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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999, 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
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(Name of Small Business Issuer in Its Charter)
DELAWARE 38-3235452
- --------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
123 PORTAGE AVENUE, THREE RIVERS, MICHIGAN 49093
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(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
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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. $7,965,798
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As of September 20, 1999, there were issued and outstanding 702,734 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 20, 1999, was $5,789,553 ($11.00 per
share based on 526,323 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, 1999 (Parts I and II).
<PAGE>
PART I
ITEM 1. DESCRIPTION OF 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 six full service offices in Three Rivers
(two offices), Schoolcraft, and Union, Michigan, and Howe and Middlebury,
Indiana.
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.
This regulation is intended primarily for the protection of depositors of the
Bank and not for the protection of shareholders of the Company.
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.
MARKET AREA AND COMPETITION
The Bank considers its primary market area to consist of St. Joseph and
Cass Counties, Michigan, the southwest portion of Kalamazoo County, Michigan, La
Grange County, Indiana, and the eastern portion of Elkhart County, Indiana.
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
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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), Eaton Corporation
(automotive parts), Lear Siegler (refrigeration equipment) and Coachman
Industries (manufactured housing and recreational vehicles).
The Bank experiences competition both in attracting and retaining
deposits and in the making of mortgage and other loans. Direct competition for
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, 1999, 77.60% 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,
---------------------------------------------------------------
1999 1998
------------------------------ --------------------------
Amount Percent Amount Percent
-------------- ----------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
One-to-four family ......................... $48,771 68.88% $43,296 67.80%
Secured by other real estate(1)............. 6,068 8.57 5,959 9.33
Construction loans ......................... 2,034 2.87 2,480 3.89
---------- --------- -------- ----------
Total real estate loans ................ $56,873 80.32 51,735 81.02
----------
----------
OTHER LOANS:
Consumer Loans:
Automobile ................................. 3,421 4.83 2,800 4.38
Home equity ................................ 2,752 3.89 2,800 4.38
Other ...................................... 4,705 6.64 4,328 6.78
---------- --------- -------- ----------
Total consumer loans ................... 10,878 15.36 9,928 15.54
---------- --------- -------- ----------
Commercial business loans .................. 3,060 4.32 2,195 3.44
---------- --------- -------- ----------
Total other loans ...................... 13,938 19.68 12,123 18.98
---------- --------- -------- ----------
Total loans ................................... 70,811 100.00% 63,858 100.00%
--------- ----------
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LESS:
Loans in process (undisbursed) ............. 1,058 801
Unearned discounts ......................... -- 2
Deferred origination fees .................. 527 446
Allowance for loan losses .................. 520 489
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Total loans receivable, net ............ $68,706 $62,120
---------- ---------
---------- ---------
</TABLE>
- ----------------------------
(1) Includes multi-family and commercial real estate.
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The following table sets forth certain information at June 30, 1999
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
One- to-four Family Real Estate (1) Construction Commercial 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DUE DURING YEARS ENDING JUNE 30,
2000 (2) ....................... $ 376 8.15% $ 10 9.50% $ 2,034 8.54% $ 3,888 9.13% $ 6,308 8.88%
2001 ........................... 198 7.46 590 8.73 -- --.-- 941 9.51 1,729 9.01
2002 ........................... 136 8.48 58 10.34 -- --.-- 1,715 9.17 1,909 9.16
2003 and 2004 .................. 1,558 7.99 1,463 8.32 -- --.-- 4,088 8.84 7,109 8.55
2005 to 2007 ................... 2,006 8.11 602 9.06 -- --.-- 1,274 9.70 3,882 8.78
2008 to 2022 ................... 18,441 8.03 3,223 9.01 -- --.-- 2,032 9.47 23,696 8.29
2023 and following ............. 26,056 7.48 122 9.20 -- --.-- -- -.-- 26,178 7.49
------- ------- ------- -------- -------
Total ................. $48,771 7.74% $ 6,068 8.84% $ 2,034 8.54% $13,938 9.18% $70,811 8.14%
------- ----- ------- ------ ------- ----- -------- ------ ------- -------
------- ----- ------- ------ ------- ----- -------- ------ ------- -------
</TABLE>
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(1) Includes multi-family and commercial real estate.
(2) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after June 30, 1999 which have
predetermined or fixed interest rates is $26.7 million, while the total amount
of loans due after such date which have floating or adjustable interest rates is
$44.1 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, 1999 $48.7 million or 68.88% 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 adjustable rate mortgage loans ("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 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
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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.
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, 1999, the Bank's loan
portfolio included $2.0 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 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, 1999, loans
on multi-family and commercial real estate properties constituted approximately
$6.1 million, or 8.57%, 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
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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, 1999, consumer loans amounted to $10.9 million, or
15.36%, of the Bank's total loan portfolio.
Consumer lending generally involves more risk as compared to
one-to-four family residential mortgage lending. 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 addition, 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
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, 1999, commercial
business loans amounted to $3.1 million, or 4.32%, of the Bank's total loan
portfolio. At June 30, 1999, the Bank's largest commercial lending relationship
was with a manufacturing corporation with an outstanding balance of $943,000
which was current.
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.
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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 a
Vice President 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 $250,000 must be approved by the Board of
Directors. Loans under $250,000 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, 1999, the Bank had $2.3
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 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, 1999, net deferred loan fees
amounted to approximately $527,000, which are 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
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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. As of June 30, 1999, the Bank was 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 specifically reserved against the allowance for loan losses, 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 it
is periodically determined that 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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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,
--------------------------------------
1999 1998
------------- --------------
(Dollars in thousands)
<S> <C> <C>
NON-ACCRUING LOANS:
One-to-four family..................................... $246 $455
Consumer............................................... 5 198
------ ------
Total 251 653
ACCRUING LOANS DELINQUENT MORE THAN 90 DAYS:
One-to-four family..................................... 368 --
Consumer............................................... 2 --
------ ------
Total 370 --
FORECLOSED ASSETS:
One-to-four family..................................... -- 29
Secured by other real estate........................... -- --
Consumer............................................... 3 --
------ ------
Total 3 682
------ ------
Total non-performing assets................................ $623 $682
------ ------
------ ------
Total as a percentage of total assets...................... 0.62% 0.69%
------ ------
------ ------
</TABLE>
During the year ended June 30, 1999, gross interest income of $35,872
would have been recorded on loans accounted for on a non-accrual basis if the
loans had been current throughout the respective periods. Interest recognized in
income on nonaccrual loans during such period amounted to $4,622.
At June 30, 1999, the Bank had approximately $67,000 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.
The following table sets forth information concerning delinquent
mortgage and consumer and commercial loans at June 30, 1999. 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 Ctegory
------ ------ -------- ------ ------ -------- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four family. 1 $95 0.19% 5 $135 0.28% 8 $613 1.26%
Consumer and
commercial......... -- -- --.-- -- -- --.-- -- -- --.--
Other.................. 3 21 0.15 5 21 0.15 3 7 0.05
---- ----- ---- ----- ---- ----
Total..... 4 $116 0.16% 10 $156 0.22% 11 $620 0.88%
---- ----- ----- ---- ----- ----- ---- ---- -----
---- ----- ----- ---- ----- ----- ---- ---- -----
</TABLE>
10
<PAGE>
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, 1999, management had
$67,000 of assets classified as special mention, $456,000 of 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 July 1999 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 to a
level considered adequate based on its evaluation of the quality of the loan
portfolio, 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.
The increase in the ratio of the allowance to non-performing loans
relates primarily to one residential real estate loan considered non-performing
at June 30, 1998 but completely paid off by June 30, 1999. The allowance for
loan losses has increased by 6.3% from June 30, 1998 to June 30, 1999.
11
<PAGE>
After considering a variety of factors, including but not limited to the facts
that the composition of the loan portfolio has remained relatively unchanged and
that there has not been a significant change in classified loans, management did
not consider an increase to the provision for losses necessary during the year
ended June 30, 1999.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period ........... $ 489 $ 487
CHARGE-OFFS:
One-to-four family ................... (10) (11)
Consumer and commercial business ..... (27) (57)
----- -----
Total charge-offs ............... (37) (68)
----- -----
RECOVERIES:
Consumer and commercial business ..... 8 10
----- -----
Total recoveries ................ 8 10
----- -----
Net charge-offs .......................... (29) (58)
Provision charged to operations .......... 60 60
----- -----
Balance at end of period ................. $ 520 $ 489
----- -----
----- -----
Ratio of net charge-offs during
the period to average loans
outstanding during the period ....... 0.04% 0.08%
----- -----
----- -----
Ratio of allowance to non-performing loans 83.47% 74.89%
----- -----
----- -----
</TABLE>
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,
------------------------------------------------
1999 1998
--------------------- -----------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family ......... $179 68.88% $159 67.80%
Secured by other real estate 51 8.57 60 9.33
Construction ............... 3 2.87 25 3.89
Consumer ................... 82 15.36 95 15.54
Commercial business ........ 30 4.32 52 3.44
-------- --------
Unallocated ................ 175 98
------ ------
Total .................... $520 100.00% $489 100.00%
------ -------- ------ --------
------ -------- ------ --------
</TABLE>
12
<PAGE>
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
federal funds, federal government and agency securities and qualified deposits
in other financial institutions. In accordance with SFAS No. 115, the Bank
classifies securities as either held to maturity or available for sale. 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 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 the Federal
Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA"), and the Government National Mortgage Association ("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
13
<PAGE>
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, 1999, the Bank's mortgage-backed securities portfolio
included net unrealized losses of $15,000. 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.
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------
1999 1998
--------------------- ---------------------
Book Fair Book Fair
Value Value Value Value
----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning time deposits in other
financial institutions .................. $ 4,155 $ 4,155 $ 4,065 $ 4,065
------- ------- ------- -------
------- ------- ------- -------
Investment Securities:
U.S. Government securities and agency
obligations ........................ -- -- $ 1,500 $ 1,502
Obligations of states and
political subdivisions.............. 375 389 375 398
Other ................................. -- -- 103 103
------- ------- ------- -------
Subtotal ........................... 375 389 1,978 2,003
------- ------- ------- -------
FHLB stock ................................ 1,162 1,162 1,162 1,162
------- ------- ------- -------
Mortgage-Backed Securities:
FNMA certificates ..................... 4,085 4,082 3,938 3,974
GNMA certificates ..................... 4,960 4,979 2,635 2,676
FHLMC certificates .................... 2,738 2,707 3,073 3,077
Collateralized mortgage obligations ... 1,855 1,854 3,378 3,383
------- ------- ------- -------
Subtotal ........................... 13,638 13,622 13,024 13,110
------- ------- ------- -------
Total investment securities, FHLB stock and
mortgage-backed securities .............. $15,175 $15,173 $16,164 $16,275
------- ------- ------- -------
------- ------- ------- -------
Average remaining life of
U.S. Government and Agency securities... -- 7.1 years
Obligations of states and political
subdivisions......................... 8.2 years 9.2 years
</TABLE>
14
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------------------------------------------
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:
Obligations of states and
political subdivisions......... $-- --.--% $ -- --.--% $375 5.31% $ -- --.--%
Other............................ -- --.-- -- --.-- -- --.-- -- --.--
----- ------ ------ ------
Total investment securities held
to maturity.................. -- --.-- -- --.-- -- --.-- -- --.--
Mortgage-backed securities....... 7 7.50 4,390 5.31 1,457 5.92 6,011 6.60
----- ------ ------ ------
Total securities held
to maturity................. 7 7.50 4,390 5.31 1,832 5.80 6,011 6.60
----- ------ ------ ------
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities....... -- -- -- --.-- -- --.-- 1,773 6.66
Total securities available
for sale.................... -- --.-- -- --.-- -- --.-- 1,773 6.66
----- ------ ------ ------
Total investment and mortgage
-backed securities............... $ 7 7.50% $4,390 5.31% $1,832 5.80% $7,784 6.61%
----- ------ ------ ------ ------ ------ ------ ------
----- ------ ------ ------ ------ ------ ------ ------
<CAPTION>
June 30, 1999
---------------------------------
Total Investment Securities
--------------------------------
Carrying Average Market
Value Yield Value
----------- ---------- -------
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY:
Obligations of states and
political subdivisions......... $ 375 5.31% $ 389
Other............................ -- --.-- --
-------- -------
Total investment securities held
to maturity.................. -- --.-- --
Mortgage-backed securities....... 11,865 6.04 11,850
-------- -------
Total securities held
to maturity................. 12,240 12,239
-------- -------
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities....... 1,773 6.66 1,772
Total securities available
for sale.................... 1,773 6.66 1,772
-------- -------
Total investment and mortgage
-backed securities............... $14,013 6.10% $14,011
-------- ------- -------
-------- ------- -------
</TABLE>
15
<PAGE>
The Bank's securities portfolio at June 30, 1999 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 savings 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,
1999.
<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.......... $1,911 $1,344 $1,297 $1,406 $5,958
</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.
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 under a blanket
collateral agreement by
16
<PAGE>
the Bank's stock in the FHLB, one to four family residential mortgage loans
contained in the Bank's loan portfolio, 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
at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
----------- ---------
(Dollars in thousands)
<S> <C> <C>
FHLB advances..................................................... $20,657 $22,744
----------- ---------
Total borrowings............................................. $20,657 $22,744
----------- ---------
----------- ---------
Weighted average interest rate of FHLB advances................... 5.30% 5.58%
</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,
---------------------------
1999 1998
-------- ----------
(Dollars in thousands)
<S> <C> <C>
MAXIMUM BALANCE:
FHLB advances........................ $22,744 $22,744
AVERAGE BALANCE:
FHLB advances........................ $20,562 $20,331
</TABLE>
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, 1999 the Bank was authorized to invest up to
approximately $3.0 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 $100,000 at June 30, 1999. 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, 1999, the Company did not have any salaried
employees. As of June 30, 1999, the Bank had 41
17
<PAGE>
full-time employees and five part-time employees, 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 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.
18
<PAGE>
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 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
19
<PAGE>
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, the Bank pays deposit insurance premiums ranging from 0 to 27
basis points per $100 of deposits. This risk classification is based on an
institution's capital group and 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, 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 provided for the merging
of the BIF and the SAIF by January 1, 1999 provided there were no financial
institutions still chartered as savings associations at that time. Because there
were still institutions chartered as savings associations, the insurance funds
were not merged. 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, 1999, 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.
20
<PAGE>
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 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, 1999.
