SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
Commission file number: 0-28510
HOME FINANCIAL BANCORP
(Exact name of registrant specified in its charter)
Indiana 35-1975585
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
279 East Morgan Street
Spencer, Indiana 47460
(Address of principle executive offices,
including Zip Code)
(812) 829-2095
(Registrant's telephone number, including area code)
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 report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's common stock, without par value,
outstanding as of November 1, 1998 was 903,052.
<PAGE>
Home Financial Bancorp
Form 10-Q
Index
Page No.
Forward Looking Statements 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statement of Financial
Condition as of September 30, 1998 and June 30, 1998
(Unaudited) 2
Consolidated Condensed Statement of Income for the three
months ended September 30, 1998 and 1997
(Unaudited) 3
Consolidated Condensed Statement of Changes in
Shareholders' Equity for the three months ended September
30, 1998 and 1997 (Unaudited) 4
Consolidated Condensed Statement of Cash Flows for the
three months ended September 30, 1998 and 1997
(Unaudited) 5
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
i
<PAGE>
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Form 10-Q") 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-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-Q 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-Q
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.
1
<PAGE>
HOME FINANCIAL BANCORP
AND WHOLLY-OWNED SUBSIDIARY
OWEN COMMUNITY BANK, s.b.
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash $ 318,515 $ 345,041
Short-term interest-bearing deposits 3,050,174 3,457,062
------------ ------------
Total cash and cash equivalents 3,368,689 3,802,103
Investment securities available for sale 1,845,700 1,917,735
Loans 34,363,682 34,278,725
Allowance for loan losses (313,182) (319,595)
------------ ------------
Net loans 34,050,501 33,959,130
Real estate acquired for development 20,758 20,758
Premises and equipment 2,028,115 1,687,355
Federal Home Loan Bank Stock 500,000 500,000
Other assets 638,475 672,662
------------ ------------
Total assets $ 42,452,237 $ 42,559,743
============ ============
LIABILITIES
Deposits $ 26,923,233 $ 26,648,610
Federal Home Loan Bank advances 8,200,000 8,200,000
Other liabilities 87,979 205,227
------------ ------------
Total liabilities 35,211,212 35,053,837
------------ ------------
SHAREHOLDERS' EQUITY Preferred stock, without par value:
Authorized and unissued - 2,000,000 shares - - - - - - - -
Common stock, without par value:
Authorized - 5,000,000 shares
Issued - 903,052 shares and 929,052 4,250,314 4,372,621
Retained earnings 3,625,040 3,689,484
Unearned Compensation RRP (217,835) (228,169)
Unearned ESOP shares (294,191) (304,310)
Accumulated other comprehensive income (122,303) (23,720)
Total shareholders' equity 7,241,025 7,505,906
Total liabilities and shareholders' equity $ 42,452,237 $ 42,559,743
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE>
HOME FINANCIAL BANCORP
AND WHOLLY-OWNED SUBSIDIARY
OWEN COMMUNITY BANK, s.b.
CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
--------- ---------
(Unaudited)
Interest income
<S> <C> <C>
Loans $ 816,941 $ 819,687
Interest-bearing deposits 43,964 35,545
Investment securities 16,976 26,277
Other interest and dividend income 16,255 10,397
--------- ---------
Total interest income 894,135 891,906
Interest expense
Deposits 329,900 322,824
Advances from Federal Home Loan Bank and
other borrowings 125,624 128,065
--------- ---------
Total interest expense 455,525 450,890
--------- ---------
Net interest income 438,611 441,016
Provision for losses on loans 12,000 25,500
--------- ---------
Net interest income after provision for losses on loans 426,611 415,516
--------- ---------
Other income
Service charges on deposit accounts 17,026 12,625
Loss on sale of real estate acquired for
development (513) (278)
Gain on sales of securities available for sale 188 32,625
Other income 6,052 13,531
--------- ---------
Total other income 22,753 58,503
--------- ---------
Other expenses
Salaries and employee benefits 211,392 180,496
Net occupancy expenses 23,430 21,905
Equipment expenses 12,705 17,238
Deposit insurance expense 3,938 3,752
Computer processing fees 23,264 19,459
Legal and accounting fees 20,298 24,248
Other expenses 83,635 72,588
--------- ---------
Total noninterest expenses 378,662 339,686
--------- ---------
Income before income taxes 70,701 134,334
Income tax expense 29,444 54,070
--------- ---------
Net income $ 41,258 $ 80,264
========= =========
Basic and diluted net income per share $ .05 $ .10
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
HOME FINANCIAL BANCORP
AND WHOLLY-OWNED SUBSIDIARY
OWEN COMMUNITY BANK, s.b.
