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, 1998
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
(State or other jurisdiction of incorporation or organization)
35-1935840
(I.R.S. Employer Identification No.)
200 East Van Trees 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: $ 3.5 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 23, 1998, was $4.2 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 23, 1998, there were issued and outstanding 293,000 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, 1998.
Part III of Form 10-KSB - Portions of the Proxy Statement for the Annual
Meeting of Stockholders held in January 1999.
Transitional Small Business Disclosure Format (check one): Yes ; No X .
<PAGE>
PART I
Item 1. Description of Business
General
Home Building Bancorp, Inc. (the "Company"), an Indiana corporation, was formed
in September 1994 to act as the holding company for Home Building Savings Bank,
FSB (the "Bank") upon the completion of the Bank's conversion from the mutual
to the stock form (the "Conversion"). The 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 Pink Sheet/Electronic Bulletin Board under the symbol "HBBI."
At September 30, 1998, the Company had $45.1 million of assets and
stockholders' equity of $6.2 million (or 13.68% 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"), and its deposits are insured up to
applicable limits by the FDIC, which insurance is backed by the full faith
and credit of the United States Government.
The principal business of the Company consists of attracting retail
deposits from the general public and investing those funds, together with
borrowings and other funds, to originate primarily loans secured by first
mortgages on owner-occupied one- to four-family residences. The Company also
originates consumer loans, and to a significantly lesser extent, loans secured
by commercial and multi-family real estate and commercial business loans. The
Company also invests in U.S. Government securities and other investment
securities. The Company offers a variety of deposit accounts having a wide
range of interest rates and terms. The Company only solicits deposits in its
primary market area and does not accept brokered deposits. The Company's
revenues are derived principally from interest on mortgage and consumer loans,
interest on investment and mortgage-backed securities, interest on time
deposits at other banks, and service fee income. The executive office of the
Company is located at 200 East Van Trees Street, Washington, Indiana 47501.
Its telephone number at that address is (812) 254-2641.
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.
Impact of the Year 2000
The Corporation has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and have
developed implementation plans to address the issue. The Corporation's data
processing is performed by a service bureau. The Corporation has already
contacted each vendor to request time tables for Year 2000 compliance and
expected costs, if any, to be passed along to the Corporation. To date, the
Corporation has been informed that their primary service providers anticipate
that all reprogramming efforts will be completed by March 31, 1999, allowing
the Corporation adequate time for testing. The Corporation will pursue
other options if it appears that these vendors will be unable to comply.
Management does not expect these costs to have a significant impact on
their financial position or results of operations, however, there can be no
assurance that the vendors systems will be Year 2000 compliant, consequently
the Corporation could incur incremental costs to convert to another vendor.
The Corporation has identified certain expenditures in connection with
achieving Year 2000 compliance. These are currently expected to total
approximately $10,000.
<PAGE>
Market Area
The Company primarily serves Daviess and Pike Counties, Indiana, through the
Bank's main office located in Washington, Indiana and a branch office located
in Petersburg, Indiana.
Washington, Indiana is the county seat of Daviess County, and is approximately
100 miles southwest of Indianapolis and approximately 50 miles northeast of
Evansville, Indiana. Petersburg is the county seat of Pike County, which is
immediately south of Daviess County.
Lending Activities
General. Historically, the Company originated primarily fixed-rate one- to
four-family mortgage loans. In the early 1980's, the Company introduced the
origination of ARM loans and short-term loans for retention in its portfolio,
in order to increase the percentage of loans in its portfolio with more
frequent repricing or shorter maturities than traditional long-term, fixed-rate
mortgage loans. Nevertheless, the Company has continued to originate fixed-
rate mortgage loans in response to customer demand, generally for terms of up
to 15 years, and , and fixed-rate loans continue to predominate the Company's
balance sheet. 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. The majority of the Company's loans are originated in its
primary market area. However, mortgages are also purchased from other
originators. At September 30, 1998, the Company's net loans receivable totaled
$32.7 million.
The Executive Committee of the Bank is responsible for review of all mortgage
loan applications. The Executive Committee currently consists of three
directors and President Beesley The 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, 1998, the maximum
amount which the Bank could have lent to any one borrower and the borrower's
related entities was $698,000. At September 30, 1998, 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 seven loans to a single
borrower totaling $293,000 secured by a first mortgage on the borrower's
residence and commercial inventory, equipment and account receivables. The
Company had only 5 other loans or lending relationships in excess of $150,000
at September 30, 1998. All of these loans are currently performing in
accordance with their repayment terms.
<PAGE>
Management reserves the right to change the amount or type of lending in which
it engages to adjust to market or other factors.
Loan Portfolio Composition. The following 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,
1998 1997
Amount Percent Amount Percent
(Dollars in Thousands)
Real Estate Loans:
One- to four-family $26,869 81.6% $22,160 77.0%
Residential construction 111 .3 295 1.0
Multi-family and commercial 328 1.0 410 1.4
Total real estate loans 27,308 82.9 22,865 79.4
Other Loans:
Consumer Loans:
Automobile 1,751 5.3 2,037 7.0
Home equity/home improvement/
2nd mortgages 2,669 8.1 2,175 7.6
Unsecured 346 1.1 320 1.1
Deposit account 570 1.7 305 1.1
Total consumer loans 5,336 16.2 4,837 16.8
Commercial business loans 301 .9 1,080 3.8
Total other loans 5,637 17.1 5,917 20.6
Total loans receivable, gross 32,945 100.0% 28,782 100.0%
Less:
Loans in process 127 47
Deferred fees and discounts 67 71
Allowance for losses 92 81
Total loans receivable, net $ 32,659 $28,583
<PAGE>
During the 1998 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,
1998 1997
Amount Percent Amount Percent
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family $19,306 58.6% $16,449 57.2%
Residential construction 111 0.3 295 1.0
Multi-family and commercial 328 1.0 410 1.4
Total real estate loans 19,745 59.9 17,154 59.6
Consumer 5,336 16.2 4,837 16.8
Commercial business 301 0.9 1,080 3.8
Total fixed-rate loans 25,382 77.0 23,071 80.2
Adjustable-Rate Loans:
Real estate:
One- to four-family 7,563 23.0 5,711 19.8
Total adjustable-rate loans 7,563 23.0 5,711 19.8
Total loans receivable, gross 32,945 100.0% 28,782 100.0%
Less:
Loans in process 127 47
Deferred fees and discounts 67 71
Allowance for loan losses 92 81
Total loans receivable, net $ 32,659 $28,583
The following table presents the contractual maturities of the Company's loan
portfolio at September 30, 1998. 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>
1999(1) $ 27 $ 0 $ 111 $ 2,649 $ 0 $ 2,787
2000 through 2003 559 0 0 910 301 1,770
2004 and following 26,283 328 0 1,777 0 28,388
Total $ 26,869 $ 328 $ 111 $ 5,336 $ 301 $ 32,945
<FN>
(1)Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
<PAGE>
The total amount of loans due after September 30, 1999 which have fixed
interest rates is $22.7 million, while the total amount of loans due after such
date which have floating or adjustable interest rates is $ 7.6 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,
1998, such loans constituted 81.6% of the Company's gross loans receivable, up
from 77.0% at September 30, 1997.
The Company currently offers fixed-rate and ARM loans. For the year ended
September 30, 1998, the Company originated $ 302,000 of adjustable-rate real
estate loans secured by one- to four-family residential real estate. During
the same period, the Company originated $ 7.8 million of fixed-rate one- to
four-family real estate loans. The Company's one- to four-family residential
mortgage originations are primarily 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."
<PAGE>
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 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 maximum loan to value is
90% without private mortgage insurance. The loan-to-value ratio on non-owner
occupied one-to four-family loans is generally 80% 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 appraised by appraisers approved by bank. 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, 1998, 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).
<PAGE>
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. Residential construction loans comprise less
than one-percent of the Company's gross loans receivable.
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, 1998 consumer loans comprised
16.2% of the Company's gross loans receivable, down from 16.8% at September 30,
1997.
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
<PAGE>
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 ($ 98,000, or approximately 1.8% of the Company's consumer loan
portfolio at September 30, 1998), there can be no assurance that delinquencies
will not increase in the future. See "Asset Quality - Non-Performing Assets."
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. Commercial business loans comprise, at
September 30, 1998, less than one-percent of the Company's gross loans
receivable, down from approximately 3.8% at September 30, 1997.
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
<PAGE>
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. Multi-family and commercial real estate loans comprise, at
September 30, 1998, approximately one-percent of the Company's gross loans
receivable, down from approximately 1.4% at September 30, 1997.
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, although fixed-rate originations have predominated during the last
several fiscal years. 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, 1998, the Company had outstanding commitments for
mortgage loans, home equity lines of credit and commercial business
loans of approximately $ 1.11 million. 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.
<PAGE>
Year Ended September 30,
1998 1997
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family $ 302 $ 855
Fixed rate:
Real estate - one- to four-family 7,793 5,353
- multi-family and commercial 326 392
- residential and other construction 332 523
Non-real estate - consumer 3,356 3,156
Total fixed-rate 11,807 9,424
Total loans originated 12,109 10,279
Purchases:
Total mortgage-backed securities purchased 0 1,299
Sales and Repayments:
Total mortgage-backed securities sold (259) (883)
Total sales (259) (883)
Principal repayments (7,962) (6,918)
Total reductions (8,221) (7,801)
Increase (decrease) in other items, net (724) (1,246)
Net increase $ 3,164 $ 2,531
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.
<PAGE>
When a loan becomes delinquent 90 days or more, the Company
will place the loan on non-accrual status and, as a result, previously accrued
interest income on the loan is taken out of current income. The loan will
remain on a non-accrual status as long as the loan is 90 days delinquent.
Delinquent consumer loans are handled in a similar manner as to
those 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 4 $ 92 0.34% 3 $ 48 0.18% 7 $ 140 0.52%
Consumer 4 6 0.11 14 98 1.84 18 104 1.95
Total 8 $ 98 0.30% 17 $ 146 0.45% 25 $ 244 0.75%
</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. In 1998 the Company had only one
troubled debt restructuring, in connection with a bankruptcy. A portion of
an auto loan, in the amount of $ 1,500 was forgiven and charged as a loss.
