<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ______________ to
___________________
Commission File Number: 000-23927
HOME LOAN FINANCIAL CORPORATION
-------------------------------
(Exact name of small business issuer as specified in its charter)
Ohio 31-1578552
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
401 Main Street, Coshocton, Ohio 43812
--------------------------------------
(Address of principal executive offices)
(740) 622-0444
--------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common shares, no par value per share
-------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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 Issuer's revenues for the fiscal year ended June 30, 2000, were $8,530,219.
Based upon the closing price quoted by the Nasdaq National Market, the aggregate
market value of the voting stock held by nonaffiliates of the Registrant on
August 28, 2000, was approximately $12.8 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 August 28, 2000, there were 1,882,093 of the Registrant's common shares
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of 2000 Annual Report to Shareholders
Part III of Form 10-KSB - Portions of Proxy Statement for the 2000 Annual
Meeting of Shareholders
Transitional Small Business Disclosure Format (check one)
Yes No X
--- ---
<PAGE> 2
PART I
ITEM 1. - DESCRIPTION OF BUSINESS
GENERAL
Home Loan Financial Corporation ("HLFC") was incorporated under Ohio law in
December 1997 for the purpose of purchasing all of the capital stock of The Home
Loan Savings Bank (the "Bank") issued in connection with the conversion of the
Bank from mutual to stock form (the "Conversion"). HLFC and the Bank are
together referred to as the Corporation. On March 25, 1998, the effective date
of the Conversion, HLFC acquired 100 common shares of the Bank. The principal
business of HLFC since the effective date of the Conversion has been holding all
of the issued and outstanding shares of the Bank.
The Bank was organized as a mutual savings and loan association under Ohio law
in 1882 as "The Home Building Loan and Savings Company." In 1996, the Bank
adopted its present name. The Bank converted to the stock form of ownership on
March 25, 1998. As an Ohio savings and loan association, the Bank is subject to
supervision and regulation by the Office of Thrift Supervision (the "OTS"), the
Ohio Department of Commerce, Division of Financial Institutions (the "Division")
and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member
of the Federal Home Loan Bank (the "FHLB") of Cincinnati, and the deposits of
the Bank are insured up to applicable limits by the FDIC in the Savings
Association Insurance Fund (the "SAIF").
The Bank conducts business from its main office located in Coshocton, Ohio and
full-service branch offices in Coshocton and West Lafayette, Ohio. The principal
business of the Bank is the origination of permanent mortgage loans secured by
one- to four-family residential real estate located in Coshocton County, Ohio,
the Bank's primary market area. The Bank also originates a limited number of
loans for the construction of one- to four-family residences and permanent
mortgage loans secured by nonresidential real estate in its primary market area.
In addition to real estate lending, the Bank originates commercial loans and
various types of consumer credits, including home improvement loans, education
loans, loans secured by savings accounts, motor vehicle loans, unsecured loans
and credit cards. For liquidity and interest rate risk management purposes, the
Bank invests in interest-bearing deposits in other financial institutions and
U.S. Treasury and agency securities, mortgage-backed securities and other
investments permitted by applicable law. Funds for lending and other investment
activities are obtained primarily from savings deposits, which are insured up to
applicable limits by the FDIC in the SAIF, principal repayments on loans,
maturities of securities and borrowings from the FHLB.
Interest on loans and other investments is the Bank's primary source of income.
The Bank's principal expense is interest paid on deposit accounts and
borrowings. Operating results are dependent to a significant degree on the net
interest income of the Bank, which is the difference between interest earned on
loans and other investments and interest paid on deposits and borrowings. Like
most thrift institutions, the Bank's interest income and interest expense are
significantly affected by general economic conditions and by the policies of
various regulatory authorities.
PRIMARY MARKET AREA
The Bank's primary market area for lending and deposits is Coshocton County,
Ohio. The City of Coshocton, in which the Bank has two offices, is the county
seat of Coshocton County. Coshocton is approximately 35 miles north of
Zanesville, Ohio, and approximately 75 miles east of Columbus, Ohio.
2
<PAGE> 3
LENDING ACTIVITIES
GENERAL. The Bank's principal lending activity is the origination of
conventional real estate loans secured by one- to four-family residences located
in the Bank's primary market area. The Bank also originates a limited number of
loans for the construction of one- to four-family residences and permanent
mortgage loans secured by nonresidential real estate in its primary market area.
In addition to real estate lending, the Bank originates commercial loans and
various types of consumer credits, including home improvement loans, education
loans, loans secured by savings accounts, motor vehicle loans, unsecured loans
and credit cards.
LOAN PORTFOLIO COMPOSITION. The following table presents certain information
regarding the composition of the Bank's loan portfolio at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------
2000 1999
--------------------------- --------------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 56,275 63.74% $ 50,060 66.72%
Home equity 3,051 3.46 1,812 2.42
Nonresidential 9,868 11.18 5,445 7.26
Construction and land 3,299 3.74 3,940 5.25
---------- ------- ---------- --------
Total real estate loans 72,493 82.12 61,257 81.65
Commercial loans 3,369 3.82 2,877 3.83
Consumer loans:
Home improvement 4,718 5.34 4,478 5.97
Automobile loans 4,369 4.95 3,408 4.54
Loans on deposits 371 0.42 413 0.55
Credit card 489 0.55 436 0.58
Other consumer loans 2,475 2.80 2,157 2.88
---------- ------- ---------- --------
Total consumer loans 12,422 14.06 10,892 14.52
---------- ------- ---------- --------
Total loans 88,284 100.00% 75,026 100.00%
======= ========
Less:
Net deferred loan fees and costs (162) (148)
Loans in process (1,865) (1,486)
Allowance for loan losses (405) (323)
---------- ----------
Net loans $ 85,853 $ 73,069
========== ==========
</TABLE>
3.
<PAGE> 4
LOAN MATURITY. The following table sets forth certain information as of June 30,
2000, regarding the dollar amount of loans maturing in the Bank's portfolio
based on their contractual terms to maturity. Demand loans and other loans
having no stated schedule of repayments or no stated maturity are reported as
due in one year or less. Mortgage loans originated by the Bank generally include
due-on-sale clauses that provide the Bank with the contractual right to deem the
loan immediately due and payable in the event the borrower transfers the
ownership of the property without the Bank's consent. The table does not include
the effects of possible prepayments or scheduled repayments.
<TABLE>
<CAPTION>
Due during Due between
the year 7/1/01 Due after
ending 6/30/01 and 6/30/05 6/30/05 Total
-------------- ----------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 18 $ 731 $ 55,526 $ 56,275
Home equity -- 112 2,939 3,051
Nonresidential -- 206 9,662 9,868
Construction and land 2,678 -- 621 3,299
Commercial loans 880 1,461 1,028 3,369
Consumer loans 3,108 5,842 3,472 12,422
--------- --------- -------- ----------
Total $ 6,684 $ 8,352 $ 73,248 $ 88,284
========= ========= ======== ==========
</TABLE>
The next table sets forth the dollar amount of all loans due after June 30,
2001, which have fixed interest rates and have adjustable interest rates:
<TABLE>
<CAPTION>
Due after June 30, 2001
-----------------------
(In thousands)
<S> <C>
Fixed rate of interest $ 31,752
Adjustable rate of interest 49,848
----------
$ 84,600
==========
</TABLE>
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending activity
of the Bank is the origination of conventional loans secured by first mortgages
on one- to four-family residences, primarily single-family residences, located
within the Bank's primary market area. At June 30, 2000, the Bank's one- to
four-family residential real estate loans totaled approximately $56.3 million,
or 63.74% of total loans.