<TABLE>
<CAPTION>
Percent of
Amount Adjusted Assets
--------- ----------------
(Dollars in Thousands)
<S> <C> <C>
GAAP Capital ........................... $10,789 10.76%
------- ------
------- ------
TANGIBLE CAPITAL: (1)
Regulatory requirement ................. $ 1,503 1.50%
Actual capital ......................... 9,786 9.76
------- ------
Excess .............................. $ 8,283 8.26%
------- ------
------- ------
LEVERAGE (CORE) CAPITAL: (1)
Regulatory requirement ................. $ 3,007 3.00%
Actual capital ......................... 9,786 9.76
------- ------
Excess .............................. $ 6,779 6.76%
------- ------
------- ------
RISK-BASED CAPITAL: (2)
Regulatory requirement ................. $ 4,326 8.00%
Actual capital ......................... 10,304 19.06
------- ------
Excess .............................. $ 5,978 11.06%
------- ------
------- ------
</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 $54.1 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 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
21
<PAGE>
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, 1999, 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 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
22
<PAGE>
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, 1999, 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, among other things, federal thrifts, such as the Bank,
to convert their charters to national or state bank charters. 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.
Also, under current law, unitary savings and loan holding companies are
permitted to engage in activities that would not be permitted for a bank holding
company. The Company cannot determine whether, or in what form, such legislation
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.
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
23
<PAGE>
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, 1999, the Bank had $1.2 million in FHLB stock, which was in
compliance with this requirement.
LIQUID ASSETS. Under OTS regulations, a savings association 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) in each calendar quarter of not less
than 4% of either (1) its liquidity base (consisting of certain net withdrawable
accounts plus short-term borrowings) as of the end of the preceding calendar
quarter, or (2) the average daily balance of its liquidity base during the
preceding quarter. This liquidity requirement 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. 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
used to satisfy the liquidity requirements that are imposed by the OTS. At June
30, 1999 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, 1998, the Bank was in compliance with its QTL
requirement and met the definition of a domestic building and loan association.
YEAR 2000 COMPLIANCE. In May 1997, the Federal Financial Institutions
Examination Council issued an interagency statement to the chief executive
officers of all federally supervised financial institutions regarding year 2000
project management awareness. It is expected that unless financial institutions
address the technology issues relating to the coming of the year 2000, there
will be major disruptions in the operations of financial institutions. The
statement provides guidance to financial institutions, providers of data
services, and all examining personnel of the federal banking agencies regarding
the year 2000 problem. The federal banking agencies intend to conduct year 2000
compliance examinations, and the failure to implement a year 2000 program may be
seen by the federal banking agencies as an unsafe and unsound banking practice.
The OTS has recently established an examination procedure which contains three
categories of ratings: "Satisfactory," "Needs Improvement," and
"Unsatisfactory." Institutions that receive a year 2000 rating of Unsatisfactory
may be subject to formal enforcement action, supervisory agreements, cease and
desist orders, civil money penalties, or the appointment of a conservator. In
addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues.
24
<PAGE>
The Company is currently addressing the year 2000 issue, as more fully discussed
in the Company's Annual Report to Stockholders for the Year Ended June 30, 1999
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Year 2000."
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, 1999.
<TABLE>
<CAPTION>
Total
Approximate Net Book Value
Date Square at June 30,
LocatIon Acquired Footage 1999
--------------- ------------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Main Office 1981 17,092 $1,254
123 Portage
Three Rivers, Michigan 49093
(616) 279-5117
Branch Office 1971 3,400 96
500 N. Grand
Schoolcraft, Michigan 49087
(616) 674-5271
Branch Office 1988 1,661 254
15534 U.S. 12
Union, Michigan 49130
(616) 641-7979
Branch Office 1988 2,443 135
1213 West Michigan Avenue
Three Rivers, Michigan 49093
(616) 273-8681
Branch Office 1998 5,171 358
303 Defiance
Howe, Indiana 46746
(219) 562-3300
Branch Office 1998 1,908 643
420 N. Main
Middlebury, Indiana 46540
(219) 825-2255
</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, 1999 was $2.7
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
25
<PAGE>
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.
(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, 1999.
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, 1999 (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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(b) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth for the directors of the Company, such
individual's name, age, the year the nominees first became directors of the
Company, and the number of shares and percentage of the Common Stock
beneficially owned.
<TABLE>
<CAPTION>
Shares of
Year First Current Common Stock
Name of Individual or Elected or Term to Beneficially Percent
Number of Persons in Group Age (1) Apointed (2) Expire Owned (3)(4) of Class
- -------------------------- ---------- ------------------- --------------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Larry A. Clark 58 1989 1999 8,503 (5) 1.21%
G. Richard Gatton 56 1990 1999 31,417 (6) 4.47%
G. Verglea Gotfryd 71 1989 2000 8,723 (7) 1.24%
Thomas O. Monroe, Sr. 75 1982 2000 11,693 (8) 1.66%
Stephen R. Olson 56 1983 2000 15,301 (9) 2.18%
Philip Halverson 78 1968 2001 4,103 (10) 0.58%
DIRECTOR EMERITUS
John A. Mathews 75 1974 n/a 7,206 (11) 1.03%
All directors, directors emeritus, and 116,265 (12) 16.54%
executive officers as a group (11 persons)
- --------------------------------------------- -------------------- ----------------- ---------------------- ------------
</TABLE>
- -------------
(1) As of June 30, 1999.
(2) Refers to the earlier of the year the individual became a director of
the Company or the Bank. All directors of the Bank became directors of
the Company upon its formation in April 1995.
(3) As of the Voting Record Date.
(4) Unless otherwise indicated, includes all shares held directly by the
named individuals as well as by spouses, minor children in trust, and
other forms of indirect ownership, over which shares the named
individual effectively exercises sole voting and investment power with
respect to the indicated shares. Excludes 42,118 unallocated shares of
Common Stock held under the ESOP for which such individuals may serve
as a member of the ESOP Committee. Excludes 18,028 unvested shares of
Common Stock held by the Company's Recognition and Retention Plan and
Trust ("RRP") for which such individuals may serve as a member of the
RRP Committee or Trustee Committee. Such individuals disclaim
beneficial ownership with respect to such shares held in a fiduciary
capacity. See Item 10 - Executive Compensation "- Benefits - Employee
Stock Ownership Plan" and "- Recognition and Retention Plan and Trust."
(5) Includes 2,145 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date.
(6) Includes 9,900 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date. Also, includes 12,474 shares
of Common Stock for which Mr. Gatton shares voting or dispositive power
with his spouse.
(7) Includes 2,145 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date. Also, includes 6,006 shares
of Common Stock for which Ms. Gotfryd shares voting or dispositive
power with her son.
(8) Includes 2,145 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date. Also includes 550 shares of
Common Stock owned by the spouse of Mr. Monroe for which Mr. Monroe has
no voting or dispositive power and which Mr. Monroe disclaims
beneficial ownership.
(9) Includes 2,145 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date. Also, includes 4,202 shares
of Common Stock for which Mr. Olson shares voting or dispositive power
with his spouse
27
<PAGE>
and 616 shares of Common Stock owned by the spouse of Mr. Olson for
which Mr. Olson has no voting or dispositive power and which Mr. Olson
disclaims beneficial ownership
(10) Includes 2,145 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date. Also, includes 1,100 shares
of Common Stock for which Mr. Halverson shares voting or dispositive
power with his spouse.
(11) Includes 5,000 shares of Common Stock for which Mr. Mathews shares
voting or dispositive power with his spouse.
(12) Includes 36,223 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date.
EXECUTIVE OFFICERS
The individuals set forth below hold the offices in the Company set
forth opposite their names.
<TABLE>
<CAPTION>
Name Age (1) Position Held With the Company
- ---- ------- ------------------------------
<S> <C> <C>
G. Richard Gatton 56 President, Chief Executive Officer, and Director
Martha Romig 60 Senior Vice President, Secretary, Treasurer, and Chief
Financial Officer
</TABLE>
- --------------
(1) As of June 30, 1999.
The Executive Officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation, or removal by the Board of Directors.
BIOGRAPHICAL INFORMATION
The principal occupation during the past five years of each director
and executive officer is set forth below. All directors and executive officers
have held their present positions for at least five years, unless otherwise
stated.
LARRY A. CLARK was employed by GTE Corporation, an independent
telephone company, from 1963 until his retirement in 1994. Mr. Clark last served
as Manager--Administrative Support in GTE's Muskegon, Michigan regional office.
G. RICHARD GATTON has served as President, Chief Executive Officer, and
a director of the Bank since December 1990. From September 1988 to December
1990, Mr. Gatton served as President and Chief Executive Officer of First
National Bank of Wabash, Indiana. Mr. Gatton has been involved in the banking
industry since 1966. He also serves as President and a director of Alpha
Financial, Inc. ("Alpha Financial"), a subsidiary of the Bank.
G. VERGLEA GOTFRYD is an independent life insurance agent licensed in
the State of Michigan. From 1949 to 1990, Ms. Gotfryd was associated with the
Paul F. Noecker Insurance Agency, serving in various capacities during that
time, including manager and owner. Ms. Gotfryd also serves on the board of
directors of the Three Rivers Area Hospital.
PHILIP HALVERSON is the former owner of Halverson Chapel, a funeral
home located in Three Rivers, Michigan, which he founded in 1949. Mr. Halverson
also serves on the board of directors of Three Rivers Area Foundation, a
charitable foundation.
THOMAS O. MONROE, SR. currently serves as Chairman Emeritus and a
member of the board of directors of Johnson Corporation, a manufacturer of steam
valves and other steam specialties. From 1986 through 1991, Mr. Monroe served as
president of Johnson Corporation and has held a variety of positions
28
<PAGE>
with that company since 1947. Mr. Monroe also serves on the boards of directors
of Camp Wakeshma and the local American Red Cross.
STEPHEN R. OLSON has served as Manager of Morton Buildings, Inc., a
construction company located in Three Rivers, Michigan, since 1970. Mr. Olson is
also on the board of directors of Camp Wakeshma, a non-profit summer youth camp.
MARTHA ROMIG has been employed by the Bank since 1970. She currently
serves as Senior Vice President, Secretary, Treasurer, and Chief Financial
Officer of the Company and the Bank. She also serves as a director and
Secretary/Treasurer of Alpha Financial.
COMPLIANCE WITH SECTION 16(b) OF THE EXCHANGE ACT
The Common Stock is registered with the SEC pursuant to Section 12(b)
of the 1934 Act. The officers and directors of the Company and beneficial owners
of greater than 10% of the Common Stock ("10% beneficial owners") are required
to file reports on Forms 3, 4, and 5 with the SEC disclosing changes in
beneficial ownership of the Common Stock.. Based solely on the Company's review
of such ownership reports, to the Company's knowledge, no officer, director, or
10% beneficial owner of the Company failed to file such ownership reports on a
timely basis for the fiscal year ended June 30, 1999.
ITEM 10. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Each non-employee director of the Company receives $350 per quarter for
meetings of the Board of Directors of the Company. Each non-employee director of
the Bank receives a retainer of $3,000 per year plus $255 per monthly Board
meeting attended and $250 for attendance at the annual meeting of the Board of
Directors of the Bank. Fees paid to all directors totaled $41,405 for the fiscal
year ended June 30, 1999.
Directors are also eligible to receive options to purchase Common Stock
pursuant to the Company's Stock Option and Incentive Plan. See "- Benefits -
Stock Option Plans."
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the name and
compensation of the Chief Executive Officer of the Company for the fiscal years
ended June 30, 1999, 1998, and 1997. No other executive officer received a
salary and bonus in excess of $100,000 during the fiscal years ended June 30,
1999, 1998, and 1997. All compensation was paid by the Bank.
<TABLE>
<CAPTION>
Long term
Annual Compensation Compensation
------------------------------------------ --------------------------
Other Restricted Securities
annual Stock Underlying All other
Name and Principal Position Year Salary Bonus Compensation(1) Award($)(2) Options (#)(3) Compensation
- --------------------------- ------ --------- ----------- ----------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
G. Richard Gatton 1999 $100,235 $15,000 -- $21,468 5,500 $19,163 (4)
President, Chief 1998 $96,246 $14,000 -- -- -- $27,261 (5)
Executive 1997 $92,708 $14,000 -- -- -- $21,550 (6)
Officer, and Director
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------
(1) For the fiscal years ended June 30, 1999, 1998, and 1997, there were no
(a) perquisites over the lesser of $50,000 or 10% of any of Mr. Gatton's total
salary and bonus; (b) payments of above-market preferential earnings on deferred
compensation; (c) tax payment reimbursements; or (d) preferential discounts on
stock.
(2) Represents the dollar value of the award of Common Stock (calculated by
multiplying $14.09 per share, the average of the bid and ask price of the
Company's unrestricted stock on the date of grant, by 1,385 shares, the number
of shares of restricted stock awarded) under the RRP.
29
<PAGE>
Dividends received on the RRP shares are held in arrears until the restricted
stock becomes vested. At June 30, 1999, the RRP held shares of Common Stock
subject to forfeiture for the benefit of Mr. Gatton with a fair market value of
$34,441 (calculated by multiplying $12.625 per share, the average of the bid and
ask price of the Company's unrestricted stock on June 30, 1999, by 2,728 shares,
the number of shares of Common Stock that remain restricted).
(3) By their terms, options vest at a rate of 20% per year beginning on the
one year anniversary date of the grant.
(4) Represents $3,003 contributed to the Bank's 401(k) plan for the account
of Mr. Gatton and the value of 1,280 shares of Common Stock allocated to Mr.
Gatton's ESOP account for the fiscal year ended June 30, 1999.
(5) Represents $2,887 contributed to the Bank's 401(k) plan for the account
of Mr. Gatton and the value of 1,258 shares of Common Stock allocated to Mr.
Gatton's ESOP account for the fiscal year ended June 30, 1998.
(6) Represents $2,781 contributed to the Bank's 401(k) plan for the account
of Mr. Gatton and the value of 1,155 shares of Common Stock allocated to Mr.
Gatton's ESOP account for the fiscal year ended June 30, 1997.
EMPLOYMENT AGREEMENT. The Bank entered into an employment agreement on
August 23, 1999 (the "Employment Agreement") with G. Richard Gatton, President
and Chief Executive Officer of the Company and the Bank. The Employment
Agreement provides for a term of three years, with an annual base salary payable
by the Bank in the amount of $104,500. On each anniversary date of the
Employment Agreement, the term of the Employment Agreement may be extended for
an additional one-year period beyond the then effective expiration date, upon a
determination by the Board of Directors that the performance of Mr. Gatton has
met the required performance standards and that such Employment Agreement should
be extended. Unless the Employment Agreement is not renewed by the Board, the
Employment Agreement will terminate automatically upon Mr. Gatton attaining age
65, except that any vested rights will not be affected.
