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, 1999
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 Identification
incorporation or organization) 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, 1999 was 879,600.
<PAGE>
Home Financial Bancorp
Form 10-Q
Index
Page No.
Forward Looking Statements 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statement of Financial
Condition as of September 30, 1999 and June 30, 1999
(Unaudited) 3
Consolidated Condensed Statement of Income for the three
months ended September 30, 1999 and 1998
(Unaudited) 4
Consolidated Condensed Statement of Changes in
Shareholders' Equity for the three months ended
September 30, 1999 and 1998 (Unaudited) 5
Consolidated Condensed Statement of Cash Flows for the
three months ended September 30, 1999 and 1998
(Unaudited) 6
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<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.
<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,
1999 1999
(Unaudited)
ASSETS
<S> <C> <C>
Cash $ 554,073 $ 296,490
Short-term interest-bearing deposits 4,977,884 2,178,313
------------ ------------
Total cash and cash equivalents 5,531,957 2,474,803
Investment securities available for sale 7,721,958 8,288,028
Loans 39,956,876 38,573,918
Allowance for loan losses (342,763) (336,235)
------------ ------------
Net loans 39,614,113 38,237,683
Real estate acquired for development 362,314 20,433
Premises and equipment 1,934,355 1,984,842
Federal Home Loan Bank Stock 735,000 660,000
Interest receivable 321,238 318,241
Investment in limited partnership 695,780 695,780
Other assets 441,332 456,640
============ ============
Total assets $ 57,358,047 $ 53,136,450
============ ============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 635,833 $ 578,267
Interest-bearing deposits 34,492,065 32,079,166
------------ ------------
Total deposits 35,127,898 32,657,433
Advances from Federal Home Loan Bank and
other borrowings 14,980,000 13,200,000
Other liabilities 172,100 155,794
------------ ------------
Total liabilities 50,279,998 46,013,227
------------ ------------
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 - 879,600 shares and 886,200 4,262,286 4,188,701
Retained earnings 3,530,556 3,613,425
Unearned Compensation RRP (170,226) (181,456)
Unearned ESOP shares (247,789) (257,908)
Accumulated other comprehensive loss (296,778) (239,539)
------------ ------------
Total shareholders' equity 7,078,049 7,123,223
------------ ------------
Total liabilities and shareholders' equity $ 57,358,047 $ 53,136,450
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
<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,
----------------------------
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
Interest income
Loans $ 934,819 $ 816,941
Deposits with financial institutions 50,735 43,964
Investment securities 121,142 23,110
Federal Home Loan Bank stock 14,722 10,120
---------- ----------
Total interest income 1,121,418 894,135
Interest expense
Deposits 397,776 329,900
Federal Home Loan Bank advances and
other borrowings 206,383 125,624
---------- ----------
Total interest expense 604,159 455,525
---------- ----------
Net interest income 517,259 438,611
Provision for losses on loans 12,000 12,000
---------- ----------
Net interest income after provision for losses on loans 505,259 426,611
---------- ----------
Other income
Service charges on deposit accounts 35,907 17,026
Gain (loss) on sale of real estate acquired for development 6,285 (513)
Net realized gain on sales of available for sale securities -- 188
Other income 6,565 6,052
---------- ----------
Total other income 48,757 22,753
---------- ----------
Other expenses
Salaries and employee benefits 225,700 197,692
Net occupancy expenses 33,325 23,430
Equipment expenses 45,027 12,705
Deposit insurance expense 4,486 3,938
Computer processing fees 44,024 23,264
Printing and office supplies 11,482 12,959
Legal and accounting fees 18,372 20,298
Director and committee fees 14,250 13,700
Advertising expense 7,821 13,275
Other expenses 54,425 57,400
---------- ----------
Total noninterest expenses 458,912 378,661
---------- ----------
Income before income taxes 95,104 70,702
Income tax expense 37,383 29,444
---------- ----------
Net income $ 57,721 $ 41,258
========== ==========
Basic and diluted net income per share $ .07 $ .05
</TABLE>
See notes to consolidated condensed financial statements.