OTS regulations and Ohio law limit the amount which the Bank may lend in
relationship to the appraised value of the real estate and improvements which
will secure the loan at the time of loan origination. In accordance with such
regulations, the Bank makes loans on one- to four-family residences of up to 80%
of the value of the real estate and improvements thereon (the "LTV") or up to
95% for borrowers who obtain private mortgage insurance.
The Bank currently offers fixed-rate mortgage loans and adjustable-rate mortgage
("ARM") loans for terms of up to 30 years. The interest-rate adjustment periods
on ARMs are typically one or three years, although most adjustable-rate loans
originated by the Bank are one-year ARMs. The maximum interest-rate adjustment
on most ARMs is 2% on any adjustment date and a total of 6% over the life of the
loan. The interest-rate adjustments on one-year and three-year ARMs presently
offered by the Bank are indexed to the weekly average rate on one-year and
three-year U.S. Treasury securities, respectively. Rate adjustments are computed
by adding a stated margin, typically 2.75%, to the index.
4.
<PAGE> 5
HOME EQUITY LOANS. The Bank makes closed-end home equity loans in amounts which,
when added to the prior indebtedness secured by the real estate, do not exceed
90% of the estimated value of the real estate. The Bank also offers home equity
loans with a line of credit feature. Home equity loans are made with adjustable
rates of interest. Rate adjustments on home equity loans are at the National
City Bank prime rate with closing fees waived if the initial borrowing was
$5,000 or more. At June 30, 2000, approximately $3.1 million, or 3.46%, of the
Bank's portfolio consisted of home equity loans.
NONRESIDENTIAL REAL ESTATE. The Bank originates loans for the purchase of
nonresidential real estate. The Bank's nonresidential real estate loans have
fixed or adjustable rates, terms of up to 15 years and LTVs of up to 75%. Rate
adjustments on ARMs secured by nonresidential real estate are determined by
adding 3.75% to the current U.S. Treasury index. Rates are determined for
fixed-rate loans by adding 2% to the rate at which fixed-rate residential loans
are then being offered. Among the properties securing the Bank's nonresidential
real estate loans are farms, office buildings and other commercial properties,
all located in the Bank's primary market area.
Nonresidential real estate lending is generally considered to involve a higher
degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. The Bank has endeavored to reduce such
risk by evaluating the credit history of the borrower, the location of the real
estate, the financial condition of the borrower, the quality and characteristics
of the income stream generated by the property and the appraisals supporting the
property's valuation. At June 30, 2000, the Bank's largest loan secured by
nonresidential real estate was approximately $894,000 and such loan was
performing according to its terms.
At June 30, 2000, approximately $9.9 million, or 11.18%, of the Bank's total
loans were secured by mortgages on nonresidential real estate.
CONSTRUCTION AND LAND LOANS. The Bank originates a limited number of loans for
the construction of single-family residential real estate and commercial real
estate. Due to a lack of residential development in the Bank's primary market
area, no speculative construction loans have been made to builders or
developers. During the first six months, while the residence or commercial
building is being constructed, the borrower is required to pay interest only.
Single-family residential construction loans are structured as permanent loans
with adjustable rates of interest and terms of up to 30 years. Permanent
financing on commercial real estate constructions loans is generally tied to the
National City Bank prime rate. Construction loans have LTVs of up to 80%, with
the value of the land counting as part of the owner's equity. At June 30, 2000,
the Bank had approximately $2.7 million, or 3.04% of its total loans, invested
in construction loans.
Construction loans generally involve greater underwriting and default risks than
do loans secured by mortgages on existing properties because construction loans
are more difficult to evaluate and monitor. Loan funds are advanced upon the
security of the project under construction, which is more difficult to value
before the completion of construction. Moreover, because of the uncertainties
inherent in estimating construction costs, it is relatively difficult to
evaluate accurately the LTVs and the total loan funds required to complete a
project. In the event a default on a construction loan occurs and foreclosure
follows, the Bank must take control of the project and attempt either to arrange
for completion of construction or dispose of the unfinished project.
The Bank also originates a limited number of loans secured by land, some of
which is purchased for the construction of single-family houses. The Bank's land
loans are generally adjustable-rate loans for terms up to 15 years and require
an LTV of 75% or less. At June 30, 2000, approximately $621,000, or 0.70%, of
the Bank's total loans were land loans made to individuals intending to
construct and occupy single-family residences on the properties.
5.
<PAGE> 6
COMMERCIAL LOANS. The Bank makes commercial loans to businesses in its primary
market area. Most commercial loans are made with LTVs of 70 to 75% and
adjustable interest rates. Adjustments on commercial loans are usually indexed
to the National City Bank prime rate.
At June 30, 2000, the Bank had approximately $3.4 million, or 3.82% of total
loans, invested in commercial loans. All of the loans were made to local
businesses and are secured by property such as trucks and equipment. The Bank
intends to continue to increase its commercial lending activity.
Commercial loans are generally deemed to entail significantly greater risk than
real estate lending. The repayment of commercial loans is typically dependent on
the income stream and successful operation of a business, which can be affected
by economic conditions.
CONSUMER LOANS. The Bank originates various types of consumer loans, including
home improvement loans, education loans, loans secured by savings accounts,
motor vehicle loans, unsecured loans and credit cards. Consumer loans are made
at fixed rates of interest for terms of up to ten years. The Bank requires a 20%
down payment on loans secured by automobiles.
Since June 1993, the Bank has offered Mastercard(R) cards to qualified
customers. The Bank's credit cards are processed by an unaffiliated third party
that receives a fee for such service.
Consumer loans may entail greater credit risk than do residential mortgage
loans. The risk of default on consumer loans increases during periods of
recession, high unemployment, and other adverse economic conditions. Although
the Bank has not had significant delinquencies on consumer loans, no assurance
can be provided that delinquencies will not increase.
At June 30, 2000, the Bank had approximately $12.4 million, or 14.06% of its
total loans, invested in consumer loans.
LOAN SOLICITATION AND PROCESSING. Loan originations are generally obtained from
existing customers and members of the local community and from referrals from
real estate brokers, lawyers, accountants, and current and former customers. The
Bank also advertises in the local print media and radio.
In underwriting real estate loans, the Bank typically obtains a credit report,
verification of employment and other documentation concerning the
creditworthiness of the borrower. An appraisal of the fair market value of the
real estate that will be given as security for the loan is prepared by a
certified fee appraiser approved by the Board of Directors. Upon the completion
of the appraisal and the receipt of information on the credit history of the
borrower, the application for a loan is submitted for review in accordance with
the Bank's underwriting guidelines, which are established annually by the Board
of Directors. The Bank's loan officers have authority to approve loans up to
$100,000. The President of the Bank has authority to approve all loans up to
$500,000. The Executive Committee of the Board of Directors may approve loans up
to $1,000,000, and loans over $1,000,000 must be approved by the full Board of
Directors.
Borrowers are required to carry satisfactory fire and casualty insurance and
flood insurance, if applicable, and to name the Bank as an insured mortgagee.
The Bank generally obtains an attorney's opinion of title and may purchase title
insurance on large commercial loans.
The procedure for approval of construction loans is the same as for permanent
real estate loans, except that an appraiser evaluates the building plans,
construction specifications, and estimates of construction costs. The Bank also
evaluates the feasibility of the proposed construction project and the
experience and record of the builder. Once approved, the construction loan is
disbursed in installments based upon periodic inspections of construction
progress.