Foreclosed assets include assets acquired in settlement of loans. There
were no loans deemed in-substance foreclosed at September 30, 1998.
At September 30,
1998 1997
(Dollars in Thousands)
Non-accruing loans:
One- to four-family $ 48 $ 171
Consumer 98 79
Total 146 250
Total non-performing assets $ 146 $ 250
Non-performing assets as a
percentage of total assets .32% .60%
<PAGE>
For the year ended September 30, 1998, gross interest income
which would have been recorded had the non-accruing loans been current
in accordance with their original terms was $7,032, none of which was
included in interest income.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by
the OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An
asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard" with the added
characteristic that the weaknesses present make "collection or liquidation
in full" on the basis of currently existing facts, conditions and values,
"highly questionable and improbable." Assets classified as "loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to sufficient
risk to warrant classification in one of the aforementioned categories but
possess weaknesses are designated by management as "special mention."
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses
in an amount deemed prudent by management. General allowances
represent loss allowances which have been established to recognize the
inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss," it is required either
to establish a specific allowance for losses equal to 100% of that portion of
the asset so classified or to charge-off such amount. An institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the regulatory authorities, who
may order the establishment of additional general or specific loss
allowances.
In connection with the filing of its periodic reports with the OTS
and in accordance with its classification of assets policy, the Company
regularly reviews problem loans and real estate acquired through
foreclosure to determine whether such assets require classification in
accordance with applicable regulations. On the basis of management's
review of its assets, at September 30, 1998, the Company had classified a
total of $ 80,000 of its assets as substandard, $ 66,000 as doubtful, none as
loss and the Company had designated $ 27,000 as special mention. At
September 30, 1998, total classified assets comprised $ 146,000, (without
special mention) or 2.4% of the Company's capital, or .32% 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, 1998, there was also an
aggregate of $ 27,000 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.
<PAGE>
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, 1998, the Company had a total allowance
for loan losses of $ 92,000 representing 63.0% of total non-performing
loans and .28% of the Company's net loans receivable. See Note 3 of the
Notes to Consolidated Financial Statements.
The following table sets forth an analysis of the Company's allowance for loan
losses.
Year Ended September 30,
1998 1997
(Dollars in Thousands)
Balance at beginning of period $ 81 $ 77
Charge-offs:
One- to four-family 0 ---
Consumer 17 3
Total charge-offs 17 3
Recoveries:
Consumer 1 2
Total recoveries 1 2
Net charge-offs 16 (1)
Additions charged to operations 27 5
Balance at end of period $ 92 $81
Ratio of net charge-offs during
the period to average loans outstanding
during the period .045 % --- %
<PAGE>
The distribution of the Company's allowance for losses on loans at
the dates indicated is summarized as follows:
At September 30,
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 $ 71 77.1% $65 80.2 %
Multi-family and commercial 2 2.2 2 2.5
Consumer 18 19.6 13 16.0
Unallocated 1 1.1 1 1.3
Total $ 92 100.0% $81 100.0%
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, 1998, the Company's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 11.44%. 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
<PAGE>
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, 1998, 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 3.2 years
(excluding FHLB Stock and equity securities).
The following table sets forth the composition and carrying value
of the Company's investment security portfolio at the dates indicated.
At September 30,
1998 1997
Book %of Book % of
Value Total Value Total
(Dollars in Thousands)
Investment securities:
Federal agency obligations $ 1,281 77.08% $2,477 85.27%
Municipal bonds 0 0 --- ---
Subtotal 1,281 77.08 2,477 85.27
Other debt securities 46 2.77 93 3.20
Equity securities at lower
of cost or market --- --- --- ---
FHLB stock 335 20.15 335 11.53
Total investment securities
And FHLB stock $ 1,662 100.00% $2,905 100.00%
Average remaining life of
investment securities 11.2 yrs. 3.8 yrs.
Other interest-earning assets:
Total interest-bearing deposits
with banks $ 4,239 100.00% $2,522 100.00%
Average remaining life or term to
repricing of investment securities
and other interest-earning assets,
excluding FHLB stock and equity
securities 3.2 yrs. 2.6 yrs.
<PAGE>
The composition and maturities of the investment securities portfolio,
excluding FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
September 30, 1998
Due After Due After
Due-in 1 Year 5 Year
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 $ 0 $ 120 $ 659 $ 502 $ 1,266 $ 1,281
Other investment securities 46 0 0 0 46 46
Equity securities 0 0 0 0 0 0
Total investment securities $ 46 $ 120 $ 659 $ 502 $ 1,312 $ 1,327
Weighted average yield 6.35 % 6.50% 6.78% 6.70% 6.64% 6.57%
</TABLE>
The Company's investment securities portfolio at September 30,
1998, contained neither tax-exempt securities nor securities of any issuer
with an aggregate book value in excess of 10.0% of the Company's
shareholders' equity, 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, 1998.
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
<PAGE>
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, 1998, $ 1.67
million, or 41.85%, of the Company's mortgage-backed securities carried
adjustable rates of interest.
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,
1998 1997
Carrying %of Carrying % of
Value Total Value Total
(Dollars in Thousands)
Mortgage-backed securities:
FHLMC $ 1,706 42.54% $2,327 47.28%
FNMA 2,265 56.48 2,551 51.83
GNMA 10 .25 12 .24
Subtotal 3,981 99.27 4,890 99.35
Unamortized premium
(discounts), net 29 .73 32 .65
Total mortgage-
backed securities $ 4,010 100.00% $4,922 100.00%
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at September 30, 1998; 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, 1998
Due After Due After
Due-in 1 Year 5 Year
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 $ 0 $ 294 $ 137 $ 1,308 $ 1,726 $ 1,736
FNMA 0 0 479 1,785 2,254 2,264
GNMA 0 10 0 0 10 10
Total mortgage-backed
securities $ 0 $ 301 $ 616 $ 3,093 $ 3,990 $ 4,010
Weighted average yield 0% 7.04% 6.92% 6.70% 6.76% 6.72%
</TABLE>
<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
their 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
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, 1998, the amount of public
funds on deposit with the Company was $ 1.1 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.
<PAGE>
The following table presents the savings flows at the Company
during the periods indicated.
September 30,
1998 1997
Opening balance $ 31,518 $ 32,628
Deposits 69,331 55,536
Withdrawals (69,729) (57,782)
Interest credited 1,047 1,136
Ending balance $ 32,167 $ 31,518
Net increase (decrease) $ 649 $ (1,110)
Percent increase (decrease) 2.06% (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,
1998 1997
Percent Percent
Amount of Total Amount of Total
(Dollars in Thousands)
Transactions and
Savings Deposits:
Passbook Accounts $ 5,150 15.99% $ 5,396 17.10%
NOW and SuperNOW Accounts 4,517 14.03 4,390 13.91
Money Market Accounts 1,047 3.25 1,094 3.47
Total Non-Certificates 10,714 33.27 10,880 34.48
Certificates:
2.50 - 4.50% 3,215 9.98 2,942 9.33
4.51 - 5.50% 9,919 30.80 9,337 29.60
5.51 - 6.50% 4,532 14.07 4,818 15.27
6.51 - 7.50% 2,961 9.21 2,784 8.82
7.51 - 8.50% 826 2.56 757 2.40
8.51% and over 0 0.00 --- ---
Total Certificates 21,453 66.62 20,638 65.42
Accrued Interest 37 0.11 31 0.10
Total Deposits $ 32,204 100.00% $31,549 100.00%
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of September 30, 1998.
<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, 1998 $ 0 $ 132 $ 4,297 $ 0 $ 0 $ 0 $ 4,429 20.65%
March 31, 1999 0 0 3,870 15 0 0 3,885 18.11
June 30, 1999 0 0 1,499 104 342 0 1,945 9.07
September 30, 1999 0 0 848 46 0 0 894 4.17
December 31, 1999 0 0 808 461 46 0 1,315 6.13
March 31, 2000 0 0 612 1,646 0 0 2,258 10.53
June 30, 2000 0 0 299 1,705 34 0 2,038 9.50
September 30, 2000 0 0 185 446 0 0 631 2.94
December 31, 2000 0 0 192 429 0 0 621 2.89
March 31, 2001 0 0 592 10 0 0 602 2.81
June 30, 2001 0 0 293 83 0 0 376 1.75
September 30, 2001 0 0 52 396 0 0 448 2.09
Thereafter 0 0 941 1,070 0 0 2,011 9.36
Total $ 0 $ 132 $ 14,488 $ 6,411 $ 422 $ 0 $ 21,453 100.00%
Percent of total 0% .62% 67.53% 29.88% 1.97% 0% 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, 1998.
<TABLE>
<CAPTION>
Maturity
Over 3 Over 6
3 Months Through Through Over
or Less 6 Months 12 Months 12 Months Total
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit of
less than $100,000 $ 3,256 $ 3,533 $ 2,487 $ 9,149 $ 18,425
Certificates of deposit of
$100,000 or more 1,173 352 352 1,151 3,028
Total certificates
of deposit $ 4,429 $ 3,885 $ 2,839 $ 10,300 $ 21,453(1)
____________________
<FN>
(1) Includes $ 1.1 million of deposits from governmental and other public
entities.
</TABLE>
<PAGE>
Borrowings. Although deposits are the Company's primary source
of funds, the Company's policy has been to utilize borrowings to support
lending activities and to assist the Company's asset/liability management
strategy when they are a less costly source of funds, can be invested at a
positive interest rate spread or when the Company desires additional
capacity to fund loan demand.
The Company's borrowings historically have consisted of advances
from the FHLB of Indianapolis 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, 1998 the Company had $ 6.3 million in
advances from the FHLB of Indianapolis and the capacity to borrow up to
$ 12.6 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.
At September 30,
1998 1997
(Dollars in Thousands)
Maximum Balance:
FHLB advances $ 6,327 $ 4,000
Repurchase agreements 0 270
Average Balance:
FHLB advances $ 5,252 $ 3,711
Repurchase agreements 0 162
The following table sets forth certain information as to the
Company's FHLB advances and other borrowings at the dates indicated.
