10KSB 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission file number 0-26560 HARDIN BANCORP, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 43-1719104 ---------------------------------------------- ----------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 2nd and Elm Streets, Hardin, Missouri 64035 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (660) 398-4312 ---------------------- Securities Registered Pursuant to Section 12(b) of the Act: None ---- Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES X . NO ___. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The registrant's revenues for the fiscal year ended March 31, 2000 were $8.8 million. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing bid price of such stock on the Nasdaq Small Cap Market as of March 31, 2000, was $10.1 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of March 31, 2000, there were 1,058,000 shares issued and 731,453 shares outstanding of the registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts II and III of Form 10-KSB - Portions of the Annual Report to Stockholders for the fiscal year ended March 31, 2000. Part III of Form 10-KSB - Portions of the Proxy Statement for 2000 Annual Meeting of Stockholders. PART I Item 1. Description of Business General Hardin Bancorp, Inc. ("Hardin Bancorp" and with its subsidiaries, the "Company") was formed in June 1995 at the direction of Hardin Federal Savings Bank ("Hardin Federal" or the "Bank") for the purpose of owning all of the outstanding stock of the Bank issued upon the conversion of the Bank from the mutual to stock form (the "Conversion"). On September 28, 1995, Hardin Bancorp acquired all of the shares of the Bank in connection with the completion of the Conversion. All references to the Company, unless otherwise indicated, at or before September 28, 1995 refer to the Bank and its subsidiary on a consolidated basis. The Company's common stock is quoted on the Nasdaq Small Cap Market under the symbol "HFSA." Hardin Federal is a federally chartered stock savings bank headquartered in Hardin, Missouri. Hardin Federal was originally chartered under the laws of the State of Missouri in 1914, converted to a federally chartered mutual savings bank in March 1995 and consummated its conversion to a stock savings bank on September 28, 1995. Its deposits are insured up to the maximum allowable amount by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). Through its main office and two branch offices, Hardin Federal serves communities located in Ray and Clay Counties, and in surrounding counties, in the State of Missouri. At March 31, 2000, the Company had total assets of $138.5 million, deposits of $86.6 million and total equity of $12.4 million. Hardin Federal has been, and intends to continue to be, a community-oriented financial institution offering selected financial services to meet the needs of the communities it serves. The Bank attracts deposits from the general public and historically has used such deposits, together with other funds, primarily to originate one- to four-family residential mortgage loans. The Bank also originates consumer loans, and, to a lesser extent, construction and land loans and commercial real estate loans. See "- Lending Activities." The Bank also invests in mortgage-backed securities, which are insured or guaranteed by federal agencies, and other investment securities. See "--Investment Activities." The executive office of the Bank is located at 201 Northeast Elm Street, Hardin, Missouri 64035. Its telephone number at that address is (660) 398-4312. Market Area Hardin Federal serves primarily Ray and Clay Counties, Missouri. The Bank currently has three offices. Its main office and Richmond branch are located in Ray County, Missouri and its Excelsior Springs branch is located in Clay County, Missouri. On March 31, 1998, the Bank opened its new branch office in Richmond, Missouri and vacated its old branch office. See "Item 2. Description of Property." Ray and Clay Counties, Missouri are located approximately 40 miles east of Kansas City, Missouri. Ray County, Missouri has a population of approximately 22,000 and Clay County, Missouri has a population of approximately 153,000. The major employers in the Bank's primary market area are engaged in agricultural, light industry, medical services and education, and include Ford Motor Co., Orbseal, Inc., 2 American Italian Pasta Co., Ray County Memorial Hospital, Excelsior Springs Community Hospital, the Richmond RXVI Public Schools, Lawson RXIV Public Schools and Excelsior Springs Public Schools. Lending Activities General. The Bank's loan portfolio consists primarily of conventional, first mortgage loans secured by one- to four-family residences and, to a lesser extent, consumer, construction, commercial business and land acquisition loans. At March 31, 2000, the Bank's gross loans and mortgage-backed securities outstanding totalled $93.0 of which $60.7 million or 65.3% were one- to four-family residential mortgage loans. Of the one- to four-family mortgage loans outstanding at that date, 45.0% were fixed-rate loans, and 20.3% were adjustable-rate loans. At that same date, consumer loans totalled $10.2 million or 11.0% of the Bank's total loan portfolio, construction loans totalled $3.2 million or 3.5% of the Bank's total loan and mortgage-backed securities portfolio, commercial real estate loans totalled $3.0 million or 3.2% of the Bank's total loan and mortgage-backed securities portfolio and land acquisition loans totalled $3.3 million or 3.6% of the Bank's total loan and mortgage-backed securities portfolio. The Bank also invests in mortgage-backed securities. At March 31, 2000, mortgage-backed securities totalled $11.8 million. See "--Investment Activities." The Bank's loans-to-one borrower limit is generally limited to the greater of 15% of unimpaired capital and surplus or $500,000. See "Regulation - Federal Regulation of Savings Associations." At March 31, 2000, the maximum amount which the Bank could have lent under this limit to any one borrower and the borrower's related entities was approximately $1.8 million. At March 31, 2000, the Bank had no loans or groups of loans to related borrowers with outstanding balances in excess of this amount. The Bank's largest lending relationship in loans to one borrower at March 31, 2000 was $1.1 million secured by a loan to develop raw land into residential lots located in Clay County, Missouri. At March 31, 2000, these loans were performing in accordance with their terms. 3 Loan Portfolio Composition. The following information sets forth the composition of the Bank's loan portfolio (including mortgage-backed securities) in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts and allowances for losses) at the dates indicated.
At March 31, -------------------------------------------------------------------------- 2000 1999 1998 ---------------------- ---------------------- ---------------------- Amount Percent Amount Percent Amount Percent ------- --------- ---------- --------- ------ ------- (Dollars in Thousands) Real Estate Loans: ----------------- One- to four-family.......................... $ 60,675 65.26% $ 54,122 64.04% $ 50,646 60.65% Land......................................... 3,304 3.55 3,048 3.61 810 .98 Commercial................................... 2,986 3.21 3,031 3.59 2,356 2.82 Construction................................. 3,214 3.46 2,380 2.81 3,967 4.75 --------- ------- --------- ------- --------- ------ Total real estate loans................... 70,179 75.48 62,581 74.05 57,779 69.20 --------- ------- --------- ------- --------- ------ Consumer Loans: -------------- Consumer Loans: Secured by deposits......................... 829 0.89 976 1.15 635 .76 Automobile.................................. 2,548 2.74 2,008 2.38 1,631 1.95 Home equity................................. 5,337 5.74 4,338 5.13 3,193 3.82 Home improvement............................ 316 0.34 303 0.36 521 .62 Other consumer loans........................ 1,161 1.25 945 1.12 725 .88 --------- ------- --------- ------- --------- ------ Total consumer loans...................... 10,191 10.96 8,570 10.14 6,705 8.03 --------- ------- --------- ------- --------- ------ Commercial business loans.................... 796 0.86 781 0.92 -- -- --------- ------- --------- ------- --------- ------ Total loans receivable...................... 81,166 87.30 71,932 85.11 64,484 77.23 --------- ------- --------- ------- --------- ------ Mortgage-Backed Securities: -------------------------- GNMA......................................... 2,053 2.21 1,118 1.32 4,446 5.32 FHLMC........................................ 4,068 4.38 4,158 4.92 5,425 6.50 FNMA......................................... 5,685 6.11 7,308 8.65 9,144 10.95 --------- ------- --------- ------- --------- ------ Total mortgage-backed securities.......... 11,806 12.70 12,584 14.89 19,015 22.77 --------- ------- --------- ------- --------- ------ Total loan and mortgage-backed securities portfolio.................... 92,972 100.00% 84,516 100.00% 83,499 100.00% ======= ====== ====== Less: ---- Loans in process............................... (2,910) (2,195) (3,022) Deferred fees and discounts.................... 107 79 60 Allowance for loan losses...................... (304) (311) (248) --------- --------- --------- Total loan and mortgage-backed securities portfolio, net............... $ 89,865 $ 82,089 $ 80,289 ========= ========= =========
4 The following table shows the composition of the Bank's loan and mortgage-backed securities portfolio by fixed- and adjustable-rate at the dates indicated.
At March 31, -------------------------------------------------------------------------- 2000 1999 1998 ---------------------- ---------------------- ---------------------- Amount Percent Amount Percent Amount Percent --------- ---------- --------- ---------- --------- ---------- (Dollars in Thousands) Fixed-Rate Loans: ---------------- Real estate: One- to four-family....................... $ 41,810 44.97% $ 36,589 43.29% $ 30,623 36.67% Land...................................... 538 0.58 512 0.61 426 .51 Commercial................................ 567 0.61 624 0.74 529 .64 Construction.............................. 2,870 3.08 1,711 2.02 3,298 3.95 ------- --------- ------- --------- ------ Total real estate loans.................. 45,785 49.24 39,436 46.66 34,876 41.77 Consumer.................................... 6,340 6.82 5,829 6.90 5,062 6.06 Commercial business......................... 18 0.02 -- -- -- -- Mortgage-backed securities.................. -- -- -- -- -- -- --------- ------- --------- ------- --------- ------ Total fixed-rate......................... 52,143 56.08 45,265 53.56 39,938 47.83 --------- ------- --------- ------- --------- ------ Adjustable-Rate Loans: --------------------- Real estate: One- to four-family....................... 18,865 20.29 17,533 20.75 20,023 23.98 Land...................................... 2,766 2.98 2,536 3.00 384 .46 Commercial................................ 2,419 2.60 2,407 2.85 1,827 2.19 Construction.............................. 344 0.37 669 0.79 669 .80 --------- ------- --------- ------- --------- ------ Total real estate loans.................. 24,394 26.24 23,145 27.39 22,903 27.43 Consumer.................................... 3,851 4.14 2,741 3.24 1,643 1.97 Commercial business......................... 778 0.84 781 0.92 -- -- Mortgage-backed securities.................. 11,806 12.70 12,584 14.89 19,015 22.77 --------- ------- --------- ------- --------- ------ Total adjustable rate.................... 40,829 43.92 39,251 46.44 43,561 52.17 --------- ------- --------- ------- --------- ------ Total loan and mortgage-backed securities portfolio.................... 92,972 100.00% 84,516 100.00% 83,499 100.00% ========= ====== ====== Less: ---- Loans in process.......................... (2,910) (2,195) (3,022) Deferred loan fees and discounts.......... 107 79 60 Allowance for loan losses................. (304) (311) (248) --------- --------- ---------- Total loans and mortgage-backed securities portfolio, net............... $ 89,865 $ 82,089 $ 80,289 ========= ========= =========
5 The following schedule illustrates the contractual maturity and weighted average rates of the Bank's loan portfolio at March 31, 2000. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of scheduled payments, possible prepayments or enforcement of due-on-sale clauses.