6.
<PAGE> 7
Consumer loans are underwritten on the basis of the borrower's credit history
and an analysis of the borrower's income and expenses, ability to repay the
loan, and the value of the collateral, if any. The President of the Bank has
authority to approve consumer loans of up to $500,000. The Bank's loan officers
have the authority to approve secured consumer loans up to $100,000, and
unsecured consumer loans up to $10,000. The Executive Committee has authority to
approve consumer loans up to $1,000,000. Consumer loans over $1,000,000 must be
approved by the full Board of Directors.
LOAN ORIGINATIONS, PURCHASES AND SALES. Currently, the Bank does not originate
loans in conformity with secondary market standards and has sold no loans in
recent years. The Bank has, however, established relationships with entities
that purchase loans in the secondary market. The Bank has not purchased any
loans in recent years. However, the Bank has purchased participation interests
in loans periodically.
The following table presents the Bank's total loan origination and repayment
activity for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Loans originated:
Real estate $ 21,799 $ 27,683
Commercial 3,596 2,461
Consumer 8,833 6,210
---------- ----------
Total loans originated 34,228 36,354
Loans purchased -- --
Loans sold -- --
Principal repayments (20,969) (19,550)
(Increase) decrease in other items, net(1) (475) (559)
---------- ----------
Net increase $ 12,784 $ 16,245
========== ==========
</TABLE>
------------------
(1) Consists of net deferred loan fees and costs, loans in process and
allowance for loan losses.
At June 30, 2000, the Bank had $2.4 million of outstanding commitments to
originate loans, $2.5 million available to borrowers under lines of credit and
$1.3 million available to customers under credit card arrangements. At June 30,
2000, the Bank had $1.9 million in undisbursed funds related to construction
loans.
LOANS TO ONE-BORROWER LIMITS. OTS regulations generally limit the aggregate
amount that a savings association may lend to any one borrower to an amount
equal to 15% of the Bank's unimpaired capital and unimpaired surplus (the
"Lending Limit Capital"). A savings association may lend to one borrower an
additional amount not to exceed 10% of the association's Lending Limit Capital
if the additional amount is fully secured by certain forms of "readily
marketable collateral." Real estate is not considered "readily marketable
collateral." In applying this limit, the regulations require that loans to
certain related or affiliated borrowers be aggregated. An exception to this
limit permits loans of any type to one borrower of up to $500,000.
Based on such limits, the Bank was able to lend approximately $1.7 million to
one borrower at June 30, 2000. The largest amount the Bank had outstanding to
any group of affiliated borrowers at June 30, 2000, was $1.5 million, which
consisted of four loans secured by commercial property, equipment, accounts
receivable and the borrower's residence. At June 30, 2000, such loans were
performing in accordance with their terms.
7.
<PAGE> 8
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. The Bank attempts
to maintain a high level of asset quality through sound underwriting policies
and aggressive collection practices.
To discourage late payments, the Bank charges a late fee of 5% of the payment
amount after a payment is 10 days late, and the borrower is sent a delinquency
notice. The Bank also utilizes personalized letters and telephone calls from
Bank personnel to collect payments in a timely manner. When a loan becomes 90
days delinquent, the loan is generally referred to an attorney for foreclosure,
unless the Bank has reason to believe that repayment will be made in a
reasonable period of time.
The following table reflects the amount of loans in a delinquent status at the
dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------
2000 1999
---------------------------------- ------------------------------------
Percent of Percent of
total total
Number Amount Loans Number Amount Loans
------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days 7 $ 33 0.04% 13 $ 150 0.20%
60-89 days 11 587 0.67 8 90 0.12
90 days or over 10 100 0.11 3 133 0.18
-------- --------- ------- --------- --------- --------
Total delinquent loans 28 $ 720 0.82% 24 $ 373 0.50%
======== ========= ======= ========= ========= ========
</TABLE>
Nonperforming assets include nonaccruing loans, accruing loans delinquent 90
days or more, real estate acquired by foreclosure or by deed-in-lieu thereof,
in-substance foreclosures and repossessed assets.
Loans are reviewed on a monthly basis and are placed on nonaccrual status when
collection in full is considered doubtful by management. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent cash payments are generally applied to interest
income unless, in the opinion of management, the collection of principal and
interest is doubtful. In those cases, subsequent cash payments would be applied
to principal. The following table sets forth information regarding the accrual
and nonaccrual status of the Bank's loans and other nonperforming assets at the
dates indicated:
<TABLE>
<CAPTION>
At June 30,
------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Total nonaccrual loans $ -- $ --
Accruing loans delinquent 90 days or more 100 133
---------- -----------
Total nonperforming loans 100 133
Real estate owned -- --
---------- -----------
Total nonperforming assets $ 100 $ 133
========== ===========
Allowance for loan losses $ 405 $ 323
Nonperforming assets as a percent of total assets 0.09% 0.12%
Nonperforming loans as a percent of gross loans(1) 0.12% 0.18%
Allowance for loan losses as a percent of nonperforming loans 404.89% 242.75%
</TABLE>
---------------
(1) Gross loans are stated at unpaid principal balances, net of loans
in process.
8.
<PAGE> 9
Real estate acquired in settlement of loans is classified separately on the
balance sheet at fair value as of the date of acquisition. Prior to foreclosure,
the loan is written down to the value of the underlying collateral by a charge
to the allowance for loan losses, if necessary. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Operating expenses of such properties, net of related
income or loss on disposition, are included in other expenses. At June 30, 2000,
the Bank had no real estate acquired in settlement of loans.
The Bank classifies its assets on a regular basis in accordance with federal
regulations. Problem assets are classified as "substandard," "doubtful" or
"loss." "Substandard" assets have one or more defined weaknesses and are
characterized by the distinct possibility that the Bank will sustain some loss
if the deficiencies are not corrected. "Doubtful" assets have the same
weaknesses as "substandard" assets, with the additional characteristics that (i)
the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, questionable and (ii) there is a high
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that its continuance as an asset of the Bank is not
warranted. In addition, federal regulations also contain a "special mention"
category, consisting of assets which do not currently expose an institution to a
different degree of risk to warrant classification but which possess credit
deficiencies or potential weaknesses deserving management's close attention.
The aggregate amounts of the Bank's classified assets at the dates indicated
were as follows:
<TABLE>
<CAPTION>
At June 30,
-----------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Classified assets:
Substandard $ 100 $ 133
Doubtful -- --
Loss -- --
------- -------
Total classified assets $ 100 $ 133
======= =======
</TABLE>
The Bank analyzes each classified asset on a quarterly basis to determine
whether changes in its classification are appropriate under the circumstances.
Such analysis focuses on a variety of factors, including the amount of any
delinquency and the reasons for the delinquency, if any, the use of the real
estate securing the loan, the status of the borrower, and the appraised value of
the real estate. As such factors change, the classification of the asset will
change accordingly.
The Bank establishes a general allowance for loan losses for any loan classified
as substandard or doubtful. If an asset, or portion thereof, is classified as
loss, the Bank establishes a specific allowance for loan losses for 100% of the
portion of the asset classified loss or charges-off the portion of any loan
deemed to be uncollectible.
As of June 30, 2000, the Bank had no assets that are not now disclosed because
of known information about the possible credit problems of the borrowers or the
cash flows of the security property which would cause 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.
9.
