UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-22376
HOME BANCORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1906765
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
132 East Berry Street, P.O. Box 989, Fort Wayne, Indiana 46801-0989
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 422-3502
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the closing bid and
asked prices of such stock on the Nasdaq National Market as of December 14,
1998, was $62.5 million. (The exclusion from such amount of the market value of
the shares owned by any person shall not be deemed an admission by the
registrant that such person is an affiliate of the registrant.)
<PAGE>
As of December 14, 1998, there were issued and outstanding 2,185,045
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to
Stockholders for the fiscal year ended September 30, 1998.
Part III of Form 10-K - Portions of the Proxy Statement for fiscal 1998
Annual Meeting of Stockholders.
<PAGE>
PART I
Item 1. Description of Business
General
Home Bancorp (the "Company") was formed as an Indiana corporation on
December 14, 1993 to act as the holding company for Home Loan Bank fsb (the
"Bank") upon the completion of the Bank's conversion from the mutual to the
stock form (the "Conversion"). The Company received approval from the Office of
Thrift Supervision (the "OTS") to acquire all of the common stock of the Bank to
be outstanding upon completion of the Conversion. The Conversion was completed
on March 29, 1995. All references to the Company, unless otherwise indicated, at
or before March 29, 1995 refer to the Bank. The Company's Common Stock trades on
The Nasdaq Stock Market under the symbol "HBFW".
At September 30, 1998, the Company had $372.4 million of assets and
stockholders' equity of $41.0 million (or 11.0% of total assets).
The Bank was organized under the name Teutonia Building Loan and
Savings Association on March 22, 1893. In November 1993, the Bank converted from
an Indiana building and loan association to an Indiana chartered mutual savings
bank, and in December 1994 converted to a federally chartered mutual savings
bank. On March 29, 1995, upon completion of the Conversion, the Bank converted
from a federally chartered mutual savings bank to a federally chartered stock
savings bank. The Bank's deposit accounts are insured up to applicable limits by
the Savings Association Insurance Fund (the "SAIF"), which is administered by
the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member of
the Federal Home Loan Bank (the "FHLB") System.
The Company's principal business historically has been attracting
deposits from the general public and originating long-term, fixed-rate and
adjustable-rate loans secured primarily by first mortgage liens on one- to
four-family real estate. The Company offers a variety of deposit accounts having
a wide range of interest rates and terms, does not actively solicit or advertise
for deposits outside of northeastern Indiana, particularly Allen and Adams
Counties, and does not accept brokered deposits.
The Company's principal source of revenue is interest income from
lending activities, primarily one- to four-family residential mortgage loans.
The Company's executive office is located at 132 East Berry Street,
P.O. Box 989, Fort Wayne, Indiana 46801-0989, and its telephone number is (219)
422-3502.
The Company and the Bank may from time to time make written or oral
"forward-looking statements", including statements contained in the Company's
filings with the Securities and Exchange Commission (including Exhibits
thereto), in its reports to shareholders and in other communications by the
Company, which are made in good faith by the Company and the Bank pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include statements with respect to the
Company's and the Bank's beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions, that are subject to significant risks
and uncertainties, and are subject to change based on various factors (some of
which are beyond the Company's and Bank's control). The words "may", "could",
"should", "would", "believe", "anticipate", "estimate", "expect", "intend",
<PAGE>
"plan" and similar expressions are intended to identify forward-looking
statements. The following factors, among others, could cause the Company's and
the Bank's financial performance to differ materially from the plans,
objectives, expectations, estimates and intentions expressed in such
forward-looking statement: the strength of the United States economy in general
and the strength of the local economies in which the Company and Bank conduct
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve Board;
inflation, interest rate, market and monetary fluctuations; the timely
development of and acceptance of new products and services of the Bank and the
perceived overall value of thee products and services; the willingness of users
to substitute competitors' products and services for the Bank's products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Company and the Bank at managing risks
involved in the foregoing.
The foregoing list of important factors is not exclusive. The Company
does not undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time by or on behalf of the Company or the
Bank.
Market Area
The Company's market area is currently northeastern Indiana, primarily
Allen and Adams Counties. The Company serves its market area through eight bank
offices in Allen County and a single bank office in Adams County.
Fort Wayne, the county seat for Allen County, is located 118 miles
northeast of Indianapolis and is situated in the center of an approximately 160
mile radius hub consisting of Chicago, Grand Rapids, Detroit, Columbus, and
Cincinnati. Allen County has a broad mix of large employers which provides a
relatively stable local business climate during recessionary times. Allen County
has 18 employers with 1,000 or more employees, ranging from communications to
education to medical care to manufacturing. Allen County's largest employer is
Fort Wayne Community Schools with 3,298 employees. The second largest employer
is the General Motors Truck and Bus Group which in 1986 established a
state-of-the-art manufacturing facility in Allen County which produces full-size
C/K pick-up trucks. The GM facility currently employs 3,194 people. Lincoln
National Corporation, the parent company of Lincoln National Life Insurance
Company, has approximately 2,978 employees and is headquartered in Fort Wayne.
Lincoln National Corporation has recently announced plans to move its corporate
center to the Philadelphia, PA area by mid year 1999. As announced in published
reports, the move only affects approximately 60 employees. The fourth largest
employer is Parkview Hospital with an employment of 2,730.
Lending Activities
General. The Company historically has concentrated its lending
activities on the origination of loans secured by first mortgage liens for the
purchase, construction or refinancing of one- to four-family residential real
property. These loans continue to be the major focus of the Company's loan
origination activities, representing 96.5% of the Company's total loan portfolio
at September 30, 1998 (including one- to four-family residential construction
loans). The Company also originates a limited amount of commercial real estate
loans secured by owner-occupied property, and a limited number of consumer
loans, primarily in the form of home equity loans. These commercial real estate
loans and consumer loans constituted approximately 0.5% and 3.0%, respectively,
of the Bank's total loan portfolio at September 30, 1998.
<PAGE>
All loans must be approved by three members of the Bank's six-person
loan committee consisting of the President, the Vice President of Lending, three
other officers, and one outside director. Commercial loan applications
aresubmitted for approval to the same committee,with the consultation of an
outside and independent appraiser. The loan committee and all loan officers meet
weekly and each loan officer presents his or her loans for approval.
Occasionally, a unique or high principal loan will be presented, at the
discretion of management, to the Bank's Board of Directors for review.
The Bank's regulatory lending limit for loans-to-one-borrower is equal
to the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At September 30,
1998, the Bank's lending limit under this restriction was $5.1 million. On
September 30, 1998 the Bank's largest aggregate lending relationship was through
a local not-for-profit community development corporation that underwrites,
originates and then guarantees payment on single family residential loans to
very low to moderate income individuals in targeted areas of the city of Fort
Wayne. The Bank generally takes a participation interest along with other local
lenders on these loans made to individual borrowers. The oustanding balance on
the aggregate of these loans as of September 30, 1998 was approximately
$860,000.The Bank's largest single lending relationship was a first lien
residential loan mortgage loan of $774,000. There was only one other lending
relationships in excess of $500,000 as of September 30, 1998, which was also a
one- to four-family residential loan. All of these loans were performing in
accordance with their repayment terms.
Loan Portfolio Data. The following table sets forth the composition of
the Company's loan portfolio by loan type as of the dates indicated, including a
reconciliation of gross loans receivable after consideration of the allowance
for loan losses, deferred net loan fees, and loans in process.
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------ ------------------- ----------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF LOAN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family residential.... $308,627 92.99% $269,995 92.28% $238,102 91.83% $204,886 92.48%
Commercial real estate............. 1,715 .52 1,856 .64 1,357 .52 1,313 .59
One- to four-family residential -
Construction..................... 11,512 3.47 11,797 4.03 12,407 4.79 8,814 3.98
Consumer loans:
Loans secured by deposits.......... 873 .26 885 .30 743 .29 880 .40
Home equity loans.................. 8,012 2.41 7,029 2.40 5,466 2.11 4,401 1.98
Home improvement loans............. 1,165 .35 1,024 .35 1,197 .46 1,262 .57
-------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable(1)....... 331,904 100.00% 292,586 100.00% 259,272 100.00% 221,556 100.00%
====== ====== ====== ======
Less:
Allowance for loan losses.......... 1,390 1,388 1,385 1,372
Deferred net loan fees............. 393 338 393 454
Loans in process................... 5,933 6,873 7,188 5,325
-------- -------- -------- ---------
Net loans receivable............ $324,188 $283,987 $250,306 $214,405
======== ======== ======== ========
<CAPTION>
At September 30,
------------------------
1994
------------------------
Amount Percent
------ -------
TYPE OF LOAN
<S> <C> <C>
Mortgage loans:
One- to four-family residential.... $192,650 92.82%
Commercial real estate............. 1,086 .52
One- to four-family residential -
Construction..................... 8,156 3.93
Consumer loans:
Loans secured by deposits.......... 680 .33
Home equity loans.................. 3,431 1.65
Home improvement loans............. 1,544 .75
Total loans receivable(1)....... 207,547 100.00%
======
Less:
Allowance for loan losses.......... 1,288
Deferred net loan fees............. 533
Loans in process................... 5,048
---------
Net loans receivable............ $200,678
========
</TABLE>
<PAGE>
The following table sets forth certain information at September 30, 1998,
regarding the dollar amount of loans maturing in the Company's loan portfolio
based on the date that final payment is due under the terms of the loan. Demand
loans having no stated schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less. This schedule does not
reflect the effects of possible prepayments or enforcement of due-on-sale
clauses.
<TABLE>
<CAPTION>
Balance Due During Fiscal Years Ended September 30,
Outstanding ----------------------------------------------------------------
at 2002 2004 2009 2014
September 30, to to to and
1998 1999 2000 2001 2003 2008 2013 following
------------- ------- ---- ----- ----- ----- ------ ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family residential....... $320,139(1) $ 125 $227 $1,301 $4,910 $49,380 $127,147 $137,049
Commercial real estate................ 1,715 177 159 --- 218 106 1,055 ---
Consumer loans:
Home improvement...................... 1,165 401 19 55 375 315 --- ---
Home equity........................... 8,012 8,012 --- --- --- --- --- ---
Loans secured by deposits............. 873 873 --- --- --- --- --- ---
-------- ------ ---- ------ ------ ------- -------- --------
Total Loans Receivable.................. $331,904 $9,588 $405 $1,356 $5,503 $49,801 $128,202 $137,049
======== ====== ==== ====== ====== ======= ======== ========
</TABLE>
(1) Includes $11.5 million in one- to four-family residential construction
loans, all of which are scheduled to convert into permanent loans maturing
after the year 2014.
The following table sets forth, as of September 30, 1998, the dollar
amount of all loans due after one year which have fixed interest rates and
variable interest rates.
<TABLE>
<CAPTION>
Due After September 30, 1999
-----------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In Thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family residential........... $265,657 $ 54,357 $320,014
Commercial real estate.................... 95 1,443 1,538
Consumer loans:
Home improvement.......................... 764 --- 764
Home equity............................... --- --- ---
Loans secured by deposits................. --- --- ---
-------- -------- --------
Total Loans Receivable...................... $266,516 $ 55,800 $322,316
======== ======== ========
</TABLE>
<PAGE>
One- to Four-Family Residential Mortgage Loans. The Company's
residential mortgage loans consist primarily of one- to four-family,
owner-occupied mortgage loans. Approximately $320.1 million, or 96.4%, of the
Company's loan portfolio at September 30, 1998 consisted of one- to four-family
residential mortgage loans. A significant portion, approximately 80% at
September 30, 1998, of the Company's one- to four-family residential mortgage
and residential mortgage construction loans provide for fixed rates of interest
and for repayment of principal over a fixed period of 10, 15 or 20 years. The
Company does not make fixed rate loans exceeding 30 years. The Company's one- to
four-family residential mortgage loans have normally remained outstanding for
shorter periods than provided for by their contractual terms. The average life
of such loans varies from year to year with changes in interest rates, but
management believes it is generally significantly less than the full term of the
loans. While the Company's fixed-rate one- to four-family residential mortgage
loans are priced at rates close to its competitors' rates, the Company competes
for loan customers somewhat more on the basis of quality of service and somewhat
less on the basis of pricing.
The Company underwrites all its fixed rate one- to four-family
residential mortgage loans to Federal National Mortgage Association ("FNMA")
standards so that they may be sold in the secondary market. The Company holds
for investment all fixed rate one- to four-family residential mortgage loans
with terms of 20 years or less and, in 1991, began selling all of its 30-year
fixed rate loans in the secondary market. As of September 30, 1998, the Company
had no fixed-rate loans held for investment with remaining terms in excess of 20
years. The Company retains the servicing on all loans it sells. See
"-Originations and Sale of Loans." Management feels that this strategy improves
liquidity and enables the Company to better manage its interest rate risk. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" contained in the Annual Report to
Stockholders attached as Exhibit 13 to this document (the "Annual Report").
The Company also offers adjustable rate loan products that reprice as
frequently as every year or can be fixed for a term of up to seven years and
adjust annually thereafter. Currently originated adjustable rate mortgage
("ARM") loans that reprice annually are indexed to the one-year U.S. Treasury
securities yield with a margin of 2 3/4% above such index. In addition, the
maximum rate adjustment per year and over the life of the loan is 2% and 6%,
respectively. The Company also originates loans which are fixed for three, five
and seven years, respectively, which convert to a one year ARM indexed to the
one-year U.S. Treasury thereafter. These products have annual caps of 2% and
lifetime caps of 6%. ARMs are underwritten for terms up to 30 years. At
September 30, 1998, the Company's one- to four-family ARM portfolio totaled
$55.7 million, or 16.8% of the Company's gross loan portfolio.
Substantially all of the one- to four-family residential mortgage loans
that the Company originates include "due-on-sale" clauses, which give the
Company the right to declare a loan immediately due and payable in the event
that, among other things, the borrower sells or otherwise disposes of the real
property subject to the mortgage and the loan is not repaid.
The Company does not currently originate mortgage loans if the ratio of
the loan amount to the value of the property securing the loan (i.e., the
"loan-to-value" ratio) exceeds 95%. In the event that the amount of a mortgage
loan exceeds 80% of the value of the real estate and improvements, the Company
requires that borrowers obtain private mortgage insurance in amounts intended to
reduce the Company's exposure to 80% or less of the appraised value of the real
estate and improvements or the purchase price of the underlying collateral. The
Company's mortgage lending is subject to loan origination procedures prescribed
by its Board of Directors. See "- Origination and Sale of Loans."
<PAGE>
The Company makes fixed-rate and adjustable-rate construction loans to
finance the construction of one- to four-family residences. Most construction
lending is of a construction/permanent type where interest only is collected for
a period of up to one year and then is converted to an amortizing permanent
loan. These loans are made to borrowers working with licensed contractors or
builders with an established credit history confirmed through the National
Association of Credit Management and/or with membership in local home builders
associations. The Company also makes builder "spec" loans to the aforementioned
types of contractors and builders, generally with no one builder having more
than three such loans outstanding at any one time. The money borrowed under the
mortgage is disbursed through four draws. Draws occur after the foundation is
laid, after roofing and flatwork is completed, after dry-walling is completed,
and after full completion of the residence. An occupancy permit is required
before the Company releases the final disbursement. There are also inspections
before each disbursement. In the case of builder "spec" loans, upon completion
of the residence, the mortgagor/owner-occupier assumes a residential mortgage
loan with the Company. The Company requires that all builder "spec" loans have
personal guarantees from the principal and his or her spouse.
Loans to individuals for the construction of their residences are
structured to be permanent loans, with an initial construction phase which
typically runs up to six months. These loans have rates and terms which are
consistent with those of other one- to four-family mortgage loans offered by the
Company, except that during the construction phase, the borrower pays interest
only. Residential construction loans are generally underwritten pursuant to the
same guidelines used for originating permanent residential loans, with the
exception that the maximum loan-to-value ratio of owner occupied single family
construction loans is 90%.
At September 30, 1998, $11.5 million, or 3.5%, of the Company's loan
portfolio consisted of construction loans. Although no construction loans were
classified as non-performing as of September 30, 1998, these loans do involve a
higher level of risk than conventional one- to four-family residential mortgage
loans. For example, if a project is not completed and the borrower defaults, the
Company may have to hire another contractor to complete the project at a higher
cost. Also, a house may be completed but may not be marketable, resulting in the
borrower defaulting and the Company taking title to the house.
Commercial Real Estate Loans. At September 30, 1998, $2.0 million, or
0.6%, of the Company's loan portfolio consisted of commercial real estate loans,
the largest of which was a construction loan for $480,000 secured by a mortgage
loan on a professional building. All commercial real estate loans are secured by
owner-occupied, non-residential real estate, such as small office buildings or
churches. The Company underwrites these loans on a case-by-case basis and, in
addition to its normal mortgage underwriting criteria, the Company will evaluate
the borrower's ability to service the debt from the net operating income of the
property. As of September 30, 1998, no commercial real estate loans were
included in non-performing assets.
Consumer Loans. The Company originates consumer loans secured by liens
on real estate, including home improvement and home equity line of credit loans,
as well as deposit secured loans. At September 30, 1998, $10.0 million, or 3.0%,
of the Company's loan portfolio consisted of consumer loans. Substantially all
of the Company's consumer loans were secured by real estate at September 30,
1998.
<PAGE>
The Company's home equity line of credit loans, the largest component
of the Company's consumer loan portfolio, are transactional accounts with a
maximum line of credit and with a minimum disbursement amount. Equity lines of
credit are not tied to a borrower's regular checking account. They are currently
priced at 1.5% above the prime rate of interest and are adjustable quarterly. In
addition, the equity lines of credit currently have a lifetime cap of 15.9%. The
minimum and maximum amounts that can be borrowed under a home equity line of
credit are $5,000 and $100,000, respectively, provided that maximum
loan-to-value ratios relating to debt secured by the residence are not exceeded.
These maximum loan-to-value ratios are 85% if the Company is the first mortgagee
and 80% if another financial institution is the first mortgagee.
Consumer loans generally involve a higher level of credit risk than
one- to four-family residential mortgage loans because of the type and nature of
the collateral and, in certain cases, the absence of collateral. These risks are
not as prevalent in the case of the Company's consumer loan portfolio because of
the high percentage of home improvement loans and home equity lines of credit
secured by real estate and underwritten in a manner such that they result in a
lending risk substantially similar to single-family residential loans.
Furthermore, their relatively higher yields and shorter terms to maturity are
believed to be helpful in reducing the interest-rate risk of the Company's loan
portfolio and in broadening the Company's lending services. As of September 30,
1998, no consumer loans were included in non-performing assets.
Origination and Sale of Loans. Loan originations come from a number of
sources. One- to four-family residential mortgage loan originations are
attributable primarily to existing and walk-in customers, print and newspaper
advertisement and to referrals from real estate brokers. Loan applications are
taken by loan officers at all of the Company's branches and its main office.
Consumer and commercial loans are also obtained from the above sources,
especially existing customers and other direct contacts with the Company.
The Company's loan approval process is intended to assess the
borrower's ability to repay the loan. To do this, the Company studies the
borrower's employment, credit history and information on the historical and
projected income and expenses of its potential mortgagors.
The Company's loan approval process also assesses, in addition to the
prospective borrower's ability to repay, the adequacy of the property as
collateral for the loan requested. All loans must be approved by three members
of the Bank's six-person loan committee consisting of the President, the Vice
President of Lending, three other officers, and one outside director. The loan
committee and all loan officers meet weekly and each loan officer presents his
or her loans for approval. Occasionally, and at the discretion of management, a
unique or high principal loan will be presented to the Bank's Board of Directors
for review.
Property appraisals on the real estate and improvements securing the
Company's one- to four-family residential mortgage loans are made by independent
appraisers approved by the Bank's Board of Directors. The appraisers inspect
properties in the process of construction before disbursements of construction
loan proceeds are authorized. The Company obtains either a title insurance
policy or an abstract of title and opinion of counsel on all mortgage real
estate loans, and borrowers also must obtain hazard insurance and, if
applicable, flood insurance prior to closing. The Company generally escrows
hazard insurance premiums, mortgage insurance premiums and real estate taxes.
The borrower is required to make escrow payments on a monthly basis with each
payment of principal and interest.
