EXHIBIT 99.1
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ITEM 1. FINANCIAL STATEMENTS
HFS Bank, F.S.B.
Condensed Consolidated Balance Sheets
(Unaudited)
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ASSETS: 31-Dec-05 31-Mar-05
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Cash and due from banks $ 4,811,338 $ 3,730,001
Interest-earning deposits 9,044,043 10,424,759
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Cash and cash equivalents 13,855,381 14,154,760
Investment securities available for sale 25,935,529 29,776,382
Loans (net of allowance for loan losses of $1,363,364 and
$1,172,318) 182,593,783 177,608,601
Premises and equipment 4,544,819 4,733,183
Federal Home Loan Bank of Indianapolis (FHLBI) stock, at cost 4,595,100 4,547,600
Interest receivable 1,018,628 1,014,151
Bank-owned life insurance 2,368,758 2,303,114
Other assets 1,047,680 1,564,896
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Total assets $235,959,678 $235,702,687
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposit accounts $144,181,030 $141,603,749
Advances from FHLBI 68,256,968 70,533,260
Escrows 1,152,415 1,915,913
Accrued expenses and other liabilities 1,679,866 1,379,588
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Total liabilities 215,270,279 215,432,510
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Stockholders' Equity:
Capital stock:
Preferred stock, $1 par value.
1,000,000 shares authorized and unissued
Common stock, $1 par value. Authorized 4,000,000
Shares; issued and outstanding 1,866,200 1,866,200 1,866,200
Additional paid-in capital 858,563 858,563
Accumulated other comprehensive income (loss) (369,375) (405,928)
Retained earnings 18,334,011 17,951,342
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Total stockholders' equity 20,689,399 20,270,177
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Total liabilities and stockholders' equity $235,959,678 $235,702,687
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See Notes to Condensed Consolidated Financial Statements
HFS Bank, F.S.B.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Three Months
Ended Ended
31-Dec-05 31-Dec-04
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Interest income:
Loans receivable $2,953,883 $2,818,857
Investment securities 153,564 182,752
Mortgage-backed securities 39,199 51,362
FHLBI stock dividends 49,224 47,920
Other interest-earning assets 89,504 19,168
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Total interest income 3,285,374 3,120,059
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Interest expense:
Deposit accounts 760,804 615,923
Advances from FHLBI 991,739 1,010,209
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Total interest expense 1,752,543 1,626,132
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Net interest income 1,532,831 1,493,927
Provision for loan losses 144,593 65,000
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Net interest income after provision for loan losses 1,388,238 1,428,927
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Noninterest income:
Fees and service charges 297,964 249,584
Net gains on the sales of loans 4,647 0
Other income 68,898 83,348
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Total noninterest income 371,509 332,932
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Noninterest expense:
Salaries and employee benefits 685,461 594,342
Premises and equipment expense 188,223 152,125
Data processing expense 167,936 160,384
Other expense 419,266 247,257
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Total noninterest expense 1,460,886 1,154,108
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Income before taxes 298,861 607,751
Income tax expense 131,468 219,547
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Net income $167,393 $388,204
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Basic earnings per share $0.09 $0.21
Diluted earnings per share $0.09 $0.21
Dividends per share $0.110 $0.105
See Notes to Condensed Consolidated Financial Statements
HFS Bank, F.S.B.
Condensed Consolidated Statements of Income
(Unaudited)
Nine Months Nine Months
Ended Ended
31-Dec-05 31-Dec-04
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Interest income:
Loans receivable $8,703,324 $8,329,577
Investment securities 483,311 571,841
Mortgage-backed securities 122,866 131,842
FHLBI stock dividends 149,773 141,696
Other interest-earning assets 280,418 51,266
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Total interest income 9,739,692 9,226,222
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Interest expense:
Deposit accounts 2,135,116 1,851,664
Advances from FHLBI 2,973,643 3,032,534
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Total interest expense 5,108,759 4,884,198
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Net interest income 4,630,933 4,342,024
Provision for loan losses 214,593 125,650
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Net interest income after provision for loan losses 4,416,340 4,216,374
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Noninterest income:
Fees and service charges 868,561 793,993
Net gains on the sales of loans 36,662 0
Net gains (loss) on the sales of foreclosed assets 1,996 (15,426)
Other income 210,718 248,828
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Total noninterest income 1,117,937 1,027,395
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Noninterest expense:
Salaries and employee benefits 1,978,929 1,789,796
Premises and equipment expense 545,089 427,055
Data processing expense 504,080 466,718
Other expense 921,422 686,677
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Total noninterest expense 3.949,520 3,370,246
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Income before taxes 1,584,757 1,873,523
Income tax expense 595,574 673,708
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Net income $989,183 $1,199,815
