SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1999
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-20956
HFB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Tennessee 61-1228266
---------------------------- ----------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
1602 Cumberland Avenue, Middlesboro, Kentucky 40965
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (606) 248-1095
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $1.00 per share)
----------------------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B 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 ]
Registrant's revenues for the fiscal year ended June 30, 1999: $13,882,000
The registrant's voting stock is listed on the OTC Bulletin Board published by
the National Association of Securities Dealers ("OTC Bulletin Board"). The
aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the $13.75 per share closing sales price of the
registrant's common stock as quoted on the OTC Bulletin Board on September 23,
1999, was $12,914,522. For purposes of this calculation, it is assumed that
directors and officers of the registrant are affiliates. As of September 1,
1999, the registrant had 1,100,985 shares of common stock outstanding, of which
161,747 were held by affiliates.
Transitional Small Business Disclosure Format Yes No X
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June
30, 1999. (Parts I and II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of Stockholders.
(Part III)
1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
HFB Financial Corporation (the "Company") is the sole stockholder of, and
acts as the holding company for, Home Federal Savings Bank ("Home Federal" or
the "Bank"). The Company has no significant assets other than capital stock of
the Bank and a portfolio of trading account equity securities. The Company
qualifies as a unitary savings and loan holding company and is subject to
regulation by the Office of Thrift Supervision ("OTS"). The Company's principal
business is the business of the Bank and its subsidiary. Therefore, references
to the "Company" in this Form 10-KSB are to both the Company and the Bank. The
Bank operates through two full service offices in the Southeastern Kentucky
communities of Middlesboro and Harlan and one full service office in the East
Tennessee community of New Tazewell. The Company is in the process of acquiring
another branch in Harlan, Kentucky, that includes approximately $17.5 million in
deposits and $478,000 in fixed assets and is subject to regulatory approval. At
June 30, 1999, the Company had total assets of $190.4 million, deposits of
$154.0 million, net loans receivable of $120.7 million and stockholders' equity
of $17.8 million.
The executive offices of the Company are located at 1602 Cumberland Avenue,
Middlesboro, Kentucky 40965, and the telephone number is (606) 248-1095.
The Company is engaged principally in the business of accepting deposits
from the general public and originating permanent loans that are secured by one-
to four-family residential properties located in its market area. The Company
also originates consumer loans and commercial real estate loans, and maintains a
substantial investment portfolio of mortgage-backed and other investment
securities.
The Company has taken certain actions in order to address issues relating
to the Year 2000, and the proper functioning of computer and data processing
equipment. For more information, see "Item 6. -- Management's Discussion and
Analysis of Financial Condition and Results of Operations."
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain matters discussed in this document are "forward looking
statements," intended to qualify for the safe harbors from liability established
by the Private Securities Legislation Reform Act of 1995. These forward looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes," "anticipates,"
"expects," "estimates," or words of similar import. Similarly, statements that
describe the Company's future plans, objectives or goals are also forward
looking statements. Such forward looking statements are subject to certain risks
and uncertainties which are described in close proximity to such statements and
which could cause actual results to differ materially from those anticipated as
of the date of this report. Shareholders, potential investors, and other readers
are cautioned not to place undue reliance on such forward-looking statements.
The forward-looking statements included herein are only made as of the date of
this report and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
LENDING ACTIVITIES
General. The Company originates loans primarily through its main office
located in Middlesboro, Kentucky. The principal lending activity of the Company
is the origination of conventional mortgage loans for the purpose of purchasing
or refinancing owner-occupied, one- to four-family residential properties in its
primary market areas. Conventional mortgage loans are primarily adjustable-rate
mortgage loans with a small amount of fixed-rate mortgage loans which are not
insured or guaranteed by federal agencies. The Company does not originate
Federal Housing Administration-insured or Veterans Administration-insured loans.
The Company does originate consumer loans on a direct basis. In addition, the
Company also makes conventional mortgage loans for the purpose of constructing
one- to four-family residences and loans to construct commercial and
multi-family real estate.
2
<PAGE>
The Company emphasizes the origination of adjustable-rate loans and
short-term loans in order to increase the interest rate sensitivity of its loan
portfolio. However, the Company also continues to offer long-term, fixed-rate
conventional mortgage loans (25 year terms or less), originated for its
portfolio.
3
<PAGE>
ANALYSIS OF LOAN PORTFOLIO
Set forth below is selected data relating to the composition of the
Company's loan portfolio at the dates indicated. As of June 30, 1999, the
Company had no concentrations of loans exceeding 10% of total loans other than
as disclosed below.
At June 30,
------------------------
1999 1998
---------- ---------
Amount Amount
(In thousands)
Real estate loans:
Single and multi-family mortgage loans........... 95,294 $ 94,153
Commercial real estate loans..................... 10,745 10,411
Real Estate construction loans..................... 12,996 8,636
------- ---------
Total real estate loans.......................... 119,035 113,200
------- ---------
Consumer loans:
Loans on deposits................................ 1,795 1,995
Home improvement loans........................... 828 1,176
Automobile loans................................. 1,109 1,685
Other(1)......................................... 2,180 1,617
------- ---------
Total consumer loans.......................... 5,912 6,473
------- ---------
Commercial loans................................... 98 353
------- ---------
Total gross loans.................................. 125,045 120,026
Less:
Undisbursed portion of mortgage loans............ 2,931 2,757
Allowances for loan losses....................... 1,212 973
Unamortized discount and deferred loan
fees, net...................................... 160 125
------- ---------
Total.............................................. 120,742 $ 116,171
======= =========
(1) Includes home equity lines of credit.
The following table sets forth certain information as of June 30, 1999
regarding the dollar amount of principal repayments becoming due during the
periods indicated for loans. Demand loans, loans having no schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The table below does not include any estimate of prepayments which
significantly shorten the average life of all mortgage loans and may cause the
Company's actual repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
Due After One
Due in One Year through Due after Five
Year or Less Five Years Years Total
------------ ---------- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage loans.......... $ 5,265 $ 23,825 $ 76,949 $ 106,039
Real estate construction loans...... 650 2,924 9,422 12,996
Consumer loans (1).................. 3,082 2,609 221 5,912
Commercial loans.................... 73 25 -- 98
----------- ----------- ----------- ----------
Total gross loans................. $ 9,070 $ 29,383 $ 86,592 $ 125,045
=========== =========== =========== ==========
</TABLE>
(1) Includes second mortgages and home equity lines of credit.
4
<PAGE>
The following table sets forth as of June 30, 1999 the dollar amount of all
the loans due after one year ending June 30, 1999 and distinguishes between
those with predetermined (i.e., fixed) interest rates and those with floating or
adjustable interest rates.
Floating or
Predetermined Adjustable
Rate Rates Total
---- ----- -----
(In thousands)
Real estate mortgage loans..... $ 15,164 $ 85,610 $ 100,774
Real estate construction loans. 2,117 10,229 12,346
Consumer loans (1)............. 2,830 -- 2,830
Commercial loans............... 25 -- 25
------------- ------------ ----------
Total gross loans........... $ 20,136 $ 95,839 $ 115,975
============= ============ ==========
One- to Four-Family Real Estate Lending. The primary emphasis of the
Company's lending activity is the origination of conventional loans secured by
owner occupied, one- to four-family residential properties. The Company's
conventional mortgage loan originations are generally for terms of 10 to 30
years, amortized on a monthly basis, with principal and interest due each month.
Borrowers may refinance or prepay loans at their option without penalty.
Conventional residential mortgage loans granted by the Company customarily
contain "due-on-sale" clauses which permit the Company to accelerate the
indebtedness of the loan upon transfer of ownership of the mortgaged property.
The Company's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 81% and 95% of
the lesser of the appraised value or purchase price. The maximum loan-to-value
ratio on mortgage loans secured by non-owner-occupied properties and/or used for
refinancing purposes is also 80%. The Company does originate some 81%-95%
loan-to-value ratio loans. The Company requires private mortgage insurance on
these loans and charges a higher effective interest rate on such loans to
account for the additional risk which 81%-95% loan-to-value ratio loans carry.
The Company also originates conventional fixed-rate mortgage loans on one-
to-four family residential properties, the majority of which have a maximum term
to maturity of 15 years. The Company originates and holds its fixed-rate
mortgage loans in its portfolio as long-term investments.
In addition, the Company engages in a limited, but increasing amount of
construction lending, involving loans to qualified borrowers for construction of
one- to-four family residential properties. These properties are primarily
located in the Company's market area. All construction loans are secured by a
first lien on the property under construction. Construction/permanent loans
generally have adjustable interest rates and are underwritten in accordance with
the same terms and requirements as the Company's permanent mortgages, except the
loans generally provide for disbursement in stages during a construction period
of up to six months, during which period the borrower is required to make
monthly payments of accrued interest on the outstanding loan balance. Interim
construction loans generally have fixed interest rates, terms of up to six
months and a maximum loan-to-value ratio of 80%. Borrowers must satisfy all
credit requirements which would apply to the Company's permanent mortgage loan
financing for the subject property.
The Company also originates consumer loans, primarily savings account
loans, automobile loans, home equity loans and lines of credit, second mortgage
loans and other consumer loans secured by mortgages on residences. The Company
also makes a limited amount of unsecured loans.
The Company has historically engaged in a limited amount of commercial and
multi-family real estate lending. The Company generally makes commercial and
multi-family real estate loans available on properties in its market area, with
terms of 20 years or less, loan-to-value ratios of 80% or less and adjustable
rates of interest. In addition, the Company, from time to time, purchases whole
loans or participation interests in loans on commercial and multi-family real
estate located in Kentucky and Eastern Tennessee.
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to the Company clarifies its loan assets as a
"substandard," "doubtful" or "loss," if warranted. Assets classified as
substandard or doubtful require a general allowances for loan losses. If an
asset or portion thereof is classified as loss, specified allowances for loan
losses in the amount of 100% of the portion of the asset classified loss must be
5
<PAGE>
established, or else the loan must be charged off. An asset which does not
currently warrant classification but which possesses weaknesses or deficiencies
deserving close attention is required to be designated as "special mention."
Currently, general loss allowances established to cover possible losses related
to assets classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. The Company has determined that at
June 30, 1999 it had $1.4 million in assets classified as substandard, $351,000
in assets classified as doubtful and $655,000 in assets classified as loss. In
addition, the Company had $623,000 in assets designated as special mention.
Depending on their future performance, it is possible that these loans might be
required to be classified in future periods.
The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated.
For the Year Ended June 30,
------------------------------
1999 1998
---- ----
(Dollars in Thousands)
Balance at Beginning of Period................... $ 973 $ 710
---------- ----------
Loan charged-offs:
Consumer....................................... 16 11
Total charge-offs 16 11
---------- ----------
Recoveries:
Consumer....................................... 2 --
Total Recoveries................................. 2 --
---------- ----------
Net loan recoveries (chargeoffs)................. (14) --
---------- ----------
Provision for Loan Losses........................ 253 274
---------- ----------
Balance at end of period......................... $ 1,212 $ 973
=========== ===========
Ratio of allowance for losses to
gross loans receivable........................ .97% .81%
=========== ===========
Ratio of net loan chargeoffs to average loans
outstanding during the period.................. .01% .01%
=========== ===========
6
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
% of Loans % of Loans
in Each in Each
Category Category
to Total to Total
Amount Gross Loans Amount Gross Loans
------ ----------- ------ -----------
(Dollars in thousands)
Residential and commercial
<S> <C> <C> <C> <C>
Real estate loans............ $ 1,210 95.19% $ 970 94.31%
Consumer loans................. 2 4.72 3 5.39
Commercial loans............... -- .09 -- .30
---------- --------- ---------- ---------
Total allowance for
Loan losses................ $ 1,212 100.00% $ 973 100.00%
========== ========= ========== =========
</TABLE>
Non-Performing Loans and Other Problem Assets. Management reviews the
credit quality of the Company's loans on a regular basis. After residential
mortgage loans become past due more than 90 days, the Company generally
establishes an allowance for uncollectible interest for the amount by which the
principal balance and uncollected interest exceeds 90% of the appraised value of
the property. Commercial and multi-family real estate loans generally are placed
on non-accrual status if the borrower is placed in bankruptcy proceedings, or
management concludes that payment in full is not likely. In accordance with the
agreement, the Company has no further recourse to recover the deficiency.
Consumer and commercial loans generally are charged off, or any expected loss is
reserved for, after they become more than 90 days past due. The Company accrues
interest on delinquent loans past due more than 90 days without establishing a
reserve when management concludes such action is warranted, such as in the event
the loan is exceptionally well collateralized or the borrower establishes the
temporary nature of the delinquency. Loans are charged off when management
concludes that they are uncollectible.
Real estate acquired by the Company as a result of foreclosure is
classified as real estate owned until such time as it is sold. When such
property is acquired, it is recorded at the lower of the unpaid principal
balance or its fair market value (less estimated selling cost at the date of
foreclosure). Any required write-down of the loan to its fair market value upon
foreclosure is charged against the allowance for loan losses.
7
<PAGE>
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of Statement of Financial Accounting
Standards No. 15, at the dates indicated.
At June 30,
----------------------------
1999 1998
---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis (1) .... $ 1,416 $ --
---------- ----------
Accruing loans which are contractually
past due 90 days or more: (1)
Real estate.................................. $ 521 $ 677
Consumer..................................... 5 40
Commercial................................... -- --
----------- -----------
Total of nonaccrual and 90 days
or more past due loans.......................... $ 1,942 $ 717
----------- -----------
Real Estate owned................................. -- --
----------- -----------
Total nonperforming assets..................... $ 1,942 $ 717
=========== ===========
Nonaccrual and 90 days or more past due
Loans as a percentage of total loans, net....... 1.61% .62%
=========== ===========
Nonaccrual and 90 days or more past due
Loans as a percentage of total assets, net...... 1.02% .41%
=========== ===========
Nonperforming assets as a percentage of
Total assets.................................... 1.02% .41%
=========== ===========
(1) Interest on delinquent loans is accrued to income to the extent considered
collectible.
As of June 30, 1999, the Company had a total of $936,000 in 19 single
family loans classified as "substandard." As of June 30, 1999, the Company had
$5,000 in consumer loans classified and $441,000 in two single family
residential loans classified as "special mention."
In addition, the Company had 6 commercial real estate loans to one borrower
totaling $1.0 million, of which $303,000 had been classified as "substandard",
$100,000 had been classified as "doubtful" and $607,000 had been classified as
"loss." The largest property, a hotel-restaurant operation, has suffered severe
cash flow problems. The borrower is currently in bankruptcy and is actively
working to obtain new financing. Management believes that these loans have been
adequately classified and reserved for, but continues to monitor them as to
their collectibility and as to any possible losses the Company could incur, or
additional reserves that may need to be established. On September 16, 1999,
$875,000 of these loans were paid off by means of financing by another lender,
$303,000 of which was classified as substandard and $572,000 of which was
classified as loss.
The Company also had, at June 30, 1999, loans to principals and related
parties of this one borrower totaling $515,000. Of these loans, $181,000 were
classified as "special mention", $140,000 as "substandard", $165,000 as
"doubtful" and $29,000 as "loss". Through September 23, 1999, $17,000 has been
paid on the doubtful portion of these loans and $29,000 has been paid on the
portion classified as "loss".
At June 30, 1999, $202,000 would have been recognized as interest income
had these loans been in a current status.
As of June 30, 1999, The Company had no real estate owned.
At June 30, 1999, the Company had no other loans of a material amount which
were not classified as non-accrual, past due 90 days or more or restructured but
where known information about possible credit problems of borrowers caused
management to have serious doubts as to the ability of the borrowers to comply
with present loan repayment terms and could result in future disclosure as
non-accrual, 90 days past due or restructured.
8
<PAGE>
INVESTMENT ACTIVITIES
The Company is required under federal regulations to maintain a minimum
amount of liquid assets, which can be invested in specified short-term
securities, and is also permitted to make certain other investments. Liquidity
levels may be increased or decreased depending upon the yields on investment
alternatives, management's judgment as to the attractiveness of the yields then
available in relation to other opportunities, its expectations of the level of
yield that will be available in the future and its projections as to the
short-term demand for funds to be used in the Company's loan origination and
other activities.
The general objectives of the Company's investment policy are to (i)
protect the Company's depositor resources, (ii) maintain liquidity levels to
meet the operational needs of the Company and applicable regulatory
requirements, (iii) reduce credit risk by investing in high quality, diverse
investments, (iv) serve as a hedge against significant interest rate shifts, (v)
contribute to earnings in a stable and dependable manner without compromising
the goals of liquidity and safety, and (vi) provide collateral for pledging
needs. The Company's investment activities are conducted by the Investment
Committee and supervised by the Board of Directors. An investment policy has
been adopted by the Board which provides for maintenance of the investment
portfolio for the purpose of providing earnings and ensuring a minimum liquidity
reserve. In accordance with the investment policy, management has primarily
invested in U.S. Treasury securities backed by the full faith and credit of the
United States and government agency securities, mortgage-backed securities
issued by FHLMC, FNMA, or GNMA, federal funds sold, and federally insured
interest-bearing deposits in other financial institutions. General obligation
and bank qualified bonds of municipalities within the market areas served by the
Company and which are considered to possess acceptable credit and limited
default risk are also considered for investment.
The Board of Directors of the Company has authorized the existence of a
trading account in an amount not to exceed 8% of total assets for the purpose of
taking advantage of favorable short-term market conditions. The Company's
investment policy specifies that securities traded within this account must be
U.S. Treasury or agency obligations. Securities in the trading account are
marked to market on a monthly basis. During the year ended June 30, 1999 there
was no trading activity. At June 30, 1999, there were no securities held in the
Company's trading account.
The Board of Directors of the Company has authorized a trading account of
up to $1.0 million for investing in common stocks of publicly traded thrifts
which are considered to be undervalued. The Company had $1.0 million invested in
common stock of publicly held thrift institutions at June 30, 1999.
The Company, in accordance with generally accepted accounting principles,
reports its investment securities, available for sale, at current market value,
with unrealized gains or losses, net of tax effect, adjusted through equity and
realized gains or losses in income when securities are sold. Investment
securities, held to maturity, are reported at cost as adjusted for unaccredited
discounts and unamortized premiums.
9
<PAGE>
The following table sets forth the carrying value of the Company's
investment securities at the dates indicated.
At June 30,
----------------------------
1999 1998
---- ----
(Dollars in Thousands)
Investment securities, available for sale:
U.S. Treasury and Federal Agency obligations.....$ 25,241 $ 18,238
----------- -----------
Total investment securities, available for sale....$ 25,241 $ 18,238
----------- -----------
Investment securities, held to maturity:
U.S. Treasury and Federal Agency obligations.....$ 7,731 $ 6,497
----------- -----------
Total investment securities, held to maturity......$ 7,731 $ 6,497
----------- -----------
Total investment securities, available for
Sale and held to maturity........................$ 32,972 $ 24,735
=========== ===========
The following table sets forth the distributions of maturities of
securities at amortized cost at June 30, 1999.
