SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1999
------------------
- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission Number: 0-22376
HOME BANCORP
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Indiana 35-1906765
- ---------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
132 East Berry Street, Fort Wayne, IN 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
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-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 ]
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing price of the Registrant's Common Stock
as quoted on the Nasdaq National Market, on December 1, 1999, was $34.1 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.)
As of December 1, 1999, there were issued and outstanding 2,011,652
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Parts II and IV of Form 10-K - Portions of the Annual Report to
Stockholders for the Fiscal Year Ended September 30, 1999.
2. Part III of Form 10-K - Portions of the Proxy Statement for fiscal 1999
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 Company and the Bank on a consolidated
basis. The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol "HBFW".
At September 30, 1999, the Company had $414.0 million of assets and
stockholders' equity of $37.9 million (or 9.2% 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.
2
<PAGE>
These forward-looking statements include statements with respect to the
Company'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 these 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. A second Adams
County office was opened in November 1999.
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 3,156 people. Lincoln
National Corporation, the parent company of Lincoln National Life Insurance
Company, has approximately 2,978 employees in Fort Wayne. The fourth largest
employer is Parkview Hospital with an employment of 2,730.
3
<PAGE>
Lending Activities
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,
-----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ---------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan
Mortgage loans:
One- to four-family $330,744 92.75% $308,627 92.99% $269,995 92.28% $238,102 91.83% $204,886 92.48%
residential
Commercial real estate 2,061 .58 1,715 .52 1,856 .64 1,357 .52 1,313 .59
One- to four-family
residential 14,493 4.06 11,512 3.47 11,797 4.03 12,407 4.79 8,814 3.98
Construction
Consumer loans:
Loans secured by deposits 988 .28 873 .26 885 .30 743 .29 880 .40
Home equity loans 6,547 1.84 8,012 2.41 7,029 2.40 5,466 2.11 4,401 1.98
Home improvement loans 1,767 .49 1,165 .35 1,024 .35 1,197 .46 1,262 .57
-------- ----- ------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable(1) 356,600 100.00% 331,904 100.00% 292,586 100.00% 259,272 100.00% 221,556 100.00%
====== ====== ====== ====== ======
Less:
Allowance for loan losses 1,342 1,390 1,388 1,385 1,372
Deferred net loan fees 413 393 338 393 454
Loans in process 8,846 5,933 6,873 7,188 5,325
-------- -------- -------- -------- --------
Net loans receivable $345,999 $324,188 $283,987 $250,306 $214,405
======= ======= ======= ======= =======
</TABLE>
4
<PAGE>
The following table sets forth certain information at September 30,
1999, 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>
Due During Fiscal Years Ended September 30,
Balance ------------------------------------------------------------------------------------
Outstanding at 2003 2005 2010 2015
September to to to and
30, 1999 2000 2001 2002 2004 2009 2014 following
-------- ---- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four
family residential $345,237(1) $ 111 $ 638 $ 937 $ 3,947 $ 56,886 $129,466 $153,252
Commercial
real estate 2,061 353 -- -- 161 185 888 474
Consumer loans:
Home improvement 1,767 560 125 113 620 349 --
Home equity 6,547 6,547 -- -- -- --
Loans secured by deposits 988 988 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total loans receivable $356,600 $ 8,559 $ 763 $ 1,050 $ 4,728 $ 57,420 $130,354 $153,726
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes $14.5 million in one- to four-family residential
construction loans, all of which are scheduled to convert into permanent loans
maturing after the year 2015.
5
<PAGE>
The following table sets forth, as of September 30, 1999, 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, 2000
-------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In Thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family residential $293,912 $ 51,214 $345,126
Commercial real estate 24 1,684 1,708
Consumer loans:
Home improvement 1,207 -- 1,207
Home equity -- -- --
Loans secured by deposits -- -- --
-------- -------- --------
Total Loans Receivable $295,143 $ 52,898 $348,041
======== ======== ========
</TABLE>
Lending Limitations. 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, 1999, the Bank's lending limit
under this restriction was $5.4 million. On September 30, 1999 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 outstanding balance on the aggregate of
these loans as of September 30, 1999 was approximately $894,000. The Bank's
largest single lending relationship was a first lien residential loan mortgage
loan of $754,000. There were two other lending relationships in excess of
$500,000 as of September 30, 1999, which were also one- to four-family
residential loans. All of these loans were performing in accordance with their
repayment terms.
One- to Four-Family Residential Mortgage Loans. The Company's
residential mortgage loans consist primarily of one- to four-family,
owner-occupied mortgage loans. A significant portion, approximately 85% at
September 30, 1999, 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.
<PAGE>
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, 1999, the Company
had no fixed-rate loans held for investment with remaining terms in excess of 20
years. The Company retains the servicing
6
<PAGE>
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, 1999, the Company's one- to four-family ARM portfolio totaled
$51.2 million, or 14.36% 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%.
Although no construction loans were classified as non-performing as of
September 30, 1999, 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
7
<PAGE>
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, 1999, the largest
commercial real estate loan was a construction loan for $474,000 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, 1999, 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, 1999, $9.30 million, or
2.61%, 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, 1999.
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,
1999, 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.
8
<PAGE>
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.
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, 1999, the Company had no loans held for sale. The Company was also
servicing $1.57 million of loans sold in the secondary market as of September
30, 1999. 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, 1999, the
Company's entire loan portfolio was secured by property located within the State
of Indiana.
9
<PAGE>
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,
--------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable at
beginning of period $331,904 $292,586 $259,272
======== ======== ========
Originations:
Mortgage loans:
One- to four-family residential 100,595 104,595 74,304
Commercial real estate 25 655 777
-------- -------- --------
Total mortgage loans originated 100,620 105,250 75,081
Consumer loans:
Home improvement/equity loans 5,921 8,320 6,343
Loans secured by deposits 795 601 464
-------- -------- --------
Total consumer loans originated 6,716 8,921 6,807
-------- -------- --------
Total originations 107,336 114,171 81,888
-------- -------- --------
Sales:
Mortgage loans:
One- to four-family residential 318 -- --
-------- -------- --------
Total sales 318 -- --
-------- -------- --------
Repayments and other deductions 82,322 74,853 48,574
-------- -------- --------
Gross loans receivable at end of period $356,600 $331,904 $292,586
======== ======== ========
</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." 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
10
<PAGE>
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,
------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accrued loans delinquent more than 90 days $ 88 $292 $223 $231 $ 97
Non-accruing loans -- -- -- -- --
Troubled debt restructurings -- -- -- -- --
---- ---- ---- ---- ----
Total non-performing loans 88 292 223 231 97
Real estate owned, net -- -- -- -- --
---- ---- ---- ---- ----
Total non-performing assets $ 88 $292 $223 $231 $ 97
==== ==== ==== ==== ====
Non-performing loans to total loans, net(1) 0.03% 0.09% 0.08% 0.09% 0.05%
Non-performing assets to total assets 0.02% 0.08% 0.06% 0.07% 0.03%
</TABLE>
(1) Total loans less deferred net loan fees and loans in process.
Delinquent Loans. 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. At September 30,
1999, the Company had $494,000 of loans that were over 60 days delinquent, or
0.14% of total loans outstanding.
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
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.
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<PAGE>
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, 1999, 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, 1999
---------------------
(In Thousands)
<S> <C>
Substandard assets $ 88
Doubtful assets --
Loss assets --
------
Total classified assets $ 88
======
General loss allowances $1,342
Specific loss allowances --
------
Total allowances $1,342
======
</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 allowance for 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.
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 approximately $50,000 in net loan
losses in fiscal 1999.
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,
1999.
12
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five years ended September 30,
1999.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at beginning of period $ 1,390 $1,388 $1,385 $1,372 $ 1,288
Add:
Recoveries of loans previously charged off:
One- to four-family residential -- -- -- -- --
------- ------ ------ ------ -------
Less charge-offs:
One- to four-family residential (50) -- -- -- (3)
------- ------ ------ ------ -------
Net charge-offs (50) -- -- -- (3)
------- ------ ------ ------ -------
Provisions for loan losses 2 2 3 13 87
------- ------ ------ ------ -------
Balance of allowance at end of period $ 1,342 $1,390 $1,388 $1,385 $ 1,372
======= ====== ====== ====== =======
Net charge-offs to total average loans
outstanding for period(1) .01% --% --% --% --%
======= ====== ====== ====== =======
Allowance to net loans receivable at
end of period .39% .43% .49% .55% .64 %
======= ====== ====== ====== =======
Allowance to total non-performing loans at
end of period 1,525% 476% 623% 600% 1,411%
======= ====== ====== ====== =======
</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,
1999 1998 1997 1996 1995
-------------------- -------------------- -------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to to to to to
Total Total Total Total 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 ............ $1,042 92.75% $1,085 92.99% $1,078 92.28% $1,058 91.83% $1,050 92.48%
Commercial real estate . 35 .58 35 .52 35 .64 35 .52 35 .59
Construction loans ..... 100 4.06 105 3.47 110 4.03 112 4.79 102 3.98
Consumer loans ......... 45 2.61 45 3.02 45 3.05 40 2.86 40 2.95
Unallocated ............ 120 -- 120 -- 120 -- 140 -- 145 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total .................. $1,342 100.00% $1,390 100.00% $1,388 100.00% $1,385 100.00% $1,372 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
13
<PAGE>
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 oninvestments 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, 1999, the Bank's liquidity ratio (liquid assets as a percentage
of net withdrawable savings deposits and current borrowings) was 16.5%.
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
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.
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,
-----------------------------------------------------------------------------------
1999 1998 1997
---------------------- ------------------------ ------------------------
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 ............. $ - - $ - - $12,024 $12,195 $26,955 $27,214
maturity
U.S. Treasury Bonds, available
for sale .............................. 23,159 23,159 5,137 5,137 11,126 11,126
FHLB stock ............................... 3,174 3,174 2,783 2,783 2,449 2,449
------- ------- ------- ------- ------- -------
Total investments ........................ $26,333 $26,333 $19,944 $20,115 $40,530 $40,789
======= ======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
At September 30, 1999
------------------------------------------------------------------------------------------
Over 1 Over 5 Total Investment Securities
1 Year Through Through Over ---------------------------
or Less 5 Years 10 Years 10 Years
-------- -------- -------- --------
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 $2,012 $21,147 $ -- $ -- $23,159 $23,159
====== ======= ====== ====== ======= =======
Weighted average yield 5.17% 5.34% -- -- 5.32%
</TABLE>
At September 30, 1999, 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.
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, 1999, at approximately 6.7% and 8.4% 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.
15
<PAGE>
An analysis of the Company's deposit accounts by type, maturity and
rate at September 30, 1999, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening September 30 % of Average
Type of Account Balance 1999 Deposits Rate
--------------- ------- ---- -------- ----
(Dollars in Thousands except minimum balance)
<S> <C> <C> <C> <C>
Withdrawable:
Passbook savings accounts $200 $16,793 4.62% 2.08%
Money market accounts 2,500 62,888 17.31 4.12
NOW and other transactions accounts 100 19,939 5.49 0.58
------ ----
Total withdrawable 99,620 27.42
------ -----
Certificates and IRA's (original terms):(1)
90 days and less 1,000 5,977 1.64 5.38
91 days 1,000 2,568 0.71 4.72
182 days 1,000 36,649 10.09 4.88
12 months 1,000 105,248 28.96 5.17
18 months 1,000 24,205 6.66 5.15
24 months 1,000 12,958 3.57 5.44
30 months 1,000 15,581 4.29 5.45
36 months 1,000 3,965 1.09 5.60
48 months 1,000 784 0.21 5.51
60 months 1,000 13,070 3.60 6.35
72 months 1,000 -- -- --
84 months and over 5,000 42,729 11.76 6.97
------ -----
Total certificates and IRA's 263,734 72.58
------- -----
Total deposits $363,354 100.00%
======= ======
</TABLE>
(1) Total IRA account balances are $28.1 million. The IRA accounts are included
in the various CD terms with corresponding minimums.
16
<PAGE>
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,
1999.