At September 30,
1998 1997
(Dollars in Thousands)
FHLB advances $ 6,327 $ 4,000
Repurchase agreements 0 0
Total $ 6,327 $ 4,000
Weighted average interest rate of
FHLB advances 5.47% 5.55%
Weighted average interest rate of
repurchase agreements N/A N/A
<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 $
902,000 at September 30, 1998, 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 $ 84,000. 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 third parties, 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,
1998, WRSC had net income of approximately $ 8,000.
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 six 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.
<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, 1998 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.
<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, 1998, the Bank's lending limit under this
restriction was $ 695,000. 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.
Insurance of Accounts and Regulation by the FDIC. The Bank is
a member of the SAIF, which is administered by the FDIC. Deposits are
insured up to applicable limits by the FDIC and such insurance is backed
by the full faith and credit of the United States Government. As insurer, the
FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It
also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if
it determines that the institution has engaged in unsafe or unsound practices
or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-
based system under which all insured depository institutions are placed into
one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Under the system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based
capital") of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy pay the lowest premium while institutions that are less
than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and
considered of substantial supervisory concern pay the highest premium.
Risk classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
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. The FDIC may also impose special assessments on SAIF
members to repay amounts borrowed from the United States Treasury or for
any other reason deemed necessary by the FDIC.
Effective January 1, 1997, the premium schedule for BIF and
SAIF insured institutions ranged from 0 to 27 basis points. However,
SAIF-insured institutions are required to pay a Financing Corporation
(FICO) assessment, in order to fund the interest on bonds issued to
<PAGE>
resolve thrift failures in the 1980s, equal to approximately 6.48 basis
points for each $100 in domestic deposits, while BIF-insured institutions
pay an assessment equal to approximately 1.52 basis points for each $100
in domestic deposits. The assessment is expected to be reduced to 2.43
basis points no later than January 1, 2000, when BIF insured institutions
fully participate in the assessment. These assessments, which may be
revised based upon the level of BIF and SAIF deposits will continue until
the bonds mature in the year 2017.
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level
of regulatory capital. The OTS has established capital standards, including
a tangible capital requirement, a leverage ratio (or core capital) requirement
and a risk-based capital requirement applicable to such savings
associations. These capital requirements must be generally as stringent as
the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition,
all intangible assets, other than a limited amount of purchased mortgage
servicing rights, must be deducted from tangible capital for calculating
compliance with the requirement. At September 30, 1998, the Bank did not
have any intangible assets.
The OTS regulations establish special capitalization requirements
for savings associations that own subsidiaries. In determining compliance
with the capital requirements, all subsidiaries engaged solely in activities
permissible for national banks or engaged in certain other activities solely
as agent for its customers are "includable" subsidiaries that are consolidated
for capital purposes in proportion to the association's level of ownership.
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, 1998, the Bank had tangible capital of $ 4.6
million, or 10.32% of adjusted total assets, which is approximately $ 2.8
million above the minimum requirement of 4.0% of adjusted total assets in
effect on that date.
The capital standards also require core capital equal to at least 3%
of adjusted total assets. Core capital generally consists of tangible capital
plus certain intangible assets, including a limited amount of purchased
credit card relationships. As a result of the prompt corrective action
provisions discussed below, however, a savings association must maintain
a core capital ratio of at least 4% to be considered adequately capitalized
unless its supervisory condition is such to allow it to maintain a 3% ratio.
At September 30, 1998, the Bank had no intangibles which were subject
to these tests.
At September 30, 1998, the Bank had core capital equal to $ 4.6
million, or 10.32% of adjusted total assets, which is $ 3.3 million above the
minimum leverage ratio requirement of 3.0% as in effect on that date.
<PAGE>
The OTS risk-based requirement requires savings associations to
have total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan
and lease loss allowances up to a maximum of 1.25% of risk-weighted
assets. Supplementary capital may be used to satisfy the risk-based
requirement only to the extent of core capital. The OTS is also authorized
to require a savings association to maintain an additional amount of total
capital to account for concentration of credit risk and the risk of non-
traditional activities. At September 30, 1998, the Bank had $92,000 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,
1998.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk
weight, ranging from 0% to 100%, based on the risk inherent in the type of
asset. For example, the OTS has assigned a risk weight of 50% for
prudently underwritten permanent one- to four-family first lien mortgage
loans not more than 90 days delinquent and having a loan to value ratio of
not more than 80% at origination unless insured to such ratio by an insurer
approved by the FNMA or FHLMC.
OTS regulations also require that savings associations 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 risk-based
capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise. At the present time, the proposal is not
expected to have a material impact on the Bank.
On September 30, 1998, the Bank had total capital of $ 4.7 million
(including approximately $4.6 million in core capital and $ 87,000 in
qualifying supplementary capital) and risk-weighted assets of $ 23.2 million
(with no converted off-balance sheet assets); or total capital of 20.37% of
risk-weighted assets. This amount was $ 2.9 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
<PAGE>
to take action to restrict the activities of an "undercapitalized association"
(generally defined to be one with less than either a 4% core capital ratio, a
4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any
such association must submit a capital restoration plan and until such plan
is approved by the OTS may not increase its assets, acquire another
institution, establish a branch or engage in any new activities, and generally
may not make capital distributions. The OTS is authorized to impose the
additional restrictions that are applicable to significantly undercapitalized
associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and includes a
forced merger or acquisition of the association. An association that
becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or
less) is subject to further mandatory restrictions on its activities in
additionto 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
<PAGE>
lesser of the association's tangible, core or risk-based capital exceeds its
capital requirement for such capital component, as measured at the
beginning of the calendar year, or 75% of their net income for the most
recent four quarter period. However, an association deemed to be in need
of more than normal supervision by the OTS may have its dividend
authority restricted by the OTS. The Bank may pay dividends in
accordance with this general authority.
Savings associations proposing to make any capital distribution
need only submit written notice to the OTS 30 days prior to such
distribution. Savings associations that do not, or would not meet their
current minimum capital requirements following a proposed capital
distribution, however, must obtain OTS approval prior to making such
distribution. The OTS may object to the distribution during that 30-day
period notice based on safety and soundness concerns. See "- Regulatory
Capital Requirements."
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 average daily balance of its liquidity base during the
preceding calendar quarter or a percentage of the amount of its liquidity
base at the end of the preceding quarter. 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%.
Penalties may be imposed upon associations for violations of either
liquid asset ratio requirement. At September 30, 1998, the Bank was in
compliance with the requirement, with an overall liquid asset ratio of
11.44% .
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
<PAGE>
housing related loans and investments. At September 30, 1998, the Bank
met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert
to a national bank charter, unless it requalifies as a QTL and thereafter
remains a QTL. If an association does not requalify and converts to a
national bank charter, it must remain SAIF-insured until the FDIC permits
it to transfer to the BIF. If such an association has not yet requalified or
converted to a national bank, its new investments and activities are limited
to those permissible for both a savings association and a national bank, and
it is limited to national bank branching rights in its home state. In
addition, the association is immediately ineligible to receive any new FHLB
borrowings and is subject to national bank limits for payment of dividends.
If such association has not requalified or converted to a national bank
within three years after the failure, it must divest of all investments and
cease all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding FHLB borrowings, which may result in
prepayment penalties. If any association that fails the QTL test is
controlled by a holding company, then within one year after the failure, the
holding company must register as a bank holding company and become
subject to all restrictions on bank holding companies. See "- Holding
Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment
Act ("CRA"), every FDIC insured institution has a continuing and
affirmative obligation consistent with safe and sound banking practices to
help meet the credit needs of its entire community, including low and
moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent with the
CRA. The CRA requires the OTS, in connection with the examination of
the Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the
Bank. An unsatisfactory rating may be used as the basis for the denial of
an application by the OTS.
The federal banking agencies, including the OTS, have recently
revised the CRA regulations and the methodology for determining an
institution's compliance with the CRA. Due to the heightened attention
being given to the CRA in the past few years, the Bank may be required to
devote additional funds for investment and lending in its local community.
The Bank was 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 OTS has the discretion to
treat subsidiaries of savings associations as affiliates on a case by case
basis. Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS.
These conflict of interest regulations and other statutes also impose
<PAGE>
restrictions on loans to such persons and their related interests. Among
other things, such loans must generally be made on terms substantially the
same as for loans to unaffiliated individuals.
Holding Company Regulation. The Company is a unitary savings
and loan holding company subject to regulatory oversight by the OTS. As
such, the Company is required to register and file reports with the OTS and
is subject to regulation and examination by the OTS. In addition, the OTS
has enforcement authority over the Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the Company acquires
control of another savings association as a separate subsidiary, it would
become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those
approved for multiple savings and loan holding companies or their
subsidiaries. In addition, within one year of such failure the Company must
register as, and will become subject to, the restrictions applicable to bank
holding companies. The activities authorized for a bank holding company
are more limited than are the activities authorized for a unitary or multiple
savings and loan holding company. See "--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are
generally prohibited if they result in a multiple savings and loan holding
company controlling savings associations in more than one state. However,
such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered
with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be
resold without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and
Super NOW checking accounts). At September 30, 1998, the Bank was in
compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may
<PAGE>
be used to satisfy liquidity requirements that may be imposed by the OTS.
See "--Liquidity."
Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations
require associations to exhaust other reasonable alternative sources of
funds, including FHLB borrowings, before borrowing from the Federal
Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the
FHLB of Indianapolis, which is one of 12 regional FHLBs, that administers
the home financing credit function of savings associations. Each FHLB
serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members
(i.e., advances) in accordance with policies and procedures established by
the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required
to be fully secured by sufficient collateral as determined by the FHLB. In
addition, all long-term advances are required to provide funds for
residential home financing.
As a member, the Bank is required to purchase and maintain stock
in the FHLB of Indianapolis. At September 30, 1998, the 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 8.60% and were 8.01%
for fiscal 1998.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected
adversely the level of FHLB dividends paid and could continue to do so in
the future. These contributions could also have an adverse effect on the
value of FHLB stock in the future. A reduction in value of the Bank's FHLB
stock may result in a corresponding reduction in the Bank's capital.
