-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ATbUuUNxBFX7m0MAqlRGnNR2T3obtfemjgKWbh7/bvkpXDMPDDxx2ik7tdWOtIJS b414xdBv5qbz5A2QZmDFHA== 0000928385-96-000832.txt : 19960629 0000928385-96-000832.hdr.sgml : 19960629 ACCESSION NUMBER: 0000928385-96-000832 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960627 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARDIN BANCORP INC CENTRAL INDEX KEY: 0000947220 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 431719104 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26560 FILM NUMBER: 96587346 BUSINESS ADDRESS: STREET 1: 2ND & ELM STS STREET 2: P O BOX 608 CITY: HARDIN STATE: MO ZIP: 64035 BUSINESS PHONE: 8163984312 MAIL ADDRESS: STREET 1: 2ND & ELM STS STREET 2: P O BOX 608 CITY: HARDIN STATE: MO ZIP: 64035 10-K 1 FORM 10-K 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 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED MARCH 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 Identification or organization) No.) 2nd and Elm Streets, Hardin, Missouri 64035 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (816) 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, 1996 were $5.8 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, 1996, was $11.7 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, 1996, there were issued and outstanding 1,058,000 shares 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, 1996. Part III of Form 10-KSB - Portions of the Proxy Statement for 1996 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, 1996, Hardin Federal had total assets of $83.4 million, deposits of $66.6 million and total equity of $16.0 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 2nd and Elm Street, Hardin, Missouri 64035. Its telephone number at that address is (816) 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. 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 2 primary market area are engaged in agricultural, light industry, medical services and education, and include Ford Motor Co., Orbseal, Inc., American Italian Pasta Co., Ray County Memorial Hospital, Excelsior Springs Community Hospital, and the Richmond R16 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, 1996, the Bank's gross loans and mortgage- backed securities outstanding totalled $70.1 million, of which $38.4 million or 54.8% were one-to four-family residential mortgage loans. Of the one- to four-family mortgage loans outstanding at that date, 48.3% were fixed-rate loans, and 51.7% were adjustable-rate loans. At that same date, consumer loans totalled $4.5 million or 6.5% of the Bank's total loan portfolio, construction loans totalled $2.7 million or 3.7% of the Bank's total loan and mortgage-backed securities portfolio, commercial real estate loans totalled $184,000 or 0.26% of the Bank's total loan and mortgage-backed securities portfolio and land acquisition loans totalled $123,000 or 0.17% of the Bank's total loan and mortgage-backed securities portfolio. The Bank also invests in mortgage-backed securities. At March 31, 1996, mortgage-backed securities totalled $24.2 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, 1996, the maximum amount which the Bank could have lent under this limit to any one borrower and the borrower's related entities was approximately $2.4 million. At March 31, 1996, 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, 1996 was $827,080 secured by several one- to four-family real estate dwellings located in Boone County, Missouri. At March 31, 1996, 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, ----------------------------------------------------------- 1996 1995 1994 ---------------- ---------------- ------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Real Estate Loans: - ------------------ One- to four-family..................... $38,395 54.76% $28,969 46.66% $25,531 40.95% Land.................................... 123 0.18 101 0.16 67 0.11 Commercial.............................. 184 0.26 157 0.25 220 0.35 Construction............................ 2,674 3.81 358 0.58 703 1.13 ------- ------ ------- ------ ------- ------ Total real estate loans............. 41,376 59.01 29,585 47.65 26,521 42.54 ------- ------ ------- ------ ------- ------ Consumer Loans: - --------------- Consumer Loans: Secured by deposits.................... 678 0.96 628 1.01 796 1.28 Automobile............................. 1,316 1.88 1,098 1.77 726 1.16 Home equity............................ 1,535 2.19 1,158 1.87 971 1.56 Home improvement....................... 693 0.99 581 0.94 425 0.68 Other consumer loans................... 313 0.45 568 0.90 165 0.26 ------- ------ ------- ------ ------- ------ Total consumer loans................ 4,535 6.47 4,033 6.49 3,083 4.94 ------- ------ ------- ------ ------- ------ Total loans receivable.............. 45,911 65.48 33,618 54.14 29,604 47.48 ------- ------ ------- ------ ------- ------ Mortgage-Backed Securities: - --------------------------- GNMA.................................... 2,142 3.05 2,476 3.99 2,201 3.53 FHLMC................................... 9,044 12.90 11,079 17.84 12,287 19.71 FNMA.................................... 13,020 18.57 14,918 24.03 18,255 29.28 ------- ------ ------- ------ ------- ------ Total mortgage-backed securities.... 24,206 34.52 28,473 45.86 32,743 52.52 ------- ------ ------- ------ ------- ------ Total loan and mortgage-backed securities portfolio........ 70,117 100.00% 62,091 100.00% 62,347 100.00% ====== ====== ====== Less: - ---- Loans in process......................... (766) (247) (335) Deferred fees and discounts.............. 17 (22) (47) Allowance for loan losses................ (131) (119) (117) ------- ------- ------- Total loan and mortgage- backed securities portfolio, net.. $69,237 $61,703 $61,848 ======= ======= =======
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, ----------------------------------------------------------- 1996 1995 1994 ------------------ ----------------- ------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Fixed-Rate Loans: - ----------------- Real estate: One- to four-family................ $18,542 26.44% $12,308 19.82% $11,299 18.12% Land............................... 86 .12 82 0.13 46 0.08 Commercial......................... 67 .10 44 0.07 61 0.10 Construction....................... 1,805 2.57 189 0.31 221 0.35 ------- ------ ------- ------ ------- ------ Total real estate loans......... 20,500 29.23 12,623 20.33 11,627 18.65 Consumer............................. 4,442 6.34 4,027 6.49 3,076 4.94 Mortgage-backed securities........... 588 .84 350 0.56 426 0.68 ------- ------ ------- ------ ------- ------ Total fixed-rate................ 25,530 36.41 17,000 27.38 15,129 24.27 ------- ------ ------- ------ ------- ------ Adjustable-Rate Loans: - ---------------------- Real estate: One- to four-family................ 19,853 28.31 16,661 26.84 14,232 22.83 Land............................... 37 .05 19 0.03 21 0.03 Commercial......................... 117 .17 113 0.18 159 0.26 Construction....................... 869 1.24 169 0.27 482 0.77 ------- ------ ------- ------ ------- ------ Total real estate loans......... 20,876 29.77 16,962 27.32 14,894 23.89 Consumer............................. 93 .14 6 0.01 7 0.01 Mortgage-backed securities........... 23,618 33.68 28,123 45.29 32,317 51.83 ------- ------ ------- ------ ------- ------ Total adjustable rate........... 44,587 63.59 45,091 72.62 47,218 75.73 ------- ------ ------- ------ ------- ------ Total loan and mortgage-backed securities portfolio.......... 70,117 100.00% 62,091 100.00% 62,347 100.00% ====== ====== ====== Less: - ----- Loans in process.................... (766) (247) (335) Deferred loan fees and discounts.... 17 (22) (47) Allowance for loan losses........... (131) (119) (117) ------- ------- ------- Total loans and mortgage-backed securities portfolio, net...... $69,237 $61,703 $61,848 ======= ======= =======
5 The following schedule illustrates the contractual maturity and weighted average rates of the Bank's loan portfolio at March 31, 1996. 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 Land -------------------- -------------------- ---------------------- -------------------- Due During Weighted Weighted Weighted Weighted Year Ending Average Average Average Average March 31, Amount Rate Amount Rate Amount Rate Amount Rate - ------------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in Thousands) 1997/(1)/.................... $ 9 7.89% $ 207 7.66% $ - --% $ - --% 1998......................... 103 9.09 -- -- 1 10.00 - -- 1999......................... 153 8.42 -- -- - -- - -- 2000 and 2001................ 316 9.17 -- -- 9 9.75 7 10.00 2002 to 2006................. 3,899 8.41 29 9.50 95 9.00 96 10.00 2006 to 2021................. 24,862 8.15 1,413 8.51 79 9.79 20 8.75 2022 and following........... 9,053 7.94 1,025 8.04 - -- - -- ------- ------- ----- ------ $38,395 $ 2,674 $ 184 $ 123 ======= ======= ===== ====== Consumer Total ---------------------- ------------------- Due During Weighted Weighted Year Ending Average Average March 31, Amount Rate Amount Rate - ------------- ------ -------- ------ ---- 1997/(1)/.................... $ 1,063 8.42% $ 1,279 8.29% 1998......................... 358 9.64 462 9.53 1999......................... 560 9.68 713 9.41 2000 and 2001................ 1,155 9.56 1,487 9.48 2002 to 2006................. 1,266 9.85 5,385 8.79 2006 to 2021................. 106 9.06 26,480 8.19 2022 and following........... 27 8.56 10,105 7.95 ------ -------- $ 4,535 $ 45,911 ====== ========
_______________________ /(1)/The total amount of loans due after March 31, 1997 which have predetermined interest rates is $23.7 million while the total amount of loans due after such date which have floating or adjustable interest rates is $20.9 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, 1996, the Bank's one- to four-family residential mortgage loans totalled $38.4 million, or 54.8%, 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, 1996 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, 1996, the Bank originated $7.5 million of fixed- rate loans or 89.5% of one-to four-family loans originated and $0.9 million of adjustable-rate real estate loans or 10.5% of one- to four-family loans originated, all of which were secured by one- to four-family residential real estate. 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 1.0% at any adjustment date and 5.0% 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. 7 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, 1996, the total balance of one-to four-family adjustable-rate loans was $19.9 million or 28.3% of the Bank's gross loan and mortgage-backed securities portfolio. See "-Originations, Purchases and Sales of Loans." 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, 1996, the total balance of one- to four-family fixed-rate loans was $18.5 million or 26.4% 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, 1996, the Bank's consumer loan portfolio totalled $4.5 million, or 6.5% 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, 1996, home equity and home improvement loans amounted to $1.5 million and $693,000, respectively, which represented 2.19% and 0.99%, respectively, of the Bank's gross loan and mortgage-backed securities portfolio. 8 The Bank also recently began originating equity lines of credit. These loans are generally limited to 80% or less of the appraised value of the property securing the loan. 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. These loans are all adjustable-rate loans and have maximum terms of up to 20 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 80% of dealer cost and loans on used vehicles are made in amounts up to its published value, less certain adjustments. At March 31, 1996, the Bank's automobile loans totalled $1.3 million or 1.88% of the Bank's gross loan and mortgage-backed securities portfolio. 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, 1996, none 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, 1996, the Bank had $2.7 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, 1996, the Bank had $1.8 million and $869,000 of fixed-rate and adjustable-rate construction loans, respectively, which represented 2.57% and 1.24%, respectively, of the Bank's gross loan and mortgage-backed securities portfolio. During the year ended March 31, 1996, the Bank purchased $1.2 million of construction loans. These loans are secured by small multi-family dwelling units, a strip mall and a residential care facility. 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. At March 31, 1996, none of these loans was non-performing. 9 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, 1996 approximately $184,000, or 0.26% 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 permanent loan on an office building in Ray 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. 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. 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, 1996, the Bank originated $12.8 million in fixed-rate loans and $1.1 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 fiscal 1994. In early fiscal 1995, the Bank changed its policy to retain fixed-rate loan originations in 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 40% of total loans receivable. At March 31, 1996, fixed-rate loans comprised 36.41% of gross loan and mortgage-backed 10 securities portfolio. Reflecting these policies, during the fiscal years ended March 31, 1996, 1995 and 1994, the Bank sold $0, $234,000, and $4.9 million, respectively, of one- to four-family fixed-rate real estate loans. Sales of these loans generally are beneficial to the Bank since these sales produce future servicing income, provide funds for additional lending and other investments and increase liquidity. During fiscal year 1996, the Bank purchased $7.5 million of real estate loans originated by other lenders all of which were secured by properties located in Missouri. At March 31, 1996, none of these loans was 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, 1996 were substantially 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, ---------------------------- 1996 1995 1994 -------- -------- -------- (In Thousands) Originations by type: - -------------------- Adjustable rate: One- to four-family................... $ 886 $ 4,746 $ 3,070 Land.................................. 20 -- -- Commercial............................ -- -- -- Construction.......................... 229 -- -- Consumer.............................. -- -- -- ------- ------- ------- Total adjustable-rate.......... 1,135 4,746 3,070 ------- ------- ------- Fixed rate:............................. One- to four-family................... 7,406 2,325 9,549 Land.................................. 11 49 6 Commercial............................ -- -- -- Construction.......................... 1,502 273 258 Consumer.............................. 3,864 4,055 3,008 ------- ------- ------- Total fixed-rate............... 12,783 6,702 12,821 ------- ------- ------- Total loans originated......... 13,918 11,448 15,891 ------- ------- ------- ........................................ Purchases:.............................. - --------- One- to four-family................... 5,810 789 -- Five or more.......................... 491 -- -- Commercial............................ 640 -- -- Mortgage-backed securities - at cost.. 523 1,276 6,080 ------- ------- ------- Total purchased................ 7,464 2,065 6,080 ------- ------- ------- Sales and Repayments: - -------------------- One- to four-family................... -- 234 4,862 Mortgage-backed securities sold - at amortized cost...................... -- -- 700 ------- ------- ------- Total sales.................... -- 234 5,562 ------- ------- ------- Principal repayments.................. 13,356 13,535 17,395 ------- ------- ------- Total sales and repayments..... 13,356 13,769 22,957 ------- ------- ------- Decrease (increase) in other items: Loans in process...................... (519) 88 42 Deferred fees and discounts........... 39 25 58 Allowance for loan losses............. (12) (2) (24) ------- ------- ------- Net increase (decrease)........ $ 7,534 $ (145) $ (910) ======= ======= =======
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, 1996. 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.. 3 $76 0.20% 2 $122 0.32% 5 $198 0.52% Land................. -- -- -- -- -- -- -- -- -- Commercial........... -- -- -- -- -- -- -- -- -- Construction......... -- -- -- -- -- -- -- -- -- Consumer............... 1 6 0.13 -- -- -- 1 6 0.13 ------ ------ -------- ------ ------ ---------- -------- ----------- -------- Total............. 4 $82 0.33% 2 $122 0.32% 6 $204 0.65% ====== ====== ======== ====== ====== ========== ======== =========== ========
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, ------------------------------ 1996 1995 1994 ------- ------ ------ (In Thousands) Non-accruing loans: One- to four-family....................... $ 93 $ 109 $ 96 Land...................................... -- -- -- Commercial................................ -- -- -- Construction.............................. -- -- -- Consumer.................................. -- -- -- ----- ----- ----- Total.................................. 93 109 96 ----- ----- ----- Accruing loans delinquent 90 days or more: One- to four-family....................... 29 59 75 Land...................................... -- -- -- Commercial................................ -- -- -- Construction.............................. -- -- -- Consumer.................................. -- -- -- ----- ----- ----- Total.................................. 29 59 75 ----- ----- ----- Foreclosed assets: One- to four-family....................... -- -- 11 Land...................................... -- -- -- Commercial................................ -- -- -- Construction.............................. -- -- -- Consumer.................................. 2 -- -- ----- ----- ----- Total.................................. 2 -- 11 ----- ----- ----- Total non-performing assets................. $ 124 $ 168 $ 182 ===== ===== ===== Total classified assets..................... $ 412 $ 480 $ 434 ===== ===== ===== Total non-performing assets as a percentage of total assets................ 0.15% 0.22% 0.24% ===== ===== ===== Total non-performing loans as a percentage of total loans receivable...... 0.29% 0.50% 0.58% ===== ===== =====
For the year ended March 31, 1996 gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $11,000. The amount that was included in interest income on such loans was $11,000 for the year ended March 31, 1996. 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, 1996, the Bank had classified a total of $412,000 of its assets as substandard, $0 as doubtful, and $0 as loss. At March 31, 1996, total classified assets comprised $412,000, or 2.6% of the Bank's capital, or 0.5% 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, 1996, 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. 15 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 property is established by a charge to operations. At March 31, 1996, 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, 1996, the Bank had a total allowance for loan losses of $131,000, representing 107% of total non-performing loans and 0.29% of the Bank's loans, net. See Note 5 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, ------------------------------------------------------------------------------------------------ 1996 1995 1994 -------------------------------- ------------------------------ ------------------------------ 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.. $ 71 $38,395 83.63% $ 61 $ 28,969 86.17% $ 48 $ 25,531 86.24% Land................. 1 123 0.27 1 101 0.30 1 67 0.23 Commercial........... 2 184 0.40 2 157 0.47 2 220 0.74 Construction......... 3 2,674 5.82 4 358 1.06 7 703 2.37 Consumer............... 19 4,535 9.88 22 4,033 12.00 12 3,083 10.42 Unallocated............ 35 -- -- 29 -- -- 47 -- -- ------ ------- ------ ------ -------- ------- ------- -------- ------ Total........... $ 131 $45,911 100.00% $ 119 $ 33,618 100.00% $ 117 $ 29,604 100.00% ====== ======= ====== ====== ======== ====== ======= ======== ======
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, ---------------------------------------------------- 1996 1995 1994 --------- -------- --------- (In Thousands) Balance at beginning of period.................... $ 119 $ 117 $ 93 Charge-offs: ----------- One- to four-family............................. -- (23) (4) Land............................................ -- -- -- Commercial...................................... -- -- -- Construction.................................... -- -- -- Consumer........................................ (2) -- -- ------- ------- ------- (2) (23) (4) ------- ------- ------- Recoveries: ---------- One- to four-family............................. -- 25 2 Land............................................ -- -- -- Commercial...................................... -- -- -- Construction.................................... -- -- -- Consumer........................................ -- -- -- ------- ------- ------- -- 25 2 ------- ------- ------- Net recoveries (charge-offs)...................... (2) 2 (2) Additions charged to operations................... 14 -- 26 ------- ------- ------- Balance at end of period.......................... $ 131 $ 119 $ 117 ======= ======= ======= Ratio of net recoveries (charge-offs) during the period to average loans outstanding during the period........................................... --% 0.01% (0.01)% ======= ======= ======= Ratio of net recoveries (charge-offs) during the period to average non-performing assets...... (1.43)% .90% (1.10)% ======= ======= =======
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, 1996, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 7.74%. See "Regulation--Liquidity." 18 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. 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 Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Association ("GNMA") and Fannie Mae ("FNMA") obligations. At March 31, 1996, the Bank's investment in mortgage-backed securities totalled $24.2 million or 29.0% of its total assets. During the fiscal year ended March 31, 1996, the Bank transferred $8.1 million of mortgage-backed securities from its held-to-maturity account to its available-for-sale account. These securities are reported at fair market value, with unrealized gains and losses excluded from earnings but reported as a separate component of stockholders' equity. The balance of the Bank's mortgage- backed securities, or $16.3 million, are reported at amortized cost and are retained in the Bank's held-to-maturity account. During the fiscal year ended March 31,1 996, the Bank did not sell any of its mortgage-backed securities. See Notes 1 and 4 of the Notes to Consolidated Financial Statements. The FNMA, FHLMC 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. FNMA and FHLMC 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 FNMA and FHLMC are weighted at no more than 20% for risk-based 19 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. The following table sets forth the contractual maturities of the Bank's mortgage-backed securities at March 31, 1996.
