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, 2000
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.
---------------------------
Indiana 35-1935840
-------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) 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 closing price of such stock on the OTC
Bulletin Board as of December 22, 2000, was $2.1 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the registrant that such person is an affiliate of the
registrant.) As of December 27, 2000, there were issued and outstanding 296,660
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, 2000.
Part III of Form 10-KSB - Portions of the
Proxy Statement for the Annual Meeting of Stockholders held in January 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ]; No [X].
<PAGE>
Forward-Looking Statements
When used in this Annual Report on Form 10-KSB or future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases or other public or shareholder communications, or in
oral statements made with the approval of an authorized executive officer, the
words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", "believe" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made, and to advise readers that various factors
including regional and national economic conditions, changes in levels of market
interest rates, credit risks of lending activities, and competitive and
regulatory factors could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
those anticipated or projected.
The Company does not undertake and specifically disclaims any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Impact of the Year 2000
The Company has not experienced any data processing or other
operational problems connected with the Year 2000 event. Moreover, management is
not aware of any significant operational problems among the bank's correspondent
institutions, data processing providers, or other vendors, which would have an
effect on the Bank's operations. The bank did not experience any noticeable
deposit withdrawals or other activity by bank's customers that had any impact on
operations.
1
<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 OTC Bulletin Board under the symbol "HBBI."
At September 30, 2000, the Company had $47.2 million of assets
and stockholders' equity of $6.3 million (or 13.35% of total assets).
The Bank is a federally chartered stock savings bank
headquartered in Washington, Indiana. The Bank is a member of the Savings
Association Insurance Fund (the "SAIF"), which is administered by the Federal
Deposit Insurance Corporation (the "FDIC"). Its deposits are insured up to
applicable limits by the FDIC, which 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.
2
<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 for terms of up to 20
years, 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, 2000, the Company's net loans receivable totaled
$37.0 million.
The Executive Committee of the Bank is responsible for review
of all mortgage loan applications. The Executive Committee currently consists of
two directors and President Graham. 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, 2000, the
maximum amount the Bank could have lent to any one borrower and the borrower's
related entities was approximately $730,000. At September 30, 2000, the Bank had
no loans with aggregate outstanding balances in excess of this amount. The
Company's largest lending relationship at that date consisted of three loans to
a single borrower totaling $441,000 secured by a first mortgage on the
borrower's residence, and commercial real estate. The Company had only eight
other loans or lending relationships in excess of $150,000 at September 30,
2000. All of these loans are currently performing in accordance with their
repayment terms.
Management reserves the right to change the amount or type of
lending in which it engages to adjust to market or other factors.
3
<PAGE>
Loan Portfolio Composition. The following table presents the
composition of the Company's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------
2000 1999
------------------------ --------------------------
Amount Percent Amount Percent
------- ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
------------------
One- to four-family ....................... $29,249 78.7% $28,900 77.7%
Residential construction .................. 72 0.2 469 1.3
Multi-family and commercial ............... 1,081 2.9 1,540 4.2
------- ----- ------- -----
Total real estate loans ............... 30,402 81.8 30,909 83.2
------- ----- ------- -----
Other Loans:
------------
Consumer Loans:
Automobile ............................... 2,303 6.2 1,904 5.1
Home equity/home improvement/2nd mortgages
2,721 7.4 2,701 7.3
Unsecured ................................ 235 0.6 244 0.6
Deposit account .......................... 235 0.6 614 1.6
------- ----- ------- -----
Total consumer loans .................. 5,494 14.8 5,463 14.6
Commercial business loans ................. 1,265 3.4 813 2.2
------- ----- ------- -----