Form 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
(Unaudited)
<S> <C> <C>
Balance, July 1 $ 7,505,906 $ 7,197,134
Comprehensive income:
Net income 41,258 80,264
Other comprehensive income, net of tax:
Unrealized gains (losses)
on securities available for sale: (98,469) 61,915
Unrealized holding gains (losses) arising during period (114) (19,702)
----------- -----------
Reclassification adjustment for losses (gains) included
in net income (98,583) 42,213
----------- -----------
Comprehensive income (57,325) 122,477
Common stock repurchased (214,500) (75,472)
Fair value adjustment of ESOP shares 9,717 - - - -
ESOP shares earned 10,119 23,046
RRP shares earned 10,334 7,257
Cash dividends (23,226) (23,496)
----------- -----------
Balance, September 30 $ 7,241,025 $ 7,250,946
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
HOME FINANCIAL BANCORP
AND WHOLLY-OWNED SUBSIDIARY
OWEN COMMUNITY BANK, s.b.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1998 1997
----------- -----------
(Unaudited)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 41,258 $ 80,264
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for loan losses 12,000 25,500
Depreciation 24,687 20,909
Investment securities gains (188) (32,625)
Change in interest receivable (7,322) (2,335)
Fair value adjustment of ESOP shares 9,717 - - - -
Amortization of unearned ESOP shares 10,119 23,046
Amortization of unearned RRP shares 10,334 7,257
Other adjustments (75,363) 26,583
----------- -----------
Net cash provided by operating activities 25,242 148,599
----------- -----------
INVESTING ACTIVITIES
Purchases of securities available for sale (605,046) (544,363)
Proceeds from sales of securities available for sale 381,451 636,875
Proceeds from maturities and repayments of investment
securities available for sale 61,773 34,715
Net changes in loans (84,957) (995,810)
Purchases of premises and equipment (365,447) (47,874)
Proceeds from real estate owned sales 116,674 145,616
----------- -----------
Net cash used by investing activities (495,552) (770,841)
----------- -----------
FINANCING ACTIVITIES Net change in:
NOW and savings accounts 361,681 571,783
Certificates of deposit (87,059) (865,635)
Proceeds from Federal Home Loan Bank advances 1,000,000 - - - -
Repayment of Federal Home Loan Bank advances (1,000,000) (1,000,000)
Purchase of stock (214,500) (75,472)
Cash dividends (23,226) (23,496)
----------- -----------
Net cash provided (used) by financing activities 36,896 (1,392,820)
----------- -----------
</TABLE>
5
<PAGE>
Three Months Ended
September 30,
1998 1997
----------- -----------
(Unaudited)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(433,414) (2,015,062)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 3,802,103 4,184,303
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD
$ 3,368,689 $ 2,169,241
=========== ===========
ADDITIONAL CASH FLOWS AND
SUPPLEMENTARY INFORMATION
Interest paid $ 455,525 $ 450,889
Income tax paid 82,964 13,000
See notes to consolidated condensed financial statements.
