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
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-24896
HOME BUILDING BANCORP, INC.
(Name of small business issuer in its charter)
Indiana 35-1935840
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
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 22, 1997, was $4.7 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 22, 1997, there were issued and outstanding 289,574 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of the Annual Report to Stockholders for the
fiscal year ended September 30, 1997.
Part III of Form 10-KSB - Portions of the Proxy Statement for the Annual
Meeting of Stockholders held in January 1998.
Transitional Small Business Disclosure Format (check one): Yes ; No X .
<PAGE>
Forward-Looking Statements
When used in this Annual Report on Form 10-KSB or future filings
by the Company with the Securities and Exchange Commission, in the
Company's press releases or other public or shareholder communications,
or in oral statements made with the approval of an authorized executive
officer, the words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", "believe" or similar
expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The
Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made,
and to advise readers that various factors-including regional and national
economic conditions, changes in levels of market interest rates, credit risks
of lending activities, and competitive and regulatory factors-could affect
the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from those anticipated or
projected.
The Company does not undertake-and specifically disclaims any
obligation-to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
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, 1997, the Company had $41.7 million of assets and
stockholders' equity of $5.9 million (or 14.1% 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.
1
<PAGE>
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.
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,
generally 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, 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, 1997,
the Company's net loans receivable totaled $28.6 million.
2
<PAGE>
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,
1997, the maximum amount which the Bank could have lent to any one
borrower and the borrower's related entities was $671,000. At September
30, 1997, 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 nine loans to a single borrower totaling $451,000 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,
1997. All these loans are currently performing in accordance with their
repayment terms.
Management reserves the right to change the amount or type of
lending in which it engages to adjust to market or other factors.
3
<PAGE>
Loan Portfolio Composition. The following table 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.
At September 30,
1996 1997
Amount Percent Amount Percent
(Dollars in Thousands)
Real Estate Loans:
One- to four-family $21,816 77.0% $22,160 77.0%
Residential construction 276 1.0 295 1.0
Multi-family and commercial 82 .3 410 1.4
Total real estate loans 22,174 78.3 22,865 79.4
Other Loans:
Consumer Loans:
Automobile 2,186 7.7 2,037 7.0
Home equity/home improvement
/2nd mortgages 2,128 7.5 2,175 7.6
Unsecured 338 1.2 320 1.1
Deposit account 344 1.2 305 1.1
Other --- --- --- ---
Total consumer loans 4,996 17.6 4,837 16.8
Commercial business loans 1,173 4.1 1,080 3.8
Total other loans 6,169 21.7 5,917 20.6
Total loans receivable, gross 28,343 100.0% 28,782 100.0 %
Less:
Loans in process 75 47
Deferred fees and discounts 83 71
Allowance for losses 77 81
Total loans receivable, net $28,108 $28,583
4
<PAGE>
During the 1997 fiscal year, the Company's percentage of fixed-rate loans
increased from the prior fiscal year. The following table presents
the composition of the Company's loan portfolio by fixed- and adjustable-
rate at the dates indicated.
At September 30,
1996 1997
Amount Percent Amount Percent
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family $14,094 49.7% $16,449 57.2%
Residential construction 276 1.0 295 1.0
Multi-family and commercial 82 .3 410 1.4
Total real estate loans 14,452 51.0 17,154 59.6
Consumer 4,996 17.6 4,837 16.8
Commercial business 1,173 4.2 1,080 3.8
Total fixed-rate loans 20,621 72.8 23,071 80.2
Adjustable-Rate Loans:
Real estate:
One- to four-family 7,722 27.2 5,711 19.8
Total adjustable-rate
loans 7,722 27.2 5,711 19.8
Total loans receivable,
Gross 28,343 100.0% 28,782 100.0%
Less:
Loans in process 75 47
Deferred fees and discounts 83 71
Allowance for loan losses 77 81
Total loans receivable,
Net $28,108 $28,583
The following table presents the contractual maturities of the
Company's loan portfolio at September 30, 1997. 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>
1998(1) $ 47 $ --- $294 $1,092 $ 663 $2,096
1999 through 2002 985 --- --- 2,622 300 3,907
2003 and following 20,580 257 --- 1,415 527 22,779
Total $21,612 $257 $294 $5,129 $1,490 $28,782
<FN>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
5
<PAGE>
The total amount of loans due after September 30, 1998 which
have fixed interest rates is $21.0 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $5.7
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, 1997, such loans constituted 57.2% of the
Company's gross loans receivable, up from 49.7% at September 30, 1996.
The Company currently offers fixed-rate and ARM loans. For the
year ended September 30, 1997, the Company originated $855,000 of
adjustable-rate real estate loans secured by one- to four-family residential
real estate. During the same period, the Company originated $5.35 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 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.
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.
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 97% 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
6
<PAGE>
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,
1997, all of the Company's construction 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 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.
7
<PAGE>
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. Currently the second largest component of the Company's loan
portfolio, at September 30, 1997 consumer loans comprised 16.8% of the
Company's gross loans receivable, down from 17.6% at September 30,
1996.
The Company 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.
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 ($88,000, or approximately 1.7% of the
Company's consumer loan portfolio at September 30, 1997), there can be
no assurance that delinquencies will not increase in the future. See "Asset
Quality - Non-Performing Assets."
8
<PAGE>
Commercial Business Lending. The Company originates 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 originates 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.
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 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.
9
<PAGE>
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.
At September 30, 1997, the Company had outstanding commitments for mortgage
loans, home equity lines of credit and commercial business loans of
approximately $879,000. The Company invests its excess funds in mortgage-
backed securities and bonds issued by U.S. government agencies. See Note 13
of the Notes to Consolidated Financial Statement. See "- Investments."
The Company does not currently service loans for other entities.
The following table presents 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.
Year Ended September 30,
1996 1997
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family $ 825 $ 855
Fixed rate:
Real estate - one- to four-family 2,876 5,353
- multi-family and commercial 1,845 392
- residential and other
construction 276 523
Non-real estate - consumer 3,803 3,156
Total fixed-rate 8,800 9,424
Total loans originated 9,625 10,279
Purchases:
Total mortgage-backed
securities purchased 2,641 1,299
Sales and Repayments:
Total mortgage-backed securities sold --- (883)
Total sales --- (883)
Principal repayments (7,918) (6,918)
Total reductions (7,918) (7,801)
Increase (decrease) in other items, net (3,382) (1,246)
Net increase $ 966 $ 2,531
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<PAGE>
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 requesting that the loan be
brought current within 30 days; otherwise, the loan will be referred to the
Company's attorneys 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.
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 described 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.
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 7 $195 .9% 8 $171 .8% 15 $366 1.7%
Consumer 9 9 .2 14 79 1.5 23 88 1.7
Total 16 $204 .8% 22 $250 .9% 38 $454 1.7%
</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
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<PAGE>
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,
1997.
At September 30,
1996 1997
(Dollars in Thousands)
Non-accruing loans:
One- to four-family $ 84 $171
Consumer 65 79
Total 149 250
Total non-performing assets $149 $250
Non-performing assets as a
percentage of total assets .35% .60%
For the year ended September 30, 1997, gross interest income
which would have been recorded had the non-accruing loans been current
in accordance with their original terms was $8,000, 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.
12
<PAGE>
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, 1997, the Company had classified a
total of $232,000 of its assets as substandard, $18,000 as doubtful, none
as loss and the Company had designated $163,000 as special mention. At
September 30, 1997, total classified assets comprised $250,000, (without
special mention) or 4.2% of the Company's capital, or .60% 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, 1997, there was also an
aggregate of $163,000 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, 1997, the Company had a total allowance
for loan losses of $81,000 representing 32.40% of total non-performing
loans and .29% of the Company's net loans receivable. See Note 3 of the
Notes to Consolidated Financial Statements.
13
<PAGE>
The following table sets forth an analysis of the Company's
allowance for loan losses.
Year Ended September 30,
1996 1997
(Dollars in Thousands)
Balance at beginning of period $ 77 $ 77
Charge-offs:
One- to four-family --- ---
Consumer 410 3
Total charge-offs 410 3
Recoveries:
Consumer --- 2
Total recoveries --- 2
Net charge-offs (410) (1)
Additions charged to operations 410 5
Balance at end of period $ 77 $ 81
Ratio of net charge-offs during
the period to average loans
outstanding during the period 1.46% --- %
The distribution of the Company's allowance for losses on loans at
the dates indicated is summarized as follows:
At September 30,
1996 1997
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)
One- to four-family $63 76.8% $65 80.2%
Multi-family and commercial 2 4.5 2 2.5
Consumer 11 18.6 13 16.0
Unallocated 1 .1 1 1.3
Total $77 100.0% $81 100.0%
14
<PAGE>
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
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, 1997, the Company's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits
and current borrowings) was 8.81%. 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. 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, 1997, all of the Company's investment securities were
classified as available for sale. At such date, the weighted average term
to maturity or repricing of the investment securities portfolio was 3.8 years
(excluding FHLB Stock and equity securities).