Maturity Period (In Thousands)
--------------- --------------
Three months or less .......................................... $ 1,905
Greater than three months through six months .................. 12,905
Greater than six months through twelve months ................. 20,689
Over twelve months ............................................ 17,107
-------
Total ....................................................... $52,606
=======
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, 1999, the Company had $7.0 million in advances outstanding with
the FHLB. The Company does not anticipate any difficulty in obtaining advances
appropriate to meet its requirements in the future.
Regulation
Recent Developments - Financial Modernization
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act") which will, effective March 11, 2000, permit
qualifying bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. The Act defines "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Board has
determined to be closely related to banking. A qualifying national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development, and real estate investment, through a
financial subsidiary of the bank.
The Act also prohibits new unitary thrift holding companies from
engaging in nonfinancial activities or from affiliating with an nonfinancial
entity. As a grandfathered unitary thrift holding company, the Company will
retain its authority to engage in nonfinancial activities.
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 SAIF, which together with 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.
17
<PAGE>
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, 1999. 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, 1999, was approximately $81,000.
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.
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 Deposit Accounts. The deposit accounts held by the Bank
are insured by the SAIF to a maximum of $100,000 for each insured member (as
defined by law and regulation). Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits during 1996 and prior years.
The FDIC also maintains another insurance fund, the BIF, which primarily insures
commercial bank deposits. In 1996, the annual insurance premium for most BIF
members was lowered to $2,000. The lower insurance premiums for BIF members
placed SAIF members at a competitive disadvantage to BIF members.
Effective, December 31, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
0.657% of deposits held on March 31, 1995. Beginning January 1, 1997, the
deposit insurance assessment for most SAIF members was reduced to 0.064% of
deposits on an annual basis through the end of 1999. During this same period,
BIF members will be assessed approximately 0.013% of deposits. After 1999,
assessments for BIF and SAIF members should be the same. It is expected that
these continuing assessments for both SAIF and BIF members will be used to repay
outstanding Financing Corporation bond obligations.
18
<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, 1999, 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,
1999, the Bank did not have any subsidiaries.
At September 30, 1999, the Bank had tangible capital of $36.2 million,
or 8.76% of adjusted total assets, which is approximately $30.0 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, 1999, the
Bank had no intangibles which were subject to these tests.
At September 30, 1999, the Bank had core capital equal to $36.2
million, or 8.76% of adjusted total assets, which is $19.7 million above the
minimum leverage ratio requirement of 4.0%.
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, 1999, the Bank had
no capital instruments that qualify as supplementary capital and $1,342 million
of general loss reserves, which was less than 1.25% of risk-weighted assets.
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, 1999.
19
<PAGE>
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, 1999, the Bank had total capital of $37.6 million
(including $36.2 million in core capital) and risk-weighted assets of $199.5
million (with $6.3 million of converted off-balance sheet assets); or total
capital of 18.84% of risk-weighted assets. This amount was $21.6 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.
Limitations on Dividends and Other Capital Distributions. The OTS
imposes various restrictions or requirements on the ability of savings
institutions to make capital distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan
holding company, such as the Bank after the conversion, must file an application
or a notice with the OTS at least 30 days before making a capital distribution.
Savings associations are not required to file an application for permission to
make a capital distribution and need only file a notice if the following
conditions are met: (1) they are eligible for expedited treatment under OTS
regulations, (2) they would remain adequately capitalized after the
distribution, (3) the annual amount of capital distribution does not exceed net
income for that year to date added to retained net income for the two preceding
years, and (4) the capital distribution would not violate any agreements between
the OTS and the savings association or any OTS regulations. Any other situation
would require an application to the OTS.
20
<PAGE>
In addition, the OTS could prohibit a proposed capital distribution by
any institution, which would otherwise be permitted by the regulation, if the
OTS determines that the distribution would constitute an unsafe or unsound
practice.
A federal savings institution is prohibited from making a capital
distribution if, after making the distribution, the savings institution would be
unable to meet any one of its minimum regulatory capital requirements. Further,
a federal savings institution cannot distribute regulatory capital that is
needed for its liquidation account.
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, 1999, the minimum liquid asset ratio was
4%. Penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At September 30, 1999, the Bank was in compliance with
the requirements, with a liquid asset ratio of 16.5%. The Bank's liquidity as of
that same date was 16.47%.
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, 1999, 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.
21
<PAGE>
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
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.
22
<PAGE>
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.
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, 1999, 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, 1999, the Company had approximately $3.17
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 7.92% and were 7.99% for
fiscal 1999.
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.
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 13 banks and thrifts located in Allen County, Indiana,
including the Bank. These financial institutions consist of eleven 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.
23
<PAGE>
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
services by emphasizing the local and personalized nature of its service as well
as its strong capital base. In September 1999, the Company originated
approximately 5.2% and 10.7% of the mortgages recorded in Allen and Adams
Counties, respectively. As of September 30, 1999, the Company had approximately
6.7% and 8.4% of all financial institution deposits in each of Allen and Adams
Counties, respectively.
Employees
As of September 30, 1999, the Company employed 84 persons on a
full-time basis and 3 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 50) 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 54) 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.
Marvin C. Schumm (age 66) has served as Interim President and Chief
Executive Officer of the Bank since November 1, 1999. From November 1998 through
October 1999, Mr. Schumm was a Senior Loan Administrator with Bruceton Bank,
Bruceton Mills, West Virginia. Since 1997, Mr. Schumm has been an independent
contractor and bank consultant with a number of financial institutions in West
Virginia, Michigan, and Ohio. Since 1996, Mr. Schumm has been the owner and
President of M'Lads Company, Maumee, Ohio, a small order printer of unique
items, and a licensed realtor with DiSalle Real Estate Company, Maumee, Ohio.
From January 1996 through November 1996, Mr. Schumm was Vice President and
Regional Director of Northwest Russia, U.S. Russia Investment Fund. From
November 1994 through November 1995, Mr. Schumm was a consultant with the U.S.
Russia Investment Fund where he established small business lending departments
in Russia's commercial banks.
24
<PAGE>
Item 2. Description of Property
At September 30, 1999, 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. Six are owned by the Bank and three
are leased for terms of one to five years. The Bank's total investment in office
property and equipment is $5.2 million with a net book value of $2.9 million at
September 30, 1999. Subsequent to September 30, 1999, an additional full-service
branch office was opened in Adams County. The Bank currently does not operate
automated teller machines at any of its branch offices. Management is
continually reviewing its facilities for adequacy and for business opportunities
for the Company and the Bank.
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,
1999.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the section captioned "Stock Price
Information" in the Company's 1999 Annual Report to Stockholders (the "Annual
Report") is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the table captioned "Selected Consolidated
Financial Data" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the section captioned "Asset/Liability
Management and Market Risk" in the Annual Report is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements listed in Item 14 herein are
incorporated herein by reference.
25
<PAGE>
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.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on January 25, 2000, 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 Company 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 Company's definitive Proxy Statement for the Annual Meeting
of Shareholders scheduled to be held on January 25, 2000, 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 Company's definitive
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
January 25, 2000, 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, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Listed below are all financial statements and exhibits filed
as part of this report, and are incorporated by reference.
26
<PAGE>
1. The consolidated statements of financial conditions of Home
Bancorp and subsidiary as of September 30, 1999 and 1998, and
the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in
the three year period ended September 30, 1999, together with
the related notes and the independent auditors' report of
Crowe, Chizek and Company LLP, independent accountants.
2. Financial Statement Schedules:
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
3. Exhibits:
Document
--------
3(i) Certificate of Incorporation*
3(ii) Bylaws, as amended***
4 Instruments defining the rights of security
holders, including indentures indentures*
10.1 Employment Agreements of W. Paul Wolf, Matthew P.
Forrester, Gary L. Hemrick, Donald E. Thornton
and John E. Fitzgerald *
10.3 1995 Stock Option and Incentive Plan**
10.4 Recognition and Retention Plan**
13 Annual Report to Security Holders
21 Subsidiaries of Registrant (see Item 1--Description
of Business - General)
23 Consent of Accountants
27 Financial Data Schedule (electronic filing only)
* 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.
** 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.
***Filed on October 3, 1997 on Form 8-K (File No. 0-22376) and incorporated
herein by reference.
27
<PAGE>
(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
- -------------- -------
9/23/99 Press release regarding declaration of cash dividend.
7/15/99 Press release regarding the resignation of Matthew
Forrester, the Senior Vice President and Treasurer of
Home Bancorp, effective October 12, 1999.
7/9/99 Press release regarding 3rd Quarter 1999 Earnings.
28
<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 27, 1999 By: /s/Donald E. Thornton
-------------------------------------
Donald E. Thornton, Director and
Senior Vice President
(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/ Donald E. Thornton /s/ Timothy A. Sheppard
- -------------------------------- --------------------------------
Donald E. Thornton, Director and Timothy A. Sheppard, Treasurer
Senior Vice President (Chief Accounting Officer and
(Principal Executive Officer) Principal Financial Officer)
Date: December 27, 1999 Date: December 27, 1999
/s/ C. Philip Andorfer /s/ Walter A. McComb, Jr.
- -------------------------------- --------------------------------
C. Philip Andorfer, Director Walter A. McComb, Jr., Director
Date: December 27, 1999 Date: December 27, 1999
/s/ Daniel F. Fulkerson /s/ Richard P. Hormann
- -------------------------------- --------------------------------
Daniel F. Fulkerson, Director Richard P. Hormann, Director
Date: December 27, 1999 Date: December 27, 1999
/s/ Rod M. Howard /s/ Luben Lazoff
- -------------------------------- --------------------------------
Rod M. Howard, Director Luben Lazoff, Director
Date: December 27, 1999 Date: December 27, 1999
1999 ANNUAL REPORT
Year ended September 30, 1999
Report To Shareholders
[GRAPHIC-BANK PICTURE OMITTED]
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, 1999 of
$414 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, the Bank is a dedicated community
oriented financial institution offering traditional deposit and mortgage and
consumer loan products. The Bank maintains a ten full-service office network in
Fort Wayne, Decatur and New Haven and possesses the distinction of being Fort
Wayne's oldest bank.
As a guide for our forthcoming 107th 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 fsb 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 Data...................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...................43
Home Loan Bank Office Locations.......................43
Mission Statement.....................................44
Market Makers.........................................44
Directors & Officers..................................45
[GRAPHIC-MAP OF BANK LOCATIONS OMITTED]
Fort Wayne . . . The Midwest Hub !
<PAGE>
PRESIDENT'S ANNUAL SHAREHOLDER REPORT
Home Loan Bank - the Bank that makes a difference!
With highly individualized service and a variety of banking products, we
continue to provide good performance and build shareholder value. With more than
$345 million in loans and other contributions throughout our community, we
support the growth of Northeast Indiana, which has been our home since 1893.
As a leader in the home loan industry, we are satisfied not simply by
maintaining the standards, but by raising and setting the standards. It is our
employees who take pride from mastering new information systems to maintaining a
refreshing, "can-do" attitude. It is our employees who meet the needs of the
community by giving of their time and talents. It is our philosophy of putting
customers and community first. Our continued commitment to customer satisfaction
has resulted in our continued growth and profitability, fueled by a strong loan
portfolio and excellent overhead control. We will never be your ordinary bank.
We will always be the Bank that makes a difference - for our customers and our
community.
Since opening in 1893, Home Loan Bank has built a history of safe, sound,
profitable growth. Now in its 106th year, the Bank continues to deliver its
hallmark customer service, while enhancing shareholder value. In 1999, this
operating philosophy helped the Bank exceed $413 million in Total Assets, which
places it in the top 25% of all thrift institutions in Indiana. The Bank earned
7.90% Return on Average Equity and .79% Return on Average Assets, both
indicative of a conservative management style. These achievements represent the
Bank's solid foundation and will facilitate future growth.
Net Income in 1999 was $3.1 million, a 6.9% increase over 1998's $2.9 million.
1999's Basic Net Income Per Share was $1.56 compared to $1.32 in 1998 and $1.20
in 1997. This consistent earnings growth demonstrates management's commitment to
effectively controlling expenses, while attracting deposits and quality loans.