At March 31, Due in 1996 ------------------------------------------------------ 6 Months 1 to 3 to 10 10 to 20 Over 20 Balance or Less 3 Years Years Years Years Outstanding ---------- ------- ------- -------- ------- ----------- (Dollars in Thousands) Government National Mortgage Association... $ -- $ -- $ -- $ -- $ 2,142 $ 2,142 Federal Home Loan Mortgage Corporation... 157 -- 423 356 8,108 9,044 Federal National Mortgage Corporation... -- -- 395 1,028 11,597 13,020 -------- ------ -------- -------- --------- --------- Total................. $ 157 $ -- $ 818 $ 1,384 $ 21,847 $ 24,206 ======== ====== ======== ======== ========= =========
INVESTMENT SECURITIES. At March 31, 1996, the Bank's investment securities (including a $742,000 investment in the common stock of the FHLB of Des Moines) totalled $7.1 million, or 8.52% 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 3 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% of the Bank's unimpaired capital and unimpaired surplus as defined by federal regulations, which totalled $1.6 million as of March 31, 1996, plus an additional 10% if the investments are fully secured by readily marketable collateral. At March 31, 1996, 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. 20 The following table sets forth the composition of the Bank's investment and mortgage-backed securities at the dates indicated.
At March 31, ------------------------------------------------------------------------------ 1996 1995 1994 --------------------- ---------------------- ------------------ Book % of Book % of Book % of Value Total Value Total Value Total -------- ------ ------ ------- ----- ----- (Dollars in Thousands) Investment securities:/(1)/ - --------------------- U.S. government securities............ $ -- --% $ 3,667 28.67% $ 4,898 48.28% Federal agency obligations............ 6,363 50.76 4,093 31.99 1,700 16.76 ------- ------ ------- ------- ------- ------- Subtotal......................... 7,760 60.66 6,598 65.04 FHLB stock............................ 742 5.92 727 5.68 727 7.16 ------- ------ ------- ------- ------- ------- Total investment securities and FHLB stock.................. $ 7,105 56.68% $ 8,487 66.34% $ 7,325 72.20% ======= ====== ======= ======= ======= ======= Average remaining life of investment securities excluding FHLB stock...... 4 years 2 years 2 years Other interest-earning assets: - ----------------------------- Interest-bearing deposits............. $ 5,430 43.32% $ 4,306 33.66% $ 2,820 27.80% Total Investment Portfolio............ $12,535 100.00% $12,793 100.00% $10,145 100.00% ======= ==== ======= ==== ======= ====
______________________ /(1)/ The Bank adopted SFAS No. 115 on April 1, 1994. Investment securities with an original maturity of less than 5 years are classified as available-for-sale and are valued at fair value at March 31, 1996 and 1995. At March 31, 1994, investment securities are reflected at amortized cost. The composition and maturities of the investment securities portfolio, excluding FHLB stock, are indicated in the following table.
At March 31, 1996 ------------------------------------------------ Less Than 1 to 5 Investment 1 Year Years Securities ---------- ---------- -------------- Book Value Book Value Market Value(1) ---------- ---------- --------------- (Dollars in Thousands) U.S. Government securities... $ -- $ -- $ -- Federal agency obligations... 2,496 3,867 6,363 ---------- ----------- ----------- Total investment securities.. $ 2,496 $ 3,867 $ 6,363 ========== =========== =========== Weighted average yield....... 5.18% 5.95% 5.45%
______________________ /(1)/ Due to the adoption of SFAS No. 115, all securities are held at market value. 21 The Bank's investment securities portfolio at March 31, 1996, contained neither tax-exempt securities nor securities of any issuer with 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, 1996, the Bank had $16.3 million in mortgage-backed securities held to maturity and investment securities with maturities of less than five years available for sale with a fair value of $6.4 million. See Note 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, 1996, the Bank had total FHLB advances of $0 million with the capacity to borrow an additional $14.8 million. See "- Borrowings" and Note 8 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 passbook, commercial demand, NOW, money market deposit and certificate accounts. The certificate accounts currently range in terms from 90 days to four years. 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. 22 The following table sets forth the savings flows at the Bank during the periods indicated.
Year Ended March 31, ------------------------------ 1996 1995 1994 --------- -------- -------- Opening balance........................ $67,449 $66,722 $67,476 Deposits............................... 89,906 59,441 47,689 Withdrawals............................ 94,205 61,523 51,108 Interest credited...................... 3,455 2,809 2,665 ------- ------- ------- Ending balance......................... $66,605 $67,449 $66,722 ======= ======= ======= Net increase (decrease)................ $ (844) $ 727 $ (754) ======= ======= ======= Percent increase (decrease)............ (1.25)% 1.09% (1.12)% ======= ======= =======
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, ------------------------------------------------------------------------- 1996 1995 1994 --------------------- ----------------------- ----------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ---------- --------- ---------- ----------- ---------- ----------- (Dollars in Thousands) Transactions and Savings Deposits:/(1)/ - --------------------------------- Commercial Demand.................................... $ 165 0.25% $ 126 0.19% $ 87 0.13% Passbook Accounts.................................... 3,675 5.51 3,958 5.87 4,773 7.15 NOW Accounts......................................... 1,825 2.74 1,986 2.94 1,932 2.89 Money Market......................................... 4,053 6.08 4,115 6.09 6,147 9.21 ------- ------- ------- ------- ------- ------ Total Non-Certificates............................... 9,718 14.58 10,185 15.09 12,939 19.38 ------- ------- ------- ------- ------- ------ Certificates: - ------------ 2.00 - 3.99%........................................ 110 0.17 3,949 5.85 28,695 42.99 4.00 - 5.99%........................................ 36,980 55.50 36,487 54.07 20,817 31.18 6.00 - 7.99%........................................ 19,414 29.13 15,810 23.43 2,744 4.11 8.00 - 9.99%........................................ 383 0.57 1,018 1.51 1,527 2.29 ------- ------- ------- ------- ------- ------ Total Certificates................................... 56,887 85.37 57,264 84.86 53,783 80.57 Accrued interest payable............................. 30 0.05 32 0.05 32 0.05 ------- ------- ------- ------- ------- ------ Total deposits and accrued interest payable.......... $66,635 100.00% $67,481 100.00% $66,754 100.00% ======= ======= ======= ======= ======= ======
________________________ /(1)/ See Note 7 of the Notes to Consolidated Financial Statements. 23 The following tables shows rate and maturity information for the Bank's certificates of deposit as of March 31, 1996.
2.00- 4.00- 6.00- 8.00- Percent 3.99% 5.99% 7.99% 9.99% Total of Total ----- ----- ----- ----- ----- -------- (Dollars in Thousands) Certificate accounts maturing in quarter ending: - ----------------- June 30, 1996........................................ $ 110 $ 9,007 $10,067 $ 78 $19,262 33.86% September 30, 1996................................... -- 8,846 220 120 9,186 16.15 December 31, 1996.................................... -- 7,608 930 175 8,713 15.32 March 31, 1997....................................... -- 4,504 329 3 4,836 8.50 June 30, 1997........................................ -- 1,113 13 -- 1,126 1.98 September 30, 1997................................... -- 2,636 444 -- 3,080 5.41 December 31, 1997.................................... -- 605 252 -- 857 1.51 March 31, 1998....................................... -- 1,043 85 -- 1,128 1.98 June 30, 1998........................................ -- 613 27 -- 640 1.13 September 30, 1998................................... -- 464 27 -- 491 0.86 December 31, 1998.................................... -- 97 16 2 115 0.20 March 31, 1999....................................... -- 39 656 -- 695 1.22 Thereafter........................................... -- 405 6,348 5 6,758 11.88 ------- ------- ------- ------- ------- ------ Total............................................. $ 110 $36,980 $19,414 $ 383 $56,887 100.00% ======= ======= ======= ======= ======= ====== Percent of total.................................. 0.19% 65.01% 34.13% 0.67% 100.00% ======= ======= ======= ======= =======
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, 1996.
Maturity --------------------------------------------- Over Over 3 Months 3 to 6 6 to 12 Over or Less Months Months 12 Months Total -------- ------ ------- --------- ------- (In thousands) Certificates of deposit less than $100,000............ $17,618 $8,733 $12,587 $13,697 $52,635 Certificates of deposit of $100,000 or more........... 1,556 414 800 1,043 3,813 Public funds /(1)/.................................... 88 39 162 150 439 ------- ------ ------- ------- ------- Total certificates of deposit......................... $19,262 $9,186 $13,549 $14,890 $56,887 ======= ====== ======= ======= =======
__________________________ /(1)/ Deposits from governmental and other public entities, including deposits greater than $100,000. 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 24 FHLB, subject to regulatory collateral requirements. At March 31, 1996, the Bank had $742,000 of FHLB of Des Moines stock. The Bank has the ability to purchase additional capital stock from the FHLB. For additional information regarding the term to maturity and average rate paid on FHLB advances, see Note 8 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, ------------------------ 1996 1995 1994 ------ ----- ----- (In Thousands) Maximum Balance: - --------------- FHLB advances.......... $1,500 $2,500 $ -- Average Balance: - --------------- FHLB advances.......... $ 208 $ 654 $ 60
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 $1.7 million at March 31, 1996, 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, 1996, 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, 1996, the Bank's investment in HSSC was $18,000. For the year ended March 31, 1996, HSSC had pre-tax income of approximately $9,000. 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 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 25 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. The last regular OTS and FDIC examinations of the Bank were as of October 1995 and February 1996, respectively. 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, 1996, was approximately $25,650. 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, 1996, the Bank's lending limit under this restriction was $1.6 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 26 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 comply with an approved plan will subject the institution to further enforcement action. The OTS and the other federal banking agencies have also proposed additional guidelines on asset quality and earnings standards. No assurance can be given as to whether or in what form the proposed regulations will be adopted. The guidelines are not expected to materially effect the Bank. INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC Hardin Federal is a member of the SAIF, which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the U.S. Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings banks, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, ranging from .23% to .31% of deposits, based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of core capital to risk-weighted assets of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy would pay the lowest premium while institutions that are less than adequately capitalized (i.e., a core capital or core capital to risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern would pay the highest premium. Risk classification of all insured institutions will be made by the FDIC for each semi-annual assessment period. The FDIC is authorized to increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The FDIC may also impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. As is the case with the SAIF, the FDIC is authorized to adjust the insurance premium rates for banks that are insured by the Bank Insurance Fund ("BIF") of the FDIC in order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits. The FDIC has reported that the BIF attained the 1.25% reserve ratio in May 1995 but that the SAIF is not likely to reach the 1.25% reserve ratio until 2002. In August 1995, the FDIC issued final regulations to reduce the assessment rates for the BIF. Under the revised assessment schedule, which became 27 effective on June 1, 1995, BIF-insured institutions paid an average of 0.045% of deposits, with new assessment rates ranging from 0.04% of deposits to 0.31% of deposits. The FDIC refunded any assessments collected in excess of those due under the revised schedule. On November 14, 1995, the FDIC voted to reduce annual BIF assessments to the legal minimum of $2,000, effective January 1, 1996 for all BIF-insured institutions except for those that were not well capitalized or were assigned to the higher supervisory risk categories. It is estimated that 92% of the BIF-insured institutions will pay only the minimum annual assessment. SAIF-insured institutions will continue to pay assessments at the current assessment rates until the SAIF attains the 1.25% reserve ratio. The resulting disparity in deposit insurance assessments between SAIF members and BIF members is likely to provide BIF-insured institutions with certain competitive advantages in the pricing of loans and deposits, and in lowered operating costs, pending any legislative action to remedy the disparity. The proposed Balanced Budget Act of 1995 (the "Budget Act"), which was vetoed by the President, included provisions that focused on a resolution of the financial problems of the SAIF. Under the provisions of the Budget Act, all SAIF member institutions would pay a special assessment to recapitalize the SAIF, and the assessment base for the payments on bonds ("FICO bonds") that were issued in the late 1980s by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation, would be expanded to include the deposits of both BIF- and SAIF-insured institutions. The amount of the special assessment required to recapitalize the SAIF has been estimated to be approximately 80 basis points of the SAIF-assessable deposits. This estimate of the special SAIF assessment is less than the assessment of 85 to 90 basis points that had been previously estimated. The special assessment would have been imposed on the first business day of January 1996, or on such other date prescribed by the FDIC not later than 60 days after enactment of the Budget Act, based on the amount of SAIF deposits on March 31, 1995. The Budget Act would have also permitted BIF-insured institutions with deposits subject to SAIF assessments to reduce such SAIF-deposits by 20% in computing the institution's special assessment. If a 90 basis point assessment were assessed against the Bank's deposits as of March 31, 1996, the Bank's aggregate special SAIF assessment would be approximately $600,000, and an assessment of 80 basis points would be $533,088. Assuming this special assessment is tax deductible, the charge to earnings, net of income tax benefits, will be approximately $390,000. Future assessments would then be anticipated to be reduced to .04% to .31% of eligible deposits, based on the risk classification assigned to the Bank by the FDIC. The Budget Act also would have provided that the BIF could not assess regular insurance assessments when it has a reserve ratio of 1.25% or more except on those of its member institutions that have been found to have "moderately severe" or "unsatisfactory" financial, operational, or compliance weaknesses. The Budget Act also provided for the merger of the BIF and SAIF on January 1, 1998, with such merger being conditioned upon the prior elimination of the thrift charter. Congressional leaders had also agreed that Congress should consider and act upon separate legislation to eliminate the thrift charter as early as possible in 1996. If adopted, such legislation would require that the Bank, as a federal savings bank, convert to a bank charter. Such a requirement to convert to a bank charter could cause the Bank to lose the favorable tax treatment for its bad debt reserves that it currently enjoys under Section 593 of the Code and to have all or part of its existing bad debt reserves recaptured into income. At March 31, 1996, the Bank had a balance of approximately $2.0 million in bad debt reserves. 28 The above described provisions of the Budget Act were not the basis for the President's veto, and Congressional leaders have indicated that these provisions will be the basis for future legislation to recapitalize the SAIF. If enacted by Congress, such legislation would have the effect of reducing the capital of SAIF member institutions by the after-tax cost of the special SAIF assessment, plus any related additional tax liabilities. The legislation would also have the effect of reducing any differential that may otherwise be required in the assessment rates for the BIF and SAIF. REGULATORY CAPITAL REQUIREMENTS Federally insured savings associations, such as the Bank, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. Generally, these capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital for calculating compliance with the requirement. Further, the valuation allowance applicable to the write-down of investments and mortgage-backed securities in accordance with SFAS No. 115 is excluded from the regulatory capital calculation. At March 31, 1996, the Bank had $ 0 of intangible assets and a valuation allowance, net of tax under SFAS No. 115 of $155,000. The OTS regulations establish special capitalization requirements for savings associations that own subsidiaries. In determining compliance with the capital requirements, all subsidiaries engaged solely in activities permissible for national banks or engaged in certain other activities solely as agent for its customers are "includable" subsidiaries that are consolidated for capital purposes in proportion to the association's level of ownership. For excludable subsidiaries the debt and equity investments in such subsidiaries are deducted from assets and capital. The Bank has one service corporation subsidiary. At March 31, 1996, the Bank had tangible capital of $10.9 million, or 13.8% of adjusted total assets, which is approximately $9.7 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. The capital standards also require core capital equal to at least 3% of adjusted total assets (as defined by regulation). Core capital generally consists of tangible capital plus certain intangible assets, including supervisory goodwill (which is phased-out over a five-year period) and a limited amount of purchased credit card relationships and purchased mortgage servicing rights. As a result of the prompt corrective action provisions of FDICIA discussed below, however, a savings association must maintain a core capital ratio of at least 4% to be considered adequately capitalized 29 unless its supervisory condition is such to allow it to maintain a 3% ratio. At March 31, 1996, the Bank had no intangibles which were subject to these tests. At March 31, 1996, the Bank had core capital equal to $10.9 million, or 13.8% of adjusted total assets, which is $8.5 million above the minimum leverage ratio requirement of 3% as in effect on that date. The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. At March 31, 1996, the Bank had $131,000 of general loan valuation allowances, which was less than 1.25% of risk-weighted assets. Certain exclusions from capital and assets are required to be made for the purpose of calculating total capital. Such exclusions consist of equity investments (as defined by regulation) and that portion of land loans and nonresidential construction loans in excess of an 80% loan-to-value ratio (these items are excluded on a sliding scale through March 31, 1995, after which they must be excluded in their entirety) and reciprocal holdings of qualifying capital instruments. Hardin Federal had $28,000 of such exclusions from capital and assets at March 31, 1996. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan to value ratio of not more than 80% at origination unless the loan amount in excess of such ratio is insured by an insurer approved by the FNMA or FHLMC. On March 31, 1996, the Bank had total capital of $11 million (including approximately $10.9 million in core capital and $131,000 in qualifying supplementary capital) and risk-weighted assets of $33.3 million (with no converted off-balance sheet assets); or total capital of 33% of risk-weighted assets. This amount was $8.4 million above the 8% requirement in effect on that date. The OTS has adopted a final rule that requires every savings association with more than normal interest rate risk exposure to deduct from its total capital, for purposes of determining compliance with such requirement, an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off- balance sheet contracts. The rule provides for a two quarter lag between calculating interest rate risk and recognizing any deduction from capital. The rule will not become effective until the OTS adopts the process by which savings associations may appeal an interest rate risk deduction determination. Any savings association with less than $300 million in assets and a total risk-based capital ratio in excess of 12% is exempt from this requirement unless the OTS determines otherwise. 30 Pursuant to FDICIA, the federal banking agencies, including the OTS, have also proposed regulations authorizing the agencies to require a depository institution to maintain additional total capital to account for concentration of credit risk and the risk of non-traditional activities. No assurance can be given as to the final form of any such regulation. The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. Effective December 19, 1992, the federal banking agencies, including the OTS, were given additional enforcement authority over undercapitalized depository institutions. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS is authorized to impose the additional restrictions that are applicable to significantly undercapitalized associations. As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized association must agree that it will enter into a limited capital maintenance guarantee with respect to the institution's achievement of its capital requirements. Any savings association that fails to comply with its capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be made subject to one or more of additional specified actions and operating restrictions, which may cover all aspects of its operations and include a forced merger or acquisition of the association. An association that becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized associations. In addition, the OTS must appoint a receiver (or conservator with the concurrence of the FDIC) for a savings association, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized association is also subject to the general enforcement activity of the OTS and the FDIC, including the appointment of a receiver or conservator. The OTS is also generally authorized to reclassify an association into a lower capital category and impose restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OTS or the FDIC of any of these measures on Hardin Federal may have a substantial adverse effect on the Bank's operations and profitability and the value of the Company's common stock. Company shareholders do not have preemptive rights, and therefore, if the Company is directed by the OTS or the FDIC to issue additional shares of its common stock, such issuance may result in the dilution in the percentage of ownership to current shareholders. 31 LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS OTS regulations impose various restrictions or requirements on associations with respect to their ability to pay dividends or make other distributions of capital. OTS regulations prohibit an association from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the regulatory capital of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. The OTS utilizes a three-tiered approach to permit associations, based on their capital level and supervisory condition, to make capital distributions which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. See "- Regulatory Capital Requirements." Generally, Tier 1 associations, which are associations that before and after the proposed distribution meet their fully phased-in capital requirements, may make capital distributions during any calendar year equal to the greater of 100% of net income for the year-to-date plus 50% of the amount by which the lesser of the association's tangible, core or risk-based capital exceeds its fully phased-in capital requirement for such capital component, as measured at the beginning of the calendar year, or the amount authorized for a Tier 2 association. However, a Tier 1 association deemed to be in need of more than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3 association as a result of such a determination. The Bank meets the requirements for a Tier 1 association and has not been notified of a need for more than normal supervision. Tier 2 associations, which are associations that before and after the proposed distribution meet their current minimum capital requirements, may make capital distributions of up to 75% of net income over the most recent four quarter period. Tier 3 associations (which are associations that do not meet current minimum capital requirements) that propose to make any capital distribution and Tier 2 associations that propose to make a capital distribution in excess of the noted safe harbor level must obtain OTS approval prior to making such distribution. Tier 2 associations proposing to make a capital distribution within the safe harbor provisions and Tier 1 associations proposing to make any capital distribution need only submit written notice to the OTS 30 days prior to such distribution. As a subsidiary of the Company, the Bank is required to give the OTS 30 days notice prior to declaring any dividend on its stock. The OTS may object to the distribution during that 30-day period based on safety and soundness concerns. See "- Regulatory Capital Requirements." The OTS has proposed regulations that would revise the current capital distribution restrictions. The proposal eliminates the current tiered structure and the safe-harbor percentage limitations. Under the proposal a savings association may make a capital distribution without notice to the OTS (unless it is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2 rating, is not in troubled condition and would remain adequately capitalized (as defined by regulation) following the proposed distribution. Savings associations that would remain adequately capitalized following the proposed distribution but do not meet the other noted requirements must notify the OTS 30 days prior to declaring a capital distribution. The OTS stated it will generally regard as permissible that amount of capital distributions that do not exceed 50% of the institution's excess regulatory capital plus net income to date during the calendar year. A savings association may not make a capital distribution without prior approval of the OTS and the FDIC if it is 32 undercapitalized before, or as a result of, such a distribution. A savings association will be considered in troubled condition if it has a CAMEL rating of 4 or 5, is subject to an enforcement action relating to its safety and soundness or financial viability or has been informed in writing by the OTS that it is in troubled condition. As under the current rule, the OTS may object to a capital distribution if it would constitute an unsafe or unsound practice. No assurance may be given as to whether or in what form the regulations may be adopted. 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, 1996, the Bank was in compliance with both requirements, with an overall liquid asset ratio of 7.74% and a short-term liquid assets ratio of 6.75%. 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 made more stringent than GAAP by the OTS, 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, including the Bank, are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. Such assets primarily consist of residential housing related loans and investments. At March 31, 1996, the Bank met the test and has always met the test since its effectiveness. 33 Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "- Holding Company Regulation." COMMUNITY REINVESTMENT ACT Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of the Bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. The federal banking agencies, including the OTS, have recently revised the CRA regulations and the methodology for determining an institution's compliance with the CRA. Due to the heightened attention being given to the CRA in the past few years, the Bank may be required to devote additional funds for investment and lending in its local community. The Bank was examined for CRA compliance in February 1996 and received a rating of "satisfactory." TRANSACTIONS WITH AFFILIATES Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of the Bank include the Company and any company which is under common control with the Bank. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes 34 also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals. 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 the Company and its 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. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any other SAIF-insured savings association) would become subject to such restrictions unless such other associations each qualify as a QTL and were acquired in a supervisory acquisition. 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." The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. 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. 35 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, 1996, 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, 1996, the Bank had $742,000 of FHLB stock, which was in compliance with this requirement. In past years, the Bank has received substantial dividends on its FHLB stock. Over the past five fiscal years such dividends have averaged 8.28% and were 7.24% for fiscal 1996. For the fiscal year ended March 31, 1996, dividends paid by the FHLB of Des Moines to the Bank totaled approximately $53,000, which constitutes a $6,000 decrease over the amount of dividends received in fiscal year 1995. 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. 36 FEDERAL AND STATE TAXATION FEDERAL TAXATION. Savings associations such as the Bank that meet certain definitional tests relating to the composition of assets and other conditions prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to establish reserves for bad debts and to make annual additions thereto which may, within specified formula limits, be 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" is computed under the experience method. The amount of the bad debt reserve deduction for "qualifying real property loans" (generally loans secured by improved real estate) may be computed under either the experience method or the percentage of taxable income method (based on an annual election). 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 specially computed taxable income that is used to compute a savings association's bad debt reserve deduction under the percentage of taxable income method (the "percentage bad debt deduction") is 8%. The percentage bad debt deduction thus computed is reduced by the amount permitted as a deduction for non-qualifying loans under the experience method. The availability of the percentage of taxable income method permits qualifying savings associations to be taxed at a lower effective federal income tax rate than that applicable to corporations generally (approximately 31.3% assuming the maximum percentage bad debt deduction). If an association's specified assets (generally, loans secured by residential real estate or deposits, educational loans, cash and certain government obligations) constitute less than 60% of its total assets, the association may not deduct any addition to a bad debt reserve and generally must include existing reserves in income over a four-year period. No representation can be made as to whether the Bank will meet the 60% test for subsequent taxable years. Under the percentage of taxable income method, the percentage bad debt deduction cannot exceed the amount necessary to increase the balance in the reserve for "qualifying real property loans" to an amount equal to 6% of such loans outstanding at the end of the taxable year or the greater of (i) the amount deductible under the experience method or (ii) the amount which when added to the bad debt deduction for "non-qualifying loans" equals the amount by which 12% of the amount comprising savings accounts at year end exceeds the sum of surplus, undivided profits and reserves at the beginning of the year. At March 31, 1996, the 6% and 12% limitations did not restrict the percentage bad debt deduction available to the Bank. It is possible that these limitations will be a limiting factor in the future. 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 37 minimum taxable income. For taxable years beginning after 1986 and before 1996, corporations, including savings associations such as the Bank, are 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, 1996, the Bank's Excess for tax purposes totaled approximately $2.0 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 are required by applicable Treasury regulations to reduce their taxable income for purposes of computing the percentage bad debt deduction for losses attributable to activities of the non-savings association members of the consolidated group that are 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. Legislation currently pending in Congress contains a provision that would repeal the tax bad-debt reserve currently available to thrifts (including the percentage of taxable income method) for tax years beginning after December 31, 1995. If enacted, the Bank would have to change to the experience method of computing its bad debt deduction. The legislation would require a thrift to recapture the portion of its bad debt reserve that exceeds the base year reserve (defined as the tax reserve of the last taxable year beginning before 1988). The amount of the recapture would generally be taken into taxable income ratably over a six year period. At March 31, 1996 the Bank's bad debt reserve exceeded the base year reserve by approximately $425,000. In accordance with SFAS No. 109 a deferred tax liability has been established for the tax effect of this item. Management cannot predict whether the pending legislation will be enacted, or if enacted, the final form of such legislation and its ultimate impact on 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. 38 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 seven commercial banks, one credit union and one savings institution, other than Hardin Federal, which compete for deposits and loans in Ray County, Missouri. In Clay County, Missouri, there are 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, 1996, the Bank had a total of 19 full-time and 3 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 KAREN K. BLANKENSHIP. Mrs. Blankenship, age 52, is the Senior Vice President and Secretary of the Bank, responsible for the supervision of the accounting department and reporting to the regulatory authorities. Mrs. Blankenship joined the Bank as a teller in 1967, and has served the Bank in various capacities prior to her promotion to Senior Vice President in 1993. Ms. Blankenship has been nominated to serve on the Board of Directors of the Company for a one-year term. Stockholders of the Company will vote on a proposal to approve this nomination at the Annual Meeting of Stockholders to be held on July 25, 1996. LYNDON M. GOODWIN. Mr. Goodwin, age 51, is currently Vice President of the Bank responsible for the supervision of all lending operations of the Bank. Prior to joining the Bank 39 in 1994, Mr. Goodwin was a County Supervisor of the United States Department of Agriculture, Farmer's Home Administration, for 28 years. WILLIAM L. HOMAN. Mr. Homan, age 48, joined the Bank in June 1995 as Vice President and Treasurer. In that capacity, Mr. Homan is responsible for the supervision of all investments and cash flows of the Bank. Prior to joining the Bank, Mr. Homan was President and Chief Executive Officer of Brenton Savings Bank, FSB, Ames, Iowa. Mr. Homan has been nominated to serve on the Board of Directors of the Company for a two-year term. Stockholders of the Company will vote on a proposal to approve this nomination at the Annual Meeting of Stockholders to be held on July 25, 1996. 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 the Excelsior Springs, Missouri branch. The Bank's Richmond, Missouri branch is leased. The following table sets forth information relating to each of the Bank's offices as of March 31, 1996. 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, 1996 was approximately $510,000. See Note 6 of the Notes to Consolidated Financial Statements.
Total Approximate Date Square Net Book Value at Location Acquired Footage March 31, 1996 - ------------------------------ -------- ----------- ----------------- Main Office: 1963 4,600 $ 30,000 100-04 North Second Street Hardin, Missouri Branch Offices:/(1)/ 201 North Jesse James Road 1990 2,024 $471,000 Excelsior Springs, Missouri 208 West Main Street Leased 1,200 N/A Richmond, Missouri (expires 1996)
_________________________ /(1)/ The Bank has entered into a contract to acquire land to build a new branch office in Richmond, Missouri and to vacate its current Richmond, Missouri branch location. The Bank expects construction on this branch facility to begin in 1997. The Bank has begun a renovation and expansion of its Excelsior Springs, Missouri branch. It is expected that the renovation and expansion will be completed during September 1996 and it is estimated that the costs of improvement will approximate $235,000. Hardin Federal believes that its current and planned 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. 40 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. 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, 1996. On April 16, 1996, the Company held a Special Meeting of Stockholders for the purpose of having stockholders consider and vote upon the ratification and adoption of the Company's 1995 Stock Option and Incentive Plan and the Company's Recognition and Retention Plan. The Stock Option and Incentive Plan, which required the affirmative vote of a majority of the holders of the Company's outstanding common stock, was approved by the following: 660,104 votes for, 37,115 votes against, 4,985 votes withheld, and 0 broker non-votes. The Recognition and Retention Plan, which required the affirmative vote of a majority of the holders of the Company's outstanding common stock, was approved by the following: 614,804 votes for, 82,415 votes against, 4,985 votes withheld, and 0 broker non- votes. PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER -------------------------------------------------------------------- MATTERS - -------- Page 41 of the attached 1996 Annual Report to Shareholders is herein incorporated by reference. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION ------------------------------------------------------------------- Pages 5 to 17 of the attached 1996 Annual Report to Shareholders are herein incorporated by reference. 41 ITEM 7. FINANCIAL STATEMENTS - ----------------------------- Pages 18 to 40 of the attached 1996 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 25, 1996. 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 25, 1996. 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 25, 1996. 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 25, 1996. 42 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, 19is incorporated by reference in this Form 10-KSB Annual Report as Exhibit 13 .
