<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended June 30, 1997, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
_____________
Commission file number 1-13826
THREE RIVERS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
DELAWARE 38-3235452
- ---------------------------------------------- -----------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
123 PORTAGE AVENUE, THREE RIVERS, MICHIGAN 49093
- ---------------------------------------------- -----------------------------
(Address of Principal Executive Offices) (Zip Code)
(616) 279-5117
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject, to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X]
State issuer's revenues for its most recent fiscal year. $7,323,460
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As of September 22, 1997, there were issued and outstanding 823,540 shares
of the registrant's common stock.
The issuer's voting stock trades on the American Stock Exchange under the
symbol "THR." The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing sale price of the
registrant's common stock on September 22, 1997, was $11,233,186 ($16.25 per
share based on 691,273 shares of common stock outstanding).
Transitional Small Business Disclosure Format
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1997. (Parts I and II).
2. Portions of the Definitive Proxy Statement relating to the Annual Meeting
of Stockholders. (Part III)
<PAGE> 2
PART I
ITEM 1. BUSINESS
BUSINESS OF THE COMPANY
Three Rivers Financial Corporation (the "Company"), a Delaware
corporation, was formed at the direction of First Savings Bank, A Federal
Savings Bank (the "Bank"), for the purpose of becoming a holding company for the
Bank as part of the Bank's conversion from the mutual to the stock form of
organization (the "Conversion"). The Bank completed the Conversion on August 23,
1995, and the Company acquired all of the capital stock of the Bank.
The Company is classified as a unitary savings and loan holding company
subject to regulation by the Office of Thrift Supervision ("OTS"). As a unitary
savings and loan holding company, the Company is generally not restricted in the
types of activities in which the Company may engage provided the Bank maintains
a specified amount of assets in housing-related investments. To date, the
Company has not conducted any significant activity other than manage its
investment in the Bank and invest the net proceeds retained by the Company in
connection with the Conversion.
BUSINESS OF THE BANK
The Bank was formed in 1886 as a Michigan-chartered mutual savings and
loan association. In 1933, the Bank became a member of the Federal Home Loan
Bank ("FHLB") of Indianapolis and in 1939 obtained federal deposit insurance.
The Bank converted to a federal mutual savings bank in 1987 and adopted its
present name. The Bank operates through four full service offices in Three
Rivers (two offices), Schoolcraft, and Union, Michigan.
The Bank's deposits are insured by the Savings Association Insurance
Fund ("SAIF") as administered by the Federal Deposit Insurance Corporation
("FDIC") up to applicable limits for each depositor. The Bank is subject to
comprehensive examination, supervision and regulation by the OTS and the FDIC.
Such regulation is intended primarily for the protection of depositors.
The Bank is principally engaged in the business of accepting deposits
from the general public through a variety of deposit programs and investing
those deposits together with other funds in originating loans secured by
one-to-four family residential properties located in its market area, loans
secured by multi-family residential and commercial properties, construction
loans, second mortgage loans on single-family residences, home equity lines of
credit, and secured and unsecured consumer loans, including loans secured by
savings accounts.
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MARKET AREA AND COMPETITION
The Bank considers its primary market area to consist of St. Joseph and
Cass Counties, Michigan and the southwest portion of Kalamazoo County, Michigan.
Management believes that most of the Bank's depositors and borrowers are
residents of these counties. The Bank's primary market area has an agricultural
and diversified industrial economic base (which includes the cyclical automobile
industry), with an emphasis on the production sector that includes major
manufacturers of international scope. Moreover, the distribution sector,
primarily in the wholesale and retail trades, constitutes a substantial portion
of the area's economy in terms of product mix, sales receipts and employment.
Large local employers include American Axle (automotive), Johnson Corporation
(steam specialties), Dutch Housing (manufactured housing), Lear Siegler
(refrigeration equipment) and Ross Laboratories (pharmaceuticals).
The Bank experiences competition both in attracting and retaining
savings deposits and in the making of mortgage and other loans. Direct
competition for savings deposits in the Bank's market area comes from one
savings institution, two credit unions, and three commercial banks which have
offices in its market area. Significant competition for the Bank's other deposit
products and services come from money market mutual funds, brokerage firms, and
insurance companies. 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 the origination of real estate loans
primarily comes from other financial institutions and mortgage companies.
LENDING ACTIVITIES
General. The Bank's primary lending activity is the origination of
conventional mortgage loans for the purpose of constructing, purchasing, or
refinancing owner-occupied one-to-four family residential properties in its
primary market area. To a lesser extent, the Bank originates multi-family
residential, commercial real estate, and church loans. The Bank also originates
consumer loans.
The Bank has sought to build an interest rate sensitive loan portfolio
by originating adjustable rate mortgage ("ARM") loans and five-year balloon
mortgage loans. The Bank is also involved to a limited extent in the origination
of fixed-rate mortgage loans on owner-occupied, single-family residential
properties. As of June 30, 1997, 71.26% of the mortgage loan portfolio was
comprised of ARM loans. The Bank's ARM loans have an interest rate that adjusts
periodically based on the 1- or 3-year U.S. Treasury index. The interest rates
on these loans have an initial adjustment period of one or three years, with a
maximum adjustment of 2% per year and 6% over the life of the loan. All ARM
loans originated by the Bank are retained in the Bank's loan portfolio.
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Loan Portfolio Composition: The following information presents the
composition of the Bank's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowance for loan losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
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1997 1996
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Amount Percent Amount Percent
-------------- ------------ -------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family $42,945 67.35% $37,007 63.51%
Secured by other real estate1 6,210 9.74 7,051 12.10
Construction loans 3,453 5.41 4,136 7.09
------- ------ ------- ------
Total real estate loans 52,608 82.50 48,194 82.70
Other Loans:
Consumer Loans:
Automobile 2,758 4.33 2,642 4.53
Home equity 2,585 4.05 2,410 4.14
Other 3,768 5.91 3,587 6.16
------- ------ ------- ------
Total consumer loans 9,111 14.29 8,639 14.83
------- ------ ------- ------
Commercial business loans 2,047 3.21 1,439 2.47
Total other loans 11,158 17.50 10,078 17.30
------- ------ ------- ------
Total loans 63,766 100.00% 58,272 100.00%
====== ======
Less:
Loans in process (undisbursed) 1,089 1,493
Unearned discounts 6 9
Deferred origination fees 371 286
Allowance for loan losses 487 441
------- -------
Total loans receivable, net $61,813 $56,043
======= =======
</TABLE>
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1 Includes multi-family and commercial real estate.
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The following table sets forth certain information at June 30, 1997,
regarding the net dollar amount of loans maturing in the Bank's portfolio, based
on contractual terms to maturity. The table does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------------------------
Secured by Other Consumer and Commercial
One- to-four family Real Estate 2 Construction Business Total
------------------- ------------------ ------------------ ------------------------ --------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in thousands)
Due During Years
Ending June 30,
- ---------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1 $ 269 8.01% $ 665 9.00% $ 3,453 9.46% $ 2,375 9.39% $ 6,762 9.34%
1999 294 8.59 922 8.52 -- --.-- 710 9.36 1,926 8.84
2000 650 8.49 67 9.65 -- --.-- 1,267 9.51 1,984 9.18
2001 and 2002 674 8.31 846 8.99 -- --.-- 3,677 9.20 5,197 9.05
2003 to 2005 2,601 8.63 427 9.60 -- --.-- 1,044 10.29 4,072 9.16
2006 to 2020 20,388 8.45 2,895 9.44 -- --.-- 2,085 10.12 25,368 8.70
2021 and following 18,069 7.94 388 8.50 -- --.-- -- --.-- 18,457 7.95
------- ------ --------- ------- -------
$42,945 8.24% $6,210 9.15% $ 3,453 9.46% $11,158 9.56% $63,766 8.13%
======= ==== ====== ==== ========= ===== ======= ===== ======= ====
</TABLE>
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1 Includes demand loans, loans having no stated maturity and overdraft loans.
2 Includes multi-family and commercial real estate.
The total amount of loans due after June 30, 1998 which have
predetermined or fixed interest rates is $16.2 million, while the total amount
of loans due after such date which have floating or adjustable interest rates is
$40.8 million.
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Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. In
addition, "due-on-sale" clauses in mortgage loans generally give the Bank the
right to declare a loan due and payable in the event, among other things, that a
borrower sells the real property subject to the mortgage and the loan is not
repaid. Due-on-sale clauses are a means of increasing the rate on existing
mortgage loans during periods of rising interest rates and increasing the
turnover of mortgage loans in the Bank's portfolio. The average life of mortgage
loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and tends to decrease
when current mortgage loan market rates are substantially lower than rates on
existing mortgage loans.
One-to-Four Family Real Estate Lending. The primary emphasis of the
Bank's lending activity is the origination and, to a lesser extent, the purchase
of loans secured by first mortgages on owner-occupied, one-to-four family
residential properties. At June 30, 1997, $42.9 million or 67.4% of the Bank's
gross loan portfolio consisted of loans secured by one-to-four family
residential real properties which were owner-occupied, single-family residences
primarily located in the Bank's market area.
The Bank offers fixed-rate mortgages with 15 to 30 year terms.
Fixed-rate loans are made only on single family, owner occupied homes. The Bank
also originates loans on condominiums, duplex dwellings and town homes in its
market area. The Bank generally sells its fixed-rate loans in the secondary
market, with servicing retained.
The Bank offers residential ARMs, all of which are tied to the 1 or 3
year U.S. Treasury index. The ARMs' adjustment periods are either one or three
years, with interest rate adjustments of not more than 2% per year and a limit
on adjustments over the life of the loan of not more than 6%. The Bank's
residential ARM loans are for terms of up to 30 years, amortized on a monthly
basis, with principal and interest due each month. Residential real estate loans
often remain outstanding for significantly shorter periods than their
contractual terms. Borrowers may refinance or prepay loans at their option
without penalty. The Bank offers five and seven year fixed-rate mortgage
products with 30 year amortization schedules that convert to one year ARMs at
the end of the term. The Bank also offers three, five and ten-year balloon
mortgages with amortization periods of 10 to 30 years. These loans are
considered to be a declining part of the loan portfolio and are not considered
to be a significant risk.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 95% of the
lesser of the appraised value or purchase price. When the Bank makes a loan in
excess of 80% of the appraised value or purchase price, private mortgage
insurance is required for at least the amount of the loan in excess of 80% of
the appraised value. The maximum loan-to-value ratio on mortgage loans secured
by non-owner- occupied properties and/or used for refinancing purposes is
generally 70%.
The retention of ARM loans in the Bank's portfolio helps reduce the
Bank's exposure to changes in interest rates. However, there are unquantifiable
credit risks resulting from potential increased costs to the borrower as a
result of repricing of adjustable-rate mortgage loans. It is possible that
during periods of rising interest rates, the risk of default on adjustable-rate
mortgage
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loans may increase due to the upward adjustment of interest cost to the
borrower. Further, although adjustable-rate mortgage loans allow the Bank to
increase the sensitivity of its asset base to changes in interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime
interest rate adjustment limitations. Accordingly, there can be no assurance
that yields on the Bank's adjustable-rate mortgages will adjust sufficiently to
compensate for increases, if any, in the Bank's cost of funds. The Bank intends
to continue actively monitoring the interest rate environment, prepayment
activity, interest rate risk and other factors in developing its strategy with
respect to the volume and pricing of its fixed-rate loans and in its lending
activities generally.
Construction Lending. The Bank engages in construction lending
involving loans to qualified borrowers for construction of one-to-four family
residential and commercial properties, with the intent of such loans converting
to permanent financing upon completion of construction. These properties are
primarily located in the Bank's market area. At June 30, 1997, the Bank's loan
portfolio included $3.4 million of loans secured by properties under
construction, all of which were construction/permanent loans structured to
become permanent loans upon the completion of construction and none of which was
an interim construction loan structured to be repaid in full upon completion of
construction and receipt of permanent financing. All construction loans are
secured by a first lien on the property under construction. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
Construction/permanent loans may have either adjustable or fixed interest rates
and are underwritten in accordance with the same terms and requirements as the
Bank's permanent mortgages. Construction/permanent loans generally provide for
disbursement in stages during a construction period of up to six months, during
which period the borrower is not required to make monthly payments. Accrued
interest must be paid at completion of construction and regular monthly payments
begin one month from the date the loan is converted to permanent financing.
Borrowers must also execute a Construction Loan Agreement with the Bank.
Construction financing generally is considered to involve a higher
degree of risk of loss than one-to-four family residential mortgage lending.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value that is insufficient to assure full repayment. The
ability of a developer to sell developed lots or completed dwelling units will
depend on, among other things, demand, pricing, availability of comparable
properties and economic conditions. The Bank has sought to minimize this risk by
limiting construction lending to qualified borrowers in the Bank's market area
and by limiting the aggregate amount of outstanding construction loans.
Multi-Family and Commercial Real Estate Lending. The multi-family and
commercial real estate loans originated by the Bank have generally been made to
individuals, small businesses and partnerships and have primarily been secured
by first mortgages on retail and office buildings, manufacturing facilities,
churches, and other properties. The Bank benefits from originating such loans
due to the higher origination fees and interest rates, as well as shorter terms
to maturity, than
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<PAGE> 8
can be obtained on one-to-four family residential mortgage loans. The Bank also
purchases participations in commercial loans originated by other financial
institutions. The Bank's multi-family residential and commercial real estate
loans generally have terms of 20 years or less, have adjustable rates, and have
loan-to-value ratios not exceeding 75%. At June 30, 1997, loans on multi-family
and commercial real estate properties constituted approximately $6.2 million, or
9.7%, of the Bank's gross loan portfolio.
Multi-family and commercial real estate lending entails significant
additional risks as compared to one-to-four family residential lending. Such
loans typically involve large loan amounts to a single borrower or group of
related borrowers. In addition, the payment experience on such loans is
typically dependent on the successful operation of the project, and these risks
can be significantly affected by the supply and demand conditions in the market
for commercial property and multi-family residential units. To minimize these
risks, the Bank generally limits itself to its market area and to borrowers with
which it has substantial experience or who are otherwise well known to the Bank.
It is the Bank's current practice to obtain personal guarantees and current
financial statements from all principals obtaining commercial real estate loans.
Substantially all of the properties securing the Bank's commercial real estate
loans are inspected by the Bank's lending personnel before the loan is made. The
Bank also obtains appraisals on each property in accordance with applicable
regulations. If such loans later become delinquent, the Bank contacts and works
with the borrower to resolve the delinquency before initiating foreclosure
proceedings.
Consumer Lending. The Bank originates consumer loans on a secured and
unsecured basis. Consumer loans consist of personal loans, automobile, boat, and
recreational vehicle loans, savings account loans, and home improvement and home
equity loans. At June 30, 1997, consumer loans amounted to $9.1 million, or
14.3%, of the Bank's total loan portfolio.
Consumer lending generally involves more risk as compared to
one-to-four family residential mortgage lending. Repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness, or personal bankruptcy.
Further, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income, expenses, and ability to
repay the loan, and the value of the collateral.
Commercial Business Loans. The Bank offers commercial business loans
which generally include equipment loans with varying terms and working capital
lines of credit secured by inventory and accounts receivable. Working capital
lines of credit are generally renewable and made for a one-year term. Interest
rates on commercial business loans are generally indexed to the prime rate. As
with commercial real estate loans, the Bank generally requires annual financial
statements from its commercial business borrowers and may require personal
guarantees if the borrower is a corporation. At June 30, 1997, the Bank's
largest commercial business loan was a loan to a manufacturing corporation with
an outstanding balance of $221,000 which was current. This loan is guaranteed by
the Farmers Home Administration at 80% of the principal balance.
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Commercial business lending generally involves greater risk as compared
to one-to-four family residential mortgage lending and involves risks that are
different from those associated with residential, commercial, and multi-family
real estate lending. Although commercial business loans are often collateralized
by equipment, inventory, accounts receivable, or other business assets, the
liquidation of collateral in the event of a borrower default is often not a
sufficient source of repayment because accounts receivable may be uncollectible
and inventories and equipment may be obsolete or of limited use, among other
things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors) and the
successful operation of the commercial enterprise, while liquidation of
collateral is a secondary source of repayment.
Loan Solicitation, Processing, and Commitments. Loan originations are
derived from a number of sources. Residential mortgage, consumer, and other loan
originations primarily come from walk-in customers and referrals by Realtors,
depositors, and borrowers. Loan applications may be taken by the President or
the Vice President of Lending of the Bank, and are then submitted to the Bank's
Loan Committee consisting of the President, Vice President of Lending, and the
Chief Financial Officer. Upon receipt of a loan application from a prospective
borrower, a credit report and verifications are ordered to verify specific
information relating to the loan applicant's employment, income, and credit
standing. An appraisal of the real estate intended to secure the proposed loan
is undertaken by an independent appraiser approved by the Bank.
Under the Bank's lending policy, all loans to customers with
outstanding borrowings in excess of $200,000 must be approved by the Board of
Directors. Loans under $200,000 may be approved by the Loan Committee or
individual officers up to certain authorized amounts as specified in the lending
policy.
Loan applicants are promptly notified of the decision of the Bank.
Interest rates on approved loans are subject to the market rate at the time of
the loan closing. The Bank will grant a 30-day commitment locking in an interest
rate upon the payment of a commitment fee. At June 30, 1997, the Bank had $1.5
million of commitments to originate mortgage loans. It has been management's
experience that substantially all approved loans are funded. Fire and casualty
insurance, as well as flood insurance, are required for all loans as
appropriate, and title insurance is required for loans secured by real estate.
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan rates reflect factors such as general interest rate
levels, the supply of money available to the savings industry and the demand for
such loans. These factors are in turn affected by general economic conditions,
the monetary policies of the federal government, including the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.
In addition to the interest earned on loans, the Bank receives fees in
connection with loan commitments and originations, loan modifications, late
payments and fees for miscellaneous services related to its loans. The Bank
charges a processing fee for its adjustable-rate mortgage loans and
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<PAGE> 10
fixed-rate mortgage loans. All fee income is recognized by the Bank in
accordance with guidelines established by Statement of Financial Accounting
Standards ("SFAS") No. 91.
To the extent that loans are originated or acquired for the portfolio,
SFAS No. 91 limits immediate recognition of loan origination or acquisition fees
as revenues and requires that such income (net of certain loan origination or
acquisition costs) be recognized over the estimated life of such loans and
thereby reduces the amount of revenue recognized by the Bank at the time such
loans are originated or acquired. At June 30, 1997, the Bank had received
$371,000 of loan fees, net of loan origination costs, that had been deferred and
were being recognized as income over the estimated lives of the related loans.
Loans-to-One Borrower. Savings institutions generally are subject to
the lending limits applicable to national banks. With certain limited
exceptions, the maximum amount that a savings institution or a national bank may
lend to any borrower (including certain related entities of the borrower) at one
time may not exceed 15% of the unimpaired capital and surplus of the
institution, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by readily marketable collateral. Savings institutions are
additionally authorized to make loans to one borrower, for any purpose, in an
amount not to exceed $500,000 or, by order of the Director of OTS, in an amount
not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus
to develop residential housing, provided: (i) the purchase price of each
single-family dwelling in the development does not exceed $500,000; (ii) the
savings institution is in compliance with its fully phased-in capital
requirements; (iii) the loans comply with applicable loan-to-value requirements,
and (iv) the aggregate amount of loans made under this authority does not exceed
150% of unimpaired capital and surplus.
