FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 0-28510
HOME FINANCIAL BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1975585
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
279 East Morgan Street, Spencer, Indiana 47460
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (812) 829-2095 Securities
Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of August 21, 2000, was $3,675,975.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of August 21, 2000, was 852,100 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders are
incorporated in Part III.
Exhibit Index on Page E-1
Page 1 of 46 Pages
<PAGE>
HOME FINANCIAL BANCORP
Form 10-K
INDEX
Page
Forward Looking Statements................................................... 3
PART I
Item 1. Business................................................... 3
Item 2. Properties................................................. 28
Item 3. Legal Proceedings.......................................... 29
Item 4. Submission of Matters to a Vote of Security Holders........ 29
Item 4.5. Executive Officers of Registrant........................... 29
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................... 29
Item 6. Selected Financial Data.................................... 31
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation....................... 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 43
Item 8. Financial Statements and Supplementary Data................ 44
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 44
PART III
Item 10. Directors and Executive Officers of Registrant............. 44
Item 11. Executive Compensation..................................... 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................... 45
Item 13. Certain Relationships and Related Transactions............. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.............................................. 45
Signatures................................................. 46
Exhibit Index..............................................E-1
<PAGE>
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-K are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-K
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
savings and financial institutions; substantial changes in financial markets;
changes in real estate values and the real estate market; regulatory changes; or
unanticipated results in pending legal proceedings.
PART I
Item 1. Business.
General
Home Financial Bancorp (the "Holding Company" and, together with the
Bank (as defined below), the "Company") is an Indiana corporation organized in
February, 1996, to become a bank holding company upon its acquisition of all the
issued and outstanding capital stock of Owen Community Bank, s.b. (the "Bank")
in connection with the Bank's conversion from mutual to stock form. The Holding
Company became the Bank's holding company on July 1, 1996; therefore, historical
financial and other data contained herein for periods prior to July 1, 1996
relate solely to the Bank, while historical financial and other data contained
herein for the periods after July 1, 1996 relate to the Company. The principal
asset of the Holding Company currently consists of 100% of the issued and
outstanding shares of common stock of the Bank. The Bank was organized under the
name Owen County Savings and Loan Association in 1911. In 1972, the Bank
converted to a federally chartered savings and loan and changed its name to Owen
County Federal Savings and Loan Association, and in 1989, the Bank converted to
a federally chartered savings bank known as Owen Federal Savings Bank. In 1994,
the Bank became an Indiana savings bank known as Owen Community Bank, s.b. As of
May 1, 1999, the Bank converted back to a federal stock savings bank and the
Company became a savings and loan holding company. The Bank's principal business
consists of attracting deposits from the general public and originating
long-term adjustable-rate loans secured primarily by first mortgage liens on
one-to-four family real estate. The Bank's deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund (the "SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC").
The Bank is the oldest continuously operating financial institution
headquartered in Owen County, Indiana. Management believes the Bank has
developed a solid reputation among its loyal customer base because of its
commitment to personal service and its strong support of the local community.
The Bank offers a number of consumer and commercial financial services. These
services include: (i) residential real estate loans; (ii) indemnification
mortgage loans ("ID Mortgage Loans"); (iii) mobile home loans; (iv) combination
land-mobile home loans ("Combo Loans"); (v) construction loans; (vi) share
loans; (vii) nonresidential real estate loans; (viii) multi-family loans; (ix)
installment loans; (x) home equity loans; (xi) NOW accounts; (xii) demand
deposit accounts; (xiii) passbook savings accounts; and (xiv) certificates of
deposit. The Company conducts business out of its main office located in
Spencer, Indiana and its branch office in Cloverdale, Indiana.
The Bank historically has concentrated its lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one-to-four family residential real property.
One-to- four family residential mortgage loans continue to be the major focus of
the Bank's loan origination activities, representing 50.8% of the Bank's total
loan portfolio at June 30, 2000. The Bank also offers mobile home loans,
multi-family mortgage loans, nonresidential real estate loans, Combo Loans and
consumer loans. Mobile home loans and Combo Loans totaled approximately 2.9% and
14.2% of the Bank's total loan portfolio at June 30, 2000, respectively.
Mortgage loans secured by multi-family properties and nonresidential real estate
totaled approximately 2.2% and 25.8%, respectively, of the Bank's total loan
portfolio at June 30, 2000. Consumer loans constituted approximately 3.6% of the
Bank's total loan portfolio at June 30, 2000.
<PAGE>
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of
the Bank's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses, deferred loan costs and loans in
process.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------
2000 1999 1998
--------------------- ---------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------- --------- -------- -------- -------- --------
(Dollars in thousands)
TYPE OF LOAN
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential.......................... $23,494 50.76% $20,952 53.46% $19,563 56.76%
Combo................................ 6,584 14.23 5,331 13.60 4,666 13.52
Nonresidential....................... 11,926 25.76 9,323 23.79 7,614 22.07
Multi-family......................... 1,017 2.20 1,096 2.80 904 2.62
Mobile home loans....................... 1,322 2.86 950 2.43 831 2.43
Commercial and industrial loans......... 264 0.57 538 1.37 242 0.70
Consumer loans.......................... 1,674 3.62 999 2.55 655 1.90
------- ------ ------- ------ ------- ------
Gross loans receivable............. $46,281 100.00% $39,189 100.00% $34,475 100.00%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential real estate.............. $23,494 50.76% $20,952 53.46% $19,563 56.76%
Mobile home and land................. 6,584 14.23 5,331 13.60 4,666 13.52
Nonresidental real estate............ 11,926 25.76 9,323 23.79 7,614 22.07
Multi-family real estate............. 1,017 2.20 1,096 2.80 904 2.62
Mobile home.......................... 1,322 2.86 950 2.43 831 2.43
Deposits............................. 121 0.26 154 0.39 152 .44
Other security....................... 1,817 3.93 1,383 3.53 745 2.16
------- ------ ------- ------ ------- ------
Gross loans receivable............. 46,281 100.00 39,189 100.00 34,475 100.00
Deduct:
Allowance for loan losses............... 372 0.80 336 0.86 320 0.93
Loans in process and
deferred loan costs.................. 568 1.23 615 1.57 196 0.57
------- ------ ------- ------ ------- ------
Net loans receivable................. $45,341 97.97% $38,238 97.57% $33,959 98.50%
======= ===== ======= ===== ======= =====
Mortgage Loans:
Adjustable-rate...................... $25,717 59.78% $23,748 64.70% $21,502 65.69%
Fixed-rate........................... 17,304 40.22 12,954 35.30 11,245 34.31
------- ------ ------- ------ ------- ------
Total.............................. $43,021 100.00% $36,702 100.00% $32,747 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information at June 30, 2000,
regarding the dollar amount of loans maturing in the Bank's loan portfolio based
on the contractual terms to maturity. Demand loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less. This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses. Management expects prepayments will cause
actual maturities to be shorter.
<TABLE>
<CAPTION>
Due during years ended June 30,
Balance ---------------------------------------------------------------------
Outstanding 2004 2006 2011 2016
at June 30, to to to and
2000 2001 2002 2003 2005 2010 2015 following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential..................... $23,494 $ 36 $112 $ 50 $ 539 $2,345 $3,412 $17,000
Combo........................... 6,584 45 34 7 85 641 1,064 4,708
Nonresidential.................. 11,926 1 386 4 3,187 743 4,655 2,950
Multi-family.................... 1,017 --- --- --- 16 307 368 326
Mobile home loans.................. 1,322 --- 7 46 145 254 382 488
Commercial and industrial loans.... 264 5 223 --- --- --- 36 ---
Consumer loans..................... 1,674 848 122 160 367 137 40 ---
------- ---- ---- ---- ------ ------ ------ -------
Total......................... $46,281 $935 $884 $267 $4,339 $4,427 $9,957 $25,472
======= ==== ==== ==== ====== ====== ====== =======
The following table sets forth, as of June 30, 2000, the dollar amount
of all loans due after one year which have fixed interest rates and floating or
adjustable rates.
Due After June 30, 2001
-------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Mortgage loans:
Residential..................... $11,653 $11,805 $23,458
Combo........................... 3,909 2,630 6,539
Nonresidential.................. 1,468 10,457 11,925
Multi-family.................... 384 633 1,017
Mobile home loans.................. 1,322 --- 1,322
Commercial and industrial loans.... 259 --- 259
Consumer loans..................... 826 --- 826
------- ------- -------
Total......................... $19,821 $25,525 $45,346
======= ======= =======
One-to-Four Family Residential Loans. Residential loans consist
primarily of one-to-four family loans. Approximately $23.5 million, or 50.8% of
the Bank's portfolio of loans at June 30, 2000, consisted of one-to-four family
residential mortgage loans, of which approximately 49.8% had adjustable rates.
Pursuant to federal regulations, such loans must require at least semi-annual
payments and be for a term of not more than 40 years, and, if the interest rate
is adjustable, the rate must be correlated with changes in a readily verifiable
index.
The Bank currently offers three (3) types of adjustable-rate
one-to-four family residential mortgage loans ("ARMs"). The Bank offers ARMs
which adjust annually and are indexed to the Auction Average of One Year U.S.
Treasury Bills as published monthly by the Federal Reserve Board ("FRB") (the
"Average One Year T-Bill"). The maximum rate adjustment per year and over the
life of the loan for the Bank's one-year ARMs are 1% to 1.5% and 4% to 5%,
respectively. These ARMs are generally underwritten for terms of up to 25 years.
The Bank also offers three-year and five-year ARMs which are indexed to the
National Average Contract Interest Rate for the Purchase of Previously Occupied
Homes as published by the Federal Housing Finance Board (the "National Average
Contract Rate") and have maximum rate adjustments per adjustment period and over
the life of the loan of 3% and 5%, respectively. The Bank's three-year and
five-year ARMs are generally underwritten for terms of up to 25 years. The Bank
will not generally lend more than $100,000 for any residential loan with a
Loan-to-Value Ratio of 90% or higher.
The initial interest rate for each of the Bank's ARM loans is
determined by the Executive Committee of the Bank's Board of Directors (the
"Executive Committee") based upon prevailing rates in the Bank's market area,
the credit history of the applicant and the Loan-to-Value Ratio. When the
initial interest rate is determined for an ARM loan, a margin is calculated by
subtracting the then-current index rate (i.e., the Average One Year T-Bill for
one-year ARMs or the National Average Contract Rate for three-year and five-year
ARMs) from the initial interest rate. Interest rate adjustments are thereafter
determined based on fluctuations of the index rate with a specific loan's margin
remaining constant.
Adjustable-rate loans decrease the risk associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrowers may rise to the extent permitted by the terms
of the loan, thereby increasing the potential for default. Also, adjustable-rate
loans have features which restrict changes in interest rates on a short-term
basis and over the life of the loan. At the same time, the market value of the
underlying property may be adversely affected by higher interest rates.
The Bank also currently offers fixed-rate loans which provide for the
payment of principal and interest over a period not to exceed 20 years. At June
30, 2000, 50.2% of the Bank's residential mortgage loans had fixed rates of
interest.
The Bank does not currently originate residential mortgage loans if the
Loan-to-Value Ratio exceeds 90% and does not currently require private mortgage
insurance on its residential single-family mortgage loans. The maximum
Loan-to-Value Ratio for non-owner occupied one-to-four family residential
mortgage loans is 80%.
Substantially all of the residential mortgage loans that the Bank
originates include "due-on-sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
The Bank's residential mortgage loans are not originated on terms and
conditions and using documentation that conform with the standard underwriting
criteria required to sell such loans in the secondary market. The Bank generally
retains its loans in its portfolio and does not anticipate the need to sell its
non-conforming loans. See "-- Origination, Purchase and Sale of Loans."
At June 30, 2000, residential loans amounting to $388,000, or 0.84% of
total loans, were included in non-performing assets. See "-- Non-Performing and
Problem Assets."
The Bank offers mortgage loans for the construction of residential real
estate. Such loans are made with respect to owner-occupied residential real
estate and, in limited cases, to builders or developers constructing such
properties on a speculative investment basis (i.e., before the builder/developer
obtains a commitment from a buyer). Substantially all of such loans are made to
owners who are to occupy the premises.
These loans are written as permanent mortgage loans such that only
disbursed principal and interest are payable during the construction phase,
which is typically limited to six (6) months. Inspections are made prior to any
disbursement under such a loan.
Mortgage loans written for the construction of residential real estate,
like construction loans generally, involve a higher level of risk than loans
secured by existing properties. For example, if a project is not completed and
the borrower defaults, the Bank may have to hire another contractor to complete
the project at a higher cost. Also, a house may be completed, but not salable,
resulting in the borrower defaulting and the Bank taking title to the house.
The Bank originates a personal revolving line of credit loan secured by
a first or second mortgage on the borrower's primary residence. The combined
total of first and second mortgages on property securing Home Equity Loans is
generally limited to 80%. The draw period for the Home Equity Loan product is
generally limited to 10 years, with a maximum of 15 years.
The Bank also offers ID Mortgage Loans. ID Mortgage Loans are similar
to home equity loans in that such loans create a line of credit secured by a
real estate mortgage against which a borrower may draw, and are typically
written as second mortgage loans. The Bank generally writes its ID Mortgage
Loans so that all future indebtedness of a borrower is secured by the ID
Mortgage without the necessity of recording an additional security instrument.
ID Mortgage loans carry fixed rates and are generally written for terms not
exceeding 20 years. The maximum Loan-to-Value Ratio for ID Mortgage Loans is 90%
if the subject real estate is not encumbered by another mortgage or the Bank
holds the first mortgage on the subject real estate, and 80% if another lender
holds the first mortgage on the subject real estate. If an appraisal has been
completed on the subject property within five (5) years, the Bank does not
generally require a new appraisal.
Combo Loans. At June 30, 2000, $6.6 million, or 14.2% of the Bank's
total loan portfolio, consisted of Combo Loans, of which approximately 40.2% had
adjustable rates. The Bank currently offers three (3) types of adjustable-rate
<PAGE>
Combo Loans. The Bank's one-year adjustable-rate Combo Loans are indexed to the
Average One Year T-Bill and have maximum rate adjustments per year and over the
life of the loan of 1.5% and 3%, respectively. The Bank also offers three-year
and five-year adjustable-rate Combo Loans which are indexed to the National
Average Contract Rate and have maximum rate adjustments per adjustment period
and over the life of the loan of 3% and 5%, respectively. The Bank's Combo Loans
are generally underwritten for terms of up to 25 years. The maximum
Loan-to-Value Ratio for a Combo Loan is 90%.
The initial interest rate for each of the Bank's Combo Loans is
determined by the Executive Committee based upon prevailing rates in the Bank's
market area, the applicant's credit history and the Loan-to-Value Ratio. The
Bank generally establishes its base interest rates for Combo Loans at a level
100 basis points higher than the corresponding rates for residential ARM loans.
An interest rate margin is determined for each Combo Loan in the same manner as
described above for residential ARM loans.
The Bank also offers fixed-rate Combo Loans with terms of 10 years, 15
years and 20 years. At June 30, 2000, 59.8% of the Bank's Combo Loans had fixed
rates of interest.