<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>
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Balance, July 1 $ 7,123,223 $ 7,505,906
Net income 57,721 41,258
Common stock repurchased (49,332) (214,500)
Fair value adjustment of ESOP shares 8,913 9,717
ESOP shares earned 10,119 10,119
RRP shares earned 11,230 10,334
Cash dividends (26,586) (23,226)
Net change in unrealized gain on securities
available for sale (57,239) (98,583)
----------- -----------
Balance, September 30 $ 7,078,049 $ 7,241,025
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<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,
------------------------------
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 57,721 $ 41,258
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for loan losses 12,000 12,000
Depreciation 59,800 24,687
Investment securities gains - - - - (188)
Gain on sale of real estate acquired for development (6,285) 513
Change in interest receivable (2,997) (7,322)
Fair value adjustment of ESOP shares 8,913 9,717
Amortization of unearned ESOP shares 10,119
Amortization of unearned RRP shares 11,230
Other adjustments 129,626 (75,876)
----------- -----------
Net cash provided by operating activities 280,127 25,242
----------- -----------
INVESTING ACTIVITIES
Purchases of securities available for sale - - - - (605,046)
Proceeds from sales of securities available for sale - - - - 381,451
Purchases of Federal Home Loan Bank stock (75,000) - - - -
Proceeds from maturities and repayments of investment
securities available for sale 459,306 61,773
Net changes in loans (1,436,863) (84,957)
Purchases of premises and equipment (9,313) (365,447)
Proceeds from real estate owned sales - - - - 116,674
Purchases of real estate for development (347,650) - - - -
Proceeds from sale of real estate acquired for
development 12,000 - - - -
----------- -----------
Net cash used by investing activities (1,397,520) (495,552)
----------- -----------
FINANCING ACTIVITIES
Net change in:
NOW and savings accounts (276,026) 361,681
Certificates of deposit 2,746,491 (87,059)
Proceeds from Federal Home Loan Bank advances 2,500,000 1,000,000
Repayment of Federal Home Loan Bank advances (1,000,000) (1,000,000)
Proceeds from other borrowings 280,000 - - - -
Purchase of stock (49,332) (214,500)
Cash dividends (26,586) (23,226)
----------- -----------
Net cash provided by financing activities 4,174,547 36,896
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,057,154 (433,414)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,474,803 3,802,103
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,531,957 $ 3,368,689
=========== ===========
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION
Interest paid $ 604,159 $ 455,525
Income tax paid 41,654 82,964
</TABLE>
See notes to consolidated condensed financial statements.
<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, 1999 are not necessarily indicative of
those expected for the remainder of the year.
NOTE B: Earnings Per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
September 30, 1999 1998
----------------------------------------- ----------------------------------------
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 $ 57,721 811,084 $ 0.07 $ 41,258 830,721 $ 0.05
====== ======
Effect of Dilutive Securities 0 515 0 1,181
---------------------------- --------------------------
Diluted Earnings Per Share:
Income Available to
Common Stockholders $ 57,721 811,599 $ 0.07 $ 41,258 831,902 $ 0.05
===================================== ====================================
</TABLE>
<PAGE>
NOTE C: Other Comprehensive Income
<TABLE>
<CAPTION>
1999
Tax
For the Three Months Ended Before-Tax (Expense) Net-of-Tax
September 30 Amount Benefit Amount
<S> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the year $ (94,787) $37,548 $ (57,239)
Less: reclassification adjustment for gains (losses) realized in
net income -- -- --
---------- --------- -------------
Other comprehensive income (loss) $(94,787) $37,548 $ (57,239)
=========== ========= =============
1998
Tax
For the Three Months Ended Before-Tax (Expense) Net-of-Tax
September 30 Amount Benefit Amount
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the year $(163,056) $ 64,587 $ (98,469)
Less: reclassification adjustment for gains (losses) realized in
net income 188 (74) 114
---------- --------- -------------
Other comprehensive income (loss) $(163,244) $ 64,661 $ (98,583)
=========== ========= =============
</TABLE>
<PAGE>
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.