Total other loans ..................... 6,759 18.2 6,276 16.8
------- ----- ------- -----
Total loans receivable, gross ............. 37,161 100.0% 37,185 100.0%
===== =====
Less:
-----
Loans in process .......................... 57 192
Deferred fees and discounts ............... 44 64
Allowance for losses ...................... 89 86
------- ---------
Total loans receivable, net ............... $36,971 $ 36,843
======= =========
</TABLE>
4
<PAGE>
During the 2000 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.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------
2000 1999
----------------------- -----------------------
Amount Percent Amount Percent
------ ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
-----------------
Real estate:
One- to four-family ............ $22,670 61.0% $23,102 62.1%
Residential construction ....... 72 0.2 469 1.3
Multi-family and commercial .... 510 1.4 1,540 4.2
------- ----- ------- -----
Total real estate loans ..... 23,252 62.6 25,111 67.6
Consumer ........................ 5,494 14.8 5,463 14.6
Commercial business ............. 1,054 2.8 813 2.2
------- ----- ------- -----
Total fixed-rate loans ...... 29,800 80.2 31,387 84.4
------- ----- ------- -----
Adjustable-Rate Loans:
----------------------
Real estate:
One- to four-family ............ 6,579 17.7 5,798 15.6
Multi-family and commercial .... 571 1.5 - -
------- ----- ------- -----
Total Real Estate ........... 7,150 19.2 5,798 15.6
Commercial (business) .......... 211 0.6 - -
------- ----- ------- -----
Total adjustable-rate loans . 7,361 19.8 5,798 15.6
------- ----- ------- -----
Total loans receivable, gross 37,161 100.0% 37,185 100.0%
===== =====
Less:
-----
Loans in process ................ 57 192
Deferred fees and discounts ..... 44 64
Allowance for loan losses ....... 89 86
------- -------
Total loans receivable, net .. $36,971 $36,843
======= =======
</TABLE>
5
<PAGE>
The following table presents the contractual maturities of the
Company's loan portfolio at September 30, 2000. 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>
2001 ......................... $ 29 $ 0 $ 72 $ 962 $ 245 $ 1,308
2002 through 2005 ............ 939 0 0 2,966 557 4,462
2006 and following ........... 28,281 1,081 0 1,566 463 31,391
------- ------- ------- ------- ------- -------
Total ...................... $29,249 $ 1,081 $ 72 $ 5,494 $ 1,265 $37,161
======= ======= ======= ======= ======= =======
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after September 30, 2001 which
have fixed interest rates is $29.8 million, while the total amount of loans due
after such date which have floating or adjustable interest rates is $ 7.4
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,
2000, such loans constituted 78.7% of the Company's gross loans receivable, up
from 77.7% at September 30, 1999.
The Company currently offers fixed-rate and ARM loans. For the
year ended September 30, 2000, the Company originated $ 839,000 of
adjustable-rate real estate loans secured by one- to four-family residential
real estate. During the same period, the Company originated $ 4.0 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.
6
<PAGE>
As a consequence of using caps, the interest rates on these
loans may not be as rate sensitive as is the Company's cost of funds. The
Company originates ARMs which may have an initial interest rate that is lower
than the sum of the specified index plus the margin. Borrowers with ARM loans
are qualified at the fully-indexed rate.
Adjustable-rate loans decrease the risk associated with
changes in interest rates but involve other risks, primarily because as interest
rates rise, the payment by the borrower may rise to the extent permitted by the
terms of the loan, thereby increasing the potential for default. At the same
time, the market value of the underlying property may be adversely affected by
higher interest rates.
The Company currently offers fixed-rate mortgage loans to
owner occupants with terms up to 15 years and may, from time to time, offer
fixed rate loans with terms up to 20 years depending on the Bank's then interest
rate risk position and asset/liability objectives. Interest rates charged on
these fixed-rate loans are priced on a regular basis according to market
conditions. See "- Originations, Purchases and Sales of Loans and
Mortgage-Backed Securities."
Currently, the Company will loan up to 97% of the lesser of
the sales price or appraised value of the security property on owner occupied
one- to four-family loans, provided that private mortgage 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, 2000, 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.
7
<PAGE>
Construction loans are obtained primarily from existing
customers. The application process includes a submission to the Company of plans
and costs of the project to be constructed. These items are used as a basis to
determine the appraised value of the subject property. Loans are based on the
lesser of current appraised value and/or the cost of construction (land plus
building).