The Employment Agreement will terminate upon the Executive's death and
is terminable by the Bank for "just cause" as defined in the Employment
Agreement. In the event of termination for just cause, no severance benefits are
available. If the Company or the Bank terminates Mr. Gatton without just cause,
Mr. Gatton will be entitled to a continuation of his salary and benefits for the
remaining term of the Employment Agreement. If his employment is terminated due
to "disability" (as defined in the Employment Agreement), Mr. Gatton will
receive compensation for a period of two years or the remaining term of the
Employment Agreement, whichever is longer. Mr. Gatton may voluntarily terminate
his Employment Agreement by providing 60 days written notice to the Boards of
Directors of the Bank and the Company, in which case Mr. Gatton is entitled to
receive only his compensation and benefits up to the date of termination, except
that any vested rights will not be affected.
The Employment Agreement contains provisions stating that in the event
of Mr. Gatton's involuntary termination of employment in connection with, or
within one year after, any change in control of the Bank or the Company, other
than for "just cause," Mr. Gatton will be paid an amount equal to the difference
between (i) 2.99 times his "base compensation," as defined in OTS Regulatory
Bulletin 27a, and (ii) the sum of any other parachute payments, as defined under
Section 280G(b)(2) of the Internal Revenue Code, that Mr. Gatton receives on
account of the change in control. The Employment Agreement also provides for a
similar lump sum payment to be made in the event of the Mr. Gatton's voluntary
termination of employment within one year following a change in control, upon
the occurrence of, or within 90 days thereafter, certain specified events
following the change in control.
These provisions may tend to discourage a non-negotiated takeover
attempt of the Company due to the increased expenses arising out of a change in
ownership or control of the Company.
BENEFITS
401(K) PLAN. Effective April 1, 1995, the Bank established a 401(k)
plan for all eligible employees. To be eligible, an employee must attain age 21
and complete one year of service with the Bank. Annual contributions to the plan
are made at the discretion of the Bank's Board of Directors under a formula
provided in the plan based upon each employee's salary. Contributions are
allocated among
30
<PAGE>
employee members of the plan who were in the employ of the Bank on the last day
of the plan year and who have at least 1,000 hours of service during the plan
year. Participants may elect to contribute to the plan between 1% and 10% of
their base salary. Contributions are matched by the Bank at a rate of $0.50 for
every $1.00 contributed by the participant up to the first 6% of the
participant's base salary.
Contributions by the Bank vest over a six year period commencing at the
end of the second full year of plan membership as to 20% of the Bank's
contribution and rising 20% a year to 100% at the end of the sixth full year of
plan membership. If a participant's employment is terminated for any reason, the
participant is entitled only to the vested portion, if any, of his or her
account.
PENSION PLAN. Effective December 1, 1994, the Bank became a
participating employer in a multi-employer pension plan sponsored by the
Financial Institutions Retirement Fund (the "Pension Plan"). The terms of the
Pension Plan as it relates to the Bank were determined in March 1995. All
full-time employees of the Bank are eligible to participate after one year of
service and attainment of age 21. A qualifying employee becomes fully vested in
the Pension Plan upon completion of five years of service or upon attainment of
the normal retirement age of 65. The Pension Plan is intended to comply with the
Employee Retirement Income Security Act of 1974, as amended.
The Pension Plan provides for monthly payments to each participating
employee at normal retirement age. The annual allowance payable under the
Pension Plan is based on an integrated fixed percentage formula which uses the
highest five consecutive years' average salary. A participant who is vested in
the Pension Plan may take an early retirement and elect to receive a reduced
monthly benefit beginning at age 55. The Pension Plan also provides for payments
in the event of disability or death. At June 30, 1999, G. Richard Gatton had
seven years of credited service under the Pension Plan. If Mr. Gatton were to
have retired as of June 30, 1999, Mr. Gatton would be entitled to a pension
payment of $1,525 per month beginning upon his attainment of age 65.
EMPLOYEE STOCK OWNERSHIP PLAN. In August 1995, the Bank's Board of
Directors adopted an ESOP for the exclusive benefit of participating employees.
Participating employees are all employees of the Company, the Bank, and their
subsidiaries who have attained age 21 and completed one year of service with the
Company. The ESOP received a favorable determination letter from the IRS as to
the tax-qualified status of the ESOP, subject to certain minor changes to the
ESOP.
The ESOP is funded by contributions made by the Company or the Bank in
cash or shares of Common Stock. The ESOP borrowed $687,700 from the Company to
purchase 68,770 shares of the Common Stock from the Bank in connection with the
Bank's conversion from mutual to stock form. This loan is secured by the shares
of Common Stock purchased and earnings thereon. Shares purchased with such loan
proceeds are held in a suspense account for allocation among participants as the
loan is repaid over a period of 10 years. For the fiscal years ended June 30,
1999 and 1998, $70,044 and $70,004 in principal payments were made on the ESOP
loan, respectively. The ESOP compensation expense for the fiscal years ended
June 30, 1999 and 1998, was $107,543 and $135,867, respectively. At June 30,
1999, 29,275 shares of Common Stock had been allocated to participants under the
ESOP.
Contributions to the ESOP and shares released from the suspense account
are allocated among accounts of participants on the basis of their annual wages,
plus any amounts withheld under a plan qualified under Sections 125 or 401(k) of
the Code and sponsored by the Company or the Bank. Dividends paid on allocated
shares may be used as repayment on the ESOP loan, credited to participant
accounts within the ESOP, or paid to participants. Dividends on unallocated
shares are expected to be used to repay the ESOP loan.
31
<PAGE>
The Company has appointed Directors Larry A. Clark, G. Verglea Gotfryd,
and Stephen R. Olson to serve on the ESOP Committee which administers the
day-to-day operations of the ESOP. First Bankers Trust Company, N.A. serves as
trustee of the ESOP (the "ESOP Trustee"). The ESOP Trustee must vote all
allocated shares held in the ESOP in accordance with the instructions of the
participants. The ESOP Trustee will not vote allocated shares for which no
timely direction is received and will vote unallocated shares in accordance with
the direction of the ESOP Committee.
STOCK OPTION PLANS. In April 1996, the Company's Board of Directors
adopted, and the stockholders approved, the Company's Stock Option and Incentive
Plan (the "Option Plan"). The purpose of the Option Plan is to provide
additional incentive to directors and key employees by facilitating their
purchase of the Common Stock or comparable ownership interest in the Company.
The Option Plan provides for a term of 10 years from the date of its approval by
the Company's stockholders, after which no awards may be made, unless the plan
is earlier terminated by the Board of Directors of the Company. Under the Option
Plan, 94,558 shares of Common Stock are reserved for issuance by the Company, in
the form of newly-issued or treasury shares, upon exercise of stock options or
stock appreciation rights. Options granted under the Option Plan are either
incentive stock options (options that afford favorable tax treatment to
recipients upon compliance with certain restrictions pursuant to Section 422 of
the Code and that do not result in tax deductions to the Company unless
participants fail to comply with Section 422 of the Code) and options that do
not so qualify.
The Option Plan is administered by a committee consisting of Directors
Larry A. Clark, G. Verglea Gotfryd, and Stephen R. Olson (the "Option
Committee"). The Option Committee will select the employees to whom awards are
to be granted, the number of shares to be subject to such awards, and the terms
and conditions of such awards (provided that any discretion exercised by the
Option Committee must be consistent with resolutions adopted by the Board of
Directors and the terms of the Option Plan).
During the fiscal year ended June 30, 1999, 21,780 options were granted
and no options were exercised under the Option Plan. As of June 30, 1999,
options to purchase 86,955 shares had been granted and are outstanding under the
Option Plan.
The following tables sets forth certain information concerning stock
option grants and exercises during the fiscal year ended June 30, 1999 and
unexercised options held at such date for the person named in the Summary
Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent of Potential Realizable Value at
Number of Total Assumed Annual Rates of Stock
Securities Options/SARs Price Appreciation for
Underlying Granted To Exercise or Option Term
Option/SARs Employees in Base Price Expiration ------------------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) (1) 10% ($)(1)
--------------------- ----------------- --------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
G. Richard Gatton 5,500 25% 14.09 10.28/08 $48,730 $123,530
</TABLE>
- ---------------
(1) Based on the difference between the assumed annual rates of stock price
appreciation and $14.09, the exercise price of the options, multiplied
by the number of shares subject to the options. Actual performance of
the Common Stock may differ significantly.
32
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED JUNE 30, 1999
AND FY-END OPTION VALUES
Value of
Number of unexercised
Shares unexercised in-the-money
acquired Value options at FY- End options at FY-end
Name on exercise realized exercisable/unexercisable exercisable/unexercisable (1)
--------------------- ----------- -------- ------------------------- -----------------------------
<S> <C> <C> <C> <C>
G. Richard Gatton -- $-- 9,900 / 12,100 $6,881 / $4,587
</TABLE>
- ---------------
(1) The value of unexercised in-the-money options is the difference between
$12.625, the average of the bid and asked price of the Common Stock on
June 30, 1999, and $11.93, the exercise price of the options,
multiplied by the number of exercisable and unexercisable shares
subject to the options, respectively.
RECOGNITION AND RETENTION PLAN AND TRUST. In April 1996, the Company's
Board of Directors adopted, and the stockholders approved, the RRP as a means of
providing the directors and employees of the Bank and the Company with an
ownership interest in the Company in a manner designed to encourage such persons
to continue their service with the Bank and the Company. Directors Larry A.
Clark, G. Verglea Gotfryd, and Stephen R. Olson serve as trustees of the RRP. In
June 1996, the RRP acquired 37,824 shares of Common Stock in the open market.
For the fiscal year ended June 30, 1999, 7,385 shares of restricted stock were
granted pursuant to the RRP.
Awards are nontransferable and nonassignable, and during the lifetime
of the recipient can only be earned by and made to him or her. The shares which
are subject to an award vest and are earned by the recipient at a rate of 20% of
the shares awarded at the end of each full 12 months of service with the Bank
after the date of grant of the award. Awards are adjusted for capital changes
such as stock dividends and stock splits. Awards will be 100% vested upon
termination of employment or service due to death or disability. If employment
or service were to terminate for other reasons, the recipient's nonvested awards
will be forfeited. If employment or service is terminated for cause (as defined
in the RRP), or if conduct would have justified termination or removal for
cause, shares not already delivered under the RRP, whether or not vested, could
be forfeited by resolution of the Board of Directors of the Company.
When shares become vested and could actually be distributed in
accordance with the RRP, the participants would also receive amounts equal to
accrued dividends and other earnings or distributions payable with respect
thereto. Prior to vesting, recipients of awards could direct the voting of the
shares allocated to them. Allocated shares and shares for which no instructions
were received would be voted by the Trustee of the RRP in the same proportion as
the shares that had been awarded and vested were voted.
ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners.
Information concerning the security ownership of management is included under
Item 9 -- Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(b) of the Exchange Act and is incorporated herein by
reference.
33
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF SHARES OF
NAME AND ADDRESS AMOUNT AND NATURE OF COMMON STOCK
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OUTSTANDING
- ------------------- ------------------------ -----------
<S> <C> <C>
THREE RIVERS FINANCIAL CORPORATION EMPLOYEE STOCK 75,647 (2) 10.76%
OWNERSHIP PLAN
c/o First Bankers Trust Company, Trustee
Broadway at 12th Street
Quincy, Illinois 62305-3566
JEFFREY S. HALIS 52,930 (3) 7.53%
TYNDALL PARTNERS, L.P.
MADISON AVENUE PARTNERS, L.P.
500 Park Avenue, Fifth Floor
New York, New York 10002
JEFFREY L. GENDELL 42,000 (4) 5.98%
TONTINE PARTNERS, L.P.
TONTINE FINANCIAL PARTNERS, L.P.
200 Park Avenue, Suite 3900
New York, New York 10166
</TABLE>
- ------------------------------------------------------ -------------------------
- ----------------------------------
(1) Unless otherwise indicated, includes all shares held directly by the
named individuals as well as in other forms of indirect ownership, over
which shares the named individual effectively exercises sole voting and
investment power with respect to the indicated shares.
2) Shares held by the ESOP and allocated to participating employees will
be voted by the ESOP Trustee in accordance with instructions by such
employees. The ESOP Trustee will not vote allocated shares for which no
timely direction is received and will vote unallocated shares in
accordance with the direction of the ESOP Committee. See "Compensation
of Directors and Executive Officers - Benefits - Employee Stock
Ownership Plan."
(3) Based on a Schedule 13D dated September 7, 1995, as amended on October
18, 1995, October 31, 1995, and May 3, 1999, Jeffrey S. Halis has sole
voting and dispositive power with respect to these shares as he is the
general partner of Halo Capital Partners, L.P. which is the general
partner of Tyndall Partners, L.P. and Madison Avenue Partners, L.P.
(4) Based on a Schedule 13D filed as of April 14, 1997. Jeffrey L Gendell
has shared voting and dispositive power with respect to these shares.
Mr. Gendell serves as the managing member of Tontine Management, L.L.C.
which is the general partner of Tontine Partners, L.P. and Tontine
Financial Partners, L.P.
(b) Security Ownership of Management.
Information required by this item is incorporated herein by
reference to the Item 9 -- Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(b)
of the Exchange Act.
(c) Changes in Control.
On September 21, 1999, the Three Rivers Financial Corporation
and Peoples Bancorp, Auburn, Indiana, jointly announced that
they had entered into a definitive agreement providing for the
merger of the Company with and into Peoples Bancorp. Under the
terms of the agreement, each shareholder of the Company would
receive in a tax-free exchange 1.08 shares of Peoples Bancorp
common stock for each share of Company common stock then
owned. The proposed merger is subject to the approval of
shareholders of Peoples Bancorp and the Company and the Office
of Thrift Supervision, the receipt of a fairness opinion, and
other customary conditions. The parties contemplate that the
merger will become effective during the first quarter of 2000.
34
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank, like many financial institutions, has followed a policy of
granting various types of loans to its officers and directors. The
loans made to such persons: (a) were made in the ordinary course of
business; (b) were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with other customers of the Bank; and (c) did
not involve more than the normal risk of collectibility or present
other unfavorable features. All loans by the Bank to its officers and
directors are subject to OTS regulations restricting loans and other
transactions with affiliated persons of the Bank. Savings institutions
are permitted to make loans to executive officers, trustees, and
principal stockholders ("Insiders") on preferential terms, provided the
extension of credit is made pursuant to a benefit or compensation
program of the Bank that is widely available to employees of the
Company or its affiliates and does not give preference to any Insider
over other employees of the Company or affiliates.
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.
