FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 0-28510
HOME FINANCIAL BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1975585
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
279 East Morgan Street, Spencer, Indiana 47460
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (812) 829-2095
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of August 29, 1997, was $5,196,949.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of August 29, 1997, was 469,526 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1997,
are incorporated by reference into Part II. Portions of the Proxy Statement for
the 1997 Annual Meeting of Shareholders are incorporated in Part III.
Exhibit Index on Page 33
Page 1 of 33 Pages
<PAGE>
HOME FINANCIAL BANCORP
Form 10-K
INDEX
Page
Forward Looking Statements.................................................... 1
PART I
Item 1. Business.................................................... 1
Item 2. Properties..................................................26
Item 3. Legal Proceedings...........................................27
Item 4. Submission of Matters to a Vote of Security Holders.........27
Item 4.5. Executive Officers of Registrant............................27
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................28
Item 6. Selected Financial Data.....................................28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation........................28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..29
Item 8. Financial Statements and Supplementary Data.................30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................30
PART III
Item 10. Directors and Executive Officers of Registrant..............30
Item 11. Executive Compensation......................................30
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................30
Item 13. Certain Relationships and Related Transactions..............30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...............................................31
Signatures..................................................32
<PAGE>
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-K are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-K
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
savings and financial institutions; substantial changes in financial markets;
changes in real estate values and the real estate market; regulatory changes; or
unanticipated results in pending legal proceedings.
PART I
Item 1. Business.
General
Home Financial Bancorp (the "Holding Company" and, together with the
Bank (as defined below), the "Company") is an Indiana corporation organized in
February, 1996, to become a bank holding company upon its acquisition of all the
issued and outstanding capital stock of Owen Community Bank, s.b. (the "Bank")
in connection with the Bank's conversion from mutual to stock form. The Holding
Company became the Bank's holding company on July 1, 1996; therefore, historical
financial and other data contained herein for periods prior to July 1, 1996
relate solely to the Bank, while historical financial and other data contained
herein for the periods after July 1, 1996 relate to the Company. The principal
asset of the Holding Company currently consists of 100% of the issued and
outstanding shares of common stock of the Bank. The Bank was organized under the
name Owen County Savings and Loan Association in 1911. In 1972, the Bank
converted to a federally chartered savings and loan and changed its name to Owen
County Federal Savings and Loan Association, and in 1989, the Bank converted to
a federally chartered savings bank known as Owen County Federal Savings Bank. In
1994, the Bank became an Indiana savings bank known as Owen Community Bank, s.b.
The Bank's principal business consists of attracting deposits from the general
public and originating long-term adjustable-rate loans secured primarily by
first mortgage liens on one- to four-family real estate. The Bank's deposit
accounts are insured up to applicable limits by the Savings Association
Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the
"FDIC").
<PAGE>
The Bank is the oldest continuously operating financial institution
headquartered in Owen County, Indiana. Management believes the Bank has
developed a solid reputation among its loyal customer base because of its
commitment to personal service and its strong support of the local community.
The Bank offers a number of consumer and commercial financial services. These
services include: (i) residential real estate loans; (ii) indemnification
mortgage loans ("ID Mortgage Loans"); (iii) mobile home loans; (iv) combination
land-mobile home loans ("Combo Loans"); (v) construction loans; (vi) share
loans; (vii) nonresidential real estate loans; (viii) multi-family loans; (ix)
installment loans; (x) NOW accounts; (xi) passbook savings accounts; and (xii)
certificates of deposit. The Company conducts business out of its main office
located in Spencer, Indiana. The Bank is, and historically has been, a
significant real estate mortgage lender in Owen County, Indiana, originating
approximately 12.8% of the mortgages recorded in Owen County during the calendar
year ended December 31, 1996.
The Bank historically has concentrated its lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
the Bank's loan origination activities, representing 57.2% of the Bank's total
loan portfolio at June 30, 1997. The Bank also offers mobile home loans,
multi-family mortgage loans, nonresidential real estate loans, Combo Loans and
consumer loans. Mobile home loans and Combo Loans totaled approximately 3.9% and
12.6% of the Bank's total loan portfolio at June 30, 1997, respectively.
Mortgage loans secured by multi-family properties and nonresidential real estate
totaled approximately 2.8% and 19.8%, respectively, of the Bank's total loan
portfolio at June 30, 1997. Consumer loans constituted approximately 1.8% of the
Bank's total loan portfolio at June 30, 1997.
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of
the Bank's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses, deferred loan costs and loans in
process.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Mortgage loans:
Residential............... $19,898 57.22% $18,240 66.12% $17,841 69.05%
Combo..................... 4,396 12.64 3,513 12.73 2,748 10.64
Nonresidential............ 6,896 19.83 2,544 9.22 2,933 11.35
Multi-family.............. 980 2.82 604 2.19 11 0.04
Mobile home loans............ 1,361 3.91 1,241 4.50 1,615 6.25
Commercial and
industrial loans.......... 634 1.82 350 1.27 --- .---
Consumer loans............... 612 1.76 1,094 3.97 691 2.67
------- ------ ------- ------ ------- ------
Gross loans receivable.. $34,777 100.00% $27,586 100.00% $25,839 100.00%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential real estate... $19,898 57.22 $18,240 66.12% $17,841 69.05%
Mobile home and land...... 4,396 12.64 3,513 12.73 2,748 10.64
Nonresidental real estate. 6,896 19.83 2,544 9.22 2,933 11.35
Multi-family real estate.. 980 2.82 604 2.19 11 0.04
Mobile home............... 1,361 3.91 1,241 4.50 1,615 6.25
Deposits.................. 122 0.35 217 0.79 225 0.87
Other security............ 1,124 3.23 1,227 4.45 466 1.80
------- ------ ------- ------ ------- ------
Gross loans receivable.. 34,777 100.00 27,586 100.00 25,839 100.00
Deduct:
Allowance for loan losses.... 231 0.66 150 0.54 57 0.22
Loans in process and
deferred loan costs....... 428 1.23 311 1.13 234 0.91
------- ------ ------- ------ ------- ------
Net loans receivable...... $34,118 98.11% $27,125 98.33% $25,548 98.87%
======= ===== ======= ===== ======= =====
Mortgage Loans:
Adjustable-rate........... $22,296 69.31% $16,415 65.92% $17,736 75.37%
Fixed-rate................ 9,874 30.69 8,486 34.08 5,797 24.63
------- ------ ------- ------ ------- ------
Total................... $32,170 100.00% $24,901 100.00% $23,533 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
<PAGE>
The following table sets forth certain information at June 30, 1997,
regarding the dollar amount of loans maturing in the Bank's loan portfolio based
on the contractual terms to maturity. Demand loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less. This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses. Management expects prepayments will cause
actual maturities to be shorter.
<TABLE>
<CAPTION>
Balance Due during years ended June 30,
Outstanding 2001 2003 2008 2013
at June 30, to to to and
1997 1998 1999 2000 2002 2007 2012 following
------- ---- --- ---- ---- ------ ------- -------
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential..................... $19,898 $ 9 $15 $ 45 $379 $2,798 $ 5,528 $11,124
Combo........................... 4,396 --- 6 --- 49 210 1,685 2,446
Nonresidential.................. 6,896 --- --- --- 247 --- 3,809 2,840
Multi-family.................... 980 --- --- --- --- --- 674 306
Mobile home loans.................. 1,361 1 7 25 122 712 494 ---
Commercial and industrial loans.... 634 --- --- --- --- 63 571 ---
Consumer loans..................... 612 358 16 50 94 64 30 ---
------- ---- --- ---- ---- ------ ------- -------
Total......................... $34,777 $368 $44 $120 $891 $3,847 $12,791 $16,716
======= ==== === ==== ==== ====== ======= =======
</TABLE>
The following table sets forth, as of June 30, 1997, the dollar amount
of all loans due after one year which have fixed interest rates and floating or
adjustable rates.
Due After June 30, 1998
--------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Mortgage loans:
Residential.................... $ 6,883 $13,006 $19,889
Combo ........................... 1,451 2,945 4,396
Nonresidential................. 1,336 5,560 6,896
Multi-family................... 561 419 980
Mobile home loans................. 1,360 --- 1,360
Commercial and industrial loans... 387 247 634
Consumer loans.................... 254 --- 254
------- ------- -------
Total........................ $12,232 $22,177 $34,409
======= ======= =======
One- to Four- Family Residential Loans. Residential loans consist
primarily of one- to four-family loans. Approximately $19.9 million, or 57.2% of
the Bank's portfolio of loans at June 30, 1997, consisted of one- to four-family
residential mortgage loans, of which approximately 65.3% had adjustable rates.
Pursuant to federal regulations, such loans must require at least semi-annual
payments and be for a term of not more than 40 years, and, if the interest rate
is adjustable, they must be correlated with changes in a readily verifiable
index.
<PAGE>
The Bank currently offers three (3) types of adjustable-rate one- to
four-family residential mortgage loans ("ARMs"). The Bank offers ARMs which
adjust annually and are indexed to the Auction Average of One Year U.S. Treasury
Bills as published monthly by the Federal Reserve Board ("FRB") (the "Average 1
Year T-Bill"). The maximum rate adjustment per year and over the life of the
loan for the Bank's one-year ARMs are 1%-1.5% and 4%-5%, respectively. These
ARMs are generally underwritten for terms of up to 25 years. The Bank also
offers three-year and five-year ARMs which are indexed to the National Average
Contract Interest Rate for the Purchase of Previously Occupied Homes as
published by the Federal Housing Finance Board ("FHFB") (the "National Average
Contract Rate") and have maximum rate adjustments per adjustment period and over
the life of the loan of 3% and 5%, respectively. The Bank's three-year and
five-year ARMs are generally underwritten for terms of up to 25 years. The Bank
will not generally lend more than $75,000 for any residential loan with a
Loan-to-Value Ratio of 90%.
The initial interest rate for each of the Bank's ARM loans is
determined by the Executive Committee of the Bank's Board of Directors based
upon prevailing rates in the Bank's market area and the Loan-to-Value Ratio. The
interest rates for loans with Loan-to-Value Ratios of greater than 80% and less
than or equal to 85% are typically 100 basis points higher than the same loans
with Loan-to-Value Ratios of 80% or less. The interest rates for loans with
Loan-to-Value Ratios of greater than 85% are generally 150 basis points higher
than the corresponding loans with Loan-to-Value Ratios of 80% or less. When the
initial interest rate is determined for an ARM loan, a margin is calculated by
subtracting the then-current index rate (i.e., the Average 1 Year T-Bill for
one-year ARMs or the National Average Contract Rate for three-year and five-year
ARMs) from the initial interest rate. Interest rate adjustments are thereafter
determined based on fluctuations of the index rate with a specific loan's margin
remaining constant.
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 borrowers may rise to the extent permitted by the terms
of the loan, thereby increasing the potential for default. Also, adjustable-rate
loans have features which restrict changes in interest rates on a short-term
basis and over the life of the loan. At the same time, the market value of the
underlying property may be adversely affected by higher interest rates.
The Bank also currently offers fixed-rate loans which provide for the
payment of principal and interest over a period not to exceed 20 years. At June
30, 1997, 34.6% of the Bank's residential mortgage loans had fixed rates of
interest.
The Bank does not currently originate residential mortgage loans if the
Loan-to-Value Ratio exceeds 90% and does not currently require private mortgage
insurance on its residential single-family mortgage loans. The maximum
Loan-to-Value Ratio for non-owner occupied one- to four-family residential
mortgage loans is 80%.
Substantially all of the residential mortgage loans that the Bank
originates include "due-on-sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
The Bank's residential mortgage loans are not originated on terms and
conditions and using documentation that conform with the standard underwriting
criteria required to sell such loans in the secondary market. The Bank generally
retains its loans in its portfolio and does not anticipate the need to sell its
non-conforming loans. See "-- Origination, Purchase and Sale of Loans."
At June 30, 1997, residential loans amounting to $558,000, or 1.60% of
total loans, were included in non-performing assets. See "-- Non-Performing and
Problem Assets."
The Bank offers mortgage loans for the construction of residential real
estate. Such loans are made with respect to owner-occupied residential real
estate and, in limited cases, to builders or developers constructing such
properties on a speculative investment basis (i.e., before the builder/developer
obtains a commitment from a buyer). Substantially all of such loans are made to
owners who are to occupy the premises.
<PAGE>
These loans are written as permanent mortgage loans such that only
disbursed principal and interest are payable during the construction phase,
which is typically limited to six (6) months. Inspections are made prior to any
disbursement under a such a loan.
Mortgage loans written for the construction of residential real estate,
like construction loans generally, involve a higher level of risk than loans
secured by existing properties. For example, if a project is not completed and
the borrower defaults, the Bank may have to hire another contractor to complete
the project at a higher cost. Also, a house may be completed, but not salable,
resulting in the borrower defaulting and the Bank taking title to the house.
The Bank also offers ID Mortgage Loans. ID Mortgage Loans are similar
to home equity loans in that such loans create a line of credit secured by a
real estate mortgage against which a borrower may draw, and are typically
written as second mortgage loans. The Bank generally writes its ID Mortgage
Loans so that all future indebtedness of a borrower is secured by the ID
Mortgage without the necessity of recording an additional security instrument.
ID Mortgage loans carry fixed rates and are generally written for terms not
exceeding 20 years. The maximum Loan-to-Value Ratio for ID Mortgage Loans is 90%
if the subject real estate is not encumbered by another mortgage or the Bank
holds the first mortgage on the subject real estate, and 80% if another lender
holds the first mortgage on the subject real estate. If an appraisal has been
completed on the subject property within 5 years, the Bank does not generally
require a new appraisal.
Combo Loans. At June 30, 1997, $4.4 million, or 12.6% of the Bank's
total loan portfolio, consisted of Combo Loans, of which approximately 67.0% had
adjustable rates. The Bank currently offers three (3) types of adjustable-rate
Combo Loans. The Bank's one-year adjustable-rate Combo Loans are indexed to the
Average One Year T-Bill and have maximum rate adjustments per year and over the
life of the loan of 1.5% and 3%, respectively. The Bank also offers three-year
and five-year adjustable-rate Combo Loans which are indexed to National Average
Contract Rate and have maximum rate adjustments per adjustment period and over
the life of the loan of 3% and 5%, respectively. The Bank's Combo Loans are
generally underwritten for terms of up to 25 years. The maximum Loan-to-Value
Ratio for a Combo Loan is 90%.
The initial interest rate for each of the Bank's Combo Loans is
determined by the Executive Committee of the Bank's Board of Directors based
upon prevailing rates in the Bank's market area and the Loan-to-Value Ratio. The
Bank generally establishes its base interest rates for Combo Loans at a level
100 basis points higher than the corresponding rate for a residential ARM loan.
The interest rates for Combo Loans with a Loan-to-Value Ratio of more than 80%
are typically 100 basis points higher than the same Combo Loans with
Loan-to-Value Ratios of 80% or less. An interest rate margin is determined for
each Combo Loan in the same manner as described above for residential ARM loans.
The Bank also offers fixed-rate Combo Loans with terms of 10 years, 15
years and 20 years. At June 30, 1997, 33.0% of the Bank's Combo Loans had fixed
rates of interest.
Mobile Home Loans. The Bank originates loans for the purchase of new
and used mobile homes. At June 30, 1997, approximately $1.4 million, or 3.9% of
the Bank's portfolio of loans, consisted of mobile home loans. The Company's
mobile home loans are fixed-rate loans with maximum terms of 15 years for new
mobile homes and 10 years for previously owned mobile homes. The maximum
Loan-to-Value Ratio for mobile home loans is 90%.
The Bank has emphasized mobile home loans because they generally have
shorter terms to maturity and higher yields than the Bank's residential mortgage
loans. In addition, the Bank is the primary lender in its market area making
mobile home loans, and mobile home lending significantly enhances the Bank's
compliance under the Community Reinvestment Act of 1977. The Bank anticipates
that it will continue to be an active originator of mobile home loans.
<PAGE>
Mobile home lending entails greater risk than traditional residential
mortgage lending. Loans secured by mobile homes involve more credit risk than
residential mortgage loans because of the type and nature of the collateral, the
fact that such loans generally are made to borrowers with low income levels, and
the fact that mobile homes tend to rapidly depreciate in value. In many cases,
any repossessed collateral for a defaulting mobile home loan will not provide an
adequate source of repayment of the outstanding loan balance because of improper
repair and maintenance of the underlying security. None of the Bank's mobile
home loans was included in non-performing assets at June 30, 1997.
Nonresidential Real Estate Loans. At June 30, 1997, $6.9 million, or
19.8% of the Bank's total loan portfolio, consisted of nonresidential real
estate loans, of which $1.2 million constituted loans secured by unimproved land
only. The nonresidential real estate loans included in the Bank's portfolio are
primarily secured by real estate such as a motel, a warehouse, a medical
facility, a funeral home and several churches. At June 30, 1997, $507,000, or
7.4% of the Bank's nonresidential loan portfolio, was secured by churches. The
Bank currently originates nonresidential real estate loans as one-year
adjustable-rate loans indexed to the prime rate with a margin of 1% to 3% above
such index. In addition, the maximum rate adjustment per adjustment period and
over the life of the loan is unrestricted. The Bank underwrites these loans on a
case-by-case basis and, in addition to its normal underwriting criteria, the
Bank evaluates the borrower's ability to service the debt from the net operating
income of the property. The largest nonresidential real estate loan on June 30,
1997 was $895,000. None of the Bank's nonresidential real estate loans was
included in non-performing assets at that date.
Loans secured by nonresidential real estate generally are larger than
one- to four-family residential loans and involve a greater degree of risk.
Nonresidential real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.
Multi-Family Loans. Approximately $980,000, or 2.8% of the Bank's
portfolio of loans at June 30, 1997, consisted of multi-family loans. The
largest multi-family loan at June 30, 1997 had a balance of $561,000 and was
secured by an apartment complex. All of the Bank's multi-family loans were fully
performing as of June 30, 1997. The Bank's multi-family loans are written for
maximum terms of 20 years, and the Bank does not originate multi-family loans if
the Loan-to-Value Ratio exceeds 80%.
Consumer Loans. The Bank's consumer loans, consisting primarily of
installment and share loans, aggregated $612,000 as of June 30, 1997, or 1.8% of
the Bank's total loan portfolio. The Bank consistently originates consumer loans
to meet the needs of its customers and to assist in meeting its asset/liability
management goals. All of the Bank's consumer loans are fixed-rate loans, and
substantially all are secured loans.
The Bank's installment loans are fixed-rate loans generally secured by
collateral, including vehicle titles, and are made for maximum terms of up to
five years (depending on the collateral). The Bank generally will not make
installment loans in amounts greater than $5,000.
The Bank's share loans are made up to 80% of the original account
balance and accrue at a rate of 2% over the underlying certificate of deposit
rate. Interest on share loans is paid semi-annually.
Consumer loans may entail greater credit 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. Further, 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. At June 30, 1997, consumer loans amounting to $4,000 were included
in non-performing assets. See "--Non-Performing and Problem Assets." There can
be no assurances, however, that additional delinquencies will not occur in the
future.
<PAGE>
Origination, Purchase and Sale of Loans. The Bank currently originates
its mortgage loans pursuant to its own underwriting standards which are not in
conformity with the standard criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). If it
desired to sell its mortgage loans, the Bank might therefore experience some
difficulty selling such loans quickly in the secondary market. The Bank has no
intention, however, of attempting to sell such loans. The Bank's ARMs vary from
secondary market criteria because, among other things, the Bank does not require
current property surveys in all cases, does not require escrow accounts for
taxes and insurance and does not permit the conversion of those loans to fixed
rate loans in the first three years of their term.
The Bank confines its loan origination activities primarily to Owen
County. At June 30, 1997, no loans were secured by property located outside of
Indiana. The Bank's loan originations are generated from referrals from real
estate dealers and existing customers, and newspaper and periodical advertising.
All loan applications are processed and underwritten at the Bank's main office.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. Mortgage loans up to $150,000 and mobile home loans may be approved
by the Executive Committee. All mortgage loans for more than $150,000 must be
approved in advance by the Board of Directors. Consumer loans up to $5,000 may
be approved by the Bank's Senior Installment Loan Officer. Consumer loans for
more than $5,000 must be approved by the Executive Committee.
The Bank generally requires appraisals on all property securing its
loans and requires title insurance and a valid lien on its mortgaged real
estate. Appraisals for residential real property valued at less than $250,000
are performed by an in-house appraiser. Appraisals for residential properties
valued in excess of $250,000 and appraisals for all nonresidential real estate
are performed by an appraiser who is a state-licensed residential appraiser. The
Bank requires fire and extended coverage insurance in amounts at least equal to
the principal amount of the loan and requires vandalism coverage on all mobile
home loans. It also requires flood insurance to protect the property securing
its interest if the property is in a flood plane. The Bank does not require
escrow accounts to be established by its borrowers for the payment of insurance
premiums or taxes and does not require private mortgage insurance for its loans.
The Bank's underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
The Bank historically has sold participations in its mortgage loans on
a limited number of occasions to ensure compliance with the loans-to-one
borrower restrictions. See "Regulation -- Loans-to-One Borrower." The Bank also
occasionally purchases participations in nonresidential real estate and
multi-family loans from other financial institutions. However, at June 30, 1997,
the Bank did not hold any participation loans.