Construction lending is generally considered to involve a
higher level of credit risk than permanent one- to four-family residential
lending, due to the concentration of principal in a limited number of loans and
borrowers and/or the effects of general economic conditions on development
projects, real estate developments, managers or homebuilders. In addition, the
nature of these loans is such that they are more difficult to evaluate and
monitor. The Company's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value upon
completion of the project and the estimated cost (including interest) of the
project. If the estimate of value proves to be inaccurate, the Company may be
confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment. When loan payments become
due, borrowers may experience cash flow from the property which is not adequate
to service the total debt. In such cases, the Company may be required to modify
the terms of the loan. 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, 2000 consumer loans comprised
14.8% of the Company's gross loans receivable, up from 14.6% at September 30,
1999.
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.
8
<PAGE>
Consumer loans may entail greater risk than do residential
mortgage loans, particularly in the case of consumer loans, which are unsecured
or are secured by rapidly depreciable assets, such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial stability
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Although the level of delinquencies in the Company's consumer loan
portfolio has generally been low, and stands at $ 63,000, or approximately 1.15%
of the Company's consumer loan portfolio at September 30, 2000), 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, 2000, less
than four-percent of the Company's gross loans receivable, up from approximately
2.2% at September 30, 1999.
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.
9
<PAGE>
Appraisals on properties securing multi-family and commercial
real estate property loans originated by the Company generally are performed by
either an in-house appraiser or an outside fee appraiser at the time the loan is
made. Appraisals on multi-family and commercial real estate loans are generally
reviewed by the Company's Executive Committee. In addition, the Company's
underwriting procedures generally require verification of the borrower's credit
history, income and financial statements, banking relationships and income
projections for the property. Personal guarantees are generally required for the
Company's multi-family and commercial real estate loans.
Loans secured by commercial real estate and multi-family
properties are generally larger and involve a greater degree of credit risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by commercial real estate properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced (for example, if leases are not
obtained or renewed), the borrower's ability to repay the loan may be impaired.
Multi-family and commercial real estate loans comprise, at September 30, 2000,
approximately six percent of the Company's gross loans receivable, up from
approximately 4.2% at September 30, 1999.
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, 2000, the Company had outstanding commitments
for mortgage loans, home equity lines of credit and commercial business loans of
approximately $ 626,000. The Company invests its excess funds in mortgage-backed
securities and bonds issued by U.S. government agencies.
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.
10
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
2000 1999
-------- ---------
(In Thousands)
Originations by type:
--------------------
<S> <C> <C>
Adjustable rate:
Real estate - one- to four-family ................ $ 839 $ 229
-------- --------
Fixed rate:
Real estate - one- to four-family ................ 3,976 8,713
- multi-family and commercial ...... 1,975 848
- residential and other construction 356 357
Non-real estate - consumer ......................... 3,431 4,120
-------- --------
Total fixed-rate .......................... 9,738 14,038
-------- --------
Total loans originated .................... 10,577 14,267
-------- --------
Purchases:
----------
Total mortgage-backed securities purchased ....... 97 0
-------- --------
Sales and Repayments:
---------------------
Total mortgage-backed securities sold ............ 0 0
-------- --------
Total sales ............................... 0 0
Principal repayments ............................. (11,442) (10,594)
-------- --------
Total reductions .......................... (11,442) (10,594)
Increase (decrease) in other items, net ............ 437 (730)
-------- --------
Net increase (decrease) ................... $ (331) $ 2,943
======== ========
</TABLE>
Asset Quality
General. When a borrower fails to make a required payment on a
loan, the Company attempts to cause the delinquency to be cured by contacting
the borrower. In the case of loans secured by real estate, a late notice is sent
to the borrower on all loans over 30 days delinquent. If the loan becomes 60
days delinquent and the borrower has not attempted to contact the Company to
arrange an acceptable plan to bring the loan current, a letter is sent to the
borrower by 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.
11
<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
"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 .... 8 $351 1.20% 5 $127 0.43% 13 $478 1.63%
Consumer .............. 10 30 0.55 5 33 0.60 15 63 1.15
---- ---- ---- ---- ---- ---- ---- ---- ----
Total .............. 18 $381 1.03% 10 $160 0.43% 28 $541 1.46%
==== ==== ==== ==== ==== ====
</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. Foreclosed assets include assets acquired in
settlement of loans. There were no loans deemed in-substance foreclosed at
September 30, 2000.