6
<PAGE>
HOME FINANCIAL BANCORP
AND WHOLLY-OWNED SUBSIDIARY
OWEN COMMUNITY BANK, s.b.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE A: Basis of Presentation
The unaudited interim consolidated condensed financial statements include the
accounts of Home Financial Bancorp ("Company") and its subsidiary, Owen
Community Bank, s.b. ("Bank").
The unaudited interim consolidated condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and disclosures required by generally accepted
accounting principles for complete financial statements. The significant
accounting policies followed by the Company and Bank for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. All adjustments, consisting of normal recurring
adjustments, which in the opinion of management are necessary for a fair
presentation of the results for the periods reported, have been included in the
accompanying consolidated financial statements. The results of operations for
the three months ended September 30, 1998 are not necessarily indicative of
those expected for the remainder of the year.
The Company, subject to certain supervisory policies of the Board of Governors
of the Federal Reserve System and the Federal Deposit Insurance Corporation, may
pay dividends to its shareholders if its assets exceed its liabilities and it is
able to pay its debts as they come due. Current regulations allow the Bank to
pay dividends on its stock after the conversion if its regulatory capital would
not be reduced below the amount then required for the liquidation account, and
if those dividends do not exceed net profits of the Bank for the current year
plus those for the previous two years.
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income. Comprehensive income includes unrealized gains
on securities available for sale, net of tax. Accumulated other comprehensive
income and income tax on such income reported are as follows:
Three Months Ended
September 30
1998 1997
Accumulated comprehensive income
Balance, July 1 $ (23,720) $ 27,193
Net unrealized gains (losses) (98,583) 42,213
Balance, September 30 (122,303) 69,406
Income tax expense (benefit):
Unrealized holding gains (losses) (64,586) 40,610
Reclassification adjustments 74 12,923
7
<PAGE>
NOTE B: Stock Option Plan
On July 23, 1997, the Board of Directors approved a Stock Option Plan.
Stockholders approved the Plan on October 14, 1997. 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. Under the Stock Option Plan 71,600 incentive stock
options have been granted to directors, executive officers, and other employees.
NOTE C: Earnings Per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
1998 1997
----------------------------------------- -------------------------- -------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
-------------- -------------------------- -------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share:
Income Available to
Common Stockholders $ 41,258 830,721 $ 0.05 $ 80,264 831,938 $ 0.10
======= =========
Effect of Dilutive Securities 0 1,181 0 1,704
-------------- ------------- ------------- -------
Diluted Earnings Per Share:
Income Available to
Common Stockholders $ 41,258 831,902 $ 0.05 $ 80,264 833,642 $ 0.10
============== ========== ======= ============ ======= =========
</TABLE>
8
<PAGE>
NOTE D: 2 for 1 Stock Split
On December 9, 1997, the Company announced a 2 for 1 stock split, under which
every share of its Common Stock outstanding at the close of business on December
23, 1997 was converted into two shares of Common Stock. The additional
certificates were distributed to shareholders on January 6, 1998. As a result of
the stock split, the number of shares outstanding increased from 464,526 to
929,052 shares. For presentation in this report, all share and per share data
have been restated for the 2 for 1 stock split.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Home Financial Bancorp ("Company") is an Indiana corporation which was organized
in February 1996 to become a bank holding company upon its acquisition of all
the capital stock of Owen Community Bank, s.b. ("Bank") in connection with the
Bank's conversion from mutual to stock form. The Company became the Bank's
holding company at July 1, 1996. At September 30, 1998, the principal asset of
the Company consisted of 100% of the issued and outstanding shares of common
stock of the Bank. At that date, the Company had no material liabilities, and
aside from purchases and sales of investment securities, the Company had not
conducted any material operations. As a result, the consolidated condensed
financial statements appearing herein and the following discussion of results of
operations relate primarily to the Bank.