<PAGE>
The following table shows loan origination, purchase and repayment
activity for the Bank during the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended
June 30,
------------------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable
at beginning of period.................. $27,586 $25,839 $21,540
------- ------- -------
Originations:
Mortgage loans:
Residential........................... 7,967 7,018 7,099
Other................................. 4,380 664 48
------- ------- -------
Total mortgage loans................ 12,347 7,682 7,147
------- ------- -------
Mobile home loans....................... 78 146 286
Consumer loans:
Installment........................... 915 805 578
Share................................. 131 157 132
------- ------- -------
Total consumer loans................ 1,124 962 710
------- ------- -------
Total originations............. 13,471 8,790 8,143
Purchases (sales) of participation loans... --- (250) 62
Repayments and other deductions............ 6,280 6,793 3,906
------- ------- -------
Gross loans receivable at end of period. $34,777 $27,586 $25,839
======= ======= =======
</TABLE>
Origination and Other Fees. The Bank realizes income from origination
fees, late charges, checking account service charges, and fees for other
miscellaneous services. The Bank does not currently charge any points on its
loans. However, the Bank currently charges $300 plus closing costs on its
mortgage loans. Late charges are generally assessed if payment is not received
within a specified number of days after it is due. The grace period depends on
the individual loan documents.
The Bank does not maintain any automated teller machines ("ATMs") but
offers ATM cards to its customers. The Bank's ATM cards permit customers to use
ATMs operating in the MAC(R) regional network and the CIRRUS(R) nationwide
network. The Company does not expect to derive any income from the ATM cards.
Mortgage-Backed Securities. At June 30, 1997, the Bank had $788,000 of
mortgage-backed securities outstanding, all of which were classified as
available for sale. These fixed-rate mortgage-backed securities may be used as
collateral for borrowings and, through repayments, as a source of liquidity.
Mortgage-backed securities generally offer yields above those available for
investments of comparable credit quality and duration.
The following table sets forth the amortized cost and fair value of the
Bank's mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
1997 1996 1995
------------------- -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Held to maturity........ $ --- $ --- $ --- $ --- $1,477 $1,462
Available for sale...... 788 793 3,151 3,119 --- ---
---- ---- ------ ------ ------ ------
Total mortgage-backed
securities............ $788 $793 $3,151 $3,119 $1,477 $1,462
==== ==== ====== ====== ====== ======
</TABLE>
<PAGE>
The following table sets forth the amount of mortgage-backed securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at June 30, 1997.
<TABLE>
<CAPTION>
Amount at June 30, 1997, which matures in
-------------------------------------------------------------------------
Less than 1 year Two through five years Over five years
-------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Value Yield
(In thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities
available for sale.... $41 8.5% $--- .---% $747 7.5%
</TABLE>
The following table sets forth the changes in the Bank's
mortgage-backed securities portfolio for the years ended June 30, 1997, 1996 and
1995.
For the Year Ended, June 30,
-----------------------------------------
1997 1996 1995
------ ------ ------
(In thousands)
Beginning balance................. $3,119 $1,477 $1,636
Purchases......................... 899 1,918 ---
Sales ........................... (2,904) --- ---
Monthly repayments................ (366) (248) (161)
Premium and discount
amortization, net.............. 10 --- 2
Unrealized loss on securities
available for sale............. 5 (28) ---
------ ------ ------
Ending balance.................... $ 793 $3,119 $1,477
====== ====== ======
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Bank on a regular basis and are
placed on a non-accrual status when the loans become contractually past due 90
days or more. It is the policy of the Bank that all earned but uncollected
interest on all loans be reviewed monthly to determine if any portion thereof
should be classified as uncollectible for any loan past due less than 90 days.
Delinquency notices are sent three times per month with respect to all mortgage
loans for which payments have not been received. Contact by phone or in person
is made, if feasible, with respect to all such loans. When loans are 40 days in
default, an additional delinquency notice is sent and personal contact is made
with the borrower to establish an acceptable repayment schedule. When loans are
60 days in default, contact is again made with the borrower to establish an
acceptable repayment schedule. The Bank also provides free in-house credit
counseling to all borrowers. Management is authorized to commence foreclosure
proceedings for any loan upon making a determination that it is prudent to do
so. All loans for which foreclosure proceedings have been commenced are placed
on non-accrual status.
Non-performing assets. At June 30, 1997, $562,000, or 1.32% of the
Company's total assets, were non-performing loans (loans delinquent more than 90
days and non-accruing loans) compared to $359,000, or 0.91%, of total assets at
June 30, 1996. At June 30, 1997, residential loans and consumer loans accounted
for 99% and 1%, respectively, of non-performing loans. There were no
non-accruing investments at June 30, 1997. As of June 30, 1997, the Bank held
$177,000 of Real Estate Owned ("REO") properties and $10,000 other repossessed
properties.
<PAGE>
The table below sets forth the amounts and categories of the Bank's
non-performing assets.
At June 30,
1997 1996 1995
(In thousands)
Non-accruing loans (1)................... $ 562 $ 359 $ 100
Total non-performing assets.............. 749 408 100
Non-performing loans to total loans...... 1.65% 1.32% 0.39%
Non-performing assets to total assets.... 1.76% 1.03% 0.32
- -------------
(1) The Bank generally places loans on a non-accruing status when the loans
become contractually past due 90 days or more. At June 30, 1997, $558,000
of non-accruing loans were residential loans and $4,000 were consumer
loans. Additional interest income that would have been recorded had income
on nonaccruing loans been considered collectible and accounted for in
accordance with their original terms was $21,000 for the year ended June
30, 1997.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------
1997 1996 1995
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent
for (1):
30-89 days.......... 37 $ 905 2.65% 45 $ 993 3.64% 33 $730 2.85%
90 days and over.... 18 562 1.65 14 359 1.32 6 100 0.39
-- ------ ---- -- ------- ---- -- ---- ----
Total delinquent
loans.......... 55 $1,467(2) 4.30% 59 $ 1,352 4.96% 39 $830 3.24%
== ====== ==== == ======= ==== == ==== ====
</TABLE>
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
(2) Of such amount, $1,381,000 consists of residential real estate loans
and $86,000 consists of nonresidential real estate and consumer loans.
Classified assets. The Bank's Asset Classification Policy provides for
the classification of loans and other assets such as debt and equity securities
considered to be of lesser quality as "substandard," "doubtful" or "loss"
assets. 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 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 do possess
weaknesses are required to be designated "special mention" by management.
<PAGE>
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
At June 30, 1997, the aggregate amount of the Bank's classified assets
and of the Bank's general and specific loss allowances were as follows:
At June 30, 1997
----------------
(In thousands)
Substandard loans................. $590
Doubtful loans.................... ---
Loss loans........................ ---
Special mention loans............. 371
-----
Total classified loans......... $ 961
=====
General loss allowances........... $ 231
Specific loss allowances.......... ---
-----
Total allowances............... $ 231
=====
The Company regularly reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations. Not
all of the Company's classifed assets constitute non-performing assets.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
loan losses, which is charged to earnings. The provision for loan losses is
determined in conjunction with management's review and evaluation of current
economic conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, the Bank's allowance for loan losses is adequate to absorb anticipated
future losses from loans at June 30, 1997. However, there can be no assurance
that regulators, when reviewing the Bank's loan portfolio in the future, will
not require increases in its allowances for loan losses or that changes in
economic conditions will not adversely affect the Bank's loan portfolio.
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five (5) one-year periods ended
June 30, 1997.
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at beginning
of period................................ $150 $ 57 $ 26 $ 12 $ 13
---- ---- ---- ---- ----
Less charge offs:
Consumer loans.............................. (4) (1) (6) (1) (8)
Add recoveries:
Consumer loans.............................. --- --- 1 1 ---
---- ---- ---- ---- ----
Net (charge-offs) recoveries................ (4) (1) (5) --- (8)
Provisions for losses on loans.............. 85 94 36 14 7
---- ---- ---- ---- ----
Balance of allowance at end of period....... $231 $150 $ 57 $ 26 $ 12
==== ==== ==== ==== ====
Net charge-offs to total average
loans receivable for period.............. 0.01% ---% 0.02% ---% 0.04%
Allowance at end of period to
net loans receivable at end
of period (1)............................ 0.67 0.55% 0.22% 0.12% 0.06%
Allowance to total non-performing
loans at end of period................... 41.10 41.78% 57.00% 108.33% .---%%
</TABLE>
(1) Total loans less net loans in process and deferred loan costs.
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of the Bank's allowance for loan losses at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
1997 1996 1995
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
of total of total of total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Residential......................... $ 25 57.22% $ 18 66.12% $--- 69.05%
Combo............................... 24 12.64 20 12.73 7 10.64
Nonresidential...................... 23 19.83 20 10.91 7 11.35
Multi-family........................ --- 2.82 --- 0.50 --- 0.04
Mobile home loans................... 25 3.91 25 4.50 12 6.25
Commercial and industrial
loans............................ 5 1.82 --- 1.27 --- ---
Consumer loans...................... 14 1.76 27 3.97 17 2.67
Unallocated......................... 115 --- 40 --- 14 ---
---- ------ ---- ------ --- ------
Total.......................... $231 100.00% $150 100.00% $57 100.00%
==== ====== ==== ====== === ======
</TABLE>
<PAGE>
Investments and FHLB Stock
The Company's investment portfolio (excluding mortgage-backed
securities) consists of U.S. government agency and treasury securities, equity
securities and Federal Home Loan Bank ("FHLB") stock. At June 30, 1997,
approximately $1.3 million, or 2.9% of the Company's total assets, consisted of
such investments. All of the Company's securities, except for FHLB stock, were
classified as available for sale at June 30, 1997.
The following table sets forth the amortized cost and fair value of the
Company's investments at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
1997 1996 1995
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale (1):
Federal agencies......................... $ 925 $931 $1,100 $1,105 $ 934 $ 934
State and municipal...................... --- --- 678 677 --- ---
Marketable equity securities............. 344 378 --- --- --- ---
------ ------ ------ ------ ------ ------
Total securities
available for sale................... 1,269 1,309 1,778 1,782 934 934
------ ------ ------ ------ ------ ------
Securities held to maturity:
Federal agencies......................... --- --- --- --- 1,477 1,462
State and municipal...................... --- --- --- --- 350 346
------ ------ ------ ------ ------ ------
Total securities
held to maturity..................... --- --- --- --- 1,827 1,808
------ ------ ------ ------ ------ ------
FHLB stock (2).............................. 500 500 360 360 250 250
------ ------ ------ ------ ------ ------
Total investments...................... $1,769 $1,809 $2,138 $2,142 $3,011 $2,992
====== ====== ====== ====== ====== ======
</TABLE>
- -------------
(1) In accordance with SFAS No. 115, securities available for sale are
recorded at fair value in the financial statements.
(2) Fair value approximates carrying value.
The following table sets forth investment securities excluding FHLB
stock and marketable equity securities which mature during each of the periods
indicated and the weighted average yields for each range of maturities at June
30, 1997.
<TABLE>
<CAPTION>
Amount at June 30, 1997, which matures in
----------------------------------------------------------------
One Year One to
or Less Five Years
-------------------------- --------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities available for sale :
Federal agencies..................... $ --- ---% $100 7.84%
Treasuries........................... 475 6.00 350 6.25
------- ----
Total investments.................. $ 475 6.00% $450 6.60%
======= ====
</TABLE>
<PAGE>
Sources of Funds
General. Deposits have traditionally been the Bank's primary source of
funds for use in lending and investment activities. In addition to deposits, the
Bank derives funds from scheduled loan payments, loan prepayments, retained
earnings and income on earning assets. While scheduled loan payments and income
on earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition. Borrowings from the FHLB of Indianapolis
may be used in the short-term to compensate for reductions in deposits or
deposit inflows at less than projected levels. The Bank rarely borrows on a
longer-term basis, for example, to support expanded activities or to assist in
its asset/liability management.
Deposits. Deposits are attracted, principally from within Owen County,
through the offering of a broad selection of deposit instruments including
fixed-rate certificates of deposit, NOW and other transaction accounts, and
savings accounts. The Bank does not actively solicit or advertise for deposits
outside of Owen County. Substantially all of the Bank's depositors are residents
of that county. Deposit account terms vary, with the principal differences being
the minimum balance required, the amount of time the funds remain on deposit and
the interest rate. The Bank does not pay a fee for any deposits it receives.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and applicable regulations. The Bank
relies, in part, on customer service and long-standing relationships with
customers to attract and retain its deposits, but also closely prices its
deposits in relation to rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its passbook, NOW and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificates of deposit, and the
rates paid on these deposits, have been and will continue to be significantly
affected by market conditions.
An analysis of the Bank deposit accounts by type, maturity, and rate at
June 30, 1997, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1997 Deposits Rate
- --------------- ------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Withdrawable:
Savings accounts...................... $ 10 $ 2,942 11.25% 3.00%
NOW and other transaction accounts....... 50 3,682 14.08 3.13
------- ------
Total withdrawable.................. 6,624 25.33 3.07
------- ------
Certificates (original terms):
91 days............................... 1,000 156 0.60 4.11
6 months.............................. 1,000 664 2.54 4.82
12 months............................. 1,000 6,471 24.74 5.32
24 months............................. 1,000 3,256 12.43 6.26
30 months............................. 1,000 3,030 11.58 5.87
36 months............................. 1,000 506 1.93 6.21
48 months............................. 1,000 815 3.12 5.56
60 months............................. 1,000 4,614 17.64 5.96
IRAs (orginal terms):
12 months............................. 1,000 7 0.03 5.25
36 months............................. 1,000 7 0.03 6.00
60 months............................. 1,000 7 0.03 6.00
------- ------
Total certificates and IRAs......... 19,533 74.67 5.72
------- ------
Total deposits...................... $26,157 100.00% 5.05%
======= ======
</TABLE>
<PAGE>
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank's at the dates indicated:
Year Ended June 30,
--------------------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
4.00% and under.... $ 55 $ 276 $ 1,169
4.01 - 6.00 %...... 14,174 13,402 10,053
6.01 - 8.00%....... 5,304 4,968 5,507
------- ------- -------
Total ............ $19,533 $18,646 $16,729
======= ======= =======
The following table represents, by various interest rate categories,
the amounts of time deposits maturing during each of the three years following
June 30, 1997, and the total amount maturing thereafter. Matured certificates
which have not been renewed as of June 30, 1997, have been allocated based upon
certain rollover assumptions:
<TABLE>
<CAPTION>
Amounts At
June 30, 1997, Maturing in
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
<S> <C> <C> <C> <C>
4.00% and under.. $ 47 $ --- $ --- $ ---
4.01 - 6.00 %.... 9,485 2,797 1,244 656
6.01-8.00%....... 1,636 832 2,268 568
------- ------ ------ ------
Total .......... $11,168 $3,629 $3,512 $1,224
======= ====== ====== ======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1997.
Maturity (In thousands)
-------- --------------
Three months or less....................................... $ 499
Greater than three months
through six months.................................... 100
Greater than six months
through twelve months................................. 407
Over twelve months......................................... 2,473
------
Total................................................. $3,479
======
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposits programs offered by the Bank at the dates
indicated, and the amount of increase or decrease in such deposits as compared
to the previous period.
<TABLE>
<CAPTION>
Deposit Activity
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from Balance at
June 30, % of June 30, June 30, % of June 30, June 30, % of
1997 Deposits 1996 1996 Deposits 1995 1995 Deposits
---- -------- ---- ---- -------- ---- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts..................... $2,942 11.25% $(4,742)$ 7,684 26.75% $3,969 $ 3,715 16.51%
NOW accounts......................... 3,682 14.08 1,286 2,396 8.34 340 2,056 9.14
------- ------ ------ ------- ------ ------ ------- ------
Total withdrawable................. 6,624 25.33 (3,456) 10,080 35.09 4,309 5,771 25.65
Certificates (original terms):
91 days.............................. 156 0.60 24 132 0.46 58 74 .33
6 months............................. 664 2.54 (94) 758 2.64 (187) 945 4.20
12 months............................ 6,471 24.74 (1,553) 8,023 27.93 939 7,084 31.48
24 months............................ 3,256 12.43 694 2,562 8.92 1,890 672 2.99
30 months............................ 3,030 11.58 1,536 1,494 5.20 (332) 1,826 8.12
36 months............................ 506 1.93 169 337 1.17 (48) 385 1.71
48 months............................ 815 3.12 (240) 1,055 3.67 (543) 1,598 7.10
60 months............................ 4,614 17.64 329 4,285 14.92 140 4,145 18.42
IRAs (original terms):
12 months............................ 7 0.03 -- -- .-- --- --- .--
36 months............................ 7 0.03 -- -- .-- --- --- .--
60 months............................ 7 0.03 -- -- .-- --- --- .--
------- ------ ------ ------- ------ ------ ------- ------
Total certificates and IRAs........ 19,533 74.67 865 18,646 64.91 1,917 16,729 74.35
------- ------ ------ ------- ------ ------ ------- ------
Total deposits................... $26,157 100.00% (2,591) $28,726 100.00% $6,226 $22,500 100.00%
======= ====== ====== ======= ====== ====== ======= ======
</TABLE>
During fiscal year 1997, the Bank began offering to its customers a new
deposit product called the "Money Management Account." The Money Management
Account is similar to a money market checking account, but customers do not have
check writing privileges. Funds may be transferred from non-interest-bearing
accounts or interest-bearing accounts paying lower rates into the Money
Management Account. Funds may also be transferred from the Money Management
Account into other accounts at the Bank when such funds are needed by the
customer. The number of fund transfers per month is limited by the Bank, and the
Money Management Account has a minimum required balance of $5,000. The Bank also
began offering individual retirement account ("IRA") certificates of deposit
during fiscal year 1997.
Borrowings. The Bank focuses on generating loans by utilizing the best
source of funding from deposits, investments or borrowings. At June 30, 1997,
the Bank had $9.0 million in borrowings from the FHLB of Indianapolis which
mature on various dates primarily during the years 1997 through 2005 and have
interest rates ranging from 5.55% to 6.86%. The Bank does not anticipate any
difficulty in obtaining advances appropriate to meet its requirements in the
future. The Bank had $22.7 million in eligible assets available as collateral
for advances from the FHLB of Indianapolis as of June 30, 1997. Based on the
Bank's blanket collateral agreements, advances from the FHLB of Indianapolis
must be collateralized by 160% of eligible assets. Therefore, the Bank's
eligible collateral would have supported approximately $14.2 million in advances
from the FHLB of Indianapolis as of June 30, 1997. However, the Bank's Board of
Directors has by resolution limited the amount of authorized borrowings to $13.0
million at June 30, 1997.
<PAGE>
The following table presents certain information relating to the Bank's
FHLB borrowings for the years ended June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
At or for the Year
Ended June 30,
-------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB Advances:
Average balance outstanding............ $ 7,725 $5,043 $3,321
Maximum amount outstanding at any
month-end during the period.......... 10,000 7,200 5,000
Weighted average interest rate
during the period.................... 6.30% 6.21% 6.03%
Weighted average interest rate
at end of period..................... 6.29% 6.08 6.36
</TABLE>
Service Corporation Subsidiary
BSF, Inc., the Bank's service corporation subsidiary ("BSF"), was
organized in 1989 and has historically engaged in the purchasing and developing
of large tracts of real estate. After land was acquired, BSF subdivided the real
estate into lots, made improvements such as streets and sold individual lots,
usually on contract. Each subdivision has separate restrictive covenants, but
most permit mobile or modular homes. Each of BSF's subdivisions is described in
detail below.
On April 6, 1989, BSF purchased the 128 acre 10 O'Clock Line
subdivision in Owen County for $110,000. The purchase was funded by a capital
infusion from the Bank. At that time, the appraised value of the land was
$180,000. The property was divided into 19 separate tracts and sold on contract
to buyers. The actual selling price per acre of tracts sold was slightly higher
than the original predicted selling price. The total sales price for all tracts
of land was over $300,000.
A second piece of property in Owen County totalling approximately 160
acres, the Autumn Hill Subdivision, was purchased on contract by BSF for $96,000
on September 21, 1990. The appraised value at the time of purchase was $110,000.
The area was divided into 23 separate tracts of land, all of which had been sold
as of June 30, 1997, for an aggregate price of $268,850.
On May 21, 1991, BFS purchased a 215 acre tract of heavily wooded land
in Greene County, Indiana, now known as the Greene Woods subdivision, for
$92,500. BSF divided this tract into sixteen parcels, all of which had been sold
on contract at June 30, 1996, and built one large lake and three small lakes in
this subdivision. As of June 30, 1997, eleven of the Greene Woods contracts had
been paid in full, and title to the corresponding parcels had been transferred
to the purchasers. The aggregate sales price for the sixteen parcels in the
Greene Woods subdivision was $257,605.
On May 8, 1992, BFS purchased approximately 60 acres of land now known
as the Watkins Farm subdivision for $32,000. This property is also located in
Greene County, Indiana. Prior to dividing this parcel into the three existing
tracts of land, BSF cleared and sold approximately $26,000 of timber. As of June
30, 1997, BSF had sold two of these tracts for cash and the other tract on
contract. The aggregate sales price for these three parcels totalled $86,157.
On May 21, 1993, BSF purchased approximately 16 acres of land in Owen
County for $58,500. BSF divided this property, now known as the County Line
East, subdivision, into sixteen separate parcels and installed underground
power, telephone, cable television and water lines. As of June 30, 1997, 15
parcels had been sold for an aggregate sales price of $366,757.