<TABLE>
<CAPTION>
Exhibit Number 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)
35
<PAGE>
<S> <C>
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, 1999
21 Subsidiaries of the Registrant(2)
27 Financial Data Schedule (6)
</TABLE>
- -------------------------
(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.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THREE RIVERS FINANCIAL CORPORATION
September 28, 1999 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 28, 1999
- ------------------------------------ and Director
G. Richard Gatton
(Principal Executive Officer)
/s/ Martha Romig Senior Vice President, Chief Financial September 28, 1999
- ------------------------------------ Officer, Secretary and Treasurer
Martha Romig (Principal Financial and Accounting
Officer)
/s/ Stephen R. Olson Chairman of the Board September 28, 1999
- ------------------------------------
Stephen R. Olson
/s/ Larry A. Clark Director September 28, 1999
- ------------------------------------
Larry A. Clark
/s/ G. Verglea Gotfryd Director September 28, 1999
- ------------------------------------
G. Verglea Gotfryd
/s/ Philip Halverson Director September 28, 1999
- ------------------------------------
Philip Halverson
/s/ Thomas O. Monroe, Sr. Director September 28, 1999
- ------------------------------------
Thomas O. Monroe, Sr.
</TABLE>
37
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
MESSAGE TO SHAREHOLDERS................................................. 1
BUSINESS OF THREE RIVERS FINANCIAL CORPORATION.......................... 2
MARKET PRICE OF TRFC COMMON SHARES AND 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............................................ 20
FINANCIAL STATEMENTS
Consolidated Balance Sheets........................................ 21
Consolidated Statements of Income.................................. 22
Consolidated Statements of Comprehensive Income.................... 23
Consolidated Statements of Changes In Shareholders' Equity......... 24
Consolidated Statements of Cash Flows.............................. 26
Notes to Consolidated Financial Statements......................... 28
OFFICERS AND DIRECTORS.................................................. 48
SHAREHOLDER INFORMATION................................................. 49
</TABLE>
<PAGE>
MESSAGE TO SHAREHOLDERS
Dear Fellow Shareholder:
It is a pleasure to report to you that Three Rivers Financial Corporation (the
"Company") and its subsidiary, First Savings Bank (the "Bank") completed another
successful year. Although net income was down from the previous year, the
decrease resulted from the Bank's recent expansion to Indiana, Year 2000 ("Y2K")
expenses and the purchase of new computer hardware and software.
For the year ended June 30, 1999, the Company reported net income of $598,000.
At June 30, 1999, total deposits were $67.2 million, net loans totaled $68.7
million and total assets stood at $100.4 million. The deposit and loan totals
represent significant increases from the previous fiscal year.
During the past year, the Company declared a 10% stock dividend, successfully
repurchased 167,000 shares of its common stock (adjusted for the stock
dividend), and increased its quarterly dividend to $.115 per share. There were
702,734 shares outstanding as of June 30, 1999 and we continue to explore ways
to improve the liquidity of our stock.
By now, you have no doubt been exposed to information about the so called "Y2K
computer problem". Maintaining your confidence has always been our priority. We
have taken the "Y2K" glitch seriously and we've upgraded or replaced all of our
computer systems to bring them into Y2K compliance. We have completed testing of
our mission-critical systems and we are pleased to report that the tests were
successful. We are now using Y2K-ready systems in all our daily operations.
On behalf of the Board of Directors, it is important to acknowledge and
recognize the tireless efforts of our employees and officers. To our valued
shareholders, we thank you for your support. We look forward to the ensuing year
and will make every effort to justify your continued confidence and support.
G. Richard Gatton
President and
Chief Executive Officer
1
<PAGE>
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,
and Howe and Middlebury, Indiana. The Howe and Middlebury branches began
operation in 1998. First Savings Bank is engaged principally in originating
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 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 10, 1999, there were 702,734 common shares of TRFC outstanding
held by approximately 257 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".
<TABLE>
<CAPTION>
Dividends
Quarter Ended High Low Declared
------------------ ----- ---- -----------
<S> <C> <C> <C>
September 30, 1998 17.73 13.64 $ .121
December 31, 1998 14.66 12.68 .115
March 31, 1999 14.25 13.00 .115
June 30, 1999 14.38 12.50 .115
September 30, 1997 15.28 14.20 $ .09
December 31, 1997 19.77 15.11 .09
March 31, 1998 21.70 18.98 .10
June 30, 1998 19.55 17.39 .10
</TABLE>
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. All share and per share amounts have been retroactively adjusted
for the October of 1998 10% stock dividend.
(Continued)
2
<PAGE>
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 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 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, 1999, available for the payment of dividends to
TRFC under the foregoing regulations was approximately $3,288,000.
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
AND OTHER DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------At June 30,-------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected Financial Condition Data: (In Thousands)
- ---------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 100,406 $ 98,885 $ 95,130 $ 87,151 $ 73,300
Cash and cash equivalents 7,966 12,281 7,438 4,112 3,822
Interest-earning time deposits in other
financial institutions 4,155 4,065 3,471 3,868 2,676
Securities and Federal Home Loan Bank stock 15,174 16,165 18,967 19,887 9,256
Loans receivable, net 68,706 62,120 61,813 56,043 54,377
Deposits 67,160 61,516 60,345 63,724 63,138
Federal Home Loan Bank advances 20,657 22,744 20,344 9,211 3,845
Shareholders' equity 10,789 12,688 12,803 12,786 5,395
</TABLE>
<TABLE>
<CAPTION>
-------------------------Years Ended June 30,---------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected Operating Results Data: (In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total interest income $ 7,214 $ 7,248 $ 6,795 $ 6,295 $ 5,484
Total interest expense 3,925 3,848 3,437 3,209 2,782
----------- ----------- ----------- ----------- ------------
Net interest income 3,289 3,400 3,358 3,086 2,702
Provision for loan losses 60 60 60 65 87
----------- ----------- ----------- ----------- ------------
Net interest income after provision for loan losses 3,229 3,340 3,298 3,021 2,615
----------- ----------- ----------- ----------- ------------
Noninterest income:
Service charges and fees 385 312 276 253 243
Gains on sales of interest-earning assets 228 127 44 84 27
Other noninterest income 139 219 208 160 95
----------- ----------- ----------- ----------- ------------
Total noninterest income 752 658 528 497 365
Total noninterest expense 3,185 2,856 3,047 2,504 2,014
----------- ----------- ----------- ----------- ------------
Income before income taxes 796 1,142 779 1,014 966
Income tax expense 198 320 269 344 314
----------- ----------- ----------- ----------- ------------
Net income $ 598 $ 822 $ 510 $ 670 $ 652
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Basic earnings per share 1, 2 $ .84 $ 1.00 $ .61 $ .72 N/A
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Diluted earnings per share 1, 2 $ .83 $ .97 $ .61 $ .72 N/A
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
</TABLE>
(Continued)
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
AND OTHER DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------Years Ended June 30,----------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
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) .60% .85% .57% .80% .90%
Interest rate spread 2.83 3.17 3.46 3.45 3.58
Net interest margin(3) 3.55 3.78 3.95 3.95 3.89
Ratio of operating expense to average total assets 3.17 2.96 3.39 2.98 2.77
Return on shareholders' equity (ratio of net income to average equity) 5.12 6.28 4.50 5.19 13.00
Asset Quality Ratios:
Non-performing assets to total assets at end of period(4) .62 .69 .60 .69 .76
Allowance for loan losses to non-performing loans
at end of period 83.42 74.89 312.30 272.12 274.82
Capital Ratios:
Shareholders' equity to total assets at end of period 10.75 12.83 13.46 14.67 7.36
Average shareholders' equity to average assets 11.82 13.58 12.59 15.38 6.91
Dividend payout (dividends declared per share divided
by basic earnings per share)(2) 55.48 38.18 51.49 28.48 N/A
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.17x 1.14x 1.12x 1.12x 1.08x
</TABLE>
- ---------------------------
(1) All per share amounts have been retroactively adjusted for the October of
1998 10% stock dividend.
(2) 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.
(3) Net interest income divided by average interest earning assets.
(4) Non-performing assets consist of non-accruing loans, accruing loans which
are past due 90 days or more and foreclosed assets.
5
<PAGE>
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, 1999, TRFC had approximately
$100.4 million in assets, $67.2 million in deposits and $10.8 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, 1999 COMPARED TO JUNE 30, 1998
ASSETS. The Company's total assets remained relatively stable, increasing
slightly to $100.4 million at June 30, 1999 from $98.9 million at June 30, 1999.
The asset mix, however, has changed at June 30, 1999 as compared to June 30,
1998, as described more fully below.
Cash and cash equivalents decreased $4.3 million to $8.0 million at June 30,
1999 from $12.3 million at June 30, 1998, primarily due to a decrease in
interest-earning deposits in other financial institutions of $5.0 million, or
52%. This decrease was the result of management's intent to shift funds into
higher yielding loan assets.
Securities decreased $1.0 million from $15.0 at June 30, 1998 to $14.0 million
at June 30, 1999. Total securities held at June 30, 1999 were primarily
classified as held to maturity and consisted of mortgage-backed securities and
securities issued by states and political subdivisions. 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. During the years ended June 30, 1999 and 1998, the Company
did not hold any securities that would be categorized as trading securities.
(Continued)
6
<PAGE>
Net loans increased $6.6 million from $62.1 million at June 30, 1998 to $68.7
million at June 30, 1999. The increase is partially attributable to the
Company's expansion into the northern Indiana market through the late 1998
addition of the Howe and Middlebury branch locations. The majority of the
increase occurred in mortgage loans secured by one-to-four family residences,
increasing $5.5 million, or 11%, to $48.8 million at June 30, 1999. The increase
is consistent with the Company's strategy, as the mortgage loan portfolio
continues to represent the Company's primary lending activity.
The loan portfolio mix remained relatively constant at June 30, 1999 as compared
to the prior year. Loans secured by real estate represents approximately 83% of
the net loan portfolio with a balance of $56.9 million at June 30, 1999. Of this
balance, mortgage loans secured by one-to-four family residences comprise the
majority of the balance at June 30, 1999. Management anticipates moderate growth
in each of its loan categories, 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 originating 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 $1.8 million to
$13.9 million at June 30, 1999 as a result of lending programs designed to
attract this loan market. Commercial and other loans, such as home improvement
and general purpose loans, represent the majority of this overall increase,
increasing approximately $1.2 million to $7.8 million at June 30, 1999.
Automobile and home equity loans represent the remaining total of consumer and
other loans, with a balance of $6.2 million at June 30, 1999. Such loan
portfolios remained relatively stable as compared to the prior 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.
LIABILITIES. The funding mix as of June 30, 1999 has shifted slightly when
compared to June 30, 1998. Total deposits increased to $67.2 million at June 30,
1999 from $61.5 million at June 30, 1998. The increase in total deposits was
attributable to a combination of increases in each of the different deposit
categories primarily a direct result of the addition of the Howe and Middlebury
branches in northern Indiana. Demand deposits increased $1.1 million, savings
and NOW deposits increased $2.5 million and time deposits increased $2.0
million. 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.
The increase in total deposits was offset by a slight decrease in other borrowed
funds of $2.0 million. The balance of borrowed funds of $20.7 million at June
30, 1999 consists solely of advances from the Federal Home Loan Bank ("FHLB")
with both fixed and variable interest rates and stated maturities ranging
through 2009. The FHLB has designed various borrowing programs to assist
financial institutions in managing liquidity needs and interest rate risk.
SHAREHOLDERS' EQUITY. Shareholders' equity amounted to $10.8 million or 10.8% of
total assets at June 30, 1999 compared to $12.7 million or 12.8% of total assets
at June 30, 1998. The decrease primarily resulted from the repurchase of stock,
totaling $2,362,000 during 1999. Management continues to utilize the stock
repurchase program to manage the Company's capital position in an effort
maximize shareholder value. In addition to the stock repurchases, shareholders'
equity increased by net income of $598,000 during 1999, offset by dividends paid
of $327,000.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED JUNE 30, 1999 AND 1998
GENERAL. Net income for the year ended June 30, 1999 was $598,000, a decrease of
$224,000 compared to net income for the year ended June 30, 1998 of $822,000.
This decrease was primarily the result of a decrease in the average interest
rate spread between interest-earning assets and interest-bearing liabilities, an
increase in overhead expenses related to the addition in late 1998 of the Howe
and Middlebury branch locations, and anticipated expenses related to the
necessary preparation for the Year 2000.
(Continued)
7
<PAGE>
INTEREST INCOME. Interest income remained relatively stable as compared to the
prior year, with a balance of $7.2 million for the year ended June 30, 1999.
Interest income on loans increased slightly, with a balance of $5.6 million for
1999, or 77.3% of total interest income. An increase in interest income on loans
related to volume increases was offset by a decrease in interest income on loans
related to an overall decrease in interest rates during the year.
In addition, a decrease in interest income on securities of $144,000 was offset
by an increase in interest income on other interest-earning assets of $78,000.
The change was largely attributable to a decrease in the average balance of
securities and an increase in the average balance of interest-earning assets
during the year.
INTEREST EXPENSE. Interest expense for the year ended June 30, 1999 was $3.93
million, an increase of $77,000 over the June 30, 1998 balance of $3.85 million.
This increase is related to an increase in interest expense on deposits
primarily the result of an increase in the average balance of money market and
savings deposits, and an increase in the average interest paid on time deposits
during 1999.
NET INTEREST INCOME. Net interest income decreased $111,000 for the year ended
June 30, 1999 as compared to June 30, 1998, primarily as a result of the
decreasing interest rate environment noted above. The net yield on average
interest-earning assets decreased to 3.55% for 1999 as compared to 3.78% for
1998. The impact on net interest income was partially offset by an increase in
the average outstanding balance of interest-earning assets of $2.5 million or
2.8%, from $90.0 million for 1998 to $92.5 million for 1999. Changes in interest
due to volume and rate variances is more fully described in the "Rate/Volume
Analysis" included in this report. Future improvement in the net yield depends
on various factors, including the Company's ability to continue to successfully
market higher-yielding consumer loan products and to obtain growth in low-cost
deposit accounts such as NOW and savings deposits.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the years ended
June 30, 1999 and 1998 was $60,000. The provision for loan losses, less net
charge-offs for 1999 of $30,000, increased the allowance for loan losses to
$520,000 at June 30, 1999 from $489,000 at June 30, 1998. Management continues
to increase the allowance based on, among other things, growth in the loan
portfolio, 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 non-performing loans 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 $658,000 to $752,000 from
1998 to 1999. As a result of increased refinancing volume from lower prevailing
interest rates compared to the prior fiscal year, proceeds from the sale of
mortgage loans increased $3.2 million, from $5.8 million for the year ended June
30, 1998 to $9.0 million for the year ended June 30, 1999. As a result, gains on
sales of loans increased by $101,000, accounting for the majority of the
increase. In the near future, the income generated from sales of loans is
expected to decrease based upon the recent increase in general interest rates.