Total Deposits were more than $363 million at September 30, 1999, with Total
Loans in excess of $345 million, representing respectively, 15% and 6.7%
increases over September 30, 1998. Total Assets were in excess of $413 million
at September 30, 1999, which represents an 11.2% increase over 1998's figure.
At the core of the Bank's solid performance is the continued soundness of its
loan portfolio - measured not by quantity of loans but by quality. Again in
FY1999 the Bank only recorded nominal charge-offs. The Bank continues to be
responsive and flexible in working with its customers, while at the same time
maintaining sound credit judgment.
Also of note is the Bank's exceptional Efficiency Ratio, which translates into
excellent control of overhead expenses. The Ratio measures the dollar amount of
overhead expense, such as salaries and benefits, building occupancy and other
noninterest expense needed to generate one dollar of income. The Bank's
Efficiency Ratio of 50 cents needed to generate $1 of income is significantly
below the industry general benchmark of 60 cents for every $1 of income.
Reaching this level of efficiency has required our employees to provide an
extraordinary level of service.
As we prepare for the next year of business, we have never deviated from our
mission: meeting the financial needs of our customers with an encouragement of
investments and the promotion of home ownership. 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.
<PAGE>
We continue to concentrate on services that will have the greatest impact on our
customers' success. Our proactive approach to technology and systems, high level
of service, competitive rates, high quality loans and low overhead all
contribute to our original purpose: raising deposits. Doing so takes people
committed to achieving even higher levels of service and success for
customers....people who make a difference. Our employees are the top
professionals in the banking industry - the results speak for themselves. With
your continued support, we are very optimistic about the coming year.
Sincerely,
/s/Marvin C. Schumm
--------------------
December 1, 1999 Marvin C. Schumm, President & Chief Executive
Officer
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are selected consolidated financial and other data of
the Company. This financial data is derived in part from the consolidated
financial statements and related notes of the Company which are presented
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets $ 413,957 $ 372,429 $ 346,041 $ 322,702 $ 313,185
Loans receivable, net 345,999 324,188 283,987 250,306 214,405
Cash and cash equivalents 36,313 23,366 16,445 11,923 21,390
Investment securities and FHLB Stock 26,333 19,944 40,530 54,842 71,917
Deposits 363,354 315,998 297,493 271,185 256,108
Federal Home Loan Bank advances 7,000 9,000 - - -
Shareholders' equity - substantially restricted 37,923 41,038 43,991 46,713 54,060
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ----- ---- ----
(In Thousands)
Summary of Operating Results:
<S> <C> <C> <C> <C> <C>
Interest income ............................ $ 27,253 $ 25,979 $ 24,422 $ 22,913 $ 21,120
Interest expense ........................... 17,204 16,223 14,963 13,787 12,730
-------- -------- -------- -------- --------
Net interest income ...................... 10,049 9,756 9,459 9,126 8,390
Provision for loan losses .................. 2 2 2 13 87
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses ............................ 10,047 9,754 9,457 9,113 8,303
Noninterest income:
Net losses on trading securities ......... (27) -- -- -- --
Net gains on sales of securities available
for sale ............................... 41 108 -- 1 1
Net gains on sales of loans held for sale 4 -- -- 2 --
Other .................................... 390 248 246 227 220
-------- -------- -------- -------- --------
Total noninterest income .............. 408 356 246 230 221
Noninterest expense:
Employee compensation and benefits ....... 3,154 3,088 2,726 2,512 2,088
Occupancy and equipment .................. 791 729 591 528 584
Federal deposit insurance premium ........ 192 186 251 2,235 582
Other .................................... 1,049 1,009 1,187 1,151 1,274
-------- -------- -------- -------- --------
Total noninterest expense ............. 5,186 5,012 4,755 6,426 4,528
-------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of change in accounting principle . 5,269 5,098 4,948 2,917 3,996
Income tax expense ......................... 2,214 2,192 2,055 1,281 1,535
-------- -------- -------- -------- --------
Income before cumulative effect of change
in accounting principle .................. 3,055 2,906 2,893 1,636 2,461
Cumulative effect of change in accounting
for derivative instruments and hedging
activities, net of tax ................... 55 -- -- -- --
-------- -------- -------- -------- --------
Net income ................................. $ 3,110 $ 2,906 $ 2,893 $ 1,636 $ 2,461
======== ======== ======== ======== ========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ----- ---- ----
PERFORMANCE RATIOS (Averages)
<S> <C> <C> <C> <C> <C>
Return on assets(1)..................... .79% .82% .87% .52% .83%
Return on shareholders' equity(2)....... 7.90 6.80 6.43 3.21 6.50
Yield on interest-earning assets........ 7.05 7.47 7.53 7.43 7.25
Cost of interest-bearing liabilities.... 5.06 5.30 5.30 5.30 4.99
Net interest spread(3).................. 1.99 2.17 2.23 2.13 2.26
Net interest rate margin(4)............. 2.60 2.80 2.92 2.96 2.88
Operating (G&A) expenses to assets(5)(6) 1.31 1.42 1.44 1.52 1.53
Efficiency ratio (6)(7)................. 49.59 49.56 48.99 51.05 52.59
Net interest income to operating (G&A)
expenses(6)........................... 193.77 194.65 198.93 190.80 185.29
Interest-earning assets to interest-bearing
liabilities........................... 113.63 113.78 114.90 118.63 114.73
Average assets (dollars in thousands)... $ 395,724 $ 353,789 $ 331,060 $ 314,645 $ 296,221
CAPITAL RATIOS
Equity to assets at period end ......... 9.16% 11.02% 12.71% 14.48% 17.26%
Average equity to average assets........ 9.95 12.07 13.59 16.21 12.79
Average tangible equity to average assets 9.95 12.07 13.59 16.21 12.79
Dividend payout ratio................... 25.17 24.22 16.95 17.54 -
ASSET QUALITY RATIOS
Non-performing assets to total assets... .02% .08% .06% .07% .03%
Non-performing loans to total loans..... .03 .09 .08 .09 .05
Allowance for loan losses to net loans.. .39 .43 .49 .55 .64
Allowance for loan losses to non-
performing loans...................... 1,525 476 622 600 1,411
Net charge-offs to net loans............ .01 - - - -
Loans to deposits....................... 95.22 102.59 95.46 92.30 83.72
Loans to assets......................... 83.58 87.05 82.07 77.57 68.46
Loan originations (dollars in thousands) $ 113,570 $ 114,171 $ 81,888 $ 83,917 $ 51,514
PER COMMON SHARE
Dividends declared per share............ $ .38 $ 0.31 $ 0.20 $ 0.10 $ -
Income before cumulative effect of
change in accounting principle:
Earnings, basic....................... 1.53 1.32 1.20 .57 .44
Earnings, diluted..................... 1.48 1.28 1.18 .57 .44
Net income:
Earnings, basic....................... 1.56 1.32 1.20 0.57 0.44
Earnings, diluted..................... 1.51 1.28 1.18 0.57 0.44
Book value.............................. 18.49 18.20 17.83 16.91 16.37
Tangible book value..................... 18.49 18.20 17.83 16.91 16.37
Shares outstanding at period end........ 2,050,506 2,254,642 2,467,238 2,762,350 3,303,178
Number of full-service offices 10 9 9 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 142.02%.
(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 1999 marked the fourth 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 1999 and 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 1999 and 1998 the
Company also repurchased 250,671 and 234,731 shares of Home Bancorp stock to
fund stock options and for other general 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 1999
represents the most profitable year on record for the Company.
Financial Condition
September 30, 1999 compared to September 30, 1998. The Company's total
assets increased from $372.4 million as of September 30, 1998 to $414.0 as of
September 30, 1999, an increase of $41.6 million or 11.2%. Shareholders' equity
decreased from $41.0 as of September 30, 1998 to $37.9 million as of September
30, 1999, a decrease of $3.1 million or 7.6%. The decrease in shareholders'
equity was primarily the net result of earnings for the year of approximately
$3.1 million, release of shares for benefit plans, the repurchase of 250,671
shares of common stock for $6.9 million, and dividends paid on common stock.
Total cash and cash equivalents increased from $23.4 million as of
September 30, 1998 to $36.3 million as of September 30, 1999, an increase of
approximately $12.9 million. Investment securities, including those
held-to-maturity and available-for-sale, were $23.2 million as of September 30,
1999, an increase of $6.0 million from the balance of $17.2 million as of
September 30, 1998. As of January 1, 1999, the Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. In accordance with
provisions in that statement, the Company chose to reclassify certain securities
from held-to-maturity to trading and available-for-sale. The amortized cost of
securities transferred to available-for-sale was $4,007,930 and the unrealized
net gain was $26,444, which is included in shareholders' equity, net of income
tax effect of $10,474. The amortized cost of the securities transferred to
trading was $4,015,191 and the unrealized net gain was $91,060, which is
reported as the cumulative effect of a change in accounting principle, net of
tax of $36,069. The Company has no derivative instruments to account for under
provisions of this statement. The net increase 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 $21.8 million or 6.7%, from $324.2
million as of September 30, 1998 to $346.0 million as of September 30, 1999.
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 $363.4 million as of September 30, 1999, an
increase of $47.4 million from $316.0 million as of September 30, 1998. The
increase in deposits was primarily the result of significant growth in both core
deposits and certificates of deposits. As of September 30, 1999, certificates of
deposit had an increase of $29.1 million from $234.6 million as of September 30,
1998 to $263.7 million as of September 30, 1999. As of September 30, 1999, core
deposits had an increase of $18.2 million from $81.4 million as of September 30,
1998 to $99.6 million as of September 30, 1999. Management attributes this fact
to customer preferences which include higher yielding instruments of deposit of
relatively short maturities as well as the liquidity afforded lower yielding
transactional accounts. At September 30, 1999, the Company had $186.4 million in
certificates of deposit with terms of one year or less as compared to $151.8
million for the same period ended September 30, 1998. 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 has borrowed funds from the FHLB. Outstanding FHLB advances as of September
30, 1999 were $7.0 million. The maturity of these advances ranged from 1 to 9
years and were secured by a blanket lien arrangement. The Company had $9.0
million in advances as of September 30, 1998.
4
<PAGE>
Results of Operations
Comparison of the Fiscal Years Ended September 30, 1999 and 1998
General. Net income for the year ended September 30, 1999 was $3.1
million, an increase of $204,000 compared to net income recorded for the year
ended September 30, 1998. The increase in net income for the year ended
September 30, 1999 compared to the prior year was primarily the result of an
increase in net interest income and other noninterest income that was partially
offset by increased operating expenses and income taxes.
Interest Income. Interest income increased $1.3 million, or 5.0%, from
$26.0 million for the year ended September 30, 1998 to $27.3 million for the
year ended September 30, 1999. Interest income on loans receivable increased
$1.4 million while interest income on investments and other interest-earning
assets decreased $155,000 during fiscal 1999 as compared to fiscal 1998. The
increase in interest income for fiscal 1999 was primarily the result of
increases in the average balance of outstanding loans, as yields earned on loan
balances decreased during the fiscal year. The average balance as well as the
yield on investment securities decreased during fiscal 1999. The average balance
of interest earning deposits increased, and the yield on these deposits
decreased when compared to fiscal 1998.
Interest Expense. Interest expense increased $1.0 million, or 6.2%,
from $16.2 million for the year ended September 30, 1998 to $17.2 million for
the year ended September 30, 1999. 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 1999. The weighted average rate
paid on interest-bearing liabilities for fiscal 1999 of 5.06% compared to an
average of 5.30% for fiscal 1998. See "Average Balances, Interest Rates and
Yields" and "Rate/Volume Analysis."
Net Interest Income. Net interest income increased $293,000, or 3.0%,
from $9.7 million for the year ended September 30, 1998 to $10.0 million for the
year ended September 30, 1999. 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 2.17%
during fiscal 1998 to 1.99% during fiscal 1999. 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, 1999 was $2,400. This was the same amount provided for in
fiscal 1998. 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, 1999, the Company's allowance for loan losses totaled $1.3 million
or .39% of net loans receivable and 1,525% 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'
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
$51,000 in net loan charge-offs in fiscal 1999.
<PAGE>
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 $356,000 in
fiscal 1998 to $408,000 in fiscal 1999. This modest increase was primarily the
result of increases in service charges and fees which more than offset the
decrease in securities gains.