At September 30,
---------------------
2000 1999
------- ------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family .................................. $ 127 $ 111
Consumer ............................................. 33 18
---- ----
Total ............................................. 160 129
---- ----
Total non-performing assets ............................ $ 160 $ 129
===== =====
Non-performing assets as a percentage of total assets .. .34% .26%
===== =====
For the year ended September 30, 2000, gross interest income
which would have been recorded had the non-accruing loans been current in
accordance with their original terms was approximately $ 3,000, none of which
was included in interest income.
12
<PAGE>
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, 2000, the Company had classified a total of $ 255,000 of its
assets as substandard, none as doubtful, none as loss and the Company had
designated $ 102,000 as special mention. At September 30, 2000, total classified
assets comprised $ 255,000, (without special mention) or 4.05% of the Company's
capital, or .54% of the Company's total assets.
Other Loans of Concern. There are no other loans 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.
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
13
<PAGE>
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. At September 30, 2000, the Company had a total
allowance for loan losses of $ 89,000 representing 55.6% of total non-performing
loans and .24% of the Company's net loans receivable.
The following table sets forth an analysis of the Company's
allowance for loan losses.
Year Ended September 30,
2000 1999
------ ------
(Dollars in Thousands)
Balance at beginning of period ................... $86 $92
--- ---
Charge-offs:
One- to four-family ............................ 0 4
Consumer ....................................... 26 20
--- ---
Total charge-offs ............................ 26 24
--- ---
Recoveries:
Consumer ....................................... 1 3
--- ---
Total recoveries ............................. 1 3
--- ---
Net charge-offs .................................. 25 21
Additions charged to operations .................. 28 15
--- ---
Balance at end of period ......................... $89 $86
=== ===
Ratio of net charge-offs during the period to
Average loans outstanding during the period .07 % .06%
=== ===
14
<PAGE>
The distribution of the Company's allowance for losses on
loans at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------
2000 1999
-------------------------- -----------------------
Percent Percent
of Loans of Loans
in Each in Each
Amount of Category Amount of Category
Loan Loss to Total Loan Loss to Total
Allowance Loans Allowance Loans
---------- --------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
One- to four-family ................. $81 78.9% $78 79.0 %
Multi-family and commercial ......... 2 6.3 2 6.4
Consumer ............................ 6 14.8 6 14.6
Unallocated ......................... 0 0.0 0 0.0
--- ----- --- -----
Total ........................... $89 100.0% $86 100.0%
=== ===== === =====
</TABLE>
Investment Activities
General. The Company must maintain minimum levels of
investments that qualify as liquid assets under OTS regulations. Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. Historically, the
Company has maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and at levels 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, 2000,
the Company's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 19.23%.
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 John Graham 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
15
<PAGE>
Executive Committee of the Company, which usually meets monthly. All securities
transactions are reported to the entire Board of Directors.
Securities. It is the Company's general policy to purchase
U.S. Government securities, federal agency obligations or other issues that are
rated investment grade. At September 30, 2000, virtually all of the Company's
securities were classified as available for sale.