In addition, service charges on deposit accounts increased $57,000, contributing
to the overall increase.
(Continued)
8
<PAGE>
NONINTEREST EXPENSE. Noninterest expense increased from $2.9 million for the
year ended June 30, 1998 to $3.2 million for the year ended June 30, 1999. This
increase of $329,000 or 11.5%, was primarily the result of the additional
overhead expenses necessary for expansion into the Howe and Middlebury, Indiana
markets in late 1998. The majority of this increase relates to an increase in
compensation and benefits of $163,000, occupancy and equipment of $59,000, and
data processing expenses of $41,000. In addition, the Company incurred a $51,000
loss on the sale and disposal of fixed assets considered non-compliant with
respect to the Year 2000, as more fully discussed in the "Year 2000" section of
this report.
INCOME TAX EXPENSE. Income tax expense decreased from $320,000 for the year
ended June 30, 1998 to $198,000 for the year ended June 30, 1999 due primarily
to decreased income before federal income taxes in 1999 as compared to 1998.
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 was previously used to determine the Bank's bad
debt deduction for tax purposes. As more fully disclosed in Note 9, the Company
must recapture approximately $52,700 of income taxes over a six-year period
beginning no later than 1999.
9
<PAGE>
COMPARISON OF YEARS ENDED JUNE 30, 1998 AND 1997
GENERAL. Net income for the year ended June 30, 1998 was $822,000, an increase
of $312,000 compared to net income for the year ended June 30, 1997 of $510,000.
This increase was primarily the result of the $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") taken in 1997. This one-time, special assessment amounted
to $.657 for every $100 of SAIF insured deposits as of March 31, 1995.
INTEREST INCOME. Interest income increased $452,000, or 6.7%, from $6.8 million
for the year ended June 30, 1997 to $7.2 million for the year ended June 30,
1998. This was due primarily to changes in the average balances of the Company's
interest-earning assets during 1998 as compared to 1997. An increase in the
average loan portfolio of $4.0 million and other interest-earning assets of $3.2
million was offset by a decrease in the average securities portfolio of $3.0
million.
INTEREST EXPENSE. Interest expense for the year ended June 30, 1998 was $3.8
million, an increase of 12.0% over the June 30, 1997 balance of $3.4 million.
This increase in interest expense was primarily the result of an increase in
average borrowed funds of $6.3 million during 1998 as compared to 1997.
NET INTEREST INCOME. Net interest income increased $42,000 for the year ended
June 30, 1998 as compared to June 30, 1997, 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 down slightly at
3.78% for 1998 as compared to 3.95% for 1997. However, the average outstanding
balance of interest-earning assets increased 5.9% from $85.0 million for 1997 to
$90.0 million in 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the years ended
June 30, 1998 and 1997 was $60,000. The provision for loan losses, less net
charge-offs for the period of $58,000, increased the allowance for loan losses
slightly to $489,000 at June 30, 1998 from $487,000 at June 30, 1997.
NONINTEREST INCOME. Noninterest income increased from $528,000 to $658,000 from
1997 to 1998. As a result of increased refinancing volume from lower prevailing
interest rates compared to the prior fiscal year, proceeds from the sale of
mortgage loans increased $3.2 million, from $2.5 million for the year ended June
30, 1997 to $5.7 million for the year ended June 30, 1998. As a result, gains on
sales of loans increased by $82,000, accounting for the majority of the
increase. In addition, service charges on deposit accounts increased $38,000,
contributing to the overall increase.
NONINTEREST EXPENSE. Noninterest expense decreased from $3.0 million for the
year ended June 30, 1997 to $2.8 million for the year ended June 30, 1998. This
decrease of $192,000 or 6.3%, was primarily the result of the $411,000 special
SAIF assessment in 1997 as discussed above. The Bank's annual deposit premiums
decreased approximately $62,000 in fiscal 1997. The decrease in the SAIF
assessment was offset by an increase in various other expense categories,
including compensation and benefits of $72,000, occupancy and equipment of
$77,000, advertising and promotion of $29,000, data processing of $29,000, and
printing and supplies of $25,000. The increase in such expense categories was
primarily the result of the addition of the two new branches in 1998.
INCOME TAX EXPENSE. Income tax expense increased from $269,000 for the year
ended June 30, 1997 to $320,000 for the year ended June 30, 1998 due primarily
to increased income before federal income taxes in 1998 as compared to 1997.
10
<PAGE>
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, 1999, 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 $26.6 million, representing a negative
cumulative one-year gap ratio of 28.2% 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.
11
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1999 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 1-2 3-5
Months Months One Year Years Years
------ ------ -------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate mortgage loans $ 1,775 $ 180 $ 220 $ 1,909 $ 1,039
Adjustable rate mortgage loans 2,055 1,965 3,596 11,536 10,132
Consumer and other loans 4,760 1,469 958 2,445 3,828
Mortgage-backed securities - 7 - 3,416 974
Securities - - - - -
Interest-earning time deposits 1,093 792 1,388 882 -
Other interest-earning assets 4,526 - - - -
FHLB stock 1,162 - - - -
----------- ----------- ----------- ----------- -----------
Total interest-earning assets 15,371 4,413 6,162 20,188 15,973
Interest-bearing liabilities:
Time deposits 7,720 7,528 9,725 9,857 4,260
Passbook savings 8,522 - - - -
NOW deposits 6,244 - - - -
Money market demand accounts 9,279 - - - -
FHLB advances 75 - 3,500 4,082 7,000
----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 31,840 7,528 13,225 13,939 11,260
----------- ----------- ----------- ----------- -----------
Interest-earning assets less
interest-bearing liabilities $ (16,469) $ (3,115) $ (7,063) $ 6,249 $ 4,713
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Cumulative interest-rate sensitivity gap $ (16,469) $ (19,584) $ (26,647) $ (20,398) $ (15,685)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Cumulative interest-rate sensitivity gap as a
percentage of total interest-earning assets (17.59)% (20.69)% (28.15)% (21.55)% (16.57)%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
-----------------------
Over
5 Years Total
------- -----
<S> <C> <C>
Interest-earning assets:
Fixed-rate mortgage loans $ 7,614 $ 12,737
Adjustable rate mortgage loans 14,852 44,136
Consumer and other loans 478 13,938
Mortgage-backed securities 9,240 13,637
Securities 375 375
Interest-earning time deposits - 4,155
Other interest-earning assets - 4,562
FHLB stock - 1,162
----------- ---------
Total interest-earning assets 32,559 94,666
Interest-bearing liabilities:
Time deposits - 39,090
Passbook savings - 8,522
NOW deposits - 6,244
Money market demand accounts - 9,279
FHLB advances 6,000 20,657
----------- ---------
Total interest-bearing liabilities 6,000 83,792
----------- ---------
Interest-earning assets less
interest-bearing liabilities $ 26,559 $ 10,874
----------- ---------
----------- ---------
Cumulative interest-rate sensitivity gap $ 10,874
-----------
-----------
Cumulative interest-rate sensitivity gap as a
percentage of total interest-earning assets 11.49%
-----------
-----------
</TABLE>
12
<PAGE>
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 $24.0 million at June 30, 1999, 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 3% 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 in net
interest income and a maximum permissible decrease in NPV given a market
interest rate change. The policy incorporates maximum permissible changes,
rather than absolute targets, to allow flexibility while avoiding an over
reliance on specific interest rate forecasts.
13
<PAGE>
The following table sets forth the interest rate sensitivity of the Bank's net
portfolio value as of June 30, 1999 in the event of 1%, 2%, and 3% 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>
+300 bp $ 9,848 $ (2,855) (22)% 10.00% (238) bp
+200 bp 11,022 (1,681) (13) 11.02 (136) bp
+100 bp 12,021 (682) (5) 11.84 (54) bp
0 bp 12,703 - - 12.38 -
-100 bp 13,071 368 3 12.64 26 bp
-200 bp 13,355 652 5 12.81 43 bp
-300 bp 13,671 968 8 13.02 64 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 rates.
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 rates 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.
14
<PAGE>
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.
15
<PAGE>
<TABLE>
<CAPTION>
-----------------------------
At June 30, 1999 ------------------1999-------
----------------
Average Interest
Yield/ Outstanding Earned/
Balance Cost Balance Paid
------- ---- ------- ----
Interest-earning assets:
<S> <C> <C> <C> <C>
Loans receivable(1) $ 68,706 7.97% $ 65,409 5,577
Securities(2) 14,012 6.10 14,555 896
Interest-earning time
deposits 4,155 5.74 4,237 252
Other interest-earning
assets 4,526 5.28 7,176 396
FHLB stock 1,162 8.00 1,162 93
----------- -------- ----------- -----------
Total interest-
earning assets $ 92,561 7.46 92,539 7,214
----------- -------- ----------- -----------
Interest-bearing liabilities:
Money market $ 9,279 3.58 8,594 317
Savings deposits 8,522 2.25 8,160 184
NOW accounts 6,244 1.88 6,060 117
Certificates of deposit 39,090 5.44 35,744 2,155
FHLB advances 20,657 5.30 20,449 1,152
----------- -------- ----------- -----------
Total interest-bearing
liabilities $ 83,792 4.61 79,007 3,925
----------- -------- ----------- -----------
Net interest income $ 3,289
-----------
-----------
Net interest rate spread 2.85%
--------
--------
Net earning assets $ 13,532
-----------
-----------
Net yield on average interest-
earning assets
Average interest-earning assets
to average interest-bearing
liabilities $ 1.17X
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
-----------------------Years ended June 30,------------------------------------------------
--------- ------------------1998--------------- ----------------1997-----------------
Average Interest Average Interest
Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Rate Balance Paid Rate Balance Paid Rate
---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C>
Loans receivable(1) 8.53 $ 62,838 $ 5,545 8.82% $ 58,835 $ 5,163 8.78%
Securities(2) 6.16 16,086 1,040 6.47 19,083 1,194 6.26
Interest-earning time
deposits 5.95 3,866 234 6.05 3,394 204 6.01
Other interest-earning
assets 5.52 6,105 342 5.60 2,891 172 5.95
FHLB stock 8.00 1,085 87 8.02 767 62 8.08
------- ----------- ----------- ------- ----------- ----------- --------
Total interest-
earning assets 7.80 89,980 7,248 8.06 84,970 6,795 8.00
------- ----------- ----------- ------- ----------- ----------- --------
Interest-bearing liabilities:
Money market 3.69 7,518 290 3.86 6,017 184 3.06
Savings deposits 2.25 7,679 176 2.29 8,562 197 2.30
NOW accounts 1.93 6,010 113 1.88 8,522 110 1.29
Certificates of deposit 6.03 37,083 2,100 5.66 38,622 2,157 5.58
FHLB advances 5.63 20,331 1,169 5.75 14,049 789 5.62
------- ----------- ----------- ------- ----------- ----------- --------
Total interest-bearing
liabilities 4.97 78,621 3,848 4.89 75,772 3,437 4.54
------- ----------- ----------- ------- ----------- ----------- --------
Net interest income $ 3,400 $ 3,358
----------- -----------
----------- -----------
Net interest rate spread 2.83% 3.17% 3.46%
------- ------- --------
------- ------- --------
Net earning assets $ 11,359 $ 9,198
----------- -----------
----------- -----------
Net yield on average interest-
earning assets 3.55% 3.78% 3.95%
------- ------- --------
------- ------- --------
Average interest-earning assets
to average interest-bearing
liabilities 1.14X 1.12X
----------- -----------
----------- -----------
</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.
16
<PAGE>
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 rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided for 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,-----------------------------------------------
-------1999------vs.-----1998-------- --------1998------vs.----1997------- -------1997------vs.----1996---
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due to Total
----------------- Increase ------------------- Increase ----------------- 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 $ 223 (191) 32 $ 353 $ 29 $ 382 $ 359 $ (37) $ 322
Securities (97) (47) (144) (193) 39 (154) 334 (1) 333
Interest-earning
time deposits 22 (4) 18 29 1 30 (6) (9) (15)
Other interest-
earning assets 59 (5) 54 181 (11) 170 (153) (153)
FHLB stock 6 - 6 26 (1) 25 12 1 13
--------- -------- --------- --------- --------- --------- --------- -------- -------
Total interest-
earning
assets $ 213 $ (247) (34) $ 396 $ 57 453 $ 546 $ (46) 500
---------- -------- --------- --------- --------- --------- --------- -------- -------
---------- -------- --------- --------- --------- --------
Interest-bearing
liabilities:
Money market $ 40 (13) 27 $ 52 $ 54 106 $ (18) $ 9 (9)
Savings deposits 11 (3) 8 (20) (1) (21) (69) 4 (65)
NOW accounts 1 3 4 (38) 41 3 42 (48) (6)
Certificates of
deposit (78) 133 55 (87) 30 (57) (39) (85) (124)
FHLB advances 7 (24) (17) 361 19 380 437 (5) 432
--------- --------- ---------- --------- --------- --------- --------- -------- -------
Total interest-
bearing
liabilities $ (19) $ 96 77 $ 268 $ 143 411 $ 353 $ (125) 228
---------- -------- --------- --------- --------- --------- --------- -------- -------
---------- -------- --------- --------- --------- --------
Net interest income $ (111) $ 42 $ 272
--------- --------- -------
--------- --------- -------
</TABLE>
17
<PAGE>
ASSET QUALITY
Total non-performing assets decreased to $624,000 at June 30, 1999 as compared
to $682,000 at June 30, 1998. The ratio of non-performing assets to total assets
at June 30, 1999 was .62% compared to .69% at June 30, 1998. Included in
non-performing assets at June 30, 1999 were real estate secured loans totaling
$614,000, consumer loans totaling $7,000 and repossessed assets of $3,000. There
was no foreclosed real estate at June 30, 1999. The allowance for loan losses
was 83.69% and 74.89% of nonperforming loans at June 30, 1999 and June 30, 1998,
respectively. The majority of the non-performing mortgage loan balance at June
30, 1999 relates to a residential construction loan which has since been fully
paid off with no loss incurred.
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, 1999, approximately
$67,000 of loans were classified as special mention and $456,000 as substandard.
The majority of the substandard loan balance relates to the one residential real
estate loan described above. As the balance of such loan classifications
represent smaller-balance homogeneous loan types, these loans are not considered
impaired at June 30, 1999. There were no other loans classified as impaired and
no assets classified as doubtful or loss at June 30, 1999. 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.
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 its
sources of funds through borrowings from the FHLB. Management believes that the
Bank's sources of funds will be adequate to meet its currently 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 4%. As of June 30, 1999, First Savings Bank's
liquidity ratio was 22.21%.