On November 29, 1993, BSF purchased approximately thirty acres of land
located in Owen County for $20,359. This land, now known as the Coon Path
subdivision, was divided into ten separate tracts of land, three of which
remained unsold at June 30, 1997. The aggregate sales price for the seven
parcels which had been sold at June 30, 1997 totaled $73,850. At June 30, 1996,
BSF's total investment in the Coon Path subdivision was approximately $27,432.
<PAGE>
On February 6, 1992, BSF purchased four contracts with an aggregate
balance of $123,875 from an Owen County couple for a discounted principal amount
of $87,500. At June 30, 1997, only one of such contracts remained outstanding.
BSF also held a second contract at June 30, 1997, which was purchased from a
probate estate in 1992.
BSF, from time to time, keeps a number of its tracts for mobile home
repossession. BSF purchases repossessed mobile homes from the Bank at book
value. The mobile homes are then placed on the vacant tracts of land and sold by
BSF, thereby protecting the Bank from related losses. Currently, the Bank has no
mobile homes on lots waiting for sale.
BSF pays the Bank rent of $500 per month for the use of its facilities
and management and staff support. The operations of BSF are managed by the
Bank's and the Holding Company's Chairman, Frank R. Stewart. All of the Bank's
directors serve as directors of BSF, and BSF's executive officers are as
follows:
Frank R. Stewart President
Robert W. Raper Vice President
Charles W. Chambers Secretary and Treasurer
In connection with the Bank's conversion to an Indiana stock savings
bank, the FDIC required the Bank to (i) immediately cease BSF's land
acquisitions, (ii) divest BSF's non-conforming real estate holdings within five
years (or by November 16, 2000), provided, however, the Bank is not precluded
from requesting an extension of the divestiture period, and (iii) maintain
capital at levels sufficient to classify the Bank as a well-capitalized
institution. The FDIC's authorization for the Bank and BSF to undertake the
required divestiture of BSF's non-conforming real estate holdings over a
five-year period is conditioned on, among other things, BSF continuing to be
satisfactorily capitalized and operated separately for the Bank, and the Bank
and BSF complying with Sections 23A and 23B of the Federal Reserve Act in
connection with future transactions between the Bank and BSF. BSF is currently
completing the divestiture of its real estate holdings. It is anticipated that
this divestiture will be accomplished through the sale of the parcels to BSF's
contract purchasers who will obtain mortgage loans from the Bank to facilitate
their purchase of the parcels. As parcels are purchased by BSF's contract
purchasers, BSF and such purchasers will terminate the corresponding land
contracts. The Bank currently anticipates that all non-conforming real estate
will be sold prior to November 16, 2000 as required by the FDIC.
At June 30, 1997, the Bank's aggregate investment in BSF was $417,000.
The consolidated statements of income of the Bank and its subsidiary included
elsewhere herein include the operations of BSF. All significant intercompany
balances and transactions have been eliminated in the consolidation.
The following are condensed balance sheets for BSF at June 30, 1997,
1996 and 1995, and a condensed income statement for BSF for the years ended June
30, 1997, 1996 and 1995.
Condensed Balance Sheet
June 30,
1997 1996 1995
---- ---- ----
(In thousands)
Assets:
Cash.......................... $ 29 $ 42 $ 57
Loans, net.................... 370 457 644
Land acquired for development. 21 172 188
---- ---- ----
Total assets.............. $420 $671 $889
==== ==== ====
Liabilities:
Other borrowings.............. $ --- $ --- $ 29
Other liabilities............. 3 16 159
---- ---- ----
Total liabilities......... 3 16 188
Equity Capital................... 417 655 701
---- ---- ----
Total liabilities and
equity capital.......... $420 $671 $889
==== ==== ====
<PAGE>
Condensed Income Statement
June 30,
1997 1996 1995
---- ---- ----
(In thousands)
Interest income.................. $44 $84 $88
Interest expense................. --- 1 9
---- ---- ----
Net interest income........... 44 83 79
---- ---- ----
Income from sale of real estate.. 31 57 78
---- ---- ----
Non-interest expense:
Salaries and employee benefits 4 4 4
Printing and office supplies.. 6 8 7
Management fees............... --- 23 33
Other expenses................ 8 7 14
---- ---- ----
Total non-interest expense 18 42 58
---- ---- ----
Income before income tax......... 57 98 99
Income tax expense............ 22 39 40
---- ---- ----
Net income................ $35 $59 $59
==== ==== ====
Employees
As of June 30, 1997, the Bank employed 16 persons on a full-time basis
and four persons on a part-time basis. None of the Bank's employees is
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
The Bank's employee benefits for full-time employees include, among
other things, a Pentegra (formerly known as Financial Institutions Retirement
Fund) defined benefit pension plan ("Pension Plan"), a Pentegra thrift plan, and
major medical, dental, and short-term and long-term disability insurance. As
part of the conversion to stock form, the Bank established the Employee Stock
Ownership Plan and Trust ("ESOP") and the Management Recognition and Retention
Plan and Trust ("RRP"). Both the ESOP and RRP are employee benefit plans
designed to provide directors and employees of the Bank and the Holding Company
with ownership interest in the Company.
Employee benefits are considered by management to be competitive with
those offered by other financial institutions and major employers in the Bank's
area.
COMPETITION
The Bank originates most of its loans to and accepts most of its
deposits from residents of Owen County, Indiana. The Bank is the oldest
continuously operating financial institution headquartered in Owen County,
Indiana.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings institutions,
credit unions, and certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers that provide similar
services in Owen County. The Bank also competes with money market funds with
respect to deposit accounts and with insurance companies with respect to
individual retirement accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of savings associations in
Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by the
Company.
<PAGE>
In addition, The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to
acquire banks in other states and, with state consent to certain limitations,
allows banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana recently passed a law establishing interstate
branching provisions for Indiana state chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion and authorizes out-of-state banks meeting certain requirements to
branch into Indiana by merger or de novo expansion. The Indiana Branching Law
became effective March 15, 1996, provided that interstate mergers and de novo
branches are not permitted to out of state banks unless the laws of their home
states permit Indiana banks to merge or establish de novo branches on a
reciprocal basis.
This new legislation may also result in increased competition for the Company.
Because of recent changes in federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings associations
have certain powers to acquire savings associations based in other states, and
Indiana law expressly permits reciprocal acquisition of Indiana savings
associations. In addition, Federal savings associations are permitted to branch
on an interstate basis. See "Regulation--Acquisitions or Dispositions and
Branching."
The primary factors in competing for deposits are interest rates and
convenience of office locations. The Bank competes for loan originations
primarily through the efficiency and quality of services it provides borrowers
and through interest rates and loan fees it charges. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors which
are not readily predictable.
REGULATION
Bank Holding Company Regulation
The Holding Company is registered as a bank holding company, and is
subject to the regulations of the FRB under the Bank Holding Company Act of
1956, as amended ("BHCA"). Bank holding companies are required to file periodic
reports with, and are subject to periodic examination by, the FRB. The FRB has
issued regulations under the BHCA requiring a bank holding company to serve as a
source of financial and managerial strength to its subsidiary banks. It is the
policy of the FRB that, pursuant to this requirement, a bank holding company
should stand ready to use its resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity. Additionally,
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA"), a bank holding company is required to guarantee the compliance of
any insured depository institution subsidiary that may become "undercapitalized"
(as defined in the statute) with the terms of any capital restoration plan filed
by such subsidiary with its appropriate federal banking agency up to the lesser
of (i) an amount equal to 5% of the institution's total assets at the time the
institution became undercapitalized; or (ii) the amount that is necessary (or
would have been necessary) to bring the institution into compliance with all
applicable capital standards as of the time the institution fails to comply with
such capital restoration plan. Under the BHCA, the FRB has the authority to
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
FRB's determination that such activity or control constitutes a serious risk to
the financial soundness and stability of any bank subsidiary of the bank holding
company.
The Holding Company is prohibited by the BHCA from acquiring direct or
indirect control of more than 5% of the outstanding shares of any class of
voting stock or substantially all of the assets of any bank or merging or
consolidating with another bank holding company without prior approval of the
FRB. Additionally, the Holding Company is prohibited by the BHCA from engaging
in or from acquiring ownership or control of more than 5% of the outstanding
shares of any class of voting stock of any company engaged in a nonbanking
business unless such business is determined by the FRB to be so closely related
to banking as to be a proper incident thereto.
<PAGE>
Capital Adequacy Guidelines for Bank Holding Companies
The FRB is the federal regulatory and examining authority for bank
holding companies. The FRB has adopted capital adequacy guidelines for bank
holding companies.
Bank holding companies are required to comply with the FRB's risk-based
capital guidelines which require a minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities such as
standby letters of credit) of 8%. At least half of the total required capital
must be "Tier I capital," consisting principally of common stockholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the general loan loss allowance. In addition to the risk-based capital
guidelines, the FRB has adopted a Tier I (leverage) capital ratio under which
the bank holding company must maintain a minimum level of Tier I capital to
average total consolidated assets of 3% in the case of bank holding companies
which have the highest regulatory examination ratings and are not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a ratio of at least 1% to 2% above the stated minimum.
Bank Regulation
The Bank is organized under the laws of the State of Indiana and as
such is subject to the supervision of the Department of Financial Institutions
("DFI"), whose examiners conduct periodic examinations of state banks. In 1994,
the Bank converted from a federal savings bank to an Indiana savings bank. Prior
to such conversion, it was subject to regulation at the federal level primarily
by the Office of Thrift Supervision ("OTS"). The Bank is not a member of the
Federal Reserve System, so its principal federal regulator is the FDIC, which
also conducts periodic examinations of the Bank. The Bank's deposits continue to
be insured by the SAIF administered by the FDIC and are subject to FDIC's rules
and regulations respecting the insurance of deposits. See "-- Insurance of
Deposits".
Both federal and state law extensively regulate various aspects of the
banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires banks, among other things, to make deposited funds available
within specified time periods.
Insured state-chartered banks are prohibited under FedICIA from
engaging as principal in activities that are not permitted for national banks,
unless: (i) the FDIC determines that the activity would pose no significant risk
to the appropriate deposit insurance fund; and (ii) the bank is, and continues
to be, in compliance with all applicable capital standards. As a result of its
conversion to an Indiana savings bank, the Bank is required to cease the real
estate development operations and divest the non-conforming real estate holdings
of BSF. See "Business -- Service Corporation Subsidiary."
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
banks. The FHFB, independent agency, controls the FHLB System including the FHLB
of Indianapolis. The FHLB System provides a central credit facility primarily
for member savings and loan associations and savings banks and other member
financial institutions. The Bank is required to hold shares of capital stock in
the FHLB of Indianapolis in an amount at least equal to the greater of 1% of the
aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations at the end of each calendar year,
0.3% of its assets or 1/20 (or such greater fraction established by the FHLB) of
outstanding FHLB advances, commitments, lines of credit and letters of credit.
The Bank is currently in compliance with this requirement. At June 30, 1997, the
Bank's investment in stock of the FHLB of Indianapolis was $500,000.
In past years, the Bank has received dividends on its FHLB stock. All
12 FHLBs are required by law to provide funds for the resolution of troubled
savings associations and to establish affordable housing programs through direct
loans or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low- and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. These
contributions and obligations could adversely affect the FHLB's ability to pay
dividends and the value of FHLB stock in the future. For the year ended June 30,
1997, dividends paid to the Bank by the FHLB of Indianapolis totaled $33,000,
for an annual rate of 7.63%.
<PAGE>
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Current law prescribes eligible collateral as first
mortgage loans less than 90 days delinquent or securities evidencing interests
therein, securities (including mortgage-backed securities) issued, insured or
guaranteed by the federal government or any agency thereof, FHLB deposits and,
to a limited extent, real estate with readily ascertainable value in which a
perfected security interest may be obtained. Other forms of collateral may be
accepted as over collateralization or, under certain circumstances, to renew
outstanding advances. All long-term advances are required to provide funds for
residential home financing and the FHLB has established standards of community
service that members must meet to maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Insurance of Deposits
The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of banks and thrifts and safeguards the safety
and soundness of the banking and thrift industries. The FDIC administers two
separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks
and state savings banks and the SAIF for savings associations and banks that
have acquired deposits from savings associations. The FDIC is required to
maintain designated levels of reserves in each fund. Currently, thrifts may
convert from one insurance fund to the other upon payment of certain exit and
entrance fees. Such fees need not be paid if a SAIF member converts to a bank
charter or merges with a bank, as long as the resulting bank continues to pay
the applicable insurance assessments to the SAIF during such period and as long
as certain other conditions are met. Consequently, although the Bank converted
to a state savings bank in 1994, the Bank's deposits continue to be insured by
the SAIF.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the BIF and members of the SAIF. The FDIC
may increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to the target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
this system, assessments vary depending on the risk the institution poses to its
deposit insurance fund. Such risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF-insured deposits. As a result of the BIF
reaching its statutory reserve ratio, the FDIC in 1995 revised the premium
schedule for BIF insured institutions to provide a range of .04% to .31% of
deposits. The revisions became effective in the third quarter of 1995. At that
time, healthy BIF-insured banks paid premiums of approximately $.04 per $100 in
deposits compared to $.23 per $100 in deposits paid by healthy SAIF-insured
institutions. The BIF rates were further revised, effective January 1996, to
provide a range of 0% to .27%, eliminating insurance premiums for healthy
BIF-insured banks. The SAIF rates, however, were not adjusted. At the time the
FDIC revised the BIF premium schedule, it noted that, absent legislative action
(as discussed below), the SAIF would not attain its designated reserve ratio
until the year 2002. As a result, SAIF-insured members would continue to be
generally subject to higher deposit insurance premiums than BIF-insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio of 1.25% of BIF-insured deposits.
<PAGE>
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided for a one time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1,
1999, if no savings associations then exist. The special assessment rate was
established by the FDIC at .657% of deposits, and the resulting assessment of
$142,000 before taxes on the Bank was paid in November, 1996. This special
assessment significantly increased noninterest expense and adversely affected
the Holding Company's results of operations for the three months ended December
31, 1996. As a result of the special assessment, the Bank's deposit insurance
premiums were reduced to $.06 per $100 in deposits upon its current risk
classification and the new assessment schedule for SAIF-insured institutions.
These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing for resolving the
thrift crisis in the 1980s. Although the FDIC has equalized the SAIF assessment
schedule with the BIF assessment schedule, SAIF-insured institutions remain
subject to a Financing Corporation ("FICO") assessment as a result of this
continuing obligation. Although the legislation also now requires assessments to
be made on BIF-assessable deposits for this purpose, effective January 1, 1997,
that assessment is limited to 20% of the rate imposed on SAIF assessable
deposits until the earlier of September 30, 1999, or when no savings association
continues to exist, thereby imposing a greater burden on SAIF member
institutions such as the Bank. Thereafter, however, assessments on BIF-member
institutions are expected to be made on the same basis as SAIF-member
institutions.
Regulatory Capital
The FDIC has adopted risk-based capital ratio guidelines to which the
Bank generally is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk weighted categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
Like the capital guidelines established by the FRB for the Holding
Company, these guidelines divide a bank's capital into two tiers. The first tier
("Tier I") includes common equity, certain non-cumulative perpetual preferred
stock (excluding auction rate issues) and minority interests in equity accounts
of consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan and lease losses, subject to
certain limitations, less required deductions. Banks are required to maintain a
total risk-based capital ratio of 8%, of which 4% must be Tier I capital. The
FDIC may, however, set higher capital requirements when a bank's particular
circumstances warrant. Banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier
I leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
In connection with the Bank's conversion to a state savings bank, the
FDIC imposed heightened capital requirements on the Bank because of the
impermissible real estate development activities of BSF, the Bank's subsidiary.
The FDIC currently requires that the Bank maintain capital (after deduction of
its investment in BSF) at levels sufficient for the Bank to be classified as a
well-capitalized institution (i.e., total risk-based capital ratio of 10% or
greater, Tier I risk-based capital ratio of 6% or greater, and leverage capital
ratio of 5% or greater). The Bank currently exceeds its heightened capital
requirements.
<PAGE>
Prompt Corrective Regulatory Action
FedICIA requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, FedICIA establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
1997, the Bank was categorized as "well capitalized."
An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital ratio of 4% or greater, and generally a leverage ratio 4%
or greater. An institution is deemed to be "undercapitalized" if it has a total
risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of
less than 4%, or generally a leverage ratio of less than 4%; and (d)
"significantly undercapitalized" if it has a total risk-based capital ratio of
less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" institutions are subject to growth limitations and
are required to submit a capital restoration plan. If an "undercapitalized"
institution fails to submit, or fails to implement in a material respect, an
acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" institutions are subject to one or more of a
number of requirements and restrictions, including an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks, and
restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically undercapitalized" institutions are subject to appointment of a
receiver or conservator.
Dividend Limitations
Under FRB supervisory policy, a bank holding company generally should
not maintain its existing rate of cash dividends on common shares unless (i) the
organization's net income available to common shareholders over the past year
has been sufficient to fully fund the dividends and (ii) the prospective rate of
earnings retention appears consistent with the organization's capital needs,
asset quality, and overall financial condition. The FDIC also has authority
under the Financial Institutions Supervisory Act to prohibit a bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice in light of the financial condition of the bank.
Under Indiana law, the Holding Company is precluded from paying cash dividends
if, after giving effect to such dividends, the Holding Company would be unable
to pay its debts as they become due or the Holding Company's total assets would
be less than its liabilities and obligations to preferential shareholders.
In connection with the Conversion, the Bank established a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. The Bank will not be permitted to pay dividends to the Holding
Company if its net worth would be reduced below the amount required for the
liquidation account.
Under Indiana law, the Bank may pay dividends without DFI approval so
long as its capital is unimpaired and those dividends in any calendar year do
not exceed the net profits of the Bank for that year plus the retained net
profits of the Bank for the previous two years. Dividends may not exceed
undivided profits on hand (less losses, bad debts and expenses). Additional
stringent regulatory requirements affecting dividend payments by the Bank,
however, are established by the prompt corrective action provisions of FedICIA,
which are discussed above. The Bank's capital levels currently exceed the
criteria established to be designated as a "well capitalized" institution. Such
institutions are required to have a total risk-based capital ratio of 10% or
greater, a Tier I risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater. At June 30, 1997, the Bank's total risk-based capital, Tier I
risk-based capital and leverage capital exceeded the amounts required to be
designated "well capitalized" by $3.7 million, $4.4 million, and $3.8 million,
respectively.
<PAGE>
Repurchase Limitations
Regulations promulgated by the FRB provide that a bank holding company
must file written notice with the FRB prior to any repurchase of its equity
securities if the gross consideration for the purchase, when aggregated with the
net consideration paid by the bank holding company for all repurchases during
the preceding 12 months, is equal to 10% or more of the bank holding company's
consolidated net worth. This notice requirement is not applicable, however, to a
bank holding company that exceeds the thresholds established for a well
capitalized bank and that satisfies certain other regulatory requirements.
Under Indiana law, the Holding Company will be precluded from
repurchasing its equity securities if, after giving effect to such repurchase,
the Holding Company would be unable to pay its debts as they become due or the
Holding Company's assets would be less than its liabilities and obligations to
preferential shareholders.
Loans-to-One Borrower
Under Indiana law, the total loans and extension of credit by an
Indiana-chartered savings bank to a borrower outstanding at one time and not
fully secured may not exceed 15% of such bank's capital and unimpaired surplus.
An additional amount up to 10% of the bank's capital and unimpaired surplus may
be loaned to the same borrower if such loan is fully secured by readily
marketable collateral having a market value, as determined by reliable and
continuously available price quotations, at least equal to the amount of such
additional loans outstanding.
As of June 30, 1997, the largest aggregate amount of loans which the
Bank had to any one borrower was approximately $933,000. The Bank had no loans
outstanding which management believes violate the applicable loans-to-one
borrower limits. The Company does not believe that the loans-to-one borrower
limits will have a significant impact on its business, operations or earnings.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place
limitations on the ability of insured depository institutions to accept, renew
or roll over deposits by offering rates of interest which are significantly
higher than the prevailing rates of interest on deposits offered by other
insured depository institutions having the same type of charter in such
depository institution's normal market area. Under these regulations,
"well-capitalized" depository institutions may accept, renew or roll such
deposits over without restriction, "adequately capitalized" depository
institutions may accept, renew or roll such deposits over with a waiver from the
FDIC (subject to certain restrictions on payments of rates) and
"undercapitalized" depository institutions may not accept, renew or roll such
deposits over. The regulations contemplate that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definition adopted by the agencies to implement the corrective action
provisions of FedICIA. The Company does not believe that these regulations will
have a materially adverse effect on its current operations.
Federal Reserve System
FRB regulations require savings associations and savings banks to
maintain reserves against their transaction accounts (primarily negotiable order
of withdrawal accounts) and certain nonpersonal time deposits. The reserve
requirements are subject to adjustment by the FRB. As of June 30, 1997, the Bank
was in compliance with the applicable reserve requirements of the FRB.
<PAGE>
Additional Limitations on Activities
FDIC law and regulations generally provide that the Bank may not engage
as principal in any type of activity, or in any activity in an amount, not
permitted for national banks, or directly acquire or retain any equity
investment of a type or in an amount not permitted for national banks. The FDIC
has authority to grant exceptions from these prohibitions (other than with
respect to non-service corporation equity investments) if it determines no
significant risk to the insurance fund is posed by the amount of the investment
or the activity to be engaged in, and if the Bank is and continues to be in
compliance with fully phased-in capital standards. National banks are generally
not permitted to hold equity investments other than shares of service
corporations and certain federal agency securities. Moreover, the activities in
which service corporations are permitted to engage are limited to those of
service corporations for national banks. As a result of its conversion to an
Indiana savings bank, the Bank is required to cease the real estate development
operations and divest the non-conforming real estate holdings of BSF. See
"Business -- Service Corporation Subsidiary."