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 Putman County Town of Coverdale,
Indiana on October 2, 1998. The Bank serves communities in Owen, Putnam and
surrounding counties through its main office located in Spencer, Indiana, and
its branch in Cloverdale, Indiana.
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.
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.
On April 30, 1999, the Company and its subsidiary Bank received approval from
the Office of Thrift Supervision ("OTS") to convert the holding company from a
bank holding company into a savings and loan holding company and convert the
Bank from an Indiana stock savings bank into a federal stock savings bank.
Management pursued these charter changes in order to permit the Company to
continue its profitable real estate development activities through the Bank's
subsidiary, BSF, Inc. The charter changes did not involve any changes in
ownership or management and did not require a name change for the Company or the
Bank.
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 is a 24-unit apartment complex for senior living. The total cost of the
project was approximately $1.4 million. The Bank purchased a 99% limited
partnership interest for $732,000. The project began accepting tenants in May
1999 and was one unit short of full occupancy as of September 30, 1999.
<PAGE>
The Bank's investment in the project is eligible for income tax credits over the
fifteen-year life of the Agreement. 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. Management anticipates that the project will achieve
an acceptable occupancy rate prior to calendar year-end 1999. Consequently,
management is optimistic that the Bank will benefit from low income tax credits
during fiscal year 2000. However, there are no assurances that changes in tax
laws will not affect the availability of low income tax credits in future years.
Financial Condition
Total assets increased 8.1%, to $57.4 million at September 30, 1999 compared to
$53.1 million at June 30, 1999. Cash and short-term interest bearing deposits
totaled $5.5 million; an increase of $3.1 million. Investment securities totaled
$7.7 million at September 30, 1999. This is a decrease of $566,000 compared to
three months earlier. During the three months ended September 30, 1999, total
loans increased $1.4 million, or 3.6% to $40.0 million.
Deposits at September 30, 1999 were $35.1 million; an increase of $2.5 million,
or 7.6% compared to three months earlier. Total borrowings increased $1.8
million to $15.0 as of September 30, 1999.
On September 8, 1998, the Company announced its 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. Pursuant to
this repurchase plan, the Company purchased and retired 6,600 shares of common
stock during the quarter-ended September 30, 1999. Since announcement of its
latest repurchase initiative during the first fiscal quarter of 1999, total
outstanding common stock has decreased by 23,452 shares.
Shareholders' equity was $7.1 million and 12.3% of total assets as of September
30, 1999, compared to $7.1 million and 13.4% of total assets as of June 30 1999.
The Company's net book value at September 30, 1999 was $8.05 per share based on
879,600 shares outstanding. Factors impacting shareholders' equity during the
quarter included net income, a cash dividend, common stock repurchases, and a
decrease in the market value of securities available for sale.
Comparison of Operating Results for the Three-Month Periods Ended September 30,
1999 and 1998
Net income for the first fiscal quarter ended September 30, 1999 was $58,000, or
$.07 per share based on an average of 811,599 diluted shares outstanding. Net
income for the same period last year was $41,000, or $.05 per share based on an
average of 831,902 diluted shares outstanding. Loan growth and an increase in
mortgage-backed securities produced additional interest income and lead to the
41.5% increase in net income.
Interest income increased by $227,000 or 25.4%, to $1.1 million for the first
quarter of fiscal year 2000 compared to the first quarter of fiscal year 1999.
This increase was partially offset by an increase in interest expense of
$149,000 or 32.5%. Net interest income before the provision for loan losses was
$517,000 for the three months ended September 30, 1999 compared to $439,000 for
the 1998 period; an increase of 17.8%.
Non-interest income more than doubled to $49,000 compared to $23,000 for the
first quarter a year earlier. This increase primarily resulted from an increase
in the number of service fee producing deposit accounts.