One-to Four-Family Construction Commercial Real EstateLand Consumer -------------------- -------------------- -------------------------------- ------------ Due During Weighted Weighted Weighted Weighted Weighted Year Ending Average Average Average Average Average March 31, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate ------------ --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- (Dollars in Thousands) 2001(1)............. $ 353 7.92% $ 1,594 8.64% $ 475 9.63% $ 40 9.00% $ 1,896 8.47% 2002................ 852 8.37 -- -- 7 9.00 1,800 9.69 544 10.11 2003................ 200 8.39 -- -- -- -- -- -- 886 9.82 2004 and 2005....... 489 8.48 -- -- 16 9.50 87 8.55 1,802 9.40 2006 to 2010........ 5,551 7.82 -- -- 530 8.64 187 8.41 1,082 9.65 2011 to 2025........ 31,134 7.79 396 8.16 1,893 8.62 992 8.95 3,981 9.97 2026 and following.. 22,096 7.97 1,224 8.57 65 7.50 198 8.29 -- -- -------- -------- --------- --------- --------- .................... $ 60,675 $ 3,214 $ 2,986 $ 3,304 $ 10,191 ======== ======== ========= ========= =========
Commercial Business Total -------------------- ------------------------ Due During Weighted Weighted Year Ending Average Average March 31, Amount Rate Amount Rate ------------ --------- --------- --------- ------------ 2001(1)............. $ 475 9.57% $ 4,833 8.71% 2002................ -- -- 3,203 9.41 2003................ 21 10.36 1,107 9.57 2004 and 2005....... -- -- 2,394 9.18 2006 to 2010........ 300 8.75 7,650 8.19 2011 to 2025........ -- -- 38,396 8.09 2026 and following.. -- -- 23,583 8.01 --------- -------- .................... $ 796 $ 81,166 ========= ========
----------------------- (1)The total amount of loans due after March 31, 2001 which have predetermined interest rates is $48.8 million while the total amount of loans due after such date which have floating or adjustable interest rates is $27.8 million. 6 All of the Bank's lending is subject to its written underwriting standards and loan origination procedures. Decisions on loan applications are made on the basis of detailed applications and property valuations, if applicable. Properties securing real estate loans made by Hardin Federal are generally appraised by Board-approved independent appraisers. All appraisals are subsequently reviewed by the Bank's Loan Committee, as applicable. In the loan approval process, Hardin Federal assesses the borrower's ability to repay the loan, the adequacy of the proposed security, the employment stability of the borrower and the credit-worthiness of the borrower. The Bank requires evidence of marketable title and lien position or appropriate title insurance on all loans secured by real property. The Bank also requires fire and extended coverage casualty insurance in amounts at least equal to the lesser of the principal amount of the loan or the value of improvements on the property, depending on the type of loan. As required by federal regulations, the Bank also requires flood insurance to protect the property securing its interest if such property is located in a designated flood area. Management reserves the right to change the amount or type of lending in which it engages to adjust to market or other factors. One- to Four-Family Residential Mortgage Lending. Residential loan originations are generated by the Bank's marketing efforts, its present customers, walk-in customers and referrals from real estate brokers. The Bank has focused its lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, single-family residences in its market area. At March 31, 2000, the Bank's one- to four-family residential mortgage loans totalled $60.7 million, or 65.3%, of the Bank's gross loan and mortgage-backed securities portfolio. The Bank experienced significant growth in its one- to four-family residential mortgage loan portfolio during the year ended March 31, 2000 as a result of increased demand for such loans within the Bank's market area and increased purchases by the Bank of such loans. It is the Bank's policy to purchase only those loans which meet its own underwriting criteria. The Bank currently offers fixed-rate and adjustable-rate mortgage loans. For the year ended March 31, 2000, the Bank originated $11.4 million fixed-rate one- to four-family loans, which constituted 70.5% of total one- to four-family loans originated and $4.8 million of adjustable-rate one- to four-family loans or 29.5% of total one- to four-family loans originated. Substantially all of the Bank's one- to four- family residential mortgage originations are secured by properties located in its market area. The Bank offers adjustable-rate mortgage loans at rates and on terms determined in accordance with market and competitive factors. The Bank currently originates adjustable-rate mortgage loans with a term of up to 30 years. The Bank currently offers one-year and three-year adjustable-rate mortgage loans (where the terms are fixed for the first one-year and three-years, respectively, and thereafter adjust every one or three years) with a stated interest rate margin over the one and three year U.S. Treasury Index adjusted to a constant maturity. Increases or decreases in the interest rate of the Bank's adjustable-rate loans are generally limited to 2.0% at any adjustment date and 6.0% over the life of the loan. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as is the Bank's cost of funds. Currently, all adjustable-rate mortgage loans originated provide for a minimum interest rate. The Bank qualifies borrowers for adjustable-rate loans based on a current interest rate plus the first adjustment. As a result, the risk of default on these loans may increase as interest rates increase. See "--Asset Quality--Non-Performing Assets." At March 31, 2000, the total balance of one-to four-family adjustable-rate loans was $18.9 million or 20.3% of the Bank's gross loan and mortgage-backed securities portfolio. See "--Originations, Purchases and Sales of Loans." 7 Adjustable-rate loans decrease the risk associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrowers may rise to the extent permitted by the terms of the loan, thereby increasing the potential for default. Also, adjustable-rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the loan. At the same time, the market value of the underlying property may be adversely affected by higher interest rates. The Bank also offers fixed-rate mortgage loans with maturities of up to 30 years. At March 31, 2000, the total balance of one- to four-family fixed-rate loans was $41.8 million or 45.0% of the Bank's gross loan and mortgage-backed securities portfolio. See "--Originations, Purchases and Sales of Loans." Hardin Federal will lend up to 95% of the lesser of the sales price or appraised value of the security property on owner occupied one- to four-family loans, provided that private mortgage insurance is obtained in an amount sufficient to reduce the Bank's exposure to not more than 80% of the appraised value or sales price, as applicable. Residential loans do not include prepayment penalties, are non-assumable (other than government-insured or guaranteed loans), and do not produce negative amortization. Real estate loans originated by the Bank customarily contain a "due on sale" clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the security property. The loans currently originated by the Bank are underwritten and documented pursuant to the guidelines of the FHLMC. Under current policy, the Bank originates these loans for its portfolio. See "--Originations, Purchases and Sales of Loans and Mortgage-Backed Securities." Consumer Lending. Hardin Federal offers a variety of consumer loans, including home equity lines of credit, automobile, home improvement, and loans secured by deposits. The Bank currently originates substantially all of its consumer loans in its primary market area generally to its existing customers. At March 31, 2000, the Bank's consumer loan portfolio totalled $10.2 million, or 11.0% of its gross loan and mortgage-backed securities portfolio. Hardin Federal originates home equity and home improvement loans. Home equity and home improvement loans secured by second mortgages, together with loans secured by all prior liens, are generally limited to 80% or less of the appraised value. If the Bank originates loans with greater than an 80% loan-to- value ratio, it requires the borrower to obtain private mortgage insurance in an amount equal to 100% of the loan-to-value ratio. Generally, such loans have a maximum term of up to 10 years. As of March 31, 2000, home equity and home improvement loans amounted to $5.3 million and $316,000, respectively, which represented 5.7% and .3%, respectively, of the Bank's gross loan and mortgage-backed securities portfolio. The Bank also recently began originating equity lines of credit. These loans are generally limited to 89% or less of the appraised value of the property securing the loan. These loans are all adjustable-rate loans and have maximum terms of up to 15 years. Another component of the Bank's consumer loan portfolio consists of automobile loans. The Bank originates automobile loans on a direct basis, where the Bank extends credit directly to the borrower. These loans generally have terms that do not exceed five years and carry a fixed-rate of interest. Generally, loans on new vehicles are made in amounts up to 90% of dealer cost and loans on used vehicles are made in amounts up to its published value, less certain adjustments. At March 31, 2000, the Bank's automobile loans totalled $2.5 million or 2.7% of the Bank's gross loan and mortgage-backed securities portfolio. 8 Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant's payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. Further, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At March 31, 2000, $18,000 of the Bank's consumer loans were non-performing. See "-- Non-Performing Assets and Classified Assets." There can be no assurances, however, that delinquencies will not occur in the future. Construction Lending. At March 31, 2000, the Bank had $3.2 million of construction loans. Hardin Federal offers loans to both builders and individuals for the construction of one- to four-family residences. Currently, such loans are offered with fixed- or adjustable-rates of interest. At March 31, 2000, the Bank had $2.9 million and $344,000 of fixed-rate and adjustable-rate construction loans, respectively, which represented 3.1% and .4%, respectively, of the Bank's gross loan and mortgage-backed securities portfolio. From time to time the Bank may purchase construction loans, but no such purchases were made during fiscal 2000. The Bank will purchase only those construction loans which are underwritten under guidelines which are as stringent as those employed by the Bank when it originates a construction loan. Following the construction period, these loans may become permanent loans, with terms for up to 30 years. Construction lending is generally considered to involve a higher level of credit risk than one- to four- family residential lending since the risk of loss on construction loans is dependent largely upon the accuracy of the initial estimate of the individual property's value upon completion of the project and the estimated cost (including interest) of the project. If the cost estimate proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. Commercial Real Estate Lending. The Bank also originates commercial real estate loans. At March 31, 2000 approximately $3.0 million, or 3.2% of the Bank's gross loan and mortgage-backed securities portfolio, was comprised of commercial real estate loans of which none was non-performing at that date. The largest commercial real estate loan is a real estate development loan secured by property in Clay County, Missouri. In underwriting these loans, the Bank currently analyzes the financial condition of the borrower, the borrower's credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The Bank generally requires personal guaranties of the borrowers. Appraisals on properties securing commercial real estate loans originated by the Bank are to the extent required by federal regulations performed by independent appraisers. 