The Bank is in compliance with these lending limits.
Non-Performing Loans and Other Problem Assets. Management reviews the
Bank's loans on a regular basis. The policy of the Bank is to place on
nonaccrual status any mortgage loan that has remained delinquent for 90 days or
more, unless the loan is well-secured and in the process of collection. Consumer
and commercial loans not secured by real estate are charged off, or any expected
loss is reserved, after the loans become more than 90 days past due.
The Bank's collection procedures provide that late payment notices are
mailed on the 15th day following the due date of the loan payment. After a loan
becomes 30 days delinquent, the customer will be contacted by the lending
officer with an attempt to collect the delinquent payments or establish a work
out plan to remove the loan from the delinquent status. After a loan becomes 90
days or more past due, management will generally initiate legal proceedings,
unless a plan to resolve the delinquency has been developed with the borrower.
Real estate acquired by the Bank as a result of, or in lieu of,
foreclosure is classified as real estate owned until such time as it is sold.
When such property is acquired, it is recorded at fair value at the date of
foreclosure. Any required write-down of the loan to its fair value upon
foreclosure is charged against the allowance for loan losses. Subsequent to
foreclosure, in accordance with generally accepted accounting principles, if the
carrying value of the property exceeds its estimated net realizable value, the
amount of the difference is charged against operations.
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At June 30, 1997, the Bank had one significant property classified as
real estate owned. The property, a retail and office complex, originally secured
a $920,000 commercial real estate loan, originated by another financial
institution in 1987, in which the Bank purchased a 90% participation interest
($828,000). At the time of origination, the property was appraised for
$1,175,000 on a fully leased basis. In 1991, the borrowers defaulted on the loan
and litigation commenced between the borrowers and the lead lender. In February
1995, the lead lender acquired title to the property by deed in lieu of
foreclosure and settled all claims with the borrowers. Currently, the property
is approximately 60% leased and listed for sale. As of June 30, 1997, the
carrying value of the property was $375,000. In the year ended June 30, 1997,
the Bank received rental income on the property in the amount of $23,000, of
which $15,000 was applied to the principal balance. Subsequent to June 30, 1997,
the Bank received additional rental income, of which $5,000 was applied to the
principal balance. On September 23, 1997, the Bank sold the property and
received proceeds from the sale of $384,058.
The table below sets forth the amounts and categories of non-performing
assets at the dates indicated. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful, as discussed above.
Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
-----------------------
1997 1996
-------- -------
(Dollars in thousands)
<S> <C> <C>
Non-accruing loans:
One-to-four family $ -- $127
Consumer 145 35
---- ----
Total 145 162
---- ----
Accruing loans delinquent more than 90 days:
One-to-four family 5 --
Consumer 6 --
---- ----
Total 11 --
---- ----
Foreclosed assets:
One-to-four family 40 50
Secured by other real estate 375 390
Consumer -- --
---- ----
Total 415 440
---- ----
Total non-performing assets $571 $602
==== ====
Total as a percentage of total assets 0.60% 0.69%
==== ====
</TABLE>
During the year ended June 30, 1997, gross interest income of $16,000
would have been recorded on loans accounted for on a non-accrual basis if the
loans had been current throughout the respective periods. Interest on such loans
included in income during such period amounted to $8,000.
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At June 30, 1997, the Bank had approximately $92,000 in loans
considered by management to be potential problem loans that were not reflected
in the preceding table. As to these loans, information about possible credit
problems of borrowers have caused management to have concerns about the ability
of the borrowers to comply with present loan repayment terms. These loans are
subject to increased management attention and their classification is reviewed
on a quarterly basis.
In addition, management has considered a commercial loan participation,
classified as a watch list loan at June 30, 1997, as impaired. Within the Bank's
asset classification policy, a "watch" classification represents a loan or loan
relationship beginning to experience deterioration in financial condition,
however, not yet having the severity to warrant a special mention
classification. The Bank's 17.19% interest in the loan participation was
originally purchased from another lender. The loan is secured by a mobile home
park and an apartment building. At June 30, 1997, the Bank's balance in the
participation was $522,000. Collection under the original terms of the agreement
is in doubt and, thus, management has classified the loan as impaired at June
30, 1997 and allocated a specific reserve of $60,000 with the allowance for loan
losses.
The following table sets forth information concerning delinquent
mortgage, consumer and other loans at June 30, 1997. The amounts presented
represent the total remaining principal balances of the related loans, rather
than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
---------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
---------------------------- --------------------------- -------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four family -- $-- --.-- 4 $ 88 0.20 1 $ 5 0.01
Consumer 1 1 0.01 5 21 0.19 1 6 0.05
-- --- -- ---- -- ---
Total 1 $ 1 0.002% 9 $109 0.17% 2 $11 0.02%
== === ===== == ---- ==== == === ====
</TABLE>
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful," or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specified allowances for
loan losses in the amount of 100% of the portion of the asset classified loss,
or charge off such amount. 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. See "Regulation--Regulation of the
Bank--Regulatory Capital Requirements." OTS examiners may disagree with the
insured institution's classifications and amounts reserved. If an institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the OTS. Management of the Bank reviews assets on a monthly
basis, and at the end of each quarter prepares an asset classification listing,
which is reviewed by the Board of Directors. At June 30, 1997, management had
$92,000 assets classified as special mention, $479,000
12
<PAGE> 13
assets classified as substandard and no assets classified as doubtful or loss.
For additional information, see "Non-Performing Loans and Other Problem Assets."
See also "Multi-Family and Commercial Real Estate Lending."
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Bank's past
loan loss experience, known and inherent risks in the loan portfolio, adverse
situations that may affect the borrower's ability to repay the estimated value
of any underlying collateral and current economic conditions. The Bank increases
its allowance for loan losses by charging provisions for loan losses against the
Bank's income and decreases the allowance by charge-offs (net of recoveries).
General allowances are made pursuant to management's assessment of
inherent risk in the Bank's loan portfolio as a whole. Specific allowances are
provided for individual loans when ultimate collection is considered
questionable by management after reviewing the current status of loans which are
contractually past due and considering the net realizable value of the security
for the loan. Management continues to actively monitor the Bank's asset quality
and to charge off loans against the allowance for loan losses when appropriate
or to provide specific loss reserves when necessary. Although management
believes it has sufficient information available to make determinations with
respect to the allowance for loan losses, future adjustments may be necessary if
economic conditions differ substantially from the economic conditions in the
assumptions used in making the initial determinations.
The Bank was last examined by the OTS in February 1996 and its loan
loss allowance was considered by the OTS to be adequate as of that time. While
the Bank believes it has established its existing allowances for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio during future
examinations, will not request the Bank to increase its allowance for loan
losses, thereby negatively affecting the Bank's financial condition and
earnings.
13
<PAGE> 14
The ratio of allowance to non-performing loans reflects an increasing
trend due to additional increases to the allowance for loan losses resulting
from management's assessment of risk in the loan portfolio as a whole. The
increases in the allowance have been primarily due to the growth in the consumer
and commercial business loan categories, which are considered to have higher
risks than one-to-four family mortgage loans. Another factor in the increase of
the ratio of allowance to non-performing loans results from a decrease in
non-performing loans since 1994. The decrease is a result of improvements in
underwriting standards and continued collection efforts on problem loans.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 441 $ 382
Charge-offs:
One-to-four family -- --
Consumer and commercial business (15) (13)
----- -----
Total charge-offs (15) (13)
----- -----
Recoveries:
Consumer and commercial business 1 7
----- -----
Total recoveries 1 7
----- -----
Net charge-offs (14) (6)
Provision charged to operations 60 65
----- -----
Balance at end of period $ 487 $ 441
===== =====
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.02% 0.01%
===== =====
Ratio of allowance to non-performing loans 312.30% 272.12%
===== =====
</TABLE>
14
<PAGE> 15
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>
At June 30,
------------------------------------------------------
1997 1996
----------------------- ------------------------
Percent of Percent of
Loans in Loans in
Each Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family $110 67.35% $100 63.51%
Secured by other real estate 120 9.74 60 12.10
Construction 50 5.41 70 7.09
Consumer 95 14.29 105 14.83
Commercial business 60 3.21 50 2.47
Unallocated 52 --.-- 56 --.--
---- ------ ---- ------
Total $487 100.00% $441 100.00%
==== ====== ==== ======
</TABLE>
INVESTMENT ACTIVITIES
GENERAL. The Bank invests in securities in order to diversify its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory authorities. Such investments generally include
purchases of federal funds, federal government and agency securities and
qualified deposits in other financial institutions. It is management's
intention, and the Bank has the ability, to hold the majority of its securities
portfolio to maturity. In accordance with SFAS No. 115, effective July 1, 1994,
the Bank began classifying certain securities as securities available-for- sale.
Securities in this classification are recorded at fair value. The balance of
securities being held to maturity are recorded at cost, adjusted for
amortization of premiums and accretion of discounts on the interest method over
the term of the related security. For further information, see Notes 1 and 3 of
Notes to Consolidated Financial Statements.
INVESTMENT SECURITIES. The Bank is permitted under federal law to make
certain investments, including investments in securities issued by various
federal agencies and state and municipal governments, deposits at the FHLB of
Indianapolis, certificates of deposit in federally insured institutions, certain
bankers' acceptances and federal funds. The Bank may also invest, subject to
certain limitations, in commercial paper having one of the two highest
investment ratings of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Bank to maintain an investment in FHLB of Indianapolis stock and a
minimum amount of liquid assets which may be invested in cash and specified
securities. From time to time, the OTS adjusts the percentage of liquid assets
that savings institutions
15
<PAGE> 16
are required to maintain. For additional information, see
"Regulation--Regulation of the Bank--Liquid Assets."
MORTGAGE-BACKED SECURITIES. The Bank invests in mortgage-backed and
related securities, including mortgage participation certificates which are
insured or guaranteed by U.S. government agencies and government sponsored
enterprises and collateralized mortgage obligations ("CMOs") and real estate
mortgage investment conduits ("REMICs"). Mortgage-backed securities represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Bank. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include FHLMC, FNMA
and GNMA.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages.
The Bank's mortgage-backed securities include CMOs, which include
securities issued by entities which have qualified under the Internal Revenue
Code of 1986, as amended ("Code"), as REMICs. CMOs and REMICs (collectively
CMOs) have been developed in response to investor concerns regarding the
uncertainty of cash flows associated with the prepayment option of the
underlying mortgagor and are typically issued by government agencies, government
sponsored enterprises and special purpose entities, such as trusts, corporations
or partnerships, established by financial institutions or other similar
institutions. A CMO can be collateralized by loans or securities which are
insured or guaranteed by FNMA, FHLMC or GNMA. In contrast to pass-through
mortgage-backed securities, in which cash flow is received pro rata by all
security holders, the cash flow from the mortgages underlying a CMO is segmented
and paid in accordance with a predetermined priority to investors holding
various CMO classes. Consequently, the maturity of a particular CMO class may be
substantially less than the contractual maturity of the underlying security. By
allocating the principal and interest cash flows from the underlying collateral
among the separate CMO classes, different classes of securities are created,
each with its own stated maturity, estimated average life, coupon rate and
prepayment characteristics.
Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the insurance or guarantees that back them. However,
mortgage-backed securities are subject to interest rate and prepayment risk. In
that regard, at June 30, 1997, the Bank's mortgage-backed securities portfolio
included net unrealized losses of $29,000. Although the Bank has the ability and
the intention to hold such securities to maturity, the Bank's net interest
income may be adversely affected as a result of such securities carrying below
market rates of interest.
16
<PAGE> 17
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------
1997 1996
---------------------- -----------------------
Book Fair Book Fair
Value Value Value Value
----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning time deposits in other
financial institutions $ 3,471 $ 3,475 $ 3,868 $ 3,870
======== ======== ======== ========
Investment Securities:
U.S. Government securities and agency obligations 2,498 2,482 3,496 3,431
Obligations of states and political subdivisions 375 386 375 369
Other 802 802 1,136 1,129
------- ------- ------- -------
Subtotal 3,675 3,670 5,007 4,929
------- ------- ------- -------
FHLB stock 1,042 1,042 619 619
------- ------- ------- -------
Mortgage-Backed Securities:
FNMA certificates 5,053 5,016 4,822 4,669
GNMA certificates 661 696 761 780
FHLMC certificates 3,788 3,790 2,790 2,739
Collateralized mortgage obligations 4,748 4,719 5,888 5,759
------- ------- ------- -------
Subtotal 14,250 14,221 14,261 13,947
------- ------- ------- -------
Total investment securities, FHLB stock and
mortgage-backed securities $18,967 $18,933 $19,887 $19,495
======= ======= ======= =======
Average remaining life of
U.S. Government and Agency securities 2.0 years 2.6 years
Obligations of states and political subdivisions 10.2 years 11.2 years
</TABLE>
17
<PAGE> 18
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table. All of the securities held by
the Bank in the securities portfolio are classified as held to maturity.
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------------------------------
Less than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years
------ ----- ----- --------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
U.S. Treasury and U.S. government
agencies $ 998 4.92% $1,500 6.26% $ -- --.--% $ -- --.--%
Obligations of states and political
subdivisions -- --.-- -- --.-- 125 5.13 250 5.40
Other 500 5.78 302 6.20 -- --.-- -- --.--
Total investment securities held to
maturity 1,498 5.21 1,802 6.25 125 5.13 250 5.40
------ ------ ------ ------
Mortgage-backed securities 404 6.37 7,153 5.47 3,111 6.05 3,582 7.35
------ ------ ------ ------
Total investment and mortgage-backed $1,902 6.04% $8,955 5.62% $3,236 6.01% $3,832 7.22%
securities ====== ==== ====== ==== ====== ==== ====== ====
<CAPTION>
June 30, 1997
---------------------------
Total Investment Securities
---------------------------
Carrying Average Market
Value Yield Value
----- ----- -----
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY:
U.S. Treasury and U.S. government
agencies $ 2,498 5.72% $ 2,482
Obligations of states and political
subdivisions 375 5.31 386
Other 802 5.94 802
Total investment securities held to
maturity 3,675 5.73 3,670
------- -------
Mortgage-backed securities 14,250 6.09 14,221
------- -------
Total investment and mortgage-backed $17,925 6.08% $17,891
securities ======= ==== =======
</TABLE>
18
<PAGE> 19
The Bank's securities portfolio at June 30, 1997 contained no
securities of any issuer with an aggregate book value in excess of 10% of the
Bank's shareholders' equity, excluding those securities issued by the U.S.
Government or its agencies.
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments, maturing investment and mortgage-backed
securities and interest payments. 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.
The Bank also has the ability to obtain advances from the FHLB as an additional
source of funds.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a variety of deposit instruments,
including passbook and statement accounts and certificates of deposit ranging in
terms from three months to five years. 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 Bank also offers individual
retirement accounts ("IRAs").
The Bank's policies are designed primarily to attract deposits from
local residents rather than to solicit deposits from areas outside its primary
market. The Bank 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 Bank 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 indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1997.
<TABLE>
<CAPTION>
Maturity
----------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
------- ------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit of $100,000 or more 1,551 632 561 1,483 4,227
</TABLE>
The Bank does not offer premiums for deposits, does not generally offer
interest rates on deposits which exceed the average rates offered by other
financial institutions in its market area, and usually does not institute
promotional programs that result in increased rates being paid on deposits. The
Bank does, however, offer above-average rates on certificates of deposit if
management believes that the deposit will entail administrative savings by the
Bank as well as contribute to the stability of the Bank's core deposit base.
These strategies are consistent with management's goals of keeping the Bank's
cost of funds at reduced levels and maintaining slow and measurable growth for
the Bank.
19
<PAGE> 20
BORROWINGS
Savings deposits historically have been the primary source of funds for
the Bank's lending and investment activities and for its general business
activities. The Bank is authorized, however, to use advances from the FHLB of
Indianapolis to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB are secured by the Bank's stock
in the FHLB and a portion of the Bank's investment and mortgage-backed
securities.
The FHLB of Indianapolis functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, the Bank 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. See "Regulation--Regulation of the
Bank--Federal Home Loan Bank System."
The following table sets forth certain information as to FHLB advances
and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1997 1996
---------------- ----------------
(Dollars in thousands)
<S> <C> <C>
FHLB advances $ 20,344 $ 9,211
-------- ---------
Total borrowings $ 20,344 $ 9,211
======== ========
Weighted average interest rate of FHLB advances 5.75% 5.48%
</TABLE>
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended
June 30,
-----------------------------------------
1997 1996
----------------- ------------------
(Dollars in thousands)
<S> <C> <C>
Maximum Balance:
- ---------------
FHLB advances $ 20,344 $ 9,211
Average Balance:
- ---------------
FHLB advances $ 14,049 $ 6,273
</TABLE>
20
<PAGE> 21
SUBSIDIARY ACTIVITIES
The Company has one wholly-owned subsidiary, the Bank. The Bank is
permitted to invest an amount equal to 2% of its assets in subsidiaries with an
additional investment of 1% of assets where such investment serves primarily
community, inner-city, and community development purposes. Under such
limitations, as of June 30, 1997, the Bank was authorized to invest up to
approximately $1.7 million in the stock of or loans to subsidiaries including
the additional 1% investment for community inner-city and community development
purposes. Institutions meeting regulatory capital requirements, such as the
Bank, may invest up to 50% of their regulatory capital in conforming first
mortgage loans to subsidiaries in which they own 10% or more of the capital
stock.
The Bank's only service corporation is Alpha Financial, Inc., a
corporation organized under the laws of the state of Michigan in 1975. The
Bank's investment in Alpha Financial, Inc. was $58 at June 30, 1997. The assets
of the service corporation consist of cash and stock in MIMLIC Life Insurance
Company, which reinsures credit life insurance policies written on the lives of
borrowers of various financial institutions.
EMPLOYEES
Substantially all of the activities of the Company are conducted by the
Bank. Therefore, as of June 30, 1997, the Company did not have any salaried
employees. As of June 30, 1997, the Bank had 31 full-time employees and four
part-time employee, none of whom was represented by a collective bargaining
agreement.
REGULATION
Set forth below is a brief description of certain laws that relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
REGULATION OF THE COMPANY
GENERAL. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, which also permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for the
benefit of stockholders of the Company.
QUALIFIED THRIFT LENDER TEST. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test or meets the
definition of domestic building and loan association pursuant to section 7701 of
the Internal Revenue Code of 1986, as amended (the "Code"). If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings
21
<PAGE> 22
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to restrictions applicable to bank holding companies unless
such other associations each also qualify as a QTL or domestic building and loan
association and were acquired in a supervisory acquisition. See "Regulation of
the Bank - Qualified Thrift Lender Test."
RESTRICTIONS ON ACQUISITIONS. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval. These provisions also prohibit, among other things, any director
or officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of a savings and loan holding
company, from acquiring control of any savings association not a subsidiary of
the savings and loan holding company, unless the acquisition is approved by the
OTS.