<TABLE>
<CAPTION>
At June 30, 1999
------------------------------------------------------------------------------------
One Year One to Five to Ten More than Total Investment
or Less Five Years Years Ten Years Portfolio
------- ---------- ----- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment securities,
available for sale:
U.S. Treasury and
Federal Agency
obligations......... $ 2,006 $ 4,526 $ 13,525 $ 5,184 $ 25,241
Total investment
securities, available for
sale................ 2,006 4,526 13,525 5,184 25,241
-------- -------- --------- ----- ------
Investment securities, held
to maturity
U.S. Treasury and
Federal Agency
obligations......... 502 1,680 4,513 1,036 7,731
-------- -------- --------- -------- ---------
Total investment
securities, held to 502 1,680 4,513 1,036 7,731
maturity............. -------- -------- --------- -------- ---------
Total investment
Securities, available for
sale and held to maturity 2,508 6,206 18,038 6,220 32,972
======== ======== ========= ======== =========
Weighted average yield 5.91 6.23 6.37 6.61 6.37
======== ======== ========= ======== =========
</TABLE>
10
<PAGE>
MORTGAGE-BACKED SECURITIES ACTIVITIES
In accordance with the Company's investment policy, management invests in
mortgage-backed securities issued by Freddie Mac, Fannie Mae, and Ginnie Mae.
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------
1999 1998
----------------------- --------------------------
Amount % Amount %
------ - ------ -
(Dollars in thousands)
Mortgage-backed securities, available for sale:
<S> <C> <C> <C> <C>
Freddie Mac................................................. $ 744 2.82% $ 1,375 6.05%
Fannie Mae.................................................. 4,786 18.18 3,912 17.22
Ginnie Mae.................................................. 6,528 24.80 3,380 14.88
------- --------- --------- -------
Total mortgage-backed securities available for sale........... 12,058 45.80 8,667 38.15
------- --------- --------- -------
Mortgage-backed securities, held to maturity:
Freddie Mac................................................. 1,074 4.08 581 2.56
Fannie Mae.................................................. 9,921 37.69 9,957 43.83
Ginnie Mae.................................................. 3,272 12.43 3,512 15.46
------- --------- --------- -------
Total mortgage-backed securities, held to maturity............ 14,267 54.20 14,050 61.85
------- --------- --------- -------
Total mortgage-backed securities, available
for sale and held to maturity............................... 26,325 100.00% 22,717 100.00%
======= ========= ========= =======
</TABLE>
11
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are a significant source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from loan principal repayments and interest payments and maturing
investment securities. Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources, or on a longer term basis for general business
purposes.
DEPOSITS. Deposits are attracted principally from within the Company's
primary market area through the offering of a variety of deposit instruments,
including passbook and statement accounts and certificates of deposit. Deposit
account terms vary, principally on the basis of the minimum balance required,
the time periods the funds must remain on deposit and the interest rate. The
Company also offers individual retirement accounts ("IRAs") and Keogh Plans.
The Company's policies are designed primarily to attract deposits from
local residents through its branch network rather than to solicit deposits from
areas outside its primary market. The Company does not accept deposits from
brokers due to the volatility and rate sensitivity of such deposits. Interest
rates paid, maturity terms, service fees and withdrawal penalties are
established by the Company on a periodic basis. Determination of rates and terms
are predicated upon funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations.
The following table sets forth the average balances and interest rates for
the Company's deposit accounts by type of deposit for the periods indicated.
Year Ended June 30,
----------------------------------------------------
1999 1998
------------------------ ------------------------
Average Average Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)
NOW and money market
deposit accounts......... $ 13,423 1.95% $ 11,823 2.18%
Passbook accounts.......... 8,008 2.48 9,140 2.72
Certificates............... 127,857 5.29 116,570 5.32
------- ----- ---------- ------
Total.................... 149,288 4.83% 137,533 4.88%
======= ===== ========== ======
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1999. Most of the Company's deposits of over $100,000 come from individual
depositors in the Company's market area.
Certificates
Maturity Period of Deposit
--------------- ----------
(In thousands)
Three months or less $ 11,249
Over three through six months 5,632
Over six through twelve months 14,730
Over twelve months 9,015
---------
Total $ 40,626
=========
Management attributes the net increase in deposits for the year ended June
30, 1999 to general economic conditions and competition in the local market. The
Company does not offer premiums for deposits, and in the past has not offered
interest rates on deposits which exceed the average rates paid by other
financial institutions in its market area. Due to aggressive competition, the
Company has recently instituted promotions offering higher rates on deposits to
maintain its market share. Management anticipates that this trend will continue
over the next twelve months.
12
<PAGE>
BORROWINGS. Savings deposits historically have been the primary source of
funds for the Company's lending and investment activities and for its general
business activities. The Company is authorized, however, to use advances from
the FHLB of Cincinnati to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. All of the advances are collateralized by FHLB
stock and single family first mortgage loans with aggregate principal balances
totaling 150% of the outstanding amount of advances. The FHLB of Cincinnati
functions as a central reserve bank providing credit for savings institutions
and certain other member financial institutions. As a member, the Company is
required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities which are obligations of, or guaranteed
by, the United States) provided certain standards related to creditworthiness
have been met. The average balance of short term borrowings during the 12 months
ended June 30, 1999 was $7.1 million with a weighted average rate of 5.26%. The
maximum balance of short term borrowings during the 12 months ended June 30,
1999 was $7.5 million.
SUBSIDIARY ACTIVITIES
The Company's only subsidiary is Home Service Corporation in which its
investment was $1.9 million at June 30, 1999. Home Service Corporation's
principal activity is that of ownership and rental of the Company's main office
building in Middlesboro, Kentucky and a branch office in New Tazewell,
Tennessee. Home Service Corporation also owns and rents two other properties to
unrelated parties. These properties are contiguous to the Company's main office
and being held for future expansion.
COMPETITION
The Company experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from other savings
institutions, credit unions, regional bank holding companies and commercial
banks located in its primary market area. Significant competition for the
Company's other deposit products and services comes from money market mutual
funds, brokerage firms, insurance companies and retail stores. The primary
factors in competing for loans are interest rates and loan origination fees and
the range of services offered by various financial institutions. Competition for
origination of real estate loans normally comes from other savings institutions,
commercial banks, mortgage bankers, mortgage brokers and insurance companies.
The Company's primary competition comprises the commercial banks near each
of the Company's branch offices. In Middlesboro, where the Company's main office
is located, primary competition consists of two banks and one savings bank. In
Harlan, Kentucky where a branch office is located, the Company's primary
competition is three banks. In New Tazewell, Tennessee, where a branch office is
located, the Bank's primary competition is three banks.
The Company is able to compete effectively in its primary market area by
offering competitive interest rates and loan fees, and a wide variety of deposit
products, and by emphasizing personal customer service. Management believes
that, as a result of the Company's commitment to competitive pricing, varied
products and personal service, the Company has developed a solid base of core
deposits and the loan origination quality and volume are among the leaders in
the Company's market area.
EMPLOYEES
As of June 30, 1999, the Company and its subsidiary had 53 full-time
employees, none of whom was represented by a collective bargaining agreement.
The Company believes that it enjoys excellent relations with its personnel.
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REGULATION
GENERAL
As a federal savings bank, Home Federal is subject to regulation,
supervision and regular examination by the OTS. Federal banking laws and
regulations control, among other things, the Bank's required reserves,
investments, loans, mergers and consolidations, payment of dividends and other
aspects of Home Federal's operations. The deposits of the Bank are insured by
the Savings Association Insurance Fund ("SAIF") administered by the FDIC to the
maximum extent provided by law ($100,000 for each depositor). In addition, the
FDIC has certain regulatory and examination authority over OTS-regulated savings
institutions and may recommend enforcement actions against savings institutions
to the OTS. The supervision and regulation of the Bank is intended primarily for
the protection of the deposit insurance fund and depositors.
As a savings institution holding company, the Company is subject to OTS
regulation, examination, supervision and reporting requirements. The Company
also is required to file certain reports with, and otherwise comply with the
rules and regulations of, the SEC under the federal securities laws.
The following discussion summarizes certain of the statutes, rules and
regulations affecting Home Federal and the Company. A number of other statutes
and regulations have an impact on their operations. The following summary of
applicable statutes and regulations does not purport to be complete and is
qualified in its entirety by reference to such statutes and regulations.
REGULATION OF HOME FEDERAL
REGULATORY CAPITAL. The OTS's capital adequacy regulations require savings
institutions such as the Bank to meet three minimum capital standards: a "core"
capital requirement of between 3% and 5% of adjusted total assets, a "tangible"
capital requirement of 1.5% of adjusted total assets, and a "risk-based" capital
requirement of 8% of total risk-based capital to total risk-weighted assets. In
addition, the OTS has adopted regulations imposing certain restrictions on
savings institutions that have a total risk-based capital ratio of less than 8%,
a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of
Tier 1 capital to total assets of less than 4% (or 3% if the institution is
rated composite 1 under the CAMELS examination rating system). See "--Prompt
Corrective Regulatory Action."
At June 30, 1999, Home Federal exceeded its tangible, core and risk-based
regulatory capital requirements. For more information, see "Selected
Consolidated Financial and Other Data - Regulatory Capital Ratios" in the Annual
Report filed as Exhibit 13 to this report.
PROMPT CORRECTIVE REGULATORY ACTION. The Federal Deposit Insurance Act
("FDI Act") requires the federal banking regulators to take prompt corrective
action in respect of depository institutions that do not meet certain minimum
capital requirements, including a leverage limit and a risk-based capital
requirement. The joint regulations of the federal banking agencies, including
the OTS, classify insured depository institutions by capital levels and provide
that the applicable agency will take various prompt corrective actions to
resolve the problems of any institution that fails to satisfy the capital
standards. Under the joint prompt corrective action regulations, a
"well-capitalized" institution is one that is not subject to any regulatory
order or directive to meet any specific capital level and that has or exceeds
the following capital levels: a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6%, and a ratio of Tier 1 capital to total assets
("leverage ratio") of 5%. An "adequately capitalized" institution is one that
does not qualify as "well capitalized" but meets or exceeds the following
capital requirements: a total risk-based capital of 8%, a Tier 1 risk-based
capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the
institution has the highest composite examination rating. An institution not
meeting these criteria is treated as "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized" depending on the extent to
which its capital levels are below these standards. An institution that falls
within any of the three "undercapitalized" categories will be subject to certain
severe regulatory sanctions required by the FDI Act and the implementing
regulations. As of June 30, 1999, Home Federal was "well-capitalized" as defined
by the regulations.
QUALIFIED THRIFT LENDER TEST. The Home Owners' Loan Act ("HOLA") and OTS
regulations require all savings institutions to satisfy one of two Qualified
Thrift Lender ("QTL") tests or to suffer a number of sanctions, including
restrictions on activities. A savings institution must maintain its status as a
QTL on a monthly basis in at least nine out of every 12 months. An initial
failure to qualify as a QTL results in a number of sanctions, including
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<PAGE>
the imposition of certain operating restrictions and a restriction on obtaining
additional advances from its Federal Home Loan Bank. If a savings institution
does not requalify under the QTL test within the three-year period after it
fails the QTL test, it would be required to terminate any activity not
permissible for a national bank and repay as promptly as possible any
outstanding advances from its Federal Home Loan Bank. In addition, the holding
company of such an institution would similarly be required to register as a bank
holding company with the Federal Reserve Board. At June 30, 1999, Home Federal
qualified as a QTL.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. Under the OTS capital distribution regulations, a savings
institution that qualifies for expedited treatment of applications by
maintaining specified supervisory examination ratings and that is not otherwise
restricted in making capital distributions may, without prior approval by the
OTS, make capital distributions during a calendar year equal to its net income
for such year plus its retained net income for the preceding two years. Capital
distributions in excess of such amount are subject to prior OTS approval. In
addition, even if a proposed capital distribution is less than the above limit,
a savings institution must give notice to the OTS at least 30 days before
declaration of a capital distribution to its holding company.
Under the OTS's prompt corrective action regulations, Home Federal would be
prohibited from paying dividends if Home Federal were classified as
"undercapitalized" under such rules. See "--Prompt Corrective Regulatory
Action." Further, earnings of Home Federal appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for payment of
dividends or other distributions to Home Federal without payment of taxes at the
then current tax rate by Home Federal on the amount of earnings removed from the
reserves for such distributions.
TRANSACTIONS WITH AFFILIATES AND INSIDERS. 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 Home
Federal include the Company and any company that 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. The OTS has the discretion to treat subsidiaries
of savings associations as affiliates on a case by case basis.
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 also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must generally be made on terms that are substantially the same as for
loans to unaffiliated individuals.
RESERVE REQUIREMENTS. The Federal Reserve Board requires all depository
institutions to maintain noninterest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1999, Home Federal 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.
LIQUIDITY REQUIREMENTS. Home Federal is required by OTS regulations to
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances, highly rated corporate debt and commercial paper,
qualifying mortgage-related securities and mortgage loans, securities of certain
mutual funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage of its net withdrawable short-term savings deposits plus short-term
borrowings. The current minimum liquid asset ratio required by the OTS is 4%.
For the month ended June 30, 1999, Home Federal was in compliance with the
requirement, with an average daily liquidity ratio of 27.4%.
FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank System consists
of 12 district Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide
a central credit facility primarily for member institutions. As a member of the
FHLB of Cincinnati, Home Federal is required to acquire and hold shares of
capital stock in the FHLB in an amount at least equal to 1% of the aggregate
unpaid principal of its home mortgage loans, home purchase contracts, and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. Home Federal was in compliance
with this requirement, with an investment in FHLB stock at June 30,
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<PAGE>
1999 of $1.3 million. Long-term FHLB advances may only be made for the purpose
of providing funds for residential housing finance.
REGULATION OF THE COMPANY
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 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 were to acquire 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 Home Federal or any other SAIF-insured savings
association) would become subject to restrictions on its activities under the
HOLA unless such other association qualifies as a QTL and is acquired in a
supervisory acquisition.
If Home Federal 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 would be required to register as, and would
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 institution.
16
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth the location and certain additional
information regarding the Company's offices at June 30, 1999. The Company owns
its main office and New Tazewell Branch, and leases its Harlan Branch.
Year Square
Opened Footage Net Book Value
------ ------- --------------
MAIN OFFICE:
1602 Cumberland Avenue (1)
Middlesboro, Kentucky 1980 9,500 $ 1,194,678
BRANCH OFFICES:
Village Center (2) 1975 3,300 65,601
Harlan, Kentucky
600 Fifth Avenue (1)
New Tazewell, Tennessee 1995 5,000 688,957
Total $ 1,949,236
===========
(1) Owned by Home Service Corporation, the Company's wholly-owned subsidiary,
and leased to the Company.
(2) In November 1990, the lease on this property was renegotiated for a
seven-year term with three five-year options. The annual rent is $49,752.
The Company is liable to reimburse the lessor for its proportionate share
of any increase in real estate taxes and insurance paid by lessor. The rent
expense for years 1999 and 1998 was $48,964 and $39,803, respectively.
DHI Computing, Inc. Provo, Utah, performs data processing and record
keeping for the Company. The Company's fixtures and equipment include a network
of teller terminals, several computers, Frame Relay communications equipment,
ATMs and a check processing machine.
At June 30, 1999, the net book value of the Company's premises, furniture,
fixtures, equipment and land for future development was $2.4 million. The
Company is in the process of building an annex building to house the Bank's
operation center. The building is under construction and $246,000 had been
disbursed at June 30, 1999. The estimated cost of the building is $1.0 million,
and the completion date is scheduled for November 1999. It is management's
opinion that all of the Company's properties are adequately covered by
insurance. See "Premises and Equipment" included in the Notes to Consolidated
Financial Statements in the Annual Report.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is a party to various routine legal
proceedings incident to its business, including loan foreclosure actions. There
are currently no material legal proceedings to which the Company, the Company or
its subsidiary is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information contained under the section captioned "Market Information"
in the Company's Annual Report to Stockholders for the Fiscal Year Ended June
30, 1999 (the "Annual Report") is incorporated herein by reference. For
information regarding restrictions on the payment of dividends see Item 1.
"Business -- Regulation -- Regulation of the Company -- Dividend Limitations."
17
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements and Related Notes contained in the
Annual Report are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
For information regarding delinquent filers and the disclosure required
pursuant to Item 405 of Regulation S-KSB, reference is made to the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement which information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) and (b) The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I - Election of
Directors" and "Voting Securities and Principal Holders Thereof" of
the Proxy Statement.
(c) Management knows of no arrangements, including any pledge by any
person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors" of the Proxy
Statement.
18
<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
The following exhibits are either attached to or incorporated
by reference in this Annual Report on Form 10-KSB.
Description
-----------
3.1 Articles of Incorporation of HFB Financial Corporation *
3.2 Bylaws of HFB Financial Corporation *
4 Common Stock Certificate of HFB Financial Corporation *
10.1 HFB Financial Corporation Stock Option Plan *
10.2 Home Federal Bank, Federal Savings Bank Management *
Recognition Plan
10.3 Home Federal Bank, Federal Savings Bank Supplemental *
Executive Retirement Plan
10.4 Employment Agreement between the Bank and David B. Cook
10.5 Employment Agreement between the Bank and Stanley Alexander, Jr.
13 Portions of the Annual Report to Stockholders for the Fiscal Year
Ended June 30, 1999
21 Subsidiaries of the Registrant
27 Financial Data Schedule
- ----------------
* Incorporated by reference to the Corporation's Registration Statement
on Form S-1 (33-52308) filed with the Securities and Exchange
Commission on September 23, 1992.
(b) REPORTS ON FORM 8-K.
On June 15, 1999, the Corporation filed a Report on Form 8-K
to report its execution of a Branch Purchase and Assumption
Agreement pursuant to which it will acquire the Harlan,
Kentucky branch of National City Bank of Kentucky. Pursuant to
the Agreement, the Corporation will assume deposits of
approximately $17.2 million and pay a related premium of
approximately 3%, or $534,000. The transaction is subject to
regulatory approval and is expected to close in October 1999.
19
<PAGE>
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.
HFB FINANCIAL CORPORATION
September 21, 1999 By: /s/ David B. Cook
---------------------------------
David B. Cook
President and Chief Executive Officer
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.
/s/ David B. Cook September 21, 1999
- -------------------------------------
David B. Cook
President and Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Stanley Alexander, Jr. September 21, 1999
- -------------------------------------
Stanley Alexander, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ E. W. Nagle September 21, 1999
- -------------------------------------
E. W. Nagle
Director
/s/ Frank W. Lee September 21, 1999
- -------------------------------------
Frank W. Lee
Secretary-Treasurer and Director
/s/ Frances Coffey Rasnic September 21, 1999
- -------------------------------------
Frances Coffey Rasnic
Director
/s/ Charles Harris September 21, 1999
- -------------------------------------
Charles Harris
Director
/s/ Earl Burchfield September 21, 1999
- -------------------------------------
Earl Burchfield
Director
/s/ Robert V. Costanzo September 21, 1999
- -------------------------------------
Robert V. Costanzo
Director
20
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of HFB Financial Corporation *
3.2 Bylaws of HFB Financial *
4 Common Stock Certificate of HFB Financial Corporation *
10.1 HFB Financial Corporation Stock Option Plan *
10.2 Home Federal Bank, Federal Savings Bank Management
Recognition Plan *
10.3 Home Federal Bank, Federal Savings Bank Supplemental
Executive Retirement Plan *
10.4 Employment Agreement between the Bank and David B. Cook
10.5 Employment Agreement between the Bank and Stanley
Alexander, Jr.
13 Portions of the Annual Report to Stockholders for the Fiscal
Year Ended June 30, 1999
21 Subsidiaries of the Registrant
27 Financial Data Schedule
* Incorporated by reference to the Corporation's Registration Statement
on Form S-1 (33-52308) filed with the Securities and Exchange
Commission on September 23, 1992.