Federal Taxation. Savings associations such as the Bank that meet
certain 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 is computed under the experience method. Under
the experience method, the bad debt reserve is an amount determined under
a formula based generally upon the bad debts actually sustained by the
savings association over a period of years.
In August 1996, legislation was enacted that repealed the
percentage of taxable income method used by many thrifts to calculate their
bad debt reserve for federal income tax purposes. 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 tax years beginning
after December 31, 1987.
<PAGE>
In addition to the regular income tax, corporations, including
savings associations such as the Bank, generally are subject to a minimum
tax. An alternative minimum tax is imposed at a minimum tax rate of 20%
on alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items,
less any available exemption. The alternative minimum tax is imposed to
the extent it exceeds the corporation's regular income tax and net operating
losses can offset no more than 90% of alternative minimum taxable
income. The corporate alternative minimum tax has been repealed for
small business corporations for taxable years beginning after December 31,
1997. Under the prescribed gross receipts test, the Company will qualify
for this exemption beginning with its fiscal year ending September 30,
1999.
A portion of the Bank's reserves for losses on loans ("Excess"),
such Excess may not, without adverse tax consequences, be utilized for the
payment of cash dividends or other distributions to a shareholder (including
distributions on redemption, dissolution or liquidation) or for any other
purpose (except to absorb bad debt losses). As of September 30, 1998, the
Bank's Excess for tax purposes totaled approximately $ 111,000.
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, 1998, the Bank had a total of 15 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.
<PAGE>
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 45, 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 the Bank's primary loan officer. Ms. Shields
is also the secretary to the Executive Committee of the Bank.
<PAGE>
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, 1998. 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, 1998 was approximately $ 759,000. See Note 4 of Notes to
Consolidated Financial Statements.
Total Net Book
Approximate Value at
Date Square September 30,
Location Acquired Footage 1998
Main Office:
200 East Van Trees Street
Washington, Indiana 47501 1980 8,900 $ 611,000
Branch Offices:
501 Main Street
Petersburg, Indiana 47567(1) 1979 2,760 $ 129,000
___________________
(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.
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, 1998
was approximately $ 30,000.
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. At
September 30, 1998 the Company was not a defendant in any legal action.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September
30, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Page 35 of the attached Annual Report to Stockholders for fiscal
1998 is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Pages 3 through 12 of the attached Annual Report to
Stockholders for fiscal 1998 are incorporated herein by reference.
Item 7. Financial Statements
The following information appearing in the Company's Annual
Report to Stockholders for the year ended September 30, 1998 attached
hereto as Exhibit 13, is incorporated herein by reference in this Annual
Report on Form 10-KSB.
Annual Report Section Pages in Annual
Report
Independent Auditors' Report 13
Consolidated Statements of Financial Condition
as of September 30, 1998 and 1997 14
Consolidated Statements of Income for the Years
Ended September 30, 1998 and 1997 15
Consolidated Statements of Comprehensive Income for the Years
Ended September 30, 1998 and 1997 16
<PAGE>
Consolidated Statements of Shareholders' Equity for
Years Ended September 30, 1998 and 1997 17
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1998 and 1997 18
Notes to Consolidated Financial Statements 19
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 on January 18, 1999, 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.
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, 1998, all Section 16(a) filing requirements applicable
to its officers, directors and greater than 10 percent beneficial owners were
complied with.
<PAGE>
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 on January 18, 1999, 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 on January 18, 1999, 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 on January
18, 1999, 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, 1998.
<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:
By:____________________________
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.
_________________________________ __________________________
Bruce A. Beesley, President, Chief James E. Scheid, Director
Executive Officer and Director
(Principal Executive and
Operating Officer)
Date: Date:
C. Darrell Deem, Director Blake L. Chambers,
Director
Date: Date:
Larry G. Wilson, Director Gregory L. Haag,
Director
Date: Date:
Debra K. Shields, Vice President,
Chief Financial Officer
and Secretary (Principal Financial
and Accounting Officer)
Date:
<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)
<PAGE>
Exhibit 13
ANNUAL REPORT TO SECURITY HOLDERS
- -------------------------------------------------------------------------------
1998 ANNUAL REPORT
- -------------------------------------------------------------------------------
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 13
Shareholder Information 34
Corporate Information 36
<PAGE>
December 15, 1998
Dear Shareholder:
It is a pleasure to present to you the Annual Report of Home Building
Bancorp, Inc. for the year ended September 30, 1998, our third full year as a
publicly held corporation. This year marked another year of solid
profitability.
The Corporation posted net income of $262,000, or $.89 per share
outstanding, as of September 30, 1998. This profit resulted from another year
of growth in net loans receivable, controlled interest expense, and improved
noninterest income. We also leveraged the capital of the Corporation's wholly-
owned subsidiary, Home Building Savings Bank, FSB, by using Federal Home Loan
Bank advances to fund the purchase of mortgage loan packages in the secondary
market.
At this year's Annual Meeting Thomas L. Hagel will retire from the board
of directors of the Corporation. A director since 1976, and a member of various
board committees through the years, Mr. Hagel's leadership and dedication to
Home Building are greatly appreciated. We look forward to his continued input
as an emeritus director.
As a unitary thrift holding company 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. Our small
size is itself an asset in giving personal service to our customers. We
continue to market our services both to new customers and 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 support, and
your investment in Home Building Bancorp, Inc.
Sincerely,
/s/ Bruce A. Beesley
Bruce A. Beesley
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
At September 30,
1998 1997 1996 1995 1994
(In Thousands)
Selected Financial Condition Data:
Total assets $45,103 $41,750 $42,561 $41,670 $40,816
Loans receivable, net 32,659 28,583 28,108 28,882 30,122
Cash and cash equivalents 5,606 4,016 5,222 3,339 4,245
Mortgage-backed securities 4,010 4,922 5,771 4,031 2,055
Investment securities 1,662 2,905 2,235 2,503 2,314
Deposits 32,167 31,518 32,628 31,269 35,432
Total borrowings 6,327 4,000 3,974 4,068 2,195
Shareholders' equity 6,172 5,893 5,499 6,076 3,027
At and For Year Ended September 30,
1998 1997 1996 1995 1994
(In Thousands, Except Per Share Data)
Selected Operations Data:
Total interest income $3,282 $3,306 $3,214 $3,159 $ 3,007
Total interest expense 1,833 1,831 1,756 1,611 1,631
Net interest income 1,449 1,475 1,458 1,548 1,376
Provision for loan losses 27 5 409 --- 40
Net interest income after
provision for loan losses 1,422 1,470 1,049 1,548 1,336
Fees and service charges 64 26 80 57
Gain (loss) on sales of
mortgage-backed securities,
investment securities, and
other assets 17 13 --- --- (13)
Other noninterest income 177 49 115 47 37
Total noninterest income 194 126 141 127 81
Total noninterest expense 1,185 1,058 1,298(1) 959 875
Income before taxes 431 538 (108) 716 542
Income tax expense 169 210 29 267 208
Net income (loss) $ 262 $ 328 $(137)(1) $449 $ 334
Basic earnings (loss)
per share $ .90 $1.15 $ (.46) $ 1.07 N/A
Dividends per share $ .30 $ .30 .30 $ .075 N/A
(1) Includes the nonrecurring Savings Association Insurance Fund ("SAIF")
special assessment of $224,000, or $135,000 net of taxes.
Year Ended September 30,
1998 1997 1996 1995
1994
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets(1) .60% .78% (.33)% 1.08% .80%
Return on average shareholders'
equity(1) 4.34 5.75 (.02) 10.38 11.45
Interest rate spread information:
Average during period 2.88 2.97 2.98 3.37 3.13
End of period 2.75 3.06 3.38 3.18 3.38
Net interest margin(2) 3.25 3.33 3.53 3.82 3.03
Ratio of operating expense to
average total assets 2.78 2.51 3.08 2.32 2.08
Ratio of average interest-
earning assets to average
interest-bearing liabilities 110.12 108.18 112.99 112.10 106.18
Quality Ratios:
Non-performing assets to
total assets at end of period(3) .32 .60 .35 .37 .29
Allowance for loan losses
to non-performing loans 63.21 32.67 51.68 49.36 63.75
Allowance for loan losses
to loans receivable, net .28 .29 .27 .27 .27
Capital Ratios:
Shareholders' equity to
total assets at end of period 13.68 14.11 12.92 14.57 7.42
Average shareholders' equity
to average assets 13.89 13.51 13.74 10.98 6.96
Dividend payout ratio(4) 35.72 26.09 >100.00 7.00 (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.
The Corporation is headquartered in Washington, Indiana, and is primarily
engaged in attracting deposits from the general public and making loans secured
by residential real estate, and to a lesser extent, commercial and multi-
family, consumer and commercial business properties. The operations of the
Corporation are significantly affected by prevailing economic conditions,
primarily interest rates and regulations relating to monetary and fiscal
affairs and financial institutions.
The Corporation's results of operations are heavily dependent on the difference
or spread between the average yield on loans, mortgage-backed securities and
investment securities, and the average rate paid on deposits and borrowings.
The interest rate spread is affected by regulatory, economic, and competitive
factors that influence interest rates, loan demand and deposit flows.
The Corporation, like other financial institutions, is subject to interest rate
risk to the degree that its interest-earning assets mature or reprice at
different times, or on a different basis, than its interest-bearing
liabilities.
The Corporation's net income is also affected, to a much lesser extent, by fee
income received for loan originations, demand deposit accounts, and commissions
received from the Bank's subsidiary for insurance and mutual fund products. In
addition to interest expense, the Corporation's operating expenses principally
consist of employee compensation and benefits, occupancy expenses, data
processing expense, federal deposit insurance premiums, and other
general and administrative expenses.
Financial Condition
Total assets of the Corporation increased $3.4 million, or 8.03% to $45.1
million at September 30, 1998 from $41.7 million at September 30, 1997.
Assets increased primarily due to increases in interest bearing deposits with
banks, which increased $1.7 million to $4.2 million and loans receivable, which
increased $4.1 million, or 14.3% to $32.7 million at September 30, 1998. In
March 1998 the Bank purchased mortgage loan packages totaling $2.9 million.