AFFILIATE RESTRICTIONS. Transactions between a savings association and
its "affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in
connection therewith limit the extent to which a savings association or its
subsidiaries may engage in certain "covered transactions" with affiliates to an
amount equal to 10% of the association's capital and surplus, in the case of
covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings association and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings association and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings
22
<PAGE> 23
association or its subsidiaries and an affiliate must be on terms and conditions
that are consistent with safe and sound banking practices. With certain
exceptions, each loan or extension of credit by a savings association to an
affiliate must be secured by collateral with a market value ranging from 100% to
130% (depending on the type of collateral) of the amount of the loan or
extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") decides to treat such subsidiaries
as affiliates. The regulation also requires savings associations to make and
retain records that reflect affiliate transactions in reasonable detail, and
provides that certain classes of savings associations may be required to give
the OTS prior notice of affiliate transactions.
REGULATION OF THE BANK
GENERAL. As a federally chartered, SAIF-insured savings bank, the Bank
is subject to extensive regulation by the OTS and the FDIC. Lending activities
and other investments of the Bank must comply with various statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements of the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies found in the operations of the Bank. The relationship between the
Bank and depositors and borrowers is also regulated by federal and state laws,
especially in such matters as the ownership of savings accounts and the form and
content of mortgage documents utilized by the Bank.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Bank, and
their operations.
INSURANCE OF DEPOSIT ACCOUNTS. The Bank's deposit accounts are insured
by the SAIF to the maximum of $100,000 permitted by law. Insurance of deposits
may be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
Under this system as of June 30, 1997, SAIF members paid within a range of 23
cents to 31 cents per $100 of domestic deposits, depending upon the
institution's risk classification. This risk classification is based on an
institution's capital group and
23
<PAGE> 24
supervisory subgroup assignment. Pursuant to the Economic Growth and Paperwork
Reduction Act of 1996 (the "Act"), the FDIC imposed a special assessment on SAIF
members to capitalize the SAIF at the designated reserve level of 1.25% as of
October 1, 1996. Based on the Bank's deposits as of March 31, 1995, the date for
measuring the amount of the special assessment pursuant to the Act, the Bank
paid a special assessment of $411,000 on November 27, 1996 to recapitalize the
SAIF. This expense was recognized during the first quarter of fiscal 1997.
Pursuant to the Act, the Bank pays, in addition to its normal deposit
insurance premium as a member of the SAIF ranging from 0 to 27 basis points as
of October 1, 1996, an amount equal to approximately 6.4 basis points toward the
retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980s
to assist in the recovery of the savings and loan industry. Members of the Bank
Insurance Fund ("BIF"), by contrast, pay, in addition to their normal deposit
insurance premium, approximately 1.3 basis points. Under the Act, the FDIC also
is not permitted to establish SAIF assessment rates that are lower than
comparable BIF assessment rates. Beginning no later than January 1, 2000, the
rate paid to retire the Fico Bonds will be equal for members of the BIF and the
SAIF. The Act also provides for the merging of the BIF and the SAIF by January
1, 1999 provided there are no financial institutions still chartered as savings
associations at that time. Should the insurance funds be merged before January
1, 2000, the rate paid by all members of this new fund to retire the Fico Bonds
would be equal.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require
savings associations to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) leverage capital (core capital) equal to
3% of total adjusted assets, and (3) risk-based capital equal to 8.0% of total
risk-based assets. The Bank must meet each of these standards in order to be
deemed in compliance with OTS capital requirements. In addition, the OTS may
require a savings association to maintain capital above the minimum capital
levels.
Under OTS regulations, a savings bank with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component in calculating its total capital for purposes of determining whether
it meets its risk-based capital requirement. Interest rate exposure is measured,
generally, as the decline in an institution's net portfolio value that would
result from a 200 basis point increase or decrease in market interest rates
(whichever would result in lower net portfolio value), divided by the estimated
economic value of the savings association's assets. The interest rate risk
component to be deducted from total capital is equal to one-half of the
difference between an institution's measured exposure and "normal" IRR exposure
(which is defined as 2%), multiplied by the estimated economic value of the
institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation. Based on information voluntarily supplied
to the OTS, at June 30, 1997, the Bank would not have been required to deduct an
IRR component in calculating total risk-based capital had the IRR component of
the capital regulations been in effect.
These capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in
24
<PAGE> 25
circumstances where, among others: (1) a savings association has a high degree
of exposure to interest rate risk, prepayment risk, credit risk, concentration
of credit risk, certain risks arising from nontraditional activities, or similar
risks or a high proportion of off-balance sheet risk; (2) a savings association
is growing, either internally or through acquisitions, at such a rate that
supervisory problems are presented that are not dealt with adequately by OTS
regulations; and (3) a savings association may be adversely affected by
activities or condition of its holding company, affiliates, subsidiaries, or
other persons, or savings associations with which it has significant business
relationships. The Bank is not subject to any such individual minimum regulatory
capital requirement.
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of June 30, 1997.
<TABLE>
<CAPTION>
Percent of
Amount Adjusted Assets
-------- ---------------
(Dollars in Thousands)
<S> <C> <C>
GAAP Capital........................................ $ 18,875 11.46%
TANGIBLE CAPITAL: (1)
Regulatory requirement.............................. $ 1,426 1.50%
Actual capital...................................... 10,827 11.39
-------- --------
Excess........................................... $ 9,401 $ 9.89%
======== ========
LEVERAGE (CORE) CAPITAL: (1)
Regulatory requirement.............................. $ 2,852 3.00%
Actual capital...................................... 10,827 11.39
-------- --------
Excess........................................... $ 7,975 $ 8.39%
======== ========
RISK-BASED CAPITAL: (2)
Regulatory requirement.............................. $ 3,927 8.00%
Actual capital...................................... 11,313 23.05
-------- --------
Excess........................................... $ 7,386 $ 15.05%
======== ========
</TABLE>
- ------------
(1) Regulatory capital reflects modifications from GAAP capital due to
goodwill and other intangible assets not permitted to be included in
regulatory capital.
(2) Based on risk-weighted assets of $49.0 million.
A savings bank's failure to maintain capital at or above the minimum
capital requirements may be deemed an unsafe and unsound practice and may
subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is required
to submit a capital plan that addresses the bank's need for additional capital
and meets certain additional requirements. While the capital plan is being
reviewed by the OTS, the savings bank must certify, among other things, that it
will not, without the approval of its appropriate OTS Regional
25
<PAGE> 26
Director, grow beyond net interest credited or make capital distributions. If a
savings bank's capital plan is not approved, the savings bank will become
subject to additional growth and other restrictions. In addition, the OTS,
through a capital directive or otherwise, may restrict the ability of a savings
bank not in compliance with the capital requirements to pay dividends and
compensation, and may require such a bank to take one or more of certain
corrective actions, including, without limitation: (i) increasing its capital to
specified levels, (ii) reducing the rate of interest that may be paid on savings
accounts, (iii) limiting receipt of deposits to those made to existing accounts,
(iv) ceasing issuance of new accounts of any or all classes or categories except
in exchange for existing accounts, (v) ceasing or limiting the purchase of loans
or the making of other specified investments, and (vi) limiting operational
expenditures to specified levels.
The Home Owners' Loan Act ("HOLA") permits savings banks not in
compliance with the OTS capital standards to seek an exemption from certain
penalties or sanctions for noncompliance. Such an exemption will be granted only
if certain strict requirements are met, and must be denied under certain
circumstances. If an exemption is granted by the OTS, the savings bank still may
be subject to enforcement actions for other violations of law or unsafe or
unsound practices or conditions.
PROMPT CORRECTIVE ACTION. The prompt corrective action regulation of
the OTS, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that falls
within certain undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
risk-based capital, leverage capital, and tangible capital ratios are used to
determine an institution's capital classification. At June 30, 1997, the Bank
met the capital requirements of a "well capitalized" institution under
applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an
insured depository institution from declaring any dividends, making any other
capital distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept Brokered Deposits only with a waiver from the FDIC and
are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew, or roll-over
Brokered Deposits.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
CAPITAL DISTRIBUTION LIMITATIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise
26
<PAGE> 27
acquire its shares, payments to shareholders of another institution in a
cash-out merger and other distributions charged against capital. In general, the
Bank may not declare or pay a cash dividend on its capital stock if the effect
thereof would cause the Bank to fail to meet one of its regulatory capital
requirements.
Under the regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has not
been notified by the OTS that it is in need of more than normal supervision (a
"Tier 1 association") may, after prior notice to but without the approval of the
OTS, make capital distributions during a calendar year up to the higher of: (i)
100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its surplus capital ratio at the beginning of the
calendar year, or (ii) 75% of its net income over the most recent four-quarter
period. A Tier 1 association may make capital distributions in excess of the
above amount if it gives notice to the OTS and the OTS does not object to the
distribution. A savings association that meets its regulatory capital
requirements both before and after a proposed distribution but does not meet its
fully phased-in capital requirement (a "Tier 2 association") is authorized,
after prior notice to the OTS but without OTS approval, to make capital
distributions in an amount up to 75% of its net income over the most recent
four-quarter period, taking into account all prior distributions during the same
period. Any distribution in excess of this amount must be approved in advance by
the OTS. A savings association that does not meet its current regulatory capital
requirements (a "Tier 3 association") cannot make any capital distribution
without prior approval from the OTS, unless the capital distribution is
consistent with the terms of a capital plan approved by the OTS.
At June 30, 1997, the Bank qualified as a Tier 1 association for
purposes of the capital distribution rule. The OTS may prohibit a proposed
capital distribution that would otherwise be permitted if the OTS determines
that the distribution would constitute an unsafe or unsound practice.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation. Under
the proposed regulation, an institution that would remain at least adequately
capitalized after making a capital distribution, and that was owned by a holding
company, would be required to provide notice to the OTS prior to making a
capital distribution. "Troubled" associations and undercapitalized associations
would be allowed to make capital distributions only by filing an application and
receiving OTS approval, and such applications would be approved under certain
limited circumstances.
THRIFT CHARTER. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. Recent legislation requires the
Treasury Department to prepare for Congress by March 31, 1997 a comprehensive
study on development of a common charter for federal savings associations and
commercial banks; and, in the event that the thrift charter was eliminated by
January 1, 1999, would require the merger of the BIF and the SAIF into a single
Deposit Insurance Fund on that date. In the absence of appropriate "grandfather"
provisions, legislation eliminating the thrift charter could have a material
adverse effect on the Bank and the Company because, among other things, the
regulatory, capital, and accounting treatment for national and state banks and
savings associations differs in certain significant respects. The Bank cannot
determine whether, or in what form, such legislation
27
<PAGE> 28
may eventually be enacted and there can be no assurance that any legislation
that is enacted would contain adequate grandfather rights for the Bank and the
Company.
LOANS-TO-ONE BORROWER. See "1. Business - Lending Activities - Loans-to-One
Borrower."
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings
associations have a responsibility under the Community Reinvestment Act ("CRA")
and related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, at a minimum, result in
regulatory restrictions on its activities and the denial of certain
applications, and failure to comply with the Fair Lending Laws could result in
enforcement actions by the OTS, as well as other federal regulatory agencies and
the Department of Justice.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank ("FHLB") system. Among other benefits, each FHLB serves as a reserve
or central bank for its members within its assigned region. Each FHLB is
financed primarily from the sale of consolidated obligations of the FHLB system.
Each FHLB makes available to members loans (i.e., advances) in accordance with
the policies and procedures established by the Board of Directors of the
individual FHLB.
As a member, the Bank is required to own capital stock in an FHLB in an
amount equal to the greater of: (i) 1% of its aggregate outstanding principal
amount of its residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year, (ii) 0.3% of total assets,
or (iii) 5% of its FHLB advances (borrowings). At June 30, 1997, the Bank had
$1.0 million in FHLB stock, which was in compliance with this requirement.
LIQUID ASSETS. Under OTS regulations, for each calendar month, a
savings bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during the
preceding calendar month. This liquidity requirement, which is currently at
5.0%, may be changed from time to time by the OTS to any amount between 4.0% to
10.0%, depending upon certain factors, including economic conditions and savings
flows of all savings associations. OTS regulations also require each savings
association to maintain an average daily balance of short-term liquid assets
equal to not less than 1.0% of the average daily balance of its net withdrawable
accounts and short-term borrowings during the preceding calendar month. The Bank
maintains liquid assets in compliance with these regulations. Monetary penalties
may be imposed upon an institution for violations of liquidity requirements.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
28
<PAGE> 29
used to satisfy the liquidity requirements that are imposed by the OTS. At June
30, 1997, the Bank was in compliance with these requirements.
QUALIFIED THRIFT LENDER TEST. Savings institutions must meet a
qualified thrift lender ("QTL") test, which test may be met either by
maintaining a specified level of assets in qualified thrift investments as
specified in HOLA or by meeting the definition of a "domestic building and loan
association" in section 7701 of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Bank maintains an appropriate level of certain specified
investments (primarily residential mortgages and related investments, including
certain mortgage-related securities) and otherwise qualifies as a QTL or a
domestic building and loan association, it will continue to enjoy full borrowing
privileges from the FHLB. The required percentage of investments under HOLA is
65% of assets while the Code requires investments of 60% of assets. An
association must be in compliance with the QTL test or definition of domestic
building and loan association on a monthly basis in nine out of every 12 months.
Associations that fail to meet the QTL test will generally be prohibited from
engaging in any activity not permitted for both a national bank and a savings
association. As of June 30, 1997, the Bank was in compliance with its QTL
requirement and met the definition of a domestic building and loan association.
29
<PAGE> 30
ITEM 2. DESCRIPTION OF PROPERTIES
(a) Properties.
The Company owns no real property but utilizes the offices of the Bank.
The following table sets forth the location and certain additional information
regarding the Bank's offices at June 30, 1997.
<TABLE>
<CAPTION>
Total
Approximate Net Book Value
Date Square at June 30,
Location Acquired Footage 1997
- ----------------------------------------------- ----------------- ---------------- ------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Main Office
123 Portage
Three Rivers, Michigan 49093
(616) 279-5117 1981 17,092 $ 1,057
Branch Office
500 N. Grand
Schoolcraft, Michigan 49087
(616) 674-5271 1971 3,400 121
Branch Office
15534 U.S. 12
Union, Michigan 49130
(616) 641-7979 1988 1,661 122
Branch Office
1213 West Michigan Avenue
Three Rivers, Michigan 49093
(616) 273-8681 1988 2,443 136
--------
$ 1,436
========
</TABLE>
The Bank owns all of its offices. The total net book value of the
Bank's premises and equipment (including land, building and leasehold
improvements and furniture, fixtures and equipment) at June 30, 1997 was $1.4
million. See Note 5 of Notes to Consolidated Financial Statements.
FIserv, Inc., West Allis, Wisconsin, performs data processing and
record keeping services for the Bank.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. All of the Bank's investment
policies are reviewed and approved by the Board of Directors of the Bank, and
such policies, subject to regulatory restrictions (if any), can be changed
without a vote of stockholders. The Bank's investments are primarily acquired to
produce income, and to a lesser extent, possible capital gain.
30
<PAGE> 31
(1) Investments in Real Estate or Interests in Real Estate. See
"Item 1. Business - Lending Activities," "Item 1. Business - Regulation of the
Bank," and "Item 2. Description of Property. (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities" and "Item 1. Business - Regulation - Regulation of the
Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities,"
"Item 1. Business - Regulation of the Bank," and "Item 1. Business -
Subsidiary Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
ITEM 3. LEGAL PROCEEDINGS
Although the Company and the Bank, from time to time, are involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which the Company, the Bank, 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 shareholders for a vote during the quarter
ended June 30, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained under the caption "Market Price of TRFC's Common
Shares and Related Shareholder Matters" in the Company's Annual Report to
Stockholders for the fiscal year ended June 30, 1997 (the "Annual Report") is
incorporated herein by reference.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN
OF OPERATION
The information contained under the caption "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 financial statements contained in the Annual Report, Item 13 herein,
are incorporated herein by reference.
31
<PAGE> 32
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(B) OF THE EXCHANGE ACT
The information contained under the caption "I - Information with
Respect to Nominees for Director, Directors Continuing in Office, and Executive
Officers" in the Company's Proxy Statement for the annual meeting of
stockholders to be held October 29, 1997 (the "Proxy Statement") is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained under the caption "Compensation of Directors
and Executive Officers " in the Proxy Statement is incorporated herein by
reference.
ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners.
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management.
Information required by this item is incorporated herein by
reference to the section captioned "I - Information with
Respect to Nominees for Director, Directors Continuing in
Office, and Executive Officers" in the Proxy Statement.
(c) Changes in Control.
Management of the Company 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 contained in the Proxy Statement under the caption
"Certain Relationships and Related Transactions" is incorporated herein by
reference.
32
<PAGE> 33
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits are either attached as part of this Report or
incorporated by reference herein.
Exhibit Number Description
3.1 Certificate of Incorporation of Three Rivers
Financial Corporation(1)
3.2 Bylaws of Three Rivers Financial Corporation(1)
4 Form of Common Stock Certificate of Three Rivers
Financial Corporation(1)
10.1 Employment Agreement between First Savings Bank, A
Federal Savings Bank and G. Richard Gatton(2)
10.1.1 Amendment No. 1 to Employment Agreement between
First Savings Bank, A Federal Savings Bank and G.
Richard Gatton(5)
10.2 Severance Agreement between First Savings Bank, A
Federal Savings Bank and Martha Romig(2)
10.2.1 Amendment No. 1 to Severance Agreement between
First Savings Bank, A Federal Savings Bank and
Martha Romig(5)
10.3 Severance Agreement between First Savings Bank, A
Federal Savings Bank and R. Orville Poling(2)
10.3.1 Amendment No. 1 to Severance Agreement between
First Savings Bank, A Federal Savings Bank and R.
Orville Poling(5)
10.4 Three Rivers Financial Corporation Employee Stock
Ownership Plan and Trust(2)
10.5 Employer's Resolution and Application to
Participate in the Financial Institutions
Retirement Fund's Comprehensive Retirement Program(3)
10.6 First Savings Bank, A Federal Savings Bank 401(k)
Plan Adoption Agreement(4)
10.7 Stock Option and Incentive Plan(5)
10.8 Recognition and Retention Plan and Trust(5)
10.9 Expense and Tax Sharing Agreement(5)
13 Annual Report to Stockholders for the fiscal year
ended June 30, 1997
33
<PAGE> 34
21 Subsidiaries of the Registrant(2)
27 Financial Data Schedule (6)
- -------------------------
(1) Incorporated by reference to Exhibit bearing the same number in the
Company's Registration Statement on Form S-1, filed on April 20, 1995,
as amended on June 16, 1995 (Reg. No. 33-91380) (the "Form S-1").
(2) Incorporated by reference to the exhibit bearing the same number in the
Company's Annual Securities Report on Form 10-KSB for the year ended
June 30, 1995.
(3) Incorporated by reference to Exhibit 10.8 of the Form S-1.
(4) Incorporated by reference to Exhibit 10.9 of the Form S-1.
(5) Incorporated by reference to the exhibit bearing the same number in the
Company's Annual Securities Report on Form 10-KSB for the year ended
June 30, 1996.
(6) Electronic filing copy only.
(b) Reports on Form 8-K
None.
34
<PAGE> 35
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.