5
<PAGE>
Noninterest Expense. Noninterest expense increased approximately
$174,000, or 3.5%, from $5.0 million in fiscal 1998 to $5.2 million in fiscal
1999. Approximately $66,000 of this increase was attributable to employee
compensation and benefits. Occupancy and equipment expense in fiscal 1999
increased by approximately $62,000 including 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." Other noninterest expenses increased $40,000 for the fiscal year
ended 1999 when compared to the like period in 1998, primarily the result of
increased data processing expenses partially offset by other noninterest
expense.
Income Tax Expense. Income tax expense increased from $2.19 million in
fiscal 1998 to $2.21 million in fiscal 1999, as a result of higher pretax
earnings for the period. The effective tax rate in fiscal 1999 was moderately
lower than in 1998 primarily due to decreased market values of ESOP shares
relative to cost.
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 net gains on sales of securities available
for sale, that was nearly offset by increased noninterest expenses and income
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 when compared to fiscal 1997. 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 compared to the year
ending September 30, 1997. 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 and 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 3.1%,
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.
<PAGE>
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'
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 charge-offs in fiscal 1998 or 1997.
6
<PAGE>
Noninterest Income. Noninterest income increased from $246,000 in
fiscal 1997 to $356,000 in fiscal 1998. The increase was the result of net gains
on sales of securities available for sale that were sold to fund liquidity needs
of 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 of this increase. Occupancy and equipment expense in fiscal 1998
increased by approximately $138,000 including 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 $65,000 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 the
deferral of loan origination 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 primarily due to increased market values of ESOP shares
relative to cost.
7
<PAGE>
Average Balances, Interest Rates and Yields
<TABLE>
<CAPTION>
At For the Year Ended September 30,
September 30, ---------------------------------------------------------------------
1999 1999 1998
--------------------- ----------------------------------- -------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Interest-earning deposits..... $ 34,232 5.22% $ 24,775 $ 1,109 4.48% $ 14,122 $ 680 4.82%
Investment securities......... 23,159 5.32 19,992 1,135 5.68 26,044 1,748 6.71
Loans........................ 345,999 7.19 338,585 24,771 7.32 305,218 23,342 7.65
FHLB stock.................... 3,174 8.03 2,978 238 7.99 2,603 209 8.03
----------- ----------- ---------- ----------- ---------
Total interest-earning assets 406,564 6.92 386,330 27,253 7.05 347,987 25,979 7.47
Noninterest-earning assets.... 7,393 9,394 5,802
----------- ----------- -----------
Total assets................ 413,957 395,724 353,789
----------- ----------- -----------
Interest-Bearing Liabilities:
Savings accounts............. 16,793 2.08 16,179 349 2.16 15,851 405 2.56
NOW and money market accounts. 75,023 3.71 71,053 2,619 3.69 62,486 2,311 3.70
Certificates of deposits...... 263,735 5.51 245,596 13,853 5.64 225,755 13,415 5.94
FHLB advances................. 7,000 5.27 7,148 383 5.36 1,750 92 5.26
----------- ----------- ---------- ----------- ---------
Total interest-bearing
liabilities............... 362,551 4.97 339,976 17,204 5.06 305,842 16,223 5.30
---------- ---------
Noninterest-bearing liabilities 13,483 16,383 5,231
-------- ---------- -----------
Total liabilities........... 376,034 356,359 311,073
Shareholders' equity.......... 37,923 39,365 42,716
----------- ----------- -----------
Total liabilities and
shareholders' equity...... 413,957 395,724 353,789
----------- ----------- -----------
Net interest-earning assets.... $ 44,013 $ 46,354 $ 42,145
=========== =========== ===========
Net interest income............ $ 10,049 $ 9,756
========== =========
Interest rate spread(1)........ 1.95% 1.99% 2.17%
Net yield on weighted average interest-
earning assets(2)............. 2.60% 2.80%
Average interest-earning assets to
average interest-bearing liabilities 113.63% 113.78%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended September 30,
---------------------------------
1997
---------------------------------
<S> <C> <C> <C>
Interest-Earning Assets:
Interest-earning deposits..... $17,097 $ 897 5.25%
Investment securities......... 39,153 2,728 6.97
Loans........................ 265,704 20,618 7.76
FHLB stock.................... 2,252 179 7.95
----------- ----------
Total interest-earning assets 324,206 24,422 7.53
Noninterest-earning assets.... 6,854
-----------
Total assets................ 331,060
-----------
Interest-Bearing Liabilities:
Savings accounts............. 15,939 455 2.85
NOW and money market accounts. 43,344 1,374 3.17
Certificates of deposits...... 222,889 13,134 5.89
FHLB advances................. - - -
----------- ----------
Total interest-bearing
liabilities............... 282,172 14,963 5.30
----------
Noninterest-bearing liabilities 3,893
----------
Total liabilities........... 286,065
Shareholders' equity.......... 44,995
-----------
Total liabilities and
shareholders' equity...... 331,060
-----------
Net interest-earning assets.... $42,034
===========
Net interest income............ $9,459
======
Interest rate spread(1)........ 2.23%
Net yield on weighted average interest-
earning assets(2)............. 2.92%
Average interest-earning assets to
average interest-bearing liabilities 114.90%
</TABLE>
- ----------------
<PAGE>
(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 average interest-earning assets for the period
indicated. No net yield figure is presented at September 30, 1999, because
the computation of net yield is applicable only over a period rather than
at a specific date.
Note: All average balances are calculated using monthly balances.
8
<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,
----------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
--------------------------------- ----------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
--------- -------- -------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits........... $ 480 $ (51) $ 429 $ (147) $ (70) $ (217)
Investment securities............... (369) (244) (613) (883) (97) (980)
Loans............................... 2,473 (1,044) 1,429 3,026 (302) 2,724
FHLB stock.......................... 30 (1) 29 28 2 30
--------- -------- -------- -------- --------- ---------
Total............................. $ 2,614 $ (1,340) $ 1,274 $ 2,024 $ (467) $ 1,557
========= ======== ======== ======== ========== =========
Interest-bearing liabilities:
Savings accounts.................... $ 8 $ (64) $ (56) $ (2) $ (48) $ (50)
NOW and money market accounts....... 316 (8) 308 680 257 937
Certificates of deposit............. 1,141 (703) 438 170 111 281
FHLB advances....................... 289 2 291 92 - 92
--------- -------- -------- -------- --------- ---------
Total............................. $ 1,754 $ (773) $ 981 $ 940 $ 320 $ 1,260
========= ======== ======== ======== ========= =========
Change in net interest income........ $ 293 $ 297
======== =========
</TABLE>
Asset/Liability Management and Market Risk
As described in "Results of Operations", 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
<PAGE>
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 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, 1999, a change in market interest rates of positive
200 basis points would have resulted in a 3.17% decrease in the NPV as a percent
of the present value of the Bank's assets, while a change in market interest
rates of negative 200 basis points would have resulted in a 1.24% increase in
the NPV as a percent of the present value of the Bank's assets.
9
<PAGE>
Presented in the following table, as of September 30, 1999, 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 300
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, 1999
Change in -------------------------
Interest Rate Board Limit Estimated Amount Percent
(Basis Points) Percent Change NPV Change Change
-------------- -------------- --- ------ ------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
+300 bp -45% $ 15,880 $ -22,048 -58%
+200 bp -29 23,482 -14,446 -38
+100 bp -13 31,061 -6,867 -18
0 bp - 37,928 - -
-100 bp - 2 42,539 4,611 +12
-200 bp - 6 44,494 6,566 +17
-300 bp -10 45,630 7,702 +20
</TABLE>
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 at September 30, 1998.
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 300
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.
<PAGE>
<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>
+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
</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:
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.
10
<PAGE>
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 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.
Promoting adjustable rate mortgages. Adjustable rate mortgages 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.
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 levels 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, FHLB advances,
principal and interest payments on loans and sales 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, 1999, the required
percentage was 4% of net withdrawable savings deposits and borrowings payable on
<PAGE>
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, 1999,
the Bank's liquidity ratio was 16.5% compared to 9.7% and 16.0% at September 30,
1998 and 1997.
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 and FHLB advances were $7.6
million, $5.3 million, and $3.9 million for the years ended September 30, 1999,
1998 and 1997, 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 maturities of investments, were $33.4 million, $19.7 million, and $19.6
million for the years ended September 30, 1999, 1998 and 1997, respectively. Net
cash provided by financing activities, consisting primarily of net deposit
activity and FHLB advances that were offset by treasury stock purchases, was
$38.7 million, $21.3 million and $20.2 million for the years ended September 30,
1999, 1998 and 1997, respectively. If the Bank requires additional funds beyond
its ability to acquire them locally, it has borrowing capability
11
<PAGE>
through the FHLB of Indianapolis. At September 30, 1999, the Bank had $7.0
million in advances from 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,
1999, the Bank had outstanding commitments to extend credit which amounted to
$15.9 million (including $12.5 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.
At September 30, 1999, the Bank had tangible and core capital of $36.2
million, or 8.76% of adjusted total assets, which was approximately $30.0
million and $23.8 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, 1999 of $37.6 million (including $36.2
million in core capital), or 18.84% of risk-weighted assets of $199.6 million.
This amount was $21.6 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 1999, the
Bank paid dividends in the amount of $1,332,000 to the Company. 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, 1999, there was a net increase of
$12.9 million in cash and cash equivalents, as major sources of funds offset the
uses of cash. Primary uses of cash during the fiscal year 1999 included funding
an increase of $22.1 million in the loan portfolio, the repurchase of $6.9
million in treasury stock, the purchase of $23.4 million in securities, and the
repayment of $2.0 million in advances from the FHLB of Indianapolis. The major
sources of funds included $17.1 million from the sale or maturity of securities,
and a $47.4 million increase in deposits. The Company paid a total of $0.38 per
share on common stock, or a total of $802,000 to its shareholders during fiscal
1999.
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 stock, and the purchase of $4.0 million in securities. The
major sources 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 Indianapolis with 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.
<PAGE>
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 stock, and the purchase of $15.1 million in securities. The
major sources 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.
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.
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,
12
<PAGE>
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 readiness 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 readiness. The Federal Financial Institutions 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. As of September 30, 1999, the Bank has completed this
phase.
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. As of September 30, 1999, the Bank has
completed this phase.
<PAGE>
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 fiscal 1998 and 1999.
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. The Bank has invested
approximately $600,000 in new computers, communication, and software purchases.
Approximately $150,000 in charges associated with Y2K were also expensed as
non-recurring charges during fiscal 1999 and 1998. While the Bank does not
anticipate any additional Y2K related expenses, it is impossible to predict the
exact expenses associated with the Y2K issue. Therefore, additional funds may be
needed for unknown expenses related to Y2K testing, training, and education, as
well as system and software replacements.
13
<PAGE>
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 the process of validating all of the its mission critical
applications.
Contingency 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.
The Bank, as with all financial institutions, has reviewed the
possibility of some level of reduction in deposits during the latter part of
1999. Based on its review, the Bank has determined that alternative sources of
funds should be available to maintain adequate funding throughout this period.
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
<PAGE>
the Bank's financial performance to differ materially from the plans,
objectives, expectations, estimates and intentions expressed in such
forward-looking statements: 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 these products and services; the willingness of users
to substitute competitors' products and services for the Bank's products and
services; 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>
[GRAPHIC-CROWE CHIZEK LETTERHEAD]
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, 1999 and 1998 and the related consolidated statements of
income, changes in shareholders' equity and cash flows for the years ended
September 30, 1999, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Home Bancorp as of
September 30, 1999 and 1998 and the results of its operations and its cash flows
for the years ended September 30, 1999, 1998 and 1997 in conformity with
generally accepted accounting principles.
