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, 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 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. [X]
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of August 31, 1999, was $5,104,990.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of August 31, 1999, was 885,200 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1999,
are incorporated by reference into Part II. Portions of the Proxy Statement for
the 1999 Annual Meeting of Shareholders are incorporated in Part III.
Exhibit Index on Page E-1
Page 1 of 33 Pages
<PAGE>
HOME FINANCIAL BANCORP
Form 10-K
INDEX
Page
Forward Looking Statements................................................. 3
PART I
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 29
Item 3. Legal Proceedings.............................................. 29
Item 4. Submission of Matters to a Vote of Security Holders............ 29
Item 4.5. Executive Officers of Registrant............................... 30
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 30
Item 6. Selected Financial Data........................................ 31
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation........................... 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 31
Item 8. Financial Statements and Supplementary Data.................... 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 31
PART III
Item 10. Directors and Executive Officers of Registrant................. 31
Item 11. Executive Compensation......................................... 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 31
Item 13. Certain Relationships and Related Transactions................. 31
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................. 32
Signatures..................................................... 33
<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 Federal Savings Bank. In 1994,
the Bank became an Indiana savings bank known as Owen Community Bank, s.b. As of
May 1, 1999, the Bank converted back to a federal stock savings bank and the
Company became a savings and loan holding company. 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) home equity loans; (xi) NOW accounts; (xii) demand
deposit accounts; (xiii) passbook savings accounts; and (xiv) certificates of
deposit. The Company conducts business out of its main office located in
Spencer, Indiana and its branch office in Cloverdale, Indiana.
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 53.5% of the Bank's total
loan portfolio at June 30, 1999. 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 2.4% and
13.6% of the Bank's total loan portfolio at June 30, 1999, respectively.
Mortgage loans secured by multi-family properties and nonresidential real estate
totaled approximately 2.8% and 23.8%, respectively, of the Bank's total loan
portfolio at June 30, 1999. Consumer loans constituted approximately 2.6% of the
Bank's total loan portfolio at June 30, 1999.
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<PAGE>
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,
---------------------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
TYPE OF LOAN
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
Residential.......................... $20,952 53.46% $19,563 56.76% $19,898 57.22%
Combo................................ 5,331 13.60 4,666 13.52 4,396 12.64
Nonresidential....................... 9,323 23.79 7,614 22.07 6,896 19.83
Multi-family......................... 1,096 2.80 904 2.62 980 2.82
Mobile home loans....................... 950 2.43 831 2.43 1,361 3.91
Commercial and industrial loans......... 538 1.37 242 0.70 634 1.82
Consumer loans.......................... 999 2.55 655 1.90 612 1.76
------- ------ ------- ------ ------- ------
Gross loans receivable............. $39,189 100.00% $34,475 100.00% $34,777 100.00%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential real estate.............. $20,952 53.46% $19,563 56.76% $19,898 57.22%
Mobile home and land................. 5,331 13.60 4,666 13.52 4,396 12.64
Nonresidental real estate............ 9,323 23.79 7,614 22.07 6,896 19.83
Multi-family real estate............. 1,096 2.80 904 2.62 980 2.82
Mobile home.......................... 950 2.43 831 2.43 1,361 3.91
Deposits............................. 154 0.39 152 .44 122 0.35
Other security....................... 1,383 3.53 745 2.16 1,124 3.23
------- ------ ------- ------ ------- ------
Gross loans receivable............. 39,189 100.00 34,475 100.00 34,777 100.00
Deduct:
Allowance for loan losses............... 336 0.86 320 0.93 231 0.66
Loans in process and
deferred loan costs.................. 615 1.57 196 0.57 428 1.23
------- ------ ------- ------ ------- ------
Net loans receivable................. $38,238 97.57% $33,959 98.50% $34,118 98.11%
======= ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate...................... $23,748 64.70% $21,502 65.69% $22,296 69.31%
Fixed-rate........................... 12,954 35.30 11,245 34.31 9,874 30.69
------- ------ ------- ------ ------- ------
Total.............................. $36,702 100.00% $32,747 100.00% $32,170 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information at June 30, 1999,
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.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
Balance Due during years ended June 30,
Outstanding 2003 2005 2010 2015
at June 30, to to to and
1999 2000 2001 2002 2004 2009 2014 following
-------------------------------------------------------------------------------
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential..................... $20,952 $176 $42 $144 $221 $2,315 $3,279 $14,775
Combo........................... 5,331 54 --- 38 99 698 1,042 3,400
Nonresidential.................. 9,323 1 --- 20 1,647 281 4,626 2,748
Multi-family.................... 1,096 --- --- 83 --- 578 150 285
Mobile home loans.................. 950 10 8 19 160 411 235 107
Commercial and industrial loans.... 538 --- --- --- 298 --- 240 ---
Consumer loans..................... 999 557 100 221 121 --- --- ---
------- ---- ---- ---- ------ ------ ------ -------
Total......................... $39,189 $798 $150 $525 $2,546 $4,283 $9,572 $21,315
======= ==== ==== ==== ====== ====== ====== =======
</TABLE>
The following table sets forth, as of June 30, 1999, the dollar amount
of all loans due after one year which have fixed interest rates and floating or
adjustable rates.
<TABLE>
<CAPTION>
Due After June 30, 2000
--------------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Mortgage loans:
<S> <C> <C> <C>
Residential..................... $7,569 $13,207 $20,776
Combo........................... 2,826 2,451 5,277
Nonresidential.................. 1,304 8,018 9,322
Multi-family.................... 921 175 1,096
Mobile home loans.................. 940 --- 940
Commercial and industrial loans.... 240 298 538
Consumer loans..................... 442 --- 442
------- ------- -------
Total......................... $14,242 $24,149 $38,391
======= ======= =======
</TABLE>
One- to Four- Family Residential Loans. Residential loans consist
primarily of one- to four-family loans. Approximately $21.0 million, or 53.5% of
the Bank's portfolio of loans at June 30, 1999, consisted of one- to four-family
residential mortgage loans, of which approximately 63.0% 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, the rate must be correlated with changes in a readily verifiable
index.
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
One 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% to 1.5% and 4% to 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 (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 $100,000 for any residential loan with a Loan-to-Value
Ratio of 90% or higher.
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 (the
"Executive Committee") based upon prevailing rates in the Bank's market area,
the credit history of the applicant and the Loan-to-Value Ratio. 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 One 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.
- 5 -
<PAGE>
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, 1999, 37.0% 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, 1999, residential loans amounting to $51,000, or 0.13% 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.
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 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 originates a personal revolving line of credit loan secured by
a first or second mortgage on the borrower's primary residence. The combined
total of first and second mortgages on property securing Home Equity Loans is
generally limited to 80%. The draw period for the Home Equity Loan product is
generally limited to 10 years, with a maximum of 15 years.
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 five (5) years, the Bank does not
generally require a new appraisal.
Combo Loans. At June 30, 1999, $5.3 million, or 13.6% of the Bank's
total loan portfolio, consisted of Combo Loans, of which approximately 46.0% 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
- 6 -
<PAGE>
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 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 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 based upon prevailing rates in the Bank's
market area, the applicant's credit history 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 rates for residential ARM loans.
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, 1999, 54.0% 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, 1999, approximately $950,000, or 2.4% 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.
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, and
because such loans generally are made to borrowers with low income levels, and
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. One of the Bank's mobile home loans was
included in non-performing assets at June 30, 1999.
Nonresidential Real Estate Loans. At June 30, 1999, $9.3 million, or
23.8% of the Bank's total loan portfolio, consisted of nonresidential real
estate loans, of which $967,000 constituted loans secured by unimproved land
only. The nonresidential real estate loans included in the Bank's portfolio are
primarily secured by real estate that includes a motel, a warehouse, a medical
facility, a funeral home, several churches and a residential real estate
development project. At June 30, 1999, $1.4 million, or 15.0% of the Bank's
nonresidential loan portfolio, was secured by real estate being developed for
residential housing. At the same date, $477,000, or 5.1% of the Bank's
nonresidential loan portfolio, was secured by churches. The Bank currently
originates nonresidential real estate loans as one-year adjustable-rate and
monthly floating-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, 1999 was $950,000, net of participation portion sold. 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.
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<PAGE>
Multi-Family Loans. Approximately $1.1 million, or 2.8% of the Bank's
portfolio of loans at June 30, 1999, consisted of multi-family loans. The
largest multi-family loan at June 30, 1999 had a balance of $512,000 and was
secured by an apartment complex. All of the Bank's multi-family loans were fully
performing as of June 30, 1999. 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 $999,000 as of June 30, 1999, or 2.6% 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'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 residential mortgage
loans do, 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, 1999, consumer loans amounting to $28,000 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.
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 experience some difficulty
selling such non-conforming 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 in that, among other things, the Bank 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
terms.
The Bank confines its loan origination activities primarily to Owen,
Putnam and surrounding counties in Indiana. At June 30, 1999, 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
- 8 -
<PAGE>
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, 1999,
the Bank did not hold any participation loans.
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,
------------------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable
at beginning of period...................... $34,475 $34,777 $27,586
------- ------- -------
Originations:
Mortgage loans:
Residential............................... 9,660 5,664 7,967
Other..................................... 2,044 641 4,380
------- ------- -------
Total mortgage loans.................... 11,704 6,305 12,347
------- ------- -------
Mobile home loans........................... 317 164 78
Consumer loans:
Installment............................... 810 793 915
Share..................................... 101 97 131
------- ------- -------
Total consumer loans.................... 911 890 1,046
------- ------- -------
Total originations................. 12,932 7,359 13,471
Purchases (sales) of participation loans....... --- --- ---
Repayments and other deductions................ 8,218 7,661 6,280
------- ------- -------
Gross loans receivable at end of period..... $39,189 $34,475 $34,777
======= ======= =======
</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
residential mortgage loans. A late charge is 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 presently maintains two automated teller machines ("ATMs").
One is located at its main office in Spencer, Indiana. A second ATM is located
at the Bank's branch office in Cloverdale, Indiana. The Bank's ATMs operate in
the MAC(R) regional network and the CIRRUS(R) nationwide network. The Company
does not derive significant income from the ATM cards.
Mortgage-Backed Securities. At June 30, 1999, the Bank had $7.8 million
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.
- 9 -
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------
1999 1998 1997
------------------- -------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Total mortgage-backed
securities............ $7,771 $7,570 $537 $543 $788 $793
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, 1999.
Amount at June 30, 1999, 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)
Mortgage-backed securities
available for sale.... --- --- --- --- $7,771 $6.4%
</TABLE>
The following table sets forth the changes in the Bank's mortgage-backed
securities portfolio for the years ended June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
For the Year Ended June 30,
---------------------------------------
1999 1998 1997
----- --------- ------
(In thousands)
<S> <C> <C> <C>
Beginning balance..................... $543 $ 793 $3,119
Purchases............................. 8,659 --- 929
Sales ............................... --- --- (2,904)
Monthly repayments.................... (1,385) (249) (366)
Premium and discount
amortization, net.................. (46) (1) 10
Unrealized loss on securities
available for sale................. (201) --- 5
------ ------ -------
Ending balance........................ $7,570 $ 543 $ 793
====== ====== =======
</TABLE>
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, 1999, $79,000, or 0.15% of the
Company's total assets, were non-performing loans (loans delinquent more than 90
days and non-accruing loans) compared to $279,000, or 0.66% of total assets at
June 30, 1998. At June 30, 1999, residential loans and consumer loans accounted
for 64.6% and 35.4%, respectively, of non-performing loans. There were no
- 10 -
<PAGE>
non-accruing investments at June 30, 1999. As of June 30, 1999, the Bank held
$6,000 of Real Estate Owned ("REO") properties and no other repossessed
properties.
The table below sets forth the amounts and categories of the Bank's
non-performing assets.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------
1999 1998 1997
---- ------- ----
(In thousands)
<S> <C> <C> <C>
Non-accruing loans (1)................. $79 $279 $ 562
Total non-performing assets............ 85 499 749
Non-performing loans to total loans.... 0.20% 0.81% 1.65%
Non-performing assets to total assets.. 0.16 1.17 1.76
</TABLE>
- ---------------
(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, 1999,
$51,000 of non-accruing loans were residential loans and $28,000 were
consumer loans. Additional interest income that would have been
recorded had income on non-accruing loans been considered collectible
and accounted for in accordance with their original terms was $5,000
for the year ended June 30, 1999.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------- -----------------------
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> <C> <C>
Loans delinquent
for (1):
30-89 days.......... 25 $630 1.61% 12 $293 0.86% 37 $ 905 2.65%
90 days and over.... 10 79 0.20 11 279 0.81 18 562 1.65
---- ---- ---- -- ---- ---- -- ------ ----
Total delinquent
loans.......... 35 $709(2) 1.81% 23 $572 1.67% 55 $1,467 4.30%
==== ==== ==== == ==== ==== == ====== ====
</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, $611,000 consisted of residential real estate loans and
$98,000 consisted 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.
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
risks 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
assets so classified or to charge off such amounts.
- 11 -
<PAGE>
At June 30, 1999, 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, 1999
-----------------
(In thousands)
Substandard loans.................................... $77
Doubtful loans....................................... 14
Loss loans........................................... ---
Special mention loans................................ 657
----
Total classified loans............................ $748
====
General loss allowances.............................. $336
Specific loss allowances............................. ---
----
Total allowances.................................. $336
====
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 classified 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, 1999. 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.
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, 1999.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at beginning
of period................................ $320 $231 $150 $ 57 $ 26
---- ---- ---- ---- ----
Less charge offs:
Mortgage loans.............................. (26) (6) --- --- ---
Consumer loans.............................. (2) (7) (4) (1) (6)
Add recoveries:
Consumer loans.............................. --- --- --- --- 1
---- ---- ---- ---- ----
Net (charge-offs) recoveries................ (28) (13) (4) (1) (5)
Provisions for losses on loans.............. 44 102 85 94 36
---- ---- ---- ---- ----
Balance of allowance at end of period....... $336 $320 $231 $150 $ 57
==== ==== ==== ==== ====
Net charge-offs to total average
loans receivable for period.............. 0.08% 0.04% 0.01% --- % 0.02%
Allowance at end of period to
net loans receivable at end
of period (1)............................ 0.88 0.94 0.67 0.55 0.22
Allowance to total non-performing
loans at end of period................... 425.32 114.70 41.10 41.78 57.00
</TABLE>
(1) Total loans less net loans in process and deferred loan costs.
- 12 -
<PAGE>
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,
----------------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- ---------------------
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......................... $ 45 53.46% $ 35 56.76% $ 25 57.22%
Combo............................... 30 13.60 33 13.52 24 12.64
Nonresidential...................... 45 23.79 32 22.07 23 19.83
Multi-family........................ 20 2.80 12 2.62 2.82
Mobile home loans................... 45 2.43 35 2.43 25 3.91
Commercial and industrial
loans............................ 15 1.37 6 0.70 5 1.82
Consumer loans...................... 25 2.55 19 1.90 14 1.76
Unallocated......................... 111 --- 148 --- 115 ---
---- ------ ---- ------ ---- ------
Total.......................... $336 100.00% $320 100.00% $231 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investments and FHLB Stock
The Company's investment portfolio (excluding mortgage-backed
securities) consists of U.S. government agency securities, equity securities and
Federal Home Loan Bank ("FHLB") stock. At June 30, 1999, approximately $1.6
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, 1999.