Page in Annual Annual Report Section Report --------------------- ------- Report of Independent Auditors ............................................... 18 Consolidated Balance Sheets at March 31, 1996 and 1995 ....................... 19 Consolidated Statements of Earnings for the Years ended March 31, 1996, 1995 and 1994 ..................................................................... 20 Consolidated Statements of Stockholders' Equity for the Years ended March 31, 1996, 1995 and 1994 ............................................... 21 Consolidated Statements of Cash Flows for the Years ended March 31, 1996, 1995 and 1994 ............................................................... 22 Notes to Consolidated Financial Statements ................................... 24
43 (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: -----------------
Sequential Page Reference to Number Where Regulation Prior Filing or Attached Exhibits S-B Exhibit Exhibit Number Are Located in this Number Document Attached Hereto Form 10-KSB Report - ------------ -------------------------------------- --------------- ------------------- 2 Plan of acquisition, reorganization, None Not applicable arrangement, liquidation or succession 3 Certificate of Incorporation and Bylaws * Not applicable 4 Instruments defining the rights of * Not applicable security holders, including indentures 9 Voting trust agreement None Not applicable 10.1 1995 Stock Option and Incentive Plan ** Not Applicable 10.2 Employment Agreement with Robert W. * Not applicable King 10.3 Employment Agreement with Karen K. * Not Applicable Blankenship 10.4 Employee Stock Ownership Plan * Not Applicable 10.5 Recognition and Retention Plan ** Not applicable 10.6 Deferred Compensation Agreement * Not applicable 10.7 Compensation Agreement with Directors * Not Applicable 11 Statement re: computation of per None Not applicable share earnings 12 Statement re: computation or ratios Not required Not applicable 13 Annual Report to Security Holders 13 Page 48
44
Sequential Page Reference to Number Where Regulation Prior Filing or Attached Exhibits S-B Exhibit Exhibit Number Are Located in this Number Document Attached Hereto Form 10-KSB Report - ----------- -------------------------------------- ---------------- -------------------- 16 Letter re: change in certifying None Not applicable accountant 18 Letter re: change in accounting None Not applicable principles 21 Subsidiaries of Registrant 21 Page 92 22 Published report regarding matters None Not applicable submitted to vote of security holders 23 Consent of experts and counsel None Not applicable 24 Power of Attorney Not Required Not applicable 27 Financial Data Schedule 27 Page 93 28 Information from reports furnished to None Not applicable State insurance regulatory authorities 99 Additional exhibits None Not applicable
___________________ *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, 1996. 45 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 27, 1996 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 27, 1996 Date: June 27, 1996 By: /s/ Karen K. Blankenship By: /s/ David K. Hatfield ------------------------------------ ---------------------------------------- Karen K. Blankenship, Senior Vice David K. Hatfield, Director President and Secretary Date: June 27, 1996 Date: June 27, 1996 By: /s/ David D. Lodwick By: /s/ W. Levan Thurman ------------------------------------ ---------------------------------------- David D. Lodwick, Director W. Levan Thurman, Director Date: June 27, 1996 Date: June 27, 1996 By: /s/ William L. Homan ------------------------------------ William L. Homan, Vice President and Treasurer Date: June 27, 1996
EXHIBIT INDEX 2 Plan of acquisition, reorganization, arrangement, liquidation or succession (none) 3 Certificate of Incorporation and Bylaws * 4 Instruments defining the rights of security holders, includingindentures * 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 share earnings (none) 12 Statement re: computation or ratios (not required) 13 Annual Report to Security Holders 16 Letter re: change in certifying accountant (none) 18 Letter re: change in accounting principles (none) 21 Subsidiaries of Registrant 22 Published report regarding matters submitted to vote of security holders (none) 23 Consent of experts and counsel (none) 24 Power of Attorney (not required) 27 Financial Data Schedule 28 Information from reports furnished to State insurance regulatory authorities (none) 99 Additional exhibits __________________________ * Filed Previously EX-13 2 EXHIBIT 13: ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 TABLE OF CONTENTS Page President's Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Selected Consolidated Financial and Other Data of the Company . . . . . . . 3 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 5 Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 18 Stockholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 [LOGO OF HARDIN BANCORP, INC. APPEARS HERE] (Holding Company for Hardin Federal Savings Bank) June 25, 1996 Dear Fellow Shareholder: The Board of Directors, Officers, and Staff of Hardin Bancorp, Inc. and Hardin Federal Savings Bank are pleased to provide you with our first annual report. During the fiscal year ended March 31, 1996 we completed the conversion from a mutual savings bank to a federally chartered stock savings bank. We are confident this event will enable Hardin Federal Savings Bank to meet the challenges and opportunities in the ever changing financial services industry. 1996 was our first year as a stock firm after more than 107 years of service to area communities as a mutual company. Net earnings for the year were $511,000 and total loans increased $11.8 million. Hardin Bancorp, Inc. will continue as a community-oriented financial institution, emphasizing mortgage and consumer lending and developing new products and services for our customers. We are excited to announce our plans to renovate our Excelsior Springs office, and build a new facility in Richmond. These building projects will provide the additional space and equipment needed to accommodate our future growth. Our goal is to enhance shareholder value while continuing our mission as a community oriented financial institution committed to our customers and to the communities we serve. Thank you for your confidence in our company, and we are looking forward to a prosperous future. Sincerely, /s/ Robert W. King Robert W. King President P.O. BOX 608 . HARDIN, MO. 64035 . 816-398-4312 GENERAL INFORMATION ------------------- Hardin Bancorp, Inc. (the "Company") is a Delaware Corporation which is the holding company for Hardin Federal Savings Bank (the "Bank"). The Company was organized by the Bank for the purpose of acquiring all of the capital stock of the Bank in connection with the conversion of the Bank from mutual to stock form, which was completed on September 28, 1995 (the "Conversion"). The only significant assets of the Company are the capital stock of the Bank, the Company's loan to the Company's Employee Stock Ownership Plan (ESOP), and the net proceeds of the Conversion retained by the Company of approximately $5.0 million. The business of the Company initially consists of the business of the Bank. The Bank, which was originally chartered in 1888 as a Missouri-chartered mutual savings and loan association, is headquartered in Hardin, Missouri. The Bank amended its mutual charter to become a federal mutual savings bank in 1995. Its deposits are insured up to the maximum allowable amount by the Federal Deposit Insurance Corporation (FDIC). The Bank serves the financial needs of its customers throughout Ray and Clay Counties through its offices in Hardin, Richmond, and Excelsior Springs, Missouri. At March 31, 1996, the Bank had total assets of $83.4 million, deposits of $66.6 million and stockholder's equity of $16.0 million. The Bank has been, and intends to continue to be, a community-oriented financial institution offering financial services to meet the needs of the market area it serves. The Bank attracts deposits from the general public and uses such funds primarily to originate and purchase loans secured by first mortgages on owner- occupied one-to-four family residences. The Bank also originates construction and consumer loans and, to a lesser extent, land loans and commercial real estate loans. The Bank also invests in mortgage-backed securities, which are insured or guaranteed by federal agencies, and other investment securities. 2 HARDIN BANCORP, INC. -------------------- SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE ----------------------------------------------------- COMPANY ------- Set forth below are selected consolidated financial and other data of the Company. The financial data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto presented elsewhere in this Annual Report.
At or for the years ended March 31, -------------------------------------------- 1996 1995(1) 1994(1) 1993(1) 1992(1) ---- ------- ------- ------- ------- (Dollars in Thousands except per share data) Selected Financial - ------------------ Condition Data: - ------------------ Total assets $83,387 $75,993 $73,495 $73,743 $72,393 Loans receivable, net 45,031 33,230 29,105 26,668 28,387 Mortgage-backed securities: Held to maturity 16,299 28,473 32,743 36,090 33,931 Available for sale 7,907 - - - - Investment securities 6,363 7,760 6,598 4,882 2,994 FHLB Stock 742 727 727 625 574 Other interest-bearing deposits 5,430 4,306 2,820 3,875 4,902 Deposits 66,605 67,449 66,722 67,476 66,794 FHLB Advances - 1,500 - - - Equity 16,035 6,393 6,064 5,422 4,829
Selected Operations Data: - ------------------------- Total interest income $ 5,552 $4,694 $4,587 $5,249 $6,123 Total interest expense 3,454 2,816 2,653 3,330 4,412 ----- ----- ----- ----- ----- Net interest income 2,098 1,878 1,934 1,919 1,711 Provision for loan losses 14 - 26 26 42 ----- ----- ----- ----- ----- Net interest income after provision for loan losses 2,084 1,878 1,908 1,893 1,669 ----- ----- ----- ----- ----- Loan fees and service charges 110 116 123 134 114 Gain/(loss) on sales of loans, investments and mortgage- backed securities 2 (39) 126 90 (116) Other non-interest income 167 110 59 (2) 5 ----- ----- ----- ----- ----- Total non-interest income 279 187 308 222 3 ----- ----- ----- ----- ----- Total non-interest expense 1,576 1,427 1,250 1,125 1,011 ----- ----- ----- ------ ----- Earnings before income taxes 787 638 966 990 661 Income tax expense (2) 277 221 325 397 250 --- --- --- --- --- Net earnings $ 511 $ 417 $ 641 $ 593 $ 411 === === === === === Pro forma net earnings per share-primary and fully diluted 0.52 - - - - ==== === === === === Pro forma average common shares outstanding 973,383 - - - - ======= === === === ===
3
At or for the years ended March 31, ---------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Selected Financial - ------------------ Ratios and Other Data: - ------------------------ Performance Ratios: Return on assets (ratio of net earnings to average total assets) 0.64% 0.56% 0.87% 0.81% 0.58% Return on equity (ratio of net earnings to average equity) 4.25 6.68 11.18 11.57 8.89 Interest rate spread (3) Average during period 2.00 2.25 2.40 2.38 2.43 End of period 2.37 1.85 2.52 2.75 2.50 Net interest margin (4) 2.70 2.56 2.68 2.68 2.78 Ratio of non-interest expense to average total assets 1.98 1.91 1.70 1.54 1.42 Ratio of average interest earning assets to average interest- bearing liabilities 115.76 107.95 107.59 106.47 105.60 Quality Ratios: Non-performing assets to total assets at end of period 0.15 0.22 0.24 0.29 0.07 Allowance for loan losses to non-performing loans 107.38 70.83 64.29 42.08 129.33 Allowance for loan losses to loans receivable, net 0.29 0.36 0.40 0.35 0.24 Capital Ratios (5): Equity to total assets at end of period 19.23 8.41 8.25 7.35 6.67 Average equity to average assets 15.05 8.33 7.80 7.01 6.47 Other Data: Number of full service offices 3 3 3 3 3
(1) Information for periods prior to 1996 relates to Hardin Federal Savings Bank and subsidary. (2) The Bank adopted Statement of Financial Accounting Standards ("SFAS") NO. 109 during the year ended March 31, 1994. (3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities. (4) Net interest margin represents net interest income as a percentage of average interest-earning assets. (5) For a discussion of the Bank's regulatory capital ratios, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." 4 MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ OF FINANCIAL CONDITION AND RESULTS OPERATIONS --------------------------------------------- GENERAL - ------- Hardin Bancorp, Inc. (the "Company") was formed in June 1995 by Hardin Federal Savings Bank (the "Bank") to become the holding company of the Bank. The acquisition of the Bank by Hardin Bancorp, Inc. was consummated on September 28, 1995, in connection with the Bank's conversion from a mutual company to a stock company (the "Conversion"). All references to the company prior to September 28, 1995, except where otherwise indicated, are to the Bank and its subsidiary on a consolidated basis. The Company's results of operation depend primarily on its level of net interest income, which is the difference between interest earned on interest-earning assets, consisting primarily of mortgage loans and other investments, and the interest paid on interest-bearing liabilities, consisting primarily of deposits. Net interest income is a function of the Company's net interest margin which is the difference between the interest earned on interest-earning assets and the interest paid on interest-bearing liabilities. The net interest margin is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, and deposit flows. The Company, like other financial institutions, is subject to interest rate risk to the degree that its interest- earning assets mature or reprice at different times, or on a different basis, than its interest-bearing liabilities. The Company's operating results are also affected by the amount of its non-interest income, including loan fees, service charges and other income, which includes commissions from sales of insurance by the Bank's service corporation. Non-interest expense consists principally of employee compensation, occupancy expense, data processing, Federal Insurance premiums, advertising, and other operating expenses. The Company's operating results are significantly affected by general economic and competitive conditions, in particular, the changes in market interest rates, government policies and actions by regulatory authorities. FINANCIAL CONDITION - ------------------- Total Assets. Total assets increased $7.4 million or 9.7% to $83.4 million at March 31, 1996 from $76.0 million at March 31, 1995. The increase was primarily due to the Company's stock conversion, which generated net proceeds of $10.0 million. The proceeds were used, in part, to fund an $11.8 million increase in loans receivable, net. Loans Receivable, Net. Loans receivable, net increased by $11.8 million or 35.5% to $45.0 million at March 31, 1996 from $33.2 million at March 31, 1995. The increase is primarily due to increased loan demand in the market areas served by the Bank's three full-service offices and the purchase of loans during the year. Mortgage-Backed Securities. Mortgage-backed securities decreased by $4.3 million or 15.0% to $24.2 million at March 31, 1996 from $28.5 million at March 31, 1995. The decrease was due to prepayments on loans which secure the Bank's mortgage-backed securities. At December 31, 1995, management reclassified mortgage-backed securities totaling $8.1 million from the held to maturity category to available for sale. The redesignation was done in accordance with the Financial Accounting Standards Board (FASB) Implementation Guide of Statement 115 released November 15, 1995. The guide allows a one-time reclassification of investment securities from held to maturity to the available for sale category without impacting securities remaining in held to maturity. The reclassification 5 provides the Bank with increased flexibility in the management of the mortgage- backed securities portfolio. Deposits. Deposits decreased $844,000 or 1.3% to $66.6 million at March 31, 1996 from $67.4 million at March 31, 1995. Withdrawals of $1.6 million by savers purchasing common stock of the Company contributed to the deposit loss. Equity. Total equity increased by $9.6 million or 150.8% to $16.0 million at March 31, 1996 from $6.4 million at March 31, 1995. Net proceeds from the conversion provided a $10.0 million increase and earnings for the fiscal year provided $511,000 which was offset by an increase in the net effect of unrealized losses on available for sale securities of $67,000, and the remaining unpaid Employee Stock Ownership Plan (ESOP) loan of $762,000 at March 31, 1996. The schedule on the following page presents, for the periods indicated, the total dollar amount of interest income from average interest-earnings assets and the resultant yields, as well as the total dollar amount of interest expense on average interest-bearing liabilities and resultant rates. All average balances are monthly average balances. Management does not believe that the use of monthly balances instead of daily balances has caused a material difference in the information presented. 6
Year Ended March 31, ---------------------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------------------------------------------------------------------------------- Average Interest Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate ------- ---- ---- ------- ---- ---- ------- ---- ---- (Dollars in Thousands) Interest-earning assets: Loans receivable $39,203 $3,194 8.15% $31,034 $2,466 7.95% $27,714 $2,349 8.48% Mortgage-backed securities 26,232 1,619 6.17 30,149 1,574 5.22 34,281 1,815 5.29 Investment securities 6,922 376 5.43 8,960 495 5.52 6,384 274 4.29 FHLB stock 732 53 7.24 727 59 8.12 847 68 8.03 Other interest-bearing deposits 4,639 310 6.68 2,536 100 3.94 2,969 81 2.73 ------- ------ ------- ------ ------- ------ Total interest-earning assets (1) $77,728 $5,552 7.14% $73,406 $4,694 6.39% $72,195 $4,587 6.35% ======= ====== ======= ====== ======= ====== Interest-bearing liabilities: Passbook accounts $ 4,225 $ 91 2.15% $ 4,437 $ 109 2.46% $ 4,665 $ 121 2.59% Demand and NOW deposits 5,958 185 3.11 7,194 189 2.63 8,190 223 2.72 Certificate accounts 56,754 3,165 5.58 55,717 2,476 4.44 54,190 2,307 4.26 Borrowings 208 13 6.25 654 42 6.42 60 2 3.33 ------- ------- ----- ------- ------ ---- ------- ------ ----- Total interest-bearing liabilities $67,145 $3,454 5.14% $68,002 $2,816 4.14% $67,105 $2,653 3.95% ======= ====== ===== ======= ====== ===== ======= ====== ===== Net interest income $2,098 $1,878 $1,934 ====== ====== ====== Net interest rate spread(2) 2.00% 2.25% 2.40% ===== ===== ===== Net interest earnings assets $10,583 $5,404 $5,090 ======= ====== ====== Net interest margin(3) 2.70% 2.56% 2.68% ===== ===== ===== Average interest-earning assets to average interest-bearing liabilities 115.76% 107.95% 107.59% ======= ======= =======
(1) Calculated net of deferred loan fees and discounts, loans in process and loss reserves. (2) Net interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average interest-earning assets. 7 The following table presents the weighted average yields earned on loans, mortgage-backed securities, investments, and other interest-earning assets, and the weighted average rates paid on deposits and borrowings and the resultant interest rate spreads at the dates indicated.