During the year ended June 30, 1999, there was a net decrease in cash and cash
equivalents of $4.3 million. Major sources of cash during the period were net
cash from operations of $1.0 million, an increase in deposits of $5.6 million,
and $6.5 million in proceeds from calls, maturities and paydowns of securities
held to maturity. Major uses of cash during the period included a net increase
in loans of $6.6 million, the purchase of $4.5 million of securities held to
maturity, net repayments of $2 million in borrowings, and repurchases of common
stock of $2.4 million.
During the year ended June 30, 1998, there was a net increase in cash and cash
equivalents of $4.8 million. Major sources of cash during the period were net
cash from operations of $1.4 million, a net increase of $2.4 million in
borrowings from the FHLB, and $6.7 million in proceeds from the maturities and
paydowns of securities held to maturity. Major uses of cash during the period
included the purchase of $3.0 million of securities held to maturity, net
premises and equipment purchases of $1.4 million, and repurchases of common
stock totaling $824,000.
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 million, a net increase of $11.1 million in
borrowings from the FHLB, and $3.6 million in proceeds from 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.
- --------------------------------------------------------------------------------
(Continued)
18
<PAGE>
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 the level of dividends to shareholders are discretionary. At June
30, 1999, the Company had $318,000 in liquid assets. The primary source of
liquidity on an ongoing basis is dividends from the Bank. For the year ended
June 30, 1999, the Bank paid $2.7 million in dividends to the Company. For the
same period, the Company paid dividends to shareholders of $327,000.
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, 1999,
the Bank exceeded each of its capital requirements, with tangible, core and
risk-based capital ratios of 9.76%, 9.76%, and 19.06%, respectively.
YEAR 2000
Included in other noninterest expense for the year ended June 30, 1999 is
approximately $20,000 in charges incurred in connection with the training and
testing of the Company's computer and related systems to properly recognize
dates beyond December 31, 1999. The Company has completed its assessment of Year
2000 issues, developed a plan, and arranged for the required resources to
complete the necessary remediation and testing. As part of its efforts to ensure
compliance with the Year 2000, the Company converted to a new processing system
in May of 1999. At that time, computer hardware was also replaced, ultimately
resulting in a net loss on sales and disposals of fixed assets of $51,000.
The Company has and will utilize both internal and external resources to
reprogram or replace, and test hardware and software for Year 2000 compliance.
The Company has completed changes and testing of critical systems to ensure Year
2000 compliance. Testing of non-critical applications will continue throughout
1999 and will be completed prior to any impact on operating systems. The total
costs of the Year 2000 project are estimated at $350,000. The Company will incur
remediation and testing costs through the Year 2000, but does not anticipate
that material incremental costs will be incurred in any single period.
The Company has initiated formal communications with all of its critical vendors
and service providers to determine the extent to which the Company is vulnerable
to any failure of those third parties to remedy their own Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be remedied in a timely manner or that there
will be no adverse effect on the Company's systems. Critical companies include
power companies and phone systems. Therefore, the Company could possibly be
negatively impacted to the extent that other entities not affiliated with the
Company are unsuccessful in properly addressing this issue.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based upon management's best estimates. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
IMPACT OF NEW ACCOUNTING STANDARDS
Information pertaining to this topic appears in Note 18 to the consolidated
financial statements of Three Rivers Financial Corporation, which are included
as part of this report.
- --------------------------------------------------------------------------------
19
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Three Rivers Financial Corporation
Three Rivers, Michigan
We have audited the accompanying consolidated balance sheets of Three Rivers
Financial Corporation as of June 30, 1999 and 1998 and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity and
cash flows for each of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1999 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
August 5, 1999
- --------------------------------------------------------------------------------
20
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from other financial institutions $ 3,439,860 $ 2,768,730
Interest-earning deposits in other financial institutions 4,526,169 9,512,347
-------------- --------------
Cash and cash equivalents 7,966,029 12,281,077
Interest-earning time deposits in other financial institutions 4,154,960 4,064,980
Securities available for sale 1,771,920 725,036
Securities held to maturity (fair value: 1999 - $12,239,450
and 1998 - $14,388,034) 12,240,083 14,277,573
Loans receivable, net of allowance for loan losses
of $519,687 in 1999 and $489,361 in 1998 68,705,967 62,119,886
Federal Home Loan Bank stock 1,162,200 1,162,200
Accrued interest receivable 481,286 467,691
Premises and equipment, net 2,739,937 2,626,114
Investment in low-income housing partnership 373,754 423,742
Other assets 809,395 736,583
-------------- --------------
Total assets $ 100,405,531 $ 98,884,882
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Demand deposits $ 4,025,494 $ 2,879,180
Savings and NOW deposits 24,045,015 21,507,839
Time deposits 39,089,857 37,128,630
-------------- --------------
Total deposits 67,160,366 61,515,649
Federal Home Loan Bank advances 20,656,961 22,743,737
Advance payments by borrowers for taxes and insurance 463,129 531,757
Due to low-income housing partnership 253,058 323,622
Accrued expenses and other liabilities 1,082,957 1,082,265
-------------- --------------
Total liabilities 89,616,471 86,197,030
Shareholders' equity
Preferred stock, par value $.01; 500,000 shares authorized;
none outstanding
Common stock, par value $.01; 2,000,000 shares authorized; 702,734 and
790,698 shares issued and 702,734 and 783,313
outstanding at June 30, 1999 and 1998, respectively 7,027 7,907
Additional paid-in capital 5,563,848 6,861,182
Retained earnings 5,851,942 6,607,642
Accumulated other comprehensive income, net of tax
of ($443) at June 30, 1999 (860) -
-------------- --------------
11,421,957 13,476,731
Unearned Employee Stock Ownership Plan shares (421,538) (491,582)
Unearned Recognition and Retention Plan shares (211,359) (199,055)
Treasury stock, at cost (7,385 shares at
June 30, 1998) - (98,242)
-------------- --------------
Total shareholders' equity 10,789,060 12,687,852
-------------- --------------
Total liabilities and shareholders' equity $ 100,405,531 $ 98,884,882
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans receivable $ 5,577,294 $ 5,544,593 $ 5,163,206
Securities 896,437 1,040,216 1,194,087
Other interest and dividend income 740,511 662,703 437,754
-------------- ------------- -------------
7,214,242 7,247,512 6,795,047
Interest expense
Deposits 2,772,871 2,678,858 2,647,541
Borrowed funds 1,152,633 1,168,767 789,448
-------------- ------------- -------------
3,925,504 3,847,625 3,436,989
-------------- ------------- -------------
NET INTEREST INCOME 3,288,738 3,399,887 3,358,058
Provision for loan losses 60,000 60,000 60,000
-------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,228,738 3,339,887 3,298,058
Noninterest income
Loan servicing 118,721 101,719 103,845
Net gains on sales of loans 227,794 126,734 44,270
Net gains on foreclosed real estate 9,193 39,835 40,949
Service charges on deposit accounts 266,736 209,968 172,075
Other income 129,112 179,680 167,274
-------------- ------------- -------------
751,556 657,936 528,413
Noninterest expense
Compensation and benefits 1,530,171 1,366,870 1,294,928
Occupancy and equipment 574,355 515,130 438,542
Federal deposit insurance premium 37,811 37,914 496,715
Advertising and promotion 108,158 110,008 81,178
Data processing 263,611 222,824 193,987
Professional fees 101,997 122,185 103,923
Printing, postage, stationery, and supplies 128,590 137,239 112,073
Net losses on sales and disposals of fixed assets 50,576 - -
Other 389,405 343,335 326,189
-------------- ------------- -------------
3,184,674 2,855,505 3,047,535
-------------- ------------- -------------
INCOME BEFORE FEDERAL INCOME TAXES 795,620 1,142,318 778,936
Federal income tax expense 197,812 319,840 269,410
-------------- ------------- -------------
NET INCOME $ 597,808 $ 822,478 $ 509,526
-------------- ------------- -------------
-------------- ------------- -------------
Basic earnings per share $ .84 $ 1.00 $ .61
----- ------ -----
----- ------ -----
Diluted earnings per share $ .83 $ .97 $ .61
----- ------ -----
----- ------ -----
</TABLE>
22
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended June 30,1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET INCOME
Other comprehensive income $ 597,808 $ 822,478 $ 509,526
Net change in unrealized gains on securities
available for sale arising during the year (1,303) - -
Tax effects 443 - -
-------------- ------------- -------------
Total other comprehensive income (860) - -
-------------- ------------- -------------
COMPREHENSIVE INCOME $ 596,948 $ 822,478 $ 509,526
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income,
Stock Capital Earnings Net of Tax
----- ------- -------- ----------
<S> <C> <C> <C>
BALANCE AT JULY 1, 1996 $ 8,596 $ 7,979,421 $ 5,870,983
Net income for the year ended June 30, 1997 509,526
Cash dividends declared on common stock,
$.314 per share (269,752)
Shares committed to be released under the ESOP 26,959
Amortization of RRP shares
Retirement of common stock (277) (387,260)
----------- ------------- ------------ ------------
BALANCE AT JUNE 30, 1997 8,319 7,619,120 6,110,757
Net income for the year ended June 30, 1998 822,478
Cash dividends declared on common stock,
$.38 per share (325,593)
Shares committed to be released under the ESOP 65,823
Amortization of RRP shares
Shares issued to RRP
Retirement of common stock (412) (823,761)
----------- ------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Unearned Unearned
Employee Recognition
Stock and
Ownership Retention Total
Plan Plan Treasury Shareholders'
Shares Shares Stock Equity
------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 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,
$.314 per share (269,752)
Shares committed to be released under the ESOP 68,770 95,729
Amortization of RRP shares 69,180 69,180
Retirement of common stock (387,537)
------------ ----------- ----------- --------------
BALANCE AT JUNE 30, 1997 (561,626) (262,281) (111,545) 12,802,744
Net income for the year ended June 30, 1998 822,478
Cash dividends declared on common stock,
$.38 per share (325,593)
Shares committed to be released under the ESOP 70,044 135,867
Amortization of RRP shares 76,529 76,529
Shares issued to RRP (13,303) 13,303
Retirement of common stock (824,173)
------------ ----------- ----------- --------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
24
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income,
Stock Capital Earnings Net of Tax
----- ------- -------- ----------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1998 $ 7,907 $ 6,861,182 $ 6,607,642 $ 0
Net income for the year ended June 30, 1999 597,808
Cash dividends declared on common stock,
$.466 per share (326,502)
Shares committed to be released under the ESOP 37,499
Amortization of RRP shares
Shares issued to RRP
72,036 shares issued for 10% stock dividend 720 1,025,793 (1,027,006)
Retirement of common stock (1,600) (2,360,626)
Net change in unrealized loss on securities
available for sale, net of tax (860)
----------- ------------- ------------ ------------
BALANCE AT JUNE 30, 1999 $ 7,027 $ 5,563,848 $ 5,851,942 $ (860)
----------- ------------- ------------ ------------
----------- ------------- ------------ ------------
</TABLE>
<TABLE>
<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, 1998 $ (491,582) $ (199,055) $ (98,242) $ 12,687,852
Net income for the year ended June 30, 1999 597,808
Cash dividends declared on common stock,
$.466 per share (326,502)
Shares committed to be released under the ESOP 70,044 107,543
Amortization of RRP shares 85,938 85,938
Shares issued to RRP (98,242) 98,242 -
72,036 shares issued for 10% stock dividend (493)
Retirement of common stock (2,362,226)
Net change in unrealized loss on securities
available for sale, net of tax (860)
------------ ----------- ----------- --------------
BALANCE AT JUNE 30, 1999 $ (421,538) $ (211,359) $ 0 $ 10,789,060
------------ ----------- ----------- --------------
------------ ----------- ----------- --------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 597,808 $ 822,478 $ 509,526
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation of premises and equipment 293,999 254,238 202,057
Net amortization (accretion) of securities (38,186) (71,756) (35,293)
Provision for loan losses 60,000 60,000 60,000
RRP expense 85,938 76,529 69,180
ESOP expense 107,543 135,867 95,729
Loans originated for sale (8,836,790) (5,684,330) (2,528,149)
Proceeds from sales of loans held for sale 8,985,098 5,811,064 2,572,419
Net realized gains on sales of loans (227,794) (126,734) (44,270)
Net loss on sales and disposals of fixed assets 50,576 - -
Change in
Accrued interest receivable and other assets (45,078) (97,424) (352,906)
Accrued expenses and other liabilities 692 256,702 279,425
-------------- ------------- -------------
Net cash provided by operating activities 1,033,806 1,436,634 827,718
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-earning time
deposits with other financial institutions (89,980) (594,000) 397,000
Net change in loans (6,646,081) (396,663) (5,751,541)
Net purchases of premises and equipment (458,398) (1,444,749) (152,855)
Securities available for sale:
Purchases (1,360,249) (725,036) -
Paydowns 306,308 - -
Securities held to maturity:
Purchases (4,455,899) (2,969,515) (2,245,992)
Calls and maturities 1,500,000 2,500,000 1,000,000
Paydowns 5,037,329 4,188,648 2,624,167
Purchase of Federal Home Loan Bank stock - (119,900) (423,600)
Proceeds from sale of other real estate owned 38,600 454,893 -
Net investment in low-income housing partnership (20,576) (40,195) (21,785)
-------------- ------------- -------------
Net cash provided by (used in) investing activities (6,148,946) 853,483 (4,574,606)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
26
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ 5,644,717 $ 1,170,857 $ (3,379,628)
Net change in advances from borrowers for taxes
and insurance (68,628) 132,426 (23,501)
Proceeds from FHLB advances 7,500,000 13,750,000 18,750,000
Repayments of FHLB advances (9,586,776) (11,350,550) (7,616,322)
Cash dividends paid (326,995) (325,593) (269,752)
Purchase of common stock (2,362,226) (824,173) (387,537)
-------------- ------------- -------------
Net cash provided by financing activities 800,092 2,552,967 7,073,260
-------------- ------------- -------------
Net change in cash and cash equivalents (4,315,048) 4,843,084 3,326,372
Cash and cash equivalents at beginning of period 12,281,077 7,437,993 4,111,621
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,966,029 $ 12,281,077 $ 7,437,993
-------------- ------------- -------------
-------------- ------------- -------------
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 3,923,236 $ 3,838,742 $ 3,444,830
Income taxes 370,225 139,950 392,000
Transfers from loans to real estate acquired
through foreclosure - 29,408 78,481
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION, NATURE OF OPERATIONS AND INDUSTRY SEGMENT
INFORMATION: The 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 and the Bank provide a broad range of banking and financial services
in the banking industry. Substantially all revenues and services are derived
from banking products and services. 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 and the central
portion of northern Indiana, through its main office in Three Rivers and five
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. While the Company's chief decision makers monitor the revenue streams
of the various Company products and services, operations are managed and
financial performance is evaluated on a Company-wide basis. Accordingly, all of
the Company's banking operations are considered by management to be aggregated
in one reportable operating segment.