Non-interest expense was $459,000 for the quarter ended September 30, 1999,
compared to $379,000 for the same period last year; an increase of 21.1%. Most
of the increase in non-interest expense can be attributed to opening the Bank's
first branch office in October 1998, and the cost of support and service for a
growing volume of loan and deposit accounts. Compared to the same three month
period in 1998, equipment expense more than doubled to $45,000, salaries and
employee benefit expense increased 14.2% to $226,000, and computer processing
expense increased 89.2% to $44,000. However, the overall increase in
non-interest expense was partially offset by a decrease in legal and
professional fees and other assorted expense categories.
Income tax expense for the first fiscal quarter of 2000 was $37,000, compared to
$29,000 for the first fiscal quarter of 1999.
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 for both quarters ended September 30, 1999 and 1998. At September 30,
1999, after net losses and recoveries, the allowance for loan losses was
$343,000 or 0.86% of total loans, compared to $336,000 or 0.88% at June 30,
1999.
Management considered the allowance for loan losses at September 30, 1999, 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, 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Balance, July 1, 1999 $336,235 Balance, July 1, 1998 $319,595
Provision for loan losses 12,000 Provision for loan losses 12,000
Recoveries -- Recoveries --
Loans charged off 5,472 Loans charged off 18,413
-------- --------
Balance, September 30, 1999 $342,763 Balance, September 30, 1998 $313,182
======== ========
</TABLE>
Total non-performing loans were $116,000 or 0.3% of total loans at September 30,
1999 compared to $79,000 or 0.2% of total loans at June 30, 1999. Real estate
acquired through foreclosure totaled $46,000 at September 30, 1999, compared to
$6,000 at June 30, 1999. Other repossessed assets totaled $9,000 at September
30, 1999, while no other repossessed assets existed at June 30, 1999. Total
non-performing assets were $171,000 or .30% of assets at September 30, 1999.
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, 1999 and June 30, 1999, cash and
interest-bearing deposits totaled $5.5 million and $2.5 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 $4.6 million at the end
of the first quarter. However, under limits adopted by Board resolution of the
subsidiary Bank, the Company had $1.3 million of unused credit available from
the FHLB. At September 30, 1999, borrowing from the FHLB totaled $14.7 million.
At September 30, 1999, borrowings other than FHLB advances totaled $280,000. The
Bank's service corporation, BSF, Inc., borrowed these funds for purposes of
purchasing a large tract of land for use in its recently reactivated real estate
development operations.
Shareholders' equity was $7.1 million or 12.3% of total assets at September 30,
1999, compared to $7.1 million or 13.4% of total assets at June 30, 1999. Book
value at September 30, 1999 was $8.05 per share based on 879,600 outstanding
shares. All fully phased-in regulatory capital requirements for the Bank were
met as of September 30, 1999. Although the real estate development operations of
the Bank's subsidiary are permissible activities under the Bank's current
charter, the OTS requires that the Bank deduction its investment in the
subsidiary from its capital for purposes of calculating regulatory capital
amounts and ratios.
The Bank's actual and required capital amounts (in thousands) and ratios were as
follows as of September 30, 1999.
<TABLE>
<CAPTION>
Required For Required To Be Well
Actual Adequate Capital* Capitalized*
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital *(to risk weighted assets) $6,317 19.9% $2,534 8.0% $3,168 10.0%
Tier 1 capital *(to risk weighted assets) 5,974 18.9% 1,267 4.0% 1,901 6.0%
Tier 1 capital *(to total assets) 5,974 10.5% 2,282 4.0% 2,852 5.0%
</TABLE>
*As defined by the regulatory agencies
The Year 2000 Issue
Management and the Board of Directors recognize and understand Year 2000 ("Y2K")
risk and have ensured that all necessary resources are available to address this
problem. While work continues on contingency planning issues, management
believes that the Company's systems are ready for Year 2000 and beyond. For the
remainder of calendar 1999, the project management team will test and evaluate
contingency plans and work closely with critical business partners to make sure
their systems will be ready for the Year 2000 date change.