The following table sets forth the composition and carrying
value of the Company's securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------
2000 1999
------------------ ------------------
Book % of Book % of
Value Total Value Total
-------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment securities:
Federal agency obligations ...................................... $1,241 66.05% $1,291 63.32%
Municipal bonds ................................................. 0 0 0 0.00
------ ------ ------ ------
Subtotal ..................................................... 1,241 66.05 1,291 63.32
Other debt securities ........................................... 297 15.81 407 9.96
Equity securities at lower of cost or market ...................... 0 0 0 0.00
FHLB stock ........................................................ 341 18.14 341 16.72
------ ------ ------ -----
Total investment securities
And FHLB stock .............................................. $1,879 100.00% $2,039 100.00%
====== ====== ====== ======
Other interest-earning assets:
Total interest-bearing deposits with banks ...................... $3,029 100.00% $4,760 100.00%
====== ====== ====== ======
</TABLE>
The composition and maturities of the investment securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
September 30, 2000
----------------------------------------------------------------------
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 $1,241 $ 0 $ 0 $1,275 $1,241
Other investment securities ......... 000 0 0 297 300 297
Equity securities ................... 0 0 0 0 0 0
------ ------ ------ ------ ------ ------
Total investment securities ......... $ 000 $1,241 $ 0 $ 297 $1,575 $1,538
====== ====== ====== ====== ====== ======
Weighted average yield ........ 0.00% 6.16% 0.00% 9.30% 6.77% 6.85%
====== ==== ====== ==== ====== ======
</TABLE>
16
<PAGE>
The Company's securities portfolio at September 30, 2000,
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.
The Company's securities portfolio includes mortgage-backed
securities which consist 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. While mortgage-backed securities
carry a reduced credit risk as compared to whole loans, such securities remain
subject to the risk that a fluctuating interest rate environment, along with
other factors such as the geographic distribution of the underlying mortgage
loans, may alter the prepayment rate of such mortgage loans and so affect both
the prepayment speed, and value, of such securities.
Historically, most of the Company's mortgage-backed securities
were long-term, fixed-rate securities. In more recent years, the Company has
begun to purchase other types of mortgage-backed securities consistent with its
asset/liability management objectives. In this regard, the Company emphasizes
the purchase of adjustable-rate, mortgage-backed securities for asset/liability
management purposes and in order to supplement the Company's origination of ARM
loans. At September 30, 2000, $ 926,000, or 40.9%, 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.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------
2000 1999
------------------------ -----------------------
Carrying %of Carrying % of
Value Total Value Total
--------- -------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC ......................................... $ 984 43.46% $1,145 42.03%
FNMA .......................................... 1,262 55.74 1,553 57.01
GNMA .......................................... 2 .09 6 .22
------ ------ ------ ------
Subtotal ................................... 2,248 99.29 2,704 99.26
Unamortized premium (discounts), net ............ 16 .71 20 .74
------ ------ ------ ------
Total mortgage-backed securities ........... $2,264 100.00% $2,724 100.00%
====== ====== ====== ======
</TABLE>
17
<PAGE>
The following table sets forth the contractual maturities of
the Company's mortgage-backed securities at September 30, 2000; 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, 2000
---------------------------------------------------------------------------------
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 ......................... $ 22 $ 60 $ 573 $ 339 $1,004 $ 994
FNMA .......................... 0 255 26 986 1,293 1,267
GNMA .......................... 0 3 0 0 3 3
------ ------ ------ ------ ------ ------
Total mortgage-backed
Securities ................. $ 22 $ 318 $ 599 $1,325 $2,300 $2,264
====== ====== ====== ====== ====== ======
Weighted average yield ........ 7.72% 6.78% 7.24% 6.90% 6.98% 6.99%
====== ====== ====== ====== ====== ======
</TABLE>
Sources of Funds
General. The Company's primary sources of funds are deposits,
payment of principal and interest on loans (including mortgage-backed
securities), interest earned on investment securities, time deposits with other
banks, FHLB advances, and funds provided from operations. 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 1997, 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.
18
<PAGE>
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, 2000, the amount of public funds on
deposit with the Company was $ 5.6 million. These accounts are subject to
volatility depending on governmental funding needs and the Company's desire to
attract such funds.
The deposit accounts marketed by the Company has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management and profitability objectives. The
ability of the Company to attract and maintain savings accounts and certificates
of deposit, and the rates paid on these deposits, has been and will continue to
be significantly affected by market conditions.
The following table presents the savings flows at the Company
during the periods indicated.