21
<PAGE>
HOME FEDERAL BANK, FEDERAL SAVINGS BANK
--------------------------
EMPLOYMENT AGREEMENT WITH
DAVID B. COOK
--------------------------
THIS AGREEMENT entered into this 23rd day of March, 1999, by and between
Home Federal Bank, Federal Savings Bank (the "Bank"), and David B. Cook (the
"Executive"), effective on the Effective Date, is an amendment and restatement
of the agreement entered into by and between the Bank and David B. Cook on
January 1st, 1998.
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Executive.
NOW, THEREFORE, it is AGREED as follows:
1. Defined Terms.
When used anywhere in this Agreement, the following terms shall have the
meaning set forth herein.
(a) "Board" shall mean the Board of Directors of the Bank.
(b) "Change in Control" shall mean any one of the following
events: (i) the acquisition of ownership, holding or power to vote more than 25%
of the Bank's or the Company's voting stock, (ii) the acquisition of the ability
to control the election of a majority of the Bank's or the Company's directors,
(iii) the acquisition of a controlling influence over the management or policies
of the Bank or the Company by any person or by persons acting as a "group"
(within the meaning of Section 13(d) of the Securities Exchange Act of 1934), or
(iv) during any period of two consecutive years, individuals (the "Continuing
Directors") who at the beginning of such period constitute the Board of
Directors of the Bank or the Company (the "Existing Board") cease for any reason
to constitute at least two-thirds thereof, provided that any individual whose
election or nomination for election as a member of the Existing Board was
approved by a vote of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. Notwithstanding the foregoing,
in the case of (i), (ii) and (iii) hereof, ownership or control of the Bank by
the Company itself shall not constitute a Change in Control. For purposes of
this paragraph only, the term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
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(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
(d) "Code ss. 280G Maximum" shall mean the product of 2.99
and his "base amount" as defined in Code ss. 280G(b)(3).
(e) "Company" shall mean HFB Financial Corporation.
(f) "Disability" shall mean, for purposes of this Agreement,
a physical or mental infirmity which impairs the Executive's ability to
substantially perform his duties under this Agreement and which results in the
Executive becoming eligible for long-term disability benefits under the Bank's
long-term disability plan (or, if the Bank has no such plan in effect, which
impairs the Executive's ability to substantially perform his duties under this
Agreement for a period of 180 consecutive days).
(g) "Effective Date" shall mean March 23, 1999.
(h) "Expiration Date" shall mean the date on which the term
of this Agreement expires pursuant to Section 5 hereof (taking into account any
and all renewals of such term).
(i) "Good Reason" shall mean any of the following events,
which has not been consented to in advance by the Executive in writing: (i) the
requirement that the Executive move his personal residence, or perform his
principal executive functions, more than 35 miles from his primary office as of
the later of the Effective Date and the most recent voluntary relocation by the
Executive; (ii) a material reduction in the Executive's base compensation under
this Agreement as the same may be increased from time to time; (iii) the failure
by the Bank to continue to provide the Executive with compensation and benefits
provided under this Agreement as the same may be increased from time to time, or
with benefits substantially similar to those provided to him under any of the
employee benefit plans in which the Executive now or hereafter becomes a
participant, or the taking of any action by the Bank which would directly or
indirectly reduce any of such benefits or deprive the Executive of any material
fringe benefit enjoyed by him under this Agreement; (iv) the assignment to the
Executive of duties and responsibilities materially different from those
normally associated with his position; (v) a failure to reelect the Executive to
the Board of Directors of the Bank; (vi) a material diminution or reduction in
the Executive's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Bank; or (vii) a
material reduction in the secretarial or other administrative support of the
Executive.
(j) "Just Cause" shall mean, in the good faith determination
of the Board, the Executive's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order,
2
<PAGE>
or material breach of any provision of this Agreement. No act, or failure to
act, on the Executive's part shall be considered "willful" unless he has acted,
or failed to act, with an absence of good faith and without a reasonable belief
that his action or failure to act was in the best interest of the Bank.
(k) "Present Value" shall mean the applicable federal rate,
as determined in accordance with the rules and regulations under Code ss. 280G.
(l) "Protected Period" shall mean the period that begins on
the date six months before a Change in Control and ends on the later of the
second annual anniversary of the Change in Control or the expiration date of
this Agreement.
(m) "Trust" shall mean a grantor trust that is designed in
accordance with Revenue Procedure 92-64 and has a trustee independent of the
Bank.
2. Employment. The Executive is employed as the President and Chief
Executive Officer of the Bank. The Executive shall render such administrative
and management services for the Bank as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Executive shall also promote, by entertainment or otherwise, as and to the
extent permitted by law, the business of the Bank. The Executive's other duties
shall be such as the Board may from time to time reasonably direct, including
normal duties as an officer of the Bank.
3. Base Compensation. The Bank agrees to pay the Executive during the term
of this Agreement a salary at the rate of $130,000.00 per annum, payable in cash
not less frequently than monthly. The Board shall review, not less often than
annually, the rate of the Executive's salary, and in its sole discretion may
decide to increase his salary.
4. Discretionary Bonuses. The Executive shall participate in an equitable
manner with all other senior management employees of the Bank in discretionary
bonuses that the Board may award from time to time to the Bank's senior
management employees. No other compensation provided for in this Agreement shall
be deemed a substitute for the Executive's right to participate in such
discretionary bonuses. Notwithstanding the foregoing, following a Change in
Control, the Executive shall receive discretionary bonuses that are made no less
frequently than, and in annual amounts not less than, the average annual
discretionary bonuses paid to the Executive during each of the three calendar
years immediately preceding the year in which such Change in Control occurs.
5. Other Benefits.
(a) Participation in Retirement, Medical and Other Plans.
During the term of this Agreement, the Executive shall be eligible to
participate in the following benefit plans maintained by the Bank: group
hospitalization, disability, health, dental, sick leave, life insurance, travel
and/or accident insurance, auto allowance/auto lease, retirement, pension,
and/or other present or future qualified plans provided by the Bank, generally,
which benefits, taken as a whole, must be
3
<PAGE>
at least as favorable as those in effect on the Effective Date. Further, if the
Executive retires from employment with the Bank at or after age 55 and for a
reason other than Just Cause, the Bank shall provide the Executive and his legal
dependents with medical insurance coverage that is not less favorable than the
coverage that the Bank provides for its officers. The Bank shall pay all
premiums for this coverage, shall provide it for the Executive's lifetime, and
agrees that this obligation shall survive expiration of this Agreement.
(b) Employee Benefits; Expenses. The Executive shall be
eligible to participate in any fringe benefits which are or may become available
to the Bank's senior management employees, including for example: any stock
option or incentive compensation plans, and any other benefits which are
commensurate with the responsibilities and functions to be performed by the
Executive under this Agreement. The Executive shall be reimbursed for all
reasonable out-of-pocket business expenses which he shall incur in connection
with his services under this Agreement upon substantiation of such expenses in
accordance with the policies of the Bank.
6. Term. The Bank hereby employs the Executive, and the Executive hereby
accepts such employment under this Agreement, for the period commencing on the
Effective Date and ending 36 months thereafter (or such earlier date as is
determined in accordance with Section 10). Additionally, on each annual
anniversary date from the Effective Date, the Executive's term of employment
shall be extended for an additional one-year period beyond the then effective
expiration date, provided the Board determines in a duly adopted resolution that
the performance of the Executive has met the Board's requirements and standards,
and that this Agreement shall be extended. Only those members of the Board who
have no personal interest in this Employment Agreement shall discuss and vote on
the approval and subsequent review of this Agreement.
In the event the Executive serves the full term of this Agreement, and the
Bank does not offer to renew this Agreement upon substantially the same terms
and conditions for an additional three- year term, the Executive shall be
entitled to a severance benefit equal to twelve months of his then current base
monthly salary, plus such vested employee benefits to which the Executive may be
entitled when due and payable.
7. Loyalty; Noncompetition.
(a) During the period of his employment hereunder and except
for illnesses, reasonable vacation periods, and reasonable leaves of absence,
the Executive shall devote all his full business time, attention, skill, and
efforts to the faithful performance of his duties hereunder; provided, however,
from time to time, the Executive may serve on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which will
not present any conflict of interest with the Bank or any of its subsidiaries or
affiliates, or unfavorably affect the performance of the Executive's duties
pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of his employment under
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this Agreement, the Executive shall not engage in any business or activity
contrary to the business affairs or interests of the Bank, or be gainfully
employed in any other position or job other than as provided above.
(b) Nothing contained in this Section shall be deemed to
prevent or limit the Executive's right to invest in the capital stock or other
securities of any business dissimilar from that of the Bank, or, solely as a
passive or minority investor, in any business.
8. Standards. The Executive shall perform his duties under this Agreement
in accordance with such reasonable standards as the Board may establish from
time to time. The Bank will provide the Executive with the working facilities
and staff customary for similar executives and necessary for him to perform his
duties.
9. Vacation and Sick Leave. At such reasonable times as the Board shall in
its discretion permit, the Executive shall be entitled, without loss of pay, to
absent herself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) The Executive shall be entitled to an annual vacation in
accordance with the policies that the Board periodically establishes for senior
management employees of the Bank.
(b) The Executive shall not receive any additional
compensation from the Bank on account of his failure to take a vacation, and the
Executive shall not accumulate unused vacation or sick leave from one fiscal
year to the next, except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the
Executive shall be entitled without loss of pay, to absent himself voluntarily
from the performance of his employment with the Bank for such additional periods
of time and for such valid and legitimate reasons as the Board may in its
discretion determine. Further, the Board may grant to the Executive a leave or
leaves of absence, with or without pay, at such time or times and upon such
terms and conditions as such Board in its discretion may determine.
(d) In addition, the Executive shall be entitled to an
annual sick leave benefit as established by the Board.
10. Termination and Termination Pay. Subject to Section 12 hereof, the
Executive's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Executive's employment under this Agreement
shall terminate upon his death during the term of this Agreement, in which event
the Executive's estate shall be entitled to receive the compensation due the
Executive through the Agreement's Expiration Date.
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(b) Disability. The Bank may terminate the Executive's
employment after having established the Executive's Disability. The Executive
shall be entitled to the compensation and benefits provided for under this
Agreement for (i) any period during the term of this Agreement and prior to the
establishment of the Executive's Disability during which the Executive is unable
to work due to the physical or mental infirmity, or (ii) any period of
Disability which is prior to the Executive's termination of employment pursuant
to this Section; provided that any benefits paid pursuant to the Bank's long
term disability plan will continue as provided in such plan. During any period
that the Executive shall receive disability benefits and to the extent that the
Executive shall be physically and mentally able to do so, he shall furnish such
information, assistance and documents so as to assist in the continued ongoing
business of the Bank and, if able, shall make himself available to the Bank to
undertake reasonable assignments consistent with his prior position and his
physical and mental health. The Bank shall pay all reasonable expenses incident
to the performance of any assignment given to the Executive during the
disability period.
(c) Just Cause. The Board may, by written notice to the
Executive, immediately terminate his employment at any time, for Just Cause. The
Executive shall have no right to receive compensation or other benefits for any
period after termination for Just Cause.
(d) Without Just Cause; Constructive Discharge. The Board
may, by written notice to the Executive, immediately terminate his employment at
any time for a reason other than Just Cause, in which event the Executive shall
be entitled to receive the following compensation and benefits (unless such
termination occurs during the Protected Period, in which event the benefits and
compensation provided for in Section 12 shall apply): (i) the salary provided
pursuant to Section 3 hereof, up to the Expiration Date, plus said salary for an
additional 12-month period, and (ii) at the Executive's election either (A) cash
in an amount equal to the Present Value of the cost to the Executive of
obtaining all health, life, disability and other benefits which the Executive
would have been eligible to participate in through the Expiration Date based
upon the benefit levels substantially equal to those that the Bank provided for
the Executive at the date of termination of employment, or (B) continued
participation under such Bank benefit plans through the Expiration Date, but
only to the extent the Executive continues to qualify for participation therein;
provided that in no event shall the total value of the payments due under (i)
and (ii) hereof exceed three years' total compensation. All amounts payable to
the Executive shall be paid, at the option of the Executive, either in periodic
payments through the Expiration Date, or in one lump sum within ten days of such
termination (in which event he shall receive the Present Value of such periodic
payments).
(e) Good Reason. The Executive shall be entitled to receive
the compensation and benefits payable under subsection 10(d) hereof in the event
that he voluntarily terminates employment within 90 days of an event that
constitutes Good Reason, (unless such voluntary termination occurs during the
Protected Period, in which event the benefits and compensation provided for in
Section 12 shall apply).
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(f) Voluntary Termination by Executive. Subject to Section
12 hereof, the Executive may voluntarily terminate employment with the Bank
during the term of this Agreement, upon at least 90 days' prior written notice
to the Board, in which case the Executive shall receive only his compensation,
vested rights and employee benefits up to the date of his termination (unless
such termination occurs pursuant to Section 10(e) hereof or within the Protected
Period, in which event the benefits and compensation provided for in Sections
10(d) or 12, as applicable, shall apply).
11. No Mitigation. The Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Executive in any subsequent employment.
12. Change in Control.
(a) Trigger Events. The Executive shall be entitled to
collect the severance benefits set forth in subsection (b) hereof in the event
that either (i) the Executive voluntarily terminates employment either for any
reason other than Just Cause within the 30-day period beginning on the date of a
Change in Control, (ii) the Executive voluntarily terminates employment within
90 days of an event that both occurs during the Protected Period and constitutes
Good Reason, or (iii) the Bank or its successor(s) in interest terminates the
Executive's employment without his written consent and for any reason other than
Just Cause during the Protected Period.
(b) Amount of Severance Benefit. If the Executive becomes
entitled to collect severance benefits pursuant to Section 12(a) hereof, the
Bank shall pay the Executive a severance benefit equal to the difference between
the Code ss. 280G Maximum and the sum of any other "parachute payments" as
defined under Code ss. 280G(b)(2) that the Executive receives on account of the
Change in Control. Said sum shall be paid, at the election of the Executive,
either (i) in one lump sum within ten days of the later of the date of the
Change in Control and the Executive's last day of employment with the Bank, or
(ii) periodic payments over a period of up to sixty months with interest
accruing on unpaid amounts at the same rate that would be applied to determine
Present Value. In the event that the Executive and the bank jointly agree that
the Executive has collected an amount exceeding the Code ss. 280G Maximum, the
parties may agree in writing that such excess shall be treated as a loan ab
initio which the Executive shall repay to the Bank, on terms and conditions
mutually agreeable to the parties, together with interest at the applicable
federal rate provided for in Section 7872(f)(2)(B) of the Code.
(c) Funding of Grantor Trust upon Change in Control.
Notwithstanding any other provision of this Agreement that may be contrary or
inconsistent herewith, not later than ten business days after a Change in
Control, the Bank shall (i) deposit in a Trust an amount equal to the Code ss.
280G Maximum, unless the Executive has previously provided a written release of
any claims under this Agreement, and (ii) provide the trustee of the Trust with
a written direction to hold said amount and any investment return thereon in a
segregated account for the benefit of the
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Executive, and to follow the procedures set forth in the next paragraph as to
the payment of such amounts from the Trust. At any time or from time to time
during the 27-consecutive month period after a Change in Control, the Executive
may provide the trustee of the Trust with a written notice directing that the
trustee pay to the Executive an amount designated in the notice as being payable
pursuant to this Agreement. Within three business days after receiving said
notice, the trustee of the Trust shall pay the Executive the amount designated
therein in immediately available funds, and shall thereafter send the Bank a
written notice thereof. Upon the earlier of the Trust's final payment of all
amounts due under the following paragraph or the date 27 months after the Change
in Control, the trustee of the Trust shall pay to the Bank the entire balance
remaining in the segregated account maintained for the benefit of the Executive.
The Executive shall thereafter have no further interest in the Trust.
13. Indemnification. The Bank agrees that its Bylaws shall continue to
provide for indemnification of directors, officers, employees and agents of the
Bank, including the Executive, during the full term of this Agreement, and to at
all times provide adequate insurance for such purposes.
14. Reimbursement of Executive for Enforcement Proceedings. In the event
that any dispute arises between the Executive and the Bank as to the terms or
interpretation of this Agreement, whether instituted by formal legal proceedings
or otherwise, including any action that the Executive takes to defend against
any action taken by the Bank, the Executive shall be reimbursed for all costs
and expenses, including reasonable attorneys' fees, arising from such dispute,
proceedings or actions, provided that the Executive obtains either a written
settlement or a final judgement by a court of competent jurisdiction
substantially in his favor. Such reimbursement shall be paid within ten days of
the Executive's furnishing to the Bank written evidence, which may be in the
form, among other things, of a cancelled check or receipt, of any costs or
expenses incurred by the Executive.
15. Federal Income Tax Withholding. The Bank may withhold all federal and
state income or other taxes from any benefit payable under this Agreement as
shall be required pursuant to any law or government regulation or ruling.
16. Successors and Assigns.
(a) Bank. This Agreement shall not be assignable by the
Bank, provided that this Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Bank which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank, as the case may be.
(b) Executive. Since the Bank is contracting for the unique
and personal skills of the Executive, the Executive shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Bank; provided, however, that nothing
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in this paragraph shall preclude (i) the Executive from designating a
beneficiary to receive any benefit payable hereunder upon his death, or (ii) the
executors, administrators, or other legal representatives of the Executive or
his estate from assigning any rights hereunder to the person or persons entitled
thereunto.
(c) Attachment. Except as required by law, no right of the
Executive to receive payments under this Agreement shall be subject to
anticipation, commutation, alienation, sale, assignment, encumbrance, charge,
pledge, or hypothecation or to exclusion, attachment, levy or similar process or
assignment by operation of law, and any attempt, voluntary or involuntary, to
effect any such action shall be null, void and of no effect.
17. Amendments. No amendments or additions to this Agreement shall be
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
18. Applicable Law. Except to the extent preempted by Federal law, the laws
of the State of Kentucky shall govern this Agreement in all respects, whether as
to its validity, construction, capacity, performance or otherwise.
19. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
20. Entire Agreement. This Agreement, together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto and shall supersede any prior
agreement between the parties.
[Signature pages to follow]
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IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
HOME FEDERAL BANK, FEDERAL
SAVINGS BANK
Witnessed by:
/s/ Frank W. Lee By: /s/ Robert V. Costanzo
--------------------------- ----------------------------
Frank W. Lee Robert V. Costanzo
EXECUTIVE
Witnessed by:
/s/ Frank W. Lee /s/ David B. Cook
--------------------------- ----------------------------
Frank W. Lee David B. Cook
10
HOME FEDERAL BANK, FEDERAL SAVINGS BANK
--------------------------
EMPLOYMENT AGREEMENT WITH
STANLEY ALEXANDER, JR.
--------------------------
THIS AGREEMENT entered into this 23rd day of March, 1999, by and between
Home Federal Bank, Federal Savings Bank (the "Bank"), and Stanley Alexander, Jr.
(the "Executive"), effective on the Effective Date, is an amendment and
restatement of the agreement entered into by and between the Bank and Stanley
Alexander, Jr. on January 1st, 1998.
NOW, THEREFORE, it is AGREED as follows:
1. Defined Terms
When used anywhere in this Agreement, the following terms shall have the
meaning set forth herein.
(a) "Board" shall mean the Board of Directors of the Bank.