<PAGE>
The Company originates substantially all its fixed rate mortgage loans
in conformity with the standard criteria of the FNMA. In fiscal 1991, the
Company began selling all its fixed rate mortgage loans with terms of 30 years
in the secondary market. It retains servicing, however, on all the loans it
sells. The Company does not securitize mortgages or participations. As of
September 30, 1998, the Company had one loan held as available for sale with a
balance of approximately $87,000. The Company was also servicing $2.0 million of
loans sold in the secondary market as of September 30, 1998. The balance of
loans serviced is relatively low because the Company has only sold longer term
loans since 1991 and it does not aggressively market 30-year fixed rate loan
products. Due to the limited amount of longer-term loans originated by the
Company, it does not hedge these loans or have a hedging policy in place.
Although the Company currently has authority to lend anywhere in the
United States, it has confined its loan origination activities to northeastern
Indiana, primarily Allen and Adams Counties. At September 30, 1998, the
Company's entire loan portfolio was secured by property located within the State
of Indiana.
The following table shows loan origination, sale and repayment activity
for the Company during the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable
at beginning of period ................... $292,586 $259,272 $221,556
-------- -------- --------
Originations:
Mortgage loans:
One- to four-family residential ........ 104,595 74,304 78,011
Commercial real estate ................. 655 777 200
-------- -------- --------
Total mortgage loans originated ..... 105,250 75,081 78,211
Consumer loans:
Home improvement/equity loans .......... 8,320 6,343 5,245
Loans secured by deposits .............. 601 464 461
-------- -------- --------
Total consumer loans originated ..... 8,921 6,807 5,706
-------- -------- --------
Total originations .................. 114,171 81,888 83,917
-------- -------- --------
Sales:
Mortgage loans:
One- to four-family residential ........ -- -- 124
-------- -------- --------
Total sales ......................... -- -- 124
-------- -------- --------
Repayments and other deductions ............ 74,853 48,574 46,077
-------- -------- --------
Gross loans receivable at end of period .... $331,904 $292,586 $259,272
======== ======== ========
</TABLE>
<PAGE>
Non-Performing and Problem Assets
Savings banks identify problem assets in several categories, including
accruing loans delinquent more than 90 days, non-accruing loans, troubled debt
restructurings, and real estate acquired through foreclosure, also called real
estate owned or "REO." At September 30, 1998, only $292,000 of the Company's
assets were so classified, which represented .08% of the Company's total assets.
Mortgage loans are reviewed by the Company on a regular basis and may
be placed on non-accrual status when they display a higher than acceptable level
of risk. This occurs when a loan is deemed inadequately protected (either by the
underlying collateral or by the paying capacity and/or net worth of the
borrower) to an extent that makes collectability of interest less probable or
the collection of principal in full doubtful. Mortgage loans are put on
non-accrual status when they are 90 days delinquent (60 days for loans less than
one year old), but only if the loan balance equals or exceeds the value of the
property. Generally, when a loan is placed on non-accrual status, unpaid accrued
interest is written off and further income with respect to the loan is only
recognized to the extent cash is received. When principal repayment is deemed
doubtful, the loan is written off.
The following table sets forth the amounts and categories of the
Company's non-performing assets. It is the policy of the Company that earned but
uncollected interest on all loans be reviewed monthly to determine if any
portion thereof should be classified as uncollectible for any loan past due in
excess of 90 days.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent more than 90 days........... $292 $223 $231 $ 97 $ 90
Non-accruing loans.................................... --- --- --- --- ---
Troubled debt restructurings.......................... --- --- --- --- ---
---- ---- ---- ----- ----
Total non-performing loans........................ 292 223 231 97 90
Real estate owned, net................................ --- --- --- --- 34
---- ---- ---- ----- ----
Total non-performing assets........................ $292 $223 $231 $ 97 $124
==== ==== ==== ===== ====
Non-performing loans to total loans, net(1)........... 0.09% 0.08% 0.09% 0.05% 0.04%
Non-performing assets to total assets................. 0.08% 0.06% 0.07% 0.03% 0.05%
</TABLE>
(1) Total loans less deferred net loan fees and loans in process.
<PAGE>
Delinquent Loans. The following table sets forth certain information at
September 30, 1998 relating to delinquencies in the Company's portfolio.
<TABLE>
<CAPTION>
Loans Delinquent For:
------------------------------------------------------------------ Total Loans Delinquent
60-89 Days 90 Days and Over 60 Days and Over
------------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family
residential mortgage
loans .............. 17 $670 .21% 6 $292 .09% 23 $962 .30%
Commercial real estate
loans ............. 1 20 1.17% -- -- -- 1 20 1.02%
Consumer loans ....... -- -- -- -- -- -- -- -- --
--- ---- ---- ---- ---- ----
Total loans ..... 18 $690 .21% 6 $292 .09% 24 $982 .29%
=== ==== ==== ==== ==== ====
</TABLE>
When a borrower fails to make a required payment after a fifteen-day
grace period, the Company attempts to cause the borrower to cure the deficiency
by corresponding with the borrower. A late notice is sent to the borrower and a
phone call to the borrower is also made. Deficiencies are cured promptly in most
cases; however, if continued trouble exists, the Company will initiate more
aggressive collection actions. If it is determined after this that the
deficiency cannot be cured, the Company normally gives notice of and then
institutes appropriate legal action, such as foreclosure.
As of September 30, 1998, included in the 90 or greater category were
three residential loans with an outstanding balance of approximately $215,000
where foreclosure is believed to be imminent. The Company's potential loss
exposure is considered minimal due to low loan to values and/or private mortgage
insurance. There were no loans which were not included in the table above where
known information about the possible credit problems of borrowers caused
management to have serious doubts as to the ability of the borrower to comply
with present loan repayment terms and which may result in disclosure of such
loans in the future.
Classified assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
<PAGE>
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS and the FDIC, which may order the
establishment of additional general or specific loss allowances.
In connection with its classification of asset policy, the Company
regularly reviews its loan portfolio to determine whether any loans require
classification. At September 30, 1998, the aggregate amount of the Company's
classified assets, and of the Company's general and specific loss allowances,
were as follows:
<TABLE>
<CAPTION>
At September 30, 1998
---------------------
(In Thousands)
<S> <C>
Substandard assets .................................. $ 292
Doubtful assets ..................................... --
Loss assets ......................................... --
------
Total classified assets .......................... $ 292
======
General loss allowances ............................. $1,390
Specific loss allowances ............................ --
------
Total allowances ................................. $1,390
======
</TABLE>
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
loan losses which is charged to earnings. In establishing its allowancefor loan
losses, the Company considers the level of its classified and non-performing
assets and their estimated value, 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, the regulators' view of adequate reserve levels
for the thrift industry, and the Company's historically low loan losses and the
levels of the allowance for loan losses established by the Company's peers in
assessing the adequacy of the loan loss allowance. Accordingly, the calculation
of the adequacy of the allowance for loan losses is not based solely on the
level of non-performing loans.
<PAGE>
Real estate properties acquired through foreclosure are recorded at
fair value. If the fair value at the date of foreclosure is lower than the
balance of the related loan, the difference will be charged-off to the allowance
for loan losses at the time of transfer. Valuations are periodically updated by
management and if the value less estimated disposition costs is less than the
carrying value a specific provision for losses on such property is established
by a charge to operations. The Company had no loan losses in fiscal 1998.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. See Notes 1 and 4 of the Notes to Consolidated Financial Statements in
the Annual Report. In management's opinion, the Company's allowance for loan
losses is adequate to absorb probable future losses from loans at September 30,
1998.
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five years ended September 30,
1998.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at beginning of period $1,388 $1,385 $1,372 $ 1,288 $ 1,244
Add:
Recoveries of loans previously charged off:
One- to four-family residential .......... -- -- -- -- --
------ ------ ------ ------- -------
Less charge-offs:
One- to four-family residential ......... -- -- -- (3) (1)
------ ------ ------ ------- -------
Net charge-offs ........................... -- -- -- (3) (1)
Provisions for loan losses ................ 2 3 13 87 45
------ ------ ------ ------- -------
Balance of allowance at end of period ..... $1,390 $1,388 $1,385 $ 1,372 $ 1,288
====== ====== ====== ======= =======
Net charge-offs to total average loans
outstanding for period(1) ................ ---% ---% ---% ---% ---%
====== ====== ====== ======= =======
Allowance to net loans receivable at end of
period ................................... .43% .49% .55% .64% .64%
====== ====== ====== ======= =======
Allowance to total non-performing loans at
end of period ............................ 476% 623% 600% 1,411% 1,431%
====== ====== ====== ======= =======
</TABLE>
(1) Total average loans exclude deferred net loan fees and loans in process.
<PAGE>
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of the Company's allowance for loan losses at the
dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ---------------- ------------------ ------------------ -------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
One- to four-family
residential .......... $1,085 92.99 $1,078 92.28 $1,058 91.83 $1,050 92.48 $1,005 92.82%
Commercial real estate . 35 .52 35 .64 35 .52 35 .59 33 .52
Construction loans ..... 105 3.47 110 4.03 112 4.79 102 3.98 95 3.93
Consumer loans ......... 45 3.02 45 3.05 40 2.86 40 2.95 33 2.73
Unallocated ............ 120 -- 120 -- 140 -- 145 -- 122 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ............. $1,390 100.00 $1,388 100.00 $1,385 100.00 $1,372 100.00 $1,288 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Investments
The Bank must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has maintained liquid
assets at levels above the minimum requirements imposed by the OTS regulations
and above levels believed adequate to meet the requirements of normal
operations, including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
At September 30, 1998, the Bank's liquidity ratio (liquid assets as a percentage
of net withdrawable savings deposits and current borrowings) was 9.7%.
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in investment grade
commercial paper and corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly.
The Company's investment policy, which was established by the Board of
Directors and is implemented by the President, is designed primarily to provide
and maintain liquidity within federal regulatory guidelines, to maintain a
balance of high quality investments to minimize risk, and to maximize return
without sacrificing liquidity and safety. The Company restricts its investments
<PAGE>
the following six types of investments: (I) U.S. Treasury Bills, (ii) U.S.
Treasury Notes, (iii) U.S. Treasury and Agency Bonds, (iv) federal funds up to a
maximum of $2 million per commercial bank, (v) FHLB of Indianapolis time
deposits, and (vi) certificates of deposit of $1 million per commercial bank. At
September 30, 1998, the Company had an outstanding balance of $17.2 million in
investment securities (excluding FHLB stock) with a weighted average yield of
6.67%.
The following table sets forth the carrying book value and market value
of the Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Bonds, held to
maturity........................ $12,024 $12,195 $26,955 $27,214 $48,819 $49,273
U.S. Treasury Bonds, available
for sale ........................ 5,137 5,137 11,126 11,126 3,969 3,969
FHLB stock.......................... 2,783 2,783 2,449 2,449 2,054 2,054
-------- -------- -------- -------- -------- --------
Total investments................... $19,944 $20,115 $40,530 $40,789 $54,842 $55,296
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth the amount of investment securities,
excluding FHLB stock which mature during each of the periods indicated and the
weighted average yields for each range of maturities at September 30, 1998.
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------------------------------------------
Over 1 Over 5
1 Year Through Through Over
or Less 5 Years 10 Years 10 Years Total Investment Securities
--------- --------- ---------- ---------- ---------------------------
Carrying Carrying Carrying Carrying Carrying Market
Value Value Value Value Value Value
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Bonds .. $ 12,085 $ 5,076 $ -- $ -- $ 17,161 $17,332
========== ========= ========== ========== ========== =======
Weighted average yield 6.60% 6.82% ---% ---% 6.67%
</TABLE>
At September 30, 1998, the Company's investment securities portfolio
contained neither tax-exempt securities nor securities of any issuer with an
aggregate book value in excess of 10% of the Company's stockholders' equity,
excluding those issued by the United States Government or its agencies.
<PAGE>
Sources Of Funds
General. Deposits have traditionally been the Company's primary source
of funds for use in lending and investment activities. In addition to deposits,
the Company derives funds from loan amortization, prepayments, retained earnings
and income on earning assets. While loan amortization and income on
interest-earning assets are relatively stable sources of funds, deposit inflows
and outflows can vary widely and are influenced by prevailing interest rates,
market conditions and levels of competition. Borrowings from the FHLB of
Indianapolis may be used in the short-term to compensate for reductions in
deposits or deposit inflows at less than projected levels and may be used when
advance rates offer lower funding opportunities than traditional deposits. The
Company has recently borrowed for terms from 30 days to ten years in response to
favorable funding rates and anticipated liquidity needs.
Deposits. Deposits are attracted, principally from within northeastern
Indiana, particularly Allen and Adams Counties, through the offering of a broad
selection of deposit instruments, including NOW and other transaction accounts,
fixed-rate certificates of deposit, individual retirement accounts, and savings
accounts. The Company does not actively solicit or advertise for deposits
outside of northeastern Indiana, particularly Allen and Adams Counties, and it
does not accept brokered deposits. Substantially all of the Company's depositors
are residents of northeastern Indiana, particularly Allen and Adams Counties.
Deposit account terms vary, with the principal differences being the minimum
balance required, the amount of time the funds remain on deposit and the
interest rate.
The Company has maintained its deposit base, estimated as of September
30, 1998, at approximately 7.0% and 8.5% of the market among each of Allen and
Adams Counties' banks and savings associations.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Company on a periodic basis. Determination of
rates and terms are predicated on funds, acquisition and liquidity requirements,
rates paid by competitors, growth goals and federal regulations. The Company
relies, in part, on customer service and long-standing relationships with
customers to attract and retain its deposits, but also competitively prices its
deposits in relation to rates offered by its competitors. For information
relating to the average balance of and rates paid on the Company's deposits by
category, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Average Balances, Interest Rates and Yields" in the
Annual Report.
<PAGE>
An analysis of the Company's deposit accounts by type, maturity and
rate at September 30, 1998, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening September 30, % of Average
Type of Account Balance 1998 Deposits Rate
- --------------- ------- ---- -------- ----
(Dollars in Thousands except minimum balance)
<S> <C> <C> <C> <C>
Withdrawable:
Passbook savings accounts...................... $ 200 $ 15,725 4.97% 2.22%
Money market accounts.......................... 2,500 49,540 15.68 4.54
NOW and other transactions accounts . . . . . 100 16,092 5.09 0.66
-------- -------
Total withdrawable........................... 81,357 25.74
-------- ------
Certificates and IRA's (original terms):(1)
90 days and less............................... 1,000 3,210 1.02 5.65
91 days........................................ 1,000 2,787 .88 4.95
182 days....................................... 1,000 38,949 12.32 5.38
12 months...................................... 1,000 72,514 22.95 5.49
18 months...................................... 1,000 22,750 7.20 5.61
24 months...................................... 1,000 10,896 3.45 5.83
30 months...................................... 1,000 17,531 5.55 6.03
36 months..................................... 1,000 4,324 1.37 5.71
48 months...................................... 1,000 876 .28 5.89
60 months...................................... 1,000 17,043 5.39 6.30
72 months...................................... 1,000 --- -.-- -.--
84 months and over............................. 5,000 43,761 13.85 6.98
------- ------
Total certificates and IRA's................ 234,641 74.26
-------- ------
Total deposits.............................. $315,998 100.00%
======== ======
</TABLE>
(1) Total IRA account balances are $25.9 million. The IRA accounts are included
in the various CD terms with corresponding minimums.
The following table indicates the amount of Company certificates of
deposit of $100,000 or more by time remaining until maturity as of September 30,
1998.
Maturity Period (In Thousands)
--------------- --------------
Three months or less...................................... $ 8,177
Greater than three months through six months.............. 8,505
Greater than six months through twelve months............. 12,092
Over twelve months........................................ 13,218
--------
Total................................................ $ 41,992
========
<PAGE>
Borrowings. The Company focuses on generating high quality loans and
then seeks the best source of funding from deposits, investments or borrowings.
On occasion the Company has obtained borrowings from the FHLB of Indianapolis.
There are regulatory restrictions on advances from the FHLBs. See "Regulation -
Federal Home Loan Bank System." These limitations are not expected to have any
impact on the Company's ability to borrow from the FHLB of Indianapolis. At
September 30, 1998, the Company had $9.0 million in advances outstanding with
the FHLB. Prior to fiscal 1998 the Bank had not had borrowings outstanding since
1983. The Company does not anticipate any difficulty in obtaining advances
appropriate to meet its requirements in the future.
Regulation
General. The Bank is a federally chartered savings bank, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. The Company is a
member of the FHLB of Indianapolis and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). As the savings and loan holding company of the Bank, the Company also
is subject to federal regulation and oversight. The purpose of the regulation of
the Company and other holding companies is to protect subsidiary savings
associations. The Bank is a member of the Savings Association Insurance Fund
("SAIF"), which together with the Bank Insurance Fund (the "BIF") are the two
deposit insurance funds administered by the FDIC, and the deposits of the Bank
are insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Bank. Certain of these regulatory requirements
and restrictions are discussed below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
examination of the Bank was as of September 30, 1998. When these examinations
are conducted by the OTS, the examiners may require the Company to provide for
higher general or specific loan loss reserves. All savings associations are
subject to a semi-annual assessment, based upon the savings association's total
assets, to fund the operations of the OTS. The Bank's OTS assessment for the
fiscal year ended September 30, 1998, was approximately $86,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to establish branch offices nationwide. The Bank is in compliance with the noted
restrictions.
<PAGE>
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1997, the Company's lending limit under this restriction was $5.1
million. The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. The current assessment rates range from .00%
to .27% of deposits.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF or the BIF, as the
case may be, will be less than the designated reserve ratio of 1.25% of SAIF or
BIF insured deposits, respectively. In setting these increased assessments, the
FDIC must seek to restore the reserve ratio to that designated reserve level, or
such higher reserve ratio as established by the FDIC.
Prior to the enactment of legislation recapitalizing the SAIF in 1996,
a portion of the SAIF assessment imposed on savings associations was used to
repay obligations issued by a federally chartered corporation to provide
financing for resolving the thrift crisis in the 1980s. Although the legislation
also now requires assessments to be made on BIF-assessable deposits for this
purpose, effective January 1, 1997, that assessment was limited to 20% of the
rate imposed on SAIF assessable deposits until the earlier of December 31, 1999
or when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions during calendar year 1998 for the
semiannual periods were 6.28 and 6.22 basis points assessment on SAIF deposits,
and 1.26 and 1.24 basis points on BIF deposits until BIF insured institutions
participate fully in the assessment.
<PAGE>
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, 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 capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At September 30, 1998, the Bank did not have any intangible
assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. At September 30,
1998, the Bank did not have any subsidiaries.
At September 30, 1998, the Bank had tangible capital of $33.8 million,
or 9.23% of adjusted total assets, which is approximately $28.3 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At September 30, 1998, the
Bank had no intangibles which were subject to these tests.
At September 30, 1998, the Bank had core capital equal to $33.8
million, or 9.23% of adjusted total assets, which is $22.8 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At September 30, 1998, the Bank had
no capital instruments that qualify as supplementary capital and $1.4 million of
general loss reserves, which was less than 1.25% of risk-weighted assets.
<PAGE>
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at September 30, 1998.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On September 30, 1998, the Bank had total capital of $35.2 million
(including $33.8 million in core capital) and risk-weighted assets of $185.7
million (with $6.1 million of converted off-balance sheet assets); or total
capital of 18.97% of risk-weighted assets. This amount was $20.4 million above
the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized, and in respect to institutions
whose capital is further depleted, required to impose additional restrictions
that can affect all aspects of the institution's operations. As a condition to
the approval of the capital restoration plan, any company controlling an
undercapitalized association must agree that it will enter into a limited
capital maintenance guarantee with respect to the institution's achievement of
its capital requirements.
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on the Company's
operations and profitability. Company shareholders do not have preemptive
rights, and therefore, if the Company is directed by the OTS or the FDIC to
issue additional shares of Common Stock, such issuance may result in the
dilution in the percentage of ownership of the Company.
<PAGE>
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
Liquidity. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At September 30, 1998, the minimum liquid asset ratio was
4%.Penalties may be imposed upon associations for violations of the liquid asset
ratio requirement. At September 30, 1998, the Bank was in compliance with the
requirements, with a liquid asset ratio of 9.7%. The Bank's liquidity as of that
same date was 9.02%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held to maturity,
available for sale, or trading) with appropriate documentation. The Bank is in
compliance with these amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
<PAGE>
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At September 30, 1998, the
Bank met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was last examined for
CRA compliance as of July 31, 1998 and received a rating of "satisfactory."