Mobile Home Loans. The Bank originates loans for the purchase of new
and used mobile homes. At June 30, 2000, approximately $1.3 million, or 2.9% of
the Bank's portfolio of loans, consisted of mobile home loans. The Bank's mobile
home loans are fixed-rate loans with maximum terms of 15 years for new mobile
homes and 10 years for previously owned mobile homes. The maximum Loan-to-Value
Ratio for mobile home loans is 90%.
The Bank has emphasized mobile home loans because they generally have
shorter terms to maturity and higher yields than the Bank's residential mortgage
loans. In addition, the Bank is the primary lender in its market area making
mobile home loans, and mobile home lending significantly enhances the Bank's
compliance under the Community Reinvestment Act of 1977. The Bank anticipates
that it will continue to be an active originator of mobile home loans.
Mobile home lending entails greater risk than traditional residential
mortgage lending. Loans secured by mobile homes involve more credit risk than
residential mortgage loans because of the type and nature of the collateral, and
because such loans generally are made to borrowers with low income levels, and
mobile homes tend to rapidly depreciate in value. In many cases, any repossessed
collateral for a defaulting mobile home loan will not provide an adequate source
of repayment of the outstanding loan balance because of improper repair and
maintenance of the underlying security. One of the Bank's mobile home loans was
included in non-performing assets at June 30, 2000.
Nonresidential Real Estate Loans. At June 30, 2000, $11.9 million, or
25.8% of the Bank's total loan portfolio, consisted of nonresidential real
estate loans, of which $849,000 constituted loans secured by unimproved land
only. The nonresidential real estate loans included in the Bank's portfolio are
primarily secured by real estate that includes a motel, a warehouse, a medical
facility, a funeral home, several churches and three residential real estate
development projects. At June 30, 2000, $3.2 million, or 26.8% of the Bank's
nonresidential loan portfolio, was secured by real estate being developed for
residential housing. At the same date, $523,000, or 4.4% of the Bank's
nonresidential loan portfolio, was secured by churches. The Bank currently
originates nonresidential real estate loans as one-year adjustable-rate and
monthly floating-rate loans indexed to the prime rate with a margin of 1% to 3%
above such index. In addition, the maximum rate adjustment per adjustment period
and over the life of the loan is typically unrestricted. The Bank underwrites
these loans on a case-by-case basis and, in addition to its normal underwriting
criteria, the Bank evaluates the borrower's ability to service the debt from the
net operating income of the property. The largest nonresidential real estate
loan on June 30, 2000 was $1.1 million, net of participation portion sold. None
of the Bank's nonresidential real estate loans was included in non-performing
assets at that date.
Loans secured by nonresidential real estate generally are larger than
one-to-four family residential loans and involve a greater degree of risk.
Nonresidential real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.
<PAGE>
Multi-Family Loans. Approximately $1.0 million, or 2.2% of the Bank's
portfolio of loans at June 30, 2000, consisted of multi-family loans. The
largest multi-family loan at June 30, 2000 had a balance of $483,000 and was
secured by an apartment complex. All of the Bank's multi-family loans were fully
performing as of June 30, 2000. The Bank's multi-family loans are written for
maximum terms of 20 years, and the Bank does not originate multi-family loans if
the Loan-to-Value Ratio exceeds 80%.
Consumer Loans. The Bank's consumer loans, consisting primarily of
installment, auto and share loans, aggregated $1.7 million as of June 30, 2000,
or 3.6% of the Bank's total loan portfolio. The Bank consistently originates
consumer loans to meet the needs of its customers and to assist in meeting its
asset/liability management goals. All of the Bank's consumer loans are
fixed-rate loans, and substantially all are secured loans.
The Bank's installment loans are fixed-rate loans generally secured by
collateral, including vehicle titles, and are made for maximum terms of up to
five years (depending on the collateral).
The Bank's share loans are made up to 80% of the original account
balance and accrue at a rate of 2% over the underlying certificate of deposit
rate. Interest on share loans is paid semi-annually.
Consumer loans may entail greater credit risk than residential mortgage
loans do, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At June 30, 2000, consumer loans amounting to $7,000 were included
in non-performing assets. See "--Non-Performing and Problem Assets." There can
be no assurances, however, that additional delinquencies will not occur in the
future.
Origination, Purchase and Sale of Loans. The Bank currently originates
its mortgage loans pursuant to its own underwriting standards, which are not in
conformity with the standard criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). If it
desired to sell its mortgage loans, the Bank might experience some difficulty
selling such non-conforming loans quickly in the secondary market. The Bank has
no intention, however, of attempting to sell such loans. The Bank's ARMs vary
from secondary market criteria in that, among other things, the Bank does not
require escrow accounts for taxes and insurance and does not permit the
conversion of those loans to fixed-rate loans in the first three years of their
terms.
The Bank confines its loan origination activities primarily to Owen,
Putnam and surrounding counties in Indiana. At June 30, 2000, no loans were
secured by property located outside of Indiana. The Bank's loan originations are
generated from referrals from real estate dealers and existing customers, and
newspaper and periodical advertising. All loan applications are processed and
underwritten at the Bank's main office.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. Mortgage loans up to $250,000 and mobile home loans may be approved
by the Executive Committee. All mortgage loans for more than $250,000 must be
approved in advance by the Board of Directors. Consumer loans up to $5,000 may
be approved by the Bank's Senior Installment Loan Officer. Consumer loans for
more than $5,000 must be approved by the Executive Committee.
The Bank generally requires appraisals on all property securing its
loans and requires title insurance and a valid lien on its mortgaged real
estate. Appraisals for residential real property valued at less than $250,000
are performed by an in-house appraiser. Appraisals for residential properties
valued in excess of $250,000 and appraisals for all nonresidential real estate
are performed by an appraiser who is a state-licensed residential appraiser. The
Bank requires fire and extended coverage insurance in amounts at least equal to
the principal amount of the loan and requires vandalism coverage on all mobile
home loans. It also requires flood insurance to protect the property securing
its interest if the property is in a flood plane. The Bank does not require
escrow accounts to be established by its borrowers for the payment of insurance
premiums or taxes and does not require private mortgage insurance for its loans.
<PAGE>
The Bank's underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
The Bank historically has sold participations in its mortgage loans on
a limited number of occasions to ensure compliance with the loans-to-one
borrower restrictions. See "Regulation -- Loans to One Borrower." The Bank also
occasionally purchases participations in nonresidential real estate and
multi-family loans from other financial institutions. At June 30, 2000, the Bank
had sold participations in a non-residential mortgage loan in the amount of
$1,789,000.
The following table shows loan origination, purchase and repayment
activity for the Bank during the periods indicated.
For the Year Ended
June 30,
-------------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Gross loans receivable
at beginning of period...................... $39,189 $34,475 $34,777
------- ------- -------
Originations:
Mortgage loans:
Residential............................... 8,645 9,660 5,664
Other..................................... 6,152 2,044 641
------- ------- -------
Total mortgage loans.................... 14,797 11,704 6,305
------- ------- -------
Mobile home loans........................... 300 317 164
Consumer loans:
Installment............................... 1,545 810 793
Share..................................... 27 101 97
------- ------- -------
Total consumer loans.................... 1,572 911 890
------- ------- -------
Total originations................. 16,669 12,932 7,359
Purchases (sales) of participation loans....... (2,363) --- ---
Repayments and other deductions................ 7,214 8,218 7,661
------- ------- -------
Gross loans receivable at end of period..... $46,281 $39,189 $34,475
======= ======= =======
</TABLE>
Origination and Other Fees. The Bank realizes income from origination
fees, late charges, checking account service charges, and fees for other
miscellaneous services. The Bank does not currently charge any points on its
loans. However, the Bank currently charges $300 plus closing costs on its
residential mortgage loans. A late charge is generally assessed if payment is
not received within a specified number of days after it is due. The grace period
depends on the individual loan documents.
The Bank presently maintains two automated teller machines ("ATMs").
One is located at its main office in Spencer, Indiana. A second ATM is located
at the Bank's branch office in Cloverdale, Indiana. The Bank's ATMs operate in
the MAC(R) regional network and the CIRRUS(R) nationwide network. The Company
does not derive significant income from the ATM cards.
Mortgage-Backed Securities. At June 30, 2000, the Bank had $7.6 million
of mortgage-backed securities outstanding, all of which were classified as
available for sale and had a market value of $7.2 million. These fixed-rate
mortgage-backed securities may be used as collateral for borrowings and, through
repayments, as a source of liquidity. Mortgage-backed securities generally offer
yields above those available for investments of comparable credit quality and
duration.
<PAGE>
The following table sets forth the amortized cost and fair value of the
Bank's mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------ --------- ----- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Total mortgage-backed
securities............ $7,573 $7,247 $7,771 $7,570 $537 $543
</TABLE>
The following table sets forth the amount of mortgage-backed securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at June 30, 2000.
<TABLE>
<CAPTION>
Amount at June 30, 2000, which matures in
-------------------------------------------------------------------------
Less than 1 year Two through five years Over five years
-------------------- ----------------------- ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Value Yield
--------- -------- --------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
available for sale.... --- --- --- --- $7,573 6.9%
</TABLE>
The following table sets forth the changes in the Bank's mortgage-backed
securities portfolio for the years ended June 30, 2000, 1999 and 1998.
For the Year Ended June 30,
-----------------------------------------
2000 1999 1998
------ ------ ------
(In thousands)
Beginning balance................. $7,570 $ 543 $ 793
Purchases......................... 825 8,600 ---
Sales ........................... --- --- ---
Monthly repayments................ (1,011) (1,320) (249)
Premium and discount
amortization, net.............. (12) (46) (1)
Unrealized loss on securities
available for sale............. (125) (207) ---
------ ------ ------
Ending balance.................... $7,247 $7,570 $ 543
====== ====== ======
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Bank on a regular basis and are
placed on a non-accrual status when the loans become contractually past due 90
days or more. It is the policy of the Bank that all earned but uncollected
interest on all loans be reviewed monthly to determine if any portion thereof
should be classified as uncollectible for any loan past due less than 90 days.
Delinquency notices are sent three times per month with respect to all mortgage
loans for which payments have not been received. Contact by phone or in person
is made, if feasible, with respect to all such loans. When loans are 40 days in
default, an additional delinquency notice is sent and personal contact is made
with the borrower to establish an acceptable repayment schedule. When loans are
60 days in default, contact is again made with the borrower to establish an
acceptable repayment schedule. The Bank also provides free in-house credit
counseling to all borrowers. Management is authorized to commence foreclosure
proceedings for any loan upon making a determination that it is prudent to do
so. All loans for which foreclosure proceedings have been commenced are placed
on non-accrual status.
Non-performing assets. At June 30, 2000, $395,000, or 0.66% of the
Company's total assets, were non-performing loans (loans delinquent more than 90
days and non-accruing loans) compared to $79,000, or 0.15%, of total assets at
June 30, 1999. At June 30, 2000, residential loans and consumer loans accounted
for 98.2% and 1.8%, respectively, of non-performing loans. There were no
non-accruing investments at June 30, 2000. As of June 30, 2000, the Bank held
$35,000 of Real Estate Owned ("REO") properties and no other repossessed
properties.
<PAGE>
The table below sets forth the amounts and categories of the Bank's
non-performing assets.
At June 30,
------------------------------
2000 1999 1998
----- ------ -------
(In thousands)
Non-accruing loans (1)................ $395 $79 $279
Total non-performing assets........... 430 85 499
Non-performing loans to total loans... 0.86% 0.20% 0.81%
Non-performing assets to total assets. 0.72% 0.16% 1.17%
---------------
(1) The Bank generally places loans on a non-accruing status when the loans
become contractually past due 90 days or more. At June 30, 2000, $388,000
of non-accruing loans were residential loans and $7,000 were consumer
loans. Additional interest income that would have been recorded had income
on non-accruing loans been considered collectible and accounted for in
accordance with their original terms was $21,000 for the year ended June
30, 2000.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- -----------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent
for (1):
30-89 days.......... 24 $ 598 1.31% 25 $630 1.61% 12 $293 0.86%
90 days and over.... 13 395 0.86 10 79 0.20 11 279 0.81
-- ------ -- ---- -- ---- ---- -- ---- ----
Total delinquent
loans.......... 37 $ 993 (2) 2.17% 35 $709 1.81% 23 $572 1.67%
== ====== == ==== == ==== ==== == ==== ====
</TABLE>
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
(2) Of such amount, $899,000 consisted of residential real estate loans and
$94,000 consisted of nonresidential real estate and consumer loans.
Classified assets. The Bank's Asset Classification Policy provides for
the classification of loans and other assets such as debt and equity securities
considered to be of lesser quality as "substandard," "doubtful" or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but do possess
weaknesses are required to be designated "special mention" by management.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risks associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
assets so classified or to charge off such amounts.
<PAGE>
At June 30, 2000, the aggregate amount of the Bank's classified assets
and of the Bank's general and specific loss allowances were as follows:
At June 30, 2000
----------------
(In thousands)
Substandard loans................................ $240
Doubtful loans................................... 89
Loss loans....................................... ---
Special mention loans............................ 555
----
Total classified loans........................ $884
====
General loss allowances.......................... $372
Specific loss allowances......................... ---
----
Total allowances.............................. $372
====
The Bank regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Not all
of the Bank's classified assets constitute non-performing assets.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
loan losses, which is charged to earnings. The provision for loan losses is
determined in conjunction with management's review and evaluation of current
economic conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, the Bank's allowance for loan losses is adequate to absorb anticipated
future losses from loans at June 30, 2000. However, there can be no assurance
that regulators, when reviewing the Bank's loan portfolio in the future, will
not require increases in its allowances for loan losses or that changes in
economic conditions will not adversely affect the Bank's loan portfolio.
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five (5) one-year periods ended
June 30, 2000.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ----- ---- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at beginning
of period................................ $336 $320 $231 $150 $ 57
---- ---- ---- ---- ----
Less charge offs:
Mortgage loans.............................. --- (26) (6) --- ---
Consumer loans.............................. (18) (2) (7) (4) (1)
Add recoveries:
Consumer loans.............................. --- --- --- --- ---
---- ---- ---- ---- ----
Net (charge-offs) recoveries................ (18) (28) (13) (4) (1)
Provisions for losses on loans.............. 54 44 102 85 94
---- ---- ---- ---- ----
Balance of allowance at end of period....... $372 $336 $320 $231 $150
==== ==== ==== ==== ====
Net charge-offs to total average
loans receivable for period.............. 0.04% 0.08% 0.04% 0.01% --- %
Allowance at end of period to
net loans receivable at end
of period (1)............................ 0.81 0.88 0.94 0.67 0.55
Allowance to total non-performing
loans at end of period................... 94.18 425.32 114.70 41.10 41.78
</TABLE>
------------
(1) Total loans less net loans in process and deferred loan costs.