September 30,
--------------------------
2000 1999
-------- -------
Opening balance ........... $ 35,589 $ 32,167
Deposits .................. 73,369 75,503
Withdrawals ............... (73,215) (72,170)
Interest credited ......... 1,113 89
-------- --------
Ending balance ............ $ 36,856 $ 35,589
======== ========
Net increase (decrease) ... $ 1,267 $ 3,422
======== ========
Percent increase (decrease) 3.56% 2.06%
======== ========
19
<PAGE>
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.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
2000 1999
-------------------- --------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Transactions and Savings Deposits:
----------------------------------
Passbook Accounts ....................... $ 4,617 12.53% $ 5,219 14.66%
NOW and SuperNOW Accounts ............... 4,957 13.45 5,056 14.21
Money Market Accounts ................... 979 2.66 915 2.57
------- ------ ------- ------
Total Non-Certificates .................. 10,553 28.64 11,190 31.44
------- ------ ------- ------
Certificates:
-------------
2.50 - 4.50% ........................... 347 0.94 4,290 12.06
4.51 - 5.50% ........................... 8,158 22.13 12,528 35.20
5.51 - 6.50% ........................... 12,159 32.99 4,086 11.48
6.51 - 7.50% ........................... 5,639 15.30 2,987 8.39
7.51 and over .......................... 0 0.00 508 1.43
----------------------------------------- ------- ------ ------- ------
Total Certificates ...................... 26,303 71.36 24,399 68.56
------- ------ ------- ------
Total Deposits .......................... $36,856 100.00% $35,589 100.00%
======= ====== ======= ======
</TABLE>
The following table shows rate and maturity information for
the Company's certificates of deposit as of September 30, 2000.
<TABLE>
<CAPTION>
0.00- 3.00- 4.00- 6.00- Percent
2.99% 3.99% 5.99% 7.99% Total of Total
------ ------ ------ ------ ------- ---------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 2000 ................... $ 0 $ 102 $ 2,886 $ 6,698 $ 9,686 36.83%
March 31, 2001 ...................... 0 0 2,171 1,996 4,167 15.84
June 30, 2001 ....................... 1 0 1,048 2,268 3,317 12.61
September 30, 2001 .................. 0 0 474 1,752 2,226 8.46
December 31, 2001 ................... 0 0 422 606 1,028 3.91
March 31, 2002 ...................... 0 0 260 450 710 2.70
June 30, 2002 ....................... 0 0 268 86 354 1.35
September 30, 2002 .................. 0 0 308 123 431 1.64
December 31, 2002 ................... 0 0 123 125 248 .94
March 31, 2003 ...................... 0 0 218 69 287 1.09
June 30, 2003 ....................... 0 0 331 0 331 1.26
September 30, 2003 .................. 0 0 164 0 164 .62
Thereafter .......................... 1 0 1,693 1,661 3,354 12.75
---- ----- ------- ------- ------- ------
Total ............................ $ 1 $ 102 $10,366 $15,834 $26,303 100.00%
==== ===== ======= ======= ======= ======
Percent of total ................. .01% .39% 39.41% 60.19% 100.00%
=== === ===== ===== ======
</TABLE>
20
<PAGE>
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, 2000.
<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> <C>
Certificates of deposit of less than $100,000 ....... $ 2,585 $ 3,605 $ 4,352 $ 6,084 $16,626
Certificates of deposit of $100,000 or more ......... 7,101 562 1,191 823 9,677
------- ------- ------- ------- -------
Total certificates of deposit ....................... $ 9,686 $ 4,167 $ 5,543 $ 6,907 $26,303(1)
======= ======= ======= ======= =======
</TABLE>
--------------------
(1) Includes $ 5.6 million of deposits from governmental and other public
entities.
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 solely of
advances from the FHLB of Indianapolis. Such advances may be made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. At September 30, 2000, the Company had $ 3.5 million in
advances from the FHLB of Indianapolis and the capacity to borrow up to $ 12.9
million.
The following table sets forth information about FHLB
advances.
<TABLE>
<CAPTION>
At September 30,
---------------------
2000 1999
-------- -------
(Dollars in Thousands)
<S> <C> <C>
Maximum Balance During the Year:
-------------------------------
FHLB advances ......................................... $6,678 $6,678
Average Balance:
----------------
FHLB advances ......................................... $5,335 $6,412
Balance at Year End:
--------------------
FHLB advances.......................................... $3,500 $6,678
Weighted average interest rate paid during the year ... 5.53% 5.49%
</TABLE>
21
<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 $
940,000 at September 30, 2000, 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, 2000, WRSC had net loss of approximately
$ 14,000.