15
<PAGE>
The following table sets forth the composition and carrying value
of the Company's investment security portfolio at the dates indicated.
At September 30,
1996 1997
Book % of Book %of
Value Total Value Total
(Dollars in Thousands)
Investment securities:
Federal agency obligations $1,737 77.93% $2,477 85.27%
Municipal bonds --- --- --- ---
Subtotal 1,737 77.93 2,477 85.27
Other debt securities 157 7.04 93 3.20
Equity securities at lower of
cost or market --- --- --- ---
FHLB stock 335 15.03 335 11.53
Total investment securities
And FHLB stock $2,229 100.0% $2,905 100.0%
Average remaining life
of investment securities 4.2 yrs. 3.8 yrs.
Other interest-earning assets:
Total interest-bearing
deposits with banks $3,794 100.0% $2,522 100.0%
Average remaining life or term
to repricing of investment
securities and other interest-
earning assets, excluding
FHLB stock and equity
securities 2.6 yrs. 2.6 yrs.
The composition and maturities of the investment securities
portfolio, excluding FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
September 30, 1997
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
Carrying Carrying Carrying Carrying Amortized Fair
Value Value Value Value Cost Value
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency
Obligations $ --- $ --- $1,978 $ 502 $2,480 $2,478
Other investment
securities --- 93 --- --- 93 93
Equity securities --- --- --- --- --- ---
Total investment
Securities $ --- $93 $1,978 $502 $2,573 $2,571
Weighted average
Yield ---% 6.89% 6.87% 6.97% 6.89% 6.90%
</TABLE>
16
<PAGE>
The Company's investment securities portfolio at September 30,
1997, contained neither tax-exempt securities nor securities of any issuer
with an aggregate book value in excess of 10.0% of the Company's
retained earnings, excluding those issued by the United States Government
or its agencies. For additional information regarding the Company's
investment securities portfolio, see Note 2 of the Notes to Consolidated
Financial Statements.
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.
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. The Bank
has a blanket pledge with the Federal Home Loan Bank of Indianapolis
which obligates 100% of its mortgage loans and mortgage-backed
securities. No specific mortgage-backed securities or loans were pledged
to secure the Bank's obligations at September 30, 1997.
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,
1997, $2.30 million, or 46.9%, of the Company's mortgage-backed
securities carried adjustable rates of interest.
17
<PAGE>
The following table sets forth the composition and 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.
At September 30,
1996 1997
Carrying % of Carrying %of
Value Total Value Total
(Dollars in Thousands)
Mortgage-backed securities:
FHLMC $3,994 69.15% $2,327 47.28%
FNMA 1,726 29.88 2,551 51.83
GNMA 14 .24 12 .24
Subtotal 5,734 99.27 4,890 99.35
Unamortized premium
(discounts), net 42 .73 32 .65
Total mortgage-backed
Securities $5,776 100.0% $4,922 100.0%
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at September 30, 1997; however,
the expected average life to maturity of this portfolio is generally 5 to 6
years. Not considered in the preparation of the table below is the effect of
prepayments, periodic principal repayments and the adjustable-rate nature
of these instruments.
<TABLE>
<CAPTION>
September 30, 1997
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
Carrying Carrying Carrying Carrying Amortized Fair
Value Value Value Value Cost Value
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLMC $109 $455 $ 41 $1,747 $2,352 $2,364
FNMA --- --- 729 1,806 2,535 2,551
GNMA --- 12 --- --- 12 12
Total mortgage-backed
Securities $109 $467 $770 $3,553 $4,899 $4,927
Weighted average
yield 6.21% 8.07% 6.68% 7.13% 7.13% 7.09%
</TABLE>
18
<PAGE>
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.
Borrowings, principally FHLB advances, are used to support lending
activities and to assist in the Company's asset/liability management
strategy.
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. In 1996, the Company added ATM/Checkcards to its
deposit services available to customers. These cards have been well
received by a growing number of our customers, who gain access to their
accounts any time via ATM's nationwide. The checkcards also allow
purchases at merchants where personal check acceptance is not permitted.
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.
The Company also serves as a depository for public funds for
various Indiana entities. At September 30, 1997, the amount of public
funds on deposit with the Company was $1.21 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.
19
<PAGE>
The following table presents the savings flows at the Company
during the periods indicated.
At September 30,
1996 1997
(Dollars in Thousands)
Opening balance $31,269 $32,628
Deposits 49,036 55,536
Withdrawals (48,766) (57,782)
Interest credited 1,089 1,136
Ending balance $32,628 $31,518
Net increase (decrease) $1,359 $(1,110)
Percent increase (decrease) 4.35% (3.40)%
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Company for the periods
indicated.
At September 30,
1996 1997
Percent Percent
Amount of Total Amount of Total
(Dollars in Thousands)
Transactions and Savings Deposits:
Passbook Accounts $ 5,822 17.82% $ 5,396 17.10%
NOW and SuperNOW Accounts 4,443 13.60 4,390 13.91
Money Market Accounts 1,307 4.00 1,094 3.47
Total Non-Certificates 11,572 35.42 10,880 34.48
Certificates:
2.50 - 4.50% 638 1.95 2,942 9.33
4.51 - 5.50% 11,879 36.36 9,337 29.60
5.51 - 6.50% 4,846 14.84 4,818 15.27
6.51 - 7.50% 3,003 9.20 2,784 8.82
7.51 - 8.50% 690 2.11 757 2.40
8.51% and over --- --- --- ---
Total Certificates 21,056 64.46 20,638 65.42
Accrued Interest 39 .12 31 .10
Total Deposits $32,667 100.00% $31,549 100.00%
20
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of September 30, 1997.
<TABLE>
<CAPTION>
0.00- 3.00- 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, 1997 $ --- $124 $3,192 $237 $ --- $ --- $3,553 17.21%
March 31, 1998 --- --- 3,048 --- --- --- 3,048 14.77
June 30, 1998 --- --- 1,723 --- --- --- 1,723 8.35
September 30, 1998 --- --- 1,149 --- --- --- 1,149 5.57
December 31, 1998 --- --- 1,231 --- --- --- 1,231 5.96
March 31, 1999 --- --- 1,167 15 --- --- 1,182 5.73
June 30, 1999 --- --- 432 4 293 --- 729 3.53
September 30, 1999 --- --- 411 46 --- --- 457 2.21
December 31, 1999 --- --- 458 455 39 --- 952 4.61
March 31, 2000 --- --- 215 1,557 --- --- 1,772 8.59
June 30, 2000 --- --- 8 1,536 135 --- 1,679 8.14
September 30, 2000 --- 1 3 450 --- --- 454 2.20
Thereafter --- --- 860 1,849 --- --- 2,709 13.13
Total $ --- $125 $13,897 $6,149 $467 --- $20,638 100.00%
Percent of total ---% .61% 67.34% 29.79% 2.26% ---% 100.00%
</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, 1997.
Maturity
Over 3 Over 6
3 Months Through Through Over
or Less 6 Months 12 Months 12 Months Total
(In Thousands)
Certificates of deposit
of less than $100,000 $3,126 $2,680 $2,322 $10,041 $18,169
Certificates of deposit
of $100,000 or more 427 368 550 1,124 2,469
Total certificates
of deposit $3,553 $3,048 $2,872 $11,165 $20,638(1)
(1) Includes $635,785 of deposits from governmental and other public entities.
21
<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 and to a lesser extent reverse repurchase
agreements. 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, 1997 the Company had $4.0 million in
advances from the FHLB of Indianapolis and the capacity to borrow up to
$7.2 million. See Note 6 of the Notes to Consolidated Financial
Statements.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and other borrowings for the periods
indicated.
Year Ended September 30,
1996 1997
(In Thousands)
Maximum Balance:
FHLB advances $3,930 $4,000
Repurchase agreements 1,130 270
Average Balance:
FHLB advances $3,920 $3,711
Repurchase agreements 454 162
The following table sets forth certain information as to the
Company's FHLB advances and other borrowings at the dates indicated.
September 30,
1996 1997
(Dollars in Thousands)
FHLB advances $3,700 $4,000
Repurchase agreements 274 ---
Total $3,974 $4,000
Weighted average interest rate
of FHLB advances 5.61% 5.55%
Weighted average interest rate
of repurchase agreements 5.45% N/A
22
<PAGE>
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
$830,000 at September 30, 1997, 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 $76,000. 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 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, 1997, WRSC had net income of approximately $10,000.
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.
23
<PAGE>
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 of the Federal
Reserve System ("Federal Reserve Board"). As the savings and loan
holding company of the Bank, the Company also is subject to federal
regulation and oversight. The purpose of the regulation of the Company
and other holding companies is to protect subsidiary savings associations.
The Bank is a member of the SAIF, which together with the 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, 1997
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 the operations of the OTS. The Bank's
OTS assessment for the fiscal year ended September 30, 1997 was
$15,000.