At March 31, ------------------- 1996 1995 1994 ---- ---- ---- Weighted average yield on: Loans receivable 8.51% 8.08% 8.00% Mortgage-backed securities 6.65 5.95 5.49 Investment securities 6.05 5.64 4.47 FHLB Stock 6.75 7.00 8.33 Other interest-earning assets 5.15 5.33 2.46 Combined weighted average yield on interest-earning assets 7.53 6.84 6.32 ---- ---- ---- Weighted average rate paid on: Passbook accounts 2.50 2.50 2.50 Demand and NOW deposits 3.06 2.79 2.59 Certificate accounts 5.56 5.37 4.10 FHLB Advances 0.00 6.16 0.00 Combined weighted average rate paid on interest-bearing liabilities 5.16 4.99 3.80 ---- ---- ---- Spread 2.37% 1.85% 2.52% ==== ==== ====
8 Rate/Volume Analysis - -------------------- The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes due to changes in outstanding balances and those due to changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (ie., changes in volume multiplied by prior interest rate) and (ii) changes in rates (i.e., changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended March 31, ---------------------------------------------------------------- 1996 vs 1995 1995 vs 1994 ---------------------------------------------------------------- Increase Increase (Decrease) Total (Decrease) Total Due to Increase Due to Increase Volume Rate (Decrease) Volume Rate (Decrease) ------ ---- ---------- ------ ---- ---------- (Dollars in Thousands) Interest-earning assets: Loans receivable $ 667 $ 76 $ 743 $ 270 $ (153) $ 117 Mortgage-backed securities (219) 264 45 (216) (25) (241) Investment securities (125) (9) (134) 129 92 221 FHLB Stock 0 (6) (6) (10) 1 (9) Other interest- earning assets 115 95 210 (11) 30 19 ----- ---- ----- ----- ----- ----- Total interest- earnings assets 438 420 858 162 (55) 107 ----- ---- ----- ----- ----- ----- Interest-bearing liabilities: Savings deposits (5) (13) (18) (6) (6) (12) Demand and NOW (36) 32 (4) (26) (8) (34) Certificate accounts 47 642 689 66 103 169 Borrowings (28) (1) (29) 38 2 40 ----- ---- ----- ----- ----- ----- Total interest- bearing liabilities (22) 660 638 72 91 163 ----- ---- ----- ----- ----- --- Net interest income $ 460 $(240) $ 220 $ 90 $ (146) $ (56) ====== ===== ===== ===== ===== =====
9 Comparison of operating results for the years ended March 31, 1996 and - ---------------------------------------------------------------------- March 31, 1995. - --------------- Performance Summary. Net earnings for the year ended March 31, 1996 increased by $93,722 or 22.5% to $511,000 from $417,000 for the year ended March 31, 1995. The increase was primarily due to an increase in net interest income of $220,000 offset by an increase in non-interest income in the amount of $92,000 and an increase in non-interest expense of $148,000. For the years ended March 31, 1996 and 1995, the return on average assets was .64% and .56%, respectively, while the return on average equity was 4.25% and 6.68%, respectively. Net Interest Income. Net interest income increased from $1.9 million for the fiscal year ended March 31, 1995 to $2.1 million for the current fiscal year, an increase of $220,000. This reflects an increase of $858,000 in interest income to $5.6 million from $4.7 million and an increase in interest expense of $638,000 to $3.5 million from $2.8 million. The net increase was primarily due to an increase in the ratio of average interest-earning assets to average interest-bearing liabilities to 115.76% in 1996 from 107.95% in 1995. The increase in the ratio was due primarily to the deployment of the $10.0 million of net proceeds from the Company's stock conversion. For the year ended March 31, 1996, the average yield on interest-earning assets was 7.14% compared to 6.39% for 1995. The average cost of interest-bearing liabilities was 5.14% for the year ended March 31, 1996 an increase from 4.14% for 1995. The average balance of interest-earning assets increased $4.3 million to $77.7 million for the year ended March 31, 1996 compared to $73.4 million for fiscal 1995. During the same period, the average balance of interest-bearing liabilities decreased by $857,000 to $67.1 million for the year ended March 31, 1996 from $68.0 million in fiscal 1995. Due to higher funding costs, the average interest rate spread was 2.00% for the year ended March 31, 1996 compared to 2.25% for fiscal 1995. The average net interest margin increased to 2.70% at March 31, 1996 compared to 2.56% for the year ended March 31, 1995. Provision for loan losses. During the year ended March 31, 1996, the Company recorded a $14,000 provision for loan losses in accordance with its classification of assets policy. The Company's loan portfolio consists primarily of one-to-four family mortgage loans, and has experienced minimal charge-offs in the past two years. The allowance for loan losses of $131,000 or .29% of loans receivable, net at March 31, 1996, compares to $119,000 or .36% of loans receivable, net at March 31, 1995. The allowance for loan losses as a percentage of non-performing assets was 107.38% at March 31, 1996, compared to 70.83% at March 31, 1995. Management will continue to monitor its allowance for loan losses and make additions to the allowance through the provision for loan losses as economic conditions dictate. Although the Company maintains its allowance for loan losses at a level which it considers to be adequate to provide for loan losses, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in the future. Non-Interest Income. For the year ended March 31, 1996, non-interest income increased by $92,000 or 49% due primarily to losses on securities sales in the amount of $41,000 in 1995 being off-set by a gain of $2,000 on securities sales in 1996. In addition, an increase in the dividend received from the Company's investment in its data processing center enhanced non-interest income. Non-Interest Expense. Non-interest expense increased by $148,000 to $1.6 10 million for the year ended March 31, 1996 from $1.4 million for the year ended March 31, 1995. The increase was due to expenses in the amount of $103,000 for the newly adopted Hardin Bancorp, Inc. Employee Stock Ownership Plan (ESOP), and additional legal, accounting, and tax expense associated with becoming a stock company. Income taxes. Income taxes increased by $56,000 to $277,000 for the year ended March 31, 1996 from $221,000 for the year ended March 31, 1995. The increase is due to the increase in pre-tax income. The Company's effective tax rate was 35% for both fiscal 1996 and 1995. Comparison of Operating Results for the Years Ended March 31, 1995 and - ---------------------------------------------------------------------- March 31, 1994 - -------------- Performance Summary. Net earnings for the year ended March 31, 1995 decreased by $224,000 or 34.9% to $417,000 from $641,000 for the year ended March 31, 1994. The decrease was primarily due to a reduction in non-interest income of $121,000 and an increase in non-interest expense of $177,000 offset by a reduction in income tax expense of $104,000. For the years ended March 31, 1995 and 1994, the return on average assets was .56% and .87%, respectively, while the return on average equity was 6.68% and 11.18%, respectively. Net Interest Income. For the year ended March 31, 1995, net interest income decreased by $56,000. This reflects an increase of $107,000 in interest income to $4.7 million from $4.6 million and an increase in interest expense of $163,000 to $2.8 million and $2.7 million. The net decrease was primarily due to the cost of the Company's interest-bearing liabilities increasing faster than the yield on the Company's interest-earning assets. The yield on the Company's assets was negatively impacted by the lagging nature of repricing on the Company's mortgage-backed securities portfolio, a significant portion of which reprices based upon the Eleventh District cost of funds index. In addition, to address competition for deposits in the local area, the Bank offered special certificate accounts during the 1995 fiscal year. For the year ended March 31, 1995, the average yield on interest-earning assets was 6.39% compared to 6.35% for 1994. The average cost of interest-bearing liabilities was 4.14% for the year ended March 31, 1995 an increase from 3.95% for 1994. The average balance of interest-earning assets increased by $1.2 million to $73.4 million for the year ended March 31, 1995 compared to $72.2 million for fiscal 1994. During this same time period, the average balance of interest-bearing liabilities increased by $897,000 to $68.0 million for the year ended March 31, 1995 from $67.1 million fiscal 1994. Due to the higher funding costs, the average interest rate spread was 2.25% for the year ended March 31, 1995 compared to 2.40% for fiscal 1994. The average net interest margin was 2.56% for the year ended March 31, 1995 compared to 2.68% for the year ended March 31, 1994. Provision for Loan Losses. During the year ended March 31, 1995, the Bank did not record a provision for additional loan losses. The Bank's loan portfolio consists primarily of one-to-four family mortgage loans, and the Bank experienced little change in the composition of its loan portfolio and experienced minimal charge-offs in the past three years. The allowance for loan losses of $119,000 or .36% of loans receivable, net at March 31, 1995, compares to $117,000 or .40% of loans receivable, net at March 31, 1994. The allowance for loan losses as a percentage of non-performing assets was 70.83% at March 31, 1995, compared to 64.29% at March 31, 1994. Non-Interest Income. For the year ended March 31, 1995, non-interest income decreased by $121,000 or 39.3% due primarily to fewer gains being realized from the sale of mortgage loans in the secondary market, a loss on the sale of available for sale securities, partially offset by an increase in other 11 income. The gain on the sale of loans in the secondary market decreased $84,000 as the Bank discontinued selling fixed rate loan originations in the secondary market early in fiscal 1995. In fiscal 1995, losses of $39,000 were incurred from the sale of available for sale securities and loans held for sale. During fiscal 1994, a gain of $126,000 was recognized on the sale of securities. Other income includes commissions on insurance sales by the Bank's service corporation of $105,000 during fiscal 1995 compared to $53,000 during fiscal 1994, the service corporation's first year of existence. Non-Interest Expense. Non-interest expense increased by $177,000 to $1.4 million for the year ended March 31, 1995 from $1.2 million for the year ended March 31, 1994. Compensation expense increased $113,000 to $748,000 in fiscal 1995 from $635,000 in fiscal 1994. During fiscal 1995, the Bank adopted a supplemental officers retirement plan which increased expenses by $22,000. During this period, the Bank was required due to updated actuarial computations to increase its contribution to its retirement plan by $48,000. The Bank also deferred $28,000 less in compensation cost for fiscal 1995 compared with fiscal 1994 due to a decrease in loan originations. In accordance with generally accepted accounting principles ("GAAP"), the Bank defers certain direct loan origination and modification costs and amortizes these costs as an adjustment to interest income. Federal insurance premiums increased $16,000 to $154,000 from $138,000 due to a credit received in fiscal 1994 for the return of the prepaid Federal Savings and Loan Insurance Corporation ("FSLIC") secondary reserve. In addition, other operating expenses increased $49,000 to $346,000 in fiscal 1995 from $297,000 in fiscal 1994, due primarily to the operations of the Bank's service corporation. Income Taxes. Income taxes decreased by $104,000 to $221,000 for the year ended March 31, 1995 from $325,000 for the year ended March 31, 1994. This decease results from the decrease in income before income taxes. The Bank's effective tax rates were 35% and 34% for fiscal 1995 and 1994, respectively. Asset Liability Management - -------------------------- One of the Company's principal financial objectives is to achieve long-term profitability while reducing its exposure to fluctuations in interest rates. The Company has sought to reduce exposure of its earnings to changes in market interest rates by managing the mismatch between asset and liability maturities and interest rates. The principal element in achieving this objective has been to increase the interest-rate sensitivity of the Company's assets by originating loans with interest rates subject to periodic adjustment to market conditions. Accordingly, the Company has emphasized the origination of ARM loans and consumer loans for retention in its portfolio. Until early in fiscal 1995, the Company also generally sold its long-term fixed-rate loans in the secondary market. The Company currently retains longer term fixed rate loans in portfolio as part of its effort to increase the size and yield of its loan portfolio and to reduce its mortgage-backed securities portfolio. The Company has adopted an informal policy, which is subject to change from time to time, to increase the longer term fixed rate loans in its portfolio so that such loans comprise up to 40% of total loans receivable. In addition, the Company has invested in short to intermediate term investments and adjustable rate mortgage-backed securities, which although long-term in nature, adjust periodically in response to changes in general levels ofinterest rates. The Company has historically relied upon retail deposit accounts as its primary source of funds and will continue to do so. Management believes that retail deposit accounts as a source of funds, compared to brokered deposits and long- term borrowings, reduces the effects of interest rate fluctuations because these deposits generally represent a more stable source of funds. In addition, the Company has emphasized longer term certificate accounts in an effort to extend the maturity of its liabilities. 12 The Company's Board of Directors has formulated an Asset Liability Management Policy designed to promote long-term profitability while managing interest-rate risk. The Company recognizes the inherent risk in its interest-sensitive gap position, particularly in periods of fluctuating interest rates. The current positive one-year gap position is within the board-prescribed limits for interest rate periods and for periods when rates are increasing. The following table sets forth at March 31, 1996, the amount of interest-earning assets and interest-bearing liabilities maturing or repricing within the time periods indicated. The table assumes an 8% annual prepayment rate for fixed- rate real estate loans, adjustable-rate real estate loans, mortgage-backed securities and consumer loans. The Bank's deposits are classified as repricing in the "six months or less" category, except for certificate accounts which are classified based upon their actual maturity.
Maturing or Repricing ----------------------------------------------------------- Over 6 Over Over 6 Months Months to 1-3 3-5 Over or Less One Year Years Years 5 Years Total Amount Amoun Amount Amount Amount Amount ----------------------------------------------------------- (Dollars in Thousands) Interest-earning assets: Fixed rate real estate loans $ 930 $ 884 $ 3,049 $2,570 $13,069 $20,502 Adjustable rate real estate loans 11,048 7,927 1,900 - - 20,875 Consumer loans 808 497 1,377 1,393 460 4,535 Mortgage-backed securities HTM 9,778 6,521 - - - 16,299 Mortgage-backed securities AFS 6,949 617 - 341 - 7,907 Investment securities 1,499 997 888 499 2,480 6,363 FHLB Stock 742 - - - - 742 Other 5,430 - - - - 5,430 ----- ----- ---- ---- ----- ----- Total interest- earning assets $37,184 $17,443 $ 7,214 $4,803 $16,009 $82,653 ====== ====== ===== ===== ====== ====== Interest-bearing liabilities: Savings deposits $ 3,676 $ - $ - $ - $ - $ 3,676 Demand and NOW deposits 5,877 - - - - 5,877 Certificate accounts 28,448 13,548 8,134 6,619 138 56,887 ------ ------ ----- ----- --- ------ Total interest- bearing liabilities $38,001 $13,548 $ 8,134 $6,619 $ 138 $66,440 ====== ====== ===== ===== === ====== Interest-earning assets less interest-bearing liabilities (817) 3,895 (920)(1,816) 15,871 16,213 Cumulative interest-rate sensitivity gap (817) 3,078 2,158 342 16,213 16,213 Cumulative interest-rate gap as a percentage of assets at 3/31/96 -.98% 3.69% 2.59% 0.41% 19.44% 19.44% Cumulative interest-rate gap as a percentage of interest-earning assets at 3/31/96 -.99 3.72 2.61 0.41 19.61 19.61
13 Net Portfolio Value - ------------------- In order to encourage associations to reduce their interest rate risk, the OTS adopted a rule incorporating an interest rate risk ("IRR") component into the risk-based capital rules. The IRR component is a dollar amount that will be deducted from total capital for the purpose of calculating an institution's risk-based capital requirement and is measured in terms of the sensitivity of its net portfolio value ("NPV") to changes in interest rates. NPV is the difference between incoming and outgoing discounted cash flows from assets, liabilities, and off-balance sheet contracts. An institution's IRR is measured as the change to its NPV as a result of a hypothetical 200 basis point ("bp") change in market interest rates. A resulting change in NPV of more than 2% of the estimated market value of its assets will require the institution to deduct from its capital 50% of that excess change. The rules provide that the OTS will calculate the IRR component quarterly for each institution. The Bank, based on asset size and risk-based capital, has been informed by the OTS that it is exempt from this rule. Nevertheless, the following table presents the Bank's NPV at March 31, 1996, as calculated by the OTS, based on information provided to the OTS by the Bank.