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Basic earnings per share $0.53 $0.64
Diluted earnings per share $0.53 $0.64
Dividends per share $0.325 $0.310
See Notes to Condensed Consolidated Financial Statements
HFS Bank, F.S.B.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Nine Months
Ended Ended
31-Dec-05 31-Dec-04
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Cash flows from operating activities:
Net income $ 989,183 $ 1,199,815
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 235,495 152,563
Provision for loan losses 214,593 125,650
FHLBI stock dividends (47,500) (145,000)
Increase (decrease) in deferred loan fees 4,956
(52,710)
Amortization of mortgage servicing rights 15,560 15,458
(Increase) in accrued interest receivable (4,477) (20,438)
Increase in life insurance value (65,644) (69,255)
Decrease in other assets 326,585 118,734
Increase in other liabilities 300,278 78,477
(Gain) loss on sale of repossessed assets (1,996) 15,426
Gain on sale of loans (36,662) 0
Proceeds from sale of loans 2,969,702 0
Loans originated for sale (2,933,040) 0
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Net cash provided by operating activities 1,909,367 1,476,386
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Cash flows from investing activities:
Loans originated (67,733,937) (67,712,106)
Loans purchased (998,240) (3,316,858)
Principal repayments on loans 63,696,111 68,500,526
Purchase of available for sale securities (115,000) (4,450,000)
Purchase of available for sale mortgage-backed securities 0 (5,027,439)
Proceeds from maturities of available for sale securities 2,817,370 5,920,005
Principal repayments available for sale mortgage-backed 1,199,003 1,072,293
securities
Proceeds from sale of foreclosed assets 42,101 237,289
Purchase of premises and equipment (47,131) (1,913,784)
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Net cash used in investing activities (1,139,723) (6,690,074)
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See Notes to Condensed Consolidated Financial Statements
HFS Bank, F.S.B.
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)
Nine Months Nine Months
Ended Ended
31-Dec-05 31-Dec-04
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Cash flows from financing activities:
Net increase in checking deposits $ 5,463,660 $ 1,963,350
Net decrease in passbook deposits (2,676,601) (149,999)
Net increase (decrease) in certificate of deposits (209,778) 1,338,354
Advances from the FHLBI 0 6,000,000
Repayments of FHLBI advances (2,276,292) (7,177,520)
Increase (decrease) in escrows (763,498) 139,395
Dividends paid (606,514) (578,521)
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Net cash (used in) provided by financing activities (1,069,023) 1,535,059
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Net decrease in cash and cash equivalents (299,379) (3,678,629)
Cash and cash equivalents at the beginning of the year 14,154,760 15,287,819
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Cash and cash equivalents at the end of period $13,855,381 $11,609,190
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Supplemental disclosures of cash flow information -
Cash paid during period for:
Interest $5,059,838 $4,876,937
Income taxes 272,027 300,000
Noncash investing activity - transfer of loans
to foreclosed assets 63,001 574,952
Noncash investing activity - transfer of foreclosed
assets to loans (174,000) 0
See Notes to Condensed Consolidated Financial Statements
HFS Bank, F.S.B.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Common Stock
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--------------------------
Accumulated
Paid-in Comprehensive Retained Other
Shares Amount Capital Income Earnings Comprehensive Total
Outstanding Income
(Loss)
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Balances, April 1, 2005 1,866,200 $1,866,200 $858,563 $17,951,342 $ (405,928) $20,270,177
Net income for the nine
months ended December 31,
2005 $989,183 989,183 989,183
Other comprehensive income,
unrealized gain on
securities, net of tax $36,553 36,553 36,553
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Comprehensive income $ 1,025,736
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Cash dividends ($0.325 per
share) (606,514) (606,514)
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Balances, Dec. 31, 2005 1,866,200 $1,866,200 $858,563 $18,334,011 $ (369,375) $20,689,399
===================================== ===============================================
See Notes to Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Presentation
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Certain information and note disclosures normally included in HFS Bank, F.S.B.'s
(the "Bank") annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
hereto included in the Bank's Form 10-K annual report for the year ended March
31, 2005, filed with the Office of Thrift Supervision ("OTS"). The accompanying
unaudited condensed consolidated financial statements reflect all adjustments
that are, in the opinion of the Bank's management, necessary to fairly present
the financial position, results of operations and cash flows of the Bank. Those
adjustments consist only of normal recurring adjustments. The results of
operations for the nine-month period ended December 31, 2005 is not necessarily
indicative of the results to be expected for the full year or any other period.
The condensed consolidated balance sheet of the Bank as of March 31, 2005 has
been derived from the audited consolidated balance sheet of the Bank as of that
date.
NOTE 2 - Earnings Per Share
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Basic earnings per share have been computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Bank. Stock options are regarded
as common stock equivalents and are considered in diluted earnings per share
computations (see Exhibit 11 attached). There were no stock options granted or
outstanding during the periods presented and therefore, no dilutive effect.