(b) "Change in Control" shall mean any one of the following
events: (i) the acquisition of ownership, holding or power to vote more than 25%
of the Bank's or the Company's voting stock, (ii) the acquisition of the ability
to control the election of a majority of the Bank's or the Company's directors,
(iii) the acquisition of a controlling influence over the management or policies
of the Bank or the Company by any person or by persons acting as a "group"
(within the meaning of Section 13(d) of the Securities Exchange Act of 1934), or
(iv) during any period of two consecutive years, individuals (the "Continuing
Directors") who at the beginning of such period constitute the Board of
Directors of the Bank or the Company (the "Existing Board") cease for any reason
to constitute at least two-thirds thereof, provided that any individual whose
election or nomination for election as a member of the Existing Board was
approved by a vote of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. Notwithstanding the foregoing,
in the case of (i), (ii) and (iii) hereof, ownership or control of the Bank by
the Company itself shall not constitute a Change in Control. For purposes of
this paragraph only, the term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
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(d) "Code ss.280G Maximum" shall mean the product of 2.99
and his "base amount" as defined in Code ss.280G(b)(3).
(e) "Company" shall mean HFB Financial Corporation.
(f) "Disability" shall mean, for purposes of this Agreement,
a physical or mental infirmity which impairs the Executive's ability to
substantially perform his duties under this Agreement and which results in the
Executive becoming eligible for long-term disability benefits under the Bank's
long-term disability plan (or, if the Bank has no such plan in effect, which
impairs the Executive's ability to substantially perform his duties under this
Agreement for a period of 180 consecutive days).
(g) "Effective Date" shall mean March 23, 1999.
(h) "Expiration Date" shall mean the date on which the term
of this Agreement expires pursuant to Section 5 hereof (taking into account any
and all renewals of such term).
(i) "Good Reason" shall mean any of the following events,
which has not been consented to in advance by the Executive in writing: (i) the
requirement that the Executive move his personal residence, or perform his
principal executive functions, more than 35 miles from his primary office as of
the later of the Effective Date and the most recent voluntary relocation by the
Executive; (ii) a material reduction in the Executive's base compensation under
this Agreement as the same may be increased from time to time; (iii) the failure
by the Bank to continue to provide the Executive with compensation and benefits
provided under this Agreement as the same may be increased from time to time, or
with benefits substantially similar to those provided to him under any of the
employee benefit plans in which the Executive now or hereafter becomes a
participant, or the taking of any action by the Bank which would directly or
indirectly reduce any of such benefits or deprive the Executive of any material
fringe benefit enjoyed by him under this Agreement; (iv) the assignment to the
Executive of duties and responsibilities materially different from those
normally associated with his position; (v) a failure to reelect the Executive to
the Board of Directors of the Bank; (vi) a material diminution or reduction in
the Executive's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Bank; or (vii) a
material reduction in the secretarial or other administrative support of the
Executive.
(j) "Just Cause" shall mean, in the good faith determination
of the Board, the Executive's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
No act, or failure to act, on the Executive's part shall be considered "willful"
unless he has acted, or failed to act, with an absence of good faith and without
a reasonable belief that his action or failure to act was in the best interest
of the Bank.
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(k) "Present Value" shall mean the applicable federal rate,
as determined in accordance with the rules and regulations under Code ss. 280G.
(l) "Protected Period" shall mean the period that begins on
the date six months before a Change in Control and ends on the later of the
second annual anniversary of the Change in Control or the expiration date of
this Agreement.
(m) "Trust" shall mean a grantor trust that is designed in
accordance with Revenue Procedure 92-64 and has a trustee independent of the
Bank.
2. Employment. The Executive is employed as the Chief Financial Officer of
the Bank. The Executive shall render such administrative and management services
for the Bank as are currently rendered and as are customarily performed by
persons situated in a similar executive capacity, including as a full-time
employee and officer of the Bank, service on the Bank's Audit, Asset/Liability
Management and Investment Committees which meet regularly. The Executive shall
also promote, by entertainment or otherwise, as and to the extent permitted by
law, the business of the Bank. The Executive's other duties shall be such as the
Board may from time to time reasonably direct, including normal duties as an
officer of the Bank.
3. Base Compensation. The Bank agrees to pay the Executive during the term
of this Agreement a salary at the rate of $ 71,000.00 per annum, payable in cash
not less frequently than monthly. The Board shall review, not less often than
annually, the rate of the Executive's salary, and in its sole discretion may
decide to increase his salary.
4. Discretionary Bonuses. The Executive shall participate in an equitable
manner with all other senior management employees of the Bank in discretionary
bonuses that the Board may award from time to time to the Bank's senior
management employees. No other compensation provided for in this Agreement shall
be deemed a substitute for the Executive's right to participate in such
discretionary bonuses. Notwithstanding the foregoing, following a Change in
Control, the Executive shall receive discretionary bonuses that are made no less
frequently than, and in annual amounts not less than, the average annual
discretionary bonuses paid to the Executive during each of the three calendar
years immediately preceding the year in which such Change in Control occurs.
5. Other Benefits.
(a) Participation in Retirement, Medical and Other Plans.
During the term of this Agreement, the Executive shall be eligible to
participate in the following benefit plans maintained by the Bank: group
hospitalization, disability, health, dental, sick leave, life insurance, travel
and/or accident insurance, auto allowance/auto lease, retirement, pension,
and/or other present or future qualified plans provided by the Bank, generally,
which benefits, taken as a whole, must be at least as favorable as those in
effect on the Effective Date. Further, if the Executive retires from employment
with the Bank at or after age 55 and for a reason other than Just Cause, the
Bank shall
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provide the Executive and his legal dependents with medical insurance coverage
that is not less favorable than the coverage that the Bank provides for its
officers. The Bank shall pay all premiums for this coverage, shall provide it
for the Executive's lifetime, and agrees that this obligation shall survive
expiration of this Agreement.
(b) Employee Benefits; Expenses. The Executive shall be
eligible to participate in any fringe benefits which are or may become available
to the Bank's senior management employees, including for example: any stock
option or incentive compensation plans, and any other benefits which are
commensurate with the responsibilities and functions to be performed by the
Executive under this Agreement. The Executive shall be reimbursed for all
reasonable out-of-pocket business expenses which he shall incur in connection
with his services under this Agreement upon substantiation of such expenses in
accordance with the policies of the Bank.
6. Term. The Bank hereby employs the Executive, and the Executive hereby
accepts such employment under this Agreement, for the period commencing on the
Effective Date and ending 36 months thereafter (or such earlier date as is
determined in accordance with Section 10). Additionally, on each annual
anniversary date from the Effective Date, the Executive's term of employment
shall be extended for an additional one-year period beyond the then effective
expiration date, provided the Board determines in a duly adopted resolution that
the performance of the Executive has met the Board's requirements and standards,
and that this Agreement shall be extended. Only those members of the Board who
have no personal interest in this Employment Agreement shall discuss and vote on
the approval and subsequent review of this Agreement.
In the event the Executive serves the full term of this Agreement, and the
Bank does not offer to renew this Agreement upon substantially the same terms
and conditions for an additional three- year term, the Executive shall be
entitled to a severance benefit equal to twelve months of his then current base
monthly salary, plus such vested employee benefits to which the Executive may be
entitled when due and payable.
7. Loyalty; Noncompetition.
(a) During the period of his employment hereunder and except
for illnesses, reasonable vacation periods, and reasonable leaves of absence,
the Executive shall devote all his full business time, attention, skill, and
efforts to the faithful performance of his duties hereunder; provided, however,
from time to time, the Executive may serve on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which will
not present any conflict of interest with the Bank or any of its subsidiaries or
affiliates, or unfavorably affect the performance of the Executive's duties
pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of his employment under this Agreement, the Executive shall not
engage in any business or activity contrary to the business
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affairs or interests of the Bank, or be gainfully employed in any other position
or job other than as provided above.
(b) Nothing contained in this Section shall be deemed to
prevent or limit the Executive's right to invest in the capital stock or other
securities of any business dissimilar from that of the Bank, or, solely as a
passive or minority investor, in any business.
8. Standards. The Executive shall perform his duties under this Agreement
in accordance with such reasonable standards as the Board may establish from
time to time. The Bank will provide the Executive with the working facilities
and staff customary for similar executives and necessary for him to perform his
duties.
9. Vacation and Sick Leave. At such reasonable times as the Board shall in
its discretion permit, the Executive shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) The Executive shall be entitled to an annual vacation in
accordance with the policies that the Board periodically establishes for senior
management employees of the Bank.
(b) The Executive shall not receive any additional
compensation from the Bank on account of his failure to take a vacation, and the
Executive shall not accumulate unused vacation or sick leave from one fiscal
year to the next, except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the
Executive shall be entitled without loss of pay, to absent himself voluntarily
from the performance of his employment with the Bank for such additional periods
of time and for such valid and legitimate reasons as the Board may in its
discretion determine. Further, the Board may grant to the Executive a leave or
leaves of absence, with or without pay, at such time or times and upon such
terms and conditions as such Board in its discretion may determine.
(d) In addition, the Executive shall be entitled to an
annual sick leave benefit as established by the Board.
10. Termination and Termination Pay. Subject to Section 12 hereof, the
Executive's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Executive's employment under this Agreement
shall terminate upon his death during the term of this Agreement, in which event
the Executive's estate shall be entitled to receive the compensation due the
Executive through the Agreement's Expiration Date.
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(b) Disability. The Bank may terminate the Executive's
employment after having established the Executive's Disability. The Executive
shall be entitled to the compensation and benefits provided for under this
Agreement for (i) any period during the term of this Agreement and prior to the
establishment of the Executive's Disability during which the Executive is unable
to work due to the physical or mental infirmity, or (ii) any period of
Disability which is prior to the Executive's termination of employment pursuant
to this Section; provided that any benefits paid pursuant to the Bank's long
term disability plan will continue as provided in such plan. During any period
that the Executive shall receive disability benefits and to the extent that the
Executive shall be physically and mentally able to do so, he shall furnish such
information, assistance and documents so as to assist in the continued ongoing
business of the Bank and, if able, shall make himself available to the Bank to
undertake reasonable assignments consistent with his prior position and his
physical and mental health. The Bank shall pay all reasonable expenses incident
to the performance of any assignment given to the Executive during the
disability period.
(c) Just Cause. The Board may, by written notice to the
Executive, immediately terminate his employment at any time, for Just Cause. The
Executive shall have no right to receive compensation or other benefits for any
period after termination for Just Cause.
(d) Without Just Cause; Constructive Discharge. The Board
may, by written notice to the Executive, immediately terminate his employment at
any time for a reason other than Just Cause, in which event the Executive shall
be entitled to receive the following compensation and benefits (unless such
termination occurs during the Protected Period, in which event the benefits and
compensation provided for in Section 12 shall apply): (i) the salary provided
pursuant to Section 3 hereof, up to the Expiration Date, plus said salary for an
additional 12-month period, and (ii) at the Executive's election either (A) cash
in an amount equal to the Present Value of the cost to the Executive of
obtaining all health, life, disability and other benefits which the Executive
would have been eligible to participate in through the Expiration Date based
upon the benefit levels substantially equal to those that the Bank provided for
the Executive at the date of termination of employment, or (B) continued
participation under such Bank benefit plans through the Expiration Date, but
only to the extent the Executive continues to qualify for participation therein;
provided that in no event shall the total value of the payments due under (i)
and (ii) hereof exceed three years' total compensation. All amounts payable to
the Executive shall be paid, at the option of the Executive, either in periodic
payments through the Expiration Date, or in one lump sum within ten days of such
termination (in which event he shall receive the Present Value of such periodic
payments).
(e) Good Reason. The Executive shall be entitled to receive
the compensation and benefits payable under subsection 10(d) hereof in the event
that he voluntarily terminates employment within 90 days of an event that
constitutes Good Reason, (unless such voluntary termination occurs during the
Protected Period, in which event the benefits and compensation provided for in
Section 12 shall apply).
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(f) Voluntary Termination by Executive. Subject to Section
12 hereof, the Executive may voluntarily terminate employment with the Bank
during the term of this Agreement, upon at least 90 days' prior written notice
to the Board, in which case the Executive shall receive only his compensation,
vested rights and employee benefits up to the date of his termination (unless
such termination occurs pursuant to Section 10(e) hereof or within the Protected
Period, in which event the benefits and compensation provided for in Sections
10(d) or 12, as applicable, shall apply).
11. No Mitigation. The Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Executive in any subsequent employment.
12. Change in Control.
(a) Trigger Events. The Executive shall be entitled to
collect the severance benefits set forth in subsection (b) hereof in the event
that either (i) the Executive voluntarily terminates employment either for any
reason other than Just Cause within the 30-day period beginning on the date of a
Change in Control, (ii) the Executive voluntarily terminates employment within
90 days of an event that both occurs during the Protected Period and constitutes
Good Reason, or (iii) the Bank or its successor(s) in interest terminates the
Executive's employment without his written consent and for any reason other than
Just Cause during the Protected Period.
(b) Amount of Severance Benefit. If the Executive becomes
entitled to collect severance benefits pursuant to Section 12(a) hereof, the
Bank shall pay the Executive a severance benefit equal to the difference between
the Code ss.280G Maximum and the sum of any other "parachute payments" as
defined under Code ss.280G(b)(2) that the Executive receives on account of the
Change in Control. Said sum shall be paid, at the election of the Executive,
either (i) in one lump sum within ten days of the later of the date of the
Change in Control and the Executive's last day of employment with the Bank, or
(ii) periodic payments over a period of up to sixty months with interest
accruing on unpaid amounts at the same rate that would be applied to determine
Present Value. In the event that the Executive and the Bank jointly agree that
the Executive has collected an amount exceeding the Code ss.280G Maximum, the
parties may agree in writing that such excess shall be treated as a loan ab
initio which the Executive shall repay to the Bank, on terms and conditions
mutually agreeable to the parties, together with interest at the applicable
federal rate provided for in Section 7872(f)(2)(B) of the Code.
(c) Funding of Grantor Trust upon Change in Control.
Notwithstanding any other provision of this Agreement that may be contrary or
inconsistent herewith, not later than ten business days after a Change in
Control, the Bank shall (i) deposit in a Trust an amount equal to the Code
ss.280G Maximum, unless the Executive has previously provided a written release
of any claims under this Agreement, and (ii) provide the trustee of the Trust
with a written direction to hold said amount and any investment return thereon
in a segregated account for the benefit of the Executive,
7
<PAGE>
and to follow the procedures set forth in the next paragraph as to the payment
of such amounts from the Trust. At any time or from time to time during the
27-consecutive month period after a Change in Control, the Executive may provide
the trustee of the Trust with a written notice directing that the trustee pay to
the Executive an amount designated in the notice as being payable pursuant to
this Agreement. Within three business days after receiving said notice, the
trustee of the Trust shall pay the Executive the amount designated therein in
immediately available funds, and shall thereafter send the Bank a written notice
thereof. Upon the earlier of the Trust's final payment of all amounts due under
the following paragraph or the date 27 months after the Change in Control, the
trustee of the Trust shall pay to the Bank the entire balance remaining in the
segregated account maintained for the benefit of the Executive. The Executive
shall thereafter have no further interest in the Trust.
13. Indemnification. The Bank agrees that its Bylaws shall continue to
provide for indemnification of directors, officers, employees and agents of the
Bank, including the Executive, during the full term of this Agreement, and to at
all times provide adequate insurance for such purposes.
14. Reimbursement of Executive for Enforcement Proceedings. In the event
that any dispute arises between the Executive and the Bank as to the terms or
interpretation of this Agreement, whether instituted by formal legal proceedings
or otherwise, including any action that the Executive takes to defend against
any action taken by the Bank, the Executive shall be reimbursed for all costs
and expenses, including reasonable attorneys' fees, arising from such dispute,
proceedings or actions, provided that the Executive obtains either a written
settlement or a final judgement by a court of competent jurisdiction
substantially in his favor. Such reimbursement shall be paid within ten days of
the Executive's furnishing to the Bank written evidence, which may be in the
form, among other things, of a cancelled check or receipt, of any costs or
expenses incurred by the Executive.
15. Federal Income Tax Withholding. The Bank may withhold all federal and
state income or other taxes from any benefit payable under this Agreement as
shall be required pursuant to any law or government regulation or ruling.
16. Successors and Assigns.
(a) Bank. This Agreement shall not be assignable by the
Bank, provided that this Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Bank which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank, as the case may be.
(b) Executive. Since the Bank is contracting for the unique
and personal skills of the Executive, the Executive shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Bank; provided, however, that nothing in this
paragraph shall preclude (i) the Executive from designating a beneficiary to
receive any
8
<PAGE>
benefit payable hereunder upon his death, or (ii) the executors, administrators,
or other legal representatives of the Executive or his estate from assigning any
rights hereunder to the person or persons entitled thereunto.
(c) Attachment. Except as required by law, no right of the
Executive to receive payments under this Agreement shall be subject to
anticipation, commutation, alienation, sale, assignment, encumbrance, charge,
pledge, or hypothecation or to exclusion, attachment, levy or similar process or
assignment by operation of law, and any attempt, voluntary or involuntary, to
effect any such action shall be null, void and of no effect.
17. Amendments. No amendments or additions to this Agreement shall be
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
18. Applicable Law. Except to the extent preempted by Federal law, the laws
of the State of Kentucky shall govern this Agreement in all respects, whether as
to its validity, construction, capacity, performance or otherwise.
19. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
20. Entire Agreement. This Agreement, together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto and shall supersede any prior
agreement between the parties.
[Signatures on following page]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
HOME FEDERAL BANK, FEDERAL
SAVINGS BANK
Witnessed by:
/s/ Frank W. Lee By: /s/ Frank V. Costanzo
-------------------------- ---------------------------------
Frank W. Lee Frank V. Costanzo
EXECUTIVE
Witnessed by:
/s/ Frank W. Lee /s/ Stanley Alexander, Jr.
------------------------- ----------------------------------
Frank W. Lee Stanley Alexander, Jr.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
CHANGE
------------------------------------
YEAR ENDED JUNE 30 1999 1998 AMOUNT PERCENT
- ---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income $ 13,558 $ 12,979 $ 579 4.46%
Interest expense 8,018 7,322 696 9.51
Net interest income 5,540 5,657 (117) (2.07)
Provision for loan losses 253 274 (21) 7.66)
Net interest income after provision
for loan losses 5,287 5,383 (96) (1.78)
Other income 324 661 (337) (50.98)
Other expenses 3,715 3,750 (35) (.93)
Income taxes 656 791 (135) (17.06)
Net income 1,240 1,503 (263) (17.50)
</TABLE>
FINANCIAL POSITION
<TABLE>
<CAPTION>
CHANGE
------------------------------------
JUNE 30 1999 1998 AMOUNT PERCENT
- ---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total assets $190,416 $176,437 $13,979 7.92%
Net loans 120,742 116,171 4,571 3.93
Investment securities
Available for sale 37,299 26,905 10,394 38.63
Held to maturity 21,998 20,547 1,451 7.06
Deposits 153,988 144,881 9,107 6.29
Stockholders' equity 17,751 17,987 (236) (1.31)
Number of Shares Outstanding 1,100,985 1,089,648 11,337 1.04
</TABLE>
2
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amount)
FINANCIAL POSITION
<S> <C> <C> <C> <C> <C>
Assets $190,416 $176,437 $159,457 $146,248 $131,260
Loans, net 120,742 116,171 104,984 95,974 87,502
Investments
Available for sale 37,299 26,905 25,113 20,838 4,175
Held to maturity 21,998 20,547 20,207 19,834 32,707
Deposits 153,988 144,881 133,203 126,742 110,104
Short-term borrowings and
long-term debt 17,098 12,162 8,221 2,650 4,576
Stockholders' equity 17,751 17,987 16,567 15,572 15,409
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amount)
OPERATING RESULTS
<S> <C> <C> <C> <C> <C>
Interest income $ 13,558 $ 12,979 $ 11,692 $ 10,479 $ 9,746
Interest expense (8,018) (7,322) (6,510) (6,024) (5,024)
--------------------------------------------------------------------------------
Net interest income 5,540 5,657 5,182 4,455 4,722
Provision for loan losses (253) (274) (138) (35) (37)
--------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,287 5,383 5,044 4,420 4,685
Other income
Net realized gain (loss) on
trading securities (141) 159 307 (3)
Other 465 502 439 359 317
Other expenses 3,715 (3,750) (4,161) (3,456) (3,000)
--------------------------------------------------------------------------------
Income before income tax 2,294 1,629 1,320 2,002
Income taxes 656 (791) (591) (473) (711)
--------------------------------------------------------------------------------
Net income $ 1,240 $ 1,503 $ 1,038 $ 847 $ 1,291
================================================================================
Basic earnings per share (1) $ 1.13 $ 1.39 $ .98 $ .79 $ 1.19
Diluted earnings per share 1.12 1.35 .96 .76 1.14
Book value per share 16.12 16.51 15.38 14.74 14.30
(1) Years before 1997 adjusted to reflect a 5-for-3 stock split on June 30, 1997.