THREE RIVERS FINANCIAL CORPORATION
September 25, 1997 By: /s/ G. Richard Gatton
-----------------------------------------------
G. Richard Gatton
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ G. Richard Gatton President, Chief Executive Officer September 25, 1997
- ------------------------------------
G. Richard Gatton (Principal Executive Officer)
/s/ Martha Romig Senior Vice President, Chief Financial September 25, 1997
- ------------------------------------
Martha Romig Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
/s/ Stephen R. Olson Chairman of the Board September 25, 1997
- ------------------------------------
Stephen R. Olson
Director September ___, 1997
- ------------------------------------
Larry A. Clark
/s/ Verglea Gotfryd Director September 25, 1997
- ------------------------------------
Verglea Gotfryd
/s/ Philip Halverson Director September 25, 1997
- ------------------------------------
Philip Halverson
/s/ John A. Mathews Director September 25, 1997
- ------------------------------------
John A. Mathews
/s/ Thomas O. Monroe, Sr. Director September 25, 1997
- ------------------------------------
Thomas O. Monroe, Sr.
</TABLE>
<PAGE> 36
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Certificate of Incorporation of Three Rivers Financial
Corporation(1)
3.2 Bylaws of Three Rivers Financial Corporation(1)
4 Form of Common Stock Certificate of Three Rivers
Financial Corporation(1)
10.1 Employment Agreement between First Savings Bank, A
Federal Savings Bank and G. Richard Gatton(2)
10.1.1 Amendment No. 1 to Employment Agreement between
First Savings Bank, A Federal Savings Bank and G.
Richard Gatton(5)
10.2 Severance Agreement between First Savings Bank, A
Federal Savings Bank and Martha Romig(2)
10.2.1 Amendment No. 1 to Severance Agreement between
First Savings Bank, A Federal Savings Bank and
Martha Romig(5)
10.3 Severance Agreement between First Savings Bank, A
Federal Savings Bank and R. Orville Poling(2)
10.3.1 Amendment No. 1 to Severance Agreement between
First Savings Bank, A Federal Savings Bank and R.
Orville Poling(5)
10.4 Three Rivers Financial Corporation Employee Stock
Ownership Plan and Trust(2)
10.5 Employer's Resolution and Application to
Participate in the Financial Institutions
Retirement Fund's Comprehensive Retirement Program(3)
10.6 First Savings Bank, A Federal Savings Bank 401(k)
Plan Adoption Agreement(4)
10.7 Stock Option and Incentive Plan(5)
10.8 Recognition and Retention Plan and Trust(5)
10.9 Expense and Tax Sharing Agreement(5)
13 Annual Report to Stockholders for the fiscal year
ended June 30, 1997
</TABLE>
<PAGE> 37
21 Subsidiaries of the Registrant(2)
27 Financial Data Schedule(6)
- ------------------------
(1) Incorporated by reference to Exhibit bearing the same number in the
Company's Registration Statement on Form S-1, filed on April 20, 1995,
as amended on June 16, 1995 (Reg. No. 33-91380)(the "Form S-1").
(2) Incorporated by reference to the exhibit bearing the same number in the
Company's Annual Securities Report on Form 10-KSB for the year ended
June 30, 1995.
(3) Incorporated by reference to Exhibit 10.8 of the Form S-1.
(4) Incorporated by reference to Exhibit 10.9 of the Form S-1.
(5) Incorporated by reference to the exhibit bearing the same number in the
Company's Annual Securities Report on Form 10-KSB for the year ended
June 30, 1996.
(6) Electronic filing copy only.
<PAGE> 1
EXHIBIT 13
THREE RIVERS
FINANCIAL
CORPORATION
1997
ANNUAL REPORT
<PAGE> 2
TABLE OF CONTENTS
MESSAGE TO SHAREHOLDERS........................................... 1
BUSINESS OF THREE RIVERS FINANCIAL CORPORATION.................... 2
MARKET PRICE OF TRFC COMMON SHARES & RELATED SHAREHOLDER
MATTERS......................................................... 2
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA........ 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 6
INDEPENDENT AUDITOR'S REPORT...................................... 19
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition............... 20
Consolidated Statements of Income............................ 21
Consolidated Statements of Shareholders' Equity.............. 22
Consolidated Statements of Cash Flows........................ 24
Notes to Consolidated Financial Statements................... 26
OFFICERS AND DIRECTORS............................................ 45
SHAREHOLDER INFORMATION........................................... 46
<PAGE> 3
MESSAGE TO SHAREHOLDERS
Dear Fellow Shareholder:
Last year was an exciting and productive year for our company. The banking
industry continues to undergo significant change. This change presents
opportunity for Three Rivers Financial Corporation with our emphasis on
community banking. The community banking emphasis forms the foundation of our
challenge to meet the financial services needs of the individuals, communities,
and businesses we serve.
In September of 1996, legislative action occurred which impacted earnings. This
event was anticipated and welcomed. Congress called for a one time mandatory
contribution to replenish the Federal Deposit Insurance Corporation's depleted
Savings Association Insurance Fund (SAIF). The effect to our corporation was a
pre-tax charge of $411,000. As a result of this one time charge, deposit
insurance premiums were substantially reduced.
For the year ended June 30, 1997, Three Rivers Financial Corporation reported
net income of $510,000. This figure compares favorably to the year earlier net
income figure of $670,000, considering the pre-tax SAIF charge of $411,000. Net
interest income improved to $3.4 million from the prior year of $3.1 million.
Total assets as of June 30, 1997 were $95.1 million compared to $87.2 million as
of June 30, 1996. Net loans totaled $61.8 million as of June 30, 1997, compared
to the June 30, 1996 total of $56.0 million, an increase of 10.4%. At year end,
shareholders' equity totaled $12.8 million. Book value per share was $15.55 at
June 30, 1997.
Like most smaller banking institutions located in the Midwest, your company
continues to face the ever present challenge of growing its asset base. To
address this issue, your company has identified potential areas of growth while
at the same time addressing what our identity should be in the marketplace. We
believe that how we conduct our business is as important as what we do to
achieve improved earnings.
As we continue to build upon our strengths, we must also acknowledge the
valuable role you hold as shareholders of the company. We recognize our
responsibility to maintain a policy of current income through the payment of
consistent dividends and growth in per share value over time.
We must recognize the effort and dedication of our employees and Board of
Directors and to express our appreciation for the continued support and
confidence evidenced by both our customers and shareholders.
G. Richard Gatton
G. Richard Gatton
President and
Chief Executive Officer
1
<PAGE> 4
BUSINESS OF THREE RIVERS FINANCIAL CORPORATION
Three Rivers Financial Corporation, a unitary savings and loan holding company
incorporated under the laws of the State of Delaware ("TRFC" or "the Company"),
owns all of the issued and outstanding common stock of First Savings Bank, a
Federal savings bank, chartered under the laws of the United States ("First
Savings Bank" or the "Bank"). In August 1995, TRFC acquired all of the common
stock issued by First Savings Bank upon its conversion from a mutual savings
bank to a stock savings bank (the "Conversion"). TRFC's activities have been
limited primarily to holding the common stock of First Savings Bank.
Serving the Three Rivers, Michigan area since 1886, First Savings Bank conducts
business from its main office at 123 Portage Avenue in Three Rivers and from its
full-service branches located in Three Rivers, Schoolcraft and Union, Michigan.
First Savings Bank is engaged principally in making loans secured by residential
real estate. First Savings Bank also originates consumer loans, loans secured by
multi-family residential and commercial properties, commercial business loans,
construction loans, second mortgages on single-family residences, home equity
lines of credit and loans secured by savings accounts. First Savings Bank also
invests in U.S. Government and agency obligations, obligations of states and
political subdivisions, mortgage-backed securities, collateralized mortgage
obligations, and other investments permitted by applicable law. Funds for
lending and other investment activities are obtained primarily from savings
deposits, loan principal repayments and borrowings from the Federal Home Loan
Bank ("FHLB") of Indianapolis.
As a savings and loan holding company, TRFC is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of Treasury (the "OTS"). As a savings bank chartered under the
laws of the United States, First Savings Bank is subject to regulation,
supervision and examination by the OTS and the Federal Deposit Insurance
Corporation (the "FDIC"). Deposits in First Savings Bank are insured up to
applicable limits by the FDIC. First Savings Bank is also a member of the FHLB
of Indianapolis.
MARKET PRICE OF TRFC'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
As of September 5, 1997, there were 823,540 common shares of TRFC outstanding
held by approximately 269 shareholders of record. The following table sets forth
the high and low sales prices and dividends declared per share of common stock
for the periods indicated. The prices do not include retail markups, markdowns
or commissions. TRFC's common shares are listed on the American Stock Exchange
("AMEX"), under the symbol "THR".
Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
September 30, 1996 13 1/2 12 3/8 $.075
December 31, 1996 14 3/8 12 5/8 .09
March 31, 1997 15 1/2 13 5/8 .09
June 30, 1997 16 3/8 13 3/8 .09
September 30, 1995 12 1/8 11 1/8 None
December 31, 1995 12 3/4 11 5/8 $.075
March 31, 1996 13 3/8 12 $.075
June 30, 1996 13 5/8 12 1/2 $.075
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions.
2
<PAGE> 5
The income of TRFC consists of dividends which may periodically be declared and
paid by the Board of Directors of First Savings Bank on the common shares of
First Savings Bank held by TRFC and earnings on the net proceeds retained by
TRFC, after reduction for a loan to the Three Rivers Financial Corporation
Employee Stock Ownership Plan, from the sale of TRFC's common shares in
connection with the Conversion.
In addition to certain federal income tax considerations, OTS regulations impose
limitations on the payment of dividends and other capital distributions by
savings associations. Under OTS regulations applicable to converted savings
associations, First Savings Bank is not permitted to pay a cash dividend on its
common shares if First Savings Bank's regulatory capital would, as a result of
the payment of such dividend, be reduced below the amount required for the
Liquidation Account (the account established for the purpose of granting a
limited priority claim on the assets of First Savings Bank in the event of a
complete liquidation to those members of First Savings Bank before the
Conversion who maintain a savings account at First Savings Bank after the
Conversion) or applicable regulatory capital requirements prescribed by the OTS.
OTS regulations applicable to all savings institutions provide that a savings
institution which immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution (including a dividend) has total
capital (as defined by OTS regulations) that is equal to or greater than the
amount of its capital requirements is generally permitted without OTS approval
(but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital to
assets ratio exceeded its required capital to assets ratio at the beginning of
the calendar year, or (2) 75% of its net earnings for the most recent
four-quarter period. Savings institutions with total capital in excess of the
capital requirements that have been notified by the OTS that they are in need of
more than normal supervision will be subject to restrictions on dividends. A
savings institution that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.
First Savings Bank currently meets all of its capital requirements and, unless
the OTS determines that First Savings Bank is an institution requiring more than
normal supervision, First Savings Bank may pay dividends in accordance with the
foregoing provisions of the OTS regulations. Unrestricted retained earnings of
First Savings Bank at June 30, 1997, available for the payment of dividends to
TRFC under the foregoing regulations was approximately $3,948,000.
3
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL INFORMATION
AND OTHER DATA
<TABLE>
<CAPTION>
----------------At June 30,---------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Selected Financial Condition Data: (In Thousands)
<S> <C> <C> <C> <C> <C>
Total assets $95,130 $87,151 $73,300 $72,611 $73,415
Cash and cash equivalents 7,438 4,112 3,822 6,331 6,889
Interest-earning time deposits in other
financial institutions 3,471 3,868 2,676 3,272 3,370
Securities and Federal Home Loan Bank stock 18,967 19,887 9,256 7,993 7,400
Loans receivable, net 61,813 56,043 54,377 52,128 52,519
Deposits 60,345 63,724 63,138 63,359 66,425
Borrowed funds 20,344 9,211 3,845 3,000 1,000
Shareholders' equity 12,803 12,786 5,395 4,743 4,161
------------Year Ended June 30,-----------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Selected Operating Results Data: (In Thousands)
Total interest income $6,795 $6,295 $5,484 $5,417 $5,968
Total interest expense 3,437 3,209 2,782 2,781 3,156
------ ------ ------ ------ ------
Net interest income 3,358 3,086 2,702 2,636 2,812
Provision for loan losses 60 65 87 65 68
------ ------ ------ ------ ------
Net interest income after provision for loan losses 3,298 3,021 2,615 2,571 2,744
------ ------ ------ ------ ------
Noninterest income:
Service charges and fees 276 253 243 293 280
Gains on sales of interest-earning assets 44 84 27 46 99
Other noninterest income 208 160 95 90 44
------ ------ ------ ------ ------
Total noninterest income 528 497 365 429 423
Total noninterest expense 3,047 2,504 2,014 2,253 2,229
------ ------ ------ ------ ------
Income before income taxes and cumulative
effect of accounting change 779 1,014 966 747 938
Income tax expense 269 344 314 235 371
------ ------ ------ ------ ------
Income before cumulative effect
of accounting change 510 670 652 512 567
Cumulative effect of accounting change 70
------ ------ ------ ------ ------
Net income $ 510 $ 670 $ 652 $ 582 $ 567
====== ====== ====== ====== ======
Earnings per common and common
equivalent share (1) $ .65 $ .78 N/A N/A N/A
====== ====== ====== ====== ======
</TABLE>
(1) This item is not applicable for any of the periods presented before
1996; prior to August 23, 1995, First Savings Bank was a mutual savings
bank.
4
<PAGE> 7
SELECTED CONSOLIDATED FINANCIAL INFORMATION
AND OTHER DATA
<TABLE>
<CAPTION>
-----------------Year Ended June 30,----------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data:
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net income to average total assets) .57% .80% .90% .80% .78%
Interest rate spread 3.46 3.45 3.58 3.58 3.86
Net interest margin(1) 3.95 3.95 3.89 3.73 4.02
Ratio of operating expense to average total assets 3.39 2.98 2.77 3.09 3.05
Return on shareholders' equity (ratio of net income to average equity) 4.50 5.19 13.00 12.88 14.66
Asset Quality Ratios:
Non-performing assets to total assets at end of period(2) .60 .69 .76 1.26 1.69
Allowance for loan losses to non-performing loans
at end of period 312.30 272.12 274.82 86.63 51.85
Capital Ratios:
Shareholders' equity to total assets at end of period 13.46 14.67 7.36 6.53 5.67
Average shareholders' equity to average assets 12.59 15.38 6.91 6.11 5.31
Dividend payout (dividends declared per share divided
by earnings per common and common equivalent share) 53.08 28.85 N/A N/A N/A
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.12x 1.12x 1.08x 1.04x 1.04x
</TABLE>
1 Net interest income divided by average interest earning assets.
2 Non-performing assets consist of non-accruing loans, accruing loans which
are past due 90 days or more and foreclosed assets.
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Bank was formed as a state-chartered savings and loan association in 1886.
The Bank became a member of the FHLB of Indianapolis in 1933, obtained federal
deposit insurance in 1939, converted to a federal mutual savings bank in 1987,
and converted to stock form in August 1995 as the wholly-owned subsidiary of
Three Rivers Financial Corporation. At June 30, 1997, TRFC had approximately
$95.1 million in assets, $60.3 million in deposits and $12.8 million in
shareholders' equity.
The principal business of savings banks, including First Savings Bank, has
historically consisted of attracting deposits from the general public and making
loans secured by residential real estate. First Savings Bank's earnings are
primarily dependent on net interest income, the difference between interest
income and interest expense. Interest income is a function of the balances of
loans and investments outstanding during the period and the yield earned on such
assets. Interest expense is the function of the balances of deposits and
borrowings outstanding during the same period and the rates paid on such
deposits and borrowings. First Savings Bank's earnings are also affected by
provisions for loan losses, service charge and fee income, operating expenses
and income taxes. Operating expenses consist primarily of employee compensation
and benefits, occupancy and equipment expenses, advertising, federal deposit
insurance premiums and other general and administrative expenses.
The Company is significantly affected by prevailing economic conditions as well
as federal regulations concerning monetary and fiscal policies of financial
institutions. Deposit balances are influenced by a number of factors including
interest rates paid on competing personal investments and the level of personal
income and savings within the Company's market. In addition, growth of deposit
balances is influenced by the perceptions of customers regarding the stability
of the financial services industry. Lending activities are influenced by the
demand for housing as well as competition from other lending institutions.
Lending activities may also be impacted by liquidity levels and funds available
to originate loans. The primary sources of funds for lending activities include
deposits, borrowed funds, loan repayments, investment maturities and funds
provided from operations.
FINANCIAL CONDITION
JUNE 30, 1997 COMPARED TO JUNE 30, 1996
The Company's total assets increased $7.9 million, or 9.1%, from $87.2 million
at June 30, 1996 to $95.1 million at June 30, 1997. The increase was due
primarily to increases in loans and interest-earning deposits with other
financial institutions. These increases were funded mainly by proceeds from
borrowed funds.
Cash and cash equivalents increased $3.3 million to $7.4 million at June 30,
1997. The increase was largely attributable to a $3.2 million increase in
interest-earning deposits in other financial institutions, from $1.5 million at
June 30, 1996 to $4.7 million at June 30, 1997.
Securities decreased $1.4 million from $19.3 at June 30, 1996 to $17.9 million
at June 30, 1997. Total securities held at June 30, 1997 were classified as held
to maturity and consisted of U.S. Government and federal agency securities,
mortgage-backed securities, securities issued by states and political
subdivisions and corporate securities. The mortgage backed and related
securities portfolio consisted of issues from FHLMC, GNMA, FNMA and other
collateralized mortgage obligations with contractual maturities ranging from one
to 25 years. The remaining securities held to maturity are primarily due in one
to five years.
During the years ended June 30, 1997 and 1996, the Company did not hold any
securities that would be categorized as trading securities.
Loans increased from $56.0 at June 30, 1996 to $61.8 million at June 30, 1997,
an increase of $5.8 million, or 10.4%. The increase in the loan portfolio was
primarily attributable to growth in first mortgage loans secured
6
<PAGE> 9
by one-to-four family residences of $5.9 million. At June 30, 1997, first
mortgage loans secured by one-to-four family residences comprise $43.0 million,
or 67.3%, of the loan portfolio. Management anticipates that this growth will
continue as long as interest rates do not rise significantly and the economy
does not experience a marked downturn.
In addition to its principal activity of making loans secured by residential
real estate, the Company offers a variety of consumer and other loans including
automobile, commercial, home equity, commercial real estate and general purpose
loans. Total consumer and other loans increased $1.1 million to $11.2 million at
June 30, 1997 as a result of lending programs designed to attract this loan
market. Commercial and other loans, such as home improvement and general purpose
loans, increased approximately $800,000 to $5.8 million, representing the
majority of the increase. Automobile and home equity loans comprise the
remaining total of consumer and other loans at $2.8 million and $2.6 million,
respectively. Both of these loan types remained relatively stable during the
year. Although the risks involved in consumer and other lending can be greater
than those associated with one-to-four family residential mortgage lending,
management does not believe that the additional risk is substantial, or that the
overall quality of the loan portfolio has been hindered, due to the standards
for extending credit in place at the Company.
Total deposits declined slightly from $63.7 million at June 30, 1996 to $60.3
million at June 30, 1997. The decrease in total deposits was primarily
attributable to a decrease of $2.3 million, or 5.8%, in time deposits and a
decrease of $1.2 million, or 5.5% in savings and NOW deposits. The timing and
magnitude of deposit growth remains difficult to predict and is affected by the
local economy, interest rates paid on competing personal investments and the
confidence of customers in the financial services industry.