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,
--------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------
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......................... $100 $101 $100 $103 $ 925 $931
Marketable equity securities............. 813 617 1,320 1,272 344 378
------ ------ ------ ------ ------ ------
Total securities
available for sale................... 913 718 1,420 1,375 1,269 1,309
------ ------ ------ ------ ------ ------
FHLB stock (2).............................. 660 660 500 500 500 500
------ ------ ------ ------ ------ ------
Total investments...................... $1,573 $1,378 $1,920 $1,875 $1,769 $1,809
====== ====== ====== ====== ====== ======
</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.
- 13 -
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
Amount at June 30, 1999, 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% --- ---%
---- ----
Total investments.................. $100 7.84 --- ---%
==== ====
</TABLE>
Sources of Funds
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
are also an important source of funding for the Bank.
Deposits. Deposits are attracted, principally from within Owen and
Putnam Counties, through the offering of a broad selection of deposit
instruments including fixed-rate certificates of deposit, NOW and other
transaction accounts, and savings accounts. Substantially all of the Bank's
depositors are residents of Owen County and the five surrounding counties of
Putnam, Clay, Greene, Monroe and Morgan. 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 rarely pays 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.
- 14 -
<PAGE>
An analysis of the Bank deposit accounts by type, maturity, and rate at
June 30, 1999, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1999 Deposits Rate
- --------------- --------- ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Withdrawable:
Savings accounts.................................. $ 10 $3,782 11.58% 2.62%
Money market accounts............................. 5,000 1,715 5.25 3.73
NOW and other transaction accounts................ 50 3,293 10.08 1.60
------- ------
Total withdrawable.............................. 8,790 26.91 2.45
------- ------
Certificates (original terms):
91 days........................................... 1,000 193 0.59 4.04
6 months.......................................... 1,000 918 2.81 4.46
12 months......................................... 1,000 11,816 36.21 5.21
24 months......................................... 1,000 2,911 8.91 5.37
30 months......................................... 1,000 2,572 7.88 5.99
36 months......................................... 1,000 416 1.27 6.09
48 months......................................... 1,000 671 2.05 5.61
60 months......................................... 1,000 4,017 12.30 5.95
IRAs (original terms):
12 months......................................... 1,000 265 0.81 6.17
36 months......................................... 1,000 8 0.02 6.00
60 months......................................... 1,000 80 0.24 5.08
------- ------
Total certificates and IRAs..................... 23,867 73.09 5.44
------- ------
Total deposits.................................. $32,657 100.00% 4.63%
======= ======
</TABLE>
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank's at the dates indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
4.00% and under.................... $ --- $ 65 $ 55
4.01 - 6.00 %...................... 19,682 14,971 14,174
6.01 - 8.00%....................... 4,185 4,020 5,304
------- ------- -------
Total ............................ $23,867 $19,056 $19,533
======= ======= =======
</TABLE>
The following table represents, by various interest rate categories,
the amounts of time deposits maturing during each of the three years following
June 30, 1999, and the total amount maturing thereafter. Matured certificates
which have not been renewed as of June 30, 1999, have been allocated based upon
certain rollover assumptions:
<TABLE>
<CAPTION>
Amounts At
June 30, 1999, 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................ $ --- $ --- $ --- $ ---
4.01 - 6.00 %.................. 14,686 2,562 324 2,110
6.01-8.00%..................... 3,117 177 520 371
------- ------ ---- ------
Total ........................ $17,803 $2,739 $844 $2,481
======= ====== ==== ======
</TABLE>
- 15 -
<PAGE>
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,
1999.
Maturity (In thousands)
Three months or less................................. $ 535
Greater than three months
through six months.............................. 1,981
Greater than six months
through twelve months........................... 1,327
Over twelve months................................... 1,305
------
Total........................................... $5,148
======
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
1999 Deposits 1998 1998 Deposits 1997 1997 Deposits
---------- -------- ------- ---------- -------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts................. $ 3,782 11.58% $511 $3,271 12.28% $ 329 $2,942 11.25%
Money market accounts............ 1,715 5.25 203 1,512 5.67 (705) 2,217 8.48
NOW accounts and
other transaction accounts..... 3,293 10.08 483 2,810 10.54 1,345 1,465 5.60
------- ------ ------ ------- ------ ---- ------- ------
Total withdrawable............. 8,790 26.91 1,197 7,593 28.49 969 6,624 25.33
Certificates (original terms):
91 days.......................... 193 0.59 61 132 0.50 (24) 156 0.60
6 months......................... 918 2.81 209 709 2.66 45 664 2.54
12 months........................ 11,816 36.21 4,625 7,191 26.98 720 6,471 24.74
24 months........................ 2,911 8.91 547 2,364 8.87 (892) 3,256 12.43
30 months........................ 2,572 7.88 (251) 2,823 10.59 (207) 3,030 11.58
36 months........................ 416 1.27 11 405 1.52 (101) 506 1.93
48 months........................ 671 2.05 (50) 721 2.71 (94) 815 3.12
60 months........................ 4,017 12.30 (609) 4,626 17.36 12 4,614 17.64
IRAs (original terms):
12 months........................ 265 0.81 193 72 0.27 65 7 0.03
36 months........................ 8 0.02 1 7 0.03 --- 7 0.03
60 months........................ 80 0.24 74 6 0.02 (1) 7 0.03
------- ------ ------ ------- ------ ---- ------- ------
Total certificates and IRAs.... 23,867 73.09 4,811 19,056 71.51 (477) 19,533 74.67
------- ------ ------ ------- ------ ---- ------- ------
Total deposits............... $32,657 100.00% $6,008 $26,649 100.00% $492 $26,157 100.00%
======= ====== ====== ======= ====== ==== ======= ======
</TABLE>
During fiscal year 1998, 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 1998.
Borrowings. The Bank focuses on generating loans by utilizing the best
source of funding from deposits, investments or borrowings. At June 30, 1999,
the Bank had $13.2 million in borrowings from the FHLB of Indianapolis, which
mature on various dates primarily during the years 2000 through 2005 and have
interest rates ranging from 5.17% to 6.86%. The Bank does not anticipate any
difficulty in obtaining advances appropriate to meet its requirements in the
future. The Bank had $30.9 million in eligible assets available as collateral
- 16 -
<PAGE>
for advances from the FHLB of Indianapolis as of June 30, 1999. Based on the
Bank's blanket collateral agreements, advances from the FHLB of Indianapolis
must be collateralized by 170% of eligible assets. Therefore, the Bank's
eligible collateral would have supported approximately $19.2 million in advances
from the FHLB of Indianapolis as of June 30, 1999. However, the Bank's Board of
Directors has by resolution limited the amount of authorized borrowings to $16.0
million at June 30, 1999.
The following table presents certain information relating to the Bank's
FHLB borrowings for the years ended June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
At or for the Year
Ended June 30,
-------------------------------------------
1999 1998 1997
------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB Advances:
Average balance outstanding....................... $10,242 $8,592 $ 7,725
Maximum amount outstanding at any
month-end during the period..................... 13,200 10,000 10,000
Weighted average interest rate
during the period............................... 5.83% 6.16% 6.30%
Weighted average interest rate
at end of period................................ 5.61% 6.01% 6.29%
</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.
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. Recognizing the FDIC's mandate, BSF has methodically reduced
its outstanding land contracts and real estate holdings. As of June 30, 1999,
outstanding contracts on BSF subdivision lots were:
Name of Subdivision Number of Contracts Contract Balance
------------------- ------------------- ----------------
10 O'Clock Line 3 $ 39,340
Greene Woods 3 34,412
Autumn Hills 11 115,829
Coon Path 2 18,662
Purchased contracts 2 15,112
-- --------
Total outstanding contracts 21 $223,355
== ========
Additionally, at June 30, 1999, BSF had four unsold lots in Coon Path
with a sale price of $44,900 and cost of $20,433.
BSF, from time to time, keeps a number of its tracts of land for mobile
home repossession. BSF purchases repossessed mobile homes from the Bank at book
value, which would approximate market 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.
- 17 -
<PAGE>
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 order to permit the Company to continue its profitable real estate
development activities through BSF, the Company and the Bank successfully sought
charter conversions under the authority granted to the Office of Thrift
Supervision ("OTS"). Effective May 1, 1999 the Company became a federally
chartered savings and loan holding company and the Bank became a federal stock
savings bank. Management expects the resumption of BSF activity to have a
positive impact on Company earnings in future periods.
At June 30, 1999, the Bank's aggregate investment in BSF was $305,000.
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 a condensed balance sheet for BSF at June 30, 1999,
1998 and 1997, and a condensed income statement for BSF for the years ended June
30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Condensed Balance Sheet
June 30,
---------------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Assets:
<S> <C> <C> <C>
Cash................................. $72 $ 14 $ 29
Investment securities................ --- 85 ---
Loans, net........................... 223 329 370
Land acquired for development........ 20 21 21
---- ---- ----
Total assets..................... $315 $449 $420
==== ==== ====
Liabilities:
Other liabilities.................... $10 10 3
---- ---- ----
Total liabilities................ --- 10 3
Equity Capital.......................... 305 439 417
---- ---- ----
Total liabilities and
equity capital................. $315 $449 $420
==== ==== ====
Condensed Income Statement
June 30,
-----------------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Interest income......................... $35 $ 39 $44
Interest expense........................ --- --- ---
---- ---- ----
Net interest income.................. 35 39 44
---- ---- ----
Income from sale of real estate......... 6 7 31
Non-interest expense:
Salaries and employee benefits....... 5 4 4
Printing and office supplies......... 1 --- 6
Other expenses....................... 8 7 8
---- ---- ----
Total non-interest expense....... 14 11 18
---- ---- ----
Income before income tax................ 27 35 57
Income tax expense................... 11 14 22
---- ---- ----
Net income....................... $16 $ 21 $35
==== ==== ====
</TABLE>
- 18 -
<PAGE>
Income Tax Credits
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, Cunot Apartments, L.P., is a 24-unit apartment complex for senior
living. The Bank purchased a 99% limited partnership interest for $732,000.
Funds were dispersed by installments during project construction, which was
completed during July 1999. The Bank's investment in the project is eligible for
income tax credits over the fifteen-year life of the Agreement.
As of June 30, 1999, the total capitalized building, land and
organizational costs for the project were $1,373,000. Management estimates that
the Bank will be able to utilize approximately $107,000 in low-income tax credit
annually, beginning in fiscal year 2000. However, 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. Recent reports from the General Partner
indicate an occupancy rate of approximately 80%. In accordance with the
Agreement, the process of certifying the project's eligibility for tax credits
if currently underway.
Employees
As of June 30, 1999, the Company employed 20 persons on a full-time
basis and four persons on a part-time basis. None of the Company's employees is
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
The Company'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 Company established the Employee Stock
Ownership Plan and Trust ("ESOP") and the Management Recognition and Retention
Plan and Trust ("RRP"). In October, 1997, the shareholders approved the Stock
Option Plan. The ESOP, RRP and the Stock Option Plan 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 and Putnam 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.
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."
- 19 -
<PAGE>
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
General
The Bank, as a federally chartered savings bank, is a member of the
Federal Home Loan Bank System ("FHLB System") and its deposits are insured by
the Federal Deposit Insurance Corporaiton ("FDIC") and it is a member of the
Savings Association Insurance Fund (the "SAIF"), which is administered by the
FDIC. The Bank is subject to extensive regulation by the OTS. Federal
associations may not enter into certain transactions unless certain regulatory
tests are met or they obtain prior governmental approval and the associations
must file reports with the OTS about their activities and their financial
condition. Periodic compliance examinations of the Bank are conducted by the OTS
which has, in conjunction with the FDIC in certain situations, examination and
enforcement powers. This supervision and regulation are intended primarily for
the protection of depositors and federal deposit insurance funds. The Bank is
also subject to certain reserve requirements under regulations of the Board of
Governors of the Federal Reserve System ("FRB").
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS. The regulation
also establishes a schedule of fees for the various types of applications and
filings made by savings associations with the OTS. The general assessment, to be
paid on a semiannual basis, is based upon the savings association's total
assets, including consolidated subsidiaries, as reported in a recent quarterly
thrift financial report. Currently, the quarterly assessment rates range from
.01164% of assets for associations with assets of $67 million or less to .00308%
for associations with assets in excess of $35 billion. The Bank's semiannual
assessment under this assessment scheme, based upon its total assets at March
31, 1999, was $9,151.
The Bank is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
their own securities, and limitations upon other aspects of banking operations.
In addition, the activities and operations of the Bank are subject to a number
of additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
The U.S. Congress is currently considering broad financial reform
legislation intended to modernize the financial services industry. Under the
pending legislation, bank holding companies may be authorized, subject to
certain conditions, to acquire manufacturing and other nonfinancial companies,
and nonfinancial companies may be authorized to acquire banks. Other provisions
of the pending legislation could affect the types of activities in which a
unitary savings and loan holding company, such as the Holding Company, may
engage. In addition, previous versions of banking reform legislation considered
by Congress included provisions that would require all federal savings
associations, including the Bank, to convert to either a state bank or a
national bank and would require savings and loan holding companies to become
bank holding companies. Because Congress is currently considering different
versions of the proposed legislation, it cannot be determined which of these
conflicting provisions might be included in any final legislation approved by
Congress or how such legislation, if enacted, would affect the activities of the
Holding Company or the Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
member savings associations and othe financial institutions within its assigned
region. It is funded primarily from funds deposited by savings associations and
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes loans to members (i.e., advances) in accordance with policies and
procedures established by the Board of Directors of the FHLB. All FHLB advances
- 20 -
<PAGE>
must be fully secured by sufficient collateral as determined by the FHLB. The
Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB
System, including the FHLB of Indianapolis.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. The Bank is currently in compliance with this
requirement. At June 30, 1999, the Bank's investment in stock of the FHLB of
Indianapolis was $660,000. The FHLB imposes various limitations on advances such
as limiting the amount of certain types of real estate-related collateral to 30%
of a member's capital and limiting total advances to a member. Interest rates
charged for advances vary depending upon maturity, the cost of funds to the FHLB
of Indianapolis and the purpose of the borrowing.
All twelve 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 have adversely affected
the level of FHLB dividends paid and could continue to do so in the future. For
the fiscal year ended June 30, 1999, dividends paid by FHLB to the Bank totaled
$45,000, for an annual rate of 8.01%.