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of the Bank's allowance for loan losses at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
of total of total of total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of period
applicable to:
<S> <C> <C> <C> <C> <C> <C>
Residential......................... $113 50.76% $ 45 53.46% $ 35 56.76%
Combo............................... 13 14.23 30 13.60 33 13.52
Nonresidential...................... 105 25.76 45 23.79 32 22.07
Multi-family........................ 2 2.20 20 2.80 12 2.62
Mobile home loans................... 11 2.86 45 2.43 35 2.43
Commercial and industrial
loans............................ 2 0.57 15 1.37 6 0.70
Consumer loans...................... 30 3.62 25 2.55 19 1.90
Unallocated......................... 96 --- 111 --- 148 ---
---- ------ ---- ------ ---- ------
Total.......................... $372 100.00% $336 100.00% $320 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investments and FHLB Stock
The Company's investment portfolio (excluding mortgage-backed
securities) consists of U.S. government agency securities, equity securities and
Federal Home Loan Bank ("FHLB") stock. At June 30, 2000, approximately $1.6
million, or 2.6% of the Company's total assets, consisted of such investments.
All of the Company's securities, except for FHLB stock, were classified as
available for sale at June 30, 2000.
The following table sets forth the amortized cost and fair value of the
Company's investments at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ----- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale (1):
Federal agencies......................... $ --- $ --- $100 $101 $100 $103
Marketable equity securities............. 719 465 813 617 1,320 1,272
------ ------ ------ ------ ------ ------
Total securities
available for sale................... 719 465 913 718 1,420 1,375
------ ------ ------ ------ ------ ------
FHLB stock (2).............................. 835 835 660 660 500 500
------ ------ ------ ------ ------ ------
Total investments...................... $1,554 $1,300 $1,573 $1,378 $1,920 $1,875
====== ====== ====== ====== ====== ======
</TABLE>
(1) In accordance with SFAS No. 115, securities available for sale are recorded
at fair value in the financial statements.
(2) Fair value approximates carrying value.
<PAGE>
Sources of Funds
Deposits have traditionally been the Bank's primary source of funds for
use in lending and investment activities. In addition to deposits, the Bank
derives funds from scheduled loan payments, loan prepayments, retained earnings
and income on earning assets. While scheduled loan payments and income on
earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition. Borrowings from the FHLB of Indianapolis
are also an important source of funding for the Bank.
Deposits. Deposits are attracted, principally from within Owen and
Putnam Counties, through the offering of a broad selection of deposit
instruments including fixed-rate certificates of deposit, NOW and other
transaction accounts, and savings accounts. Substantially all of the Bank's
depositors are residents of Owen County and the five surrounding counties of
Putnam, Clay, Greene, Monroe and Morgan. Deposit account terms vary, with the
principal differences being the minimum balance required, the amount of time the
funds remain on deposit and the interest rate. The Bank rarely pays a fee for
any deposits it receives.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and applicable regulations. The Bank
relies, in part, on customer service and long-standing relationships with
customers to attract and retain its deposits, but also closely prices its
deposits in relation to rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its passbook, NOW and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificates of deposit, and the
rates paid on these deposits, have been and will continue to be significantly
affected by market conditions.
<PAGE>
An analysis of the Bank deposit accounts by type, maturity, and rate at
June 30, 2000, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 2000 Deposits Rate
--------------- -------- ---------- -------- --------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Savings accounts.................................. $ 10 $3,523 9.14% 2.52%
Money market accounts............................. 5,000 287 0.74 4.25%
NOW and other transaction accounts................ 50 3,645 9.46 1.64%
------ -----
Total withdrawable.............................. $7,455 19.34% 2.17%
------ -----
Certificates (original terms):
91 days........................................... 1,000 1,316 3.41 4.57%
6 months.......................................... 1,000 4,014 10.41 6.86%
12 months......................................... 1,000 12,681 32.90 6.00%
18 months......................................... 500 712 1.85 6.95%
24 months......................................... 1,000 6,507 16.88 5.81%
30 months......................................... 1,000 1,118 2.90 5.28%
36 months......................................... 1,000 214 0.56 5.31%
48 months......................................... 1,000 545 1.41 5.60%
60 months......................................... 1,000 3,649 9.47 5.81%
IRAs (original terms):
12 months......................................... 1,000 99 0.26 5.79%
36 months......................................... 1,000 174 0.45 6.20%
60 months......................................... 1,000 58 0.16 5.18%
------- ------
Total certificates and IRAs..................... 31,087 80.66 5.97%
------- ------
Total deposits.................................. $38,542 100.00% 5.23%
======= ====== ====
</TABLE>
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank's at the dates indicated:
Year Ended June 30,
---------------------------------------------
2000 1999 1998
---------- ---------- ---------
(In thousands)
4.00% and under.......... $ --- $ --- $ 65
4.01 - 6.00 %............ 17,312 19,682 14,971
6.01 - 8.00%............. 13,775 4,185 4,020
------- ------- -------
Total .................. $31,087 $23,867 $19,056
======= ======= =======
The following table represents, by various interest rate categories,
the amounts of time deposits maturing during each of the three years following
June 30, 2000, and the total amount maturing thereafter. Matured certificates
which have not been renewed as of June 30, 2000, have been allocated based upon
certain rollover assumptions:
Amounts At
June 30, 2000, Maturing in
-----------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
4.00% and under.......... $ --- $ --- $ --- $ ---
4.01 - 6.00 %............ 10,133 4,224 922 2,032
6.01-8.00%............... 10,563 2,569 366 278
------- ------ ------ ------
Total .................. $20,696 $6,793 $1,288 $2,310
======= ====== ====== ======
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
2000.
Maturity (In thousands)
---------------------- --------------
Three months or less.................. $1,951
Greater than three months
through six months............... 2,392
Greater than six months
through twelve months............ 3,128
Over twelve months.................... 2,145
------
Total............................ $9,616
======
The following table sets forth the dollar amount of savings deposits in
the various types of deposits programs offered by the Bank at the dates
indicated, and the amount of increase or decrease in such deposits as compared
to the previous period.
<TABLE>
<CAPTION>
Deposit Activity
------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from Balance at
June 30, % of June 30, June 30, % of June 30, June 30, % of
2000 Deposits 1999 1999 Deposits 1998 1998 Deposits
---------------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts..................... $3,523 9.14% $ (259)$ 3,782 11.58% $511 $3,271 12.28%
Money market accounts................ 287 0.74 (1,428) 1,715 5.25 203 1,512 5.67
NOW accounts and
other transaction accounts......... 3,645 9.46 352 3,293 10.08 483 2,810 10.54
------- ------ ------ ------- ------ ------ ------- ------
Total withdrawable................. 7,455 19.34 (1,335) 8,790 26.91 1,197 7,593 28.49
Certificates (original terms):
91 days.............................. 1,316 3.41 1,123 193 0.59 61 132 0.50
6 months............................. 4,014 10.41 3,096 918 2.81 209 709 2.66
12 months............................ 12,681 32.90 865 11,816 36.18 4,625 7,191 26.98
18 months............................ 712 1.85 712 --- --- --- --- ---
24 months............................ 6,507 16.88 3,596 2,911 8.91 547 2,364 8.87
30 months............................ 1,118 2.90 (1,454) 2,572 7.88 (251) 2,823 10.59
36 months............................ 214 0.56 (202) 416 1.27 11 405 1.52
48 months............................ 545 1.41 (126) 671 2.06 (50) 721 2.71
60 months............................ 3,649 9.47 (368) 4,017 12.30 (609) 4,626 17.36
IRAs (original terms):
12 months............................ 99 0.26 (166) 265 0.81 193 72 0.27
36 months............................ 174 0.45 166 8 0.02 1 7 0.03
60 months............................ 58 0.16 (22) 80 0.25 74 6 0.02
------- ------ ------ ------- ------ ------ ------- ------
Total certificates and IRAs........ 31,087 80.66 7,220 23,867 73.08 4,811 19,056 71.51
------- ------ ------ ------- ------ ------ ------- ------
Total deposits................... $38,542 100.00% $5,885 $32,657 100.00% $6,008 $26,649 100.00%
======= ====== ====== ======= ====== ====== ======= ======
</TABLE>
Borrowings. The Bank focuses on generating loans by utilizing the best
source of funding from deposits, investments or borrowings. At June 30, 2000,
the Bank had $13.2 million in borrowings from the FHLB of Indianapolis, which
mature on various dates primarily during the years 2000 through 2005 and have
interest rates ranging from 5.17% to 6.90%. The Bank does not anticipate any
difficulty in obtaining advances appropriate to meet its requirements in the
future. The Bank had $34.9 million in eligible assets available as collateral
for advances from the FHLB of Indianapolis as of June 30, 2000. Based on the
Bank's blanket collateral agreements, advances from the FHLB of Indianapolis
must be collateralized by 160% of eligible assets. Therefore, the Bank's
eligible collateral would have supported approximately $21.8 million in advances
from the FHLB of Indianapolis as of June 30, 2000. However, the Bank's Board of
Directors has by resolution limited the amount of authorized borrowings to $19.0
million at June 30, 2000.
<PAGE>
The following table presents certain information relating to the Bank's
FHLB borrowings for the years ended June 30, 2000, 1999 and 1998.
At or for the Year
Ended June 30,
------------------------------------
2000 1999 1998
------- --------- -------
(Dollars in thousands)
FHLB Advances:
Average balance outstanding............ $14,325 $10,242 $ 8,592
Maximum amount outstanding at any
month-end during the period.......... 16,700 13,200 10,000
Weighted average interest rate
during the period.................... 5.85% 5.83% 6.16%
Weighted average interest rate
at end of period..................... 5.91% 5.61% 6.01%
Service Corporation Subsidiary
BSF, Inc., the Bank's service corporation subsidiary ("BSF"), was
organized in 1989 and has historically engaged in the purchasing and developing
of large tracts of real estate. After land was acquired, BSF subdivided the real
estate into lots, made improvements such as streets and sold individual lots,
usually on contract. Each subdivision has separate restrictive covenants, but
most permit mobile or modular homes. As of June 30, 2000, outstanding contracts
on BSF subdivision lots were:
Name of Subdivision Number of Contracts Contract Balance
------------------- ------------------- ----------------
Hancock Corner 1 $ 20,237
10 O'Clock Line 3 37,658
Greene Woods 1 6,705
Autumn Hills 9 101,583
Coon Path 2 17,977
Purchased contracts 1 2,948
-- --------
Total outstanding contracts 17 $187,108
== ========
Additionally, at June 30, 2000, BSF had three unsold lots in Coon Path,
with a sale price of $32,400 and cost of $15,663.
BSF has been developing Hancock Corner as a subdivision to accommodate
modular homes. As of June 30, 2000, BSF had sold two lots with a sale price of
$45,000 and a cost of $26,000. Additionally, BSF had 28 tracts of ground in
inventory with a price of $730,000 and a cost of $353,000.
BSF held title to three commercial lots in Cloverdale with a cost of
$135,000 and a listed price of $200,000. While awaiting sale of this real
estate, it is rented for commercial use.
BSF, from time to time, keeps a number of its tracts of land for mobile
home repossession. BSF purchases repossessed mobile homes from the Bank at book
value, which would approximate market value. The mobile homes are then placed on
the vacant tracts of land and sold by BSF, thereby protecting the Bank from
related losses. Currently, the Bank has no mobile homes on lots waiting for
sale.
BSF pays the Bank rent of $500 per month for the use of its facilities
and management and staff support. The operations of BSF are managed by the
Bank's and the Holding Company's Chairman, Frank R. Stewart. All of the Bank's
directors serve as directors of BSF, and BSF's executive officers are as
follows:
Frank R. Stewart President
Robert W. Raper Vice President
Charles W. Chambers Secretary and Treasurer
<PAGE>
At June 30, 2000, the Bank's aggregate investment in BSF was $315,000.
The consolidated statements of income of the Bank and its subsidiary included
elsewhere herein include the operations of BSF. All significant intercompany
balances and transactions have been eliminated in the consolidation.
The following are a condensed balance sheet for BSF at June 30, 2000,
1999 and 1998, and a condensed income statement for BSF for the years ended June
30, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
Condensed Balance Sheet
June 30,
---------------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Assets:
<S> <C> <C> <C>
Cash................................. $ 4 $ 72 $ 14
Investment securities................ --- --- 85
Loans, net........................... 187 223 329
Land acquired for development........ 440 20 21
---- ---- ----
Total assets..................... $631 $315 $449
==== ==== ====
Liabilities:
Borrowings........................... $300 $ --- $ ---
Other liabilities.................... 16 10 10
---- ---- ----
Total liabilities................ 316 10 10
Equity Capital.......................... 315 305 439
---- ---- ----
Total liabilities and
equity capital................. $631 $315 $449
==== ==== ====
Condensed Income Statement
June 30,
---------------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Interest income......................... $ 25 $35 $ 39
Interest expense........................ 20 --- ---
---- ---- ----
Net interest income.................. 5 35 39
---- ---- ----
Income from sale of real estate......... 25 6 7
---- ---- ----
Non-interest expense:
Salaries and employee benefits....... 5 5 4
Printing and office supplies......... 1 1 ---
Other expenses....................... 8 8 7
---- ---- ----
Total non-interest expense....... 14 14 11
---- ---- ----
Income before income tax................ 16 27 35
Income tax expense................... 6 11 14
---- ---- ----
Net income....................... $ 10 $ 16 $ 21
==== ==== =====
</TABLE>
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 $696,000.
Funds were dispersed by installments during project construction, which was
completed during July 1999. The Bank's investment in the project is eligible for
income tax credits over the fifteen-year life of the Agreement.
As of June 30, 2000, the total capitalized building, land and
organizational costs for the project were $1,452,018. The Bank's share of net
operating losses from the project during the year was $34,000, reducing its net
investment to $662,000 at June 30, 2000. Income tax credits related to this
investment reduced the Company's federal income tax expense by $108,000 in
fiscal year 2000.
<PAGE>
On April 25, 2000, the Cunot Apartments sustained severe fire damage to
one of three buildings in the 24-unit complex. The project's general partner has
taken steps necessary to begin reconstructing the eight-unit building with
insurance proceeds. Management has been advised that future tax credits,
estimated at approximately $108,000 annually, will not be adversely affected by
the fire damaged property, provided the structure is rebuilt and achieves
acceptable occupancy prior to June 30, 2001.
Employees
As of June 30, 2000, the Company employed 23 persons on a full-time
basis and five persons on a part-time basis. None of the Company's employees is
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
The Company's employee benefits for full-time employees include, among
other things, a Pentegra (formerly known as Financial Institutions Retirement
Fund) defined benefit pension plan ("Pension Plan"), a Pentegra thrift plan, and
major medical, dental, and short-term and long-term disability insurance. As
part of the conversion to stock form, the Company established the Employee Stock
Ownership Plan and Trust ("ESOP") and the Management Recognition and Retention
Plan and Trust ("RRP"). In October, 1997, the shareholders approved the Stock
Option Plan. The ESOP, RRP and the Stock Option Plan are employee benefit plans
designed to provide directors and employees of the Bank and the Holding Company
with ownership interest in the Company.
Employee benefits are considered by management to be competitive with
those offered by other financial institutions and major employers in the Bank's
area.