The Bank has been, and continues to be, a community-oriented financial
institution offering selected financial services to meet the needs of the
communities it serves. The Bank attracts deposits from the general public and
historically has used such deposits, together with other funds, primarily to
originate one-to-four-family residential loans. The Bank also originates
commercial mortgage, consumer and, to a lesser extent, construction loans. The
Bank opened its first branch office in the Putnam County Town of Cloverdale,
Indiana on November 2, 1998. However, for the three month period ended September
30, 1998, the Bank served communities in Owen and surrounding counties through
its main office located in Spencer, Indiana.
BSF, Inc. ("BSF") is the wholly owned subsidiary of the Bank which 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. In connection with the Bank's
conversion to an Indiana stock savings bank, the FDIC required the Bank to cease
BSF's land acquisitions, divest BSF's non-conforming 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.
The Company's subsidiary Bank entered into a Partnership Agreement ("Agreement")
with Area Ten Development, Inc. (the "General Partner"), a wholly owned
subsidiary of Area 10 Council on Aging of Monroe and Owen Counties, Inc. to
finance construction and development of a low income housing project. The
project will result in a 24 unit apartment complex for senior living. The total
cost of the project will be approximately $1.4 million. The Bank purchased a 99%
limited partnership interest for $732,000. Funds are to be dispersed by
installments during project construction, which is expected to be completed by
calendar year-end 1998. The Bank's investment in the project is eligible for
income tax credits over the fifteen year life of the Agreement.
9
<PAGE>
Management estimates that the Bank will be able to utilize approximately
$107,000 in low income tax credits annually. However, in order to maximize the
benefit of the tax credits the project must maintain an acceptable occupancy
rate and prove that it qualifies for the tax credits on an annual basis.
Additionally, there are no assurances that changes in tax laws will not affect
the availability of low income tax credits in future years.
The Company's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets such as loans and investments, and the costs of the
Company's interest-bearing liabilities, primarily deposits and borrowings.
Results of operations are also dependent upon the level of the Company's
non-interest income, including fee income and service charges, and affected by
the level of its non-interest expenses, including its general and administrative
expenses.
Financial Condition
Total assets decreased 0.3%, to $42.5 million at September 30, 1998 compared to
$42.6 million at June 30, 1998. Cash and short-term interest bearing deposits
totaled $3.1 million; a decrease of $433,000. Investment securities totaled $1.8
million at September 30, 1998; down $72,000 from three months earlier.
During the three months ended September 30, 1998, premises and equipment
increased $341,000 or 20.2% to $2.0 million. This increase was due to costs for
final phases of construction on the future Bank branch site in the southern
Putnam County town of Cloverdale, Indiana. The cost of construction, furniture
and equipment for the new branch was estimated at $750,000.
Deposits at September 30, 1998 were $26.9 million; an increase of $275,000 or
1.0% compared to three months earlier. Borrowings at the Federal Home Loan Bank
("FHLB") were $8.2 million, unchanged from the level at June 30, 1998.
On August 21, 1998, the Company repurchased 26,000 shares of its common stock on
the open market, completing a 10% common stock repurchase plan that was
originally announced on March 10, 1997. On September 8, 1998, the Company
announced a second stock repurchase plan that authorized the repurchase, from
time to time on the open market, up to 45,152 or 5% of the Company's outstanding
shares of common stock.
Shareholders' equity was $7.2 million, or 17.1% of total assets as of September
30, 1998, compared to $7.5 million or 17.6% of total assets as of June 30 1998.
The Company's net book value at September 30, 1998 was $8.02 per share based on
903,052 shares outstanding. This represents a decrease from book value of $8.08
per share as of June 30, 1998. Stock repurchases, cash dividends, and a sharp
decline in the market value of investment securities available for sale as of
September 30, 1998, all combined to produce a decline in overall shareholders'
equity and net book value per share.
Comparison of Operating Results for the Three-Month Periods Ended September 30,
1998 and 1997
Net income for the first fiscal quarter ended September 30, 1998 was $41,000, or
$.05 per share based on an average of 831,902 diluted shares outstanding. Net
income for the same period last year was $80,000, or $.10 per share based on an
average of 833,642 diluted shares outstanding. Net income was lower due to a
decrease in investment securities income and higher expenses associated with
starting the Company's first branch operation.