Net Portfolio Value NPV as % of PV of Assets Change in Rates $ Amount $ Change % Change NPV Ratio Change - -------- -------- -------- -------- --------- ------ +400 bp 7,368 -4,618 -39% 10.05% -493 bp +300 bp 8,796 -3,191 -27 11.69 -329 bp +200 bp 10,099 -1,888 -16 13.11 -187 bp +100 bp 11,171 -816 -7 14.21 -78 bp - bp 11,986 14.98 - -l00 bp 12,517 531 +4 15.43 +45 bp - -200 bp 12,766 780 +7 15.57 +59 bp - -300 bp 13,002 1,016 +8 15.70 +71 bp - -400 bp 13,451 1,465 +12 16.03 +105 bp
March 31, 1996 ------------- *** Risk measures: 200 BP rate shock *** Pre-Shock NPV ratio: NPV as % of PV of Assets 14.98% Exposure Measure: Post-shock NPV ratio 13.11 Sensitivity Measure: Change in NPV ratio -187 bp *** Calculation of capital component *** Change in NPV as % of PV of Assets -2.36% Interest rate risk capital component ($000) -
Certain shortcomings are inherent in the method of analysis presented in both the computation of NPV and in the analysis presented in prior tables setting forth the maturing and repricing of interest-earning assets and interest-bearing liabilities. Although certain assets and liabilities may have similar maturities or periods within which they will reprice, they may react differently to changes in market interest rates. The interest rates on certain types of assets and 14 liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, adjustable-rate mortgages have features which restrict changes in interest rates on a short-term basis and over the life of the asset. The proportion of adjustable-rate loans could be reduced in future periods if market interest rates would decrease and remain at lower levels for a sustained period, due to increased refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of a sustained interest rate increase. Liquidity and Capital Resources - ------------------------------- The Company's primary sources of funds are deposits, repayments and prepayments of loans and mortgage-backed securities, the maturity of investment securities and interest income. Although maturity and scheduled amortization of loans are relatively predictable sources of funds, deposit flows and prepayments on loans are influenced significantly by general interest rates, economic conditions and competition. Mortgage loans and mortgage-backed securities prepayments accelerated through all of 1992 and 1993 and the first few months of 1994, due to lower level of interest rates which have prompted significant mortgage loan refinancing activity. Since early 1994, however, interest rates have increased and mortgage loan refinancing has decreased. The primary investing activity of the Company is originating adjustable rate mortgages and fixed rate mortgages to be held to maturity. The Company will purchase loans from other Missouri originators if loans are unavailable in its market area. For the fiscal years ended March 31, 1996 and 1995, the Bank originated loans for its portfolio in the amount of $13.9 million and $11.2 million, respectively. Purchases of loans during fiscal 1996 and 1995 totaled $6.9 million and $789,000, respectively. For the fiscal years ended March 31, 1996 and 1995, these activities were partially funded by principal repayments of $13.4 million and $13.5 million, respectively. The Bank is required to maintain minimum levels of liquid assets under the Office of Thrift Supervision (OTS) regulations. Savings institutions are required to maintain an average daily balance of liquid assets (including cash, certain time deposits, and specified U.S. Government, State or Federal Agency obligations) of not less than 5.0% of its average daily balance of net withdrawable accounts plus short-term borrowings It is the Bank's policy to maintain its liquidity portfolio in excess of regulatory requirements. The Bank's eligible liquidity ratios were 7.74%, and 18.74% respectively, at March 31, 1996 and 1995. The Company's most liquid assets are cash and cash equivalents, which include short-term investments. At March 31, 1996 and 1995, cash and cash equivalents were $5.7 million and $4.5 million, respectively. Liquidity management for the Company is both an ongoing and long-term component of the Company's asset liability management strategy. Excess funds generally are invested in overnight deposits at the Federal Home Loan Bank of Des Moines (FHLB). Should the Company require funds beyond its ability to generate them internally additional sources of funds are available through advances from the FHLB. The Company would pledge its FHLB stock or certain other assets as collateral for such advances. At March 31, 1996, the Bank had outstanding loan commitments of $1,007,000 and undisbursed loans in process of $766,000. The Bank anticipates it will have sufficient funds available to meet its current loan commitments, including loan applications received and in process prior to the issuance of firm commitments. 15 Certificates of deposit which are scheduled to mature in one year or less at March 31, 1996 were $42.0 million. Management believes that a significant portion of such deposits will remain with the Bank. At March 31, 1996, the Bank had tangible capital of $10.9 million, or 13.8% of total adjusted assets, which is approximately $9.7 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. The Bank had core capital of $10.9 million, or 13.8% of adjusted total assets, which is $8.5 million above the minimum leverage ratio requirement of 3.0% in effect on that date. The Bank had total capital of $11.0 million and total risk-weighted assets of $33.3 million, or total capital of 33.1% of risk-weighted assets. This was $8.4 million above the 8.0% requirement in effect on that date. The deposits of savings associations such as the Bank are presently insured by the Savings Association Insurance Fund (the "SAIF"), which along with the Bank Insurance Fund (the "BIF"), is one of the two insurance funds administered by the Federal Deposit Insurance Corporation. Financial institutions which are members of the BIF are experiencing substantially lower deposit insurance premiums because the BIF has achieved its required level of reserves while the SAIF has not yet achieved its required level of reserves. A number of proposals are being considered to recapitalize the SAIF in order to eliminate this disparity. One plan currently being considered by the Treasury Department, the FDIC, the OTS and the Congress provides for a one-time assessment of .85% to .90% to be imposed on all deposits assessed at the SAIF rates as of March 31, 1995, including those held by commercial banks, and for BIF deposit insurance premiums to be used to pay the FICO bond interest on a pro rata basis together with SAIF premiums. The BIF and SAIF would be merged into one fund as soon as practicable, but no later than January 1, 1998. There can be no assurance that any particular proposal will be implemented or that premiums for either BIF or SAIF members will not be adjusted in the future by the FDIC or by legislative action. If the legislation is enacted, the Bank will be assessed approximately $600,000. Assuming the special assessment is tax deductible, the cost, net of income tax benefits, will be approximately $375,000. Future assessments would then be anticipated to be reduced to .04% to .31% of eligible deposits, based on risk classification assigned to the Bank by FDIC. Recent Accounting Developments - ------------------------------ Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," is effective for the fiscal year beginning April 1, 1996. The statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized if the sum of the expected future cash flows is less than the carrying amount of the asset. Management does not expect the implementation of SFAS No. 121 to have a material impact on the Company's consolidated financial position or results of operations. SFAS No. 122, Accounting for Mortgage Servicing Rights, will be effective for the Bank for the year beginning April 1, 1996 and generally requires entities that sell or securities loans and retain the mortgage servicing rights to allocate the total cost of the mortgage loans to the mortgage servicing right and the loan based on their relative fair value. Costs allocated to mortgage servicing rights should be recognized as a separate asset and amortized over the period of estimated net servicing income and evaluated for impairment based on fair value. The adoption of this statement is not expected to have a material effect on the consolidated financial statements. Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-based Compensation" will require pro forma disclosures in 1997 of net earnings and earnings per share as if the new accounting method based on the 16 estimated fair value of employee stock options had been adopted. The Company has not decided if the optional accounting treatment allowed by SFAS No. 123 will be adopted. In April 1995, the FASB issued SOP 94-6, "Disclosure of Certain Significant Risks and Uncertainties." This SOP applies to financial statements prepared in conformity with generally accepted accounting principles by all nongovernmental entities. The disclosure requirements in SOP 94-6 focus primarily on risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near-term functioning of the reporting entity. The risks and uncertainties discussed in SOP 94-6 stem from the nature of the entity's operations, from the necessary use of estimates in the preparation of the entity's financial statements, and from significant concentrations in certain aspects of the entity's operations. SOP 94-6 is effective for financial statements issued for fiscal years ending after December 31, 1995 and is not expected to have any impact on the Bank's operations. For a discussion of certain recent accounting developments including SFAS No. 107, SFAS No. 114, SFAS No. 115, SFAS No. 118, SFAS No. 119, and SOP 93-6 see Notes to the Consolidated Financial Statements in this Annual Report. Impact of Inflation and Changing Prices - --------------------------------------- The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which generally requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Nearly all the assets and liabilities of the Company are financial, unlike most industrial companies. As a result, the Company's performance is directly impacted by changes in interest rates, which are indirectly influenced by inflationary expectations. The Company's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its financial liabilities in its asset/liability management may tend to minimize the effect of change in interest rates on the Company's performance. Changes in interest rates do not necessarily move to the same extent as changes in the price of goods and services. In the current increasing interest rate environment, liquidity and the maturity structure of the Company's assets and liabilities are critical to the maintenance of acceptable performance levels. 17 [LOGO OF KPMG PEAT MARWICK LLP APPEARS HERE] 1000 Walnut, Suite 1600 P.O. Box 13127 Kansas City, MO 64199 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Hardin Bancorp, Inc.: We have audited the accompanying consolidated balance sheet of Hardin Bancorp, Inc. and subsidiaries (the Company) as of March 31, 1996 and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended, and the balance sheet of Hardin Federal Savings Bank and subsidiary (the Bank) as of March 31, 1995 and the related consolidated statements of earnings, stockholders' equity and cash flows for the years ended March 31, 1995 and 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and the Bank as of March 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1996, in conformity with generally accepted accounting principles. As described in note 1 to the consolidated financial statements, the Bank adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective April 1, 1994. /s/ KPMG Peat Marwick LLP Kansas City, Missouri May 24, 1996 18 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Consolidated Balance Sheets March 31, 1996 and 1995
Assets 1996 1995 ------ ---- ---- Cash $ 253,557 236,475 Interest-bearing deposits in other financial institutions 5,430,396 4,205,641 Certificates of deposit - 100,000 Investment securities available-for-sale (note 3) 6,362,850 7,760,068 Mortgage-backed securities (note 4): Held-to-maturity 16,298,987 28,473,015 Available-for-sale 7,906,862 - Loans receivable, net (note 5) 45,031,460 33,230,233 Accrued interest receivable on: Investment securities 116,562 110,752 Mortgage-backed securities 188,532 193,059 Loans receivable 296,775 186,296 Premises and equipment (note 6) 510,218 512,390 Stock in Federal Home Loan Bank (FHLB) of Des Moines, at cost 742,000 727,400 Prepaid expenses and other assets 248,623 257,726 ---------- ---------- Total assets $ 83,386,822 75,993,055 ========== ========== Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Deposits (note 7) $ 66,605,247 67,449,281 Advances from borrowers for property taxes and insurance 223,752 205,306 Advances on FHLB line of credit (note 8) - 1,500,000 Accrued interest payable 30,385 31,969 Income taxes payable (note 9): Current 56,575 4,132 Deferred 48,000 89,000 Accrued expenses and other liabilities 387,922 320,853 ---------- ---------- Total liabilities 67,351,881 69,600,541 ---------- ---------- Stockholders' equity: Common stock, $.01 par value; 3,500,000 shares authorized, 1,058,000 shares issued and outstanding at March 31, 1996 10,580 - Serial preferred stock, $.01 par value; 500,000 shares authorized, none issued or outstanding - - Additional paid-in capital 10,055,448 - Retained earnings (note 12) 6,885,230 6,480,507 Net unrealized loss on available-for-sale securities, net (154,597) (87,993) Unearned employee benefits (note 10) (761,720) - ---------- ---------- Total stockholders' equity 16,034,941 6,392,514 Commitments (note 5) Total liabilities $ 83,386,822 75,993,055 ========== ==========
See accompanying notes to consolidated financial statements. 19 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Consolidated Statements of Earnings Years ended March 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Interest income: Loans receivable $ 3,193,688 2,466,374 2,348,628 Mortgage-backed securities 1,619,048 1,573,741 1,815,290 Investment securities 376,379 495,302 274,584 Other 363,164 158,587 148,939 --------- --------- --------- Total interest income 5,552,279 4,694,004 4,587,441 --------- --------- --------- Interest expense: Deposits 3,441,049 2,773,931 2,650,493 FHLB advances 12,876 41,725 2,255 --------- --------- --------- Total interest expense 3,453,925 2,815,656 2,652,748 --------- --------- --------- Net interest income 2,098,354 1,878,348 1,934,693 Provision for losses on loans (note 5) 13,902 - 26,400 --------- --------- --------- Net interest income after provision for losses 2,084,452 1,878,348 1,908,293 ========= ========= ========= Noninterest income: Service charges 67,021 67,799 66,548 Loan servicing fees 42,675 48,611 56,075 Gain on sale of loans held for sale - 1,433 85,558 Gain (loss) on sale of investments and mortgage- backed securities (notes 3 and 4) 1,878 (40,816) 40,750 Other income 167,290 110,261 58,892 --------- --------- --------- Total noninterest income 278,875 187,288 307,823 --------- --------- --------- Noninterest expenses: Compensation and benefits (note 10) 854,732 748,074 634,832 Occupancy and equipment 106,008 93,765 87,166 Federal insurance premiums 153,649 154,018 138,376 Data processing 90,897 85,835 81,753 Real estate owned (3,050) 205 9,989 Other 373,826 345,863 297,175 --------- --------- --------- Total noninterest expenses 1,576,062 1,427,760 1,249,291 --------- --------- --------- Earnings before income taxes 787,265 637,876 966,825 Income tax expense (note 9) 276,742 221,075 325,389 --------- --------- --------- Net earnings $ 510,523 416,801 641,436 ========= ========= ========= Net earnings per share (pro forma) $ .52 N/A N/A ========= ========= ========= Average number of shares outstanding (pro forma) 973,383 N/A N/A ========= ========= =========
See accompanying notes to consolidated financial statements. 20 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Consolidated Statements of Stockholders' Equity Years ended March 31, 1996, 1995 and 1994
Net unrealized loss on available- Additional for-sale Unearned Common paid-in Retained securities, employee stock capital earnings net benefits Total ----- ------- -------- --- -------- ----- Balance at March 31 1993 $ - - 5,422,270 - - 5,422,270 Net earnings - - 641,436 - - 641,436 Balance at March 31, 1994 - - 6,063,706 - - 6,063,706 Adoption of accounting change to record net unrealized loss on securities available- for-sale at April 1, 1994, net of taxes - - - (16,500) - (16,500) Net earnings - - 416,801 - - 416,801 Change in net unrealized loss on securities available-for-sale, net of tax - - - (71,493) - (71,493) Balance at March 31, 1995 - - 6,480,507 (87,993) - 6,392,514 Net earnings - - 510,523 - - 510,523 Sale of common stock, net of issuance costs 10,580 10,036,820 - - - 10,047,400 Change in net unrealized loss on securities available-for-sale, net of tax - - - (66,604) - (66,604) Unearned Employee Stock Ownership Plan (ESOP) benefit - - - - (846,400) (846,400) Allocation of ESOP shares - 18,628 - - 84,680 103,308 Dividends declared ($.10 per share) - - (105,800) - - (105,800) ------ ---------- --------- --------- --------- ---------- Balance at March 31, 1996 $ 10,580 10,055,448 6,885,230 (154,597) (761,720) 16,034,941 ====== ========== ========= ========= ========= ==========
See accompanying notes to consolidated financial statements. 21 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Consolidated Statements of Cash Flows Years ended March 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Operating activities: Net earnings $ 510,523 416,801 641,436 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for losses on loans 13,902 - 26,400 Depreciation 44,360 44,539 39,536 Premium amortization and accretion of discounts and deferred loan fees, net 91,248 90,835 50,297 FHLB stock dividends (14,600) - (12,400) Loss (gain) on sale of loans and securities, net (1,878) 39,383 (126,308) Gain on sales of premises and equipment (4,877) - - (Gain) loss on sales of real estate owned - (564) 9,678 Proceeds from sale of loans held for sale - 235,433 4,947,921 Origination of loans held for sale - (234,000) (4,862,363) Allocation of ESOP shares 103,308 - - Provision for deferred income taxes 4,565 (26,254) 22,607 Changes in other assets and liabilities: Accrued interest receivable (111,762) (61,190) 81,454 Prepaid expenses and other assets 9,103 31,158 (6,018) Accrued interest payable (1,584) (264) (6,229) Accrued expenses and other liabilities (38,731) 71,609 43,804 Income taxes payable 52,443 (61,057) (225,463) ----------- --------- ---------- Net cash provided by operating activities 656,020 546,429 624,352 ----------- --------- ---------- Investing activities: Net increase in loans receivable (4,871,370) (3,347,718) (2,407,937) Proceeds from maturities of certificates of deposit in other financial institutions 100,000 497,473 1,533 Purchase of loans (6,941,351) (788,502) - Purchase of mortgage-backed securities (522,781) (1,276,446) (6,079,884) Principal payments on mortgage-backed securities 4,475,167 5,437,003 8,634,960 Proceeds from sales of mortgage-backed securities - - 700,421 Purchase of investment securities available-for-sale (6,657,843) (7,489,375) - Proceeds from maturities of investment securities available- for-sale 4,901,696 700,000 - Proceeds from sales of investment securities available-for-sale 3,264,197 5,457,594 - Purchase of investment securities held-to-maturity - - (5,692,132) Proceeds from maturities of investment securities held-to- maturity - - 2,112,769 Proceeds from sales of investment securities held-to-maturity - - 1,894,085 Purchase of stock in FHLB of Des Moines - - (444,700) Sale of stock in FHLB of Des Moines - - 355,000 Proceeds from sales of real estate owned - 35,976 33,009 Purchase of office property and equipment (50,810) (23,694) (14,539) Proceeds from sale of office properties and equipment 13,500 1,260 - ----------- --------- ---------- Net cash used in investing activities $ (6,289,595) (796,429) (907,415) ----------- --------- ----------