9 Commercial real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower's ability to repay the loan may be impaired. Commercial Business Loans At March 31, 2000, the Bank had a total of $796,000 outstanding in commercial business loans, and an additional commitment to fund a $240,000 line of credit. At March 31, 2000, the largest outstanding commercial business loan was a $340,000 loan to a farm implement dealership in Ray County, Missouri that was secured by machinery, equipment and accounts receivable. The Bank had a total of eight commercial loans at March 31, 2000. Commercial business loans are underwritten by analyzing the financial condition of the borrower, the borrower's credit history, the reliability and predictability of the business operations and the security for the loan. Commercial loans and credit lines are continually monitored in an attempt to detect any adverse conditions at the earliest possible stages to limit the Bank's exposure to potential losses. Commercial business lending represents a relatively new lending arena for the Bank. In the near term, management intends to limit both the size and number of commercial loans. Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential, commercial and multi-family real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as primary source of repayment in the event of borrower default. Although commercial business loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of borrower default is often not a sufficient source of repayment. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower, while liquidation of collateral is a secondary and often insufficient source of repayment. Originations, Purchases and Sales of Loans Loan originations are developed from continuing business with depositors and borrowers, soliciting realtors, builders, walk-in customers and third-party sources. While the Bank originates both adjustable-rate and fixed-rate loans, its ability to originate loans to a certain extent is dependent upon the relative customer demand for loans in its market, which is affected by the interest rate environment, among other factors. For the year ended March 31, 2000, the Bank originated $21.1 million in fixed-rate loans and $9.2 million in adjustable rate loans. The Bank from time-to-time sells fixed rate loan originations as part of its asset/liabilities management policies. The Bank generally followed a policy of selling its fixed-rate loan originations during 10 fiscal 1994. In early fiscal 1995, the Bank changed its policy to retain fixed-rate loan originations in its portfolio. The Bank's Board of Directors has adopted an informal policy which is subject to change from time-to-time, of retaining fixed-rate loans in order to increase the overall level of fixed-rate loans in its portfolio up to 60% of total loans receivable. At March 31, 2000, fixed-rate loans comprised 56.1% of gross loan and mortgage-backed securities portfolio. Reflecting these policies, during the fiscal years ended March 31, 2000, 1999 and 1998, the Bank sold $675,000, $3.5 million, and $3.7 million, respectively, of one- to four-family fixed-rate real estate loans. During fiscal year 2000, the Bank purchased $423,000 of real estate loans originated by other lenders all of which were secured by properties located in Missouri. At March 31, 2000, none of these loans were included in the Bank's non-performing assets. See "--Non-Performing Assets and Classified Assets." As part of the Bank's effort to increase the size of its loan portfolio, management anticipates that loan purchases may increase in the future. It is presently anticipated that such purchases would consist primarily of loans secured by one- to four-family residences located in the State of Missouri. The Bank employs the same underwriting standards for purchased loans as for loans originated by the Bank. In addition, the Bank purchases mortgage-backed securities, consistent with its asset/liability management objectives to complement its mortgage lending activities. The Board believes that the slightly lower yield carried by mortgage-backed securities is somewhat offset by the lower level of credit risk and the lower level of overhead required in connection with these assets, as compared to one- to four-family, non- residential and other types of loans. See "--Investment Securities--Mortgage-backed Securities." Loan originations during the year ended March 31, 2000 were greater than the comparable period in the prior year. The Bank believes the increase was due to an increased emphasis on the origination of loans and increased loan demand within the Bank's market area, plus the availability of lower fixed-rate interest on long-term loans. 11 The following table shows the loan and mortgage-backed securities origination, purchase, sale and repayment activities of the Bank for the periods indicated.
Year Ended March 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- (In Thousands) Originations by type: -------------------- Adjustable rate: One- to four-family.................................................. $ 4,769 $ 1,072 $ 3,367 Land................................................................. 1,855 1,525 333 Commercial real estate............................................... 15 2,215 1,140 Construction......................................................... -- -- 669 Consumer............................................................. 2,130 2,007 1,963 Commercial business.................................................. 417 930 -- --------- --------- --------- Total adjustable-rate.............................................. 9,186 7,749 7,462 --------- --------- --------- Fixed rate: One- to four-family.................................................. 11,395 15,064 12,254 Land................................................................. 306 292 188 Commercial real estate............................................... -- 225 -- Construction......................................................... 3,357 1,964 3,351 Consumer............................................................. 6,068 4,247 4,398 Commercial business.................................................. 20 -- -- --------- --------- --------- Total fixed-rate................................................... 21,146 21,792 20,191 --------- --------- --------- Total loans originated............................................. 30,332 29,541 27,653 --------- --------- --------- Purchases: --------- One- to four-family.................................................. 423 1,212 1,048 Land................................................................. -- -- 184 Commercial real estate............................................... -- 450 -- Mortgage-backed securities - at cost................................. 2,362 -- 10,940 --------- --------- --------- Total purchased.................................................... 2,785 1,662 12,172 --------- --------- --------- Sales and Repayments: -------------------- One- to four-family.................................................. 675 3,486 3,737 Mortgage-backed securities sold - at amortized cost.................. 361 2,769 8,176 --------- --------- --------- Total sales........................................................ 1,036 6,255 11,913 --------- --------- --------- Principal repayments................................................. 23,569 23,893 19,630 --------- --------- --------- Total sales and repayments......................................... 24,605 30,148 31,543 --------- --------- --------- Decrease (increase) in other items: Loans in process..................................................... (715) 827 (1,669) Deferred fees and discounts.......................................... (28) (19) (17) Allowance for loan losses............................................ 7 (63) (89) --------- --------- --------- Net increase (decrease)............................................ $ 7,776 $ 1,800 $ 6,507 ========= ========= =========
12 Asset Quality General. When a borrower fails to make a required payment on a loan, the Bank attempts to cause the delinquency to be cured by contacting the borrower. In the case of loans secured by real estate, reminder notices are sent to borrowers. If payment is late, appropriate late charges are assessed and a notice of late charges is sent to the borrower. If the loan is in excess of 90 days delinquent, the loan will be referred to the Bank's legal counsel for collection. In all cases, if the Bank believes that its collateral is at risk and added delay would place the collectibility of the balance of the loan in further question, management may refer loans for collection even sooner than the 90 days described above. When a loan becomes more than 90 days delinquent, the Bank will place the loan on non-accrual status and previously accrued interest income on the loan is charged against current income. The loan will remain on a non-accrual status as long as the loan is more than 90 days delinquent. Delinquent consumer loans are handled in a similar manner as to those described above; however, shorter time frames for each step apply due to the type of collateral generally associated with such types of loans. The Bank's procedures for repossession and sale of consumer collateral are subject to various requirements under Missouri and federal consumer protection laws. The following table sets forth the Bank's loan delinquencies by type, by amount and by percentage of type at March 31, 2000. The amounts presented in the table below represent the total remaining principal balances of the loans, rather than the actual payment amounts which are overdue.
Loans Delinquent For ---------------------------------------------------------------- 60-89 Days 90 Days and Over Total Delinquent Loans ------------------------------- ------------------------------- ------------------------------- Percent Percent Percent of Loan of Loan of Loan Number Amount Category Number Amount Category Number Amount Category ------ ------ -------- ------ ------ -------- ------ ------ -------- (Dollars in Thousands) Real Estate: One- to four-family.......... 7 $ 230 0.38% 3 $ 219 0.36% 10 $ 449 0.74% Land......................... -- -- -- -- -- -- -- -- -- Commercial................... -- -- -- -- -- -- -- -- -- Construction................. -- -- -- -- -- -- -- -- -- Consumer....................... -- -- -- 2 11 0.10 2 11 0.10 Commercial business............ -- -- -- -- -- -- -- -- -- --------- -------- ------- ------- ------- -------- ------- ------ ------ Total....................... 7 $ 230 0.38% 5 $ 230 0.46% 12 $ 460 0.84% ========= ======== ======= ======= ======= ======== ======= ====== ======
13 Non-Performing Assets. The table below sets forth the amounts and categories of non-performing assets in the Bank's loan portfolio. Loans are placed on non-accrual status when the collection of principal and/or interest become doubtful. For all years presented, the Bank has had no troubled debt restructurings (which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates). Foreclosed assets include assets acquired in settlement of loans.