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
<PAGE>
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates; however,
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to laws that impose restrictions on loans to such persons and
their related interests. Among other things, such loans must be made on terms
substantially the same as for loans to unaffiliated individuals except if made
pursuant to an employee benefit plan. The Bank is in compliance with this
requirement.
Holding Company Regulation. 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.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. 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 such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as and will become subject to
the restrictions applicable to bank holding companies. The activities authorized
for a bank holding company are more limited than are the activities authorized
for a unitary or multiple savings and loan holding company. See "- Qualified
Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration unless sold in accordance with certain resale restrictions. If the
Company meets specified current public information requirements, each affiliate
of the Company is able to sell in the public market, without registration, a
limited number of shares in any three-month period.
<PAGE>
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain noninterest-bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At September 30, 1998, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs, that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB, which
are subject to the oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At September 30, 1998, the Company had approximately $2.8
million in FHLB stock, which was in compliance with this requirement. In past
years, the Bank has received substantial dividends on its FHLB stock. Over the
past five calendar years such dividends have averaged 8.75% and were 8.02% for
fiscal 1998.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
Federal Taxation. Savings associations such as the Bank that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), had been permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, be taken as
a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" is computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) may be computed under either the experience method or the percentage of
taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
<PAGE>
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (I) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equaled the amount by
which 12% of the amount comprising savings accounts at year-end exceeded the sum
of surplus, undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repeals the
above-described reserve method of accounting (including the percentage of
taxable income method) used by many thrift institutions to calculate their bad
debt reserve for federal income tax purposes. Thrift institutions with $500
million or less in assets may, however, continue to use the experience method.
As a result, the Bank must recapture that portion of the reserve that exceeds
the amount that could have been taken under the experience method for post-1987
tax years. The recapture will occur over a six-year period, the commencement of
which will be delayed until the first taxable year beginning after December 31,
1997, provided the institution meets certain residential lending requirements.
The legislation also requires thrift institutions to account for bad debts for
federal income tax purposes on the same basis as commercial banks for tax years
beginning after December 31, 1995.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to .12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million. The environmental tax expired as of January 1, 1997.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 1998, the Bank's Excess for tax purposes for which
no deferred tax liability has been established totaled approximately $7.6
million.
<PAGE>
The Bank files federal income tax returns on a fiscal year basis using
the accrual method of accounting. The Company intends to file consolidated
federal income tax returns with the Bank. Savings associations, such as the
Bank, that file federal income tax returns as part of a consolidated group are
required by applicable Treasury regulations to reduce their taxable income for
purposes of computing the percentage bad debt deduction for losses attributable
to activities of the non-savings association members of the consolidated group
that are functionally related to the activities of the savings association
member.
State Taxation. For its taxable period beginning January 1, 1990, the
Bank became subject to Indiana's new Financial Institutions Tax ("FIT"), which
is imposed at a flat rate of 8.5% on "adjusted gross income." The Company is
also subject to FIT. "Adjusted gross income," for purposes of FIT, begins with
taxable income as defined by Section 63 of the Code and, thus, incorporates
federal tax law to the extent that it affects the computation of taxable income.
Federal taxable income is then adjusted by several Indiana modifications, the
most notable of which is the required add back of interest that is tax-free for
federal income tax purposes. Other applicable state taxes include generally
applicable sales and use taxes plus real and personal property taxes. The Bank's
state income tax returns have not been audited in recent years.
Competition
The Company originates most of its loans to, and accepts most of its
deposits from, residents of northeastern Indiana, primarily Allen and Adams
Counties. The Company is subject to competition from various financial
institutions, including state and national banks, state and federal savings
associations, credit unions, certain non-banking consumer lenders, and other
companies or firms, including brokerage houses and mortgage brokers, that
provide similar services in northeastern Indiana, particularly Allen and Adams
Counties, some of which have significantly more resources than the Company. In
total, there are 11 banks and thrifts located in Allen County, Indiana,
including the Bank. These financial institutions consist of nine banks and two
savings associations (or thrifts). The Company must also compete with banks,
thrifts, and credit unions throughout northeastern Indiana since media
advertising from across this region reaches the Fort Wayne community. The
Company also competes with money market funds and with insurance companies with
respect to its individual retirement accounts and savings investments.
Competition has increased in recent years due to changes in Indiana law
permitting (i) state wide branching by national and state banks and savings
associations and (ii) nationwide acquisitions on a reciprocal basis of and by
Indiana banks and bank holding companies. Indiana law permits acquisitions of
Indiana banks and bank holding companies by certain non-Indiana federal and
state FDIC-insured institutions and their holding companies if the laws of their
home state permit Indiana bank holding companies to acquire banks and bank
holding companies of that state.
The primary factors influencing competition for deposits are interest
rates, service, and convenience of office locations. The Company competes for
loan originations primarily through the efficiency and quality of services it
provides borrowers, builders and Realtors and through interest rates and loan
fees it charges. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels, and other factors that are not readily predictable. The
Company attempts to differentiate itself from other providers of financial
<PAGE>
services by emphasizing the local and personalized nature of its service as well
as its strong capital base. In September 1998, the Company originated
approximately 7.5% and 6.0% of the mortgages recorded in Allen and Adams
Counties, respectively. As of September 30, 1998, the Company had approximately
7.0% and 8.5% of all financial institution deposits in each of Allen and Adams
Counties, respectively.
Employees
As of September 30, 1998, the Company employed 82 persons on a
full-time basis and six persons on a part-time basis. None of the Company's
employees are represented by a collective bargaining group. Management considers
its employee relations to be good.
Executive Officers of the Company and the Bank Who Are Not Directors
The following information as to the business experience during the past
five years is supplied with respect to the executive officers of the Company and
the Bank who do not serve on the Company's or the Bank's Board of Directors.
Information regarding executive officers who are directors of the Company is
incorporated in Part III of this Form 10-K from the Company's proxy statement.
There are no arrangements or understandings between such persons named and any
persons pursuant to which such officers were selected.
John E. Fitzgerald (age 49) has served as Vice President of the Bank
since 1993. He also currently serves as the Community Reinvestment Act
Compliance Officer of the Bank. Prior to that, he was an Assistant Vice
President, Assistant Secretary, Loan Officer and Loan Representative of the
Bank. He has worked for the Bank since 1976.
Gary L. Hemrick (age 53) has served as Vice President and Secretary of
the Company since its incorporation, Vice President of the Bank since 1983 and
has been Vice President in charge of branch operations at the Bank since 1987.
Mr. Hemrick has been employed by the Bank since 1976.
<PAGE>
Item 2. Description of Property
At September 30, 1998, the Company conducted its business from its main
office at 132 East Berry Street, Fort Wayne, Indiana and eight branch offices.
All nine offices are full-service offices. Management is continually reviewing
its facilities for adequacy and for business opportunities for the Company and
the Bank.
The following table provides certain information with respect to the
Company's offices as of September 30, 1998:
<TABLE>
<CAPTION>
Lease Net Book Value of
Owned or Year Expiration Total Deposits at Property, Furniture Approximate
Leased Opened Date September 30, 1998 and Fixtures Square Footage
------ ------ ---- ------------------ ------------ --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Main Office Owned 1916 --- $58,268 $1,185 10,500
132 E. Berry Street
Fort Wayne, IN 46802
Southtown Mall Leasehold 1971 4/30/01 46,226 11 2,278
1110 E. Tillman Road
Fort Wayne, IN 46816
Decatur Leased 1973 6/26/00 39,789 --- 2,000
101 N. Second Street
Decatur, IN 46733
Canterbury Leased 1975 10/1/99 36,931 3 1,800
5611 St. Joe Road
Fort Wayne, IN 46835
Covington/Times Corner Owned 1977 --- 38,773 121 2,064
6128 Covington Road
Fort Wayne, IN 46804
West State Owned 1987 --- 26,620 217 2,048
926 W. State Boulevard
Fort Wayne, IN 46808
New Haven Owned 1987 --- 17,722 260 2,221
1230 Lincoln Highway E.
New Haven, IN 46774
Georgetown Owned 1992 --- 37,546 427 2,563
6411 State Boulevard
Fort Wayne, IN 46815
Dupont Crossing Owned 1996 --- 14,123 581 2,800
720 E. Dupont Road
Fort Wayne, IN 46825
</TABLE>
- --------------------
<PAGE>
The Company owns computer and data processing equipment which is used
for transaction processing and accounting. The net book value of electronic data
processing equipment owned by the Company was approximately $400,000 at
September 30, 1998 and is included in the net book value of the Main Office. The
Company also has contracted for the data processing and reporting services of
NCR Corporation. The cost of these data processing services was approximately
$13,000 per month during fiscal 1998, and will be approximately $17,000 per
month in fiscal 1999 due to communication and software enhancements.
Item 3. Legal Proceedings
From time to time the Company is involved as plaintiff or defendant in
various legal actions arising in the normal course of business. Presently, the
Company is not a party to any material pending legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Page 41 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Pages 2 and 3 of the attached 1998 Annual Report to Stockholders are
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 4 through 14 of the attached 1998 Annual Report to Stockholders
are herein incorporated by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Pages 9 through 11 of the attached 1998 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 15 through 40 of the attached 1998 Annual Report to Stockholders
are herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Directors of the Registrant is incorporated
herein by reference from the Corporation's definitive Proxy Statement for the
Annual Meeting of Shareholders scheduled to be held on January 26, 1999, except
for information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Information concerning the executive officers of the Registrant who are
not directors of the Corporation is contained in Part I of this form 10-K under
the caption "Executive Officers of the Company and the Bank who are not
Directors" and is incorporated herein by this reference.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on January 26, 1999, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Corporation's
definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to
be held on January 26, 1999, except for information contained under the heading
"Compensation Committee Report on Executive Compensation" and "Shareholder
Return Performance Presentation", a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
No information was required to be reported by the Company under Item
404 of Regulation S-K for the fiscal year ended September 30, 1998.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
The following information appearing in the Registrant's Annual Report
to Shareholders for the year ended September 30, 1998, is incorporated by
reference in this Form 10-K Annual Report as Exhibit 13.
Pages in
Annual
Annual Report Section Report
--------------------- ------
Report of Independent Auditors................................... 15
Consolidated Balance Sheets at September 30, 1998 and 1997....... 16
Consolidated Statements of Income for the years ended
September 30, 1998, 1997 and 1996................................ 17
Consolidated Statement of Changes in Shareholders' Equity
for the years ended September 30, 1998, 1997 and 1996............ 18
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996................................ 19
Notes to Consolidated Financial Statements........................ 20 - 40
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
<PAGE>
(a) (3) Exhibits:
<TABLE>
<CAPTION>
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
------ -------- ---------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(i) Certificate of Incorporation *
3(ii) Bylaws, as amended ***
4 Instruments defining the rights of security holders, *
including indentures
9 Voting trust agreement None
10.1 Employment Agreements of W. Paul Wolf, *
Matthew P. Forrester, Gary L. Hemrick, Donald
E. Thornton and John E. Fitzgerald
10.2 Employee Stock Ownership Plan *
10.3 1995 Stock Option and Incentive Plan **
10.4 Recognition and Retention Plan **
11 Statement re: computation of per share earnings Not required
12 Statement re: computation or ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountants Not Required
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to None
vote of security holders
23 Consent of Experts 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
</TABLE>
- -------------------
*Filed on December 23, 1995, as exhibits to the Registrant's Form SB-2
registration statement (Registration No. 33-87906), pursuant to the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
**Filed as Exhibits 10.3 and 10.4 to the Company's Annual Report on Form
10-K (File No. 0-22376) for the fiscal year ended September 30, 1995 and
incorporated herein by reference in accordance with Item 601 of regulation S-K.
***Filed on October 3, 1997 on Form 8-K (File No. 0-22376) and incorporated
herein by reference in accordance with Item 601 of regulation S-K.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed by the Company during the
period covered by this report.
Date of Report Subject
-------------- -------
7-28-98 Press Release relative to 3rd Quarter 1998 Earnings
and Dividend Declaration
9-18-98 Press Release relative to Declaration of Cash
Dividend
<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.
HOME BANCORP
Date: December 18, 1998 By: /s/W. Paul Wolf
---------------
W. Paul Wolf, Chairman of the Board,
President and Chief Executive Officer
(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.
/s/ W. Paul Wolf /s/ Matthew P. Forrester
- ---------------- ------------------------
W. Paul Wolf, Chairman of the Board Matthew P. Forrester, Director, Vice
President and Chief Executive Officer President and Treasurer (Chief
(Principal Executive Officer) Accounting Officer and Principal
Financial Officer)
Date: December 18, 1998 Date: December 18, 1998
/s/ C. Philip Andorfer /s/ Walter A. McComb, Jr.
- ---------------------- -------------------------
C. Philip Andorfer, Director Walter A. McComb, Jr., Director
Date: December 18, 1998 Date: December 18, 1998
/s/ Daniel F. Fulkerson /s/ Richard P. Hormann
- ----------------------- ----------------------
Daniel F. Fulkerson, Director Richard P. Hormann, Director
Date: December 18, 1998 Date: December 18, 1998
/s/ Rod M. Howard /s/ Luben Lazoff
- ----------------- ----------------
Rod M. Howard, Director Luben Lazoff, Director
Date: December 18, 1998 Date: December 18, 1998
/s/ Donald E. Thornton
- ----------------------
Donald E. Thornton, Director
Date: December 18, 1998
<PAGE>
Index to Exhibits
Exhibit
Number
------
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consent of Experts
27 Financial Data Schedule
- --------------------------------------------------------------------------------
1998 ANNUAL REPORT
Year ended September 30, 1998
- --------------------------------------------------------------------------------
Report To Shareholders
--------------------------------------------
-----------------------------------------
-------------------------------------
----------------------------------
Home Bancorp
Fort Wayne, Indiana
<PAGE>
CORPORATE PROFILE
Home Bancorp, Fort Wayne, Indiana, an Indiana Corporation, was
established March 29, 1995 as a savings bank holding company for its principal
subsidiary, Home Loan Bank fsb. Based on total assets at September 30, 1998 of
$372 million, Home Bancorp is the largest savings bank holding company
headquartered in Fort Wayne, the second largest city in Indiana.
Originally founded on March 22, 1893 by a group of fellow German
immigrants representing local business people, Home Loan Bank is a dedicated
community oriented financial institution offering traditional deposit and
mortgage and consumer loan products. The Bank maintains a nine full-service
office network in Fort Wayne, Decatur and New Haven and possesses the
distinction of being Fort Wayne's oldest bank and Fort Wayne's only locally
owned bank.
As a guide for our forthcoming 106th consecutive year, our challenge
is to continue the Bank's solid reputation and offer superior service with
competitive prices through increased efficiency and close operating expense
controls. Home Loan Bank is an equal opportunity employer and an equal housing
lender.
The common stock of Home Bancorp trades under the symbol HBFW on The
Nasdaq National Market.
<PAGE>
TABLE OF CONTENTS
Corporate Profile.........................................Front Cover Inside
President's Annual Shareholder Report......................................1
Selected Consolidated Financial Information................................2
Management's Discussion & Analysis of Financial
Condition & Results of Operations.....................................4
Report of Independent Auditors............................................15
Consolidated Balance Sheets...............................................16
Consolidated Statements of Income.........................................17
Consolidated Statements of Changes in
Shareholders' Equity.................................................18
Consolidated Statements of Cash Flows.....................................19
Notes to Consolidated Financial Statements................................20
Corporate & Shareholder Information.......................................41
Home Loan Bank Office Locations...........................................41
Mission Statement.........................................................42
Market Makers.............................................................42
Directors & Officers......................................................43
Fort Wayne . . . The Midwest Hub !
<PAGE>
PRESIDENT'S ANNUAL SHAREHOLDER REPORT
During the fiscal year 1998 (FY 1998), mortgage loan originations increased
39.3% to a historical $114.2 million, up from $81.9 million for the previous
year. The continued low interest rate environment produced the record mortgage
origination volume. Total net loans at September 30, 1998 were $324.2 million,
compared with $284.0 million a year ago, an increase of $40.2 million or 14.2%,
exceeding prior year (FY 1997) 13.5% loan growth.
Fiscal year ended September 30, 1998 completed our third full year as a public
company, as result of the March 29, 1995 conversion, with continued positive
results for shareholders. All 14 quarters of Home Bancorp's existence have
reported successively higher outstanding loan balances. Total net loans
receivable at September 30, 1998 were $324.2 million compared with outstanding
loans following the conversion of $204.0 million at March 31, 1995, an increase
of 58.9%. The net conversion proceeds of $30.1 million were invested in 13 short
months with the net loan increase through community residential loan
originations. The Company's loan to deposit ratio, following the stock
conversion, stood at 81.5% on March 31, 1995, has reflected a 42-month increase
to 102.6% at September 30, 1998.
For fiscal year 1998, the net income reported at $2,906,000 was impacted by a
Year 2000 (Y2K) pretax expense of $140,000, compared to net income of $2,893,000
for fiscal year 1997. Basic earnings per share (EPS) were $1.32 for FY 1998, a
10% increase, compared to the $1.20 basic EPS for prior year FY 1997. Diluted
earnings per share were $1.28, an 8.5% increase from the prior year of $1.18
diluted EPS. Home Bancorp return on average assets was 0.82%, and its return on
average equity was 6.80% for FY 1998.
The September 30, 1998 total deposits grew by $18.5 million or 6.2% to $316.0
million in FY 1998 from $297.5 million for the previous year. Core deposits,
which include checking, savings and money market accounts, were $81.4 million,
an increase of $4.4 million or 5.8% for FY 1998. Time deposits, certificates of
deposit, were $234.6 million, a 6.3% yearly increase compared to FY 1997. The
September 30, 1998 total assets increased by $26.4 million or 7.6% to $372.4
million from $346.0 million at the FY 1997 year end.
As severe competition for residential mortgage customers has intensified in
recent quarters, many lenders are finding themselves up against rivals willing
to compromise their underwriting standards to win business. We have continued
prudent asset-quality underwriting as reflected in our delinquency history
compared with our peer group ratios for non-performing assets to total assets.
As of September 30, 1998, non-performing loans 90 days or more delinquent
totaled $292,000 or 0.09% of total loans, compared to $223,000 or 0.08% of total
loans at September 30, 1997. Non-performing assets, consisting solely of loans
90 days or more delinquent, totaled 0.08% of total assets at September 30, 1998,
compared to $223,000 or 0.06% of assets on September 30, 1997.
Diligent contribution in controlling the Bank's operating expenses continued
during FY 1998. The 1998 fiscal year operating (general and administrative)
expenses to average assets was 1.42% compared to 1.44% for fiscal year 1997. The
efficiency ratio for the year ended September 30, 1998 was 49.6% compared to
49.0% for the fiscal year ended September 30, 1997. The efficiency ratio
represents operating expenses as a percentage of the sum of net interest income
and non-interest income. For example, during FY 1998, every 49.6(cent) in
expense generated $1.00 in net income before taxes.
<PAGE>
During FY 1998, the Company repurchased a total of 234,731 shares. These shares
were repurchased at an average price of $27.42. Since the inception of the
Company's stock repurchase plans, a total of 1,163,622 shares have been
repurchased as of September 30, 1998. The Bank remained a well-capitalized
institution, exceeding all current minimum regulatory capital requirements. In
our current program, 6,997 shares remain eligible to complete the 241,186
authorized December 15, 1997 repurchase program. We believe this represents a
very prudent investment and use of our capital.
The initial quarterly dividend of $0.05 per share paid June 20, 1996 continued
quarterly until the dividend per share declared June 16, 1998 was increased to a
quarterly $0.08 per share, a 60% increase over the prior dividend rate.
All new teller terminals and in-house pc's have been installed. Plus, the data
processing software provided by an outside vendor as being certified as Year
2000 compliant has been tested and will involve a second testing, along with the
installation of the Federal Reserve Bank Fedline software by March 31, 1999.
To our shareholders, we value your confidence and appreciate your financial
referrals. The directors, officers and staff know of their fiduciary
responsibility to enhance shareholder value. Sincere thanks to everyone involved
for their hard work, dedication and commitment to our company.
Cordially,
/s/W. Paul Wolf
---------------
W.Paul Wolf
Chairman, President
December 1, 1998 Chief Executive Officer
<PAGE>
SELECTED FINANCIAL DATA
Set forth below are selected financial and other data of the Company.