As disclosed in Notes 1 and 2, on January 1, 1999 the Company changed its method
of accounting for derivative instruments and hedging activities to comply with
new accounting guidance.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
October 12, 1999
15
<PAGE>
<TABLE>
<CAPTION>
Home Bancorp
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
1999 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash on hand and in other banks $ 2,081,354 $ 1,643,168
Federal funds sold 16,000,000 10,000,000
Interest-earning deposits in other banks 18,231,528 11,722,658
----------------- -----------------
Total cash and cash equivalents 36,312,882 23,365,826
Securities available for sale 23,159,062 5,137,187
Securities held to maturity (fair value:
1998 - $12,195,000) - 12,024,247
Loans receivable, net of allowance for loan losses:
1999 - $1,342,220 and 1998 - $1,390,389 345,999,338 324,187,601
Federal Home Loan Bank stock 3,173,700 2,782,500
Accrued interest receivable 2,156,465 1,948,771
Premises and equipment, net 2,916,349 2,804,550
Other assets 239,004 178,303
----------------- -----------------
Total assets $ 413,956,800 $ 372,428,985
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Non-interest-bearing demand deposits $ 7,803,507 $ 5,754,398
Savings, NOW and MMDA deposits 91,816,212 75,602,517
Certificates of deposit 263,734,550 234,641,189
Total deposits 363,354,269 315,998,104
Federal Home Loan Bank advances 7,000,000 9,000,000
Advances from borrowers for taxes and insurance 2,971,219 2,597,387
Accrued expenses and other liabilities 2,708,221 3,795,215
Total liabilities 376,033,709 331,390,706
</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; 1999 - 3,380,255 shares issued
and 2,050,506 shares outstanding; 1998 - 3,380,315
shares issued and 2,254,642 shares outstanding 34,874,404 34,399,134
Retained earnings, substantially restricted 32,159,378 29,851,665
Accumulated other comprehensive income (loss),
net of tax of $(73,357) in 1999 and $33,110 in 1998 (110,033) 64,273
Unearned Employee Stock Ownership Plan shares (1,287,963) (1,536,908)
Unearned Recognition and Retention Plan shares (232,608) (466,130)
Treasury stock at cost, 1,329,749 and 1,125,673 common
shares at 1999 and 1998, respectively (27,480,087) (21,273,755)
----------------- -----------------
Total shareholders' equity 37,923,091 41,038,279
----------------- -----------------
Total liabilities and shareholders' equity $ 413,956,800 $ 372,428,985
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
HOME BANCORP
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1999, 1998 and 1997
1999 1998 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
Interest income
Loans receivable, including fees
Mortgage loans $ 23,878,385 $ 22,407,485 $ 19,820,186
Consumer and other loans 892,901 934,504 798,484
Securities 1,135,069 1,747,735 2,728,399
Other 1,346,372 889,770 1,075,643
--------------- --------------- ----------------
27,252,727 25,979,494 24,422,712
Interest expense
Deposits 16,821,148 16,130,669 14,963,252
Federal Home Loan Bank advances 382,601 92,112 -
--------------- --------------- ----------------
17,203,749 16,222,781 14,963,252
Net interest income 10,048,978 9,756,713 9,459,460
Provision for loan losses 2,400 2,400 2,400
--------------- --------------- ----------------
Net interest income after provision
for loan losses 10,046,578 9,754,313 9,457,060
Noninterest income
Net losses on trading securities (26,705) - -
Net gains on sales of securities available
for sale 40,719 108,406 -
Net gains on sales of loans held for sale 3,763 - -
Other 390,527 247,664 246,713
--------------- --------------- ----------------
408,304 356,070 246,713
Noninterest expense
Employee compensation and benefits 3,154,488 3,087,945 2,725,691
Occupancy and equipment 790,820 729,436 591,127
Federal deposit insurance premium 191,537 185,957 251,594
Other 1,049,384 1,008,989 1,187,017
--------------- --------------- ----------------
5,186,229 5,012,327 4,755,429
--------------- --------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income before income taxes and cumulative
effect of change in accounting principle 5,268,653 5,098,056 4,948,344
Income tax expense 2,213,644 2,192,056 2,055,344
--------------- --------------- ----------------
Income before cumulative effect of change
in accounting principle 3,055,009 2,906,000 2,893,000
Cumulative effect of change in accounting for
derivative instruments and hedging activities,
net of tax 54,991 - -
--------------- --------------- ----------------
Net income $ 3,110,000 $ 2,906,000 $ 2,893,000
=============== =============== ================
Earnings per share
Basic earnings per common share
Income before cumulative effect of change
in accounting principle $ 1.53 $ 1.32 $ 1.20
Cumulative effect of change in accounting for
derivative instruments and hedging activities,
net of tax .03 - -
------ ------- -------
Net income $ 1.56 $ 1.32 $ 1.20
====== ====== ======
Diluted earnings per common share
Income before cumulative effect of change
in accounting principle $ 1.48 $ 1.28 $ 1.18
Cumulative effect of change in accounting for
derivative instruments and hedging activities,
net of tax .03 - -
------ ------- -------
Net income $ 1.51 $ 1.28 $ 1.18
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
HOME BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 1999, 1998 and 1997
Common Retained
Stock Earnings
----- --------
<S> <C> <C>
Balances at October 1, 1996 $ 33,758,217 $ 25,203,053
Comprehensive Income:
Net income for the year ended September 30, 1997 -- 2,893,000
Other comprehensive income:
Net change in net unrealized gains on securities available for sale, net of
reclassification adjustments and tax effects -- --
Total comprehensive income
Cash dividends declared on common stock - $.20 per share -- (477,214)
22,590 shares committed to be released under the ESOP 224,687 --
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 -- --
------------ ------------
Balances at September 30, 1997 33,985,413 27,618,839
Comprehensive income:
Net income for the year ended September 30, 1998 -- 2,906,000
Other comprehensive income:
Net change in net unrealized gains on securities available for sale, net of
reclassification adjustments and tax effects -- --
Total comprehensive income
Cash dividends declared on common stock - $.31 per share -- (673,174)
21,504 shares committed to be released under the ESOP 420,147 --
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 -- --
------------ ------------
Balances at September 30, 1998 34,399,134 29,851,665
Comprehensive income:
Net income for the year ended September 30, 1999 -- 3,110,000
Other comprehensive income (loss):
Net change in net unrealized gains (losses) on securities available for sale, net
of reclassification adjustments and tax effects -- --
Net unrealized gains on securities transferred from the held-to-maturity
to the available-for-sale category, net of tax of $10,474 -- --
Total other comprehensive income (loss)
Total comprehensive income
Cash dividends declared on common stock - $.38 per share -- (802,287)
20,218 shares committed to be released under the ESOP 364,071 --
Cancellation of 60 RRP shares (915) --
Amortization of RRP contribution -- --
Issuance of 46,595 common shares from treasury stock due to exercise of stock options 9,328 --
Tax benefit of employee benefit plans 102,786 --
Purchase 250,671 shares of treasury stock -- --
------------ ------------
Balances at September 30, 1999 $ 34,874,404 $ 32,159,378
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated Unearned
Other Employee
Comprehensive Stock
Income (Loss), Ownership
Net of Tax Plan Shares
---------- -----------
<S> <C> <C>
Balances at October 1, 1996 $ 3,124 $ (2,001,177)
Comprehensive Income:
Net income for the year ended September 30, 1997 -- --
Other comprehensive income:
Net change in net unrealized gains on securities available for sale, net of
reclassification adjustments and tax effects 47,897 --
Total comprehensive income
Cash dividends declared on common stock - $.20 per share -- --
22,590 shares committed to be released under the ESOP -- 231,798
Cancellation of 200 RRP shares -- --
Amortization of RRP contribution -- --
Issuance of 14,824 common shares from treasury stock due to exercise of stock options -- --
Purchase 309,736 shares of treasury stock -- --
------------ ------------
Balances at September 30, 1997 51,021 (1,769,379)
Comprehensive income:
Net income for the year ended September 30, 1998 -- --
Other comprehensive income:
Net change in net unrealized gains on securities available for sale, net of
reclassification adjustments and tax effects 13,252 --
Total comprehensive income
Cash dividends declared on common stock - $.31 per share -- --
21,504 shares committed to be released under the ESOP -- 232,471
Cancellation of 990 RRP shares -- --
Amortization of RRP contribution -- --
Issuance of 23,125 common shares from treasury stock due to exercise of stock options -- --
Purchase 234,731 shares of treasury stock -- --
------------ ------------
Balances at September 30, 1998 64,273 (1,536,908)
Comprehensive income:
Net income for the year ended September 30, 1999 -- --
Other comprehensive income (loss):
Net change in net unrealized gains (losses) on securities available for sale, net
of reclassification adjustments and tax effects (189,876) --
Net unrealized gains on securities transferred from the held-to-maturity
to the available-for-sale category, net of tax of $10,474 15,570 --
Total other comprehensive income (loss)
Total comprehensive income
Cash dividends declared on common stock - $.38 per share -- --
20,218 shares committed to be released under the ESOP -- 248,945
Cancellation of 60 RRP shares -- --
Amortization of RRP contribution -- --
Issuance of 46,595 common shares from treasury stock due to exercise of stock options -- --
Tax benefit of employee benefit plans -- --
Purchase 250,671 shares of treasury stock -- --
------------ ------------
Balances at September 30, 1999 $ (110,033) $ (1,287,963)
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unearned
Recognition
and Retention Treasury
Plan Shares Stock
----------- -----
<S> <C> <C>
Balances at October 1, 1996 $ (955,589) $ (9,294,413)
Comprehensive Income:
Net income for the year ended September 30, 1997 -- --
Other comprehensive income:
Net change in net unrealized gains on securities available for sale, net of
reclassification adjustments and tax effects -- --
Total comprehensive income
Cash dividends declared on common stock - $.20 per share -- --
22,590 shares committed to be released under the ESOP -- --
Cancellation of 200 RRP shares 3,050 --
Amortization of RRP contribution 238,245 --
Issuance of 14,824 common shares from treasury stock due to exercise of stock options -- 220,507
Purchase 309,736 shares of treasury stock -- (6,106,642)
------------ ------------
Balances at September 30, 1997 (714,294) (15,180,548)
Comprehensive income:
Net income for the year ended September 30, 1998 -- --
Other comprehensive income:
Net change in net unrealized gains on securities available for sale, net of
reclassification adjustments and tax effects -- --
Total comprehensive income
Cash dividends declared on common stock - $.31 per share -- --
21,504 shares committed to be released under the ESOP -- --
Cancellation of 990 RRP shares 15,098 --
Amortization of RRP contribution 233,066 --
Issuance of 23,125 common shares from treasury stock due to exercise of stock options -- 343,984
Purchase 234,731 shares of treasury stock -- (6,437,191)
------------ ------------
Balances at September 30, 1998 (466,130) (21,273,755)
Comprehensive income:
Net income for the year ended September 30, 1999 -- --
Other comprehensive income (loss):
Net change in net unrealized gains (losses) on securities available for sale, net
of reclassification adjustments and tax effects -- --
Net unrealized gains on securities transferred from the held-to-maturity
to the available-for-sale category, net of tax of $10,474 -- --
Total other comprehensive income (loss)
Total comprehensive income
Cash dividends declared on common stock - $.38 per share -- --
20,218 shares committed to be released under the ESOP -- --
Cancellation of 60 RRP shares 915 --
Amortization of RRP contribution 232,607 --
Issuance of 46,595 common shares from treasury stock due to exercise of stock options -- 701,246
Tax benefit of employee benefit plans -- --
Purchase 250,671 shares of treasury stock -- (6,907,578)
------------ ------------
Balances at September 30, 1999 $ (232,608) $(27,480,087)
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Shareholders'
Equity
------
<S> <C>
Balances at October 1, 1996 $ 46,713,215
Comprehensive Income:
Net income for the year ended September 30, 1997 2,893,000
Other comprehensive income:
Net change in net unrealized gains on securities available for sale, net of
reclassification adjustments and tax effects 47,897
Total comprehensive income 2,940,897
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 --
Amortization of RRP contribution 238,245
Issuance of 14,824 common shares from treasury stock due to exercise of stock options 226,066
Purchase 309,736 shares of treasury stock (6,106,642)
------------
Balances at September 30, 1997 43,991,052
Comprehensive income:
Net income for the year ended September 30, 1998 2,906,000
Other comprehensive income:
Net change in net unrealized gains on securities available for sale, net of
reclassification adjustments and tax effects 13,252
Total comprehensive income 2,919,252
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 --
Amortization of RRP contribution 233,066
Issuance of 23,125 common shares from treasury stock due to exercise of stock options 352,656
Purchase 234,731 shares of treasury stock (6,437,191)
------------
Balances at September 30, 1998 41,038,279
Comprehensive income:
Net income for the year ended September 30, 1999 3,110,000
Other comprehensive income (loss):
Net change in net unrealized gains (losses) on securities available for sale, net
of reclassification adjustments and tax effects (189,876)