Liquidity
Federal regulations require the Bank to maintain minimum levels of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of mutual
funds and certain corporate debt securities and commercial paper) equal to an
amount not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to an amount within the range of 4% to 10%
depending upon economic conditions and savings flows of member institutions. The
OTS recently lowered the level of liquid assets that must be held by a savings
association from 5% to 4% of the association's net withdrawable accounts plus
short-term borrowings based upon the average daily balance of such liquid assets
for each quarter of the association's fiscal year. The Bank has historically
maintained its liquidity ratio at a level in excess of that required. At June
30, 1999, the Bank's liquidity ratio was 38.4%. The Bank has never been subject
to monetary penalties for failure to meet its liquidity requirements.
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 (the "BIF") for commercial
banks and state savings banks and the SAIF for savings associations such as the
Bank and banks that have acquired deposits from savings associations. The FDIC
is required to maintain designated levels of reserves in each fund. As of
September 30, 1996, the reserves of the SAIF were below the level required by
law, primarily because a significant portion of the assessments paid into the
SAIF have been used to pay the cost of prior thrift failures, while the reserves
of the BIF met the level required by law in May, 1995. However, on September 30,
1996, provisions designed to recapitalize the SAIF and eliminate the premium
disparity between the BIF and SAIF were signed into law, as further described
below.
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 these rates if the 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. An institution's risk level is determined based on its
capital level and the FDIC's level of supervisory concern about the institution.
- 21 -
<PAGE>
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
the Bank was charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1995. The Bank recognized this one-time
assessment as a non-recurring operating expense of $142,000 ($86,000 after tax)
during the three-month period ended September 30, 1996. The assessment was fully
deductible for both federal and state income tax purposes. Beginning January 1,
1997, the Bank's annual deposit insurance premium was reduced from .23% to .06%
of total assessable deposits. BIF institutions pay lower assessments than
comparable SAIF institutions because BIF institutions pay only 20% of the rate
being paid by SAIF institutions on their deposits with respect to obligations
issued by the federally-chartered corporation which provided some of the
financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also
provides for the merger of the SAIF and the BIF by 1999, but not until such time
as bank and thrift charters are combined. Until the charters are combined,
savings associations with SAIF deposits may not transfer deposits into the BIF
system without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. The OTS recently adopted a regulation, which became effective
April 1, 1999, that requires savings associations that receive the highest
supervisory rating for safety and soundness to maintain "core capital" of at
least 3% of total assets. All other savings associations must maintain core
capital of at least 4% of total assets. Core capital is generally defined as
common shareholders' equity (including retained income), noncumulative perpetual
preferred stock and related surplus, certain minority equity interests in
subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing
rights and purchased credit card relationships (subject to certain limits) less
nonqualifying intangibles. Under the tangible capital requirement, a savings
association must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights which may be included after
making the above-noted adjustment in an amount up to 100% of tangible capital)
of at least 1.5% of total assets. Under the risk-based capital requirements, a
minimum amount of capital must be maintained by a savings association to account
for the relative risks inherent in the type and amount of assets held by the
savings association. The risk-based capital requirement requires a savings
association to maintain capital (defined generally for these purposes as core
capital plus general valuation allowances and permanent or maturing capital
instruments such as preferred stock and subordinated debt less assets required
to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to
risk in one of four categories (0-100%). A credit risk-free asset, such as cash,
requires no risk-based capital, while an asset with a significant credit risk,
such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At June 30, 1999, the Bank was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation, the
Bank would be exempt from its provisions because it has less than $300 million
in assets and its risk-based capital ratio exceeds 12%. The Bank nevertheless
measures its interest rate risk in conformity with the OTS regulation and, as of
June 30, 1999, the Bank's interest rate risk was within the parameters set forth
in the regulation.
- 22 -
<PAGE>
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991, as
amended ("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions 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,
1999, the Bank was categorized as "well capitalized," meaning that its total
risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Capital Distributions Regulation
The OTS recently adopted a regulation, which became effective on April
1, 1999, that revised the restrictions that apply to "capital distributions" by
savings associations. The amended regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
The amended regulation exempts certain savings associations from the
requirement under the previous regulation that all savings associations file
either a notice or an application with the OTS before making any capital
distribution. As revised, the regulation requires a savings association to file
an application for approval of a proposed capital distribution with the OTS if
the association is not eligible for expedited treatment under OTS's application
processing rules, or the total amount of all capital distributions, including
the proposed capital distribution, for the applicable calendar year would exceed
an amount equal to the savings association's net income for that year to date
plus the savings association's retained net income for the preceding two years
- 23 -
<PAGE>
(the "retained net income standard"). At June 30, 1999, the Bank's retained net
income standard was 554,000. A savings association must also file an application
for approval of a proposed capital distribution if, following the proposed
distribution, the association would not be at least adequately capitalized under
the OTS prompt corrective action regulations, or if the proposed distribution
would violate a prohibition contained in any applicable statute, regulation, or
agreement between the association and the OTS or the FDIC.
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because the
Bank is a subsidiary of a savings and loan holding company, this latter
provision requires that, at a minimum, the Bank must file a notice with the OTS
thirty days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, the Bank's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires the Bank to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders and prohibits the Bank from
making capital distributions to the Holding Company if its net worth would be
reduced below the amount required for the liquidation account.
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 the 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 Bank does not believe that these regulations
will have a materially adverse effect on its current operations.
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. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's board
of directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to
a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily marketable collateral, including certain debt and equity
securities but not including real estate. In some cases, a savings association
may lend up to 30 percent of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At June 30, 1999, the Bank
did not have any loans or extensions of credit to a single or related group of
borrowers in excess of its lending limits. The Bank does not believe that the
loans-to-one-borrower limits will have a significant impact on its business
operations or earnings.
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<PAGE>
Transactions with Affiliates
The Bank and Holding Company are 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.
Holding Company Regulation
The Holding Company is regulated as a "non-diversified unitary savings
and loan holding company" within the meaning of the Home Owners' Loan Act, as
amended ("HOLA"), and subject to regulatory oversight of the Director of the
OTS. As such, the Holding Company is registered with the OTS and thereby subject
to OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Holding Company and with other companies
affiliated with the Holding Company.
The HOLA generally prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from (i) acquiring control of
any other savings association or savings and loan holding company or controlling
the assets thereof or (ii) acquiring or retaining more than 5 percent of the
voting shares of a savings association or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock may also
acquire control of any savings institution, other than a subsidiary institution,
or any other savings and loan holding company.
The Holding Company's Board of Directors presently intends to continue
to operate the Holding Company as a unitary savings and loan holding company.
Under current OTS regulations, there are generally no restrictions on the
permissible business activities of a unitary savings and loan holding company.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply). See "--Qualified
Thrift Lender." At June 30, 1999, the Bank's asset composition was in excess of
that required to qualify the Bank as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
institution other than through a merger or other business combination with the
Bank, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than the Bank or other subsidiary savings associations)
would thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings association shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution,
(iv) holding or managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies or (vii) those activities
authorized by the FRB as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of the OTS prior to being engaged in by a
multiple holding company.
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<PAGE>
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5,1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings associations holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding
company may declare or pay a dividend on its permanent or nonwithdrawable stock
unless it first gives the Director of the OTS thirty days advance notice of such
declaration and payment. Any dividend declared during such period or without the
giving of such notice shall be invalid.
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. If the Holding Company has fewer
than 300 shareholders, it may deregister the 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 or unless sold in
accordance with the resale restrictions of Rule 144 under 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.
Qualified Thrift Lender
Savings associations must meet a QTL test. If the Bank maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, the Bank will
continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the association in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC
as QTIs. Compliance with the QTL test is determined on a monthly basis in nine
out of every twelve months.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to SAIF) or be subject to the following penalties: (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
- 26 -
<PAGE>
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification it
shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At June 30, 1999, 88.4% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future. The Bank expects
to continue to qualify as a QTL, although there can be no such assurance.
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, 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 and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana enacted legislation 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, provided that such transactions are not permitted to
out-of-state banks unless the laws of their home states permit Indiana banks to
merge or establish de novo banks on a reciprocal basis. The Indiana Branching
Law became effective March 15, 1996.
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
- 27 -
<PAGE>
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 OTS 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 Internal Revenue Code of 1986, as amended (the "Code"); or (ii)
excess dividends are paid out by the Bank.
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 federal 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, and its branch office at 102 South Main Street,
Cloverdale, Indiana 46120. The Company owns both of its offices.
- 28 -
<PAGE>
The following table provides certain information with respect to the
Company's offices as of June 30, 1999:
<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)
<S> <C> <C> <C> <C> <C>
279 East Morgan Street Owned 1987 $29,555 $1,037 11,300
Spencer, IN 47460
(including annex)
102 South Main Street Owned 1998 $ 3,102 $ 948 6,000
Cloverdale, IN 46120
</TABLE>
The Cloverdale, Indiana branch office opened for business on October 1,
1998.
As of June 30, 1999, the Bank also owned a parcel of real estate
located across the street from its Spencer office that is used for employee
parking.
The Company owns computer and data processing equipment that 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 April 1999 by GFS Holdings Co. The cost of these data processing
services was approximately $8,000 per month for the twelve months ended June 30,
1999.
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, 1999.
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 49) 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 40) 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 84) 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.
- 29 -
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Holding Company's common stock, without par value ("Common Stock"),
is quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), SmallCap Market, under the symbol "HWEN." As of August 23,
1999, there were approximately 450 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, 1997 $ 8 5/8 $ 7 7/16 $ .025
December 31, 1997 9 1/4 8 1/8 .025
March 31, 1998 9 3/4 8 3/4 .025
June 30, 1998 9 1/2 8 7/16 .025
September 30, 1998 9 7 5/8 0.25
December 31, 1998 7 7/8 6 1/2 0.30
March 31, 1999 8 7 0.30
June 30, 1999 7 7/8 7 0.30
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 dependent upon the
earnings on its investment securities and the ability of the Bank to pay
dividends to the Holding Company. The Bank's ability to pay dividends is subject
to certain regulatory restrictions. See "Regulations -- Capital Distributions
Regulation."
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.
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by the Holding Company. Indiana law, however, 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.
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 pages 2 through 3 of the Shareholder Annual
Report.
- 30 -
<PAGE>
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 4 through 17 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to
pages 5 through 7 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and Notes thereto are
contained on pages 18 through 37 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.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 through 4 of the Company's Proxy Statement
for its 1999 Shareholder Annual Meeting (the "1999 Proxy Statement").
Information concerning the Holding Company's executive officers is included in
Item 4.5 in Part I of this report. Information concerning the Holding Company's
executive officers is included in Item 4.5 in Part I of this report. Information
concerning compliance with Section 16(a) of the Exchange Act is incorporated by
reference to page 7 of the 1999 Proxy Statement.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 5 through 6 of the 1999 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages 1 through 3 of the 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 6 of the 1999 Proxy Statement.
- 31 -
<PAGE>
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:
Annual Report
Financial Statements Page No.
Independent Auditor's Report 18
Consolidated Statement of Financial Condition
at June 30, 1999, and 1998 19
Consolidated Statement of Income for the Years Ended
June 30, 1999, 1998, and 1997 20
Consolidated Statement of Stockholders' Equity
for the Years Ended June 30, 1999, 1998, and 1997 21
Consolidated Statement of Cash Flows for the Years
Ended June 30, 1999, 1998, and 1997 22
Notes to Consolidated Financial Statements 23-37
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the
quarter ended June 30, 1999.
(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.
- 32 -
<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 27, 1999 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 27th day of September,
1999.
/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, Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
/s/ Charles W. Chambers
- --------------------------------
Charles W. Chambers, Secretary and Director
/s/ John T. Gillaspy
- --------------------------------
John T. Gillaspy, Director
/s/ Gary Michael Monnett
- --------------------------------
Gary Michael Monnett, 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
- 33 -
<PAGE>
EXHIBIT INDEX
Exhibit Index* Page
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 is incorporated by
reference to Exhibit 10(1) to the Report on Form 10-K for
the period ended June 30, 1996.
10(2) Share Pledge Agreement between ESOP Trust and Home
Financial Bancorp is incorporated by reference to Exhibit
10(2) to the Report on Form 10-K for the period ended
June 30, 1996.
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).
10(6) Home Financial Bancorp Stock Option Plan is incorporated
by reference to Exhibit 10(6) to the Company's Form 10-Q
for the Period Ended September 30, 1997.
13 1999 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).
23 Consent of Independent Auditor _____
27 Financial Data Schedule (filed electronically).
- ------------
* Management contracts and plans required to be filed as exhibits are
included as Exhibits 10(1) - 10(6).
TABLE OF CONTENTS
Description of Business....................................................Below
Message to Shareholders.................................................... 1
Selected Consolidated Financial Data....................................... 2
Management's Discussion and Analysis....................................... 4
Independent Auditor's Report............................................... 18
Consolidated Statement of Financial Condition.............................. 19
Consolidated Statement of Income........................................... 20
Consolidated Statement of Stockholders' Equity ............................ 21
Consolidated Statement of Cash Flows....................................... 22
Notes to Consolidated Financial Statements................................. 23
Shareholder Information.................................................... 38
Directors and Officers..................................................... 39
DESCRIPTION OF BUSINESS
Home Financial Bancorp (the "Holding Company" and together with the
Bank (as defined below), "HFB" or 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. Effective May 1, 1999,
the Bank converted to a federally chartered stock savings bank and the Company
became a savings and loan holding company. 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) home equity loans; (xi) NOW accounts; (xii) demand
deposit accounts; (xiii) passbook savings accounts; and (xiv) 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.
FELLOW SHAREHOLDERS AND FRIENDS:
On behalf of our colleagues and ourselves, we are pleased to present to you
the 1999 Annual Report of Home Financial Bancorp.
The decision to become a stock company three years ago presented management
with choices. One option was to simply maintain the status quo operations of
slow growth and average earnings. An alternative was to grow into our capital,
and leverage the Bank into a larger institution. We chose the latter. We
invested in a new branch in Cloverdale, we built an annex to the Spencer office
location, and we invested in tax credits in the Cunot Apartments Retirement
Community, among other growth oriented initiatives.
We are mindful of the tremendous change occurring in the banking industry
in recent years. The challenges facing a small community oriented lending
institution have never seemed greater. Recently, mortgage brokers and other
originators active in the secondary market have lured away many of our
traditional customers with low rates on thirty year fixed rate mortgages. Just
the other day we were reminded that approximately 75% of all mortgages
originated in the United States last year were done through mortgage brokers.
Like many small community banks, this Bank has responded to increased
competition by re-inventing itself. Rather than chasing low rate competition and
originating marginally profitable loans with excessive interest rate risk, we
have evolved into a bank specializing in sub-prime mortgage loans. We make loans
on non-conforming collateral to customers with tarnished credit records at
risk-adjusted rates. Coupled with aggressive collections, this strategy offers a
viable and profitable market niche for the Bank. Additionally, to grow the Bank
we have aggressively pursued and acquired several sizable real estate-backed
commercial loans extended to low credit risk customers.
