UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-24896
HOME BUILDING BANCORP, INC.
(Name of small business issuer in its charter)
Indiana 35-1935840
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
200 East VanTrees Street, Washington, Indiana 47501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 254-2641
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the
past 90 days. YES X . NO ___.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $3.4 million
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the closing price of such
stock on the Nasdaq System as of December 17, 1996, was $1.7 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 17, 1996, there were issued and outstanding 282,158 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
ended September 30, 1996.
Part III of Form 10-KSB - Proxy Statement for 1997 Annual Meeting of
Stockholders.
<PAGE>
PART I
Item 1. Description of Business
General
Home Building Bancorp, Inc. (the "Company"), an Indiana corporation,
was formed in September 1994 to act as the holding company for Home
Building Savings 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
February 7, 1995. All references to the Company, unless otherwise
indicated, at or before February 7, 1995 refer to the Bank. The Company's
Common Stock trades on The Nasdaq Stock Market under the symbol
"HBBI."
At September 30, 1996, the Company had $42.6 million of assets and
stockholders' equity of $5.5 million (or 12.9% of total assets).
The Bank is a federally chartered stock savings bank headquartered in
Washington, Indiana. The Bank is a member of the Savings Association
Insurance Fund (the "SAIF"), which is administered by the Federal Deposit
Insurance Corporation (the "FDIC"). Its deposits are insured up to
applicable limits by the FDIC, which insurance is backed by the full faith
and credit of the United States Government.
The principal business of the Company consists of attracting retail
deposits from the general public and investing those funds, together with
borrowings and other funds, to originate primarily loans secured by first
mortgages on owner-occupied one- to four-family residences. The
Company also originates consumer loans, and to a significantly lesser
extent, loans secured by commercial and multi-family real estate and
commercial business loans. The Company also invests in U.S.
Government securities and other investment securities.
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company only solicits deposits in its
primary market area and does not accept brokered deposits.
The Company's revenues are derived principally from interest on
mortgage and consumer loans, interest on investment and mortgage-
backed securities, interest on time deposits at other banks, and service
fee income.
The executive office of the Company is located at 200 East VanTrees
Street, Washington, Indiana 47501. Its telephone number at that address
is (812) 254-2641.
<PAGE>
Market Area
The Company primarily serves Daviess and Pike Counties, Indiana,
through the Bank's main office located in Washington, Indiana and a
branch office located in Petersburg, Indiana.
Washington, Indiana is the county seat of Daviess County, and is
approximately 100 miles southwest of Indianapolis and approximately 50
miles northeast of Evansville, Indiana. Petersburg is the county seat of
Pike County, which is immediately south of Daviess County.
Lending Activities
General. Historically, the Company originated primarily fixed-rate one-
to four-family mortgage loans. In the early 1980's, the Company
introduced the origination of ARM loans and short-term loans for
retention in its portfolio, in order to increase the percentage of loans in
its portfolio with more frequent repricing or shorter maturities than
traditional long-term, fixed-rate mortgage loans. Nevertheless, the
Company has continued to originate fixed-rate mortgage loans in response
to customer demand. Such loans are primarily for terms of up to 15
years. See "- Originations, Purchases and Sales of Loans and Mortgage-
Backed Securities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability
Management" contained in the Annual Report to Stockholders attached
hereto as Exhibit 13 (the "Annual Report").
The Company primarily focuses its lending activities on the origination
of loans secured by first mortgages on owner-occupied one- to four-family
residences, and consumer loans (including automobile loans), and to a
significantly lesser extent, commercial business, construction, multi-
family and commercial real estate loans. Substantially all of the
Company's loans are originated in its primary market area. At September
30, 1996, the Company's net loans receivable totaled $28.1 million.
The Executive Committee of the Bank is responsible for review of all
mortgage loan applications. The Executive Committee currently consists
of Chairman Murray, President Beesley and Director Wittmer, with
Directors Hagel and Scheid acting as alternate members. Three members
of the Executive Committee generally meet monthly to review loan
applications. Individual loan officers and the Executive Committee each
have authority, up to individually authorized lending limits, to approve
consumer and mortgage loans.
The Bank's loans-to-one-borrower limit is generally limited to the greater
of 15% of unimpaired capital and surplus or $500,000. See "Regulation -
Federal Regulation of Savings Banks." At September 30, 1996, the
maximum amount which the Bank could have lent to any one borrower
and the borrower's related entities was $636,000. At September 30, 1996,
the Bank had no loans with aggregate outstanding balances in excess of
this amount. The Company's largest lending relationship at that date
consisted of three loans to a single borrower totaling $283,000 secured by
a first mortgage on the borrower's residence and commercial inventory,
equipment and account receivables. The Company had only four other
loans or lending relationships in excess of $150,000 at September 30,
1996. All these loans are currently performing in accordance with their
repayment terms.
<PAGE>
Management reserves the right to change the amount or type of lending
in which it engages to adjust to market or other factors.
Loan Portfolio Composition. The following information presents the
composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and
discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1995 1996
Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family $22,867 78.4% $21,816 77.0%
Residential construction 55 .2 276 1.0
Multi-family and commercial 91 .3 82 0.3
Total real estate loans 23,013 78.9 22,174 78.3
Other Loans:
Consumer Loans:
Automobile 2,217 7.6 2,186 7.7
Home equity/home improvement
/2nd mortgages 2,032 7.0 2,128 7.5
Unsecured 388 1.4 338 1.2
Deposit account 285 1.0 344 1.2
Other 130 .4 0 0.0
Total consumer loans 5,052 17.4 4,996 17.6
Commercial business loans 1,087 3.7 1,173 4.1
Total other loans 6,139 21.1 6,169 21.7
Total loans receivable, gross 29,152 100.0% 28,343 100.0%
</TABLE>
<TABLE>
<S> <C> <C>
Less:
Loans in process 96 75
Deferred fees and discounts 98 83
Allowance for losses 77 77
Total loans receivable, net $28,881 $28,108
</TABLE>
<PAGE>
The following table shows the composition of the Company's loan
portfolio by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1995 1996
Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family $14,850 50.9% $14,094 49.7%
Residential construction 55 .2 276 1.0
Multi-family and commercial 91 .3 82 .3
Total real estate loans 14,996 51.4 14,452 51.0
Consumer 5,052 17.4 4,996 17.6
Commercial business 1,087 3.7 1,173 4.2
Total fixed-rate loans 21,135 72.5 20,621 72.8
Adjustable-Rate Loans:
Real estate:
One- to four-family 8,017 27.5 7,722 27.2
Total adjustable-rate loans 8,017 27.5 7,722 27.2
Total loans receivable, gross 29,152 100.0% 28,343 100.0%
</TABLE>
<TABLE>
<S> <C> <C>
Less:
Loans in process 96 75
Deferred fees and discounts 98 83
Allowance for loan losses 77 77
Total loans receivable, net $28,881 $28,108
</TABLE>
The following table illustrates the contractual maturities of the
Company's loan portfolio at September 30, 1996. Loans which have
adjustable or renegotiable interest rates are shown as maturing in the
period during which the contract is due. The table does not reflect the
effects of possible prepayments or due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
Multi- family
One- to and Residential Commercial
Four-Family Commercial Construction Consumer Business Total
(In Thousands)
Due During
Periods Ending
September 30,
<S> <C> <C> <C> <C> <C> <C>
1997(1) $ 26 $ --- $276 $2,002 $422 $2,726
1998 through 2001 612 82 --- 2,708 175 3,577
2002 and following 20,949 --- --- 516 575 22,040
Total $21,587 $82 $276 $5,226 $1,172 $28,343
<FN>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
</FN>
</TABLE>
<PAGE>
The total amount of loans due after September 30, 1997 which have fixed
interest rates is $17.9 million, while the total amount of loans due after
such date which have floating or adjustable interest rates is $7.7 million.
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Company's marketing efforts (which
include radio, newspaper and direct mail), its present customers, walk-in
customers and referrals from real estate brokers. The Company has
focused its lending efforts primarily on the origination of loans secured by
first mortgages on owner-occupied, single-family residences in its market
area. At September 30, 1996, the Company's one- to four-family
residential mortgage loans totaled $21.6 million, or 76.6% of the
Company's gross loan portfolio.
The Company currently offers fixed-rate and ARM loans. For the year
ended September 30, 1996, the Company originated $825,000 of
adjustable-rate real estate loans, all of which were secured by one- to four-
family residential real estate. During the same period, the Company
originated $2.88 million of fixed-rate one- to four-family real estate loans.
The Company's one- to four-family residential mortgage originations are
secured by properties located in its primary market area.
The Company currently originates ARM loans generally with a term of 15
to 20 years, however, the Company does offer ARM loans with up to a
maximum term of 30 years. The Company currently offers one, three and
five year ARM loans with a stated interest rate margin over the Constant
Maturity Treasury Index. The Company has utilized other indices in prior
years. The one and three year ARMs generally provide for a 2.0% annual
cap and a lifetime cap of 6.0% over the initial rate. The five year ARMs
generally provide for a 3.0% annual cap and a lifetime cap of 6.0% over the
initial rate. Currently, all ARM loans originated provide for a "floor," equal
to the interest rate of the loan on the date of its origination, below which
the rate charged may not fall, although in previous years loans originated
by the Company did not have such a feature.
In addition, the Company has also modified the contractual rates of
interest on notes in response to competitive factors and a lower interest
rate environment. The Company generally charges a fee for such
modifications similar to those that would be incurred in the case of a
refinancing of such loans. During the year ended September 30, 1996, the
Company modified 5 single-family residential mortgage loans aggregating
$98,000.
As a consequence of using caps, the interest rates on these loans may
not be as rate sensitive as is the Company's cost of funds. The Company
originates ARMs which may have an initial interest rate that is lower than
the sum of the specified index plus the margin. Borrowers with ARM
loans are qualified at the fully-indexed rate.
Adjustable-rate loans decrease the risk associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower may rise to the extent permitted by the
terms of the loan, thereby increasing the potential for default. At the
same time, the market value of the underlying property may be adversely
affected by higher interest rates.
<PAGE>
The Company currently offers fixed-rate mortgage loans to owner
occupants with terms up to 15 years and may, from time to time, offer
fixed rate loans with terms up to 20 years depending on the Bank's then
interest rate risk position and asset/liability objectives. Interest rates
charged on these fixed-rate loans are priced on a regular basis according to
market conditions. See "- Originations, Purchases and Sales of Loans and
Mortgage-Backed Securities."
Currently, the Company will loan up to 95% of the lesser of the sales
price or appraised value of the security property on owner occupied one-
to four-family loans, provided that private mortgage insurance is obtained
in an amount sufficient to reduce the Company's exposure to not more
than 80% of the appraised value or sales price, as applicable. The loan-to-
value ratio on non-owner occupied one-to four-family loans is generally
70% of the lesser of the sales price or appraised value of the security
property. Residential loans do not include prepayment penalties, are non-
assumable, and do not produce negative amortization. Real estate loans
originated by the Company contain a "due on sale" clause allowing the
Company to declare the unpaid principal balance due and payable upon the
sale of the security property.
In underwriting one- to four-family residential real estate loans, the
Company evaluates both the borrower's ability to make monthly payments
and the value of the property securing the loan. Properties securing real
estate loans made by the Company are generally appraised by in-house
appraisers. The Company requires borrowers to obtain an attorney's
opinion or certificate of title, casualty insurance and flood insurance (if
appropriate) in an amount not less than the amount of the loan.
Residential Construction Lending. The Company makes construction
loans to individuals for the construction of their residences and, from
time to time, to established builders for the construction of residential
homes without an underlying sales contract. At September 30, 1996, the
Company's construction loan portfolio totaled $276,000, or .97% of its
gross loan portfolio. As of that date, all of these loans were secured by
property located within the Company's market area.
Construction loans to individuals for their residences are structured to
be converted to permanent loans at the end of the construction phase,
which typically runs up to six months. These construction loans have
rates and terms which match any one- to four-family loans then offered by
the Company, except that during the construction phase, the borrower
pays interest only. The maximum loan-to-value ratio of owner occupied
single family construction loans is generally 80%. Residential
construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans.
Construction loans are obtained primarily from existing customers. The
application process includes a submission to the Company of plans and
costs of the project to be constructed. These items are used as a basis to
determine the appraised value of the subject property. Loans are based on
the lesser of current appraised value and/or the cost of construction (land
plus building).
Construction lending is generally considered to involve a higher level of
credit risk than permanent one- to four-family residential lending, due to
the concentration of principal in a limited number of loans and borrowers
and/or the effects of general economic conditions on development
<PAGE>
projects, real estate developments, managers or homebuilders. In
addition, the nature of these loans is such that they are more difficult to
evaluate and monitor. The Company's risk of loss on a construction loan
is dependent largely upon the accuracy of the initial estimate of the
property's value upon completion of the project and the estimated cost
(including interest) of the project. If the estimate of value proves to be
inaccurate, the Company may be confronted, at or prior to the maturity of
the loan, with a project having a value which is insufficient to assure full
repayment. When loan payments become due, borrowers may experience
cash flow from the property which is not adequate to service the total
debt. In such cases, the Company may be required to modify the terms of
the loan.
Consumer Lending. Management considers consumer lending to be an
important component of its asset/liability management strategy.
Specifically, consumer loans generally have shorter terms to maturity
and/or adjustable rates, thus helping to reduce the Company's exposure to
changes in interest rates, and carry higher rates than do residential
mortgage loans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -Asset/Liability Management" in the
Annual Report. In addition, management believes that offering consumer
loan products helps expand and create stronger ties to its existing
customer base.
The Company currently offers a variety of secured consumer loans,
including automobile loans (on both new and used automobiles), home
improvement and home equity loans and loans secured by savings
deposits. The Company also offers unsecured consumer loans. The
Company currently originates substantially all of its consumer loans in its
primary market area. The Company originates consumer loans solely on a
direct basis. Direct loans are made when the Company extends credit
directly to the borrower, in contrast to indirect loans which are obtained
when loan contracts are purchased by a bank or other institution from
retailers who have extended credit to their customers for goods or
services. At September 30, 1996, the Company's consumer loans totaled
$5.2 million, or 18.4% of the Company's gross loan portfolio, with
automobile loans amounting to $2.2 million, or 7.7% of the Company's
gross loan portfolio and 41.8% of the Company's consumer loan portfolio.
The underwriting standards employed by the Company for consumer
loans include a determination of the applicant's payment history on other
debts and an assessment of the ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the
applicant is a primary consideration, the underwriting process also
includes a comparison of the value of the security, if any, in relation to
the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, or
are secured by rapidly depreciable assets, such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance
as a result of the greater likelihood of damage, loss or depreciation. In
addition, consumer loan collections are dependent on the borrower's
continuing financial stability and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various
federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans. Although the
level of delinquencies in the Company's consumer loan portfolio has
generally been low ($62,000, or approximately 1.2% of the Company's
<PAGE>
consumer loan portfolio at September 30, 1996), there can be no
assurance that delinquencies will not increase in the future. See "Asset
Quality - Non-Performing Assets."
Commercial Business Lending. The Company also originates commercial
business loans. At September 30, 1996, the Company had $1.2 million in
commercial business loans outstanding, representing 4.2% of the
Company's gross loan portfolio. The Company offers commercial business
loans to service existing customers, to consolidate its banking
relationships with these customers, and to further its asset/liability
management goals.
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment
and other income, and which are secured by real property whose value
tends to be more easily ascertainable, commercial business loans are of
higher risk and typically are made on the basis of the borrower's ability to
make repayment from the cash flow of the borrower's business. As a
result, the availability of funds for the repayment of commercial business
loans may be dependent upon the success of the business itself. The
Company's commercial business loans almost always include personal
guarantees and are usually, but not always, secured by business assets.
However, the collateral securing the loans may depreciate over time, may
be difficult to appraise and may fluctuate in value based on the success of
the business.
