HF Financial Corp. Reports Fiscal Second Quarter 2015 GAAP Loss of $0.12 Per Diluted Share and Core Diluted Earnings Per Share of $0.24

Loan Growth of 15% Year-Over-Year Continues Contribution to Margin Expansion

Company Declares Regular Quarterly Dividend of $0.1125 per Share

SIOUX FALLS, S.D., Jan. 26, 2015 (GLOBE NEWSWIRE) -- HF Financial Corp. (Nasdaq:HFFC) today reported its financial results for the three and six months ended December 31, 2014. A GAAP loss of $868,000, or $0.12 per diluted share, was reported for the second fiscal quarter which included the prepayment of Federal Home Loan Bank ("FHLB") term borrowings resulting in pre-tax charges of $4.1 million, or $2.5 million after tax. The Company reported core earnings, a non-GAAP measure, of $1.7 million, or $0.24 per diluted share for the second fiscal quarter ended December 31, 2014, as compared to core earnings of $2.1 million, or $0.30 per diluted share, for the quarter ended December 31, 2013. For the previous quarter ended September 30, 2014, core earnings were $1.9 million, or $0.27 per diluted share.

Loan balances grew 14.7% from a year ago to $855.1 million, which is near the record levels set at the end of fiscal 2010. Loan growth and recovery of non-accruing interest contributed to loan interest income increasing $1.0 million in the second fiscal quarter of 2015 compared to the prior quarter and $1.5 million higher than the prior year quarterly period. Total loans increased by $109.3 million over the past year and $37.8 million from the previous quarter. Asset quality remains strong with nonperforming assets as a percentage of total assets declining to 1.01% at December 31, 2014 from 1.71% one year earlier and 1.21% the previous quarter.

"Our strong capital position allowed us the opportunity to reposition our balance sheet by prepayment of FHLB term advances. We are pleased to report strong core earnings and continue to maintain our strong capital position. Our staff is continuing to explore opportunities to maximize our efficiencies while delivering quality service to our customers. The decision to prepay several longer-term FHLB advances will result in lowering our cost of funds and improving our net interest margin going forward. An enhanced net interest margin combined with lower operating costs derived from streamlining our branch office network are part of our strategy to generate stronger core earnings and to improve return on equity. Meanwhile, we continue to convert lower yielding liquid investments into loans with higher yields resulting in better net interest margins," said Stephen Bianchi, President and Chief Executive Officer.

Core diluted earnings per share, a non-GAAP measure, were $0.51 compared to $0.41 for the six months ended December 31, 2014 and 2013, respectively. For a reconciliation of core earnings and core diluted earnings per share to accounting principles generally accepted in the United States ("GAAP") net income and GAAP diluted earnings per share, please refer to the tables in the section titled "Reconciliation of GAAP Earnings and Core Earnings".

Fiscal 2015 Second Quarter Financial Highlights: (at or for the periods ended December 31, 2014, compared to September 30, 2014, June 30, 2014 and/or December 31, 2013.)