Although recent infrastructure investments dampened financial results for
1999, management believes that the Bank is better positioned than ever before
for long-term growth and enhanced shareholder value. Further, the expansion of
our physical facilities during the past year allows the Bank to be a larger,
more visible presence in our local market communities. Our new Cloverdale branch
is in full swing now and has been successful in attracting many new customers
since its doors opened in October 1998. We are pleased with the level of initial
deposit and loan growth at the branch and excited about the long-term growth
prospects for this location. The branch staff has worked hard to cultivate new
customer relationships and promote our services to the Cloverdale community.
Our long-term commitment to the Cloverdale area is also reflected in our
investment in the newly constructed Cunot Apartments Retirement Community
complex. Although conceived of several years ago as a complement to the
neighboring Cunot Community and Senior Center, actual groundbreaking for the
apartment project was in July 1998. Based on the level of public interest and
early occupancy numbers, we anticipate utilizing federal housing tax credits
associated with this project as early as the first quarter of fiscal year 2000.
Our ability to use these tax credits should have a favorable impact on future
earnings.
Throughout this past year, we worked hard to improve our existing products
and services as well as introduce new ones. We introduced an enhanced
construction loan product, two new commercial checking accounts and a new auto
loan program. Also this past summer, we entered into a floor-plan financing
arrangement with a new local modular and mobile home dealer. We believe this
relationship has encouraging growth potential and fits well with our
retail-lending niche. Earlier this year we also expanded our lending activities
to include a limited number of real estate development loans. During fiscal year
2000, management intends to continue the active pursuit of prudent loan growth
opportunities, primarily through mortgage lending.
Effective May 1, 1999, Home Financial Bancorp converted from a bank holding
company into a savings and loan holding company and Owen Community Bank became a
federal stock savings bank. We are convinced that the broader powers afforded by
this charter conversion offer greater flexibility and therefore provide more
business opportunities for the Company as a whole. Also, as a result of the
conversion, the Bank's real estate development subsidiary corporation, BSF,
Inc., a reliable source of income in the past, will again be allowed to pursue
profitable business opportunities. We believe the decision to convert was made
in the best interest of the Bank and its shareholders.
During the most recent two quarters, we have seen favorable loan growth
while maintaining an attractive yield. During the same period, our overall
deposits increased while the average cost on those deposits decreased. We will
continue our existing strategy of increasing loan volume and lowering our cost
of funds as we enter a new millennium. With our expanded facilities, new
markets, and dedicated staff, the opportunity for stronger performance levels
looks promising.
Respectfully submitted,
/s/ Frank R. Stewart /s/ Kurt J. Meier
Frank R. Stewart, Chairman Kurt J. Meier, President
- 1 -
<PAGE>
<TABLE>
<CAPTION>
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.
SELECTED FINANCIAL DATA
At June 30 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets....................................... $53,136 $42,560 $42,508 $39,426 $30,839
Loans receivable, net.............................. 38,238 33,959 34,117 27,125 25,547
Cash and cash equivalents.......................... 2,475 3,802 4,184 5,721 1,386
Securities available for sale...................... 8,288 1,918 2,102 4,901 934
Securities held to maturity........................ --- --- --- --- 1,827
Deposits........................................... 32,657 26,649 26,157 28,726 22,500
Federal Home Loan Bank advances.................... 13,200 8,200 9,000 7,200 5,000
Stockholders' equity............................... 7,123 7,506 7,197 3,410 3,159
Year Ended June 30 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Summary of Operating Results:
Interest and dividend income..................... $3,883 $3,690 $3,397 $2,955 $2,420
Interest expense................................. 2,032 1,812 1,703 1,593 1,174
------ ------ ------ ------ ------
Net interest income........................... 1,851 1,878 1,694 1,362 1,246
Provision for loan losses........................ 44 102 85 94 36
------ ------ ------ ------ ------
Net interest income after provision for
loan losses.............................. 1,807 1,776 1,609 1,268 1,210
------ ------ ------ ------ ------
Other income:
Service charges on deposit accounts........... 84 55 43 37 27
Gain on sale of real estate acquired
for development.......................... 6 7 31 57 78
Net realized gain on sales of available
for sale securities ...................... 3 141 37 --- ---
Other......................................... 32 64 53 47 43
------ ------ ------ ------ ------
Total other income......................... 125 267 164 141 148
------ ------ ------ ------ ------
Other expenses:
Salaries and employee benefits................ 819 723 521 374 364
Net occupancy expense......................... 110 85 71 67 74
Equipment expense............................. 115 58 61 55 35
Deposit insurance expense..................... 17 16 165 54 49
Computer processing expense................... 152 120 95 75 63
Printing and office supplies.................. 65 41 38 33 32
Advertising................................... 60 47 34 24 26
Legal and professional fees................... 105 123 172 47 35
Directors and committee fees.................. 56 43 42 41 40
Other......................................... 190 188 169 155 148
------ ------ ------ ------ ------
Total other expenses..................... 1,689 1,444 1,368 925 866
------ ------ ------ ------ ------
Income before income tax......................... 243 599 405 484 492
Income tax expense............................... 99 206 153 196 203
------ ------ ------ ------ ------
Net income.................................... $144 $ 393 $ 252 $ 288 $ 289
====== ====== ====== ====== ======
</TABLE>
- 2 -
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Supplemental Data (1):
<S> <C> <C> <C> <C> <C>
Basic earnings per share......................... $.18 $ .47 $ .27 --- ---
Diluted earnings per share....................... .18 .47 .27 --- ---
Book value per common share at end of year....... 8.04 8.08 7.66 --- ---
Dividends per share.............................. .12 .10 .08 --- ---
Dividend payout ratio............................ 66.67% 21.28% 29.63% --- ---
Return on assets (2) ............................ 0.30 .93 .63 .84% 1.00%
Return on equity (3)............................. 1.99 5.34 3.31 8.71 9.59
Interest rate spread (4) ........................ 3.61 3.87 3.56 3.78 4.19
Net yield on interest-earning assets (5)......... 4.17 4.65 4.41 4.13 4.54
Other expenses to average assets ................ 3.52 3.42 3.40 2.70 2.99
Net interest income to other expenses............ 1.10x 1.30x 1.24x 1.47x 1.44x
Equity-to-assets (6)............................. 13.41% 17.66% 16.93% 8.65% 10.24%
Average equity to average total assets........... 15.08 17.42 18.90 9.64 10.42
Average interest-earning assets to average
interest-bearing liabilities.................. 1.13x 1.17x 1.19x 1.07x 1.08x
Non-performing assets to total assets............ .16% 1.17% 1.76% 1.03% .32%
Non-performing loans to total loans.............. .20 .81 1.65 1.32 .39
Loan loss allowance to total loans, net.......... .88 .94 .68 .55 .22
Loan loss allowance to non-performing loans...... 425.32 114.70 41.10 41.78 57.00
Net charge-offs to average loans ................ .08 .04 .01 * .02
</TABLE>
(1) All per share amounts have been restated to reflect a 2-for-1 stock split
effective January 6, 1998.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) Interest rate spread is calculated by subtracting combined weighted average
interest rate cost from combined weighted average interest rate earned for
the period indicated.
(5) Net interest income divided by average interest-earning assets.
(6) Total equity divided by total assets.
* Less than .01%
- 3 -
<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 Company include deposits, payments on loans, borrowings and income
provided from operations.
STOCKHOLDER MATTERS
The book value of HFB Common Stock was $8.04 at June 30, 1999. On this
same date, the price of HFB Common Stock was $7.88 per share, representing a
98.0% price-to-book value ratio. For the year ended June 30, 1999, quarterly
dividends totaling $.12 per share were paid to shareholders.
Pursuant to two consecutive repurchase initiatives, the Company
purchased and retired 42,852 shares of its Common Stock at an average cost of
$7.93 per share during fiscal year 1999. At June 30, 1999, there were 886,200
shares of Common Stock outstanding.
HFB Common Stock is traded on the Nasdaq SmallCap Market under the
symbol HWEN. As of June 30, 1999, there were approximately 275 shareholders of
record, and 170 holders who held stock in nominee or "street" name through
various brokerage firms.
INCOME TAX CREDITS
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, Cunot Apartments, L.P., is a 24 unit apartment complex for senior
living. The Bank purchased a 99% limited partnership interest for $732,000. As
of June 30, 1999, the Bank's investment in the Cunot project totaled $696,000.
Funds were dispersed by installments during construction, which was completed
during July 1999. The Bank's investment in the project is eligible for income
tax credits over the fifteen-year life of the Agreement.
As of June 30, 1999, the total capitalized building, land and
organizational costs for the project was $1,373,000. Management estimates that
the Bank will be able to utilize approximately $107,000 in low-income tax credit
annually, beginning in fiscal year 2000. 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.
- 4 -
<PAGE>
Additionally, there are no assurances that changes in tax laws will not affect
the availability of low income tax credits in future years. Recent reports from
the General Partner indicate an occupancy rate of approximately 80%. In
accordance with the Agreement, the process of certifying the project's
eligibility for tax credits is currently underway.
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. 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 testing phase of the
Company's Year 2000 Project Management Plan was completed prior to June 30,
1999. As part of extensive critical date tests, system dates were advanced to
the Year 2000 and beyond. No material 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 accounted for over half of Y2K costs during fiscal year
1999. 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 twelve months ended
June 30, 1999, direct costs incurred to address Y2K compliance totaled
approximately $58,000. 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.
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.
- 5 -
<PAGE>
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.
It is estimated that at June 30, 1999, 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.
Differences in MV performance resulting from changes in market rates
reflect increases and decreases in cash flow for each asset and liability
category. Changes in asset and liability mix, pricing assumptions, loan
prepayment rates, transaction account decay rates, and other influences account
for modified cash flows from one period to another.
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
interest rates.
JUNE 30, 1999
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> <C>
+ 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
</TABLE>
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock MV Ratio: MV as % of PV of Assets.................... 12.70%
Exposure Measure: Post-Shock MV Ratio.......................... 11.17%
Sensitivity Measure: Change in MV Ratio........................ 153bp
- 6 -
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
+ 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
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock MV 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
- --------
* Basis points.
</TABLE>
- 7 -
<PAGE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the years ended June 30, 1999, 1998
and 1997, the month-end average balances of each category of the Company'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, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits.......$ 3,242 $ 157 4.84% $ 3,214 $ 177 5.51% $ 2,692 $ 137 5.09%
Investment securities (1)....... 6,022 335 5.55 2,318 167 7.20 4,899 315 6.43
Loans receivable (2)............ 34,547 3,346 9.69 34,366 3,306 9.62 30,418 2,912 9.57
Stock in FHLB of Indianapolis... 562 45 8.01 500 40 8.00 433 33 7.62
------ ----- ------ ----- ------ -----
Total interest-earning assets. 44,373 3,883 8.75 40,398 3,690 9.13 38,442 3,397 8.84
------ ------- -------
Non-interest earning assets, net of
allowance for loan losses
and including unrealized gain
(loss) on securities
available for sale.............. 3,676 1,860 1,804
------- -------- --------
Total assets..................$48,049 $42,258 $40,246
======= ======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings accounts................$ 3,559 97 2.73 $3,399 103 3.03 $ 3,930 114 2.90
NOW accounts.................... 4,402 123 2.79 3,998 124 3.10 2,162 70 3.24
Certificates of deposit......... 21,364 1,215 5.69 18,482 1,056 5.71 18,465 1,032 5.59
FHLB advances................... 10,242 597 5.83 8,592 529 6.16 7,725 487 6.30
------ ----- ------ ----- ------ -----
Total interest-bearing
liabilities............... 39,567 2,032 5.14 34,471 1,812 5.26 32,282 1,703 5.28
------ ------- -------
Other liabilities.................. 1,237 426 358
------- -------- --------
Total liabilities............. 40,804 34,897 32,640
------- -------- --------
Stockholders' equity............... 7,376 7,316 7,601
Net unrealized gain/(loss)
on securities
available for sale.............. (131) 45 5
------- -------- --------
Total stockholders' equity.... 7,245 7,361 7,606
------- -------- --------
Total liabilities and
stockholders' equity......$48,049 $42,258 $40,246
======= ======== ========
Net interest-earning assets........$ 4,806 $ 5,927 $ 6,160
======= ======== ========
Net interest income................ $1,851 $ 1,878 $ 1,694
====== ======= =======
Interest rate spread............... 3.61 3.87 3.56
Net yield on weighted average
interest-earning assets......... 4.17 4.65 4.41
Average interest-earning
assets to average interest-
bearing liabilities............. 112.97% 117.19% 119.08%
</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.
- 8 -
<PAGE>
INTEREST RATE SPREAD
The Company's results of operations have been impacted primarily by net
interest income. 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 Company on its loan, investment portfolios and total
interest-earning assets. The table also includes weighted average effective cost
of the Company's deposits and borrowings, the interest rate spread of the
Company, 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>
Year Ended June 30,
At June 30, -------------------------------------
1999 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Weighted average interest rate earned on:
<S> <C> <C> <C> <C>
Interest-earning deposits......................... 5.45% 4.84% 5.51% 5.09%
Investment securities............................. 5.79 5.55 7.20 6.43
Loans receivable.................................. 9.35 9.69 9.62 9.57
Stock in FHLB of Indianapolis..................... 8.00 8.01 8.00 7.62
Total interest-earning assets................... 8.49 8.75 9.13 8.84
Weighted average interest rate cost of:
Savings accounts.................................. 2.57 2.73 3.03 2.90
NOW and money market accounts..................... 2.61 2.79 3.10 3.24
Certificates of deposit........................... 5.36 5.69 5.71 5.59
FHLB advances..................................... 5.68 5.83 6.16 6.30
Total interest-bearing liabilities.............. 4.94 5.14 5.26 5.28
Interest rate spread (1)............................. 3.55 3.61 3.87 3.56
Net yield on weighted average
interest-earning assets (2)....................... 4.17 4.65 4.41
</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,
1999, 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 Company'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.
