SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant: Yes.
Filed by a Party other than the Registrant: No.
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
HOME FINANCIAL BANCORP
(Name Of Registrant As Specified In Its Charter)
HOME FINANCIAL BANCORP
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
(1) Title of each class of securities to which transaction
applies: N/A
(2) Aggregate number of securities to which transaction
applies: N/A
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing. N/A
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
[Home Financial Bancorp Logo]
279 East Morgan Street
Spencer, Indiana 47460
(812) 829-2095
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held On October 12, 1999
Notice is hereby given that the Annual Meeting of Shareholders of Home
Financial Bancorp (the "Holding Company") will be held at the Canyon Inn,
Sycamore Room, McCormicks Creek State Park, State Highway 46 (two miles east of
Spencer), Spencer, Indiana, on Tuesday, October 12, 1999, at 3:00 p.m., Eastern
Standard Time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of three directors of the Holding
Company for terms expiring in 2002.
2. Ratification of Auditors. Approval and ratification of the appointment
of Olive LLP as auditors for Home Financial Bancorp for the fiscal
year ending June 30, 2000.
3. Other Business. Such other matters as may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on August 23, 1999, are
entitled to vote at the meeting or any adjournment thereof.
We urge you to read the enclosed Proxy Statement carefully so that you may
be informed about the business to come before the meeting, or any adjournment
thereof. At your earliest convenience, please sign and return the accompanying
proxy in the postage-paid envelope furnished for that purpose.
A copy of our Annual Report for the fiscal year ended June 30, 1999, is
enclosed. The Annual Report is not a part of the proxy soliciting material
enclosed with this letter.
By Order of the Board of Directors
/s/ Kurt J. Meier
Kurt J. Meier, President
Spencer, Indiana
September 9, 1999
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
HOME FINANCIAL BANCORP
279 East Morgan Street
Spencer, Indiana 47460
(812) 829-2095
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
October 12, 1999
This Proxy Statement is being furnished to the holders of common stock,
without par value (the "Common Stock"), of Home Financial Bancorp (the "Holding
Company"), an Indiana corporation, in connection with the solicitation of
proxies by the Board of Directors of the Holding Company to be voted at the
Annual Meeting of Shareholders to be held at 3:00 p.m., Eastern Standard Time,
on October 12, 1999, at the Canyon Inn, Sycamore Room, McCormicks Creek State
Park, State Highway 46, Spencer, Indiana, and at any adjournment of such
meeting. The principal asset of the Holding Company consists of 100% of the
issued and outstanding shares of common stock, $.01 par value per share, of Owen
Community Bank, s.b. (the "Bank"). This Proxy Statement is expected to be mailed
to the shareholders on or about September 9, 1999.
The proxy solicited hereby, if properly signed and returned to the Holding
Company and not revoked prior to its use, will be voted in accordance with the
instructions contained therein. If no contrary instructions are given, each
proxy received will be voted for each of the matters described below and, upon
the transaction of such other business as may properly come before the meeting,
in accordance with the best judgment of the persons appointed as proxies.
Any shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Holding Company
written notice thereof (Charles W. Chambers, 279 East Morgan Street, Spencer,
Indiana 47460), (ii) submitting a duly executed proxy bearing a later date, or
(iii) by appearing at the Annual Meeting and giving the Secretary notice of his
or her intention to vote in person. Proxies solicited hereby may be exercised
only at the Annual Meeting and any adjournment thereof and will not be used for
any other meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on August 23, 1999
("Voting Record Date"), will be entitled to vote at the Annual Meeting. On the
Voting Record Date, there were 885,200 shares of the Common Stock issued and
outstanding, and the Holding Company had no other class of equity securities
outstanding. Each share of Common Stock is entitled to one vote at the Annual
Meeting on all matters properly presented at the Annual Meeting. The holders of
over 50% of the outstanding shares of Common Stock as of the Voting Record Date
must be present in person or by proxy at the Annual Meeting to constitute a
quorum. In determining whether a quorum is present, shareholders who abstain,
cast broker non-votes, or withhold authority to vote on one or more director
nominees will be deemed present at the Annual Meeting.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of August 23, 1999, by each person who is known
by the Holding Company to own beneficially 5% or more of the Common Stock.