COMPETITION
The Bank originates most of its loans to and accepts most of its
deposits from residents of Owen County and Putnam County, Indiana. The Bank is
the oldest continuously operating financial institution headquartered in Owen
County, Indiana.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings institutions,
credit unions, and certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers that provide similar
services in Owen County. The Bank also competes with money market funds with
respect to deposit accounts and with insurance companies with respect to
individual retirement accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of savings associations in
Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by the
Company.
Because of recent changes in federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings associations
have certain powers to acquire savings associations based in other states, and
Indiana law expressly permits reciprocal acquisition of Indiana savings
associations. In addition, Federal savings associations are permitted to branch
on an interstate basis. See "Regulation--Acquisitions or Dispositions and
Branching."
The primary factors in competing for deposits are interest rates and
convenience of office locations. The Bank competes for loan originations
primarily through the efficiency and quality of services it provides borrowers
and through interest rates and loan fees it charges. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors which
are not readily predictable.
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REGULATION
General
The Bank, as a federally chartered savings bank, is a member of the
Federal Home Loan Bank System ("FHLB System"), its deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") and it is a member of the Savings
Association Insurance Fund (the "SAIF"), which is administered by the FDIC. The
Bank is subject to extensive regulation by the OTS and the FDIC. For example,
the Bank must obtain OTS approval before it engages in certain activities and
must file reports with the OTS regarding its activities and financial condition.
The OTS periodically examines the Bank's books and records and, in conjunction
with the FDIC in certain situations, has examination and enforcement powers.
This supervision and regulation are intended primarily for the protection of
depositors and federal deposit insurance funds. The Bank is also subject to
certain reserve requirements under regulations of the Board of Governors of the
Federal Reserve System ("FRB").
A savings association must pay a semi-annual assessment to the OTS
based upon a marginal assessment rate that decreases as the asset size of the
savings association increases, and which includes a fixed-cost component that is
assessed on all savings associations. The assessment rate that applies to a
savings association depends upon the institution's size and condition and the
complexity of its operations. The Bank's semiannual assessment under this
assessment scheme, based upon its total assets at March 31, 2000, was $10,331.
The Bank is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
their own securities, and limitations upon other aspects of banking operations.
In addition, the activities and operations of the Bank are subject to a number
of additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
Holding Company Regulation
The Holding Company is regulated as a "non-diversified unitary savings
and loan holding company" within the meaning of the Home Owners' Loan Act, as
amended ("HOLA"), and subject to regulatory oversight of the Director of the
OTS. As such, the Holding Company is registered with the OTS and thereby subject
to OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Holding Company and with other companies
affiliated with the Holding Company.
The HOLA generally prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from (i) acquiring control of
any other savings association or savings and loan holding company or controlling
the assets thereof or (ii) acquiring or retaining more than 5 percent of the
voting shares of a savings association or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock may also
acquire control of any savings institution, other than a subsidiary institution,
or any other savings and loan holding company.
The Holding Company currently operates as a unitary savings and loan
holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB
Act") on November 12, 1999, there were no restrictions on the permissible
business activities of a unitary savings and loan holding company. The GLB Act
included a provision that prohibits any new unitary savings and loan holding
company, defined as a company that acquires a thrift after May 4, 1999, from
engaging in commercial activities. This provision also includes a grandfather
clause, however, that permits a company that was a savings and loan holding
company as of May 4, 1999, or had an application to become a savings and loan
holding company to file with the OTS as of that date, to acquire and continue to
control a thrift and to continue to engage in commercial activities. Because the
Holding Company qualifies under this grandfather provision, the GLB Act did not
affect the Holding Company's authority to engage in diversified business
activities.
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Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would be deemed to be a bank
holding company subject to all of the provisions of the Bank Holding Company Act
of 1956 and other statutes applicable to bank holding companies, to the same
extent as if the Holding Company were a bank holding company and the Bank were a
bank. See "--Qualified Thrift Lender." At June 30, 2000, the Bank's asset
composition exceeded that required to qualify the Bank as a Qualified Thrift
Lender.
If the Holding Company were to acquire control of another savings
institution other than through a merger or other business combination with the
Bank, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than the Bank or other subsidiary savings associations)
would thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings association shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution,
(iv) holding or managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies or (vii) those activities
authorized by the FRB as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of the OTS prior to being engaged in by a
multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5,1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings associations holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS thirty days advance notice of such
declaration and payment. Any dividend declared during such period or without the
giving of such notice shall be invalid.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
member savings associations and other financial institutions within its assigned
region. It is funded primarily from funds deposited by banks and savings
associations and proceeds derived from the sale of consolidated obligations of
<PAGE>
the FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB. All
FHLB advances must be fully secured by sufficient collateral as determined by
the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System, including the FHLB of Indianapolis.
Prior to the enactment of the GLB Act, a federal savings association
was required to become a member of the FHLB for the district in which the thrift
is located. The GLB Act abolished this requirement, effective six months
following the enactment of the statute. At that time, membership with the FHLB
became voluntary. Any savings association that chooses to become (or remain) a
member of the FHLB following the expiration of this six-month period must
qualify for membership under the criteria that existed prior to the enactment of
the GLB Act. The Bank currently intends to remain a member of the FHLB of
Indianapolis. See "Forward Looking Statements."
As a member of the FHLB, the Bank is required to purchase and maintain
stock in the FHLB of Indianapolis in an amount equal to at least 1% of its
aggregate unpaid residential mortgage loans, home purchase contracts, or similar
obligations at the beginning of each year. The Bank is currently in compliance
with this requirement. At June 30, 2000, the Bank's investment in stock of the
FHLB of Indianapolis was $835,000. The FHLB imposes various limitations on
advances such as limiting the amount of certain types of real estate-related
collateral to 30% of a member's capital and limiting total advances to a member.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the FHLB of Indianapolis and the purpose of the borrowing.
All twelve FHLBs are required by law to provide funds for the
resolution of troubled savings associations and to establish affordable housing
programs through direct loans or interest subsidies on advances to members to be
used for lending at subsidized interest rates for low- and moderate-income,
owner-occupied housing projects, affordable rental housing, and certain other
community projects. These contributions and obligations have adversely affected
the level of FHLB dividends paid and could continue to do so in the future. For
the fiscal year ended June 30, 2000, dividends paid by FHLB to the Bank totaled
$63,000, for an annual rate of 8.01%.
Insurance of Deposits
The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of banks and thrifts and safeguards the safety
and soundness of the banking and thrift industries. The FDIC administers two
separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial
banks and state savings banks and the SAIF for savings associations such as the
Bank and banks that have acquired deposits from savings associations. The FDIC
is required to maintain designated levels of reserves in each fund. As of
September 30, 1996, the reserves of the SAIF were below the level required by
law, primarily because a significant portion of the assessments paid into the
SAIF have been used to pay the cost of prior thrift failures, while the reserves
of the BIF met the level required by law in May, 1995. However, on September 30,
1996, provisions designed to recapitalize the SAIF and eliminate the premium
disparity between the BIF and SAIF were signed into law, as further described
below.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the BIF and members of the SAIF. The FDIC
may increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to the target level within a reasonable
time and may decrease these rates if the target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
this system, assessments vary depending on the risk the institution poses to its
deposit insurance fund. An institution's risk level is determined based on its
capital level and the FDIC's level of supervisory concern about the institution.
In 1996, legislation was enacted which included provisions designed to
recapitalize the SAIF and eliminate the significant premium disparity between
the BIF and the SAIF. Under the new law, the Bank was charged a one-time special
assessment equal to $.657 per $100 in assessable deposits at March 31, 1995. The
Bank recognized this one-time assessment as a non-recurring operating expense of
$142,000 ($86,000 after tax) during the three-month period ended September 30,
1996. The assessment was fully deductible for both federal and state income tax
purposes. Beginning January 1, 1997, the Bank's annual deposit insurance premium
was reduced from .23% to .06% of total assessable deposits. BIF institutions pay
lower assessments than comparable SAIF institutions because BIF institutions pay
only 20% of the rate being paid by SAIF institutions on their deposits with
respect to obligations issued by the federally-chartered corporation which
<PAGE>
provided some of the financing to resolve the thrift crisis in the 1980's
("FICO"). Although Congress has considered merging the SAIF and the BIF, until
such a merger occurs, savings associations with SAIF deposits may not transfer
deposits into the BIF system without paying various exit and entrance fees, and
SAIF institutions will continue to pay higher FICO assessments. Such exit and
entrance fees need not be paid if a SAIF institution converts to a bank charter
or merges with a bank, as long as the resulting bank continues to pay applicable
insurance assessments to the SAIF, and as long as certain other conditions are
met.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
The OTC recently amended this requirement to require a core capital level of 3%
of total adjusted assets for savings associations that receive the highest
rating for safety and soundness, and 4% to 5% for other savings associations.
This amendment became effective April 1, 1999. Under the tangible capital
requirement, a savings association must maintain tangible capital (core capital
less all intangible assets except purchased mortgage servicing rights which may
be included after making the above-noted adjustment in an amount up to 100% of
tangible capital) of at least 1.5% of total assets. Under the risk-based capital
requirements, a minimum amount of capital must be maintained by a savings
association to account for the relative risks inherent in the type and amount of
assets held by the savings association. The risk-based capital requirement
requires a savings association to maintain capital (defined generally for these
purposes as core capital plus general valuation allowances and permanent or
maturing capital instruments such as preferred stock and subordinated debt, less
assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets
are ranked as to risk in one of four categories (0-100%). A credit risk-free
asset, such as cash, requires no risk-based capital, while an asset with a
significant credit risk, such as a non-accrual loan, requires a risk factor of
100%. Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusive agency activities for its
customers or mortgage banking subsidiaries). At June 30, 2000, the Bank was in
compliance with all capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. Even though the OTS has delayed implementing this
rule, the Bank nevertheless measures its interest rate risk in conformity with
the OTS regulation. As of June 30, 2000, the Bank's interest rate risk was
considered "moderate" within the parameters set forth in the regulation.
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operating activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991, as
amended ("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
<PAGE>
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
2000, the Bank was categorized as "well capitalized," meaning that its total
risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Capital Distributions Regulation
The OTS adopted a regulation, which became effective on April 1, 1999,
that revised the restrictions that apply to "capital distributions" by savings
associations. The amended regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
The amended regulation exempts certain savings associations from the
requirement under the previous regulation that all savings associations file
either a notice or an application with the OTS before making any capital
distribution. As revised, the regulation requires a savings association to file
an application for approval of a proposed capital distribution with the OTS if
the association is not eligible for expedited treatment under OTS's application
processing rules, or the total amount of all capital distributions, including
the proposed capital distribution, for the applicable calendar year would exceed
an amount equal to the savings association's net income for that year to date
plus the savings association's retained net income for the preceding two years
(the "retained net income standard"). At June 30, 2000, the Bank's retained net
income standard was $524,000. A savings association must also file an
application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because the
Bank is a subsidiary of a savings and loan holding company, this latter
provision requires that, at a minimum, the Bank must file a notice with the OTS
thirty days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, the Bank's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires the Bank to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders and prohibits the Bank from
making capital distributions to the Holding Company if its net worth would be
reduced below the amount required for the liquidation account.
<PAGE>
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of FedICIA. The Bank does not believe that these regulations
will have a materially adverse effect on its current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's board
of directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to
a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily marketable collateral, including certain debt and equity
securities but not including real estate. In some cases, a savings association
may lend up to 30 percent of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At June 30, 2000, the Bank
did not have any loans or extensions of credit to a single or related group of
borrowers in excess of its lending limits. The Bank does not believe that the
loans-to-one-borrower limits will have a significant impact on its business
operations or earnings.
Transactions with Affiliates
The Bank and Holding Company are subject to Sections 22(h), 23A and 23B
of the Federal Reserve Act, which restrict financial transactions between banks
and their directors, executive officers and affiliated companies. The statute
limits credit transactions between a bank and its executive officers and its
affiliates, prescribes terms and conditions for bank affiliate transactions
deemed to be consistent with safe and sound banking practices, and restricts the
types of collateral security permitted in connection with a bank's extension of
credit to an affiliate.
<PAGE>
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with
the SEC under the Securities and Exchange Act of 1934, as amended (the "1934
Act"). As a result, the Holding Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the 1934
Act and the rules of the SEC thereunder. If the Holding Company has fewer than
300 shareholders, it may deregister the shares under the 1934 Act and cease to
be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the
Holding Company may not be resold without registration or unless sold in
accordance with the resale restrictions of Rule 144 under the Securities and
Exchange Act of 1933 (the "1933 Act"). If the Holding Company meets the current
public information requirements under Rule 144, each affiliate of the Holding
Company who complies with the other conditions of Rule 144 (including conditions
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Holding Company or (ii) the average weekly
volume of trading in such shares during the preceding four calendar weeks.
Qualified Thrift Lender
Savings associations must meet a QTL test. If the Bank maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, the Bank will
continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the association in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC
as QTIs. Compliance with the QTL test is determined on a monthly basis in nine
out of every twelve months.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to SAIF) or be subject to the following penalties: (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification it
shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At June 30, 2000, 91.6% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future. The Bank expects
to continue to qualify as a QTL, although there can be no such assurance.
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
<PAGE>
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss. 7701(a)(19) of the Code or the asset
composition test of ss. 7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state- chartered
associations or their holding companies in the state where the acquiring
association or holding company is located. Moreover, Indiana banks and savings
associations are permitted to acquire other Indiana banks and savings
associations and to establish branches throughout Indiana.
Finally, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana enacted legislation establishing
interstate branching provisions for Indiana state-chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion, provided that such transactions are not permitted to
out-of-state banks unless the laws of their home states permit Indiana banks to
merge or establish de novo banks on a reciprocal basis. The Indiana Branching
Law became effective March 15, 1996.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, unsatisfactory
and needs improvement -- and a written evaluation of each institution's
performance. Each FHLB is required to establish standards of community
investment or service that its members must maintain for continued access to
long-term advances from the FHLBs. The standards take into account a member's
performance under the CRA and its record of lending to first-time home buyers.
The OTS examiners have determined that the Bank has a satisfactory record of
meeting community credit needs.
TAXATION
Federal Taxation
Historically, savings banks have been permitted to compute bad debt
deductions using either the bank experience method or the percentage of taxable
income method. However, for years beginning after December 31, 1995, the Bank is
not able to use the percentage of taxable income method of computing its
allocable tax bad debt deduction. The Bank will be required to compute its
allocable deduction using the experience method. As a result of the repeal of
the percentage of taxable income method, reserves taken after 1987 using the
percentage of taxable income method generally must be included in future taxable
income over a six-year period, although a two-year delay may be permitted for
institutions meeting a residential mortgage loan origination test. In addition,
the pre-1988 reserve, in which no deferred taxes have been recorded, will not
have to be recaptured into income unless (i) the Bank no longer qualifies as a
bank under the Internal Revenue Code of 1986, as amended (the "Code"); or (ii)
the Bank pays out excess dividends or distributions.