- 9 -
<PAGE>
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
-------------------------------------------------
Due to Due to Total Net
Volume Rate Change
-------------------------------------------------
YEAR ENDED JUNE 30, 1999
COMPARED TO YEAR ENDED JUNE 30, 1998
- ----------------------------------------------------------------------------------------------------------------
(In thousands) Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits.............................. $ 2 $ (22) $ (20)
Investment securities.................................. 214 (46) 168
Loans receivable....................................... 17 23 40
Stock in FHLB of Indianapolis.......................... 5 --- 5
----- ----- -----
Total................................................ 238 (45) 193
----- ----- -----
Interest-bearing liabilities:
Savings accounts....................................... 5 (11) (6)
NOW and money market accounts.......................... 12 (12) ---
Certificates of deposit................................ 164 (6) 158
FHLB advances.......................................... 97 (29) 68
----- ----- -----
Total................................................ 278 (58) 220
----- ----- -----
Change in net interest income............................. $ (40) $ 13 $ (27)
===== ===== =====
YEAR ENDED JUNE 30, 1998
COMPARED TO YEAR ENDED JUNE 30, 1997
- ----------------------------------------------------------------------------------------------------------------
(In thousands) Interest-earning assets:
Interest-earning deposits.............................. $ 28 $ 12 $ 40
Investment securities.................................. (186) 38 (148)
Loans receivable....................................... 380 14 394
Stock in FHLB of Indianapolis.......................... 5 2 7
----- ----- -----
Total................................................ 227 66 293
----- ----- -----
Interest-bearing liabilities:
Savings accounts....................................... (16) 5 (11)
NOW and money market accounts.......................... 57 (4) 53
Certificates of deposit................................ 1 24 25
FHLB advances.......................................... 54 (12) 42
----- ----- -----
Total................................................ 96 13 109
----- ----- -----
Change in net interest income............................. $131 $ 53 $184
===== ===== =====
YEAR ENDED JUNE 30, 1997
COMPARED TO YEAR ENDED JUNE 30, 1996
- ----------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Interest-earning deposits.............................. $ (4) $ 5 $ 1
Investment securities.................................. 122 14 136
Loans receivable....................................... 336 (43) 293
Stock in FHLB of Indianapolis.......................... 12 --- 12
----- ----- -----
Total................................................ 466 (24) 442
----- ----- -----
Interest-bearing liabilities:
Savings accounts....................................... (8) 5 (3)
NOW and money market accounts.......................... (4) 16 12
Certificates of deposit................................ (12) (42) (54)
Other borrowings....................................... (1) --- (1)
FHLB advances.......................................... 141 15 156
----- ----- -----
Total................................................ 116 (6) 110
----- ----- -----
Change in net interest income............................. $350 $ (18) $332
===== ===== =====
</TABLE>
- 10 -
<PAGE>
CHANGES IN FINANCIAL POSITION AND RESULTS OF OPERATIONS - YEAR ENDED JUNE 30,
1999, COMPARED TO YEAR ENDED JUNE 30, 1998:
General. HFB earned net income totaling $144,000 for the year ended
June 30, 1999 compared to $393,000 for the year ended June 30, 1998. The
investment of current resources for the goal of long-term growth and expansion
lowered net earnings for the year. During fiscal year 1999, the Company
experienced various cost increases associated with constructing and operating a
new branch office as well as higher overall interest expenses related to
leveraged loan and investment growth.
The return on average assets for the year ended June 30, 1999 was .30%,
compared to .93% the prior year. The return on average equity was 1.99% for the
year ended June 30, 1999, compared to 5.34% for the prior year ended June 30,
1998. Earnings per share were $.18 for the year ended June 30, 1999 and $.47 for
the year ended June 30, 1998.
Assets. Total assets at June 30, 1999 were $53,136,000, compared to
total assets of $42,560,000 at June 30, 1998. Cash and cash equivalents
decreased $1,327,000 or 34.9%, to $2,475,000 at June 30, 1999, compared to
$3,802,000 a year earlier. The decrease in cash and cash equivalents combined
with cash inflows from deposits and new borrowings were used to purchase
mortgage-backed securities, fund loan growth and acquire additional premises and
equipment. Investment securities increased $6,370,000 to $8,288,000 at June 30,
1999, compared to $1,918,000 at June 30, 1998. Total loans increased $4,295,000
or 12.5% during fiscal 1999. At June 30, 1999 total loans were $38,574,000
compared to $34,279,000 at prior year-end June 30, 1998.
The year-end level of stock in the FHLB of Indianapolis stood at
$660,000 and $500,000 for 1999 and 1998, respectively. Net premises and
equipment increased $298,000 or 17.7%, to $1,985,000 at June 30, 1999 compared
to $1,687,000 at June 30, 1998. This increase is due to costs for the completion
of construction for the Bank's first branch office, which is located in the
Putnam County town of Cloverdale. Foreclosed real estate and repossessed assets
decreased $214,000 or 97.3% to $6,000 compared to $220,000 at June 30, 1998. The
total at June 30, 1999 consists of one mobile home.
Average assets increased $5,791,000 or 13.7%, to $48,049,000 for the
year ended June 30, 1999, compared to $42,258,000 for the prior year-ended June
30, 1998. Average interest-earning assets increased $4,300,000 or 10.6%, to
$44,373,000 for the year ended June 30, 1999 and represented 92.4% of total
average assets. The increase was due to average mortgage-backed securities which
increased $4,295,000 to $4,982,000 for the year ended June 30, 1999, compared to
$687,000 for the year ended June 30, 1998. The average level of other
interest-earning assets was $39,391,000 for the year ended June 30, 1999,
compared to $39,711,000 for the same period a year ago. Much of the loan growth
in fiscal year 1999 occurred in the fourth quarter, reducing the impact on the
average loans receivable calculation for the year.
Liabilities and Stockholders' Equity. Primarily attributed to a
successful beginning for the new branch, all deposit categories posted increases
as of June 30, 1999, as compared to a year earlier. Total deposits were
$32,657,000 at June 30, 1999, a $6,008,000 or 22.5% increase from $26,649,000 at
June 30, 1998. The change is traced to a $4,809,000 or 25.2% increase in
certificates of deposit to $23,867,000 at June 30, 1999, compared to $19,058,000
at June 30, 1998. Passbook and statement savings deposits increased by $511,000
or 15.6%. Transaction deposits increased by $561,000 or 20.0% while money market
deposits also increased by $203,000 or 13.4%. In addition to deposits, FHLB
advances are an important source of both short-term and long-term funding for
the Bank. FHLB advances increased $5,000,000 and totaled $13,200,000 at June 30,
1999, compared to $8,200,000 at June 30, 1998.
Average liabilities increased $5,907,000 or 16.9%, to $40,804,000 for
the year ended June 30, 1999, compared to $34,897,000 for the prior year-ended
June 30, 1998. Average interest-bearing liabilities increased $5,096,000 or
14.8%, to $39,567,000 for the year ended June 30, 1999. The increase was
primarily due to increases in average certificates of deposit and FHLB advances.
Average certificates of deposit increased by $2,882,000 or 15.6% to $21,364,00
for the year ended June 30, 1999, compared to $18,482,000 for the year ended
June 30, 1998. Average FHLB advances increased by $1,650,000 or 19.2% to
$10,242,000 for the year ended June 30, 1999, compared to $8,592,000 for the
prior year ended June 30, 1998.
- 11 -
<PAGE>
HFB's stockholders' equity decreased $383,000 or 5.1%, to $7,123,000 at
June 30, 1999, compared to $7,506,000 at June 30, 1998. Contributing to the
decrease were common stock repurchases totaling $340,000, an increase of
$216,000 in net unrealized losses on securities available for sale, and cash
dividends of $94,000. The decrease was partially offset by net income of
$144,000 and the amortization of employee stock ownership plans. The ratio of
stockholders' equity to total assets decreased to 13.4% at June 30, 1999
compared to 17.6% at June 30, 1998.
Net Interest Income. Net interest income decreased by $27,000 or 1.4%,
to $1,851,000 for the year ended June 30, 1999, compared to $1,878,000 for the
year ended June 30, 1998. Impacting net interest income were interest rate
changes on rate-sensitive assets and liabilities during the current period and
average balance increases or decreases applicable to the rate-sensitive portion
of the balance sheet. As a result of these factors, total interest income
increased by $193,000 or 5.2% while total interest expense increased by $220,000
or 12.1%, compared to the same period a year earlier.
Interest income on loans totaled $3,346,000 for the year ended June 30,
1999, compared to $3,306,000 for the year ended June 30, 1998; an increase of
$40,000 or 1.2%. The increase can be attributed to a larger average balance of
loans receivable outstanding for the current year and an increase in the average
yield earned, compared to the same period one year ago.
Interest and dividend income from total investments increased $266,000
to $334,000 for the year ended June 30, 1999, compared to $167,000 for the year
ended June 30, 1998. The increase can be attributed to an increase in the
average balance outstanding for the current year, which was partially offset by
an decline in the average yield compared to the same period a year earlier. At
June 30, 1999, investment securities included an average balance of $946,000 in
equity stock, some of which earned dividends. Dividend income on FHLB stock
totaled $45,000 for the year ended June 30, 1999, compared to $40,000 for the
year ended June 30, 1998; an increase of $5,000 or 12.5%. The increase can be
attributed to a larger average balance outstanding compared to the same period a
year earlier. The combined weighted average yield on the balance of
interest-earning assets outstanding for the year ended June 30, 1999 decreased
to 8.75%, compared to 9.13% for the prior year ended June 30, 1998.
Interest expense on deposits increased $152,000 or 11.8%, to $1,435,000
for the year ended June 30, 1999, compared to $1,283,000 for the year ended June
30, 1998. The change was the result of an increase in the average deposit
balance outstanding for the current year compared to the same period a year
earlier. The average cost of deposits declined to 4.89% for the year ended June
30, 1999, compared to 4.96% for the year ended 1998. Interest expense on
borrowings increased by $68,000 or 12.9%, to $597,000 for the year ended June
30, 1999, compared to $529,000 for the year ended June 30, 1998. The increase
was the result of a larger average balance outstanding for the current year,
which was partially offset by a decline in the average cost of borrowings. The
combined weighted average rate paid on deposits and borrowings was 5.1% for the
year ended June 30, 1999, compared to 5.3% for the prior year.
The Bank's interest rate spread decreased 26 basis points to 3.61% for
the year ended June 30, 1999, compared to 3.87% for the year ended June 30,
1998. The net interest margin decreased to 4.17% for the year ended June 30,
1999, compared to 4.65% for the year ended June 30, 1998. Decreases in both
interest rate spread and interest rate margin were the result of larger average
balances of mortgage-backed securities and a decline in the average yield earned
on all investment securities. The decreases in interest rate spread and interest
rate margin were partially offset by larger average balances in loans receivable
earning a higher average yield than a year earlier, and larger average balances
in lower costing liabilities, such as transaction accounts.
Provisions for Loan Losses. For the year ended June 30, 1999, the Bank
provided $44,000 for future loan losses. During the prior year, provisions of
$102,000 were made. The allowance for loan losses totaled $336,000 or .88% of
net loans at June 30, 1999, compared to $320,000 or .94% of net loans at June
30, 1998; an increase of $16,000 or 5.0%. Management considers the Bank's
allowance for loan losses to be adequate based on general economic conditions,
historical net charge-offs and other factors such as the size, condition and
characteristics of the loan portfolio. In assessing loan loss allowance
adequacy, consideration is also given to the volume and composition of loan
portfolio growth as well as the level of allowances maintained by peers.
- 12 -
<PAGE>
Noninterest Income. Noninterest income decreased by $142,000 or 53.2%
to $125,000 for the year ended June 30, 1999, compared to $267,000 for the prior
year ended June 30, 1998. A major reason for the decrease was a $138,000
decrease in gains on the sale of investments to $3,000 for the year ended June
30, 1999, compared to $141,000 for the year ended June 30, 1998. Partially
offsetting this decrease and a decrease in other income was an increase of
$29,000 or 52.7% in service fee income to $84,000 for the year ended June 30,
1999 compared to $55,000 for the same period a year ago.
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. Management has utilized the sale of lots and
residences to provide an additional source of income for the Company. 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.
In order to permit the Company to continue its profitable real estate
development activities through BSF, the Company and the Bank successfully sought
charter conversions under authority granted to the Office of Thrift Supervision.
Effective May 1, 1999 the Company became a federally chartered savings and loan
holding company and the Bank became a federal stock savings bank.
The level of income from BSF fluctuates widely since it is primarily
dependent on the volume of lots sold, and profits on residential properties.
Income from this source declined in recent years due to operating restrictions
imposed by the Bank's charter. Gains on the sale of real estate for development
was $6,000 for the year ended June 30, 1999 and $7,000 for the year ended June
30, 1998. Management is hopeful that the resumption of BSF activity will have a
favorable impact on future net income.
Noninterest Expense. Noninterest expense increased by $245,000 or
17.0%, to $1,689,000 for the year ended June 30, 1999, compared to $1,444,000
for the year ended June 30, 1998. The increase can be traced to expense
increases for staff, equipment and general overhead to support the Company's
growth during the fiscal year ended June 30, 1999. Salaries and employee
benefits increased $96,000 or 13.3% to $819,000 for the year ended June 30,
1999, compared to $723,000 for the prior year ended June 30, 1998. The increase
was primarily the result of new staff members hired for the Bank's Cloverdale
branch. Also related to the new branch, equipment expenses increased $57,000 or
98.3% to $115,000 for the year ended June 30, 1999, compared to $58,000 for the
year ended June 30, 1998. Further, computer processing fees increased $32,000 or
26.7% to $152,000 compared to $120,000 for the prior year. Other increases
related to net occupancy, advertising, and director fees. These increases were
partially offset by a decline in legal and professional fees of $18,000 or
14.6%, to $105,000 for the year ended June 30, 1999, compared to $123,000 for
the year ended June 30, 1998.
Income Tax Expense. Income tax expense decreased $107,000 or 51.9%, to
$99,000 for the year ended June 30, 1999, compared to $206,000 for the prior
year ended June 30, 1998. The decrease was due to a decrease in income before
taxes of $356,000 or 59.4% and an increase in the effective combined federal and
state income tax rate to 40.9% for the year ended June 30, 1999, compared to
34.4% for the same period a year ago.
- 13 -
<PAGE>
CHANGES IN FINANCIAL POSITION AND RESULTS OF OPERATIONS - YEAR ENDED JUNE 30,
1998, COMPARED TO YEAR ENDED JUNE 30, 1997:
General. HFB earned record net income totaling $393,000 for the year
ended June 30, 1998, representing a $141,000 or 55.7% increase from the year
ended June 30, 1997, in which net income of $252,000 was earned. Major
contributions to improved earnings for the year were higher net interest income
and lower deposit insurance expense.
The return on average assets for the year ended June 30, 1998 was .93%,
compared to .63% the prior year June 30, 1997. The return on average equity was
5.34% for the year ended June 30, 1998, compared to 3.31% for the prior year
ended June 30, 1997. Earnings per share was $.47 for the year ended June 30,
1998, compared to $.27 for the year ended June 30, 1997. Without the special
assessment imposed by federal legislation to recapitalize the SAIF, net income
for the prior year ended June 30, 1997 would have been $338,000 for returns on
average assets and average equity of .84% and 4.45% respectively.
Assets. Total assets at June 30, 1998 were $42,560,000, compared to
total assets of $42,508,000 at June 30, 1997. Cash and cash equivalents
decreased $382,000 or 9.1%, to $3,802,000 at June 30, 1998, compared to
$4,184,000 a year earlier. The decrease in cash and cash equivalents combined
with cash inflows from deposits and sales of investment securities were used to
repay borrowings and acquire additional premises and equipment. Investment
securities decreased $184,000 or 8.8% to $1,918,000 at June 30, 1998, compared
to $2,102,000 at June 30, 1997. Total loans at June 30, 1998 were $34,279,000
compared to total loans of $34,349,000 at prior year-end June 30, 1997.