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.
24
<PAGE>
The Bank's general permissible lending limit for loans-to-one-
borrower is equal to the greater of $500,000 or 15% of unimpaired capital
and surplus (except for loans fully secured by certain readily marketable
collateral, in which case this limit is increased to 25% of unimpaired capital
and surplus). At September 30, 1997, the Bank's lending limit under this
restriction was $671,000. 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 audit systems, interest rate risk exposure
and compensation and other employee benefits. Any institution which fails
to comply with these standards must submit a compliance plan. A failure
to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC. The Bank is
a member of the SAIF, which is administered by the FDIC. Deposits are
insured up to applicable limits by the FDIC and such insurance is backed
by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to
pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon
their level of capital and supervisory evaluation. The current assessment
rates range from zero to .27% of deposits. Risk classification of all insured
institutions is made by the FDIC semi-annually. Institutions that are well-
capitalized and have a high supervisory rating are subject to the lowest
assessment rate. At September 30, 1997, the Bank met the capital
requirement of a "well capitalized" institution and was not subject to any
assessment. See Note 15 of Notes to Consolidated Financial Statements
in the Annual Report.
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. These premiums are also subject to change in
future periods.
Prior to the enactment of the legislation recapitalizing the SAIF, a
portion of the SAIF assessment imposed on savings associations was used
to repay obligations issued by a federally chartered corporation to provide
financing for resolving the thrift crisis in the 1980s. Although the
legislation also now requires assessments to be made on BIF-assessable
deposits for this purpose, effective January 1, 1997, that assessment 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
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to exist, thereby imposing a greater burden on SAIF member institutions
such as the Bank. Thereafter, however, assessments on BIF-member
institutions will be made on the same basis as SAIF-member institutions.
The rates established by the FDIC to implement this requirement for all
FDIC-insured institutions are a 6.7 basis points assessment on SAIF
deposits and 1.5 basis points assessment 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, 1997, the Bank did
not have any intangible assets.
The OTS regulations establish special capitalization requirements
for savings associations that own subsidiaries. In determining compliance
with the capital requirements, all subsidiaries engaged solely in activities
permissible for national banks or engaged in certain other activities solely
as agent for its customers are "includable" subsidiaries that are
consolidated for capital purposes in proportion to the association's level of
ownership. 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, 1997, the Bank had tangible capital of $4.5
million, or 10.76% of adjusted total assets, which is approximately $3.8
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, 1997, the Bank had no intangibles which were subject
to these tests.
At September 30, 1997, the Bank had core capital equal to $4.5
million, or 10.76% of adjusted total assets, which is $3.2 million above the
minimum leverage ratio requirement of 3.0% as in effect on that date.
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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, 1997, the Bank had no capital
instruments that qualify as supplementary capital and $81,000 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
did not have any such exclusions from capital and assets at September 30,
1997.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk
weight, ranging from 0% to 100%, based on the risk inherent in the type
of asset. For example, the OTS has assigned a risk weight of 50% for
prudently underwritten permanent one- to four-family first lien mortgage
loans not more than 90 days delinquent and having a loan to value ratio of
not more than 80% at origination unless insured to such ratio by an insurer
approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with
more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the
present value of its assets. This exposure is a measure of the potential
decline in the net portfolio value of a savings association, greater than 2%
of the present value of its assets, based upon a hypothetical 200 basis point
increase or decrease in interest rates (whichever results in a greater
decline). Net portfolio value is the present value of expected cash flows
from assets, liabilities and off-balance sheet contracts. The rule will not
become effective until the OTS evaluates the process by which savings
associations may appeal an interest rate risk deduction determination. It
is uncertain as to when this evaluation may be completed. Any savings
association with less than $300 million in assets and a total capital ratio in
excess of 12% is exempt from this requirement unless the OTS determines
otherwise.
On September 30, 1997, the Bank had total capital of $4.5 million
(including approximately $4.5 million in core capital and $81,000 in
qualifying supplementary capital) and risk-weighted assets of $21,213
(with no converted off-balance sheet assets); or total capital of 21.42% of
risk-weighted assets. This amount was $2.8 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"
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(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.
The imposition by the OTS or the FDIC of any of these measures
on the Bank of the Company 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
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capital component, as measured at the beginning of the calendar year, or
75% of their net income for the most recent four quarter period. However,
an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Bank
may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution
need only submit written notice to the OTS 30 days prior to such
distribution. Savings associations that do not, or would not meet their
current minimum capital requirements following a proposed capital
distribution, however, must obtain OTS approval prior to making such
distribution. The OTS may object to the distribution during that 30-day
period notice based on safety and soundness concerns. See "- Regulatory
Capital Requirements."
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.
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.
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 4%.
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, 1997,
the Bank was in compliance with both requirements, with an overall liquid
asset ratio of 8.81% and a short-term liquid assets ratio of 7.96%.
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
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of and accounting for loans and securities (i.e., whether held for
investment, 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 of 1986, as amended
(the "Code"). Under either test, such assets primarily consist of residential
housing related loans and investments. At September 30, 1997, the Bank
met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must
convert to a national bank charter, unless it requalifies as a QTL and
thereafter remains a QTL. If an association does not requalify and
converts to a national bank charter, it must remain SAIF-insured until the
FDIC permits it to transfer to the BIF. If such an association has not yet
requalified or converted to a national bank, its new investments and
activities are limited to those permissible for both a savings association and
a national bank, and it is limited to national bank branching rights in its
home state. In addition, the association is immediately ineligible to receive
any new FHLB borrowings and is subject to national bank limits for
payment of dividends. If such association has not requalified or converted
to a national bank within three years after the failure, it must divest of all
investments and cease all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding FHLB borrowings, which
may result in prepayment penalties. If any association that fails the QTL
test is controlled by a holding company, then within one year after the
failure, the holding company must register as a bank holding company and
become subject to all restrictions on bank holding companies. See "-
Holding Company Regulation."
Community Reinvestment Act. Under the Community
Reinvestment Act ("CRA"), every FDIC insured institution has a
continuing and affirmative obligation consistent with safe and sound
banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with
the examination of the Bank, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in
its evaluation of certain applications, such as a merger or the establishment
of a branch, by the Bank. An unsatisfactory rating may be used as the basis
for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently
revised the CRA regulations and the methodology for determining an
institution's compliance with the CRA. Due to the
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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 September 1997 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. Directors, officers or controlling persons are also subject to
regulations that restrict 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. At September 30, 1997, the
Bank was in compliance with the above restrictions.
Holding Company Regulation. The Company is a unitary savings
and loan holding company subject to regulatory oversight by the OTS. As
such, the Company is required to register and file reports with the OTS and
is subject to regulation and examination by the OTS. In addition, the OTS
has enforcement authority over the Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the Company acquires
control of another savings association as a separate subsidiary, it would
become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those
approved for multiple savings and loan holding companies or their
subsidiaries. In addition, within one year of such failure the Company must
register as, and will become subject to, the restrictions applicable to bank
holding companies. The activities authorized for a bank holding company
are more limited than are the activities authorized for a unitary or multiple
savings and loan holding company. See "--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are
generally prohibited if they result in a multiple savings and loan holding
company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings
association.
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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 checking accounts). At September 30, 1997, the
Bank was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be
imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations
require associations to exhaust other reasonable alternative sources of
funds, including FHLB borrowings, before borrowing from the Federal
Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the
FHLB of Indianapolis, which is one of 12 regional FHLBs, that administers
the home financing credit function of savings associations. Each FHLB
serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members
(i.e., advances) in accordance with policies and procedures established by
the board of directors of the FHLB, which are subject to the oversight of
the Federal Housing Finance Board. All advances from the FHLB are
required to be fully secured by sufficient collateral as determined by the
FHLB. In addition, all long-term advances are required to provide funds
for residential home financing.
As a member, the Bank is required to purchase and maintain stock
in the FHLB of Indianapolis. At September 30, 1997, the Bank had
$335,000 in FHLB stock, which was in compliance with this requirement.
In past years, the Bank has received dividends on its FHLB stock. Over
the past five fiscal years such dividends have averaged 8.80% and were
7.95% for fiscal 1997.
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.
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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 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).
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 repealed the reserve
method of accounting (including the percentage of taxable income method)
used by many thrifts 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, 1997, the Bank's post-1987 excess reserves
amounted to approximately $133,000, all of which has been reserved for
by the Bank. The recapture will occur over a six-year period commencing
in fiscal 1997. 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
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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. For tax years beginning after 1997, the corporate alternative
minimum tax has been repealed by the "Taxpayer Relief Act of 1997" for
small business corporations. Small business corporations are those with
average gross receipts for the past three years of less than $5 million.
Based on the last three years' gross income, the Company will qualify for
this exemption.
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,
1997, the Bank's Excess for tax purposes totaled approximately $133,000.
The Company, the Bank and the Bank's subsidiary file consolidated
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 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, 1997, the Bank had a total of 14 full-time and no
part-time employees. The Company's employees are not represented by
any collective bargaining group. Management considers its employee
relations to be good.