(Continued) 22 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Consolidated Statements of Cash Flows, Continued
1996 1995 1994 ---- ---- ---- Financing activities: Net increase (decrease) in deposits $ (844,034) 727,003 (753,596) Net increase (decrease) in advances from borrowers for taxes and insurance 18,446 3,045 (4,409) Proceeds from FHLB advances 1,000,000 2,500,000 21,468,000 Repayments of FHLB advances (2,500,000) (1,000,000) (21,468,000) Proceeds from issuance of stock, net of issuance costs 9,201,000 - - ---------- --------- ----------- Net cash provided by (used in) financing activities 6,875,412 2,230,048 (758,005) ---------- --------- ----------- Increase (decrease) in cash and cash equivalents 1,241,837 1,980,048 (1,041,068) Cash and cash equivalents at beginning of year 4,442,116 2,462,068 3,503,136 ---------- --------- ----------- Cash and cash equivalents at end of year $ 5,683,953 4,442,116 2,462,068 ========== ========= =========== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 3,455,509 2,821,920 2,664,977 ========== ========= =========== Income taxes, net of refunds $ 224,299 308,388 528,244 ========== ========= =========== Noncash investing and financing activities: Loans transferred to real estate owned $ - 24,540 33,503 ========== ========= =========== Loans to facilitate sales of real estate owned $ - - 7,100 ========== ========= =========== Dividend declared and payable on April 18, 1996 $ 105,800 - - ========== ========= ===========
See accompanying notes to consolidated financial statements. 23 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements March 31, 1996, 1995 and 1994 (1) Conversion and Acquisition of the Bank by the Company ----------------------------------------------------- On September 28, 1995, Hardin Federal Savings Bank (the Bank) converted from a federally chartered mutual savings bank to a federally chartered stock savings bank, at which time all of the capital stock of the converted bank was acquired by Hardin Bancorp, Inc. (the Company). The Company was organized to acquire all of the stock issued by the Bank upon consummation of the stock conversion. Prior to September 28, 1995, the Company had no assets or liabilities and had not engaged in any business other than as necessary to complete its organization and the conversion. On September 28, 1995, in connection with the stock conversion, the Company issued and sold 1,058,000 shares of its common stock, par value $0.01 per share, in a subscription and community offering to the Company's Employee Stock Ownership Plan, the Bank's members and the general public. Total net proceeds of the subscription and community offering, after conversion expenses of approximately $532,600, were approximately $10,047,400. The Company utilized $5,023,700 of the net proceeds to acquire all of the common stock issued by the Bank in connection with the stock conversion. The remaining $5,023,700 was retained for investment. The transaction was accounted for in a manner similar to a pooling-of-interests method. Accordingly, the accounting basis for assets, liabilities and equity accounts remained the same as prior to the conversion. (2) Summary of Significant Accounting Policies ------------------------------------------ (a) Principles of Consolidation and Basis of Presentation ----------------------------------------------------- The accompanying consolidated financial statements include the accounts of the Company and the Bank and its wholly-owned subsidiary, Hardin Savings Service Corporation. Amounts for 1995 and 1994 are those of the Bank. Significant intercompany balances and transactions have been eliminated in consolidation. (b) Investment and Mortgage-backed Securities ----------------------------------------- Prior to April 1, 1994, securities were stated at cost, adjusted for amortization of premiums and accretion of discounts. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," on April 1, 1994. Under SFAS No. 115, investment securities are classified as either available-for-sale or held-to- maturity. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity. The Company classified all investment securities as available-for-sale and classified all mortgage-backed securities as held-to-maturity on the date of adoption. Pursuant to SFAS No. 115, implementation guidance recently issued by the Financial Accounting Standards Board (FASB), the Company reclassified certain held-to-maturity securities with aggregate cost and fair value of approximately $8,076,000 and $7,838,000, respectively, to available-for-sale in December 1995. (Continued) 24 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements Held-to-maturity securities are recorded at amortized cost. Available-for- sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Transfers of securities from available-for-sale to held-to-maturity are recorded at fair value at the date of transfer, and unrealized holding gains or losses are amortized over the remaining life of the security. A decline in the market value of any security below cost that is deemed other than temporary is charged to income, resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to interest income using the interest method. Realized gains and losses are included in income using the specific identification method for determining the cost of the securities sold. (c) Loans ----- The Company determines at the time of origination whether mortgage loans will be held for the Company's portfolio or sold in the secondary market. Loans originated and intended for sale in the secondary market are recorded at the lower of aggregate cost or estimated fair value. Fees received on such loans are deferred and recognized in income as part of the gain or loss on sale. There were no such loans at March 31, 1996 or 1995. The Company defers all loan origination, commitment and related fees and certain direct origination costs related to loans generated for the Bank's portfolio. The Bank amortizes the net fees over the expected life of the individual loans using the interest method. SFAS No. 114 and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan," were adopted effective April 1, 1995. They require that impaired loans be measured based on the present value of future cash flows discounted at the loan's effective interest rate. The impact of these statements on the consolidated financial statements of the Company was immaterial. (d) Allowance for Loan Losses ------------------------- The provision for losses on loans is based upon management's estimate of the amount required to maintain an adequate allowance for losses, relative to the risks in the loan portfolio. This estimate is based on reviews of the loan portfolio, including assessment of the estimated net realizable value of the related underlying collateral, and consideration of historical loss experience, current economic conditions and such other factors which, in the opinion of management, deserve current recognition. Loans are also subject to periodic examination by regulatory agencies. Such agencies may require charge- offs or additions to the allowance based upon their judgments about information available at the time of their examination. (Continued) 25 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements Additionally, accrual of interest on potential problem loans is excluded from income by an offsetting increase in a specific allowance for loss where, in the opinion of management, such exclusion is warranted. (e) Mortgage Banking Activities --------------------------- At March 31, 1996 and 1995, the Bank was servicing loans for others amounting to $9,910,000 and $11,712,000, respectively. Loan servicing fees include servicing fees from investors and certain charges collected from borrowers, such as late payment fees, which are recorded when received. The amount of escrow balances held for borrowers at March 31, 1996 and 1995 was insignificant. (f) Real Estate Owned ----------------- Real estate properties acquired through foreclosure are initially recorded at estimated fair value, less selling costs, at the date of foreclosure. Costs relating to development and improvement of property are capitalized, whereas holding costs are expensed when incurred. Valuations are periodically reviewed and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated fair value, less selling costs. (g) Stock in Federal Home Loan Bank of Des Moines --------------------------------------------- The Bank is a member of the Federal Home Loan Bank (FHLB) system. As a member, the Bank is required to purchase and hold stock in the FHLB of Des Moines in an amount equal to the greater of (a) 1% of unpaid residential loans, (b) 5% of outstanding FHLB advances, or (c) .3% of total assets. FHLB stock is carried at cost in the accompanying consolidated balance sheets. (h) Premises and Equipment ---------------------- Premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided using both straight-line and accelerated methods over the estimated useful lives of the assets, which range from three to thirty-five years. Major replacements and betterments are capitalized while normal maintenance and repairs are charged to expense when incurred. Gains or losses on dispositions are reflected in current operations. (i) Income Taxes ------------ The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. (Continued) 26 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements (j) Effect of New Financial Accounting Standards -------------------------------------------- SFAS No. 122, "Accounting for Mortgage Servicing Rights," will be effective for the year beginning April 1, 1996 and generally requires entities that sell or securitize loans and retain the mortgage servicing rights to allocate the total cost of the mortgage loans to the mortgage servicing right and the loan based on their relative fair value. Costs allocated to mortgage servicing rights should be recognized as a separate asset and amortized over the period of estimated net servicing income and evaluated for impairment based on fair value. The adoption of this statement is not expected to have a material effect on the consolidated financial statements. Also, SFAS No. 123, "Accounting for Stock-based Compensation," will require pro forma disclosures in 1997 of net earnings and earnings per share as if the new accounting method based on the estimated fair value of employee stock options had been adopted. The Company has not decided if the optional accounting treatment allowed by SFAS No. 123 will be adopted. (k) Cash and Cash Equivalents ------------------------- For purposes of the cash flows, all short-term investments with a maturity of three months or less at date of purchase are considered cash equivalents. (l) Use of Estimates ---------------- Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (m) Pro Forma Earnings ------------------ Pro form earnings per share assumes the common shares issued in 1996 have been outstanding for all periods and further assumes no earnings on reinvested proceeds from the sale of the shares. The shares issued to the Employee Stock Ownership Plan are not included in this computation until they are allocated to plan participants (see note 10). (Continued) 27 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements (3) Investment Securities --------------------- A summary of investment securities available-for-sale at March 31, 1996 and 1995 is as follows:
Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---- ----- ------ ----- March 31, 1996: United States government and agency obligations maturing: Within one year $ 2,499,948 102 (4,103) 2,495,947 After one year, but within five years 3,888,286 - (21,383) 3,866,903 ----------- --- ------- --------- $ 6,388,234 102 (25,486) 6,362,850 =========== === ======= =========
Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---- ----- ------ ----- March 31, 1995: United States government and agency obligations maturing: Within one year $ 1,697,573 - 17,727 1,679,846 After one year, but within five years 6,195,819 - 115,597 6,080,222 ----------- --- ------- --------- $ 7,893,392 - 133,324 7,760,068 ============ === ======= =========
Proceeds from the sales of investment securities for the years ended March 31, 1996, 1995 and 1994 totaled $3,264,197, $5,457,594 and $1,894,085, respectively, and resulted in gross realized losses of $3,793 and $40,816 in 1996 and 1995, respectively, and gross realized gains of $5,671 in 1996. At March 31, 1996, investment securities with a fair value of approximately $702,000 were pledged to secure public funds on deposit. (Continued) 28 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements (4) Mortgage-backed Securities -------------------------- Mortgage-backed securities at March 31, 1996 are summarized as follows:
Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---- ----- ------ ----- March 31, 1996: Available-for-sale: FHLMC participation certificates $ 3,324,193 - (105,019) 3,219,174 FNMA participation certificates 4,802,778 - (115,090) 4,687,688 ------------ ------ -------- ---------- $ 8,126,971 - (220,109) 7,906,862 ============ ====== ======== ========== Held-to-maturity: Pass-through certificates $ 2,141,827 20,000 (5,004) 2,156,823 guaranteed by GNMA FHLMC participation certificates 5,825,293 7,031 (193,518) 5,638,806 FNMA participation certificates 8,331,867 14,003 (122,467) 8,223,403 ------------ ------ -------- ---------- $ 16,298,987 41,034 (320,989) 16,019,032 ============ ====== ======== ==========
Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---- ----- ------ ----- March 31, 1995: Held-to-maturity: Pass-through certificates $ 2,475,442 - 62,914 2,412,528 guaranteed by GNMA FHLMC participation certificates 11,079,404 17,484 399,009 10,697,879 FNMA participation certificates 14,918,169 - 467,979 14,450,190 ------------ ------ -------- ---------- $ 28,473,015 17,484 929,902 27,560,597 ============ ====== ======== ==========
During the years ended March 31, 1996 and 1995, there were no sales of mortgage-backed securities. (Continued) 29 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements (5) Loans Receivable ---------------- Loans receivable at March 31, 1996 and 1995 are summarized as follows:
1996 1995 ---- ---- Real estate: One to four family $38,395,962 28,968,859 Land 122,843 100,778 Commercial 184,195 156,865 Construction 2,673,827 358,300 Consumer 4,535,437 4,033,635 ----------- ---------- 45,912,264 33,618,437 Loans in process (766,414) (247,161) Discounts and deferred loan origination fees, net of cost 16,650 (22,138) Allowance for loan losses (131,040) (118,905) ----------- ---------- Net loans receivable $45,031,460 33,230,233 =========== ==========
The Bank evaluates each customer's creditworthiness on a case-by-case basis. Residential loans with a loan-to-value ratio exceeding 80% are required to have private mortgage insurance or to pledge savings account balances or additional collateral. The Bank's principal lending areas are agricultural-based rural communities northeast of Kansas City, Missouri. The Bank makes contractual commitments to extend credit which are subject to the Bank's credit monitoring procedures. At March 31, 1996, the Bank was committed to originate loans aggregating approximately $1,007,340. Fixed loan commitments approximated $975,340 with interest rates ranging from 7.50% to 8.50%. There were no commitments to buy loans at March 31, 1996. The Company had loans to directors and officers at March 31, 1996 and 1995, which carry terms similar to those for other loans. A summary of such loans is as follows:
1996 1995 -------- -------- Balance at beginning of year $187,000 165,000 New loans 22,000 58,000 Payments (63,000) (36,000) -------- ------- Balance at end of year $146,000 187,000 ======== =======
(Continued) 30 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements Activity in the allowance for loan losses for the years ended March 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 ---- ---- ---- Balance at beginning of year $ 118,905 117,023 92,615 Provision for loan losses 13,902 - 26,400 Charge-offs (1,767) (23,493) (4,189) Recoveries - 25,375 2,197 --------- ------- ------- Balance at end of year $ 131,040 118,905 117,023 ========= ======= =======
Nonaccrual loans at March 31, 1996 and 1995 aggregated approximately $93,000 and $109,000, respectively. (6) Premises and Equipment ---------------------- Premises and equipment consist of the following:
1996 1995 ---- ---- Land and improvements $ 78,000 $ 78,000 Building 460,384 421,839 Leasehold improvements 33,603 33,603 Furniture and fixtures 473,578 461,313 Automobile - 15,678 ---------- ---------- 1,045,565 1,010,433 Less accumulated depreciation 535,347 498,043 ---------- ---------- Office properties and equipment, net $ 510,218 $ 512,390 ========== ==========
(Continued) 31 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements (7) Deposits -------- Deposits at March 31, 1996 and 1995 are summarized as follows:
1996 1995 ----------------------- ---------------------- Stated rate Amount Percent Amount Percent ----------- ------ ------- ------ ------- Balance by interest rate: Commercial 0.00% $ 164,993 - % $ 126,142 - % NOW accounts 0.00-2.50% 1,824,743 3 1,984,950 3 Money market demand - accounts 3.25-4.00% 4,052,579 6 4,115,421 6 Passbook accounts 2.50% 3,675,537 6 3,957,937 6 ---------- --- ----------- --- 9,717,852 15 10,184,450 15 ---------- --- ----------- --- Certificate accounts 0.00-2.99% - - 5,000 - 3.00-3.99 109,512 - 3,944,235 6 4.00-4.99 8,731,472 13 16,004,835 24 5.00-5.99 28,248,958 42 20,482,390 30 6.00-6.99 15,427,213 23 5,868,785 9 7.00-7.99 3,987,487 6 9,941,340 15 8.00 and up 382,753 1 1,018,246 1 ----------- --- ----------- --- 56,887,395 85 57,264,831 85 ----------- --- ----------- --- $66,605,247 100% $67,449,281 100% =========== === =========== === Weighted average interest rate on deposits at March 31 5.16% 4.96 ==== ====
A summary of contractual maturity dates for certificate accounts at March 31, 1996 is as follows:
Amount Percent ------ ------- Contractual maturity of certificate accounts: Under 12 months $41,995,948 74% 12 to 24 months 6,192,281 11 24 to 36 months 1,941,646 3 36 to 48 months 6,332,678 11 48 to 60 months 286,195 1 Over 60 months 138,647 - ----------- --- $56,887,395 100% =========== ===