Unless otherwise indicated, the named beneficial owner has sole voting and
dispositive power with respect to the shares.
<TABLE>
<CAPTION>
Number of Shares of
Name and Address of Common Stock Percent of
Beneficial Owner Beneficially Owned Class (5)
---------------- ------------------ ---------
<S> <C> <C>
Chiplease, Inc. 120,584 (1)(2) 13.6%
330 South Wells St.
Suite 718
Chicago, Illinois 60606
Gary E. Gray, Jr. 47,000 5.3%
2600 6th Street, Apt. 13
Bedford, IN 47421
William Lannan 64,000 (1) 7.2%
R.R. 4, Box 12
Loogootee, Indiana 47533
Frank R. Stewart 101,020 (1) (3) 11.3%
c/o Owen Community Bank, s.b.
279 East Morgan Street
Spencer, Indiana 47460
Community Trust & Investment 80,948 (1)(4) 9.1%
Company, Inc., Trustee
105 N. Pete Ellis Drive
Suite B
P.O. Box 5996
Bloomington, Indiana 47407
</TABLE>
(1) The information in this chart is based on Schedule 13D or 13G Report(s)
filed by the above-listed person(s) with the Securities and Exchange
Commission (the "SEC") containing information concerning shares held by
them. It does not reflect any changes in those shareholdings which may have
occurred since the date of such filings.
(2) Includes 70,584 shares held by Chiplease, Inc. and 50,000 held by its
secretary, Leon Greenblatt. Pursuant to the Holding Company's Articles of
Incorporation, the Holding Company will count as shares entitled to vote
only up to ten percent of the issued and outstanding shares of Common
Stock, or 88,520 shares, of the shares held by the shareholder. The
remaining 32,064 shares held by this shareholder will not be counted as
shares eligible to vote on matters submitted to the shareholders at the
Annual Meeting.
(3) Of these shares, 84,000 are owned jointly by Mr. Stewart and his wife,
3,416 are held under the Owen Community Bank, s.b. Recognition and
Retention Plan and Trust (the "RRP"), 10,000 are subject to a stock option
granted under the Home Financial Bancorp Stock Option Plan (the "Option
Plan"), and 1,328 are held under the Holding Company's Employee Stock
Ownership Plan (the "ESOP").
(4) These shares are held by the Trustee of the Owen Community Bank, s.b.
Employee Stock Ownership Plan and Trust. The employees participating in
that Plan are entitled to instruct the Trustee how to vote shares held in
their accounts under the Plan. Unallocated shares held in a suspense
account under the Plan are required under the Plan terms to be voted by the
Trustee in the same proportion as allocated shares are voted.
(5) Based upon 885,200 shares of Common Stock outstanding which does not
include options for 69,300 shares of Common Stock granted to certain
directors, officers and employees of the Holding Company and the Bank.
PROPOSAL I -- ELECTION OF DIRECTORS
The Board of Directors consists of nine members. The By-Laws provide that
the Board of Directors is to be divided into three classes as nearly equal in
number as possible. The members of each class are to be elected for a term of
three years and until their successors are elected and qualified. One class of
directors is to be elected annually. The three nominees for election as a
director this year are Kurt J. Meier, Frank R. Stewart and Tad Wilson, each of
whom currently serves as a director. Messrs. Meier, Stewart and Wilson each have
been nominated to serve for a three-year term ending in 2002.
Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted for the election of the nominees listed below. If any
person named as a nominee should be unable or unwilling to stand for election at
the time of the Annual Meeting, the proxy holders will nominate and vote for a
replacement nominee recommended by the Board of Directors. At this time, the
Board of Directors knows of no reason why the nominees listed below may not be
able to serve as directors if elected.
The following table sets forth certain information regarding the nominees
for the position of director of the Holding Company and each director continuing
in office after the Annual Meeting, including the number and percent of shares
of Common Stock beneficially owned by such persons as of the Voting Record Date.
Unless otherwise indicated, each nominee has sole investment and/or voting power
with respect to the shares shown as beneficially owned by him. Mr. Parrish is
married to Mr. Wilson's sister. No other nominee for director is related to any
other nominee for director or executive officer of the Holding Company by blood,
marriage, or adoption, and there are no arrangements or understandings between
any nominee and any other person pursuant to which such nominee was selected.