Year Ended March 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- (In Thousands) Non-accruing loans One- to four-family............................................. $ 100 $ 205 $ 220 Land............................................................ -- -- -- Commercial real estate.......................................... -- -- -- Construction.................................................... -- -- -- Consumer........................................................ 11 25 12 Commercial business............................................. -- -- -- --------- --------- --------- Total......................................................... 111 230 232 --------- --------- --------- Accruing loans delinquent 90 days or more One- to four-family............................................. 119 47 -- Land............................................................ -- -- -- Commercial real estate.......................................... -- -- -- Construction.................................................... -- -- -- Consumer........................................................ -- -- -- Commercial business............................................. -- -- -- --------- --------- --------- Total......................................................... 119 47 -- --------- --------- --------- Foreclosed assets One- to four-family............................................. -- -- -- Land............................................................ -- -- -- Commercial real estate.......................................... -- -- -- Construction.................................................... -- -- -- Consumer........................................................ 7 -- -- Commercial business............................................. -- -- -- --------- --------- --------- Total......................................................... 7 -- -- --------- --------- --------- Total non-performing assets........................................ $ 237 $ 277 $ 232 ========= ========= ========= Total classified assets............................................ $ 628 $ 336 $ 501 ========= ========= ========= Total non-performing assets as a percentage of total assets 0.17% .20% Total non-performing loans as a percentage of total loans receivable................................................ 0.30% .45% .36% ========= ========= =========
For the year ended March 31, 2000 gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $20,000. The amount that was included in interest income on such loans was $18,000 for the year ended March 31, 2000. 14 Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities, considered by the OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full" on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, who may order the establishment of additional general or specific loss allowances. In connection with the filing of its periodic reports with the OTS and in accordance with its classification of assets policy, the Bank regularly reviews loans in its portfolio to determine whether such assets require classification in accordance with applicable regulations. On the basis of management's review of its assets, at March 31, 2000, the Bank had classified a total of $628,000of its assets as substandard, -0- as doubtful, and $7,000 as loss. At March 31, 2000, total classified assets comprised $635,000 or 5.11% of the Bank's capital, or .46% of the Bank's total assets. Other Loans of Concern. In addition to the non-performing and classified loans set forth in the tables above, as of March 31, 2000, there were no other loans classified by the Bank with respect to which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have some doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non- performing asset categories. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity, including those loans which are being specifically monitored by management. Such evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers among other matters, the loan classifications discussed above, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience, the amount of loans outstanding and other factors that warrant recognition in providing for an adequate loan loss allowance. Real estate properties acquired through foreclosure are recorded at the lower of cost or fair value minus estimated cost to sell. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged-off to the allowance for loan losses at the time of transfer. Valuations are periodically updated by management and if the value declines, a specific provision for losses on such 15 property is established by a charge to operations. At March 31, 2000, the Bank had no real estate properties acquired through foreclosure. Although management believes that it uses the best information available to determine the allowance, unforeseen market conditions could result in adjustments and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. Future additions to the Bank's allowance for loan losses will be the result of periodic loan, property and collateral reviews and thus cannot be predicted in advance. In addition, federal regulatory agencies, as an integral part of the examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to increase the allowance based upon their judgment of the information available to them at the time of their examination. At March 31, 2000, the Bank had a total allowance for loan losses of $304,000, representing 128.3% of total non-performing loans and .39% of the Bank's loans, net. See Note 4 of the Notes to Consolidated Financial Statements. 16 The distribution of the Bank's allowance for loan losses at the dates indicated is summarized as follows:
At March 31, ------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------- ------------------------------- ------------------------------- Percent Percent Percent of Loans of Loans of Loans Loan in Each Loan in Each Loan in Each Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total Allowance Category Loans Allowance Category Loans Allowance Category Loans -------------------- --------- -------------------- --------- -------------------- --------- (Dollars in Thousands) Real estate: One- to four-family....... 152 $60,675 74.75% $ 113 $54,122 75.24% $ 74 $50,646 78.54% Land...................... 34 3,304 4.07 31 3,048 4.24 8 810 1.26 Commercial real estate.... 30 2,986 3.68 31 3,031 4.21 24 2,356 3.65 Construction.............. 3 3,214 3.96 7 2,380 3.31 13 3,967 6.15 Consumer..................... 63 10,191 12.56 49 9,350 13.00 32 6,705 10.40 Commercial business.......... 8 796 0.98 8 781 1.09 -- -- -- Unallocated.................. 14 -- -- 72 -- -- 97 -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total................... $ 304 $81,166 100.00% $ 311 $71,932 100.00% $ 248 $64,484 100.00% ======= ======= ======= ======= ======= ======= ======= ======= =======
The portion of the allowance to each loan category does not necessarily represent the total available for losses within that category since the total allowance is applicable to the entire loan portfolio. 17 The following table sets forth an analysis of the Bank's allowance for loan losses.
Year Ended March 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- (In Thousands) Balance at beginning of period........................................... $ 311 $ 248 $ 158 Charge-offs: ----------- One- to four-family................................................... -- -- -- Land.................................................................. -- -- -- Commercial real estate................................................ -- -- -- Construction.......................................................... -- -- -- Consumer.............................................................. (11) (3) (4) Commercial business................................................... -- -- -- ------- ------- ------- (11) (3) (4) ------- ------- -------- Recoveries: ---------- One- to four-family................................................... -- -- -- Land.................................................................. -- -- -- Commercial real estate................................................ -- -- -- Construction.......................................................... -- -- -- Consumer.............................................................. 3 -- -- Commercial business................................................... -- -- -- ------- ------- ------- 3 -- -- ------- ------- ------- Net charge-offs.......................................................... (8) (3) (4) Additions charged to operations.......................................... 1 66 94 ------- ------- ------- Balance at end of period................................................. $ 304 $ 311 $ 248 ======= ======= ======= Ratio of net charge-offs during the period to average loans outstanding during the period................. 0.011% .004% .01% ======= ======= ======= Ratio of net charge-offs during the period to average non-performing assets......................................... 5.22% 1.13% 1.98% ======= ======= =======
Investment Activities General. Hardin Federal must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Bank has generally maintained liquid assets at levels above the minimum requirements imposed by the OTS regulations and at levels believed adequate to meet the requirements of normal operations, including repayments of maturing debt and potential deposit outflows. Cash flows projections are regularly reviewed and updated to assure that adequate liquidity is maintained. At March 31, 2000, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits with maturities of 1 year or less and current borrowings) was 33.8%. See "Regulation--Liquidity." Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. 18 Generally, the investment policy of the Bank, as established by the Board of Directors, is to invest funds among various categories of investments and maturities based upon the Bank's liquidity needs, asset/liability management policies, investment quality, marketability and performance objectives. Mortgage-backed Securities. The Bank purchases mortgage-backed securities to supplement residential loan production and as part of its asset/liability strategy. The type of securities purchased is based upon the Bank's asset/liability management strategy and balance sheet objectives. For instance, substantially all of the mortgage-backed investments purchased by the Bank over the last several years have had adjustable rates of interest. The Bank has invested primarily in federal agency securities, principally Freddie Mac, Government National Mortgage Association ("GNMA") and Fannie Mae obligations. At March 31, 2000, the Bank's investment in mortgage-backed securities totalled $11.8 million or 8.5% of its total assets. The Bank's available-for-sale mortgage-backed securities are reported at fair value, with unrealized gains and losses excluded from earnings but reported as a separate component of stockholders' equity. During the fiscal year ended March 31, 2000, the Bank sold $361,000 of its mortgage-backed securities. See Note 3 of the Notes to Consolidated Financial Statements. The Fannie Mae, Freddie Mac and GNMA certificates are modified pass-through mortgage-backed securities that represent undivided interests in underlying pools of fixed-rate, or certain types of adjustable- rate, single-family residential mortgages issued by these government-sponsored entities. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as prepayment risk, are passed on to the certificate holder. Fannie Mae and Freddie Mac provide the certificate holder a guarantee of timely payments of interest and ultimate collection of principal, whether or not they have been collected. GNMA's guarantee to the holder of timely payments of principal and interest is backed by the full faith and credit of the U.S. government. Mortgage-backed securities generally yield less than the loans that underlie such securities, because of the cost of payment guarantees or credit enhancements that reduce credit risk. In addition, mortgage- backed securities are more liquid than individual mortgage loans and may be used to collateralize obligations of the Bank. In general, mortgage-backed securities issued or guaranteed by Fannie Mae and Freddie Mac are weighted at no more than 20% for risk-based capital purposes, and mortgage-backed securities issued or guaranteed by GNMA are weighted at 0% for risk-based capital purposes, compared to an assigned risk weighting of 50% to 100% for whole residential mortgage loans. These types of securities thus allow the Bank to optimize regulatory capital to a greater extent than non-securitized whole loans. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. Investment Securities. At March 31, 2000, the Bank's investment securities (including a $2.0 million investment in the common stock of the FHLB of Des Moines) totalled $39.8 million, or 28.7% of its total assets. It is the Bank's general policy to purchase U.S. Government securities and federal agency obligations and other investment securities. See Note 2 of the Notes to Consolidated Financial Statements. OTS regulations restrict investments in corporate debt and equity securities by the Bank. These restrictions include prohibitions against investments in the debt securities of any one issuer in excess of 15% 19 of the Bank's unimpaired capital and unimpaired surplus as defined by federal regulations, which totalled $12.4 million as of March 31, 2000, plus an additional 10% if the investments are fully secured by readily marketable collateral. At March 31, 2000, the Bank was in compliance with this regulation. See "Regulation--Federal Regulation of Savings Associations" for a discussion of additional restrictions on the Bank's investment activities. The following table sets forth the composition of the Bank's investment portfolio, including mortgage-backed securities, at the dates indicated.