(Continued) 32 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements The components of interest expense on deposits for the years ended March 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 ---- ---- ---- NOW, passbook, Super NOW and money market demand $ 276,250 297,811 344,054 Certificates of deposit 3,164,799 2,476,120 2,306,439 ---------- --------- --------- $3,441,049 2,773,931 2,650,493 ========== ========= =========
At March 31, 1996 and 1995, certificate accounts of $100,000 or greater totaled $3,812,778 and $2,671,496, respectively. (8) Advance on FHLB Line of Credit ------------------------------ At March 31, 1995, the Bank had advances of $1,500,000 on a $3,500,000 line of credit from the FHLB of Des Moines. The line of credit expired in January 1996. The rate on this line was 65 basis points above the New York Federal Funds Rate. One to four family real estate mortgages of approximately $27,831,000 were pledged to secure this line of credit. (9) Income Taxes ------------ The components of income tax expense from operations are as follows:
Federal State Total ------- ----- ----- Year ended March 31, 1996: Current $241,177 31,000 272,177 Deferred 4,565 - 4,565 -------- ------- ------- $245,742 31,000 276,742 ======== ======= ======= Year ended March 31, 1995: Current $247,659 45,000 292,659 Deferred (54,584) (17,000) (71,584) -------- ------- ------- $193,075 28,000 221,075 ======== ======= ======= Year ended March 31, 1994: Current $340,389 57,000 397,389 Deferred (58,000) (14,000) (72,000) -------- ------- ------- $282,389 43,000 325,389 ======== ======= =======
In addition, during the years ended March 31, 1996 and 1995, the Company recorded deferred income tax benefits of approximately $46,000 and $45,000, respectively, related to unrealized losses on investment securities available-for-sale. (Continued) 33 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements The reasons for the difference between the effective tax rates and the expected federal income tax rate of 34% are as follows:
Percent of earnings before income tax expense ----------------------------- 1996 1995 1994 ---- ---- ---- Expected federal income tax rate 34.0% 34.0 34.0 Items affecting income tax rate: State taxes, net of federal tax benefit 2.2 2.9 3.0 Reduce valuation allowance for capital loss carryforward - - (4.7) Other (1.0) (2.2) 1.4 ---- ---- ---- Effective tax rate 35.2% 34.7 33.7 ==== ==== ====
The tax effects of temporary differences which give rise to a significant portion of deferred tax assets and liabilities at March 31, 1996 and 1995 are as follows:
1996 1995 ---- ---- Unrealized loss on available-for-sale $ 91,000 45,000 securities Allowance for loan losses 51,000 35,000 Accrued compensation 93,000 45,000 Other 7,000 1,000 -------- ------- Deferred tax assets 242,000 126,000 -------- ------- FHLB dividends 33,000 20,000 Tax bad debt reserve in excess of base year 145,000 110,000 Fixed asset basis difference 42,000 50,000 Core deposit premium 15,000 15,000 Accrued interest on loans originated prior to September 25, 1985 10,000 9,000 Loan origination fees 41,000 7,000 Other 4,000 4,000 -------- ------- Deferred tax liabilities 290,000 215,000 -------- ------- Net deferred tax liabilities $ 48,000 89,000 ======== =======
There was no valuation allowance for the deferred tax assets at March 31, 1996 or 1995. Under the Internal Revenue Code, the Bank is allowed the greater of an experience method bad debt deduction based on actual charge-offs or a statutory bad debt deduction based on a percentage of taxable income before such deduction for additions to tax bad debt reserves established for the purpose of absorbing losses. The allowable deduction under the percentage of taxable income method is 8% of income subject to tax before such deduction. (Continued) 34 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements (10) Benefit Plans ------------- Qualified employees of the Company and Bank participate in an employee stock ownership plan (the ESOP). In connection with the conversion described in note 1, the ESOP has borrowed from the Company, the proceeds of which were used to acquire 84,640 shares of the Company's common stock. Contributions from the Company and the Bank, along with dividends on unallocated shares of common stock, are used by the ESOP to make payments of principal and interest on the loan. Under the terms of the ESOP, contributions are allocated to participants using a formula based upon compensation. Participants vest over five years. Because the Company has provided the ESOP's borrowing, the unearned compensation is presented as a reduction of stockholders' equity in the accompanying 1996 consolidated balance sheet. On March 31, 1996, 8,468 shares were allocated to participants. ESOP contributions by the Bank, representing the fair value of allocated shares, charged to compensation and benefits expense in 1996 were approximately $103,000. The fair value of the remaining unallocated shares at March 31, 1996 aggregated approximately $876,000. The Bank's employees participate in the Financial Institutions Retirement Fund, a noncontributory, multiemployer, defined benefit pension plan which covers all eligible employees with one or more years of continuous service. The Bank's policy is to fund pension costs accrued. Pension expense of $52,000, $53,360 and $4,862 was recorded for the years ended March 31, 1996, 1995 and 1994, respectively. The Bank has supplemental retirement plans for officers and directors. Under the Directors' Plan, members forfeit their first five years of directors' fees to enter into the plan and will receive monthly payments for a ten-year period beginning at the time the member turns sixty-five. Under the Officers' Plan, two officers, after completing a pre-determined service period, will receive benefit payments beginning at age sixty-five for a term of ten years. Expense under the plans for the years ended March 31, 1996, 1995 and 1994 amounted to approximately $103,000, 111,000 and $99,000, respectively. The Bank has purchased life insurance policies to fund its obligations under the plans. The Board of Directors has approved the adoption of a stock option plan and a recognition and retention plan (RRP). Under the stock option plan, options to acquire 105,800 shares of the Company's common stock may be granted to certain officers, directors and employees of the Company or the Bank. The options will enable the recipient to purchase stock at an exercise price equal to the fair market value of the stock at the date of the grant. The options will vest over the five years following the date of grant. Under the RRP, common stock aggregating 42,320 shares may be awarded to certain officers and directors of the Company and the Bank. The awards will not require any payment by the recipients, and will vest over five years beginning one year after shareholder approval of the RRP. (Continued) 35 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements (11) Financial Instruments With Off-balance Sheet Risk and Concentrations of ----------------------------------------------------------------------- Credit Risk ----------- The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet customer financing needs. These financial instruments consist principally of commitments to extend credit. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party is represented by the contractual amount of those instruments. The Bank does not generally require collateral or other security on unfunded loan commitments until such time that loans are funded. In addition to financial instruments with off-balance sheet risk, the Bank is exposed to varying risks associated with concentrations of credit relating primarily to lending activities in specific geographic areas. The Bank's principal lending area consists of the agricultural-based rural communities northeast of Kansas City and the Bank's loans are primarily to residents of or secured by properties located in its principal lending area. Accordingly, the ultimate collectibility of the Bank's loan portfolio is dependent upon market conditions in that area. This geographic concentration is considered in management's establishment of the allowance for loan losses. (12) Regulatory Capital Requirements ------------------------------- Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA) and the capital regulations of the Office of Thrift Supervision (OTS) promulgated thereunder require institutions to have a minimum regulatory tangible capital equal to 1.5% of total assets, a minimum 3% leverage capital ratio and a minimum 8% risk-based capital ratio. These capital standards set forth in the capital regulations must generally be no less stringent than the capital standards applicable to banks. FIRREA also specifies the required ratio of housing-related assets in order to qualify as a savings institution. The Bank met the regulatory capital requirements at March 31, 1996 and 1995. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established additional capital requirements which require regulatory action against depository institutions in one of the undercapitalized categories defined in implementing regulations. Institutions such as the Bank, which are defined as well capitalized, must generally have a leverage capital (core) ratio of at least 5%, a tier risk-based capital ratio of at least 6% and a total risk-based capital ratio of at least 10%. In November 1994, the OTS revised its regulations whereby unrealized gains or losses on available-for-sale securities accounted for under SFAS No. 115 are not considered in the determination of regulatory capital. FDICIA also provides for increased supervision by federal regulatory agencies, increased reporting requirements for insured depository institutions and other changes in the legal and regulatory environment for institutions. The Bank met the regulatory capital requirements at March 31, 1996 and 1995. (Continued) 36 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements At March 31, 1996, the Bank had federal income tax bad debt reserves of approximately $2,060,000, which constitute allocations to bad debt reserves for federal income tax purposes for which no provision for taxes on income had been made. If such allocations are charged for other than bad debt losses, taxable income would be created to the extent of the charges. The Bank's retained earnings at March 31, 1996 was substantially restricted because of the effect of these tax bad debt reserves. (13) Fair Value of Financial Instruments ----------------------------------- SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of estimated fair value for financial instruments held by the Company. Fair value estimates of the Company's financial instruments as of March 31, 1996, including methods and assumptions utilized, are set forth below:
Carrying Estimated amount fair value ------ ---------- Investment securities $ 6,362,850 6,363,000 =========== ========== Mortgage-backed securities $24,205,849 23,926,000 =========== ========== Loans, net of unearned fees and allowance for loan losses $45,031,460 44,104,000 =========== ========== Noninterest bearing demand deposit $ 164,993 165,000 Money market and NOW deposits 5,877,322 5,877,000 Passbook accounts 3,675,537 3,676,000 Certificate accounts 56,887,395 57,184,000 ----------- ---------- Total deposits $66,605,247 66,902,000 =========== ==========
Methods and Assumptions Utilized -------------------------------- The estimated fair value of mortgage-backed and investment securities, except certain obligations of states and political subdivisions, is based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain obligations of states and political subdivisions is not readily available through market sources other than dealer quotations, so fair value estimates are based upon quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. (Continued) 37 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements The estimated fair value of the Company's loan portfolio is based on the segregation of loans by collateral type, interest terms and maturities. In estimating the fair value of each category of loans, the carrying amount of the loan is reduced by an allocation of the allowance for loan losses. Such allocation is based on management's loan classification system which is designed to measure the credit risk inherent in each classification category. The estimated fair value of performing variable rate loans is the carrying value of such loans, reduced by an allocation of the allowance for loan losses. The estimated fair value of performing fixed rate loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the interest rate risk inherent in the loan, reduced by an allocation of the allowance for loan losses. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. The fair value for significant nonperforming loans, if any, is the estimated fair value of the underlying collateral based on recent external appraisals or other available information, which generally approximates carrying value, reduced by an allocation of the allowance for loan losses. The estimated fair value of deposits with no stated maturity, such as noninterest bearing deposits, savings, money market accounts, passbook accounts and NOW accounts, is equal to the amount payable on demand. The fair value of interest-bearing time deposits is based on the discounted value of contractual cash flows of such deposits. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Limitations ----------- Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. (Continued) 38 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements (14) Parent Company Only Condensed Financial Statements -------------------------------------------------- Following is condensed financial information of the Parent Company Only as of and for the year ended March 31, 1996:
Condensed Balance Sheet Assets ------ Interest-bearing deposits $ 2,291,521 Investment and mortgage-backed 2,278,473 securities available-for-sale Loans receivable 761,760 Investment in subsidiary 10,765,886 Other 44,986 ----------- Total assets $16,142,626 =========== Liabilities and Stockholders' Equity ------------------------------------ Accrued expenses and other liabilities $ 107,685 Stockholders' equity 16,034,941 ----------- Total liabilities and stockholders' $16,142,626 equity =========== Condensed Statement of Earnings Dividends from subsidiary $ 286,152 Interest income 152,268 Other expense, net (40,514) ----------- Income before equity in undistributed earnings of subsidiary 397,906 Increase in undistributed equity of subsidiary 155,450 ----------- Earnings before income taxes 553,356 Income tax expense 42,833 ----------- Net earnings $ 510,523 ===========
(Continued) 39 HARDIN BANCORP, INC. AND SUBSIDIARIES HARDIN, MISSOURI Notes to Consolidated Financial Statements
Condensed Statement of Cash Flows Cash flows from operating activities: Net earnings $ 510,523 Increase in undistributed equity of (155,450) subsidiary Other (40,319) ---------- Net cash provided by operating activities 314,754 ---------- Cash flows from investing activities: Net increase in loans receivable (761,760) Purchase of investment and mortgage-backed securities available-for-sale (2,412,969) Principal payments on investment and mortgage-backed securities available-for-sale 127,846 Investment in subsidiary (5,023,750) ---------- Net cash used by investing activities (8,070,633) ---------- Cash flows from financing activities: Issuance of 10,580 shares common stock, net of offering costs 10,047,400 ---------- Cash at end of year $ 2,291,521 ===========
Dividends paid by the Company are provided through subsidiary Bank dividends. At March 31, 1996, the Bank could distribute dividends of up to $463,000 without regulatory approvals. 40 HARDIN BANCORP, INC. -------------------- STOCKHOLDER INFORMATION ----------------------- Annual Meeting - -------------- The Annual Meeting of Stockholders will be held at 1:30 p.m., Hardin, Missouri time on July 25, 1996, at the American Legion Hall located at 103 West Elm Street, Hardin, Missouri 64035. Stock Listing - ------------- Hardin Bancorp, Inc. common stock is traded on the National Association of Securities Dealers, Inc. Small Cap Market under the symbol "HFSA." Price Range of Common Stock - --------------------------- The per share price range of the common stock for each quarter since the common stock began trading on September 29, 1995 was as follows:
FISCAL 1996 HIGH LOW DIVIDENDS ----------- ---- --- --------- Third Quarter $13.00 $10.00 $ -- Fourth Quarter $12.00 $11.25 $ .10
A $.10 per share dividend was declared by the Board of Directors on March 21, 1996, payable April 18, 1996 to stockholders of record on April 4, 1996. The stock price information set forth in the table above was provided by the National Association of Securities Dealers, Inc. Automated Quotation System. At March 31, 1996, there were 1,058,000 shares of Hardin Bancorp, Inc. (HFSA) common stock issued and outstanding (including unallocated ESOP shares) and there were 601 registered holders of record. Shareholders and General Inquiries Transfer Agent - ---------------------------------- -------------- Robert W. King Registrar and Transfer Co. President 10 Commerce Drive Hardin Bancorp, Inc. Cranford, New Jersey 07016 2nd and Elm Street Hardin, Missouri 64035 (816) 398-4312 Annual and Other Reports - ------------------------ A copy of Hardin Bancorp, Inc.'s Annual Report on Form 10-K for the year ended March 31, 1996, as filed with the Securities and Exchange Commission, may be obtained without charge by contacting Robert W. King, President and Chief Executive Officer, Hardin Bancorp, Inc., 2nd and Elm Street, Hardin, Missouri 64035. 41 HARDIN BANCORP, INC. -------------------- CORPORATE INFORMATION --------------------- Company and Bank Address - ------------------------ 2nd and Elm Street Telephone: (816) 398-4312 Hardin, Missouri 64035 Fax: (816) 398-4317 Board of Directors - ------------------ Ivan Hogan Chairman of Hardin Bancorp, Inc. and David D. Lodwick Hardin Federal Savings Bank Attorney at Law and Retired CEO of Hardin Federal Savings Bank W. Levan Thurman Retired Funeral Director Robert W. King President of Hardin Bancorp, Inc., David Hatfield and Hardin Federal Savings Bank Farmer and Part-time Broker Hardin Bancorp, Inc. Executive Officers - --------------------------------------- Robert W. King William L. Homan President and Chief Executive Officer Vice President and Treasurer Karen K. Blankenship Senior Vice President and Secretary Hardin Federal Savings Bank Executive Officers - ---------------------------------------------- Robert W. King William L. Homan President and Chief Executive Officer Vice President and Treasurer Karen K. Blankenship Lyndon M. Goodwin Senior Vice President and Secretary Vice President of Lending Independent Accountants Special Counsel - ----------------------- --------------- KPMG Peat Marwick LLP Luse, Lehman, Gorman, 1000 Walnut, Suite 1600 Pomerenk, and Schick Post Office Box 13127 5335 Wisconsin Ave, N.W., Kansas City, Missouri 64199 Suite 400 Washington, D.C. 20015 42 EX-27 3 EX-27: FINANCIAL DATA SCHEDULE (ART 9) WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
9 1,000 12-MOS MAR-31-1996 MAR-31-1996 254 5,430 0 0 14,270 16,299 16,019 45,911 (131) 83,387 66,605 0 747 0 0 0 11 16,035 83,387 3,194 1,995 363 5,552 3,441 13 2,098 14 2 1,576 787 787 0 0 511 0 0 .0714 93 29 0 412 119 14 (2) 131 96 0 35
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