To fund the loan growth, the decrease in total deposits was more than offset by
an increase in total borrowed funds of $11.1 million. The balance of borrowed
funds of $20.3 million at June 30, 1997 consists of advances from the Federal
Home Loan Bank ("FHLB") with both fixed and variable interest rates and stated
maturities ranging through 2000. The FHLB has designed various borrowing
programs to assist financial institutions in managing liquidity needs and
interest rate risk.
Shareholders' equity amounted to $12.8 million or 13.5% of total assets at June
30, 1997 compared to $12.8 million or 14.7% of total assets at June 30, 1996.
The increase primarily resulted from net income of $510,000 and $96,000 for the
release of ESOP shares, which were offset by the repurchase of stock totaling
$388,000 and dividends paid of $270,000.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED JUNE 30, 1997 AND 1996
General. Net income for the year ended June 30, 1997 was $510,000, a decrease of
$160,000 compared to net income for the year ended June 30, 1996 of $670,000.
This decrease was primarily due to a $271,000, net of tax impact, government
mandated special assessment to recapitalize the Savings Association Insurance
Fund ("SAIF"), administered by the Federal Deposit Insurance Corporation
("FDIC"). This one-time, special SAIF assessment amounted to $.657 for every
$100 of SAIF insured deposits as of March 31, 1995.
Interest Income. Interest income increased $500,000, or 7.9%, from $6.3 million
for the year ended June 30, 1996 to $6.8 million for the year ended June 30,
1997. This was due primarily to the increase in the average securities portfolio
of $5.3 million and the loan portfolio of $4.1 million during 1997 as compared
to 1996.
Interest Expense. Interest expense for the year ended June 30, 1997 was $3.4
million, an increase of 6.3% over the June 30, 1996 balance of $3.2 million. The
increase in expense was primarily the result of an increase in average borrowed
funds of $7.8 million, partially offset by a decrease of $1.6 million in the
average of total deposits.
Net interest income. Net interest income increased $272,000 for the year ended
June 30, 1997 as compared to June 30, 1996, primarily as a result of the volume
variances in interest-earning assets and interest-bearing liabilities noted
above. The net yield on average interest-earning assets was stable at 3.95% for
1996 and 1997. However, the average outstanding balance increased 8.8% from
$78.1 million in 1996 to $85.0 million for 1997. Future improvement in this
yield depends on various factors, including the Company's ability to continue to
7
<PAGE> 10
successfully market higher-yielding consumer loan products and to obtain growth
in low-cost deposit accounts such as NOW and savings.
Provision for Loan Losses. The provision for loan losses for the year ended June
30, 1997 was $60,000 compared to $65,000 in the prior year. The provision for
loan losses, less net charge-offs for the period of $14,000, increased the
allowance for loan losses to $487,000 at June 30, 1997 from $441,000 at June 30,
1996. Management continues to increase the allowance based on, among other
things, the composition of the Company's loan portfolio, including the higher
risk associated with commercial real estate and construction loans, home equity
lines of credit, and loans not secured by real estate, such as automobile loans.
In establishing the allowance, management also considers the level of classified
and nonperforming assets and their estimated value, and the national economic
outlook, which may tend to inhibit economic activity and depress real estate and
other values in the Company's primary market area.
Management will continue to monitor the allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions and loan portfolio quality dictate. Although management
maintains the allowance for loan losses at a level which it considers to be
adequate to provide for losses, there can be no assurance that future losses
will not exceed estimated amounts or that additional provisions for loan losses
will not be required in future periods. In addition, management's determination
as to the amount of the allowance for loan losses is subject to review by the
OTS and the FDIC as part of their examination processes, which may result in the
establishment of additional allowances based upon their judgments of the
information available to them at the time of their examinations.
Noninterest Income. Noninterest income increased from $497,000 to $528,000 from
1996 to 1997. This increase was attributable to a combination of factors. As a
result of lower refinancing volume from higher prevailing interest rates
compared to the prior fiscal year, proceeds from the sale of mortgage loans
decreased $1.0 million, from $3.6 million for the year ended June 30, 1996 to
$2.6 million for the year ended June 30, 1997. As a result, gains on sales of
loans decreased by $40,000. This decrease was mainly offset by increases of
$26,000 in other income and $23,000 in gains on foreclosed real estate.
Noninterest Expense. Noninterest expense increased from $2.5 million for the
year ended June 30, 1996 to $3.0 million for the year ended June 30, 1997. This
increase of $500,000 or 20%, was primarily the result of the $411,000 special
SAIF assessment as discussed above. Despite this one-time assessment, the Bank's
deposit premiums were reduced from $.23 for every $100 of assessable deposits to
$.064 during fiscal 1997, resulting in a decrease of $62,000 in the Bank's
regular SAIF deposit insurance premiums.
In addition to the SAIF adjustments, compensation and benefits increased
$179,000 in 1997 over 1996. Along with general rises in compensation levels of
employees, the increase in compensation expense is attributable to the vesting
of shares earned in connection with the Employee Stock Ownership Plan and
Recognition and Retention Plan.
Income Tax Expense. Income tax expense decreased from $344,000 for the year
ended June 30, 1996 to $269,000 for the year ended June 30, 1997 due primarily
to lower income before federal income taxes in 1997 as compared to 1996.
On August 20, 1996, the Small Business Job Protection Act of 1996 was signed
into law by the President of the United States. This law repeals the percentage
of taxable income method which is currently used to determine the Bank's bad
debt deduction for tax purposes. As more fully disclosed in Note 10, the Company
must recapture approximately $52,700 of income taxes over a six-year period
beginning no later than 1999.
8
<PAGE> 11
COMPARISON OF YEARS ENDED JUNE 30, 1996 AND 1995
General. Net income for the year ended June 30, 1996 was $670,000, an increase
of $18,000 compared to net income for the year ended June 30, 1995 of $652,000.
This increase was primarily the result of an increase in net interest income of
$384,000 combined with an increase in non-interest income of $133,000 that was
partially offset by an increase in operating expense of $490,000. Further
details regarding changes in the major categories of income and expense are
discussed below.
Interest Income. Interest income increased $811,000, or 14.78%, from $5.5
million for the year ended June 30, 1995 to $6.3 million for the year ended June
30, 1996. This was due primarily to the increased volume in securities and
loans, which was funded mostly by the Conversion proceeds, and an increase in
the rate earned on loans.
Interest Expense. Interest expense for the year ended June 30, 1996 was $3.2
million, an increase of 15.37% over the June 30, 1995 balance of $2.8 million.
The increase in expense was a result of increases in the rate on certificates of
deposit and the volume of borrowings, which were only partially offset by
decreases in the cost of other deposits.
Net interest income. Net interest income increased $384,000 for the year ended
June 30, 1996 as compared to June 30, 1995, primarily as a result of the volume
and rate increase in interest-earning assets noted above. The net yield on
average interest-earning assets increased from 3.89% for 1995 to 3.95% for 1996.
Provision for Loan Losses. The provision for loan losses for the year ended June
30, 1996 was $65,000 compared to $87,000 in the prior year, a decrease of
$22,000. The provision for loan losses, less net charge-offs for the period of
$6,000, increased the allowance for loan losses to $441,000 at June 30, 1996
from $382,000 at June 30, 1995.
Noninterest Income. Noninterest income increased from $365,000 to $497,000 from
1995 to 1996. This increase was primarily the result of increases of $57,000
each in net gains recorded on sales of loans and net gains on sales of
foreclosed real estate. Proceeds from the sale of mortgage loans increased $2.3
million, from $1.3 million for the year ended June 30, 1995 to $3.6 million for
the year ended June 30, 1996. The availability of fixed rate mortgage loans to
sell in the secondary market increased during the year primarily as a result of
the general decrease and stabilization of interest rates. This scenario has
resulted in a higher demand from borrowers for fixed rate mortgage loans. For
the year ended June 30, 1995, losses on foreclosed real estate were $39,000 as
compared to gains of $18,000 for the year ended June 30, 1996. The losses in
1995 resulted primarily from a net write-down of $45,000 on a significant
property. In 1996, one mortgage property was sold at a gain of $4,000. In
addition, a portion of deferred profit on a previous year's sale of other real
estate was recognized.
Noninterest Expense. Noninterest expense increased from $2.0 million for the
year ended June 30, 1995 to $2.5 million for the year ended June 30, 1996. This
increase of $490,000 or 24.31%, was primarily the result of an increase of
$303,000 in compensation and benefits. In 1995, the Company saw a net decrease
of $196,000 in compensation and benefits expense due to a settlement gain from
the conversion of its single-employer defined benefit pension plan to a
multi-employer plan. Not considering this gain, the increase in compensation and
benefits is $107,000, which is primarily due to normal increases in compensation
levels, as well as expense attributable to the Employee Stock Ownership Plan and
Retention and Recognition Plan that were adopted in fiscal 1996.
In addition to the increase in compensation and benefits expense, there was also
an increase of $146,000 in other noninterest expense. This increase resulted
primarily from additional expenses associated with being a public company, such
as increased legal and accounting fees due to new accounting and reporting
requirements, fees related to stock listing and recordkeeping, and holding
company franchise tax.
Income Tax Expense. Income tax expense increased for the year ended June
30, 1996 due primarily to higher income before federal income taxes in
1996 as compared to 1995.
9
<PAGE> 12
IMPACT OF INFLATION AND CHANGING PRICES
Generally accepted accounting principles require that measurement of operations
and financial position be made using historical dollars, with no consideration
to current values except in the cases of certain securities available for sale,
which are recorded at fair value and loans held for sale, which are recorded at
the lower of cost or market value. The impact of inflation is reflected in the
increased cost of operations for the Company, as nearly all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rate fluctuations have a greater effect on the Company's performance
than changes in the general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same degree as the level of
inflation.
ASSET/LIABILITY MANAGEMENT
The matching of maturity or repricing of assets and liabilities may be analyzed
by examining the extent to which such assets and liabilities are "interest rate
sensitive", and by monitoring an institution's interest rate sensitivity "gap".
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated, based upon certain assumptions,
to mature or reprice within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that same time period.
A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income,
although the magnitude of repricing of individual items also will effect the
change in net interest income.
A primary objective of asset/liability management is to manage interest rate
risk. The Company monitors its asset/liability mix on an ongoing basis, and,
from time-to-time, may institute certain changes in its product mix and asset
and liability maturities.
At June 30, 1997, the Company's total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $19.6 million, representing a negative
cumulative one-year gap ratio of 21.58% of total interest-earning assets.
Therefore, management believes that the Company could be adversely affected
during a period of rising interest rates depending on the magnitude of repricing
of individual items, particularly adjustable rate loans, which are subject to
various limitations on interest rate changes, and the passbook and
transaction-type demand accounts for which interest rate changes will depend on
competitive and other factors.
10
<PAGE> 13
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1997 which are scheduled to
reprice or mature in each of the time periods shown. Except as stated below, the
amounts of assets or liabilities shown which reprice or mature during a
particular period were determined in accordance with the contractual terms of
the asset or liability.
<TABLE>
<CAPTION>
------------------------Maturing or Repricing--------------------------
0-3 3-6 6 Months to 1-3 3-5 Over
Months Months One Year Years Years 5 Years Total
------ ------ -------- ----- ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate mortgage loans $ 1,874 $ 1,403 $ 583 $ 1,756 $ 1,178 $ 8,324 $ 15,118
Adjustable rate mortgage loans 2,725 3,395 6,364 14,283 4,364 6,359 37,490
Consumer and other loans 3,807 662 1,326 1,942 3,052 369 11,158
Mortgage-backed securities - - 404 1,104 6,049 6,693 14,250
Securities - 500 998 500 1,302 375 3,675
Interest-earning time deposits 1,192 594 893 792 - - 3,471
Other interest-earning assets 4,713 - - - - - 4,713
FHLB stock 1,042 - - - - - 1,042
--------- --------- -------- -------- ------- ------- ---------
Total interest-earning assets 15,353 6,554 10,568 20,377 15,945 22,120 90,917
Interest-bearing liabilities:
Time deposits 8,445 5,234 7,130 12,322 4,730 - 37,861
Passbook savings 8,024 - - - - - 8,024
NOW deposits 5,360 - - - - - 5,360
Money market demand accounts 6,548 - - - - - 6,548
Other borrowings 3,351 2,000 6,000 8,661 332 - 20,344
--------- --------- -------- -------- ------- ------- ---------
Total interest-bearing liabilities 31,728 7,234 13,130 20,983 5,062 - 78,137
--------- --------- -------- -------- ------- ------- ---------
Interest-earning assets less
interest-bearing liabilities $ (16,375) $ (680) $ (2,562) $ (606) $10,883 $22,120 $ 12,780
========= ========= ======== ======== ======= ======= =========
Cumulative interest-rate sensitivity gap $ (16,375) $ (17,055) $(19,617) $(20,223) $(9,340) $12,780
========= ========= ======== ======== ======= =======
Cumulative interest-rate sensitivity gap as a
percentage of total interest-earning assets (18.01)% (18.76)% (21.58)% (22.24)% 10.27% 14.06%
====== ====== ====== ====== ===== =====
</TABLE>
11
<PAGE> 14
Certain assumptions affecting the interest-rate sensitivity as calculated above
are as follows:
1. All loan amounts are not reduced by the undisbursed portion of loans
in process, unearned and deferred income, and the allowance for loan
losses.
2. Other interest-earning assets includes interest-earning deposit
accounts.
3. Fixed-rate time deposit accounts will not be withdrawn prior to
maturity.
4. Passbook savings, commercial demand, NOW and money market accounts,
which totaled $19.9 million at June 30, 1997, are withdrawn or reprice
within three months due to the possibility that such deposits will
reprice in the event of significant changes in the overall level of
interest rates.
The effect of these assumptions is to quantify the dollar amount of items that
are interest-sensitive and which can be repriced within each of the periods
specified. Such repricing can occur in one of three ways: (1) the rate of
interest to be paid on an asset or liability may adjust periodically on the
basis of an interest rate index; (2) an asset or liability such as a mortgage
loan may amortize, permitting reinvestment of cash flows at the then prevailing
interest rates; or (3) an asset or liability may mature, at which time the
proceeds can be reinvested at the current market rates.
In recent years, management has measured interest rate sensitivity by computing
the "gap" between the assets and liabilities which were expected to mature or
reprice within certain periods, based on assumptions regarding loan prepayment
and deposit decay rates formerly provided by the OTS. However, the OTS now
requires the computation of amounts by which the net present value of an
institution's cash flows from assets, liabilities and off balance sheet items
(the institution's net portfolio value, or "NPV") would change in the event of a
range of assumed changes in market interest rates. The OTS also requires the
computation of estimated changes in net interest income over a four quarter
period. These computations estimate the effect of an institution's NPV and net
interest income of instantaneous and permanent 1% to 4% increases and decreases
in market interest rates. In the Company's interest rate sensitivity policy, the
Board of Directors has established a maximum permissible decrease of 45% in net
interest income and a maximum permissible decrease of 55% in NPV given a market
interest rate change of 4%. The policy incorporates maximum permissible changes,
rather than absolute targets, to allow flexibility while avoiding an over
reliance on specific interest rate forecasts.
12
<PAGE> 15
The following table sets forth the interest rate sensitivity of the Bank's net
portfolio value as of June 30, 1997 in the event of 1%, 2%, 3% and 4%
instantaneous and permanent increases and decreases in market interest rates,
respectively. These changes are set forth below as basis points, where 100 basis
points equals one percentage point.
<TABLE>
<CAPTION>
NPV as % of Present
Net Portfolio Value Value of Assets
----------------------------------- ---------------
Changes Basis Point
in Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $ 11,687 $ -2,909 -20% 12.66% -226 bp
+300 bp 12,585 -2,011 -14 13.41 -151 bp
+200 bp 13,418 -1,177 -8 14.08 -84 bp
+100 bp 14,116 -479 -3 14.61 -32 bp
0 bp 14,596 14.92
-100 bp 14,767 172 1 14.96 +4 bp
-200 bp 14,694 98 1 14.79 -14 bp
-300 bp 14,584 -11 0 14.58 -35 bp
-400 bp 14,651 56 0 14.52 -40 bp
</TABLE>
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments, and deposit run-offs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions management may undertake in response to changes in interest rate.
Certain shortcomings are inherent in the method of analysis presented in both
the computation of NPV and in the analysis presented in prior tables setting
forth the maturing and repricing of interest-earning assets and interest-bearing
liabilities. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in differing degrees
to changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, which
represent the Company's primary loan product, have features which restrict
changes in interest rate on a short-term basis and over the life of the asset.
In addition, the proportion of adjustable-rate loans in the Company's portfolios
could decrease in future periods if market interest rates remain at or decrease
below current levels due to refinance activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in the tables. Finally, the ability of
borrowers to service their adjustable-rate debt may decrease in the event of an
interest rate increase.
13
<PAGE> 16
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Net interest income is affected by (i) the difference ("interest rate spread")
between rates of interest earned on interest-earning assets and rates of
interest paid on interest-bearing liabilities and (ii) the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income. Savings institutions have
traditionally used interest rate spreads as a measure of net interest income.
Another indication of an institution's net interest income is its "net yield on
interest-earning assets" which is net interest income divided by average
interest-earning assets.
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 average cost of liabilities for the period
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of assets or liabilities, respectively, for the
periods presented. During the periods indicated, nonaccruing loans are included
in the net loan category. 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.
14
<PAGE> 17
<TABLE>
<CAPTION>
--------------------------Years ended June 30,-------------------------------------
At June 30, 1997----------1997------------ ----------1996----------- ----------1995-----------
Average Interest Average Interest Average Interest
Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Cost Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $61,813 8.55% $58,835 $5,163 8.78% $54,749 $4,841 8.84% $53,331 $4,582 8.59%
Securities (2) 17,925 6.08 19,083 1,194 6.55 13,739 861 6.32 9,019 526 6.10
Interest-earning time
deposits 3,471 6.13 3,394 204 6.01 3,497 219 6.26 2,975 175 5.88
Other interest-earning
assets 4,713 4.94 2,891 172 5.95 5,461 325 5.95 3,548 157 4.43
FHLB stock 1,042 7.85 767 62 8.08 619 49 7.92 619 44 7.11
------- ---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-
earning assets $88,964 7.76 84,970 6,795 8.00 78,065 6,295 8.06 69,492 5,484 7.89
======= ---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Interest-bearing liabilities:
Money market $ 6,548 3.35 6,017 184 3.06 6,599 193 2.92 6,836 215 3.15
Savings deposits 8,024 2.32 8,562 197 2.30 11,576 262 2.26 11,129 307 2.76
NOW accounts 5,360 2.01 8,522 110 1.29 5,880 116 1.97 5,477 122 2.23
Certificates of deposit 37,861 5.88 38,622 2,157 5.58 39,299 2,281 5.80 37,652 1,937 5.14
Borrowings 20,344 5.75 14,049 789 5.62 6,273 357 5.69 3,512 201 5.72
------- ---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities $78,137 5.00 75,772 3,437 4.54 69,627 3,209 4.61 64,606 2,782 4.31
======= ---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Net interest income $3,358 3,086 $2,702
====== ====== ======
Net interest rate spread 2.76% 3.46% 3.45% 3.58%
==== ==== ==== ====
Net earning assets $ 9,198 $ 8,438 $ 4,886
======= ======= =======
Net yield on average interest-
earning assets 3.95% 3.95% 3.89%
==== ==== ====
Average interest-earning asset
to average interest-bearing
liabilities 1.12X 1.12X 1.08X
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
(2) Yields reflected have not been computed on a tax equivalent basis.