This financial data is derived in part from the financial statements and related
notes of the Company which are presented elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Summary of Financial Condition:
Total assets.................................... $372,429 $346,041 $322,702 $313,185 $275,210
Loans receivable, net........................... 324,188 283,987 250,306 214,405 200,678
Cash and cash equivalents....................... 23,366 16,445 11,923 21,390 19,695
Investment securities and FHLB Stock............ 19,944 40,530 54,842 71,917 49,995
Deposits........................................ 315,998 297,493 271,185 256,108 251,340
Shareholders' equity - substantially restricted. 41,038 43,991 46,713 54,060 21,370
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- -------- -------
(In Thousands)
Summary of Operating Results:
Interest income................................ $25,979 $24,422 $22,913 $ 21,120 $17,625
Interest expense............................... 16,223 14,963 13,787 12,730 10,247
------- ------- ------- -------- -------
Net interest income.......................... 9,756 9,459 9,126 8,390 7,378
Provision for loan losses...................... 2 2 13 87 45
------- ------- ------- -------- -------
Net interest income after provision for
loan losses................................. 9,754 9,457 9,113 8,303 7,333
Noninterest income:
Gains on sales of interest-earning assets,
net........................................ 108 --- 3 1 14
Other........................................ 248 246 227 220 250
------- ------- ------- -------- -------
Total noninterest income................... 356 246 230 221 264
Noninterest expense:
Compensation and benefits.................... 3,088 2,726 2,512 2,088 1,806
Occupancy and equipment...................... 729 591 528 584 559
SAIF deposit insurance premium....... 186 251 2,235 582 517
Conversion costs............................. --- --- --- --- 486
Other........................................ 1,009 1,187 1,151 1,274 970
------- ------- ------- -------- -------
Total noninterest expense.................. 5,012 4,755 6,426 4,528 4,338
------- ------- ------- -------- -------
Income before income taxes and cumulative
effect of change in accounting principle...... 5,098 4,948 2,917 3,996 3,259
Income tax expense............................. 2,192 2,055 1,281 1,535 1,233
------- ------- ------- -------- -------
Income before cumulative effect of change
in accounting principle....................... 2,906 2,893 1,636 2,461 2,026
Cumulative effect of change in accounting
for income taxes.............................. --- --- --- --- 324
------- ------- ------- -------- -------
Net income..................................... $ 2,906 $ 2,893 $ 1,636 $ 2,461 $ 2,350
======= ======= ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS (Averages)
Return on assets(1)............................... .82% .87% .52% .83% .88%
Return on shareholders' equity(2)................. 6.80 6.43 3.21 6.50 11.47
Yield on interest-earning assets.................. 7.47 7.53 7.43 7.25 6.78
Cost of interest-bearing liabilities.............. 5.30 5.30 5.30 4.99 4.22
Net interest spread(3)............................ 2.17 2.23 2.13 2.26 2.56
Net interest rate margin(4)....................... 2.80 2.92 2.96 2.88 2.84
Operating (G&A) expenses to assets(5)(6).......... 1.42 1.44 1.52 1.53 1.63
Efficiency ratio (6)(7)........................... 49.56 48.99 51.05 52.59 57.36
Net interest income to operating (G&A)
expenses(6).................................. 194.67 198.87 190.80 185.61 170.06
Interest-earning assets to interest-bearing
liabilities.................................. 113.78 114.92 118.63 114.73 106.99
Average assets (dollars in thousands)............. $354,167 $331,060 $314,645 $296,221 $266,115
CAPITAL RATIOS
Equity to assets at period end ................... 11.02% 12.71% 14.48% 17.26% 7.76%
Average equity to average assets.................. 12.06 13.59 16.21 12.79 7.70
Average tangible equity to average assets......... 12.06 13.59 16.21 12.79 7.70
Dividend payout ratio............................. 23.16 16.50 16.13 --- ---
ASSET QUALITY RATIOS
Non-performing assets to total assets............. .08% .06% .07% .03% .05%
Non-performing loans to total loans............... .09 .08 .09 .05 .04
Allowance for loan losses to net loans............ .43 .49 .55 .64 .64
Allowance for loan losses to non-
performing loans............................ 476 623 600 1,411 1,431
Net charge-offs to net loans...................... --- --- --- --- ---
Loans to deposits................................. 102.59 95.46 92.30 83.72 79.84
Loans to assets................................... 87.13 82.07 77.57 68.46 72.92
Loan originations (dollars in thousands).......... $114,171 $ 81,888 $ 83,917 $ 51,514 $ 71,152
PER COMMON SHARE
Dividends declared per share....................... $ 0.31 $ 0.20 $ 0.10 $ --- $ ---
Earnings, basic.................................... 1.32 1.20 0.57 0.44 ---
Earnings, diluted.................................. 1.28 1.18 0.57 0.44 ---
Book value......................................... 18.20 17.83 16.91 16.37 ---
Tangible book value................................ 18.20 17.83 16.91 16.37 ---
Shares outstanding at period end................... 2,254,642 2,467,238 2,762,350 3,303,178 ---
Number of full-service offices 9 9 8 8 8
</TABLE>
<PAGE>
(1) Net income divided by average total assets.
(2) Net income divided by average total shareholders' equity.
(3) Interest rate spread is determined by subtracting combined weighted average
interest rate cost from combined weighted average interest rate earned for
the period indicated.
(4) Net interest income divided by average interest-earning assets.
(5) Other expense divided by average total assets.
(6) The ratios for 1996 excludes $1.65 million pre-tax on non-recurring SAIF
special assessment. Including the said exclusion, operating expenses to
average assets would be 2.04%; efficiency ratio would be 68.68%; net
interest income to operating expenses would be 141.81%.
(7) Operating expenses divided by the sum of net interest income and
noninterest income.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Fiscal year 1998 marked the third full year of operation of Home
Bancorp (the " Company") since the conversion of Home Loan Bank fsb (the "Bank")
on March 29, 1995 from a mutual to stock form of ownership (the "Conversion").
Through that conversion the Company raised $30.1 million, net of funds used to
purchase shares for an Employee Stock Ownership Plan (the "ESOP") and net of
Conversion costs. During fiscal 1998 the Company continued to leverage those
conversion proceeds in sustained growth in its balance sheet. Through the
origination of first lien residential mortgages in the Bank's service area, the
Company had substantive loan portfolio growth that was supported by growth in
consumer deposits, borrowings from the Federal Home Loan Bank of Indianapolis
(the "FHLB"), and use of investment proceeds. During fiscal 1998 the Company
also repurchased 234,731 shares of Home Bancorp stock to fund stock options and
other corporate purposes. The leverage of the Company's capital through the
stock repurchases enhanced both the earnings per share and the return on equity.
The Company's net income for fiscal 1998 represents the most profitable year on
record for the Company.
Financial Condition
September 30, 1998 compared to September 30, 1997. The Company's total
assets increased from $346.0 million as of September 30, 1997 to $372.4 as of
September 30, 1998, an increase of $26.4 million or 7.6%. Shareholders' equity
decreased from $44.0 as of September 30, 1997 to $41.0 million as of September
30, 1998, a decrease of $3.0 million or 6.8%. The decrease in shareholders'
equity was primarily the net result of earnings for the year of approximately
$2.9 million, payments on benefit plans, less the repurchase of 234,731 shares
of common stock for $6.4 million, and dividends paid on common stock.
Total cash and cash equivalents increased from $16.4 million as of
September 30, 1997 to $23.4 million as of September 30, 1998, an increase of
approximately $7.0 million. Investment securities, including those held to
maturity and available for sale, were $17.2 million as of September 30, 1998, a
decrease of $20.9 million from the balance of $38.1 million as of September 30,
1997. The net decrease in liquid assets during the fiscal year was used
primarily to fund growth in the loan portfolio and repurchase common stock.
Net loans receivable increased $40.2 million or 14.2%, from $284.0
million as of September 30, 1997 to $324.2 million as of September 30, 1998.
This increase was primarily the result of continued growth in one- to
four-family residential loan originations in the Company's primary lending area.
Mortgage loan originations increased as a result of demand attributable to a
continued stable interest rate environment and historically low unemployment
rates.
<PAGE>
Total deposits were $316.0 million as of September 30, 1998, an
increase of $18.5 million from $297.5 million as of September 30, 1997. The
increase in deposits was primarily the result of modest growth in core deposits
and more substantive growth in certificates of deposit. As of September 30,
1998, certificates of deposit had an increase of $14.0 million from $220.6
million as of September 30, 1997 to $234.6 million as of September 30, 1998.
Management attributes this fact to customer preferences for higher yielding
instruments of deposit of relatively short maturities as opposed to the
liquidity afforded lower yielding transactional accounts. At September 30, 1998,
the Company had $151.8 million in certificates of deposit with terms of one year
or less as compared to $140.1 million for the same period ended September 30,
1997.The Company's pricing of certificates of deposit are consistent with that
of its competitors.
Due to favorable funding rates and anticipated liquidity needs, the
Bank borrowed from the FHLB. Outstanding FHLB advances as of September 30, 1998
were $9.0 million. The maturity of these advances ranged from 30 days to 10
years and were secured by a blanket lien arrangement. The Company had no
advances as of September 30, 1997.
4
<PAGE>
Results of Operations
Comparison of the Fiscal Years Ended September 30, 1998 and 1997
General. Net income for the year ended September 30, 1998 was $2.9
million, an increase of $13,000 compared to net income recorded for the year
ended September 30, 1997. The modest increase in net income for the year ended
September 30, 1998 compared to the prior year was primarily the result of an
increase in net interest income and profit recorded from the sale of available
for sale investments, that was nearly offset by increased operating expenses and
taxes.
Interest Income. Interest income increased $1.6 million, or 6.6%, from
$24.4 million for the year ended September 30, 1997 to $26.0 million for the
year ended September 30, 1998. Interest income on loans receivable increased
$2.7 million while interest income on investments and other interest-earning
assets decreased $1.1 million during fiscal 1998 as compared to fiscal 1997. The
increase in interest income for fiscal 1998 was primarily the result of
increases in the average balance of outstanding loans, as yields earned on loan
balances decreased during the fiscal year. Both the average balances of
investments and interest-earning deposits, and the yield earned on those
balances decreased during the year ended September 30, 1998. See "Average
Balances, Interest Rates and Yields" and "Rate/Volume Analysis."
Interest Expense. Interest expense increased $1.2 million, or 8.0%,
from $15.0 million for the year ended September 30, 1997 to $16.2 million for
the year ended September 30, 1998. The increase in interest expense was the
result of higher average balances of deposits, FHLB advances, and rate based
savings preferences of customers during fiscal 1998. The weighted average rate
paid on interest-bearing liabilities for fiscal 1998 of 5.30% was the same as in
fiscal 1997. See "Average Balances, Interest Rates and Yields" and "Rate/Volume
Analysis."
Net Interest Income. Net interest income increased $297,000 or 3.2%,
from $9.5 million for the year ended September 30, 1997 to $9.8 million for the
year ended September 30, 1998. This increase was attributable to the increase in
interest income which more than offset the increase in interest expense as
previously discussed. The Company's interest rate spread decreased from 2.23%
during fiscal 1997 to 2.17% during fiscal 1998. The decrease in the interest
rate spread during the fiscal year reflected a general decrease in market
spreads.
Provision for Loan Losses. The provision for loan losses for the year
ended September 30, 1998 was $2,400. This was the same amount provided for in
fiscal 1997. The Company's provision for loan losses was based on, among other
things, management's assessment of the credit risk inherent in the Company's
loan portfolio and the current balance of the allowance for loan losses. At
September 30, 1998, the Company's allowance for loan losses totaled $1.4 million
or .43% of net loans receivable and 476% of total non-performing loans. In
management's assessment, continued growth in the Company's residential loan
portfolio has not significantly raised anticipated risk exposures nor impaired
the Company's ability to absorb future loan losses.
In establishing its allowance, the Company also considers the level of
its classified and non-performing assets and their estimated value, 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, the regulators'
<PAGE>
view of adequate reserve levels for the thrift industry, the Company's
historically low loan losses, and the levels of the allowance for loan losses
established by the Company's peers. Accordingly, the allowance for loan losses
is not based solely on the level of non-performing loans. The Company had no
loan losses in fiscal 1998.
The Company will continue to monitor its allowance for loan losses and
make future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although the Company maintains its allowance for
loan losses at a level which it considers to be adequate to provide for
potential 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, the Company's determination as to the
amount of its allowance for loan losses is subject to review by the Office of
Thrift Supervision (the "OTS") as part of their examination process, which may
result in the establishment of additional allowances based upon their judgment
of the information available to them at the time of their examination.
Noninterest Income. Noninterest income increased from $247,000 in
fiscal 1997 to $356,000 in fiscal 1998. The increase was the result of gains
from the sale of securities held as available for sale that were sold to fund
liquidity needs of
5
<PAGE>
the Company. There were no sales of interest earning assets during fiscal 1997.
Noninterest Expense. Noninterest expense increased approximately
$257,000 or 5.4%, from $4.7 million in fiscal 1997 to $5.0 million in fiscal
1998. Approximately $362,000 of this increase was attributable to employee
compensation and benefits. Specifically, increases in the Company's stock price
during the fiscal year impacted expenses associated with the ESOP and accounted
for most this increase. Occupancy and equipment expense in fiscal 1998 increased
by approximately $140,000 associated with expenditures and depreciation costs
associated with Year 2000 issues. Some of these costs represented non-recurring
items necessary in the Company's readiness for Year 2000. See "Year 2000
Compliance." Federal deposit insurance premiums decreased by approximately
$66,000 in fiscal 1998 from the prior year as a result of the lowering of
premiums following the recapitalization of the federal deposit insurance fund.
Other noninterest expenses decreased $178,000 for the fiscal year ended 1998
when compared to the like period in 1997, primarily from income on loan
originations that was applied to costs.
Income Tax Expense. Income tax expense increased from $2.1 million in
fiscal 1997 to $2.2 million in fiscal 1998, as a result of higher pretax
earnings for the period. The effective tax rate in fiscal 1998 was moderately
higher than in 1997 due to increased market values of ESOP shares relative to
cost.
Comparison of the Fiscal Years Ended September 30, 1997 and 1996
General. Net income for the year ended September 30, 1997 was $2.9
million, an increase of $1.3 million compared to net income of $1.6 million for
the year ended September 30, 1996. Net income for fiscal 1996 was impacted by a
$1.0 million after tax special assessment by the Federal Deposit Insurance
Corporation ("FDIC") to capitalize the Savings Association Insurance Fund
("SAIF") to its statutory reserve level of at least 1.25%. Comparing net income
for fiscal 1997 to fiscal 1996 after adjusting for the effect of the FDIC
special assessment would yield an increase of approximately $257,000, or 9.8%,
for the period. The increase in net income for the year ended September 30, 1997
compared to the year ended September 30, 1996 was primarily the result of the
decrease in operating expenses of $1.6 million primarily attributable to the
gross amount of the 1996 FDIC special assessment, and an approximately $334,000
increase in net interest income, partially offset by an associated increase in
income taxes as more fully described below.
Interest Income. Interest income increased $1.5 million or 6.6%, from
$22.9 million for the year ended September 30, 1996 to $24.4 million for the
year ended September 30, 1997. Interest income on loan receivables increased
$2.5 million while interest income on investments and other interest-earning
assets decreased $1.0 million during fiscal 1997 as compared to fiscal 1996. The
increase in interest income for fiscal 1997 was primarily the result of
increases in the average balance of interest-earning assets and a modest
improvement in the yield of those balances. See "Average Balances, Interest
Rates and Yields" and "Rate/Volume Analysis."
Interest Expense. Interest expense increased $1.2 million or 8.7%, from
$13.8 million for the year ended September 30, 1996 to $15.0 million for the
year ended September 30, 1997. The increase in interest expense was the result
of higher average balances of deposits and rate based savings preferences of
customers during fiscal 1997. The weighted average rate paid on deposits for
fiscal 1997 of 5.30% was the same as in fiscal 1996. See "Average Balances,
Interest Rates and Yields" and "Rate/Volume Analysis."
<PAGE>
Net Interest Income. Net interest income increased approximately
$334,000 or 3.7%, from $9.1 million for the year ended September 30, 1996 to
$9.5 million for the year ended September 30, 1997. This increase was
attributable to the increase in interest income which more than offset the
increase in interest expense as previously discussed. The Company's interest
rate spread increased from 2.13% during fiscal 1996 to 2.23% during fiscal 1997.
The increase in the interest rate spread during the fiscal year reflected a
general increase in market spreads.
Provision for Loan Losses. The provision for loan losses for the year
ended September 30, 1997 was $2,400 compared to $13,200 in the prior year, a
decrease of $10,800. The decrease in the provision for loan losses for fiscal
1997 was based on, among other things, the continued low levels of credit risk
inherent in the Company's loan portfolio and the current balance of the
allowance for loan losses. At September 30, 1997 the Company's allowance for
loan losses totaled $1.4 million or .49% of net loans receivable and 622.88% of
total non-performing loans. In management's assessment,
6
<PAGE>
continued growth in the Company's residential loan portfolio has not
significantly raised anticipated risk exposures nor impaired the Company's
ability to absorb future loan losses.
In establishing its allowance, the Company also considers the level of
its classified and non-performing assets and their estimated value, 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, the regulators'
view of adequate reserve levels for the thrift industry, and the Company's
historically low loan losses and the levels of the allowance for loan losses
established by the Company's peers in assessing the adequacy of the loan loss
allowance. Accordingly, the calculation of the adequacy of the allowance for
loan losses is not based solely on the level of non-performing loans. The
Company had no loan losses in fiscal 1997.
The Company will continue to monitor its allowance for loan losses and
make future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although the Company maintains its allowance for
loan losses at a level which it considers to be adequate to provide for
potential 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, the Company's determination as to the
amount of its allowance for loan losses is subject to review by the OTS as part
of their examination process, which may result in the establishment of
additional allowances based upon their judgment of the information available to
them at the time of their examination.
Noninterest Income. Noninterest income increased from $231,000 in
fiscal 1996 to $247,000 in fiscal 1997. The increase was primarily the result of
increases in service charges and fees. There were no sales of interest earning
assets during fiscal 1997.
Noninterest Expense. Noninterest expense decreased $1.6 million or
25.0%, from $6.4 million in fiscal 1996 to $4.8 million in fiscal 1997. Of the
decrease, $1.6 million was attributable in fiscal 1996 to the special SAIF
assessment by the FDIC. Noninterest expense without the foregoing non-recurring
item would have increased approximately $23,000 or 0.3%, from fiscal 1996 to
fiscal 1997.
Increased compensation and benefit expenses of $214,000 from fiscal
1996 to 1997 were primarily due to costs associated with the fair market value
expense on ESOP shares and general cost of living increases. Net occupancy and
equipment expense increased $63,000 in fiscal 1997 primarily due to the opening
of the Bank's ninth office in late 1996 and the associated operating and
depreciation expenses incurred in the fiscal year. Other expenses increased by a
modest $36,000 in the current fiscal year.
Income Tax Expense. Income tax expense increased from $1.3 million in
fiscal 1996 to $2.1 million in fiscal 1997, as a result of higher pretax
earnings for the period. Included in the tax expense for fiscal 1996 was the tax
benefit associated with the special SAIF assessment, which effectively lowered
the Company's tax liability by $650,000.