The Company recognizes the generally increased credit risks associated
with commercial business lending. The Company's commercial business
lending practice emphasizes credit file documentation and analysis of the
borrower's character, management capabilities, capacity to repay the loan,
the adequacy of the borrower's capital and collateral. Analysis of the
borrower's past, present and future cash flows is also an important aspect
of the Company's credit analysis.
Multi-Family and Commercial Real Estate Lending. The Company also
makes a limited amount of real estate loans secured by multi-family and
non-residential properties. The Company's Board of Directors currently
evaluates applications for loans secured by multi-family or commercial
income-producing property on a case by case basis. At September 30,
1996, $317,000, or 1.1%, of the Company's gross loan portfolio consisted
of multi-family and commercial real estate loans.
Commercial real estate loans typically involve large loan balances to
single borrowers or groups of related borrowers. The payment experience
on such loans is typically dependent on the successful operation of the
real estate project and as such may be subject to a greater extent than
residential loans to adverse conditions in the economy generally. In
dealing with these risk factors, the Company generally limits itself to a
real estate market and/or borrowers with which it has knowledge and
experience.
Appraisals on properties securing multi-family and commercial real
estate property loans originated by the Company generally are performed
by either an in-house appraiser or an outside fee appraiser at the time the
loan is made. Appraisals on multi-family and commercial real estate loans
are generally reviewed by the Company's Executive Committee. In
addition, the Company's underwriting procedures generally require
verification of the borrower's credit history, income and financial
statements, banking relationships and income projections for the
<PAGE>
property. Personal guarantees are generally required for the Company's
multi-family and commercial real estate loans.
Loans secured by commercial real estate and multi-family properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Because payments on loans
secured by commercial real estate properties are often dependent on the
successful operation or management of the properties, repayment of such
loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed), the borrower's ability to repay the
loan may be impaired.
Originations, Purchases and Sales of Loans and Mortgage-Backed
Securities
The Company originates real estate loans through marketing efforts, the
Company's customer base, walk-in customers and referrals from real
estate brokers. The Company originates both adjustable-rate and
fixed-rate loans. Its ability to originate loans is dependent upon the
relative demand for fixed-rate or ARM loans in the origination market,
which is affected by the term structure (short-term compared to
long-term) of interest rates, as well as the current and expected future
level of interest rates and competition.
Historically, a portion of the Company's loan portfolio has been
comprised of purchased loans or loan participations. Currently, such
loans constitute approximately 4.5% of the total loans outstanding. The
Company has not purchased any loans or loan participations during the
last five fiscal years; however, the Company may consider purchasing
loans in the future. The Company invests its excess funds in mortgage-
backed securities and bonds issued by U.S. government agencies. At
September 30, 1996, the Company had outstanding commitments for
mortgage loans, home equity lines of credit and commercial business
loans of approximately $1.4 million. See Note 13 of the Notes to
Consolidated Financial Statement. See "- Investments."
The Company does not currently service loans for other entities.
<PAGE>
The following table shows the loan origination and repayment activities
of the Company and the purchase, sale and repayment activities of the
Company's mortgage-backed securities for the periods indicated. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Annual Report.
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1996
(In Thousands)
Originations by type:
Adjustable rate:
<S> <C> <C>
Real estate - one- to four-family $ 975 $ 825
Fixed rate:
Real estate - one- to four-family 1,817 2,876
- multi-family and commercial 1,092 1,845
- residential construction 117 276
Non-real estate - consumer 3,686 3,803
Total fixed-rate 6,712 8,800
Total loans originated 7,687 9,625
Purchases:
Total mortgage-backed securities purchased 1,735 2,641
Sales and Repayments:
Total mortgage-backed securities sold --- ---
Total sales --- ---
Principal repayments (7,465) (7,918)
Total reductions (7,465) (7,918)
Increase (decrease) in other items, net (1,275) (3,382)
Net increase (decrease) $ 682 $ 966
</TABLE>
Asset Quality
General. When a borrower fails to make a required payment on a loan,
the Company attempts to cause the delinquency to be cured by contacting
the borrower. In the case of loans secured by real estate, a late notice is
sent to the borrower on all loans over 30 days delinquent. If the loan
becomes 60 days delinquent and the borrower has not attempted to
contact the Company to arrange an acceptable plan to bring the loan
current, a letter is sent to the borrower by the Chief Executive Officer
requesting that the loan be brought current within 30 days; otherwise, the
loan will be referred to the Company's attorney for collection. If the
borrower contacts the Company with a reasonable explanation for the
delinquency, the Company generally will attempt to reach workable
accommodations with the borrower to bring the loan current. All
proposed workout arrangements are evaluated on a case by case basis,
based on the best judgement of the Company's Chief Executive Officer (or
the Executive Committee if the matter is referred to it by the Chief
Executive Officer), considering, among other things, the borrower's past
credit history, current financial status, cooperativeness, future prospects
and the reason for the delinquency. In all cases, if the Company believes
that its collateral is at risk and added delay would place the collectibility
of the balance of the loan in further question, management may refer
loans for collection even sooner than the 90 days described above.
<PAGE>
When a loan becomes delinquent 90 days or more, the Company will
place the loan on non-accrual status and, as a result, previously accrued
interest income on the loan is taken out of current income. The loan will
remain on a non-accrual status as long as the loan is 90 days delinquent.
Delinquent consumer loans are handled in a similar manner as to those
describe above; however, shorter time frames for each step apply due to
the type of collateral generally associated with such types of loans. See
"Business of the Company - Lending Activities -- Consumer Lending." The
Company's procedures for repossession and sale of consumer collateral are
subject to various requirements under Indiana consumer protection laws.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or estimated
fair value at the date of acquisition, and any write-down resulting
therefrom is charged to the allowance for losses on loans. After
acquisition, all costs incurred in maintaining the property are expensed.
However, costs relating to the development and improvement of the
property are capitalized to the extent of fair value.
The amounts presented in the table below represent the total remaining
principal balances of the loans, rather than the actual payment amounts
which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
60-89 Days 90 Days and Over Total Delinquent Loans
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family 11 $276 1.3% 5 $ 84 .4% 16 $360 1.7%
Consumer 8 73 1.4 9 65 1.2 17 138 2.6
Total 19 $349 1.3% 14 $149 .6% 33 $498 1.9%
</TABLE>
Non-Performing Assets. The following table sets forth the amounts and
categories of non-performing assets in the Company's loan portfolio. All
loans delinquent 90 days and over are placed on non-accrual status. Loans
are also placed on non-accrual status when the collection of principal
and/or interest become doubtful. For all years presented, the Company
has had no troubled debt restructurings (which involve forgiving a portion
of interest or principal on any loans or making loans at a rate materially
less than that of market rates). Foreclosed assets include assets acquired
in settlement of loans. There were no loans deemed in-substance
foreclosed at September 30, 1996.
<PAGE>
<TABLE>
<CAPTION>
At September 30,
1995 1996
(Dollars in Thousands)
Non-accrual loans:
<S> <C> <C>
One- to four-family $105 $84
Consumer 9 65
Total 114 149
Total non-performing assets $114 $149
Total as a percentage of total assets .27% .35%
</TABLE>
For the year ended September 30, 1996, gross interest income which
would have been recorded had the non-accruing loans been current in
accordance with their original terms was $6,302, none of which was
included in interest income.
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. Assets which do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are designated by
management as "special mention."
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan
losses in an amount deemed prudent by management. General allowances
represent loss allowances which have been established to recognize the
inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss," it is required either
to establish a specific allowance for losses equal to 100% of that portion
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 regulatory authorities,
who may order the establishment of additional general or specific loss
allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Company regularly
reviews problem loans and real estate acquired through foreclosure to
determine whether such assets require classification in accordance with
applicable regulations. On the basis of management's review of its assets,
at September 30, 1996, the Company had classified a total of $148,000 of
<PAGE>
its assets as substandard, $450 as doubtful, none as loss and the Company
had designated $56,000 as special mention. At September 30, 1996, total
classified assets comprised $149,000, (without special mention) or 2.7%
of the Company's capital, or .34% of the Company's total assets.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of September 30, 1996, there was also an
aggregate of $56,000 in net book value of loans secured by four single
family residences with respect to which known information about the
possible credit problems of the borrowers have caused management to
have doubts as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such
items in the non-performing asset categories. Management considered
these loans in establishing the Company's allowance for loan losses.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of
the risk inherent in its loan portfolio and changes in the nature and
volume of its loan activity, including those loans which are being
specifically monitored by management. Such evaluation, which includes a
review of loans for which full collectibility may not be reasonably assured,
considers among other matters, the loan classifications discussed above,
the estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience, and other factors that warrant recognition
in providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value less estimated selling expenses, which then
becomes the new basis of the foreclosed property. If 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
declines, a specific provision for losses on such property is established by
a charge to operations.
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 for
loan losses will be the result of periodic loan, property and collateral
reviews and thus cannot be predicted in advance. In addition, federal
regulatory agencies, as an integral part of the examination process,
periodically review the Company's allowance for loan losses. Such
agencies may require the Company to recognize additions to the allowance
level based upon their judgment of the information available to them at
the time of their examination. At September 30, 1996, the Company had
a total allowance for loan losses of $77,000 representing 51.6% of total
non-performing loans and .3% of the Company's net loans receivable. See
Note 3 of the Notes to Consolidated Financial Statements.
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1996
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of period $ 77 $ 77
Charge-offs:
One- to four-family --- ---
Consumer --- 410
Total charge-offs --- 410
Recoveries:
Consumer --- ---
Total recoveries --- ---
Net charge-offs --- (410)
Additions charged to operations --- 410
Balance at end of period $ 77 $ 77
Ratio of net charge-offs during the
period to average loans outstanding
during the period ---% 1.46%
</TABLE>
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At September 30,
1995 1996
Percent Percent
of Loans of Loans
in Each in Each
Amount of Category Amount of Category
Loan Loss to Total Loan Loss to Total
Allowance Loans Allowance Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C>
One- to four-family $ 63 77.0% $63 76.8%
Multi-family and
commercial 2 1.2 2 4.5
Consumer 11 16.1 11 18.6
Unallocated 1 5.7 1 .1
Total $77 100.0% $77 100.0%
</TABLE>
Investment Activities
General. The Company must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. Liquidity may
increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans.
Historically, the Company has maintained liquid assets at levels above the
minimum requirements imposed by the OTS regulations and at levels
<PAGE>
believed adequate to meet the requirements of normal operations,
including repayments of maturing debt and potential deposit outflows.
Cash flow projections are regularly reviewed and updated to assure that
adequate liquidity is maintained. At September 30, 1996, the Company's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 12.85%. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" in the Annual Report and "Regulation -
Liquidity."
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 commercial paper, investment grade corporate debt securities
and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly.
Generally, the investment policy of the Company, as established by the
Board of Directors, is to invest funds among various categories of
investments and maturities based upon the Company's liquidity needs,
asset/liability management policies, investment quality, marketability
and performance objectives. Subject to the Board's direction, the
President (and such other officers as the President may from time to time
authorize with the Board's permission) manages and oversees the
Company's investments and objectives for its investment portfolio.
Currently, President Beesley and Vice Presidents Shields and Kim Murray
are authorized to act in such capacity. All securities transactions are
disclosed to the Board of Directors at their next regular meeting or to the
Executive Committee of the Company, which usually meets monthly. All
securities transactions are reported to the entire Board of Directors.
Investment Securities. The Company's investment securities, consisting
of federal agency obligations, other debt and equity securities and FHLB
stock, totaled $2.2 million, or 5.2% of the Company's $42.6 million of
total assets. As of such date, the Company had a $334,900 investment in
FHLB stock, satisfying its requirement for membership in the FHLB of
Indianapolis. It is the Company's general policy to purchase investment
securities which are U.S. Government securities or federal agency
obligations or other issues that are rated investment grade. At September
30, 1996, the weighted average term to maturity or repricing of the
investment securities portfolio was 4.2 years (excluding FHLB Stock and
equity securities). See Note 2 of the Notes to the Consolidated Financial
Statements.
At September 30, 1996, all of the Company's investment securities were
classified as available for sale. The following table sets forth the
composition and carrying value of the Company's investment security
portfolio at the dates indicated. For additional information regarding the
Company's investment securities portfolio, see Note 2 of the Notes to
Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
At September 30,
1995 1996
Book % of Book % of
Value Total Value Total
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment securities:
Federal agency obligations $1,853 74.00% $1,737 77.93%
Municipal bonds --- --- --- ---
Subtotal 1,853 74.00 1,737 77.93
Other debt securities 283 11.30 157 7.04
Equity securities at lower
of cost or market 33 1.32 --- ---
FHLB stock 335 13.38 335 15.03
Total investment securities
and FHLB stock $2,504 100.00% $2,229 100.0%
<FN>
Average remaining life of investment
securities 3.8 yrs. 4.2 yrs.
</FN>
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Other interest-earning assets:
Total interest-bearing deposits
with banks $4,579 100.00% $3,794 100.0%
<FN>
Average remaining life or term to
repricing of investment securities
and other interest-earning assets,
excluding FHLB stock and equity
securities .8 yrs. 2.6 yrs.
</FN>
</TABLE>
The composition and maturities of the investment securities portfolio,
excluding FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
September 30, 1996
Due After Due After
Due in 1 Year 5 Years
1 Year Through Through Due After Total
or Less 5 Years 10 Years 10 Years Investment Securities
Book Book Book Book Book Fair
Value Value Value Value Value Value
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency
obligations $ --- $500 $773 $510 $1,783 $1,737
Other investment
securities --- 164 --- --- 164 157
Equity securities --- --- --- --- --- ---
Total investment
securities --- $664 $773 $510 $1,947 $1,894
Weighted average yield $ --- 5.21% 6.57% 6.65% 6.13% 6.13%
</TABLE>
The Company's investment securities portfolio at September 30, 1996,
contained neither tax-exempt securities nor securities of any issuer with
an aggregate book value in excess of 5.6% of the Company's retained
earnings, excluding those issued by the United States Government or its
agencies.
<PAGE>
Mortgage-Backed Securities. The Company's mortgage-backed securities
portfolio consists primarily of securities issued under government-
sponsored agency programs, including those of the Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). The
GNMA, FNMA and FHLMC certificates are modified pass-through mortgage-
backed securities that represent undivided interests in underlying pools of
fixed-rate, or certain types of adjustable-rate, predominantly single-family
and, to a lesser extent, multi-family residential mortgages issued by these
government-sponsored entities. FNMA and FHLMC generally provide the
certificate holder a guarantee of timely payments of interest, whether or
not collected. GNMA's guarantee to the holder is timely payments of
principal and interest, backed by the full faith and credit of the U.S.
Government.
At September 30, 1996, the Company's $5.8 million of mortgage-backed
securities, representing 13.5% of the Company's $42.6 million of total
assets, were comprised of $473,000 of mortgage-backed securities
classified as held to maturity, with the remaining balance of mortgage-
backed securities classified as available for sale. At September 30, 1996,
the fair value of the Company's mortgage-backed securities classified as
available for sale was $5.3 million. For additional information regarding
the Company's mortgage-backed securities portfolio, see Note 2 of the
Notes to Consolidated Financial Statements.
Mortgage-backed securities generally increase the quality of the
Company's assets by virtue of the insurance or guarantees that back them,
are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Company. At
September 30, 1996, none of the Company's mortgage-backed securities
were pledged to secure various obligations of the Company.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the
prepayment speed, and value, of such securities.
Historically, most of the Company's mortgage-backed securities were
long-term, fixed-rate securities. In more recent years, the Company has
begun to purchase other types of mortgage-backed securities consistent
with its asset/liability management objectives. In this regard, the
Company emphasizes the purchase of adjustable-rate, mortgage-backed
securities for asset/liability management purposes and in order to
supplement the Company's origination of ARM loans. At September 30,
1996, $1.2 million, or 20.9%, of the Company's mortgage-backed
securities carried adjustable rates of interest.