Net unrealized gains on securities transferred from the held-to-maturity
to the available-for-sale category, net of tax of $10,474 15,570
------------
Total other comprehensive income (loss) (174,306)
Total comprehensive income 2,935,694
Cash dividends declared on common stock - $.38 per share (802,287)
20,218 shares committed to be released under the ESOP 613,016
Cancellation of 60 RRP shares --
Amortization of RRP contribution 232,607
Issuance of 46,595 common shares from treasury stock due to exercise of stock options 710,574
Tax benefit of employee benefit plans 102,786
Purchase 250,671 shares of treasury stock (6,907,578)
------------
Balances at September 30, 1999 $ 37,923,091
============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
HOME BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,110,000 $ 2,906,000 $ 2,893,000
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 350,224 338,956 208,661
Provision for loan losses 2,400 2,400 2,400
Net losses on trading securities 26,705 -- --
Net gains on sales of securities available for sale (40,719) (108,406) --
Net gains on sales of loans held for sale (3,763) -- --
Proceeds from sales of loans held for sale 319,474 -- --
ESOP expense 613,016 652,618 456,485
Amortization of RRP contribution 232,607 233,066 238,245
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of tax (54,991) -- --
Proceeds from sales of trading securities 4,077,500 -- --
Loss on disposal of premises and equipment 803 8,609 770
Securities amortization and accretion, net 143,005 (253,523) (72,753)
Change in
Accrued interest receivable (207,694) 100,793 210,935
Accrued expenses and other liabilities (1,053,884) 1,296,892 (451,160)
Other assets 79,374 166,790 432,777
------------ ------------ ------------
Net cash from operating activities 7,594,057 5,344,195 3,919,360
Cash flows from investing activities
Proceeds from maturities of securities available for sale 4,000,000 -- --
Proceeds from maturities of securities held to
maturity 4,000,000 15,000,000 30,000,000
Proceeds from sales of securities available for sale 5,027,573 10,286,815 --
Purchase of securities available for sale (23,421,406) (3,985,125) (7,084,219)
Purchase of securities held to maturity -- -- (8,063,750)
Purchase of Federal Home Loan Bank stock (391,200) (333,400) (394,900)
Net change in loans (22,129,848) (40,203,079) (33,683,676)
Purchase of premises and equipment (462,826) (441,623) (325,006)
------------ ------------ ------------
Net cash from investing activities (33,377,707) (19,676,412) (19,551,551)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits 47,356,165 18,505,479 26,307,158
Advances from Federal Home Loan Bank -- 9,000,000 --
Repayments of FHLB advances (2,000,000) -- --
Net change in advances from borrowers
for taxes and insurance 373,832 504,975 205,553
Purchase of treasury stock (6,907,578) (6,437,191) (6,106,642)
Cash dividends paid (802,287) (673,174) (477,214)
Proceeds from exercise of stock options 710,574 352,656 226,066
------------ ------------ ------------
Net cash from financing activities 38,730,706 21,252,745 20,154,921
------------ ------------ ------------
Net change in cash and cash equivalents 12,947,056 6,920,528 4,522,730
Cash and cash equivalents at beginning of year 23,365,826 16,445,298 11,922,568
------------ ------------ ------------
Cash and cash equivalents at end of year $ 36,312,882 $ 23,365,826 $ 16,445,298
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 17,293,757 $ 16,076,559 $ 14,942,651
Income taxes 2,418,377 1,712,000 1,681,976
Transfer of securities from held-to-maturity to trading $ 4,015,191 $ -- $ --
Transfer of securities from held-to-maturity to available-
for-sale 4,007,930 -- --
Transfer from loans receivable to loans held for sale 315,711 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
19
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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, Concentrations of Credit Risk and Industry Segment
Information: 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, 1999. 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, operating income and assets. While the
Company's chief decision makers monitor the revenue streams of the various
Company products and services, operations are managed and financial performance
is evaluated on a Company-wide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
Use of Estimates In 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 advances from
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 net
unrealized gains and losses included as a separate component of other
comprehensive income (loss) and 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.
<PAGE>
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.
(Continued)
20
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, requires all derivatives to be
recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. As of January 1, 1999, the Company adopted this statement
and, in accordance with its provisions, chose to reclassify certain securities
from held-to-maturity to trading and available-for-sale. The amortized cost of
the securities transferred to trading was $4,015,191. The amortized cost of the
securities transferred to available-for-sale was $4,007,930. The Company does
not have derivative instruments in its portfolio to account for under provisions
of this statement.
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 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.
(Continued)
21
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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. There were no properties held as
foreclosed real estate at September 30, 1999 and 1998.
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.
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.
(Continued)
22
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
13.
Earnings Per Share: 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.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income
and other comprehensive income (loss). Other comprehensive income (loss)
includes the net change in net unrealized gains and losses on securities
available for sale, net of tax, which is also recognized as a separate component
of shareholders' equity. The accounting standard that requires reporting
comprehensive income (loss) first applied for 1999, with prior information
restated to be comparable.
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.
(Continued)
23
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 2 - EARNINGS PER 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 September 30,
1999 1998 1997
------------- ------------- --------------
Basic earnings per common share
<S> <C> <C> <C>
Numerator
Income before cumulative effect of change
in accounting principle $ 3,055,009 $ 2,906,000 $ 2,893,000
Cumulative effect of change in accounting for
derivative instruments and hedging activities,
net of tax 54,991 - -
------------- ------------- --------------
Net income $ 3,110,000 $ 2,906,000 $ 2,893,000
============= ============= ==============
Denominator
Weighted average common shares outstanding 2,161,725 2,396,434 2,642,006
Less: Average unallocated ESOP shares (141,420) (162,199) (184,270)
Less: Average non-vested RRP shares (23,500) (38,842) (54,765)
------------- ------------- --------------
Weighted average common shares outstanding
for basic earnings per common share 1,996,805 2,195,393 2,402,971
============= ============= ==============
Basic earnings per common share
Income before cumulative effect of change
in accounting principle $ 1.53 $ 1.32 $ 1.20
Cumulative effect of change in accounting for
derivative instruments and hedging activities,
net of tax .03 - -
------------- ------------- --------------
Net income $ 1.56 $ 1.32 $ 1.20
============= ============= ==============
Diluted earnings per common share
Numerator
Income before cumulative effect of change
in accounting principle $ 3,055,009 $ 2,906,000 $ 2,893,000
Cumulative effect of change in accounting for
derivative instruments and hedging activities,
net of tax 54,991 - -
------------- ------------- --------------
Net income $ 3,110,000 $ 2,906,000 $ 2,893,000
============= ============= ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Denominator
Weighted average common shares outstanding
for basic earnings per common share 1,996,805 2,195,393 2,402,971
Add: Dilutive effects of assumed exercises of
stock options 56,396 76,588 39,213
Add: Dilutive effects of average nonvested RRP
shares 1,971 37 -
------------- ------------- --------------
Weighted average common shares and
dilutive potential common shares outstanding 2,055,172 2,272,018 2,442,184
============= ============= ==============
Diluted earnings per common share
Income before cumulative effect of change
in accounting principle $ 1.48 $ 1.28 $ 1.18
Cumulative effect of change in accounting for
derivative instruments and hedging activities,
net of tax .03 - -
------------- ------------- --------------
Net income $ 1.51 $ 1.28 $ 1.18
============ ============= =============
</TABLE>
(Continued)
24
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES
Year end securities available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
- ---- ---- ----- ------ -----
Debt securities
<S> <C> <C> <C> <C>
U.S. Government $ 23,342,452 $ 6,187 $ (189,577) $ 23,159,062
================ ============= ============== ================
1998
- ----
Debt securities
U.S. Government $ 5,039,804 $ 97,383 $ - $ 5,137,187
================ ============= ============== ================
</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
================ ============= ============== ================
</TABLE>
The amortized cost and fair value of debt securities by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------
Amortized Fair
Cost Value
---------------- ---------------
<S> <C> <C>
Due in one year or less $ 2,018,443 $ 2,011,875
Due after one year through five years 21,324,009 21,147,187
---------------- ---------------
$ 23,342,452 $ 23,159,062
================ ===============
</TABLE>
Proceeds from the sale of trading securities during the year ended September 30,
1999 were $4,077,500; net holding losses were $26,705. Proceeds from the sale of
securities available for sale during the year ended September 30, 1999 were
$5,027,573; gross gains of $40,719 were realized on these sales. Proceeds from
the sale of 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 during the year ended September 30, 1997. No
securities classified as held to maturity were transferred to trading or
available-for-sale during the years ended September 30, 1998 or 1997.
(Continued)
25
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
As of January 1, 1999, the Company adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. In accordance with provisions in that
statement, the Company chose to reclassify certain securities from
held-to-maturity to trading and available-for-sale. The amortized cost of
securities transferred to available-for-sale was $4,007,930 and the unrealized
net gain was $26,444, which is included in shareholders' equity, net of income
tax effect of $10,474. The amortized cost of the securities transferred to
trading was $4,015,191 and the unrealized net gain was $91,060, which is
reported as the cumulative effect of a change in accounting principle, net of
tax of $36,069. The Company has no derivative instruments to account for under
provisions of this statement.
NOTE 4 - LOANS RECEIVABLE
Loans receivable at year end are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Mortgage loans
Principal balances
Secured by one to four family residences $ 328,202,931 $ 308,626,708
Secured by other properties 2,060,556 1,715,486
Construction loans 14,492,827 11,511,693
---------------- ----------------
344,756,314 321,853,887
Less
Undisbursed portion of construction loans (6,048,678) (5,687,860)
Net deferred loan origination fees (413,267) (392,456)
---------------- ----------------
Total first mortgage loans 338,294,369 315,773,571
Consumer and other loans
Principal balances
Home equity and second mortgage 7,903,640 8,789,814
Other 1,544,157 1,259,950
---------------- ----------------
Total consumer and other loans 9,447,797 10,049,764
Less
Allowance for loan losses (1,342,220) (1,390,389)
Loans in process (400,608) (245,345)
---------------- ----------------
$ 345,999,338 $ 324,187,601
================ ================
</TABLE>
<PAGE>
Activity in the allowance for loan losses for the years ended September 30 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ---------------- --------------
<S> <C> <C> <C>
Balance at beginning of period $ 1,390,389 $ 1,387,989 $ 1,385,589
Provision charged to income 2,400 2,400 2,400
Net charge-offs (50,569) - -
-------------- ---------------- --------------
Balance at end of period $ 1,342,220 $ 1,390,389 $ 1,387,989
============== ================ ==============
</TABLE>
At September 30, 1999, 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, 1999,
1998 and 1997.
(Continued)
26
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Mortgage loans serviced for FNMA $ 1,571,134 $ 1,955,651
=============== ==============
</TABLE>
Custodial escrow balances maintained for this loan servicing were approximately
$23,000 and $24,000 at September 30, 1999 and 1998, respectively.
NOTE 6 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and land improvements $ 770,475 $ 643,350
Buildings 2,610,674 2,557,674
Furniture, fixtures and equipment 1,575,874 1,297,483
Leasehold improvements 291,005 291,005
--------------- --------------
5,248,028 4,789,512
Less accumulated depreciation and amortization (2,331,679) (1,984,962)
--------------- --------------
$ 2,916,349 $ 2,804,550
=============== ==============
</TABLE>
NOTE 7 - DEPOSITS
The aggregate amount of deposits with a minimum denomination of $100,000 or more
was approximately $66,871,000 and $62,518,000 at September 30, 1999 and 1998.
Depositors have their accounts insured up to applicable limits ($100,000 per
depositor, as defined) by the Federal Deposit Insurance Corporation.