10
<PAGE>
Net interest income before the provision for loan losses was $439,000 for the
three months ended September 30, 1998 compared to $441,000 for the 1997 period.
Total non-interest income totaled $23,000 for the quarter ended September 30,
1998 compared to $59,000 for the same period in 1997, a 61.1% decline. Most of
this decrease can be traced to a sharp fall in gains on the sale of investment
securities. For the three months ended September 30, 1998, income from the sale
of securities was negligible, compared to $32,000 for the same period in 1997.
Total non-interest expense was $379,000 for the quarter ended September 30,
1998, compared to $340,000 for the same period last year. Additional employees
to staff the new branch office contributed to the overall increase in
non-interest expense. Salaries and employee benefits totaled $211,000 for the
three months ended September 30, 1998, compared to $180,000 for the same period
a year earlier; a 17.1% increase. Other non-interest expense also increased. A
significant portion of this increase was attributed to higher expenses for
office supplies, advertising, and various one-time costs related to the November
2, 1998 opening of the new branch office in Cloverdale.
Income tax expense for the first fiscal quarter of 1999 was $29,000, compared to
$54,000 for the first fiscal quarter of 1998.
Asset Quality
Management has established valuation allowances sufficient to absorb estimated
losses or exposure inherent in the Bank's asset structure. Adjustments to these
allowances reflect management's assessment of various risk factors which
include, but are not limited to changes in the type and volume of the lending
portfolio, level and trend of loan delinquencies, size of individual credit
exposure, and effectiveness of collection efforts. Loan loss provisions were
$12,000 and $26,000 for the quarters ended September 30, 1998 and 1997
respectively. At September 30, 1998, after net losses and recoveries, the
allowance for loan losses was $313,000 or 0.91% of total loans, compared to
$320,000 or 0.93% at June 30, 1998.
Management considered the allowance for loan losses at September 30, 1998, to be
adequate to cover estimated losses inherent in the loan portfolio at that date,
including probable losses that could be reasonably estimated. Such belief is
based upon an analysis of loans currently outstanding, past loss experience,
current economic conditions and other factors and estimates that are subject to
change and re-evaluation over time.
The following table sets forth the changes affecting the allowance for loan
losses for the three months ended September 30, 1998.
Balance, July 1, 1998 $319,595
Provision for loan losses 12,000
Recoveries --
Loans charged off 18,413
--------
Balance, September 30, 1998 $313,182
========
11
<PAGE>
Total non-performing loans fell to $252,000 or 0.7% of total loans at September
30, 1998 compared to $286,000 or 0.8% of total loans at June 30, 1998. Real
estate acquired through foreclosure totaled $168,000 at September 30, 1998,
compared to $213,000 at June 30, 1998. No other repossessed assets existed at
September 30, 1998, compared to $8,000 at June 30, 1998. Total non-performing
assets were $420,000 or 1.0% of assets at September 30, 1998.
Liquidity and Capital Resources
The Company's most liquid assets are cash and interest bearing deposits. The
levels of these assets are dependent on the Company's operating, financing and
investing activities. At September 30, 1998 and June 30, 1998, cash and
interest-bearing deposits totaled $3.4 million and $3.8 million, respectively.
The Company's primary sources of funds include principal and interest payments
on loans, loan maturities, and repayments on investment securities. While
scheduled loan repayments and proceeds from investment securities are relatively
predictable, deposit flows and early repayments are more influenced by interest
rates, general economic conditions and competition. The Company attempts to
price its deposits to meet asset-liability objectives and local market
conditions.
