HF Financial Corp. Earns $4.6 Million, or $0.86 per Share in First Nine Months of Fiscal 2010; Reports Continued Profitability and Excellent Asset Quality

SIOUX FALLS, S.D., April 26 /PRNewswire-FirstCall/ -- HF Financial Corp. (Nasdaq: HFFC) today reported it earned $1.8 million, or $0.26 per diluted share, in its third fiscal quarter, ended March 31, 2010, on 6.9 million shares outstanding.  In the third fiscal quarter a year ago, net income available to common shareholders totaled $1.8 million, or $0.45 per diluted share, when it had 4.0 million shares outstanding.  For the first nine months of fiscal 2010, HF Financial Corp. posted a profit of $4.6 million, or $0.86 per diluted share, compared to $5.7 million, or $1.40 per diluted share in the like period a year ago.  Current period results reflect the successful $20.7 million capital raising campaign completed in November 2009 and the June 2009 repayment of $25.0 million of preferred shares that had been issued to the U.S. Treasury.

Financial Highlights (at or for the period ended March 31, 2010)

• HF Financial Corp. reported its 31st consecutive quarter of positive earnings, has been profitable in all but two quarters since its initial public offering in 1992, and has been consistently profitable on an annual basis.
• HF Financial Corp. has paid a cash dividend for over 17 years, with the current dividend of $0.1125 per share yielding 4.46%.
• The annualized return on average equity was 7.55% for the nine months ended March 31, 2010.
• The annualized return on average assets was 0.52%.
• Nonperforming assets (NPA) remained well below regional and national averages, totaling $10.8 million or 0.88% of total assets.  At March 31, 2010, NPAs to total assets was 0.88% versus 1.38% at December 31, 2009, and up from 0.45% a year ago.
• Total risk-based capital to risk weighted assets was 11.72%, Tier 1 capital to risk-weighted assets was 10.85% and Tier 1 capital to total adjusted assets was 8.63%.  These ratios all exceed the regulatory required levels of 10.00%, 6.00% and 5.00%, respectively, to meet the well capitalized requirement.  
• HF Financial Corp. generated a 3.7% year-over-year loan growth, with agricultural loans up 18.4%.
• Similarly, deposit levels increased 4.4% over the past year with money market deposits increasing 22.5% to 20.9% of total deposits.
• Certificates of deposits, which are a higher cost of funding, declined 6.0% and accounted for 47.1% of total deposits compared to 52.3% of deposits a year ago.
• Year-to-date, net interest margin expressed on a fully taxable equivalent basis was 3.32% compared to 3.39% a year ago.

"Despite nationwide economic difficulties, our franchise continues to generate solid profitability, while continuing to provide credit to regional businesses and consumers," stated Curt Hage, Chairman, CEO and President of HF Financial Corp.  "We have positioned our core franchise to weather economic downturns and volatile interest rate cycles."

South Dakota Economic Update

South Dakota's economy continues to be healthier than the nation, as a whole, as reflected by a South Dakota unemployment rate of 4.8% in March, which is half the national unemployment rate of 9.7%.  "Our markets in eastern South Dakota and western Minnesota have fared better than many areas around the country, with a well-diversified industrial and services-based urban economy and a very healthy agricultural sector.  Sioux Falls, South Dakota, continues to be a commerce and cultural center for the region, creating business lending opportunities for us."

According to the REALTOR ® Association of the Sioux Empire, Inc., a non-profit trade association associated with the real estate industry, home buyers in the Sioux Falls MSA were active in March with a strong 15.1% year-over-year increase in closed sales.  The Company believes home prices are stabilizing, as the March median sales price of $150,500 represents a 10.0% increase over March, 2009.

Asset Quality and Balance Sheet Review

Total assets were $1.23 billion at March 31, 2010, compared to $1.17 billion at March 31, 2009.   The asset growth reflects both loan and investment security growth funded by deposits, borrowings and new equity.  

The loan portfolio increased 4.1% to $875.0 million at March 31, 2010 from $840.7 million a year ago.  

Agriculture loans increased 18.4% to $252.3 million at March 31, 2010 from $213.1 million at March 31, 2009.  Commercial business and real estate loans decreased slightly to $307.1 million at March 31, 2010, from $313.2 million at March 31, 2009.  "Reflecting the overall caution in the markets, our customers are not fully utilizing their credit lines during this economic cycle.  Consequently, commercial loan demand is down from prior years," said Darrel Posegate, President of Home Federal Bank.

Nonperforming assets at March 31, 2010 decreased 33.3% to $10.8 million compared to $16.2 million at December 31, 2009.  The decrease was largely the result of non-accruing loans decreasing $5.5 million from December 31, 2009.  Total nonperforming assets were 0.88% of total assets at March 31, 2010, compared to 1.38% of total assets three months earlier. Approximately 32% of the nonperforming assets at March 31, 2010 were commercial loans and 48% 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 have made progress on resolving our largest nonperforming loan by agreeing to restructure this ag credit. This change allowed us to return $4.0 of the $6.5 million principal balance back to accruing and performing status.  The other credit mentioned in previous releases, a $1.4 million business loan, continues to make quarterly principal and interest payments even though past due.  We are continuing to work to return this loan to performing status," Posegate stated.  