Other Indiana Regulations
As an Indiana-chartered savings bank, the Bank derives its authority
from, and is regulated by, the DFI. The DFI has the right to promulgate rules
and regulations necessary for the supervision and regulation of
Indiana-chartered savings banks under its jurisdiction and for the protection of
the public investing in such institutions. The regulatory authority of the DFI
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases; the
regulation of incorporators, shareholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest.
The DFI generally conducts regular annual examinations of
Indiana-chartered savings banks such as the Bank. The purpose of such
examination is to assure that institutions are being operated in compliance with
applicable Indiana law and regulations and in a safe and sound manner. In
addition, the DFI is required to conduct an examination of any institution as
often as it deems necessary. The DFI has the power to issue cease and desist
orders if any person or institution is engaging in, or has engaged in, any
unsafe or unsound practice in the conduct of its business or has or is violating
any other law, rule or regulation and, as to officers and directors of an
Indiana savings bank, breached his fiduciary duty as an officer or director.
With the approval of the DFI, a savings bank may merge or consolidate
with another savings bank, a state bank, a national bank, or a federal or state
savings association. In considering whether to approve or disapprove such a
merger or consolidation, the DFI is to consider the following factors: (i)
whether the institutions are operated in a safe, sound and prudent manner; (ii)
whether the financial conditions of any of the institutions will jeopardize the
financial stability of the other institutions; (iii) whether the proposed merger
or consolidation will result in an institution that has inadequate capital,
unsatisfactory management or poor earnings prospects; (iv) whether the
management or other principals of the resulting institution are qualified by
character and financial responsibility to control and operate in a legal and
proper manner the resulting institution; (v) whether the interests of the
depositors and creditors of the institutions and the public generally will be
jeopardized by the transaction; and (vi) whether institutions furnish all of the
information the DFI requires in reaching the DFI's decision.
Acquisitions of control of the Bank by a bank or bank holding company
require the prior approval of the DFI. Control is defined as the power, directly
or indirectly, to (i) vote 25.0% or more of the voting stock of an
Indiana-chartered savings bank; or (ii) exercise a controlling influence over
the management or policies of a savings bank.
<PAGE>
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings.
Transactions with Affiliates
The Bank is subject to Sections 22(h), 23A and 23B of the Federal
Reserve Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank and its
executive officers and its affiliates, prescribes terms and conditions for bank
affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with
the SEC under the 1934 Act. The Holding Company is subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
1934 Act and the rules of the SEC thereunder. After the third anniversary of the
Bank's conversion to stock form, if the Holding Company has fewer than 300
shareholders it may deregister its shares under the 1934 Act and cease to be
subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the
Holding Company may not be resold without registration unless sold in accordance
with the resale restrictions of Rule 144 under the Securities Act of 1933, as
amended (the "1933 Act"). If the Holding Company meets the current public
information requirements under Rule 144, each affiliate of the Holding Company
who complies with the other conditions of Rule 144 (including conditions that
require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Holding Company; or (ii) the average weekly
volume of trading in such shares during the preceding four calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory,
unsatisfactory, and needs improvement -- and a written evaluation of each
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The examiners have determined that the Bank has a satisfactory record of
meeting community credit needs.
TAXATION
Federal Taxation
Historically, savings banks have been permitted to compute bad debt
deductions using either the bank experience method or the percentage of taxable
income method. However, for years beginning after December 31, 1995, the Bank is
not able to use the percentage of taxable income method of computing its
allocable tax bad debt deduction. The Bank will be required to compute its
allocable deduction using the experience method. As a result of the repeal of
the percentage of taxable income method, reserves taken after 1987 using the
percentage of taxable income method generally must be included in future taxable
income over a six-year period, although a two-year delay may be permitted for
institutions meeting a residential mortgage loan origination test. In addition,
the pre-1988 reserve, in which no deferred taxes have been recorded, will not
have to be recaptured into income unless (i) the Bank no longer qualifies as a
bank under the Code; or (ii) excess dividends are paid out by the Bank.
<PAGE>
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid can be
credited against regular tax due in later years.
For federal income tax purposes, the Bank has been reporting its income
and expenses on the accrual method of accounting. The Bank's federal income tax
returns have not been audited in recent years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications the most notable of which is the
required addback of interest that is tax-free for fedeal income tax purposes.
Other applicable state taxes include generally applicable sales and use taxes
plus real and personal property taxes.
The Bank's state income tax returns have not been audited in recent
years.
Item 2. Properties.
The Company conducts business from its main office at 279 East Morgan
Street, Spencer, Indiana 47460. The Company owns its main office.
The following table provides certain information with respect to the
Company's office as of June 30, 1997:
<TABLE>
<CAPTION>
Net Book Value
of Property,
Owned or Year Total Furniture & Approximate
Description and Address Leased Opened Deposits Fixtures Square Footage
- ----------------------- ------ ------ -------- -------- --------------
(Dollars in thousands)
<C> <C> <C> <C> <C> <C>
279 East Morgan Street Owned 1987 $26,157 $964 11,300
Spencer, IN 47460
(including annex)
</TABLE>
As of June 30, 1997, the Bank also owned a parcel of real estate
located across the street from its office which is utilized for employee
parking. In January, 1996, the Bank purchased another parcel of real estate
located adjacent to its office (the "West Parcel"). The Bank has sold one-half
of the West Parcel to a local insurance agency. The Company has completed
improvements to the remaining one-half of the West Parcel, including an office
facility for the Holding Company and additional storage and office space for the
Bank.
The Company owns computer and data processing equipment which is used
for transaction processing, loan origination, and accounting.
The Bank has also contracted for the data processing and reporting
services of On-Line Financial Services, Inc. in Oak Brook, Illinois, which was
acquired in 1995 by Argo Federal Savings Bank, FSB. The cost of these data
processing services is approximately $4,900 per month.
<PAGE>
Item 3. Legal Proceedings.
Neither the Holding Company nor the Bank is a party to any pending
legal proceedings, other than routine litigation incidental to the Bank's
business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended June 30, 1997.
Item 4.5. Executive Officers of the Registrant.
Presented below is certain information regarding the executive officers
of the Holding Company:
Name Position
Kurt J. Meier President, Chief Executive Officer and Treasurer
Kurt D. Rosenberger Vice President and Chief Financial Officer
Charles W. Chambers Secretary
Kurt J. Meier (age 46) is President, Chief Executive Officer and
Treasurer of the Holding Company. Mr. Meier has also served as President of the
Bank since 1994. Theretofore, he served as Managing Officer of the Bank from
1990 to 1994.
Kurt D. Rosenberger (age 38) is Vice President and Chief Financial
Officer of the Holding Company. Mr. Rosenberger has also served as Vice
President of the Bank since 1994. Theretofore, he served as Senior Financial
Analyst for the Office of Thrift Supervision in Indianapolis, Indiana, from 1990
to 1994.
Charles W. Chambers (age 81) is Secretary of the Holding Company. Mr.
Chambers has also served as a Staff Appraiser of the Bank from 1991 to 1996 and
as Secretary of the Bank since 1990.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Bank converted from an Indiana mutual savings bank to an Indiana
stock savings bank effective July 1, 1996, and simultaneously formed a bank
holding company, the Holding Company. The Holding Company's common stock,
without par value ("Common Stock"), is quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), Small Cap Market,
under the symbol "HWEN." Because the Conversion was not effected until July 1,
1996, no prices were reported by NASDAQ for the Holding Company's Common Stock
during the year ended June 30, 1996, and no dividends were paid on the Common
Stock during the year. As of August 29, 1997, there were approximately 571
record holders of the Holding Company's Common Stock, including shares held in
broker accounts.
The following table sets forth the high and low bid prices and
dividends paid per share of Common Stock for the quarters indicated. Such
over-the-counter quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
Quarter Ended High Bid Low Bid Dividends Declared
September 30, 1996 $ 13 3/4 $ 9 3/4 $ ---
December 31,1996 13 1/4 11 3/4 .05
March 31, 1997 15 1/2 12 3/4 .05
June 30, 1997 15 3/4 14 1/2 .05
Since the Holding Company has no independent operations or other
subsidiaries to generate income, its ability to accumulate earnings for the
payment of cash dividends to its shareholders is directly dependant upon the
earnings on its investment securities and the ability of the Bank to pay
dividends to the Holding Company.
Under current federal income tax law, dividend distributions with
respect to the Common Stock, to the extent that such dividends paid are from the
current or accumulated earnings and profits of the Bank (as calculated for
federal income tax purposes), will be taxable as ordinary income to the
recipient and will not be deductible by the Bank. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from the Bank's accumulated bad
debt reserves, which could result in increased federal income tax liability for
the Company. Moreover, the Bank may not pay dividends to the Holding Company if
such dividends would result in the impairment of the liquidation account
established in connection with the Conversion.
<PAGE>
The Holding Company's ability to pay dividends on the Common Stock is
subject to certain regulatory restrictions. See "Regulation." In addition,
Indiana law would prohibit the Holding Company from paying a divided, if after
giving effect to the payment of that dividend, the Holding Company would not be
able to pay its debts as they become due in the ordinary course of business or
if the Holding Company's total assets would be less than the sum of its total
liabilities plus preferential rights of holders of preferred stock, if any.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to
the material under the heading "Selected Consolidated Financial Data of Home
Financial Bancorp and Subsidiary" on page 2 of the Shareholder Annual Report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
The information required by this item is incorporated by reference to
pages 3 through 18 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Asset/Liability Management
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and securities, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. The Bank, like
other financial institutions, is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its interest-bearing
liabilities. The Bank manages its mix of assets and liabilities with the goals
of limiting its exposure to interest rate risk, ensuring adequate liquidity, and
coordinating its sources and uses of funds. Specific strategies have included
shortening the amortized maturity of fixed-rate loans and increasing the volume
of adjustable rate loans to reduce the average maturity of the Bank's
interest-earning assets. FHLB advances are used in an effort to match the
effective maturity of interest-bearing liabilities to its interest-earning
assets
The Bank seeks to control its interest rate risk exposure in a manner
that will allow for adequate levels of earnings and capital over a range of
possible interest rate environments. The Bank has adopted formal policies and
practices to monitor and manage interest rate risk exposure. As part of this
effort, the Bank uses the market value ("MV") methodology to gauge interest rate
risk exposure.
Generally, MV is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other assets and outgoing
cash flows on interest-bearing liabilities and other liabilities. The
application of the methodology attempts to quantify interest rate risk as the
change in the MV which would result from a theoretical 200 and 400 basis point
(1 basis point equals .01%) change in market interest rates. Both 200 and 400
basis point increases in market interest rates and 200 and 400 basis point
decreases in market interest rates are considered.
At June 30, 1997, it was estimated that the Bank's MV would decrease
5.2% and 13.7% in the event of 200 and 400 basis point increases in market
interest rates, respectively. The Bank's MV at the same date would increase 2.3%
and 5.4% in the event of 200 and 400 basis point decreases in market ratio,
respectively.
<PAGE>
Presented below, as of June 30, 1997, is an analysis of the Bank's
interest rate risk as measured by changes in MV for instantaneous and sustained
parallel shifts of 200 and 400 basis point increments in market interest rates.
Market Value Summary Performance
<TABLE>
<CAPTION>
MV as % of
Present Value (PV)
Change Market Value of Assets
In Rates $ Amount $ Change % Change MV Ratio Change
-------- -------- -------- -------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp* $5,254 $ (831) (13.66)% 13.48% (121) bp
+ 200 bp 5,769 (317) (5.20) 14.32 (37) bp
0 bp 6,085 0 0.00 14.69 --- bp
- 200 bp 6,223 138 2.26 14.66 3 bp
- 400 bp 6,414 329 5.41 14.74 5 bp
</TABLE>
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock MV Ratio: MV as % of PV of Assets..................... 14.69%
Exposure Measure: Post-Shock MV Ratio........................... 14.32%
Sensitivity Measure: Change in MV Ratio......................... 37 bp
Change in MV as % of PV of Assets............................... 5.19%
Interest Rate Risk Capital Component............................ ---
- ----------
*Basis points.
<PAGE>
Management believes that the MV methodology overcomes three shortcoming
of the typical maturity gap methodology. First, it does not use arbitrary
repricing intervals and accounts for all expected future cash flows; weighting
each by its appropriate discount factor. Second, because the MV method projects
cash flows of each financial instrument under different interest-rate
environments, it can incorporate the effect of embedded options on an
institution's interest rate risk exposure. Third, it allows interest rates on
different instruments to change by varying amounts in response to a change in
market interest rates, resulting in more accurate estimates of cash flows.
However, as with any method of gauging interest rate risk, there are
certain shortcomings inherent to the MV methodology. The model assumes interest
rates changes are instantaneous parallel shifts in the yield curve. In reality,
rate changes are rarely instantaneous. The use of the simplifying assumption
that short-term and long-term rates change by the same degree may also misstate
historic rate patterns, which rarely show parallel yield curve shifts. Further,
the model assumes that certain assets and liabilities of similar maturity or
period to repricing will react the same to changes in rates. In reality, certain
types of financial instruments may react in advance of changes in market rates,
while the reaction of other types of financial instruments may lag behind the
change in general market rates. Additionally, the MV methodology may not reflect
the full impact of annual and life-time restrictions on changes in rates for
certain assets, such as adjustable-rate mortgage loans. When interest rates
change, actual loan prepayments and actual early withdrawals from certificates
may deviate significantly from assumptions used in the model. Finally, this
methodology does not measure or reflect the impact that higher rates may have on
adjustable-rate loan customers' ability to serviced their debt. All of these
factors are considered in monitoring the Bank's exposure to interest rate risk.
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and Notes thereto are
contained on pages 20 through 34 of the Shareholder Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with repsect to directors is
incorporated by reference to pages 2 through 4 of the Company's Proxy Statement
for its 1997 Shareholder Annual Meeting (the "1997 Proxy Statement").
Information concerning the Holding Company's executive officers is included in
Item 4.5 in Part I of this report.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 5 through 9 of the 1997 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages 2 through 3 of the 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
pages 2 through 4 of the 1997 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Financial Statements Page No.
Independent Auditor's Report 19
Consolidated Statement of Financial Condition
at June 30, 1997, and 1996 20
Consolidated Statement of Income for the Years Ended
June 30, 1997, 1996, and 1995 21
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended June 30, 1997, 1996, and 1995 22
Consolidated Statement of Cash Flows for the Years Ended
June 30, 1997, 1996, and 1995 23
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended June 30, 1997.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1. Included in those exhibits are
Executive Compensation Plans and Arrangements which are identified as
Exhibits 10(1) through 10(5).
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
HOME FINANCIAL BANCORP
Date: September 26, 1997 By: /s/ Kurt J. Meier
---------------------------
Kurt J. Meier, President,
Chief Executive Officer
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 26th day of September,
1997.
/s/ Kurt J. Meier
- -----------------------------
Kurt J. Meier
President, Chief Executive Officer,
Treasurer and Director
(Principal Executive Officer)
/s/ Kurt D. Rosenberger
- -----------------------------
Kurt D. Rosenberger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Charles W. Chambers
- -----------------------------
Charles W. Chambers, Secretary and Director
/s/ John T. Gillaspy
- -----------------------------
John T. Gillaspy, Director
/s/ Stephen Parrish
- -----------------------------
Stephen Parrish, Director
/s/ Robert W. Raper
- -----------------------------
Robert W. Raper, Vice Chairman
/s/ Frank R. Stewart
- -----------------------------
Frank R. Stewart, Chairman
/s/ Tad Wilson
- -----------------------------
Tad Wilson, Director
<PAGE>
EXHIBIT INDEX
Exhibit Index*
3(1) The Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3(1) to the
Registration Statement on Form S-1 (Registration No.
333-1746).
3(2) The Code of By-Laws of the Registrant are incorporated by
reference to Exhibit 3(2) to the Report on Form 10-Q for the
period ended March 31, 1997.
10(1) Exempt Loan and Share Purchase Agreement between ESOP Trust
and Home Financial Bancorp.
10(2) Share Pledge Agreement between ESOP Trust and Home Financial
Bancorp.
10(3) Employment Agreement between Owen Community Bank, s.b. and
Kurt J. Meier is incorporated by reference to Exhibit 10(5)
to the Registration Statement on Form S-1 (Registration No.
333-1746).
10(4) Employment Agreement between Owen Community Bank, s.b. and
Kurt D. Rosenberger is incorporated by reference to Exhibit
10(6) to the Registration Statement on Form S-1
(Registration No. 333-1746).
10(5) Employment Contract between Owen Community Bank, s.b. and
Frank R. Stewart is incorporated by reference to Exhibit
10(7) to the Registration Statement on Form S-1
(Registration No. 333-1746).
13 1997 Shareholder Annual Report.
21 Subsidiaries of the Registrant are incorporated by reference
to Exhibit 21 to the Registration Statement on Form S-1
(Registration No. 333-1746).
27 Financial Data Schedule.
Message to Shareholders.................................................. 1
Selected Consolidated Financial Data..................................... 2
Management's Discussion and Analysis..................................... 3
Independent Auditor's Report............................................. 19
Consolidated Statement of Financial Condition............................ 20
Consolidated Statement of Income......................................... 21
Consolidated Statement of Changes in
Stockholders' Equity................................................ 22
Consolidated Statement of Cash Flows..................................... 23
Notes to Consolidated Financial Statements............................... 24
Directors and Officers................................................... 35
Shareholder Information.................................................. 37
Home Financial Bancorp (the "Holding Company" and together with the
Bank (as defined below), the "Company") is an Indiana corporation organized in
February 1996, to become a bank holding company upon its acquisition of all the
issued and outstanding capital stock of Owen Community Bank, s.b. (the "Bank")
in connection with the Bank's conversion from mutual to stock form. The Holding
Company became the Bank's holding company on July 1, 1996; therefore, all
historical financial and other data contained for periods prior to July 1, 1996
herein relate solely to the Bank while historical financial and other data
contained herein for the period after July 1, 1996 relate to the Company. The
principal asset of the Holding Company currently consists of 100% of the issued
and outstanding shares of common stock, $.01 par value per share, of the Bank.
The Bank was organized under the name Owen County Savings and Loan Association
in 1911. In 1972, the Bank converted to a federally chartered savings and loan
and changed its name to Owen County Federal Savings and Loan Association, and in
1989, the Bank converted to a federally chartered savings bank known as Owen
Federal Savings Bank. In 1994, the Bank became an Indiana savings bank known as
Owen Community Bank, s.b. The Bank's principal business consists of attracting
deposits from the general public and originating long-term adjustable-rate loans
secured primarily by first mortgage liens on one- to four-family real estate.
The Bank's deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance
Corporation (the "FDIC").
The Bank is the oldest continuously operating financial institution
headquartered in Owen County, Indiana. Management believes the Bank has
developed a solid reputation among its loyal customer base because of its
commitment to personal service and its strong support of the local community.
The Bank offers a number of consumer and commercial financial services. These
services include: (i) residential real estate loans; (ii) indemnification
mortgage loans ("ID Mortgage Loans"); (iii) mobile home loans; (iv) combination
land-mobile home loans ("Combo Loans"); (v) construction loans; (vi) share
loans; (vii) nonresidential real estate loans; (viii) multi-family loans; (ix)
installment loans; (x) NOW accounts; (xi) passbook savings accounts; and (xii)
certificates of deposit. The Company conducts business out of its main office
located in Spencer, Indiana. The Bank is and historically has been a significant
real estate mortgage lender in Owen County, Indiana, originating approximately
13% of the mortgages recorded in Owen County during the calendar year ended
December 31, 1996.
<PAGE>
[WATERMARK OF BANK APPEARS ON THIS PAGE]
TO OUR SHAREHOLDERS:
We are pleased to present the 1997 Annual Report of Home Financial
Bancorp, the holding company for Owen Community Bank, s.b. Throughout the past
year, residential and non-residential real estate mortgage loan demand continued
to be strong resulting in loan growth of $7,074,000 or 25.8%. This growth was
primarily funded with stock conversion proceeds and Federal Home Loan Bank
borrowings. Our fiscal year earnings were impacted by a one-time mandatory FDIC
special premium assessment in the amount of $142,000. The good news resulting
from the assessment is that current and future deposit insurance premiums have
been significantly reduced.
Our new 6,000 square foot annex building was completed this summer and
now provides office space for the Bank's subsidiary, collections and compliance
operations. Space is ample and will accommodate additional future growth.
Efforts toward building a bank branch in our neighboring community of
Cloverdale continue to move forward. Our branch application submitted to the
Indiana Department of Financial Institutions was recently approved while site
and building plans currently remain under discussion. We are optimistic about
the Cloverdale market and look forward to offering our host of services to the
area. Our target for the branch opening is slated for some time in the summer of
1998. It is our belief that Cloverdale and Spencer possess many similar
community characteristics and that our experience and sensitivity to serving the
needs of small rural communities will give us the proper foundation to do well
in the Cloverdale community. Currently only one other bank is located in
Cloverdale.