The table also sets forth the number of shares of Holding Company Common Stock
beneficially owned by all directors and executive officers of the Holding
Company as a group.
<TABLE>
<CAPTION>
Director Common Stock
of the Beneficially
Expiration of Director of Holding Owned as of
Term as the Bank Company August 23, Percentage
Name Director Since Since 1999 (1) of Class
- ------------------------------------------------------------------------------------------------------------------
Director Nominees
- -----------------
<S> <C> <C> <C> <C> <C>
Kurt J. Meier 2002 1991 1996 19,197(2) 2.1%
Frank R. Stewart 2002 1963 1996 101,020(3) 11.3%
Tad Wilson 2002 1978 1996 40,024(4) 3.7%
Directors Continuing
- --------------------
in Office
- ---------
Charles W. Chambers 2001 1978 1996 6,024(5) .7%
John T. Gillaspy 2000 1986 1996 31,024(5) 3.5%
Gary Michael Monnett 2000 1998 1998 1,500(6) .2%
Stephen Parrish 2001 1982 1996 13,024(5) 1.5%
Robert W. Raper 2000 1970 1996 15,024(7) 1.7%
Kurt D. Rosenberger 2001 1998 1998 16,908(8) 1.9%
All directors and executive 243,745(9) 26.2%
officers as a group (9 persons)
</TABLE>
(1) Based upon information furnished by the respective director nominees. Under
applicable regulations, shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares the power to vote
or dispose of the shares, whether or not he or she has any economic power
with respect to the shares. Includes shares benefically owned by members of
the immediate families of the director nominees residing in their homes.
(2) Of these shares, 4,276 are owned jointly by Mr. Meier and his wife, 3,416
are held under the RRP, 10,000 are subject to a stock option granted under
the Option Plan, and 1,505 are held under the ESOP.
(3) Of these shares, 84,000 are owned jointly by Mr. Stewart and his wife,
3,416 are held under the RRP, 10,000 are subject to a stock option granted
under the Option Plan, and 1,328 are held under the ESOP.
(4) Of these shares, 32,808 are owned jointly by Mr. Wilson and his wife, 1,216
are held under the RRP, and 3,000 are subject to a stock option granted
under the Option Plan.
(5) Of these shares, 1,216 are held under the RRP, 3,000 are subject to a stock
option granted under the Option Plan, and the balance are held jointly by
the director and his wife.
(6) These shares are subject to a stock option granted under the Option Plan.
(7) Of these shares 10,404 are held jointly by Mr. Raper and his grandchildren,
1,216 are held under the RRP, and 3,000 are subject to a stock option
granted under the Option Plan.
(8) Of these shares, 3,216 are owned jointly by Mr. Rosenberger and his wife,
10,000 are subject to a stock option granted under the Option Plan, 2,278
are held under the RRP, and 1,414 are held under the Holding Company's
ESOP.
(9) Of these shares, 15,190 are held under the RRP, 46,500 are subject to stock
options granted under the Option Plan, and 4,247 are held under the ESOP.
Presented below is certain information concerning the director nominees of the
Holding Company:
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 served
as a staff appraiser for the Bank and has served as the Secretary of the Bank
since 1990.
John T. Gillaspy (age 71), has served as a director and President of the
Holding Company since its formation and of the Bank since 1986. Mr. Gillaspy has
also served as President until 1994 and Chief Executive Officer since 1994 of
the Spencer Evening World, Inc., a newspaper based in Spencer, Indiana.
Kurt J. Meier (age 49), has served as a director and President of the
Holding Company since its formation and as director of the Bank since 1991. Mr.
Meier has also served as President of the Bank since 1994.
Gary Michael Monnett (age 39), was named a director in 1998, and has served
as a self-employed certified public accountant based in Cloverdale, Indiana for
more than the last five years.
Stephen 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.
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), has served as Vice President and Chief
Financial Officer of the Holding Company since 1996. 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 Chairman of the Board 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., a subsidiary of the Bank, 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 Service, Inc., a print management company based in
Bloomington, Indiana, and is the owner of various rental properties located in
Bloomington, Indiana.