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Executive Officers of the Company and the Bank Who Are Not
Directors
The following information as to the business experience during the
past five years is supplied with respect to executive officer of the Company
and the Bank who does not serve on the Company's Board of Directors.
There are no arrangements or understandings between the persons named
and any other person pursuant to which such officers were selected.
Debra K. Shields - Ms. Shields, age 43, is the Vice President
and Corporate Secretary of the Bank. Ms. Shields joined the Bank in
1974 as a teller, was appointed head teller in 1975, Corporate Secretary
in 1980 and Vice President in 1990. She is responsible for the
supervision of the bookkeeping, accounting and reporting functions of
the Bank and is the Bank's primary loan officer. Ms. Shields is also the
secretary to the Executive Committee of the Bank.
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, 1997. 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, 1997 was approximately $784,000. See Note 4 of Notes
to Consolidated Financial Statements.
Total Net Book
Approximate Value at
Date Square September 30,
Location Acquired Footage 1997
Main Office:
200 East VanTrees Street
Washington, Indiana 47501 1980 8,900 $627,000
Branch Offices:
501 Main Street
Petersburg, Indiana 47567(1) 1979 2,760 $133,000
(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.
The Company remodeled the drive-through banking facilities
located at the Bank's main office and redecorated that office at an
approximate cost of $25,000. The Company believes that its current
facilities are adequate to meet the present and foreseeable needs of the
Company and the Bank.
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<PAGE>
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, 1997
was approximately $28,000.
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 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. The
Bank sought 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. In June 1997, the Bank
obtained a judgment against Mr. Hughes for $354,000, the collection of
which may not be recoverable; however, the Bank is continuing its efforts
to collect.
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, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Page 33 of the attached Annual Report to Stockholders for fiscal
1997 is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Pages 3 through 13 of the attached Annual Report to Stockholders
for fiscal 1997 are incorporated herein by reference.
36
<PAGE>
Item 7. Financial Statements
The following information appearing in the Company's Annual
Report to Stockholders for the year ended September 30, 1997 attached
hereto as Exhibit 13, is incorporated herein by reference in this Annual
Report on Form 10-KSB.
Pages in Annual
Annual Report Section Report
Independent Auditors' Report 14
Consolidated Statements of Financial Condition
as of September 30, 1997 and 1996 15
Consolidated Statements of Income for the Years
Ended September 30, 1997 and 1996 16
Consolidated Statements of Shareholders' Equity for
Years Ended September 30, 1997 and 1996 17
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1997 and 1996 18
Notes to Consolidated Financial Statements
19 - 32
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 1998, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
Executive Officers
Information concerning Executive Officers of the Company is
contained under the caption "Executive Officers of the Company and the
Bank Who Are Not Directors" in Part I of this Form 10-KSB, and is
incorporated herein by this reference
37
<PAGE>
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, 1997, 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 1998, 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 1998, 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 1998, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period
ended September 30, 1997.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HOME BUILDING BANCORP, INC.
Date: December 26, 1997 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, Chairman of the Board Bruce A. Beesley,
President, Chief Executive
Officer and Director
(Principal Executive and
Operating Officer)
Date: December 26, 1997 Date: December 26, 1997
/s/James E. Scheid /s/Amos M. Wittmer
James E. Scheid, Director Amos M. Wittmer, Director
Date: December 26, 1997 Date: December 26, 1997
/s/Thomas L. Hagel /s/Blake L. Chambers
Thomas L. Hagel, Director Blake L. Chambers, Director
Date: December 26, 1997 Date: December 26, 1997
/s/C. Darrell Deem /s/Gregory L. Haag
C. Darrell Deem, Director Gregory L. Haag, Director
Date: December 26, 1997 Date: December 26,1997
/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 26, 1997 Date: December 26, 1997
<PAGE>
Index to Exhibits
Exhibit
Number Document
3(i) Registrant's Articles of Incorporation as currently in
effect, filed on September 23, 1995 as an exhibit to
Registrant's Registration Statement on Form S-1 (File
No. 33-84332), is incorporated herein by reference.
3(ii) Registrant's Bylaws as currently in effect, filed as Exhibit
3(ii) to Registrant's Report on Form 10-KSB for the
fiscal year ended September 30, 1995 (File No.
0-24896), is incorporated herein by reference.
4 Registrant's Specimen Stock Certificate, filed on
September 23, 1995 as an exhibit to Registrant's
Registration Statement on Form S-1 (File No. 33-84332),
is incorporated herein by reference.
10.1 Employment Agreement between the Bank and Bruce A.
Beesley, filed on September 23, 1995 as an exhibit to
Registrant's Registration Statement on Form S-1 (File
No. 33-84332), is incorporated herein by reference.
10.2 Registrant's Employee Stock Ownership Plan, filed on
September 23, 1995 as an exhibit to Registrant's
Registration Statement on Form S-1 (File No. 33-84332),
is incorporated herein by reference.
10.3 Registrant's 1995 Stock Option and Incentive Plan, filed
on December 19, 1995 as Exhibit A to Registrant's proxy
statement dated December 18, 1995, is incorporated
herein by reference.
10.4 Registrant's Recognition and Retention Plan, filed on
December 19, 1995 as Exhibit B to Registrant's proxy
statement dated December 18, 1995, is incorporated
herein by reference.
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 Stockholders
21 Subsidiaries of the Registrant
23 Consent of Accountants
27 Financial Data Schedule (electronic filing only)
Exhibit 13
ANNUAL REPORT TO SECURITY HOLDERS
1997 ANNUAL REPORT
[LOGO]
HOME BUILDING BANCORP, INC.
Washington, Indiana
<PAGE>
TABLE OF CONTENTS
Page No.
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 14
Shareholder Information 33
Corporate Information 34
<PAGE>
[HOME BUILDING BANCORP, INC. LETTERHEAD]
December 19, 1997
Dear Shareholder:
It is a pleasure to present to you the Annual Report of Home Building Bancorp,
Inc. for the year ended September 30, 1997, our second full year as a publicly
held corporation. This year marked a return to solid profitability after the
challenges of last year.
The Corporation posted net income of $328,000, or $1.15 per share outstanding,
as of September 30, 1997. This profit resulted from growth in net loans
receivable, maintenance of a below average cost of funds, and lower
noninterest expenses than the previous year.
During the year we took a variety of steps to increase the convenience and
comfort of our customers. The office hours of the Corporation's wholly-owned
subsidiary, Home Building Savings Bank, F.S.B., were modified to include
Saturdays, the Washington, Indiana office was remodeled, and our debit card
program was expanded. Our customers now have more access to us than ever
before.
At this years Annual Meeting Robert M. Murray and Amos W. Wittmer, two of our
most distinguished directors, will retire. Chairman Murray has been
associated with Home Building since 1946. He oversaw the evolution of the
Bank from a "building and loan" sharing offices with a law firm into the
modern unitary thrift holding company it is today. He has been a director
since 1964, and was President/CEO from 1977-1990. Mr. Murray has been
Chairman of the Board since 1990. Mr. Wittmer became a director in 1974 and
brought excellent business judgement and experience to the Bank. Mr. Wittmer
also served on the Bank's Executive Committee since 1978. We at Home
Building wish to express to Messrs. Murray and Wittmer our sincere thanks for
their many years of faithful and dedicated service. These men are widely
known and respected throughout the communities we serve, and we look forward
to their continued guidance as emeritus directors.
Home Building Bancorp, Inc. and its bank subsidiary offer a variety of
banking, investment, and real estate related services unmatched even by many
larger institutions. Certainly we feel our combination of products,
services, and individual attention is unique. We will market our unique
approach both to new customers and also encourage our existing customers to
use us in additional ways. The Corporation also continues to explore our
market for additional opportunities.
On behalf of everyone at Home Building, thank you for your business, your
support, and your investment in Home Building Bancorp, Inc.
Sincerely,
Bruce A. Beesley
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
At September 30,
1997 1996 1995 1994 1993
(In Thousands)
Selected Financial Condition Data:
Total assets $41,750 $42,561 $41,670 $40,816 $43,749
Loans receivable, net 28,583 28,108 28,882 30,122 30,578
Cash and cash equivalents 4,016 5,222 3,339 4,245 5,615
Mortgage-backed securities 4,922 5,771 4,031 2,055 2,744
Investment securities 2,905 2,235 2,503 2,314 1,696
Deposits 31,518 32,628 31,269 35,432 38,292
Total borrowings 4,000 3,974 4,068 2,195 2,500
Shareholders' equity 5,893 5,499 6,076 3,027 2,693
At and For the Year Ended September 30,
1997 1996 1995 1994 1993
(In Thousands, Except Per Share Data)
Selected Operations Data:
Total interest income $3,306 $3,214 $3,159 $3,007 $3,128
Total interest expense 1,831 1,756 1,611 1,631 1,779
Net interest income 1,475 1,458 1,548 1,376 1,349
Provision for loan losses 5 409 --- 40 24
Net interest income after
provision for loan losses 1,470 1,049 1,548 1,336 1,325
Fees and service charges 64 26 80 57 52
Gain (loss) on sales of
mortgage-backed securities
and investment securities 13 --- --- (13) ---
Other noninterest income 49 115 47 37 51
Total noninterest income 126 141 127 81 103
Total noninterest expense 1,058 1,298(1) 959 875 779
Income before taxes 538 (108) 716 542 649
Income tax expense 210 29 267 208 242
Net income (loss) $ 328 $(137)(1) $ 449 $ 334 $ 407
Earnings (loss) per share $1.15 $(.46) $ 1.07 N/A N/A
Dividends per share $ .30 $ .30 $ .075 N/A N/A
(1) Includes the nonrecurring Savings Association Insurance Fund ("SAIF")
special assessment of $224,000, or $135,000 net of taxes.