Operationally, several enhancements were implemented during the past
year. A new software system was installed in March of this year with
capabilities of interfacing with our outside data processing bureau. The chart
of accounts was reorganized as part of this conversion to improve internal and
external reporting requirements. Other features purchased with the software
package include automated safety deposit box administration, fixed asset
management and accounts payable processing. Our internal computer network system
was also expanded in recent months to accommodate growth of personnel and
improve customer service. In December 1996, we contracted with the Federal Home
Loan Bank of Indianapolis to utilize their coin and currency service and daily
deposit transit service. Both have resulted in improvements to cash management
and turn around time of items processing.
In an effort to maximize the use of Bank personnel and minimize the
number of employees, management will continue outsourcing labor-intensive
operations.
As part of our continuing efforts to attract new and lower cost
deposits, several new products were developed and introduced late in fiscal
1997. These new deposit products include IRAs, Statement Savings and Money
Management Accounts. A new non-interest-bearing commercial checking account and
a family of personal checking accounts will be introduced in the near future. We
will continue to aggressively promote our new deposit products which will
eventually allow us to pay down borrowings and reduce our average cost of funds.
We continue to look for new growth opportunities to enhance the value
of your Home Financial Bancorp stock investment. Contributing to your
shareholder value, we declared our first quarterly dividend in the second fiscal
quarter ending December 31, 1996 and continued to declare dividends during
ensuing quarters. We have also seen our stock price appreciate from a low of
$9.75 to a recent high of $15.75.
As always, we appreciate your past confidence and look forward to
serving you in the future.
Sincerely,
/s/ Kurt J. Meier
Kurt J. Meier
President
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
HOME FINANCIAL BANCORP AND SUBSIDIARY
The following selected consolidated financial data of the Company is
qualified in its entirety by, and should be read in conjunction with, the
consolidated financial statements, including notes thereto, included elsewhere
in this Annual Report. In the opinion of management of the Company, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of results for and such periods have been included.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
At June 30 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Summary of Financial Condition:
Total assets....................................... $42,508 $39,426 $30,839 $26,008 $23,460
Loans receivable, net.............................. 34,117 27,125 25,547 21,479 19,368
Cash and cash equivalents.......................... 4,184 5,721 1,386 1,237 1,343
Securities available for sale...................... 2,102 4,901 934 --- ---
Securities held to maturity........................ --- --- 1,827 2,414 1,833
Deposits........................................... 26,157 28,726 22,500 21,451 20,174
Federal Home Loan Bank advances.................... 9,000 7,200 5,000 1,500 500
Stockholders' equity - substantially restricted.... 7,197 3,410 3,159 2,850 2,589
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Interest and dividend income..................... $3,397 $2,955 $2,420 $2,023 $1,958
Interest expense................................. 1,703 1,593 1,174 949 993
------- ------- ------- ------- -------
Net interest income........................... 1,694 1,362 1,246 1,074 965
Provision for losses on loans.................... 85 94 36 14 6
------- ------- ------- ------- -------
Net interest income after provision for
losses on loans.......................... 1,609 1,268 1,210 1,060 959
------- ------- ------- ------- -------
Other income:
Service charges on deposit accounts........... 43 37 27 23 22
Gain on sale of real estate acquired
for development.......................... 31 57 78 145 117
Net realized gain on sales of available
for sale securities........................ 37 --- --- --- ---
Other......................................... 53 47 43 33 28
------- ------- ------- ------- -------
Total other income......................... 164 141 148 201 167
------- ------- ------- ------- -------
Other expense:
Salaries and employee benefits................ 563 415 404 344 254
Net occupancy and equipment expense........... 132 123 109 109 91
Deposit insurance expense..................... 165 54 49 48 32
Other......................................... 508 333 304 306 255
------- ------- ------- ------- -------
Total other expense...................... 1,368 925 866 807 632
------- ------- ------- ------- -------
Income before income tax and cumulative
effect of change in accounting principle...... 405 484 492 454 494
Income tax expense............................... 153 196 203 169 186
Cumulative effect of change
in accounting principle..................... --- --- --- (24) ---
------- ------- ------- ------- -------
Net income.................................... $ 252 $ 288 $ 289 $ 261 $ 308
======= ======= ======= ======= =======
Supplemental Data:
Return on assets (1) ............................ .63% .84% 1.00% 1.03% 1.34%
Return on equity (2)............................. 3.31 8.71 9.59 9.46 12.55
Interest rate spread (3) ........................ 3.56 3.78 4.19 4.11 4.11
Net yield on interest-earning assets (4)......... 4.41 4.13 4.54 4.42 4.43
Other expenses to average assets ................ 3.40 2.70 2.99 3.17 2.75
Net interest income to other expenses............ 1.24x 1.47x 1.44x 1.33x 1.53x
Equity-to-assets (5)............................. 16.93 8.65 10.24 10.96 11.04
Average equity capital to
average total assets.......................... 18.90 9.64 10.42 10.85 10.69
Average interest-earning assets to average
interest-bearing liabilities.................. 1.19x 1.07x 1.08x 1.08x 1.07x
Non-performing assets to total assets............ 1.76 1.03 .32 .10 ---
Non-performing loans to total loans.............. 1.65 1.32 .39 .13 ---
Loan loss allowance to total loans, net.......... .68 .55 .22 .12 .06
Loan loss allowance to non-performing loans...... 30.88 41.78 57.00 108.33 ---
Net charge-offs to average loans ................ .01 * .02 * .04
</TABLE>
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Interest rate spread is calculated by subtracting combined weighted average
interest rate cost from combined weighted average interest rate earned for
the period indicated.
(4) Net interest income divided by average interest-earning assets.
(5) Total equity divided by total assets.
* Less than .01%
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Holding Company was formed as an Indiana corporation on February 21, 1996,
for the purpose of issuing its common stock, without par value (the "Common
Stock") and owning all of the outstanding common stock of the Bank to be issued
in the Conversion as a unitary bank holding company. As a newly formed
corporation, the Holding Company has no operating history prior to July 1, 1996.
The principal business of savings banks, including the Bank, has
historically consisted of attracting deposits from the general public and making
loans secured by residential real estate. The Company's earnings are primarily
dependent upon its net interest income, the difference between interest income
and interest expense. Interest income is a function of the balances of loans and
investments outstanding during a given period and the yield earned on such loans
and investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. The Company's earnings are also affected by provisions
for loan losses, service charges and other non-interest income, operating
expenses and income taxes.
The Company is significantly affected by prevailing economic
conditions, as well as government policies and regulations concerning, among
other things, monetary and fiscal affairs, housing and financial institutions.
Deposit flows are influenced by a number of factors, including interest rates
paid on competing investments, account maturities and level of personal income
and savings within the Bank's market. In addition, deposit growth is affected by
how customers perceive the stability of the financial services industry amid
various current events such as regulatory changes, failures of other financial
institutions and financing of the deposit insurance fund. Lending activities are
influenced by the demand for and supply of housing lenders, the availability and
cost of funds and various other items. Sources of funds for lending activities
of the Bank include deposits, payments on loans, borrowings and income provided
from operations.
ASSET/LIABILITY MANAGEMENT
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and securities, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. The Bank, like
other financial institutions, is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its interest-bearing
liabilities. The Bank manages its mix of assets and liabilities with the goals
of limiting its exposure to interest rate risk, ensuring adequate liquidity, and
coordinating its sources and uses of funds.
The Bank seeks to control its interest rate risk exposure in a manner
that will allow for adequate levels of earnings and capital over a range of
possible interest rate environments. The Bank has adopted formal policies and
practices to monitor and manage interest rate risk exposure. As part of this
effort, the Bank uses the market value ("MV") methodology to gauge interest rate
risk exposure.
Generally, MV is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other assets and outgoing
cash flows on interest-bearing liabilities and other liabilities. The
application of the methodology attempts to quantify interest rate risk as the
change in the MV which would result from a theoretical 200 and 400 basis point
(1 basis point equals .01%) change in market interest rates. Both 200 and 400
basis point increases in market interest rates and 200 and 400 basis point
decreases in market interest rates are considered.
At June 30, 1997, it was estimated that the Bank's MV would decrease
5.2% and 13.7% in the event of 200 and 400 basis point increases in market
interest rates, respectively. The Bank's MV at the same date would increase 2.3%
and 5.4% in the event of 200 and 400 basis point decreases in market rates,
respectively.
<PAGE>
Presented below, as of June 30, 1997, is an analysis of the Bank's interest rate
risk as measured by changes in MV for instantaneous and sustained parallel
shifts of 200 and 400 basis point increments in market interest rates.
<TABLE>
<CAPTION>
MV as % of
Present Value (PV)
Change Market Value of Assets
In Rates $ Amount $ Change % Change MV Ratio Change
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp* $5,254 $ (831) (13.66)% 13.48% (121) bp
+ 200 bp 5,769 (317) (5.20) 14.32 (37) bp
0 bp 6,085 0 0.00 14.69 ---
- 200 bp 6,223 138 2.26 14.66 3 bp
- 400 bp 6,414 329 5.41 14.74 5 bp
</TABLE>
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock MV Ratio: MV as % of PV of Assets................ 14.69%
Exposure Measure: Post-Shock MV Ratio...................... 14.32%
Sensitivity Measure: Change in MV Ratio.................... 37 bp
Change in MV as % of PV of Assets.......................... 5.19%
Interest Rate Risk Capital Component....................... ---
*Basis points.
<PAGE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents, for the years ended June 30, 1997, 1996
and 1995, the month-end average balances of each category of the Bank's
interest-earning assets and interest-bearing liabilities, and the average yields
earned and interest rates paid on such balances. Such yields and costs are
determined by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented.
AVERAGE BALANCE SHEET/YIELD ANALYSIS
<TABLE>
<CAPTION>
Year Ended June 30, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits.......$ 2,692 $ 137 5.09% $ 2,782 $ 136 4.89% $ 1,298 $ 77 5.93%
Mortgage-backed
securities (1)................ 2,523 185 7.33 1,628 90 5.53 1,556 93 5.98
Other investment securities (1). 2,376 130 5.47 1,291 89 6.89 1,032 67 6.49
Loans receivable (2)............ 30,418 2,912 9.57 26,970 2,619 9.71 23,329 2,167 9.29
Stock in FHLB of Indianapolis... 433 33 7.63 274 21 7.66 224 16 7.14
------ ----- ------ ----- ------ -----
Total interest-earning assets. 38,442 3,397 8.84 32,945 2,955 8.97 27,439 2,420 8.82
----- ----- -----
Non-interest earning assets, net of
allowance for loan losses
and including unrealized
gain (loss) on securities
available for sale.............. 1,804 1,367 1,495
------- ------- -------
Total assets..................$40,246 $34,312 $28,934
======= ======= =======
Liabilities and
stockholders' equity:
Interest-bearing liabilities:
Savings accounts................$ 3,930 114 2.90 $ 4,235 117 2.76 $ 4,460 138 3.09
NOW accounts.................... 2,162 70 3.24 2,320 58 2.50 2,349 62 2.64
Certificates of deposit......... 18,465 1,032 5.59 18,672 1,086 5.82 15,145 763 5.04
Other borrowings................ --- --- --- 15 1 6.67 102 10 9.80
FHLB advances................... 7,725 487 6.30 5,475 331 6.05 3,321 201 6.05
------ ----- ------ ----- ------ -----
Total interest-bearing
liabilities................. 32,282 1,703 5.28 30,717 1,593 5.19 25,377 1,174 4.63
----- ----- -----
Other liabilities.................. 358 289 543
------- -------- --------
Total liabilities............. 32,640 31,006 25,920
------- -------- --------
Stockholders' equity............ 7,601 3,305 3,007
Net unrealized gain on securities
available for sale............ 5 1 7
------- -------- --------
Total stockholders' equity.... 7,606 3,306 3,014
------- -------- --------
Total liabilities and
stockholders' equity......$40,246 $34,312 $28,934
======= ======= =======
Net interest-earning assets........$ 6,160 $ 2,228 $ 2,062
======= ======== ========
Net interest income................ $ 1,694 $1,362 $1,246
======= ====== ======
Interest rate spread............... 3.56% 3.78% 4.19%
Net yield on weighted average
interest-earning assets......... 4.41% 4.13% 4.54%
Average interest-earning
assets to average interest-
bearing liabilities............. 118.99% 107.25% 108.13%
</TABLE>
(1) Yields for mortgage-backed securities and other investments available for
sale are computed based upon amortized cost.
(2) Non-accruing loans have been included in average balances.
In the foregoing table, no adjustment of interest on tax-exempt
securities to a tax-equivalent basis was made since the adjustment was less than
$10,000 in each period presented.
<PAGE>
INTEREST RATE SPREAD
The Bank's results of operations have been determined primarily by net
interest income, and to a lesser extent, fee income, miscellaneous income and
general and administrative expenses including provisions for losses on loans.
Net interest income is determined by the interest rate spread between the yields
earned on interest-earning assets and the rates paid on interest-bearing
liabilities and by the relative amounts of interest-earning assets and
interest-bearing liabilities.
The following table sets forth the weighted average effective interest
rate earned by the Bank on its loan, investment portfolios and total
interest-earning assets. The table also includes weighted average effective cost
of the Bank's deposits and borrowings, the interest rate spread of the Bank, and
the net yield on weighted average interest-earning assets for the periods and as
of the date shown. Average balances are based on month-end average balances.
INTEREST RATE SPREAD ANALYSIS
<TABLE>
<CAPTION>
At June 30, Year Ended June 30,
1997 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average interest rate earned on:
Interest-earning deposits......................... 5.21% 5.09% 4.89% 5.93%
Mortgage-backed securities........................ 7.55 7.33 5.53 5.98
Other investment securities....................... 6.31 5.47 6.89 6.49
Loans receivable.................................. 9.51 9.57 9.71 9.29
Stock in FHLB of Indianapolis..................... 7.85 7.63 7.66 7.14
Total interest-earning assets................... 8.97 8.84 8.97 8.82
Weighted average interest rate cost of:
Savings accounts.................................. 3.00 2.90 2.76 3.09
NOW and money market accounts..................... 3.13 3.24 2.50 2.64
Certificates of deposit........................... 5.36 5.59 5.82 5.04
Other borrowings.................................. --- --- 6.67 9.80
FHLB advances..................................... 6.29 6.30 6.05 6.05
Total interest-bearing liabilities.............. 5.37 5.28 5.19 4.63
Interest rate spread (1)............................. 3.60% 3.56% 3.78% 4.19%
Net yield on weighted average
interest-earning assets (2)....................... 4.41% 4.13% 4.54%
</TABLE>
(1) Interest rate spread is calculated by subtracting weighted average interest
rate cost from weighted average interest rate earned for the period
indicated. Interest rate spread figures must be considered in light of the
relationship between the amounts of interest-earning assets and
interest-bearing liabilities.
(2) The net yield on weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets
for the period indicated. No net yield percentage is presented at June 30,
1997 because the computation of net yield is applicable only over a period
rather than at a specific date.
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected the
Bank's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (i.e.,
changes in rate multiplied by old volume) and (2) changes in volume (i.e.,
changes in volume multiplied by old rate). Changes attributable to both rate and
volume have been allocated proportionally to the change due to volume and the
change due to rate.
<PAGE>
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
Total Net Due to Due to
Change Rate Volume
YEAR ENDED JUNE 30, 1997 COMPARED
TO YEAR ENDED JUNE 30, 1996
(In thousands)
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits.............................. $ 1 $ 5 $ (4)
Mortgage-backed securities............................. 95 35 60
Other investment securities............................ 41 (21) 62
Loans receivable....................................... 293 (43) 336
Stock in FHLB of Indianapolis.......................... 12 --- 12
---- ------ ----
Total................................................ 442 (24) 466
---- ------ ----
Interest-bearing liabilities:
Savings accounts....................................... (3) 5 (8)
NOW and money market accounts.......................... 12 16 (4)
Certificates of deposit................................ (54) (42) (12)
Other borrowings....................................... (1) --- (1)
FHLB advances.......................................... 156 15 141
---- ------ ----
Total................................................ 110 (6) 116
---- ------ ----
Change in net interest income............................. $332 $ (18) $350
==== ====== ====
YEAR ENDED JUNE 30, 1996
COMPARED TO YEAR ENDED JUNE 30, 1995
Interest-earning assets:
Interest-earning deposits.............................. $ 59 $ (16) $ 75
Mortgage-backed securities............................. (3) (7) 4
Other investment securities............................ 22 3 19
Loans receivable....................................... 452 102 350
Stock in FHLB of Indianapolis.......................... 5 1 4
---- ------ ----
Total................................................ 535 83 452
---- ------ ----
Interest-bearing liabilities:
Savings accounts....................................... (21) (14) (7)
NOW and money market accounts.......................... (4) (3) (1)
Certificates of deposit................................ 323 129 194
Other borrowings....................................... (9) (2) (7)
FHLB advances.......................................... 130 --- 130
---- ------ ----
Total................................................ 419 110 309
---- ------ ----
Change in net interest income............................. $ 116 $ (27) $ 143
====== ====== ======
YEAR ENDED JUNE 30, 1995
COMPARED TO YEAR ENDED JUNE 30, 1994
Interest-earning assets:
Interest-earning deposits.............................. $ 33 $ 28 $ 5
Mortgage-backed securities............................. (13) --- (13)
Other investment securities............................ 21 4 17
Loans receivable....................................... 353 76 277
Stock in FHLB of Indianapolis.......................... 3 3 ---
---- ------ ----
Total................................................ 397 111 286
---- ------ ----
Interest-bearing liabilities:
Savings accounts....................................... (28) 2 (30)
NOW and money market accounts.......................... (5) (1) (4)
Certificates of deposit................................ 83 6 77
Other borrowings....................................... 2 3 (1)
FHLB advances.......................................... 173 32 141
---- ------ ----
Total................................................ 225 42 183
---- ------ ----
Change in net interest income............................. $172 $ 69 $103
==== ====== ====
</TABLE>
<PAGE>
CHANGES IN FINANCIAL POSITION AND RESULTS OF OPERATIONS - YEAR ENDED JUNE 30,
1997, COMPARED TO YEAR ENDED JUNE 30, 1996:
General. Total assets increased $3.1 million at June 30, 1997 compared
to June 30, 1996. The increase was the net result of an increase in loans,
combined with decreases in investment securities and cash and cash equivalents.
Loans increased by $7.0 million or 25.8%, while the sale of securities decreased
investment securities by $2.8 million and cash and cash equivalents decreased by
$1.5 million to fund the increase in loans. The increase in loans was also
funded by additional advances of $1.8 million from the Federal Home Loan Bank
("FHLB") of Indianapolis.
Average assets increased from $34.3 million for the year ended June 30,
1996, to $40.2 million for the year ended June 30, 1997, an increase of 17.2%.
Average interest-earning assets represented 96.0% of average assets for the year
ended June 30, 1996 compared to 95.5% for the year ended June 30, 1997. Average
loans experienced the largest increase amounting to $3.4 million while other
interest-earning assets increased to a lesser extent. Average interest-bearing
liabilities as a percentage of average interest-earning assets were 84.0% for
1997 compared to 93.2% for 1996.
Investment Securities. Average investment securities and
mortgage-backed securities increased $1.1 million and $895,000 respectively for
the year ended June 30, 1997 compared to the year ended June 30, 1996 primarily
due to the initial investment of conversion proceeds in securities. During the
year ended June 30, 1997, mortgage-backed securities and selected other
securities were sold primarily to fund loan growth. Consequently, at June 30,
1997, the total of mortgage-backed securities and other investment securities
decreased $2.8 million compared to June 30, 1996. All investments are classified
as available for sale to provide maximum flexibility in managing the investment
portfolio. At June 30, 1997 and 1996 the net unrealized gain (loss) on
securities available for sale was $42,000 and ($28,000), respectively.
[Bar chart with area shaded that signifies conversion period]
<TABLE>
<CAPTION>
June, September, December, March, June,
1996 1996 1996 1997 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Mortgage Backed Securities $ 3,119 $ 3,791 $ 3,239 $ 2,266 $ 795
Loans Receivable $26,828 $27,655 $28,949 $31,647 $33,419
</TABLE>
Loans and Allowance for Loan Losses. Average loans increased approximately $3.4
million from the year ended June 30, 1996 to June 30, 1997. The growth in loans
was funded by decreases in other earning assets and increased average
borrowings. Average loans were $30.4 million for the period ended June 30, 1997
compared to $27.0 million for the period ended June 30, 1996. The average rate
on loans was 9.57% for the year ended June 30, 1997 compared to 9.71% for the
year ended June 30, 1996, a decrease of 14 basis points. The allowance for loan
losses as a percentage of net loans increased to .68% from .55% as a result of a
monthly provision for loan losses and nominal charge-offs. The ratio of the
allowance for loan losses to nonperforming loans was 41.1% at June 30, 1997
compared to 41.8% at June 30, 1996.
Residential mortgage loans increased by $1.7 million and comprised
57.2% of total loans at June 30, 1997 compared to 66.1% a year earlier.
Nonresidential mortgage loans increased by $4.4 million to $6.9 million, or
19.8% of total loans at June 30, 1997, compared to 9.22% of total loans at June
30, 1996.
LOAN MIX AT JUNE 30, 1997
[pie chart]
1-4 Residential 57%
Non residential 20
Mobile w/land 12
Mobile home 4
Multifamily 3
Commercial 2
Consumer 2
<PAGE>
Premises and Equipment. Premises and equipment increased approximately $451,000,
net of depreciation from June 30, 1996 to June 30, 1997. The largest increases
were related to the purchase of a property for a proposed branch office in
Cloverdale, Indiana and building construction for expanded facilities on
property adjacent to the Bank.