<PAGE>
The following table sets forth the carrying value of the Company's
mortgage-backed securities at the dates indicated. For additional
information regarding the fair market values of the Company's mortgage-
backed securities portfolio, see Note 2 of the Notes to Consolidated
Financial Statements.
<TABLE>
<CAPTION>
At September 30,
1995 1996
Book % of Book % of
Value Total Value Total
(Dollars in Thousands)
Mortgage-backed securities:
<S> <C> <C> <C> <C>
FHLMC $2,923 72.50% $3,994 69.15%
FNMA 1,085 26.90 1,726 29.88
GNMA 16 .40 14 .24
Subtotal 4,024 99.80 5,734 99.27
Unamortized premium
(discounts), net 7 .20 42 .73
Total mortgage-backed
securities $4,031 100.00% $5,776 100.0%
</TABLE>
Sources of Funds
General. The Company's primary sources of funds are deposits, payment
of principal and interest on loans (including mortgage-backed securities),
interest earned on investment securities, time deposits with other banks,
FHLB advances, and funds provided from operations.
FHLB advances are used to support lending activities and to assist in the
Company's asset/liability management strategy. Typically, the Company
does not use other forms of borrowings. At September 30, 1996, the
Company had total FHLB advances of $3.7 million. See "- Borrowings" and
Note 6 of the Notes to Consolidated Financial Statements.
Deposits. The Company offers a variety of deposit accounts having a
wide range of interest rates and terms. The Company's deposits consist of
passbook, savings, NOW and SuperNOW checking, money market deposit
and certificate accounts. The certificate accounts currently range in
terms from 91 days to five years. In the event a customer desires a
certificate of deposit account with a maturity date other than those
typically offered with these accounts, the Company will allow its customer
to set its own maturity date with the interest rate being the rate being
offered on its certificates of deposit most resembling the customers
desired maturity date. During 1996, the Company added
ATM/Checkcards to its deposit services available to customers.
The Company relies primarily on advertising (including radio, newspaper
and direct mail), competitive pricing policies and customer service to
attract and retain these deposits. The Company solicits deposits from its
market area only, does not use brokers to obtain deposits and currently,
does not engage in any type of premium, gift or promotional programs
beyond the advertising vehicles mentioned above. The flow of deposits is
influenced significantly by general economic conditions, changes in
money market and prevailing interest rates and competition.
<PAGE>
The Company also serves as a depository for public funds for various
Indiana entities. At September 30, 1996, the amount of public funds on
deposit with the Company was $1.6 million. These accounts are subject
to volatility depending on governmental funding needs and the Company's
desire to attract such funds.
The deposit accounts marketed by the Company has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Company has become more susceptible to
short-term fluctuations in deposit flows as customers have become more
interest rate conscious. The Company endeavors to manage the pricing of
its deposits in keeping with its asset/liability management and
profitability objectives. The ability of the Company to attract and
maintain savings accounts and certificates of deposit, and the rates paid
on these deposits, has been and will continue to be significantly affected
by market conditions.
The following table sets forth the savings flows at the Company during
the periods indicated.
<TABLE>
<CAPTION>
At September 30,
1995 1996
(Dollars in Thousands)
<S> <C> <C>
Opening balance $35,432 $31,269
Deposits 57,385 49,036
Withdrawals (62,620) (48,766)
Interest credited 1,072 1,089
Ending balance $31,269 $32,628
Net increase (decrease) $(4,163) $1,359
Percent increase (decrease) (11.70)% 4.35%
</TABLE>
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Company for the
periods indicated.
<TABLE>
<CAPTION>
At September 30,
1995 1996
Percent Percent
Amount of Total Amount of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook Accounts $ 5,808 18.55% $ 5,822 17.82%
NOW and SuperNOW Accounts 3,895 12.44 4,443 13.60
Money Market Accounts 1,533 4.89 1,307 4.00
Total Non-Certificates 11,236 35.88 11,572 35.42
Certificates:
2.50 - 4.50% 3,150 10.06 638 1.95
4.51 - 5.50% 9,090 29.03 11,879 36.36
5.51 - 6.50% 2,973 9.50 4,846 14.84
6.51 - 7.50% 3,785 12.09 3,003 9.20
7.51 - 8.50% 1,035 3.31 690 2.11
8.51% and over --- --- --- ---
Total Certificates 20,033 63.98 21,056 64.46
Accrued Interest 45 .14 39 .12
Total Deposits $31,314 100.00% $32,667 100.00%
</TABLE>
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of September 30, 1996.
<TABLE>
<CAPTION>
0.00- 2.0 4.00- 6.00 8.00- 10.00% Percent
2.99% 3.99 5.99% 7.99% 9.99% or greater Total of Total
(Dollars in Thousands)
Certificate accounts
maturing in quarter
ending:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 $175 $251 $3,254 $245 $ --- $ --- $ 3,925 18.64%
March 31, 1997 --- 93 3,066 312 --- --- 3,471 16.49
June 30, 1997 --- --- 1,155 131 --- --- 1,286 6.11
September 30, 1997 --- --- 1,252 195 --- --- 1,447 6.87
December 31, 1997 --- --- 499 223 --- --- 772 3.43
March 31, 1998 --- --- 444 --- --- --- 444 2.11
June 30, 1998 --- --- 1,024 --- --- --- 1,024 4.86
September 30, 1998 --- --- 716 --- --- --- 716 3.40
December 31, 1998 --- --- 644 --- --- --- 644 3.06
March 31, 1999 --- --- 552 14 --- --- 566 2.69
June 30, 1999 --- --- 190 3 246 --- 439 2.08
September 30, 1999 --- --- 267 45 --- --- 312 1.48
Thereafter --- 1 934 4,958 167 --- 6,060 28.78
Total $175 $345 $13,997 $6,126 $413 $ --- $21,056 100.0%
Percent of total .83 % 1.64% 66.48% 29.09% 1.96% ---% 100.0%
</TABLE>
The following table indicates the amount of the Company's certificates of
deposit and other deposits by time remaining until maturity as of
September 30, 1996.
<TABLE>
<CAPTION>
Maturity
Over 3 Over 6
3 Months Through Through Over
or Less 6 Months 12 Months 12 Months Total
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit
less than $100,000 $3,249 $3,061 $3,314 $ 8,789 $18,413
Certificates of deposit of
$100,000 or more 401 110 102 1,070 1,683
Public Funds(1) 275 300 40 345 960
Total certificates of deposit $3,925 $3,471 $3,456 $10,204 $21,056
__________________
<FN>
(1) Deposits from governmental and other public entities.
</FN>
</TABLE>
<PAGE>
Borrowings. Although deposits are the Company's primary source of funds, the
Company's policy has been to utilize borrowings to support lending activities
and to assist the Company's asset/liability management strategy when they are a
less costly source of funds, can be invested at a positive interest rate
spread or when the Company desires additional capacity to fund loan demand.
The Company's borrowings historically have consisted of advances from the
FHLB of Indianapolis. Such advances may be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. At September 30, 1996, the Company had $3.7 million in advances
from the FHLB of Indianapolis and the capacity to borrow up to $23.3 million.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances and other borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1996
(In Thousands)
<S> <C> <C>
Maximum Balance:
FHLB advances $2,930 $3,930
Repurchase agreements 1,138 1,130
Average Balance:
FHLB advances $2,215 $3,920
Repurchase agreements 69 454
</TABLE>
The following table sets forth certain information as to the Company's FHLB
advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1995 1996
(Dollars in Thousands)
<S> <C> <C>
FHLB advances $2,930 $3,700
Repurchase agreements 1,138 274
Total $4,068 $3,974
Weighted average interest rate
of FHLB advances 6.11% 5.61%
Weighted average interest rate
of repurchase agreements 5.54% 5.45%
</TABLE>
Service Corporation Activities
As a federally chartered savings bank, the Bank is permitted by OTS
regulations to invest up to 2.0% of its assets, or approximately $581,000 at
September 30, 1996, in the stock of, or loans to, service corporation
subsidiaries. As of such date, the net book value of the Bank's investment in
its service corporation was approximately $66,000. The Bank may invest an
additional 1% of its assets in service corporations where such additional funds
are used for inner-city or community development purposes and up to 50% of its
total capital in
<PAGE>
conforming loans to service corporations in which it owns more than 10% of the
capital stock. In addition to investments in service corporations, federal
associations are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities in which a federal association may
engage.
The Bank has one service corporation, White River Service Corporation
("WRSC"), an Indiana corporation, located in Washington, Indiana. WRSC was
organized by the Bank in 1985. WRSC, through a contractual agreement with a
third party, offers retail brokerage and annuity products to the Bank's
customers and the general public. In addition, WRSC provides real estate
appraisal comparison services for the local realtors on a subscription basis.
For the fiscal year ended September 30, 1996, WRSC had net income of
approximately $15,000.
Competition
The Company faces strong competition, both in originating real estate loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from commercial and savings banks, and to a lesser extent, credit
unions located in the Bank's market area and various secondary market
originators and mortgage loan brokers. Commercial banks, savings banks, credit
unions and finance companies provide vigorous competition in consumer lending.
The Company competes for real estate and other loans principally on the basis of
the quality of services it provides to borrowers, the interest rates and loan
fees it charges, and the types of loans it originates.
The Company attracts all of its deposits through its retail banking offices,
primarily from the communities in which those retail banking offices are
located. Therefore, competition for those deposits is principally from
commercial banks, savings banks, brokerage firms and credit unions located in
these communities. The Company competes for these deposits by offering a
variety of account alternatives at competitive rates and by providing convenient
business hours, branch locations and interbranch deposit and withdrawal
privileges.
The Company primarily serves Daviess and Pike Counties, Indiana. There are
eight commercial banks, one savings bank other than the Bank, and two credit
unions which compete for deposits and loans in the Company's primary market
area. In addition, several lending institutions not headquartered in the area
make loans in the Company's market area. The Company estimates its share of
the mortgage lending market and the savings market to be approximately 9.0%
and 8.0%, respectively, in Daviess County, Indiana and 6.0% and 5.0%,
respectively, in Pike County, Indiana. These percentages represent
management's best estimate of the Company's market share taking into
consideration the banking institutions headquartered in the Company's market
area.
Regulation
General. The Bank is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. The Bank is a member
of the FHLB of Indianapolis and is subject to certain limited regulation by the
Board of Governors
<PAGE>
of the Federal Reserve System ("Federal Reserve Board"). As the savings and
loan holding company of the Bank, the Company also is subject to federal
regulation and oversight. The purpose of the regulation of the Company and
other holding companies is to protect subsidiary savings associations. The Bank
is a member of the Savings Association Insurance Fund ("SAIF"), which together
with the Bank Insurance Fund (the ("BIF") are the two deposit insurance funds
administered by the FDIC, and the deposits of the Bank are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank.
Certain of these regulatory requirements and restrictions are discussed below
or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive authority
over the operations of savings associations. As part of this authority, the
Bank is required to file periodic reports with the OTS and is subject to
periodic examinations by the OTS and the FDIC. The last regular OTS and FDIC
examinations of the Bank were as of June 30, 1994 and June 7, 1991,
respectively. When these examinations are conducted by the OTS and the FDIC,
the examiners may require the Bank 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 operations
of the OTS. The Bank's OTS assessment for the fiscal year ended September
30, 1996, was $14,000.
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 branch
nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At September 30, 1996, the Bank's lending limit under this restriction was
$636,000. The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters as loan underwriting
and documentation, asset quality, earnings standards, internal controls and
<PAGE>
audit systems, interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these standards must
submit a compliance plan. A failure to submit a plan or to comply with an
approved plan will subject the institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member of
the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of and to
require reporting by FDIC-insured institutions. It also may prohibit any FDIC-
insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and
may terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier
1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4%
or a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all
insured institutions is made by the FDIC semi-annually.
The FDIC is authorized to increase assessment rates, on a semiannual basis, if
it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF members
and SAIF members ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule
for BIF insured institutions to provide a range of .04% to .31% of deposits.
The revisions became effective in the third quarter of 1995. In addition, the
BIF rates were further revised, effective January 1996, to provide a range of
0% to .27%. The SAIF rates, however, were not adjusted. At the time the
FDIC revised the BIF premium schedule, it noted that, absent legislative
action (as discussed below), the SAIF would not attain its designated reserve
ratio until the year 2002. As a result, SAIF insured members would continue
to be generally subject to higher deposit insurance premiums than BIF insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio.
<PAGE>
In order to eliminate this disparity and any competitive disadvantage between
BIF and SAIF member institutions with respect to deposit insurance premiums,
legislation to recapitalize the SAIF was enacted in September 1996. The
legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1,
1999 if no savings associations then exist. The special assessment rate has
been established at .648% of deposits by the FDIC and the resulting assessment
of $224,000 was paid in November 1996. This special assessment significantly
increased noninterest expense and adversely affected the Company's results of
operations for the year ended September 30, 1996. As a result of the special
assessment, the Bank's deposit insurance premiums were reduced to zero based
upon its current risk classification and the new assessment schedule for SAIF
insured institutions. These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective
October 1, 1996, SAIF-insured institutions will continue to be subject to a
FICO assessment as a result of this continuing obligation. Although the
legislation also now requires assessments to be made on BIF-assessable
deposits for this purpose, effective January 1, 1997, that assessment will be
limited to 20% of the rate imposed on SAIF assessable deposits until the
earlier of December 31, 1999 or when no savings association continues to
exist, thereby imposing a greater burden on SAIF member institutions such as
the Bank. Thereafter, however, assessments on BIF-member institutions will
be made on the same basis as SAIF-member institutions. The rates to be
established by the FDIC to implement this requirement for all FDIC-insured
institutions is uncertain at this time, but are anticipated to be about a 6.5
basis points assessment on SAIF deposits and 1.5 basis points on BIF deposits
until BIF insured institutions participate fully in the assessment.
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, 1996, 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
<PAGE>
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. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. All of the Subsidiaries of the Bank are includable
subsidiaries.
At September 30, 1996, the Bank had tangible capital of $4.3 million, or
10.07% of adjusted total assets, which is approximately $3.6 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, 1996,
the Bank had no intangibles which were subject to these tests.
At September 30, 1996, the Bank had core capital equal to $4.3 million, or
10.07% of adjusted total assets, which is $3.0 million above the minimum
leverage ratio requirement of 3.0% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core
capital. The OTS is also authorized to require a savings association to
maintain an additional amount of total capital to account for concentration
of credit risk and the risk of non-traditional activities. At September 30,
1996, the Bank had no capital instruments that qualify as supplementary
capital and $77,000 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, 1996.
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.
The OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
<PAGE>
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, 1996, the Bank had total capital of $4.3 million (including
approximately $4.3 million in core capital and $77,000 in qualifying
supplementary capital) and risk-weighted assets of $20.8 million (with no
converted off-balance sheet assets); or total capital of 20.6% of risk-
weighted assets. This amount was $2.7 million above the 8.0% 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 to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
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.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and includes a
forced merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less)
is subject to further mandatory restrictions on its activities in addition to
those applicable to significantly undercapitalized associations. In
addition, the OTS must appoint a receiver (or conservator with the
concurrence of the FDIC) for a savings association, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized.
Any undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver. The OTS is also generally authorized to reclassify an association
into a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or is in
an unsafe or unsound condition.
<PAGE>
The imposition by the OTS or the FDIC of any of these measures on 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. OTS regulations
impose various restrictions on savings associations with respect to their
ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Bank may pay
dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain
OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions
that do not exceed 50% of the institution's excess regulatory capital plus
net income to date during the calendar year. A savings association may not
make a capital distribution without prior approval of the OTS and the FDIC if
it is undercapitalized before, or as a result of, such a distribution. As
under the current rule, the OTS may object to a capital distribution if it
would constitute an unsafe or unsound practice. No assurance may be given as
to whether or in what form the regulations may be adopted.