2
<PAGE>
Year Ended September 30,
1997 1996 1995 1994 1993
Selected Financial Ratios
and Other Data:
Performance Ratios:
Return on average assets(1) .78% (.33)% 1.08% .80% .97%
Return on average
shareholders' equity(1) 5.75 (.02) 10.38 11.45 14.20
Interest rate spread information:
Average during period 2.97 2.98 3.37 3.13 2.83
End of period 3.06 3.38 3.18 3.38 3.35
Net interest margin(2) 3.33 3.53 3.82 3.03 3.07
Ratio of operating expense to
average total assets 2.51 3.08 2.32 2.08 1.87
Ratio of average interest-
earning assets to average
interest-bearing liabilities 108.18 112.99 112.10 106.18 106.05
Quality Ratios:
Non-performing assets to total
assets at end of period(3) .60 .35 .37 .29 .22
Allowance for loan losses
to non-performing loans 32.67 51.68 49.36 63.75 46.88
Allowance for loan losses to
loans receivable, net .29 .27 .27 .27 .15
Capital Ratios:
Shareholders' equity to total
assets at end of period 14.11 12.92 14.57 7.42 6.16
Average shareholders' equity
to average assets 13.51 13.74 10.98 6.96 6.02
Dividend payout ratio(4) 26.09 >100.00 7.00 (5) (5)
Other Data:
Number of full-service offices 2 2 2 2 2
(1) The fiscal 1996 numbers includes the nonrecurring SAIF special assessment.
(2) Net interest income divided by average interest-earning assets.
(3) Non-performing assets consist of nonaccruing loans, loans past due 90 or
more days and real estate owned.
(4) Dividends declared per share divided by earnings per common stock and
common share equivalent.
(5) Not applicable.
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.
3
<PAGE>
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 decreased $811,000, or 1.9%, to $41.7 million
at September 30, 1997 from $42.6 million at September 30, 1996. Assets
decreased primarily due to a reduction in interest bearing deposits with
banks, which decreased $1.3 million to $2.5 million at September 30, 1997.
Some of these funds were used to fund loan originations, as loans receivable,
net of allowance for loan losses, increased $474,000, or 1.7% to $28.6
million. The Bank continues to compete in its marketplace for quality
mortgage, installment and auto loans.
The balance of the decline in interest bearing deposits was used to fund net
withdrawals of customer deposits, which decreased $1.1 million, or 3.4%, to
$31.5 million at September 30, 1997. Starting the fiscal year with high
levels of liquidity, Bank management stressed maintenance of the Bank's
relatively low cost of funds, even at the cost of some deposit loss. The
Bank is able to compete aggressively for retail deposits should loan volume
warrant. Advances from the FHLB of Indianapolis increased $300,000 to $4.0
million at September 30, 1997, replacing repurchase agreement funds which
matured during the year.
Shareholder equity increased $394,000, to $5.9 million at September 30, 1997
from $5.5 million at September 30, 1996, through the retention of net income,
after payment of cash dividends to shareholders. At September 30, 1997
shareholder's equity was $20.43 per share, based on 288,378 shares, compared
to $19.49 per share on September 30, 1996, based on the 282,158 shares.
Results of Operations
Comparison of the Fiscal Years Ended September 30, 1997 and 1996
4
<PAGE>
General. The Corporation had net income of $328,000 for the year ended
September 30, 1997 compared to a net loss of $137,000 for the same period
last year. The 1996 results of operations were affected by loan losses
realized from the bankruptcy of a major commercial borrower and by the
nonrecurring SAIF special assessment. Operations in fiscal 1996 were also
affected by tax legislation requiring the recapture of certain bad debt
deductions resulting in the payment of additional taxes in fiscal 1996.
Excluding these extraordinary events, the Corporation had net income of
$311,000 for fiscal 1996.
Interest Income. Total interest income increased $92,000, or 2.8%, to $3.3
million for the year ended September 30, 1997 compared to the previous year.
The increase was primarily due to increases in interest earned from
investments and mortgage-backed securities, as the average balances and
yields earned on such portfolios increased from 1996 to 1997. See "Average
Balances, Interest Rates and Yields" and "Rate/Volume Analysis of Net
Interest Income."
Interest Expense. Total interest expense increased $75,000, or 4.3%, to
$1.8 million for the year ended September 30, 1997 compared to the previous
year. The increase was primarily due to interest paid on the increased average
balances of savings and certificate accounts. Higher rates paid on certificate
accounts also contributed to an increase in interest paid on such accounts,
but was more than offset by the decline in rates paid on other deposits and on
borrowings. See "Average Balances, Interest Rates and Yields" and "Rate/Volume
Analysis of Net Interest Income".
Net Interest Income. Net interest income increased $17,000, or 1.1%, to $1.5
million for the year ended September 30, 1997 compared to the previous year.
Management attributes the increase in net interest income to its success in
controlling the Company's average cost of funds. The Corporation's
percentage of average interest-earning assets to average interest-bearing
liabilities decreased to 109.95% during fiscal 1997 from 112.99% during
fiscal 1996.
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,
1997 was $5,000. In 1996, the provision for loan losses was, and charge-offs
were, $409,000, leaving allowance for loan losses at $77,000 at September 30,
1996. During fiscal 1997 net charge-offs were only $1,000, resulting in an
allowance for loan losses of $81,000 at September 30, 1997. The $81,000
allowance represents .29% of net loans receivable and 32.7% of total
nonperforming loans as of September 30, 1997.
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 decreased $15,000, or 10.6%, to
$126,000 for the year ended September 30, 1997 from $141,000 for the previous
year. The decrease resulted from customers incurring fewer late charges and
penalties on savings and money market deposit accounts and certificates of
deposit, as well as a decline in net income by White River Service Corporation,
the Bank's wholly owned service subsidiary.
Noninterest Expense. Noninterest expense fell $239,000, or 18.4%, to $1.1
million for the year ended September 30, 1997 compared to $1.3 million for
the previous fiscal year. Excluding the $224,000 nonrecurring SAIF special
assessment paid by the Corporation in fiscal 1996, noninterest expense would
have remained relatively unchanged for fiscal 1996 to fiscal 1997.
Salaries and employee benefits, the largest component of noninterest expense,
increased $22,000, or 4.0%, from the previous year as a result of normal cost of
living adjustments. Occupancy and equipment expense rose $23,000 to $146,000
compared to $123,000 the previous fiscal year, as the Washington, Indiana
office was remodeled and redecorated. These increases were offset by a
decline in the SAIF insurance premiums paid by the Bank and a decline in
professional fees.
Income Tax Expense. Income tax expense increased from $29,000 in fiscal 1996
to $210,000 in fiscal 1997, as a result of an increase in net income before
income tax.
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 $224,000 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 were offset 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 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 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.
6
<PAGE>
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 1996,
however, the Corporation 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.
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 $224,000, increased $339,000, or 35.3%, to $1.3 million for the
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 associated with the AMT/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.
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.
7
<PAGE>
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.
<TABLE>
<CAPTION>
At
September 30, September 30,
1997 1997 1996
Average Interest Average Interest
Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Rate Balance Paid Rate Balance Paid Rate
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1) 8.29% $28,478 $2,394 8.41% $28,974 $2,402 8.29%
Mortgage-backed securities 6.99 5,531 394 7.12 5,102 347 6.80
Investment securities 6.81 2,795 187 6.69 1,972 125 6.34
Interest-earning deposits
at banks 4.56 5,751 304 5.29 4,939 314 6.36
FHLB stock 8.06 335 27 8.06 335 26 7.76
Total interest-
earning assets(1) 7.73 42,890 3,306 7.71 41,322 3,214 7.78
Interest-Bearing Liabilities:
Savings deposits 2.98 7,379 227 3.08 5,983 207 3.46
Demand and NOW deposits 2.43 5,841 144 2.47 5,726 151 2.64
Certificate accounts 5.56 21,951 1,243 5.66 20,889 1,157 5.54
Borrowings 5.87 3,836 217 5.66 3,973 241 6.07
Total interest-bearing
liabilities 4.68 39,007 1,831 4.69 36,571 1,756 4.80
Net interest income $1,475 $1,458
Net interest rate
spread(1)(2) 3.05 3.02% 2.98%
Net interest-earning
assets(1) $3,883 $ 4,751
Net yield on average
interest-earning assets(3) 3.45% 3.44% 3.53%
Average interest-earning
assets to average interest-
bearing liabilities 109.95% 112.99%
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
(2) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate of interest-
bearing liabilities.