Deposits. Deposits decreased $2.5 million from $28.7 million at June
30, 1996 to $26.2 million at June 30, 1997. Passbook savings accounts decreased
approximately $4.7 million, substantially all of which was attributable to funds
withdrawn for the purchase of common stock related to the conversion of the Bank
from a mutual to a stock institution. All other deposits increased $2.2 million
during this period. Average total deposits decreased $670,000 to $24.5 million
for the year ended June 30, 1997 compared to $25.2 million for the year ended
June 30, 1996.
Interest-bearing demand deposits and money market deposits totaled $3.7
million or 14.1% of total deposits at June 30, 1997, compared to $2.4 million
and 8.3% of total deposits at June 30, 1996. Savings deposits, which were
unusually high at June 30, 1996, comprised 11.3% of total deposits at June 30,
1997 compared to 26.8% a year earlier. Savings deposits, at June 30, 1996,
included approximately $4.7 million of conversion proceeds for the purchase of
stock. Certificates of deposits increased to $19.5 million or 74.7% of total
deposits at June 30, 1997 compared to $16.0 million and 64.9% of deposits at
June 30, 1996.
DEPOSIT MIX AS OF JUNE 30, 1997
[pie chart]
C.D.'s 75
Checking 14
Savings 11
Borrowed Funds. Borrowed funds increased $1.8 million from June 30, 1996 to June
30, 1997. The increase in borrowed funds was used to fund a portion of the
Bank's loan growth. The weighted average interest rate on advances from the FHLB
of Indianapolis increased from 6.05% at June 30, 1996 to 6.30% at June 30, 1997.
Average borrowed funds increased to $7.7 million for the year ended June 1997
from $5.5 million for the year ended June 1996.
Stockholders' Equity. Stockholders' equity increased $3.8 million to
$7.2 million at June 30, 1997 compared to $3.4 million at June 30, 1996
primarily due to conversion proceeds and net income during the period. On July
1, 1996, the Bank completed the conversion and the formation of Home Financial
Bancorp as the holding company of the Bank. As part of the conversion, the
Company issued 505,926 shares of common stock at $10 per share, of which 40,474
shares were issued to an Employee Stock Ownership Plan. Net proceeds of the
Company's stock issuance, after costs, were approximately $4.7 million, of which
$2.5 million was used to acquire 100% of the stock and ownership of the Bank.
During the period ended June 30, 1997, 36,400 shares of common stock
were purchased and retired by the Company pursuant to a 10% stock repurchase
program. These repurchases reduced total outstanding shares of common stock to
469,526 at June 30, 1997, and the $565,000 cost represented a reduction in total
stockholders' equity.
<PAGE>
CHANGES IN FINANCIAL POSITION AND RESULTS OF OPERATIONS - YEAR ENDED JUNE 30,
1996, COMPARED TO YEAR ENDED JUNE 30, 1995:
General. Total assets increased $8.6 million at June 30, 1996 compared
to June 30, 1995. The increase was primarily a result of an increase in cash and
cash equivalents of $4.3 million. In addition, investment securities increased
$2.1 million and net loans increased $1.6 million. These increases in assets
were funded by increased deposits of $6.2 million or 27.6% and additional
advances of $2.2 million from the Federal Home Loan Bank ("FHLB") of
Indianapolis. The increase in deposits included $4.7 million of funds related to
the sale of common stock associated with the conversion of the Bank from a state
mutual savings bank to a state stock savings bank. The conversion and related
formation of a bank holding company were completed effective July 1, 1996.
Average assets increased from $28.9 million for the period ended June
30, 1995, to $34.3 million for the period ended June 30, 1996, an increase of
18.7%. Average interest-earning assets represented 94.8% of average assets for
the year ended June 30, 1995 compared to 96.0% for the year ended June 30, 1996.
Average loans experienced the largest increase amounting to $3.6 million while
other interest-earning assets increased to a lesser extent. Average
interest-bearing liabilities as a percentage of average interest-earning assets
were 93.2% for the year ended June 30, 1996 compared to 92.5% for the June 30,
1995.
Investment Securities. Total securities increased $2.1 million,
primarily in mortgage-backed securities at June 30, 1996 compared to June 30,
1995. The Bank availed itself of the opportunity in December 1995 to transfer
all of its held-to-maturity securities to available-for-sale as permitted by the
Financial Accounting Standards Board ("FASB"). All subsequent purchases have
been classified as available for sale. The Bank believes that maintaining all
investment securities as available for sale provides the most flexibility in
managing the investment portfolio.
Loans and Allowance for Loan Losses. Average loans increased
approximately $3.6 million from the period ended June 30, 1995 to June 30, 1996.
The growth in loans was funded by increased average deposits and increased
average borrowings. Average loans were $27.0 million for the year ended June 30,
1996 compared to $23.3 million for the year ended June 30, 1995. The average
rate on loans was 9.71% for the year ended June 30, 1996 compared to 9.29% for
the year ended June 30, 1995, an increase of 42 basis points. The allowance for
loan losses as a percentage of net loans increased to .55% from .22% as a result
of a larger provision for loan losses and nominal charge-offs. The ratio of the
allowance for loan losses to nonperforming loans was 41.7% at June 30, 1996
compared to 57.0% at June 30, 1995.
Premises and Equipment. Premises and equipment increased approximately
$41,000, net of depreciation and the disposition of a possible location for
future expansion, from June 30, 1995 to June 30, 1996. The largest increases
were related to the purchase of a property adjacent to the Bank and a property
across the street from the Bank. The Bank utilizes one-half of the location
adjacent to the main office primarily for additional office space and storage
for the Bank. The property located across the street from the main office is
used for employee parking. A location purchased for a loan origination office in
a nearby community was sold on contract for a nominal gain after management
determined that a full service branch was more desirable.
Deposits. Deposits increased $6.2 million from $22.5 million at June
30, 1995 to $28.7 million at June 30, 1996. Increased deposits were used to fund
loans and increases in other earning assets. Savings accounts increased
approximately $4 million, substantially all of which was attributable to funds
on deposit for the purchase of common stock related to the conversion of the
Bank from a mutual to a stock institution. NOW accounts and certificates of
deposit increased $2.3 million during this period. Average total deposits
increased $3.3 million to $25.2 million for the year ended June 30, 1996
compared $22.0 million for the year ended June 30, 1995.
Borrowed Funds. Borrowed funds increased $2.2 million from June 30,
1995 to June 30, 1996. The increase in borrowed funds was used to fund a portion
of the Bank's loan growth. The weighted average interest rate on advances from
the FHLB of Indianapolis decreased from 6.36% at June 30, 1995 to 6.08% at June
30, 1996. Average borrowed funds increased to $5.5 million for the year ended
June 30, 1996 from $3.4 million for the year ended June 30, 1995.
Equity Capital. Equity capital increased $251,000 to $3.4 million at
June 30, 1996 compared to $3.2 million at June 30, 1995 primarily due to net
income during the period.
COMPARISON OF OPERATING RESULTS FOR FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND
1995
General. Net income for the fiscal year ended June 30, 1997 totaled
$252,000 compared to $288,000 for the year ended June 30, 1996, representing a
$36,000 or 12.5% decrease. The decline in net income was due primarily to a
one-time special assessment of $142,000 ($86,000 after tax) imposed by federal
legislation to recapitalize the Savings Association Insurance Fund (SAIF). The
return on average assets for the year ended June 30, 1997 was .63% as compared
to .84% and 1.00% for the prior years ended June 30, 1996 and June 30, 1995,
respectively.
The return on average equity was 3.31% for the year ended June 30,
1997, as compared to 8.71% and 9.59% for the years ended 1996 and 1995
respectively. Primary earnings per share were $.53 for the year ended June 30,
1997, based on 477,164 average shares of common stock outstanding.
Net income without the special SAIF assessment would have totaled
$338,000 or $.71 per share. The return on assets and the return on equity,
without the special SAIF assessment, would have been .84% and 4.44%,
respectively.
Interest Income. The Bank's total interest income was $3.4 million
compared to $3.0 million for 1996. Average earning assets increased $5.5 million
from $32.9 million to $38.4 million from 1996 to 1997. The increase in average
earning assets was accompanied by a decrease in average yields from 8.97% in
1996 to 8.84% in 1997. The increase in average loans was the primary factor
contributing to the increase in total interest income. Total interest income
increased $535,000 from 1995 to 1996. Average earning assets increased $5.5
million during the period ended June 30, 1996 compared to the period ended June
30, 1995 and the average yield increased 15 basis points to 8.97% from 8.82%.
Interest Expense. Interest expense increased $110,000 during the fiscal
year ended June 30, 1997 compared to 1996. The increase in interest expense was
the result of an increase in average interest-bearing liabilities of $1.6
million from $30.7 million to $32.3 million as well as an increase in the
average cost of funds of 9 basis points from 5.19% for 1996 to 5.28% for 1997.
The average balances of NOW and savings accounts decreased $463,000 while the
average balance of certificates of deposits decreased $207,000 during 1997.
Borrowed funds averaged $2.3 million higher during 1997 compared to 1996 as the
Bank continued to utilize borrowings from the FHLB to meet increased loan and
other asset growth. Interest expense increased $419,000 in 1996 compared to 1995
reflecting increases in interest rates of $110,000 and volume increases of
$309,000. The average cost of interest-bearing liabilities increased to 5.19% in
1996, or 56 basis points, compared to 4.63% in 1995.
Net Interest Income. Net interest income increased approximately
$332,000 to $1.7 million for the fiscal year ended June 30, 1997 compared to the
fiscal year ended June 30, 1996. The increase was due to an increase of $350,000
due to volume while interest rates accounted for a decrease of $18,000. The
increase of $116,000 for the year ended June 30, 1996 was the result of $143,000
due to volume while interest rates accounted for a decrease of $27,000. The
$172,000 increase in 1995 was the result of $103,000 due to volume and $69,000
due to rates. The Bank's interest spread for 1997 was 3.56% compared to 3.78%
for 1996 and 4.19 % for 1995.
Provision for Loan Losses. The Bank provided $85,000 for future loan
losses for the fiscal year ended June 30, 1997. The allowance for loan losses at
June 30, 1997 was considered adequate based on historical net chargeoffs and
other factors including the size, condition and components of the loan
portfolio. Consideration was also given to the growth in the loan portfolio and
the level of the allowance maintained by peers. The provision for loan losses
was $94,000 for 1996 and $36,000 for 1995. The Bank provides a general allowance
that reflects inherent losses based upon the types of outstanding loans as well
as the level of problem or nonperforming loans.
Other Income. Service charges on deposit accounts increased
approximately $5,000 in 1997
<PAGE>
compared to 1996 primarily as a result of an increase in the number of accounts
subject to such charges. Service charges on deposit accounts increased $10,000
in 1996 compared to 1995. The increase in other income in 1997 of $5,000
compared to 1996 was primarily the result of an increase in the number of
service fees assessed, including ATM and safe deposit box fees. The increase of
$5,000 in 1996 compared to 1995 was also the result of an increase in service
fees.
BSF Inc., the Bank's service corporation subsidiary ("BSF"), was
organized in 1989 and has historically engaged in the purchasing and developing
of large tracts of real estate. BSF's gain on sales of real estate acquired for
development was $31,000, $57,000 and $78,000 for 1997, 1996 and 1995. Management
has utilized the sale of lots and residences to provide an additional source of
income for the Bank. The level of income from this source fluctuates widely
since it is dependent on the volume of activity, primarily the number of lots
sold, and profits on residential properties. In connection with the Bank's
conversion to an Indiana mutual savings bank in 1996, the FDIC required the Bank
to cease BSF's land acquisitions and divest of BSF's non-conforming real estate
holdings within five years, among other conditions. BSF has ceased to acquire
land and is in process of divesting of its real estate holdings. BSF currently
anticipates that all non-conforming real estate will be sold within the required
disposition period. The loss of the income from this source will have an adverse
effect on net income subsequent to discontinuance of this business activity.
Salaries and Employee Benefits. Salaries and benefits increased 35.7%
to $563,000 for the fiscal year ended June 30, 1997 compared to 1996 reflecting
new employee benefit plans, two additional full-time employees and normal
increases in officers' and employees' compensation and payroll taxes. Salaries
and benefits increased 2.7% to $415,000 in 1996 compared to 1995.
Most of the increase in salaries and benefits in the period ended June
30, 1997 was the result of expenses related to the Employee Stock Ownership Plan
("ESOP") adopted in July 1996 and the Recognition and Retention Plan and Trust
("RRP") approved by shareholders on January 8, 1997. The expense under the ESOP
was $66,000 for the year ended June 30, 1997, while the expense under the RRP
was $25,000. Compensation expense related to the ESOP was recorded equal to the
fair market value of the stock when contributions were made by the Bank to the
ESOP. Restricted stock awards covering up to 4% of the common stock sold in the
conversion may be awarded to the Bank's directors, officers and key employees
under the RRP.
Net Occupancy and Equipment Expenses. Occupancy and equipment expenses
were $132,000 for 1997, $123,000 for 1996 and $109,000 for 1995. The increases
in 1997 and 1996 resulted primarily from increased depreciation on new equipment
placed in service for the Bank's operations.
Deposit Insurance Expense. Deposit insurance expense was $165,000
during 1997; an increase of $111,000, or 206% compared to 1996. Assessments for
1996 and 1995 were $54,000 and $49,000 respectively.
The Bank's deposits are presently insured by the Savings Association
Insurance Fund. A recapitalization plan for the SAIF was signed into law on
September 30, 1996, which provided for a special assessment on all SAIF-insured
institutions to enable the SAIF to achieve its required level of reserves. The
assessment of .65% was effected based on deposits as of June 30, 1996. The
Company's special assessment totaled $142,000 before taxes, and was charged
against current year income and included with deposit insurance expense.
Other Expenses. Expenses other than those discussed above, consisting
primarily of expenses related to computer processing, supplies, professional
fees, advertising, management fees, supervisory examination fees, telephone,
postage and insurance expenses, increased $174,000 or 52.1% in 1997 compared to
1996, and increased $30,000 in 1996 compared to 1995. In 1997, computer
processing expenses increased $4,000 compared to 1996 as a result of increased
usage and a higher volume of activity. Printing and office supplies in fiscal
year 1997 increased $5,000 due to increased volume and general price increases
compared to 1996. Legal, accounting and professional fees increased $124,000
during the year ended June 30, 1997 primarily as a result of costs related to
the conversion of the Bank to a stock company and the implementation of various
employee plans. Management fees paid to Mr. Stewart in connection with the
operations of BSF deceased during 1996 as a result of the termination of such
fees effective January 1, 1997. Other increases occurred as a result of general
increases in a variety of expense categories, including advertising, which
increased by $10,000 compared to 1996.
Income Tax Expense. Income tax expense was $152,000 for 1997 compared
to $196,000 for 1996 and $203,000 for 1995. The level of tax expense was
consistent with the amount of taxable income each year. The effective tax rate
was 37.7%, 40.5% and 41.3% for 1997, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and proceeds from maturing securities.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, competition and the restructuring of the
thrift industry.
The primary investing activity of the Bank is the origination of
mortgage loans. During the years ended June 30, 1997, 1996 and 1995, the Bank
originated mortgage loans in the amounts of $12.3 million, $7.6 million and $7.1
million, respectively. The Bank originated mobile home loans of $78,000,
$146,000 and $286,000, and consumer loans of $1.0 million, $962,000 and
$710,000, respectively, during these periods. Loan repayments and other
deductions were $6.0 million, $6.8 million and $3.9 million during the
respective three one-year periods.
During each of the years ended June 30, 1997 and 1996, the Bank and the
Holding Company purchased investment securities in the amounts of $3.3 million.
Securities totaling $605,000 were purchased during 1995. During 1997, in order
to fund loan growth, investment securities totaling $4.8 million were sold. No
investment securities were sold in the prior two years. Maturities and
repayments of securities were $1.3 million in 1997, $1.1 million in 1996 and
$291,000 in 1995.
During the year ended June 30, 1997, deposits decreased approximately
$2.6 million, which resulted primarily from $4.7 million in deposit withdrawals
related to the sale of stock associated with the conversion. The Bank also
utilized FHLB advances to fund increases in loans. FHLB advances increased
during each of the years in the periods presented.
The Bank's cash and cash equivalents decreased $1.5 million during the
year ended June 30, 1997. However, the amount at June 30, 1996 was substantially
higher than the preceding year as a result of deposits related to the conversion
being invested short term. Cash and cash equivalents were significantly lower in
1995 compared to 1996.
The Bank had outstanding loan commitments of $1.1 million and unused
lines of credit of $9,000 at June 30, 1997. The Bank anticipates that it will
have sufficient funds from loan repayments and cash and cash equivalents to meet
its current commitments without borrowing additional funds from the FHLB of
Indianapolis. Certificates of deposit scheduled to mature in one year or less at
June 30, 1997 totaled $11.2 million. Management believes that a significant
portion of such deposits will remain with the Bank based upon historical deposit
flow data and the Bank's competitive pricing in its market area.
Liquidity management is both a daily and long-term function of the
Bank's management strategy. In the event that the Bank should require funds
beyond its ability to generate them internally, additional funds are available
through the use of FHLB advances and through sales of securities. The Bank
regularly monitors its interest rate spread position to determine the
appropriate mix between retail and wholesale funds available to fund its loan
activities. From time-to-time the Bank offers higher cost deposit products to
generate funds for loans. The Bank also relies on advances from the FHLB of
Indianapolis to fund its lending activities when the cost of alternative sources
of funds makes it prudent to do so. The Bank will continue to monitor its
interest rate spread position and its mix of deposits and alternative sources of
funds. FHLB advances were $9.0 million at June 30, 1997. The Bank had $22.7
million in eligible assets available as collateral for advances from the FHLB of
Indianapolis as of June 30, 1997. Based on the
<PAGE>
Bank's blanket collateral agreements, advances from the FHLB of
Indianapolis must be collateralized by 160% of eligible assets. Therefore, the
Bank's eligible collateral would have supported approximately $14.2 million in
advances from the FHLB of Indianapolis as of June 30, 1997. However, the Bank's
Board of Directors has by resolution limited the amount of authorized borrowings
to $13 million.
The following is a summary of the Bank's three major types of cash
flows. Cash flows from operating activities consist primarily of net income
generated by cash. Investing activities generate cash flows through the
origination and principal collection on loans as well as purchases and sales of
securities. Investing activities will generally result in negative cash flows
when the Bank is experiencing loan growth. Cash flows from financing activities
include savings deposits, withdrawals and maturities and changes in borrowings.
The following table summarizes cash flows for each of the three years in the
period ended June 30, 1997.
SUMMARY OF CASH FLOWS
Year Ended June 30, 1997 1996 1995
- --------------------------------------------------------
(In thousands)
Operating activities.........$ 345 $ 261 $ 218
------- ------- ------
Investing activities:
Investment purchases...... (3,262) (1,918) (605)
Mortgage-backed
securities purchases.... --- (1,399) ---
Investment sales.......... 4,825 --- ---
Total investment
securities maturities
and paydowns............ 1,343 1,114 291
Changes in loans.......... (7,372) (1,762) (4,134)
Other..................... (300) (98) (118)
------- ------- ------
Total................... (4,766) (4,063) (4,566)
------- ------- ------
Financing activities:
Deposit increases
(decreases)............. (2,569) 6,226 1,049
Borrowings, net
of repayments........... 1,800 2,171 3,448
Other..................... 3,654 (260) ---
------- ------- ------
Total................... 2,885 8,137 4,497
------- ------- ------
Net change in cash and
cash equivalents..........$(1,536) $ 4,335 $ 149
======= ======= ======
During the years ended June 30, 1997, 1996 and 1995, operating and
financing activities provided the most significant portion of funds to support
growth in the loan portfolio. Sales of securities as well as increases in
borrowed funds funded loan growth during 1997. Loan growth in 1996 and 1995 was
funded primarily by increases in deposits and borrowed funds.
IMPACT OF INFLATION
The consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
The primary assets and liabilities of financial institutions such as
the Bank are monetary in nature. As a result, interest rates have a more
significant impact on the Bank's performance than the effects of general levels
of inflation. Interest rates, however, do not necessarily move in the same
direction or with the same magnitude as the price of goods and services, since
such prices are affected by inflation. In a period of rapidly rising interest
rates, the liquidity and maturity structure of the Bank's assets and liabilities
are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans made by the Bank. The Bank is unable to determine the extent, if
any, to which properties securing the Bank's loans have appreciated in dollar
value due to inflation.
CURRENT ACCOUNTING ISSUES
Accounting for Mortgage Servicing Rights. During 1995, the FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 122, entitled
Accounting for Mortgage Servicing Rights. SFAS No. 122 pertains to mortgage
banking enterprises and financial institutions that conduct operations that are
substantially similar to the primary operations of a mortgage banking
enterprise. This Statement eliminates the accounting distinction between
mortgage servicing rights that are acquired through loan origination activities
and those acquired through purchase transactions. Under this Statement, if a
mortgage banking enterprise sells or securitizes loans and retains the mortgage
servicing rights, the enterprise must allocate the total cost of the mortgage
loans to mortgage servicing rights and loans (without the rights) based on their
relative fair values if it is practicable to estimate those fair values. If it
is not practicable, the entire cost should be allocated to the mortgage loans
and no cost should be allocated to the mortgage servicing rights. An entity
would measure impairment of mortgage servicing rights and loans based on the
excess of the carrying amount of the mortgage servicing rights portfolio over
the fair value of that portfolio.