THE DIRECTORS SHALL BE ELECTED UPON RECEIPT OF A PLURALITY OF VOTES CAST AT
THE ANNUAL SHAREHOLDERS MEETING. PLURALITY MEANS THAT INDIVIDUALS WHO RECEIVE
THE LARGEST NUMBER OF VOTES CAST ARE ELECTED UP TO THE MAXIMUM NUMBER OF
DIRECTORS TO BE CHOSEN AT THE MEETING. ABSTENTIONS, BROKER NON-VOTES, AND
INSTRUCTIONS ON THE ACCOMPANYING PROXY TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR
MORE OF THE NOMINEES WILL RESULT IN THE RESPECTIVE NOMINEE RECEIVING FEWER
VOTES. HOWEVER, THE NUMBER OF VOTES OTHERWISE RECEIVED BY THE NOMINEE WILL NOT
BE REDUCED BY SUCH ACTION.
The Board of Directors and its Committees
During the fiscal year ended June 30, 1999, the Board of Directors of the
Holding Company met or acted by written consent five times. No director attended
fewer than 75% of the aggregate total number of meetings during the last fiscal
year of the Board of Directors of the Holding Company held while he served as
director and of meetings of committees which he served during that fiscal year.
The Board of Directors of the Holding Company has a Stock Compensation Committee
and Nominating Committee, among its other Board Committees. All committee
members are appointed by the Board of Directors.
The Stock Compensation Committee administers the RRP and the Option Plan.
The members of that Committee are Messrs. Gillaspy, Parrish and Wilson. It met
two times during fiscal 1999.
The Holding Company's Nominating Committee, consisting of Messrs. Gillaspy,
Parrish and Wilson, nominated the slate of directors set forth in the Proxy
Statement. Although the Board of Directors of the Holding Company will consider
nominees recommended by shareholders, it has not actively solicited
recommendations for nominees from shareholders nor has it established procedures
for this purpose. Article III, Section 12 of the Holding Company's By-Laws
provides that shareholders entitled to vote for the election of directors may
name nominees for election to the Board of Directors but there are certain
requirements that must be satisfied in order to do so. Among other things,
written notice of a proposed nomination must be received by the Secretary of the
Holding Company not less than 60 days prior to the Annual Meeting; provided,
however, that in the event that less than 70 days' notice or public disclosure
of the date of the meeting is given or made to shareholders (which notice or
public disclosure includes the date of the Annual Meeting specified in the
Holding Company's By-Laws if the Annual Meeting is held on such date), notice
must be received not later than the close of business on the 10th day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made.
Management Remuneration and Related Transactions
Remuneration of Named Executive Officer
During the fiscal year ended June 30, 1999, no cash compensation was paid
directly by the Holding Company to any of its executive officers. Each of such
officers was compensated by the Bank.
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to the Holding Company and its
subsidiaries for the last three fiscal years of the person who served as chief
executive officer of the Holding Company during the fiscal year ended June 30,
1999 (the "Named Executive Officer"). There were no executive officers of the
Holding Company who earned over $100,000 in salary and bonuses during that
fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
Name Other All
and Annual Restricted Securities Other
Principal Fiscal Compen- Stock Underlying Compen-
Position Year Salary ($) Bonus ($) sation($)(2) Awards($)(3) Options(#) sation($)(4)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kurt J. Meier 1999 $59,448 (1) $ --- --- --- --- $1,639
President, Chief 1998 $55,994 (1) $985 --- --- 10,000 $1,561
Executive Officer 1997 $51,220 (1) $ --- --- $38,243 --- $1,399
and Treasurer
</TABLE>
(1) Includes fees received for service on the Bank's Board of Directors and
amounts deferred by the Named Executive Officer pursuant to 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code") under the Bank's
Thrift Plan.
(2) Mr. Meier received certain perquisites, but the incremental cost of
providing such perquisites did not exceed the lesser of $50,000 or 10% of
his salary and bonus.
(3) The value of the restricted stock awards was determined by multiplying the
fair market value of the Common Stock on the date the shares were awarded
by the number of shares awarded. These shares vest over a five year period.
As of June 30, 1999, the number and aggregate value of restricted stock
holdings by Mr. Meier were 3,416 and $25,833.50, respectively. Dividends
paid on the restricted shares are payable to the grantee as the shares are
vested and are not included in the table.
(4) Consists of the Bank's contribution on behalf of the Named Executive
Officer to the Thrift Plan.