The allowance for loan losses was $8.9 million, or 1.02% of total loans at March 31, 2010, compared to $8.5 million, or 1.01% of total loans at December 31, 2009, and $8.1 million, or 0.97% of total loans a year ago.

At March 31, 2010, the investment securities portfolio held six trust preferred pools at an adjusted cost basis of $9.5 million and a fair value of $4.4 million.  "In addition to our internal evaluation of the value of these securities based on a number of event scenarios we also contract with a third party appraiser to value these securities," said Posegate.  "Year-to-date, we have booked other-than-temporary impairment (OTTI) of $2.0 million, of which $2.4 million of credit loss was recognized through the earnings statement, with the balance of $380,000 recognized on the balance sheet in other comprehensive income.  Over the past two years, we have taken OTTI credit loss charges totaling $2.8 million to bring the carrying value of these securities in line with expected life-time returns."  

Deposits totaled $839.6 million at March 31, 2010, compared to $863.4 million at December 31, 2009, and $804.2 million a year ago. The Bank's deposits are affected by the seasonality of municipal deposits.  Noninterest-bearing demand deposits totaled $96.8 million at March 31, 2010, or 11.5% of the deposit portfolio.  Total low-cost deposits (excluding all time deposits) were $444.2 million at March 31, 2010, or 52.9% of the deposit portfolio compared to $423.7 million, or 49.1% of total deposits at December 31, 2009, and $383.6 million, or 47.7% of total deposits a year ago.  "We continue to emphasize funding our core operations with lower cost accounts, which now make up more than 50% of total deposits," said Hage.

Tangible common shareholders' equity to tangible assets was 7.22% at March 31, 2010. Tangible book value per common share was $12.79 at March 31, 2010, compared to $15.93 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.  "Our strong capital position will allow us to continue our growth and move into new markets as opportunities present themselves," stated Hage.  HF Financial Corp. remains well-capitalized with Tier 1 Capital to Risk Weighted Assets of 10.85% at March 31, 2010.

Review of Operations  

HF Financial Corp.'s earnings continued to remain stable despite an increase in loan loss provisions.  Net income available to common shareholders was $1.8 million, or $0.26 per diluted share, for the quarter ended March 31, 2010 compared to $2.0 million, or $0.38 per diluted share, for the quarter ended December 31, 2009, and $1.8 million, or $0.45 per diluted share, for the third quarter fiscal 2009.   For the nine months ended March 31, 2010, net income available to common shareholders was $4.6 million or $0.86 per diluted share versus $5.7 million or $1.40 per diluted share for the comparable period one year earlier.  

Third quarter 2010 net interest income, before the provision for loan losses, grew 5.6% from the second quarter.  Net interest income totaled $9.4 million for the third quarter of fiscal 2010 compared to $8.9 million for the second quarter of fiscal 2010.

The net interest margin expressed on a fully taxable equivalent basis (net interest income, TE as a percentage of average earning assets) was 3.32% for the first nine months of fiscal 2010 compared to 3.39% for the same period a year ago.  

"In the current interest rate environment, we are proactively managing interest rate risk by selling a portion of our fixed-rate mortgage backed securities and reinvesting in adjustable rate investments," said Posegate.  "Though adjustable rate securities currently produce lower yields than other types of investments, they are more likely to hold their value in a rising interest rate environment.  Consequently, we are working to preserve capital in the long run and are willing to sacrifice some yield in the short run."  

The loan loss provision for the quarter ended March 31, 2010 was $981,000 compared to $424,000 the previous quarter and $414,000 one year earlier.  "The increased provision reflects reserve allocations relative to a larger loan portfolio and the replacement of loan charge-offs," said Posegate.  Loan loss provisions for the nine months ended March 31, 2010 were $1.75 million versus $801,000 for the comparable period one year earlier.  For the third fiscal quarter of 2010, loan charge-offs were $602,000 compared to $459,000 for the second fiscal quarter of 2010.

For the fiscal third quarter 2010, noninterest income was $2.8 million compared to $3.3 million for the second fiscal quarter of 2010 and $3.0 million for the fiscal third quarter a year ago.  The decrease in noninterest income from the second quarter of fiscal 2010 was largely due to smaller gains on the sale of loans and securities and slightly lower fees on deposits.  The lower fees on deposits were a result of decreased overdraft fees.  For the nine months ended March 31, 2010, noninterest income totaled $7.8 million compared to $9.0 million for the nine months ended March 31, 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 in the current fiscal year when compared to the nine months ended March 31, 2009.

Operating expenses in the third quarter of fiscal 2010 decreased to $8.5 million from $8.8 million in the second quarter of fiscal 2010, reflecting lower compensation and benefit costs and marketing and community development, and increased slightly from $8.4 million one year earlier.   For the nine months ended March 31, 2010, operating expenses increased 1.0% to $26.3 million from $26.0 million in the comparable period 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 third quarter of fiscal 2010.  The dividend will be paid on May 14, 2010 to stockholders of record on May 7, 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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