15
<PAGE> 18
RATE/VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between changes related to higher
or lower outstanding balances and changes due to the levels and changes in
interest rate. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (i.e. changes in volume multiplied by old rate) and (ii) changes in rate
(i.e. changes in rate multiplied by old volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
------------------------------------Years ended June 30,----------------------------------
-----1997----vs.---1996----- ------1996----vs.----1995----- ----1995----vs.-----1994----
Increase Increase Increase
(Decrease) Total (Decrease) Total (Decrease) Total
Due to Increase Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 359 $ (37) $ 322 $ 124 $ 135 $ 259 $ 35 $(135) $(100)
Securities 301 32 333 315 20 335 53 87 140
Interest-earning
time deposits (6) (9) (15) 32 12 44 (22) 38 16
Other interest-
earning assets (142) (11) (153) 74 94 168 (53) 56 3
FHLB stock 12 1 13 5 5 8 8
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-
earning
assets $ 524 $ (24) 500 $ 545 $ 266 811 $ 13 $ 54 67
===== ===== ----- ===== ===== ----- ===== ===== -----
Interest-bearing
liabilities:
Money market $ (18) $ 9 (9) $ (7) $ (15) (22) $ (6) $ 29 23
Savings deposits (69) 4 (65) 12 (57) (45) (2) (5) (7)
NOW accounts 42 (48) (6) 9 (15) (6) (30) 23 (7)
Certificates of
deposit (39) (85) (124) 87 257 344 (122) 48 (74)
Borrowings 437 (5) 432 157 (1) 156 36 30 66
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-
bearing
liabilities $ 353 $(125) 228 $ 258 $ 169 427 $(124) $ 125 1
===== ===== ----- ===== ===== ----- ===== ===== -----
Net interest income $ 272 $ 384 $ 66
===== ===== =====
</TABLE>
16
<PAGE> 19
ASSET QUALITY
Total non-performing assets decreased to $571,000 at June 30, 1997 as compared
to $602,000 at June 30, 1996. The ratio of non-performing assets to total assets
at June 30, 1997 was .60% compared to .69% at June 30, 1996. Included in
non-performing assets at June 30, 1997 were mortgage loans totaling $5,000 and
consumer and commercial loans totaling $151,000. Foreclosed real estate was
$415,000 at June 30, 1997. The allowance for loan losses was 312.30% and 272.12%
of nonperforming loans at June 30, 1997 and June 30, 1996, respectively.
OTS regulations require that management periodically review and classify assets
pursuant to the classification of assets policy set forth in its regulations.
Based on management's review of assets as of June 30, 1997, $92,000 of loans
were classified as special mention and $64,000 as substandard. As the balance of
such loan classifications represent smaller-balance homogeneous loan types,
these loans are not considered impaired at June 30, 1997. There were no assets
classified as doubtful or loss. Management reviews assets on a monthly basis,
and at the end of each quarter prepares the asset classification listing in
conformity with the OTS regulations.
Management has considered a commercial loan participation, classified as a watch
loan at June 30, 1997, as impaired. Within the Bank's asset classification
policy, a watch classification represents a loan or loan relationship beginning
to experience a deterioration in financial condition, however, not yet having
the severity to warrant a special mention classification. At June 30, 1997, the
Bank's balance in the participation was $522,000. Collection under the original
terms of the agreement is in doubt and, thus, management has classified the loan
as impaired at June 30, 1997 and allocated a specific reserve of $60,000 within
the allowance for loan losses.
LIQUIDITY AND CAPITAL RESOURCES
First Savings Bank's primary sources of funds are deposits, borrowings from the
FHLB, principal and interest payments on loans, and maturities and paydowns on
securities. While scheduled repayments of loans and security maturities and
paydowns are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition. Management has controlled this fluctuation in the
sources of funds through borrowings from the FHLB. Management believes that the
Bank's sources of funds will be adequate to meet its foreseeable liquidity
needs.
A standard measure of liquidity for thrift institutions is the ratio of cash and
eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year. Currently, the OTS requires savings institutions
to maintain a liquidity ratio of 5%, of which 1% must be comprised of short-term
investments. As of June 30, 1997, First Savings Bank's liquidity ratio was
15.14%.
During the year ended June 30,1997, there was a net increase in cash and cash
equivalents of $3.3 million. Major sources of cash during the period were net
cash from operations of $828,000, a net increase of $11.1 million in borrowings
from the FHLB, and $3.6 million in proceeds from the maturities and paydowns of
securities held to maturity. Major uses of cash during the period included the
purchase of $2.2 million of securities held to maturity, a net increase of $5.8
million in loans and a net reduction of $3.4 million in deposits.
During the year ended June 30, 1996, there was a net increase in cash and cash
equivalents of $289,000. Major sources of cash during the period were net cash
from operations of $1.6 million, a net increase of $5.4 million in borrowings
from the FHLB, proceeds from the Conversion of $7.3 million, and $2.1 million in
proceeds from the maturity, sale and paydown of securities. Major uses of cash
during the period included the purchase of $12.8 million of securities held to
maturity, a $2.6 million purchase of loans and a $1.2 million investment in
interest-earning deposits in other financial institutions.
17
<PAGE> 20
During the year ended June 30, 1995, there was a net decrease in cash and cash
equivalents of $2.5 million. Major sources of cash during the period, which
partially offset the uses of cash, included net cash from operations of
$664,000, a net increase of $845,000 in borrowings from the FHLB, proceeds from
the maturity and paydown of securities held to maturity of $543,000, and
proceeds from the maturity of interest-earning time deposits of $596,000. Major
uses of cash during the period included the purchase of $1.8 million of
investment and mortgage-backed securities, a $2.4 million increase in loans,
which includes the purchase of $1.3 million in loans, and a $350,000 decrease in
deposits.
The Company also has a need for liquid assets in order to fund its operating
expenses, as well as for the payment of any dividends to shareholders. The
Company currently has no significant liquidity commitments, as operating costs
are modest and dividends to shareholders are discretionary. At June 30, 1997,
the Company had $260,000 in liquid assets. The primary source of liquidity on an
ongoing basis is dividends from the Bank. For the year ended June 30, 1997, the
Bank paid $300,000 in dividends to the Company. For the same period, the Company
paid dividends to shareholders of $270,000.
Federally insured savings institutions are required to maintain a minimum level
of regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The Bank is required to maintain regulatory capital sufficient to meet tangible,
core and risk-based capital ratios of 1.5%, 3.0%, and 8.0%. At June 30, 1997,
the Bank exceeded each of its capital requirements, with tangible, core and
risk-based capital ratios of 11.39%, 11.39%, and 23.05%, respectively.
IMPACT OF NEW ACCOUNTING STANDARDS
Information pertaining to this topic appears in Note 17 to the consolidated
financial statements of Three Rivers Financial Corporation, which are included
as part of this report.
18
<PAGE> 21
[CROWE CHIZEK LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Three Rivers Financial Corporation
Three Rivers, Michigan
We have audited the accompanying consolidated statements of financial condition
of Three Rivers Financial Corporation as of June 30, 1997 and 1996 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 referred to above present
fairly, in all material respects, the financial position of Three Rivers
Financial Corporation as of June 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
August 8, 1997
19
<PAGE> 22
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from other financial institutions $ 2,724,565 $ 2,613,637
Interest-earning deposits in other financial institutions 4,713,428 1,497,984
------------ ------------
Cash and cash equivalents 7,437,993 4,111,621
Interest-earning time deposits in other financial institutions 3,470,980 3,867,980
Securities held to maturity (fair value: 1997 - $17,891,461
and 1996 - $18,875,837) 17,924,950 19,267,832
Loans receivable, net of allowance for loan losses
of $487,184 in 1997 and $440,835 in 1996 61,812,630 56,042,608
Federal Home Loan Bank stock 1,042,300 618,700
Accrued interest receivable 450,892 554,937
Premises and equipment, net 1,435,603 1,484,805
Foreclosed real estate 415,059 440,304
Investment in low-income housing partnership 473,117 499,880
Other assets 666,385 262,670
------------ ------------
Total assets $ 95,129,909 $ 87,151,337
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Demand deposits $ 2,551,384 $ 2,442,447
Savings and NOW deposits 19,932,473 21,086,566
Other time deposits 37,860,935 40,195,407
------------ ------------
Total deposits 60,344,792 63,724,420
Borrowed funds 20,344,287 9,210,609
Advance payments by borrowers for taxes and insurance 399,331 422,832
Due to low-income housing partnership 413,192 461,740
Accrued expenses and other liabilities 825,563 546,138
------------ ------------
Total liabilities 82,327,165 74,365,739
Shareholders' equity
Preferred stock, par value $.01; 500,000 shares authorized;
none outstanding
Common stock, par value $.01; 2,000,000 shares authorized; 831,925 and
859,625 shares issued and 823,540 and 851,240
outstanding at June 30, 1997 and 1996, respectively 8,319 8,596
Additional paid-in capital 7,619,120 7,979,421
Retained earnings, substantially restricted 6,110,757 5,870,983
------------ ------------
13,738,196 13,859,000
Unearned Employee Stock Ownership Plan shares (561,626) (630,396)
Unearned Recognition and Retention Plan shares (262,281) (331,461)
Treasury stock, at cost (8,385 shares at
June 30, 1997 and 1996) (111,545) (111,545)
------------ ------------
Total shareholders' equity 12,802,744 12,785,598
------------ ------------
Total liabilities and shareholders' equity $ 95,129,909 $ 87,151,337
============ ============
</TABLE>
The accompanying notes are an interal part of these
consolidated financial statements.
20
<PAGE> 23
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans receivable $5,163,206 $4,841,166 $ 4,582,307
Securities 1,194,087 861,170 526,357
Other interest and dividend income 437,754 592,822 375,726
---------- ---------- -----------
6,795,047 6,295,158 5,484,390
Interest expense
Deposits 2,647,541 2,852,281 2,580,655
Borrowed funds 789,448 357,087 201,204
---------- ---------- -----------
3,436,989 3,209,368 2,781,859
---------- ---------- -----------
NET INTEREST INCOME 3,358,058 3,085,790 2,702,531
Provision for loan losses 60,000 65,000 87,000
---------- ---------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,298,058 3,020,790 2,615,531
Noninterest income
Loan servicing 103,845 96,291 97,120
Net gains on sales of loans 44,270 83,778 26,875
Net gains (losses) on foreclosed real estate 40,949 17,879 (38,762)
Net realized gain on sales of securities available for sale 995
Service charges on deposit accounts 172,075 156,885 146,117
Other income 167,274 141,553 133,172
---------- ---------- -----------
528,413 497,381 364,522
Noninterest expense
Compensation and benefits 1,294,928 1,115,910 791,372
Occupancy and equipment 438,542 402,585 385,491
Federal deposit insurance premium 496,715 147,958 145,946
Advertising and promotion 81,178 71,073 64,390
Data processing 193,987 228,557 220,480
Professional fees 103,923 119,670 50,165
Printing, postage, stationery, and supplies 112,073 102,722 101,502
Other 326,189 315,172 254,623
---------- ---------- -----------
3,047,535 2,503,647 2,013,969
---------- ---------- -----------
INCOME BEFORE FEDERAL INCOME TAXES 778,936 1,014,524 966,084
Federal income tax expense 269,410 344,484 314,354
---------- ---------- -----------
NET INCOME $ 509,526 $ 670,040 $ 651,730
========== ========== ===========
Earnings per common and common equivalent share
subsequent to conversion $ .65 $ .78 N/A
========== ========== ===========
</TABLE>
The accompanying notes are an integal part of
these consolidated financial statements.
21
<PAGE> 24
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized Unearned
Appreciation Employee
on Securities Stock
Additional Available Ownership
Common Paid-In Retained For Sale, Plan
Stock Capital Earnings Net of Tax Shares
----- ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1994 $4,742,629
Net income for the year ended June 30, 1995 651,730
Net change in unrealized appreciation
on securities available for sale, net of tax $ 1,122
---------- ------------
BALANCE AT JUNE 30, 1995 5,394,359 1,122
Net income for the year ended June 30, 1996 670,040
Proceeds from the sale of 859,625 shares of common
stock, net of conversion costs $ 8,596 $ 7,964,673 $ (687,700)
Cash dividends declared on common stock,
$.225 per share (193,416)
5,730 shares committed to be released under the ESOP 14,748 57,304
Repurchase of 26,000 shares of common stock for RRP
Amortization of 1,083 RRP shares
Repurchase of 8,385 shares of common stock
Net change in unrealized appreciation
on securities available for sale, net of tax (1,122)
------- ----------- ---------- ------------ ------------
<CAPTION>
Unearned
Recognition
and
Retention Total
Plan Treasury Shareholders'
Shares Stock Equity
------ ----- ------
<S> <C> <C> <C>
BALANCE AT JULY 1, 1994 $ 4,742,629
Net income for the year ended June 30, 1995 651,730
Net change in unrealized appreciation
on securities available for sale, net of tax 1,122
--------------
BALANCE AT JUNE 30, 1995 5,395,481
Net income for the year ended June 30, 1996 670,040
Proceeds from the sale of 859,625 shares of common
stock, net of conversion costs 7,285,569
Cash dividends declared on common stock,
$.225 per share (193,416)
5,730 shares committed to be released under the ESOP 72,052
Repurchase of 26,000 shares of common stock for RRP $ (345,874) (345,874)
Amortization of 1,083 RRP shares 14,413 14,413
Repurchase of 8,385 shares of common stock $ (111,545) (111,545)
Net change in unrealized appreciation
on securities available for sale, net of tax (1,122)
----------- ----------- --------------
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
(Continued) 22
<PAGE> 25
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
on Securities
Additional Available
Common Paid-In Retained For Sale,
Stock Capital Earnings Net of Tax
----- ------- -------- ----------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 $ 8,596 $ 7,979,421 $ 5,870,983 $ 0
Net income for the year ended June 30, 1997 509,526
Cash dividends declared on common stock,
$.345 per share (269,752)
6,877 shares committed to be released under the ESOP 26,959
Amortization of 5,200 RRP shares
Retirement of 27,700 shares of common stock (277) (387,260)
----------- ------------- ------------ ------------
BALANCE AT JUNE 30, 1997 $ 8,319 $ 7,619,120 $ 6,110,757 $ 0
=========== ============= ============ ============
<CAPTION>
Unearned Unearned
Employee Recognition
Stock and
Ownership Retention Total
Plan Plan Treasury Shareholders'
Shares Shares Stock Equity
------ ------ ----- ------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 $ (630,396) $ (331,461) $ (111,545) $ 12,785,598
Net income for the year ended June 30, 1997 509,526
Cash dividends declared on common stock,
$.345 per share (269,752)
6,877 shares committed to be released under the ESOP 68,770 95,729
Amortization of 5,200 RRP shares 69,180 69,180
Retirement of 27,700 shares of common stock (387,537)
------------ ----------- ----------- --------------
BALANCE AT JUNE 30, 1997 $ (561,626) $ (262,281) $ (111,545) $ 12,802,744
============ =========== =========== ==============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
23
<PAGE> 26
THREE RIVERS FINANICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 509,526 $ 670,040 $ 651,730
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation of premises and equipment 202,057 190,845 169,990
Net amortization (accretion) on securities (35,293) 21,914 17,545
Provision for loan losses 60,000 65,000 87,000
RRP expense 69,180 14,413
ESOP expense 95,729 72,052
Loans originated for sale (2,528,149) (3,281,291) (1,481,218)
Proceeds from sales of loans held for sale 2,572,419 3,640,219 1,321,612
Net realized gains on sales of loans (44,270) (83,778) (26,875)
Net realized gain on sales of securities (995)
Change in
Accrued interest receivable and other assets (352,906) 149,475 138,973
Accrued expenses and other liabilities 279,425 110,366 (214,364)
----------- ------------ -----------
Net cash provided by operating activities 827,718 1,568,260 664,393
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in interest-earning time
deposits with other financial institutions 397,000 (1,191,980) 596,000
Net decrease (increase) in loans (5,751,541) 763,598 (1,046,145)
Purchases of loans (2,571,006) (1,325,000)
Net premises and equipment expenditures (152,855) (101,333) (368,360)
Purchases of securities available for sale (500,207)
Proceeds from sales of securities available for sale 501,094
Purchases of mortgage-backed and related securities
held to maturity (2,245,992) (12,812,143) (1,321,858)
Proceeds from maturities of securities held to maturity 1,000,000 964,342 30,000
Paydowns on mortgage-backed and related securities
held to maturity 2,624,167 682,134 512,500
Purchase of Federal Home Loan Bank stock (423,600)
Net investment in low-income housing partnership (21,785) (38,140)
----------- ------------ -----------
Net cash used in investing activities (4,574,606) (13,803,434) (3,423,070)
</TABLE>
(Continued)
24
<PAGE> 27
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (3,379,628) $ 586,532 $ (349,638)
Net change in advances from borrowers for taxes
and insurance (23,501) (62,359) (245,865)
Proceeds from borrowed funds 18,750,000 6,500,000 3,000,000
Repayments of borrowed funds (7,616,322) (1,134,372) (2,155,019)
Proceeds from sale of common stock, net of
conversion costs 7,285,569
Cash dividends paid (269,752) (193,416)
Purchase of common stock (387,537) (345,874)
Purchase of treasury stock (111,545)
-------------- ------------- -------------
Net cash provided by financing activities 7,073,260 12,524,535 249,478
-------------- ------------- -------------
Net change in cash and cash equivalents 3,326,372 289,361 (2,509,199)
Cash and cash equivalents at beginning of period 4,111,621 3,822,260 6,331,459
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,437,993 $ 4,111,621 $ 3,822,260
============== ============= =============
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 3,444,830 $ 3,189,275 $ 2,773,048
Income taxes 392,000 198,000 180,000
Transfers from loans to real estate acquired
through foreclosure 78,481 76,563 35,847
Transfer from investment securities to securities
available for sale 630,270
Transfer from investment securities to securities
held to maturity 1,131,417
Transfer from mortgage-backed and related securities
to mortgage-backed and related securities
held to maturity 6,231,102
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
25
<PAGE> 28
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation, Nature of Operations and Industry Segment
Information: The accompanying consolidated financial statements include the
accounts of Three Rivers Financial Corporation ("the Company"), First Savings
Bank ("the Bank") and Alpha Financial, Inc. ("Alpha"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company is a savings and loan holding company located in Three Rivers,
Michigan and owns all of the outstanding stock of the Bank. Alpha is a
wholly-owned subsidiary of the Bank. The Company was organized in April 1995 for
the purpose of owning all of the outstanding stock of the Bank. Financial
information presented herein, prior to the organization of the Company reflects
the consolidated financial position, results of operations and cash flows of the
Bank and Alpha.
The Bank grants residential and commercial real estate and consumer loans,
accepts deposits and engages in mortgage banking activities. Substantially all
loans are secured by specific items of collateral including residences, business
assets and consumer assets. The Bank services its customers, which are primarily
located in southwestern Michigan, through its main office in Three Rivers and
three other offices located in its market area. The primary business of Alpha is
to own and receive the dividend income from stock holdings in MMLIC Life
Insurance Company.