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amount)
OTHER DATA
<S> <C> <C> <C> <C> <C>
Average interest rate spread 2.69% 3.12% 3.06% 2.92% 3.34%
Net yield on average interest-earning 3.09 3.52 3.49 3.36 3.73
assets
Return on average assets .67 .90 .68 .61 .99
Return on average stockholders' equity 6.85 8.70 6.60 5.45 8.56
Equity as a percent of year-end assets 9.32 10.20 10.39 10.65 11.74
Non-interest expense as a percent of
average assets 2.02 2.22 2.71 2.33 2.18
Non-performing assets to total assets 1.02 .52 .27 .45 .26
Ratio of allowance for loan losses to
gross loans .99 .83 .67 .68 .70
Dividend payout ratio 39.74 29.94 39.89 45.77 30.09
Number of
Real estate loans outstanding 2,249 2,077 2,033 1,959 1,892
Deposit accounts 14,802 14,945 14,161 13,465 12,732
Full service offices 3 3 3 3 3
</TABLE>
3
<PAGE>
BUSINESS OF THE COMPANY AND THE BANK
- --------------------------------------------------------------------------------
THE CORPORATION. HFB Financial Corporation (Company), a Tennessee corporation,
was organized by Home Federal Bank, Federal Savings Bank (Home Federal or Bank)
to be a savings institution holding company. The Company was organized at the
direction of the Bank in September 1992 to acquire all of the capital stock
issued by the Bank upon the conversion of the Bank from mutual to stock form and
the simultaneous offering and sale of 722,704 shares of common stock of the
Company, completed on December 28, 1992 (Conversion). The Company has no
significant assets other than capital stock of the Bank, a portfolio of trading
account equity securities and a loan to the Bank's employee stock ownership
plan. The Company's principal business is the business of the Bank and its
subsidiary. Therefore, most of the discussion in this Annual Report regards the
Bank and its operations.
The executive offices of the Company and the Bank are located at 1602 Cumberland
Avenue, Middlesboro, Kentucky 40965 and the telephone number is (606) 248-1095.
THE BANK. Home Federal was incorporated in 1920 as a Kentucky-chartered building
and loan association known as Peoples Building and Loan. The Bank converted to a
federal savings and loan association and obtained federal insurance of accounts
in 1961 and became a federally-chartered mutual savings bank, Home Federal
Savings Bank, in 1985. The Bank changed to its current name, Home Federal Bank,
Federal Savings Bank, in 1990. The Bank completed its conversion from mutual to
stock form on December 28, 1992. The Bank operates through two full service
offices in the southeastern Kentucky communities of Middlesboro and Harlan and
one full service office in the East Tennessee community of New Tazewell and is
in the process of acquiring another branch in Harlan, including $17.2 million in
deposits from National City Bank of Kentucky.
The Bank is engaged principally in the business of accepting deposits from the
general public and originating permanent loans which are secured by one-to-four
family residential properties located in its market area. The Bank also
originates consumer loans and commercial real estate loans, and maintains a
substantial investment portfolio of mortgage-backed and other investment
securities. Home Federal's current business strategy embodies several
objectives: (i) continued emphasis on originating interest rate sensitive or
shorter term loans for portfolio, primarily in the form of longer term
adjustable-rate mortgage loans and shorter term consumer loans, (ii) continued
maintenance of a substantial investment portfolio of short-term, low-risk
investments, primarily U. S. government and agency securities and investment
grade mortgage-backed securities and (iii) expanding the Bank's loan
originations in the counties adjacent to the Bank's market area. In addition,
from time-to-time, the Bank has purchased whole loans and participation
interests in residential and commercial real estate and multi-family real estate
loans located primarily in Kentucky and East Tennessee areas contiguous to the
Bank's immediate market area.
As a federally-chartered savings bank, the Bank's deposits are insured by the
Federal Deposit Insurance Corporation (FDIC) up to applicable limits for each
depositor. The Bank is a member of the Federal Home Loan Bank (FHLB) of
Cincinnati which is one of the twelve district banks comprising the FHLB system.
The Bank is subject to comprehensive examination, supervision and regulation by
the Office of Thrift Supervision (OTS) and the FDIC. This regulation is intended
primarily for the protection of depositors.
4
<PAGE>
MARKET INFORMATION
- --------------------------------------------------------------------------------
TRADING IN THE COMMON STOCK. The Company's common stock is listed
over-the-counter through the National Daily Quotation System "Pink Sheet"
published by the National Quotation Bureau, Inc. There are currently 1,100,985
shares of the common stock outstanding and approximately 400 holders of record
of the common stock (not including shares held in "street name").
The following table sets forth certain information as to the range of the high
and low bid prices for the Company's common stock for the calendar quarters
indicated:
HIGH BID (1) LOW BID (1) DIVIDENDS PAID
----------------------------------------------------
FISCAL 1998
First quarter $16.00 $14.75 $.21
Second quarter 18.00 16.00
Third quarter 18.00 18.00 .22
Fourth quarter 20.00 18.00
FISCAL 1999
First quarter $20.00 $18.00 $.22
Second quarter 21.00 19.125
Third quarter 20.00 18.00 .23
Fourth quarter 20.00 17.00
(1) Quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
The latest bid price as of September 1, 1999 was $18.00.
DIVIDEND RESTRICTIONS. Under regulations of the OTS, the Bank is not permitted
to pay dividends on its capital stock if its regulatory capital would thereby be
reduced below regulatory capital requirements.
Additionally, an OTS regulation restricts the Bank's ability to make capital
distributions, including payment of dividends. The regulation provides that an
institution meeting its capital requirements, both before and after its proposed
capital distribution, may generally distribute net income to date during the
year, plus retained income for the preceding two years. The regulation provides
more significant restrictions on payment of dividends in the event that the
capital requirements are not met.
Although the Company is not subject to these restrictions, the Company's primary
source of funds for the payment of dividends is dividends from the Bank.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
HFB Financial Corporation, a Tennessee corporation, was organized by Home
Federal to be a savings institution holding company. The Company was organized
at the direction of the Bank in September 1992 to acquire all of the capital
stock issued by the Bank upon the conversion of the Bank from mutual to stock
form. The Company has no significant assets other than capital stock of the
Bank. The Company's principal business is the business of the Bank and its
subsidiary. Therefore, the discussion in this Management's Discussion and
Analysis relates to the Bank and its operations.
Home Federal's results of operations in recent years have reflected the
fundamental changes which have occurred in the regulatory, economic and
competitive environment in which savings institutions operate. The Bank's
results of operations are primarily dependent on its net interest income, which
is the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities. Interest income is a function
of the balances of interest-earning assets outstanding during the period and the
yields earned on such assets. Interest expense is a function of the amount of
interest-bearing liabilities outstanding during the period and the rates paid on
such liabilities. The Bank also generates non-interest income, such as service
charges on transaction accounts and other fees. Net income is further affected
by the level of non-interest expenses, such as personnel expenses, occupancy and
equipment expenses, federal deposit insurance premiums and other expenses.
The operations of Home Federal, and savings institutions generally, are
significantly influenced by general economic conditions and the monetary and
fiscal policies of governmental regulatory agencies. Deposit flows and costs of
funds are influenced by interest rates on competing investments and prevailing
market rates of interest. Lending activities are affected by the demand for
financing real estate and other types of loans, which in turn is affected by the
interest rates at which such financing may be offered and other factors
affecting loan demand and the availability of funds. Just as the Bank's
operations are influenced by regulatory authorities, so are its liquidity levels
and capital resources.
6
<PAGE>
ASSET/LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
Key components of a successful asset/liability strategy are the monitoring and
managing of interest rate sensitivity of both the interest-earning asset and
interest-bearing liability portfolios. Home Federal has employed various
strategies intended to minimize the adverse effect of interest rate risk on
future operations by providing a better match between the interest rate
sensitivity between its assets and liabilities. In particular, the Bank's
strategies are intended to stabilize net interest income for the long term by
protecting its interest rate spread against increases in interest rates. Such
strategies include the origination for portfolio of adjustable-rate mortgage
loans secured by one-to-four family residential real estate and the origination
of consumer and other loans with greater interest rate sensitivities than
long-term, fixed-rate residential mortgage loans. At June 30, 1999,
approximately 85% of the loans in the Bank's mortgage loan portfolio were
adjustable-rate mortgages. The Bank has used excess funds to invest in various
short-term investments, including mortgage-backed securities, with terms of 7
years or less, U. S. Government Treasury and agency securities with terms of 15
years or less and other short-term investments.
Asset/liability management in the form of structuring cash instruments provides
greater flexibility to adjust exposure to interest rates. During periods of high
interest rates, management believes it is prudent to offer competitive rates on
short-term deposits and less competitive rates for long-term liabilities. This
posture allows the Bank to benefit quickly from declines in interest rates.
Likewise, offering more competitive rates on long-term deposits during the low
interest rate periods allows the Bank to extend the repricing and/or maturity of
its liabilities thus reducing its exposure to rising interest rates.
INTEREST RATE SENSITIVITY
- --------------------------------------------------------------------------------
Net portfolio value (NPV) analysis provides a quantification of interest rate
risk. In essence, this approach calculates the difference between the present
value of liabilities, expected cash flows from assets and cash flow from
off-balance-sheet contracts. Under OTS regulations, an institution's "normal"
level of interest rate risk in the event of an immediate and sustained 200 basis
point change in interest rates is a decrease in the institution's NPV in an
amount not exceeding 2% of the present value of its assets. Pursuant to this
regulation, thrift institutions with greater than "normal" interest rate
exposure must take a deduction from their total capital available to meet their
risk-based capital requirement. The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to the 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the present value of its assets.
At June 30, 1999, 2% of the present value of the Bank's assets was approximately
$3.8 million, which was less than $5.8 million, the decrease in NPV resulting
from a 200 basis point change in interest rates. As a result, if the rule were
in effect and were applicable to the Bank, it would have been required to make a
$2.0 million deduction from total capital in calculating its risk-based capital
requirement, although the Bank's capital would have remained far in excess of
regulatory minimums.
7
<PAGE>
The following table sets forth, as of June 30, 1999, the estimated changes in
the Bank's NPV (i.e., the present value of expected cash flows from assets,
liabilities and off-balance-sheet contracts).
NET PORTFOLIO EQUITY
(Dollars in Thousands)
CHANGE IN INTEREST
RATES (BASIS POINTS) ESTIMATED NPV AMOUNT OF CHANGE PERCENT OF CHANGE
- --------------------------------------------------------------------------------
+300 $13,668 $(9,039) (40)%
+200 16,946 (5,761) (25)
+100 20,001 (2,706) (12)
0 22,707
-100 25,040 2,333 10
-200 27,185 4,478 20
-300 29,464 6,757 30
As noted above, the market value of the Bank's net assets would be anticipated
to decline significantly in the event of certain designated increases in
interest rates. For instance, in the event of a 200 basis point increase in
interest rates, NPV is anticipated to fall by $5.8 million, or 25%. Conversely,
a 200 basis point decrease in interest rates is anticipated to cause a $4.5
million, or 20%, increase in NPV. Subject to market conditions, management
intends to continue to restructure the Bank's assets and liabilities over time
to attempt to better manage the Bank's NPV volatility.
Certain assumptions utilized by the OTS in assessing the interest rate risk of
thrift institutions were employed in preparing the previous table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay rates
and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. In the event that interest rates do not change in the
designated amounts, there can be no assurance that the Bank's assets and
liabilities would perform as set forth above. In addition, a change in Treasury
rates in the designated amounts accompanied by a change in the shape of the
Treasury yield curve would cause significantly different changes to the NPV than
indicated above.
8
<PAGE>
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
The Corporation's assets increased by 7.92% to $190.4 million at June 30, 1999
compared to $176.4 million at June 30, 1998. The majority of this increase is
reflected in investment securities and loans receivable, which was primarily
funded by a decrease in cash and cash equivalents and an increase in deposits
and long-term debt.
Cash and due from banks decreased by $3.4 million to $3.6 million at June 30,
1999 from $6.9 million at June 30, 1998, primarily due to increased lending and
investment activities.
The Company maintains a portfolio of trading account securities, which is
comprised of common stocks of other financial institutions. The portfolio was
$1.0 million at June 30, 1999 compared to $835,000 at June 30, 1998. The
portfolio was profitable during the fiscal year ended June 30, 1998, but recent
declines in the stock market significantly affected profitability during the
year ended June 30, 1999.
The Bank augments its lending activities and increases its asset yields to a
significant extent by investing in investment securities such as mortgage-backed
securities "MBSs" and U.S. Government securities. During the year ended June 30,
1999, management purchased $33.6 million in investment securities. Most of these
purchases were funded by proceeds from called and maturing investment
securities, principal collected on MBSs and investments, the sale of investment
securities and a decrease in cash and cash equivalents. A portion of these
purchases include a $5.0 million growth strategy funded by long-term debt used
to purchase MBSs. At June 30, 1999, the balance of investment securities
available for sale, "AFS" was $37.3 million with a net unrealized loss of $1.2
million and the balance of investment securities held to maturity, "HTM" was
$22.0 million. This represented an increase in total investment securities of
$11.8 million or 24.9% as compared to $47.5 million at June 30, 1998.
During the year ended June 30, 1999, total loans receivable, net increased 3.93%
to $120.7 million compared to $116.2 million at June 30, 1998.
At June 30, 1999, allowance for loan losses was $1.2 million or .99% of loans
receivable compared to $973,000 or .83% of loans receivable at June 30, 1998.
During fiscal 1999, the Bank had net charge-offs of $14,000. Provisions to the
allowance were $253,000 for the year ended June 30, 1999. Currently the Bank has
reserved $812,000 for impaired loans totaling $1.3 million. These loans are now
involved in bankruptcy proceedings and Management is closely monitoring them as
to their collectability.
Interest receivable increased $414,000 to $1.822 million at June 30, 1999 from
$1.408 million at June 30, 1998 due to increased loan and investment balances.
Total deposits increased by $9.1 million to $154.0 million at June 30, 1999 from
$144.9 million at June 30, 1998. During the year ended June 30, 1999, CDs
increased $9.2 million and NOW accounts and other demand accounts increased $1.1
million, while passbook savings and money market deposit accounts decreased by
$1.2 million.
Long-term debt increased $4.9 million to $10.6 million at June 30, 1999 from
$5.7 million at June 30, 1998 as the result of a $5.0 million growth strategy,
which was implemented during fiscal 1999. $5.0 million was borrowed to purchase
investment securities with a projected margin of 138 basis points.
The Bank's regulatory liquidity ratio was 27.40% at June 30, 1999 as compared to
26.19% at June 30, 1998. At June 30, 1999 the Bank met all the fully phased-in
regulatory capital requirements under FIRREA. Tangible, core and risk-based
capital ratios were 9.0%, 9.0% and 21.4%, respectively at June 30, 1999 as
compared to 9.1%, 9.1% and 22.5% at June 30, 1998.
9
<PAGE>
COMPARISON OF YEAR ENDED JUNE 30, 1999 TO YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
General. Net earnings decreased by $263,000 to $1.240 million for the fiscal
year ended June 30, 1999 from $1.503 million for the fiscal year ended June 30,
1998. The primary reasons for the decreases were a $117,000 decrease in net
interest income, and a $337,000 decrease in noninterest income, offset by a
$21,000 decrease in provision for loan losses, a $36,000 decrease in noninterest
expense and a $134,000 decrease in income tax expense.
Net Interest Income. Net interest income decreased from $5.7 million for fiscal
1998 to $5.6 million for fiscal 1999. This is primarily due to spread
compression, as the decline in the average yield on interest-earning assets is
greater than the decline in the related average cost of interest-bearing
liabilities.
Interest Income. Interest income for the fiscal years ended June 30, 1999 and
June 30, 1998, was $13.6 million and $13.0 million, respectively. The increase
in fiscal 1999 over fiscal 1998 was due primarily to an increase in the average
balance of interest earning assets. Yields on such assets were 7.57% in fiscal
1999 compared to 8.07% in fiscal 1998.
Average interest-earning assets were $179.0 million and $160.8 million for the
fiscal years ended June 30, 1999 and June 30, 1998, respectively. The increase
in the average balance of interest-earning assets was primarily due to an
increase in loan originations and an increase in investment securities.
Interest Expense. Interest expense for fiscal 1999 and 1998, was $8.0 million
and $7.3 million, respectively. The increase in interest expense of $696,000 in
fiscal 1998 over fiscal 1997 was due primarily to an increase in the average
balance of interest-bearing liabilities from $147.9 million in fiscal 1998 to
$164.2 million in fiscal 1998. Although interest expense increased due to
increased volume, the Company's cost of funds on deposits decreased to 4.83% in
fiscal 1999 from 4.88% in fiscal 1998. The cost of borrowed funds decreased to
5.44% in fiscal 1999 from 5.91% in fiscal 1998. The average balance of
interest-bearing liabilities increased due to increased deposits and increased
borrowings used primarily to fund increases in the investment portfolio and also
to fund loan demand.
Provision for Loan Losses. The provision for loan losses for the fiscal years
ended June 30, 1999 and 1998 was $253,000 and $274,000, respectively. The
provision was the result of Management's evaluation of the adequacy of the
allowance for loan losses including consideration of recoveries of loans
previously charged off, the perceived risk exposure among loan types, actual
loss experience, delinquency rates, and current economic conditions.
Other Income. Other income for fiscal 1999 was $324,000 compared to $661,000 for
fiscal 1998, a decrease of $337,000. The decrease is primarily the result of a
$299,000 decrease in gains on trading account securities held by the Company, a
$5,000 decrease in service charges for deposits and other customer fees, a
decrease in other income of $26,000 and a decrease in gains on the sale of
investment securities of $7,000.
10
<PAGE>
Other Expenses. Other expenses decreased $36,000 from $3.750 million for fiscal
1998 to $3,714 million for fiscal 1999. Salaries and employee benefits decreased
by $74,000 primarily as the result of an increase of $105,000 in deferred loan
origination costs related to compensation expense. General compensation expense
increased $85,000 due to normal increases. ESOP expense decreased $30,000 due to
the loan to purchase shares for the plan being paid off in fiscal 1998 and
employee education expense decreased $24,000 due to the cost of training
resulting from the Bank's conversion to a new data processor in fiscal 1998.
Occupancy expense increased $5,000 primarily due to higher property tax expense.