7
<PAGE>
Average Balances, Interest Rates and Yields
<TABLE>
<CAPTION>
At
September 30, For the Year Ended September 30,
------------------ --------------------------------------------------------------
1998 1998 1997
------------------ ----------------------------- ----------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Interest-earning deposits................. $ 21,723 5.09% $ 14,122 $ 680 4.82% $ 17,097 $ 897 5.25%
Investment securities..................... 17,161 6.67 26,044 1,748 6.71 39,153 2,728 6.97
Loans..................................... 324,188 7.43 305,218 23,342 7.65 265,704 20,618 7.76
FHLB stock................................ 2,782 8.03 2,603 209 8.02 2,252 179 7.95
-------- -------- -------- -------- --------
Total interest-earning assets........... 365,854 7.26 347,987 25,979 7.47 324,206 24,422 7.53
Noninterest-earning assets................. 6,575 6,180 6,854
-------- -------- --------
Total assets............................ 372,429 354,167 331,060
-------- -------- --------
Interest-Bearing Liabilities:
Savings accounts.......................... 15,725 2.22 15,851 405 2.56 15,939 455 2.85
NOW and money market accounts............. 65,632 3.58 62,486 2,311 3.70 43,344 1,374 3.17
Certificates of deposits.................. 234,641 5.87 225,755 13,415 5.94 222,889 13,134 5.89
FHLB Advances............................. 9,000 5.34 1,750 92 5.26 --- --- ---
-------- -------- -------- -------- --------
Total interest-bearing liabilities....... 324,998 5.21 305,842 16,223 5.30 282,172 14,963 5.30
Noninterest-bearing liabilities........... 6,393 5,231 3,893
-------- -------- --------
Total liabilities....................... 331,391 311,073 286,065
Shareholders' equity...................... 41,038 42,716 44,995
-------- -------- --------
Total liabilities and retained earnings.. 372,429 353,789 331,060
-------- -------- --------
Net interest-earning assets................ $ 40,856 $ 42,145 $ 42,034
======== ======== ========
Net interest income........................ $ 9,756 $ 9,459
======= =======
Interest rate spread(1).................... 2.05% 2.17% 2.23%
Net yield on weighted average interest-
earning assets(2)......................... 2.80% 2.92%
Average interest-earning assets to
average interest-bearing liabilities...... 113.78% 114.92%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended September 30,
----------------------------------
1996
----------------------------------
<S> <C> <C> <C>
Interest-Earning Assets:
Interest-earning deposits.................. $ 17,927 $ 1,009 5.63%
Investment securities...................... 57,479 3,627 6.31
Loans...................................... 231,047 18,119 7.84
FHLB stock................................. 2,008 158 7.87
Total interest-earning assets............ 308,461 22,913 7.43
-------
Noninterest-earning assets.................. 6,184
--------
Total assets............................. 314,645
--------
Interest-Bearing Liabilities:
Savings accounts........................... 16,981 482 2.84
NOW and money market accounts.............. 20,819 382 1.83
Certificates of deposits................... 222,219 12,923 5.82
FHLB Advances.............................. -------- -------
Total interest-bearing liabilities........ 260,019 13,787 5.30
-------
Noninterest-bearing liabilities............ 3,606
--------
Total liabilities........................ 263,625
Shareholders' equity....................... 51,020
--------
Total liabilities and retained earnings... 314,645
--------
Net interest-earning assets................. $ 48,442
========
Net interest income......................... $ 9,126
=======
Interest rate spread(1)..................... 2.13%
Net yield on weighted average interest-
earning assets(2).......................... 2.96%
Average interest-earning assets to
average interest-bearing liabilities....... 118.63%
</TABLE>
- ----------------
(1) Net interest rate spread is calculated by subtracting combined weighted
average interest rate paid from combined weighted average interest rate
earned for the period indicated. Net interest rate spread must be
considered in light of the relationship between the amounts of
interest-earning assets and interest-bearing liabilities. Since the
Company's interest-earning assets exceeded its interest-bearing liabilities
for each of the three years shown above, a positive interest rate spread
resulted in net interest income.
(2) The net yield on average interest-earning assets is calculated by dividing
net interest income by total interest-earning assets for the period
indicated. No net yield figure is presented at September 30, 1998, because
the computation of net yield is applicable only over a period rather than
at a specific date.
<PAGE>
Rate/Volume Analysis
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in rate (changes in rate multiplied by old volume) and (2) changes
in volume (changes in volume multiplied by old rate). Changes attributable to
both rate and volume that cannot be segregated have been allocated
proportionally to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
-------------------------------------- --------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
--------------------- Increase ---------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits ... $ (147) $ (70) $ (217) $ (45) $ (67) $ (112)
Investment securities ....... (883) (97) (980) (1,247) 348 (899)
Loans ....................... 3,026 (302) 2,724 2,691 (192) 2,499
FHLB stock .................. 28 2 30 19 2 21
------- ------- ------- ------- ------- -------
Total ..................... $ 2,024 $ (467) $ 1,557 $ 1,418 $ 91 $ 1,509
======= ======= ------- ======= ======= -------
Interest-bearing liabilities:
Savings accounts ............ $ (2) $ (48) $ (50) $ (30) $ 3 $ (27)
NOW and money market accounts 680 257 937 593 399 992
Certificates of deposit ..... 170 111 281 39 172 211
-------
FHLB Advances ............... 92 -- 92 39 172 211
------- ------- ------- ------- ------- -------
Total ..................... $ 940 $ 320 $ 1,260 $ 602 $ 574 $ 1,176
======= ======= ------- ======= ======= -------
Change in net interest income $ 297 $ 333
======= =======
</TABLE>
<PAGE>
Asset/Liability Management and Market Risk
As described in "Results of Operation", the Company derives its income
primarily from the excess of interest collected over interest paid. The rates of
interest the Company earns on assets and pays on liabilities generally are
established contractually for a period of time. Market interest rates change
over time. Accordingly, the Company's results of operations, like those of many
financial institution holding companies are impacted by changes in interest
rates and the interest rate sensitivity of its assets and liabilities. The risk
associated with changes in interest rates and the Company's ability to adapt and
respond to these changes is known as interest rate risk. Interest rate risk is
the Company's significant market risk.
In attempt to manage the Company's exposure to interest rate risk, the
Company continually analyzes and manages assets and liabilities based on payment
streams and interest rates, the timing of maturities, and the sensitivity to
actual or potential changes in market interest rates. The Bank, like other
financial institutions, recognizes that it is subject to interest rate risk to
the extent that its interest-bearing liabilities with short- and
intermediate-term maturities reprice more rapidly, or on a different basis, than
its interest-earning assets. Management of the Bank believes it is important to
recognize the relationship between interest rates and the effect on the Bank's
net portfolio value ("NPV"). This approach calculates the difference between the
present value of expected cash flows from assets and the present value of
expected cash flows from liabilities, as well as cash flows from off-balance
sheet contracts. Management of the Bank's assets and liabilities is done
9
<PAGE>
within the context of the market place, but also within limits established by
the Board of Directors on the amount of change in NPV which is acceptable given
certain interest rate changes.
At September 30, 1998, a change in the interest rate of positive 200
basis points would have resulted in a 1.95% decrease in the NPV as a percent of
the present value of the Bank's assets, while a change in the interest rate of
negative 200 basis points would have resulted in a 0.56% decrease in the NPV as
a percent of the present value of the Bank's assets. Under proposed Office of
Thrift Supervision regulations, the Bank's level of interest rate risk exposure
would have been considered normal.
Presented in the following table, as of September 30, 1998, is an
analysis of the Bank's interest rate risk as measured by changes in NPV as
calculated by the Office of Thrift Supervision for instantaneous and sustained
parallel shifts in the yield curve in 100 basis point increments up and down 400
basis points and compared to Board policy limits. As illustrated in the table,
NPV is more sensitive to rising rates than declining rates. This occurs
principally because, as rates rise, the market value of fixed-rate loans
declines due to both the rate increase and slowing prepayments. When rates
decline, the Bank does not experience a significant rise in market value for
these loans because borrowers prepay at relatively high rates. OTS assumptions
are used in calculating the amounts in this table.
<TABLE>
<CAPTION>
At September 30, 1998
Change in ---------------------
Interest Rate Board Limit Estimated Amount Percent
(Basis Points) Percent Change NPV Change Change
-------------- -------------- --- ------ ------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
+400 bp -60% $15,756 $-21,435 -58%
+300 bp -45 22,251 -14,940 -40
+200 bp -29 28,568 - 8,623 -23
+100 bp -13 33,939 - 3,252 - 9
0 bp --- 37,191 --- ---
-100 bp - 2 36,870 - 321 - 1
-200 bp - 6 35,766 - 1,425 - 4
-300 bp -10 35,410 - 1,781 - 5
-400 bp -14 35,324 - 1,867 -5
</TABLE>
The Bank has structured its assets and liabilities in an attempt to
maintain interest rate risk at a level deemed acceptable by the Board. The Board
reviews the OTS measurements as well as the Bank's own results from modeling
performed on a quarterly basis. In addition to monitoring selected measures on
NPV, management also monitors effects on net interest income resulting from
increases or decreases in rates. This measure is used in conjunction with NPV
measures to identify excessive interest rate risk. 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 manages interest rate risk by
applying the following policies:
<PAGE>
Promoting adjustable rate mortgages. Adjustable rate mortgages ("ARMs")
have been historically viewed by management as a viable option for managing
interest rate exposure. The Company focuses lending efforts toward offering
competitively priced adjustable rate loan products as an alternative to more
traditional fixed rate mortgage loans. The Company offers a wide variety of
adjustable rate loan products that reprice as frequently as every year or can be
fixed for a term of up to seven years and adjust yearly thereafter.
Originating 10, 15 and 20 year fixed rate mortgages. By retaining these
mortgages in the loan portfolio, and selling mortgages with terms of 30 years,
management can reduce its interest rate exposure. Loans with maturities of 30
years are currently classified as held for sale by the Company at origination.
The Company retains the servicing on loans sold in the secondary market.
Emphasizing long-term deposits. The Company's cost of funds responds to
changes in interest rates due to the relatively short-term nature of its deposit
portfolio. Consequently, the results of operations are influenced by the levels
of short-term interest rates. The Company offers a range of maturities on its
deposit products at competitive rates and concentrates a portion of its
advertising and promotional campaigns on attracting longer-term deposit
products. It also
10
<PAGE>
monitors the maturities on an ongoing basis.
Actively managing liquidity position. Management actively manages the
Company's liquidity position in anticipation of changing interest rate exposure.
The primary objective of the Company's investment strategy is to provide
liquidity necessary to meet funding needs as well as address daily, cyclical and
long-term changes in the asset/liability mix while contributing to profitability
by providing a stable flow of dependable earnings. Generally, the Company
invests funds based on its liquidity needs and to achieve the proper balance
between the desire to minimize risk and maximize yield to fulfill its
asset/liability management policies.
Actively marketing short-term home equity loans. Short-term home equity
lines of credit and home improvement loans offer higher yields while lowering
interest rate exposure through their relatively short-term maturities.
In evaluating the Bank's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities for periods of re-pricing, they may react in different
degrees to changes in market interest rates. Also, 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. Furthermore, in the event of a change in interest rates,
prepayments and early withdrawal level would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debts may decrease in the event of an interest rate increase.
As a result, the actual effect of changing interest rates may differ from that
presented in the foregoing table.
Liquidity And Capital Resources
The Bank's primary sources of funds are deposits, principal and
interest payments on loans and maturities of investment securities. While
maturities of securities and scheduled amortizations of loans are a predictable
source of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition.
Federal regulations require the Bank to maintain minimum levels of
liquid assets. The required percentage has varied from time to time based upon
economic conditions and savings flows. As of September 30, 1998, was 4% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. Government, government agency
and other securities and obligations generally having remaining maturities of
less than five years. The Bank has maintained its liquidity ratio at levels in
excess of those required. At September 30, 1998, the Bank's liquidity ratio was
9.7% compared to 16.0% and 22.9% at September 30, 1997 and 1996.
Management structures the liquid asset portfolio of the Bank to meet
the cash flow needs of operating, investing and financing activities. Cash flows
provided by operating activities, consisting primarily of interest received on
loans and investments less interest paid on deposits, were $5.3 million, $3.9
million, and $4.3 million for the years ended September 30, 1998, 1997 and 1996,
respectively. Net cash flows used for investing activities, consisting primarily
of disbursements for loan originations and investments purchased offset by
principal collections on loans and proceeds from the sales and maturity of
investments, were $19.7 million, $19.6 million, and $19.4 million for the years
ended September 30, 1998, 1997 and 1996, respectively. Net cash provided by
<PAGE>
financing activities, consisting primarily of net deposit activity and FHLB
advances that were offset by treasury share purchases, was $21.3 million, $20.2
million, $5.6 million for the years ended September 30, 1998, 1997 and 1996,
respectively. If the Bank requires additional funds beyond its ability to
acquire them locally, it has borrowing capability through the FHLB of
Indianapolis. At September 30, 1998, the Bank had $9.0 million in advances from
the FHLB of Indianapolis. Prior to fiscal 1998 the Bank had not had advances or
other borrowings outstanding since 1983.
The Bank uses its liquidity resources principally to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals
and to meet operating expenses. The Bank anticipates that it will have
sufficient funds available to meet current loan commitments. At September 30,
1998, the Bank had outstanding commitments to extend credit which amounted to
$22.4 million (including $12.3 million in unused lines of credit). Management
believes that loan repayments and other sources of funds will be adequate to
meet the Bank's foreseeable liquidity needs.
11
<PAGE>
At September 30, 1998, the Bank had tangible and core capital of $33.8
million, or 9.23% of adjusted total assets, which was approximately $28.3
million and $22.8 million above the minimum requirements of 1.5% and 3.0%,
respectively, of the adjusted total assets in effect on that date. The Bank had
risk-based capital at September 30, 1998 of $35.2 million (including $33.8
million in core capital), or 18.97% of risk-weighted assets of $185.7 million.
This amount was $20.3 million above the 8.0% requirement in effect on that date.
The Company also has a need for, and sources of, liquidity. Liquidity
is required to fund operating expenses, stock repurchase programs, as well as
the payments of any dividends to shareholders. The primary source of liquidity
for the Company on an ongoing basis is dividends from the Bank. During 1998, the
Bank paid dividends in the amount of $2,714,000 to the Company. This amount
represented the transfer of 100 percent of the Bank's net income. In addition,
the Company has access to public debt and equity markets. The Company currently
has no significant liquidity commitments as its operating costs are modest and
dividends on common stock are discretionary.
Uses and Sources of Funds
During the year ended September 30, 1998, there was a net increase of
$6.9 million in cash and cash equivalents, as major sources of funds offset the
uses of cash. Primary uses of cash during the fiscal year 1998 included funding
an increase of $40.2 million in the loan portfolio, the repurchase of $6.4
million in treasury shares, and the purchase of $4.0 million in securities. The
major source of funds included $25.3 million from the sale or maturity of
securities, a $18.5 million increase in deposits, and $9.0 million in advances
from the FHLB of maturities from 30 days to ten years. The Company paid a total
of $0.31 per share on common stock, or a total of $673,000 to its shareholders
during fiscal 1998.
During the year ended September 30, 1997, there was a net increase of
$4.5 million in cash and cash equivalents, as major sources of funds offset the
uses of cash. Primary uses of cash during the fiscal year 1997 included funding
an increase of $33.7 million in the loan portfolio, the repurchase of $6.1
million in treasury shares, and the purchase of $15.1 million in securities. The
major source of funds included $30.0 million from maturity of securities and a
$26.3 million increase in deposits. The Company paid a total of $0.20 per share
on common stock, or a total of $477,000 to its shareholders during fiscal 1997.
During the year ended September 30, 1996, there was a net decrease of
$9.5 million in cash and cash equivalents, as uses offset sources of funds.
Primary uses of cash during the fiscal year 1996 included funding an increase of
$35.9 million in the loan portfolio, the repurchase of $9.3 million in treasury
shares, and the repurchase of $6.1 million in securities. The major source of
funds included $23.0 million from the maturity and sales of securities and a
$15.0 million increase in deposits. The Company paid a total of $0.10 per share
on common stock, or a total of $264,000 to its shareholders during fiscal 1996.
Year 2000 Compliance
General. The Year 2000 (the "Y2K") issue confronting the Bank and its
suppliers, customers, and competitors centers on the inability of computer
systems to recognize the year 2000. Many existing computer programs and systems
originally were programmed with only two digits to identify the calendar year.
With the impending new millennium, these programs and computers could recognize
"00" as the year 1900 rather than the year 2000.
<PAGE>
Risk. Like most financial institutions, the Bank and its operations may
be significantly affected by the Y2K issue due to its dependency on technology
and date-sensitive data. Computer software and hardware and other equipment,
both within and outside the Bank's direct control, including the Bank's
dependency on data processing capabilities from NCR Corporation and other third
parties with whom the Bank electronically or operationally interfaces may be
affected. If computer systems are not modified and tested properly to process
the year 2000, many computer applications could fail or create erroneous
results. As a result, many calculations which rely on date filled information,
such as interest, payment or due dates and other operating functions, could
generate results which are significantly misstated, and the Bank could
experience an inability to process transactions, prepare statements or engage in
similar normal business activities. Thus if not adequately addressed, the Y2K
issue could have an adverse impact on the Bank's operations and, in turn, its
financial condition and results of operations.
Systematic Review. Financial institution regulators have placed
significant emphasis upon Y2K compliance issues and have issued guidance
concerning the responsibilities of senior management and directors. The federal
bank regulatory agencies have stressed the adoption of specific steps to achieve
Y2K compliance. The Federal Financial Institutions
12
<PAGE>
Examination Council (the "FFIEC"), of which the Office of Thrift Supervision is
a member, has designed an outline for institutions to use in effectively
managing the Y2K challenge. Those phases include:
Awareness Phase. Define the problem and obtain executive level support
for the resources necessary to perform compliance work. Develop an overall
strategy that covers in-house systems, service bureaus, vendors, auditors,
customers, and suppliers.
Assessment Phase. Assess the size and the complexity of the problem,
including identifying all systems that will be affected by the year 2000.
Identification of needs and the prioritization of work based upon risk.
Renovation Phase. Undertake the reworking, replacement , or
modification of systems based upon priorities. Monitor servicers' progress.
Validation Phase. Testing and verification of changes to systems.
Simulate critical date changes. Verification of exchanges of information between
servicers.
Implementation Phase. Use of renovated systems. Monitoring of critical
systems and contingency plans.
State of Readiness. During December 1997, the Bank formulated its plan
to address the Y2K issue. Since that time, the Bank has established timeframes,
taken specific steps, and developed contingencies in regards to the issue. The
Bank has explicitly followed regulatory guidance. The following paragraphs
summarize the Bank's progress to date as illustrated by the FFIEC specified
phases:
Awareness Phase. The Bank established a formal Y2K plan headed by an
executive officer, and a project team for the management of the issue. A plan of
action was developed with the support of the Board of Directors that included
milestones, budget estimates, strategies, and methodologies to track and report
the status of the project. This phase is substantially complete.
Assessment Phase. The Bank's strategies were further developed with
respect to how the objectives of the Y2K plan would be achieved, and a business
risk assessment was made to quantify the extent of the Bank's Y2K exposure. A
corporation inventory was developed to identify and monitor readiness for
information systems (hardware, software, utilities and vendors) as well as
environmental systems. Systems were prioritized based upon business impact and
available alternatives. A formal plan was developed to replace, repair, or
upgrade all mission critical systems. This phase is substantially complete.
Because the Bank's loan portfolio is primarily residential real estate
based and is diversified with individual borrowers, and the Bank's primary
market area is not significantly dependent on one employer or industry, the Bank
does not expect any significant or prolonged Y2K related difficulties that will
affect net earnings or cash flow. As part of the current credit approval
process, all residential loan applications over $300,000 by self-employed
individuals are evaluated for Y2K risk as are all commercial loan applications.
Renovation Phase. In recognition of potential Y2K problems, the Bank
delayed significant hardware and software purchases until this fiscal year. The
Bank has replaced or renovated virtually all of its hardware systems and updated
or replaced most of its software systems. Y2K compliant equipment and software
has been delivered and placed into production and is either in the validation or
<PAGE>
implementation phase of the plan. The Bank has invested approximately $500,000
in new computers, communication, and software purchases. Approximately, $140,000
in charges associated with Y2K were also expensed as non-recurring charges
during the fiscal year.
Validation and Implementation Phases. These phases are designed to test
the ability of the systems to accurately process date sensitive data. The Bank
has completed or is in the process of validating all of the its mission critical
applications. These phases are expected to be fully completed by March 31, 1999.
Continency Plans. The Bank has also developed a plan that recognizes
that certain contingencies may undermine preparations to date. The plan
addresses the viability of certain processes, including data and information
processing, that could be threatened by circumstances beyond the Bank's direct
or even recognizable control. The Bank's contingency plan attempts to provide
thoughtful analysis of issues and circumstances, and provide substantive plans
of action in the event of system failures.
13
<PAGE>
While the Bank does not, nor can it make representation that it will
not be susceptible to Y2K problems, the Bank has expended tremendous energies
and resources to the issue. The Bank has attempted to identify its exposures and
to respond to them.
Impact Of Inflation
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Nearly
all the assets and liabilities of the Company are financial, unlike most
industrial companies. As a result, the Company's performance is directly
impacted by changes in interest rates, which are indirectly influenced by
inflationary expectations. The Company's ability to match the interest
sensitivity of its financial assets to the interest sensitivity of its financial
liabilities in its asset/liability management may tend to minimize the effect of
changes in interest rates on the Company's performance. Changes in interest
rates do not necessarily move to the same extent as do changes in the prices of
goods and services.