<PAGE>
At September 30, 1999, the scheduled maturities of certificates of deposit are
as follows for the years ended September 30:
2000 $186,428,969
2001 33,024,985
2002 12,571,844
2003 6,490,298
2004 4,864,897
Thereafter 20,353,557
------------
$263,734,550
============
(Continued)
27
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 1999, advances from the FHLB with fixed rates ranging from
5.04% to 5.84% are required to be repaid in the year ending September 30 as
follows:
2000 $ 5,000,000
2001 -
2002 -
2003 -
2004 -
Thereafter 2,000,000
--------------
$ 7,000,000
==============
In addition to Federal Home Loan Bank stock, these advances were required to be
collateralized by pledged securities with an amortized cost of approximately
$23,342,000 and a fair value of approximately $23,159,000. In addition,
qualifying mortgage loans of approximately $327,899,000 were available as
collateral under a blanket lien arrangement at September 30, 1999.
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, 1999, the fund was fully funded. There was no expense
under this plan for the years ended September 30, 1999, 1998 and 1997.
401(k) Plan: The Company maintains a 401(k) salary reduction plan which covers
substantially all employees. Participants may make deferrals from 1% to 15% of
compensation, however, the Company does not provide any match of such elective
deferrals. Expenses attributable to the plan for discretionary employer
contributions were approximately $2,000, $4,000 and $4,000 for the years ended
September 30, 1999, 1998 and 1997.
Recognition and Retention Plan (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
<PAGE>
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. Expense of
approximately $233,000, $233,000 and $238,000 was recorded for the Plan for the
years ended September 30, 1999, 1998 and 1997.
(Continued)
28
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFITS (Continued)
Employee Stock Ownership Plan (ESOP): The Company has 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 $566,000, $636,000 and $451,000 was
recorded relative to the ESOP for the years ended September 30, 1999, 1998 and
1997. Contributions of $260,000, $283,000 and $302,000 were made to the ESOP
during the years ended September 30, 1999, 1998 and 1997. 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.
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, 1999, 1998 and 1997, 20,218, 21,504 and 22,590
shares with an average fair value of $28.01, $29.56 and $19.96 per share,
respectively, were committed to be released.
<PAGE>
The ESOP shares as of September 30 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Allocated shares 99,899 79,681 58,177
Unearned shares 131,310 151,528 173,032
---------- ---------- ----------
Total ESOP shares 231,209 231,209 231,209
========== ========== ==========
Fair value of unearned shares $3,578,198 $4,129,138 $4,196,026
========== ========== ==========
</TABLE>
(Continued)
28
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFITS (Continued)
Stock Option Plan: The Board of Directors of the Company adopted the Home
Bancorp 1995 Stock Option and Incentive Plan (the Plan). The number of options
authorized under the Plan is 330,317 shares of common stock. 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.
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
for companies that do not adopt its fair value accounting method for stock-based
compensation. Accordingly, the following proforma information presents the
effects on the Company's income before cumulative effect of change in accounting
principle, net income and earnings per share under the provisions of SFAS No.
123 for the years ended September 30, 1999, 1998 and 1997. In future years, as
additional options are granted, the effect on net income and earnings per share
may increase.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income before cumulative effect of
change in accounting principle
Dollar amount reported $ 3,055,009 $ 2,906,000 $ 2,893,000
Dollar amount proforma 2,914,958 2,770,033 2,747,825
Basic EPS reported $ 1.53 $ 1.32 $ 1.20
Basic EPS proforma 1.46 1.26 1.14
Diluted EPS reported 1.48 1.28 1.18
Diluted EPS proforma 1.42 1.22 1.13
Net income
Dollar amount reported $ 3,110,000 $ 2,906,000 $ 2,893,000
Dollar amount proforma 2,969,949 2,770,033 2,747,825
Basic EPS reported $ 1.56 $ 1.32 $ 1.20
Basic EPS proforma 1.49 1.26 1.14
Diluted EPS reported 1.51 1.28 1.18
Diluted EPS proforma 1.45 1.22 1.13
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Available Options Weighted-Average
For Grant Outstanding Exercise Price
--------- ----------- --------------
<S> <C> <C> <C>
Balance - October 1, 1996 101,813 228,504 $ 15.25
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) 15.25
------------ ------------
Balance - September 30, 1998 105,602 186,766 15.25
Granted - -
Exercised - (46,595) 15.25
Forfeited 635 (635) 15.25
------------ ------------
Balance - September 30, 1999 106,237 139,536 15.25
============ ============
</TABLE>
At year end 1999, options outstanding had a weighted-average remaining life of 6
years and an exercise price of $15.25.
(Continued)
30
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFITS (Continued)
Options exercisable at year end are as follows.
Number Weighted-Average
of Options Exercise Price
---------- --------------
1999 50,996 $ 15.25
1998 53,476 15.25
1997 30,877 15.25
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 with the tax year ending September 30, 1999.
Income tax expense for the years ended September 30 is:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal
Current $ 1,858,863 $ 1,808,251 $ 978,879
Deferred (133,219) (91,695) 630,214
-------------- --------------- ---------------
1,725,644 1,716,556 1,609,093
State
Current 495,897 475,916 284,219
Deferred (7,897) (416) 162,032
-------------- --------------- ---------------
488,000 475,500 446,251
-------------- -------------- ---------------
Income tax expense $ 2,213,644 $ 2,192,056 $ 2,055,344
============== ============== ===============
</TABLE>
(Continued)
31
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
The differences between the provision for income taxes shown on the consolidated
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>
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Income taxes at statutory rate $ 1,791,342 $ 1,733,339 $ 1,682,437
Tax effect of:
ESOP expense (market value in excess
of cost of related shares) 123,784 142,850 76,394
State tax, net of federal income tax effect 322,080 313,830 294,526
Other (23,562) 2,037 1,987
-------------- -------------- ---------------
Income tax expense $ 2,213,644 $ 2,192,056 $ 2,055,344
============== ============== ===============
Effective tax rate 42.0% 43.0% 41.5%
======== ======== =======
</TABLE>
Components of the net deferred tax asset (liability) as of September 30 are:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred loan fees $ 163,695 $ 155,452 $ 133,687
Recognition and retention plan 41,884 41,703 94,673
Net unrealized losses on
securities available for sale 73,357 - -
Bad debts 10,058 - -
Other 6,312 13,798 18,602
-------------- -------------- ---------------
Total deferred tax assets 295,306 210,953 246,962
Deferred tax liabilities:
Bad debts - (75,181) (76,133)
Discount accretion - (54,939) (182,107)
Net unrealized gains on securities
available for sale - (33,110) (26,284)
-------------- -------------- ---------------
Total deferred tax liabilities - (163,230) (284,524)
Valuation allowance - - -
-------------- -------------- ---------------
Net deferred tax asset (liability) $ 295,306 $ 47,723 $ (37,562)
============== ============== ===============
</TABLE>
<PAGE>
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, 1999 and 1998. 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.
(Continued)
32
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS
Savings institutions insured by the FDIC must meet various regulatory capital
requirements. If a requirement is not met, regulatory authorities may take legal
or administrative action, including restrictions on growth or operations or, in
extreme cases, seizure.
As of September 30, 1999 and 1998, the Bank was categorized as well capitalized.
The Bank's actual and required capital amounts and ratios are presented below:
<TABLE>
<CAPTION>
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>
1999
- ----
Total Capital (to risk
weighted assets) $ 37,590 18.84% $ 15,961 8.00% $ 19,951 10.00%
Tier I (Core) Capital
(to risk weighted
assets) $ 36,248 18.17% $ 7,980 4.00% $ 11,970 6.00%
Tier I (Core) Capital
(to adjusted total
assets) $ 36,248 8.76% $ 16,543 4.00% $ 20,679 5.00%
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% $ 14,668 4.00% $ 18,335 5.00%
</TABLE>
(Continued)
33
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS (Continued)
The Qualified Thrift Lender (QTL) test requires that approximately 65% of assets
be maintained in housing-related finance and other specified areas. If the QTL
test is not met, limits are placed on growth, branching, new investments, FHLB
advances and dividends, or the Bank must concert to a commercial bank charter.
Management believes that the QTL test has been met.
Under OTS regulations, limitations have been imposed on all "capital
distributions" by savings institutions, including cash dividends. The regulation
establishes a three-tiered system of restrictions, with the greatest flexibility
afforded to thrifts which are both well-capitalized and given favorable
qualitative examination ratings by the OTS. For example, a thrift which is given
one of the two highest examination ratings and has "capital" equal to its fully
phased-in regulatory capital requirements (a tier 1 institution) could make
capital distributions in any year of 100% of its retained net income for the
calendar year-to-date plus net income for the previous two calendar years (less
any dividends previously paid) as long as the Bank would remain "well
capitalized", following the proposed distribution. Other thrifts would be
subject to more stringent procedural and substantive requirements, the most
restrictive being prior OTS approval of any capital distribution. The Bank is a
tier one institution. At September 30, 1999, none of the Bank's retained
earnings was potentially available for distribution to the Company, without
obtaining prior regulatory approval.
The Bank established a liquidation account of $21,370,000 which is equal to its
total net worth as of the date of the latest audited balance sheet appearing in
the final conversion prospectus for the Company's stock offering related to
converting from a mutual to a stock ownership structure. The liquidation account
is maintained for the benefit of eligible depositors who continue to maintain
their accounts at the Bank after the conversion. The liquidation account is
reduced annually to the extent that eligible depositors have reduced their
qualifying deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible depositor will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The Bank may not pay dividends that
reduce shareholders' equity below the required liquidation account balance.
<PAGE>
NOTE 12 - OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expenses for the years ended September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Other noninterest income
Service charges and fees $ 217,681 $ 155,615 $ 147,890
Late charges 53,721 41,263 48,088
Other 119,125 50,786 50,735
-------------- -------------- ---------------
$ 390,527 $ 247,664 $ 246,713
============== ============== ===============
Other noninterest expenses
Advertising and promotion $ 183,280 $ 203,694 $ 201,798
Data processing 397,075 309,994 252,750
Professional fees 120,398 151,880 165,230
Telephone, postage and supplies 224,475 181,532 154,751
Other 124,156 161,889 412,488
-------------- -------------- ---------------
$ 1,049,384 $ 1,008,989 $ 1,187,017
============== ============== ===============
</TABLE>
(Continued)
34
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 13 - 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, 1999:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
-------------- -------------- ---------------
<S> <C> <C> <C>
Mortgage loans $ 2,256,100 $ 774,050 $ 3,030,150
Consumer and other loans 108,000 191,000 299,000
-------------- -------------- ---------------
$ 2,364,100 $ 965,050 $ 3,329,150
============== ============== ===============
</TABLE>
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 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 6.35% to 9.50%.
The Company has commitments for unused lines of credit aggregating $12,527,000
at September 30, 1999.
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
<PAGE>
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, 1999, 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.
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, 1999, 1998 and 1997.
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 or operations of the Company.