Depending on the composition of its items of income and expense, the
Company may be subject to the alternative minimum tax. The Company must pay an
alternative minimum tax equal to the amount (if any) by which 20% of alternative
<PAGE>
minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI,
exceeds the regular tax due. AMTI equals regular taxable income increased or
decreased by certain tax preferences and adjustments, including depreciation
deductions in excess of that allowable for alternative minimum tax purposes,
tax-exempt interest on most private activity bonds issued after August 7, 1986
(reduced by any related interest expense disallowed for regular tax purposes),
the amount of the bad debt reserve deduction claimed in excess of the deduction
based on the experience method and 75% of the excess of adjusted current
earnings over AMTI (before this adjustment and before any alternative tax net
operating loss). AMTI may be reduced only up to 90% by net operating loss
carryovers, but alternative minimum tax paid can be credited against regular tax
due in later years. In addition, there is a small business exception which
currently, and in the immediate future, applies to the Company. Due to this
exception, the Company is not subject to the alternative minimum tax.
For federal income tax purposes, the Company has been reporting its
income and expenses on the accrual method of accounting. The Company's federal
income tax returns have not been audited in recent years. State Taxation
The Company is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications, the most notable of which is the
required addback of interest that is tax-free for federal income tax purposes.
Other applicable state taxes include generally applicable sales and use taxes
plus real and personal property taxes.
The Company's state income tax returns have not been audited in recent
years.
Item 2. Properties.
The Company conducts business from its main office at 279 East Morgan
Street, Spencer, Indiana 47460, and its branch office at 102 South Main Street,
Cloverdale, Indiana 46120. The Company owns both of its offices.
The following table provides certain information with respect to the
Company's offices as of June 30, 2000:
Net Book Value
of Property, Approximate
Owned or Year Total Furniture & Square
Description and Address Leased Opened Deposits Fixtures Footage
----------------------- ------ ------ -------- -------- ------------
(Dollars in thousands)
279 East Morgan Street Owned 1987 $32,516 $1,043 11,300
Spencer, IN 47460
(including annex)
102 South Main Street Owned 1998 $6,026 $878 6,000
Cloverdale, IN 46120
The Cloverdale, Indiana branch office opened for business on October 1,
1998.
As of June 30, 2000, the Bank also owned a parcel of real estate
located across the street from its Spencer office that is used for employee
parking.
The Company owns computer and data processing equipment that is used
for transaction processing, loan origination, and accounting.
The Bank has also contracted for the data processing and reporting
services of On-Line Financial Services, Inc. in Oak Brook, Illinois, which was
acquired in April 1999 by GFS Holdings Co. The cost of these data processing
services was approximately $9,000 per month for the twelve months ended June 30,
2000.
Item 3. Legal Proceedings.
Neither the Holding Company nor the Bank is a party to any pending
legal proceedings, other than routine litigation incidental to the Bank's
business. Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended June 30, 2000.
Item 4.5. Executive Officers of the Registrant.
Presented below is certain information regarding the executive officers
of the Holding Company:
Name Position
------------------- --------------
Kurt J. Meier President, Chief Executive Officer and Treasurer
Kurt D. Rosenberger Vice President and Chief Financial Officer
Charles W. Chambers Secretary
Kurt J. Meier (age 50) is President, Chief Executive Officer and
Treasurer of the Holding Company. Mr. Meier has also served as President of the
Bank since 1994. Theretofore, he served as Managing Officer of the Bank from
1990 to 1994.
Kurt D. Rosenberger (age 41) is Vice President and Chief Financial
Officer of the Holding Company. Mr. Rosenberger has also served as Vice
President of the Bank since 1994. Theretofore, he served as Senior Financial
Analyst for the Office of Thrift Supervision in Indianapolis, Indiana, from 1990
to 1994.
Charles W. Chambers (age 85) is Secretary of the Holding Company. Mr.
Chambers has also served as a Staff Appraiser of the Bank from 1991 to 1996 and
as Secretary of the Bank since 1990.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Holding Company's common stock, without par value ("Common Stock"),
is quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), SmallCap Market, under the symbol "HWEN." As of August 21,
2000, there were 262 registered holders of the Holding Company's Common Stock.
Management estimates at least 200 additional stockholders held shares in broker
accounts on August 21, 2000.
The following table sets forth the high and low bid prices and
dividends paid per share of Common Stock for the quarters indicated. Such
over-the-counter quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
Quarter Ended High Bid Low Bid Dividends Declared
--------------------------------------------------------------------
September 30, 1998 $ 9 $ 7 5/8 $ 0.025
December 31, 1998 7 7/8 6 1/2 0.030
March 31, 1999 8 7 0.030
June 30, 1999 7 7/8 7 0.030
September 30, 1999 8 6 7/8 0.030
December 31, 1999 7 1/8 6 1/8 0.030
March 31, 2000 6 3/4 5 1/16 0.030
June 30, 2000 6 1/4 5 3/16 0.030
Stockholder Matters
The book value of HFB Common Stock was $8.38 at June 30, 2000. On this
same date, the price of HFB Common Stock was $5.69 per share, representing a
67.9% price-to-book value ratio. For the year ended June 30, 2000, quarterly
dividends totaling $.12 per share were paid to shareholders.
The Company repurchased and retired 28,800 shares of its Common Stock
at an average cost of $6.35 per share during fiscal year 2000. As of June 30,
2000, the Company had purchased a total of 154,452, or 15.3% of the total number
of Common Stock shares originally offered to the public. Further, on May 25,
2000, the Company announced its third consecutive repurchase initiative. The
Company plans additional purchases, from time to time, on the open market up to
43,000, or approximately 5% of the Corporation's outstanding shares on the date
of the announcement. At June 30, 2000, there were 857,400 shares of Common Stock
outstanding.
Since the Holding Company has no independent operations or other
subsidiaries to generate income, its ability to accumulate earnings for the
payment of cash dividends to its shareholders is directly dependent upon the
earnings on its investment securities and the ability of the Bank to pay
dividends to the Holding Company. The Bank's ability to pay dividends is subject
to certain regulatory restrictions. See "Regulations -- Capital Distributions
Regulation."
Under current federal income tax law, dividend distributions with
respect to the Common Stock, to the extent that such dividends paid are from the
current or accumulated earnings and profits of the Bank (as calculated for
federal income tax purposes), will be taxable as ordinary income to the
recipient and will not be deductible by the Bank. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from the Bank's accumulated bad
debt reserves, which could result in increased federal income tax liability for
the Company. Moreover, the Bank may not pay dividends to the Holding Company if
such dividends would result in the impairment of the liquidation account
established in connection with the Conversion.
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by the Holding Company. Indiana law, however, would
prohibit the Holding Company from paying a dividend, if after giving effect to
the payment of that dividend, the Holding Company would not be able to pay its
debts as they become due in the ordinary course of business or if the Holding
Company's total assets would be less than the sum of its total liabilities plus
preferential rights of holders of preferred stock, if any.
Item 6. Selected Financial Data.
The 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.
<TABLE>
<CAPTION>
At June 30 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets....................................... $59,451 $53,136 $42,560 $42,508 $39,426
Loans receivable, net.............................. 45,341 38,238 33,959 34,117 27,125
Cash and cash equivalents.......................... 1,716 2,475 3,802 4,184 5,721
Securities available for sale...................... 7,712 8,288 1,918 2,102 4,901
Securities held to maturity........................ --- --- --- --- ---
Deposits........................................... 38,542 32,657 26,649 26,157 28,726
Federal Home Loan Bank advances
and other borrowings............................ 13,500 13,200 8,200 9,000 7,200
Stockholders' equity............................... 7,182 7,123 7,506 7,197 3,410
Year Ended June 30 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Summary of Operating Results:
Interest and dividend income..................... $4,773 $3,883 $3,690 $3,397 $2,955
Interest expense................................. 2,577 2,032 1,812 1,703 1,593
------ ------ ------ ------ ------
Net interest income........................... 2,196 1,851 1,878 1,694 1,362
Provision for loan losses........................ 54 44 102 85 94
------ ------ ------ ------ ------
Net interest income after provision for
loan losses.............................. 2,142 1,807 1,776 1,609 1,268
------ ------ ------ ------ ------
Other income:
Service charges on deposit accounts........... 151 84 55 43 37
Gain on sale of real estate acquired
for development.......................... 25 6 7 31 57
Net realized gain on sales of available
for sale securities ...................... (18) 3 141 37 ---
Loss on low-income housing investment......... (34) --- --- --- ---
Other......................................... 30 32 64 53 47
------ ------ ------ ------ ------
Total other income......................... 154 125 267 164 141
------ ------ ------ ------ ------
Other expenses:
Salaries and employee benefits................ 924 819 723 521 374
Net occupancy expense......................... 145 110 85 71 67
Equipment expense............................. 139 115 58 61 55
Deposit insurance expense..................... 13 17 16 165 54
Computer processing expense................... 185 152 120 95 75
Printing and office supplies.................. 43 65 41 38 33
Advertising................................... 46 60 47 34 24
Legal and professional fees................... 137 105 123 172 47
Directors and committee fees.................. 57 56 43 42 41
Other......................................... 204 190 188 169 155
------ ------ ------ ------ ------
Total other expenses..................... 1,893 1,689 1,444 1,368 925
------ ------ ------ ------ ------
Income before income tax......................... 403 243 599 405 484
Income tax expense............................... 54 99 206 153 196
------ ------ ------ ------ ------
Net income.................................... $349 $144 $ 393 $ 252 $ 288
====== ====== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Supplemental Data (1):
<S> <C> <C> <C> <C>
Basic earnings per share......................... $ .44 $.18 $ .47 $ .27 ---
Diluted earnings per share....................... .44 .18 .47 .27 ---
Book value per common share at end of year....... 8.38 8.04 8.08 7.66 ---
Dividends per share.............................. .12 .12 .10 .08 ---
Dividend payout ratio............................ 27.27% 66.67% 21.28% 29.63% ---
Return on assets (2) ............................ 0.61 0.30 .93 .63 .84%
Return on equity (3)............................. 4.92 1.99 5.34 3.31 8.71
Interest rate spread (4) ........................ 3.62 3.61 3.87 3.56 3.78
Net yield on interest-earning assets (5)......... 4.06 4.17 4.65 4.41 4.13
Other expenses to average assets ................ 3.30 3.52 3.42 3.40 2.70
Net interest income to other expenses............ 1.16x 1.10x 1.30x 1.24x 1.47x
Equity-to-assets (6)............................. 12.08% 13.41% 17.66% 16.93% 8.65%
Average equity to average total assets........... 12.37 15.08 17.42 18.90 9.64
Average interest-earning assets to average
interest-bearing liabilities.................. 1.09x 1.13x 1.17x 1.19x 1.07x
Non-performing assets to total assets............ .72% .16% 1.17% 1.76% 1.03%
Non-performing loans to total loans.............. .86 .20 .81 1.65 1.32
Loan loss allowance to total loans, net.......... .81 .88 .94 .68 .55
Loan loss allowance to non-performing loans...... 94.18 425.32 114.70 41.10 41.78
Net charge-offs to average loans ................ .04 .08 .04 .01 *
</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%
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
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.
Average Balance Sheet/Yield Analysis
<TABLE>
<CAPTION>
Year Ended June 30, 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits....... $2,580 $ 157 6.09%$ 3,242 $ 157 4.84% $ 3,214 $ 177 5.51%
Investment securities (1)....... 8,435 530 6.28% 6,022 335 5.55% 2,318 167 7.20%
Loans receivable (2)............ 42,243 4,023 9.52% 34,547 3,346 9.69% 34,366 3,306 9.62%
Stock in FHLB of Indianapolis... 787 63 8.01% 562 45 8.01% 500 40 8.00%
------ ----- ------ ----- ------ -----
Total interest-earning assets. 54,045 4,773 8.83% 44,373 3,883 8.75% 40,398 3,690 9.13%
----- ----- -----
Non-interest earning assets, net of
allowance for loan
losses and including
unrealized gain (loss)
on securities
available for sale.............. 3,289 3,676 1,860
------- ------- -------
Total assets..................$57,334 $48,049 $42,258
======= ======= =======
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings accounts................$ 3,837 101 2.63% $ 3,559 97 2.73% $3,399 103 3.03%
NOW accounts.................... 3,596 85 2.36% 4,402 123 2.79% 3,998 124 3.10%
Certificates of deposit......... 27,502 1,533 5.57% 21,364 1,215 5.69% 18,482 1,056 5.71%
FHLB advances................... 14,325 838 5.85% 10,242 597 5.83% 8,592 529 6.16%
Other borrowings................ 240 20 8.33% --- --- --- --- --- ---
------ ----- ------ ----- ------ -----
Total interest-bearing
liabilities............... 49,500 2,577 5.21% 39,567 2,032 5.14% 34,471 1,812 5.26%
----- ----- -----
Other liabilities.................. 743 1,237 426
------- ------- -------
Total liabilities............. 50,243 40,804 34,897
------- ------- -------
Stockholders' equity............... 7,423 7,376 7,316
Net unrealized gain/(loss)
on securities
available for sale.............. (332) (131) 45
------- ------- -------
Total stockholders' equity.... 7,091 7,245 7,361
------- ------- -------
Total liabilities and
stockholders' equity......$57,334 $48,049 $42,258
======= ======= =======
Net interest-earning assets........$ 4,545 $ 4,806 $ 5,927
======= ========= ========
Net interest income................ $ 2,196 $1, 851 $ 1,878
======== === === =======
Interest rate spread............... 3.62% 3.61% 3.87%
Net yield on weighted average
interest-earning assets......... 4.06% 4.17% 4.65%
Average interest-earning assets to
average interest-bearing
liabilities..................... 109.18% 112.97% 117.19%
</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.
INTEREST RATE SPREAD ANALYSIS
<TABLE>
<CAPTION>
Year Ended June 30,
At June 30, -------------------------------------
2000 2000 1999 1998
------------------------------------------------------------------------------------------------
Weighted average interest rate earned on:
<S> <C> <C> <C> <C>
Interest-earning deposits................. 6.07% 6.09% 4.84% 5.51%
Investment securities..................... 6.43 6.28 5.55 7.20
Loans receivable.......................... 9.76 9.52 9.69 9.62
Stock in FHLB of Indianapolis............. 8.00 8.01 8.01 8.00
Total interest-earning assets........... 9.19 8.83 8.75 9.13
Weighted average interest rate cost of:
Savings accounts.......................... 2.52 2.63 2.73 3.03
NOW and money market accounts............. 2.20 2.36 2.79 3.10
Certificates of deposit................... 5.97 5.57 5.69 5.71
FHLB advances and other borrowings........ 5.97 5.92 5.83 6.16
Total interest-bearing liabilities...... 5.50 5.21 5.14 5.26
Interest rate spread (1)..................... 3.69 3.62 3.61 3.87
Net yield on weighted average
interest-earning assets (2)............... 4.06 4.17 4.65
</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,
2000, 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.