Stock Options
The following table includes the number of shares covered by stock options
held by the Named Executive Officer as of June 30, 1999. None of these were
"in-the-money" options (options whose exercise price is lower than the market
value of the shares at fiscal year end). The Named Executive Officer did not
exercise any stock options during the fiscal year and was not granted any stock
options during that fiscal year.
Outstanding Stock Option Grants and Value Realized As Of 6/30/99
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year End Options at Fiscal Year End (1)
Name Exercisable Unexercisable(2) Exercisable Unexercisable(2)
---- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Kurt J. Meier 10,000 --- $--- $ ---
</TABLE>
(1) The outstanding options have an exercise price of $8.50 which is higher
than the average between the high and low prices for the shares on June
30, 1999, which was $7.5625 per share. Therefore none of these options
was in-the-money on June 30, 1999.
Employment Contracts
The Bank has entered into three-year employment contracts with each of
Messrs. Meier and Rosenberger (together, the "Employees"). The contracts with
the Employees, effective July 1, 1999, extend annually for an additional
one-year term to maintain their three-year term if the Board of Directors of the
Bank determines to so extend them, unless notice not to extend is properly given
by either party to the contract. Each Employee receives an initial salary under
the contract equal to his current salary subject to increases approved by the
Board of Directors. The contracts also provide, among other things, for
participation in other fringe benefits and benefit plans available to the Bank's
employees. Each Employee may terminate his employment upon sixty days' written
notice to the Bank. The Bank may discharge each Employee for cause (as defined
in the contract) at any time or in certain specified events. If the Bank
terminates an Employee's employment for other than cause or if the Employee
terminates his own employment for cause (as defined in the contract), the
Employee will receive his base compensation under the contract for an additional
three years if the termination follows a change of control in the Holding
Company (as defined below) or for the remaining term of the Agreement, if the
termination does not follow a change of control. In addition, during such
period, the Employee will continue to participate in the Bank's group insurance
plans or receive comparable benefits. Moreover, within a period of three months
after such termination following a change of control, each Employee will have
the right to cause the Bank to purchase any stock options he holds for a price
equal to the fair market value (as defined in the contact) of the shares subject
to such options minus their option price. If the payments provided for in the
contract, together with any other payments made to the Employees by the Bank,
are deemed to be payments in violation of the "golden parachute" rules of the
Code, such payments will be reduced to the largest amount which would not cause
the Bank to lose a tax deduction for such payments under those rules. As of the
date hereof, the cash compensation which would be paid under the contracts to
the Employees if the contracts were terminated either after a change of control
of the Holding Company, without cause by the Bank, or for cause by the
Employees, would be $164,736 for Mr. Meier and $152,724 for Mr. Rosenberger. For
purposes of these employment contracts, a change of control of the Holding
Company is generally an acquisition of control, as defined in regulations issued
under the Change in Bank Control Act and the Savings and Loan Holding Company
Act.
The employment contracts provide the Bank protection of its confidential
business information and protection from competition by each of the Employees
should he voluntarily terminate his employment without cause or be terminated by
the Bank for cause.
The Bank also entered into a three-year employment contract with Mr.
Stewart effective as of July 1, 1999, which may be renewed by the Board each
year for one additional year. Mr. Stewart's employment agreement provides for
the payment by the Bank to Mr. Stewart of an annual salary equal to $45,864,
subject to increases as determined by the Board of Directors. In the event Mr.
Stewart's employment is terminated by the Bank without cause, Mr. Stewart will
continue to receive such compensation during the then-remaining term of the
contract.
The Bank is the owner and beneficiary of $100,000 in key man life insurance
on the lives of Mr. Meier and Mr. Rosenberger.
Compensation of Directors
All directors of the Bank are entitled to receive monthly director fees for
their services. Each of Mr. Gillaspy and Mr. Raper receive $700 per month, and
Mr. Stewart receives $500 per month. All other directors of the Bank receive
$400 per month.
Directors of the Holding Company are not currently paid directors' fees.
The Holding Company may, if it believes it is necessary to attract qualified
directors or otherwise beneficial to the Holding Company, adopt a policy of
paying directors' fees.