<PAGE>
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 the present time, the minimum liquid asset
ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At September 30, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 12.87% and a short-term
liquid assets ratio of 10.67%.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held to maturity, available
for sale or trading) with appropriate documentation. The Company is in
compliance with these amended rules.
OTS accounting regulations, which may be made more stringent than GAAP by
the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
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, 1996,
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
<PAGE>
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess
the institution's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by the Bank. An unsatisfactory
rating may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the CRA
regulations and the methodology for determining an institution's compliance with
the CRA. Due to the heightened attention being given to the CRA in the past few
years, the Bank may be required to devote additional funds for investment and
lending in its local community. The Bank was examined for CRA compliance in
July 1994 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 conflict of interest regulations enforced by the OTS. These conflict
of interest regulations and other statutes also 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.
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.
<PAGE>
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 SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or 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 non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
<PAGE>
checking accounts). At September 30, 1996, 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. At
September 30, 1996, the Bank had outstanding borrowings of $3.7 million from
the FHLB of Indianapolis and had the capacity to borrow up to an additional
$19.6 million.
As a member, the Bank is required to purchase and maintain stock in the FHLB
of Indianapolis. At September 30, 1996, the Bank had $334,900 in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. For the fiscal year ended
September 30, 1996, dividends paid by the FHLB of Indianapolis to the Bank
totaled $26,351, which constitutes a $818 increase over the amount of dividends
received in fiscal year 1995. Over the past five calendar years such dividends
have averaged 9.40% and were 7.87% for fiscal 1996.
Under federal law the FHLBs are required to provide funds for the resolution
of troubled savings associations and to contribute to low- and moderately
priced housing programs through direct loans or interest subsidies on advances
targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock
in the future. A reduction in value of the Bank's FHLB stock may result in
a corresponding reduction in the Bank's capital.
Federal Taxation. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), had
been permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the
bad debt reserve deduction for "non-qualifying loans" was computed under the
experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) could have been computed under either the experience method or the
percentage of taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction")
was 8%. The percentage bad debt deduction thus computed was reduced by the
amount permitted as a deduction for non-qualifying loans under the experience
method. The availability of the percentage of taxable income method
permitted qualifying savings associations to be taxed at a lower effective
federal income tax rate than that applicable to corporations generally
(approximately 31.3% assuming the maximum percentage bad debt deduction).
<PAGE>
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equaled the amount
by which 12% of the amount comprising savings accounts at year end exceeded the
sum of surplus, undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repeals the above-described
reserve method of accounting (including the percentage of taxable income
method) used by many thrift institutions to calculate their bad debt reserve for
federal income tax purposes. Thrift institutions with $500 million or less in
assets may, however, continue to use the experience method. As a result, the
Bank must recapture that portion of the reserve that exceeds the amount that
could have been taken under the experience method for post-1987 tax years.
At September 30, 1996, the Bank's post-1987 excess reserves amounted to
approximately $170,000, all of which has been reserved for by the Bank. The
recapture will occur over a six-year period, the commencement of which will
be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
legislation also requires thrift institutions to account for bad debts for
federal income tax purposes on the same basis as commercial banks for tax
years beginning after December 31, 1995.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental
reserves for losses on loans ("Excess"), such Excess may not, without adverse
tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad
debt losses). As of September 30, 1996, the Bank's Excess for tax purposes
totaled approximately $170,000.
The Company, the Bank and the Bank's subsidiary file separate federal income
tax returns on a fiscal year basis using the accrual method of accounting.
Savings associations that file federal income tax returns as part of a
consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt
deduction for losses attributable to
<PAGE>
activities of the non-savings association members of the consolidated group
that are functionally related to the activities of the savings association
member.
The Company and its subsidiary have not been audited by the IRS with respect
to their federal income tax returns. In the opinion of management, any
examination of still open returns (including returns of subsidiaries and
predecessors of, or entities merged into, the Bank) would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Bank and its consolidated subsidiary.
Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on the
net income of financial (including thrift) institutions, exempting them from the
current gross income, supplemental net income and intangible taxes. Net income
for franchise tax purposes will constitute federal taxable income before net
operating loss deductions and special deductions, adjusted for certain items,
including Indiana income taxes, tax exempt interest and bad debts. Other
applicable Indiana taxes include sales, use and property taxes.
Employees
At September 30, 1996, the Bank had a total of 13 full-time and two part-time
employees. The Company's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Item 2. Description of Property
The Company conducts its business through two offices, its main office located
in Washington, Indiana and its branch office located in Petersburg, Indiana;
both locations are owned by the Company. The following table sets forth
information relating to each of the Company's offices as of September 30, 1996.
The total net book value of the Company's premises and equipment (including
land, buildings and leasehold improvements and furniture, fixtures and
equipment) at September 30, 1996 was approximately $787,000. See Note 4 of
Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Total Net Book
Approximate Value at
Date Square September 30,
Acquired Footage 1996
Location
<S> <C> <C> <C>
Main Office:
200 East VanTrees Street
Washington, Indiana 47501 1980 8,900 $622,102
Branch Offices:
501 Main Street
Petersburg, Indiana 47567(1) 1979 2,760 $137,778
___________________
<FN>
(1) The Company currently occupies 1,500 square feet of this Building. An adjacent
1,260 square feet store front owned by the Company is leased to an unaffiliated
third party.
</FN>
</TABLE>
<PAGE>
The Company is in the process of remodeling the drive-through banking
facilities located at the Bank's main office at an approximate cost of $32,000.
The Company believes that its current facilities are adequate to meet the
present and foreseeable needs of the Company and the Bank.
The Company maintains an on-line data base with a service bureau servicing
financial institutions. The net book value of the data processing and computer
equipment utilized by the Company at September 30, 1996 was approximately
$23,000.
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.
On March 26, 1996, a borrower of the Bank, Charles V. Hughes, d/b/a Tri-
County Motors and Valley Auto Sales (the "Borrower") filed for Chapter 7
bankruptcy protection in the United States Bankruptcy Court of the Southern
District of Indiana, Evansville Division. As a result, the Borrower
defaulted on his commercial loans during the second quarter of fiscal 1996.
The Bank has filed in the United States Bankruptcy Court of the Southern
District of Indiana, Evansville Division, a Complaint to Determine
Dischargeablility of Debt owed the Bank by the Borrower. By this action the
Bank is seeking a judicial declaration that the indebtedness owed to the Bank
by the Borrower resulted from the Borrower's fraud and misrepresentations, and
that under the provisions of the bankruptcy code are non-dischargeable in
bankruptcy proceedings. At this time, management cannot predict the outcome
of its Complaint or, in the event of a favorable ruling for the Bank, the
amount of losses recoverable, if any.
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,
1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Page 31 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Pages 3 through 12 of the attached 1996 Annual Report to Stockholders are
herein incorporated by reference.
<PAGE>
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended September 30, 1996, is incorporated by
reference in this Annual Report on Form 10-KSB as Exhibit 13.
Annual Report Section Pages in Annual
Report
Independent Auditors' Report 13
Consolidated Statements of Financial Condition
as of September 30, 1996 and 1995 14
Consolidated Statements of Income for the Years
Ended September 30, 1996 and 1995 15
Consolidated Statements of Shareholders' Equity for
Years Ended September 30, 1996 and 1995 16
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1996 and 1995 17
Notes to Consolidated Financial Statements 18-30
With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended September 30, 1996, is not deemed
filed as part of this Annual Report on Form 10-KSB.
Item 8. 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 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance
with Section 16(a) of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in January 1997, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
<PAGE>
Executive Officers
Information concerning Executive Officers of the Company is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in January 1997, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10%
of a registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common
Stock and other equity securities of the Company. Officers, directors and
greater than 10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended September 30, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in January 1997, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Item 11. 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 definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in January 1997, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in January 1997, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference to
Prior Filing
Regulation or Exhibit
S-B Number
Exhibit Attached
Number Document Hereto
<S> <C> <C>
3(I) Articles of Incorporation, including amendments thereto (a)
3(ii) By-Laws (b)
4 Instruments defining the rights of security holders,
including debentures (a)
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements
(a) Employment Contract between Bruce A. Beesley and
the Bank (a)
11 Statement re: computation of per share earnings (c)
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountants None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote
of security holders None
23 Consents of Experts and Counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
28 Information from reports furnished to state insurance
regulatory authorities None
99 Additional Exhibits None
<FN>
________________
<F1>
(a) Filed as exhibits to the Company's Form S-1 registration statement filed on September 23, 1995 (File No. 33-84332) of the
Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-B.
<F2>
(b) Filed as Exhibit 3(ii) to the Company's Annual Report on Form 10-KSB (File No. 0-24896) for the fiscal year ended
September 30, 1995 which was filed with the Securities and Exchange Commission on September 28, 1995. All of
such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
<F3>
(c) See Note 1 of Notes to Consolidated Financial Statements in the Annual Report to Shareholders' attached hereto as Exhibit 13.
</FN>
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period ended
September 30, 1996.
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 BUILDING BANCORP, INC.
Date: December 23, 1996 By: /s/Bruce A. Beesley
Bruce A. Beesley, President, Chief Executive
Officer, and Director (Duly Authorized
Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
/s/Robert M. Murray /s/Bruce A. Beesley
Robert M. Murray, Bruce A. Beesley, President,
Chairman of the Board Chief Executive Officer
and Director (Principal Executive
and Operating Officer)
Date: December 23, 1996 Date: December 23, 1996
/s/James E. Scheid /s/Amos M. Wittmer
James E. Scheid, Director Amos M. Wittmer, Director
Date: December 23, 1996 Date: December 23, 1996
/s/Thomas L. Hagel /s/Blake L. Chambers
Thomas L. Hagel, Director Blake L. Chambers, Director
Date: December 23, 1996 Date: December 23, 1996
/s/C. Darrell Deem /s/Gregory L. Haag
C. Darrell Deem, Director Gregory L. Haag, Director
Date: December 23, 1996 Date: December 23, 1996
/s/ Larry G. Wilson /s/Debra K. Shields
Larry G. Wilson, Director Debra K. Shields, Vice President,
Chief Financial Officer and
Secretary (Principal Financial
and Accounting Officer)
Date: December 23, 1996 Date: December 23, 1996
Index to Exhibits
Exhibit
Number Description
11 Statement re: computation of per share earnings (included under
Note 1 of Notes to Consolidated Financial Statements in the
Annual Report to Shareholders' attached hereto as Exhibit 13)
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consent of Experts
27 Financial Data Schedule
Exhibit 13
1996 ANNUAL REPORT
[LOGO]
HOME BUILDING BANCORP, INC.
Washington, Indiana
<PAGE>
TABLE OF CONTENTS
President's Message 1
Selected Consolidated Financial Information 2
Management's Discussion and Analysis of Financial
Condition and Results of Operation 3
Consolidated Financial Statements 13
Shareholder Information 31
Corporate Information 32
<PAGE>
[HOME BUILDING BANCORP, INC. LETTERHEAD]
December 18, 1996
Dear Shareholder:
It is a pleasure to present to you the Annual Report of Home Building Bancorp,
Inc. for the fiscal year ended September 30, 1996, our first full year as a
publicly held corporation. The year was filled with many challenges and
opportunities, two of which deserve special mention.
First, on September 30, 1996, federal legislation was enacted that required the
Savings Association Insurance Fund (the "SAIF") to be recapitalized with a
special assessment on virtually all SAIF-insured institutions, such as Home
Building Savings Bank, FSB, the Corporation's wholly-owned operating subsidiary.
The SAIF assessment, which was paid to the FDIC on November 27, 1996, was
$224,000. As a result of the SAIF recapitalization, the Federal Deposit
Insurance Corporation (the "FDIC"), which administers the SAIF, has proposed
reducing insurance premiums payable by SAIF-insured institutions. In this
respect, if the regulations are amended as currently proposed, the Corporation
can expect to pay reduced deposit insurance premiums resulting in after tax
savings of approximately $32,500, or $.115 per share in fiscal 1997.
Second, the Corporation weathered the default of a large commercial loan
during the third quarter of fiscal 1996 as a result of the bankruptcy of the
borrower. The Bank has filed in the United States Bankruptcy Court a
Complaint to Determine Dischargeablility of Debt owed the Bank by the borrower.
By this action the Bank is seeking a judicial declaration that the
indebtedness owed to the Bank resulted from the debtor's fraud and
misrepresentations, and that under the provisions of the bankruptcy code are
non-dischargeable in bankruptcy proceedings. At this time, management cannot
predict the outcome of its Complaint or, in the event of a favorable ruling
for the Bank, the amount of losses recoverable, if any.
The previously reported loan default, together with the special SAIF
assessment, were primarily responsible for the $137,000 net loss experienced
by the Corporation in fiscal 1996. Despite these impediments your
Corporation paid cash dividends totaling $.30 per share and continued to
enhance shareholder value by introducing a stock repurchase program,
increasing its asset size and reducing its overall equity-to-assets ratio,
all of which management believes positions the Company well for the future.
Total assets grew by $900,000 from $41.7 million to $42.6 million during the
fiscal year, with shareholders' equity of $5.5 million at September 30, 1996.
In addition, Home Building Savings Bank introduced an ATM/Checkcard in May
1996 which provides our checking and money market deposit accountholders access
to their accounts around the clock. The card can also be used at any merchant
recognizing the Mastercard logo. We continue to explore our market for
additional opportunities to better serve our customers.
In conclusion, with the SAIF assessment and the problem loan behind us, we
believe your Corporation is poised for much improved results this year. On
behalf of everyone at Home Building, thank you for your continued support
and your investment in Home Building Bancorp, Inc.
Sincerely,
Bruce A. Beesley
President and Chief Executive Officer
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<CAPTION>
At September 30,
1996 1995 1994 1993 1992
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets $42,561 $41,670 $40,816 $43,749 $41,966
Loans receivable, net 28,108 28,882 30,122 30,578 26,185
Cash and cash equivalents 1,429 3,339 4,245 5,615 3,778
Mortgage-backed securities 5,771 4,031 2,055 2,744 4,036
Investment securities 2,235 2,503 2,314 1,696 1,373
Deposits 32,628 31,269 35,432 38,292 38,230
Total borrowings 3,974 4,068 2,195 2,500 1,250
Shareholders' equity 5,499 6,076 3,027 2,693 2,286
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994 1993 1992
(In Thousands)
Selected Operations Data:
<S> <C> <C> <C> <C> <C>
Total interest income $3,214 $3,159 $ 3,007 $ 3,128 $ 3,306
Total interest expense 1,756 1,611 1,631 1,779 2,303
Net interest income 1,458 1,548 1,376 1,349 1,003
Provision for loan losses 409 --- 40 24 15
Net interest income after provision
for loan losses 1,049 1,548 1,336 1,325 988
Fees and service charges 26 80 57 52 47
Gain (loss) on sales of mortgage-backed
securities and investment securities --- --- (13) --- (183)
Other noninterest income 115 47 37 51 51
Total noninterest income 141 127 81 103 (85)
Total noninterest expense 1,298 959 875 779 806
Income before taxes (108) 716 542 649 97
Income tax expense 29 267 208 242 22
Net income (loss) $ (137) $ 449 $ 334 $ 407 $ 75
Earnings (loss) per share $ (.46) $ 1.07 N/A N/A N/A
Dividends per share $ .30 $ .075 N/A N/A N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994 1993 1992
Selected Financial Ratios and
Other Data:
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net
income to average total assets) (.33)% 1.0 .80% .97% .18%
Return on shareholders' equity
(ratio of net income to
average shareholders' equity) (.02) 10.38 11.45 14.20 3.40
Interest rate spread information:
Average during period 2.98 3.37 3.13 2.83 2.06
End of period 3.38 3.18 3.38 3.35 2.41
Net interest margin(1) 3.53 3.82 3.03 3.07 2.39
Ratio of operating expense to
average total assets 3.08 2.32 2.08 1.87 1.92
Ratio of average interest-
earning assets to average
interest-bearing liabilities 112.99 112.10 106.18 106.05 105.88
Quality Ratios:
Non-performing assets to total
assets at end of period(2) .35 .37 .29 .22 .66
Allowance for loan losses
to non-performing loans 51.68 49.36 63.75 46.88 14.34
Allowance for loan losses
to loans receivable, net .27 .27 .27 .15 .15
Capital Ratios:
Shareholders' equity to
total assets at end of period 12.92 14.57 7.42 6.16 5.45
Average shareholders' equity
to average assets 13.74 10.98 6.96 6.02 5.26
Dividend payout ratio(3) >100.00 7.00 (4) (4) (4)
Other Data:
Number of full-service offices 2 2 2 2 2
<FN>
<F1>
(1) Net interest income divided by average interest-earning assets.