The Bank continues to compete in its own marketplace for quality mortgage
loans, as well as installment and auto loans. The remainder of the increase
in loans receivable was due to increased local market share.
Securities available for sale decreased $2.0 million, or 27.2%, to $5.4
million at September 30, 1998. Repayments of principal from the securities
portfolio were used to partially fund the increases in the loan portfolio
Total deposits increased $649,000, or 2.06%, to $32.2 million at September 30,
1998. The increase was in time deposits. The Bank has been able to maintain a
relatively low cost of savings. The Bank is able to compete aggressively for
retail deposits should loan volume or other investment opportunities warrant.
Advances from the FHLB of Indianapolis increased $2.3 million, to $6.3 million
at year-end.
Shareholders' equity increased $279,000, to $6.2 million, at September 30, 1998
from $5.9 million at September 30, 1997, through the retention of net income,
after payment of dividends to shareholders. At September 30, 1998
shareholders' equity was $21.05 per share based on 293,160 shares, compared to
$20.43 per share on September 30, 1997, based on 288,378 shares.
Results of Operations
Comparison of the Fiscal Years Ended September 30, 1998 and 1997.
General. The Corporation had net income of $262,000 for the year ended
September 30, 1998 compared to net income of $328,000 for the same period
last year. Net interest income was down only slightly by $26,000, while
noninterest income increased $68,000. Noninterest expense, however, increased
$127,000, including salaries and benefits for two new employees and
approximately $45,000 in non-recurring professional fees and insurance
deductibles.
Interest Income. Total interest income decreased $24,000, or 0.71%, to $3.3
million for the year ended September 30, 1998 compared to the previous year.
The slight decrease was due to decreases in interest earned from investments
and mortgage-backed securities as they repaid. Interest earned on deposits
with other banks also fell as interest rates declined during the year and
the average of such deposits during the year was lower than the previous year.
See "Average Balances, Interest Rates and Yields" and Rate/Volume Analysis of
Net Interest Income".
Interest Expense. Total interest expense increased $2,000, or 0.11%, to $1.8
million for the year ended September 30, 1998 compared to the previous year.
Slightly lower interest expense on deposits was offset by higher interest
expense on borrowed funds. See "Average Balances, Interest Rates and Yields"
and " Rate/Volume Analysis of Net Interest Income".
Net Interest Income. Net interest income decreased $26,000, or 1.76%, to $1.5
million for the year ended September 30, 1998 compared to the previous year.
The Bank has been successful at maintaining and even increasing its deposits
while controlling its cost savings. The Bank has also utilized advantageous
interest rates on FHLB advances in managing its liability structure. While
interest income from the securities and mortgage-backed security portfolios
decreased as these assets repaid, the Bank has realized improved interest
income from its increased lending activities. The Corporation's percentage of
average interest-earning assets to average interest-bearing liabilities
increased to 110.12% during fiscal year 1998 from 109.95% during fiscal 1997.
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, 1998 was
$27,000. During fiscal 1997 the provision was $5,000, with net charge-offs of
only $1,000, resulting in an allowance at September 30, 1997 of $81,000.
During fiscal year 1998 net charge-offs were $16,000, resulting in an allowance
for loan losses of $92,000 at September 30, 1998. The $92,000 allowance
represents 0.28% of net loans receivable and 63.2% of total nonperforming
loans as of September 30, 1998.
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 nonperforming assets and their estimated value, the national
economic outlook which may tend to inhibit economic activity and depress real
estate 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 nonperforming 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 if its allowance for loan losses
is subject to review by the Office of Thrift Supervision (the "OTS")and the
Federal Deposit Insurance Corporation (the "FDIC"), as part of their
examination process, which may result in the establishment of an additional
allowance based upon their judgment of the information available to them at
the time of their examination.
Noninterest Income. Total noninterest income increased $68,000, or 53.68%, to
$194,000 for the period ended September 30, 1998 from $126,000 for the previous
year. The change resulted in large part from increases in loan fees recognized
from the refinance of existing mortgage loans. During the year the Bank also
implemented an updated fee schedule for savings and checking accounts. Debit
card use and fees increased as well.
Noninterest Expense. Noninterest expense increased $128,000, or 12.10%, to
$1,186,000 for the period ended September 30, 1998 from $1,058,000 for the
previous year. Salaries and employee benefits, the largest component of
noninterest expense, increased $56,000, or 9.86% from the previous year,
principally because two full-time employees were added to the staff. Occupancy
and equipment expense decreased slightly. Service fees, professional fees, and
other expenses increased $77,000, including approximately $45,000 in
nonrecurring professional fees and insurance deductible expense realized
during the fiscal year.
Income Tax Expense. Income tax expense decreased to $169,000 for the fiscal
year ended September 30, 1998 from $210,000 in fiscal year 1997, as a result
of lower net taxable income.
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,
1998 1998 1997
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) 8.05% $31,057 $2,547 8.20% $28,478 $2,394 8.41%
Mortgage-backed securities 6.76 4,491 299 6.66 5,531 394 7.12
Investment securities 6.45 2,046 154 7.53 2,795 187 6.69
Interest-earning deposits at banks 5.03 4,373 225 5.83 5,751 304 5.29
FHLB stock 8.01 335 27 8.06 335 27 8.06
Total interest-earning assets(1) 7.53 42,302 3,282 7.82 42,890 3,306 7.71
Interest-Bearing Liabilities:
Savings deposits 2.98 6,354 191 3.01 7,379 227 3.08
Demand and NOW deposits 2.32 6,078 146 2.41 5,841 144 2.47
Certificate accounts 5.57 21,011 1,191 5.67 21,951 1,243 5.66
Borrowings 5.47 5,252 305 5.81 3,836 217 5.66
Total interest-bearing
liabilities 4.78 38,695 1,833 4.74 39,007 1,831 4.69
Net interest income $1,449 $1,475
Net interest rate spread(1)(2) 2.75% 3.08% 3.02%
Net interest-earning assets(1) $3,607 $3,883
Net yield on average interest-
earning assets(3) 3.14% 3.43% 3.44%
Average interest-earning assets to
average interest-bearing
liabilities 109.32% 109.95%
<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.
</TABLE>
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,
1998 vs. 1997 1997 vs. 1996
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $217 $ (78) $ 139 $ (41) $ 33 $ (8)
Mortgage-backed securities (74) (14) (88) 29 18 47
Investment securities (50) 3 (47) 55 7 62
Interest-earning
deposits at banks (73) (15) (88) 52 (62) (10)
FHLB Stock --- --- ---- --- 1 1
Total interest-earning
assets $ 20 $(104) (84) $ 95 $ (3) 92
Interest-Bearing
Liabilities:
Savings deposits (32) (5) (37) $ 48 $ (28) 20
Demand and NOW deposits 6 (3) 3 3 (10) (7)
Certificate accounts (53) 3 (50) 61 25 86
Borrowings 80 6 86 (8) (16) (24)
Total interest-bearing
liabilities $ 1 $ 1 2 $104 $ (29) 75
Net interest income $ (86) $ 17
</TABLE>
Asset/Liability Management
The Bank, like other financial institutions, is subject to interest rate risk
to the extent that its interest-bearing liabilities with short- and
intermediate-term maturities reprice more rapidly, or on a different basis,
than its interest-earning assets. Management believes it is important to
manage the relationship between interest rates and the effect on the Bank's net
portfolio value (NPV). This approach calculates the difference between the
present value of expected cash flows from assets and the present value of
expected cash flows from liabilities, as well as cash flows from off-balance
sheet contracts. Management of the Bank's assets and liabilities is done
within the context of the market place, but also within limits established by
the Board of Directors on the amount of change in NPV which is acceptable given
certain interest rate changes. Specific strategies to manage interest rate
risk have included the origination of ARMs and advances from the FHLB to match
durations of fixed rate mortgages. In addition, management monitors the
spread between short-term and long-term liabilities, and at the appropriate
time, lengthens its interest-bearing liabilities to keep the percent change in
NPV within acceptable limits. At September 30, 1998, approximately $19.9
million, or 64.5%, of the Corporation's mortgage loans and mortgage-backed
securities were scheduled to mature or reprice during the next five years.
Management anticipates that it will replace these loans in the normal course of
business and through marketing efforts, which are devoted to attracting
mortgage loans directly from the public. Subject to demand, new loans will be
originated at market interest rates. Loans may also be purchased from other
originators as whole loans or participations in pools of loans should local
demand prove unsatisfactory. Furthermore, mortgage-backed securities may also
be purchased if excess funds cannot be invested in mortgage loans.
OTS regulations provide a NPV approach to the quantification of interest rate
risk. Under OTS regulations, an institutions "normal" level of interest rate
risk, in the event of an assumed change in interest rate, is a decrease in the
institution's NPV in an amount not exceeding two percent of the present value
of its assets. Thrift institutions with greater than normal interest rate
exposure, as defined above, must take a deduction from their total capital
available to meet their risk based capital requirement. The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to the 200 basis point interest rate increase or decrease
(whichever results in the greater pro-forma decrease in NPV) and (b) its normal
level of exposure which is two percent of its present value of its assets. The
regulation, however, will not become effective until the OTS evaluates the
process by which savings associations may appeal an interest rate risk
deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and
a total capital ratio in excess of 12% is exempt from this requirement unless
the OTS determines otherwise. Accordingly, the Bank, because of its asset size
and level of risk-based capital, is exempt from this requirement.
Notwithstanding the foregoing, utilizing the foregoing measuring concept, at
September 30, 1998, a change in the interest rate of positive 200 basis points
would have resulted in a 1.76% 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 .92% 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.
Presented below, as of September 30, 1998, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve in 100 basis point increments up
and down 400 basis points and compared to Board policy limits. As illustrated
in the table, NPV is more sensitive to rising rates than declining rates. This
occurs principally because, as rates rise, the market value of fixed-rate loans
declines due to both the rate increase and slowing prepayments. When rates
decline, the Bank does not experience a significant rise in market value for
these loans because borrowers prepay at relatively high rates. OTS assumptions
are used in calculating the amounts in this table.