Transactions With Certain Related Persons
The Bank has followed a policy of offering to its directors and executive
officers real estate mortgage loans secured by their principal residence and
other loans. These loans are made in the ordinary course of business with the
same collateral, interest rates and underwriting criteria as those of comparable
transactions prevailing at the time and do not involve more than the normal risk
of collectibility or present other unfavorable features.
PROPOSAL II -- RATIFICATION OF AUDITORS
The Board of Directors proposes for the ratification of the shareholders at
the Annual Meeting the appointment of Olive LLP, certified public accountants,
as independent auditors for the fiscal year ended June 30, 2000. Olive LLP has
served as auditors for the Bank since 1989. A representative of Olive LLP is
expected to be present at the Annual Meeting with the opportunity to make a
statement if he so desires. He will also be available to respond to any
appropriate questions shareholders may have.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"1934 Act"), requires that the Holding Company's officers and directors and
persons who own more than 10% of the Holding Company's Common Stock file reports
of ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than 10% shareholders
are required by SEC regulations to furnish the Holding Company with copies of
all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for those persons, the Holding Company believes that during the
fiscal year ended June 30, 1999, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act were satisfied in a timely manner.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have presented at the next
Annual Meeting of the Holding Company and included in the proxy statement and
form of proxy must be received at the main office of the Holding Company for
inclusion in the Holding Company's proxy statement no later than 120 days in
advance of September 9, 2000. Any such proposal should be sent to the attention
of the Secretary of the Holding Company at 279 East Morgan Street, Spencer,
Indiana 47460. A shareholder proposal being submitted outside the processes of
Rule 14a-8 promulgated under the 1934 Act will be considered untimely if it is
received by the Holding Company later than 45 days in advance of September 9,
2000.
OTHER MATTERS
Management is not aware of any business to come before the Annual Meeting
other than those matters described in the Proxy Statement. However, if any other
matters should properly come before the Annual Meeting, it is intended that the
proxies solicited hereby will be voted with respect to those other matters in
accordance with the judgment of the persons voting the proxies.
The cost of solicitation of proxies will be borne by the Holding Company.
The Holding Company will reimburse brokerage firms and other custodians,
nominees and fiduciaries for reasonable expenses incurred by them in sending
proxy material to the beneficial owners of the Common Stock. In addition to
solicitation by mail, directors, officers, and employees of the Holding Company
may solicit proxies personally or by telephone without additional compensation.
Each shareholder is urged to complete, date and sign the proxy and return
it promptly in the enclosed envelope.
By Order of the Board of Directors
/s/ Kurt J. Meier
Kurt J. Meier, President
September 9, 1999
<PAGE>
REVOCABLE PROXY HOME FINANCIAL BANCORP
Annual Meeting of Shareholders
October 12, 1999
The undersigned hereby appoints Nancy Logan and Jack Childers, with full
powers of substitution, to act as attorneys and proxies for the undersigned to
vote all shares of common stock of Home Financial Bancorp which the undersigned
is entitled to vote at the Annual Meeting of Shareholders to be held at the
Canyon Inn, Sycamore Room, McCormicks Creek State Park, State Highway 46,
Spencer, Indiana, on Tuesday, October 12, 1999, at 3:00 p.m., and at any and all
adjournments thereof, as follows:
1. The election as directors of all nominees listed below,
except as marked to the contrary |_| FOR |_| VOTE WITHHELD
INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name on the list below:
Kurt J. Meier Frank R. Stewart Tad Wilson
(each for a three-year term)
2. Ratification of the appointment of Olive LLP as auditors for the year
ending June 30, 2000. |_| FOR |_| AGAINST |_| ABSTAIN
In their discretion, the proxies are authorized to vote on any other business
that may properly come before the Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" each
of the listed propositions.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
<PAGE>
This Proxy may be revoked at any time prior to the voting thereof.
The undersigned acknowledges receipt from Home Financial Bancorp, prior to the
execution of this Proxy, of a Notice of the Meeting, a Proxy Statement and an
Annual Report to Shareholders.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS
IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS
PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS
OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
__________________, 1999
NUMBER OF SHARES
------------------------------------------------------------
Signature of Shareholder
------------------------------------------------------------
Signature of Shareholder
Please sign as your name appears on the envelope in which
this card was mailed. When signing as attorney, executor,
administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder should sign.
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
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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.
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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
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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.
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[PHOTO OF BOARD OF DIRECTORS]