NOTE 3 - Bank Merger
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On October 26, 2005, the Bank entered in an Agreement and Plan of Merger,
referred to as the merger agreement, with MainSource Financial Group, Inc.,
referred to as MainSource. Under the merger agreement, subject to the terms and
conditions set forth therein, the Bank would merge into a newly-formed bank
subsidiary of MainSource, which would survive the merger and do business as
"MainSource Bank - Hobart."
The merger agreement provides that upon the effective date of the merger,
pursuant to election procedures described in the merger agreement, each share of
common stock of the Bank will be converted into either (a) a number of shares of
MainSource common stock determined as provided below, referred to as the
exchange ratio, or (b) cash in an amount equal to the total merger consideration
(as defined below) divided by the number of shares of Bank common stock
outstanding at the effective time of the merger, referred to as the per share
cash consideration; provided, however, that 52% of Bank common stock must be
converted into MainSource common stock, except as provided in the merger
agreement.
The total merger consideration is $36,110,970, subject to adjustment. If as of
the last day of the calendar month ending immediately prior to the Effective
Date of the merger, referred to as the measurement date, the Bank's
stockholders' equity is less than $19,250,000, the total merger consideration
will be reduced on a dollar-for-dollar basis by an amount equal to the
difference between $19,250,000 and the actual Bank stockholders' equity as of
the measurement date. If at the measurement date, the Bank's stockholders'
equity is greater than $19,750,000, the total merger consideration will be
increased on a dollar-for-dollar basis by an amount equal to the difference
between $19,750,000 and the actual Bank stockholders' equity as of the
measurement date.
The Bank's stockholders' equity will be determined based upon the balance sheet
of the Bank as of the measurement date, prepared in accordance with generally
accepted accounting principles consistently applied, after adjustment for the
following amounts if not otherwise reflected in such balance sheet (which
amounts shall also be calculated in accordance with generally accepted
accounting principles consistently applied and on an after-tax basis):
o the accrual or payment of any fees payable to a broker or investment
advisor by the Bank as a result of the consummation of the merger;
o the accrual or payment of any change-in-control payment owed or
payable to James Greiner as a result of the consummation of the
merger, but not including any amounts payable to him pursuant to the
employment agreement contemplated by Section 8.01(i) of the merger
agreement;
o the accrual or payment of $1,200,000 to terminate the Bank's data
processing contract with The Bisys Group, Inc.;
o the accrual in full of any deferred compensation plan maintained by
the Bank;
o the accrual or payment of the cost to extend the duration of the
insurance tail coverage policy described in Section 12.08 of the
merger agreement from three to nine years, if so elected by the Bank;
and
o the accrual of all compensable vacation and sick days for employees of
the Bank.
For purposes of calculating the Bank's stockholders' equity, the mark-to-market
adjustment to equity of the Bank's investment portfolio will be $(327,571).
The exchange ratio representing the number of shares of MainSource common stock
to be issued in exchange for one share of Bank common stock in the merger will
be determined as follows:
o if the average of the high and low sales prices of shares of
MainSource common stock as quoted on the Nasdaq Stock Market for the
ten consecutive trading days ending three trading days prior to the
closing date of the merger, referred to as the average MainSource
stock price, is not less than $17.00 per share and not more than
$21.00 per share, then the exchange ratio will be determined by
dividing the per share cash consideration by the average MainSource
stock price;
o if the average MainSource stock price is less than $17.00 per share,
the exchange ratio will be determined by dividing the per share cash
consideration by $17.00; and
o if the average MainSource stock price is greater than $21.00 per
share, the exchange ratio will be determined by dividing the per share
cash consideration by $21.00; in each case, if applicable, the result
will be calculated (and rounded, if applicable) to the fourth decimal
place.
As of October 26, 2005, and assuming no adjustment based on the Bank's
stockholders' equity, the per share cash consideration would be $19.35 per share
and the exchange ratio would be 1.0403 shares of MainSource common stock, based
on MainSource's October 26, 2005 closing price of $18.60 per share. Cash will be
paid in lieu of issuing fractional shares.
At the closing of the merger, James Greiner, the president and chief executive
officer of the Bank, will terminate his existing employment agreement with the
Bank in exchange for the change of control payments and other amounts payable
under the terms of that agreement. At closing, Mr. Greiner will enter into an
employment agreement with the surviving bank to serve as president for a term of
up to three years after the merger.
The merger is expected to close in the second quarter of calendar year 2006. The
merger agreement has been approved by the boards of directors of the Bank and
MainSource, but is subject to certain other customary closing conditions,
including the approval of the shareholders of the Bank and the approval of
regulatory authorities.