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, the fair value of stock options 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. Securities are written down to fair value when
a decline in fair value is not temporary.
- --------------------------------------------------------------------------------
(Continued)
28
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
MORTGAGE BANKING ACTIVITIES: Mortgage loans originated and intended for sale in
the secondary market are reported on the consolidated balance sheets 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.
SERVICING RIGHTS: Servicing rights represent the allocated value of servicing
rights retained on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights, using groupings of the
underlying loans as to interest rates and then, secondarily, as to geographic
and prepayment characteristics. Any impairment of a grouping is reported as a
valuation allowance.
LOANS RECEIVABLE, NET: Loans receivable are reported at the unpaid principal
balance, less the allowance for loan losses, 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. The accrual of interest on loans
is discontinued when full loan repayment is in doubt, typically when the loan is
deemed impaired or when payments become past due 90 days, unless the loan is
well-secured and in the process of collection. Payments received on such loans
are reported as principal reductions. Interest income previously accrued on such
loans is reversed.
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 it
is probable that all principal and interest amounts will not be collected
according to the original terms of the loan.
The allowance for loan losses is a valuation allowance for probable credit
losses, 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, typically when payments are past due 90 days for consumer
loans and 180 days for residential mortgage loans, although collection efforts
continue and future recoveries may occur.
- --------------------------------------------------------------------------------
(Continued)
29
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated depreciation.
These assets are reviewed for impairment 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 recognized when incurred.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP): The Company accounts for its 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.
RECOGNITION AND RETENTION PLAN (RRP): The RRP is a stock award plan for which
the measurement of total compensation cost is based upon the fair value of the
shares on the date of grant. RRP awards vest in five equal annual installments
from the date of grant, subject to the continuous employment of the recipients
as defined under such plans. Compensation expense for the RRPs is recognized on
a prorata basis over the vesting period of the awards. The unearned compensation
value of the RRPs is shown as a reduction of shareholders' equity.
STOCK OPTION PLAN (SOP): Expense for employee compensation under SOPs is
recognized only if options are granted below the market price at the grant date.
As shown in a separate note, pro forma disclosures of net income and earnings
per share are provided as if the fair value method were used for stock-based
compensation.
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)
30
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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, enters into commitments to make loans which are not
reflected in the financial statements. A summary of these commitments is
disclosed in a separate note.
EARNINGS AND DIVIDENDS PER SHARE: Basic earnings per share is based on net
income dividend by the weighted average common shares outstanding. ESOP shares
are considered outstanding as they are committed to be released; unearned shares
are not considered outstanding. Recognition and Retention Plan ("RRP") shares
are considered outstanding as they vest. Diluted earnings per share further
assumes issue of dilutive potential common shares relating to outstanding stock
options and unvested RRP shares. All share and per share amounts have been
retroactively adjusted for the October of 1998 10% stock dividend.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, net of tax, which are also recognized
as a separate component of shareholders' equity. The accounting standard that
requires reporting comprehensive income first applies for fiscal 1999, with
prior information restated to be comparable.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on- and
off-balance-sheet financial instruments does not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
RECLASSIFICATIONS: Certain items in the 1998 and 1997 financial statements have
been reclassified to conform with the 1999 presentation.
NOTE 2 - SECURITIES
Securities available for sale were as follows at June 30:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
1999
Mortgage-backed securities $ 1,773,223 $ 5,787 $ (7,090) $ 1,771,920
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
1998
Mortgage-backed securities $ 725,036 $ 725,036
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
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>
1999
Mortgage-backed securities $ 11,865,083 $ 45,582 $ (60,565) $ 11,850,100
Obligations of states and political
subdivisions 375,000 14,350 - 389,350
------------- -------------- ------------- -------------
$ 12,240,083 $ 59,932 $ (60,565) $ 12,239,450
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
1998
U.S. government and federal agencies $ 1,500,000 $ 1,563 $ 1,501,563
Mortgage-backed securities 12,299,329 113,429 $ (27,779) 12,384,979
Obligations of states and political
subdivisions 375,000 22,979 - 397,979
Corporates 103,244 269 - 103,513
------------- -------------- ------------- -------------
$ 14,277,573 $ 138,240 $ (27,779) $ 14,388,034
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
Contractual maturities of debt securities at June 30, 1999 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>
------Available for Sale----------------Held to Maturity------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due from five years to ten years $ 375,000 $ 389,350
Mortgage-backed securities $ 1,773,223 $ 1,771,920 11,865,083 11,850,100
------------- -------------- ------------- -------------
$ 1,773,223 $ 1,771,920 $ 12,240,083 $ 12,239,450
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
There were no sales of securities available for sale during the years ended June
30, 1999, 1998 and 1997. No securities classified as held to maturity were sold
or transferred to available for sale during 1999, 1998 or 1997.
Securities, with carrying values of approximately $13,638,000 and $14,523,000 at
June 30, 1999 and 1998, were pledged as collateral for purposes required or
permitted by law.
- --------------------------------------------------------------------------------
(Continued)
32
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE, NET
Loans were as follows at June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Real estate loans
One-to-four family $ 48,771,218 $ 43,295,874
Commercial 6,067,713 5,959,640
Construction or development 2,033,796 2,479,732
-------------- --------------
Total real estate loans 56,872,727 51,735,246
Consumer and other loans
Automobile 3,421,143 2,799,876
Home equity 2,752,021 2,799,489
Commercial 3,059,698 2,194,983
Other 4,705,341 4,328,252
-------------- --------------
Total consumer and other loans 13,938,203 12,122,600
-------------- --------------
Total loans 70,810,930 63,857,846
Less
Undisbursed portion of construction loans (1,058,371) (800,834)
Unearned discounts (375) (2,027)
Deferred loan fees (526,530) (445,738)
Allowance for loan losses (519,687) (489,361)
-------------- --------------
$ 68,705,967 $ 62,119,886
-------------- --------------
-------------- --------------
</TABLE>
Mortgage loans serviced for others are not included in the accompanying balance
sheets. The unpaid principal balances of these loans were $19,687,000,
$15,522,000 and $12,581,000 at June 30, 1999, 1998 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $125,895, $102,486 and $100,453 at June 30, 1999, 1998 and 1997
respectively.
Activity in the allowance for loan losses was as follows for the years ended
June 30:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 489,361 $ 487,184 $ 440,835
Provision charged to operating expense 60,000 60,000 60,000
Loans charged-off (37,301) (67,801) (14,392)
Recoveries 7,627 9,978 741
-------------- -------------- --------------
Balance at end of year $ 519,687 $ 489,361 $ 487,184
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
33
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE, NET (Continued)
Impaired loans were as follows for the year ended June 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Average investment in impaired loans $ 509,500 $ 87,000
Interest income recognized during impairment 61,700 8,400
Cash-basis interest income recognized 61,700 -
Information regarding impaired loans at June 30 is as follows:
Impaired loans with no allowance for loan losses allocated $ - $ -
Impaired loans with allowance for loan losses allocated - 522,000
Amount of allowance for loan losses allocated to impaired
loans - 60,000
</TABLE>
The above information reflects one commercial loan the Company had deemed
impaired during 1998 and 1997. The Company did not have any impaired loans as of
and during the year ended June 30, 1999.
NOTE 4 - PREMISES AND EQUIPMENT, NET
Premises and equipment were as follows at June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and land improvements $ 438,281 $ 438,281
Buildings and improvements 3,173,992 3,162,263
Furniture and equipment 1,767,600 1,577,280
-------------- -------------
Total cost 5,379,873 5,177,824
Less accumulated depreciation (2,639,936) (2,551,710)
-------------- -------------
$ 2,739,937 $ 2,626,114
-------------- -------------
-------------- -------------
</TABLE>
NOTE 5 - DEPOSITS
The aggregate amount of time deposit accounts with balances greater than or
equal to $100,000 was $5,957,819 and $4,887,584 at June 30, 1999 and 1998.
At June 30, 1999, scheduled maturities of time deposits were as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 24,973,024
2001 6,791,020
2002 3,065,861
2003 2,527,697
2004 1,732,255
--------------
$ 39,089,857
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
34
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 6 - FEDERAL HOME LOAN BANK (FHLB) ADVANCES
FHLB advances as of June 30 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Single-maturity fixed rate advances maturing September of 1998 through December
of 2001, with rates ranging from 5.09% to 6.14%, averaging 5.09% and 5.79%
at June 30, 1999 and 1998 $ 2,000,000 $ 7,000,000
Amortizable fixed rate advance maturing July of 2000 at a
rate of 5.46% 406,961 493,737
Variable rate advances maturing October of 1998 through June of 2000, with rates
of 5.13% and 5.66% at June 30, 1999
and 1998 3,500,000 1,000,000
Putable advances maturing July of 1998 through February of 2009, with rates
ranging from 4.53% to 5.71% at June 30, 1999, averaging 5.36% and 5.48% at
June 30, 1999 and 1998
14,750,000 14,250,000
------------- -------------
$ 20,656,961 $ 22,743,737
------------- -------------
------------- -------------
</TABLE>
The variable rate advances carry the three-month LIBOR rate plus three basis
points and are adjusted quarterly. For the putable advances, the FHLB has the
option to convert to an adjustable rate of three-month LIBOR flat, adjusted
quarterly. Depending on the advance, this option can be initially exercised one,
two, three or five years after the purchase date and quarterly thereafter.
Pursuant to collateral agreements with the FHLB, advances are secured under a
blanket collateral arrangement by securities and mortgage loans with a carrying
value of approximately $59,821,000 at June 30, 1999.
The aggregate annual maturities of the advances are as follows for the years
ended June 30:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 3,574,756
2001 2,082,205
2002 2,000,000
2003 6,000,000
2004 1,000,000
Thereafter 6,000,000
-------------
$ 20,656,961
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
35
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 7 - EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory multi-employer defined-benefit pension
plan covering substantially all 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 $15,000 and $75,000 for the years
ended June 30, 1999 and 1997. No contribution was required for the year ended
June 30, 1998.
The Company also maintains a 401(k) profit sharing plan 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 $21,000 for the year ended June 30, 1999 and $19,000 for the
years ended June 30, 1998 and 1997.
NOTE 8 - STOCK BASED COMPENSATION PLANS
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP"): An ESOP was established 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 75,647 shares of stock at $9.09 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, 1999 and 1998,
approximately $70,000 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 1999, 7,704 shares with an average fair value of $13.96 per share were
committed to be released, resulting in ESOP compensation expense of $107,543.
During 1998, 7,704 shares with an average fair value of $17.64 per share were
committed to be released, resulting in ESOP compensation expense of $135,867.
During 1997, 7,565 shares with an average fair value of $12.65 per share were
committed to be released, resulting in ESOP compensation expense of $95,729.
Shares held by the ESOP at June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Allocated to participants 29,275 21,572
Unearned 46,372 54,075
---------- -----------
Total ESOP shares 75,647 75,647
---------- -----------
---------- -----------
Fair value of unearned shares $ 604,227 $ 952,456
---------- -----------
---------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - STOCK BASED COMPENSATION PLANS (Continued)
All share and per share amounts have been retroactively adjusted for the October
of 1998 10% stock dividend.
RECOGNITION AND RETENTION PLAN ("RRP") AND STOCK OPTION AND INCENTIVE PLAN
("SOP"): An RRP and SOP 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. RRP awards vest in five annual
installments subject to the continuous employment of the recipients.
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, 1999, 1998 and
1997, $85,938, $76,529 and $69,180 was charged to compensation expense for the
RRP. The unearned balance of the RRP is shown as a reduction to shareholders'
equity. SOP options are granted at the market price of the Company's stock on
the date of grant and vest in five equal annual installments and expire 10 years
from the date of grant. 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 37,824 and 94,558, respectively.
The following proforma information presents net income and earnings per share
had the fair value method been used to measure compensation cost for stock
options granted during fiscal 1999, 1998, and 1997. No compensation cost was
actually recognized for stock options for the years ended June 30, 1999, 1998
and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income as reported $ 597,808 $ 822,478 $ 509,526
Proforma net income 567,504 792,175 479,223
Basic earnings per share as reported .84 1.00 .61
Proforma basic earnings per share .80 .96 .57
Diluted earnings per share as reported .83 .97 .61
Proforma diluted earnings per share .79 .94 .57
Weighted-average fair value of options granted
during year 2.22 2.56
- -
</TABLE>
In future years, the proforma effect of not applying the fair value method is
expected to increase as additional options are granted.
The fair value of options granted during the years ended June 30, 1999 and 1998,
respectively, is estimated using the following weighted-average information:
risk-free interest rate of 5.00% and 5.25%, expected life of 7 years, expected
monthly volatility of stock price of 5.48% and 4.82%, and expected dividends of
2.20% and 2.11% per year.
- --------------------------------------------------------------------------------
(Continued)
37
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - STOCK BASED COMPENSATION PLANS (Continued)
At June 30, 1999, stock options outstanding were as follows:
<TABLE>
<CAPTION>
<S> <C>
Number of options 86,955
Range of exercise price $12.05-$14.89
Weighted-average exercise price $12.70
Weighted-average remaining option life 2.85 years
For options now exercisable:
Number 37,345
Weighted-average exercise price $12.12
</TABLE>
A summary of activity in the SOP and RRP Plans is as follows:
<TABLE>
<CAPTION>
SOP RRP
--- ---
Weighted Weighted
Average Average
Exercise Grant Date
Options Price Shares Fair Value
------- ----- ------ ----------
<S> <C> <C> <C> <C>
Total options/shares available 94,558 37,824
Balance outstanding
July 1, 1996 64,350 $ 12.05 28,600 $ 12.09
------------ -------------
Balance outstanding
June 30, 1997 64,350 12.05 28,600 12.09
Granted October 1, 1997 4,400 14.89 1,100 12.09
------------ -------------
Balance outstanding
June 30, 1998 68,750 12.23 29,700 12.09
Granted October 28, 1998 21,780 14.09 8,124 12.09
Forfeited (3,575) 12.05
------------ -------------
Balance outstanding
June 30, 1999 86,955 12.70 37,824 12.09
------------ -------------
------------ -------------
Options/shares exercisable
(vested) 37,345 18,583
------------ -------------
------------ -------------
Options/shares available for
future grant 7,603 -
------------ -------------
------------ -------------
</TABLE>
All share and per share amounts have been retroactively adjusted for the October
of 1998 10% stock dividend.