If the Company requires funds beyond its ability to generate them internally, it
has the ability to borrow funds from the FHLB of Indianapolis. Federal law
limits an institution's borrowings from the FHLB to 20 times the amount paid for
capital stock in the FHLB, subject to regulatory capital requirements. As a
policy matter, however, the FHLB of Indianapolis typically limits the amount of
borrowings from the FHLB to 50% of adjusted assets (total assets less
borrowings). Based on the percentage of Company assets classified as "qualified
investments" excess borrowing capacity was approximately $6.0 million at the end
of the first quarter. However, under limits adopted by Board resolution of the
subsidiary Bank, the Company had $4.8 million of unused credit available from
the FHLB. At September 30, 1998, borrowing from the FHLB totaled $8.2 million.
Shareholders' equity was $7.2 million or 17.1% of total assets at September 30,
1998, compared to $7.5 million or 17.7% of total assets at June 30, 1998. Book
value at September 30, 1998 was $8.02 per share based on 903,052 outstanding
shares. All fully phased-in regulatory capital requirements for the Bank are
currently met. 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 the Bank's subsidiary. The
FDIC currently requires that the Bank maintain capital (after deduction of its
investment in its subsidiary) at levels sufficient for the Bank to be classified
as a well-capitalized institution.
The Bank's actual and required capital amounts (in thousands) and ratios were as
follows as of September 30, 1998.
<TABLE>
<CAPTION>
Required For Required To Be
Actual Adequate Capital* Well Capitalized*
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total capital *(to risk weighted assets) $6,596 25.9% $2,038 8.0% $2,547 10.0%
Tier 1 capital *(to risk weighted assets) 6,283 24.7% 1,019 4.0% 1,528 6.0%
Tier 1 capital *(to total assets) 6,283 15.1% 1,667 4.0% 2,084 5.0%
</TABLE>
*As defined by the regulatory agencies
12
<PAGE>
Effect of Inflation and Changing Prices
The Company's asset and liability structure is substantially different from that
of an industrial company in that most of its assets and liabilities are monetary
in nature. Management believes the impact of inflation on financial results
depends upon the Company's ability to react to changes in interest rates and, by
such reaction, reduce the inflationary impact on performance. Interest rates do
not necessarily move in the same direction at the same time, or at the same
magnitude, as the prices of other goods and services. Management relies on its
ability to manage the relationship between interest-sensitive assets and
liabilities to protect against wide interest rate fluctuations, including those
resulting from inflation.
The Year 2000 Issue
Management and the Board of Directors recognize and understand Year 2000 ("Y2K")
risk, are active in overseeing corrective efforts, and have ensured that all
necessary resources are available to address this problem. The awareness and
assessment phases of the Company's Year 2000 Project Management Plan have been
completed, and the testing phase is currently underway.
Management believes that the key to successfully meeting the Y2K challenge is
prior testing of all affected systems. The majority of mission-critical systems
are provided by On-Line Financial Services, Inc., Oak Brook, Illinois.
Presently, the Company is participating in a series of extensive Y2K tests that
use the Company's specific computer applications and customer data. In addition,
an information technology professional is assisting with testing in-house
systems and third party vendor applications. Substantially all testing for
mission-critical applications is scheduled to be completed prior to December 31,
1998.
During the remainder of 1998 and the first half of calendar 1999, management
intends to modify or replace internal system components based on the results of
testing. The Company has made, and will continue to make, investments in its
systems and applications to ensure, to the degree possible, Y2K compliance. At
this time, management is aware of the need for some minor equipment or software
changes.
The largest component of Y2K costs during fiscal year 1999 is expected to be
related to systems testing. Although the full cost of modifications is not yet
known, management does not anticipate a need to invest heavily in system
improvements to achieve Y2K compliance. At this time, it is estimated that costs
associated with Y2K issues will be less than $50,000 for fiscal year 1999.