Rate/Volume Analysis
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
-------------------------------------------------
Due to Due to Total Net
Volume Rate Change
-----------------------------------------------------------------------------------------------------------------
Year ended June 30, 2000
compared to Year ended June 30, 1999
(In thousands)
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits.............................. $ (36) $ 36 $ 0
Investment securities.................................. 147 48 195
Loans receivable....................................... 734 (57) 677
Stock in FHLB of Indianapolis.......................... 18 0 18
----- ----- --------
Total................................................ 887 3 890
----- ----- --------
Interest-bearing liabilities:
Savings accounts....................................... 7 (3) 4
NOW and money market accounts.......................... (21) (17) (38)
Certificates of deposit................................ 343 (25) 318
FHLB advances and other borrowings..................... 255 6 261
----- ----- --------
Total................................................ 584 (39) 545
----- ----- --------
Change in net interest income............................. $303 $ 42 $ 345
===== ===== ========
Year ended June 30, 1999
compared to Year ended June 30, 1998
(In thousands)
Interest-earning assets:
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
===== ===== ========
</TABLE>
<PAGE>
Changes in Financial Position and Results of Operations - Year Ended June 30,
2000, Compared to Year Ended June 30, 1999:
General. HFB earned net income totaling $349,000 for the year ended
June 30, 2000, compared to $144,000 for the year ended June 30, 1999. In
addition to increasing net income by 142.4%, the Company achieved an 18.6%
increase in loans outstanding and an 18.0% increase in deposits for the twelve
months ended June 30, 2000. Management attributes these and other positive
results for fiscal year 2000 to strategic investments initiated in prior
periods.
Federal income taxes for the year were significantly reduced as the
result of tax credits earned on an investment the Bank initiated in March 1997.
The Bank's sole branch office, which opened in October 1998, made substantial
contributions to the Bank's overall loan and deposit growth during the year. Lot
sales from the Bank's real estate development subsidiary, which was reactivated
with the conversion of the Company and the Bank to federally chartered entities
in May 1999, helped boost income in fourth quarter 2000 and should contribute to
profits throughout fiscal year 2001. See "See Forward Looking Statements."
The return on average assets for the year ended June 30, 2000 was .61%,
compared to .30% the prior year. The return on average equity was 4.92% for the
year ended June 30, 2000, compared to 1.99% for the year ended June 30, 1999.
Earnings per share were $.44 for the year ended June 30, 2000 and $.18 for the
year ended June 30, 1999.
Assets. Total assets increased $6,315,000, or 11.9%, to $59,451,000 at
June 30, 2000, compared to $53,136,000 at June 30, 1999. Cash and cash
equivalents decreased $759,000, or 30.7%, to $1,716,000 at June 30, 2000,
compared to $2,475,000 a year earlier. The decrease in cash and cash equivalents
combined with cash inflows from deposits, loan payments, proceeds from
investments, and new borrowings were used to fund loan growth, purchase
mortgage-backed securities, and acquire land for real estate development
activities. Investment securities decreased $576,000, or 6.9%, to $7,712,000 at
June 30, 2000, compared to $8,288,000 at June 30, 1999. Total loans increased
$7,138,000, or 18.5%, during fiscal 2000. At June 30, 2000 total loans were
$45,712,000, compared to $38,574,000 at June 30, 1999.
The year-end levels of stock in the FHLB of Indianapolis were $835,000
and $660,000 for fiscal years 2000 and 1999, respectively. Net premises and
equipment decreased $65,000, or 3.4%, to $1,920,000 at June 30, 2000, compared
to $1,985,000 at June 30, 1999. Foreclosed real estate and repossessed assets
increased $29,000 to $35,000, compared to $6,000 at June 30, 1999. The total at
June 30, 2000 consists of one lot and one mobile home.
Average assets increased $9,285,000, or 19.3%, to $57,334,000 for the
year ended June 30, 2000, compared to $48,049,000 for the prior year-ended June
30, 1999. Average interest-earning assets increased $9,672,000, or 21.8%, to
$54,045,000 for the year ended June 30, 2000, and represented 94.3% of average
assets. The bulk of this increase was due to average loans, which increased
$7,696,000, or 22.3%, to $42,243,000 for the year ended June 30, 2000, compared
to $34,547,000 for the year ended June 30, 1999. Average mortgage-backed
securities increased $2,669,000, or 53.6%, to $7,651,000 for the year ended June
30, 2000. Also, average Federal Home Loan Bank stock increased by $225,000, or
40.0%, to $787,000 for the year ended June 30, 2000. The overall increase in
average interest-earning assets was partially offset by a decrease in the
average balance of interest-earning deposits of $662,000, or 20.4%, to
$2,580,000.
Liabilities and Stockholders' Equity. Deposits from the Cloverdale bank
branch nearly doubled during the year and totaled $6,026,000 at June 30, 2000.
For the entire Bank, deposits increased $5,885,000, or 18.0%. Total deposits
were $38,542,000 at June 30, 2000, and $32,657,000 at June 30, 1999. The change
is in part a result of a $7,220,000, or 30.3%, increase in certificates of
deposit to $31,087,000 at June 30, 2000, compared to $23,867,000 at June 30,
1999. Transaction accounts increased $352,000, or 10.7%, to $3,645,000 at June
30, 2000, compared to $3,293,000 at June 30, 1999. Partially offsetting the
overall increase in deposits, passbook and statement savings deposits decreased
by $259,000, or 6.9%, and amounted to $3,523,000 at June 30, 2000. Money market
deposits also decreased by $1,428,000, or 83.3%, to $287,000 at June 30, 2000,
compared to $1,715,000 at June 30, 1999. Much of this decrease in money market
deposits reflects a shift of funds to higher earning short-term certificates of
deposit and the impact of local rate competition.
In addition to deposits, FHLB advances are an important source of both
short-term and long-term funding for the Bank. While the level of FHLB advances
at June 30, 2000 was unchanged from a year earlier at $13,200,000, borrowings of
$300,000 by the Bank's subsidiary increased total borrowings to $13,500,000 at
June 30, 2000.
Average liabilities increased $9,439,000, or 23.1%, to $50,243,000 for
the year ended June 30, 2000, compared to $40,804,000 for the prior year-ended
June 30, 1999. Average interest-bearing liabilities increased $9,933,000, or
25.1%, to $49,500,000 for the year ended June 30, 2000. The increase was
primarily due to increases in average certificates of deposit and FHLB advances.
Average certificates of deposit increased by $6,138,000, or 28.7%, to
$27,502,000 for the year ended June 30, 2000, compared to $21,364,000 for the
year ended June 30, 1999. Average FHLB advances increased by $4,083,000, or
39.9%, to $14,325,000 for the year ended June 30, 2000, compared to $10,242,000
for the prior year ended June 30, 1999.
HFB's stockholders' equity increased $59,000, or 0.8%, to $7,182,000 at
June 30, 2000, compared to $7,123,000 at June 30, 1999. Several factors combined
to produce the net increase in stockholders' equity. Significant decreases in
stockholders' equity during the twelve months ended June 30, 2000 included
common stock repurchases totaling $183,000, an increase of $111,000 in net
unrealized losses on securities available for sale, and cash dividends of
$95,000. However, net income of $349,000 and the amortization of employee stock
ownership plans offset these decreases. Due primarily to the large relative
increase in assets, the ratio of stockholders' equity to total assets decreased
to 12.1% at June 30, 2000, compared to 13.4% at June 30, 1999.
Net Interest Income. Net interest income increased by $345,000 or
18.6%, to $2,196,000 for the year ended June 30, 2000, compared to $1,851,000
for the year ended June 30, 1999. 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 $890,000, or 22.9%, while total interest expense increased
by $545,000, or 26.8%, compared to the same period a year earlier.
Interest income on loans totaled $4,024,000 for the year ended June 30,
2000, compared to $3,346,000 for the year ended June 30, 1999; an increase of
$678,000, or 20.3%. The increase can be attributed to a larger average balance
of loans receivable outstanding for the current year, which was partially offset
by a decline in the average yield earned, compared to the same period one year
ago.
Interest and dividend income from total investments increased $195,000,
or 58.2%, to $530,000 for the year ended June 30, 2000, compared to $335,000 for
the year ended June 30, 1999. The increase can be traced to a larger average
balance of investment securities held during fiscal 2000 and an increase in the
average yield earned, compared to fiscal 1999. At June 30, 2000, investment
securities included a balance of $719,000 in equity securities, some of which
earn dividends. Equity securities totaled $813,000 at June 30, 1999. Dividend
income on FHLB stock totaled $63,000 for the year ended June 30, 2000, compared
to $45,000 for the year ended June 30, 1999; an increase of $18,000, or 40.0%.
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, 2000,
increased to 8.83%, compared to 8.75% for the prior year ended June 30, 1999.
Interest expense on deposits increased $285,000, or 19.9%, to
$1,720,000 for the year ended June 30, 2000, compared to $1,435,000 for the year
ended June 30, 1999. 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 increased to 4.92% for the year ended
June 30, 2000, compared to 4.89% for the year ended 1999. Interest expense on
borrowings increased by $261,000, or 43.7%, to $858,000 for the year ended June
30, 2000, compared to $597,000 for the year ended June 30, 1999. The increase
was the result of a larger average balance outstanding for the current year and
an increase in the average cost of borrowings. The combined weighted average
rate paid on deposits and borrowings was 5.21% for the year ended June 30, 2000,
compared to 5.14% for the prior year.
The Company's interest rate spread increased 1 basis point to 3.62% for
the year ended June 30, 2000, compared to 3.61% for the year ended June 30,
1999. The net interest margin decreased to 4.06% for the year ended June 30,
2000, compared to 4.17% for the year ended June 30, 1999. The increase in
interest rate spread was the result of an increase in the average balance of
loans receivable for the current year compared to the same period in 1999, and
an increase in the yield earned on earning assets other than loans. The decrease
in interest rate margin was the result of larger average balances in higher
costing liabilities, such as certificates of deposit and borrowings.
Provisions for Loan Losses. For the year ended June 30, 2000, the Bank
provided $54,000 for future loan losses. During the prior year, provisions of
$44,000 were made. The allowance for loan losses totaled $372,000, or .81%, of
net loans at June 30, 2000, compared to $336,000, or .88%, of net loans at June
30, 1999; an increase of $36,000, or 10.7%. 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.
Noninterest Income. Noninterest income increased by $29,000, or 23.2%,
to $154,000 for the year ended June 30, 2000, compared to $125,000 for the prior
year ended June 30, 1999. The largest portion of this increase was due to a
$67,000, or 79.8%, increase in income from service charges on deposit accounts
to $151,000 for the year ended June 30, 2000, compared to $84,000 for the prior
year ended June 30, 1999. This increase can be attributed to an increase in the
number of service fee producing deposit accounts, particularly checking
accounts. Gains on the sale of real estate acquired for development for the year
ended June 30, 2000, increased $19,000 to $25,000, compared to $6,000 for the
prior year ended June 30, 1999. The overall increase in noninterest income for
the year ended June 30, 2000, was partially offset by net operating losses of
$34,000 recognized on the Bank's investment in Cunot Apartments, L.P. and an
$18,000 loss on the sale of investment securities. During fiscal year 1999, the
Cunot Apartments were not yet operating and securities sold resulted in a $3,000
gain.
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 home financing opportunities for the Bank and an
additional source of income for the Company as a whole. 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. During fiscal year 2000, BSF purchased, developed
and began selling lots in a 27-lot subdivision. This renewed BSF development
activity directly led to an increase in gains on the sale of real estate for
development for the year ended June 30, 2000, compared to recent prior years.
Gains on the sale of real estate for development totaled $25,000 for the year
ended June 30, 2000, compared to $6,000 and $7,000 for the years ended June 30,
1999 and 1998, respectively. Management is optimistic that the Company will
continue to benefit from the resumption of BSF activity. See "Forward Looking
Statements."
Noninterest Expense. Noninterest expense increased by $204,000, or
12.1%, to $1,893,000 for the year ended June 30, 2000, compared to $1,689,000
for the year ended June 30, 1999. The increase is due to expense increases for
staff, equipment and general overhead to support the Company's growth during the
fiscal year ended June 30, 2000. Salaries and employee benefits increased
$105,000, or 12.8%, to $924,000 for the year ended June 30, 2000, compared to
$819,000 for the prior year ended June 30, 1999. This increase was the result of
normal salary increases and new staff members hired during the year. Computer
processing fees increased $33,000, or 21.7%, to $185,000, compared to $152,000
for the prior year. Equipment expenses increased $24,000, or 20.9%, to $139,000
for the year ended June 30, 2000, compared to $115,000 for the year ended June
30, 1999. Further, legal and professional fees increased to $137,000 for the
year ended June 30, 2000, compared to $105,000 for the prior year ended June 30,
1999. Other increases related to net occupancy and director fees. These
increases were partially offset by a decline in printing and supplies expenses
of $22,000, or 33.8%, and a decline of $14,000, or 23.3%, in advertising
expenses for the year ended June 30, 2000 compared to the prior year.
Income Tax Expense. Income tax expense decreased $45,000, or 45.5%, to
$54,000 for the year ended June 30, 2000, compared to $99,000 for the prior year
ended June 30, 1999. The decrease was due to tax credits that offset income tax
related to an increase in income before taxes of $160,000, or 65.8%, to $403,000
for the year ended June 30, 2000, compared to $99,000 for the prior year ended
June 30, 1999. Income tax credits of $108,000 decreased the effective combined
federal and state income tax rate to 13.4% for the year ended June 30, 2000,
compared to 40.9% for the same period a year ago.
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 ended June 30, 1999. 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 levels of stock in the FHLB of Indianapolis were $660,000
and $500,000 for fiscal years 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 ended June 30, 1998. 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 in part the result of 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.
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 ended June 30, 1998.
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 fiscal year 1999, 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 fiscal year 1999 compared to fiscal year 1998.
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 fiscal 1999, 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 Company'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 considered 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 was also given to the volume and composition of loan
portfolio growth as well as the level of allowances maintained by peers.
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 prior year ended June 30, 1998.
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.
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 is due 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%. The effective combined federal and state income tax
rate increased to 40.9% for the year ended June 30, 1999, compared to 34.4% for
the year ended June 30, 1998.
Impact of Inflation
The consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
The primary assets and liabilities of financial institutions such as
the Bank are monetary in nature. As a result, interest rates have a more
significant impact on the Bank's performance than the effects of general levels
of inflation. Interest rates, however, do not necessarily move in the same
direction or with the same magnitude as the price of goods and services, since
such prices are affected by inflation. In a period of rapidly rising interest
rates, the liquidity and maturity structure of the Bank's assets and liabilities
are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans made by the Bank. The Bank is unable to determine the extent, if
any, to which properties securing the Bank's loans have appreciated in dollar
value due to inflation.
Current Accounting Issues
Accounting for 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Asset/Liability Management
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and securities, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. The Bank, like
other financial institutions, is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its interest-bearing
liabilities. The Bank manages its mix of assets and liabilities with the goals
of limiting its exposure to interest rate risk, ensuring adequate liquidity, and
coordinating its sources and uses of funds.
The Bank seeks to control its interest rate risk exposure in a manner that
will allow for adequate levels of earnings and capital over a range of possible
interest rate environments. The Bank has adopted formal policies and practices
to monitor and manage interest rate risk exposure. As part of this effort, the
Bank uses the market value ("MV") methodology to gauge interest rate risk
exposure.