- --------------------------------------------------------------------------------
(Continued)
38
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
The Company and the Bank file a consolidated federal income tax return on a
fiscal year basis. Prior to fiscal 1997, the Bank was allowed a bad debt
deduction based on a percentage of taxable income. 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 the tax year ended June 30, 1999. For
the tax year ended June 30, 1999, one-sixth or $8,800 of the deferred tax
liability is currently payable. The remaining deferred tax liability of $43,900
will be recaptured over the five year period beginning June 30, 2000 through
June 30, 2004.
The consolidated provision for federal income taxes consisted of the following
for the years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current expense $ 231,910 $ 345,501 $ 304,410
Deferred expense (benefit) (34,098) (25,661) (35,000)
----------- ----------- -----------
$ 197,812 $ 319,840 $ 269,410
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The consolidated federal income tax expense 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at statutory federal rate $ 270,511 $ 388,388 $ 264,838
Increase (decrease) in taxes resulting from
Low income housing tax credit (61,343) (59,127) (28,025)
ESOP expense (market value in excess of
cost on released shares) 12,750 22,385 9,166
Other (24,106) (31,806) 23,431
----------- ----------- -----------
$ 197,812 $ 319,840 $ 269,410
----------- ----------- -----------
----------- ----------- -----------
Effective tax rate 24.9% 28.0% 34.6%
---- ---- ----
---- ---- ----
</TABLE>
Deferred tax assets and liabilities consist of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets
Bad debts $ 132,748 $ 113,634
Deferred loan fees 26,581 22,486
Pension costs 13,656 8,500
Deferred compensation 22,532 14,214
RRP expense 15,670 9,727
Non-accrual loan interest 24,375 9,821
Unrealized loss on securities available for sale 443 -
----------- -----------
Total deferred tax assets 236,005 178,382
Deferred tax liabilities
Depreciation (143,131) (143,743)
Mortgage servicing rights (22,765) -
Other (15,704) (14,775)
----------- -----------
Total deferred tax liabilities (181,600) (158,518)
----------- -----------
Net deferred tax asset (liability) $ 54,405 $ 19,864
----------- -----------
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
39
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 - 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, 1999 and 1998.
Retained earnings at June 30, 1999 and 1998 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, 1999 and 1998.
NOTE 10 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders $ 597,808 $ 822,478 $ 509,526
----------- ----------- -----------
Weighted average common shares outstanding 712,469 825,163 833,511
----------- ----------- -----------
Basic earnings per share $ .84 $ 1.00 $ .61
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings per share
Net income available to common shareholders $ 597,808 $ 822,478 $ 509,526
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding 712,469 825,163 833,511
Add: dilutive effects of assumed exercise of stock
options and unvested RRP shares
Stock options 8,711 20,230 1,326
RRP shares - 166 -
----------- ----------- -----------
Weighted average common and dilutive potential
common shares outstanding 721,180 845,559 834,837
----------- ----------- -----------
Diluted earnings per share $ .83 $ .97 $ .61
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Stock options for 4,400 and 21,450 shares of common stock were not considered in
the computation of diluted earnings per share for the years ended June 30, 1999
and 1997, respectively, as they were antidilutive. In addition, unvested RRP
shares were not considered in the computation of diluted earnings per share for
the years ended June 30, 1999 and 1997 as they were antidilutive. All share and
per share amounts have been retroactively adjusted for the October of 1998 10%
stock dividend.
- --------------------------------------------------------------------------------
(Continued)
40
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY CAPITAL
Savings institutions insured by the FDIC must meet various regulatory capital
requirements. If a requirement is not met, regulatory authorities may take legal
or administrative action, including restrictions on growth or operations or, in
extreme cases, seizure.
At June 30, the Bank's actual and required capital amounts and ratios (in
thousands) were:
<TABLE>
<CAPTION>
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>
1999
Total Capital (to risk weighted
assets) $ 10,304 19.06% $ 4,326 8.00% $ 5,407 10.00%
Tier 1 (Core) Capital (to risk
weighted assets) 9,786 18.10 2,163 4.00 3,244 6.00
Tier 1 (Core) Capital (to adjusted
total assets) 9,786 9.76 3,007 3.00 5,012 5.00
Tangible Capital (to adjusted
total assets) 9,786 9.76 1,503 1.50 N/A
1998
Total Capital (to risk weighted
assets) $ 12,060 23.29% $ 4,142 8.00% $ 5,177 10.00%
Tier 1 (Core) Capital (to risk
weighted assets) 11,573 22.35 2,071 4.00 3,106 6.00
Tier 1 (Core) Capital (to adjusted
total assets) 11,573 11.74 2,958 3.00 4,930 5.00
Tangible Capital (to adjusted
total assets) 11,573 11.74 1,479 1.50 N/A
</TABLE>
At June 30, 1999, 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)
41
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY CAPITAL (Continued)
At the time of conversion to a stock savings bank, 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, 1999, approximately $3,288,000 was available to the Bank for the payment of
dividends to the holding company.
NOTE 12 - STOCK REPURCHASE PROGRAMS
During fiscal 1999 and 1998, the Company repurchased and subsequently retired
167,000 and 45,350 shares of its common stock at an average price of $14.15 and
$18.17 per share after receiving regulatory approval. All share and per share
amounts have been retroactively adjusted for the October of 1998 10% stock
dividend.
NOTE 13 - 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>
1999 1998
---- ----
<S> <C> <C>
Fixed rate $ 1,065,050 $ 2,185,648
Variable rate 1,251,242 850,500
------------- -------------
$ 2,316,292 $ 3,036,148
------------- -------------
------------- -------------
</TABLE>
Loan commitments generally have terms of 30 days and contractual interest rates
ranging from 7.125% to 9.75%. Fees received in connection with these commitments
have not been recognized in income.
Additionally, at June 30, 1999 and 1998, the Company had outstanding unused
lines of credit and letters of credit aggregating approximately $3,247,000 and
$2,693,000.
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 balance sheets. No
losses are anticipated as a result of these transactions.
- --------------------------------------------------------------------------------
(Continued)
42
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
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 14 - 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>
1999 1998
---- ----
<S> <C> <C>
Beginning balance $ 892,078 $ 594,463
New loans 543,000 437,515
Repayments and renewals (581,711) (193,747)
Other changes 74,081 53,847
----------- -----------
Ending balance $ 927,448 $ 892,078
----------- -----------
----------- -----------
</TABLE>
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period and disbursements on equity
lines of credit.
Related party deposits totaled approximately $738,000 and $480,000 at June 30,
1999 and 1998.
- --------------------------------------------------------------------------------
(Continued)
43
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Presented below is condensed financial information for Three Rivers Financial
Corporation:
CONDENSED BALANCE SHEETS
June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 318,228 $ 253,384
Investment in subsidiary 9,815,556 11,611,769
Securities held to maturity 250,000 250,000
Loan receivable from subsidiary bank 100,000 200,000
Loan receivable from ESOP 421,538 491,582
Other assets 5,512 5,488
-------------- ---------------
Total assets $ 10,910,834 $ 12,812,223
-------------- ---------------
-------------- ---------------
LIABILITIES $ 121,774 $ 124,371
SHAREHOLDERS' EQUITY 10,789,060 12,687,852
-------------- ---------------
Total liabilities and shareholders' equity $ 10,910,834 $ 12,812,223
-------------- ---------------
-------------- ---------------
</TABLE>
CONDENSED STATEMENTS OF INCOME
For the years ended
June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating income
Interest $ 39,512 $ 47,738 $ 52,535
Dividends from subsidiary bank 2,700,000 400,000 300,000
Other 13,500 13,563 13,500
--------------- -------------- ---------------
2,753,012 461,301 366,035
Operating expense 141,729 139,878 153,704
--------------- -------------- ---------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 2,611,283 321,423 212,331
Equity in undistributed (excess distributed)
income of subsidiary (2,013,475) 501,055 297,195
--------------- -------------- ---------------
NET INCOME $ 597,808 $ 822,478 $ 509,526
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
Other comprehensive income and comprehensive income are equal to the amounts
reported for the consolidated Company for 1999, 1998 and 1997 as disclosed in
the Consolidated Statements of Comprehensive Income.
- --------------------------------------------------------------------------------
(Continued)
44
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended
June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 597,808 $ 822,478 $ 509,526
Adjustments to reconcile net income to net cash
from operating activities
Equity in (undistributed) excess distributed
income of subsidiary 2,013,475 (501,055) (297,195)
Decrease (increase) in other assets (24) 24 (501)
Increase (decrease) in other liabilities (2,597) 25,856 (29,138)
--------------- -------------- ---------------
Net cash from operating activities 2,608,662 347,303 182,692
CASH FLOWS FROM INVESTING ACTIVITIES
Repayments on loan from subsidiary bank 100,000 750,000 550,000
Repayments on loan from ESOP 45,403 46,229 46,936
--------------- -------------- ---------------
Net cash from investing activities 145,403 796,229 596,936
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of common stock (2,362,226) (824,173) (387,537)
Cash dividends paid (326,995) (325,593) (269,752)
--------------- -------------- ---------------
Net cash from financing activities (2,689,221) (1,149,766) (657,289)
--------------- -------------- ---------------
Net change in cash and cash equivalents 64,844 (6,234) 122,339
Cash and cash equivalents at beginning of period 253,384 259,618 137,279
--------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 318,228 $ 253,384 $ 259,618
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
45
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 16 - 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, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------ ------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 7,966,029 $ 7,966,000 $ 12,281,077 $ 12,281,000
Interest-earning time deposits in
other financial institutions 4,154,960 4,156,000 4,064,980 4,072,000
Securities available for sale 1,771,920 1,772,000 725,036 725,000
Securities held to maturity 12,240,083 12,239,000 14,277,573 14,388,000
Loans receivable, net of allowance
for loan losses 68,705,967 68,974,000 62,119,886 62,824,000
Federal Home Loan Bank stock 1,162,200 1,162,000 1,162,200 1,162,000
Accrued interest receivable 481,286 481,000 467,691 468,000
FINANCIAL LIABILITIES
Demand and savings deposits (28,070,509) (28,071,000) (24,387,019) (24,387,000)
Time deposits (39,089,857) (38,885,000) (37,128,630) (37,191,000)
Borrowed funds (20,656,961) (20,343,000) (22,743,737) (22,590,000)
Advance payments by borrowers
for taxes and insurance (463,129) (463,000) (531,757) (532,000)
Accrued interest payable (93,500) (94,000) (95,768) (96,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of June 30, 1999 and 1998. 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 other 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)
46
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 17 - 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 per
$100 of SAIF-insured 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 18 - IMPACT OF NEW ACCOUNTING STANDARDS
Beginning July 1, 2000, a new accounting standard will require all derivatives
to be recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. This is not expected to have a material effect but the
effect will depend on derivative holdings when this standard applies.
NOTE 19 - MERGER AGREEMENT (EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT)
On September 21, 1999, the Company announced that it had agreed to merge with
Peoples Bancorp of Auburn, Indiana. The transaction will be a tax-free exchange,
accounted for as a purchase. It is subject to shareholder and regulatory
approval, and is anticipated to be effective in the first quarter of 2000. The
exchange ratio is planned to be 1.08 shares of Peoples for one share of Three
Rivers.
- --------------------------------------------------------------------------------
47
<PAGE>
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
RETIRED GTE EXECUTIVE
G. Verglea Gotfryd
DIRECTOR
RETIRED LIFE INSURANCE AGENT
Philip Halverson
DIRECTOR
RETIRED FUNERAL DIRECTOR
Thomas O. Monroe, Sr.
DIRECTOR
CHAIRMAN EMERITUS, JOHNSON CORPORATION
John A. Mathews
DIRECTOR EMERITUS
RETIRED OPTOMETRIST
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
Jeffery H. Gatton
VICE-PRESIDENT, MANAGER-
INDIANA DIVISION
R. Orville Poling
VICE-PRESIDENT
Susan Lowry
ASSISTANT VICE-PRESIDENT AND
ASSISTANT TREASURER
Joyce Shidaker
ASSISTANT VICE-PRESIDENT AND
SECRETARY OF THE BOARD
Christy Linn
BANKING SERVICES OFFICE AND
BRANCH MANAGER
Rhonda Skinner
LOAN OFFICER AND SUPERVISOR OF
LENDING OPERATIONS
Betty Kipker
SAVINGS OFFICER
48
<PAGE>
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 _______ __, ____, at ____ _.m., local time, at the Carnegie Center for
the Arts, Three Rivers, Michigan. 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
49
<PAGE>
CORPORATE OFFICE
123 Portage Avenue
Three Rivers, Michigan 49093
(616) 279-5117
<TABLE>
<S> <C> <C>
SCHOOLCRAFT BRANCH UNION BRANCH THREE RIVERS BRANCH
500 NORTH GRAND 15534 U.S. 12 1213 WEST MICHIGAN AVENUE
SCHOOLCRAFT, MICHIGAN 49087 UNION, MICHIGAN 49130 THREE RIVERS, MICHIGAN 49093
(616) 679-5271 (616) 641-7979 (616) 273-8681
HOWE BRANCH MIDDLEBURY BRANCH
303 DEFIANCE STREET 420 NORTH MAIN
HOWE, INDIANA 46746 MIDDLEBURY, INDIANA 46540
(219) 562-3300 (219) 825-2255
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SCHEDULE 10-K DATED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,439,860
<INT-BEARING-DEPOSITS> 4,526,169
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,771,920
<INVESTMENTS-CARRYING> 12,240,083
<INVESTMENTS-MARKET> 12,239,450
<LOANS> 68,705,967
<ALLOWANCE> 519,687
<TOTAL-ASSETS> 100,405,531
<DEPOSITS> 67,160,366
<SHORT-TERM> 463,129
<LIABILITIES-OTHER> 1,082,957
<LONG-TERM> 20,656,961
0
0
<COMMON> 7,027
<OTHER-SE> 10,791,033
<TOTAL-LIABILITIES-AND-EQUITY> 100,405,531
<INTEREST-LOAN> 5,577,294
<INTEREST-INVEST> 896,437
<INTEREST-OTHER> 740,511
<INTEREST-TOTAL> 7,214,242
<INTEREST-DEPOSIT> 2,772,871
<INTEREST-EXPENSE> 3,925,504
<INTEREST-INCOME-NET> 3,288,738
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 389,405
<INCOME-PRETAX> 795,620
<INCOME-PRE-EXTRAORDINARY> 795,620
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 597,808
<EPS-BASIC> 0.84
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 7.46
<LOANS-NON> 250,356
<LOANS-PAST> 370,264
<LOANS-TROUBLED> 171,595
<LOANS-PROBLEM> 66,950
<ALLOWANCE-OPEN> 489,361
<CHARGE-OFFS> 37,301
<RECOVERIES> 7,627
<ALLOWANCE-CLOSE> 519,687
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 519,687
</TABLE>