<PAGE> 10
ALLOWANCE FOR LOAN LOSSES. Management reviews on a quarterly basis the allowance
for loan losses as it relates to a number of relevant factors, including, but
not limited to, growth and changes in the composition of the loan portfolio,
trends in the level of delinquent and problem loans, current economic conditions
in the primary lending area, past loss experience, and probable losses arising
from specific problem assets. While management believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in adjustments and net income could be
significantly affected if circumstances differ substantially from the
assumptions used in making the final determination. In addition, the Bank's
determination as to the amount of its allowance for loan losses is subject to
review by the OTS, as part of its examination process, which could result in the
establishment of an additional allowance based upon the judgment of the OTS.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 323 $ 223
Charge-offs (39) (23)
Recoveries 1 3
----- -----
Net (charge-offs) recoveries (38) (20)
Provision for loan losses 120 120
----- -----
Balance at end of period $ 405 $ 323
===== =====
Ratio of net charge-offs to average
gross loans outstanding during the
period, net of loans in process and
deferred loan fees and costs 0.05% 0.03%
Ratio of allowance for loan losses to
loans, net of loans in process 0.47% 0.44%
</TABLE>
The following table sets forth the allocation of the allowance for loan losses
by category. The allocations are based on management's assessment of the risk
characteristics of each of the components of the total loan portfolio and are
subject to changes as and when the risk factors of each such component changes.
The allocation is not indicative of either the specific amounts or the loan
categories in which future charge-offs may be taken, nor should it be taken as
an indicator of future loss trends. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------
2000 1999
------------------------- --------------------------
Percent of Percent of
loans in each loans in each
category to category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans $ 206 82.12% $ 169 81.65%
Commercial loans 34 3.82 29 3.83
Consumer loans 86 14.06 65 14.52
Unallocated 79 -- 60 --
--------- --------- --------- ----------
Total $ 405 100.00% $ 323 100.00%
========= ========= ========= ==========
</TABLE>
10.
<PAGE> 11
INVESTMENT ACTIVITIES
GENERAL. Federal regulations and Ohio law permit the Bank to invest in various
types of securities, including interest-bearing deposits in other financial
institutions, U.S. Treasury and agency obligations, mortgage-backed securities,
and certain other specified investments. The Board of Directors of the Bank has
adopted an investment policy that authorizes management to make investments in
U.S. Treasury obligations, U.S. agency and federally-sponsored corporation
obligations, municipal obligations, mortgage-backed and related securities,
bankers' acceptances, mutual funds, federal funds and term deposits. The Bank's
investment policy is designed primarily to provide and maintain liquidity within
regulatory guidelines, to maintain a balance of high quality investments to
minimize risk, and to maximize return without sacrificing liquidity and safety.
As of June 30, 2000, the Bank's securities portfolio was comprised of FHLB
stock, U.S. agency securities, and mortgage-backed and related securities with
an aggregate market value of $23.4 million. The Bank's securities at June 30,
2000, did not include securities of any issuer with an aggregate book value in
excess of 10% of the Bank's equity, excluding those issued by the U.S.
Government or its agencies.
11.
<PAGE> 12
The following table sets forth the composition of the Bank's interest-bearing
deposits and securities portfolio at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
2000
-----------------------------------------------
Carrying % of Fair % of
Value Total Value Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Interest-bearing deposits:
Interest-bearing demand deposits $ 103 0.44% $ 103 0.44%
Interest-bearing deposits in other
financial institutions -- -- -- --
Overnight deposits -- -- -- --
Federal funds -- -- -- --
------- ------- ------- -------
Total interest-bearing deposits 103 0.44 103 0.44
Securities available for sale:
U.S. Treasury securities -- -- -- --
U.S. Government agency securities 3,418 14.54 3,418 14.54
FLHB stock 1,564 6.65 1,564 6.65
------- ------- ------- -------
Total securities 4,982 21.19 4,982 21.19
------- ------- ------- -------
Mortgage-backed securities:
GNMA 248 1.05 248 1.05
FNMA 441 1.88 441 1.88
FHLMC 17,734 75.44 17,734 75.44
------- ------- ------- -------
Total mortgage-backed securities 18,423 78.37 18,423 78.37
------- ------- ------- -------
Total securities available for sale 23,405 99.56 23,405 99.56
------- ------- ------- -------
Total $23,508 100.00% $23,508 100.00%
======= ======= ======= =======
<CAPTION>
At June 30,
---------------------------------------------------
1999
-------------------------------------------------
Carrying % of Fair % of
Value Total Value Total
----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing deposits:
Interest-bearing demand deposits $ 40 0.13% $ 40 0.13%
Interest-bearing deposits in other
financial institutions 35 0.11 35 0.11
Overnight deposits 3,500 11.14 3,500 11.14
Federal funds 3,200 10.18 3,200 10.18
------- ------- ------- -------
Total interest-bearing deposits 6,775 21.56 6,775 21.56
Securities available for sale:
U.S. Treasury securities 251 0.80 251 0.80
U.S. Government agency securities 2,719 8.65 2,719 8.65
FLHB stock 1,431 4.55 1,431 4.55
------- ------- ------- -------
Total securities 4,401 14.00 4,401 14.00
------- ------- ------- -------
Mortgage-backed securities:
GNMA 341 1.09 341 1.09
FNMA 544 1.73 544 1.73
FHLMC 19,363 61.62 19,363 61.62
------- ------- ------- -------
Total mortgage-backed securities 20,248 64.44 20,248 64.44
------- ------- ------- -------
Total securities available for sale 24,649 78.44 24,649 78.44
------- ------- ------- -------
Total $31,424 100.00% $31,424 100.00%
======= ======= ======= =======
</TABLE>
12.
<PAGE> 13
The maturities of the Bank's interest-bearing deposits and securities at June
30, 2000 are indicated in the following table:
<TABLE>
<CAPTION>
At June 30, 2000
----------------------------------------------------------------------------
After one through Not due at a
One Year or Less Five Years Single Maturity
-------------------- --------------------- ---------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Interest-bearing demand deposits $ 103 6.75% $ -- --% $ -- --%
Interest-bearing deposits in other financial
institutions -- -- -- -- -- --
Overnight deposits -- -- -- -- -- --
Federal funds -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 103 6.75 -- -- -- --
Securities available for sale:
U.S. Treasury securities
U.S. Government agency securities -- -- 3,418 5.99 -- --
FHLB stock -- -- -- -- 1,564 7.33
-------- -------- -------- -------- -------- --------
Total securities 3,418 5.99 1,564 7.33
Mortgage-backed securities:
GNMA -- -- -- -- 248 6.00
FNMA -- -- -- -- 441 6.50
FHLMC -- -- -- -- 17,734 6.50
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities -- -- -- -- 18,423 6.49
Total securities available for sale -- -- 3,418 5.99 19,987 6.56
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits and securities $ 103 6.75% $ 3,418 5.99% $ 19,987 6.56%
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At June 30, 2000
-----------------------------------
Total
-------------------------------------
Carrying Fair Weighted
Value Value Average Yield
----- ----- -------------
<S> <C> <C> <C>
Interest-bearing deposits:
Interest-bearing demand deposits $ 103 $ 103 6.75%
Interest-bearing deposits in other financial
institutions -- -- --
Overnight deposits -- -- --
Federal funds -- -- --
-------- -------- --------
Total interest-bearing deposits 103 103 6.75
Securities available for sale:
U.S. Treasury securities
U.S. Government agency securities 3,418 3,418 5.99
FHLB stock 1,564 1,564 7.33
-------- -------- --------
Total securities 4,982 4,982 6.41
Mortgage-backed securities:
GNMA 248 248 6.00
FNMA 441 441 6.50
FHLMC 17,734 17,734 6.50
-------- -------- --------
Total mortgage-backed securities 18,423 18,423 6.49
Total securities available for sale 23,405 23,405 6.48
-------- -------- --------
Total interest-bearing deposits and securities $ 23,508 $ 23,508 6.48%
======== ======== ========
</TABLE>
13.
