's strong growth in years to come."

Economic Update

The Sioux Falls unemployment rate of 4.6% through May 2010 is considerably below the national average. "The economic climate is more conducive to banking and we are actively lending to credit worthy borrowers and gaining deposits in our market," said Hage. "Sioux Falls, South Dakota, continues to be a commerce and cultural center for the region, creating business lending opportunities for us."

"Minneapolis, which is less than 250 miles from our headquarters, continues to be an area of interest for expansion as financial difficulties experienced by many Minneapolis banks have created opportunities for strong institutions," Hage continued. The state has seen 12 bank failures since 2008 and more are likely according to industry analysts. The Minnesota Department of Commerce watch list of troubled banks has recently risen to 98, a spokesperson for the agency told SNL Financial.

Asset Quality and Balance Sheet Review

Total assets increased by 6.5% during the fiscal year to $1.25 billion at June 30, 2010, from $1.18 billion at June 30, 2009. The $76.2 million increase in total assets was primarily a result of both loan and investment security growth funded by deposits, borrowings and new equity. The Company maintains a high level of liquidity, both on balance sheet and through off-balance sheet access to funds.

The loan portfolio increased 2.4% to $872.1 million at June 30, 2010 from $851.3 million a year ago. Agriculture loans increased 17.0% to $270.6 million from $231.3 million a year ago. Commercial business and real estate loans decreased slightly to $316.4 million at June 30, 2010, from $322.4 million at June 30, 2009. Consumer indirect loan originations ceased in fiscal year 2008 and decreased in outstanding balances to $8.2 million from $21.4 million a year ago.

Nonperforming assets (NPAs) at June 30, 2010 decreased 17.4% to $9.2 million compared to $11.1 million at March 31, 2010. Total NPAs were 0.73% of total assets at June 30, 2010, compared to 0.90% of total assets three months earlier. Approximately 22.6% of the nonperforming assets at June 30, 2010 were commercial loans and 55.9% were agricultural loans. The remaining NPAs were commercial real estate, one-to four-family and other consumer loans. Nonperforming assets consist of non-accruing loans, accruing loans 90 days or more past due and foreclosed assets.

"We continue to resolve our nonperforming loans on schedule allowing us to improve the level of assets earning interest," said Darrel Posegate, President of Home Federal Bank. "Our core earnings have improved over the past year, and core operations are more predictable."

The allowance for loan losses totaled $9.6 million at June 30, 2010, or 1.07% of total loans, compared to $8.9 million, or 1.02% of total loans at March 31, 2010, and $8.5 million, or 0.98% of total loans a year ago.

At June 30, 2010, the investment securities portfolio held six trust preferred pools at an adjusted cost basis of $9.3 million and a fair value of $3.9 million. "With the increase in the level of capital raises this year, we have seen some improvement in the number of banks paying dividends on their trust preferred securities. However, the pools of trust preferred securities continue to include financial institutions that are restricted by regulators from paying dividends," said Posegate.

Deposits totaled $914.3 million at June 30, 2010, compared to $840.0 million at March 31, 2010, and $837.9 million a year ago. The increase in the fourth quarter of fiscal 2010 was due primarily to seasonal public fund deposit net increases of $69.5 million since March 31, 2010. Noninterest-bearing demand deposits totaled $117.1 million at June 30, 2010, or 12.8% of the deposit portfolio. Total low-cost deposits (excluding all time deposits) were $490.3 million at June 30, 2010, or 53.6% of the deposit portfolio compared to $415.5 million, or 49.6% of total deposits a year ago. "Our margins continue to benefit from the low interest rate environment where customers prefer the flexibility provided by NOW and money market accounts," said Hage.

Tangible common shareholders' equity to tangible assets was 7.21% at June 30, 2010. Tangible book value per common share was $12.97 at June 30, 2010, compared to $15.83 year ago. HF Financial Corp. raised additional capital in November 2009 by selling 2.9 million shares at $8.00 each, netting approximately $20.7 million in new capital. The Company remains well-capitalized with Tier 1 Capital to Risk Weighted Assets of 10.79% at June 30, 2010.

Review of Operations

HF Financial Corp. continued to report profitability as the net interest margin remained stable at 3.29% for the fiscal year ended June 30, 2010. Provision for loan losses increased reflecting the growing loan portfolio; fee income decreased slightly, impairment charges increased relative to the prior year and noninterest expense increased due to enhanced marketing efforts and the write-off of goodwill associated with the Company's leasing division.

Net income available to common shareholders was $1.1 million, or $0.16 per diluted share, for the quarter ended June 30, 2010 compared to $1.8 million, or $0.26 per diluted share, for the quarter ended March 31, 2010, and $848,000, or $0.21 per diluted share, for the fiscal fourth quarter a year ago. For the fiscal year ended June 30, 2010, net income available to common shareholders was $5.7 million or $1.00 per diluted common share versus $6.5 million or $1.61 per diluted common share for the year ago period.