(Continued)
35
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 14 - 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 15 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are condensed financial statements for the parent company, Home
Bancorp:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
September 30, 1999 and 1998
1999 1998
---------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 629,440 $ 1,012,023
Investment in subsidiary bank 36,138,255 33,840,543
Securities available for sale - 5,137,187
Loan receivable from ESOP 1,287,963 1,536,908
Other assets 86,788 31,347
---------------- ---------------
Total assets $ 38,142,446 $ 41,558,008
================ ===============
LIABILITIES
Accrued expenses $ 219,355 $ 519,729
SHAREHOLDERS' EQUITY 37,923,091 41,038,279
---------------- ---------------
Total liabilities and shareholders' equity $ 38,142,446 $ 41,558,008
================ ===============
</TABLE>
(Continued)
36
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Year ended September 30,
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income $ 236,257 $ 500,331 $ 459,166
Dividends from subsidiary bank 1,332,000 2,714,000 8,383,000
Net gains on sales of securities
available for sale 40,719 - -
-------------- -------------- ---------------
1,608,976 3,214,331 8,842,166
Operating expenses 147,598 140,186 127,287
-------------- -------------- ---------------
Income before income taxes and equity in
undistributed earnings of subsidiary bank 1,461,378 3,074,145 8,714,879
Equity in undistributed (excess distributed)
earnings of subsidiary bank 1,700,000 (25,000) (5,690,000)
-------------- -------------- ---------------
Income before income taxes 3,161,378 3,049,145 3,024,879
Income tax expense 51,378 143,145 131,879
-------------- -------------- ---------------
Net income $ 3,110,000 $ 2,906,000 $ 2,893,000
============== ============== ===============
</TABLE>
(Continued)
37
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Year ended September 30,
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,110,000 $ 2,906,000 $ 2,893,000
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in (undistributed) excess distributed
income of subsidiary bank (1,700,000) 25,000 5,690,000
Amortization and accretion, net 293,614 197,337 226,069
Net gains on sales of securities
available for sale (40,719) - -
Net change in other assets (55,441) 178,489 (55,035)
Net change in accrued expenses (267,264) 458,198 8,454
-------------- -------------- ---------------
Net cash provided by operating activities 1,340,190 3,765,024 8,762,488
Cash flows from investing activities
Proceeds from sales of securities available
for sale 5,027,573 - -
Proceeds from maturities of securities held
to maturity - 1,000,000 3,000,000
Purchase of securities available for sale - - (5,078,125)
Repayments on loan receivable from ESOP 248,945 232,471 231,798
-------------- -------------- ---------------
Net cash provided by (used in) investing
activities 5,276,518 1,232,471 (1,846,327)
Cash flows from financing activities
Purchase of treasury stock (6,907,578) (6,437,191) (6,106,642)
Cash dividends paid (802,287) (673,174) (477,214)
Proceeds from exercise of stock options 710,574 352,656 226,066
-------------- -------------- ---------------
Net cash used in financing activities (6,999,291) (6,757,709) (6,357,790)
-------------- -------------- ---------------
Net change in cash and cash equivalents (382,583) (1,760,214) 558,371
Cash and cash equivalents at beginning of period 1,012,023 2,772,237 2,213,866
-------------- -------------- ---------------
Cash and cash equivalents at end of period $ 629,440 $ 1,012,023 $ 2,772,237
============== ============== ===============
</TABLE>
<PAGE>
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).
(Continued)
38
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 16 - 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, 1999 and 1998.
Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
1 9 9 9 1 9 9 8
------- -------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 36,312,882 $ 36,313,000 $ 23,365,826 $ 23,366,000
Securities available for sale 23,159,062 23,159,000 5,137,187 5,137,000
Securities held to maturity - - 12,024,247 12,195,000
Loans receivable, net 345,999,338 347,304,000 324,187,601 338,857,000
Federal Home Loan Bank
stock 3,173,700 3,174,000 2,782,500 2,783,000
Demand and savings deposits (99,619,719) (99,620,000) (81,356,915) (81,357,000)
Certificates of deposit (263,734,550) (264,859,000) (234,641,189) (237,578,000)
FHLB advances (7,000,000) (7,000,000) (9,000,000) (9,000,000)
Advances from borrowers for
taxes and insurance (2,971,219) (2,971,000) (2,597,387) (2,597,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 1999 and 1998. 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, 1999 and 1998, applied for
the time period until the loans are assumed to reprice or be paid. In addition,
when computing the estimated fair value for loans receivable, the allowance for
loan losses was subtracted from the calculated fair value for consideration of
credit issues. 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, 1999
and 1998, 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.
<PAGE>
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, 1999 and 1998, 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, 1999 and 1998 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 trained work force, customer goodwill and
similar items.
(Continued)
39
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net change in net unrealized gains (losses) on securities
available for sale
Unrealized gains (losses) arising
during the year $(266,498) $ 128,484 $ 72,573
Reclassification adjustments for transfers
from securities held to maturity to
securities available for sale upon
adoption of SFAS No. 133 26,444 -- --
Reclassification adjustments for gains
included in net income (40,719) (108,406) --
--------- --------- ---------
Net change in net unrealized gains
(losses) on securities available for sale (280,773) 20,078 72,573
Tax effects 106,467 (6,826) (24,676)
--------- --------- ---------
Total other comprehensive income (loss) $(174,306) $ 13,252 $ 47,897
========= ========= =========
</TABLE>
(Continued)
40
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
--------------Year Ended September 30, 1999--------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income $ 6,653 $ 6,718 $ 6,868 $ 7,014
Interest expense 4,250 4,260 4,316 4,378
----------- ----------- ----------- -----------
Net interest income 2,403 2,458 2,552 2,636
Provision for loan losses 1 - 1 -
----------- ----------- ----------- -----------
Net interest income after provision for loan 2,402 2,458 2,551 2,636
losses
Noninterest income 114 56 107 131
Noninterest expense 1,172 1,283 1,312 1,419
----------- ----------- ----------- -----------
Income before income taxes and cumulative
effect of change in accounting principle 1,344 1,231 1,346 1,348
Income tax expense 579 497 570 568
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle 765 734 776 780
Cumulative effect of change in accounting
for derivative instruments and hedging
activities, net of tax - 55 - -
----------- ----------- ----------- -----------
Net income $ 765 $ 789 $ 776 $ 780
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Earnings per share
Income before cumulative effect of
change in accounting principle:
Basic $ .37 $ .36 $ .39 $ .41
=========== =========== =========== ===========
Diluted $ .35 $ .34 $ .37 $ .41
=========== =========== =========== ===========
Net income:
Basic $ .37 $ .39 $ .39 $ .41
=========== =========== =========== ===========
Diluted $ .35 $ .37 $ .37 $ .41
=========== =========== =========== ===========
</TABLE>
(Continued)
41
<PAGE>
HOME BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
--------------Year Ended September 30, 1998--------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income $ 6,476 $ 6,429 $ 6,466 $ 6,608
Interest expense 4,122 3,988 4,003 4,110
----------- ----------- ----------- -----------
Net interest income 2,354 2,441 2,463 2,498
Provision for loan losses 1 - 1 -
----------- ----------- ----------- -----------
Net interest income after provision for loan 2,353 2,441 2,462 2,498
losses
Noninterest income 108 139 84 25
Noninterest expense 1,226 1,158 1,257 1,371
----------- ----------- ----------- -----------
Income before income taxes and cumulative
effect of change in accounting principle 1,235 1,422 1,289 1,152
Income tax expense 570 583 540 499
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle 665 839 749 653
----------- ----------- ----------- -----------
Net income $ 665 $ 839 $ 749 $ 653
=========== =========== =========== ===========
Earnings per share
Net income:
Basic $ .29 $ .38 $ .34 $ .31
=========== =========== =========== ===========
Diluted $ .28 $ .37 $ .33 $ .30
=========== =========== =========== ===========
</TABLE>
(Continued)
42
<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 1998 and 1999 and dividends declared
during such periods. 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 1998 1999
Quarter Div. High Low Div. High Low
I .05 $29.50 $24.00 .08 $29.75 $26.50
II .05 $37.875 $28.50 .10 $33.50 $27.50
III .08 $35.375 $29.125 .10 $28.25 $27.00
IV .08 $30.00 $26.625 .10 $30.50 $27.00
Stock Price
September 30th: $27.25 $27.25
The sixteenth quarterly dividend (Div.) of $.10 was declared on the Company's
common stock, payable January 13, 2000 to shareholders of record December 28,
1999. For information regarding restrictions on dividends, see Note 11 to the
Consolidated Financial Statement.
As of December 1, 1999, the Company had approximately 1,352 shareholders of
record and 2,011,652 outstanding shares of common stock.
Investor Relations
Stockholders, investors and analysts interested in additional information may
contact:
Marvin C. Schumm, President & 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, 1999 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 25, 2000, 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.......HomeBnc
Wall Street Journal...HmBcp
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
<PAGE>
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
Decatur North 334 N. Second St.
1999 Decatur, Indiana (46733)
(219) 728-2155
New Haven 1230 E. Lincoln Hwy.
1987 New Haven, Indiana (46774)
(219) 749-1780
43
<PAGE>
Mission Statement
The mission statement of Home Loan Bank fsb, 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.
[GRAPHIC-PHOTO OF BANK OMITTED]
MARKET MAKERS AS OF SEPTEMBER 30, 1999
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 Investments Inc.
Stifel, Nicolaus & Company, Inc.
Wheat First Union
44
<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, President and CEO 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 Senior Vice President and
Chief Financial Officer 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
Senior Vice-President and
Chief Financial Officer
Gary L. Hemrick
Vice President/Secretary
Timothy A. Sheppard
Treasurer
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
Officers of Home Loan Bank fsb
W. Paul Wolf
Chairman, President and CEO
Matthew P. Forrester
Senior Vice President/CFO
Donald E. Thornton
Vice President of Lending/Secretary
Gary L. Hemrick
Vice President/Operations
John E. Fitzgerald
Vice President/CRA
Barbara J. Boyd
Vice President/Retail Banking
Gladys A. (Jo) Thomas
Vice President/Decatur Operations
Timothy A. Sheppard
Treasurer
Paul N. Lewark
Assistant Vice President
James M. Turner
Assistant Vice President
Robert P. Norton
Assistant Vice President
Robert V. Earl
Assistant Vice President
Stanley J. Amstutz
Assistant Vice President
Linda M. DeGroff
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
Doris G. Hall
Assistant Vice President
Cathy S. Stidham
Assistant Vice President
Luben Lazoff
Assistant Secretary
Jerry W. Gump
Internal Auditor/Compliance
John C. Monroe
Assistant Internal Auditor
Randal L. Hockemeyer
Loan Officer
J. Scott Lancaster
Loan Officer
Lupka Baloski
Personnel
Carol A. Tait
Administrative Assistant
45
<PAGE>
[GRAPHIC-PHOTO OF W. PAUL WOLF OMITTED]
W. Paul Wolf
Ninth President of Home Loan Bank
W. Paul Wolf, at the age of twenty-eight, joined Home Loan Bank July 1, 1960 as
Assistant Secretary Treasurer. Within a year he was elected to take a place on
the board. In 1963 Mr. Wolf became Secretary Treasurer. From the position of
Managing Officer, he was elected President and Chief Executive Officer in 1970
and in 1991 he became Chairman of the Board. Thirty-nine years and three months
later, Mr. Wolf transferred his energies to an active retirement that includes
grandchildren, golf and travel coupled with community and church activities.
During Mr. Wolf's tenure, Home Loan Bank's assets have grown from $13 million to
$413.8 million, as of September 30, 1999, with ten (10) banking offices now
serving customers. Chairman C. Philip Andorfer stated, "On behalf of the Board
of Directors, we have all had the opportunity and pleasure of working with Paul
Wolf for many years. Paul has demonstrated administrative leadership in both the
growth of the Bank and the maintenance, safety and solvency of Home Loan Bank.
We appreciate his years of dedicated service and know that he has positioned the
organization to grow stronger and more progressive into the future. We wish him
the very best in his retirement."
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 12, 1999, 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, 1999.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
December 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,081
<INT-BEARING-DEPOSITS> 18,232
<FED-FUNDS-SOLD> 16,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,159
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 347,341
<ALLOWANCE> 1,342
<TOTAL-ASSETS> 413,957
<DEPOSITS> 363,354
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 5,680
<LONG-TERM> 2,000
0
0
<COMMON> 34,874
<OTHER-SE> 3,049
<TOTAL-LIABILITIES-AND-EQUITY> 413,957
<INTEREST-LOAN> 24,771
<INTEREST-INVEST> 1,135
<INTEREST-OTHER> 1,347
<INTEREST-TOTAL> 27,253
<INTEREST-DEPOSIT> 16,821
<INTEREST-EXPENSE> 17,204
<INTEREST-INCOME-NET> 10,049
<LOAN-LOSSES> 2
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 5,186
<INCOME-PRETAX> 5,269
<INCOME-PRE-EXTRAORDINARY> 3,055
<EXTRAORDINARY> 0
<CHANGES> 55
<NET-INCOME> 3,110
<EPS-BASIC> 1.56
<EPS-DILUTED> 1.51
<YIELD-ACTUAL> 2.60
<LOANS-NON> 0
<LOANS-PAST> 88
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,390
<CHARGE-OFFS> 50
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,342
<ALLOWANCE-DOMESTIC> 1,222
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 120
</TABLE>