<PAGE> 14
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of the Bank's funds
for use in lending and other investment activities. In addition to deposits, the
Bank derives funds from interest payments and principal repayments on loans and
income on earning assets. Loan payments are a relatively stable source of funds,
while deposit inflows and outflows fluctuate in response to general interest
rates and money market conditions. The Bank also borrows from the FHLB as a
source of funds.
DEPOSITS. Deposits are attracted principally from within the Bank's primary
market area through the offering of a selection of deposit instruments,
including regular passbook savings accounts, demand deposits, NOW accounts,
money market accounts, and certificates of deposit. Interest rates paid,
maturity terms, service fees, and withdrawal penalties for the various types of
accounts are monitored weekly by the Bank's President. The Bank does not use
brokers to attract deposits, and the amount of deposits from outside the Bank's
primary market area is not significant.
The following table sets forth the dollar amount of deposits in the various
types of accounts offered by the Bank at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
2000 1999
------------------ ------------------------
Percent Percent
of total of total
Amount Deposits Amount Deposits
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
Noninterest-bearing demand
deposit accounts $ 4,871 7.50% $ 3,115 5.51%
NOW accounts(1) 4,779 7.36 4,396 7.78
Savings accounts (2) 11,368 17.50 11,859 20.99
Money market accounts(3) 10,469 16.12 9,541 16.89
-------- --------- --------- ----------
Total transactions accounts 31,487 48.48 28,911 51.17
Certificates of deposit:
4.00% or less 24 0.04 55 0.10
4.01% - 6.00% 20,366 31.35 23,923 42.35
6.01% - 8.00% 13,074 20.13 3,306 5.85
Over 8.00% -- -- 300 0.53
-------- ---------- --------- ----------
Total certificates of deposit(4) 33,464 51.52 27,584 48.83
-------- --------- --------- ----------
Total deposits $ 64,951 100.00% $ 56,495 100.00%
======== ========= ========= ==========
</TABLE>
-------------
(1) The weighted average rate on NOW accounts was 2.00% and 2.02% at June
30, 2000 and 1999.
(2) The weighted average rate on savings accounts was 2.54% and 2.50% at
June 30, 2000 and 1999.
(3) The weighted average rate on money market accounts was 4.75% and 4.59%
at June 30, 2000 and 1999.
(4) The weighted average rate on all certificates of deposit was 5.70% and
5.50% at June 30, 2000 and 1999.
14.
<PAGE> 15
The following table shows rate and maturity information for the Bank's
certificates of deposit at June 30, 2000:
<TABLE>
<CAPTION>
At June 30, 2000
-------------------------------------------------
Over
Up to 1 year to Over
Rate One Year 2 Years 2 Years Total
---- -------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
4.00% or less $ 24 $ -- $ -- $ 24
4.01% to 6.00% 14,050 5,717 599 20,366
6.01% to 8.00% 1,988 8,745 2,341 13,074
Over 8.00% -- -- -- --
---------- --------- --------- ----------
Total certificates of deposit $ 16,062 $ 14,462 $ 2,940 $ 33,464
========== ========= ========= ==========
</TABLE>
At June 30, 2000, approximately $16.1 million of the Bank's certificates of
deposit were scheduled to mature within one year. Based on past experience and
the Bank's prevailing pricing strategies, management believes that a substantial
percentage of such certificates will be renewed with the Bank at maturity.
The following table presents the amount of the Bank's certificates of deposit of
$100,000 or more by the time remaining until maturity at June 30, 2000:
<TABLE>
<CAPTION>
MATURITY AMOUNT
-------- ------
(In thousands)
<S> <C>
Three months or less $ 414
Over 3 months to 6 months --
Over 6 months to 12 months 1,165
Over 12 months 3,257
----------
Total $ 4,836
==========
</TABLE>
Management believes that a substantial percentage of the above certificates will
be renewed with the Bank at maturity.
The following table sets forth the Bank's deposit account balance activity for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Beginning balance $ 56,495 $ 48,538
Increase before interest credited 6,623 6,860
----------- -----------
Net deposits before interest credited 63,118 55,398
Interest credited 1,833 1,097
----------- -----------
Ending balance $ 64,951 $ 56,495
=========== ===========
Net increase $ 8,456 $ 7,957
=========== ===========
Percent increase 14.97% 16.39%
=========== ===========
</TABLE>
15.
<PAGE> 16
BORROWINGS. The FHLB system functions as a central reserve bank providing credit
for its member institutions and certain other financial institutions. As a
member in good standing of the FHLB of Cincinnati, the Bank is authorized to
apply for advances from the FHLB of Cincinnati, provided certain standards of
creditworthiness have been met. Under current regulations, an association must
meet certain qualifications to be eligible for FHLB advances. The extent to
which an association is eligible for such advances will depend upon whether it
meets the Qualified Thrift Lender (the "QTL") test. If an association meets the
QTL test, the association will be eligible for 100% of the advances it would
otherwise be eligible to receive. If an association does not meet the QTL test,
the association will be eligible for such advances only to the extent it holds
specified QTL test assets. At June 30, 2000, the Bank complied with the QTL test
and had $28.6 million outstanding in advances from the FHLB.
The following table sets forth the maximum month-end and average balance of
borrowings for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at period end:
FHLB advances $ 28,625 $ 28,200
Weighted average rate 5.87% 5.39%
Other borrowings $ -- $ 2,350
Weighted average rate --% 7.75%
Maximum balance at any month end during the period:
FHLB advances $ 29,975 $ 28,200
Other borrowings 2,875 2,350
Average balance for the period:
FHLB advances and other borrowings $ 28,637 $ 8,922
Weighted average rate 5.71% 5.30%
</TABLE>
COMPETITION
The Bank faces competition for deposits and loans from other savings and loan
associations and banks in the Bank's primary market area. The primary factors in
competition for deposits are customer service, convenience of office location
and interest rates. The Bank competes for loan originations primarily through
the interest rates and loan fees it charges and through the efficiency and
quality of services it provides to borrowers. Competition is affected by, among
other things, the general availability of lendable funds, general and local
economic conditions, current interest rate levels and other factors that are not
readily predictable. The Bank does not offer all of the products and services
offered by some of its competitors, particularly commercial banks.
EMPLOYEES
At June 30, 2000, the Bank had 28 full-time equivalent employees and four
part-time employees.
YEAR 2000 ISSUE
The Corporation did not experience any Year 2000-related computer system
problems, nor was the Corporation aware of any Year 2000-related problems with
any of its loan customers that would impact their ability to meet their debt
service requirements. The Corporation did not experience any significant unusual
deposit activity from its customers.
16.
<PAGE> 17
REGULATION
GENERAL
The Bank is subject to regulation, examination and oversight by the OTS, the
Division, and the FDIC. The Bank must file periodic reports with the OTS, the
Division and the FDIC concerning its activities and financial condition.
Examinations are conducted periodically by federal and state regulators to
determine whether the Bank complies with various regulatory requirements and is
operating in a safe and sound manner. The Bank is a member of the FHLB of
Cincinnati.