The year-end level of stock in the Federal Home Loan Bank ("FHLB") of
Indianapolis stood at $500,000 for 1998 and 1997. Net premises and equipment
increased $724,000 or 75.1%, to $1,687,000 at June 30, 1998 compared to $964,000
at June 30, 1997. The increase is due to costs for the nearly completed
construction of the Bank's first branch office site in the Putnam County town of
Cloverdale, as well as costs for finishing construction on new facilities
adjacent to the Bank's main office in Spencer. Foreclosed real estate and
repossessed assets increased $33,000 or 17.6% to $220,000 compared to $187,000
at June 30, 1997. The total at June 30, 1998 consists of three residential
single family properties and one mobile home.
Average assets increased $2,012,000 or 5.0%, to $42,258,000 for the
year ended June 30, 1998, compared to $40,246,000 for the prior year-ended June
30, 1997. Average interest-earning assets increased $1,956,000 or 5.1%, to
$40,398,000 for the year ended June 30, 1998 and represented 95.6% of total
average assets. The increase was due to average loans receivable which increased
$3,948,000 or 13.0%, to $34,366,000 for the year ended June 30, 1998, compared
to $30,418,000 for the year ended June 30, 1997. The average level of other
interest-earning assets decreased $1,992,000 or 24.8%, to $6,032,000 for the
year ended June 30, 1998, compared to $8,024,000 the same period a year earlier.
Liabilities and Stockholders' Equity. Total deposits were $26,649,000
at June 30, 1998, a $492,000 or 1.9% increase from $26,157,000 at June 30, 1997.
The change is traced to a $1,339,000 or 91.0% increase in transaction deposits
to $2,810,000 at June 30, 1998, compared to $1,471,000 at June 30, 1997.
Passbook and statement savings deposits also increased by $330,000 or 11.2%.
These increases were offset by declines of $705,000 or 31.8%, and $473,000 or
2.4%, in money market deposits and certificates of deposit, respectively. In
addition to deposits, FHLB advances are an important source of both short-term
and long-term funding for the Bank. FHLB advances totaled $8,200,000 at June 30,
1998, compared to $9,000,000 at June 30, 1997.
Average liabilities increased $2,257,000 or 6.9%, to $34,897,000 for
the year ended June 30, 1998, compared to $32,640,000 for the prior year-ended
June 30, 1997. Average interest-bearing liabilities increased $2,189,000 or
6.8%, to $34,471,000 for the year-ended June 30, 1998. The increase was
primarily due to average transaction and money market deposits which together
increased $1,836,000 or 84.9%, to $3,998,000 for the 1998, compared to
$2,162,000 for the prior year.
HFB's stockholders' equity increased $309,000 or 4.3%, to $7,506,000 at
June 30, 1998, compared to $7,197,000 at June 30, 1997. Contributing to the
- 14 -
<PAGE>
increase was net income of $393,000. The increase was partially offset by cash
dividends of $85,000 paid for the year ended June 30, 1998. The ratio of
stockholders' equity to total assets increased to 17.6% at June 30, 1998,
compared to 16.9% at June 30, 1997.
During the year ended June 30, 1998, 10,000 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 929,052 at
June 30, 1998. The $78,000 cost of these repurchased shares represented a
reduction in total stockholders' equity.
Net Interest Income. Net interest income increased by $185,000 or
10.9%, to $1,878,000 for the year ended June 30, 1998, compared to $1,693,000
for the year ended June 30, 1997. Impacting net interest income were interest
rate changes on rate-sensitive assets and liabilities during the current period
and average balance increases or decreases applicable to the rate-sensitive
portion of the balance sheet. As a result of these factors, total interest
income increased by $294,000 or 8.6% while total interest expense increased by
$109,000 or 6.4%, compared to the same period a year earlier.
Interest income on loans totaled $3,306,000 for the year ended June 30,
1998, compared to $2,912,000 for the year ended June 30, 1997; an increase of
$394,000 or 13.5%. The increase can be attributed to a larger average balance of
loans receivable outstanding for the current year and an increase in the average
yield earned, compared to the same period one year earlier. At June 30, 1998,
investment securities included $1,320,000 in equity stocks which earned
dividends rather than interest income. Interest and dividend income from total
investments decreased $141,000 or 40.4% to $207,000 for the year ended June 30,
1998 compared to $348,000 for the year ended June 30, 1997. The decline can be
attributed to a decrease in average balance outstanding for the year ended June
30, 1998, which was partially offset by an increase in the average yield
compared to the same period a year earlier. Interest income on FHLB stock
totaled $40,000 for the year ended June 30, 1998, compared to $33,000 for the
year ended June 30, 1997; an increase of $7,000 or 21.2%. The increase can be
attributed to a larger average balance outstanding and an increase in the
average yield earned, compared to the same period a year earlier. The combined
weighted average yield on the balance of interest-earning assets outstanding for
the year ended June 30, 1998 increased to 9.13%, compared to 8.84% for the prior
year ended June 30, 1997.
Interest expense on deposits increased $73,000 or 6.0%, to $1,283,000
for the year ended June 30, 1998, compared to $1,210,000 for the year ended June
30, 1997. The change was the result of an increase in the average deposit
balance outstanding for the year ended June 30, 1998 compared to the same period
a year earlier. The average cost of deposits remained unchanged at 5.0%.
Interest expense on borrowings increased by $42,000 or 8.6%, to $529,000 for the
year ended June 30, 1998, compared to $487,000 for the year ended June 30, 1997.
The increase was the result of a larger average balance outstanding for fiscal
year 1998, which was partially offset by a decline in the average cost of
borrowings. The combined weighted average rate paid on deposits and borrowings
was 5.3% for the year ended June 30, 1998 and the prior year.
The Company's interest rate spread increased to 3.87% for the year
ended June 30, 1998, compared to 3.56% for the year ended June 30, 1997. The net
interest margin increased to 4.65% for the year ended June 30, 1998, compared to
4.41% for the year ended June 30, 1997. Increases in both interest rate spread
and interest rate margin were the result of larger average balances in loans
receivable, which are the Company's highest yielding assets, and larger average
balances in lower costing liabilities, such as transaction accounts.
Provisions for Loan Losses. For the year ended June 30, 1998, the Bank
provided $102,000 for future loan losses. During the prior year, provisions of
$85,000 were made. The allowance for loan losses totaled $320,000 or .94% of net
loans at June 30, 1998, compared to $231,000 or .68% of net loans at June 30,
1997, an increase of $89,000 or 38.5%.
Noninterest Income. Noninterest income increased by $103,000 or 62.9%
to $267,000 for the year ended June 30, 1998, compared to $164,000 for the prior
year ended June 30, 1997. A major contributor to the increase was a $104,000 or
279.3% increase in gains on the sale of investments to $141,000 for the year
ended June 30, 1998, compared to $37,000 for the year ended June 30, 1997.
Partially offsetting this increase and an increase in service fee income was a
decline of $24,000 in gains on the sale of real estate acquired for development
to $7,000 for the year ended June 30, 1998, compared to $31,000 for the same
period a year earlier.
- 15 -
<PAGE>
Noninterest Expense. Noninterest expense increased by $77,000 or 5.6%,
to $1,444,000 for the year ended June 30, 1998, compared to $1,368,000 for the
year ended June 30, 1997. The increase can be primarily attributed the $202,000
or 38.8% increase in salaries and employee benefits to $723,000 for the year
ended June 30, 1998, compared to $521,000 for the prior year ended June 30,
1997. The increase was the result of new staff members hired for the Bank's
Cloverdale branch and costs associated with employee benefit plans adopted
during fiscal year 1997. Partially offsetting this increase was a drop in
deposit insurance expense of $149,000 or 90.3%, to $16,000 for the year ended
June 30, 1998, compared to $165,000 for the year ended June 30, 1997. Deposit
insurance expense for the year ended June 30, 1997 included the one-time special
assessment expense of $142,000 imposed by federal legislation to recapitalize
the SAIF. Other increases related to occupancy, advertising, foreclosed
property, and data processing expenses. These increases were partially offset by
a decline in legal and professional fees of $48,000 or 28.2%, to $123,000 for
the year ended June 30, 1998, compared to $172,000 for the year ended June 30,
1997.
Income Tax Expense. Income tax expense increased $54,000 or 35.3%, to
$206,000 for the year ended June 30, 1998, compared to $152,000 for the prior
year ended June 30, 1997. The increase was due to an increase in income before
taxes of $194,000 or 48.0%, which was partially offset by a decline in the
effective combined federal and state income tax rate to 34.4% for the year ended
June 30, 1998, compared to 37.7% for the same period a year ago.
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.
- 16 -
<PAGE>
CURRENT ACCOUNTING ISSUES
Accounting for Derivative Instruments and Hedging Activities. Statement of
Financial Accounting Standards ("SFAS") No. 133 requires companies to record
derivatives on the balance sheet at their fair value. SFAS No. 133 also
acknowledges that the method of recording a gain or loss depends on the use of
the derivative. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
o For a derivative designated as hedging the exposure to changes in the
fair value of a recognized asset or liability or a firm commitment
(referred to as a fair value hedge), the gain or loss is recognized in
earnings in the period of change together with the offsetting loss or
gain on the hedged item attributable to the risk being hedged. The
effect of that accounting is to reflect in earnings the extent to
which the hedge is not effective in achieving offsetting changes in
fair value.
o For a derivative designated as hedging the exposure to variable cash
flows of a forecasted transaction (referred to as a cash flow hedge),
the effective portion of the derivative's gain or loss is initially
reported as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the
forecasted transaction affects earnings. The ineffective portion of
the gain or loss is reported in earnings immediately.
o For a derivative designated as hedging the foreign currency exposure
of a net investment in a foreign operation, the gain or loss is
reported in other comprehensive income (outside earnings) as part of
the cumulative translation adjustment. The accounting for a fair value
hedge described above applies to a derivative designated as a hedge of
the foreign currency exposure of an unrecognized firm commitment or an
available-for-sale security. Similarly, the accounting for a cash flow
hedge described above applies to a derivative designated as a hedge of
the foreign currency exposure of a foreign-currency-denominated
forecasted transaction.
o For a derivative not designated as a hedging instrument, the gain or
loss is recognized in earnings in the period of change.
The new Statement applies to all entities. If hedge accounting is elected
by the entity, the method of assessing the effectiveness of the hedging
derivative and the measurement approach of determining the hedge's
ineffectiveness must be established at the inception of the hedge.
SFAS No. 133 amends SFAS No. 52 and supercedes SFAS Nos. 80, 105, and 119.
SFAS No. 107 is amended to include the disclosure provisions about the
concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task
Force consensuses are also changed or nullified by the provisions of SFAS No.
133.
SFAS No. 133 was to be effective for all fiscal years beginning after June
15, 1999. The implementation date has been deferred and SFAS No. 133 will now be
effective for all fiscal quarters for all fiscal years beginning after June 15,
2000. The adoption of this Statement is not currently expected to have a
material impact on the Company's financial statements. Early application is
encouraged; however, this Statement may not be applied retroactively to
financial statements of prior periods.
- 17 -
<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 and subsidiary as of June 30, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999, in conformity with generally accepted accounting
principles.
Olive LLP
/s/ Olive LLP
Indianapolis, Indiana
July 23, 1999
- 18 -
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 296,490 $ 318,043
Short-term interest-bearing deposits 2,178,313 3,484,060
--------------------------------
Total cash and cash equivalents 2,474,803 3,802,103
Investment securities-- available for sale 8,288,028 1,917,734
Loans, net of allowance for loan losses of
$336,235 and $319,595 38,237,683 33,959,130
Premises and equipment 1,984,842 1,687,355
Federal Home Loan Bank stock 660,000 500,000
Interest receivable 318,241 263,859
Other assets 1,172,853 429,562
--------------------------------
Total assets $ 53,136,450 $ 42,559,743
================================
Liabilities
Deposits
Noninterest bearing $ 578,267 $ 510,423
Interest-bearing deposits 32,079,166 26,138,187
--------------------------------
Total deposits 32,657,433 26,648,610
Federal Home Loan Bank advances 13,200,000 8,200,000
Other liabilities 155,794 205,227
--------------------------------
Total liabilities 46,013,227 35,053,837
--------------------------------
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 shares
Issued - 886,200 and 929,052 shares 4,100,034 4,314,294
Additional paid-in capital 88,667 58,327
Retained earnings 3,613,425 3,689,484
Unearned compensation (181,456) (228,169)
Unearned ESOP shares (257,908) (304,310)
Accumulated other comprehensive loss (239,539) (23,720)
--------------------------------
Total stockholders' equity 7,123,223 7,505,906
--------------------------------
Total liabilities and stockholders' equity $ 53,136,450 $ 42,559,743
================================
</TABLE>
See notes to consolidated financial statements.
- 19 -
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans $3,346,281 $3,305,864 $2,912,085
Deposits with financial institutions 156,845 177,192 136,538
Investment securities
Taxable 334,463 166,965 284,785
Tax exempt 30,073
Federal
Home Loan Bank stock 44,994 40,315 33,189
------------------------------------------
Total interest and dividend income 3,882,583 3,690,336 3,396,670
------------------------------------------
Interest Expense
Deposits 1,434,612 1,282,778 1,210,207
Federal Home Loan Bank advances 596,927 529,325 487,217
Other interest expense 5,758
------------------------------------------
Total interest expense 2,031,539 1,812,103 1,703,182
------------------------------------------
Net Interest Income 1,851,044 1,878,233 1,693,488
Provision for loan losses 44,000 102,000 85,000
------------------------------------------
Net Interest Income After Provision for Loan Losses 1,807,044 1,776,233 1,608,488
------------------------------------------
Other Income
Service charges on deposit accounts 84,148 55,182 42,494
Gain on sale of real estate acquired for development 5,973 7,108 31,437
Net realized gain on sales of available-for-sale securities 3,325 140,925 37,155
Other income 31,963 63,736 52,750
------------------------------------------
Total other income 125,409 266,951 163,836
------------------------------------------
Other Expenses
Salaries and employee benefits 819,296 722,886 521,142
Net occupancy expenses 110,326 84,653 70,825
Equipment expenses 115,268 57,932 61,044
Deposit insurance expense 16,510 15,881 164,550
Computer processing fees 151,936 120,133 94,869
Printing and office supplies 64,670 40,839 38,274
Legal and professional fees 104,660 123,218 171,674
Director and committee fees 56,450 43,450 42,000
Advertising expense 60,403 46,931 34,004
Other expenses 189,597 188,217 169,184
------------------------------------------
Total other expenses 1,689,116 1,444,140 1,367,566
------------------------------------------
Income Before Income Tax 243,337 599,044 404,758
Income tax expense 99,603 206,266 152,441
------------------------------------------
Net Income $ 143,734 $ 392,778 $ 252,317
==========================================
Net Income Per Share
Basic $ .18 $ .47 $ .27
Diluted .18 .47 .27
</TABLE>
See notes to consolidated financial statements.