<F2>
(2) Non-performing assets consist of nonaccrual loans, loans past due 90 or more days and real estate owned.
<F3>
(3) Dividends declared per share divided by earnings per common stock and common share equivalent.
<F4>
(4) Not applicable.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Home Building Bancorp, Inc. ("Home Building" and with its subsidiaries, the
"Corporation") is an Indiana corporation that was organized in September 1994 to
act as the holding company for Home Building Savings Bank, FSB (the "Bank")
upon the completion of the Bank's conversion from the mutual to the stock
form (the "Conversion"). The Conversion was completed on February 7, 1995.
On that same date, Home Building issued 322,000 shares of common stock at $10.00
per share (raising $2.6 million, net of shares acquired by the newly formed
Employee Stock Ownership Plan (the "ESOP") and net of the costs of the
Conversion) and acquired 100% of the stock of the Bank. Home Building has no
significant operations outside those of the Bank and the Bank's wholly owned
subsidiary, White River Service Corporation. All references to the
Corporation prior to February 7, 1995, except where otherwise indicated, are
to the Bank.
The Corporation is headquartered in Washington, Indiana, and is primarily
engaged in attracting deposits from the general public and making loans secured
by residential real estate, and to a lesser extent, commercial and multi-
family, consumer and commercial business properties. The operations of the
Corporation are significantly affected by prevailing economic conditions,
primarily interest rates and regulations relating to monetary and fiscal
affairs and financial institutions.
The Corporation's results of operations are heavily dependent on the difference
or spread between the average yield on loans, mortgage-backed securities and
investment securities, and the average rate paid on deposits and borrowings.
The interest rate spread is affected by regulatory, economic, and competitive
factors that influence interest rates, loan demand and deposit flows. The
Corporation, like other financial institutions, is subject to interest rate
risk to the degree that its interest-earning assets mature or reprice at
different times, or on a different basis, than its interest-bearing liabilities.
The Corporation's net income is also affected, to a much lesser extent, by fee
income received for loan originations, demand deposit accounts, and
commissions received from the Bank's subsidiary for insurance and mutual fund
products. In addition to interest expense, the Corporation's operating
expenses principally consist of employee compensation and benefits, occupancy
expenses, data processing expense, federal deposit insurance premiums, and
other general and administrative expenses.
Financial Condition
Total assets of the Corporation increased $900,000, or 2.2%, to $42.6 million
at September 30, 1996 from $41.7 million at September 30, 1995. Assets
increased due primarily to an increase in securities available for sale,
consisting of mortgage-backed securities which increased $1.7 million, or
42.5%, to $5.8 million at September 30, 1996 from $4.0 million at September
30, 1995. Loan originations did not keep pace with loan prepayments and
amortization during the period resulting in a $774,000 decline in net loans
receivable to $28.1 million at September 30, 1996 from $28.8 million at
September 30, 1995. The funds received from the amortization and prepayments
of loans, together with increased advances from the Federal Home Loan Bank
("FHLB") of Indianapolis, were used to fund the increase in mortgage-backed
securities. Management attributes the decline in mortgage loan originations
to government agency programs, such as the Farmer's Home Administration and
<PAGE>
the Indiana Housing Authority, which continued to compete for mortgages in the
Corporation's market area and to the additional competition from a credit
union which built a new branch office in Washington, Indiana. Other assets
increased $192,000 to $263,000 at September 30, 1996 from $71,000 at
September 30, 1995, primarily due to an increase in deferred tax assets
relating to the SAIF assessment and bad debt recapture recognized in fiscal
1996.
Total liabilities increased $1.5 million, or 4.1%, to $37.1 million at September
30, 1996 from $35.6 million at September 30, 1995. Deposits increased $1.4
million, or 4.3%, to $32.6 million at September 30, 1996 from $31.3 million
at September 30, 1995. The increase in deposits consisted primarily of a
$1.0 million increase in certificates of deposit, which resulted from a shift of
public funds to certificates of deposit from securities sold under agreements to
repurchase which decreased $864,000 to $274,000 at September 30, 1996.
Advances from the FHLB of Indianapolis, which were used to fund the purchase of
mortgage-backed securities as discussed above, increased $769,000 to $3.7
million at September 30, 1996. Accrued expenses and other liabilities also
increased due to a special assessment of $204,000 payable by the Bank to
recapitalize the Federal Deposit Insurance Corporation's ("FDIC") Savings
Associations Insurance Fund ("SAIF").
Shareholders' equity decreased to $5.5 million at September 30, 1996 from $6.1
million at September 30, 1995. The repurchase of 20,000 shares of the
Corporation's common stock combined with the net loss for the year ended
September 30, 1996 and the payment of dividends were the primary reasons for
the decrease in shareholders' equity. At September 30, 1996, shareholders'
equity was $19.49 per share based on 282,158 shares outstanding on that date.
Results of Operations
Comparison of the Fiscal Years Ended September 30, 1996 and 1995
General. The Corporation had a net loss of $137,000 for the year ended
September 30, 1996, compared to net income of $449,000 for the same period last
year. The decrease was due primarily to a $409,000 loan loss realized from
the bankruptcy of a major commercial borrower and the $204,000 non-recurring
SAIF assessment charged in connection with federal legislation requiring the
recapitalization of the SAIF. In addition, tax legislation was passed requiring
the recapture of certain bad debt deductions which resulted in additional taxes
of $67,000 in fiscal 1996.
Interest Income. Total interest income increased $55,000, or 1.7%, to $3.2
million for the year ended September 30, 1996. The increase was primarily due
to a slight overall increase in interest-earning assets during the period,
particularly the increase in mortgage-backed securities. Increases overall
wereoffset by lower volumes of loans receivable, investment securities and
deposits at banks. See "Average Balances, Interest Rates and Yields" and
"Rate\Volume Analysis of Net Interest Income" herein.
Interest Expense. Total interest expense increased $145,000, or 9.0%, to $1.8
million for the year ended September 30, 1996 from $1.6 million for the previous
year. The increase was due to the higher balance of, and higher rates paid
on, outstanding borrowings during the year, as well as the higher rates paid
on certificates of deposit. The volume of and rates paid on other types of
<PAGE>
deposits declined slightly during fiscal 1996 as compared to fiscal 1995. See
"Average Balances, Interest Rates and Yields" and "Rate\Volume Analysis of Net
Interest Income" herein.
Net Interest Income. Net interest income decreased $90,000, or 5.8%, to $1.5
million for the year ended September 30, 1996. The decrease in net interest
income reflects the shift in the asset mix from higher yielding mortgage
loans to lower yielding mortgage-backed securities as discussed under
"Financial Condition" above and the higher rates paid on certificates of deposit
and borrowings. The Corporation's percentage of average interest-earning
assets to average interest-bearing liabilities increased slightly to 112.99%
during fiscal 1996 from 112.10% during fiscal 1995. See "Average Balances,
Interest Rates and Yields" and "Rate\Volume Analysis of Net Interest Income"
herein.
Provision for Loan Losses. The provision for loan losses is a result of
management's periodic analysis of the adequacy of the allowance for loan losses.
The provision for loan losses during the year ended September 30, 1996 was
$409,000. No provision was made the previous year, nor did the Corporation
experience any charge-offs during that year. During fiscal year 1996,
however, the orporation charged-off $409,000, which equaled its provision,
leaving the allowance for loan loss reserves unchanged at the end of fiscal
1996 at $77,000. The $77,000 allowance represented .27% of the net loans
receivable and 51.6% of total nonperforming loans as of September 30, 1996.
Management establishes an allowance for loan losses based on an analysis of risk
factors in the loan portfolio. This analysis includes 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 Corporation's primary market area, the
regulators' view of adequate reserve levels for the thrift industry, and the
levels of the allowance for loan losses established by the Corporation's
peers. Accordingly, the calculation of the adequacy of the allowance for loan
losses is not based directly on the level of non-performing assets.
Management will continue to monitor the allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions and loan portfolio quality dictate. Although the
Corporation maintains its allowance for loan losses at a level which it
considers to be adequate to provide for losses, there can be no assurance
that future losses will not exceed estimated amounts or that additional
provisions for loan losses will not be required in future periods. In
addition, the determination as to the amount of its allowance for loan losses is
subject to review by the Office of Thrift Supervision (the "OTS") and the
Federal Deposit Insurance Corporation (the "FDIC"), as part of their
examination process, which may result in the establishment of an additional
allowance based upon their judgment of the information available to them at
the time of their examination.
Noninterest Income. Total noninterest income increased $14,000, or 11.0%, to
$141,000 for the year ended September 30, 1996 compared to $127,000 for the
previous fiscal year. The increase was due to improved fees and operating
results by the Bank's service corporation, White River Service Corporation
("WRSC"), compared to previous year.
Noninterest Expense. Noninterest expense, including the non-recurring SAIF
assessment of $204,000, increased $339,000, or 35.3%, to $1.3 million for the
fiscal year ended September 30, 1996 compared $959,000 for the previous
fiscal year. Noninterest expense without the SAIF assessment would have been
$1.1 million for fiscal 1996 compared to $959,000 for fiscal 1995, an
increase of $133,000 or 13.9%. Salaries and employee benefits, the largest
component of noninterest expense, increased $59,000 to $543,000 for fiscal
1996 from $485,000 for fiscal 1995, representing an increase of 12.1%.
Salaries and employee benefits increased as a result of the addition of a
full time employee and normal compensation increases. Other expenses also
increased in fiscal 1996 primarily as a result of expenses
<PAGE>
associated with the ATM/Checkcard introduced by the Bank in May 1996 and repairs
and maintenance on real estate owned during the year.
On September 30, 1996, federal legislation was enacted that requires the SAIF to
be recapitalized with a special assessment on virtually all SAIF-insured
institutions, such as the Bank, equal to 65.7 basis points on SAIF-insured
deposits maintained by those institutions as of March 31, 1995. This SAIF
assessment, which was be paid to the FDIC on November 27, 1996, was $224,000
and was accrued by the Company at September 30, 1996.
As a result of the SAIF recapitalization, the FDIC has proposed to amend its
regulation concerning the insurance premiums payable by SAIF-insured
institutions. Effective October 1, 1996 through December 31, 1996, the FDIC
has proposed that the SAIF insurance premium for all SAIF-insured institutions
that are required to pay the Financing Corporation (FICO) obligation, such as
the Bank, be reduced to a range of 18 to 27 basis points from 23 to 31 basis
points per $100 of domestic deposits. The Bank currently qualifies for the
minimum SAIF insurance premium of 23 basis points. The FDIC has also
proposed to further reduce the SAIF insurance premium to a range of 0 to 27
basis points per $100 of domestic deposits, effective January 1, 1997.
Management cannot predict whether or in what form the FDIC's final regulation
may be promulgated.
Income Tax Expense. Income tax expense decreased $238,000 to $29,000 for fiscal
1996 from $267,000 for fiscal 1995. The decrease was the result of net loss for
the year, offset by the recapture of certain bad debt deductions which had
reduced the Corporation's tax expense in previous years.
Comparison of the Fiscal Years Ended September 30, 1995 and 1994
General. The Corporation had net income of $449,000 for the year ended
September 30, 1995, an increase of $115,000 or 34.4% from the net income of
$334,000 for the year ended September 30, 1994. The increase was primarily
the result of an $152,000 increase in total interest income, a $21,000
decrease in total interest expense, a $40,000 decrease in the provision for loan
losses and a $46,000 increase in noninterest income, offset in part by a
$84,000 increase in noninterest expense and an increase of $59,000 in income
tax expense.
Interest Income. Total interest income increased $152,000, or 5.1%, to $3.2
million for the year ended September 30, 1995 from $3.0 million for the same
period in 1994. The increase was primarily due to higher rates earned on
interest-earning assets, particularly on investment securities which interest
rates increased 144 basis points to 7.11% and short-term, interest-earning
deposits at other banks for which interest rates increased 270 basis points
to 7.76%, generally as a result of rising interest rate environment prevalent
during fiscal 1995. See "Average Balances, Interest Rates and Yields" and
"Rate\Volume Analysis of Net Interest Income" herein.
Interest Expense. Total interest expense decreased $21,000, or 1.2%, to $1.6
million for the year ended September 30, 1995 compared to the previous fiscal
year. The decrease was primarily due to the reduction in the level of
deposits held during the year and a decrease in the rate paid on borrowings.
See "Average Balances, Interest Rates and Yields" and "Rate\Volume Analysis of
Net Interest Income" herein.
<PAGE>
Net Interest Income. Net interest income increased $172,000, or 12.5%, to $1.5
million for the year ended September 30, 1995 from $1.4 million the previous
fiscal year. The increase in net interest income reflects an overall
increase in average interest-earning assets to average interest-bearing
liabilities of 112.10% during fiscal 1995 compared to 106.18% during fiscal
1994, primarily as a result of a decrease in the average outstanding
interest-bearing liabilities (primarily deposits) during fiscal 1995. In
addition, the net yield on average interest-earning assets increased to 3.82%
for the year ended September 30, 1995 from 3.38% for the year ended September
30, 1994, primarily due to the increase in the yield on interest-earning
assets. See "Average Balances, Interest Rates and Yields" and "Rate\Volume
Analysis of Net Interest Income" herein.
Provision for Loan Losses. The Corporation made no provision for loan losses
for the year ended September 30, 1995. The Corporation did not experience any
charge-offs during the year and management, based on its review of the loan
portfolio and other factors, considered the allowance for loan losses to be
adequate. At September 30, 1995 the Corporation's allowance for loan losses
totaled $77,000 or .27% of net loans receivable and 49.36% of total
nonperforming loans.
Noninterest Income. Total noninterest income increased $46,000, or 56.8%, to
$127,000 for the year ended September 30, 1995 from $81,000 for the previous
fiscal year. The increase was due to $36,000 of income recognized by the
Bank from its equity investment in its data processor and the absence of the
$13,000 loss in 1994 relating to the sale of an investment security. These
increases were partially offset by a $14,000 decrease in brokerage fees and
commissions from WRSC, the Bank's operating subsidiary, due to an
interruption in the sales efforts of WRSC. WRSC's sales efforts were
interrupted as a result of personnel changes and the sale by the owners of the
company which provided brokerage services for WRSC's customers. The Company
entered into an agreement with the new owners of the third party brokerage
service company and hired and trained new personnel to resume sales.
Noninterest Expense. Noninterest expense increased $83,000, or 9.6%, to
$959,000 for the year ended September 30, 1995 from $875,000 for the previous
fiscal year. Increases in noninterest expense stem primarily from increases
in compensation and benefits, including expenses related to the ESOP which
was established during fiscal 1995 and professional fees for legal and
accounting services, reflecting the additional costs associated with
operating as a public company.
Income Tax Expense. Income tax expense increased $59,000, or 28.4%, to
$267,000 for the year ended September 30, 1995 from $208,000 for the previous
fiscal year. This increase was a direct result of increased taxable net
income for the year.
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the total dollar amount of interest expense from average
interest-bearing liabilities and the resultant rates. No tax equivalent
adjustments were made. All average balances are monthly average balances.
Non-accruing loans have been included in the table as loans carrying a zero
yield.