<TABLE>
<CAPTION>
At September 30, 1998
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)
<S> <C> <C> <C> <C> <C>
+400 bp (60)% $ 3,119 $(2,304) (42)% 7.32%
+300 bp (45) 3,809 (1,614) (30) 8.74
+200 bp (30) 4,462 (961) (18) 10.01
+100 bp (15) 5,008 (415) (8) 11.04
--- bp --- 5,423 --- --- 11.77
-100 bp (15) 5,694 271 5 12.20
-200 bp (30) 6,006 583 11 12.69
-300 bp (45) 6,421 998 18 13.35
-400 bp (60) 6,850 1,427 26 14.02
</TABLE>
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, 1998 was 11.44%.
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 itsasset/liability management program. Excess liquidity generally
is invested in interest-bearing overnight deposits. If the Bank requires
additional funds beyond its internal ability to generate such funds it has
additional borrowing capacity with the FHLB of Indianapolis and collateral
eligible for repurchase agreements. At September 30, 1998, the Corporation
had outstanding borrowings consisting $ 6.3 million in FHLB advances, with
the capacity to borrow up to an additional $ 12.6 million from the FHLB of
Indianapolis.
The Bank principally uses its liquidity resources to fund maturing certificates
of deposit and deposit withdrawals, to invest, to fund existing and future loan
commitments, to maintain liquidity, and to meet other operating needs. At
September 30, 1998, the Bank had $ 1.1 million of loan commitments.
Certificates of deposit scheduled to mature in a year or less at September
30, 1998 totaled $ 12.4 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, 1998, these assets accounted for 81.3% 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, 1998, the Bank had tangible and core capital of $ 4.64
million, or 10.31% of adjusted total assets, which was approximately $ 3.96
million and $ 2.84 million above the minimum requirements of 1.5% and 4.0%,
respectively, of the adjusted total assets in effect on that date. The Bank
had risk-based capital at September 30, 1998 of $ 4.72 million (consisting
of $ 4.64 million in core capital), or 19.73% of risk-weighted assets of $23.94
million. This amount was $ 2.87 million above the 8.0% requirement in effect
on that date. At September 30, 1998, 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,
1998, Home Building had $ 1.2million in liquid assets on hand. The primary
source of liquidity on an ongoing basis is dividends from the Bank. Dividends
totaling $ 150,000 were paid from the Bank to Home Building for the year ended
September 30, 1998. 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, 1998, Home Building paid
dividends to shareholders totaling $ 93,498. Home Building currently has no
significant liquidity commitments as its operating costs are modest and
dividends on common stock are discretionary. Management anticipates that it
will have adequate funds to meet the Corporation's foreseeable short- and long-
term liquidity needs.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Corporation's operations. Nearly all
the assets and liabilities of the Corporation are financial, unlike most
industrial companies. As a result, the Corporation's performance is directly
impacted by changes in interest rates, which are indirectly influenced by
inflationary expectations. The Corporation's ability to match the interest
sensitivity of its financial assets to the interest sensitivity of its
financial liabilities in its asset/liability management may tend to minimize
the effect of changes in interest rates on the Corporation's performance.
Changes in interest rates do not necessarily move to the same extent as do
changes in the price of goods and services.
Forward-Looking Statements
When used in this report, the words "believes," "anticipates," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially, including, but not limited to, those set
forth in "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date hereof.
The Corporation undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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, 1998 and 1997, and the related consolidated statements of income,
comprehensive 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, 1998
and 1997 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
November 4, 1998
<PAGE>
HOME BUILDING BANCORP, INC.
WASHINGTON, INDIANA
Consolidated Statements of Financial Condition
September 30, 1998 and 1997
1998 1997
ASSETS
Cash and due from banks $ 1,366,761 $ 1,494,118
Interest-bearing deposits with banks 4,238,977 2,521,578
Securities available for sale 5,443,539 7,483,447
Securities held to maturity, fair
market value of $229,754
in 1998 and $349,193 in 1997 228,059 344,257
Loans receivable, net of allowance
for loan losses of $92,249
in 1998 and $80,680 in 1997 32,659,339 28,582,610
Insurance receivable - 240,444
Accrued interest receivable 226,102 210,256
Premises and equipment 759,343 783,967
Other assets 180,465 89,075
Total assets $ 45,102,585 $ 41,749,752
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Savings and NOW deposits $ 10,713,887 $ 10,880,043
Other time deposits 21,452,629 20,637,490
Total deposits 32,166,516 31,517,533
Advances from Federal Home Loan Bank 6,327,415 4,000,341
Accrued expenses and other liabilities 436,809 338,947
Total liabilities 38,930,740 35,856,821
Shareholders' equity:
Common stock, $.01 par value,
1 million shares authorized,
331,660 issued and outstanding 3,317 3,317
Additional paid-in capital 3,088,095 3,046,415
Treasury stock, at cost (345,000) (345,000)
Retained earnings 3,618,107 3,449,876
Net unrealized gain on available for sale
securities net of deferred tax of
$13,827 in 1998 and $8,451 in 1997 20,741 12,606
Unearned ESOP & recognition and
retention shares (213,415) (274,283)
Total shareholders' equity 6,171,845 5,892,931
Total liabilities and
shareholders' equity $ 45,102,585 $ 41,749,752
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE>
HOME BUILDING BANCORP, INC.
WASHINGTON, INDIANA
Consolidated Statements of Income
Years Ended September 30, 1998 and 1997
1998 1997
Interest income:
Loans receivable $ 2,547,091 $ 2,393,642
Investments 181,022 186,717
Mortgage-backed securities 298,676 394,015
Deposits with other banks 255,233 331,271
Total interest income 3,282,022 3,305,645
Interest expense:
Deposits 1,528,344 1,614,091
Other borrowed funds 304,898 216,870
Total interest expense 1,833,242 1,830,961
Net interest income 1,448,780 1,474,684
Provision for loan losses 27,000 5,000
Net interest income after
provision for loan losses 1,421,780 1,469,684
Noninterest income:
Gain on sale of assets 17,238 12,743
Customer service fees 177,113 113,724
Total other income 194,351 126,467
Noninterest expenses:
Salaries and employee benefits 620,514 564,840
Occupancy and equipment 143,008 145,733
Computer expense 54,071 55,146
Service fees 78,304 50,075
Advertising expense 59,156 51,358
Professional fees 91,140 49,764
Other expense 139,337 141,731
Total other expenses 1,185,530 1,058,647
Income before income taxes 430,601 537,504
Income tax expense (168,872) (209,764)
Net income $ 261,729 $ 327,740
Basic earnings per share of common stock $ .90 $ 1.15
Weighted average shares outstanding 290,769 285,912
Diluted earnings per share of common stock $ .89 $ 1.12
Diluted weighted average shares outstanding 294,478 291,573
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
HOME BUILDING BANCORP, INC.
WASHINGTON, INDIANA
Consolidated Statements of Comprehensive Income
Years Ended September 30, 1998 and 1997
1998 1997
Net income: $ 261,729 $ 327,740
Other comprehensive income,
net of income tax:
Unrealized holding gains and (losses) 8,135 39,003
Comprehensive income $ 269,864 $ 366,743
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, 1998 and 1997
1998 1997
Common stock, $.01 par value,
1 million shares authorized,
331,660 issued and outstanding $ 3,317 $ 3,317
Additional paid-in capital
Beginning of period 3,046,415 3,014,935
Allocation of ESOP shares 32,616 31,480
Allocation of RRP shares 9,064 -
End of period 3,088,095 3,046,415
Treasury stock, at cost (345,000) (345,000)
Retained earnings
Beginning of period 3,449,876 3,217,134
Net income 261,729 327,740
Dividends declared (93,498) (94,998)
End of period 3,618,107 3,449,876
Unrealized gain (loss) on securities
available for sale, net of deferred tax
Beginning of period 12,606 (26,397)
Change in unrealized gain or (loss) 8,135 39,003
End of period 20,741 12,606
Unearned ESOP & recognition and
retention shares
Beginning of period (274,283) (365,470)
Allocation of ESOP shares 28,507 37,653
Allocation of recognition and
retention shares 32,361 53,534
End of period (213,415) (274,283)
Total shareholders' equity $ 6,171,845 $ 5,892,931
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, 1998 and 1997
1998 1997
Cash flows from operating activities:
Net income $ 261,729 $ 327,740
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 35,928 32,938
Non cash compensation 102,548 122,667
Provision for loan losses 27,000 5,000
Other gains, net (9,929) -
Net realized gains on available-for-
sale securities (7,434) (12,743)
(Increase) decrease in
insurance receivable 240,444 (240,444)
Increase in accrued interest receivable (15,846) (35,736)
Increase (decrease) in accrued expenses
and other liabilities 92,486 (130,070)
(Increase) decrease in other assets (97,361) 155,442
Total adjustments (367,836) (102,946)
Net cash provided by operating activities 629,565 224,794
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits with banks (1,717,399) 1,272,126
Purchases of available-for-sale securities (957,647) (2,780,997)
Proceeds from maturities of
available-for-sale securities 2,759,847 1,138,670
Proceeds from sales of available-for-
sale securities 258,653 1,769,844
Proceeds from maturities of held-to-
maturity securities 116,198 128,847
Net increase in loans (4,103,729) (481,421)
Net purchases of premises and equipment (11,304) (29,897)
Proceeds from sale of foreclosed collateral 15,900 2,090
Net cash (used) provided by
investing activities (3,639,481) 1,019,262
Cash flows from financing activities:
Net decrease in savings and NOW
deposit accounts (166,156) (691,800)
Net increase (decrease) in time deposits 815,139 (418,299)
Net decrease in securities sold under
agreements to repurchase - (273,951)
Repayments of Federal Home Loan
Bank Advances (172,926) (199,644)
Proceeds from Federal Home Loan
Bank Advances 2,500,000 500,000
Dividends paid (93,498) (94,998)
Net cash (used) provided by
financing activities 2,882,559 (1,178,692)
Net increase (decrease) in cash and
due from banks (127,357) 65,364
Cash and due from banks at beginning
of period 1,494,118 1,428,754
Cash and due from banks at end of period $ 1,366,761 $ 1,494,118
Interest paid $ 1,814,672 $ 1,837,229
Income taxes paid $ 233,131 $ 12,264
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
Home Building Bancorp, Inc. (the"Company") was formed at the direction
of Home Building Savings Bank, FSB (the "Bank"), for the purpose of
owning all the stock outstanding in the Bank. Established in 1908, Home
Building Savings Bank, FSB is a community oriented financial institution
offering a variety of financial services to meet the needs of the communities
it serves. The Bank's primary market area covers Daviess and Pike Counties
in southwestern Indiana. The Bank attracts deposits from the general public
and uses such deposits, together with borrowings and other funds, to
originate one- to four-family residential mortgage, automobile and consumer
loans, and to a lesser extent commercial, multifamily and construction real
estate loans.