Although management believes it is taking the necessary steps to address the
Year 2000 compliance issue, no assurances can be given that some problems will
not occur or that the Company will not incur significant additional expenses in
future periods. In the event that the Company is ultimately required to purchase
replacement computer systems, programs and equipment, or to incur substantial
expenses to make its current systems, programs and equipment Year 2000
compliant, its financial position and results of operations could be adversely
impacted. Amounts expenses in fiscal 1997 and 1998 were immaterial.
Item 3: 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
13
<PAGE>
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.
Management seeks to control the Bank's 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. Management has adopted formal policies and
practices to monitor and manage interest rate risk exposure. As part of this
effort, management 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 this
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, 1998, the most recent available analysis of the subsidiary Bank's
interest rate risk position, it was estimated that the Bank's MV would decrease
3.9% and 19.4% in the event of 200 and 400 basis point increases in market
interest rates respectively, compared to 5.2% and 13.7% for the same increases
at June 30, 1997. The Bank's MV at June 30, 1998 would decrease 8.7% and 14.4%
in the event of 200 and 400 basis point decreases in market rates respectively.
A year earlier, 200 and 400 basis point decreases in market rates would have
increased MV 2.3% and 5.4% respectively.
Presented below, as of June 30, 1998 and 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 rates.
June 30, 1998
Market Value Summary Performance
Present Value (PV)
Change Market Value of Assets
In Rates $ Amount $ Change % Change MV Ratio Change
-------- -------- -------- -------- -------- ------
(Dollars in thousands)
+400 bp* $5,058 $(1,220) (19.44)% 13.26% (191) bp
+200 bp 6,035 (243) (3.87) 15.05 (12) bp
0 bp 6,278 0 0.00 15.17 ----
-200 bp 5,734 (544) (8.67) 13.68 (149) bp
-400 bp 5,376 (902) (14.37) 12.59 (258) bp
*Basis Points.
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock EV Ratio: MV as % of PV of Assets 15.17%
Exposure Measure: Post-Shock MV Ratio 13.68%
Sensitivity Measure: Change in MV Ratio 149 bp
14
<PAGE>
June 30, 1997
Market Value Summary Performance
MV as % of
Present Value (PV)
Change Market Value of Assets
In Rates $ Amount $ Change % Change MV Ratio Change
-------- -------- -------- -------- -------- ------
(Dollars in thousands)
+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
*Basis Points.
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock EV 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
Management believes that the MV methodology overcomes three shortcomings of the
typical maturity gap methodology. First, it does not use arbitrary repricing
intervals and accounts for all expected future cash flows; weighing 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.
15
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to Vote of Security Holders.
On October 13, 1998, the Company held its third annual meeting of shareholders
at which time matters submitted to a vote of stockholders included an election
of four Company directors, and ratification of the appointment of Olive LLP as
auditors for the fiscal year ending June 30, 1999.
All four director nominees were elected, and the appointment of auditors was
also approved and ratified by a majority of 903,052 issued and outstanding share
votes. A tabulation of votes cast as to each matter submitted to stockholders is
presented below:
Director Nominees For Against Abstain Non-Vote
-----------------
Charles W. Chambers - 3 years 767,557 12,050 - 123,445
Gary Michael Monnett - 2 years 751,357 28,250 - 123,445
Stephen Parrish - 3 years 767,507 12,100 - 123,445
Kurt D. Rosenberger - 3 years 767,557 12,050 - 123,445
Other Matters
Auditors 775,077 3,200 1,330 123,445
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
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). 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.
27 Financial Data Schedule (filed electronically).
Reports on Form 8-K
There were no reports on Form 8-K filed during the period
ended September 30, 1998.
16
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOME FINANCIAL BANCORP
Date: November 12, 1998 By: /s/ Kurt J. Meier
-----------------------
Kurt J. Meier
President and
Chief Executive Officer
Date: November 12, 1998 By: /s/ Kurt D. Rosenberger
-----------------------
Kurt D. Rosenberger
Vice President and
Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1998 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> 3-MOS
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<PERIOD-START> JUL-1-1998
<PERIOD-END> SEP-30-1998
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0
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