Generally, MV is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other assets and outgoing
cash flows on interest-bearing liabilities and other liabilities. The
application of the methodology attempts to quantify interest rate risk as the
change in the MV which would result from a theoretical 200 and 400 basis point
(1 basis point equals .01%) change in market interest rates. Both 200 and 400
basis point increases in market interest rates and 200 and 400 basis point
decreases in market interest rates are considered.
It is estimated that at June 30, 2000, MV would decrease 30.4% and 66.8% in
the event of 200 and 400 basis point increases in market interest rates
respectively, compared to 9.5% and 26.2% for the same increases at June 30,
1999. The Bank's MV at June 30, 2000 would increase 11.1% and 6.3% 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 10.9% and 19.5% 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, 2000 and 1999, 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.
<PAGE>
June 30, 2000
Market Value Summary Performance
MV as % of
Present Value (PV)
Change Market Value of Assets
In Rates $ Amount $ Change % Change MV Ratio Change
--------------------------------------------------------------------------------
(Dollars in thousands)
+ 400 bp* $2,067 $(4,157) (66.78)% 4.01% (670) bp
+ 200 bp 4,333 (1,891) (30.38) 7.88 (283) bp
0 bp 6,224 0 0.00 10.71 ---
- 200 bp 6,916 692 11.12 11.52 81 bp
- 400 bp 6,617 393 6.32 10.86 15 bp
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock MV Ratio: MV as % of PV of Assets...................... 10.71%
Exposure Measure: Post-Shock MV Ratio............................ 7.88%
Sensitivity Measure: Change in MV Ratio.......................... 283 bp
June 30, 1999
Market Value Summary Performance
MV as % of
Present Value (PV)
Change Market Value of Assets
In Rates $ Amount $ Change % Change MV Ratio Change
-------------------------------------------------------------------------------
(Dollars in thousands)
+ 400 bp* $4,956 $(1,762) (26.23)% 10.22% (248) bp
+ 200 bp 6,077 (641) (9.54) 11.94 (76) bp
0 bp 6,718 0 0.00 12.70 ---
- 200 bp 5,987 (731) (10.88) 11.17 (153) bp
- 400 bp 5,406 (1,312) (19.53) 9.93 (277) bp
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
--------
* Basis points.
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and Notes as listed
under Item 14, appear in a separate section of this Annual Report on Form 10-K
beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 through 4 of the Company's Proxy Statement
for its 2000 Shareholder Annual Meeting (the "2000 Proxy Statement").
Information concerning the Holding Company's executive officers is included in
Item 4.5 in Part I of this report. Information concerning compliance with
Section 16(a) of the Exchange Act is incorporated by reference to page 7 of the
2000 Proxy Statement.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 5 through 6 of the 2000 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages 2 through 3 of the 2000 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 6 of the 2000 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements:
The Company's financial statements appear in a separte section of this
Annual Report on Form 10-K beginning on the pages referenced below:
Financial Statements Page No.
Independent Auditor's Report F-2
Consolidated Statement of Financial Condition
at June 30, 2000, and 1999 F-3
Consolidated Statement of Income for the Years Ended
June 30, 2000, 1999, and 1998 F-4
Consolidated Statement of Stockholders' Equity
for the Years Ended June 30, 2000, 1999, and 1998 F-5
Consolidated Statement of Cash Flows for the Years Ended
June 30, 2000, 1999, and 1998 F-6
Notes to Consolidated Financial Statements F-7
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended June 30,
2000.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page E-1.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
HOME FINANCIAL BANCORP
Date: August 23, 2000 By: /s/ Kurt J. Meier
--------------------------------------
Kurt J. Meier, President,
Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 23rd day of August, 2000.
/s/ Kurt J. Meier
------------------------------
Kurt J. Meier
President, Chief Executive Officer,
Treasurer and Director
(Principal Executive Officer)
/s/ Kurt D. Rosenberger
------------------------------
Kurt D. Rosenberger
Vice President, Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
/s/ Charles W. Chambers
------------------------------
Charles W. Chambers, Secretary and Director
/s/ John T. Gillaspy
------------------------------
John T. Gillaspy, Director
/s/ Gary M. Monnett
------------------------------
Gary M. Monnett, Comptroller and Director
/s/ Stephen Parrish
------------------------------
Stephen Parrish, Director
/s/ Robert W. Raper
------------------------------
Robert W. Raper, Vice Chairman
/s/ Frank R. Stewart
------------------------------
Frank R. Stewart, Chairman
/s/ Tad Wilson
------------------------------
Tad Wilson, Director
<PAGE>
EXHIBIT INDEX
Exhibit Index*
3(1) The Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3(1) to the
Registration Statement on Form S-1 (Registration No.
333-1746).
3(2) The Code of By-Laws of the Registrant are
incorporated by reference to Exhibit 3(2) to the
Report on Form 10-Q for the period ended March 31,
1997.
10(1) Exempt Loan and Share Purchase Agreement between ESOP
Trust and Home Financial Bancorp is incorporated by
reference to Exhibit 10(1) to the Report on Form 10-K
for the period ended June 30, 1996.
10(2) Share Pledge Agreement between ESOP Trust and Home
Financial Bancorp is incorporated by reference to
Exhibit 10(2) to the Report on Form 10-K for the
period ended June 30, 1996.
10(3) Employment Agreement between Owen Community Bank,
s.b. and Kurt J. Meier is incorporated by reference
to Exhibit 10(5) to the Registration Statement on
Form S-1 (Registration No. 333-1746).
10(4) Employment Agreement between Owen Community Bank,
s.b. and Kurt D. Rosenberger is incorporated by
reference to Exhibit 10(6) to the Registration
Statement on Form S-1 (Registration No. 333-1746).
10(5) Employment Contract between Owen Community Bank, s.b.
and Frank R. Stewart is incorporated by reference to
Exhibit 10(7) to the Registration Statement on Form
S-1 (Registration No. 333-1746).
10(6) Home Financial Bancorp Stock Option Plan is
incorporated by reference to Exhibit 10(6) to the
Company's Form 10-Q for the Period Ended September
30, 1997.
21 Subsidiaries of the Registrant are incorporated by
reference to Exhibit 21 to the Registration Statement
on Form S-1 (Registration No. 333-1746).
23 Consent of Independent Auditor
27 Financial Data Schedule (filed electronically).
* Management contracts and plans required to be filed as exhibits
are included as Exhibits 10(1) - 10(6).
<PAGE>
Home Financial Bancorp
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Independent Auditor's Report F-2
Consolidated Statement of Financial Condition
at June 30, 2000, and 1999 F-3
Consolidated Statement of Income for the Years Ended
June 30, 2000, 1999, and 1998 F-4
Consolidated Statement of Stockholders' Equity
for the Years Ended June 30, 2000, 1999, and 1998 F-5
Consolidated Statement of Cash Flows for the Years Ended
June 30, 2000, 1999, and 1998 F-6
Notes to Consolidated Financial Statements F-7
<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, 2000 and 1999, and the related
consolidated statements of income, stockholders equity and cash flows for each
of the three years in the period ended June 30, 2000. 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, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2000, in conformity with generally accepted accounting
principles.
/s/ Olive LLP
Indianapolis, Indiana
August 1, 2000
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
June 30 2000 1999
--------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash $ 500,970 $ 296,490
Short-term interest-bearing deposits 1,214,840 2,178,313
---------------------------------
Total cash and cash equivalents 1,715,810 2,474,803
Investment securities--available for sale 7,712,073 8,288,028
Loans, net of allowance for loan losses of $371,793 and $336,235 45,340,588 38,237,683
Real estate acquired for development 440,020 20,434
Premises and equipment 1,920,452 1,984,842
Federal Home Loan Bank of Indianapolis stock 835,000 660,000
Interest receivable 337,267 318,241
Other assets 1,149,487 1,152,419
---------------------------------
Total assets $59,450,697 $53,136,450
=================================
Liabilities
Deposits
Noninterest bearing $ 663,747 $ 578,267
Interest-bearing deposits 37,877,763 32,079,166
---------------------------------
Total deposits 38,541,510 32,657,433
Other borrowings 13,500,000 13,200,000
Other liabilities 226,713 155,794
---------------------------------
Total liabilities 52,268,223 46,013,227
---------------------------------
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--857,400 and 886,200 shares 3,956,034 4,100,034
Additional paid-in capital 99,698 88,667
Retained earnings 3,828,322 3,613,425
Unearned compensation (137,381) (181,456)
Unearned ESOP shares (213,854) (257,908)
Accumulated other comprehensive loss (350,345) (239,539)
---------------------------------
Total stockholders' equity 7,182,474 7,123,223
---------------------------------
Total liabilities and stockholders' equity $59,450,697 $53,136,450
=================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------
Interest Income
<S> <C> <C> <C>
Loans $4,023,634 $3,346,281 $3,305,864
Deposits with financial institutions 157,035 156,845 177,192
Investment securities--taxable 529,895 334,463 166,965
Federal Home Loan Bank stock 62,816 44,994 40,315
-----------------------------------------------------
Total interest and dividend income 4,773,380 3,882,583 3,690,336
-----------------------------------------------------
Interest Expense
Deposits 1,719,769 1,434,612 1,282,778
Federal Home Loan Bank advances 837,573 596,927 529,325
Other interest expense 20,514
-----------------------------------------------------
Total interest expense 2,577,856 2,031,539 1,812,103
-----------------------------------------------------
Net Interest Income 2,195,524 1,851,044 1,878,233
Provision for loan losses 54,000 44,000 102,000
-----------------------------------------------------
Net Interest Income After
Provision for Loan Losses 2,141,524 1,807,044 1,776,233
-----------------------------------------------------
Other Income
Service charges on deposit accounts 150,875 84,148 55,182
Gain on sale of real estate acquired for development 24,908 5,973 7,108
Net realized gain (loss) on sales of available-for-sale securities (17,700) 3,325 140,925
Equity in losses of limited partnerships (33,613)
Other income 30,280 31,963 63,736
-----------------------------------------------------
Total other income 154,750 125,409 266,951
-----------------------------------------------------
Other Expenses
Salaries and employee benefits 923,628 819,296 722,886
Net occupancy expenses 145,003 110,326 84,653
Equipment expenses 139,202 115,268 57,932
Computer processing fees 185,279 151,936 120,133
Printing and office supplies 43,340 64,670 40,839
Legal and professional fees 136,554 104,660 123,218
Director and committee fees 57,000 56,450 43,450
Advertising expense 45,707 60,403 46,931
Other expenses 217,394 206,107 204,098
-----------------------------------------------------
Total other expenses 1,893,107 1,689,116 1,444,140
-----------------------------------------------------
Income Before Income Tax 403,167 243,337 599,044
Income tax expense 54,124 99,603 206,266
-----------------------------------------------------
Net Income $ 349,043 $ 143,734 $ 392,778
=====================================================
Net Income Per Share
Basic $.44 $.18 $.47
Diluted .44 .18 .47
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Unearned Other
Common Stock Paid-in Comprehensive Retained Unearned ESOP Comprehensive
Shares Amount Capital Income Earnings Compensation Shares Income (Loss) Total
------ ------ ------- ------ -------- ------------ ------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1997 939,052 $4,364,294 $25,404 $3,409,288 $(264,781) $(364,264) $ 27,193 $7,197,134
Comprehensive income
Net income $392,778 392,778 392,778
Other comprehensive
income, net of tax
Unrealized loss on
securities, net
of reclassification
adjustment (50,913) (50,913) (50,913)
--------
Comprehensive income $341,865
========
Cash dividends
($.10 per share) (85,082) (85,082)
ESOP shares earned 32,923 59,954 92,877
RRP shares earned 36,612 36,612
Purchase of stock (10,000) (50,000) (27,500) (77,500)
----------------------------- -----------------------------------------------------------
Balances, June 30, 1998 929,052 4,314,294 58,327 3,689,484 (228,169) (304,310) (23,720) 7,505,906
Comprehensive income
Net income $143,734 143,734 143,734
Other comprehensive
loss, net of tax
Unrealized loss on
securities, net of
reclassification
adjustment (215,819) (215,819) (215,819)
---------
Comprehensive loss $ (72,085)
=========
Cash dividends
($.115 per share) (94,386) (94,386)
ESOP shares earned 23,718 46,402 70,120
RRP shares earned 46,713 46,713
Purchase of stock (42,852) (214,260) (125,407) (339,667)
Tax benefit on RRP shares 6,622 6,622
----------------------------- -----------------------------------------------------------
Balances, June 30, 1999 886,200 4,100,034 88,667 3,613,425 (181,456) (257,908) (239,539) 7,123,223
Comprehensive income
Net income $349,043 349,043 349,043
Other comprehensive
income, net of tax
Unrealized loss on
securities, net of
reclassification
adjustment (110,806) (110,806) (110,806)
--------
Comprehensive income $238,237
========
Cash dividends
($.12 per share) (95,170) (95,170)
ESOP shares earned 12,475 44,054 56,529
RRP shares earned 44,075 44,075
Purchase of stock (28,800) (144,000) (38,976) (182,976)
Tax expense on RRP shares (1,444) (1,444)
----------------------------- -----------------------------------------------------------
Balances, June 30, 2000 857,400 $3,956,034 $99,698 $3,828,322 $(137,381) $(213,854) $(350,345) $7,182,474
============================= ===========================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 349,043 $ 143,734 $ 392,778
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 54,000 44,000 102,000
Investment securities amortization, net 11,902 46,163 981
ESOP shares earned 56,529 70,120 92,877
RRP shares earned 44,075 46,713 36,612
Depreciation 196,664 149,874 87,912
Deferred income tax benefit (35,700) (4,336) (50,485)
Gain on sale of real estate acquired for development (24,908) (5,973) (7,108)
Gain on sale of foreclosed assets (5,560) (37,466) (35,016)
Investment securities (gains) losses 17,700 (3,325) (140,925)
Losses from limited partnerships 33,613
Net change in interest receivable (19,026) (54,382) 4,789
Other adjustments 176,481 (197,688) 112,703
--------------------------------------------------
Net cash provided by operating activities 854,813 197,434 597,118
--------------------------------------------------
Investing Activities
Purchases of securities available for sale (824,860) (8,658,915) (1,905,142)
Proceeds from sales of securities available for sale 76,909 568,350 1,895,041
Proceeds from maturities and paydowns of securities
available for sale 1,110,819 1,320,049 250,523
Net changes in loans (7,246,088) (4,090,925) (258,317)
Improvements to foreclosed assets (5,121) (31,552)
Proceeds from sale of foreclosed assets 71,318 13,000 345,119
Purchase of premises and equipment (132,274) (447,361) (811,610)
Purchase of real estate acquired for development (340,000)
Proceeds from sale of real estate acquired for development 57,000 6,298 7,108
Purchase of FHLB of Indianapolis stock (175,000) (160,000)
Land development costs (111,678)
Other investing activities (650,000)
--------------------------------------------------
Net cash used by investing activities (7,518,975) (12,099,504) (508,830)
--------------------------------------------------
Financing Activities
Net change in
NOW and savings deposits (1,335,449) 1,199,675 (467,983)
Certificates of deposit 7,219,526 4,809,148 960,077
Proceeds from other borrowings 15,300,000 7,000,000 5,000,000
Repayment of other borrowings (15,000,000) (2,000,000) (5,800,000)
Purchase of stock (182,976) (339,667) (77,500)
Dividends paid (95,932) (94,386) (85,082)
--------------------------------------------------
Net cash provided (used) by financing activities 5,905,169 10,574,770 (470,488)
--------------------------------------------------
Net Change in Cash and Cash Equivalents (758,993) (1,327,300) (382,200)
Cash and Cash Equivalents, Beginning of Year 2,474,803 3,802,103 4,184,303
--------------------------------------------------
Cash and Cash Equivalents, End of Year $1,715,810 $2,474,803 $3,802,103
--------------------------------------------------
Additional Cash Flows and Supplementary Information
Interest paid $2,570,356 $2,021,539 $1,805,250
Income tax paid 41,916 211,053 174,710
Transfers from loans to foreclosed assets 89,183 231,628 314,438
</TABLE>
See notes to consolidated financial statements.