HLFC is subject to regulation, examination, and oversight by the OTS and is
required to submit periodic reports to the OTS. HLFC and the Bank are also
subject to the provisions of the Ohio Revised Code applicable to corporations
generally.
OHIO SAVINGS AND LOAN LAW
The Division is responsible for the regulation and supervision of Ohio savings
associations in accordance with the laws of the State of Ohio. Ohio law
prescribes the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries, and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally chartered savings and loan association.
The Division also has approval authority over any mergers or acquisitions of
control involving Ohio savings and loan associations. The Division may initiate
certain supervisory measures or formal enforcement actions against Ohio
associations. Ultimately, if the grounds provided by law exist, the Division may
place an Ohio association in conservatorship or receivership.
The Division conducts regular examinations of the Bank approximately once every
18 months. Such examinations are usually conducted jointly with one or both
federal regulators. The Division imposes assessments on Ohio associations based
on their asset size to cover the cost of supervision and examination.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings and loan associations and all other savings and loan associations the
deposits of which are insured by the FDIC. The OTS issues regulations governing
the operation of savings and loan associations, regularly examines such
associations and imposes assessments on savings associations based on their
asset size to cover the costs of this supervision and examination. The OTS also
may initiate enforcement actions against savings and loan associations and
certain persons affiliated with them for violations of laws or regulations or
for engaging in unsafe or unsound practices. If the grounds provided by law
exist, the OTS may appoint a conservator or receiver for a savings and loan
association.
17.
<PAGE> 18
Savings associations are subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosures, equal credit opportunity, fair credit reporting
and community reinvestment. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of an association to
open a new branch or engage in a merger. Community reinvestment regulations
evaluate how well and to what extent an institution lends and invests in its
designated service area, with particular emphasis on low- to moderate-income
communities and borrowers in that area. The Bank has received a "satisfactory"
examination rating under those regulations.
REGULATORY CAPITAL REQUIREMENTS. The Bank is required by OTS regulations to meet
certain minimum capital requirements. Current capital requirements call for
tangible capital of 1.5% of adjusted total assets and risk-based capital (which
for the Bank consists of core capital and general valuation allowances) of 8.0%
of risk-weighted assets (assets, including certain off-balance sheet items, are
weighted at percentage levels ranging from 0% to 100% depending on the relative
risk).
The Bank is also required to meet minimum core capital requirements. Savings
associations with the highest examination rating must maintain core capital
(which for the Bank consists solely of tangible capital) of at least 3% of their
adjusted total assets. Those associations that do not have the highest
examination rating and exceed an acceptable level of risk will be required to
maintain core capital of at least 4%. Depending on the association's examination
rating and overall risk, the OTS may require a higher core capital ratio.
The OTS has adopted regulations governing prompt corrective action to resolve
the problems of capital deficient and otherwise troubled savings and loan
associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. In addition, the OTS
generally can downgrade an association's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. An undercapitalized association must submit a
capital restoration plan to the OTS within 45 days after it becomes
undercapitalized. Undercapitalized associations will be subject to increased
monitoring and asset growth restrictions and will be required to obtain prior
approval for acquisitions, branching and engaging in new lines of business.
Critically undercapitalized institutions must be placed in conservatorship or
receivership within 90 days of reaching that capitalization level, except under
limited circumstances. The Bank's capital at June 30, 2000, met the standards
for a well-capitalized institution.
Federal law prohibits a savings and loan association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized.
LIQUIDITY. OTS regulations require that savings associations maintain an average
daily balance of liquid assets (cash, certain time deposits, association's
acceptances, and specified United States Government, state or federal agency
obligations) equal to a monthly average of not less than 4% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Monetary penalties may be imposed upon member institutions failing to meet
liquidity requirements. The eligible liquidity of the Bank at June 30, 2000, was
9.27%.
18.
<PAGE> 19
QUALIFIED THRIFT LENDER TEST. Savings associations must meet one of two possible
tests in order to be a qualified thrift lender ("QTL"). The first test requires
a savings association to maintain a specified level of investments in assets
that are designated as qualifying thrift investments ("QTI"), which are
generally related to domestic residential real estate and manufactured housing
and include credit card, student, and small business loans and stock issued by
any FHLB, the FHLMC or the FNMA. Under this test 65% of an institution's
"portfolio assets" (total assets less goodwill and other intangibles, property
used to conduct business, and 20% of liquid assets) must consist of QTI on a
monthly average basis in nine out of every 12 months. The second test permits a
savings association to qualify as a QTL by meeting the definition of "domestic
building and loan association" under the Internal Revenue Code of 1986, as
amended (the "Code"). In order for an institution to meet the definition of a
"domestic building and loan association" under the Code, at least 60% of such
institution's assets must consist of specified types of property, including
cash, loans secured by residential real estate or deposits, educational loans
and certain governmental obligations. The OTS may grant exceptions to the QTL
test under certain circumstances. If a savings association fails to meet the QTL
test, the association and its holding company become subject to certain
operating and regulatory restrictions. A savings association that fails to meet
one of the QTL tests will not be eligible for new FHLB advances. At June 30,
2000, the Bank met the QTL test.
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors, and principal shareholders and their related interests must conform
to the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders, and their related
interests cannot exceed the Bank's Lending Limit Capital (or 200% of Lending
Limit Capital for qualifying institutions with less than $100 million in
assets). Most loans to directors, executive officers, and principal shareholders
must be approved in advance by a majority of the "disinterested" members of the
board of directors of the Bank with any "interested" director not participating.
All loans to directors, executive officers, and principal shareholders must be
made on terms substantially the same as offered in comparable transactions with
the general public or as offered to all employees in a company-wide benefit
program, and loans to executive officers are subject to additional limitations.
The Bank complied with such restrictions at June 30, 2000.
All transactions between a savings association and its affiliates must comply
with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An affiliate
of a savings association is any company or entity that controls, is controlled
by or is under common control with, the savings association. HLFC is an
affiliate of the Bank. Generally, Sections 23A and 23B of the FRA (i) limit the
extent to which a savings association or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, (ii) limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee, and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. The Bank complied
with these requirements and restrictions at June 30, 2000.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions or
requirements on the ability of associations to make capital distributions,
according to ratings of associations based on their capital level and
supervisory condition. Capital distributions, for purposes of such regulation,
include, without limitation, payments of cash dividends, repurchases, and
certain other acquisitions by an association of its shares and payments to
stockholders of another association in an acquisition of such other association.
19.
<PAGE> 20
A savings and loan holding company must file a notice or an application with the
OTS before it can declare and pay a dividend. An application must be submitted
and approval from the OTS must be obtained (1) if the proposed distribution
would cause total distributions for that year to exceed net income for that
calendar year to date plus the savings association's retained net income for the
preceding two years; (2) if the savings association will not be at least
adequately capitalized following the capital distribution; (3) if the proposed
distribution would violate a prohibition contained in any applicable statute,
regulation or agreement between the savings association and the OTS (or the
FDIC), or a condition imposed on the savings association in an OTS-approved
application or notice; or, (4) if the savings association has not received
certain favorable examination ratings from the OTS. If a savings association
subsidiary of a holding company is not required to file an application, it must
file a notice with the OTS.