Equipment expense increased $1,000 due to increased repair and maintenance costs
offset by lower depreciation expense. Data processing expense decreased $78,000
primarily due to one-time costs associated with the Bank's conversion to a new
data processor during fiscal 1998. Deposit insurance expense increased by $3,000
as the result of increased deposits. Legal and professional expense increased
$32,000 due to higher legal fees. Advertising expense decreased $20,000 and
state franchise and deposit tax increased $24,000 due to increased deposits and
a higher apportionment for state franchise and excise tax. Other expense
increased $71,000. This was primarily due to a $27,000 increase in postage
expense and a $47,000 increase in other services and fees. Postage expense
increased due to bringing the Bank's statement rendering operation in-house and
other services and fees increased due to the implementation of check imaging
services with the Federal Reserve Bank.
Income Tax Expense. Income taxes decreased by $134,000 to $657,000 for fiscal
1999 compared to $791,000 for fiscal 1998 due to lower earnings.
11
<PAGE>
COMPARISON OF YEAR ENDED JUNE 30, 1998 TO YEAR ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
General. Net earnings increased by $465,000 to $1.503 million for the fiscal
year ended June 30, 1998 from $1.038 million for the fiscal year ended June 30,
1997. The primary reasons for the increase were a $475,000 increase in net
interest income, and a $411,000 decrease in noninterest expense. Offsetting
these increases were a $136,000 increase in provision for loan losses, a $85,000
decrease in noninterest income and a $200,000 increase in income tax expense.
Net Interest Income. Net interest income increased from $5.2 million for fiscal
1997 to $5.7 million for fiscal 1998.
Interest Income. Interest income for the fiscal years ended June 30, 1998 and
June 30, 1997, was $13 million and $11.7 million, respectively. The increase in
fiscal 1998 over fiscal 1996 was due primarily to an increase in the average
balance of interest earning assets. Yields on such assets were 8.07% in fiscal
1998 compared to 7.88% in fiscal 1997.
Average interest-earning assets were $160.8 million and $148.4 million for the
fiscal years ended June 30, 1998 and June 30, 1997, respectively. The increase
in the average balance of interest-earning assets was primarily due to an
increase in loan originations and an increase in investment securities.
Interest Expense. Interest expense for fiscal 1998 and 1997, was $7.3 million
and $6.5 million, respectively. The increase in interest expense of $812,000 in
fiscal 1998 over fiscal 1997 was due primarily to an increase in the average
balance of interest-bearing liabilities from $135.2 million in fiscal 1997 to
$147.9 million in fiscal 1998. The Company's cost of funds on deposits increased
to 4.95% in fiscal 1998 from 4.82% in fiscal 1997. The cost of borrowed funds
increased to 5.91% in fiscal 1998 from 5.13% in fiscal 1997. The average balance
of interest-bearing liabilities increased due to increased deposits and
increased borrowings used to fund loan demand and increases in the investment
portfolio.
Provision for Loan Losses. The provision for loan losses for the fiscal years
ended June 30, 1998 and 1997 was $274,000 and $138,000, respectively. The
provision was the result of Management's evaluation of the adequacy of the
allowance for loan losses including consideration of recoveries of loans
previously charged off, the perceived risk exposure among loan types, actual
loss experience, delinquency rates, and current economic conditions.
Other Income. Other income for fiscal 1998 was $661,000 compared to $746,000 for
fiscal 1997, a decrease of $85,000. The decrease is primarily the result of a
$148,000 decrease in gains on trading account securities held by the Company and
a $68,000 increase in service charges for deposits and other customer fees. A
decrease in other income of $24,000 offsets increases in gains on the sale of
investment securities of $3,000 and other customer fees of $16,000.
12
<PAGE>
Other Expenses. Other expenses decreased $411,000 from $4.161 million for fiscal
1997 to $3.750 million for fiscal 1998. Salaries and employee benefits increased
by $160,000 primarily as the result of salary increases and overtime incurred
during the Bank's recent conversion to a new data processor. Occupancy expense
decreased $14,000 due to lower depreciation expense. Equipment expense increased
$12,000 due to increased depreciation and repairs and maintenance. Data
processing expense increased $91,000 primarily due to one-time costs associated
with the Bank's conversion to a new data processor. Deposit insurance expense
decreased by $85,000 as the result of lower premium rates. This was precipitated
by the recapitalization of the Savings Association Insurance Fund "SAIF".
Legislation enacted on September 30, 1996 to recapitalize the underfunded SAIF
resulted in a one time assessment to savings associations insured by the SAIF.
The Banks one time assessment of $706,000 was expensed in fiscal 1997. Legal and
professional expense decreased $19,000 due to lower consulting fees and
advertising expense increased $13,000. Other expense increased $138,000
primarily as the result of a $53,000 penalty for breaking a contract for ATM
processing, a $33,000 increase in printing and stationary expense and an
increase of $28,000 in postage expense.
Income Tax Expense. Income taxes increased by $200,000 to $791,000 for fiscal
1998 compared to $591,000 for fiscal 1997 due to higher earnings.
13
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
- --------------------------------------------------------------------------------
The following table sets forth certain information relating to the Company's
average interest-earning assets and interest-bearing liabilities and reflects
the average yield on assets and the average cost of liabilities for the periods
and dates indicated. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of
average daily balances has caused any material difference in the information
presented.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
YEAR ENDED JUNE 30 BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net (1) $121,817 $10,030 8.23% $110,906 $ 9,768 8.81% $100,098 $ 8,692 8.68%
Investment securities 51,493 3,229 6.27 44,829 2,911 6.49 44,234 2,768 6.26
FHLB stock and deposits
with financial
institutions 5,716 299 5.23 5,098 300 5.88 4,106 232 5.65
----------------------------------------------------- ---------------------
Total interest-
earning assets $179,026 $13,558 7.57% $160,833 $12,979 8.07% $148,438 $11,692 7.88%
=================== ====================== =====================
Interest-bearing liabilities
Deposits $149,288 $ 7,207 4.83% $137,533 $ 6,708 4.88% $131,202 $ 6,305 4.81%
Short-term borrowings and
long-term debt 14,918 811 5.44 10,397 614 5.91 3,998 205 5.13
------------------- ---------------------- ---------------------
Total interest-bearing
liabilities $164,206 $ 8,018 4.88% $147,930 $ 7,322 4.95% $135,200 $ 6,510 4.82%
=================== ====================== =====================
Net interest income $ 5,540 $ 5,657 $ 5,182
========== =========== ===========
Interest rate spread 2.69% 3.12% 3.06%
============ ============== ========
Net yield on interest-
earning assets 3.09% 3.52% 3.49%
============ ============== ========
Ratio of average interest-
earning assets to average
interest-bearing 109.03% 108.72% 109.79%
liabilities
============ ============== ========
</TABLE>
(1) Includes nonaccrual loans.
14
<PAGE>
RATE/VOLUME ANALYSIS
- --------------------------------------------------------------------------------
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rate (change in rate
multiplied by old volume); and (iii) changes in rate/volume (changes in rate
multiplied by changes in volume). Average balances are derived from month-end
balances. Management does not believe that the use of month-end balances instead
of average daily balances has caused any material differences in the information
presented.
<TABLE>
<CAPTION>
1999 VS. 1998 1998 VS. 1997
-----------------------------------------------------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-----------------------------------------------------------------------------------
RATE/ RATE/
YEAR ENDED JUNE 30 VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $961 $(636) $(63) $262 $ 938 $124 $14 $1,076
Investment securities 433 (100) (15) 318 37 103 3 143
Other dividend income and deposits
with financial institutions 36 (33) (4) (1) 56 10 2 68
----------------------------------------------------------------------------------
Total interest-earning assets 1,430 (769) (82) 579 1,031 237 19 1,287
----------------------------------------------------------------------------------
Interest expense
Deposits 573 (68) (6) 499 304 94 5 403
Short-term borrowings and long-
term debt 267 (49) (21) 197 328 31 50 409
----------------------------------------------------------------------------------
Total interest-bearing
liabilities 840 (117) (27) 696 632 125 55 812
----------------------------------------------------------------------------------
Change in net interest income $590 $(652) $(55) $(117) $ 343 $170 $(38) $ 475
==================================================================================
</TABLE>
(1) For purposes of calculating volume, rate and rate/volume variances,
nonaccrual loans were included in the weighted-average balance outstanding.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The Company's primary source of liquidity is dividends paid by the Bank. The
Bank, as a stock savings institution, is subject to certain regulatory
limitations with respect to the payment of dividends to the Company. See "Market
Information-Dividend Restrictions". Prior to 1998, the Company repurchased
shares of its common stock in order to improve earnings per share and return on
stockholders' equity. To date, the Company has repurchased 202,046 of its shares
(as restated for a 5-for-3 stock split on June 30, 1997) of common stock at a
cost of $2 million.
Home Federal's capital ratios are substantially in excess of regulatory capital
requirements. At June 30, 1999, the Bank's tangible and core capital amounted to
9.0% of total adjusted assets, or 7.5% and 6.0%, respectively, in excess of the
Bank's current 1.5% tangible and 3.0% core capital requirements. Additionally,
the Bank's risk-weighted capital to risk-weighted assets ratio was 21.4% at June
30, 1999, or 13.4% in excess of the Banks 8.0% risk-based capital requirement.
Home Federal's principal sources of funds for operations are deposits from its
primary market area, principal and interest payments on loans and
mortgage-backed securities and proceeds from maturing investment securities. In
addition, as a member of the FHLB of Cincinnati, the Bank is eligible to borrow
funds from the FHLB of Cincinnati in the form of advances.
Home Federal is required by OTS regulations to maintain minimum levels of
specified liquid assets which are currently equal to 5% of deposits and
short-term borrowings. Such investments serve as a source of liquid funds which
the Bank may use to meet deposit withdrawals and other short-term needs. The
Bank's most liquid assets are cash and cash equivalents, which are short-term,
highly liquid investments with original maturities of three months or less that
are readily convertible to known amounts of cash. The levels of such assets are
dependent upon the Bank's operating, financing and investment activities at any
given time. In recent years, the Bank has maintained higher levels of liquid
assets than required by regulation. Management believes that the liquidity
levels maintained are fully adequate to meet potential deposit outflows, loan
demand and normal operations. Home Federal's liquidity ratio at June 30, 1999
was approximately 27.4%.
The primary source of cash from operating activities is net earnings. The
primary uses of funds are lending activities and investments in mortgage-backed
and investment securities. Cash received from net loan repayments and other
sources is used to purchase investment and mortgage-backed securities. Financing
sources consist principally of net increases in deposits. Other financing
sources include short and long-term borrowings.
16
<PAGE>
YEAR 2000
- --------------------------------------------------------------------------------
The Company has completed an assessment of its computer systems, including its
information and non-information systems, and identified those systems that it
believes could be affected by the Year 2000 issue. It has also developed an
implementation plan to address the issue and has tested all of its internal
mission critical hardware and software systems to determine if they are Year
2000 compliant. While the Company has exposure to several risks related to Year
2000, the primary risk to the Company of not complying with Year 2000 is the
potential inability to correctly process and record customer loan and deposit
transactions.
The Company believes that it has met the requirements that have been established
for the banking industry by the Federal Financial Institution Examination
Council "FFIEC". These standards require that a series of procedures be
performed by financial institutions within established timeframes to reduce the
risk of noncompliance with the Year 2000 issue. While the Company believes that
it will meet all of the FFIEC requirements and that its mission critical systems
will be in compliance with Year 2000, it can give no assurance that this will
occur.
The Company has developed a business resumption contingency plan that would take
effect if its internal systems, or the systems of those material vendors on
which it is reliant, would not be compliant with Year 2000 requirements.
The Company outsources a significant portion of its data processing to an
outside provider. A worst case scenario for the Company would likely involve
non-compliance with Year 2000 by its primary data processor in such a manner
that would leave the Company in a position where it could not correctly process
and record customer loan and deposit transactions. While the Company has
successfully tested its primary data processing system for compliance with Year
2000, it cannot guarantee that the systems of this and other companies on which
the Company's systems rely will be timely converted and not have a material
effect on the Company. Other parties whose Year 2000 compliance may affect the
Company include the Federal Home Loan Bank of Cincinnati, the Federal Reserve
Bank of Cincinnati and vendors who support loan and deposit documentation
software, and the operations of the Company's ATM network. These third parties
have indicated their compliance or intended compliance. Where it was possible to
do so, the Company scheduled testing with these third parties. Where testing was
not possible, the Company will rely on certifications from vendors and service
providers. A failure to resolve year 2000 issues by governmental agencies,
utilities and telecommunications companies on whom the Company is dependent
could also adversely affect the Company. There can be no assurance that the
Company's year 2000 plan will effectively address the year 2000 issue or that
the impact of any failure of the Company's third-party vendors and service
providers to be year 2000 compliant will not have a material effect on the
Company's business, financial condition or results of operations.
The Company has, through June 30, 1999, incurred certain costs, not including
salary expense, related to Year 2000. A portion of these costs was incurred in
connection with the recent conversion of the Company's primary data processing
system. Costs incurred through June 30, 1999 total approximately $326,000 and
include $205,000 for equipment, $65,000 for software, $12,000 for de-conversion
fees that were paid to the previous data processing provider, $38,000 for
training and $6,000 for the initial assessment. At June 30, 1999, the Company
expects to incur additional costs associated with Year 2000 preparedness but
does not expect these costs to be material to the Company's financial condition
or results of operations.
The Company does not have, at June 30, 1999, any material commitments to
purchase new equipment, software or to incur material costs to modify its
existing system for year 2000 compliance and does not believe that any material
amounts of its existing computer hardware or software is impaired. The Company
has assessed the impact of Year 2000 on its commercial-lending customers, and
believes that the impact, in terms of potential credit exposure, is not
material. The majority of the Company's commercial lending portfolio consists of
commercial real estate loans that are made to companies that are not highly
technology intensive.
17
<PAGE>
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 require the measurement of financial position and operating results in
terms of historical dollars without consideration of the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary. As a
result, interest rates have a greater impact on the Bank's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
18
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 3,573,139 $ 6,947,148
Trading assets, at fair value 1,014,808 835,307
Investment securities
Available for sale 37,298,664 26,904,517
Held to maturity (fair value of $21,508,000 and $20,625,000) 21,997,870 20,546,634
------------------------------------------
Total investment securities 59,296,534 47,451,151
Loans, net of allowance for loan losses of $1,211,594 and $972,859 120,741,798 116,170,754
Premises and equipment 2,432,475 2,220,548
Federal Home Loan Bank stock 1,346,800 1,255,900
Interest receivable 1,821,970 1,407,901
Other assets 188,876 148,077
------------------------------------------
Total assets $190,416,400 $176,436,786
==========================================
LIABILITIES
Deposits
Interest bearing $152,971,687 $144,622,466
Non-interest bearing 1,016,069 258,952
------------------------------------------
Totals 153,987,756 144,881,418
Short-term borrowings 6,500,000 6,500,000
Long-term debt 10,597,501 5,661,598
Interest payable 733,041 580,621
Other liabilities 847,055 825,950
------------------------------------------
Total liabilities 172,665,353 158,449,587
------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value
Authorized and unissued--1,000,000 shares
Common stock, $1 par value
Authorized--5,000,000 shares
Issued and outstanding--1,303,031 and 1,291,694 shares 1,303,031 1,291,694
Additional paid-in capital 6,303,419 6,195,948
Less: Common stock acquired by ESOP (41,545)
Common stock acquired by Rabbi trusts for deferred
compensation plans (639,767) (313,059)
Treasury stock, at cost--202,046 shares (2,030,955) (2,030,955)
Retained earnings 13,501,715 12,754,183
Accumulated other comprehensive income (686,396) 130,933
------------------------------------------
Total stockholders' equity 17,751,047 17,987,199
------------------------------------------
Total liabilities and stockholders' equity $190,416,400 $176,436,786
==========================================
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C>
Loans receivable $10,029,733 $ 9,767,979 $ 8,692,178
Investment securities 3,228,779 2,911,288 2,768,076
Other dividend income 115,142 87,085 78,953
Deposits with financial institutions 184,062 212,868 152,989
--------------------------------------------------
Total interest income 13,557,716 12,979,220 11,692,196
--------------------------------------------------
INTEREST EXPENSE
Deposits 7,206,451 6,708,163 6,305,373
Short-term borrowings 374,466 469,668 160,393
Long-term debt 436,840 144,100 44,140
--------------------------------------------------
Total interest expense 8,017,757 7,321,931 6,509,906
--------------------------------------------------
NET INTEREST INCOME 5,539,959 5,657,289 5,182,290
Provision for loan losses 252,876 273,721 138,156
--------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,287,083 5,383,568 5,044,134
--------------------------------------------------
OTHER INCOME
Service charges for deposit accounts 366,606 387,845 319,555
Other customer fees 89,369 72,738 56,260
Net gain (loss) on trading securities (140,596) 158,642 307,461
Net realized gain on sales of available-
for-sale securities 7,122 13,614 10,653
Other income 1,737 28,383 51,989
--------------------------------------------------
Total other income 324,238 661,222 745,918
--------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 1,744,475 1,818,476 1,658,323
Net occupancy expenses 196,683 191,988 205,675
Equipment expenses 230,550 229,994 217,608
Data processing fees 234,144 311,847 221,250
Deposit insurance expense 87,091 84,129 169,261
SAIF special assessment 705,859
Legal and professional fees 195,040 162,686 181,584
Advertising 113,658 133,453 120,579
State franchise and deposit taxes 145,606 121,915 123,033
Other expenses 767,282 695,868 558,108
--------------------------------------------------
Total other expenses 3,714,529 3,750,356 4,161,280
--------------------------------------------------
INCOME BEFORE INCOME TAX 1,896,792 2,294,434 1,628,772
Income tax expense 656,503 791,360 591,180
--------------------------------------------------
NET INCOME $ 1,240,289 $ 1,503,074 $ 1,037,592
==================================================
BASIC EARNINGS PER SHARE $1.13 $1.39 $.98
==================================================
DILUTED EARNINGS PER SHARE $1.12 $1.35 $.96
==================================================
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL
SHARES PAID-IN ESOP MRP AND RABBI COMPREHENSIVE
OUTSTANDING AMOUNT CAPITAL DEBT* SERP** TRUSTS INCOME
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JULY 1, 1996 746,064 $ 746,064 $6,297,130 $(209,428) $(121,250) $(258,290)
Comprehensive income
Net income $1,037,592
Other comprehensive
income, net of tax
Unrealized gains on
securities, net of
reclassification
adjustment 159,195
==========
Comprehensive income $1,196,787
==========
Cash dividends ($.39 per
share)
Stock issued upon exercise
of stock options 25,439 25,439 256,421
Reduction of ESOP debt 84,006
Stock issued under MRP 20,300
Stock purchased by Rabbi
trusts (24,969)
5-for-3 stock split
($4,490 paid
in lieu of fractional
shares) 514,170 514,170 (518,660)
Treasury stock purchased--
8,850 shares
Tax benefit of employee
benefit plans 59,660
-----------------------------------------------------------------------------
BALANCES, JUNE 30, 1997 1,285,673 1,285,673 6,094,551 (125,422) (100,950) (283,259)
Comprehensive income
Net income $1,503,074
Other comprehensive
income, net of tax
Unrealized gains on
securities, net of
reclassification
adjustment 121,058
==========
Comprehensive income $1,624,132
==========
Cash dividends ($.43 per
share)
Stock issued upon exercise
of stock options 6,021 6,021 30,105
Reduction of ESOP debt 83,877
Stock issued under MRP and
SERP 100,950
Stock purchased by Rabbi
trusts (29,800)
Tax benefit of employee
benefit
plans 71,292
------------------------------------------------------------------------------
BALANCES, JUNE 30, 1998 1,291,694 1,291,694 6,195,948 (41,545) (313,059)
</TABLE>
21
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(continued)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
EARNINGS INCOME STOCK EQUITY
-------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES, JULY 1, 1996 $11,093,766 $(149,320) $(1,826,405) $15,572,267
Comprehensive income
Net income 1,037,592 1,037,592
Other comprehensive
income, net of tax
Unrealized gains on
securities, net of
reclassification
adjustment 159,195 159,195
Comprehensive income
Cash dividends ($.39 per
share) (413,844) (413,844)
Stock issued upon exercise
of stock options 281,860
Reduction of ESOP debt 84,006
Stock issued under MRP 20,300
Stock purchased by Rabbi
trusts (24,969)
5-for-3 stock split
($4,490 paid
in lieu of fractional
shares) (4,490)
Treasury stock purchased--
8,850 shares (204,550) (204,550)
Tax benefit of employee
benefit
plans 59,660
-------------------------------------------------------
BALANCES, JUNE 30, 1997 11,717,514 9,875 (2,030,955) 16,567,027
Comprehensive income
Net income 1,503,074 1,503,074
Other comprehensive
income, net of tax
Unrealized gains on
securities, net of
reclassification
adjustment 121,058 121,058
Comprehensive income
Cash dividends ($.43 per
share) (466,405) (466,405)
Stock issued upon exercise
of stock options 36,126
Reduction of ESOP debt 83,877
Stock issued under MRP and
SERP 100,950
Stock purchased by Rabbi
trusts (29,800)
Tax benefit of employee
benefit
plans 71,292
-------------------------------------------------------
BALANCES, JUNE 30, 1998 12,754,183 130,933 (2,030,955) 17,987,199
</TABLE>
22
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL
SHARES PAID-IN ESOP MRP AND RABBI COMPREHENSIVE
OUTSTANDING AMOUNT CAPITAL DEBT* SERP** TRUSTS INCOME
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, (BROUGHT FORWARD)
JUNE 30, 1998 1,291,694 $1,291,694 $6,195,948 $(41,545) $(313,059)
Comprehensive income
Net income $1,240,289
Other comprehensive
income, net of tax
Unrealized losses on
securities, net of
reclassification
adjustment (817,329)
----------
Comprehensive income $ 422,960
==========
Cash dividends ($.45 per
share)
Stock issued upon exercise
of stock options 11,337 11,337 56,685
Reduction of ESOP debt 41,545
Stock purchased by Rabbi
trusts (48,600)
Tax benefit of employee
benefit
plans 50,786
Stock withdrawn from Rabbi
Trusts 8,352
Transitional fair value
adjustment of Rabbi
Trust shares (371,815)
Net change in fair value
of Rabbi Trust shares 85,355
-----------------------------------------------------------------------------
BALANCES, JUNE 30, 1999 1,303,031 $1,303,031 $6,303,419 $ 0 $ 0 $(639,767)
=============================================================================
</TABLE>
*Employee Stock Ownership Plan (ESOP)
**Management Recognition Plan (MRP) and Supplemental Executive Retirement Plan
(SERP)
See notes to consolidated financial statements.