<PAGE>
<TABLE>
<CAPTION>
At September 30,
September 30,
1996 1996 1995
Average Interest Average Interest
Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield
Rate Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1) 8.36% $28,974 $2,402 8.29% $29,551 $2,429 8.22%
Mortgage-backed securities 7.52 5,102 347 6.80 2,513 188 7.48
Investment securities 6.15 1,972 125 6.34 2,278 162 7.11
Interest-earning
deposits at banks 4.57 4,939 314 6.36 5,886 354 5.98
FHLB stock 7.76 335 26 7.76 335 26 7.76
Total interest-
earning assets(1) 7.67 41,322 3,214 7.78 40,563 3,159 7.79
Interest-Bearing Liabilities:
Savings deposits 2.97 5,983 207 3.46 $ 6,515 231 3.55
Demand and NOW deposits 2.45 5,726 151 2.64 5,774 172 2.98
Certificate accounts 5.63 20,889 1,157 5.54 20,782 1,064 5.12
Borrowings 5.72 3,973 241 6.07 3,115 144 4.62
Total interest-bearing
liabilities 4.66 36,571 1,756 4.80 36,186 1,611 4.45
Net interest income $1,458 $1,548
Net interest rate spread(1)(2) 3.01 2.98% 3.34%
Net interest-earning assets(1) $ 4,751 $ 4,377
Net yield on average interest-
earning assets(3) 3.38% 3.53% 3.82%
Average interest-earning assets to
average interest-bearing liabilities 112.99% 112.10%
_________________
<FN>
<F1>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.
<F2>
(2) Net interest rate spread represents the difference between the average yield on interest-earning assets and the average rate of
interest-bearing liabilities.
<F3>
(3) Net yield on average interest-earning assets represents net interest income before provision for loan losses divided by average
interest-earning assets.
</FN>
</TABLE>
<PAGE>
Rate/Volume Analysis of the Net Interest Income
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and interest-
bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(i.e., changes in volume multiplied by old rate) and (ii) changes in rate
(i.e., changes in rate multiplied by old volume). For purposes of this table,
changes attributable to both rate and volume which cannot be segregated have
been allocated proportionately to the change due to volume and the change due
to rate.
<TABLE>
<CAPTION>
Year Ended September 30,
1996 vs. 1995 1995 vs. 1994
Increase Total Increase Total
(Decrease) Increase (Decrease) Increase
Due to Due to
Volume Rate (Decrease) Volume Rate (Decrease)
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ (45) $ 20 $ (25) $ (36) $ --- $ (36)
Mortgage-backed securities 193 (35) 158 31 (18) 13
Investment securities (22) (11) (33) 16 33 49
Interest-earning deposits at banks (57) 12 (45) (15) 132 117
FHLB Stock --- --- --- --- 9 9
Total interest-earning assets $ 69 $ (14) 55 $ (4) $115 152
Interest-bearing liabilities:
Savings deposits (19) (5) (24) $ (32) $ 37 5
Demand and NOW deposits (1) (20) (21) (67) (75) (142)
Certificate accounts 5 88 93 (17) 140 123
Borrowings 40 57 97 56 (62) (6)
Total interest-bearing
liabilities $ 25 $ 121 145 $(60) $ 40 (20)
Net interest income $ (90) $172
</TABLE>
Asset/Liability Management
The Bank, like other financial institutions, 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 believes it is important to
manage 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. Specific strategies to manage interest rate risk have
included the origination of ARMs and advances from the FHLB to match durations
<PAGE>
of fixed rate mortgages. In addition, management monitors the spread between
short-term and long-term liabilities, and at the appropriate time, lengthens
its interest-bearing liabilities to keep the percent change in NPV within
acceptable limits. At September 30, 1996, approximately $20.3 million, or
72.1%, of the Corporation's mortgage loans and mortgage-backed securities
were scheduled to mature or reprice during the next five years. Management
anticipates that it will replace these loans in the normal course of business
and through marketing efforts which are devoted to attracting mortgage loans
directly from the public. Subject to demand, new loans will be originated at
market interest rates. Loans may also be purchased from other originators
as whole loans or participations in pools of loans should local demand
prove unsatisfactory. Furthermore, mortgage-backed securities may also be
purchased if excess funds cannot be invested in mortgage loans.
OTS regulations provide a NPV approach to the quantification of interest rate
risk. Under OTS regulations, an institutions "normal" level of interest rate
risk, in the event of an assumed change in interest rate, is a decrease in
the institution's NPV in an amount not exceeding two percent of the present
value of its assets. Thrift institutions with greater than normal interest
rate exposure, as defined above, must take a deduction from their total
capital available to meet their risk based capital requirement. The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to the 200 basis point interest rate increase or
decrease (whichever results in the greater pro-forma decrease in NPV) and
(b) its normal level of exposure which is two percent of its present value of
its assets. The regulation, however, 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. Accordingly, the Bank, because of its
asset size and level of risk-based capital, is exempt from this requirement.
Notwithstanding the foregoing, utilizing the foregoing measuring concept, at
September 30, 1996, a change in the interest rate of positive 200 basis points
would have resulted in a 1.03% 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 .38% decrease in the NPV
as a percent of the present value of the Bank's assets. Therefore, the Bank's
level of interest rate risk would be considered normal under OTS regulations.
Presented below, as of September 30, 1996, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve in 100 basis point increments
up and down 400 basis points and compared to Board policy limits. As
illustrated in the table, NPV is more sensitive to rising rates than declining
rates. This occurs principally because, as rates rise, the market value of
fixed-rate loans declines due to both the rate increase and slowing
prepayments. When rates decline, the Bank does not experience a significant
rise in market value for these loans because borrowers prepay at relatively high
rates. OTS assumptions are used in calculating the amounts in this table.
<TABLE>
<CAPTION>
Change in At September 30, 1996
Interest Rate Board Limit Estimated Amount Percent
(Basis Points) Percent Change NPV Change Change
(Dollars In Thousands)
<S> <C> <C> <C> <C>
+400 bp (60)% $4,209 $(1,509) (26)%
+300 bp (45) 4,671 (1,047) (18)
+200 bp (30) 5,099 (619) (11)
+100 bp (15) 5,464 (254) (4)
0 bp --- 5,718 --- ---
- -100 bp (15) 5,796 78 1
- -200 bp (30) 5,655 (63) (1)
- -300 bp (45) 5,573 (145) (3)
- -400 bp (60) 5,638 (80) (1)
</TABLE>
<PAGE>
As indicated in the table above, the Bank has structured its assets and
liabilities in an attempt to maintain interest rate risk at a level deemed
acceptable by the Board. Management reviews the OTS measurements 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.
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities for periods of re-pricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates while interest rates on other types may lag behind
changes in market rates. Furthermore, in the event of a change in interest
rates, prepayments and early withdrawal level would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their debts may decrease in the event of an interest
rate increase. As a result, the actual effect of changing interest rates may
differ from that presented in the foregoing table.
Liquidity and Capital Resources
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. OTS regulations presently require the Bank to maintain an
average daily balance of liquid assets equal to at least 5.0% of the sum of
its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. Such investments are intended to provide a source
of relatively liquid funds upon which the Bank may rely, if necessary, to
fund deposit withdrawals and other short-term funding needs. The Bank's
regulatory liquidity at September 30, 1996 was 12.85%. In addition to the
regulatory liquidity requirement, the Bank is required to maintain short-term
liquid assets (as defined by OTS regulations) equal to 1.0% of the average
sum of net withdrawal deposits and other liabilities. The Bank's short-term
liquidity ratio at September 30, 1996 was 10.67%.
Liquidity management is both a daily and long-term responsibility of management.
Management adjusts the Bank's investments in liquid assets based upon its
assessment of (i) expected loan demand, (ii) expected deposit flows,
(iii) yields available on interest-earning investments and (iv) the objectives
of its asset/liability management program. Excess liquidity generally is
invested in interest-bearing overnight deposits. If the Bank requires
additional funds beyond its internal ability to generate such funds it has
additional borrowing capacity with the FHLB of Indianapolis and collateral
eligible for repurchase agreements. At September 30, 1996, the Corporation had
outstanding borrowings consisting of $274,000 in reverse repurchase
agreements and $3.7 million in FHLB advances, with the capacity to borrow up
to an additional $19.6 million from the FHLB of Indianapolis.
The Bank principally uses its liquidity resources to fund maturing certificates
of deposit and deposit withdrawals, to invest, to fund existing and future
loan commitments, to maintain liquidity, and to meet other operating needs.
At September 30, 1996, the Bank had $1.4 million of loan commitments.
<PAGE>
Certificates of deposit scheduled to mature in a year or less at September 30,
1996 totaled $9.95 million. Based on historical experience, management believes
that a significant portion of such deposits will remain with the Bank.
There can be no assurance, however, that the Bank can retain all such
deposits. Management anticipates that it will have sufficient funds available
to meet the Bank's liquidity needs.
The primary investing activities of the Bank includes the origination and
purchase of loans and the purchase of mortgage-backed and investment securities.
At September 30, 1996, these assets accounted for 85% of the Bank's total
assets. Such originations and purchases are funded primarily from loan
repayments, repayments of mortgage-backed and investment securities, FHLB
advances and net income.
At September 30, 1996, the Bank had tangible and core capital of $4.3 million,
or 10.07% of adjusted total assets, which was approximately $3.6 million and
$3.0 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, 1996 of $4.3 million (consisting of $4.3
million in core capital), or 20.9% of risk-weighted assets of $20.7 million.
This amount was $2.7 million above the 8.0% requirement in effect on that date.
Home Building has a need for, and sources of, liquidity. Liquidity is
required to fund its operating expenses, fund stock repurchase programs, as well
as for the payment of any dividends to shareholders. At September 30, 1996,
Home Building had $841,000 in liquid assets on hand. The primary source of
liquidity on an ongoing basis is dividends from the Bank. Dividends totaling
$290,000 were paid from the Bank to Home Building for the year ended September
30, 1996. Home Building also retained $1.4 million of the net cash from the
Conversion and, as a public company, has access to public debt and equity
markets. For the year ended September 30, 1996, Home Building paid dividends
to shareholders totaling $98,000 and repurchased 20,000 shares of common stock
at a total cost of $345,000. Home Building currently has no significant
liquidity commitments as its operating costs are modest and dividends on
common stock are discretionary. Management anticipates that it will have
adequate funds to meet the Corporation's foreseeable short- and long-term
liquidity needs.
Impact of Inflation and Changing Prices
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 Corporation's operations.
Nearly all the assets and liabilities of the Corporation are financial,
unlike most industrial companies. As a result, the Corporation's performance
is directly impacted by changes in interest rates, which are indirectly
influenced by inflationary expectations. The Corporation'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 Corporation's
performance. Changes in interest rates do not necessarily move to the same
extent as do changes in the price of goods and services.
<PAGE>
Forward-Looking Statements
Certain statements in this report that relate to Home Building Bancorp,
Inc.'s plans, objectives or future performance may be deemed to be forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are based on Management's current
expectations. Actual strategies and results in future periods may differ
materially from those currently expected because of various risks and
uncertainties. Additional discussion of factors affecting Home Building
Bancorp's business and prospects is contained in the Corporation's periodic
filings with the Securities and Exchange Commission.
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
WASHINGTON, INDIANA
CONSOLIDATED
FINANCIAL STATEMENTS
FISCAL YEARS ENDED
SEPTEMBER 30, 1996 AND 1995
AND
INDEPENDENT AUDITOR'S REPORT
<PAGE>
HOME BUILDING BANCORP, INC. AND SUBSIDIARIES
WASHINGTON, INDIANA
Index to Consolidated Financial Statements
PAGE
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . . . . .13
Consolidated Statements of Financial Condition
as of September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . .14
Consolidated Statements of Income for the
years ended September 30, 1996 and 1995. . . . . . . . . . . . . . . . 15
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . 16
Consolidated Statements of Cash Flows for the
years ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . 17
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 18-30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Home Building Bancorp, Inc.
Washington, Indiana
We have audited the accompanying consolidated statements of financial condition
of Home Building Bancorp, Inc., and subsidiaries, as of September 30, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial position of
Home Building Bancorp, Inc., and subsidiaries, as of September 30, 1996 and
1995 and the consolidated results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 1, the Bank adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS 118, during 1996.
Kemper CPA Group, LLC
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
Mt. Carmel, Illinois
October 23, 1996
<PAGE>
<TABLE>
HOME BUILDING BANCORP, INC.
WASHINGTON, INDIANA
Consolidated Statements of Financial Condition
September 30, 1996 and 1995
<CAPTION>
1996 1995
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,428,754 $ 640,003
Interest-bearing deposits with banks 3,793,704 4,578,674
Securities available for sale 7,532,540 3,239,852
Securities held to maturity, fair market
value of $473,000 in 1996 and $3,344,919
in 1995 473,104 3,294,652
Loans receivable, net of allowance for
loan losses of $77,000 in 1996 and
$77,039 in 1995 28,108,279 28,881,714
Accrued interest receivable 174,519 154,315
Premises and equipment 787,008 809,054
Other assets 262,792 71,246
Total assets $42,560,700 $41,669,510
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Savings and NOW deposits $11,571,843 $11,235,945
Other time deposits 21,055,789 20,033,498
Total deposits 32,627,632 31,269,443
Advances from Federal Home Loan Bank 3,699,985 2,930,153
Securities sold under agreements to repurchase 273,951 1,138,245
Accrued expenses and other liabilities 460,613 255,957
Total liabilities 37,062,181 35,593,798
Shareholders' equity:
Common stock, $.01 par value, 1 million
shares authorized, 331,660 issued
and outstanding at September 30, 1996
and 322,000 issued and outstanding
at September 30, 1995 3,317 3,220
Additional paid-in capital 3,014,935 2,855,642
Treasury stock, at cost (345,000) -
Retained earnings 3,217,134 3,451,949
Net unrealized (loss) on available for
sale securities net of deferred tax
of $17,694 in 1996 and $2,138
in 1995 (26,397) (3,259)
Unearned ESOP & recognition and
retention shares (365,470) (231,840)
Total shareholders' equity 5,498,519 6,075,712
Total liabilities and shareholders' equity $42,560,700 $41,669,510
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
HOME BUILDING BANCORP, INC.
WASHINGTON, INDIANA
Consolidated Statements of Income
Years Ended September 30, 1996 and 1995
<CAPTION>
1996 1995
<S> <C> <C>
Interest income:
Loans receivable $ 2,404,113 $ 2,428,737
Investments 155,259 188,354
Mortgage-backed securities 346,243 187,727
Deposits with other banks 308,865 354,156
Total interest income 3,214,480 3,158,974
Interest expense:
Deposits 1,514,716 1,466,287
Repurchase agreements 25,065 8,266
Other borrowed funds 216,289 135,946
Total interest expense 1,756,070 1,610,499
Net interest income 1,458,410 1,548,475
Provision for loan losses (409,770) -
Net interest income after
provision for loan losses 1,048,640 1,548,475
Noninterest income:
Gain on sale of assets 6,009 6,666
Customer service fees 135,381 119,950
Total other income 141,390 126,616
Noninterest expenses:
Salaries and employee benefits 543,101 484,517
Occupancy and equipment 122,519 145,039
Deposit insurance premium 299,308 82,322
Computer expense 56,769 50,696
Service fees 50,869 47,847
Advertising expense 48,358 45,457
Professional fees 63,669 45,470
Other expense 113,513 57,558
Total other expenses 1,298,106 958,906
Income (loss) before income taxes (108,076) 716,185
Income tax expense (28,684) (266,924)
Net income ( loss) $ (136,760) $ 449,261
Net income (loss) per share of
common stock $ (0.46) $ 1.07
Weighted average shares outstanding 298,992 296,240
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
HOME BUILDING BANCORP, INC.