<PAGE>
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 Bank after elimination of all material intercompany transactions.
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 in accumulated other comprehensive income,
net of tax.
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.
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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, 2000, 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.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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. 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 1999 consolidated financial
statements have been made to conform to the 2000 presentation.
Note 2 -- Investment Securities
<TABLE>
<CAPTION>
2000
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------
Available for sale
<S> <C> <C> <C> <C>
Marketable equity securities $ 719 $4 $(258) $ 465
Mortgage-backed securities 7,573 (326) 7,247
---------------------------------------------------------------------
Total investment securities $8,292 $4 $(584) $7,712
=====================================================================
1999
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------
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
=====================================================================
</TABLE>
Securities with a carrying value of $7,247,000 and $7,600,000 were pledged at
June 30, 2000 and 1999 to secure FHLB advances.
Proceeds from sales of securities available for sale during 2000, 1999 and 1998
were $77,000, $569,000 and $1,895,000. Gross gains of $12,000 and $141,000 in
1999 and 1998 and gross losses of $18,000 and $9,000 in 2000 and 1999 were
realized on the sales. The tax expense (benefit) for net gains (losses) on
security transactions for June 30, 2000, 1999 and 1998 was $(7,000), $1,000 and
$56,000, respectively.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 3 -- Loans and Allowance
June 30 2000 1999
--------------------------------------------------------------------------------
Real estate mortgage loans
Residential $ 23,494 $ 20,952
Mobile home and land 6,584 5,331
Nonresidential 11,926 9,323
Multi-family 1,017 1,096
Mobile home loans 1,322 950
Commercial and industrial 264 538
Consumer loans 1,674 999
--------------------------------
46,281 39,189
--------------------------------
Undisbursed portion of loans (571) (619)
Deferred loan costs 3 4
Allowance for loan losses (372) (336)
--------------------------------
(940) (951)
--------------------------------
Total loans $ 45,341 $ 38,238
================================
Year Ended June 30 2000 1999 1998
--------------------------------------------------------------------------------
Allowance for loan losses
Balances, July 1 $ 336 $ 320 $ 231
Provision for loan losses 54 44 102
Loans charged off (18) (28) (13)
-----------------------------------
Balances, June 30 $ 372 $ 336 $ 320
===================================
Note 4 -- Premises and Equipment
June 30 2000 1999
--------------------------------------------------------------------------------
Land $ 377 $ 302
Buildings 1,881 1,846
Equipment 771 749
------------------------
Total cost 3,029 2,897
Accumulated depreciation (1,109) (912)
------------------------
Net $ 1,920 $ 1,985
========================
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 5 -- Investment In Limited Partnership
The investment in limited partnership of $662,000 and $696,000 at June 30, 2000
and 1999 represents a 99 percent equity in Cunot Apartments (Cunot) a limited
partnership organized to build, own and operate a 24-unit apartment complex for
senior living. In addition to recording its equity in the losses of Cunot, the
Company has recorded the benefit of low income housing tax credits of $108,000
for the year ended June 30, 2000. Condensed financial statements for Cunot are
as follows:
June 30 2000 1999
--------------------------------------------------------------------------------
Condensed statement of financial condition
Assets
Cash $ 30 $ 48
Land and property 1,441 1,336
Other assets 11 14
------------------------
Total assets $1,482 $1,398
========================
Liabilities
Notes payable $ 610 $ 563
Other liabilities 214 156
------------------------
Total liabilities 824 719
Partners' equity 658 679
------------------------
Total liabilities and partners' equity $1,482 $1,398
========================
Year Ended June 30 2000 1999
--------------------------------------------------------------------------------
Condensed statement of operations
Total revenue $ 56 $ 3
Total expenses (77) (23)
------------------------
Net loss $(21) $(20)
========================
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 6 -- Deposits
June 30 2000 1999
--------------------------------------------------------------------------------
Noninterest bearing demand $ 664 $ 578
Interest-bearing demand 2,981 2,715
Money market deposits 287 1,715
Savings 3,523 3,782
Certificates of $100,000 or more 9,616 5,148
Other certificates 21,471 18,719
------------------------
Total deposits $38,542 $32,657
========================
Certificates maturing in years ending June 30:
2001 $20,696
2002 6,793
2003 1,288
2004 1,771
2005 539
-------
$31,087
=======
Note 7 -- Other Borrowings
June 30 2000 1999
--------------------------------------------------------------------------------
Federal Home Loan Bank advances $13,200 $13,200
Line of credit 300
---------------------
Total $13,500 $13,200
=====================
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------
Weighted- Weighted-
Average Average
June 30 Amount Rate Amount Rate
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB advances maturities in years ending
2000 $ 3,000 5.85%
2001 $ 6,000 6.51% 3,000 5.90
2002 5,000 5.17 5,000 5.17
2003 2,000 5.85 2,000 5.85
2006 200 6.86 200 6.86
-------- -------
$13,200 5.91% $13,200 5.61%
======== =======
</TABLE>
The Federal Home Loan Bank advances are secured by first mortgage loans and
investment securities totaling $34,868,000.
On September 1, 1999, BSF obtained a line of credit for $500,000 from another
financial institution. The line of credit matures on August 31, 2000 and carries
an interest rate of .50% above prime. At June 30, 2000, the outstanding balance
was $300,000 and was guaranteed by the Bank.
Note 8 -- Income Tax
Year Ended June 30 2000 1999 1998
--------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $ 47 $ 82 $ 199
State 43 22 57
Deferred
Federal (30) (6) (39)
State (6) 2 (11)
--------------------------------
Total income tax expense $ 54 $ 100 $ 206
================================
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended June 30 2000 1999 1998
--------------------------------------------------------------------------------
Reconciliation of federal
statutory to actual tax expense
Federal statutory income tax at 34% $ 137 $ 83 $ 204
Effect of state income taxes 24 16 31
Business tax credits (107)
Tax-exempt dividends and interest (4) (5) (24)
Other 4 6 (5)
--------------------------------
Actual tax expense $ 54 $ 100 $ 206
================================
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
June 30 2000 1999
--------------------------------------------------------------------------------
Assets
Allowance for loan losses $ 139 $ 117
Deferred compensation 25 23
Securities available for sale 129 157
Other 12 1
------------------------
Total assets 305 298
------------------------
Liabilities
Depreciation (16) (19)
State income tax (12) (10)
Loan fees (2) (2)
------------------------
Total liabilities (30) (31)
------------------------
$275 $267
========================
No valuation allowance was necessary for the years ended June 30, 2000 and 1999.
Retained earnings at June 30, 2000, 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, 2000.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 9 -- Other Comprehensive Income
<TABLE>
<CAPTION>
2000
----------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising during the year $(201) $79 $(122)
Less: reclassification adjustment for
losses realized in net income (18) 7 (11)
----------------------------------------------------------
Other comprehensive loss $(183) $72 $(111)
==========================================================
1999
----------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
----------------------------------------------------------------------------------------------------------------
Unrealized 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 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)
==========================================================
</TABLE>
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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:
2000 1999
--------------------------------------------------------------------------------
Commitments to extend credit $2,729 $1,712
Unused lines of credit 332 717
Standby letters of credit 861
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.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
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 and Bank.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 11 -- 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.
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, 2000, 1999 and 1998, the Company had repurchased 28,800,
42,852 and 10,000 of its outstanding shares.
Note 12 -- 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, 2000, total stockholder's equity of the Bank was $6,498,000, of
which approximately $524,000 was available for the payment of dividends.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 13 -- 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, 2000 and 1999, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since June 30, 2000 that
management believes has changed the Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
2000
---------------------------------------------------------------------------
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) $6,752 18.6% $2,903 8.0% $3,629 10.0%
Tier I capital1
(to risk weighted assets) 6,380 17.6 1,452 4.0 2,177 6.0
Core capital1
(to adjusted total assets) 6,380 10.9 2,343 4.0 2,929 5.0
Core capital1
(to adjusted tangible assets) 6,380 10.9 1,171 2.0 N/A N/A
Tangible capital1
(to adjusted total assets) 6,380 10.9 879 1.5 N/A N/A
1999
---------------------------------------------------------------------------
Required
for Adequate To Be Well
Actual Capital 1 Capitalized 1
---------------------------------------------------------------------------
June 30 Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------
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 1,238 4.0 1,857 6.0
Core capital1
(to adjusted total assets) 6,363 12.1 2,103 4.0 2,629 5.0
Core capital1
(to adjusted tangible assets) 6,363 12.1 1,052 2.0 N/A N/A
Tangible capital1
(to adjusted total assets) 6,363 12.1 789 1.5 N/A N/A
</TABLE>
1 As defined by the regulatory agencies
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 14 -- 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, 2000, the date of the latest actuarial valuation.
The plan required contributions in the amount of $25,200, $11,900 and $2,700 for
the years ended June 30, 2000, 1999 and 1998. 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 $14,700 and $8,900 and $12,000 for the years
ended June 30, 2000, 1999 and 1998.
The Company has 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's common stock at $10 per share with funds
provided by a loan from the Company. Accordingly, the unearned 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 $57,000, $70,000 and $93,000 for the years ended June 30, 2000,
1999 and 1998. At June 30, 2000 and 1999, the ESOP had 33,655 and 24,609
allocated shares, 43,005 and 51,816 suspense shares and 4,288 and 4,523
committed-to-be released shares. The fair value of the unearned ESOP shares at
June 30, 2000 and 1999 was $244,589 and $408,048.
The Company has a 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. As of June 30, 2000, 30,356 shares of common stock have been
awarded to management. Nonvested shares have been recorded as unearned
compensation and shown as a reduction to stockholders' equity. Expense under the
RRP was $44,000, $47,000 and $37,000 for the years ended June 30, 2000, 1999 and
1998.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 15 -- 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, 1999 $ 328
New loans, including renewals 5
Payments, etc. including renewals (14)
Balances, June 30, 2000 $ 319
Deposits from related parties held by the Bank at June 30, 2000 and 1999 totaled
$656,801 and $609,882.
Note 16 -- 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
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.
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 20.50% 16.67%
Weighted-average expected life of the options 6 years 6 years
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 69,300 $8.50 70,000 $8.50
Granted 1,500 8.25 70,400 $8.50
Forfeited (11,400) (2,200) 8.50 (400) 8.50
-------- ------- -------
Outstanding and exercisable,
end of year 57,900 8.49 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, 2000, 56,400 options outstanding have an exercise price of $8.50
and a remaining contractual life of eight years, and 1,500 options outstanding
have an exercise prices of $8.25 and a remaining contractual life of nine years.
There were 43,284 shares available for grant at June 30, 2000.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 17 -- Earnings Per Share
Earnings per share were computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 2000
---------------------------------------------------
Weighted Per-
Net Average Share
Income Shares Amount
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common stockholders $349 800,011 $.44
Effect of Dilutive Securities
Stock options and awards 98
-----------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $349 800,109 $.44
=================================================
Year Ended June 30, 1999
---------------------------------------------------
Weighted Per-
Net Average Share
Income Shares Amount
--------------------------------------------------------------------------------------------------------------
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
==================================================
</TABLE>
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 18 -- 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 is 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.
Other Borrowings--The fair value of other borrowings is estimated using a
discounted cash flow calculation, based on current rates for similar debt. Fair
value approximates carrying value.
Off-Balance Sheet Commitments--Commitments include commitments to originate
mortgage loans, and extend lines of credit and are generally of a short-term
nature. The fair value of such commitments are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
<PAGE>
HOME FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The estimated fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------
Carrying Fair Carrying Fair
June 30 Amount Value Amount Value
----------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $1,716 $1,716 $2,475 $2,475
Securities available for sale 7,712 7,712 8,288 8,288
Loans, net 45,341 45,282 38,238 38,885
Stock in FHLB 835 835 660 660
Interest receivable 337 337 318 318
Liabilities
Deposits 38,542 38,494 32,657 32,937
Other borrowings 13,500 13,331 13,200 13,127
Off-Balance Sheet Assets
Commitments to extend credit
</TABLE>
Note 19 -- 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 2000 1999
--------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 56 $ 109
Securities available for sale 465 617
Premises and equipment 11 14
Investment in subsidiary 6,498 6,242
Other assets 206 143
------------------------
Total assets $7,236 $7,125
========================
Liabilities
Other liabilities $ 54 $ 2
Stockholders' Equity 7,182 7,123
------------------------
Total liabilities and stockholders' equity $7,236 $7,125
========================
<PAGE>
Home Financial Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Interest income $ 42 $ 48 $ 137
Dividends from subsidiary 125 100
Net realized gains (losses) on sales of
available for sale securities (18) 4 141
----------------------------------
Total income 149 152 278
----------------------------------
Expenses
Salaries and employee benefits 26 39 60
Legal and professional fees 66 38 64
Other expenses 36 40 56
----------------------------------
Total expenses 128 117 180
----------------------------------
Income before income tax benefit and equity in
undistributed income of subsidiary 21 35 98
Income tax benefit (expense) (38) (23) 7
----------------------------------
Income before equity in undistributed income of subsidiary 59 58 91
Equity in undistributed income of subsidiary 290 86 302
----------------------------------
Net Income $ 349 $ 144 $ 393
==================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
Year Ended June 30 2000 1999 1998
-----------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 349 $ 144 $ 393
Adjustments to reconcile net income to net cash
provided by operating activities (200) (40) (289)
----------------------------------------------
Net cash provided by operating activities 149 104 104
----------------------------------------------
Investing Activities
Purchases of securities available for sale (58) (1,848)
Proceeds from sales of securities available for sale 77 485 1,895
Purchases of premises and equipment (1)
----------------------------------------------
Net cash provided by investing activities 77 427 46
----------------------------------------------
Financing Activities
Dividends paid (96) (94) (85)
Purchase of stock (183) (340) (78)
----------------------------------------------
Net cash used by financing activities (279) (434) (163)
----------------------------------------------
Net Change in Cash and Cash Equivalents (53) 97 (13)
Cash and Cash Equivalents at Beginning of Year 109 12 25
----------------------------------------------
Cash and Cash Equivalents at End of Year $ 56 $ 109 $ 12
==============================================
</TABLE>