Fiscal fourth quarter 2010 net interest income, before the provision for loan losses, grew 3.8% from the preceding quarter. Net interest income totaled $9.7 million for the fourth quarter of fiscal 2010 compared to $9.4 million for the third quarter of fiscal 2010. Relative to one year earlier, the net interest margin for the fiscal fourth quarter was 14.5% higher.

The net interest margin expressed on a fully taxable equivalent basis as a percentage of average earning assets was 3.34% for fiscal 2010 compared to 3.32% for the same period a year ago.

The loan loss provision for the quarter ended June 30, 2010 was $1.2 million compared to $981,000 the previous quarter and $878,000 one year earlier. The increased provision reflects reserve allocations relative to a larger loan portfolio and the replacement of loan charge-offs. The loan loss provision for the fiscal year was $3.0 million versus $1.7 million for the comparable period a year ago.

Fiscal fourth quarter noninterest income was $3.3 million, compared to $2.8 million for the preceding quarter and $3.6 million for the comparable quarter a year ago. The increase in noninterest income from the third quarter of fiscal 2010 was largely due to larger gains on the sale of loans and investments and higher fees on deposits. For the fiscal year ended June 30, 2010, noninterest income totaled $11.0 million compared to $12.6 million for fiscal 2009. This decrease was due to larger impairment losses recognized, which reduce noninterest income, and this reduction was partially offset by the larger gain on sale of securities when compared to fiscal 2009.

Operating expenses in the fourth quarter of fiscal 2010 increased to $9.8 million from $8.5 million in the third quarter of fiscal 2010, reflecting the $585,000 non-cash write-off of goodwill associated with the leasing division, higher compensation and benefit costs and marketing and community development costs. The goodwill impairment charge does not impact liquidity, operations, tangible capital or the Company's regulatory capital ratios. For the fiscal year 2010, operating expenses increased 4.3% to $36.0 million from $34.6 million one year ago.  

Quarterly Dividend Declared

The Company announced that its board of directors has declared another regular quarterly cash dividend of $0.1125 per common share for the fourth quarter of fiscal 2010.  The dividend will be paid August 13, 2010 to stockholders of record August 6, 2010.

About HF Financial Corp.

HF Financial Corp., based in Sioux Falls, SD, is the parent company for financial services companies, including Home Federal Bank, Mid America Capital Services, Inc., dba Mid America Leasing Company, Hometown Investment Services, Inc. and HF Financial Group, Inc. The largest publicly traded savings association headquartered in South Dakota, HF Financial Corp. operates with 33 offices in 19 communities, throughout Eastern South Dakota and one location in Marshall, Minnesota. Internet banking is also available at www.homefederal.com.

This news release and other reports issued by the Company, including reports filed with the Securities and Exchange Commission, contain "forward-looking statements" that deal with future results, expectations, plans and performance. In addition, the Company's management may make forward-looking statements orally to the media, securities analysts, investors or others. These forward-looking statements might include one or more of the following:

• Projections of income, loss, revenues, earnings or losses per share, dividends, capital expenditures, capital structure, tax benefit or other financial items.
• Descriptions of plans or objectives of management for future operations, products or services, transactions, investments and use of subordinated debentures payable to trusts.
• Forecasts of future economic performance.
• Use and descriptions of assumptions and estimates underlying or relating to such matters.

Forward-looking statements can be identified by the fact they do not relate strictly to historical or current facts. They often include words such as "optimism," "look-forward," "bright," "pleased," "believe," "expect," "anticipate," "intend," "plan," "estimate" or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may".

Forward-looking statements about the Company's expected financial results and other plans are subject to certain risks, uncertainties and assumptions. These include, but are not limited to the following: possible legislative changes and adverse economic, business and competitive conditions and developments (such as shrinking interest margins and continued short-term environments); additional other-than-temporary impairment credit loss incurred in the Company's trust preferred securities portfolio; deposit outflows, reduced demand for financial services and loan products; changes in accounting policies or guidelines, or in monetary and fiscal policies of the federal government; changes in credit and other risks posed by the Company's loan and lease portfolios; the ability or inability of the Company to manage interest rate and other risks; unexpected or continuing claims against the Company's self-insured health plan; the ability or inability of the Company to successfully enter into a definitive agreement for and close anticipated transactions; technological, computer-related or operational difficulties; adverse changes in securities markets; results of litigation; and the other risks detailed from time to time in the Company's SEC filings, including but not limited to, its annual report on Form 10-K for the fiscal year ending June 30, 2009, and its subsequent quarterly reports on Form 10-Q.

Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. Although the Company believes its expectations are reasonable, it can give no assurance that such expectations will prove to be correct. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in any forward-looking statements.

SOURCE HF Financial Corp.

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