Forward-Looking Statements
The Company and the Bank may from time to time make written or oral
"forward-looking statements", including statements contained in the Company's
filings with the Securities and Exchange Commission (including Exhibits
thereto), in its reports to shareholders and in other communications by the
Company, which are made in good faith by the Company and the Bank pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include statements with respect to the
Company's and the Bank's beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions, that are subject to significant risks
and uncertainties, and are subject to change based on various factors (some of
which are beyond the Company's and Bank's control). The words "may", "could",
"should", "would", "believe", "anticipate", "estimate", "expect", "intend",
"plan" and similar expressions are intended to identify forward-looking
statements. The following factors, among others, could cause the Company's and
the Bank's financial performance to differ materially from the plans,
objectives, expectations, estimates and intentions expressed in such
forward-looking statement: the strength of the United States economy in general
and the strength of the local economies in which the Company and Bank conduct
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve Board;
inflation, interest rate, market and monetary fluctuations; the timely
development of and acceptance of new products and services of the Bank and the
perceived overall value of thee products and services; the willingness of users
to substitute competitors' products and services for the Bank's products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Company and the Bank at managing risks
involved in the foregoing.
The foregoing list of important factors is not exclusive. The Company
does not undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time by or on behalf of the Company or the
Bank.
14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Home Bancorp
Fort Wayne, Indiana
We have audited the accompanying consolidated balance sheets of Home Bancorp as
of September 30, 1998 and 1997 and the related consolidated statements of
income, changes in shareholders' equity and cash flows for the years ended
September 30, 1998, 1997 and 1996. 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 Home Bancorp as of
September 30, 1998 and 1997 and the results of its operations and its cash flows
for the years ended September 30, 1998, 1997 and 1996 in conformity with
generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
October 21, 1998
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash on hand and in other banks ............................ $ 1,643,168 $ 1,282,926
Federal funds sold ......................................... 10,000,000 7,000,000
Interest-earning deposits in other banks ................... 11,722,658 8,162,372
------------- -------------
Total cash and cash equivalents ....................... 23,365,826 16,445,298
Securities available for sale .............................. 5,137,187 11,126,562
Securities held to maturity (fair value:
1998 - $12,195,000 and 1997 - $27,214,000) ............... 12,024,247 26,954,555
Loans receivable, net of allowance for loan losses:
1998 - $1,390,389 and 1997 - 1,387,989................... 324,187,601 283,986,922
Federal Home Loan Bank stock ............................... 2,782,500 2,449,100
Accrued interest receivable ................................ 1,948,771 2,049,564
Premises and equipment, net ................................ 2,804,550 2,710,492
Other assets ............................................... 178,303 318,809
------------- -------------
Total assets .......................................... $ 372,428,985 $ 346,041,302
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Non-interest-bearing demand deposits .................. $ 5,754,398 $ 4,048,663
Savings, NOW and MMDA deposits ........................ 75,602,517 72,876,749
Certificates of deposit ............................... 234,641,189 220,567,213
------------- -------------
Total deposits .................................... 315,998,104 297,492,625
Federal Home Loan Bank advances ....................... 9,000,000 --
Advances from borrowers for taxes and insurance ....... 2,597,387 2,092,412
Accrued expenses and other liabilities ................ 3,795,215 2,465,213
------------- -------------
Total liabilities ................................. 331,390,706 302,050,250
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Shareholders' equity
Preferred stock, no par value; 5,000,000 shares
authorized; none issued ............................. -- --
Common stock, no par value; 10,000,000 shares
authorized; 1998 - 3,380,315 shares issued
and 2,254,642 shares outstanding; 1997 - 3,381,305
shares issued and 2,467,238 shares outstanding ...... 34,399,134 33,985,413
Retained earnings, substantially restricted ........... 29,851,665 27,618,839
Net unrealized appreciation on securities
available for sale, net of tax of $33,110 in 1998 and
$26,284 in 1997 ..................................... 64,273 51,021
Unearned Employee Stock Ownership Plan shares ......... (1,536,908) (1,769,379)
Unearned Recognition and Retention Plan shares ........ (466,130) (714,294)
Treasury stock at cost, 1,125,673 and 914,067 common
shares at 1998 and 1997, respectively ............... (21,273,755) (15,180,548)
------------- -------------
Total shareholders' equity ........................ 41,038,279 43,991,052
------------- -------------
Total liabilities and shareholders' equity ........ $ 372,428,985 $ 346,041,302
============= =============
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income
Loans receivable, including fees
Mortgage loans ....................... $22,407,485 $19,820,186 $17,463,746
Consumer and other loans ............. 934,504 798,484 655,700
Securities ............................... 1,747,735 2,728,399 3,626,283
Other .................................... 889,770 1,075,643 1,167,304
----------- ----------- -----------
25,979,494 24,422,712 22,913,033
Interest expense
Deposits ................................. 16,130,669 14,963,252 13,787,143
Federal Home Loan Bank advances .......... 92,112 -- --
----------- ----------- -----------
16,222,781 14,963,252 13,787,143
Net interest income ........................... 9,756,713 9,459,460 9,125,890
Provision for loan losses ..................... 2,400 2,400 13,200
----------- ----------- -----------
Net interest income after provision
for loan losses ............................. 9,754,313 9,457,060 9,112,690
Noninterest income
Gains on sales of interest-earning
assets, net ............................ 108,406 -- 3,550
Other .................................... 247,664 246,713 227,024
----------- ----------- -----------
356,070 246,713 230,574
Noninterest expense
Employee compensation and benefits ....... 3,087,945 2,725,691 2,511,718
Occupancy and equipment .................. 729,436 591,127 528,360
Federal deposit insurance premium ........ 185,957 251,594 2,235,132
Other .................................... 1,008,989 1,187,017 1,150,883
----------- ----------- -----------
5,012,327 4,755,429 6,426,093
Income before income taxes .................... 5,098,056 4,948,344 2,917,171
Income tax expense ............................ 2,192,056 2,055,344 1,281,171
----------- ----------- -----------
Net income .................................... $ 2,906,000 $ 2,893,000 $ 1,636,000
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Earnings per common and
common equivalent share
Basic earnings per common share .......... $ 1.32 $ 1.20 $ 0.57
=========== =========== ===========
Diluted earnings per common share ........ $ 1.28 $ 1.18 $ 0.57
=========== =========== ===========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
HOME BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 1998, 1997 and 1996
Net Unrealized Unearned
Appreciation on Employee
Securities Stock
Common Retained Available For Ownership
Stock Earnings Sale, Net of Tax Plan Shares
------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balances at October 1, 1995 $ 32,445,205 $ 23,831,000 $ $ (2,215,753)
Cash dividends declared on common stock - $.10 per share (263,947)
23,237 shares committed to be released under the ESOP 118,525 214,576
78,327 shares issued under the RRP 1,194,487
Amortization of RRP contribution
Purchase 619,155 shares of treasury stock
Net change in unrealized appreciation on
securities available for sale, net of tax of $1,608 3,124
Net income for the year ended September 30, 1996 1,636,000
------------- -------------- -------------- ---------------
Balances at September 30, 1996 33,758,217 25,203,053 3,124 (2,001,177)
Cash dividends declared on common stock - $.20 per share (477,214)
22,590 shares committed to be released under the ESOP 224,687 231,798
Cancellation of 200 RRP shares (3,050)
Amortization of RRP contribution
Issuance of 14,824 common shares from treasury stock
due to exercise of stock options 5,559
Purchase 309,736 shares of treasury stock
Net change in unrealized appreciation on securities
available for sale, net of tax of $24,676 47,897
Net income for the year ended September 30, 1997 2,893,000
------------- -------------- -------------- ---------------
Balances at September 30, 1997 33,985,413 27,618,839 51,021 (1,769,379)
Cash dividends declared on common stock - $.31 per share (673,174)
21,504 shares committed to be released under the ESOP 420,147 232,471
Cancellation of 990 RRP shares (15,098)
Amortization of RRP contribution
Issuance of 23,125 common shares from treasury stock
due to exercise of stock options 8,672
Purchase 234,731 shares of treasury stock
Net change in unrealized appreciation on securities
available for sale, net of tax of $6,826 13,252
Net income for the year ended September 30, 1998 2,906,000
------------- -------------- -------------- ---------------
Balances at September 30, 1998 $ 34,399,134 $ 29,851,665 $ 64,273 $ (1,536,908)
============= ============== ============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unearned
Recognition Total
and Retention Treasury Shareholders'
Plan Shares Stock Equity
--------------- ---------------- --------------
<S> <C> <C> <C>
Balances at October 1, 1995 $ $ $ 54,060,452
Cash dividends declared on common stock - $.10 per share (263,947)
23,237 shares committed to be released under the ESOP 333,101
78,327 shares issued under the RRP (1,194,487) -
Amortization of RRP contribution 238,898 238,898
Purchase 619,155 shares of treasury stock (9,294,413) (9,294,413)
Net change in unrealized appreciation on
securities available for sale, net of tax of $1,608 3,124
Net income for the year ended September 30, 1996 1,636,000
-------------- --------------- --------------
Balances at September 30, 1996 (955,589) (9,294,413) 46,713,215
Cash dividends declared on common stock - $.20 per share (477,214)
22,590 shares committed to be released under the ESOP 456,485
Cancellation of 200 RRP shares 3,050 -
Amortization of RRP contribution 238,245 238,245
Issuance of 14,824 common shares from treasury stock
due to exercise of stock options 220,507 226,066
Purchase 309,736 shares of treasury stock (6,106,642) (6,106,642)
Net change in unrealized appreciation on securities
available for sale, net of tax of $24,676 47,897
Net income for the year ended September 30, 1997 - 2,893,000
-------------- --------------- --------------
Balances at September 30, 1997 (714,294) (15,180,548) 43,991,052
Cash dividends declared on common stock - $.31 per share (673,174)
21,504 shares committed to be released under the ESOP 652,618
Cancellation of 990 RRP shares 15,098 -
Amortization of RRP contribution 233,066 233,066
Issuance of 23,125 common shares from treasury stock
due to exercise of stock options 343,984 352,656
Purchase 234,731 shares of treasury stock (6,437,191) (6,437,191)
Net change in unrealized appreciation on securities
available for sale, net of tax of $6,826 13,252
Net income for the year ended September 30, 1998 2,906,000
-------------- --------------- --------------
Balances at September 30, 1998 $ (466,130) $ (21,273,755) $ 41,038,279
============== =============== ==============
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
HOME BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ......................................... $ 2,906,000 $ 2,893,000 $ 1,636,000
Adjustments to reconcile net income
to net cash from operating activities
Depreciation ..................................... 338,956 208,661 181,463
Provision for loan losses ........................ 2,400 2,400 13,200
Gain on sale of securities ....................... (108,406) -- (1,438)
Gain on sale of loans ............................ -- -- (2,112)
Loans originated for sale ........................ -- -- (123,500)
Proceeds from loan sales ......................... -- -- 125,612
ESOP expense ..................................... 652,618 456,485 333,101
Amortization of RRP contribution ................. 233,066 238,245 238,898
Loss on disposal of premises and equipment ....... 8,609 770 --
Securities amortization and accretion, net ....... (253,523) (72,753) 127,892
Change in
Accrued interest receivable .................... 100,793 210,935 421,114
Accrued expenses and other liabilities ......... 1,296,892 (451,160) 1,698,342
Other assets ................................... 166,790 432,777 (317,673)
------------ ------------ ------------
Net cash from operating activities ........... 5,344,195 3,919,360 4,330,899
Cash flows from investing activities
Proceeds from maturities of securities held to
maturity ......................................... 15,000,000 30,000,000 21,000,000
Proceeds from sales of securities available for sale 10,286,815 -- 2,032,376
Purchase of securities available for sale .......... (3,985,125) (7,084,219) (5,992,813)
Purchase of securities held to maturity ............ -- (8,063,750) --
Purchase of Federal Home Loan Bank stock ........... (333,400) (394,900) (86,700)
Net change in loans ................................ (40,203,079) (33,683,676) (35,914,093)
Purchase of premises and equipment ................. (441,623) (325,006) (444,394)
------------ ------------ ------------
Net cash from investing activities ............... (19,676,412) (19,551,551) (19,405,624)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits ............................. 18,505,479 26,307,158 15,077,412
Advances from Federal Home Loan Bank ............... 9,000,000 -- --
Increase in advance payments by
borrowers for taxes and insurance ................ 504,975 205,553 88,514
Purchase of treasury stock ......................... (6,437,191) (6,106,642) (9,294,413)
Cash dividends paid ................................ (673,174) (477,214) (263,947)
Proceeds from exercise of stock options ............ 352,656 226,066 --
------------ ------------ ------------
Net cash from financing activities ............... 21,252,745 20,154,921 5,607,566
------------ ------------ ------------
Net change in cash and cash equivalents ............... 6,920,528 4,522,730 (9,467,159)
Cash and cash equivalents at beginning of year ........ 16,445,298 11,922,568 21,389,727
------------ ------------ ------------
Cash and cash equivalents at end of year .............. $ 23,365,826 $ 16,445,298 $ 11,922,568
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid for
Interest ......................................... $ 16,076,559 $ 14,942,651 $ 13,763,931
Income taxes ..................................... 1,712,000 1,681,976 1,586,000
</TABLE>
19
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements
include Home Bancorp (the Company), and its wholly-owned subsidiary, Home Loan
Bankfsb (the Bank). All significant intercompany transactions and balances are
eliminated in consolidation.
Nature of Business and Concentrations of Credit Risk: The primary source of
income for the Company is the origination of residential real estate loans in
Fort Wayne, Indiana and the surrounding areas. Loans secured by real estate
mortgages comprise approximately 99% of the loan portfolio at September 30,
1998. The Company accepts deposits from customers in the normal course of
business primarily in Fort Wayne, Indiana and the surrounding areas. The Company
operates in the banking industry which accounts for more than 90% of its
revenues.
Use of Estimates In Preparing Financial Statements: Preparing financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and 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.
Actual results could differ from those estimates. Estimates associated with the
allowance for loan losses and the classification and fair values of securities
and other financial instruments are particularly susceptible to material change
in the near term.
Certain Vulnerability Due to Certain Concentrations: Management is of the
opinion that the Company is not vulnerable to concentrations which have a
potentially significant short-term impact.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash
equivalents is defined to include the Company's cash on hand and in other banks,
federal funds sold, and interest-earning deposits in other financial
institutions with maturities of 90 days or less. The Company reports net cash
flows for customer loan transactions, deposit transactions and advance payments
by borrowers for taxes and insurance.
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. 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.
Gains and losses on the sale of securities are determined using the specific
identification method based on amortized cost and are reflected in results of
operations at the time of sale. Interest and dividend income, adjusted by
amortization of purchase premium or discount over the estimated life of the
security using the level yield method, is included in earnings.
20
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Banking Activities: Mortgage loans originated and intended for sale in
the secondary market are reported as loans held for sale and are carried at the
lower of cost or estimated market value in the aggregate. Net unrealized losses
are recognized in a valuation allowance by charges to income.
Loan servicing fees are recognized when received and the related costs are
recognized when incurred. The Bank sells mortgages into the secondary market at
market prices, which includes consideration for normal servicing fees.
Effective October 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. This
Statement changed the accounting for mortgage servicing rights retained by a
loan originator. Under this standard, if the originator sells or securitizes
mortgage loans and retains the related servicing rights, the total cost of the
mortgage loan is allocated between the loan (without the servicing rights) and
the servicing rights, based on their relative fair values. Under prior practice,
all such costs were assigned to the loan. The costs allocated to mortgage
servicing rights are now recorded as a separate asset and are amortized in
proportion to, and over the life of, the net servicing income. The carrying
value of the mortgage servicing rights are periodically evaluated for
impairment. The effect of adopting the statement was not material.
Loans Receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, and net of deferred loan origination fees, costs
and discounts.
Interest income on loans is accrued over the term of the loan based on the
amount of unpaid principal, except where doubt exists as to the collectibility
of a loan, in which case the accrual of interest is discontinued. The carrying
values of impaired loans are periodically adjusted to reflect cash payments,
revised estimates of future cash flows, and increases in the present value of
expected cash flows due to the passage of time. Cash payments representing
interest income are reported as such. Other cash payments are reported as
reductions in carrying value, while increases or decreases due to changes in
estimates of future payments and due to the passage of time are reported as
adjustments to the provision for loan losses.
Loan Origination Fees and Costs: Loan fees and certain direct loan origination
costs are deferred, and the net fee or cost is recognized using the level yield
method, as an adjustment to interest income over the life of the loan.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. The allowance for loan losses is
increased by a provision for loan losses charged to expense 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 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. While management may periodically allocate portions of the allowance
for specific problem loan situations, the whole allowance is available for any
loan charge-offs that occur.
21
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is less than the unpaid
balance. If these allocations cause the allowance for loan losses to require
increase, such increase is reported in the provision for loan losses.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, automobile, manufactured homes, home
equity and second mortgage loans. Commercial loans and mortgage loans secured by
other properties are evaluated individually for impairment. When analysis of
borrower operating results and financial condition indicates that underlying
cash flows of the borrower's business are not adequate to meet debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments of 30 days or more. Nonaccrual loans are
often also considered impaired. Impaired loans, or portions thereof, are charged
off when deemed uncollectible. The nature of disclosures for impaired loans is
considered generally comparable to prior nonaccrual and renegotiated loans and
non-performing and past due asset disclosures.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure 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, 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.
Income Taxes: The Company records income tax expense based on the amount of
taxes due on its tax return plus deferred taxes 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. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
Premises and Equipment: Land and land improvements are carried at cost.
Buildings, leasehold improvements, and furniture, fixtures, and equipment are
carried at cost, less accumulated depreciation and amortization. Buildings and
furniture, fixtures, and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets. The cost of leasehold
improvements is being amortized using the straight-line method over the terms of
the related leases. These assets are reviewed for impairment under SFAS No. 121
when events indicate the carrying amount may not be recoverable.
Employee Benefits: The Company has a noncontributory defined benefit pension
plan and a defined contribution 401(k) plan, each covering substantially all
employees. The pension plan is funded through a multi-employer defined benefit
plan, on the individual level premium method. The defined contribution plan is a
multi-employer contributory profit sharing plan. The amount of the Company's
contribution is at the discretion of its Board of Directors and is limited to
the amount deductible for federal income tax purposes.
22
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Employee Stock Ownership Plan: The Company accounts for its employee stock
ownership plan (ESOP) in accordance with AICPA Statement of Position (SOP) 93-6.
Under SOP 93-6, the cost of shares issued to the ESOP, but not yet allocated to
participants, is presented in the consolidated balance sheets 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 common stock. Dividends
on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP
shares reduce debt and accrued interest.
Federal Home Loan Bank Stock: 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.
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to make loans which are not reflected in
the financial statements. A summary of these commitments is disclosed in Note
14.
Earnings Per Share: Basic and diluted earnings per common share are computed
under a new accounting standard effective beginning with the quarter ended
December 31, 1997. All prior earnings per common share amounts have been
restated to be comparable. Basic earnings per common share is based on the net
income divided by the weighted average number of common shares outstanding
during the period. ESOP shares are considered outstanding for earnings per
common share calculations as they are committed to be released; unearned shares
are not considered outstanding. Recognition and retention plan ("RRP") shares
are considered outstanding for earnings per common share calculations as they
become vested. Diluted earnings per common share shows the dilutive effect of
additional potential common shares issuable under stock options and nonvested
shares issued under the RRP. Earnings and dividends per common shares are
restated for all stock splits and dividends.
Stock Compensation: Expense for employee compensation under stock option plans
is based on Accounting Principles Board ("APB") Opinion 25, with expense
reported only if options are granted below market price at grant date. If
applicable, disclosures of net income and earnings per share are provided as if
the fair value method of SFAS No.
123 were used for stock-based compensation.
Impact of New Accounting Standards: In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for reporting of
comprehensive income. Comprehensive income is net income plus changes in
unrealized appreciation (depreciation) on securities available for sale, net of
tax. The Company will be required to adopt this statement as of October 1, 1998.