At March 31, -------------------------------------------------------------------------- 2000 1999 1998 ---------------------- ---------------------- ---------------------- Book % of Book % of Book % of Value Total Value Total Value Total --------- --------- --------- --------- --------- -------- (Dollars in Thousands) Investment securities: --------------------- Federal agency securities........... $ 32,821 59.73% $ -- --% $ -- --% Revenue bonds....................... 1,054 1.92 38,206 60.40 31,651 56.15 Perpetual preferred stock........... 3,814 6.94 1,473 2.33 1,005 1.78 Other investments................... 104 0.19 4,840 7.65 -- -- --------- ------- --------- --------- --------- -------- Subtotal.......................... 37,793 68.78 44,519 70.37 32,656 57.93 FHLB stock.......................... 2,015 3.67 2,000 3.16 1,475 2.62 --------- ------- --------- --------- --------- -------- Total investment securities and FHLB stock................... 39,808 72.45 $ 46,519 73.54% $ 34,131 60.55% --------- ------- --------- --------- --------- -------- Average remaining life of investment securities excluding FHLB stock... 9 years 8 years 9 years Other interest-bearing assets: ----------------------------- Interest-bearing deposits........... $ 3,332 6.06% $ 4,157 6.57% $ 3,225 5.72% Mortgage-backed securities: GNMA.............................. 2,053 3.74 1,118 1.77 4,446 7.89 Freddie Mac....................... 4,068 7.40 4,158 6.57 5,424 9.62 Fannie Mae........................ 5,685 10.35 7,308 11.55 9,145 16.22 --------- ------- --------- --------- --------- -------- Total mortgage-backed securities, net 11,806 21.49 12,584 19.89 19,015 33.73 --------- --------- ---------- -------- ---------- ---------- Total investment portfolio.......... $ 54,946 100.00% $ 63,260 100.00% $ 56,371 100.00% ========= ======= ========= ========= ========= ========
20 The composition and maturities of the investment securities portfolio, excluding FHLB stock, are indicated in the following table.
March 31, 2000 ----------------------------------------------------------------------------- Total Investment Less Than 1 to 5 5 to 10 Over Book Securities 1 Year Years Years 10 Years Value Market Value ----------- ----------- ----------- ----------- ----------- ------------ (Dollars in Thousands) Federal agency obligations.............. $ 26,122 $ -- $ -- $ 6,699 $ 32,821 $ 32,821 Revenue bonds........................... -- 618 436 -- 1,054 1,054 Perpetual preferred stock............... -- 1,913 1,901 -- 3,814 3,814 Other Investments....................... -- -- -- 104 104 104 --------- -------- --------- --------- --------- --------- Total investment securities............. $ 26,122 $ 2,531 $ 2,337 $ 6,803 $ 37,793 $ 37,793 --------- -------- --------- --------- --------- --------- Weighted average yield.................. 6.66% 6.24% 6.36% 6.38% 6.42% 6.42% ========= ======== ========= ========= ========= =========
The Bank's investment securities portfolio at March 31, 2000, contained tax-exempt securities consisting of local revenue bonds. No securities of any issuer had an aggregate book value in excess of 10% of the Bank's retained earnings, excluding those issued by the U.S. government, or its agencies. Hardin Federal's investments, including the mortgage-backed and related securities portfolio, are managed in accordance with a written investment policy adopted by the Board of Directors. OTS guidelines regarding investment portfolio policy and accounting require insured institutions to categorize securities and certain other assets as held for "investment," "sale," or "trading." In addition, effective April 1, 1994, the Bank adopted SFAS 115 which states that securities available for sale are accounted for at fair value and securities which management has the intent and the Bank has the ability to hold to maturity are accounted for on an amortized cost basis. The Bank's investment policy has strategies for each type of security. At March 31, 2000, the Bank had $28.7 million in mortgage-backed securities and investment securities with maturities of less than five years classified as available for sale. See Notes 2 and 3 of the Notes to the Consolidated Financial Statements. Sources of Funds General. The Bank's primary sources of funds are deposits, receipt of principal and interest on loans and securities, interest-earning deposits with other banks, FHLB advances, and other funds provided from operations. FHLB advances are used to support lending activities and to assist in the Bank's asset/liability management strategy. Typically, the Bank does not use other forms of borrowings. At March 31, 2000, the Bank had total FHLB advances of $38.3 million. See "--Borrowings" and Note 7 of the Notes to Consolidated Financial Statements. Deposits. Hardin Federal offers a variety of deposit accounts having a wide range of interest rates and terms. The Bank's deposits consist of savings deposits, commercial demand, NOW, money market deposit and certificate accounts. The certificate accounts currently range in terms from 90 days to five years. 21 The Bank relies primarily on advertising, competitive pricing policies and customer service to attract and retain these deposits. Currently, Hardin Federal solicits deposits from its market area only, and does not use brokers to obtain deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The Bank has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Bank endeavors to manage the pricing of its deposits in keeping with its profitability objectives giving consideration to its asset/liability management. The ability of the Bank to attract and maintain savings accounts and certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. The following table sets forth the dollar amount of savings deposits in the various types of deposit programs offered by the Bank for the periods indicated.
At March 31, -------------------------------------------------------------------------- 2000 1999 1998 ---------------------- ---------------------- ---------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total --------- --------- --------- --------- --------- -------- (Dollars in Thousands) Transactions and Savings Deposits:(1) --------------------------------- Commercial Demand................... $ 2,653 3.06% $ 1,919 2.30% $ 1,082 1.41% Savings Accounts.................... 4,402 5.09 3,805 4.57 3,265 4.25 NOW Accounts........................ 8,783 10.15 6,852 8.22 4,258 5.53 Money Market....................... 7,033 8.12 6,584 7.90 5,901 7.68 Certificates........................ 63,694 73.58 64,167 77.01 62,378 81.13 --------- ------- --------- ------- --------- ------ Total deposit accounts.............. $ 86,565 100.00% $ 83,327 100.00% $ 76,884 100.00% ========= ======= ========= ====== ========= ======
(1) See Note 6 of the Notes to Consolidated Financial Statements. The following table indicates the amount of the Bank's certificates of deposit and other deposits by time remaining until maturity as of March 31, 2000.
Maturity --------------------------------------- Over Over Over 3 Months 3 to 6 6 to 12 12 or Less Months Months Months Total --------- --------- --------- --------- --------- (In thousands) Certificates of deposit less than $100,000.............. $ 40,466 $ 5,673 $ 1,715 $ 4,597 $ 52,451 Certificates of deposit of $100,000 or more............. 8,624 784 313 1,089 10,810 Public funds (1)........................................ 390 37 6 -- 433 --------- --------- --------- --------- --------- Total certificates of deposit........................... $ 49,480 $ 6,494 $ 2,034 $ 5,686 $ 63,694 ========= ========= ========= ========= =========
(1) Deposits from governmental and other public entities, including deposits greater than $100,000. 22 Borrowings. Hardin Federal's borrowings historically have consisted of advances from the FHLB of Des Moines. Such advances may be made pursuant to different credit programs, each of which has its own interest rate and range of maturities. Federal law limits an institution's borrowings from the FHLB to 20 times the amount paid for capital stock in the FHLB, subject to regulatory collateral requirements. At March 31, 2000, the Bank had $2.0 million of FHLB of Des Moines stock. The Bank has the ability to purchase additional capital stock from the FHLB. At March 31, 2000 and March 31, 1999, the weighted average interest rate of the Bank's FHLB advances was 5.84% and 5.18%, respectively. For additional information regarding the term to maturity and average rate paid on FHLB advances, see Note 7 of the Notes to Consolidated Financial Statements and "--Lending Activities." The following table sets forth the maximum month-end balance and average balance of FHLB advances.
Year Ended March 31, ------------------------------------------------ 2000 1999 1998 -------------- -------------- ------------- (In Thousands) Maximum Balance: --------------- FHLB advances............................................ $ 38,300 $ 40,000 $ 29,500 Average Balance: --------------- FHLB advances............................................ $ 36,583 $ 37,458 $ 24,458
Service Corporation Activities As a federally chartered savings bank, Hardin Federal is permitted by OTS regulations to invest up to 2% of its assets, or approximately $2.8 million at March 31,2000, in the stock of, or loans to, service corporation subsidiaries. Hardin Federal may invest an additional 1% of its assets in service corporations where such additional funds are used for inner-city or community development purposes and up to 50% of its total capital in conforming loans to service corporations in which it owns more than 10% of the capital stock. In addition to investments in service corporations, federal associations are permitted to invest an unlimited amount in operating subsidiaries engaged solely in activities in which a federal association may engage. At March 31, 2000, Hardin Federal had one subsidiary, Hardin Savings Service Corporation ("HSSC"). HSSC was established in 1993 for the purpose of offering credit life, disability and accident insurance to its customers. At March 31, 2000, the Bank's investment in HSSC was $50,000. For the year ended March 31, 2000, HSSC had pre-tax income of approximately $14,000. In November 1999, Hardin Federal Savings Bank established a wholly-owned direct operating subsidiary, Hardin Investment, LLC. The subsidiary's activities consists solely of investment portfolio management activities. REGULATION General Hardin Federal is a federally chartered savings bank, the deposits of which are federally insured and backed by the full faith and credit of the United States Government. Accordingly, the Bank is subject to 23 broad federal regulation and oversight extending to all its operations. The Bank is a member of the FHLB of Des Moines and is subject to certain limited regulation by the Federal Reserve Board. As the savings and loan holding company of the Bank, the Company also is subject to federal regulation and oversight. The purpose of the regulation of the Company and other holding companies is to protect subsidiary savings associations. The Bank is a member of the SAIF. The deposits of the Bank are insured by the SAIF of the FDIC. As a result, the FDIC has certain regulatory and examination authority over the Bank. Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document. Federal Regulation of Savings Associations The OTS has extensive authority over the operations of savings associations. As part of this authority, the Bank is required to file periodic reports with the OTS and is subject to periodic examinations by the OTS and the FDIC. When these examinations are conducted by the OTS and the FDIC, the examiners may require the Bank to provide for higher general or specific loan loss reserves. All savings associations are subject to a semi-annual assessment, based upon the savings association's total assets. The Bank's OTS assessment for the fiscal year ended March 31, 2000, was approximately $41,000. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including the Bank and the Holding Company. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. Except under certain circumstances, public disclosure of final enforcement actions by the OTS is required. In addition, the investment, lending and branching authority of the Bank is prescribed by federal laws, and regulations, and it is prohibited from engaging in any activities not permitted by such laws and regulations. For instance, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal associations in loans secured by non- residential real property may not exceed 400% of total capital, except with approval of the OTS. Federal savings associations are also generally authorized to branch nationwide. The Bank is in compliance with the noted restrictions. The Bank's general permissible lending limit for loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At March 31, 2000, the Bank's lending limit under this restriction was $1.8 million. The Bank is in compliance with the loans-to-one-borrower limitation. The OTS, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a capital compliance plan. A failure to submit a plan or to 24 comply with an approved plan will subject the institution to further enforcement action. The OTS and the other federal banking agencies have also adopted additional guidelines on asset quality and earnings standards. The guidelines are designed to enhance early identification and resolution of problem assets. The guidelines are not expected to materially effect the Bank. Insurance of Deposits The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of depository institutions. The FDIC currently maintains two separate insurance funds: the Bank Insurance Fund and the Savings Association Insurance Fund. As insurer of Hardin Federal's deposits, the FDIC has examination, supervisory and enforcement authority over Hardin Federal. Hardin Federal's accounts are insured by the Savings Association Insurance Fund to the maximum extent permitted by law. Hardin Federal pays deposit insurance premiums based on a risk-based assessment system established by the FDIC. Under applicable regulations, institutions are assigned to one of three capital groups that are based solely on the level of an institution's capital -- "well capitalized," "adequately capitalized," and "undercapitalized" -- which are defined in the same manner as the regulations establishing the prompt corrective action system, as discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates that until September 30, 1996 ranged from 0.23% for well capitalized, financially sound institutions with only a few minor weaknesses to 0.31% for undercapitalized institutions that pose a substantial risk of loss to the Savings Association Insurance Fund unless effective corrective action is taken. Under the Deposit Insurance Funds Act, which was enacted on September 30, 1996, the FDIC imposed a special assessment on each depository institution with Savings Association Insurance Fund-assessable deposits which resulted in the Savings Association Insurance Fund achieving its designated reserve ratio. As a result, the FDIC reduced the assessment schedule for Savings Association Insurance Fund members, effective January 1, 1997, to a range of 0% to 0.27%, with most institutions, including Hardin Federal, paying 0%. This assessment schedule is the same as that for the Bank Insurance Fund, which reached its designated reserve ratio in 1995. In addition, since January 1, 1997, Savings Association Insurance Fund members are charged an assessment of .065% of Savings Association Insurance Fund-assessable deposits to pay interest on the obligations issued by the Financing Corporation in the 1980s to help fund the thrift industry cleanup. Bank Insurance Fund-assessable deposits have been charged an assessment to help pay interest on the Financing Corporation bonds at a rate of approximately .013% until the earlier of December 31, 1999 or the date upon which the last savings association ceases to exist, after which time the assessment will be the same for all insured deposits. The Deposit Insurance Funds Act also contemplates the development of a common charter for all federally chartered depository institutions and the abolition of separate charters for national banks and federal savings associations. It is not known what form the common charter may take and what effect, if any, the adoption of a new charter would have on the operation of Hardin Federal. The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any 25 condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the deposit insurance of Hardin Federal. Capital Requirements. The OTS capital regulations require savings institutions to meet three capital standards: a 1.5% tangible capital standard, a 3.0% leverage (core capital) standard, and an 8.0% risk-based capital standard. Core capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights ("MSRs") and purchased credit card relationships. The OTS regulations require that, in meeting the tangible, core and risk-based capital standards, institutions generally must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. In addition, the OTS prompt corrective action regulation provides that a savings institution that has a leverage capital ratio of less than 4.0% (3.0% for institutions receiving the highest CAMELS examination rating) will be deemed to be "undercapitalized" and may be subject to certain restrictions. The risk-based capital standard for savings institutions requires the maintenance of total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of 8.0%. In determining the amount of risk-weighted assets, assets and certain off-balance sheet assets items are multiplied by a risk- weight of 0% to 100%, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. The components of core capital are equivalent to those discussed earlier under the 3.0% leverage standard. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and, within specified limits, the allowance for loan losses. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The OTS has incorporated an interest rate risk component into its regulatory capital rule. Under the rule, savings associations with "above normal" interest rate risk exposure would be subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200-basis point increase or decrease in market interest rates divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. A savings association whose measured interest rate risk exposure exceeds 2% must deduct an interest rate component in calculating its total capital under the risk-based capital rule. The interest rate risk component is an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Under the rule, there is a two quarter lag between the reporting date of an institution's financial data and the effective date for the new capital requirement based on that data. A savings association with assets of less than $300 million and risk-based capital ratios in excess of 12% is exempt from the interest rate risk component, unless the OTS determines otherwise. The rule also provides that the OTS may waive or defer 26 an association's interest rate risk component on a case-by-case basis. Under certain circumstances, a savings association may request an adjustment to its interest rate risk component if it believes that the calculated interest rate risk component, as calculated by the OTS, overstates its interest rate risk exposure. In addition, certain "well-capitalized" institutions may obtain authorization to use their own interest rate risk model to calculate their interest rate risk component in lieu of the amount as calculated by the OTS. The OTS has postponed the date that the component will first be deducted from an institution's total capital. At March 31, 2000, the Bank had tangible capital of $13.2 million, or 9.43% of adjusted total assets, which is approximately $11.1 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. At March 31, 2000, the Bank had core capital equal to $13.2 million, or 9.43% of adjusted total assets, which is $7.6 million above the minimum leverage ratio requirement of 4% as in effect on that date. At that date, the Bank had total risk based capital of $13.5 million (including approximately $13.2 million in core capital and $304,000 in qualifying supplementary capital) and risk-weighted assets of $72.4 million (with no converted off-balance sheet assets); or total capital of 18.63% of risk-weighted assets. This amount was $7.7 million above the 8% requirement in effect on that date. Prompt Corrective Regulatory Action Each federal banking agency is required to implement a system of prompt corrective action for institutions that it regulates. The federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action. Under the regulations, an institution shall be deemed to be "well capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not required to meet and maintain a specific capital level for any capital measure;"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, has a Tier I risk-based capital ratio of 4.0% or more, has a leverage ratio of 4.0% or more, or 3.0% under certain circumstances, and does not meet the definition of "well capitalized"; "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, has a Tier I risk-based capital ratio that is less than 4.0% or has a leverage ratio that is less than 4.0%, or 3.0% under certain circumstances; "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, has a Tier I risk-based capital ratio that is less than 3.0% or has a leverage ratio that is less than 3.0%; and "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. A federal banking agency may, after notice and an opportunity for a hearing, reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category if the institution is in an unsafe or unsound condition or has received in its most recent examination, and has not corrected, a less than satisfactory rating for asset quality, management, earnings or liquidity. The OTS may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized. An institution generally must file a written capital restoration plan that meets specified requirements, as well as a performance guaranty by each company that controls the institution, with the appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Immediately upon becoming undercapitalized, an institution shall face various mandatory and discretionary restrictions on its operations. 27 At March 31, 2000, the Bank was categorized as "well capitalized"under the prompt corrective action regulations. Standards for Safety and Soundness The federal banking regulatory agencies have adopted regulatory guidelines for all insured depository institutions relating to internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. The guidelines outline the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that the Bank fails to meet any standard prescribed by the guidelines, it may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard. OTS regulations establish deadlines for the submission and review of safety and soundness compliance plans. Capital Distributions OTS regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. Under new regulations effective April 1, 1999, a savings institution must file an application for OTS approval of the capital distribution if either (1) the total capital distributions for the applicable calendar year exceed the sum of the institution's net income for that year to date plus the institution's retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute, regulation, agreement or OTS-imposed condition, or (4) the institution is not eligible for expedited treatment of its filings. If an application is not required to be filed, savings institutions which are a subsidiary of a holding company, as well as certain other institutions, must still file a notice with the OTS at least 30 days before the board of directors declares a dividend or approves a capital distribution. Liquidity All savings associations, including the Bank, are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. This liquid asset ratio requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At the present time, the minimum liquid asset ratio is 5%. In addition, short-term liquid assets (e.g., cash, certain time deposits, certain bankers acceptances and short-term United States Treasury obligations) currently must constitute at least 1% of the association's average daily balance of net withdrawable deposit accounts and current borrowings. Penalties may be imposed upon associations for violations of either liquid asset ratio requirement. At March 31, 2000, the Bank was in compliance with both requirements, with an overall liquid asset ratio of 33.8% and a short-term liquid assets ratio of 24.4%. 28 Accounting An OTS policy statement applicable to all savings associations clarifies and re-emphasizes that the investment activities of a savings association must be in compliance with approved and documented investment policies and strategies, and must be accounted for in accordance with GAAP. Under the policy statement, management must support its classification of and accounting for loans and securities (i.e., whether held for investment, sale or trading) with appropriate documentation. The OTS has adopted an amendment to its accounting regulations, which may be more stringent than GAAP, to require that transactions be reported in a manner that best reflects their underlying economic substance and inherent risk and that financial reports must incorporate any other accounting regulations or orders prescribed by the OTS. The Bank is in compliance with these amended rules. Qualified Thrift Lender Test All savings associations are required to meet a qualified thrift lender test to avoid certain restrictions on their operations. A savings institution that fails to become or remain a qualified thrift lender shall either convert to a national bank charter or face the following restrictions on its operations. These restrictions are: the association may not make any new investment or engage in activities that would not be permissible for national banks; the association may not establish any new branch office where a national bank located in the savings institution's home state would not be able to establish a branch office; the association shall be ineligible to obtain new advances from any Federal Home Loan Bank; and the payment of dividends by the association shall be under the rules regarding the statutory and regulatory dividend restrictions applicable to national banks. Also, beginning three years after the date on which the savings institution ceases to be a qualified thrift lender, the savings institution would be prohibited from retaining any investment or engaging in any activity not permissible for a national bank and would be required to repay any outstanding advances to any Federal Home Loan Bank. In addition, within one year of the date on which a savings association controlled by a company ceases to be a qualified thrift lender, the company must register as a bank holding company and follow the rules applicable to bank holding companies. A savings institution may requalify as a qualified thrift lender if it thereafter complies with the test. Currently, the qualified thrift lender test requires that either an institution qualify as a domestic building and loan association under the Internal Revenue Code or that 65% of an institution's "portfolio assets" consist of certain housing and consumer-related assets on a monthly average basis in nine out of every 12 months. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage-backed securities where the mortgages are secured by domestic residential housing or manufactured housing; Federal Home Loan Bank stock; direct or indirect obligations of the FDIC; and loans for educational purposes, loans to small businesses and loans made through credit cards. In addition, the following assets, among others, may be included in meeting the test based on an overall limit of 20% of the savings institution's portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; 100% of consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio assets consist of total assets minus the sum of goodwill and other intangible assets, property used by the savings institution to conduct its business, and liquid assets up to 20% of the institution's total assets. At March 31, 2000, the Bank was in compliance with the qualified thrift lender test. 29 Community Reinvestment Act Savings associations are required to follow the provisions of the Community Reinvestment Act of 1977, which requires the appropriate federal bank regulatory agency, in connection with its regular examination of a savings association, to assess the savings association's record in meeting the credit needs of the community serviced by the savings associations, including low and moderate income neighborhoods. The regulatory agency's assessment of the savings association's record is made available to the public. Further, an assessment is required of any savings associations which has applied, among other things, to establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. The Bank received a "satisfactory" rating as a result of its most recent examination. Activities of Associations and Their Subsidiaries A savings association may establish operating subsidiaries to engage in any activity that the savings association may conduct directly and may establish service corporation subsidiaries to engage in certain pre- approved activities or, with approval of the OTS, other activities reasonably related to the activities of financial institutions. When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings association must notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices. Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the Savings Association Insurance Fund. If so, it may require that no Savings Association Insurance Fund member engage in that activity directly. Transactions with Affiliates Savings associations must comply with Sections 23A and 23B of the Federal Reserve Act relative to transactions with affiliates in the same manner and to the same extent as if the savings association were a Federal Reserve member bank. A savings and loan holding company, its subsidiaries and any other company under common control are considered affiliates of the subsidiary savings association under the Home Owners Loan Act. Generally, Sections 23A and 23B limit the extent to which the insured association or its subsidiaries may engage in certain covered transactions with an affiliate to an amount equal to 10% of the institution's capital and surplus and place an aggregate limit on all transactions with affiliates to an amount equal to 20% of capital and surplus, and require that all transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term"covered transaction" includes the making of loans, the purchase of assets, the issuance of a guarantee and similar types of transactions. Any loan or extension of credit by the Bank to an affiliate must be secured by collateral in accordance with Section 23A. 30 Three additional rules apply to savings associations. First, a savings association may not make any loan or other extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies. Second, a savings association may not purchase or invest insecurities issued by an affiliate, other than securities of a subsidiary. Third, the OTS may, for reasons of safety and soundness, impose more stringent restrictions on savings associations but may not exempt transactions from or otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted only by the Federal Reserve, as is currently the case with respect to all FDIC-insured banks. The Bank's authority to extend credit to executive officers, directors and 10% shareholders, as well as entities controlled by those persons, is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation O thereunder. Among other things, these regulations require that loans be made on terms and conditions substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. Regulation O also places individual and aggregate limits on the amount of loans the Bank may make to those persons based, in part, on the Bank's capital position, and requires certain board approval procedures to be followed. The OTS regulations, with certain minor variances, apply Regulation O to savings institutions. Holding Company Regulation The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over holding companies and their non-savings association subsidiaries which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. Federal law and regulation generally prohibit a savings and loan holding company, without prior OTS approval, from acquiring more than 5% of the voting stock of any other savings association or savings and loan holding company or controlling the assets thereof. They also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of the Company from acquiring control of any savings association not a subsidiary of a savings and loan holding company, unless the acquisition is approved by the OTS. Until recently, a unitary savings and loan holding company was not restricted as to the types of business activities in which it could engage, provided that its subsidiary savings association continued to be a qualified thrift lender. Recent legislation, however, restricts unitary saving and loan holding companies not existing or applied for before May 4, 1999 to activities permissible for a financial holding company as defined under the legislation, including insurance and securities activities, and those permitted for a multiple savings and loan holding company as described below. The Company has certain grandfather rights under this legislation. Upon any non-supervisory acquisition by the Company of another savings association as a separate subsidiary, the Company would become a multiple savings and loan holding company and would have extensive limitations on the types of business activities in which it could engage. The Home Owner's Loan Act limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for the bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, provided the prior approval of the Office of Thrift Supervision is obtained, and to other activities authorized by Office of Thrift Supervision regulation. Multiple savings and loan holding companies are generally prohibited from acquiring or retaining more than 5% of a non-subsidiary company engaged in activities other than those permitted by the Home Owners. Loan Act. 31 The activities authorized by the Federal Reserve Board as permissible for bank holding companies also must be approved by the OTS prior to being engaged in by a multiple savings and loan holding company. If the Bank fails the QTL test, the Company must obtain the approval of the OTS prior to continuing after such failure, directly or through its other subsidiaries, any business activity other than those approved for multiple savings and loan holding companies or their subsidiaries. In addition, within one year of such failure the Company must register as, and will become subject to, the restrictions applicable to bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a unitary or multiple savings and loan holding company. See "--Qualified Thrift Lender Test." Federal Securities Law The stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Company stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. Federal Reserve System The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). At March 31, 2000, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS. See "--Liquidity." Savings associations are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve Board regulations require associations to exhaust other reasonable alternative sources of funds, including FHLB borrowings, before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System The Bank is a member of the FHLB of Des Moines, which is one of 12 regional FHLBs, that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB. These policies and procedures are subject to the regulation and oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines. At March 31, 2000, the Bank had $2.0 million of FHLB stock, which was in compliance with this requirement. 32 In past years, the Bank has received substantial dividends on its FHLB stock. Over the past five fiscal years such dividends have averaged 6.81% and were 6.40% for fiscal 2000. For the fiscal year ended March 31, 2000, dividends paid by the FHLB of Des Moines to the Bank totaled approximately $129,000, which constitutes a $5,000 increase over the amount of dividends received in fiscal year 1999. No assurance can be given that such dividends will continue in the future at such levels. Under federal law, the FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to low- and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank's FHLB stock may result in a corresponding reduction in the Bank's capital. Federal and State Taxation Federal Taxation. Savings associations such as the Bank that met certain definitional tests relating to the composition of assets and other conditions prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), have been permitted to establish reserves for bad debts and to make annual additions thereto which, within specified formula limits, were taken as a deduction in computing taxable income for federal income tax purposes. The amount of the bad debt reserve deduction for "non-qualifying loans" was computed under the experience method. For tax years beginning before December 31, 1995, the amount of the bad debt reserve deduction for "qualifying real property loans" (generally, loans secured by improved real estate) was computed under either the experience method or the percentage of taxable income method (based on an annual election). If a savings association elected the latter method, it could claim, each year, a deduction based on a percentage of taxable income, without regard to actual bad debt experience. Under the experience method, the bad debt reserve deduction is an amount determined under a formula based generally upon the bad debts actually sustained by the savings association over a period of years. The percentage of taxable income method was repealed for years beginning after December 31, 1995, and "large" associations, i.e., the quarterly average of the association's total assets or of the consolidated group of which it is a member, exceeds $500 million for the year, may no longer be entitled to use the experience method of computing additions to their bad debt reserve. A "large" association must use the direct write-off method for deducting bad debts, under which charge-offs are deducted and recoveries are taken into taxable income as incurred. Since the Bank is not a "large" association, the Bank will continue to be permitted to use the experience method. The Bank will be required to recapture (i.e., take into income) over a six-year period its applicable excess reserves, i.e, the balance of its reserves for losses on qualifying loans and nonqualifying loans, as of March 31, 1996, the close of the last tax year beginning before January 1, 1996, over the greater of (a) the balance of such reserves as of December 31, 1987 (pre-1988 reserves) or (b) in the case of a bank which is not a "large" association, an amount that would have been the balance of such reserves as of the close of the last tax year beginning before January 1, 1996, had the bank always computed the additions to its reserves using the experience method. Postponement of the recapture is possible for a two-year period if an association meets a minimum level of mortgage lending for 1996 and 1997. As of March 31, 2000, the Bank's bad debt reserve subject to recapture over a six-year period totaled approximately $282,000. 