In addition to certain federal income tax considerations, OTS regulations impose
limitations on the payment of dividends and other capital distributions by
savings associations. Under OTS regulations applicable to converted savings
associations, the Bank is not permitted to pay a cash dividend on its common
shares if its regulatory capital would, as a result of payment of such
dividends, be reduced below the amount required for the Liquidation Account, or
below applicable regulatory capital requirements prescribed by the OTS.
HOLDING COMPANY REGULATION. HLFC is a savings and loan holding company within
the meaning of the Home Owners Loan Act (the "HOLA"). As such, HLFC is
registered with the OTS and subject to OTS regulations, examination,
supervision, and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from controlling
any other savings and loan association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings and loan association or holding company
thereof which is not a subsidiary. Under certain circumstances, a savings and
loan holding company is permitted to acquire, with the approval of the OTS, up
to 15% of the previously unissued voting shares of an undercapitalized savings
and loan association for cash without being deemed to control the association.
Except with the prior approval of the OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such company's stock may also acquire control of any savings
institution, other than a subsidiary institution, or any other savings and loan
holding company.
HLFC is a unitary savings and loan holding company. Under current law, there are
generally no restrictions on the activities of unitary savings and loan holding
companies and such companies are the only financial institution holding
companies which may engage in commercial, securities, and insurance activities
without limitation. The broad latitude under current law can be restricted if
the OTS determines that there is reasonable cause to believe that the
continuation by a savings and loan holding company of an activity constitutes a
serious risk to the financial safety, soundness, or stability of its subsidiary
savings and loan association. The OTS may impose such restrictions as deemed
necessary to address such risk, including limiting (i) payment of dividends by
the savings and loan association; (ii) transactions between the savings and loan
association and its affiliates; and (iii) any activities of the savings and loan
association that might create a serious risk that the liabilities of HLFC and
its affiliates may be imposed on the savings and loan association. However, if
the savings and loan association subsidiary of a unitary holding company fails
to meet the QTL, then the holding company would become subject to the activities
restrictions applicable to multiple holding companies. At June 30, 2000, the
Bank met the QTL test. See "Qualified Thrift Lender Test."
If HLFC were to acquire control of another savings institution, other than
through a merger or other business combination with the Bank, HLFC would become
a multiple savings and loan holding company and would generally be subject to
activity restrictions.
20.
<PAGE> 21
FDIC REGULATIONS
The FDIC is an independent federal agency that insures the deposits, up to
prescribed statutory limits, of federally-insured banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund (the
"BIF") for commercial banks and state savings banks and the SAIF for savings
associations. The FDIC is required to maintain designated levels of reserves in
each fund. The Bank's deposit accounts are insured by the FDIC in the SAIF up to
the prescribed limits. The FDIC has examination authority over all insured
depository institutions, including the Bank, and has authority to initiate
enforcement actions if the FDIC does not believe the OTS has taken appropriate
action to safeguard safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each fund. The
FDIC may increase assessment rates for either fund if necessary to restore the
fund's ratio of reserves to insured deposits to its target level within a
reasonable time and may decrease such rates if such target level has been met.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, assessments vary based on the risk the institution
poses to its deposit insurance fund. The risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution. Since the Bank is considered a healthy institution under this
system, it pays the lowest assessment rate.
FRB REGULATIONS
FRB regulations currently require savings associations to maintain reserves of
3% of net transaction accounts (primarily NOW accounts) up to $44.3 million
(subject to an exemption of up to $5.0 million), and of 10% of net transaction
accounts over $44.3 million. At June 30, 2000, the Bank complied with this
reserve requirement.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. See "
Deposits and Borrowings." The Bank is a member of the FHLB of Cincinnati and
must maintain an investment in the capital stock of the FHLB of Cincinnati in an
amount equal to the greater of 1% of the aggregate outstanding principal amount
of the Bank's residential mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, and 5% of its advances from the FHLB.
The Bank complies with this requirement with an investment in stock of the FHLB
of Cincinnati of $1.6 million at June 30, 2000.
Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully disbursed, whole first mortgage loans
on improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the U.S. Government or
an agency thereof; deposits in any FHLB; or other real estate related collateral
(up to 30% of the member association's capital) acceptable to the applicable
FHLB, if such collateral has a readily ascertainable value and the FHLB can
perfect its security interest in the collateral.
Each FHLB is required to establish standards of community investment or service
that its members must maintain for continued access to long-term advances from
the FHLBs. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by each FHLB must be made only to provide funds for
residential housing finance.
21.
<PAGE> 22
RECENT LEGISLATION
On November 12, 1999, President Clinton signed the Graham-Leach-Bliley Act of
1999 ("GLB Act"), which is intended to modernize the financial services
industry. The GLB Act sweeps away large parts of a regulatory framework that had
its origins in the Depression Era of the 1930s. Effective March 11, 2000, new
opportunities will be available for banks, other depository institutions,
insurance companies and securities firms to enter into combinations that permit
a single financial service organization to offer customers a more complete array
of financial products and services. The GLB Act provides a new regulatory
framework for regulation through the financial holding company, which will have
as its umbrella regulator the Federal Reserve Board. The functional regulation
of the financial holding company's separately regulated subsidiaries will be
conducted by their primary functional regulator. The GLB Act makes satisfactory
or above Community Reinvestment Act compliance for insured depository
institutions and their financial holding companies necessary in order for them
to engage in new financial activities. The GLB Act provides a federal right to
privacy of non-public personal information of individual customers. The
Corporation and the Bank are also subject to certain state laws that deal with
the use and distribution of non-public personal information.
TAXATION
FEDERAL TAXATION
HLFC and the Bank are each subject to the federal tax laws and regulations that
apply to corporations generally. In addition to the regular income tax, HLFC and
the Bank may be subject to an alternative minimum tax 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. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. The Taxpayer Relief Act of 1997 repealed the
alternative minimum tax for certain "small corporations" for tax years beginning
after December 31, 1997. A corporation initially qualifies as a small
corporation if it had average gross receipts of $5 million or less for the three
tax years ending with its first tax year beginning after December 31, 1996. Once
a corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period do not exceed $7.5 million. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration. Based on the
Bank's average gross receipts of $6.74 million for the three tax years ending on
December 31, 1999, the Bank would qualify as a small corporation exempt from the
alternative minimum tax.
22,
<PAGE> 23
Prior to the enactment of the Small Business Jobs Protection Act (the "Small
Business Act"), which was signed into law on August 21, 1996, certain thrift
institutions, were allowed deductions for bad debts under methods more favorable
than those granted to other taxpayers. Qualified thrift institutions could
compute deductions for bad debts using either the specific charge off method of
Section 166 of the Code, or one of the two reserve methods of Section 593 of the
Code. The reserve methods under Section 593 of the Code permitted a thrift
institution annually to elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions, or
(ii) the "experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans under either the experience method or the
percentage of taxable income method.
The Small Business Act eliminated the percentage of taxable-income reserve
method of accounting for bad debts by thrift institutions, effective for taxable
years beginning after 1995. Thrift institutions that would be treated as small
banks are allowed to use the experience method applicable to such institutions,
while thrift institutions that are treated as large banks are required to use
only the specific charge off method.
A thrift institution required to change its method of computing reserves for bad
debts will treat such change as a change in the method of accounting, initiated
by the taxpayer, and having been made with the consent of the Secretary of the
Treasury. Section 481(a) of the Code requires certain amounts to be recaptured
with respect to such change. Generally, the amounts to be recaptured will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that becomes a large bank, the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that
becomes a small bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans and its reserve for losses on nonqualifying loans
as of the close of its last taxable year beginning before January 1, 1996, over
(ii) the greater of the balance of (a) its pre-1988 reserves or (b) what the
thrift's reserves would have been at the close of its last year beginning before
January 1, 1996, had the thrift always used the experience method.