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 of 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. In February 1998,
the Corporation moved its stock listing from the NASDAQ SmallCap
Market to NASDAQ's Electronic Bulletin Board.
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, consisting 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
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 Bank adopted 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 Bank adopted this October 1, 1997 and is presented on the income
statement.
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 Bank adopted
this October 1, 1997 without any material impact on its consolidated
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, however the Company has
implemented this for its year ended September 30, 1998.
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.
In February of 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits--an
amendment of FASB statements No. 87, 88, and 106." This statement
revises employers' disclosures about pensions and other postretirement
benefit plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits but does not change the measurement or
recognition of those plans. This statement is effective for fiscal years
beginning after December 15, 1997 and will be adopted by the Company for
their year ending September 30, 1999.
21
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
Effect of New Financial Accounting Standards - continued
In June of 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those
methods must be consistent with the entity's approach to managing risk.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company had no derivatives as of September 30,
1998 nor does the Company engage in any hedging activities. The
Company does not anticipate that the adoption of SFAS No. 133 will have a
material impact of its financial position or results of operations.
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.
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.
22
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
Earnings Per Common Share - Basic earnings per share of common stock
have been computed by dividing net income by the weighted average
number of share outstanding during the fiscal year, less Employee Stock
Ownership Plan ("ESOP") shares, and Recognition and Retention Plan
("RRP") shares not committed to be released. Dilutive earnings per share is
consistent with that of basic earnings per share while giving effect to all
dilutive potential common shares that were outstanding during the fiscal
year.
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
1998 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
U.S. Government
Agency securities $ 1,266,222 $ 14,491 $ - $ 1,280,713
Mortgage-backed
securities 3,761,450 20,269 - 3,781,719
Stock in FHLB 334,900 - - 334,900
Other securities 46,399 - (192) 46,207
TOTALS $ 5,408,971 $ 34,760 $ (192) $ 5,443,539
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
Held to maturity
GROSS GROSS
1998 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Mortgage-backed
securities $ 228,059 $ 1,695 $ - $ 229,754
GROSS GROSS
1997 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Mortgage-backed
securities $ 344,257 $ 5,025 $ (89) $ 349,193
Gross realized gains and gross realized losses on sales of available for sale
securities were $7,434 and $0 respectively, in 1998 and $22,254 and $9,511,
respectively, in 1997.
23
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - DEBT AND EQUITY SECURITIES, CONTINUED
The scheduled maturities of securities held to maturity and securities (other
than equity securities) available for sale at September 30, 1998 were as
follows:
<TABLE>
<CAPTION>
Held to maturity securities: Available for sale securities:
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ 46,399 $ 45,935
Due from one to five years - - 120,005 119,864
Due from five to ten years - - 652,824 662,762
Due after ten years - - 493,393 498,359
Subtotal - - 1,312,621 1,326,920
Mortgage backed securities 228,059 229,754 3,761,450 3,781,719
Total $228,059 $229,754 $5,074,071 $5,108,639
</TABLE>
NOTE 3 - LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
1998 1997
Commercial $ 300,892 $ 1,079,763
Real estate construction 110,611 294,568
Commercial real estate 328,347 410,067
Residential real estate 26,869,867 22,160,269
Consumer 5,336,329 4,837,192
Subtotal 32,946,046 28,781,859
Loans in process (127,261) (47,353)
Net deferred loan fees and discounts (67,197) (71,216)
Allowance for loan losses (92,249) (80,680)
$ 32,659,339 $ 28,582,610
An analysis of the change in the allowance for loan losses follows:
1998 1997
Balance at October 1 $ 80,680 $ 77,000
Loans charged off (16,663) (3,249)
Recoveries 1,232 1,929
Net loans charged off (15,431) (1,320)
Provision for loan losses 27,000 5,000
Balance at September 30 $ 92,249 $ 80,680
Impairment of loans having recorded investments of $145,940 at September
30, 1998 and $250,000 at September 30, 1997 has been recognized in
conformity with FASB Statement 114, as amended by FASB Statement 118.
The average recorded investment in impaired loans during 1998 and 1997
was $184,057 and $287,546, respectively. The total allowance for loan
losses related to these loans was $44,811 and $39,556 on September 30,
1998 and 1997, respectively. Interest income on impaired loans of $15,411
and $14,493 was recognized for cash payments received in 1998 and 1997,
respectively.
The Bank is not committed to lend additional funds to debtors whose loans
have been modified.
24
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PREMISES AND EQUIPMENT
Components of premises and equipment included in the consolidated
statements of financial condition at September 30, 1998 and 1997 were as
follows:
1998 1997
Cost:
Land $ 140,048 $ 140,048
Bank premises 1,001,307 993,932
Furniture and equipment 142,588 213,423
Total Cost 1,283,943 1,347,403
Less accumulated depreciation (524,600) (563,436)
Net book value $ 759,343 $ 783,967
NOTE 5 - DEPOSITS
The aggregate amount of short-term jumbo CDs, each with a minimum
denomination of $100,000, was approximately $3,028,000 and $2,469,000
as of September 30, 1998 and 1997, respectively.
At September 30, 1998 the scheduled maturities of CDs are as follows:
1999 $ 12,468,789
2000 5,547,806
2001 1,799,172
2002 1,033,949
2003 602,913
$ 21,452,629
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 5.32%-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, 1998 and 1997 are as follows:
1998 1997
1998 $ 1,000,000 $ 1,500,000
1999 1,000,000 1,500,000
2000 827,415 1,000,341
2001 - -
2002 and thereafter 3,500,000 -
$ 6,327,415 $ 4,000,341
Other borrowed funds, consisting of agreements to repurchase securities
sold, at September 30, 1998 and 1997 totaled $0 and $0, respectively.
Information concerning these borrowings held during the fiscal year 1997 is
summarized as follows:
1998 1997
Average balance during the year $ - $ 162,200
Average interest rate during the year 0% 5.49%
Maximum month-end balance during the year $ - $ 270,000
25
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and lines of
credit. Those instruments involve, to varying degrees, elements of credit
and interest-rate risk in excess of the amount recognized in the consolidated
statements of financial condition. The contract or notional amounts of these
instruments reflect the extent of the Bank's involvement in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
lines of credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to Extend Credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank's experience has been that
approximately 32% 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, 1998: September 30,1997:
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Cash and due from banks,
interest- bearing
deposits with banks $ 5,605,738 $ 5,605,738 $ 4,015,696 $ 4,015,696
Securities available
for sale 5,443,539 5,443,539 7,483,447 7,483,447
Securities held to maturity 228,059 229,754 344,257 349,193
Loans receivable 32,659,339 33,347,170 28,582,610 29,005,138
Accrued interest receivable 226,102 226,102 210,256 210,256
Financial Liabilities:
Deposit liabilities 32,166,516 32,561,577 31,517,533 31,897,570
FHLB advances 6,327,415 6,336,726 4,000,341 3,985,720
A summary of the notional amounts of the Bank's financial instruments with
off-balance sheet risk at September 30, 1998 follows.
Notional
Amount
Commitments to extend credit $ 661,000
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 $0
for the years ended September 30, 1998 and 1997, respectively.
26
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, was $197,016. For the
year ended September 30, 1998, new loans to such related parties amounted
to $44,735 and repayments amounted to $40,903.
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 1997, 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 year ended September
30, 1997.
The provision for income taxes consisted of the following for the years
ended September 30:
Current tax provision: 1998 1997
Federal $ 138,193 $ 101,289
State 41,878 31,119
Total current expense 180,071 132,408
Deferred expense - 85,555
Deferred benefit (11,199) (11,199)
Total provision $ 168,872 $ 209,764
The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows.
1998 1997
Statutory rates $ 146,404 $ 182,751
Increase (decrease)
resulting from:
Effect of tax brackets (11,750) (11,750)
Effect of SAIF deduction - 30,109
Tax bad debt recapture (11,199) (11,199)
State tax provision 39,638 19,853
Other 5,779 -
$ 168,872 $ 209,764
Deferred tax liabilities included in other liabilities at September 30 consist
of the following:
1998 1997
Deferred tax liabilities:
Net unrealized gains on available
for sale securities $ (13,827) $ (8,451)
Allowance for loan losses (44,795) (55,947)
$ (58,622) $ (64,398)
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 exposed but seldom becomes a 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 $836,000.
NOTE 14 - RESTRICTIONS ON RETAINED EARNINGS
The Bank must obtain regulatory approval before any dividends may be
declared. Dividends from the Corporation are limited to the unconsolidated
retained earnings of the parent corporation.
NOTE 15 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -and possibly additional
discretionary- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined) to average assets (as
defined). Management believes, as of September 30, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of September 15, 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.
<TABLE>
<CAPTION>
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, 1998:
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets) 4,722,000 19.7% >1,914,800 >8.0% >2,393,500 > 10.0%
Tier I Capital
(to Risk-Weighted Assets) 4,635,000 19.4% > 957,400 >4.0% >1,436,100 > 6.0%
Tier I Capital
(to Average Assets) 4,635,000 10.3% >1,797,280 >4.0% >2,246,600 > 5.0%
Tangible Capital Ratio 4,635,000 10.3%> 673,980 >1.5%
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%
</TABLE>
NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN
Employee Stock Ownership Plan - Concurrent with the conversion the board
of directors approved the adoption of the Home Building Bancorp, Inc.,
Employees Stock Ownership Plan (the "ESOP"). The ESOP is qualified
under Sections 401 (a) and 501 (a) of the Internal Revenue Code. Eligibility
is based on hours of service, date of hire, and age. Contributions to the
ESOP are determined by the board of directors, in the form of cash or the
Corporation's common stock. No employee contributions are accepted.