33 If an association ceases to qualify as a "bank" (as defined in Code Section 581) or converts to a credit union, the pre-1988 reserves and the supplemental reserve are restored to income ratably over a six-year period, beginning in the tax year the association no longer qualifies as a bank. The balance of the pre-1988 reserves are also subject to recapture in the case of certain excess distributions to (including distributions on liquidation and dissolution), or redemptions of, shareholders. In addition to the regular federal income tax, corporations, including savings associations such as the Bank, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable income. For taxable years beginning after 1986 and before 1996, corporations, including savings associations such as the Bank, were also subject to an environmental tax equal to 0.12% of the excess of alternative minimum taxable income for the taxable year (determined without regard to net operating losses and the deduction for the environmental tax) over $2 million. To the extent earnings appropriated to a savings association's bad debt reserves for "qualifying real property loans" and deducted for federal income tax purposes exceed the allowable amount of such reserves computed under the experience method and to the extent of the Bank's supplemental reserves for losses on loans ("Excess"), such Excess may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). As of March 31, 2000, the Bank's excess for tax purposes totaled approximately $1.6 million. The Company and its subsidiaries file consolidated federal income tax returns on a fiscal year basis using the accrual method of accounting. Savings associations, such as the Bank, that file federal income tax returns as part of a consolidated group were required by applicable Treasury regulations to reduce their taxable income for purposes of computing the now expired percentage bad debt deduction for losses attributable to activities of the non-savings association members of the consolidated group that were functionally related to the activities of the savings association member. The Bank has not been audited by the IRS recently with respect to federal income tax returns. In the opinion of management, any examination of still open returns would not result in a deficiency which could have a material adverse effect on the financial condition of the Bank. Missouri Taxation. The State of Missouri has a corporate income tax; however, savings associations are exempt from such tax. Missouri-based thrift institutions, such as the Bank, are subject to a special financial institutions tax, based on net income without regard to net operating loss carryforwards, at the rate of 7% of net income as defined in the Missouri statutes. This tax is a prospective tax for the privilege of the Bank exercising its corporate franchise within the state, based on its net income for the preceding year. The tax is in lieu of all other state taxes on thrifts, except taxes on real estate, tangible personal property owned by the taxpayer and held for lease or rental to others, certain payroll taxes, and sales and use taxes. 34 Delaware Taxation. As a Delaware holding company, the Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual fee to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware. Competition Hardin Federal faces strong competition, both in originating real estate loans and in attracting deposits. Competition in originating real estate loans comes primarily from commercial banks, credit unions and savings institutions located in the Bank's market area. Commercial banks, credit unions and savings institutions provide vigorous competition in consumer lending. The Bank competes for real estate and other loans principally on the basis of the quality of services it provides to borrowers, the interest rates and loan fees it charges, and the types of loans it originates. See "Business--Lending Activities." The Bank attracts all of its deposits through its retail banking offices, primarily from the communities in which those retail banking offices are located. Therefore, competition for those deposits is principally from retail brokerage offices, commercial banks, credit unions and savings institutions located in these communities. The Bank competes for these deposits by offering a variety of account alternatives at competitive rates and by providing convenient business hours, branch locations and interbranch deposit and withdrawal privileges. The Bank serves primarily Ray and Clay Counties, Missouri. There are six commercial banks, one savings institution, and one credit union which compete for deposits and loans in Ray County, Missouri. In Clay County, Missouri, there are approximately 36 commercial banks, 44 credit unions, and 10 savings institutions, other than Hardin Federal, which compete for deposits and loans in Clay County, Missouri. Employees At March 31, 2000, the Bank had a total of 31 full-time and 5 part-time employees. The Bank's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Executive Officers of the Company and the Bank Who Are Not Directors Lyndon M. Goodwin. Mr. Goodwin, age 55, is currently Vice President of the Bank responsible for the supervision of all lending operations of the Bank. Prior to joining the Bank in 1994, Mr. Goodwin was a County Supervisor of the United States Department of Agriculture, Farmer's Home Administration, for 28 years. J. Michael Schwarz. Mr. Schwarz, age 56, joined the Bank in January 1997 as Vice President of Lending at the Excelsior Springs Branch. Mr. Schwarz previously was employed as Executive Vice President of Lawson Bank, Lawson, Missouri. 35 Item 2. Description of Property ----------------------- The Bank conducts its business through three offices, which are located in Ray and Clay Counties, Missouri. The Bank owns its main office and its Richmond and Excelsior Springs, Missouri branch offices. The following table sets forth information relating to each of the Bank's offices as of March 31, 2000. The total net book value of the Bank's premises and equipment (including land, buildings and leasehold improvements and furniture, fixtures and equipment) at March 31, 2000 was approximately $1.8 million. See Note 5 of the Notes to Consolidated Financial Statements. Total Approximate Date Square Net Book Value at Location Acquired Footage March 31, 2000 ---------------------------- -------- ------- -------------- Main Office: 1963 4600 62,128 201 Northeast Elm Street Hardin, Missouri Branch Offices:(1) 201 North Jesse James Road 1990 2024 591,842 Excelsior Springs, Missouri 200 N. Spartan Drive 1998 6800 1,123,941 Richmond, Missouri ---------------- (1) The Bank constructed an approximate 6800 sq. foot branch office facility located at 200 N. Spartan Drive, Richmond, Missouri, which opened for business on March 31, 1998. At that time, the Bank closed its branch office which was located at 208 West Main Street in Richmond, Missouri. Hardin Federal believes that its current facilities are adequate to meet the present and foreseeable needs of the Bank and the Holding Company. The Bank maintains an on-line data base with an independent service bureau servicing financial institutions. Item 3. Legal Proceedings ----------------- The Company and Hardin Federal are involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of their businesses. While the ultimate outcome of these proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing Hardin Federal and the Company in the proceedings, that the resolution of these proceedings should not have a material effect on the Company's financial position or results of operations on a consolidated basis. 36 Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended March 31, 2000. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters ------------------------------------------------------------- Page 43 of the attached 2000 Annual Report to Shareholders is herein incorporated by reference. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------------------------- Pages 5 to 16 of the attached 2000 Annual Report to Shareholders are herein incorporated by reference. Item 7. Financial Statements Pages 17 to 42 of the attached 2000 Annual Report to Shareholders are herein incorporated by reference. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ----------------------------------------------------------- There has been no Current Report on Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. PART III -------- Item 9. Directors and Executive Officers of the Registrant -------------------------------------------------- Information concerning Directors of the Registrant is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on July 27, 2000. Item 10. Executive Compensation ---------------------- Information concerning executive compensation is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on July 27, 2000. Item 11. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on July 27, 2000. 37 Item 12. Certain Relationships and Related Transactions ---------------------------------------------- Information concerning certain relationships and transactions is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on July 27, 2000. PART IV ------- Item 13. Exhibits List and Reports on Form 8-K ------------------------------------- (a) (1) Financial Statements: ----------------------------- The following information appearing in the Registrant's Annual Report to Shareholders for the year ended March 31, 2000, is incorporated by reference in this Form 10-KSB Annual Report as Exhibit 13.
Page in Annual Annual Report Section Report --------------------- ------ Report of Independent Auditors............................................................... 17 Consolidated Balance Sheets at March 31, 2000 and 1999....................................... 18 Consolidated Statements of Earnings for the Years ended March 31, 2000, 1999 and 1998........ 19 Consolidated Statements of Stockholders' Equity for the Years ended March 31, 2000, 1999 and 1998............................................................... 20 Consolidated Statements of Cash Flows for the Years ended March 31, 2000, 1999 and 1998.............................................................................. 21 Notes to Consolidated Financial Statements................................................... 23
(a) (2) Financial Statement Schedules: -------------------------------------- All financial statement schedules have been omitted as the information is not required under the related instructions or is inapplicable. (a) (3) Exhibits: ----------------- 38 Reference to Regulation Prior Filing or S-B Exhibit Exhibit Number Number Document Attached Hereto ----------- -------------------------------------- ----------------- 2 Plan of acquisition, reorganization, None arrangement, liquidation or succession 3 Certificate of Incorporation and Bylaws * 4 Instruments defining the rights of * security holders, including indentures 9 Voting trust agreement None 10.1 1995 Stock Option and Incentive Plan ** 10.2 Employment Agreement with Robert W. King * 10.3 Employment Agreement with Karen K. * Blankenship 10.4 Employee Stock Ownership Plan * 10.5 Recognition and Retention Plan ** 10.6 Deferred Compensation Agreement * 10.7 Compensation Agreement with Directors * 11 Statement re: computation of per None share earnings 12 Statement re: computation or ratios Not required 13 Annual Report to Security Holders 13 16 Letter re: change in certifying None accountant 18 Letter re: change in accounting None principles 21 Subsidiaries of Registrant 21 22 Published report regarding matters None submitted to vote of security holders 39 Reference to Regulation Prior Filing or S-B Exhibit Exhibit Number Number Document Attached Hereto ----------- -------------------------------------- ----------------- 23 Consent of experts and counsel 23 24 Power of Attorney Not Required 27 Financial Data Schedule 27 28 Information from reports furnished to None State insurance regulatory authorities 99 Additional exhibits None ------------------- *Filed on June 23, 1995, as exhibits to the Registrant's Form S-1 registration statement (Registration No. 33-93888), pursuant to the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. **Filed on March 18, 1996, as exhibits to the Registrant's definitive proxy statement relating to the Registrant's special meeting of stockholders held on April 16, 1996. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. (b) Reports on Form 8-K: ------------------------ No current reports on Form 8-K were filed by the Company during the three months ended March 31, 2000. 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARDIN BANCORP, INC. Date: June 28, 2000 By: /s/ Robert W. King ------------------------------- Robert W. King (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ Robert W. King By: /s/ Ivan R. Hogan -------------------------------------- ---------------------------- Robert W. King, President Ivan R. Hogan Chief Executive Officer and Director Chairman of the Board Date: June 28, 2000 Date: June 28, 2000 By: /s/ Karen K. Blankenship By: /s/ David K. Hatfield -------------------------------------- ---------------------------- Karen K. Blankenship, Senior Vice David K. Hatfield, Director President, Secretary and Director (Principal Accounting Officer) Date: June 28, 2000 Date: June 28, 2000 By: /s/ David D. Lodwick By: /s/ W. Levan Thurman -------------------------------------- ---------------------------- David D. Lodwick, Director W. Levan Thurman, Director Date: June 28, 2000 Date: June 28, 2000 By: /s/ William L. Homan -------------------------------------- William L. Homan, Vice President, Treasurer and Director (Principal Financial Officer) Date: June 28, 2000 EXHIBIT INDEX 3 Certificate of Incorporation and Bylaws* 4 Instruments defining the rights of security holders, including indentures* 10.1 1995 Stock Option and Incentive Plan** 10.2 Employment Agreement with Robert W. King* 10.3 Employment Agreement with Karen K. Blankenship* 10.4 Employee Stock Ownership Plan* 10.5 Recognition and Retention Plan** 10.6 Deferred Compensation Agreement* 10.7 Compensation Agreement with Directors* 13 Annual Report to Security Holders 21 Subsidiaries of Registrant 23 Consent of experts and counsel 27 Financial Data Schedule --------------- *Filed on June 23, 1995, as exhibits to the Registrant's Form S-1 registration statement (Registration No. 33-93888), pursuant to the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. **Filed on March 18, 1996, as exhibits to the Registrant's definitive proxy statement relating to the Registrant's special meeting of stockholders held on April 16, 1996. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B.