HF Financial Corp. Reports Earnings of $0.28 per share in Third Fiscal Quarter

Continued Improvement in Asset Quality and Net Interest Income Highlight Quarter
Nine Month Earnings Total $0.73 per share
Declares Regular Quarterly Dividend of $0.1125 per Share

SIOUX FALLS, S.D., April 28, 2014 (GLOBE NEWSWIRE) -- HF Financial Corp. (Nasdaq:HFFC) today reported earnings of $2.0 million, or $0.28 per diluted share, for the third quarter of fiscal 2014, compared to $2.2 million, or $0.31 per diluted share, for the second quarter of fiscal 2014. For the nine months ended March 31, 2014, earnings increased 13.4% to $5.1 million, or $0.73 per share, versus $4.5 million, or $0.64 per share for the comparable period one year earlier. Nonperforming assets as a percentage of total assets declined to 1.50% at March 31, 2014, from 1.71% one quarter earlier. In addition, the net interest margin increased 27 basis points to 2.89% and added $538,000 to pre-tax earnings in the third quarter relative to the second quarter of the current fiscal year.

"We are pleased to see margin expansion, asset quality improvement and loan growth while delivering shareholder value in the form of a 2% increase in tangible book value in the most recent quarter and paying a strong quarterly dividend. As we continue to review the efficiency of our product delivery system and reach further into our communities for new banking opportunities, we are building the core earnings capacity we need to create value for our shareholders. We are optimistic that we can continue to make meaningful progress on these important metrics in the coming years," said Stephen Bianchi, President and Chief Executive Officer.

Fiscal Third Quarter Financial Highlights: (at or for the periods ended March 31, 2014, compared to December 31, 2013 and/or March 31, 2013.)

• Earnings per diluted share for the third fiscal quarter of 2014 were $0.28 compared to $0.31 the previous quarter and $0.20 one year earlier. Relative to one year earlier, the increase in earnings reflects a stronger net interest margin. For the nine month period ended March 31, 2014, earnings increased to $0.73 per share compared to $0.64 per share one year earlier.
• The net interest margin expressed on a fully taxable equivalent basis ("NIM, TE") was 2.95% for the third quarter of fiscal 2014 compared to 2.66% for the second quarter of the current fiscal year. A recovery of nonaccruing interest of approximately $490,000 partially led to a stronger margin in the current quarter. For the nine months ended March 31, 2014, the NIM, TE was 2.66% compared to 2.68% for the same period of the prior fiscal year.
• Gross loans increased to $754.8 million at March 31, 2014, from $745.8 million at December 31, 2013. Year-over-year, gross loans increased 10.6% from $682.6 million, reflecting strong demand for loans from businesses in the regional market.
• Deposit balances decreased to $952.4 million at March 31, 2014 from $964.2 million in the previous quarter, but have increased by 6.2% from $897.2 million a year ago.
• Nonperforming assets declined to $18.8 million at March 31, 2014, or 1.50% of total assets from $21.4 million the previous quarter and from $23.6 million compared to the same quarter a year ago.
• Mortgage banking revenue totaled $1.0 million ($344,000 in gain on sale of loans and $703,000 for net loan servicing income) for the third quarter ended March 31, 2014. The most recent quarter reflects a mortgage servicing rights valuation recovery of $374,000. For the nine months ended March 31, 2014, mortgage banking revenue totaled $3.9 million compared to $3.5 million for the first nine months of fiscal 2013.
• Capital levels at March 31, 2014, continued to remain well above the regulatory "well-capitalized" minimum levels:
  • Total risk-based capital to risk-weighted assets was 15.27% versus 15.30% at December 31, 2013.
  • Tier 1 capital to risk-weighted assets was 14.05% versus 14.05% at December 31, 2013.
  • Tier 1 capital to total adjusted assets was 9.51% versus 9.42% at December 31, 2013.
• The most recent dividend of $0.1125 per share represents the twenty-fourth consecutive quarter at this level and provides a 3.24% current yield at recent market prices.
• Tangible book value per share was $13.41 per share at March 31, 2014 compared to $13.15 per share the previous quarter.

Balance Sheet and Asset Quality Review

HF Financial's total asset base was flat relative to the second quarter of fiscal 2014. Total assets at March 31, 2014, increased to $1.26 billion from $1.25 billion at December 31, 2013, and from $1.20 billion a year ago. The loan portfolio reflects increases during the quarter in commercial business, multi-family, commercial real estate and agricultural business balances. Meanwhile, residential, construction and agricultural real estate lending were down relative to the previous period. Commercial real estate loans continue to represent the largest portion of the loan portfolio, which totaled 49.5% of the loan portfolio at March 31, 2014, followed by agricultural loans totaling 24.4% at the end of the third quarter of fiscal 2014.

Total deposits decreased to $952.4 million at March 31, 2014, versus $964.2 million at December 31, 2013, however deposit balances represented an increase from $897.2 million a year ago. "As our business relationships have increased, so has our level of non-certificate accounts," noted Bianchi. Non-certificate accounts represented 74.3% of total deposits while certificates of deposit represented 25.7% of total deposits at March 31, 2014.

Borrowings increased during the third fiscal quarter of fiscal 2014 to $147.4 million compared to $138.3 million in the second quarter.