23
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
EARNINGS INCOME STOCK EQUITY
-------------------------------------------------------
BALANCES, (BROUGHT FORWARD)
<S> <C> <C> <C> <C>
JUNE 30, 1998 $12,754,183 $130,933 $(2,030,955) $17,987,199
Comprehensive income
Net income 1,240,289 1,240,289
Other comprehensive
income, net of tax
Unrealized losses on
securities, net of
reclassification
adjustment (817,329) (817,329)
Comprehensive income
Cash dividends ($.45 per
share) (492,757) (492,757)
Stock issued upon exercise
of stock options 68,022
Reduction of ESOP debt 41,545
Stock purchased by Rabbi
trusts (48,600)
Tax benefit of employee
benefit
plans 50,786
Stock withdrawn from Rabbi
Trusts 8,352
Transitional fair value
adjustment of Rabbi
Trust shares (371,815)
Net change in fair value
of Rabbi Trust shares 85,355
-------------------------------------------------------
BALANCES, JUNE 30, 1999 $13,501,715 $(686,396) $(2,030,955) $17,751,047
=======================================================
</TABLE>
24
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 1,240,289 $ 1,503,074 $ 1,037,592
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 252,877 273,721 138,156
Depreciation and amortization
Property and equipment 267,702 217,587 233,684
Cost of ESOP and MRP 41,545 184,827 104,306
Investment securities 33,996 32,336 60,686
FHLB stock dividend (90,900) (86,800) (78,700)
Investment security (gains) losses (7,122) (13,614) (10,653)
Deferred income tax 135,000 (27,000) 29,000
Net change in
Trading assets, at fair value (179,501) (39,752) (549,055)
Interest receivable (414,069) (333,619) (119,656)
Interest payable 152,420 32,388 13,935
Other assets 53,315 4,494 43,192
Other liabilities 21,105 (62,977) 83,620
Other 29,718
-----------------------------------------------------
Net cash provided by operating activities 1,506,657 1,684,665 1,015,825
-----------------------------------------------------
INVESTING ACTIVITIES
Purchases of securities available for sale (24,954,517) (9,722,516) (8,881,777)
Proceeds from maturities of securities available for sale 8,614,926 6,342,531 2,849,946
Purchases of securities held to maturity (8,239,459) (8,763,360) (4,005,000)
Proceeds from sales of securities available for sale 4,615,865 1,783,144 2,000,000
Proceeds from maturities of securities held to maturity 6,808,811 8,399,235 3,615,504
Net change in loans (4,823,921) (11,460,088) (9,364,864)
Purchases of premises and equipment (479,629) (270,742) (31,314)
Proceeds from sale of real estate owned 185,527
Other 1,401
-----------------------------------------------------
Net cash used by investing activities (18,457,924) (13,691,796) (13,630,577)
-----------------------------------------------------
</TABLE>
25
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
<S> <C> <C> <C>
Net change in
Noninterest-bearing, interest-bearing and
savings deposits $ (64,074) $ 654,002 $ (483,555)
Certificates of deposit 9,170,412 11,024,874 6,943,860
Short-term borrowings (1,000,000) 5,625,000
Proceeds of long-term debt 5,000,000 5,000,000
Repayment of long-term debt (64,097) (59,155) (54,595)
Cash dividends (492,757) (466,405) (413,844)
Purchase of stock (204,550)
Sale of common stock 68,022 36,126 281,860
Cash paid in lieu of fractional shares (4,490)
Common stock acquired by Rabbi trusts (48,600) (29,800) (24,969)
Common stock withdrawn from Rabbi trusts 8,352
-----------------------------------------------------
Net cash provided by financing activities 13,577,258 15,159,642 11,664,717
-----------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,374,009) 3,152,511 (950,035)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,947,148 3,794,637 4,744,672
-----------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,573,139 $ 6,947,148 $ 3,794,637
=====================================================
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 7,865,337 $ 7,289,543 $ 6,492,945
Income tax paid 305,864 914,762 426,896
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of HFB Financial Corporation (Company) and
its wholly-owned subsidiary, Home Federal Bank (Bank), and the Bank's
wholly-owned subsidiary, Home Service Corporation, conform to generally accepted
accounting principles and reporting practices followed by the banking industry.
The more significant of the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The Company is a bank holding company whose principal activity is the ownership
and management of the Bank. The Bank operates under a federal thrift charter and
provides full banking services in a single significant business segment. As a
federally-chartered thrift, the Bank is subject to regulation by the Office of
Thrift Supervision and the Federal Deposit Insurance Corporation.
The Bank generates commercial, mortgage and consumer loans and receives deposits
from customers located primarily in Bell County, Kentucky, surrounding counties
and the surrounding States of Tennessee and Virginia. The Bank's loans are
generally secured by specific items of collateral including real property,
consumer assets and business assets.
CONSOLIDATION--The consolidated financial statements include the accounts of the
Company, the Bank and the Bank's subsidiary after elimination of all material
intercompany transactions and accounts.
TRADING ACTIVITIES are engaged in by the Company for its own account. Securities
that are held principally for resale in the near term are recorded in the
trading assets account at fair value with changes in fair value recorded in
earnings. Trading account securities consist primarily of thrift equity
securities. Interest and dividends are included in net interest income.
Quoted market prices are used to determine the fair value of trading
instruments.
INVESTMENT SECURITIES--Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity or included in the trading account
and marketable equity securities not classified as trading are classified as
available for sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately in stockholders' equity, net of
tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
27
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
LOANS are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of June
30, 1999 the allowance for loan losses is adequate based on information
currently available. A worsening or protracted economic decline in the area
within which the Bank operates would increase the likelihood of additional
losses due to credit and market risks and could create the need for additional
loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the declining balance method principally on the
estimated useful lives of the assets. Maintenance and repairs are expensed as
incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
FEDERAL HOME LOAN BANK (FHLB) STOCK is a required investment for institutions
that are members of the Federal Home Loan Bank system. The required investment
in the common stock is based on a predetermined formula.
TREASURY STOCK is stated at cost. Cost is determined by the first-in, first-out
method.
INCOME TAX in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiary.
EARNINGS PER SHARE have been computed based upon the weighted average common
shares (including ESOP shares) outstanding during each year.
28
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
STOCK OPTIONS are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for and will continue to account for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants.
NOTE 2 -- INVESTMENT SECURITIES
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 1999
Available for sale
U. S. Treasury $ 4,491 $ 54 $ 4,545
Federal agencies 21,465 5 $ (774) 20,696
Mortgage-backed securities 12,436 10 (388) 12,058
-----------------------------------------------------------------------
Total available for sale 38,392 69 (1,162) 37,299
-----------------------------------------------------------------------
Held to maturity
Federal agencies 7,731 (221) 7,510
Mortgage-backed securities 14,267 37 (306) 13,998
-----------------------------------------------------------------------
Total held to maturity 21,998 37 (527) 21,508
-----------------------------------------------------------------------
Total investment securities $60,390 $106 $ (1,689) $58,807
=======================================================================
JUNE 30, 1998
Available for sale
U. S. Treasury $ 5,479 $ 98 $ 5,577
Federal agencies 12,603 64 $ (6) 12,661
Mortgage-backed securities 8,633 50 (16) 8,667
-----------------------------------------------------------------------
Total available for sale 26,715 212 (22) 26,905
-----------------------------------------------------------------------
Held to maturity
Federal agencies 6,497 56 (20) 6,533
Mortgage-backed securities 14,050 61 (19) 14,092
-----------------------------------------------------------------------
Total held to maturity 20,547 117 (39) 20,625
-----------------------------------------------------------------------
Total investment securities $47,262 $329 $ (61) $47,530
=======================================================================
</TABLE>
29
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities held to maturity and available
for sale at June 30, 1999, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
HELD TO MATURITY AVAILABLE FOR SALE
-----------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
JUNE 30 COST VALUE COST VALUE
- -----------------------------------------------------------------------------
Within one year $ 502 $ 501 $ 1,999 $ 2,006
One to five years 1,680 1,640 4,491 4,526
Five to ten years 4,513 4,382 14,007 13,525
After ten years 1,036 987 5,459 5,184
-----------------------------------------------
7,731 7,510 25,956 25,241
Mortgage-backed securities 14,267 13,998 12,436 12,058
-----------------------------------------------
Totals $21,998 $21,508 $38,392 $37,299
===============================================
Securities with a carrying value of $11,766,000 and $9,775,000 were pledged at
June 30, 1999 and 1998 to secure public deposits.
Proceeds from sales of securities available for sale during 1999, 1998 and 1997
were $4,615,865, $1,783,144 and $2,000,000. Gross gains on those sales of
$7,122, $13,614 and $14,212 were realized in 1999, 1998 and 1997 and gross
losses of $3,559 were realized in 1997.
Unrealized holding gains (losses) on trading securities of $(37,292), $(35,915)
and $50,069 were included in earnings in 1999, 1998 and 1997.
30
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 3 -- LOANS AND ALLOWANCE
JUNE 30 1999 1998
- -------------------------------------------------------------------------------
Commercial real estate and industrial loans $ 10,843 $ 10,764
Real estate mortgage loans 92,203 91,271
Construction loans 12,996 8,636
Consumer loans 5,912 6,473
-------------------------
121,954 117,144
Allowance for loan losses (1,212) (973)
-------------------------
Total loans $120,742 $116,171
=========================
YEAR ENDED JUNE 30 1999 1998 1997
- --------------------------------------------------------------------------------
Allowance for loan losses
Balances, beginning of year $ 973 $710 $671
Provision for losses 253 274 138
Recoveries on loans 2 3
Loans charged off (16) (11) (102)
------------------------------------------
Balances, end of year $1,212 $973 $710
==========================================
Information on impaired loans is summarized below:
JUNE 30 1999 1998
- -------------------------------------------------------------------------------
Impaired loans with an allowance $1,523 $1,271
==========================
Allowance for impaired loans (included in
the Company's allowance for loan losses) $ 812 $ 356
==========================
YEAR ENDED JUNE 30 1999 1998
- -------------------------------------------------------------------------------
Average balance of impaired loans $1,812 $1,285
Interest income recognized on impaired loans 14 156
Cash-basis interest included above 128
31
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 4 -- PREMISES AND EQUIPMENT
JUNE 30 1999 1998
- ------------------------------------------------------------------------------
Land and improvements $1,075 $ 611
Buildings 1,410 1,685
Furniture and equipment 1,642 1,499
Automobiles 104 104
-----------------------------
Total cost 4,231 3,899
Accumulated depreciation (1,799) (1,678)
-----------------------------
Net $2,432 $2,221
=============================
NOTE 5 -- DEPOSITS
JUNE 30 1999 1998
- ------------------------------------------------------------------------------
Demand deposits $ 13,600 $ 12,453
Savings deposits 7,625 8,836
Certificates and other time deposits
of $100,000 or more 40,626 35,181
Other certificates and time deposits 92,137 88,411
-----------------------------
Total deposits $153,988 $144,881
=============================
Certificates and other time deposits maturing in years ending June 30
2000 $ 94,766
2001 30,638
2002 1,724
2003 2,520
2004 2,995
Thereafter 120
---------------
$132,763
===============
32
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 6 -- SHORT-TERM BORROWINGS AND LINE OF CREDIT
In 1999 and 1998, the Company had available a 90-day revolving line of credit up
to a maximum of $10,000,000 and $13,000,000. The line of credit bears interest
at a daily variable rate which is set by the Federal Home Loan Bank.
At June 30, 1999 and 1998, the Company had drawn $6,500,000 on the line of
credit.
This line of credit is collateralized by FHLB stock and single-family first
mortgage loans with aggregate principal balances totaling 150% of the
outstanding amount.
NOTE 7 -- LONG-TERM DEBT
1999 1998
- --------------------------------------------------------------------------------
Federal Home Loan Bank advances, variable
rates, due at various dates through January 2009 $10,598 $5,662
These advances are collateralized by FHLB stock and single-family first mortgage
loans with aggregate principal balances totaling 150% of the outstanding amount
of advances. Advances are subject to restrictions or penalties in the event of
prepayment.
Maturities in years ending June 30
2000 $ 69
2001 75
2002 82
2003 88
2004 94
Thereafter 10,190
-----------------
$10,598
=================
33
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 8 -- INCOME TAX
YEAR ENDED JUNE 30 1999 1998 1997
- --------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $496 $765 $523
State 26 53 39
Deferred
Federal 119 (35) 27
State 16 8 2
--------------------------------------
Total income tax expense $657 $791 $591
======================================
Reconciliation of federal statutory
to actual tax expense
Federal statutory income tax at 34% $645 $780 $554
Effect of state income taxes 28 40 27
Other (16) (29) 10
--------------------------------------
Actual tax expense $657 $791 $591
======================================
34
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
A cumulative net deferred tax asset (liability) is included in other assets
(liabilities). The components of the asset (liability) are as follows:
JUNE 30 1999 1998
- --------------------------------------------------------------------------------
ASSETS
Deferred compensation $299 $127
Allowance for loan losses 4
Unrealized gain on securities available for sale 406
----------------------
Total assets 705 131
----------------------
LIABILITIES
Basis in FHLB stock (276) (243)
Allowance for loan losses (88)
Unrealized loss on investment securities
available for sale (59)
Other (27) (8)
----------------------
Total liabilities (391) (310)
----------------------
$314 $(179)
======================
Retained earnings include approximately $2,096,000 for which no deferred income
tax liability has been recognized. This amount represents an allocation of
income to bad debt deductions as of June 30, 1988 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses
including redemption of bank stock of excess dividends, or loss of "bank"
status, would create income for tax purposes only, which income would be subject
to the then-current corporate income tax rate. At June 30, 1999, the unrecorded
deferred income tax liability on the above amount was approximately $800,000.
35
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 9 -- OTHER COMPREHENSIVE INCOME--UNREALIZED GAINS (LOSSES) ON SECURITIES
<TABLE>
<CAPTION>
1999
-----------------------------------------------------
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
YEAR ENDED JUNE 30 AMOUNT BENEFIT AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the year $(1,275) $462 $(813)
Less: reclassification adjustment for gains (losses)
realized in net income 7 (3) 4
-----------------------------------------------------
Other comprehensive income--net unrealized
gains (losses) on securities $(1,282) $465 $(817)
=====================================================
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
YEAR ENDED JUNE 30 AMOUNT BENEFIT AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the year $190 $(60) $130
Less: reclassification adjustment for gains (losses)
realized in net income 13 (4) 9
-----------------------------------------------------
Other comprehensive income--net unrealized
gains (losses) on securities $177 $(56) $121
=====================================================
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
YEAR ENDED JUNE 30 AMOUNT BENEFIT AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the year $250 $(84) $166
Less: reclassification adjustment for gains (losses)
realized in net income 10 (3) 7
-----------------------------------------------------
Other comprehensive income--net unrealized
gains (losses) on securities $240 $(81) $159
=====================================================
</TABLE>
36
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 10 -- COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Banks' exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making such commitments
as it does for instruments that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of June 30
were as follows:
1999 1998
---------------------------------
Commitments to extend credit $1,788 $10,127
Commitments to purchase investments 1,436
Standby letters of credit 226 360
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
The Company has entered into change in control agreements with two of its
executive officers which provide for the continuation of salary and certain
benefits for a specified period of time under certain conditions.
The Company and subsidiary are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Company.
37
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 11 -- YEAR 2000
Like all entities, the Company is exposed to risks associated with the Year 2000
Issue, which affects computer software and hardware; transactions with
customers, vendors, and other entities; and equipment dependent upon microchips.
The Company has begun, but not yet completed, the process of identifying and
remediating potential Year 2000 problems. It is not possible for any entity to
guarantee the results of its own remediation efforts or to accurately predict
the impact of the Year 2000 Issue on third parties with which the Company does
business. If remediation efforts of the Company or third parties with which the
Company does business are not successful, the Year 2000 Issue could have
negative effects on the Company's financial condition and results of operations
in the near term.
The Company has not estimated the ultimate cost of addressing the Year 2000
Issue. It is reasonably possible that the Company's belief that it will recover
the carrying amount of certain existing hardware and software could change
materially in the near term as a result of the Company's Year 2000 resolution
decisions.
NOTE 12 -- DIVIDENDS AND CAPITAL RESTRICTIONS
Without prior approval, current regulations allow the Bank to pay dividends to
the Company not exceeding net income for the current year plus those for the
preceding two years. The Bank normally restricts dividends to a lesser amount
because of the need to maintain an adequate capital structure.
NOTE 13 -- REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, Tier 1 capital, and
Tier 1 leverage ratios. The ratios are intended to measure capital relative to
assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At June 30, 1999 and 1998, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since June 30, 1999 that
management believes have changed the Bank's classification.