23
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A new accounting standard, SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, will require all derivatives to be recognized at fair
value as either assets or liabilities in the Consolidated Balance Sheets for
fiscal years beginning after June 15, 1999. Changes in the fair value of
derivatives not designated as hedging instruments are to be recognized currently
in earnings. Gains or losses on derivatives designated as hedging instruments
are either to be recognized currently in earnings or are to be recognized as a
component of other comprehensive income, depending on the intended use of the
derivatives and the resulting designations. The Company does not believe
adoption of this new standard will have a material impact on its consolidated
financial position or results of operations.
Reclassifications: Certain amounts in the 1997 and 1996 financial statements
have been reclassified to conform with the 1998 presentation.
NOTE 2 - EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE
A reconciliation of the numerators and denominators used in the computation of
the basic earnings per common share and diluted earnings per common share is
presented below:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per common share
Numerator
Net income ............................... $2,906,000 $2,893,000 $1,636,000
========== ========== ==========
Denominator
Weighted average common shares outstanding 2,396,434 2,642,006 3,136,253
Less: Average unallocated ESOP shares ... 162,199 184,270 207,205
Less: Average non-vested RRP shares ..... 38,842 54,765 70,497
---------- ---------- ----------
Weighted average common shares outstanding
for basic earnings per common share .... 2,195,393 2,402,971 2,858,551
========== ========== ==========
Basic earnings per common share ............ $ 1.32 $ 1.20 $ 0.57
========== ========== ==========
</TABLE>
24
<PAGE>
NOTE 2 - EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Diluted earnings per common share
Numerator
Net income .................................... $2,906,000 $2,893,000 $1,636,000
========== ========== ==========
Denominator
Weighted average common shares outstanding
for basic earnings per common share ......... 2,195,393 2,402,971 2,858,551
Add: Dilutive effects of assumed exercises of
stock options ............................... 76,588 39,213 --
Add: Dilutive effects of average nonvested RRP
shares ...................................... 37 -- --
---------- ---------- ----------
Weighted average common shares and
dilutive potential common shares outstanding 2,272,018 2,442,184 2,858,551
========== ========== ==========
Diluted earnings per common share ............... $ 1.28 $ 1.18 $ 0.57
========== ========== ==========
</TABLE>
NOTE 3 - SECURITIES
Year end securities available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- ---- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Debt securities
U.S. Government $ 5,039,804 $ 97,383 $ -- $ 5,137,187
=========== =========== =============== ===========
1997
Debt securities
U.S. Government $11,049,257 $ 77,305 $ -- $11,126,562
=========== =========== =============== ===========
</TABLE>
Year end securities held to maturity were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- ---- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Debt securities
U.S. Government $12,024,247 $ 170,753 $ -- $12,195,000
=========== =========== =============== ===========
1997
Debt securities
U.S. Government $26,954,555 $ 259,445 $ -- $27,214,000
=========== =========== =============== ===========
</TABLE>
25
<PAGE>
NOTE 3 - SECURITIES (Continued)
The amortized cost and fair value of debt securities by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less .................... $12,037,305 $12,136,875
Due after one year through five years ...... 5,026,746 5,195,312
----------- -----------
$17,064,051 $17,332,187
=========== ===========
</TABLE>
Proceeds from securities available for sale during the year ended September 30,
1998 were $10,286,815; gross gains of $108,406 were realized on these sales.
There were no sales of securities available for sale during the year ended
September 30, 1997. Proceeds from securities available for sale during the year
ended September 30, 1996 were $2,032,376; gross gains of $1,438 were realized on
these sales. No securities classified as held to maturity were transferred to
available for sale during the years ended September 30, 1998 or 1997.
NOTE 4 - LOANS RECEIVABLE
Loans receivable at year end are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Mortgage loans
Principal balances
Secured by one to four family residences $308,626,708 $269,995,150
Secured by other properties ............. 1,715,486 1,856,007
Construction loans ...................... 11,511,693 11,796,566
------------ ------------
321,853,887 283,647,723
Less
Undisbursed portion of construction loans 5,687,860 6,666,049
Net deferred loan origination fees ...... 392,456 337,509
------------ ------------
Total first mortgage loans .......... 315,773,571 276,644,165
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Consumer and other loans
Principal balances
Home equity and second mortgage ......... 8,789,814 7,804,899
Other ................................... 1,259,950 1,133,388
------------ ------------
Total consumer and other loans ...... 10,049,764 8,938,287
Less
Allowance for loan losses .................... 1,390,389 1,387,989
Loans in process ............................. 245,345 207,541
------------ ------------
$324,187,601 $283,986,922
============ ============
</TABLE>
26
<PAGE>
NOTE 4 - LOANS RECEIVABLE (Continued)
Activity in the allowance for loan losses for the years ended September 30 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period .... $1,387,989 $1,385,589 $1,372,357
Provision charged to income ....... 2,400 2,400 13,200
Net recoveries (charge-offs) ...... -- -- 32
---------- ---------- ----------
Balance at end of period .......... $1,390,389 $1,387,989 $1,385,589
========== ========== ==========
</TABLE>
At September 30, 1998 and 1997, no portion of the allowance for loan losses was
allocated to impaired loan balances as the Company had no loans it considered to
be impaired loans as of or for the years ended September 30, 1998 and 1997.
NOTE 5 - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying balance
sheets. The unpaid principal balances at September 30 are as follows:
1998 1997
--------------- --------------
Mortgage loans serviced for FNMA $ 1,955,651 $ 2,531,364
=============== ==============
Custodial escrow balances maintained for this loan servicing were approximately
$24,000 and $28,000 at September 30, 1998 and 1997, respectively.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at September 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and land improvements ................... $ 643,350 $ 643,350
Buildings .................................... 2,557,674 2,554,705
Furniture, fixtures and equipment ............ 1,297,483 1,310,475
Leasehold improvements ....................... 291,005 291,005
----------- -----------
4,789,512 4,799,535
Less accumulated depreciation and amortization (1,984,962) (2,089,043)
----------- -----------
$ 2,804,550 $ 2,710,492
=========== ===========
</TABLE>
27
<PAGE>
NOTE 7 - DEPOSITS
The aggregate amount of deposits with a minimum denomination of $100,000 or more
was approximately $62,518,313 and $54,316,000 at September 30, 1998 and 1997,
respectively. Depositors have their accounts insured up to applicable limits
($100,000 per depositor, as defined) by the Federal Deposit Insurance
Corporation.
At September 30, 1998, the scheduled maturities of certificates of deposit are
as follows for the years ended September 30:
1999 $ 151,761,407
2000 33,114,685
2001 9,283,948
2002 10,271,519
2003 6,501,727
Thereafter 23,707,903
------------------
$ 234,641,189
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 1998, advances from the FHLB with fixed rates ranging from
5.04% to 5.84% mature in the year ending September 30 as follows:
1999 $ 2,000,000
2000 5,000,000
2001 -
2002 -
2003 -
Thereafter 2,000,000
--------------
$ 9,000,000
There were no outstanding advances at September 30, 1997.
These advances were required to be collateralized by pledged securities with an
amortized cost of approximately $12,024,000 and a fair value of approximately
$12,195,000. In addition, qualifying mortgage loans of approximately
$305,152,000 were available as collateral under a blanket lien arrangement at
September 30, 1998.
NOTE 9 - EMPLOYEE BENEFITS
Employee Pension Plan: The pension plan is part of a noncontributory
multi-employer defined-benefit pension plan covering substantially all
employees. As a multi-employer plan, there is no separate valuation of plan
benefits nor segregation of plan assets specifically for the Company. For the
year ended September 30, 1998, the fund was fully funded. Expense under this
plan was approximately $-0-, $-0- and $49,000 for the years ended September 30,
1998, 1997 and 1996, respectively.
28
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS (Continued)
401(k) Plan: The Company maintains a 401(k) salary reduction plan which covers
substantially all employees. Participants made deferrals from 1% to 15% of
compensation and the Company matched 50% of elective deferrals on the first 6%
of the participants' compensation through March 31, 1996. Between March 31, 1996
and November 30, 1996, participants made deferrals on the first 2% of
compensation, however, the Company did not provide any match of such elective
deferrals. After November 30, 1996, participants may make deferrals from 1% to
15% of compensation, however, the Company does not provide any match of such
elective deferrals. The Company provided discretionary contributions of 1% of
compensation for the year ended September 30, 1996. Contributions and related
expense attributable to the plan were approximately $4,000 for each of the years
ended September 30, 1998, 1997 and 1996, respectively.
Recognition and Retention Plans ("RRP"): In October, 1995, the Company
established the RRP as a method of providing directors, officers and other key
employees of the Company with a proprietary interest in the Company in a manner
designed to encourage such persons to remain with the Company. The terms of each
grant of stock pursuant to the RRP are identical; only the participants and the
number of shares awarded to each participant vary. The Bank contributed funds to
the RRP for the purchase of 78,327 shares of Company common stock at an average
price of $15.25 per share. On October 10, 1995, awards of grants for these
shares were issued to various directors, officers and other key employees of the
Company. These awards generally are to vest and be earned by the recipient at
the rate of 20% per year, commencing October 10, 1996. The unearned portion of
these stock awards is presented as a reduction of shareholders' equity. An
expense of approximately $233,000 and $238,000 was recorded for these Plans for
the years ended September 30, 1998 and 1997, respectively.
Employee Stock Ownership Plan (ESOP): In conjunction with the stock conversion,
the Company established an ESOP for eligible employees. Employees with 1,000
hours of employment with the Bank and who have attained age 21 are eligible to
participate. The ESOP borrowed $2,312,090 from the Company to purchase 231,209
shares of the common stock issued in the conversion at $10 per share. Collateral
for the loan is the unearned shares of common stock purchased with the loan
proceeds by the ESOP. The loan will be repaid principally from the Bank's
discretionary contributions to the ESOP over a period of twelve years. The
interest rate for the loan is a variable monthly rate equal at all times to the
Applicable Federal Rate. Shares purchased by the ESOP are held in a suspense
account for allocation among participants as the loan is repaid. Expense of
approximately $635,000, $451,000 and $352,000 was recorded relative to the ESOP
for the years ended September 30, 1998, 1997 and 1996, respectively.
Contributions of $283,000, $302,000 and $310,000 were made to the ESOP during
the years ended September 30, 1998, 1997 and 1996, respectively. Dividends on
unearned shares are used to reduce the accrued interest and principal amount of
the ESOPs loan payable to the Company.
Contributions to the ESOP and shares released from the suspense account in an
amount proportional to the repayment of the ESOP loan are allocated among ESOP
participants on the basis of compensation in the year of allocation. Benefits
generally become 100% vested after five years of credited service. Credit for
vesting purposes is given for years of service prior to the effective date of
the ESOP. Prior to the completion of five years of credited service, a
participant who terminates employment for reasons other than death, normal
retirement, or disability does not receive any benefit under the ESOP.
Forfeitures are reallocated among remaining participating employees, in the same
proportion as contributions. Benefits are payable in the form of stock or cash
upon termination of employment. The Company's contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated.
29
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS (Continued)
ESOP participants are entitled to receive distributions from their ESOP accounts
only upon termination of service. A participant entitled to a distribution may
require the Company to repurchase the stock in the event that the stock is not
readily tradable on an established market (referred to as the put option). In
general, participants are entitled to exercise the put option for a period of
not more than 60 days following the date of distribution of the stock. As the
Company's common stock is traded on the NASDAQ National Market under the symbol
"HBFW", the provisions of the put option currently have no effect.
For the years ended September 30, 1998, 1997 and 1996, 21,504, 22,590 and 23,237
shares with an average fair value of $29.56, $19.96 and $15.07 per share,
respectively, were committed to be released.
The ESOP shares as of September 30 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Allocated shares .................. 79,681 58,177 35,587
Unearned shares ................... 151,528 173,032 195,622
---------- ---------- ----------
Total ESOP shares ................. 231,209 231,209 231,209
========== ========== ==========
Fair value of unearned shares ..... $4,129,138 $4,196,026 $3,105,499
========== ========== ==========
</TABLE>
Stock Option Plan: The Board of Directors of the Company adopted the Home
Bancorp 1995 Stock Option and Incentive Plan (the "Plan") in conjunction with
the stock conversion. The number of options authorized under the Plan is 10% or
330,317 shares of common stock issued in the conversion. Officers, directors and
key employees of the Company and its subsidiaries are eligible to participate in
the Plan. The option exercise price must be at least 100% of the market value
(as defined in the Plan) of the common stock on the date of the grant, and the
option term cannot exceed 10 years. Eligible officers and directors of the
Company are able to exercise options awarded to them at a rate of 20% per year,
October 10, 1996 being the first possible exercise date.
30
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS (Continued)
The Company applied APB Opinion 25 "Accounting for Stock Issued to Employees"
and related interpretations in accounting for its Plan. Accordingly, no
compensation expense has been recognized for the Plan. SFAS No. 123, "Accounting
for Stock-Based Compensation," requires disclosures for stock-based compensation
awarded in fiscal years beginning after December 15, 1994 for companies that do
not adopt its fair value accounting method for stock-based compensation. The
effects on the Company's net income and earnings per share under the provisions
of SFAS No. 123 were not material for the years ended September 30, 1997 and
1998. In future years, as additional options are granted, the effect on net
income and earnings per share may increase.
<TABLE>
<CAPTION>
Available Options Weighted-Average
For Grant Outstanding Exercise Price
------------ ------------ ------------
<S> <C> <C> <C>
Balance - October 10, 1995 330,317 -
Granted (expire October 10, 2005) (228,504) 228,504 $ 15.25
Exercised - -
Forfeited - -
------------ ------------
Balance - September 30, 1996 101,813 228,504
Granted - -
Exercised - (14,824) 15.25
Forfeited - -
------------ ------------
Balance - September 30, 1997 101,813 213,680 15.25
Granted - -
Exercised - (23,125) 15.25
Forfeited 3,789 (3,789)
------------ ------------
Balance - September 30, 1998 105,602 186,766
============ ============
</TABLE>
At year end 1998, options outstanding had a weighted-average remaining life of 7
years and an exercise price of $15.25.
Options exercisable at year end are as follows.
Number Weighted-Average
of Options Exercise Price
---------- --------------
1998 53,476 $15.25
1997 30,877 15.25
31
<PAGE>
NOTE 10 - INCOME TAXES
The Company and the Bank file a consolidated federal income tax return on a
fiscal year basis. Prior to fiscal year 1997, if certain conditions were met in
determining taxable income as reported on the consolidated federal income tax
return, the Bank was allowed a special bad debt deduction based on a percentage
of taxable income (8.00% through 1996) or on specified experience formulas. The
Bank used the percentage of taxable income method for the tax year ended
September 30, 1996. 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
beginning after September 30, 1987. The related amount of deferred tax liability
which must be recaptured is approximately $625,000 and is payable over a six
year period beginning no later than the tax year ending September 30, 1999.
Income tax expense for the years ended September 30 is:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal
Current ........... $ 1,808,251 $ 978,879 $ 1,410,864
Deferred .......... (91,695) 630,214 (390,632)
----------- ----------- -----------
1,716,556 1,609,093 1,020,232
State
Current ........... 475,916 284,219 422,380
Deferred .......... (416) 162,032 (161,441)
----------- ----------- -----------
475,500 446,251 260,939
----------- ----------- -----------
Income tax expense ..... $ 2,192,056 $ 2,055,344 $ 1,281,171
=========== =========== ===========
</TABLE>
The differences between the provision for income taxes shown on the statements
of income and amounts computed by applying the statutory federal income tax rate
of 34% to income before income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at statutory rate ................ $ 1,733,339 $ 1,682,437 $ 991,838
Increase in taxes resulting from:
ESOP expense (market value in excess
of cost of related shares) .............. 142,850 76,394 117,976
State tax, net of federal income tax effect 300,510 294,526 172,220
Other ..................................... 15,357 1,987 (863)
----------- ----------- -----------
Income tax expense ........................ $ 2,192,056 $ 2,055,344 $ 1,281,171
=========== =========== ===========
Effective tax rate ........................ 43.0% 41.5% 43.9%
=========== =========== ===========
</TABLE>
32
<PAGE>
NOTE 10 - INCOME TAXES (Continued)
Components of the net deferred tax asset as of September 30 are:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
SAIF assessment ......................... $ -- $ -- $ 652,686
Deferred loan fees ...................... 155,452 133,687 155,588
Recognition and retention plan .......... 41,703 94,673 --
Other ................................... 13,798 18,602 125,953
--------- --------- ---------
Total deferred tax assets .......... 210,953 246,962 934,227
Deferred tax liabilities:
Bad debts ............................... (75,181) (76,133) (41,936)
Discount accretion ...................... (54,939) (182,107) (111,323)
Net unrealized appreciation on securities
available for sale .................... (33,110) (26,284) (1,608)
--------- --------- ---------
Total deferred tax liabilities ..... (163,230) (284,524) (154,867)
Valuation allowance ......................... -- -- --
--------- --------- ---------
Net deferred tax asset (liability) .......... $ 47,723 $ (37,562) $ 779,360
========= ========= =========
</TABLE>
Federal income tax laws provided savings banks with additional bad debt
deductions through September 30, 1987, totaling $7,600,000 for the Bank.
Accounting standards do not require a deferred tax liability to be recorded on
this amount, which liability otherwise would total approximately $2,600,000 at
September 30, 1998 and 1997. If the Bank were liquidated or otherwise ceases to
be a bank or if tax laws were to change, the $2,600,000 would be recorded as
expense.
NOTE 11 - CAPITAL STANDARDS
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 actions, including restrictions on growth or operations or, in
extreme cases, seizure.
33
<PAGE>
NOTE 11 - CAPITAL STANDARDS (Continued)
At September 30, the Bank's actual capital levels and minimum required levels
(in thousands) were:
<TABLE>
<CAPTION>
Minimum
Requirement
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
--------- ----- --------- ---- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1998
Total Capital (to risk
weighted assets) $ 35,232 18.97% $ 14,855 8.00% $ 18,569 10.00%
Tier I (Core) Capital
(to risk weighted
assets) $ 33,841 18.22% $ 7,428 4.00% $ 11,141 6.00%
Tier I (Core) Capital
(to adjusted total
assets) $ 33,841 9.23% $ 11,001 3.00% N/A N/A
Tangible Capital
(to adjusted total
assets) $ 33,841 9.23% $ 5,500 1.50% N/A N/A
Tier I (Core) Capital
(to average assets) $ 33,841 9.68% $ 13,982 4.00% $ 17,478 5.00%
1997
Total Capital (to risk
weighted assets) $ 34,601 21.38% $ 12,946 8.00% $ 16,182 10.00%
Tier I (Core) Capital
(to risk weighted
assets) $ 33,213 20.52% $ 6,473 4.00% $ 9,709 6.00%
Tier I (Core) Capital
(to adjusted total
assets) $ 33,213 9.85% $ 10,120 3.00% N/A N/A
Tangible Capital
(to adjusted total
assets) $ 33,213 9.85% $ 5,060 1.50% N/A N/A
Tier I (Core) Capital
(to average assets) $ 33,213 10.03% $ 13,242 4.00% $ 16,553 5.00%
</TABLE>
34
<PAGE>
NOTE 11 - CAPITAL STANDARDS (Continued)
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by a savings institution
without prior approval of the Office of Thrift Supervision. 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 one-half its
"surplus capital ratio" (the excess over its capital requirements) at the
beginning of the calendar year. Accordingly, at September 30, 1998 approximately
$8,680,000 of the Bank's retained earnings is potentially available for
distribution to the Company.
At the time of the conversion, the Company established a liquidation account in
an amount equal to its total net worth as of the date of the latest balance
sheet appearing in the final prospectus ($21,370,000 at September 30, 1994). The
liquidation account will be maintained for the benefit of eligible depositors
who continue to maintain their accounts at the Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible
depositors have reduced their qualifying deposits. Subsequent increases 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 the accounts then held. The
liquidation account balance is not available for payment of dividends. This is
less restrictive than the divided limitation discussed above.
NOTE 12 - FEDERAL DEPOSIT INSURANCE PREMIUM
The deposits of savings associations such as the Bank are insured by the Savings
Association Insurance Fund ("SAIF"). A recapitalization plan signed into law on
September 30, 1996 provided for a one-time assessment of 65.7 basis points
applied to all SAIF deposits as of March 31, 1995. Based on the Bank's deposits
as of this date, a one-time assessment of approximately $1,648,000 was recorded
as a non-interest expense for the year ended September 30, 1996.