- 20 -
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Unearned
Common Stock Paid-in Comprehensive Retained Unearned ESOP
Shares Amount Capital Income Earnings Compensation Shares
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1996 $3,427,201
Comprehensive income
Net income $252,317 252,317
Other comprehensive income (loss),
net of tax
Unrealized gains on securities,
net of reclassification adjustment 44,322
--------
Comprehensive income $296,639
========
Common stock issued in conversion,
net of costs 1,011,852 $4,728,294
Cash dividends ($.075 per share) (68,818)
Contributions for unearned ESOP shares $(404,740)
ESOP shares earned $25,404 40,476
Contribution for unearned RRP shares $(290,172)
RRP shares earned 25,391
Purchase of stock (72,800) (364,000) (201,412)
------------------------------- ---------------------------------------
Balances, June 30, 1997 939,052 4,364,294 25,404 3,409,288 (264,781) (364,264)
Comprehensive income
Net income $392,778 392,778
Other comprehensive income (loss),
net of tax
Unrealized loss on securities, net of
reclassification adjustment (50,913)
--------
Comprehensive income $341,865
========
Cash dividends ($.10 per share) (85,082)
ESOP shares earned 32,923 59,954
RRP shares earned 36,612
Purchase of stock (10,000) (50,000) (27,500)
------------------------------- ---------------------------------------
Balances, June 30, 1998 929,052 4,314,294 58,327 3,689,484 (228,169) (304,310)
Comprehensive income
Net income $143,734 143,734
Other comprehensive income (loss), net of tax
Unrealized loss on securities,
net of reclassification adjustment (215,819)
--------
Comprehensive loss $ (72,085)
========
Cash dividends ($.115 per share) (94,386)
ESOP shares earned 23,718 46,402
RRP shares earned 46,713
Purchase of stock (42,852) (214,260) (125,407)
Tax benefit on RRP shares 6,622
------------------------------- ---------------------------------------
Balances, June 30, 1999 886,200 $4,100,034 $88,667 $3,613,425 $(181,456) $(257,908)
=============================== =======================================
</TABLE>
Accumulated
Other
Comprehensive
Income (Loss) Total
- -------------------------------------------------------------------
Balances, July 1, 1996 $ (17,129) $3,410,072
Comprehensive income
Net income 252,317
Other comprehensive income (loss),
net of tax
Unrealized gains on securities,
net of reclassification adjustment 44,322 44,322
Comprehensive income
Common stock issued in conversion,
net of costs 4,728,294
Cash dividends ($.075 per share) (68,818)
Contributions for unearned ESOP shares (404,740)
ESOP shares earned 65,880
Contribution for unearned RRP shares (290,172)
RRP shares earned 25,391
Purchase of stock (565,412)
---------------------------
Balances, June 30, 1997 27,193 7,197,134
Comprehensive income
Net income 392,778
Other comprehensive income (loss),
net of tax
Unrealized loss on securities, net of
reclassification adjustment (50,913) (50,913)
Comprehensive income
Cash dividends ($.10 per share) (85,082)
ESOP shares earned 92,877
RRP shares earned 36,612
Purchase of stock (77,500)
---------------------------
Balances, June 30, 1998 (23,720) 7,505,906
Comprehensive income
Net income 143,734
Other comprehensive income (loss), net of
Unrealized loss on securities,
net of reclassification adjustment (215,819) (215,819)
Comprehensive loss
Cash dividends ($.115 per share) (94,386)
ESOP shares earned 70,120
RRP shares earned 46,713
Purchase of stock (339,667)
Tax benefit on RRP shares 6,622
---------------------------
Balances, June 30, 1999 $(239,539) $7,123,223
===========================
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
- 21 -
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 143,734 $ 392,778 $ 252,317
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 44,000 102,000 85,000
Investment securities amortization, net 46,163 981 2,630
ESOP shares earned 70,120 92,877 65,880
RRP shares earned 46,713 36,612 25,391
Depreciation and amortization 149,874 87,912 83,193
Deferred income tax benefit (4,336) (50,485) (35,294)
Gain on sale of real estate acquired for development (5,973) (7,108) (31,437)
Gain on sale of other real estate (37,466) (35,016) (21,964)
Gain on sale of securities available for sale (3,325) (140,925) (37,155)
Change in
Interest receivable (54,382) 4,789 (32,970)
Other assets (154,877) 62,331 (74,794)
Other adjustments (42,811) 50,372 64,038
------------------------------------------------
Net cash provided by operating activities 197,434 597,118 344,835
------------------------------------------------
Investing Activities
Purchases of securities available for sale (8,658,915) (1,905,142) (3,261,591)
Proceeds from sales of securities available for sale 568,350 1,895,041 4,824,600
Proceeds from maturities and paydowns of
securities available for sale 1,320,049 250,523 1,342,922
Net changes in loans (4,090,925) (258,317) (7,371,895)
Improvements to real estate owned (31,552) (12,621)
Proceeds from real estate owned sales 13,000 345,119 204,501
Purchase of premises and equipment (447,361) (811,610) (569,082)
Proceeds from disposal of premises and equipment 35,000
Purchase of real estate acquired for development (2,911)
Proceeds from sale of real estate acquired for development 6,298 7,108 185,170
Purchase of FHLB of Indianapolis stock (160,000) (140,000)
Other investing activities (650,000)
------------------------------------------------
Net cash used by investing activities (12,099,504) (508,830) (4,765,907)
------------------------------------------------
Financing Activities
Net change in
NOW and savings deposits 1,199,675 (467,983) (3,456,237)
Certificates of deposit 4,809,148 960,077 887,053
Advances from Federal Home Loan Bank of Indianapolis 7,000,000 5,000,000 4,300,000
Payments on advances from Federal Home Loan Bank of Indianapolis (2,000,000) (5,800,000) (2,500,000)
Sale of stock 4,578,341
Purchase of stock (339,667) (77,500) (565,412)
Dividends paid (94,386) (85,082) (68,818)
Contribution of RRP shares (290,172)
------------------------------------------------
Net cash provided (used) by financing activities 10,574,770 (470,488) 2,884,755
------------------------------------------------
Net Change in Cash and Cash Equivalents (1,327,300) (382,200) (1,536,317)
Cash and Cash Equivalents, Beginning of Year 3,802,103 4,184,303 5,720,620
------------------------------------------------
Cash and Cash Equivalents, End of Year $2,474,803 $3,802,103 $4,184,303
================================================
Additional Cash Flows and Supplementary Information
Interest paid $2,021,539 $1,805,250 $1,703,182
Income tax paid 211,053 174,710 178,988
Transfers from loans to other real estate (231,628) 314,438 294,368
Stock issuance costs transferred from other assets
to stockholders' equity 254,787
Common stock issued to ESOP leveraged with an employer loan 404,740
</TABLE>
See notes to consolidated financial statements.
- 22 -
<PAGE>
[**THE FOLLOWING HEADING APPEARS
AT THE TOP OF EVERY PAGE THROUGHOUT THE NOTES**]
HOME FINANCIAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Note 1 -- 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 savings and loan holding company whose principal activity is
the ownership and management of the Bank. Commencing May 1, 1999, the Bank
operates under a federal thrift charter, known as a federal stock savings bank,
and provides full banking services. Prior to May 1, 1999, the Bank operated
under a state thrift charter, known as a stock savings bank. As a federally
chartered thrift, the Bank is subject to regulation by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation ("FDIC").
The Bank generates mortgage and consumer loans and receives deposits from
customers located primarily in Owen, Putnam 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 deed. 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. Prior to May 1, 1999, BSF had ceased land acquisitions and was in
the process of divesting of its real estate holdings. Effective with the Bank's
change to a federal thrift charter on May 1, 1999 discussed above, BSF resumed
its normal activities.
Consolidation--The consolidated financial statements include the accounts of the
Company and subsidiary after elimination of all material intercompany
transactions and accounts.
Investment Securities--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 accumulated other
comprehensive income.
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. Loans whose payments have 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.
- 23 -
<PAGE>
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, 1999, 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 FHLB system. The required investment in the common stock
is based on a predetermined formula.
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.
Stock options are granted for a fixed number of shares with an exercise price
equal to the fair value of the shares at the date of grant. The Company accounts
for and will continue to account for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants.
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 and potential 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 and potential common shares outstanding.
Reclassifications of certain amounts in the 1998 consolidated financial
statements have been made to conform to the 1999 presentation.
Note 2 -- 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 (before restatement for the 2 for 1 stock split discussed
in Note 10) 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.
- 24 -
<PAGE>
Note 3 -- Investment Securities
<TABLE>
<CAPTION>
1999
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $ 100 $1 $ 101
Marketable equity securities 813 2 $(198) 617
Mortgage-backed securities 7,771 3 (204) 7,570
-------------------------------------------------------------
Total investment securities $8,684 $6 $(402) $8,288
=============================================================
1998
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
Available for sale
Federal agencies $ 100 $3 $ 103
Marketable equity securities 1,320 $(48) 1,272
Mortgage-backed securities 537 6 543
-------------------------------------------------------------
Total investment securities $1,957 $9 $(48) $1,918
=============================================================
</TABLE>
- 25 -
<PAGE>
The amortized cost and fair value of securities available for sale at June 30,
1999, 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.
1999
------------------------
Maturity Distribution Amortized Fair
at June 30 Cost Value
- --------------------------------------------------------
One to five years $ 100 $ 101
Marketable equity
securities 813 617
Mortgage-backed
securities 7,771 7,570
------------------------
Totals $8,684 $8,288
========================
Securities with a carrying value of $7,600,000 and $528,000 were pledged at June
30, 1999 and 1998 to secure FHLB advances.
Proceeds from sales of securities available for sale during 1999, 1998 and 1997
were $569,000, $1,895,000 and $4,825,000. Gross gains of $12,000, $141,000 and
$71,000 in 1999, 1998 and 1997 and gross losses of $8,700 and $34,000 in 1999
and 1997 were realized on the sales. The tax expense for net gains on security
transactions for June 30, 1999, 1998 and 1997 was $1,300, $55,800 and $14,700,
respectively.
Note 4 -- Loans and Allowance
<TABLE>
<CAPTION>
June 30 1999 1998
- ---------------------------------------------------------------------------
Real estate mortgage loans
<S> <C> <C>
Residential $ 20,952 $ 19,563
Mobile home and land 5,331 4,666
Nonresidential 9,323 7,614
Multi-family 1,096 904
Mobile home loans 950 831
Commercial and industrial 538 242
Consumer loans 999 655
-----------------------------
39,189 34,475
-----------------------------
Undisbursed portion of loans (619) (198)
Deferred loan costs 4 2
Allowance for loan losses (336) (320)
-----------------------------
(951) (516)
-----------------------------
Total loans $ 38,238 $ 33,959
=============================
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------
Allowance for loan losses
<S> <C> <C> <C>
Balances, July 1 $ 320 $ 231 $ 150
Provision for loan losses 44 102 85
Loans charged off (28) (13) (4)
-----------------------------------
Balances, June 30 $ 336 $ 320 $ 231
===================================
Note 5 -- Premises and Equipment
June 30 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 302 $ 302
Buildings 1,846 1,697
Equipment 749 450
-----------------------------
Total cost 2,897 2,449
Accumulated depreciation (912) (762)
-----------------------------
Net $ 1,985 $ 1,687
=============================
</TABLE>
- 26-
<PAGE>
Note 6 -- Deposits
June 30 1999 1998
- --------------------------------------------------------------------------------
Noninterest bearing demand $ 578 $ 510
Interest-bearing demand 2,715 2,298
Money market deposits 1,715 1,512
Savings 3,782 3,271
Certificates of $100,000 or more 5,148 3,319
Other certificates 18,719 15,739
-----------------------------
Total deposits $32,657 $26,649
=============================
Certificates maturing in years ending June 30:
2000 $17,803
2001 2,739
2002 844
2003 982
2004 1,499
-------
$23,867
=======
Note 7 -- Federal Home Loan Bank Advances
1999
---------------------------
Weighted
Average
June 30 Amount Rate
- --------------------------------------------------------------------------------
Maturities in years ending
2000 $ 3,000 5.85%
2001 3,000 5.90
2002 5,000 5.17
2003 2,000 5.85
2006 200 6.86
-------
$13,200 5.61%
=======
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 170 percent of these advances and all stock in the FHLB. Advances are
subject to restrictions or penalties in the event of prepayment.
Note 8 -- Income Tax
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $ 82 $ 199 $ 141
State 22 57 46
Deferred
Federal (6) (39) (25)
State 2 (11) (10)
-----------------------------------
Total income tax expense $ 100 $ 206 $ 152
===================================
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------
Reconciliation of federal
statutory to actual
tax expense
Federal statutory
income tax at 34% $ 83 $ 204 $ 138
Effect of state
income taxes 16 31 24
Tax exempt dividends
and interest (5) (24) (9)
Other 6 (5) (1)
-----------------------------------
Actual tax expense $ 100 $ 206 $ 152
===================================
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
June 30 1999 1998
- --------------------------------------------------------------------------------
Assets
Allowance for loan losses $117 $ 98
Deferred compensation 23 26
Securities available for sale 78 16
Other 1 1
-------------------------
Total assets 219 141
-------------------------
Liabilities
Depreciation 19 6
State income tax 10 10
Loan fees 2 3
-------------------------
Total liabilities 31 19
-------------------------
$188 $122
=========================
No valuation allowance was necessary for the years ended June 30, 1999 and 1998.
- 27 -
<PAGE>
Retained earnings at June 30, 1999, 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, 1988
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, 1999.
Note 9 -- Other Comprehensive Income
<TABLE>
<CAPTION>
1999
------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on securities
Unrealized holding losses arising during the year $(354) $140 $(214)
Less: reclassification adjustment for gains
realized in net income 3 (1) 2
------------------------------------------------------
Other comprehensive loss $(357) $141 $(216)
======================================================
1998
------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- -------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities
Unrealized holding gains arising during the year $84 $(33) $51
Less: reclassification adjustment for gains
realized in net income 141 (39) 102
------------------------------------------------------
Other comprehensive loss $(57) $ 6 $(51)
======================================================
1997
------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- -------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
Unrealized holding gains arising during the year $110 $(44) $66
Less: reclassification adjustment for
gains realized in net income 37 (15) 22
------------------------------------------------------
Other comprehensive income $73 $(29) $44
======================================================
</TABLE>
- 28 -
<PAGE>
Note 10 -- 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:
1999 1998
- --------------------------------------------------------------------------------
Mortgage loan commitments
At variable rates $747 $827
At fixed rates 348 553
Unused lines of credit 717 510
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 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.