• Core earnings, a non- GAAP measure, were $1.7 million, or $0.24 per share, for the second fiscal quarter of 2015. GAAP earnings decreased to a loss of $868,000, or $0.12 per diluted share, from earnings of $1.8 million, or $0.26 per diluted share in the previous quarter.
• FHLB term advances totaling $84.9 million were prepaid during the second fiscal quarter resulting in pre-tax charges of $4.1 million, or $2.5 million after tax. Average borrowing costs decreased to 1.68% in the second fiscal quarter compared to 2.49% the previous quarter. More reflective of the restructuring, the FHLB borrowing costs were lowered to a weighted average rate of 0.27% at December 31, 2014, as the longer-term funds were replaced with less expensive short-term funding.
• Total loans increased to $855.1 million at December 31, 2014, from $817.3 million at September 30, 2014, and from $745.8 million one year earlier, or a 14.7% increase year over year.
• The net interest margin expressed on a fully taxable equivalent basis ("NIM, TE"), a non-GAAP measure, increased to 3.19% for the fiscal second quarter 2015 compared to 2.84% for the previous quarter. In the second quarter, a recovery of nonaccruing interest of $771,000 was realized on a dairy loan that was refinanced, which contributed nearly 26 basis points to the NIM, TE for the quarter.
• Nonperforming assets continued to decline and totaled $12.8 million at December 31, 2014, or 1.01% of total assets compared to $15.2 million at September 30, 2014, or 1.21% of total assets. One year earlier, nonperforming assets totaled $21.4 million, or 1.71% of total assets. Nonperforming assets at December 31, 2014, include $9.3 million of nonaccruing troubled debt restructured loans that are compliant with their restructured terms. Net charge-offs were $387,000 for the fiscal second quarter, and total $488,000 on a fiscal year to date basis or just 0.12% annualized of total loans.
• Loan loss allowances totaled 1.28% of total loans at December 31, 2014 compared to 1.27% one quarter earlier. The Company has no direct exposure to the Oil & Gas Industry.
• As previously announced, the Bank plans to close three grocery store branches and relocate one grocery store branch in Sioux Falls. The financial impact of the closures of approximately $770,000 to $810,000 in one-time pre-tax charges will be reflected in the third fiscal quarter. The Company believes these branch efficiencies will lead to noninterest expense savings of approximately $900,000 annually.
• Capital levels at December 31, 2014, continued to remain well above the regulatory "well-capitalized" minimum levels:
  • Total risk-based capital to risk-weighted assets was 13.86% versus 14.50% at September 30, 2014.
  • Tier 1 capital to risk-weighted assets was 12.70% versus 13.36% at September 30, 2014.
  • Tier 1 capital to total adjusted assets was 9.46% versus 9.70% at September 30, 2014.
• The most recent dividend of $0.1125 per share represents 3.17% current yield at recent market prices.
• Tangible book value was $13.76 per share at December 31, 2014, compared to $13.15 per share one year earlier. This increase in tangible book value combined with a total dividend of $0.45 results in an intrinsic return of 8.06% for the past twelve month period.

Balance Sheet and Asset Quality Review

HF Financial's total asset base remained flat relative to the previous quarter at $1.26 billion. One year earlier, total assets were $1.25 billion. Though the asset base overall reflected minimal growth, HF Financial continues to grow its loan portfolio and fund new loans, in part, with proceeds from short-term, liquid investments. In the second fiscal quarter of 2015, total loans increased 4.6% to $855.1 million from $817.3 million at the end of the previous quarter and 14.7% from $745.8 million a year ago. The increase in the loan balance reflected an increased balance of commercial real estate and agricultural loans. Commercial real estate loans continued to represent the largest portion of the loan portfolio, which totaled 53.0% of the loan portfolio at December 31, 2014, followed by agricultural loans totaling 24.8%.

"Growing the loan portfolio, improving our delivery system to our customers, expanding our net interest margin and maintaining strong capital ratios are our primary focus. Our management team continues to be energized by the improvement in our core operations and the approach we have made in delivering our services to our communities," stated Bianchi.

Total deposits decreased slightly to $946.8 million at December 31, 2014, from $964.2 million one year earlier and $954.3 million one quarter earlier. Non-certificate accounts represented 67.5% of total deposits while certificates of deposit represented 32.5% of total deposits at December 31, 2014. Certificate deposits increased slightly due to re-allocation of some public funds.

FHLB advances and other borrowings increased during the second fiscal quarter of fiscal 2015 to $164.1 million compared to $142.9 million in the previous quarter to fund loan growth. Management expects borrowing balances to decline in the upcoming quarters as investment securities mature or are sold and proceeds are used to repay the newly acquired short term borrowings. At December 31, 2014, the weighted average cost of FHLB borrowings has been reduced to 0.27%.

Nonperforming assets ("NPAs"), which included $9.3 million of troubled debt restructurings that are in compliance with their restructured terms, decreased to $12.8 million at December 31, 2014, from $15.2 million the preceding quarter and $21.4 million one year earlier. At December 31, 2014, NPAs represented 1.01% of total assets and included only $2,000 in foreclosed assets.

The allowance for loan and lease losses at December 31, 2014, totaled $10.9 million and represented 1.28% of total loans and leases. Total allowance relative to total nonperforming loans was 85.3% at December 31, 2014, compared to 68.7% the previous quarter and 50.2% one year earlier.