(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>
8
<PAGE>
Rate/Volume Analysis of 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,
1997 vs. 1996 1996 vs. 1995
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(In Thousands)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $ (41) $ 33 $ (8) $ (45) $ 20 $ (25)
Mortgage-backed securities 29 18 47 193 (35) 158
Investment securities 55 7 62 (22) (11) (33)
Interest-earning
deposits at banks 52 (62) (10) (57) 12 (45)
FHLB Stock --- 1 1 --- --- ---
Total interest-earning assets $ 95 $ (3) 92 $ 69 $ (14) 55
Interest-Bearing Liabilities:
Savings deposits $ 48 $ 28 20 (19) (5) (24)
Demand and NOW deposits 3 (10) (7) (1) (20) (21)
Certificate accounts 61 25 86 5 88 93
Borrowings (8) (16) (24) 40 57 97
Total interest-bearing
liabilities $104 $(29) 75 $ 25 $ 121 145
Net interest income $17 $(90)
</TABLE>
9
<PAGE>
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 of fixed rate mortgages. In addition, management monitors the
spread between short-term and loan-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, 1997, approximately $18.1
million, or 66.4%, 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
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, 1997, a change in the interest rate of positive 200 basis
points would have resulted in a 1.70% 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 .25% increase 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.
10
<PAGE>
Presented below, as of September 30, 1997, 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.
At September 30, 1997
Change in NPV NPV as a %
Interest Rate Board Limit Estimated Dollar Percent of the Present
(Basis Points) Percent Change NPV Change Change Value Assets
(Dollars In Thousands)
+400 bp (60)% $3,801 $(2,085) (35)% 9.60%
+300 bp (45) 4,397 (1,489) (25) 10.87
+200 bp (30) 4,974 (912) (15) 12.03
+100 bp (15) 5,492 (394) (7) 13.03
- --- bp --- 5,886 --- --- 13.74
- -100 bp (15) 6,058 171 3 13.97
- -200 bp (30) 6,118 232 4 13.98
- -300 bp (45) 6,287 401 7 14.20
- -400 bp (60) 6,616 730 12 14.71
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 4.0% 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, 1997 was 8.81%.
11
<PAGE>
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 FHLB of Indianapolis and collateral
eligible for repurchase agreements. At September 30, 1997, the Corporation
had outstanding borrowings consisting $4.0 million in FHLB advances, with
the capacity to borrow up to an additional $7.2 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, 1997, the Bank had $879,000 of loan
commitments. Certificates of deposit scheduled to mature in a year or less
at September 30, 1997 totaled $10.7 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, 1997, these assets accounted for 87.2% 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, 1997, the Bank had tangible and core capital of
$4.5 million, or 10.76% of adjusted total assets, which was approximately
$3.8 million and $3.2 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, 1997 of $4.5 million
(consisting of $4.5 million in core capital), or 21.4% of risk-weighted
assets of $21.2 million. This amount was $2.8 million above the 8.0%
requirement in effect on that date. At September 30, 1997, the Bank was
considered a "well capitalized" institution under OTS regulations.
The Corporation also 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, 1997, Home Building had $900,000 in liquid assets on hand. The primary
source of liquidity on an ongoing basis is dividends from the Bank.
Dividends totaling $175,000 were paid from the Bank to Home Building for the
year ended September 30, 1997. 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, 1997, Home Building
paid dividends to shareholders totaling $95,000. 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.
12
<PAGE>
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.
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.
13
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
WASHINGTON, INDIANA
CONSOLIDATED
FINANCIAL STATEMENTS
FISCAL YEARS ENDED
SEPTEMBER 30, 1997 AND 1996
AND
INDEPENDENT AUDITOR'S REPORT
<PAGE>
HOME BUILDING BANCORP, INC. AND SUBSIDIARIES
WASHINGTON, INDIANA
Index to Consolidated Financial Statements
PAGE
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . . .14
Consolidated Statements of Financial Condition
as of September 30, 1997 and 1996 . . . . . . . . . . . . . . . . .15
Consolidated Statements of Income for the
years ended September 30, 1997 and 1996 . . . . . . . . . . . . . .16
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1997 and 1996. . . . . . . . . . . . . .17
Consolidated Statements of Cash Flows for the
years ended September 30, 1997 and 1996 . . . . . . . . . . . . . .18
Notes to Consolidated Financial Statements. . . . . . . . . . . . .19-32
<PAGE>
[Kemper CPA Group LLC Letterhead]
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, 1997 and 1996, 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, 1997
and 1996 and the consolidated results of their operations and their cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Kemper CPA Group LLC
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
Mt. Carmel, Illinois
December 26, 1997
<PAGE>
HOME BUILDING BANCORP, INC.
WASHINGTON, INDIANA
Consolidated Statements of Financial Condition
September 30, 1997 and 1996
1997 1996
ASSETS
Cash and due from banks $ 1,494,118 $ 1,428,754
Interest-bearing deposits with banks 2,521,578 3,793,704
Securities available for sale 7,483,447 7,532,540
Securities held to maturity, fair
market value of $349,193
in 1997 and $473,000 in 1996 344,257 473,104
Loans receivable, net of allowance
for loan losses of $80,680
in 1997 and $77,000 in 1996 28,582,610 28,108,279
Insurance receivable 240,444 -
Accrued interest receivable 210,256 174,519
Premises and equipment 783,967 787,008
Other assets 89,075 262,792
Total assets $ 41,749,752 $ 42,560,700
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Savings and NOW deposits $ 10,880,043 $ 11,571,843
Other time deposits 20,637,490 21,055,789
Total deposits 31,517,533 32,627,632
Advances from Federal Home Loan Bank 4,000,341 3,699,985
Securities sold under
agreements to repurchase - 273,951
Accrued expenses and other liabilities 338,947 460,613
Total liabilities 35,856,821 37,062,181
Shareholders' equity:
Common stock, $.01 par value,
1 million shares authorized,
331,660 issued and outstanding 3,317 3,317
Additional paid-in capital 3,046,415 3,014,935
Treasury stock, at cost (345,000) (345,000)
Retained earnings 3,449,876 3,217,134
Net unrealized gain (loss)
on available for sale securities
net of deferred tax of $8,451 in
1997 and $17,694 in 1996 12,606 (26,397)
Unearned ESOP & recognition
and retention shares (274,283) (365,470)
Total shareholders' equity 5,892,931 5,498,519
Total liabilities and
shareholders' equity $ 41,749,752 $ 42,560,700
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
HOME BUILDING BANCORP, INC.
WASHINGTON, INDIANA
Consolidated Statements of Income
Years Ended September 30, 1997 and 1996
1997 1996
Interest income:
Loans receivable $ 2,393,642 $ 2,404,113
Investments 186,717 155,259
Mortgage-backed securities 394,015 346,243
Deposits with other banks 331,271 308,865
Total interest income 3,305,645 3,214,480
Interest expense:
Deposits 1,614,091 1,514,716
Repurchase agreements - 25,065
Other borrowed funds 216,870 216,289
Total interest expense 1,830,961 1,756,070
Net interest income 1,474,684 1,458,410
Provision for loan losses 5,000 409,770
Net interest income after
provision for loan losses 1,469,684 1,048,640
Noninterest income:
Gain on sale of assets 12,743 6,009
Customer service fees 113,724 135,381
Total other income 126,467 141,390
Noninterest expenses:
Salaries and employee benefits 564,840 543,101
Occupancy and equipment 145,733 122,519
Deposit insurance premium 32,185 299,308
Computer expense 55,146 56,769
Service fees 50,075 50,869
Advertising expense 51,358 48,358
Professional fees 49,764 63,669
Other expense 109,546 113,513
Total other expenses 1,058,647 1,298,106
Income (loss) before income taxes 537,504 (108,076)
Income tax expense (209,764) (28,684)
Net income (loss) $ 327,740 $ (136,760)
Net income (loss) per share of common stock $ 1.15 $ (0.46)
Weighted average shares outstanding 285,912 298,992
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
HOME BUILDING BANCORP, INC.