Management believes that the key to successfully meeting the Y2K challenge is
prior testing of all affected systems. The difficult and detailed testing phase
of the Company's Year 2000 Project Management Plan was completed prior to June
30, 1999. In fact, computer systems have already run with the clock rolled past
the Year 2000. As part of extensive critical date tests, system dates were
advanced to the Year 2000 and beyond. No problems were encountered during this
testing process. The Company completed all phases of the Y2K compliance program
on schedule and has shifted attention to contingency planning.
As part of the Y2K planning process, contingency plans have been established for
mission-critical systems. These plans will provide for alternative methods of
doing business, which include provisions for a back-up power source and manual
processing procedures, if needed. These contingency plans will continue to be
reviewed, tested and refined as Year 2000 approaches.
The Company has made, and will continue to make, investments in its systems and
applications to ensure, to the degree possible, Y2K compliance. Certain minor
equipment and software changes have been made in preparation for Year 2000.
However, at this point, management anticipates little or no additional Y2K
equipment and software changes.
Systems testing accounts for over half of Y2K costs incurred to-date. Due to the
fact that the Company uses outside data service providers for most of its
computer processing operations, it was unnecessary to invest heavily in system
improvements to achieve Y2K compliance. For the quarter ended September 30,
1999, Y2K related expense totaled about $4,000. Including fiscal year 1999,
total direct costs for Y2K compliance activity amounts to approximately $62,000.
This amount includes expenses for fixing or replacing non-compliant in-house
hardware and software, performing multiple systems tests, and contracting the
assistance of information technology professionals. This figure does not include
the cost of compensation for existing staff members involved in planning,
testing and reporting on Y2K issues.
Although management believes it has taken the necessary steps to address the Y2K
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 Y2K compliant, its
financial position and results of operations could be adversely impacted.
Amounts expensed in fiscal 1997 and 1998 for Y2K readiness were immaterial.
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.
<PAGE>
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
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, 1999, the most recent available analysis of the subsidiary Bank's
interest rate risk position, it was estimated that the Bank's MV would decrease
9.5% and 26.2% in the event of 200 and 400 basis point increases in market
interest rates respectively, compared to 3.9% and 19.4% for the same increases
at June 30, 1998. The Bank's MV at June 30, 1999 would decrease 10.9% and 19.5%
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
decreased MV 8.7% and 14.4% respectively.
Presented below, as of June 30, 1999 and 1998, 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.
<PAGE>
June 30, 1999
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* $4,956 $(1,762) (26.23)% 10.22% (248)bp
+200 bp 6,077 (641) (9.54) 11.94 (76)bp
0 bp 6,718 0 0.00 12.70 ---
-200 bp 5,987 (731) (10.88) 11.17 (153)bp
-400 bp 5,406 (1,312) (19.53) 9.93 (277)bp
*Basis Points.
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock EV Ratio: MV as % of PV of Assets 12.70%
Exposure Measure: Post-Shock MV Ratio 11.17%
Sensitivity Measure: Change in MV Ratio 153 bp
June 30, 1998
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* $5,058 $(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
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.
<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 12, 1999, the Company held its fourth annual meeting of shareholders
at which time matters submitted to a vote of stockholders included an election
of three Company directors, and ratification of the appointment of Olive LLP as
auditors for the fiscal year ending June 30, 2000.
All three director nominees were elected, and the appointment of auditors was
also approved and ratified by a majority of 885,200 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
----------------- --- ------- ------- --------
Kurt J. Meier - 3 years 662,510 25,960 - 196,730
Frank R. Stewart - 3 years 659,540 28,930 - 196,730
Tad Wilson - 3 years 662,510 25,960 - 196,730
Other Matters
Auditors 675,370 10,600 2,500 196,730
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
(a) 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).
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the period
ended September 30, 1999.
<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 11, 1999 By:/s/ Kurt J. Meier
---------------------------
Kurt J. Meier
President and
Chief Executive Officer
Date: November 11, 1999 By:Kurt D. Rosenberger
---------------------------
Kurt D. Rosenberger
Vice President and
Chief Financial Officer
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001009242
<NAME> Home Financial Bancorp
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