<PAGE>
NOTE 13 - OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expenses for the years ended September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Other noninterest income
Service charges and fees ...... $ 155,615 $ 147,890 $ 129,656
Late charges .................. 41,263 48,088 42,270
Other ......................... 50,786 50,735 55,098
---------- ---------- ----------
$ 247,664 $ 246,713 $ 227,024
========== ========== ==========
Other noninterest expenses
Advertising and promotion ..... $ 203,694 $ 201,798 $ 187,176
Data processing ............... 309,994 252,750 250,114
Professional fees ............. 151,880 165,230 164,765
Telephone, postage and supplies 181,532 154,751 172,657
Other ......................... 161,889 412,488 376,171
---------- ---------- ----------
$1,008,989 $1,187,017 $1,150,883
========== ========== ==========
</TABLE>
35
<PAGE>
NOTE 14 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. The principal commitments,
excluding loans in process, of the Company are as follows at September 30, 1998:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
----------- ----------- -----------
<S> <C> <C> <C>
Mortgage loans .............. $ 8,420,100 $ 1,105,650 $ 9,525,750
Consumer and other loans .... 242,000 379,550 621,550
----------- ----------- -----------
$ 8,662,100 $ 1,485,200 $10,147,300
=========== =========== ===========
</TABLE>
The principal commitments, excluding loans in process, of the Company are as
follows at September 30, 1997:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
---------- ---------- ----------
<S> <C> <C> <C>
Mortgage loans ................. $3,633,000 $1,745,000 $5,378,000
Consumer and other loans ....... 3,000 409,000 412,000
---------- ---------- ----------
$3,636,000 $2,154,000 $5,790,000
========== ========== ==========
</TABLE>
The majority of loan commitments have commitment periods up to 90 days, loan
terms ranging from 10 years to 30 years and contractual interest rates ranging
from 6.59% to 10.00%.
The Company has commitments for unused lines of credit aggregating $12,279,000
at September 30, 1998.
Since certain commitments to make loans and to fund lines of credit and loans in
process expire without being used, the amount does not necessarily represent
future cash commitments. In addition, commitments used to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. 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 on the consolidated balance sheet.
At September 30, 1998, the Company has an approved line of credit of $15,000,000
with the Federal Home Loan Bank of Indianapolis. In the event the Company were
to draw on the line, the Company would pledge as collateral, securities and
qualifying mortgage loans under a blanket lien arrangement.
<PAGE>
The Company has long-term leases for premises which expire at various dates
through 2001. The Company pays taxes, insurance and maintenance costs on such
premises. Total lease expense related to these premises was approximately
$80,000 for each of the years ended September 30, 1998, 1997 and 1996.
The Company and the Bank are subject 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 adverse effect on the consolidated financial
position of the Company.
36
<PAGE>
NOTE 15 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company grants real estate and consumer loans including home improvement and
other consumer loans primarily in Allen and Adams counties. Loans secured by
residential real estate mortgages comprise approximately 99% of the loan
portfolio. The Company is also involved in the sale of mortgage loans and
servicing of these loans for secondary market agencies. The Company's policy for
collateral on mortgage loans allows borrowings up to 95% of the appraised value
of the property as established by appraisers approved by the Company's Board of
Directors, provided that private mortgage insurance is obtained in an amount
sufficient to reduce the Company's exposure to or below the 80% loan-to-value
level. The percentage and documentation guidelines are designed to protect the
Company's interest in the collateral as well as to comply with guidelines for
sale in the secondary market.
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are condensed financial statements for the parent company, Home
Bancorp:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
September 30, 1998 and 1997
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ...................... $ 1,012,023 $ 2,772,237
Investment in subsidiary bank .................. 33,840,543 33,252,929
Securities available for sale .................. 5,137,188 5,090,938
Securities held to maturity .................... -- 990,443
Loan receivable from ESOP ...................... 1,536,908 1,769,379
Other assets ................................... 31,346 143,547
----------- -----------
Total assets .............................. $41,558,008 $44,019,473
=========== ===========
LIABILITIES
Accrued expenses ............................... $ 519,729 $ 28,421
SHAREHOLDERS' EQUITY ........................... 41,038,279 43,991,052
----------- -----------
Total liabilities and shareholders' equity $41,558,008 $44,019,473
=========== ===========
</TABLE>
37
<PAGE>
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Year ended September 30,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income ............................ $ 500,331 $ 459,166 $ 727,979
Dividends from subsidiary bank ............. 2,714,000 8,383,000 907,000
Net realized gains on sales of securities
available for sale ....................... -- -- 1,438
----------- ----------- -----------
3,214,331 8,842,166 1,636,417
Operating expenses ......................... 140,186 127,287 384,354
----------- ----------- -----------
Income before income taxes and equity in
undistributed earnings of subsidiary bank 3,074,145 8,714,879 1,252,063
Equity in undistributed (excess distributed)
earnings of subsidiary bank .............. (25,000) (5,690,000) 521,000
----------- ----------- -----------
Income before income taxes ................. 3,049,145 3,024,879 1,773,063
Income tax expense ......................... 143,145 131,879 137,063
----------- ----------- -----------
Net income ................................. $ 2,906,000 $ 2,893,000 $ 1,636,000
=========== =========== ===========
</TABLE>
38
<PAGE>
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Year ended September 30,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ....................................... $ 2,906,000 $ 2,893,000 $ 1,636,000
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in (undistributed) excess distributed
income of subsidiary bank .................. 25,000 5,690,000 (521,000)
Amortization and accretion, net .............. 197,337 226,069 200,417
Net realized gains on sales of securities
available for sale ......................... -- -- (1,438)
Net change in other assets ................... 178,489 (55,035) 56,281
Net change in accrued expenses ............... 458,198 8,454 (863)
----------- ----------- -----------
Net cash provided by operating activities 3,765,024 8,762,488 1,369,397
Cash flows from investing activities
Proceeds from sales of securities available
for sale ....................................... -- -- 2,032,376
Proceeds from maturities of securities held
to maturity .................................... 1,000,000 3,000,000 4,000,000
Purchase of securities available for sale ........ -- (5,078,125) (2,030,938)
Repayments on loan receivable from ESOP .......... 232,471 231,798 214,576
----------- ----------- -----------
Net cash provided by (used in) investing
activities ................................. 1,232,471 (1,846,327) 4,216,014
Cash flows from financing activities
Purchase of treasury stock ....................... (6,437,191) (6,106,642) (9,294,413)
Cash dividends paid .............................. (673,174) (477,214) (263,947)
Proceeds from exercise of stock options .......... 352,656 226,066 --
----------- ----------- -----------
Net cash used in financing activities ........ (6,757,709) (6,357,790) (9,558,360)
----------- ----------- -----------
Net change in cash and cash equivalents .......... (1,760,214) 558,371 (3,972,949)
Cash and cash equivalents at beginning of period ...... 2,772,237 2,213,866 6,186,815
----------- ----------- -----------
Cash and cash equivalents at end of period ............ $ 1,012,023 $ 2,772,237 $ 2,213,866
=========== =========== ===========
</TABLE>
The extent to which the Company may pay cash dividends to shareholders will
depend on the cash currently available at the Company, as well as the Bank's
ability to pay dividends to the Company (see Note 11).
39
<PAGE>
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value and the related carrying
amounts of the Company's financial instruments at September 30, 1998 and 1997.
Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 23,365,826 $ 23,366,000 $ 16,445,298 $ 16,445,000
Securities available for sale 5,137,187 5,137,000 11,126,562 11,127,000
Securities held to maturity 12,024,247 12,195,000 26,954,555 27,214,000
Loans receivable, net 324,187,601 338,857,000 283,986,922 287,953,000
Federal Home Loan Bank
stock 2,782,500 2,783,000 2,449,100 2,449,000
Demand and savings deposits (81,356,915) (81,357,000) (76,925,412) (76,925,000)
Certificates of deposit (234,641,189) (237,578,000) (220,567,213) (222,072,000)
FHLB advances (9,000,000) (9,000,000) - -
Advances from borrowers for
taxes and insurance (2,597,387) (2,597,000) (2,092,412) (2,092,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 1998 and 1997. The estimated fair
value for cash and cash equivalents, Federal Home Loan Bank stock, demand and
savings deposits and advances from borrowers for taxes and insurance is
considered to approximate cost. The estimated fair value for securities is based
on quoted market values for the individual securities or equivalent securities.
The estimated fair value for loans is based on estimates of the rate the Bank
would charge for similar such loans at September 30, 1998 and 1997, applied for
the time period until the loans are assumed to reprice or be paid. The estimated
fair value for certificates of deposit is based on estimates of the rate the
Bank would pay on such deposits at September 30, 1998 and 1997, applied for the
time period until maturity. The estimated fair value for FHLB advances is
estimated by discounted cash flow analysis using current market rates for the
estimated life and credit risk. The estimated fair value of other financial
instruments and off-balance-sheet loan commitments approximate cost and are not
considered significant for 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 at September 30, 1998 and 1997, 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 at
September 30, 1998 and 1997 should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
premises and equipment. Also, non-financial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These included, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the trained work force, customer goodwill and similar items.
40
<PAGE>
CORPORATE AND SHAREHOLDER INFORMATION
Company and Bank Address
132 East Berry Street
P. O. Box 989
Fort Wayne, Indiana 46801-0989
Telephone: (219) 422-3502
Facsimile: 219.426.7027
Stock Price Information
The Company's stock is traded on The Nasdaq National Market under the symbol
"HBFW." The table below shows the range of high and low bid prices of the
Company's Common Stock for fiscal years 1997 and 1998. The information set forth
in the table below was provided by The Nasdaq Stock Market. Such information
reflects interdealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions for fiscal years:
Fiscal
1997 1998
Quarter Div. High Low Div. High Low
I .05 $19.50 $16.00 .05 $29.50 $24.00
II .05 $21.25 $19.00 .05 $37.875 $28.50
III .05 $20.875 $20.125 .08 $35.375 $29.125
IV .05 $25.75 $21.375 .08 $30.00 $26.625
Stock Price
September 30th: $24.25 $27.25
- --------------------------------------------------------------------------------
The twelfth quarterly dividend (Div.) Of $0.08 was declared on the Company's
common stock payable January 7, 1999 to shareholders of record December 22,
1998. For information regarding restrictions on dividends, see Note 11 to the
Consolidated Financial Statements.
As of December 1, 1998, the Company had approximately 1,505 shareholders of
record and 2,190,042 outstanding shares of Common Stock.
Investor Relations
Stockholders, investors and analysts interested in additional information may
contact:
W. Paul Wolf, CEO
Home Bancorp
132 East Berry Street
P. O. Box 989
Fort Wayne, IN 46801-0989
(219) 422-3502
<PAGE>
Annual Report on Form 10-K
Copies of Home Bancorp's Annual Report for year ended September 30, 1998 on Form
10-K filed with the Securities and Exchange Commission are available without
charge to shareholders upon written request to:
Investor Relations
Home Bancorp
P. O. Box 989
Fort Wayne, IN 46801-0989
Annual Meeting
The annual meeting of shareholders of Home Bancorp will be held at 2:00 p.m.,
local time, on Tuesday, January 26, 1999, at the Holiday Inn Downtown, 300 East
Washington Boulevard, Fort Wayne, Indiana. Your attendance is appreciated.
Stock Transfer Agent and Registrar Home Bancorp's transfer agent, Registrar and
Transfer Company, maintains all shareholder records and can assist with stock
transfer and registration address changes, changes or corrections in social
security or tax identification numbers and 1099 tax reporting questions. If you
have questions, please contact the stock transfer agent at the address below:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Toll Free (800) 368-5948
Stock Listing
Home Bancorp stock is traded on The Nasdaq National Market under the symbol
HBFW. The following newspaper stock tables list the Company as:
The Journal Gazette.........................................HmeBc
The News-Sentinel...........................................HmeBc
Indianapolis Star...........................................HmeBc
New York Times..............................................HmeBc
USA Today...................................................HmeBc
Chicago Tribune
Wall Street Journal.........................................HmBcp
<PAGE>
Home Loan Bank o Banking Offices
(year established)
Corporate 132 E. Berry St. (46802)
1893 (219) 422-3502
Southtown 1110 E. Tillman Rd. (46816)
1971 (219) 447-3531
Marketplace of Canterbury 5611 Saint Joe Rd. (46835)
1975 (219) 485-1619
Covington/Time Corners 6128 Covington Rd. (46804)
1977 (219) 432-0606
Northwest 926 W. State Blvd. (46808)
1987 (219) 482-6391
Georgetown North 6411 E. State Blvd. (46815)
1992 (219) 486-0646
Dupont Crossing 720 E. Dupont Rd. (46825)
1996 (219) 490-4663
Decatur 101 N. Second St.
1973 Decatur, Indiana (46733)
(219) 728-2155
New Haven 1230 E. Lincoln Hwy.
1987 New Haven, Indiana (46774)
(219) 749-1780
41
<PAGE>
Mission Statement
The mission statement of Home Loan Bank, subsidiary of Home Bancorp, reflects a
chartered course for meeting the financial needs of our customers with an
encouragement of investments and the promotion of home ownership. We are
committed to providing the highest quality financial services for all customers
in our operating areas, while maintaining a conservative, well capitalized,
liquid and profitable financial institution.
Further, we shall perform our obligations in an ethical manner in the community
as a responsible corporate citizen and acknowledge the holding company's
ultimate responsible goal of shareholder enhancements.
42
<PAGE>
- --------------------------------------------------------------------------------
MARKET MAKERS AS OF SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
ABN AMRO Chicago Corporation
Capital Resources, Inc.
Friedman, Billings, Ramsey & Co., Inc.
Herzog, Heine, Geduld, Inc.
J.J.B. Hilliard, W.L. Lyons
Keefe, Bruyette & Woods, Inc.
McDonald & Company Securities, Inc.
Sandler O'Neill & Partners, L.P.
Stifel, Nicolaus & Company, Inc.
43
<PAGE>
DIRECTORS
and
OFFICERS
- --------------------------------------------------------------------------------
Board of Directors
(Home Bancorp and Home Loan Bank) (Year appointed to Bank Board)
W. Paul Wolf Chairman of the Board and President 1961
Rod M. Howard Retired, Howard's Graphic Supply 1969
Walter A. McComb, Jr. McComb Funeral Homes 1982
Richard P. Hormann DeHayes Group, Inc. 1987
C. Philip Andorfer CPA 1988
Luben Lazoff Lazoff & Associates 1991
Daniel F. Fulkerson McMahon Paper Company 1993
Matthew P. Forrester Vice President and Treasurer 1994
Donald E. Thornton Vice President of Lending 1997
Officers of
Home Bancorp
W. Paul Wolf
Chairman, President and
Chief Executive Officer
Matthew P. Forrester
Vice President/Treasurer
Gary L. Hemrick
Vice President/Secretary
Luben Lazoff
Assistant Secretary
---------------------------------------
Home Bancorp
HBFW
132 East Berry St. o P.O. Box 989
Fort Wayne, Indiana 46801-0989
Telephone (219) 422-3502
Facsimile 219.426.7027
<PAGE>
Officers of Home Loan Bank fsb
W. Paul Wolf
Chairman, President and CEO
Donald E. Thornton
Vice President of Lending/Secretary
Gary L. Hemrick
Vice President/Operations
Matthew P. Forrester
Vice President/Treasurer/CFO
John E. Fitzgerald
Vice President/CRA
Barbara J. Boyd
Vice President/Retail Banking
Gladys A. (Jo) Thomas
Vice President/Decatur Operations
Paul N. Lewark
Assistant Vice President
James M. Turner
Assistant Vice President
Robert P. Norton
Assistant Vice President
Betty A. Schlensker
Assistant Vice President
Irene A. Thain
Assistant Vice President
Robert V. Earl
Assistant Vice President
Stanley J. Amstutz
Assistant Vice President
Linda M. DeGroff
Assistant Vice President
<PAGE>
Mark R. Freudenberg
Assistant Vice President
Ruth A. Marburger
Assistant Vice President
Jody J. Morrissey
Assistant Vice President
Joseph M. Hayes
Assistant Vice President
Matthew L. Level
Assistant Vice President
Michael J. Jones
Assistant Vice President
Penny S. Parrish
Assistant Vice President
Todd A. Hall
Assistant Vice President
Timothy A. Sheppard
Assistant Treasurer
Luben Lazoff
Assistant Secretary
Jerry W. Gump
Internal Auditor/Compliance
John C. Monroe
Assistant Internal Auditor
Lupka Baloski
Personnel
Carol A. Tait
Administrative Assistant
44
<PAGE>
Home Bancorp
132 East Berry Street o P.O. Box 989 o Fort
Wayne, Indiana 46801-0989 Telephone (219)
422-3502 o Facsimile 219.426.7027
Exhibit 21
Subsidiaries of the Registrant
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary
Percent State of
of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
Home Bancorp Home Loan Bank fsb 100% Federal
Exhibit 23
Consent of Experts
<PAGE>
[CROWE CHIZEK LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement Nos.
333-4138 and 333-4146 of Home Bancorp on Form S-8 of our report dated October
21, 1998 contained in the Annual Report to Shareholders under Exhibit 13 to Home
Bancorp's Annual Report on Form 10-K for the fiscal year ended September 30,
1998.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
December 16, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,643
<INT-BEARING-DEPOSITS> 11,723
<FED-FUNDS-SOLD> 10,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,137
<INVESTMENTS-CARRYING> 12,024
<INVESTMENTS-MARKET> 12,195
<LOANS> 324,188
<ALLOWANCE> 1,390
<TOTAL-ASSETS> 372,429
<DEPOSITS> 315,998
<SHORT-TERM> 9,000
<LIABILITIES-OTHER> 6,393
<LONG-TERM> 0
0
0
<COMMON> 34,399
<OTHER-SE> 6,639
<TOTAL-LIABILITIES-AND-EQUITY> 372,429
<INTEREST-LOAN> 23,342
<INTEREST-INVEST> 2,637
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 25,979
<INTEREST-DEPOSIT> 16,131
<INTEREST-EXPENSE> 16,223
<INTEREST-INCOME-NET> 9,756
<LOAN-LOSSES> 2
<SECURITIES-GAINS> 108
<EXPENSE-OTHER> 5,012
<INCOME-PRETAX> 5,098
<INCOME-PRE-EXTRAORDINARY> 2,906
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,906
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 7.47
<LOANS-NON> 0
<LOANS-PAST> 292
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,390
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,390
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,390
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,283
<INT-BEARING-DEPOSITS> 8,162
<FED-FUNDS-SOLD> 7,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,127
<INVESTMENTS-CARRYING> 26,954
<INVESTMENTS-MARKET> 27,214
<LOANS> 283,987
<ALLOWANCE> 1,388
<TOTAL-ASSETS> 346,041
<DEPOSITS> 297,493
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,557
<LONG-TERM> 0
0
0
<COMMON> 33,985
<OTHER-SE> 10,006
<TOTAL-LIABILITIES-AND-EQUITY> 346,041
<INTEREST-LOAN> 20,619
<INTEREST-INVEST> 3,803
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,422
<INTEREST-DEPOSIT> 14,963
<INTEREST-EXPENSE> 14,963
<INTEREST-INCOME-NET> 9,459
<LOAN-LOSSES> 2
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,755
<INCOME-PRETAX> 4,948
<INCOME-PRE-EXTRAORDINARY> 2,893
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,893
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.18
<YIELD-ACTUAL> 7.53
<LOANS-NON> 0
<LOANS-PAST> 223
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,388
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,388
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,388
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,349
<INT-BEARING-DEPOSITS> 8,479
<FED-FUNDS-SOLD> 11,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,939
<INVESTMENTS-CARRYING> 33,889
<INVESTMENTS-MARKET> 34,085
<LOANS> 260,774
<ALLOWANCE> 1,387
<TOTAL-ASSETS> 327,789
<DEPOSITS> 278,751
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,325
<LONG-TERM> 0
0
0
<COMMON> 33,856
<OTHER-SE> 11,857
<TOTAL-LIABILITIES-AND-EQUITY> 327,789
<INTEREST-LOAN> 9,986
<INTEREST-INVEST> 1,952
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,938
<INTEREST-DEPOSIT> 7,228
<INTEREST-EXPENSE> 7,228
<INTEREST-INCOME-NET> 4,710
<LOAN-LOSSES> 1
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,374
<INCOME-PRETAX> 2,450
<INCOME-PRE-EXTRAORDINARY> 2,450
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,451
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.58
<YIELD-ACTUAL> 7.42
<LOANS-NON> 0
<LOANS-PAST> 296
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,386
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,387
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,387
</TABLE>