WASHINGTON, INDIANA
Consolidated Statements of Shareholders' Equity
Years Ended September 30, 1997 and 1996
1997 1996
Common stock
Beginning of period $ 3,317 $ 3,220
Issuance of 9,660 shares under
Recognition and Retention Plan (RRP) - 97
End of period 3,317 3,317
Additional paid in capital
Beginning of period 3,014,935 2,855,642
Allocation of 3,000 ESOP shares 31,480 -
Issuance of 9,660 share under RRP - 159,293
End of period 3,046,415 3,014,935
Treasury stock, at cost (345,000) (345,000)
Retained earnings
Beginning of period 3,217,134 3,451,949
Net income 327,740 (136,760)
Dividends declared (94,998) (98,055)
End of period 3,449,876 3,217,134
Unrealized gain (loss) on securities
available for sale, net of
deferred tax
Beginning of period (26,397) (3,259)
Change in unrealized gain or (loss) 39,003 (23,138)
End of period 12,606 (26,397)
Unearned ESOP & RRP shares
Beginning of period (365,470) (231,840)
Issuance of 9,660 shares under RRP - (159,390)
Allocation of RRP shares 53,534 -
Allocation of ESOP shares 37,653 25,760
End of period (274,283) (365,470)
Total equity $ 5,892,931 $ 5,498,519
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
HOME BUILDING BANCORP, INC.
WASHINGTON, INDIANA
Consolidated Statements of Cash Flows
Years Ended September 30, 1997 and 1996
1997 1996
Cash flows from operating activities:
Net income (loss) $ 327,740 $ (136,760)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 32,938 32,090
Non cash compensation 122,667 25,760
Provision for loan losses 5,000 409,770
Other gains, net - (6,009)
Net realized gains on
available-for-sale securities (12,743) -
Increase in insurance receivable (240,444) -
Increase in accrued interest receivable (35,736) (20,204)
Increase (decrease) in accrued expenses
and other liabilities (130,070) 204,656
(Increase) decrease in other assets 155,442 (175,409)
Total adjustments (102,946) 470,654
Net cash provided by operating activities 224,794 333,894
Cash flows from investing activities:
Net decrease in interest-bearing
deposits with banks 1,272,126 784,970
Purchases of available-for-sale securities (2,780,997) (3,141,399)
Proceeds from maturities of available-
for-sale securities 1,138,670 1,445,451
Proceeds from sales of available-
for-sale securities 1,769,844 -
Proceeds from maturities of held-to-
maturity securities 128,847 185,533
Net (increase) decrease in loans (481,421) 270,248
Net purchases of premises and equipment (29,897) (10,044)
Proceeds from sale of foreclosed collateral 2,090 99,426
Net cash (used) provided by
investing activities 1,019,262 (365,815)
Cash flows from financing activities:
Net increase (decrease) in savings
and NOW deposit accounts (691,800) 335,898
Net increase (decrease) in time deposits (418,299) 1,022,291
Net decrease in securities sold
under agreements to repurchase (273,951) (864,294)
Repayments of Federal Home
Loan Bank Advances (199,644) (230,168)
Proceeds from Federal Home Loan Bank Advances 500,000 1,000,000
Purchase of treasury stock - (345,000)
Dividends paid (94,998) (98,055)
Net cash (used) provided by
financing activities (1,178,692) 820,672
Net increase in cash and due from banks 65,364 788,751
Cash and due from banks at
beginning of period 1,428,754 640,003
Cash and due from banks at end of period $ 1,494,118 $ 1,428,754
Interest paid $ 1,837,229 $ 1,761,929
Income taxes paid $ 12,264 $ 197,200
The accompanying notes are an integral part of these consolidated financial
statements.
18
<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 - Held to maturity securities 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.
19
<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
capitalized and recognized as an adjustment of the yield of the related loan.
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.
20
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
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.
Effect of New Financial Accounting Standards -In August 1996, the FASB
issued Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS No. 125"). SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities using a financial-components approach that
focuses on control of the asset or liability. It requires that an entity
recognize only assets it controls and liabilities it has incurred and should
derecognize assets only when control has been surrendered and derecognize
liabilities only when they have been extinguished. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. The Company plans to adopt this October 1, 1997 without
any material impact on its consolidated financial statements. In December
1996, the FASB issued SFAS No. 127, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," which
defers the effective date of SFAS No. 125 for one year.
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
that specifies the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common stock. SFAS No.
128 is effective for financial statements ending after December 15, 1997.
The Company does not anticipate implementation of SFAS No. 128 will
have a material effect on its earnings per share computation.
In February of 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," that specifies standards for disclosing
information about an entity's capital structure. SFAS No. 129 is effective
for financial statements ending after December 15, 1997. The Company
does not anticipate implementation of SFAS No. 129 will have any
disclosure effect on its financial statements.
In June of 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. This statement requires classification of items
of other compressive income by their nature in the financial statements and
display of the accumulated balance of other comprehensive income
separately from retained earnings and additional paid in capital in the equity
section of the statement of financial position. This statement is effective
for fiscal years beginning after December 31, 1997, and the Company will
implement this for its year ending September 30, 1999.
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes
standards for reporting information about operating segments in annual
financial statements and requires that those businesses report selective
information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This
statement is effective for fiscal years beginning after December 31, 1997.
This statement requires disclosure in information in the financial statements
and the Company will implement this for their year ending September 30,
1999.
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.
21
<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 quality. 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 has been
computed on the basis of the weighted-average number of shares of common
stock outstanding
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.
Amortized cost of securities and their approximate fair values at September
30 follow.
Available for sale
GROSS GROSS
1997 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
U.S. Government
Agency securities $ 2,479,782 $ 5,433 $ (8,170) $ 2,477,045
Mortgage-backed
securities 4,555,012 36,918 (13,884) 4,578,046
Stock in FHLB 334,900 - - 334,900
Other securities 92,625 831 - 93,456
TOTALS $ 7,462,319 $ 43,182 $ (22,054) $ 7,483,447
22
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - DEBT AND EQUITY SECURITIES-CONTINUED
Available for sale
GROSS GROSS
1996 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
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 - - 334,900
Other securities 163,990 - (6,956) 157,034
TOTALS $ 7,576,250 $ 63,569 $ (107,279) $ 7,532,540
Held to maturity
GROSS GROSS
1997 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Mortgage-backed
securities $ 344,257 $ 5,025 $ (89) $ 349,193
GROSS GROSS
1996 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Mortgage-backed
securities $ 473,104 $ - $ (104) $ 473,000
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. Gross realized gains and gross realized losses on sales of available
for sale securities were $22,254 and $9,511, respectively, in 1997 and $0
and $0, respectively, in 1996.
The scheduled maturities of securities held to maturity and securities (other
than equity securities) available for sale at September 30, 1997 were as
follows:
Held to maturity securities: Available for sale securities:
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
Due in one year or less $ - $ - $ - $ -
Due from one to five years - - 92,625 93,456
Due from five to ten years - - 1,977,722 1,971,181
Due after ten years - - 502,060 505,864
Subtotal - - 2,572,407 2,570,501
Mortgage backed securities 344,257 349,193 4,555,012 4,578,046
Total $344,257 $349,193 $7,127,419 $7,148,547
23
<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:
1997 1996
Commercial $ 1,079,763 $ 1,173,354
Real estate construction 294,568 276,200
Commercial real estate 410,067 81,771
Residential real estate 22,160,269 21,815,594
Consumer 4,837,192 4,996,685
Subtotal 28,781,859 28,343,604
Loans in process (47,353) (75,066)
Net deferred loan fees and discounts (71,216) (83,259)
Allowance for loan losses (80,680) (77,000)
$28,582,610 $28,108,279
An analysis of the change in the allowance for loan losses follows:
1997 1996
Balance at October $ 77,000 $ 77,039
Loans charged off (3,249) (409,809)
Recoveries 1,929 -
Net Loans charged off (1,320) (409,809)
Provision for loan losses 5,000 409,770
Balance at September 30 $ 80,680 $ 77,000
Impairment of loans having recorded investments of $250,000 at September
30, 1997 and $197,493 at September 30, 1996 has been recognized in
conformity with FASB Statement 114, as amended by FASB Statement 118.
The average recorded investment in impaired loans during 1997 and 1996
was $287,546 and $104,038, respectively. The total allowance for loan
losses related to these loans was $39,556 and $22,328 on September 30,
1997 and 1996, respectively. Interest income on impaired loans of $14,493
and $12,879 was recognized for cash payments received in 1997 and 1996,
respectively.
The Bank is not committed to lend additional funds to debtors whose loans
have been modified.
NOTE 4 - PREMISES AND EQUIPMENT
Components of premises and equipment included in the consolidated
statements of financial condition at September 30, 1997 and 1996 were as
follows:
1997 1996
Cost:
Land $ 140,048 $ 140,048
Bank premises 993,932 969,459
Furniture and equipment 213,423 208,000
Total Cost 1,347,403 1,317,507
Less accumulated depreciation (563,436) (530,499)
Net book value $ 783,967 $ 787,008
24
<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 $2,469,000 and $2,543,000
as of September 30, 1997 and 1996, respectively.