WASHINGTON, INDIANA
Consolidated Statements of Shareholders' Equity
Years Ended September 30, 1996 and 1995
<CAPTION>
Unrealized Unearned
Common Paid in Treasury Retained Gain (Loss) Compen- Total
Stock Capital Stock Earnings Securities sation Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 $3,026,838 $3,026,838
Net income for the year
ended September 30, 1995 449,261 449,261
Proceeds from issuance
of common stock $3,220 $2,855,642 $(257,600) 2,601,262
Cash dividends paid (24,150) (24,150)
Allocation of ESOP shares 25,760 25,760
Adoption of SFAS 115 $(35,000) (35,000)
Net changes in unrealized
loss on securities
available for sale,
net of taxes of $2,138 31,741 31,741
Balance, September 30, 1995 3,220 2,855,642 3,451,949 (3,259) (231,840) 6,075,712
Net income (loss) for the year
ended September 30, 1996 (136,760) (136,760)
Proceeds from issuance
of 9,660 shares of
common stock for
funding Recognition
and Retention Plan 97 159,293 (159,390)
Cash dividends paid (98,055) (98,055)
Allocation of ESOP shares 25,760 24,760
Purchase of 20,000 shares of
treasury stock, at cost (345,000) (345,000)
Net changes in unrealized
loss on securities available
for sale, net of
taxes of $16,137 (23,138) (23,138)
Balance at September 30, 1996 $3,317 $3,014,935 $(345,000) $3,217,134 $(26,397) $(365,470) $5,498,519
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
HOME BUILDING BANCORP, INC.
WASHINGTON, INDIANA
Consolidated Statements of Cash Flows
Years Ended September 30, 1996 and 1995
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income(loss) $ (136,760) $ 449,261
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 32,090 37,367
Provision for loan losses 409,770 -
Other gains and losses, net (6,009) (6,666)
(Increase) decrease in accrued interest receivable (20,204) (44,737)
Increase (decrease) in accrued expenses and
other liabilities 230,416 118,820
(Increase) decrease in other assets (175,409) 72,678
Total adjustments 470,654 177,462
Net cash provided by operating activities 333,894 626,723
Cash flows from investing activities:
Net (increase) decrease in interest-bearing
deposits with banks 784,970 (140,206)
Purchases of available-for-sale securities (3,141,399) (3,259,205)
Proceeds from maturities of
available-for-sale securities 1,445,451 456,540
Purchases of held-to-maturity securities - 634,290
Proceeds from maturities of held-to-maturity securities 185,533 -
Net (increase) decrease in loans 270,248 1,247,079
Net purchases of premises and equipment (10,044) (9,842)
Proceeds from sale of foreclosed collateral 99,426 -
Net cash used in investing activities (365,815) (1,071,344)
Cash flows from financing activities:
Net increase (decrease) in savings and
NOW deposit accounts 335,898 (3,708,492)
Net increase in time deposits 1,022,291 (454,499)
Net decrease in securities sold under
agreements to repurchase (864,294) 1,138,245
Repayments of Federal Home Loan Bank Advances (230,168) (265,027)
Proceeds from Federal Home Loan Bank Advances 1,000,000 1,000,000
Issuance of capital stock, net of expenses - 2,602,872
Purchase of treasury stock (345,000) -
Dividends paid (98,055) (24,150)
Net cash provided by financing activities 820,672 288,949
Net increase (decrease) in cash and due from banks 788,751 (155,672)
Cash and due from banks at beginning of period 640,003 795,675
Cash and due from banks at end of period $ 1,428,754 $ 640,003
Interest paid $ 1,761,929 $ 1,602,962
Income taxes paid $ 197,200 $ 193,745
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock Conversion - On February 7, 1995, Home Building Bancorp, Inc. (the
"Corporation") began trading as a public company on The Nasdaq SmallCap
Market. The Corporation issued 322,000 shares, $.01 par value common stock,
for proceeds of $2,858,862 net expenses of approximately $361,000. Home
Building Savings Bank, FSB (the "Bank") converted to a stock federal savings
bank following the formation of the Corporation and received proceeds
of $1,432,853 in exchange for selling all its common stock to the
Corporation. This transaction was accounted for using historical cost in
a manner similar to that in a pooling of interests.
Federal regulations require that, upon conversion from a mutual to stock form
of ownership, a "liquidation account" be established by restricting a portion
of net worth for the benefit of eligible savings account holders who maintain
their savings accounts with the Bank after conversion. In the event of complete
liquidation (and only in such event) each savings account holder who
continues to maintain his savings account shall be entitled to receive a
distribution from the liquidation account after payment of all creditors, but
before any liquidation distribution with respect to capital stock. This
account will be proportionately reduced for any subsequent reduction in such
holders' savings accounts. Federal regulations impose limitations on the
payment of dividends and other capital distributions, including, among
others, that the Corporation may not declare or pay a cash dividend on any of
its capital stock if the effect thereof would cause the Bank's capital to be
reduced below the amount required for the liquidation account or the capital
requirements imposed by the Financial Institutions Reform, Recovery, and
Enforcement Act and the Office of Thrift Supervision (the "OTS") (See Note
15). The liquidation account balance was $3,128,000 at conversion.
Principles of Consolidation - The consolidated financial statements include
the accounts of Home Building Bancorp, Inc., Home Building Savings Bank, FSB,
and White River Service Corporation (the "Service Corp"), the Bank's
wholly owned subsidiary, which sells stocks, bonds, mutual funds, and
annuities. All significant intercompany transactions and balances have been
eliminated in consolidation.
Cash and Cash Equivalents - For the purpose of presentation in the consolidated
statements of cash flows, cash and cash equivalents are defined as those
amounts included in the balance-sheet caption cash and due from banks.
Securities Held to Maturity - Consist of mortgage-backed securities for which
the Bank has the positive intent and ability to hold to maturity are reported at
cost, adjusted for premiums and discounts that are recognized in interest
income using the interest method over the period to maturity.
Securities Available for Sale - Available for sale securities consist of bonds
and mortgage backed securities not classified as held to maturity.
Unrealized holding gains and losses, net of tax, on available for sale
securities are reported as a net amount in a separate component of retained
earnings until realized.
Gains and losses on the sale of available for sale securities are determined
using the specific identification method.
Declines in the fair value of individual held to maturity and available for sale
securities below their cost that are other than temporary result in write-
downs of the individual securities to their fair value. Stock in the Federal
Home Loan Bank is carried at cost.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
18
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Loans Receivable - Loans receivable that management has the intent and ability
to hold for the foreseeable future or until maturity or pay-off are reported
at their outstanding principal adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Discounts on purchased, first mortgage loans are amortized to income using the
interest method over the remaining period to contractual maturity, adjusted
for anticipated prepayments. Unearned discounts on installment loans are
recognized over the term of the loans using the interest method.
Loan origination fees and direct costs related to loan originations are
recorded as income and charged to expense during the period received or
incurred. The Bank has determined that deferring these items would have an
immaterial impact on the Bank's results of operation.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.
Allowances for impaired loans are generally determined based on collateral
values. The allowance is increased by a provision for loan losses, which
is charged to expense, and reduced by charge-offs, net of recoveries.
Changes in the allowance relating to impaired loans are charged or credited
to the provision for loan losses. Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Foreclosed Real Estate - Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation allowance
are included in loss on foreclosed real estate.
Costs relating to development and improvement of property are capitalized,
whereas costs relating to the holding of property are expensed. The portion
of interest costs relating to the development of real estate is capitalized.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its estimated net realizable value.
Income Taxes - Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Premises and Equipment - Land is carried at cost. Building, improvements,
and furniture, fixtures, and equipment, are carried at cost, less accumulated
depreciation computed principally by the straight-line method.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
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. Actual results could differ from those estimates.
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans. In
connection with the determination of the allowances for losses on loans,
management obtains independent appraisals for significant properties.
19
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Effect of New Financial Accounting Standards - Statement of Financial Accounting
Standards No. 107, and No. 119, "Disclosures about Fair Value of Financial
Instruments," became effective for the Corporation for the fiscal year
beginning October 1, 1995 and require disclosure of the fair value of
financial instruments, both assets and liabilities recognized and not
recognized in the statements of financial position, for which it is practical
to estimate fair value. The adoption of this statement had no impact on the
Corporation's financial position or results of operations.
The Bank adopted Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of Loan-Income Recognition
and Disclosures," as of October 1, 1995. SFAS No. 114 requires that certain
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's original effective interest rate. As a
practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a
valuation allowance. The Bank had previously measured the allowance for
credit losses using methods similar to those prescribed in SFAS No. 114. As a
result of adopting these statements, no additional allowance for loan losses
was required as of October 1, 1995.
Statement Of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights," will be effective for the Corporation for the year beginning
October 1, 1996 and generally requires entities that sell or securitize loans
and retain the mortgage servicing rights to allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loan based on their
relative fair value. Costs allocated to mortgage servicing rights should be
recognized as a separate asset and amortized over the period of estimated net
servicing income and evaluated for impairment based on fair value. The standard
is not expected to have a material impact on the corporation's financial
statements.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock
Based Compensation," will be effective for the Corporation for the year
beginning October 1, 1996 and generally requires entities that have stock
based compensation to disclose to the employee stock options based on their
fair value at the grant date. The entity is required to use recognized
option pricing models to estimate the fair values. The standard is not
expected to have a material impact on the financial statements.
Financial Instruments - In the ordinary course of business, the Bank has entered
into off-balance-sheet financial instruments consisting of commitments to extend
credit. Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Bank in estimating fair
values of financial instruments as disclosed in Note 8:
Cash and short term instruments. The carrying amounts of cash and short term
instruments approximate their fair value.
Available for sale and held to maturity securities. Fair values for securities
are based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
20
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Fair Values of Financial Instruments, Continued
Loans receivable. For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
Fair values for mortgage loans and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values
for commercial real estate and commercial loans are estimated using
discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit qualify. Fair
values for impaired loans are estimated using discounted cash flow analyses
or underlying collateral values, where applicable.
Deposit liabilities. The carrying amounts of variable-rate, fixed-term money-
market accounts and certificates of deposit (CD's) approximate their fair
values at the reporting date. Fair values for fixed-rate CD's are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Short-term borrowings. The carrying amounts of securities sold under
agreements to repurchase maturing within 90 days approximate their fair
value. The fair values of the Bank's Federal Home Loan Bank advances are
estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest. The carrying amounts of accrued interest approximate their
fair values.
Off-balance-sheet instruments. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standings.
Net Income Per Share - Net income per share of common stock for 1996 has been
computed on the basis of the weighted-average number of shares of common
stock outstanding. Net income per share of common stock for 1995 has been
computed on the basis of the weighted average number of shares of common
stock outstanding using net income since conversion of $316,643.
Reclassifications - Certain amounts from the prior year have been reclassified
to conform to the current year's presentation.
NOTE 2 - DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the consolidated statements
of financial condition according to management's intent. The carry amount of
securities and their approximate fair values at September 30 follow.
<TABLE>
<CAPTION>
Available for sale
GROSS GROSS
1996 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government
Agency securities $1,783,295 $1,289 $(47,147) $1,737,437
Mortgage-backed
securities 5,294,065 62,280 (53,176) 5,303,169
Stock in FHLB 334,900 0 0 334,900
Other securities 163,990 0 (6,956) 157,034
TOTALS $7,576,250 $63,569 $(107,279) $7,532,540
</TABLE>
21
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - DEBT AND EQUITY SECURITIES, CONTINUED
<TABLE>
<CAPTION>
Available for sale, continued
GROSS GROSS
1995 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C> <C>
Equity securities $ 32,987 $ 0 $ 0 $ 32,987
U.S. government and
agency securities 1,343,405 14,238 (5,000) 1,352,643
Mortgage-backed
securities 1,235,739 1,215 (629) 1,236,325
Stock in FHLB 334,900 0 0 334,900
Other securities 279,373 3,624 0 282,997
TOTALS $ 3,226,404 $19,077 $(5,629) $3,239,852
</TABLE>
<TABLE>
<CAPTION>
Held to maturity securities
GROSS GROSS
1996 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Mortgage-backed
securities $ 473,104 $ 0 $ (104) $ 473,000
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
1995 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government and
agency securities $ 499,625 $ 0 $ (19,225) $ 480,400
Mortgage-backed
securities 2,795,027 70,306 (814) 2,864,519
TOTALS $ 3,294,652 $ 70,306 $ (20,039) $ 3,344,919
</TABLE>
During the first quarter of fiscal year 1996, the Financial Accounting Standards
Board allowed a one-time opportunity for entities to review their
classifications of investments in accordance with Statement on Financial
Accounting Standards (SFAS) No. 115 and reclassify investments without the
constraints imposed by SFAS 115. Thus, the Corporation transferred
securities with amortized costs of $2,617,941 and fair value of $2,645,719 from
held to maturity to available for sale, increasing the carrying value by
$27,778. During 1996, there were no sales of investments available for sale.
The scheduled maturities of securities held to maturity and securities (other
than equity securities) available for sale at September 30, 1996 were as
follows:
<TABLE>
<CAPTION>
Held to maturity securities: Available for sale securities:
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 0 $ 0 $ 0 $ 0
Due from one to five years 251,747 249,545 980,761 960,188
Due from five to ten years 221,357 223,455 1,111,571 1,100,215
Due after ten years 0 0 5,149,018 5,137,237
$473,104 $473,000 $7,241,350 $7,197,640
</TABLE>
For purposes of the maturity table, mortgage backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings based
on the weighted-average contractual maturities of underlying collateral. The
mortgage backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
22
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
1996 1995
Commercial $ 1,173,354 $1,087,000
Real estate construction 276,200 55,149
Commercial real estate 81,771 92,000
Residential real estate 21,815,594 22,866,410
Consumer 4,996,685 5,052,242
Subtotal 28,343,604 29,152,801
Loans in process (75,066) (95,974)
Net deferred loan fees and discounts (83,259) (98,074)
Allowance for loan losses (77,000) (77,039)
$28,108,279 $28,881,714
An analysis of the change in the allowance for loan losses follows:
1996 1995
Balance at October $77,039 $77,039
Loans charged off (409,809) 0
Recoveries 0 0
Net Loans charged off (409,809) 0
Provision for loan losses 409,770 0
Balance at September 30 $77,000 $77,039
Impairment of loans having recorded investments of $197,493 at September 30,
1996 and $114,088 at September 30, 1995 has been recognized in conformity
with FASB Statement 114, as amended by FASB Statement 118. The average
recorded investment in impaired loans during 1996 and 1995 was $104,038 and
$158,204, respectively. The total allowance for loan losses related to these
loans was $22,328 and $41,241 on September 30, 1996 and 1995, respectively.
Interest income that would have been recorded under the original term of such
loans but has been foregone totaled approximately $6,302 and $6,632 for the
years ended September 30, 1996 and 1995, respectively.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
NOTE 4 - PREMISES AND EQUIPMENT
Components of properties and equipment included in the consolidated statements
of financial condition at September 30, 1996 and 1995 were as follows:
1996 1995
Cost:
Land $ 140,048 $ 140,048
Bank premises 969,459 969,459
Furniture and equipment 208,000 197,956
Leasehold improvements 0 0
Total Cost 1,317,507 1,307,463
Less accumulated depreciation (530,499) (498,409)
Net book value $ 787,008 $ 809,054
23
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - DEPOSITS
The aggregate amount of short-term jumbo CDs, each with a minimum denomination
of $100,000, was approximately $2,543,138 and $851,675 as of September 30, 1996
and 1995, respectively.
At September 30, 1996 the scheduled maturities of CDs are as follows:
1997 $10,851,684
1998 2,828,159
1999 2,149,053
2000 4,167,800
2001 1,059,093
$ 21,055,789
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK and OTHER BORROWED FUNDS
The advances from the Federal Home Loan Bank consisted of advances ranging in
interest rates from 5.4%-8.75%. These advances are collateralized by virtually
the Corporation's entire mortgage loan and securities portfolio. Maturity
dates for advances outstanding at September 30, 1996 and 1995:
1996 1995
1996 $ 0 $ 1,730,168
1997 1,199,644 199,644
1998 1,172,926 172,926
1999 649,552 149,552
2000 and thereafter 677,863 677,863
$ 3,699,985 $ 2,930,153
Other borrowed funds, consisting of agreements to repurchase securities sold, at
September 30, 1996 totaled $273,951. The agreements at September 30, 1996
mature within twelve months.