Note 11 -- Year 2000
Like all entities, the Company and subsidiaries are exposed to risks associated
with the Year 2000 Issue, which affects computer software and hardware;
transactions with customers, vendors, and other entities; and equipment
dependent upon microchips. The Company has completed the process of identifying
and remediating potential Year 2000 problems. It is not possible for any entity
to guarantee the results of its own remediation efforts or to accurately predict
the impact of the Year 2000 Issue on third parties with which the Company and
subsidiaries do business. If remediation efforts of the Company or third parties
with which the Company and subsidiaries do business are not successful, the Year
2000 Issue could have negative effects on the Company's financial condition and
results of operations in the near term.
Note 12 -- Stockholders' Equity
On December 9, 1997, the Company approved 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 stockholders on January 6, 1998. As a result of
the stock split, the number of shares outstanding increased from 464,526 to
929,052 shares. Unless otherwise noted, all share and per share data have been
restated for the 2-for-1 stock split.
- 29 -
<PAGE>
The Company's board of directors has approved the repurchase of up to 15 percent
of the Company's outstanding shares of common stock. Such purchases will be made
subject to market conditions in open market or block transactions. During the
years ended June 30, 1999, 1998 and 1997, the Company had repurchased 42,852,
10,000 and 72,800 of its outstanding shares.
Note 13 -- Dividends and Capital Restrictions
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 retained net profits for the current calendar year to
date plus those for the previous two calendar 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, 1999, total stockholder's equity of the Bank was $6,242,000, of
which approximately $669,000 was available for the payment of dividends.
Note 14 -- Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, Tier 1 capital, and
Tier 1 leverage ratios. The ratios are intended to measure capital relative to
assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At June 30, 1999 and 1998, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since June 30, 1999 that
management believes has changed the Bank's classification.
- 30 -
<PAGE>
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------------------
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>
Total risk-based capital1
(to risk weighted assets) $6,699 21.6% $2,476 8.0% $3,095 10.0%
Tier I capital1
(to risk weighted assets) 6,363 20.6 2,476 8.0 3,095 10.0
Core capital1
(to adjusted tangible assets) 6,363 12.1 2,103 4.0 3,154 6.0
Core capital1 (to adjusted total) 6,363 12.1 2,103 4.0 2,629 5.0
1998
Required
for Adequate To Be Well
Actual Capital 1 Capitalized 1
June 30 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
Total capital1
(to risk weighted assets) $6,543 26.2% $1,994 8.0% $2,493 10.0%
Tier I capital1
(to risk weighted assets) 6,223 25.0 997 4.0 1,496 6.0
Tier I capital1
(to average assets) 6,223 15.1 1,648 4.0 2,060 5.0
</TABLE>
1 As defined by the regulatory agencies
Note 15 -- Employee Benefit Plans
The Bank is a participant in a pension fund known as the Pentegra Group. 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, 1999, the date of the latest actuarial valuation.
The plan required contributions in the amount of $11,900, $2,700 and $13,000 for
the years ended June 30, 1999, 1998 and 1997. 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 $8,900 and $12,000 and $10,100 for the years
ended June 30, 1999, 1998 and 1997.
As part of the conversion, the Company established an ESOP covering
substantially all employees of the Bank. The ESOP acquired 40,474 (before
restatement for the 2 for 1 stock split discussed in Note 12) 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 $70,100, $93,000 and $66,000 for the years ended June 30, 1999, 1998 and
1997. At June 30, 1999 and 1998, the ESOP had 24,374 and 15,094 allocated
shares, 52,051 and 61,096 suspense shares and 4,523 and 4,758 committed-to-be
released shares. The fair value of the unearned ESOP shares at June 30, 1999 and
1998 was $229,415 and $547,758.
- 31 -
<PAGE>
In January 1997, the Company's stockholders approved the Recognition and
Retention Plan and Trust ("RRP"). The RRP may acquire up to 40,474 shares of the
Company's common stock for awards to management. Shares awarded to management
under the RRP vest at a rate of 20 percent at the end of each full 12 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 40,474 shares
of the Company's common stock of which 30,356 shares were awarded to management
and recorded as unearned compensation. Expense under the RRP was $47,000,
$37,000 and $25,000 for the years ended June 30, 1999, 1998 and 1997.
Note 16 -- Related Party Transactions
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, 1998 $ 409
New loans, including renewals 65
Payments, etc. including renewals (146)
-------
Balances, June 30, 1999 $ 328
=======
Deposits from related parties held by the Bank at June 30, 1999 totaled
$609,882.
Note 17 -- Stock Option Plan
On October 14, 1997, the stockholders approved a stock option plan, reserving
101,184 shares of Company stock for the granting of options to certain
directors, officers and other key employees of the Company and its subsidiary.
The plan is accounted for in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations.
Since the plan's adoption, incentive stock options for 55,000 shares of common
stock have been granted with ten year terms that expire October 13, 2007 and a
exercise price of $8.50 per share. These options became exercisable in full on
April 14, 1998. In addition, non-qualified options for 15,000 shares and 1,500
shares have been granted with ten year terms that expire October 14, 2007 and
August 25, 2008 with an exercise price of $8.50 and $8.25 per share,
respectively. These options were exercisable in full on April 14, 1998 and
February 25, 1999. The exercise price of each option was equal to the market
price of the Company's stock on the date of grant; therefore, no compensation
expense was recognized.
- 32 -
<PAGE>
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated on the grant date using an option-pricing model
with the following assumptions:
1999 1998
- --------------------------------------------------------------------------------
Risk-free interest rates 5.07% 6.12%
Dividend yields 1.42% 1.17%
Volatility factors of
expected market price
of common stock 20.5% 16.67%
Weighted-average expected
life of the options 6 years 6 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
1999 1998
- --------------------------------------------------------------------------------
Net income As reported $144 $393
Pro forma 140 238
Basic earnings
per share As reported .18 .47
Pro forma .17 .28
Diluted earnings
per share As reported .18 .47
Pro forma .17 .28
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the years ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Options Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of year 70,000 $8.50
Granted 1,500 8.25 70,400 $8.50
Forfeited (2,200) 8.50 (400) 8.50
-------- --------
Outstanding and exercisable, end of year 69,300 8.50 70,000 8.50
======== ========
Weighted-average fair value of options
granted during the year $2.22 $2.41
</TABLE>
As of June 30, 1999, 67,800 options outstanding have an exercise price of $8.50
and a remaining contractual life of nine years and 1,500 options outstanding
have an exercise prices of $8.25 and a remaining contractual life of ten years.
There were 31,884 shares available for grant at June 30, 1999.
- 33 -
<PAGE>
Note 18 -- Earnings Per Share
<TABLE>
<CAPTION>
Earnings per share were computed as follows:
Year Ended June 30, 1999
--------------------------------------------------
Weighted Per-
Net Average Share
Income Shares Amount
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common stockholders $144 814,803 $.18
Effect of Dilutive Securities
Stock options and awards 631
-------------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $144 815,434 $.18
==================================================
Year Ended June 30, 1998
--------------------------------------------------
Weighted Per-
Net Average Share
Income Shares Amount
- --------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders $393 837,087 $.47
Effect of Dilutive Securities
Stock options and awards 4,737
-------------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $393 841,824 $.47
==================================================
Year Ended June 30, 1997
--------------------------------------------------
Weighted Per-
Net Average Share
Income Shares Amount
- --------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders $252 923,972 $.27
Effect of Dilutive Securities
Stock options and awards 1,864
-------------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $252 925,836 $.27
==================================================
</TABLE>
- 34 -
<PAGE>
Note 19 -- 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.
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------
Carrying Fair Carrying Fair
June 30 Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $2,475 $2,475 $3,802 $3,802
Securities available for sale 8,288 8,288 1,918 1,918
Loans, net 38,238 38,885 33,959 34,496
Stock in FHLB 660 660 500 500
Interest receivable 318 318 264 264
Liabilities
Deposits 32,657 32,937 26,649 26,662
FHLB advances 13,200 13,127 8,200 8,215
</TABLE>
Off-Balance Sheet Assets
Commitments to extend credit
- 35 -
<PAGE>
Note 20 -- Condensed Financial Information (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 1999 1998
- --------------------------------------------------------------------------------
Assets
Cash $ 34 $ 12
Securities available for sale 692 1,213
Premises and equipment 14 15
Investment in subsidiary 6,242 6,230
Other assets 143 39
-----------------------
Total assets $7,125 $7,509
=======================
Liabilities
Other liabilities $ 2 $ 3
Stockholders' Equity 7,123 7,506
-----------------------
Total liabilities and
stockholders' equity $7,125 $7,509
=======================
Condensed Statement of Income
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------
Income
Interest income $ 48 $ 137 $ 118
Other income 4 141 36
---------------------------------
Total income 52 278 154
---------------------------------
Expenses
Salaries and employee
benefits 39 60 31
Legal and professional fees 38 64 97
Other expenses 40 56 34
---------------------------------
Total expenses 117 180 162
---------------------------------
Income (loss) before income
tax benefit and equity in
undistributed income
of subsidiary (65) 98 (8)
Income tax
benefit (expense) (23) 7 (11)
---------------------------------
Income before equity in
undistributed income
of subsidiary (42) 91 3
Equity in undistributed
income of subsidiary 186 302 249
---------------------------------
Net Income $ 144 $ 393 $ 252
=================================
- 36 -
<PAGE>
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $144 $393 $252
Adjustments to reconcile net income to net cash
provided (used) by operating activities (115) (289) (258)
--------------------------------------------
Net cash provided (used) by operating activities 29 104 (6)
--------------------------------------------
Investing Activities
Purchases of securities available for sale (58) (1,848) (2,216)
Proceeds from sales of securities available for sale 485 1,895 1,080
Purchases of premises and equipment (1) (16)
--------------------------------------------
Net cash provided (used) by investing activities 427 46 (1,152)
--------------------------------------------
Financing Activities
Sale of stock 4,578
Dividends (94) (85) (69)
Purchase of stock (340) (78) (565)
Capital contributions to Bank (2,471)
Contribution of RRP shares (290)
--------------------------------------------
Net cash provided (used) by financing activities (434) (163) 1,183
--------------------------------------------
Net Change in Cash and Cash Equivalents 22 (13) 25
Cash and Cash Equivalents at Beginning of Year 12 25
--------------------------------------------
Cash and Cash Equivalents at End of Year $ 34 $ 12 $ 25
============================================
Additional Cash Flows and Supplementary Information
Common stock issued to ESOP leveraged with an employer loan 404,740
</TABLE>
- 37 -
<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"), SmallCap Market, under the symbol "HWEN." As of August 23,
1999, there were approximately 450 holders of the Holding Company's Common Stock
including shares held in broker accounts.
Since the Holding Company has limited independent operations and no
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 Company (as calculated for
federal income tax purposes), will be taxable as ordinary income to the
recipient and will not be deductible by the Company. 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, of which there were
none.
The stock information provided below has been adjusted to reflect the
2-for-1 stock split effective January 6 ,1998.
Stock Price Dividends
Quarter Ended High Low Per Share
September 30, 1997 $8 5/8 $7 7/16 $.025
December 31, 1997 9 1/4 8 1/8 .025
March 31, 1998 9 3/4 8 3/4 .025
June 30, 1998 9 1/2 8 7/16 .025
September 30, 1998 9 7 5/8 .025
December 31, 1998 7 7/8 6 1/2 .030
March 31, 1999 8 7 .030
June 30, 1999 7 7/8 7 .030
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 AUDITOR
Olive LLP
201 N. Illinois
Indianapolis, Indiana 46204
SHAREHOLDER AND GENERAL INQUIRIES
The Company is required to file an Annual Report on Form 10-K for its
fiscal year ended June 30, 1999 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
HOME PAGE AND E-MAIL
www.hfbancorp.com
[email protected]
- 38 -
<PAGE>
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C> <C>
Frank R. Stewart Charles W. Chambers John T. Gillaspy
Chairman of the Board Secretary President and
President, BSF, Inc. Chief Executive Officer,
Spencer Evening World, Inc.
Kurt J. Meier Robert W. Raper Tad Wilson
President Vice Chairman of the Board President, Metropolitan
Owen Community Bank, s.b. Printing Services, Inc.
Stephen Parrish Kurt D. Rosenberger Gary Michael Monnett
Funeral Director, Vice President Mike Monnett, CPA
West-Parrish-Pedigo Funeral Home Owen Community Bank, s.b.
</TABLE>
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 Charles W. Chambers
Chairman President and Secretary
Chief Executive Officer
Kurt D. Rosenberger Judith A. Terrell Christie Leach
Vice President and Branch Manager and Assistant Branch Manager
Chief Financial Officer Mortgage Loan Officer and Mortgage Loan Officer
Nancy Logan Carole Eder Lisa K. Sherfield
Accounting Manager Teller Supervisor Mortgage Loan Officer
Julie A. Hedden Lisa Wilson Rodger Samuels
Mortgage Loan Officer Compliance and Commercial Loan Officer
Special Projects
- 39 -
<PAGE>
DIRECTORS AND OFFICERS
Charles W. Chambers (age 84) 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 71) 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 49) 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 59) 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.
Gary Michael Monnett (age 39) was named a director of the Holding
Company in 1998. He has been a self-employed certified public accountant since
1993, providing tax and accounting services to individuals and small businesses.
Robert W. Raper (age 82) 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 40) is a director and 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 74) 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 64) has served as a director of the Holding Company
since its formation and of the Bank since 1978. Mr. Wilson is also the President
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.
- 40 -
<PAGE>
[PHOTO OF BOARD OF DIRECTORS]
Exhibit 23 - Consent of Independent Public Accountants
We hereby consent to the incorporation by reference to the Registration
Statement on Form S-8, File Number 333-45413, of our report dated July 23, 1999,
on the consolidated financial statements of Home Financial Bancorp, Spencer,
Indiana, which report is incorporated by reference in the Annual Report on Form
10-K of Home Financial Bancorp, Spencer, Indiana.
/s/ Olive LLP
OLIVE LLP
Indianapolis, IN
September 24, 1999
<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, 1999 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-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 296
<INT-BEARING-DEPOSITS> 2,178
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,288
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 38,574
<ALLOWANCE> 336
<TOTAL-ASSETS> 53,136
<DEPOSITS> 32,657
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 158
<LONG-TERM> 10,200
<COMMON> 4,189
0
0
<OTHER-SE> 2,934
<TOTAL-LIABILITIES-AND-EQUITY> 53,136
<INTEREST-LOAN> 3,346
<INTEREST-INVEST> 379
<INTEREST-OTHER> 157
<INTEREST-TOTAL> 3,883
<INTEREST-DEPOSIT> 1,435
<INTEREST-EXPENSE> 2,032
<INTEREST-INCOME-NET> 1,851
<LOAN-LOSSES> 44
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 1,689
<INCOME-PRETAX> 243
<INCOME-PRE-EXTRAORDINARY> 243
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 144
<EPS-BASIC> .18
<EPS-DILUTED> .18
<YIELD-ACTUAL> 8.75
<LOANS-NON> 79
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 320
<CHARGE-OFFS> 28
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 336
<ALLOWANCE-DOMESTIC> 336
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