At September 30, 1997 the scheduled maturities of CDs are as follows:
1998 $10,704,227
1999 3,320,590
2000 4,358,029
2001 1,630,236
2002 624,408
$ 20,637,490
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%-6.34%. These advances are
collateralized by virtually the Corporation's entire mortgage loan and
securities portfolio. Maturity dates for advances outstanding at September
30, 1997 and 1996 are as follows:
1997 1996
1998 $ 1,500,000 $ -
1999 1,500,000 1,199,644
2000 1,000,341 1,172,926
2001 - 649,552
2002 and thereafter - 677,863
$ 4,000,341 $ 3,699,985
Other borrowed funds, consisting of agreements to repurchase securities
sold, at September 30, 1997 and 1996 totaled $0 and $273,951, respectively.
Information concerning these borrowings at September 30, is summarized as
follows:
1997 1996
Average balance during the year $ 162,200 $ 454,250
Average interest rate during the year 5.49% 5.49%
Maximum month-end balance during the year $ 270,000 $1,129,979
Mortgage-backed securities under the Corporation's control and
underlying the agreements at year-end:
Carrying value $ - $ 489,783
Estimated fair value $ - $ 483,082
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.
25
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - FINANCIAL INSTRUMENTS, CONTINUED
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 34% 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:
September 30, 1997: September 30,1996:
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets
Cash and due from
banks, interest-bearing
deposits with banks $ 4,199,140 $ 4,199,140 $ 5,222,458 $ 5,222,458
Securities available
for sale 7,483,447 7,483,447 7,532,540 7,532,540
Securities held to maturity 344,257 349,193 473,104 473,000
Loans receivable 28,582,610 29,005,138 28,108,279 28,176,268
Accrued interest receivable 210,256 210,256 174,519 174,519
Financial Liabilities:
Deposit liabilities 31,517,533 31,897,570 32,627,632 33,085,864
FHLB advances 4,000,341 3,985,720 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, 1997 follows.
Notional
Amount
Commitments to extend credit $879,000
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 $0 and
$31,225 for the years ended September 30, 1997 and 1996, respectively.
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, 1997, was $191,684. For the
year ended September 30, 1997, new loans to such related parties amounted
to $110,604 and repayments amounted to $46,645.
26
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 consolidated federal income tax
returns on a fiscal-year basis. Before the current year if certain conditions
were met in determining taxable income, the Bank was allowed a special bad
debt deduction based on a percentage of taxable income or on specified
experience formulas. The percentage of taxable income method was
repealed for tax years beginning after December 31, 1995. The Bank is now
required to use either the experience method or the specific charge-off
method. The Bank is also 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 current fiscal year.
The provision for income taxes consisted of the following for the years
ended September 30:
Current tax provision: 1997 1996
Federal $101,289 $ 35,673
State 31,119 14,374
Total current expense 132,408 50,047
Deferred expense 88,555 67,192
Deferred benefit (11,199) (88,555)
Total provision $209,764 $ 28,684
The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows.
1997 1996
Statutory rates $ 182,751 $ (36,746)
Increase (decrease) resulting from:
Effect of tax brackets (11,750) (11,750)
Effect of SAIF deduction 30,109 -
Tax bad debt recapture (11,199) 67,192
State tax provision 19,853 9,988
$ 209,764 $ 28,684
Deferred tax assets and liabilities included in other assets at September 30
consist of the following:
1997 1996
Deferred tax assets:
Deferred Saving Association
Insurance Fund assessment - $ 88,555
Net unrealized losses on available
for sale securities - 18,275
$ - $106,830
Deferred tax liabilities:
Net unrealized gains on available
for sale securities $ (8,451) $ -
Allowance for loan losses (55,947) (67,192)
$(64,398) $(67,192)
27
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $1,189,000.
Due to alleged employee theft that was discovered during the year ended
September 30, 1997, the Corporation has recorded an insurance receivable
for $240,444. Legal counsel for the Corporation believes this amount will
be fully recovered through the Bank's insurance.
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, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, 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.
28
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - REGULATORY MATTERS, CONTINUED
The Bank's actual capital amounts and ratios are also presented in the table.
REGULATORY CAPITAL RATIOS
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of September 30, 1997:
Total Capital
(to Risk-Weighted Assets) 4,544,000 21.4% >1,697,040 >8.0% >2,121,300 >10.0%
Tier I Capital
(to Risk-Weighted Assets) 4,463,000 21.0% > 848,520 >4.0% >1,272,780 > 6.0%
Tier I Capital
(to Average Assets) 4,463,000 10.8% >1,659,040 >4.0% >2,073,800 > 5.0%
Tangible Capital Ratio 4,463,000 10.8% > 622,140 >1.5%
As of September 30, 1996:
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%
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, 1997 and 1996, totaled $61,480 and
$25,760, with 2,999 and 3,151 shares committed to be allocated at
September 30, 1997 and 1996, respectively. The fair value of unallocated
shares was $372,230 and $347,229 at September 30, 1997 and 1996,
respectively.
The ESOP shares at September 30 were as follows:
1997 1996
Allocated Shares 5,918 2,767
Shares released for allocation 2,999 3,151
Unreleased shares 16,843 19,842
Total ESOP shares 25,760 25,760
29
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Compensation expense related to the RRP
was $33,547 for the year ended September 30, 1997.
30
<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 is as follows:
1997 1996
ASSETS
Cash $ 992,674 $ 841,118
Certificates of deposit with other banks 199,000 198,000
Investment in subsidiary 4,475,044 4,239,973
Loan receivable from subsidiary 180,320 206,080
Other assets 45,662 13,348
Total Assets $5,892,700 $5,498,519
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities 27,375 -
Common stock, $.01 par value,
331,660 outstanding at September 30, 1997 3,317 3,317
Paid in capital 6,181,912 6,150,432
Treasury stock (345,000) (345,000)
Retained earnings 286,773 81,637
Unearned compensation (274,283) (365,470)
Unrealized gain (loss) on securities
available for sale 12,606 (26,397)
Total liabilities & shareholders' equity $5,892,700 $5,498,519
Interest income $ 54,651 $ 63,105
Income(loss) from subsidiary 345,308 (123,330)
Total income (loss) 399,959 (60,225)
Expenses (110,123) (63,885)
Income (loss) before income tax expense 289,836 (124,110)
Income tax benefit (expense) 10,300 (12,650)
Net income (loss) $ 300,136 $(136,760)
Cash flows from operating activities
Net income (loss) $ 300,136 $(136,760)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities
Non cash compensation expense 96,907 -
Increase in other assets (32,315) (13,539)
Increase (decrease) in other liabilities 27,374 (41,000)
Dividends received from sub 175,000 290,000
(Income) loss from subsidiary (345,308) 123,330
Net cash provided by operating activities 221,794 222,031
Cash flows from investing activities
Net increase in interest-bearing deposits
with banks (1,000) -
Net decrease in loans 25,760 25,760
Net cash provided by investing activities 24,760 25,760
Cash flows from financing activities
Purchase of treasury stock - (345,000)
Dividends paid (94,998) (98,055)
Net cash used by financing activities (94,998) (443,055)
Net increase (decrease) in cash 151,556 (195,264)
Cash at beginning of period 841,118 1,036,382
Cash at end of period $ 992,674 $ 841,118
31
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - PARENT ONLY FINANCIAL STATEMENTS,
CONTINUED
Cash dividends paid to the Corporation from the Bank for the years ended
September 30,
1997 1996
$175,000 $290,000
32
<PAGE>
HOME BUILDING BANCORP, INC.
SHAREHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:30 a.m., Thursday,
January 29, 1998, 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 presents the quarterly range of high and low bid prices of, and
dividends declared on, the Corporation's Common Stock during fiscal 1997 and
1996. The price 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.
1997 1996
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
First Quarter 18.50 16.75 .075 $17.00 $15.25 $.075
Second Quarter 21.00 17.00 .075 $17.50 $16.25 $.075
Third Quarter 21.00 20.50 .075 $19.50 $16.25 $.075
Fourth Quarter 22.00 19.50 .075 $22.00 $17.00 $.075
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 26,
1997 to shareholders of record on October 12, 1997. Restrictions on dividend
payments are described in Note 14 of the Notes to Consolidated Financial
Statements included in this Annual Report.
At September 30, 1997, the Corporation had approximately 320 shareholders of
record and 288,378 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, 1997, 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
BUILDING SAVINGS BANK, FSB
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
EXECUTIVE OFFICERS OF HOME
BUILDING BANCORP, INC.AND
HOME 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
38
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
Subsidiary State
Percent of of Incorporation
Parent Subsidiary Ownership or Organization
Home Building Bancorp, Inc. Home Building
Savings Bank, FSB 100% Federal
Home Building Savings Bank,
FSB White River Service
Corporation 100% Indiana
Exhibit 23
CONSENT OF EXPERTS
<PAGE>
[Kemper CPA Group LLC Letterhead]
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 December 26, 1997 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, 1997.
/s/ Kemper CPA Group LLC
KEMPER CPA GROUP LLC
Mt. Carmel, Illinois
December 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS DATED September 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
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