Information concerning these borrowings at September 30, is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Average balance during the year $ 454,250 $ 68,500
Average interest rate during the year 5.49% 5.54%
Maximum month-end balance during the year $ 1,129,979 $ 1,138,245
</TABLE>
Mortgage-backed securities under the Corporation's control and underlying the
agreements at year-end:
Carrying value $ 489,783 $ 1,555,649
Estimated fair value $ 483,082 $ 1,584,445
24
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and lines of credit. Those
instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recognized in the consolidated statements of
financial condition. The contract or notional amounts of these instruments
reflect the extent of the Bank's involvement in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and lines of
credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to Extend Credit. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank's experience has been that approximately 30% of home equity
commitments and 100% of mortgage loan commitments are drawn upon by customers.
The bank evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if it is deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable;
inventory, property, plant, and equipment; and income-producing commercial
properties.
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments were as follows:
Carrying Fair
September 30, 1996 Value Value
Financial assets:
Cash and due from banks, interest-bearing
deposits with banks $ 5,222,458 $ 5,222,458
Securities available for sale 7,532,540 7,532,540
Securities held to maturity 473,104 473,000
Loans receivable 28,108,279 28,176,268
Accrued interest receivable 174,519 174,519
Financial Liabilities:
Deposit liabilities 32,627,632 33,085,864
FHLB advances 3,699,985 3,666,390
A summary of the notional amounts of the Bank's financial instruments with off-
balance sheet risk at September 30, 1996 follows.
Notional
Amount
Commitments to extend credit $1,383,100
25
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9- PENSION PLAN
The Corporation participates in the Financial Institutions Retirement Fund,
which is a multi-employer retirement fund that covers substantially all of
the Corporation's employees providing defined benefits. The relative
position of the Corporation regarding the accumulated plan benefits and plan
net assets is not determinable by the Corporation. Pension expense totaled
$31,225 and $23,394 for the years ended September 30, 1996 and 1995.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with its directors, significant
shareholders, and their affiliates (related parties). The aggregate amount
of loans to such related parties at September 30, 1996, was $122,515. For
the year ended September 30, 1996, new loans to such related parties amounted
to $17,200 and repayments amounted to $32,521.
NOTE 11 - CONCENTRATION OF CREDIT RISK
Most of the Bank's business and lending activity is with customers located
within Daviess County and other surrounding counties in Indiana. Thus, the
risk of its loan portfolio is directly affected by the economic well-being of
this primarily agricultural area.
NOTE 12 - INCOME TAXES
The Corporation and subsidiaries file separate federal income tax returns on a
fiscal-year basis. If certain conditions are met in determining taxable
income, the Bank has been allowed a special bad-debt deduction based on a
percentage of taxable income (presently 8 percent) or on specified experience
formulas. The percentage of taxable income method has been repealed for tax
years beginning after December 31, 1995. After the current year, the Bank
will be required to use either the experience method or the specific charge-off
method. The Bank will also be required to include in income for tax purposes
only a portion of its tax bad debt reserve. Approximately $170,000 will be
taxed over a period of six years beginning with the fiscal year ending
September 30, 1997.
The provision for income taxes consisted of the following for the years ended
September 30:
Current tax provision: 1996 1995
Federal $35,673 $204,161
State 14,374 62,763
Total current expense 50,047 266,924
Deferred expense 67,192 0
Deferred benefit (88,555) 0
Total provision $28,684 $266,924
The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows.
1996 1995
Statutory rates ($36,746) $243,503
Increase (decrease) resulting from:
Effect of tax brackets (11,750) 0
Effect of tax-exempt income 0 ( 22,855)
Tax bad debt deduction 67,192 ( 16,487)
State tax provision 9,988 62,763
$28,684 $266,924
26
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES, CONTINUED
Deferred tax assets and liabilities included in other assets at September 30
consist of the following:
1996 1995
Deferred tax assets:
Deferred Saving Association
Insurance Fund assessment $ 88,555 0
Net unrealized losses on available
for sale securities 18,275 2,138
$106,830 $2,138
Deferred tax liabilities:
Allowance for loan losses $(67,192) $ 0
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Corporation has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Corporation is
often defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial position of the
Corporation.
The Corporation has deposits with two other Banks which exceed the federal
deposit insurance limits by approximately $1,055,000.
NOTE 14 - RESTRICTIONS ON RETAINED EARNINGS
The Bank must obtain regulatory approval before any dividends may be declared.
Dividends from the Corporation are limited to the unconsolidated retained
earnings of the parent corporation.
NOTE 15 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -and possibly additional discretionary- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined) to average assets (as defined).
Management believes, as of September 30, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
27
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - REGULATORY MATTERS, CONTINUED
As of November 20, 1995, the most recent notification from the Office of the
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
REGULATORY CAPITAL RATIOS
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of September 30, 1996:
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets) 4,343,000 20.9% >1,658,800 >8.0% >2,073,500 >10.0%
Tier I Capital
(to Risk-Weighted Assets) 4,266,000 20.6% > 829,400 >4.0% >1,244,100 > 6.0%
Tier I Capital
(to Average Assets) 4,266,000 10.1% >1,694,320 >4.0% >2,117,900 > 5.0%
Tangible Capital Ratio 4,266,000 10.1% > 635,370 >1.5%
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1995:
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets) 4,731,000 20.9% >1,814,400 >8.0% >2,268,000 >10.0%
Tier I Capital
(to Risk-Weighted Assets) 4,654,000 20.5% > 907,200 >4.0% >1,360,800 >6.0%
Tier I Capital
(to Average Assets) 4,654,000 11.2% >1,667,440 >4.0% >2,084,300 >5.0%
Tangible Capital Ratio 4,654,000 11.2% > 625,290 >1.5%
</TABLE>
NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN
Employee Stock Ownership Plan - Concurrent with the conversion the board of
directors approved the adoption of the Home Building Bancorp, Inc., Employees
Stock Ownership Plan (the "ESOP"). The ESOP is qualified under Sections 401
(a) and 501 (a) of the Internal Revenue Code. Eligibility is based on hours
of service, date of hire, and age. Contributions to the ESOP are determined
by the board of directors, in the form of cash or the Corporation's common
stock. No employee contributions are accepted. Contributions are allocated
based on the ratio of the participant's compensation to total compensation of
all participants. Participant's account balances are fully vested after five
years of service. ESOP expense recorded for the year ended September 30,
1996 and 1995, totaled $25,760, with 3,151 and 2,767 shares committed to be
allocated at September 30, 1996 and 1995, respectively. The fair value of
unallocated shares was $347,229 and $347,760 at September 30, 1996 and 1995,
respectively.
28
<PAGE>
HOME BUILDING BANCORP, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN, CONTINUED
The ESOP shares at September 30 were as follows:
1996 1995
Allocated Shares 2,767 0
Shares released for allocation 3,151 2,767
Unreleased shares 19,842 22,993
Total ESOP shares 25,760 25,760
NOTES 17 - RECOGNITION AND RETENTION PLAN
The adoption of the Recognition and Retention Plan ("RRP"), was approved by the
Corporation's shareholders on January 22, 1996. This plan is for the benefit
of directors and certain officers of the Corporation. The RRP is a
restricted stock award plan The RRP is administered by a Committee of
Directors of the Corporation. This Committee selects recipients and terms of
awards pursuant to the plan. The total shares made available for awards
under the RRP plan were 12,880. The Committee has awarded 9,660 shares of
common stock under the RRP. RRP awards vest in five equal annual
installments, with the first award vesting on January 22, 1997, subject to the
continuous employment of the recipients and the Corporation's achievement of
certain performance standards as defined under such plans. The unamortized
unearned compensation value of the RRP is shown as a reduction to
shareholders' equity in the accompanying consolidated statements of financial
condition.
29
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - PARENT ONLY FINANCIAL STATEMENTS
Summarized financial information concerning Home Building Bancorp, Inc., only as
of September 30, 1996 is as follows:
ASSETS
Cash $ 841,118
Certificates of deposit with other banks 198,000
Investment in subsidiary 4,239,973
Loan receivable from subsidiary 206,080
Other assets 13,348
Total Assets $5,498,519
LIABILITIES AND SHAREHOLDERS' EQUITY
Common stock, $.01 par value,
331,660 outstanding at September 30, 1996 3,317
Paid in capital 6,150,432
Treasury stock (345,000)
Retained earnings 81,637
Unearned compensation (365,470)
Unrealized loss on securities
available for sale (26,397)
Total Liabilities & Shareholders' Equity $5,498,519
Interest income $ 63,105
(Loss) from subsidiary (123,330)
Total Income(Loss) (60,225)
Expenses (63,885)
Income Before Income Tax Expense (124,110)
Income Tax Expense (12,650)
Net (Loss) $(136,760)
Cash flows from operating activities
Net income (loss) ($136,760)
Adjustments to reconcile net income
to net cash provided by operating
activities
Increase in other assets (13,539)
Decrease in other liabilities (41,000)
Dividends received from sub 290,000
Loss from subsidiary 123,330
Net cash provided by operating activities 222,031
Cash flows from investing activities
Net decrease in loans 25,760
Cash flows from financing activities
Purchase of treasury stock (345,000)
Dividends paid (98,055)
Net cash used by financing activities (443,055)
Net decrease in cash (195,264)
Cash at beginning of period 1,036,382
Cash at end of period $ 841,118
Cash dividends paid to the Corporation from the Bank for the years ended
September 30,
1996 1995
$290,000 $ 0
30
<PAGE>
HOME BUILDING BANCORP, INC.
SHAREHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:30 a.m., Monday, January
20, 1997, at the main office of the Corporation, located at 200 East VanTrees
Street, Washington, Indiana.
STOCK LISTING
The Corporation's stock is traded on The Nasdaq SmallCap Market under the
symbol "HBBI".
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices since the
Corporation's Common Stock began trading on February 7, 1995 and any
dividends declared. 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 therefore may not
represent actual transactions.
<TABLE>
<CAPTION>
1996 1995
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
<S> <C> <C> <C> <C> <C> <C>
First Quarter $17.00 $15.25 $.075 N/A N/A N/A
Second Quarter $17.50 $16.25 $.075 $12.50(1) $10.75(1) $ ---(1)
Third Quarter $19.50 $16.25 $.075 $13.00 $12.50 $ ---
Fourth Quarter $22.00 $17.00 $.075 $15.00 $13.50 $.075
<FN>
(1) Reflects the period from February 7, 1995 through March 31, 1995.
</TABLE>
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. The Corporation paid a $.075 quarterly dividend on October 22,
1996 to shareholders of record on October 8, 1996. Restrictions on dividend
payments are described in Note 14 of the Notes to Consolidated Financial
Statements included in this Annual Report.
At September 30, 1996, the Corporation had approximately 335 shareholders of
record and 282,158 outstanding shares of Common Stock.
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
Bruce A. Beesley, President Registrar and Transfer Company
Home Building Bancorp, Inc. 10 Commerce Drive
200 East VanTrees Street Cranford, New Jersey 07016
Washington, Indiana 47501 (908) 272-8511
(812) 254-2641
ANNUAL AND OTHER REPORTS
The Corporation is required to file an annual report on Form 10-KSB for its
fiscal year ended September 30, 1996, with the Securities and Exchange
Commission. Copies of the Form 10-KSB annual report and the Corporation's
quarterly reports may be obtained without charge by contacting: Bruce A.
Beesley, President, Home Building Bancorp, Inc., 200 East VanTrees Street,
Washington, Indiana 47501; telephone number (812) 254-2641.
<PAGE>
HOME BUILDING BANCORP, INC.
CORPORATE INFORMATION
CORPORATION AND BANK ADDRESS
200 East VanTrees Street Telephone: (812) 254-2641
Washington, Indiana 47501 Fax: (812) 254-2619
DIRECTORS OF THE BOARD OF HOME
BUILDING BANCORP, INC AND HOME
HOME BUILDING SAVINGS BANK, FSB
Robert M. Murray
Chairman of the Board of Home Building Bancorp,
Inc. and Home Building Savings Bank, FSB
Washington, Indiana
Bruce A. Beesley
President and Chief Executive Officer of Home
Building Bancorp, Inc. and Home Building Savings
Bank, FSB
Washington, Indiana
Blake L. Chambers
Partner, Law firm of Waller, Leonard
Chambers & Hanson
Washington, Indiana
C. Darrell Deem, D.D.S.
Dentist
Washington, Indiana
Gregory L. Haag
President, Haag Heating and Air Conditioning, Inc.
Washington, Indiana
Thomas L. Hagel
President, Hagel's Hearing Service
Washington, Indiana
James E. Scheid
Owner, Scheid Farms
Washington, Indiana
Larry G. Wilson
President, R.L. Wilson Family Farms, Inc.
Montgomery, Indiana
Amos M. Wittmer
Owner and Auctioneer, Wittmer & Yagle Auction
Service
Montgomery, Indiana
EXECUTIVE OFFICERS OF HOME
BUILDING BANCORP, INC. AND
BUILDING SAVINGS BANK, FSB
Bruce A. Beesley
President and Chief Executive Officer of Home Building Bancorp, Inc. and Home
Building Savings Bank, FSB
Debra K. Shields
Vice President and Chief Financial Officer
of Home Building Bancorp, Inc. and Home Building Savings Bank, FSB
INDEPENDENT AUDITORS
Kemper CPA Group LLC
1500 Cherry Street
Mt. Carmel, Illinois 62863
SPECIAL COUNSEL
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, D.C. 20005
Exhibit 21
<TABLE>
SUBSIDIARIES OF THE REGISTRANT
<CAPTION>
Subsidiary State
Parent Subsidiary Percent of of Incorporation
Ownership or Organization
<S> <C> <C> <C>
Home Building Bancorp, Inc. Home Building Savings 100% Federal
Bank, FSB
Home Building Savings Bank, FSB White River Service Corporation 100% Indiana
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement Nos.
333-3946 and 333-3948 of Home Building Bancorp, Inc. on Form S-8, of our
report dated October 23, 1996 contained in the Annual Report to Shareholders
under Exhibit 13 to Home Building Bancorp, Inc.'s Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1996.
/s/ Kemper CPA Group LLC
KEMPER CPA GROUP LLC
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
Mt. Carmel, Illinois
December 23, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS DATED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,428,754
<INT-BEARING-DEPOSITS> 3,793,704
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,532,540
<INVESTMENTS-CARRYING> 473,104
<INVESTMENTS-MARKET> 473,000
<LOANS> 28,185,279
<ALLOWANCE> 77,000
<TOTAL-ASSETS> 42,560,700
<DEPOSITS> 32,627,632
<SHORT-TERM> 273,951
<LIABILITIES-OTHER> 460,613
<LONG-TERM> 3,699,985
0
0
<COMMON> 3,317
<OTHER-SE> 5,495,202
<TOTAL-LIABILITIES-AND-EQUITY> 42,560,700
<INTEREST-LOAN> 2,404,113
<INTEREST-INVEST> 501,502
<INTEREST-OTHER> 308,865
<INTEREST-TOTAL> 3,214,480
<INTEREST-DEPOSIT> 1,514,716
<INTEREST-EXPENSE> 1,756,070
<INTEREST-INCOME-NET> 1,458,410
<LOAN-LOSSES> 409,770
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,298,106
<INCOME-PRETAX> (108,076)
<INCOME-PRE-EXTRAORDINARY> (136,076)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (136,076)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
<YIELD-ACTUAL> .09
<LOANS-NON> 149,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 56,000
<ALLOWANCE-OPEN> 77,039
<CHARGE-OFFS> 409,809
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 77,000
<ALLOWANCE-DOMESTIC> 22,328
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 54,672
</TABLE>