"We remain diligent in recovering the underlying value of our nonperforming loans. During the third quarter, a large nonperforming loan reached a necessary threshold of performance according to loan terms. Accordingly, we returned this loan to performing status, and booked interest into income in the third quarter that had been considered nonaccrual in prior periods," stated Bianchi. "We continue to see improvement in credit quality while new lending opportunities are allowing us to put more assets to work earning higher yields relative to shorter term investment products."

Nonperforming assets ("NPAs"), which include $15.2 million of troubled debt restructurings that are in-compliance with their restructured terms and payments due, decreased to $18.8 million at March 31, 2014, from $21.4 million the preceding quarter. At March 31, 2014, NPAs represented 1.50% of total assets. Classified assets totaled $32.1 million at March 31, 2014, compared to $27.5 million at December 31, 2013, and $39.7 million a year ago. Troubled debt restructurings declined to $16.6 million at March 31, 2014, from $19.7 million at December 31, 2013, and $10.1 million at March 31, 2013.

The allowance for loan and lease losses at March 31, 2014, totaled $10.3 million and represented 1.37% of total loans. Primary factors impacting the $259,000 decrease in the balance from the prior quarter was the reduction in special valuation allowances related to impaired loans of $775,000, and net charge-offs for the third quarter of $519,000. The general allowance for loan and lease losses increased $516,000 compared to the second fiscal quarter, and has increased $1.7 million compared to the prior year third quarter. As the total of nonperforming loans declined, the relative reserve level has increased. Total allowance relative to total nonperforming loans was 55.76% at March 31, 2014, compared to 50.24% the previous quarter and 46.96% one year earlier.

Tangible common shareholders' equity increased to 7.55% of tangible assets at March 31, 2014, compared to 7.43% at December 31, 2013. The increase was due largely to a higher level of retained earnings and improvement in accumulated other comprehensive losses. Tangible book value per common share was $13.41 at March 31, 2014, up from $13.15 per share at the end of the previous quarter.

Capital ratios continued to remain well above regulatory requirements with Tier 1 capital to risk-weighted assets of 14.05% at March 31, 2014, while the ratio of Tier 1 capital to total adjusted assets was 9.51%. These regulatory ratios were higher than the required minimum levels of 6.00% and 5.00%, respectively.

Review of Operations

For the quarter ended March 31, 2014, HF Financial's earnings reflect an improved net interest margin. "In the third quarter, our net interest margin reflected some recovery of nonaccruing interest and our noninterest income was positively influenced by the reversal of all remaining mortgage servicing impairments. Notwithstanding these one-time adjustments, we expect to continue to benefit from the slightly higher interest rate environment as our short term securities portfolio re-prices to higher yields," said Brent Olthoff, Chief Financial Officer and Treasurer.

Net interest income totaled $8.3 million for the third fiscal quarter of 2014 compared to $7.8 million for the second quarter and $7.1 million in the third quarter of fiscal 2013. The NIM, TE was 2.95% for the third quarter compared to 2.66% for the second quarter. For the nine month period ended March 31, 2014, net interest income increased 5.9% to $22.9 million compared to $21.6 million for the nine months ended March 31, 2013.

Provision for loan losses was $260,000 for the quarter ended March 31, 2014, compared to a benefit of $257,000 for the second quarter and to no provision or benefit one year earlier. The provision was largely related to reserves associated with the expanding loan portfolio and net charge-offs/recoveries during the respective quarters. Provisions for the nine month period ended March 31, 2014, were $279,000 compared to a benefit of $172,000 one year earlier.

Gain on the sale of loans continue to decline from previous periods as refinancing activity has declined due to a slight rise in mortgage rates. Mortgage activity produced $344,000 in gains during the third fiscal quarter compared to $621,000 the preceding quarter and $1.2 million a year ago. For the nine month period ended March 31, 2014, gains on sale totaled $1.8 million compared to $3.6 million for the comparable period one year earlier. Net loan servicing income totaled $703,000 for the third fiscal quarter compared to $809,000 in the second quarter of fiscal 2014. Fees on deposits totaled $1.5 million for the third quarter of fiscal 2014 versus $1.6 million the second quarter and $1.4 million the third quarter in fiscal 2013. Total noninterest income was $3.7 million for the third fiscal quarter of 2014 compared to $3.9 million in the second quarter, and $3.7 million a year ago.

Noninterest expense increased to $8.9 million in the third fiscal quarter from $8.8 million the previous quarter. The third quarter reflects slightly higher employee benefit expense and professional fees and reduced expense associated with foreclosed real estate.

These financial results are preliminary until the Form 10-Q is filed in May 2014.

Quarterly Dividend Declared

The board of directors declared a regular quarterly cash dividend of $0.1125 per common share for the third fiscal quarter 2014. The dividend is payable May 16, 2014 to stockholders of record May 9, 2014.

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" is a non-GAAP financial measure. Information regarding the usefulness of Net Interest Margin, TE appears 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, this presentation 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 the largest publicly traded savings association headquartered in South Dakota, HF Financial Corp. operates with 27 offices in 18 communities, throughout Eastern South Dakota and Minnesota. HF Financial Corp. recently added a loan production office in Fargo, North Dakota. The Company operates a branch in the Twin Cities market as Infinia Bank, a Division of Home Federal Bank of South 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, 2013, 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.