38
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL* CAPITALIZED*
-------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------------------------------------
AS OF JUNE 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital* (to risk-
weighted assets) $17,694 22% $6,612 8.00% $ 8,265 10.00%
Core capital* (to adjusted tangible
assets) 17,138 9 7,631 4.00 11,447 6.00
Core capital* (to adjusted total assets) 17,138 9 7,631 4.00 9,539 5.00
AS OF JUNE 30, 1998
Total risk-based capital* (to risk-
weighted assets) $16,727 23% $5,943 8.00% $7,429 10.00%
Core capital* (to adjusted tangible
assets) 16,040 9 7,023 4.00 10,534 6.00
Core capital* (to adjusted total assets) 16,040 9 7,023 4.00 8,778 5.00
</TABLE>
*As defined by regulatory agencies
The Bank's tangible capital at June 30, 1999 was $17,138,000 which amount was 9%
of tangible assets and exceeded the required ratio of 1.5%.
NOTE 14 -- STOCKHOLDERS' EQUITY
On June 15, 1997, the Board of Directors declared a 5-for-3 stock split, which
was paid on June 30, 1997. All share data has been adjusted to reflect the stock
split.
NOTE 15 -- EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company is a participant in a pension fund known as The Pentegra Group
(formerly the Financial Institutions Retirement Fund). This plan is a
multi-employer plan; separate actuarial valuations are not made with respect to
each participating employer. According to The Pentegra Group, the market value
of the fund's assets exceed the value of vested benefits in the aggregate as of
June 30, 1998, the most recent valuation date. There is no unfunded liability
for past service. Plan benefits are fully vested after five years of service and
are based on an employee's years of service and a percentage of the employee's
average salary, using the five highest consecutive years preceding retirement.
The Bank's funding policy is to make contributions to the plan equal to the
amount accrued as pension expense. The Bank incurred no expense for the years
ended June 30, 1999, 1998 or 1997.
39
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
EMPLOYEE STOCK OWNERSHIP PLAN
The Bank has an Employee Stock Ownership Plan (ESOP) for the benefit of
participating employees. Generally, all employees age 21 or older are eligible
to participate upon completion of one year of service. The Bank accounts for its
ESOP in accordance with Emerging Issues Task Force (EITF) Issue No. 89-8. ESOP
cash contributions and ESOP expense accrued during the year are determined by
several factors including the number of shares allocated to participants, ESOP
debt service and dividends on unallocated shares. Dividends on allocated and
unallocated shares are used to retire ESOP debt.
The ESOP borrowed $505,890 from the Company to purchase 84,314 shares of HFB
Financial Corporation common stock. The loan, secured by the stock, bears
interest at a rate of prime plus 1% and matures in the year 2002. Principal and
interest payments are made monthly. The Bank's contributions for 1999, 1998, and
1997 were $41,545, $83,877 and $82,955, of which $31,738, $61,715 and $67,030
was charged to operations. For 1999, 1998, and 1997, the portions eliminated in
consolidation were $1,060, $7,914 and $15,925. ESOP expense is determined by the
shares allocated method. The number of shares released is determined by taking
the number of shares before the allocation for the current plan year and
multiplying by a fraction. The numerator of the fraction is the amount of
principal and interest paid on the loan for that plan year. The denominator of
the fraction is the sum of the numerator plus the total payments of principal
and interest on that loan projected to be paid for all future plan years. For
this purpose, the interest to be paid in future years is to be computed by using
the interest rate in effect as of the current allocation date. Both allocated
and unallocated shares are considered outstanding when computing earnings per
share. At June 30, 1999, the ESOP paid off the remaining balance of the loan and
all shares were allocated to participants.
MANAGEMENT RECOGNITION PLAN
The objective of the Bank's Management Recognition Plan (MRP) is to enable the
Bank to retain executive personnel of experience and ability in key positions of
responsibility. Under the plan, 20,475 shares of HFB Financial Corporation
common stock were issued to the MRP Trust and were payable over a three-year
period, at the rate of 33 1/3% of such shares per year, following the date of
the grant or award. Compensation expense in the amount of the fair market value
at the award date of the common stock was recognized pro rata over the three
years (1995, 1996 and 1997) during which the shares vest. All shares in the MRP
Trust have been awarded to the President of the Bank. The MRP expense was
$11,360 for 1997. There was no expense recognized in 1999 and 1998. In 1998 and
1997, 1,166 and 3,383 shares were paid to the President of the Bank.
40
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The objective of the Bank's Supplemental Retirement Plan (SERP) is to provide
selected senior officers with postretirement benefits which will (i) enable a
targeted level of retirement income to be met, (ii) provide certain
preretirement death benefits should the covered executive die prior to
retirement age and (iii) compensate for the inability to earn full ESOP benefits
due to the senior officer's anticipated retirement before the Bank's ESOP loan
is repaid. Under the plan, 15,658 shares of HFB Financial Corporation common
stock were issued to the SERP Trust and were payable upon completion of the
earlier of five years of service or when the recipient's employment terminates
due to retirement at or after age 65. Compensation expense in the amount of the
fair market value at the award date of the common stock was being recognized pro
rata over four years to the projected retirement date of the recipient. All
shares in the SERP Trust have been awarded to the former Chairman of the Board
of the Bank. The SERP expense was $14,364 for 1997. There was no expense
recognized in 1999 or 1998. The shares awarded under this plan were fully paid
in 1998.
DEFERRED COMPENSATION AGREEMENTS (RABBI TRUSTS)
Prior to its conversion, the Bank maintained an unfunded deferred compensation
plan for members of the Board of Directors who elected to participate in any one
year. Benefits were payable upon a participating director's retirement,
resignation, disability or death unless the plan committee permitted earlier
distributions in the event of a participant's emergency or necessity. The Bank
established individual grantor trusts (Rabbi trusts) for each director who had
deferred compensation, contributed funds sufficient to equal the deferred fees
for each director and purchased a total of 37,061 shares of HFB Financial
Corporation common stock at its conversion date. The assets of the individual
Rabbi trusts are available to the general creditors of the Bank in the event of
the Bank's insolvency. In 1994, the Bank adopted a new Deferred Compensation
Agreement for the directors similar to the old agreement. All deferred payments
are paid to these same Rabbi trusts.
The Rabbi trusts purchased an additional 2,700, 1,600 and 1,666 shares at a
total cost of $48,600, $29,800 and $25,000 in 1999, 1998 and 1997. A total of
1,392 shares were distributed to a trust beneficiary in 1998. The Bank's
liability at June 30, 1999 and 1998 for both plans was $808,870 and $328,887.
Deferred amounts are included in accrued expenses and other liabilities. The
stock in the grantor trusts is shown as a contra-capital account until
distributed to the directors over a five-year period beginning at their
retirement, resignation or death. The amount charged to expense was $45,008,
$33,047 and $21,509 for 1999, 1998 and 1997.
Effective September 30, 1998, the Company implemented Emerging Issues Tasks
Forces (EITF) 97-14, Accounting for Deferred Compensation Agreements Where
Amounts Earned Are Held in a Rabbi Trust and Invested. This EITF requires that
deferred compensation obligation arrangements where amounts earned by an
employee are invested in the stock of the employer and placed in a "rabbi trust"
be recorded as a liability at the fair value of the Company shares held rather
than at original acquisition cost as has previously been the case. The EITF
allowed for a transition adjustment of the excess of the September 30, 1998 fair
value over the original cost of Company shares owned to be recorded, net of tax,
as a one-time adjustment. This transition adjustment amounted to $552,400
($371,815 net of tax) at September 30, 1998, and was reduced to $449,400
($286,460 net of tax) at June 30, 1999. All future increases/decreases in the
deferred compensation liability will be recognized in income.
41
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 16 -- STOCK OPTION PLAN
The Company has an incentive stock option plan in which 120,450 shares have been
reserved for future issuance by the Company to directors and employees of the
Company and its subsidiary. The plan provides for a term of ten years, after
which no awards may be made, unless earlier terminated by the Board of
Directors. At June 30, 1994, options to purchase 108,148 shares had been
granted, with 102,127 shares at $10 per share and 6,021 shares at $14 per share.
Under the Company's incentive stock option plan, which is accounted for in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, and related interpretations, the Company grants
selected executives and other key employees stock option awards which vest and
become fully exercisable immediately. During 1997, the Company authorized the
grant of options for up to 9,995 shares of the Company's common stock. The
exercise price of each option, which has a ten-year life, was equal to the
market price of the Company's stock on the date of grant; therefore, no
compensation expense was recognized.
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated using an option-pricing model with the following
assumptions:
1997
----------
Risk-free interest rate 6%
Dividend yield 2.5%
Volatility factor of expected market price of common stock 11%
Weighted-average expected life of the options 8 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement were not materially different from those presented on the
consolidated statement of income.
42
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the years ended June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
OPTIONS SHARES PRICE Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 38,848 $7.07 44,869 $6.93 81,255 $ 6.00
Granted 9,995 12.90
Exercised (11,337) 6.00 (6,021) (6.00) (42,408) 6.65
Forfeited/expired (3,973) 6.00
Outstanding, end of year 27,511 7.51 38,848 7.07 44,869 6.93
Options exercisable at year end 27,511 7.51 38,848 7.07 44,869 6.93
Weighted-average fair value of options
granted during the year $2.86
</TABLE>
As of June 30, 1999, the 27,511 options outstanding have exercise prices ranging
from $6.00 to $12.90 and a weighted-average remaining contractual life of four
years.
43
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 17 -- EARNINGS PER SHARE
Earnings per share were computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
-----------------------------------------------------
WEIGHTED PER
AVERAGE SHARE
INCOME SHARES AMOUNT
-----------------------------------------------------
<S> <C> <C> <C>
NET INCOME $1,240
==================
BASIC EARNINGS PER SHARE
Income available to common stockholders $1,240 1,095,517 $1.13
EFFECT OF DILUTIVE SECURITIES
Stock options 10,523
-----------------------------------------------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $1,240 1,106,040 $1.12
=====================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
-----------------------------------------------------
Weighted Per
Income Average Share
Shares Amount
-----------------------------------------------------
<S> <C> <C> <C>
NET INCOME $1,503
==================
BASIC EARNINGS PER SHARE
Income available to common stockholders $1,503 1,083,866 $1.39
EFFECT OF DILUTIVE SECURITIES
Stock options 28,882
-----------------------------------------------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversion $1,503 1,112,748 $1.35
=====================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
-----------------------------------------------------
Weighted Per
Income Average Share
Shares Amount
-----------------------------------------------------
<S> <C> <C> <C>
NET INCOME $1,038
==================
BASIC EARNINGS PER SHARE
Income available to common stockholders $1,038 1,057,642 $ .98
EFFECT OF DILUTIVE SECURITIES
Stock options 19,423
-----------------------------------------------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversion $1,038 1,077,065 $ .96
=====================================================
</TABLE>
44
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 18 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS--The fair value of cash and cash equivalents
approximates carrying value.
TRADING ACCOUNT AND INVESTMENT SECURITIES--Fair values are based on quoted
market prices.
LOANS--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair values for certain mortgage loans, including one-to-four family
residential, are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. The fair value for other loans is estimated using discounted
cash flow analyses using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE--The fair values of interest receivable/payable
approximate carrying values.
FHLB STOCK--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
DEPOSITS--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt.
OFF-BALANCE-SHEET COMMITMENTS--Commitments include commitments to purchase and
originate mortgage loans, commitments to sell mortgage loans, and standby
letters of credit and are generally of a short-term nature. The fair value of
such commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing. The carrying amounts of these commitments,
which are immaterial, are reasonable estimates of the fair values of these
financial statements.
45
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------
CARRYING FAIR Carrying Fair
JUNE 30 AMOUNT VALUE Amount Value
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,573 $ 3,573 $ 6,947 $ 6,947
Trading account securities 1,015 1,015 835 835
Investment securities available for sale 37,299 37,299 26,905 26,905
Investment securities held to maturity 21,998 21,508 20,547 20,625
FHLB stock 1,347 1,347 1,256 1,256
Loans, net 120,742 123,977 116,171 118,665
Interest receivable 1,822 1,822 1,408 1,408
LIABILITIES
Deposits 153,988 154,010 144,881 146,517
Short-term borrowings 6,500 6,500 6,500 6,496
Long-term debt 10,598 10,988 5,662 5,667
Interest payable 733 733 581 581
</TABLE>
46
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 19 -- CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position,
results of operations and cash flows for the Company:
CONDENSED BALANCE SHEET
JUNE 30 1999 1998
- -------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 184 $ 414
Account receivable--subsidiary 500
Trading assets, at fair value 1,015 835
Loan to ESOP 42
Investment in common stock of subsidiaries 16,452 16,171
Other assets 100 25
---------------------------
Total assets $17,751 $17,987
===========================
STOCKHOLDERS' EQUITY $17,751 $17,987
===========================
47
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENT OF INCOME
YEAR ENDED JUNE 30 1999 1998 1997
- --------------------------------------------------------------------------------
INCOME
Dividends from subsidiary $ 950 $ 620
Net gain (loss) on trading securities $ (141) 159 307
Other income 27 28 27
---------------------------------
Total income (114) 1,137 954
EXPENSES
Other expenses 51 64 30
---------------------------------
INCOME BEFORE INCOME TAX AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARY (165) 1,073 924
INCOME TAX EXPENSE (BENEFIT) (71) 54 108
---------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY (94) 1,019 816
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 1,334 484 222
---------------------------------
NET INCOME $1,240 $1,503 $1,038
=================================
48
<PAGE>
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $1,240 $1,503 $1,038
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed earnings of subsidiary (1,334) (484) (222)
Amortization of cost of ESOP and MRP 42 185 104
Net change in
Account receivable--subsidiary 500 (452) (36)
Trading account securities (180) (39) (549)
Other assets and other liabilities (75) (50) (51)
Other 1 (156)
-----------------------------------------------------
Net cash provided by operating activities 194 507 284
-----------------------------------------------------
INVESTING ACTIVITIES--Principal collected on loan to ESOP 42 83 84
-----------------------------------------------------
FINANCING ACTIVITIES
Sale of common stock 68 36 282
Cash paid in lieu of fractional shares (5)
Purchase of stock (205)
Other (30) (25)
Stock purchased by Rabbi trusts (49)
Common stock withdrawn from Rabbi trusts 8
Cash dividends (493) (466) (414)
-----------------------------------------------------
Net cash used by financing activities (466) (460) (367)
-----------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (230) 130 1
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 414 284 283
-----------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 184 $ 414 $ 284
=====================================================
</TABLE>
49
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
HFB Financial Corporation
Middlesboro, Kentucky
We have audited the consolidated balance sheet of HFB Financial Corporation and
subsidiary as of June 30, 1999 and 1998, and the related consolidated statements
of income, changes in stockholders' equity, and cash flows for each of the three
years in the period ended June 30, 1999. 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 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 described above present
fairly, in all material respects, the consolidated financial position of HFB
Financial Corporation and subsidiary as of June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, the Company
changed its method of accounting for deferred compensation agreements (Rabbi
Trusts) during the year ended June 30, 1999.
OLIVE LLP
Evansville, Indiana
July 23, 1999
50
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
<S> <C> <C>
ROBERT V. COSTANZO FRANK W. LEE FRANCES COFFEY RASNIC
Chairman of the Board of Retired Pharmacist Vice-President
the Bank and the Company Lee's Drug Store Coffey Funeral Home
E. W. NAGLE CHARLES A. HARRIS EARL BURCHFIELD
Vice Chairman of the Bank Independent Insurance Agent Retired Publisher of
and a Director of the Company Harris Insurance Agency Middlesboro Daily News
DAVID B. COOK
President, Chief Executive
Officer and Director of the
Bank and the Company
EXECUTIVE OFFICERS
DAVID B. COOK STANLEY ALEXANDER, JR.
President and Chief Executive Chief Financial Officer
Officer
OFFICE LOCATIONS
MAIN OFFICE BRANCH OFFICE BRANCH OFFICE
1602 Cumberland Avenue Village Center 500 Fifth Avenue
Middlesboro, Kentucky Harlan, Kentucky New Tazewell, Tennessee
GENERAL INFORMATION
INDEPENDENT CERTIFIED ANNUAL MEETING ANNUAL REPORT ON FORM 10-KSB
PUBLIC ACCOUNTANTS The 1999 Annual Meeting of Stockholders A copy of the Company's Annual Report on
Olive LLP will be held on October 19, 1999 at 2:00 Form 10-KSB for the fiscal year ended
20 N. W. Third Street p.m. June 30, 1999, as filed with the
Evansville, Indiana 47708 at the Pine Mountain State Resort Securities and Exchange Commission, will
Park, Pineville, Kentucky. be furnished without charge to
stockholders as of the record date for
GENERAL COUNSEL TRANSFER AGENT AND REGISTRAR the 1999 Annual Meeting upon written
Joseph Coker Reliance Trust Company request to the Chief Financial Officer,
P. O. Box 134 950 East Paces Ferry Road HFB Financial Corporation, 1602
Jacksboro, Tennessee 37757 Suite 2840 Cumberland Avenue, Middlesboro, Kentucky.
Atlanta, Georgia 30326
SPECIAL COUNSEL
Kutak Rock
Suite 1000
1101 Connecticut Ave., N.W.
Washington, D.C. 20036-4374
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
HFB Financial Corporation
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Percentage
Subsidiaries (1) Incorporation Ownership
- ---------------- ------------- ---------
<S> <C> <C>
Home Federal Bank, Federal Savings Bank United States 100%
Subsidiary of Home Federal Bank, Federal Savings Bank
- -----------------------------------------------------
Home Service Corporation Kentucky 100%
</TABLE>
- ---------------
(1) The assets, liabilities and operations of the subsidiary are included
in the consolidated financial statements contained in the Annual Report
to Stockholders attached hereto as an exhibit.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000892157
<NAME> HFB Financial Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,553,021
<INT-BEARING-DEPOSITS> 20,118
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,014,808
<INVESTMENTS-HELD-FOR-SALE> 37,298,664
<INVESTMENTS-CARRYING> 21,997,870
<INVESTMENTS-MARKET> 21,508,000
<LOANS> 121,953,392
<ALLOWANCE> 1,211,594
<TOTAL-ASSETS> 190,416,400
<DEPOSITS> 153,987,756
<SHORT-TERM> 6,500,000
<LIABILITIES-OTHER> 1,580,096
<LONG-TERM> 10,597,701
0
0
<COMMON> 4,935,728
<OTHER-SE> 12,815,319
<TOTAL-LIABILITIES-AND-EQUITY> 190,416,400
<INTEREST-LOAN> 10,029,733
<INTEREST-INVEST> 3,343,921
<INTEREST-OTHER> 184,062
<INTEREST-TOTAL> 13,557,716
<INTEREST-DEPOSIT> 7,206,451
<INTEREST-EXPENSE> 8,017,757
<INTEREST-INCOME-NET> 5,539,959
<LOAN-LOSSES> 252,876
<SECURITIES-GAINS> 7,122
<EXPENSE-OTHER> 3,714,529
<INCOME-PRETAX> 1,896,792
<INCOME-PRE-EXTRAORDINARY> 1,896,792
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,240,289
<EPS-BASIC> 1.13
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 3.09
<LOANS-NON> 1,416,000
<LOANS-PAST> 526,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 973,000
<CHARGE-OFFS> 16,000
<RECOVERIES> 2,000
<ALLOWANCE-CLOSE> 1,212,000
<ALLOWANCE-DOMESTIC> 1,212,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