The Statement which was to be applied prospectively in fiscal years
beginning after December 15, 1995, to transactions in which an entity acquires
mortgage servicing rights and to impairment evaluations of all capitalized
mortgage servicing rights. Retroactive application is prohibited. The adoption
of No. 122 during 1996 did not have a material impact on either the Company's
financial position or results of operations.
Accounting For Stock-based Compensation. The FASB has issued SFAS No.
123, Accounting for Stock-based Compensation. This Statement establishes a fair
value based method of accounting for stock-based compensation plans. The FASB
encourages all entities to adopt this method for accounting for all arrangements
under which employees receive shares of stock or other equity instruments of the
employer, or the employer incurs liabilities to employees in amounts based on
the price of its stock.
Due to the extremely controversial nature of this project, the
Statement permits a company to continue the accounting for stock-based
compensation prescribed in Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. If a company elects that option, pro
forma disclosures of net income (and EPS, if presented) are required in the
footnotes as if the provisions of this Statement had been used to measure
stock-based compensation.
The disclosure requirements of Opinion No. 25 have been superseded by
the disclosure requirements of this Statement.
Once an entity adopts the fair value based method for accounting for
these transactions, that election cannot be reversed.
Equity instruments granted or otherwise transferred directly to an
employee by a principal stockholder are stock-based employee compensation to be
accounted for in accordance with either Opinion 25 or this Statement, unless the
transfer clearly is for a purpose other than compensation.
The accounting requirements of this Statement are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The disclosure requirements are effective for financial statements for fiscal
years beginning after December 15, 1995. Pro forma disclosures required for
entities that elect to continue to measure compensation cost using Opinion 25
must include the effects of all awards granted in fiscal years that begin after
December 15, 1994.
During the initial phase-in period, the effects of applying this
Statement are not likely to be representative of the effects on reported net
income for future years because options vest over several years and additional
awards generally are made each year. If that situation exists, the entity must
include a statement to that effect.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Statement No. 125 breaks new ground in resolving
long-standing questions about whether transactions should be accounted for as
secured borrowings or as sales. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are considered secured borrowings.
<PAGE>
A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The transferor has surrendered control over transferred
assets only if all of the following conditions are met:
The transferred assets have been isolated from the transferor -- put
presumptively beyond the reach of the transferor and its creditors, even in
bankruptcy or other receivership.
Each transferee obtains the right -- free of conditions that constrain
it from taking advantage of that right -- to pledge or exchange the transferred
assets, or the transferee is a qualifying special-purpose entity and the holders
of beneficial interests in that entity have the right -- free of conditions that
constrain them from taking advantage of that right -- to pledge or exchange
those interests.
The transferor does not maintain effective control over the transferred
assets through an agreement that both entitles and obligates the transferor to
repurchase or redeem them before their maturity, or an agreement that entitles
the transferor to repurchase or redeem transferred assets that are not readily
obtainable.
This Statement provides detailed measurement standards for assets and
liabilities included in these transactions. It also includes implementation
guidance for assessing isolation of transferred assets and for accounting for
transfers of partial interests, servicing of financial assets, securitizations,
transfers of sales-type and direct financing lease receivables, securities
lending transactions, repurchase agreements, "wash sales", loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse, and extinguishments of
liabilities.
The Statement supersedes FASB Statements No. 76, Extinguishment of
Debt, and No. 77, Reporting by Transferors for Transfers of Receivables with
Recourse, and No. 122, Accounting for Mortgage Servicing Rights and amends FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, in addition to clarifying or amending a number of other statements
and technical bulletins.
This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. Earlier or retroactive application is not
permitted.
The adaption of No. 125 did not have any material effect on 1997
financial statements.
Earnings per Share. Statement No. 128 establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock, as well as any other
entity that chooses to present EPS in its financial statements.
This Statement simplifies the current standards of APB Opinion No. 15,
Earnings per Share, and makes them comparable to international EPS standards. It
eliminates the presentation of primary EPS and requires presentation of basic
EPS (the principal difference being that common stock equivalents are not
considered in the computation of basic EPS). It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if the potential common shares were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed similarly to that of fully
diluted EPS pursuant to Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier application
is not permitted. The Statement requires restatement of all prior-period EPS
data presented.
<PAGE>
Disclosure of Information about Capital Structure. Statement No. 129
continues the current requirements to disclose certain information about an
entity's capital structure found in APB Opinion No. 10, Omnibus Opinion ( 1966,
Opinion 15, and SFAS No. 47, Disclosure of Long-Term Obligations. It
consolidates specific disclosure requirements from those standards. SFAS No. 129
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods.
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No.
130, Reporting Comprehensive Income, establishing standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. It requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This Statement
does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period in that financial statement.
SFAS No. 130 also requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position.
The Statement is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
Disclosures about Segments of an Enterprise. In June 1997, the FASB
issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishing standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise, but retains the
requirement to report information about major customers. It amends SFAS No. 94,
Consolidation of All Majority-Owned Subsidiaries, to remove the special
disclosure requirements for previously unconsolidated subsidiaries. This
Statement does not apply to nonpublic business enterprises or to not-for-profit
organizations.
SFAS No. 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
This Statement requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose financial
statements. This Statement also requires that a public business enterprise
report descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This Statement need
not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application.
<PAGE>
Accounting for Employee Stock Plans. In November 1993, AICPA issued
Statement of Position ("SOP") 93-6 which addresses the accounting for shares of
stock issued to employees by an ESOP. SOP 93-6 requires that the employer record
compensation expense in an amount equal to the fair value of shares committed to
be released to employees from the ESOP. SOP 93-6 is effective for fiscal years
beginning after December 15, 1993 and relates to shares purchased by an ESOP
after December 31, 1992. Assuming shares of Common Stock appreciate in value
over time, the adoption of SOP 93-6 will likely increase compensation expense
relative to the Company's ESOP established in connection with the Conversion, as
compared with prior guidance which would have required the recognition of
compensation expense based on the cost of shares acquired by the ESOP.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Home Financial Bancorp
Spencer, Indiana
We have audited the consolidated statement of financial condition of Home
Financial Bancorp (formerly Owen Community Bank, s. b.) and subsidiary as of
June 30, 1997 and 1996, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended June 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of Home
Financial Bancorp and subsidiary as of June 30, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
Geo. S. Olive & Co. LLC
Indianapolis, Indiana
July 25, 1997
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, 1997 1996
- ---------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash $ 296,805 $ 385,824
Short-term interest-bearing deposits 3,887,498 5,334,796
------------ ------------
Total cash and cash equivalents 4,184,303 5,720,620
Investment securities--available for sale 2,101,734 4,901,120
Loans 34,348,648 27,274,557
Allowance for loan losses (231,397) (149,833)
------------ ------------
Net loans 34,117,251 27,124,724
Real estate acquired for development 20,758 171,580
Premises and equipment 963,657 512,768
Federal Home Loan Bank stock 500,000 360,000
Interest receivable 268,648 235,678
Prepaid stock conversion costs 260,067
Other assets 351,876 139,754
------------ ------------
TOTAL ASSETS $ 42,508,227 $ 39,426,311
============ ============
LIABILITIES
Interest-bearing deposits $ 26,156,516 $ 28,725,700
Federal Home Loan Bank advances 9,000,000 7,200,000
Other liabilities 154,577 90,539
------------ ------------
TOTAL LIABILITIES 35,311,093 36,016,239
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY Preferred stock, without par value:
Authorized and unissued--2,000,000 shares
Common stock, without par value
Authorized--5,000,000
Issued--469,526 4,389,698
Retained earnings--substantially restricted 3,409,288 3,427,201
Unearned compensation (264,781)
Unearned ESOP shares (364,264)
Net unrealized gain (loss) on securities available for sale 27,193 (17,129)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 7,197,134 3,410,072
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,508,227 $ 39,426,311
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C>
Loans $2,912,085 $2,618,394 $2,166,726
Deposits with financial institutions 136,538 135,553 76,678
Investment securities
Taxable 279,869 161,258 143,426
Tax exempt 30,073 18,206 17,745
Other interest and dividend income 38,105 21,210 15,728
--------- --------- ---------
Total interest and dividend income 3,396,670 2,954,621 2,420,303
--------- --------- ---------
INTEREST EXPENSE
Deposits 1,210,207 1,261,043 962,764
Federal Home Loan Bank advances 487,217 330,458 201,463
Other interest expense 5,758 1,282 9,994
--------- --------- ---------
Total interest expense 1,703,182 1,592,783 1,174,221
--------- --------- ---------
NET INTEREST INCOME 1,693,488 1,361,838 1,246,082
Provision for losses on loans 85,000 94,000 36,134
NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS 1,608,488 1,267,838 1,209,948
OTHER INCOME
Service charges on deposit accounts 42,494 37,478 27,345
Gain on sale of real estate acquired for development 31,437 56,944 78,499
Net realized gain on sales of available-for-sale securities 37,155
Other income 52,750 47,535 42,567
--------- --------- ---------
Total other income 163,836 141,957 148,411
--------- --------- ---------
OTHER EXPENSES
Salaries and employee benefits 563,142 414,986 403,787
Net occupancy expenses 70,825 67,213 73,761
Equipment expenses 61,044 55,436 35,302
Deposit insurance expense 164,550 53,686 49,444
Computer processing fees 59,152 55,410 47,945
Printing and office supplies 38,274 33,479 32,215
Legal and professional fees 171,674 47,324 35,125
Advertising expense 34,004 24,346 25,518
Management fees 22,998 33,005
Other expenses 204,901 150,563 129,824
--------- --------- ---------
Total other expenses 1,367,566 925,441 865,926
--------- --------- ---------
INCOME BEFORE INCOME TAX 404,758 484,354 492,433
Income tax expense 152,441 195,964 203,210
--------- --------- ---------
NET INCOME $ 252,317 $ 288,390 $ 289,223
========= ========= =========
NET INCOME PER SHARE $.53
WEIGHTED AVERAGE SHARES OUTSTANDING 477,164
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Unearned Securities
Common Stock Retained Unearned ESOP Available
Shares Amount Earnings Compensation Shares For Sale Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1994 $2,849,588 $2,849,588
Net income for 1995 289,223 289,223
Cumulative effect of change
in method of accounting
for securities $ 6,912 6,912
Net change in unrealized
gain (loss) on securities
available for sale 13,439 13,439
----------------------------------------------------------------------------------------
Balances, June 30, 1995 3,138,811 20,351 3,159,162
Net income for 1996 288,390 288,390
Net change in unrealized
gain (loss) on securities
available for sale (37,480) (37,480)
----------------------------------------------------------------------------------------
Balances, June 30, 1996 3,427,201 (17,129) 3,410,072
Net income for 1997 252,317 252,317
Common stock issued in
conversion, net of costs 505,926 $4,728,294 4,728,294
Cash dividends
($.15 per share) (68,818) (68,818)
Net change in unrealized
gain (loss) on securities
available for sale 44,322 44,322
Contributions for unearned
ESOP shares $(404,740) (404,740)
ESOP shares earned 25,404 40,476 65,880
Contribution for
unearned RRP shares $(290,172) (290,172)
RRP shares earned 25,391 25,391
Purchase of stock (36,400) (364,000) (201,412) (565,412)
----------------------------------------------------------------------------------------
Balances, June 30, 1997 469,526 $4,389,698 $3,409,288 $(264,781)$(364,264) $27,193 $7,197,134
========================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 252,317 $ 288,390 $ 289,223
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 85,000 94,000 36,134
Investment securities amortization, net 2,630 464 683
ESOP shares earned 65,880
RRP shares earned 25,391
Depreciation and amortization 83,193 74,367 58,813
Deferred income tax benefit (35,294) (41,460) (198)
Gain on sale of real estate acquired for development (31,437) (56,944) (78,499)
Gain on sale of other real estate (21,964) (3,250) (11,019)
Gain on sale of securities available for sale (37,155)
Change in
Interest receivable (32,970) (49,069) (74,994)
Other assets (74,794) (10,361) (13,636)
Other adjustments 64,038 (34,852) 11,360
---------- ---------- --------
Net cash provided by operating activities 344,835 261,285 217,867
---------- ---------- --------
INVESTING ACTIVITIES
Purchases of securities available for sale (3,261,591) (3,316,533) (399,719)
Purchase of securities held to maturity (205,000)
Proceeds from sales of securities available for sale 4,824,600
Proceeds from maturities and paydowns of
securities available for sale 1,342,922 1,002,691
Proceeds from maturities and paydowns of
securities held to maturity 111,071 290,803
Net changes in loans (7,371,895) (1,761,684) (4,134,319)
Improvements to real estate owned (12,621)
Proceeds from real estate owned sales 204,501 44,202 41,284
Purchase of premises and equipment (569,082) (164,998) (173,327)
Proceeds from disposal of premises and equipment 35,000 58,000
Purchase of real estate acquired for development (2,911) (38,421) (231,464)
Proceeds from sale of real estate acquired for development 185,170 112,170 274,247
Purchase of FHLB of Indianapolis stock (140,000) (110,000) (28,500)
---------- ---------- --------
Net cash used by investing activities (4,765,907) (4,063,502) (4,565,995)
---------- ---------- --------
FINANCING ACTIVITIES
Net change in
NOW and savings deposits (3,456,237) 4,309,021 (1,774,297)
Certificates of deposit 887,053 1,916,677 2,822,850
Advances from Federal Home Loan Bank of Indianapolis 4,300,000 2,200,000 3,500,000
Payments on advances from Federal
Home Loan Bank of Indianapolis (2,500,000)
Other borrowings 75,000
Payments on other borrowings (28,773) (126,400)
Sale of stock 4,578,341
Prepaid stock conversion costs (260,067)
Purchase of stock (565,412)
Dividends paid (68,818)
Contribution of RRP shares (290,172)
---------- ---------- --------
Net cash provided by financing activities 2,884,755 8,136,858 4,497,153
---------- ---------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,536,317) 4,334,641 149,025
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,720,620 1,385,979 1,236,954
---------- ---------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $4,184,303 $5,720,620 $1,385,979
========== ========== ==========
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION
Interest paid $1,703,182 $1,592,783 $1,174,221
Income tax paid 178,988 179,305 144,375
Transfers from loans to other real estate 294,368
Stock issuance costs transferred from other
assets to stockholder's equity 254,787
Common stock issued to ESOP leveraged with an employer loan 404,740
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
- -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Home Financial Bancorp
("Company") and its wholly owned subsidiary, Owen Community Bank, s.b. ("Bank")
and the Bank's wholly owned subsidiary, BSF, Inc. ("BSF"), conform to generally
accepted accounting principles and reporting practices followed by the thrift
industry. The more significant of the policies are described below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company is a bank holding company whose principal activity is the
ownership and management of the Bank. Commencing July 1, 1997, the Bank operates
under a state thrift charter, known as a stock savings bank, and provides full
banking services. Prior to July 1, 1997, the Bank operated as an Indiana mutual
savings bank. As a state-chartered thrift, the Bank is subject to regulation by
the Department of Financial Institutions, State of Indiana and the Federal
Deposit Insurance Corporation ("FDIC").
The Bank generates mortgage and consumer loans and receives deposits
from customers located primarily in Owen and surrounding counties. The Bank's
loans are generally secured by specific items of collateral including real
property and consumer assets.
BSF engages in purchasing and developing large tracts of real estate.
After land is purchased, BSF subdivides the real estate into lots, makes
improvements such as streets, and sells individual lots, usually on contract for
debt. In connection with the Bank's conversion to an Indiana mutual savings bank
in 1995, the FDIC required the Bank to cease BSF's land acquisitions, divest of
BSF's nonconforming real estate holdings by November 16, 2000 and maintain the
Bank's capital at levels sufficient to classify the Bank as a well-capitalized
institution. BSF has ceased land acquisitions and is in process of divesting of
its real estate holdings. BSF's net income for the years ended June 30, 1997,
1996 and 1995, included in the Company's consolidated net income, totaled
$35,000, $59,000, and $59,000.
Consolidation--The consolidated financial statements include the
accounts of the Company and subsidiary after elimination of all material
intercompany transactions and accounts.
Investment Securities--The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities, on July 1, 1994.
Debt securities are classified as held to maturity when the Company has
the positive intent and ability to hold the securities to maturity. Securities
held to maturity are carried at amortized cost.
Debt securities not classified as held to maturity are classified as
available for sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately, net of tax, in stockholders'
equity.
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Amortization of premiums and accretion of discounts are recorded using
the interest method as interest income from securities. Realized gains and
losses are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
Loans are carried at the principal amount outstanding. A loan is
impaired when, based on current information or events, it is probable that the
Bank will be unable to collect all amounts due (principal and interest)
according to the contractual terms of the loan agreement. Payments with
insignificant delays not exceeding 90 days outstanding are not considered
impaired. The Bank considers its investment in one-to-four family residential
loans and consumer loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. Interest income is accrued on the
principal balances of loans. The accrual of interest on impaired and nonaccrual
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans over the contractual lives of the loans. When a
loan is paid off or sold, any unamortized loan origination fee balance is
credited to income.
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is
based on estimates that are particularly susceptible to significant changes in
the economic environment and market conditions. Management believes that as of
June 30, 1997, the allowance for loan losses is adequate based on information
currently available. A worsening or protracted economic decline in the area
within which the Bank operates would increase the likelihood of additional
losses due to credit and market risks and could create the need for additional
loss reserves.
Real estate acquired for development is carried at the lower of cost or
fair value. Costs relating to development and improvements of property are
allocated to individual lots and capitalized, whereas costs relating to holding
the property are expensed. Gains on sales of lots are determined on the
specific-identification method.
Premises and equipment are carried at cost net of accumulated
depreciation. Depreciation is computed using the accelerated and straight-line
methods based principally on the estimated useful lives of the assets.
Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Gains and losses on dispositions are included in
current operations.
Federal Home Loan Bank ("FHLB") stock is a required investment for
institutions that are members of the Federal Home Loan Bank system. The required
investment in the common stock is based on a predetermined formula.
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Pension plan costs are based on actuarial computations and charged to
current operations. The funding policy is to pay at least the minimum amounts
required by ERISA.
Income tax in the consolidated statement of income includes deferred
income tax provisions or benefits for all significant temporary differences in
recognizing income and expenses for financial reporting and income tax purposes.
The Company and Bank file consolidated tax returns.
Earnings per share have been computed based upon the weighted average
common shares outstanding during the period subsequent to the Bank's conversion
to a stock savings bank on July 1, 1996. Unearned employee stock ownership plan
("ESOP") shares have been excluded from the computation of average common shares
outstanding.
- -- CONVERSION TO STATE STOCK SAVINGS BANK
On July 1, 1996, the Bank completed the conversion from a state
chartered mutual savings bank to a state chartered stock savings bank and the
formation of the Company as the holding company of the Bank. As part of the
conversion, the Company issued 505,926 shares of common stock at $10 per share.
Net proceeds of the Company's stock issuance, after costs and excluding the
shares issued for the ESOP, were approximately $4,320,000, of which $2,472,548
was used to acquire 100% of the stock and ownership of the Bank. Costs
associated with the conversion were deducted from the proceeds of stock sold by
the Company. The transaction was accounted for in a manner similar to a pooling
of interests.
- -- INVESTMENT SECURITIES
1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, Cost Gains Losses Value
- ------------------------------------------------------------------
Available for sale
U.S. Treasury $ 825 $ 2 $ 827
Federal agencies 100 4 104
Marketable
equity securities 344 34 378
Mortgage-backed
securities 788 5 793
--------------------------------------------
Total investment
securities $2,057 $45 $2,102
============================================
1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, Cost Gains Losses Value
- ------------------------------------------------------------------
Available for sale
Federal agencies $1,100 $ 5 $1,105
State and
municipal 678 4 $ 5 677
Mortgage-backed
securities 3,151 23 55 3,119
----------------------------------------------
Total investment
securities $4,929 $32 $60 $4,901
==============================================
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities available for sale at
June 30, 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
1997
-------------------------
Available for Sale
-------------------------
Amortized Fair
Cost Value
-------------------------
Maturity Distribution
at June 30
- ----------------------------------------------------
Within one year $ 475 $ 475
One to five years 450 456
925 931
Marketable equity
securities 344 378
Mortgage-backed
securities 788 793
------ ------
Totals $2,057 $2,102
====== ======
Securities with a carrying value of $788,000 and $3,119,000 were
pledged at June 30, 1997 and 1996 to secure FHLB advances.
Proceeds from sales of securities available for sale during 1997 were
$4,825,000. Gross gains of $71,000 and gross losses of $34,000 were realized on
those sales.
On December 26, 1995, the Bank transferred certain securities from held
to maturity to available for sale in accordance with a transition
reclassification allowed by the Financial Accounting Standards Board. Such
securities had a carrying value of $1,716,000 and a fair value of $1,707,000.
Other than the initial adoption of SFAS No. 115 and the preceding, there were no
transfers or sales of investment securities during the periods presented.