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.
22
<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, 2000 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, 2000 was
$ 16,000.
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.
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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, 2000, the Bank's lending limit
under this restriction was approximately $ 730,000. 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. The current assessment rates range
from zero to 0.27% per $100 of assessable deposits. 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. At September 30, 2000, the rate established by the FDIC for all
FDIC-insured institutions is 2.02 basis points per $100 of assessable SAIF
deposits and BIF deposits.
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<PAGE>
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least
1.5% of adjusted total assets (as defined by regulation). Tangible capital
generally includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At September 30, 2000, 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, 2000, the Bank had tangible capital of $ 4.9
million, or 10.50% of adjusted total assets, which is approximately $ 4.2
million above the minimum requirement of 1.5% of adjusted total assets in effect
on that date.
The capital standards also require core capital equal to at
least 4% of adjusted total assets. Core capital generally consists of tangible
capital plus certain intangible assets, including a limited amount of purchased
credit card relationships. At September 30, 2000, the Bank had no intangibles,
which were subject to these tests.
At September 30, 2000, the Bank had core capital equal to $
4.9 million, or 10.50% of adjusted total assets, which is $ 3.0 million above
the minimum leverage ratio requirement of 4.0% as in effect on that date.
The OTS risk-based requirement requires savings associations
to have total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The OTS is also authorized to require a savings
association to maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional activities. At
September 30, 2000, the Bank had only $89,000 of general loss reserves, which
was less than 1.25% of the risk-weighted assets.
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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, 2000.
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, 2000, the Bank had total capital of $ 5.0
million (including approximately $4.9 million in core capital and $ 0.1 million
in qualifying supplementary capital) and risk-weighted assets of $ 26.4 million
(with no converted off-balance sheet assets); or total capital of 18.8% 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 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.
26
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Any savings association that fails to comply with its capital
plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core
capital ratios of less than 3% or a risk-based capital ratio of less than 6%)
must be made subject to one or more of additional specified actions and
operating restrictions which may cover all aspects of its operations and
includes a forced merger or acquisition of the association. An association that
becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or
less) is subject to further mandatory restrictions on its activities in addition
to those applicable to significantly undercapitalized associations. In addition,
the OTS must appoint a receiver (or conservator with the concurrence of the
FDIC) for a savings association, with certain limited exceptions, within 90 days
after it becomes critically undercapitalized. Any undercapitalized association
is also subject to the general enforcement authority of the OTS and the FDIC,
including the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an
association into a lower capital category and impose the restrictions applicable
to such category if the institution is engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures
on the Bank or the Company may have a substantial adverse effect on it'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.
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A savings association, such as the Bank, may make a capital
distribution equal to its net income to date plus the prior two years' net
income available for dividends, with prior notice to the OTS (but without prior
approval from the OTS) provided that it has a supervisory rating of 1 or 2, 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 and
receive its approval. 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. The Bank is in compliance with these
requirements.
Liquidity. All savings associations, including the Bank, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum average daily balance of its liquidity base during
the preceding calendar quarter or the average daily balance 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, 2000, the Bank was in
compliance with the requirement, with an overall liquid asset ratio of
19.23%.
Qualified Thrift Lender Test. All savings associations,
including the Bank, are required to meet a qualified thrift lender ("QTL") test
to avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code of 1986, as amended (the "Code"). Under either
test, such assets primarily consist of residential housing related loans and
investments. At September 30, 2000, 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
28
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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 1998 and received a rating of "satisfactory."
Transactions with Affiliates. Generally, transactions between
a savings association or its subsidiaries and its affiliates are required to be
on terms as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis. Certain transactions with
directors, officers or controlling persons are also subject to conflict of
interest regulations enforced by the OTS. These conflict of interest regulations
and other statutes also impose restrictions on loans to such persons and their
related interests. Among other things, such loans must 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 that has been in
existence since before May 4, 1999, 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.