Use of Estimates in the Preparation of Financial Statements: 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, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period, as well as the disclosures
provided. Areas involving the use of significant estimates and assumptions in
the accompanying financial statements include the allowance for loan losses,
fair values of securities and other financial instruments, determination and
carrying value of impaired loans, and the determination of depreciation of
premises and equipment recognized in the Company's financial statements. Actual
results could differ from those estimates. Estimates associated with the
allowance for loan losses and the fair values of securities and other financial
instruments are particularly susceptible to material change in the near term.
Cash and Cash Equivalents: Cash and cash equivalents are defined to include the
Company's cash on hand, amounts due from financial institutions and short-term
interest-earning deposits in other financial institutions with original
maturities of 90 days or less. The Company reports net cash flows for customer
loan and deposit transactions, advance payments by borrowers for taxes and
insurance, and interest-earning time deposits in other financial institutions.
Securities: The Company classifies securities into held-to-maturity,
available-for-sale and trading categories. Held-to-maturity securities are those
which the Company has the positive intent and ability to hold to maturity, and
are reported at amortized cost. Available-for-sale securities are those the
Company may decide to sell if needed for liquidity, asset-liability management
or other reasons. Available-for-sale securities are reported at fair value, with
unrealized gains and losses included as a separate component of shareholders'
equity, net of tax, until realized. Trading securities are bought principally
for sale in the near term, and are reported at fair value with unrealized gains
and losses included in earnings.
Realized gains and losses resulting from the sale of securities are computed by
the specific identification method. Interest and dividend income, adjusted by
amortization of purchase premium or discount, is included in earnings. Premiums
and discounts are recognized in interest income using the interest method over
the period of maturity.
(Continued)
26
<PAGE> 29
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Banking Activities: Mortgage loans originated and intended for sale in
the secondary market are reported on the statements of financial condition as
loans held for sale and are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to income.
Loan servicing fees are recognized when received and the related costs are
recognized when incurred. The Bank sells mortgages into the secondary market at
market prices, which includes consideration for normal servicing fees.
Effective July 1, 1996, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights." This
Statement changed the accounting for mortgage servicing rights retained by a
loan originator. Under this standard, if the originator sells or securitizes
mortgage loans and retains the related servicing rights, the total cost of the
mortgage loan is allocated between the loan (without the servicing rights) and
the servicing rights, based on their relative fair values. Under prior practice,
all such costs were assigned to the loan. The costs allocated to mortgage
servicing rights are now recorded as a separate asset and are amortized in
proportion to, and over the life of, the net servicing income. The carrying
value of the mortgage servicing rights are periodically evaluated for
impairment. The effect of adopting the statement was not material.
Loans Receivable, Net: Loans are reported at the unpaid principal balance, less
the allowance for loan losses, net deferred fees or costs on originated loans,
and unamortized premiums or discounts on purchased loans.
Discounts on mortgage loans are amortized to income using the level-yield method
over the remaining period to contractual maturity, adjusted for anticipated
prepayments. Interest income is reported on the interest method and includes
amortization of net deferred fees and costs over the loan term. When full loan
repayment is in doubt, interest income is not reported. Payments received on
such loans are reported as principal reductions.
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Estimating the risk of loss and
the amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
losses that are currently anticipated. Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. A loan is charged off against the
allowance by management when deemed uncollectible, although collection efforts
continue and future recoveries may occur. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments of information available to them at the time of their
examination.
(Continued)
27
<PAGE> 30
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of the collateral if the loan is collateral dependent. Loans are evaluated
for impairment when payments are delayed, typically 90 days or more, or when the
internal grading system indicates.
Premises and Equipment: Asset cost is reported net of accumulated depreciation.
These assets are reviewed for impairment under SFAS No. 121 when events indicate
the carrying amount may not be recoverable. Depreciation expense is calculated
on the straight-line method over asset useful lives. The cost of leasehold
improvements is being amortized using the straight-line method over the terms of
the related leases, or over the useful lives of the assets, if less.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at fair value at the
date of acquisition, establishing a new cost basis. Any reduction to fair value
from the carrying value of the related loan at the time of acquisition is
accounted for as a loan loss and charged against the allowance for loan losses.
After acquisition, the property is carried at the lower of cost or fair value,
less estimated costs to sell. A valuation allowance is recorded through a charge
to income for the amount of selling costs. Valuations are periodically performed
by management and valuation allowances are adjusted through a charge to income
for changes in fair value or estimated selling costs. Costs relating to
improvement of property are capitalized, whereas costs and revenues relating to
the holding of property are expensed.
Employee Stock Ownership Plan: The Company accounts for its employee stock
ownership plan (ESOP) in accordance with AICPA Statement of Position 93-6. The
cost of shares issued to the ESOP, but not yet allocated to participants, are
presented as a reduction of shareholders' equity. Compensation expense is
recorded based on the market price of the shares as they are committed to be
released for allocation to participant accounts. The difference between the
market price and the cost of shares committed to be released is recorded as an
adjustment to additional paid-in capital. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings; dividends on unearned ESOP shares
are reflected as a reduction of debt and accrued interest. Shares are considered
outstanding for earnings per share calculations as they are committed to be
released; unearned ESOP shares are not considered outstanding.
Federal Home Loan Bank System: The Bank is a member of the Federal Home Loan
Bank System and is required to invest in capital stock of the Federal Home Loan
Bank (FHLB). The amount of the required investment is based upon the balance of
the Bank's outstanding home mortgage loans or advances from the FHLB and is
carried at cost plus the value assigned to stock dividends.
Preferred Stock: The Board of Directors of the Company is authorized to issue
preferred stock from time to time in one or more series subject to applicable
provisions of law, and is authorized to fix the designations, powers,
preferences and relative participating, optional and other special rights of
such shares, including voting rights (which could be multiple or as a separate
class) and conversion rights, and the qualifications, limitations and
restrictions thereof. In the event of a proposed merger, tender offer or other
attempt to gain control of the Company that the Board of Directors does not
approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. The Board of Directors has no
present plans or understandings for the issuance of any preferred stock.
(Continued)
28
<PAGE> 31
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: The entities included in these consolidated financial statements
file a consolidated federal income tax return. The Company records income tax
expense based on the amount of taxes due on its tax return plus the change in
deferred tax assets and liabilities computed based on the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities, using enacted tax rates.
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to make loans which are not reflected in
the financial statements. A summary of these commitments is disclosed in Note
12.
Earnings Per Share: Earnings per share is based on the weighted-average number
of common shares outstanding during the year plus dilutive common stock
equivalents using the average stock price. ESOP shares are considered
outstanding for earnings per share calculations as they are committed to be
released; unearned shares are not considered outstanding. The weighted-average
number of shares outstanding for the year ended June 30, 1997 was 780,097. For
the period presented in 1996, earnings per common share was computed by dividing
net income earned subsequent to the Bank's conversion from mutual to stock form
(the "conversion") by the weighted average number of shares. Net income
subsequent to the conversion was $618,000 for the period ended June 30, 1996 and
the weighted-average number of shares outstanding for the period ended June 30,
1996 subsequent to the conversion was 792,881.
Reclassifications: Certain items in the 1996 and 1995 financial statements have
been reclassified to conform with the 1997 presentation.
NOTE 2 - CONVERSION TO A STOCK SAVINGS BANK WITH THE CONCURRENT
FORMATION OF A HOLDING COMPANY
On March 9, 1995, the Board of Directors of the Bank, subject to regulatory
approval and approval by members of the Bank, unanimously adopted a Plan of
Conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent formation of the
Company as the Bank's holding company. The conversion was consummated on August
23, 1995 by amending the Bank's federal charter and the sale of the Company's
common shares in an amount equal to the pro forma market value of the Company
after giving effect to the conversion. Common shares of the Company were offered
in accordance with the plan of conversion. A total of 859,625 common shares of
the Company were sold at $10.00 per share and net proceeds from the sale were
$7,973,269, including ESOP shares and after deducting the costs of conversion.
The Company retained 35% of the net proceeds from the sale of common shares,
from which funds were loaned to the Employee Stock Ownership Plan (Note 9). The
remainder of the net proceeds were used to purchase 100% of the common shares of
the Bank. The Bank is now a wholly-owned subsidiary of the Company. The
conversion was an internal reorganization with historical balances carried
forward without adjustment.
(Continued)
29
<PAGE> 32
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 3 - SECURITIES
Securities held to maturity were as follows at June 30:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1997
U.S. government and federal agencies $ 2,498,344 $ 219 $ (16,703) $ 2,481,860
Mortgage-backed securities 14,249,963 67,786 (96,611) 14,221,138
Obligations of states and political
subdivisions 375,000 10,968 385,968
Corporates 801,643 852 802,495
------------- -------------- ------------- -------------
$ 17,924,950 $ 79,825 $ (113,314) $ 17,891,461
============= ============== ============= =============
1996
U.S. government and federal agencies $ 3,495,930 $ (64,495) $ 3,431,435
Mortgage-backed securities 14,261,244 $ 27,320 (341,968) 13,946,596
Obligations of states and political
subdivisions 375,000 (6,124) 368,876
Corporates 1,135,658 (6,728) 1,128,930
------------- -------------- ------------- -------------
$ 19,267,832 $ 27,320 $ (419,315) $ 18,875,837
============= ============== ============= =============
</TABLE>
Contractual maturities of debt securities at June 30, 1997 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 1,498,344 $ 1,493,274
Due from one year to five years 1,801,643 1,791,080
Due from five years to ten years 125,000 128,116
Due after ten years 250,000 257,853
Mortgage-backed securities 14,249,963 14,221,138
------------- -------------
$ 17,924,950 $ 17,891,461
============= =============
</TABLE>
There were no sales of securities available for sale during the years ended June
30, 1997 and 1995. Proceeds from sales of securities available for sale were
$501,094 during the year ended June 30, 1996. Gross gains of $995 were realized
on these sales. No securities classified as held to maturity were sold or
transferred to available for sale during 1997, 1996 or 1995.
Securities held to maturity, with carrying values of approximately $16,748,000
and $17,802,000 at June 30, 1997 and 1996, were pledged as collateral for
purposes required or permitted by law.
(Continued)
30
<PAGE> 33
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 4 - LOANS RECEIVABLE, NET
Loans were as follows at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate loans
One-to-four family $ 42,945,509 $ 37,007,058
Commercial 6,209,964 7,051,251
Construction or development 3,452,839 4,135,600
------------ ------------
Total real estate loans 52,608,312 48,193,909
Consumer and other loans
Automobile 2,758,609 2,642,354
Home equity 2,584,622 2,409,610
Commercial 2,047,087 1,439,093
Other 3,767,735 3,586,837
------------ ------------
Total consumer and other loans 11,158,053 10,077,894
------------ ------------
Total loans 63,766,365 58,271,803
Less
Undisbursed portion of construction loans (1,089,922) (1,493,541)
Unearned discounts (5,977) (8,760)
Deferred loan fees (370,652) (286,059)
Allowance for loan losses (487,184) (440,835)
------------ ------------
$ 61,812,630 $ 56,042,608
============ ============
</TABLE>
Mortgage loans serviced for others are not included in the accompanying balance
sheets. The unpaid principal balances of these loans were $12,581,000,
$14,141,000 and $12,686,000 at June 30, 1997, 1996 and 1995, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $100,453, $118,895 and $128,537 at June 30, 1997, 1996 and 1995
respectively.
Activity in the allowance for loan losses was as follows for the years ended
June 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 440,835 $ 381,981 $ 310,797
Provision charged to operating expense 60,000 65,000 87,000
Loans charged-off (14,392) (12,923) (21,935)
Recoveries 741 6,777 6,119
--------- --------- ---------
Balance at end of year $ 487,184 $ 440,835 $ 381,981
========= ========= =========
</TABLE>
(Continued)
31
<PAGE> 34
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 4 - LOANS RECEIVABLE, NET (Continued)
Impaired loans were as follows for the year ended June 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Average investment in impaired loans $ 87,000
Interest income recognized during impairment 8,400
Cash-basis interest income recognized -
Information regarding impaired loans at June 30 is as follows:
Balance of impaired loans $ 522,000
Less portion for which no allowance for loan losses is allocated -
-------------
Portion of impaired loan balance for which an allowance for
loan losses is allocated $ 522,000
=============
Portion of allowance for loan losses allocated to the impaired
loan balance $ 60,000
=============
</TABLE>
The above information reflects one commercial loan the Bank has deemed impaired
as of June 30, 1997. The Bank did not have any impaired loans as of and during
the year ended June 30, 1996.
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment were as follows at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and land improvements $ 198,672 $ 186,691
Buildings and improvements 2,313,446 2,248,858
Furniture and equipment 1,229,117 1,163,041
----------- -----------
Total cost 3,741,235 3,598,590
Less accumulated depreciation (2,305,632) (2,113,785)
----------- -----------
$ 1,435,603 $ 1,484,805
=========== ===========
</TABLE>
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts with balances greater than or
equal to $100,000 was $4,226,638 and $4,993,782 at June 30, 1997 and 1996.
At June 30, 1997, scheduled maturities of time deposits are as follows for the
years ended June 30:
<TABLE>
<CAPTION>
<S> <C>
1998 $20,808,413
1999 5,566,622
2000 6,756,793
2001 2,934,657
2002 1,794,450
-----------
$37,860,935
===========
</TABLE>
(Continued)
32
<PAGE> 35
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 7 - BORROWED FUNDS
Borrowed funds as of June 30 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Single-maturity fixed rate advances:
5.49%, due on July 29, 1996 $ 500,000
5.74%, due on September 3, 1996 500,000
5.53%, due on June 20, 1997 1,000,000
5.91%, due on June 30, 1997 500,000
6.00%, due on September 2, 1997 $ 500,000 500,000
5.21%, due on January 20, 1998 2,000,000 2,000,000
6.17%, due on May 1, 1998 1,000,000
5.19%, due on September 9, 1998 1,000,000 1,000,000
5.83%, due on November 16, 1998 1,000,000
5.81%, due on December 7, 1998 1,000,000
5.28%, due on February 1, 1999 1,000,000 1,000,000
5.68%, due on February 26, 1999 1,000,000
6.14%, due on June 7, 1999 3,000,000
----------- ----------
11,500,000 7,000,000
----------- ----------
Single-maturity variable rate advances (Rates as of June 30, 1997)
5.75%, due on July 16, 1996 1,500,000
5.81%, due on July 18, 1997 1,750,000
5.78%, due on September 12, 1997 1,000,000
5.82%, due on October 17, 1997 500,000
5.82%, due on October 17, 1997 500,000
5.75%, due on December 24, 1997 1,000,000
5.81%, due on January 20, 1998 1,000,000
5.81%, due on January 28, 1998 1,000,000
5.81%, due on January 28, 1998 1,000,000
5.75%, due on July 2, 1998 500,000
----------- ----------
8,250,000 1,500,000
----------- ----------
Amortizable fixed rate advance
5.46%, due through July 17, 2000 594,287 710,609
----------- ----------
$20,344,287 $9,210,609
=========== ==========
</TABLE>
Variable rate advances carry the three-month LIBOR rate less three basis points
and are adjusted quarterly. Pursuant to collateral agreements with the Federal
Home Loan Bank, advances are secured under a blanket collateral arrangement by
securities and mortgage loans with a carrying value of approximately $57,848,000
at June 30, 1997.
The aggregate annual maturities of the advances are as follows for the years
ended June 30:
<TABLE>
<S> <C>
1998 $ 11,350,550
1999 8,586,776
2000 74,756
2001 332,205
-------------
$ 20,344,287
=============
</TABLE>
(Continued)
33
<PAGE> 36
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 8 - EMPLOYEE BENEFIT PLANS
Effective December 1, 1994, the Company terminated participation in a
single-employer pension plan and adopted a noncontributory multi-employer
defined-benefit pension plan. For the year ended June 30, 1995, the gain on
settlement of the single-employer plan was $221,000. The multi-employer plan
covers substantially all of the Company's employees. The plan is administered by
the trustees of the Financial Institutions Retirement Fund. There is no separate
valuation of plan benefits nor segregation of plan assets specifically for the
Company because the plan is a multi-employer plan and separate actuarial
valuations are not made with respect to each employer nor are the plan assets so
segregated. Under the multi-employer plan, the Company made contributions and
recognized pension expense of approximately $75,000, $56,000 and $25,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
The Company established a 401(k) profit sharing plan in 1995 covering
substantially all employees. The annual expense of the plan is based on 50%
matching of voluntary employee contributions, up to 6% of individual
compensation. Employee contributions vest immediately and the Company's matching
contributions vest after six years. Contributions and related expenses
attributable to the plan were approximately $19,000, $16,000, and $4,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
NOTE 9 - STOCK BASED COMPENSATION PLANS
Employee Stock Ownership Plan (ESOP): In conjunction with the conversion
transaction described in Note 2, the Company established an ESOP for the benefit
of substantially all employees. Contributions to the ESOP are made by the
Company and may be made in the form of cash or the Company's common stock.
To fund the plan, the ESOP borrowed $687,700 from the Company for the purpose of
purchasing 68,770 shares of stock at $10 per share. The original loan agreement
was modified in May 1996 to provide for principal and interest payments on the
loan to be paid in equal annual installments over a nine-year period ending June
30, 2005. The loan is collateralized by the unallocated shares of the Company's
common stock purchased with the loan proceeds and will be repaid by the ESOP
with funds from the Company's contributions to the ESOP and earnings on ESOP
assets. For the years ended June 30, 1997 and 1996, $68,770 and $57,304 in
principal payments were made on the loan.
Shares are allocated among participants each June 30 on the basis of principal
payments made by the ESOP on the loan from the Company, according to each
participant's relative compensation. ESOP participants are entitled to receive
distributions from their ESOP accounts only upon termination of service.
During 1997, 6,877 shares with an average fair value of $13.92 per share were
committed to be released, resulting in ESOP compensation expense of $95,729.
During 1996, 5,730 shares with an average fair value of $12.57 per share were
committed to be released, resulting in ESOP compensation expense of $72,052.
Shares held by the ESOP at June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Allocated to participants 12,607 5,730
Unearned 56,163 63,040
-------- --------
Total ESOP shares 68,770 68,770
======== ========
Fair value of unearned shares $919,700 $827,400
======== ========
</TABLE>
(Continued)
34
<PAGE> 37
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 9 - STOCK BASED COMPENSATION PLANS (Continued)
Recognition and Retention Plan (RRP) and Stock Option and Incentive Plan (SOP):
An RRP and SOP were approved by the Company's shareholders on April 17, 1996.
These plans were established to reward directors and certain officers of the
Company for their contributions, and to encourage them to remain with the
Company and continue to promote the Company's growth and profitability. The RRP
is a restricted stock award plan. The RRP and SOP are administered by a
committee of Directors of the Company. This committee selects recipients and
terms of awards pursuant to the plans. The total shares made available under the
RRP and SOP plans were 34,385 and 85,962, respectively.
During the year ended June 30, 1996, the Committee awarded 26,000 shares of
common stock under the RRP. No shares under the RRP were awarded during the year
ended June 30, 1997. RRP awards vest in five annual installments, beginning
April 17, 1996, subject to the continuous employment of the recipients. The RRP
will terminate no later than April 17, 2006. Compensation expense for the RRP is
recognized on a pro-rata basis over the vesting period of the awards. During the
years ended June 30, 1997 and 1996, $69,180 and $14,413 was charged to
compensation expense for the RRP. The unearned compensation value of the RRP is
shown as a reduction to shareholders' equity.