Contributions are allocated based on the ratio of the participant's
compensation to total compensation of all participants. Participant's account
balances are fully vested after five years of service. ESOP expense recorded
for the year ended September 30, 1998 and 1997, totaled $61,125 and
$61,480, with 2,851 and 2,999 shares committed to be allocated at
September 30, 1998 and 1997, respectively. The fair value of unallocated
shares was $276,845 and $372,230 at September 30, 1998 and 1997,
respectively.
The ESOP shares at September 30 were as follows:
1998 1997
Allocated Shares 8,917 5,918
Shares released for allocation 2,851 2,999
Unreleased shares 13,992 16,843
Total ESOP shares 25,760 25,760
29
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 $41,423 and 33,547 for the years ended September 30, 1998 and 1997,
respectively.
NOTE 18 - STOCK OPTION AND INCENTIVE PLAN
The adoption of the 1995 Stock Option and Incentive plan ("1995 SOIP"),
was approved by the Corporation's shareholders on January 22, 1996. The
purpose of the Plan is to promote the long-term interests of the Corporation
and its shareholders by providing a means for attracting and retaining
directors (including emeritus and advisory directors), officers and employees
of the Corporation and its Affiliates. The Plan shall be administered by a
Committee consisting of two or more each of whom shall be a Disinterested
Person. This Committee selects recipients and terms of awards pursuant to
the plan. The maximum number of Shares with respect to which Awards
may be made under the Plan is 10% of the total Shares issued in the Bank's
conversion to the capital stock form, which is 32,200.
On January 22, 1996, the Committee granted a total of 24,146 Options with
an exercise price of $16.75. These Options vest over a period of five years,
with the first 20% vested on January 22, 1997.
Information with respect to these stock options is summarized below:
Outstanding at September 30, 1996 24,146
Granted -
Exercised -
Expired -
Outstanding at September 30, 1997 24,146
Granted -
Exercised -
Expired -
Outstanding at September 30, 1998 24,146
At September 30, 1998 and 1997 there were 9,658 and 4,829 outstanding
exercisable options, respectively. These options are exercisable at$16.75 per
share.
The Company applies APB Opinion 25 and related Interpretations in
accounting for stock options. Compensation cost charged against operations
for 1998 and 1997 was $0 for each year which reflects no options were
exercised that have been granted under the Plan.
In compliance with SFAS No. 123, the Company has elected to provide the
pro forma disclosure. As such, the Company's net income and earnings per
share for 1998 and 1997 adjusted to reflect pro forma amounts are indicated
as follows:
30
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - STOCK OPTION AND INCENTIVE PLAN, CONTINUED
1998 1997
Net Income
As reported $261,729 $327,740
Pro forma 240,821 306,832
Basic earnings per share
As reported 0.90 1.15
Pro forma 0.83 1.07
Diluted earnings per share
As reported 0.89 1.12
Pro forma 0.82 1.05
The fair value of stock options granted in 1996 was estimated on the date of
grant using the Black-Scholes option pricing model. The weighted average
fair values and related assumptions were:
Weighted average fair value $ 6.56
Expected volatility 25.17%
Risk-free interest rate 5.5%
Expected lives 8 years
Dividend yield 1.5%
31
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - PARENT ONLY FINANCIAL STATEMENTS
Summarized financial information concerning Home Building Bancorp, Inc.,
only as of September 30 is as follows:
1998 1997
ASSETS
Cash $ 1,228,171 $ 992,674
Certificates of deposit with other banks - 199,000
Investment in subsidiary 4,658,382 4,475,044
Loan receivable from subsidiary 154,560 180,320
Other assets 128,486 45,662
Total Assets $ 6,169,599 $ 5,892,700
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities 25,361 27,375
Common stock, $.01 par value,
331,660 outstanding at September 30, 1998 3,317 3,317
Paid in capital 6,223,592 6,181,912
Treasury stock (345,000) (345,000)
Dividends declared (93,498) -
Retained earnings 548,501 286,773
Unearned compensation (213,415) (274,283)
Unrealized gain (loss) on
securities available for sale 20,741 12,606
Total liabilities & shareholders' equity $ 6,169,599 $ 5,892,700
Interest income $ 49,838 $ 54,651
Gain on sale of investment 9,803 -
Income(loss) from subsidiary 299,402 345,308
Total income (loss) 359,043 399,959
Expenses (123,495) (110,123)
Income (loss) before income tax expense 235,548 289,836
Income tax benefit (expense) 26,180 10,300
Net income 261,728 300,136
Other comprehensive income, net of income tax
Unrealized gain (loss) on
securities available for sale 8,135 39,003
Comprehensive income $ 269,863 $ 339,139
32
<PAGE>
HOME BUILDING BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - PARENT ONLY FINANCIAL STATEMENTS, CONTINUED
1998 1997
Cash flows from operating activities
Net income (loss) $ 261,728 $ 300,136
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities
Non cash compensation expense 76,830 96,907
Increase in other assets (82,824) (32,315)
Increase (decrease) in
other liabilities (2,097) 27,374
Dividends received from sub 150,000 175,000
(Income) loss from subsidiary (299,402) (345,308)
Net cash provided by
operating activities 104,235 221,794
Cash flows from investing activities
Net (increase) decrease in
interest-bearing deposits
with banks 199,000 (1,000)
Net decrease in loans 25,760 25,760
Net cash provided by
investing activities 224,760 24,760
Cash flows from financing activities
Dividends paid (93,498) (94,998)
Net cash used by financing activities (93,498) (94,998)
Net increase (decrease) in cash 235,497 151,556
Cash at beginning of period 992,674 841,118
Cash at end of period $1,228,171 $ 992,674
Cash dividends paid to the Corporation from the Bank for the years ended
September 30,
1998 1997
$ 150,000 $ 175,000
33
<PAGE>
HOME BUILDING BANCORP, INC.
SHAREHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:30 a.m., Monday, January
18, 1999, 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 Pink Sheet/Electronic Bulletin
Board 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 1998 and
1997. 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.
1998 1997
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
First Quarter $ 23.75 $ 21.25 $ .075 $18.50 $16.75 $.075
Second Quarter $ 24.00 $ 21.00 $ .075 $21.00 $17.00 $.075
Third Quarter $ 26.00 $ 17.00 $ .075 $21.00 $20.50 $.075
Fourth Quarter $ 20.50 $ 18.00 $ .075 $22.00 $19.50 $.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,
1998 to shareholders of record on October 12, 1998. Restrictions on dividend
payments are described in Note 14 of the Notes to Consolidated Financial
Statements included in this Annual Report.
At September 30, 1998, the Corporation had approximately 350 shareholders of
record and 293,160 outstanding shares of Common Stock.
SHAREHOLDERS AND GENERAL INQUIRIES
Bruce A. Beesley, President
Home Building Bancorp, Inc.
200 East VanTrees Street
Washington, Indiana 47501
(812) 254-2641
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(908) 272-8511
ANNUAL AND OTHER REPORTS
The Corporation is required to file an annual report on Form 10-KSB for its
fiscal year ended September 30, 1998, 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 Van Trees
Street, Washington, Indiana 47501; telephone number (812) 254-2641.
<PAGE>
HOME BUILDING BANCORP, INC.
CORPORATE INFORMATION
- ------------------------------------------------------------------------------
CORPORATION AND BANK ADDRESS
200 East Van Trees 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, 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
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 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
INDEPENDENT AUDITORS
Kemper CPA Group LLC
1500 Cherry Street
Mt. Carmel, Illinois 62863
SPECIAL COUNSEL
Silver, Freedman & Taff, L.L.P
1110 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, D.C. 20005
35
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Exhibit 21
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SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary State
Parent Subsidiary Percent of of Incorporation
Ownership or Organization
Home Building Home Building
Bancorp, Inc. Savings Bank, FSB 100% Federal
Home Building White River Service
Savings Bank. FSB Corporation 100% Indiana
Exhibit 23
CONSENT OF EXPERTS
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, 1998.
/s/ Kemper CPA Group LLC
KEMPER CPA GROUP LLC
Mt. Carmel, Illinois
November 4, 1998
Exhibit 27
FINANCIAL DATA SCHEDULE
[TYPE] EX-27
[ARTICLE] 9
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS DATED September 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] OCT-01-1997
[PERIOD-END] SEP-30-1998
[CASH] 1366761
[INT-BEARING-DEPOSITS] 4238977
[FED-FUNDS-SOLD] 0
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 5443539
[INVESTMENTS-CARRYING] 228059
[INVESTMENTS-MARKET] 229754
[LOANS] 32659339
[ALLOWANCE] 92249
[TOTAL-ASSETS] 45102585
[DEPOSITS] 32166516
[SHORT-TERM] 0
[LIABILITIES-OTHER] 436809
[LONG-TERM] 6327415
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 3317
[OTHER-SE] 6168528
[TOTAL-LIABILITIES-AND-EQUITY] 45102585
[INTEREST-LOAN] 2547091
[INTEREST-INVEST] 479698
[INTEREST-OTHER] 255233
[INTEREST-TOTAL] 3282022
[INTEREST-DEPOSIT] 1528344
[INTEREST-EXPENSE] 1833242
[INTEREST-INCOME-NET] 1448780
[LOAN-LOSSES] 27000
[SECURITIES-GAINS] 17238
[EXPENSE-OTHER] 1185530
[INCOME-PRETAX] 430601
[INCOME-PRE-EXTRAORDINARY] 261729
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 261729
[EPS-PRIMARY] .90
[EPS-DILUTED] .89
[YIELD-ACTUAL] .08
[LOANS-NON] 145940
[LOANS-PAST] 0
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 26880
[ALLOWANCE-OPEN] 80680
[CHARGE-OFFS] 16663
[RECOVERIES] 1232
[ALLOWANCE-CLOSE] 92249
[ALLOWANCE-DOMESTIC] 44811
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 47438