For taxable years that began on or after January 1, 1996, and before January 1,
1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential real and church property and certain mobile homes), but only to the
extent that the loan is made to the owner of the property.
23.
<PAGE> 24
The balance of the pre-1988 reserves is subject to the provisions of Section
593(e) as modified by the Small Business Act, which require recapture in the
case of certain excessive distributions to shareholders. The pre-1988 reserves
may not be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by the Bank to HLFC is deemed paid out of its
pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and
the Bank's gross income for tax purposes would be increased by the amount which,
when reduced by the income tax, if any, attributable to the inclusion of such
amount in its gross income, equals the amount deemed paid out of the pre-1988
reserves. As of June 30, 2000, the Bank's pre-1988 reserves for tax purposes
totaled approximately $1.5 million. The Bank believes it had approximately $1.0
million of accumulated earnings and profits for tax purposes as of June 30,
2000, which would be available for dividend distributions, provided regulatory
restrictions applicable to the payment of dividends are met. No representation
can be made as to whether the Bank will have current or accumulated earnings and
profits in subsequent years.
The tax returns of the Bank have been audited or closed without audit through
fiscal year 1996. In the opinion of management, any examination of open returns
would not result in a deficiency that could have a material adverse effect on
the financial condition of the Bank.
OHIO TAXATION
HLFC is subject to the Ohio corporation franchise tax, which, as applied to
HLFC, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.5% of computed Ohio taxable income in excess of $50,000 and (ii) 0.4% times
taxable net worth. Under these alternative measures of computing tax liability,
the states to which a taxpayer's adjusted total net income and adjusted total
net worth are apportioned or allocated are determined by complex formulas. The
minimum tax is $50 per year.
A special litter tax is also applicable to all corporations, including HLFC,
subject to the Ohio Corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times
taxable-net-worth.
Certain holding companies, such as HLFC, will qualify for complete exemption
from the net worth tax if certain conditions are met. HLFC will most likely meet
these conditions, and thus, calculate its Ohio franchise tax on the net income
basis.
The Bank is a "financial institution" for State of Ohio tax purposes. As such,
it is subject to the Ohio corporate franchise tax on "financial institutions,"
which is imposed annually at a rate of 1.3% for the 2000 tax year and thereafter
of the Bank's apportioned book net worth, determined in accordance with
generally accepted accounting principles, less any statutory deduction. As a
"financial institution," the Bank is not subject to any tax based upon net
income or net profits imposed by the State of Ohio.
24.
<PAGE> 25
ITEM 2. - DESCRIPTION OF PROPERTY
The following table sets forth certain information at June 30, 2000, regarding
the properties on which the main office and the branch offices of the Bank are
located:
<TABLE>
<CAPTION>
Owned or Date Net book
Location Leased Acquired Value Deposits
-------- ------ -------- ----- --------
(In thousands)
<S> <C> <C> <C> <C>
401 Main Street Owned 1924 $ 134,135 $ 45,330
Coshocton, Ohio 43812-1523
590 Walnut Street Owned 1985 $ 145,336 $ 13,889
Coshocton, Ohio 43812-1632
503 West Main Street Owned 1999 $ 568,386 $ 5,732
West Lafayette, Ohio 43845-1134
</TABLE>
ITEM 3. - LEGAL PROCEEDINGS
HLFC and the Bank are not presently involved in any material legal proceedings.
From time to time, the Bank is a party to legal proceedings incidental to its
business to enforce its security interest in collateral pledged to secure loans
made by the Bank.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information contained in the Home Loan Financial Corporation Annual Report
to Shareholders for the fiscal year ended June 30, 2000 (the "Annual Report")
under the caption "Market Price of the Corporation's Common Shares and Related
Shareholder Matters" is incorporated herein by reference.
ITEM 6. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in the Annual Report under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" is
incorporated herein by reference.
ITEM 7. - FINANCIAL STATEMENTS
The Consolidated Financial Statements appearing in the Annual Report and the
report of Crowe, Chizek and Company LLP dated July 26, 2000, are incorporated
herein by reference.
25.
<PAGE> 26
ITEM 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information contained in the definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders of HLFC (the "Proxy Statement"), under the caption
"Board of Directors" is incorporated herein by reference.
ITEM 10. - EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption "Compensation
of Executive Officers and Directors" is incorporated herein by reference.
ITEM 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption "Voting
Securities and Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
ITEM 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
ITEM 13. - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3 Articles of Incorporation and Code of Regulations.
10 Employment Contract for Robert C. Hamilton.
11 Statement Regarding Computation of Earnings per Share. See
Note 19 to the Consolidated Financial Statements, which is
incorporated by reference.
13 2000 Annual Report to Shareholders (the following parts of
which are incorporated herein by reference; "Market Price of
HLFC's Common Shares and Related Shareholders' Matters,"
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Consolidated Financial
Statements).
20 Proxy Statement for 2000 Annual Meeting of Shareholders.
21 Subsidiaries of Home Loan Financial Corporation.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by HLFC during the
quarter ended June 30, 2000.
26.
<PAGE> 27
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOME LOAN FINANCIAL CORPORATION
By: /s/ Robert C. Hamilton
----------------------
Robert C. Hamilton, President
(Principal Executive Officer)
Date: September 25, 2000
In accordance with 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.
<TABLE>
<S> <C>
/s/ Robert C. Hamilton /s/ Preston W. Bair
------------------------------------ -------------------
Robert C. Hamilton, Preston W. Bair,
President and Director Treasurer
(Principal Financial Officer)
Date: September 25, 2000 Date: September 25, 2000
/s/ Neal J. Caldwell /s/ Charles H. Durmis
------------------------------------ ---------------------
Neal J. Caldwell Charles H. Durmis
Director Director
Date: September 25, 2000 Date: September 25, 2000
/s/ Robert D. Mauch /s/ Douglas L. Randles
------------------------------------ ----------------------
Robert D. Mauch Douglas L. Randles
Director Director
Date: September 25, 2000 Date: September 25, 2000
</TABLE>
27.
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<S> <C> <C>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
3.1 Articles of Incorporation of Home Incorporated by reference to the Registration Statement
Loan Financial Corporation on Form S-1 filed by HLFC on December 16, 1997 (the "S-1")
with the Securities and Exchange Commission (the "SEC"),
Exhibit 3.1.
3.2 Certificate of Amendment to Articles Incorporated by reference to Pre-Effective Amendment No.
of Incorporation of Home Loan 1 to the S-1 filed with the SEC on February 3, 1998,
Financial Corporation Exhibit 3.2.
3.4 Code of Regulations of Home Loan Incorporated by reference to the S-1, Exhibit 3.3.
Financial Corporation
11 Statement Regarding Computation of See Note 19 to the consolidated financial statements.
Earnings per Share
10 Employment Contract for Robert C. Incorporated by reference to the Form 10-KSB filed by
Hamilton HLFC on September 28, 1998 (the "10-KSB") with the SEC,
Exhibit 10.
13 Home Loan Financial Corporation 2000
Annual Report to Shareholders
20 Proxy Statement for 2000 Annual
Meeting of Shareholders
21 Subsidiaries of Home Loan Financial Incorporated by reference to the 10-KSB, Exhibit 21.
Corporation
27 Financial Data Schedule
</TABLE>
28.