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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, 2000, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the
FHLB of Indianapolis, which is one of 12 regional FHLBs that administer 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.
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As a member, the Bank is required to purchase and maintain
stock in the FHLB of Indianapolis. At September 30, 2000, the Bank had $ 341,000
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 over 8.0% and were 8.21% for fiscal 2000.
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 1997, 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.
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, 1996.
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, 2000, the
Bank's Excess for tax purposes totaled approximately $ 85,000.
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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, 2000, 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.
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Executive Officers of the Company and the Bank Who Are Not Directors
The following information as to the business experience during
the past five years is supplied with respect to executive officers of the
Company and the Bank who do 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 47, 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.
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, 2000. The net book value of the Company's premises and equipment
(including land, buildings and leasehold improvements and furniture, fixtures
and equipment) at September 30, 2000 was approximately $ 730,000.
Total Net Book
Approximate Value at
Date Square September 30,
Location Acquired Footage 2000
-------- -------- ------- -------------
Main Office:
200 East Van Trees Street
Washington, Indiana 47501 1980 8,900 $ 574,000
Branch Offices:
501 Main Street
Petersburg, Indiana 47567(1) 1979 2,760 $121,000
-------------------
(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 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, 2000
was approximately $ 40,000.
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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, 2000 the Company was not a defendant in any legal action.
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,
2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 34 of the attached Annual Report to Stockholders for
fiscal 2000 is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Pages 3 through 11 of the attached Annual Report to
Stockholders for fiscal 2000 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, 2000 attached hereto as
Exhibit 13, is incorporated herein by reference in this Annual Report on Form
10-KSB.
------------------------------------------------------- --------------------
Pages in Annual
Annual Report Section Report
Independent Auditors' Report 14
Consolidated Balance Sheets 15
as of September 30, 2000 and 1999
Consolidated Statements of Income for the Years 16
Ended September 30, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity for 17
Years Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows for the Years 18
Ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements 19-33
34
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Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information required by Item 304 of Regulation S-B
regarding the change in the Company's accountants was previously reported in the
Company's Current Report on Form 8-K filed on January 28, 2000, as amended on
Form 8-K/A filed on February 15, 2000 and on the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on January 15, 2001
filed on December 13, 2000.
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 15, 2001, a copy of which
has been filed with the SEC.
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
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, 2000,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated
herein by reference from the definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on January 15, 2001, a copy of which has been filed
with the SEC.
35
<PAGE>
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 15, 2001, a copy of which has been filed with the SEC.
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 15, 2001,
a copy of which has been filed with the SEC.
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 quarter ended
September 30, 2000.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HOME BUILDING BANCORP, INC.
Date: December 29, 2000 By: /s/ John B. Graham
-------------------- -------------------------------------------
John B. Graham, President, Chief Executive
Officer, and Director (Duly Authorized
Representative)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ John B. Graham /s/ James E. Scheid
------------------------------------------- -------------------------
John B. Graham, President, Chief James E. Scheid, Director
Executive Officer and Director
(Principal Executive and Operating Officer)
Date: December 29, 2000 Date: December 29, 2000
-------------------------------------- ----------------------
/s/ C. Darrell Deem /s/ Blake L. Chambers
------------------------- ---------------------------
C. Darrell Deem, Director Blake L. Chambers, Director
Date: December 29, 2000 Date: December 29, 2000
-------------------------------------- -----------------------
/s/ Larry G. Wilson /s/ Gregory L. Haag
------------------------- ---------------------------
Larry G. Wilson, Director Gregory L. Haag, Director
Date: December 29, 2000 Date: December 29, 2000
------------------------------------- ----------------------
/s/ Debra K. Shields
--------------------------------------------------------
Debra K. Shields, Vice President,
Chief Financial Officer and
Secretary (Principal Financial and Accounting Officer)
Date: December 29, 2000
--------------------------------------
37
<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 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.
10.2 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.
10.3 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 10 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
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of Kemper CPA Group LLC
27 Financial Data Schedule
99 Report of Kemper CPA Group LLC
38