- -- LOANS AND ALLOWANCE
June 30 1997 1996
- ---------------------------------------------------
Real estate mortgage loans
Residential $ 19,898 $ 18,240
Mobile home and land 4,396 3,513
Nonresidential 6,896 2,544
Multi-family 980 604
Mobile home loans1,361
1,241
Commercial and industrial 634 350
Consumer loans 612 1,094
------ ------
34,777 27,586
------ ------
Undisbursed portion of loans (430) (319)
Deferred loan costs 2 8
------ ------
(428) (311)
------ ------
Total loans $34,349 $27,275
======= =======
Year Ended June 30 1997 1996 1995
- ----------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Balances, July 1 $ 150 $ 57 $ 26
Provision for loan losses 85 94 36
Recoveries on loans 1
Loans charged off (4) (1) (6)
----- ----- -----
Balances,
June 30 $ 231 $ 150 $ 57
===== ===== =====
The Bank adopted SFAS No. 114 and No. 118, Accounting by Creditors For
Impairment of a Loan and Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures, on July 1, 1995. The adoption of SFAS
Nos. 114 and 118 did not have a material impact on the Bank's financial position
or results of operations.
At June 30, 1997 and 1996, the Bank had nonaccrual loans of
approximately $562,000 and $359,000, for which impairment had not been
recognized. If interest on these loans had been recognized at the original
interest rates, interest income would have increased approximately $21,000 and
$19,000.
The Bank has no commitments to loan additional funds to the borrowers
of nonaccrual loans.
Nonaccruing loans totaled approximately $71,000 at June 30, 1995.
Additional interest income that would have been recorded had income on
nonaccruing loans been considered collectible and
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
accounted for in accordance with their original terms was immaterial.
The Bank has entered into transactions with certain directors and
officers. Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. The aggregate
amount of loans, as defined, to such related parties were as follows:
Balances, June 30, 1996 $ 508
New loans, including renewals 14
Payments, etc. including renewals (39)
Change in composition (48)
-----
Balances, June 30, 1997 $ 435
=====
- -- PREMISES AND EQUIPMENT
June 30 1997 1996
- -----------------------------------------------------
Land $277 $188
Building 991 606
Equipment 381 321
--- ---
Total cost 1,649 1,115
Accumulated depreciation (685) (602)
---- ----
Net $964 $513
==== ====
- -- DEPOSITS
June 30 1997 1996
- --------------------------------------------
Interest-bearing demand $ 3,682 $ 2,396
Savings 2,942 7,684
Certificates of $100,000
or more 3,479 2,655
Other certificates 16,054 15,991
------- -------
Total deposits $26,157 $28,726
======= =======
Certificates maturing in years ending June 30:
1998 $11,168
1999 3,629
2000 3,512
2001 470
2002 754
-------
$19,533
=======
- -- FEDERAL HOME LOAN BANK ADVANCES
1997
-----------------------
Weighted
Average
June 30 Amount Rate
- ------------------------------------------------------
Maturities in years ending
1998 $3,800 6.19%
1999 1,500 6.25%
2000 3,500 6.24%
2006 200 6.87%
------
$9,000 6.29%
======
The terms of the security agreement with the FHLB require the Bank to
pledge as collateral for advances qualifying first mortgage loans in an amount
equal to at least 160 percent of these advances and all stock in the FHLB.
Advances are subject to restrictions or penalties in the event of prepayment.
- -- INCOME TAX
Year Ended June 30 1997 1996 1995
- ------------------------------------------------------
Income tax expense
Currently payable
Federal $141 $185 $153
State 46 52 50
Deferred
Federal (25) (32)
State (10) (9)
---- ---- ----
Total income
tax expense $152 $196 $203
==== ==== ====
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended June 30 1997 1996 1995
- --------------------------------------------------
Reconciliation of
federal statutory to
actual tax expense
Federal statutory
income tax at 34% $ 138 $ 165 $ 167
Effect of state
income taxes 24 28 33
Tax exempt interest (9) (5) (5)
Other (1) 8 8
----- ----- -----
Actual tax expense $ 152 $ 196 $ 203
===== ===== =====
A cumulative net deferred tax asset is included in other assets at June 30, 1997
and 1996. The components of the asset are as follows:
June 30 1997 1996
- -------------------------------------------------------
Differences in
depreciation methods $ (3) $ (7)
Differences in accounting
for loan fees (4) (6)
Differences in accounting
for loan losses 61 36
Differences in
compensation plans 9
State income tax (7) (3)
Differences in
accounting for securities
available for sale (18) 12
--- --
$38 $32
=== ===
Assets $70 $48
Liabilities (32) (16)
--- ---
$38 $32
=== ===
No valuation allowance was necessary for the years ended June 30, 1997
and 1996.
Retained earnings at June 30, 1997, include approximately $700,000 for
which no deferred federal income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions as of June 30, 1997
for tax purposes only. Reduction of amounts so allocated for purposes other than
tax bad debt losses including redemption of bank stock or excess dividends, or
loss of "bank status" would create income for tax purposes only, which income
would be subject to the then-current corporate income tax rate. The unrecorded
deferred federal income tax liability on the above amounts was approximately
$280,000 at June 30, 1997.
- -- COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying financial statements. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit is represented by the contractual
or notional amount of those instruments. The Bank uses the same credit policies
in making such commitments as it does for instruments that are included in the
consolidated statement of financial condition. Financial instruments whose
contract amount represents credit risk as of June 30 were as follows:
1997 1996
- ----------------------------------------
Mortgage loan commitments
At variable rates $563 $989
At fixed rates 515 752
Unused lines of credit 9 205
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation. Collateral held varies, but may include
residential real estate, or other assets of the borrower.
The Bank has entered into agreements with three officers which provide
for salary continuation for a three-year period under certain circumstances,
primarily related to change of control of the Bank, as defined. Under the terms
of the agreements, these payments could occur if, following a change of control,
such officers are terminated other than for cause or unreasonable changes are
made in their employment relationships. These agreements extend automatically
for one year on each anniversary date unless certain conditions are met. One of
the agreements was effective January 1, 1996 and the other two agreements were
effective July 1, 1996.
The Company and Bank are also subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate determination of such possible
claims or lawsuits will not have a material adverse effect on the consolidated
financial position of the Company.
- -- RESTRICTION ON DIVIDENDS
The Company is not subject to any regulatory restriction on the payment
of dividends to its stockholders.
Without prior approval, current regulations allow the Bank to pay
dividends to the Company not exceeding net profits (as defined) for the current
year plus those for the previous two years. The Bank normally restricts
dividends to a lesser amount because of the need to maintain an adequate capital
structure.
At the time of conversion, a liquidation account was established in an
amount equal to the Bank's net worth as reflected in the latest statement of
condition used in its final conversion offering circular. The liquidation
account is maintained for the benefit of eligible deposit account holders who
maintain their deposit account in the Bank after conversion. In the event of a
complete liquidation (and only in such event), each eligible deposit account
holder will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance for deposit accounts then held, before any liquidation distribution may
be made to stockholders. Except for the repurchase of stock and payment of
dividends, the existence of the liquidation account will not restrict the use or
application of net worth. The initial balance of the liquidation account was
$3,295,000.
At June 30, 1997, total stockholder's equity of the Bank was
$5,890,000, of which approximately $538,000 was available for the payment of
dividends.
- -- REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate actions by the regulatory agencies that, if
undertaken, could have a material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
At June 30, 1997, the Bank believes that it meets all capital adequacy
requirements to which it is subject and the most recent notification from the
regulatory agency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action.
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
In connection with the Bank's conversion to a state-chartered savings
bank, the FDIC imposed heightened capital requirements on the Bank because of
the impermissible real estate development activities of BSF. The FDIC currently
requires that the Bank maintain capital (after deduction of its investment in
BSF) at levels sufficient for the Bank to be classified as a well-capitalized
institution.
The Bank's actual and required capital amounts and ratios are as
follows:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------------
Required Required
for Adequate To Be Well
Actual Capital 1 Capitalized 1
-------------------------------------------------------------------------
June 30 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total capital 1 (to risk weighted assets) $6,109 25.0% $1,952 8.0% $2,440 10.0%
Tier I capital 1 (to risk weighted assets) 5,879 24.1 976 4.0 1,464 6.0
Tier I capital 1 (to average assets) 5,879 14.2 1,662 4.0 2,077 5.0
</TABLE>
1 As defined by the regulatory agencies
- -- EMPLOYEE BENEFIT PLANS
The Bank is a participant in a pension fund known as the Pentegra Group
(formerly Financial Institutions Retirement Fund). This plan is a multi-employer
plan; separate actuarial valuations are not made with respect to each
participating employer. According to the plan administrators, the market value
of the fund's assets exceeded the value of vested benefits in the aggregate as
of June 30, 1996, the date of the latest actuarial valuation. The plan required
contributions in the amount of $13,000, $15,700 and $17,900 for the years ended
June 30, 1997, 1996 and 1995. The plan provides pension benefits for
substantially all of the Bank's employees.
The Bank has a retirement savings Section 401(k) plan in which
substantially all employees may participate. The Bank matches employees'
contributions at the rate of 50 percent of the first 6 percent of base salary
contributed by participants. The Bank's expense for the plan was $10,100,
$9,200, and $8,550 for the years ended June 30, 1997, 1996 and 1995.
As part of the conversion, the Company established an ESOP covering
substantially all employees of the Bank. The ESOP acquired 40,474 shares of the
Company common stock at $10 per share in the conversion with funds provided by a
loan from the Company. Accordingly, the $404,740 of common stock acquired by the
ESOP is shown as a reduction of stockholders' equity. Shares are released to
participants proportionately as the loan is repaid. Dividends on allocated
shares are recorded as dividends and charged to retained earnings. Dividends on
unallocated shares, which will be distributed to participants, are treated as
compensation expense. Compensation expense is recorded equal to the fair market
value of the stock when contributions, which are determined annually by the
Board of Directors of the Bank, are made to the ESOP. The expense under the ESOP
was $65,900 for the year ended June 30, 1997. At June 30, 1997, the ESOP had
2,555 allocated shares, 35,157 suspense shares and 2,762 committed-to-be
released shares.
On July 23, 1997, the board of Directors approved a Stock Option Plan.
The plan is subject to stockholders' approval. Under the Stock Option Plan,
stock options representing an aggregate of up to 10% of Common Stock sold in the
conversion may be granted to directors, officers and other key employees of the
Company or its subsidiary.
<PAGE>
In January, 1997, the Company's stockholders approved the Recognition
and Retention Plan and Trust ("RRP"). The RRP may acquire up to 20,237 shares of
the Company's common stock for awards to management. Shares awarded to
management under the RRP vest at a rate of 20% at the end of each full twelve
months of service with the Bank after the date of grant. During the year ended
June 30, 1997, the Bank contributed $290,172 to the RRP for the purchase of
20,237 shares of the Company's common stock of which 15,178 shares were awarded
to management and recorded as unearned compensation. Expense under the RRP was
$25,391 for the year ended June 30, 1997.
- -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Securities Available for Sale--Fair values are based on quoted market
prices.
Loans--For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values are based
on carrying values. The fair value for other loans, are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
FHLB Stock--Fair value of FHLB stock is based on the price at which it
may be resold to the FHLB.
Interest Receivable--The fair values of interest receivable approximate
carrying values.
Deposits--The fair values of interest-bearing demand, NOW, money market
deposit and savings accounts are equal to the amount payable on demand at the
balance sheet date. The carrying amounts for variable rate, fixed-term
certificates of deposit approximate their fair values at the balance sheet date.
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
FHLB Advances--The fair value of these borrowings are estimated using a
discounted cash flow calculation, based on current rates for similar debt. Fair
value approximates carrying value.
Off-Balance Sheet Commitments--Commitments include commitments to
originate mortgage loans, and extend lines of credit and are generally of a
short-term nature. The fair value of such commitments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------
Carrying Fair Carrying Fair
June 30 Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,184 $4,184 $5,721 $5,721
Securities available for sale 2,102 2,102 4,901 4,901
Loans, net 34,117 33,703 27,125 27,183
Stock in FHLB 500 500 360 360
Interest receivable 269 269 236 236
LIABILITIES
Deposits 26,157 26,281 28,726 28,856
FHLB advances 9,000 9,018 7,200 7,236
OFF-BALANCE SHEET ASSETS
Commitments to extend credit
</TABLE>
(PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
CONDENSED BALANCE SHEET
June 30 1997
- -------------------------------------------------------
ASSETS
Cash $ 25
Securities available for sale 1,205
Premises and equipment 15
Investment in subsidiary 5,890
Other assets 103
------
Total assets $7,238
======
LIABILITIES
Other liabilities $ 41
STOCKHOLDERS' EQUITY 7,197
------
Total liabilities and
stockholders' equity $7,238
======
CONDENSED STATEMENT OF INCOME
Year Ended June 30 1997
- ----------------------------------------------------
Income
Interest income $ 118
Other income 36
-----
Total income 154
-----
Expenses
Salaries and employee benefits 31
Legal and professional fees 97
Other expenses 34
-----
Total expenses 162
-----
Loss before income tax benefit and
equity in undistributed income
of subsidiary (8)
Income tax benefit (11)
-----
Income before equity in
undistributed income of subsidiary 3
Equity in undistributed income of subsidiary 249
-----
NET INCOME $ 252
=====
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended June 30 1997
- ------------------------------------------------
OPERATING ACTIVITIES
Net income $ 252
Adjustments to reconcile net income
to net cash provided by
operating activities (258)
-------
Net cash used by operating activities (6)
-------
INVESTING ACTIVITIES
Purchases of securities
available for sale (2,216)
Proceeds from sales of securities
available for sale 1,080
Purchases of premises
and equipment (16)
------
Net cash used by investing activities (1,152)
------
FINANCING ACTIVITIES
Sale of stock 4,578
Dividends (69)
Purchase of stock (565)
Capital contribution to Bank (2,471)
Contribution of RRP shares (290)
------
Net cash provided by
financing activities 1,183
------
NET CHANGE IN CASH 25
CASH AT BEGINNING OF YEAR 0
------
CASH AT END OF YEAR $ 25
======
ADDITIONAL CASH FLOWS
AND SUPPLEMENTARY INFORMATION
Common stock issued to ESOP
leveraged with an employer loan $ 404
<PAGE>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Frank R. Stewart Charles W. Chambers John T. Gillaspy
Chairman of the Board Secretary and President and
President, BSF, Inc. Staff Appraiser Chief Executive Officer,
Spencer Evening World, Inc.
Kurt J. Meier Robert W. Raper Tad Wilson
President Vice Chairman Co-owner, Metropolitan
Owen Community Bank, s.b. of the Board Printing Services, Inc.
Stephen Parrish
Funeral Director,
West-Parrish-Pedigo
Funeral Home
OFFICERS OF HOME FINANCIAL BANCORP
Frank R. Stewart Kurt J. Meier
Chairman President, Chief Executive Officer
and Treasurer
Kurt D. Rosenberger Charles W. Chambers
Vice President and Secretary
Chief Financial Officer
OFFICERS OF OWEN COMMUNITY BANK, s.b.
Frank R. Stewart Kurt J. Meier
Chairman President and
Chief Executive Officer
Kurt D. Rosenberger Charles W. Chambers
Vice President and Secretary
Chief Financial Officer
Judith A. Terrell Julie A. Hedden
Mortgage Loan Officer Mortgage Loan Officer
Lisa K. Sherfield
Mortgage Loan Officer
<PAGE>
DIRECTORS AND OFFICERS
Charles W. Chambers, (age 81) has served as a director of the Holding
Company since its formation and of the Bank since 1978. Mr. Chambers has also
served as a staff appraiser for the Bank since 1991 and as Secretary of the Bank
since 1990. Mr. Chambers is Secretary of the Holding Company and the Bank.
John T. Gillaspy, (age 69) has served as a director of the Holding
Company since its formation and of the Bank since 1986. Mr. Gillaspy has also
served as President and Chief Executive Officer of the Spencer Evening World,
Inc., a newspaper based in Spencer, Indiana for more than the past five years.
Kurt J. Meier, (age 47) has served as President and a director of the
Holding Company since its formation and as a director of the Bank since 1991.
Mr. Meier has also served as President of the Bank since 1994. From 1990 to
1994, Mr. Meier served as Managing Officer of the Bank.
Steven Parrish, (age 57) has served as a director of the Holding
Company since its formation and of the Bank since 1982. Mr. Parrish has also
served as a funeral director for the West-Parrish-Pedigo Funeral Home in
Spencer, Indiana, for more than five years.
Robert W. Raper, (age 80) has served as a director of the Holding
Company since its formation and of the Bank since 1970, with which he has served
as Vice Chairman since 1994. Prior to 1994, Mr. Raper served as Vice President
of the Bank.
Kurt D. Rosenberger (age 39) is Vice President and Chief Financial
Officer of the Holding Company. Mr. Rosenberger has also served as Vice
President of the Bank since 1994. Theretofore, he served as Senior Financial
Analyst for the Office of Thrift Supervision in Indianapolis, Indiana, from 1990
to 1994.
Frank R. Stewart, (age 72) has served as a director of the Holding
Company since its formation and of the Bank since 1963. Mr. Stewart served as
President of the Bank from 1982 until 1994. Mr. Stewart has also served as
President of BSF, Inc. since its formation in 1989. Mr. Stewart has extensive
experience in real estate development and sales.
Tad Wilson,(age 62) has served as a director of the Holding Company
since its formation and of the Bank since 1978. Mr. Wilson is also the co-owner
of Metropolitan Printing Services, Inc., a printing company based in
Bloomington, Indiana, and is the owner of a retail book store and various rental
properties located in Bloomington, Indiana.
There are no arrangements or understandings between the Holding Company
and any person pursuant to which that person has been selected a director of the
Holding Company.
<PAGE>
SHAREHOLDER INFORMATION
MARKET INFORMATION
The Bank converted from an Indiana mutual savings bank to an Indiana
stock savings bank effective July 1, 1996, and simultaneously formed a bank
holding company, the Holding Company. The Holding Company's Common Stock, is
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), Small Cap Market, under the symbol "HWEN." As of August 29,
1997, there were approximately 571 record holders of the Holding Company's
Common Stock including shares held in broker accounts.
Since the Holding Company has no independent operations or other
subsidiaries to generate income, its ability to accumulate earnings for the
payment of cash dividends to its shareholders is directly dependant upon the
earnings on its investment securities and the ability of the Bank to pay
dividends to the Holding Company.
Under current federal income tax law, dividend distributions with
respect to the Common Stock, to the extent that such dividends paid are from the
current or accumulated earnings and profits of the Bank (as calculated for
federal income tax purposes), will be taxable as ordinary income to the
recipient and will not be deductible by the Bank. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from the Bank's accumulated bad
debt reserves, which could result in increased federal income tax liability for
the Company. Moreover, the Bank may not pay dividends to the Holding Company if
such dividends would result in the impairment of the liquidation account
established in connection with the Conversion.
The Holding Company's ability to pay dividends on the Common Stock is
subject to certain regulatory restrictions. In addition, Indiana law would
prohibit the Holding Company from paying a dividend, if after giving effect to
the payment of that dividend, the Holding Company would not be able to pay its
debts as they become due in the ordinary course of business or if the Holding
Company's total assets would be less than the sum of its total liabilities plus
preferential rights of holders of preferred stock, if any.
Stock Price Dividends
Quarter Ended High Low Per Share
September 30, 1996 13 3/4 9 3/4 $---
December 31, 1996 13 1/4 11 3/4 $.05
March 31, 1997 15 1/2 12 3/4 $.05
June 30, 1997 15 3/4 14 1/2 $.05
TRANSFER AGENT AND REGISTRAR
Fifth Third Bank
Corporate Trust Operations
38 Fountain Square Plaza, MD - 1090F5
Cincinnati, Ohio 45202
(513) 579-5320 or (800) 837-2755
GENERAL COUNSEL
Barnes & Thornburg
11 South Meridian Street
Indianapolis, Indiana 46204
INDEPENDENT AUDITORS
Geo. S. Olive & Co. LLC
201 N. Illinois
Indianapolis, Indiana 46204
SHAREHOLDERS AND GENERAL INQUIRIES
The Company is required to file an Annual Report on Form 10-K for its
fiscal year ended June 30, 1997 with the Securities and Exchange Commission.
Copies of this annual report may be obtained without charge upon written request
to:
Kurt D. Rosenberger
Vice President and Chief Financial Officer
Home Financial Bancorp
279 East Morgan Street
Spencer, Indiana 47460
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001009242
<NAME> Home Financial Bancorp
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 297
<INT-BEARING-DEPOSITS> 3,887
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,102
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 34,349
<ALLOWANCE> 231
<TOTAL-ASSETS> 42,508
<DEPOSITS> 26,157
<SHORT-TERM> 0
<LIABILITIES-OTHER> 155
<LONG-TERM> 9,000
<COMMON> 0
0
0
<OTHER-SE> 7,197
<TOTAL-LIABILITIES-AND-EQUITY> 42,508
<INTEREST-LOAN> 2,912
<INTEREST-INVEST> 348
<INTEREST-OTHER> 137
<INTEREST-TOTAL> 3,397
<INTEREST-DEPOSIT> 1,210
<INTEREST-EXPENSE> 1,703
<INTEREST-INCOME-NET> 1,693
<LOAN-LOSSES> 85
<SECURITIES-GAINS> 37
<EXPENSE-OTHER> 1,368
<INCOME-PRETAX> 405
<INCOME-PRE-EXTRAORDINARY> 405
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252
<EPS-PRIMARY> .53
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.74
<LOANS-NON> 562
<LOANS-PAST> 562
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 150
<CHARGE-OFFS> 4
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 231
<ALLOWANCE-DOMESTIC> 231
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