During the year ended June 30, 1996, the committee awarded under the SOP options
to purchase 58,500 shares of common stock at an exercise price of $13.25 per
share, which was the market price of the Company's common stock on the date of
the award. No options under the SOP were awarded during the year ended June 30,
1997. During the years ended June 30, 1997 and 1996, no options were exercised
or canceled. At June 30, 1997, there were 27,462 shares reserved for future
grants. SOP options vest in five equal annual installments beginning April 17,
1996 and expiring ten years from the date of grant. At June 30, 1997, 58,500
options were outstanding at an exercise price of $13.25 per share. Of the
options outstanding, 13,650 options were exercisable at June 30, 1997 at $13.25
per share.
The Company applies APB Opinion 25 "Accounting for Stock Issued to Employees"
and related interpretations in accounting for its plan. Accordingly, no
compensation expense has been recognized for the plan. SFAS No. 123, "Accounting
for Stock-Based Compensation," requires disclosures for stock-based compensation
awarded after December 15, 1995 for companies that do not adopt its fair value
accounting method for stock-based compensation. The effects on the Company's net
income and earnings per share under the provisions of SFAS No. 123 were not
material for the years ended June 30, 1996 and 1997. In future years, as
additional options are granted, the effect on net income and earnings per share
may increase.
NOTE 10 - INCOME TAXES
The Company and the Bank file a consolidated federal income tax return on a
fiscal year basis. Prior to fiscal year 1997, if certain conditions were met in
determining taxable income as reported on the consolidated federal income tax
return, the Bank was allowed a special bad debt deduction based on a percentage
of taxable income (8% for 1996) or on specified experience formulas. The Bank
used the percentage of taxable income method for tax purposes as of June 30,
1996 and 1995. Tax legislation passed in August 1996 now requires the Bank to
deduct a provision for bad debts for tax purposes based on actual loss
experience and recapture the excess bad debt reserve accumulated in tax years
after 1987. The related amount of deferred tax liability which must be
recaptured is approximately $52,700 and is payable over a six-year period
beginning no later than 1999.
(Continued)
35
<PAGE> 38
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 10 - INCOME TAXES (Continued)
The consolidated provision for federal income taxes consisted of the following
for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current expense $ 304,410 $312,261 $206,146
Deferred expense (benefit) (35,000) 32,223 108,208
--------- -------- --------
$ 269,410 $344,484 $314,354
========= ======== ========
</TABLE>
The provision for federal income taxes differs from that computed by applying
the statutory corporate federal income tax rate of 34% as follows for the years
ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at statutory federal rate $ 264,838 $ 344,938 $ 328,469
Increase (decrease) in taxes resulting from
Nontaxable interest income (2,047) (1,532) (11,615)
Other 6,619 1,078 (2,500)
--------- --------- ---------
$ 269,410 $ 344,484 $ 314,354
========= ========= =========
Effective tax rate 34.6% 34.0% 32.5%
========= ========= =========
</TABLE>
Deferred tax assets and liabilities consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Bad debts $ 112,908 $ 97,149
Deferred loan fees 21,864 32,158
Pension costs 29,873 8,174
Other 17,400 7,618
--------- ---------
Total deferred tax assets 182,045 145,099
Deferred tax liabilities
Depreciation (157,549) (178,060)
Other (30,293) (7,836)
--------- ---------
Total deferred tax liabilities (187,842) (185,896)
--------- ---------
Net deferred tax asset (liability) $ (5,797) $ (40,797)
========= =========
</TABLE>
(Continued)
36
<PAGE> 39
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 10 - INCOME TAXES (Continued)
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits related to such
assets will not be realized. Management has determined that no such allowance is
required at June 30, 1997 and 1996.
Retained earnings at June 30, 1997 and 1996 includes approximately $1,314,000
for which no deferred federal income tax liability has been recognized. This
amount represents an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $447,000 at June 30, 1997 and 1996.
NOTE 11 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate certain actions by regulators that, if
undertaken, could have a direct material effect on the consolidated financial
statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
(Continued)
37
<PAGE> 40
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 11 - REGULATORY CAPITAL (Continued)
At June 30, the Bank's actual capital levels and minimum required levels (in
thousands) were:
<TABLE>
<CAPTION>
Minimum Required
to be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1997
Total capital (to risk weighted
assets) $ 11,313 23.05% $ 3,927 8.00% $ 4,909 10.00%
Tier 1 (core) capital (to risk
weighted assets) 10,827 22.06 1,963 4.00 2,945 6.00
Tier 1 (core) capital (to adjusted
total assets) 10,827 11.39 2,852 3.00 4,753 5.00
Tangible capital (to adjusted
total assets) 10,827 11.39 1,426 1.50 N/A
1996
Total capital (to risk weighted
assets) $ 10,662 24.69% $ 3,455 8.00% $ 4,319 10.00%
Tier 1 (core) capital (to risk
weighted assets) 10,223 23.68 1,727 4.00 2,591 6.00
Tier 1 (core) capital (to adjusted
total assets) 10,223 11.78 2,603 3.00 4,339 5.00
Tangible capital (to adjusted
total assets) 10,223 11.78 1,301 1.50 N/A
</TABLE>
At June 30, 1997, the Bank was categorized as well capitalized.
The Qualified Thrift Lender (QTL) test requires that approximately 65% of assets
be maintained in housing-related finance and other specified areas. If the QTL
test is not met, limits are placed on growth, branching, new investments, FHLB
advances and dividends, or the Bank must convert to a commercial bank charter.
Management believes that the QTL test has been met.
Regulations of the Office of Thrift Supervision (OTS) limit the amount of
dividends and other capital distributions that may be paid by a savings
institution without prior approval of the OTS. The regulatory restriction is
based on a three-tiered system with the greatest flexibility being afforded to
well-capitalized (Tier 1) institutions. The Bank is currently a Tier 1
institution. Accordingly, the Bank can make, without prior regulatory approval,
distributions during a calendar year up to 100% of its net income to date during
the calendar year plus an amount that would reduce by up to one-half the amount
of its capital which exceeds its most stringent capital requirement as of the
beginning of the calendar year.
(Continued)
38
<PAGE> 41
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 11 - REGULATORY CAPITAL (Continued)
At the time of conversion, the Bank established a liquidation account of
$5,507,290 which was equal to its total net worth as of the date of the latest
balance sheet appearing in the final conversion prospectus. The liquidation
account is maintained for the benefit of eligible depositors who continue to
maintain their accounts at the Bank after the conversion. The liquidation
account is reduced annually to the extent that eligible depositors have reduced
their qualifying deposits. Subsequent increases in a deposit account will not
restore an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation, each eligible depositor will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held. The Bank may
not pay dividends that would reduce shareholders' equity below the required
liquidation account balance.
Under the most restrictive of the dividend limitations described above, at June
30, 1997, approximately $3,948,000 was available to the Bank for the payment of
dividends to the holding company.
NOTE 12 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK
Some financial instruments are used in the normal course of business to meet the
financing needs of customers. These financial instruments include commitments to
make loans and loans-in-process. The contractual amount of these financial
instruments are as follows at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Fixed rate $1,207,922 $1,950,341
Variable rate 1,354,810 698,400
---------- ----------
$2,562,732 $2,648,741
========== ==========
</TABLE>
Loan commitments generally have terms of 30 days and contractual interest rates
ranging from 6.00% to 10.50%. Fees received in connection with these commitments
have not been recognized in income.
Additionally, at June 30, 1997 and 1996, the Company had outstanding unused
lines of credit and letters of credit aggregating approximately $3,503,298 and
$1,763,000.
(Continued)
39
<PAGE> 42
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 12 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
Commitments to make loans are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Since certain
commitments to make loans and lines of credit expire without being used, the
amount does not necessarily represent future cash commitments. The Company's
exposure to credit loss in the event of nonperformance by the other party to
these financial instruments is represented by the contractual amount of these
instruments. The Company follows the same credit policy to make such commitments
as is followed for those loans recorded in the consolidated statements of
financial condition. No losses are anticipated as a result of these
transactions.
The Company has entered into an employment agreement and severance agreements
with certain officers of the Company. The employment agreement provides for a
term of three years and a salary and performance review by the Board of
Directors not less often than annually, as well as inclusion of the employee in
any formally established employee benefit, bonus, pension and profit-sharing
plans for which senior management personnel are eligible. The agreement may be
extended for one-year periods as determined by the Board of Directors. Under the
terms of the agreement, certain events leading to termination from the Company
could result in a cash payment of approximately three times the affected
employee's compensation. The severance agreements are for a period of two years
and may be extended for one-year periods as determined by the Board of
Directors. They provide for benefits of up to two times base compensation to the
employees upon a change in control of the Bank or the Company.
In addition, the Company is a party to certain claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the Company's consolidated financial
position or results of operations.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has granted loans to related parties, which include executive
officers, directors and their affiliates. A summary of activity of related party
loans aggregating $60,000 or more to any one related party at June 30 is as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Beginning balance $ 365,353 $ 404,985
New loans 545,626 45,826
Repayments and renewals (371,346) (77,432)
Other changes 54,830 (8,026)
--------- ---------
Ending balance $ 594,463 $ 365,353
========= =========
</TABLE>
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
Related party deposits totaled approximately $1,193,000 at June 30, 1997.
(Continued)
40
<PAGE> 43
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 14 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Presented below is condensed financial information for Three Rivers Financial
Corporation as of June 30:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 259,618 $ 137,279
Investment in subsidiary 10,874,503 10,390,564
Securities held to maturity 250,000 250,000
Loan receivable from subsidiary bank 950,000 1,500,000
Loan receivable from ESOP 561,626 630,396
Other assets 5,512 5,011
----------- -----------
Total assets $12,901,259 $12,913,250
=========== ===========
LIABILITIES $ 98,515 $ 127,652
SHAREHOLDERS' EQUITY 12,802,744 12,785,598
----------- -----------
Total liabilities and shareholders' equity $12,901,259 $12,913,250
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
For the year ended June 30, 1997, and for the period
August 23, 1995 through June 30, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Operating income
Interest on loan $ 52,535 $ 48,492
Other 13,500 1,763
--------- ---------
66,035 50,255
Operating expense 153,704 140,905
--------- ---------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY (87,669) (90,650)
Equity in undistributed income of subsidiary 597,195 708,650
--------- ---------
NET INCOME $ 509,526 $ 618,000
========= =========
</TABLE>
(Continued)
41
<PAGE> 44
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 14 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended June 30, 1997, and for the period
August 23, 1995 through June 30, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 509,526 $ 618,000
Adjustments to reconcile net income to net cash
from operating activities
Equity in undistributed income of subsidiary (597,195) (708,650)
Increase in other assets (501) (5,011)
Increase (decrease) in other liabilities (29,138) 127,652
-------------- ---------------
Net cash from operating activities (117,308) 31,991
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities held to maturity (250,000)
Origination of loan from subsidiary bank (1,500,000)
Repayments on loan from subsidiary bank 550,000
Origination of loan from ESOP (687,700)
Repayments on loan from ESOP 46,936 57,304
Purchase of common stock in subsidiary bank (5,182,624)
-------------- ---------------
Net cash from investing activities 596,936 (7,563,020)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends received from subsidiary bank 300,000
Proceeds from sale of common stock, net of conversion costs 7,973,269
Purchase of treasury stock (111,545)
Purchase of common stock (387,537)
Cash dividends paid (269,752) (193,416)
-------------- ---------------
Net cash from financing activities (357,289) 7,668,308
-------------- ---------------
Net change in cash and cash equivalents 122,339 137,279
Cash and cash equivalents at beginning of period 137,279
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 259,618 $ 137,279
============== ===============
</TABLE>
(Continued)
42
<PAGE> 45
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values of the Company's financial
instruments and the related carrying values at June 30, 1997 and 1996.
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
------- -------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 7,437,993 $ 7,438,000 $ 4,111,621 $ 4,112,000
Interest earning time deposits in
other financial institutions 3,470,980 3,475,000 3,867,980 3,870,000
Securities held to maturity 17,924,950 17,891,000 19,267,832 18,876,000
Loans, net of allowance for loan losses 61,812,630 62,571,000 56,042,608 56,826,000
Federal Home Loan Bank Stock 1,042,300 1,042,000 618,700 619,000
Accrued interest receivable 450,892 451,000 554,937 555,000
Financial Liabilities
Demand and savings deposits (22,483,857) (22,484,000) (23,529,013) (23,529,000)
Time deposits (37,860,935) (37,501,000) (40,195,407) (40,025,000)
Borrowed funds (20,344,287) (19,846,000) (9,210,609) (9,074,000)
Advances from borrowers for taxes
and insurance (399,331) (399,000) (422,832) (423,000)
Accrued interest payable (86,885) (87,000) (94,727) (95,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of June 30, 1997 and 1996. The estimated fair value for
cash and cash equivalents, the allowance for loan losses, Federal Home Loan Bank
stock, accrued interest receivable, demand and savings deposits, advances from
borrowers for taxes and insurance, and accrued interest payable is considered to
approximate cost. The estimated fair value of interest earning time deposits is
based on offering rates for such instruments, applied for the time period until
maturity. The estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. The estimated
fair value for loans is based on estimates of the rate the Bank would charge for
similar such loans, applied for the time period until estimated repayment. The
estimated fair value for time deposits and borrowed funds is based on estimates
of the rate the Bank would pay on such deposits or borrowings, applied for the
time period until maturity. The estimated fair value of other financial
instruments and off-balance sheet loan commitments approximate cost and are not
considered significant to this presentation.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items, the estimated fair values would necessarily have been
achieved at that date, since market values may differ depending on various
circumstances. The estimated fair values should not be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, non-financial instruments typically not recognized
in financial statements may have value but are not included in the above
disclosures. These include, among other items, the estimated earnings power of
core deposit accounts, the trained work force, customer goodwill and similar
items.
(Continued)
43
<PAGE> 46
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 AND 1995
NOTE 16 - FEDERAL DEPOSIT INSURANCE PREMIUM
The deposits of savings associations such as the Bank are insured by the Savings
Association Insurance Fund ("SAIF"). A recapitalization plan signed into law on
September 30, 1996 provided for a one-time assessment of 65.7 basis points
applied to all SAIF deposits as of March 31, 1995. Based on the Bank's deposits
as of that date, a one-time assessment of approximately $411,000 was paid and
recorded as federal deposit insurance premium expense for the year ended June
30, 1997.
NOTE 17 - IMPACT OF NEW ACCOUNTING STANDARDS
In March 1997, the accounting requirements for calculating earnings per share
were revised. Basic earnings per share for the quarter ended December 31, 1997
and later will be calculated solely on average common shares outstanding.
Diluted earnings per share will reflect the potential dilution of stock options
and other common stock equivalents. All prior calculations will be restated to
be comparable to the new methods. As the Company has not had significant
dilution from stock options, the new calculation methods are not expected to
change prior earnings per share disclosures.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued in 1996. It revises the accounting
for transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It became effective for
some transactions occurring after December 31, 1996, and will be effective for
others in 1998. The impact of partial adoption in 1997 was not material to the
1997 consolidated financial statements and the impact of the complete adoption
in 1998 is also not expected to be material to the consolidated financial
statements.
44
<PAGE> 47
BOARD OF DIRECTORS OF
THREE RIVERS FINANCIAL CORPORATION AND
FIRST SAVINGS BANK
Stephen R. Olson
Chairman of the Board of Directors
Manager, Morton Buildings, Inc.
G. Richard Gatton
President, Chief Executive Officer, and
Director
Larry A. Clark
Director
Automobile Sales
G. Verglea Gotfryd
Director
Retired Life Insurance Agent
Philip Halverson
Director
Retired Funeral Director
John A. Mathews
Director
Retired Optometrist
Thomas O. Monroe, Sr.
Director
Chairman Emeritus, Johnson Corporation
OFFICERS OF THREE RIVERS FINANCIAL CORPORATION
G. Richard Gatton
President and Chief Executive Officer
Martha Romig
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
OFFICERS OF FIRST SAVINGS BANK
G. Richard Gatton
President and Chief Executive Officer
Martha Romig
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
William F. Cody
Vice-President
R. Orville Poling
Vice-President
Susan Lowry
Assistant Vice-President and
Assistant Treasurer
Joyce Shidaker
Assistant Secretary
Betty Kipker
Savings Officer
45
<PAGE> 48
STOCK LISTING
The common stock of Three Rivers Financial Corporation is listed on the American
Stock Exchange under the symbol "THR".
SHAREHOLDER SERVICES
Registrar and Transfer Company serves as transfer agent and dividend
distributing agent for TRFC's shares. Communications regarding change of
address, transfer of shares, lost certificates, and dividends should be sent to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 346-6084
ANNUAL MEETING
The Annual Meeting of Shareholders of Three Rivers Financial Corporation will be
held on October 29, 1997, at 9:00 a.m., local time, at the Three Rivers
Community Center. Shareholders are cordially invited to attend.
LEGAL COUNSEL
Manatt, Phelps & Phillips, LLP
1501 M Street, N.W.
Suite 700
Washington, D.C. 20005
ANNUAL REPORT ON FORM 10-KSB
A copy of TRFC's Annual Report on Form 10-KSB, as filed with the Securities and
Exchange Commission, will be available at no charge to shareholders upon request
to:
Three Rivers Financial Corporation
123 Portage Avenue
Three Rivers, MI 49093
Attention: President
46
<PAGE> 49
CORPORATE OFFICE
123 Portage Avenue
Three Rivers, Michigan 49093
(616) 279-5117
Schoolcraft Branch Union Branch
500 North Grand 15534 U.S. 12
Schoolcraft, Michigan 49087 Union, Michigan 49130
(616) 679-5271 (616) 641-7979
Three Rivers Branch
1213 West Michigan Avenue
Three Rivers, Michigan 49093
(616) 273-8681
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SCHEDULE
10-K DATED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,724,565
<INT-BEARING-DEPOSITS> 4,713,428
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 17,924,950
<INVESTMENTS-MARKET> 17,891,461
<LOANS> 61,812,630
<ALLOWANCE> 487,184
<TOTAL-ASSETS> 95,129,909
<DEPOSITS> 60,344,792
<SHORT-TERM> 399,331
<LIABILITIES-OTHER> 825,563
<LONG-TERM> 20,344,287
0
0
<COMMON> 8,319
<OTHER-SE> 12,794,425
<TOTAL-LIABILITIES-AND-EQUITY> 95,129,909
<INTEREST-LOAN> 5,163,206
<INTEREST-INVEST> 1,194,087
<INTEREST-OTHER> 437,754
<INTEREST-TOTAL> 6,795,047
<INTEREST-DEPOSIT> 2,647,541
<INTEREST-EXPENSE> 3,436,989
<INTEREST-INCOME-NET> 3,358,058
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 326,189
<INCOME-PRETAX> 778,936
<INCOME-PRE-EXTRAORDINARY> 778,936
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 509,526
<EPS-PRIMARY> .65
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.76
<LOANS-NON> 144,970
<LOANS-PAST> 10,373
<LOANS-TROUBLED> 521,990
<LOANS-PROBLEM> 92,364
<ALLOWANCE-OPEN> 440,835
<CHARGE-OFFS> 14,392
<RECOVERIES> 741
<ALLOWANCE-CLOSE> 487,184
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 487,184
</TABLE>