Tangible common stockholders' equity was to 7.72% of tangible assets at December 31, 2014, compared to 7.62% at June 30, 2014. Tangible book value per common share was $13.76 at December 31, 2014, up from $13.15 one year earlier.

Capital ratios continued to remain well above regulatory requirements with Tier 1 capital to risk-weighted assets of 12.70% at December 31, 2014, while the ratio of Tier 1 capital to total adjusted assets was 9.46%. These regulatory ratios were higher than the required minimum levels of 6.00% and 5.00%, respectively.

Review of Operations

For the second fiscal quarter ending December 31, 2014, HF Financial's operations reflected restructuring charges designed to improve the net interest margin and a growing balance of loans generating a larger stream of interest income. Net interest income increased 13.0% to $9.4 million for the second fiscal quarter of 2015 compared to $8.3 million the previous quarter and $7.8 million one year earlier. The increase in net interest income was primarily related to the recovery of $771,000 of nonaccruing interest on a refinanced loan. The NIM, TE expanded to 3.19% for the fiscal second quarter compared to 2.84% the previous quarter and 2.66% one year earlier. 

"We expect approximately a 40 basis point improvement in our net interest margin in coming quarters as a result of prepaying $84.9 million in FHLB term advances. Additionally, the continued growth in our loan portfolio is providing a stronger stream of interest income. Adding cost savings of approximately $900,000 from realigning our branch network will further enhance our drive to maximize the efficiency of HF Financial. The combination of enhanced interest income from loan growth, lowering funding costs and cost savings from our branch network consolidation will provide for a stronger core operation," stated Brent Olthoff, Chief Financial Officer and Treasurer.

Provision for loan losses reflected reserves established for the larger loan portfolio, environmental conditions and historical charge-off activity. Provisions totaled $941,000 for the second fiscal quarter of 2015, compared to benefits of $22,000 for the first fiscal quarter of 2015 and $257,000 for the year ago quarter.

Noninterest income totaled $3.1 million for the fiscal second quarter of 2015 compared to $3.3 million in the previous quarter. Mortgage activity produced $817,000 in servicing and gains on loan sales in the second fiscal quarter of 2015 compared to $917,000 in the previous quarter. Fees on deposits totaled $1.6 million for each of the first and second quarters of fiscal 2015. A sale of land previously obtained for branch expansion resulted in a one-time loss on sale of $64,000 and reduced other noninterest income in the second quarter.

Total noninterest expenses were $13.1 million compared to $9.0 million in the previous quarter. Noninterest expense includes one-time prepayment charges of $4.1 million associated with the FHLB advances.

These financial results are preliminary until the Form 10-Q is filed in February 2015.

Quarterly Dividend Declared

The board of directors declared a regular quarterly cash dividend of $0.1125 per common share for the second fiscal quarter 2015. The dividend is payable February 13, 2015 to stockholders of record February 6, 2015.

Use of Non-GAAP Financial Measures

This press release contains financial measures that are not calculated in accordance with U.S. generally accepted accounting principles ("GAAP"). "Net Interest Margin, TE" and "Core Earnings" are non-GAAP financial measures. Information regarding the usefulness of Net Interest Margin, TE and Core Earnings appear in the notes to the attached financial statements. The Company believes that the presentation of non-GAAP financial measures will permit investors to assess the Company's core operating results on the same basis as management. Non-GAAP financial measures should be considered supplemental to, not a substitute for or superior to, financial measures calculated in accordance with GAAP. As other companies may use different calculations for these measures, these presentations may not be comparable to other similarly titled measures reported by other companies. Reconciliation of the non-GAAP measures to the most comparable GAAP measures are set forth in the notes to the attached financial statements.

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. As a publicly traded savings association headquartered in South Dakota, HF Financial Corp. operates with 27 offices in 18 communities, throughout Eastern South Dakota, Minnesota, and North Dakota. The Company operates a branch in the Twin Cities market as Infinia Bank, a Division of Home Federal Bank of South Dakota, and a loan production office in Fargo, North Dakota. Internet banking is also available at www.homefederal.com and www.infiniabank.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, adequacy of loan loss reserves, 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); 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, 2014, 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.