<PAGE> 1
FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended December 31, 1997
[ ] 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 000-23927
---------
HOME LOAN FINANCIAL CORPORATION
-------------------------------
(Exact name of small business issuer as specified in its charter)
Ohio 31-1578552
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
401 Main Street, Coshocton, Ohio 43812
--------------------------------------
(Address of principal executive offices)
(740) 622-0444
--------------
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 [ ] No [X]*
As of March 26, 1998, the latest practical date, 2,248,250 of the issuer's
common shares, no par value, were issued and outstanding.
* The small business issuer's Registration Statement on Form S-1 was declared
effective on February 11, 1998. The small business issuer has conducted no
business except the offering of its shares and preparation to acquire The
Home Loan Savings Bank. The financial information contained in the Form
10-QSB is provided, therefore, for The Home Loan Savings Bank.
<PAGE> 2
THE HOME LOAN SAVINGS BANK
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I -FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Balance Sheets ......................................................................... 3
Statements of Income ................................................................... 4
Statements of Changes in Members' Equity................................................ 5
Statements of Cash Flows ............................................................... 6
Notes to Financial Statements .......................................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 23
Item 2. Changes in Securities and Use of Proceeds.......................................... 23
Item 3. Defaults Upon Senior Securities.................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................................ 23
Item 5. Other Information.................................................................. 23
Item 6. Exhibits and Reports on Form 8-K................................................... 23
SIGNATURES ........................................................................................... 24
</TABLE>
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2.
<PAGE> 3
THE HOME LOAN SAVINGS BANK
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
December 31, June 30,
1997 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,600,301 $ 1,765,821
Interest-bearing deposits in other banks 845,866 165,228
Overnight deposits -- 1,250,000
Federal funds sold -- 1,500,000
----------- -----------
Total cash and cash equivalents 2,446,167 4,681,049
Interest-bearing time deposits 39,936 38,796
Securities available for sale at fair value 4,520,001 5,004,296
Loans, net of allowance for loan losses 52,919,471 49,300,124
Premises and equipment, net 490,860 524,061
Federal Home Loan Bank stock 379,400 366,000
Accrued interest receivable 283,530 287,014
Other assets 244,406 199,505
----------- -----------
Total assets $61,323,771 $60,400,845
=========== ===========
LIABILITIES
Deposits $48,586,551 $49,235,430
Federal Home Loan Bank advances 1,000,000 --
Accrued interest payable 544,052 460,029
Accrued expenses and other liabilities 391,109 335,122
----------- -----------
Total liabilities 50,521,712 50,030,581
MEMBERS' EQUITY
Retained earnings - substantially restricted 10,788,062 10,366,232
Net unrealized gain on securities available for sale,
net of tax 13,997 4,032
----------- -----------
Total members' equity 10,802,059 10,370,264
----------- -----------
Total liabilities and members' equity $61,323,771 $60,400,845
=========== ===========
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3.
<PAGE> 4
THE HOME LOAN SAVINGS BANK
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees $1,179,244 $1,008,593 $2,316,432 $2,024,541
Securities 68,016 62,683 142,506 133,905
Dividends on Federal Home Loan
Bank stock 6,809 6,113 13,497 12,120
Interest-bearing deposits and federal
funds sold 15,533 41,185 51,117 80,166
---------- ---------- ---------- ----------
Total interest income 1,269,602 1,118,574 2,523,552 2,250,732
INTEREST EXPENSE
Deposits 522,563 495,487 1,039,482 932,263
Federal Home Loan Bank advances 6,581 -- 6,581 --
---------- ---------- ---------- ----------
Total interest expense 529,144 495,487 1,046,063 932,263
---------- ---------- ---------- ----------
NET INTEREST INCOME 740,458 623,087 1,477,489 1,318,469
Provision for loan losses 30,000 1,500 60,000 3,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 710,458 621,587 1,417,489 1,315,469
NONINTEREST INCOME
Service charges and other fees 31,919 38,131 65,829 71,932
Other income 11,548 7,603 20,985 16,319
---------- ---------- ---------- ----------
Total noninterest income 43,467 45,734 86,814 88,251
NONINTEREST EXPENSE
Salaries and employee benefits 240,421 222,971 475,080 433,710
Occupancy and equipment 35,828 36,024 70,280 72,348
State franchise taxes 36,900 35,100 73,800 70,200
Computer processing 24,888 24,028 48,768 44,887
SAIF deposit insurance premiums 7,753 20,080 15,221 306,053
Legal, audit and supervisory exam fees 17,400 16,300 35,476 31,838
Director fees 19,725 21,030 39,000 42,060
Other expense 46,950 42,185 87,348 76,772
---------- ---------- ---------- ----------
Total noninterest expense 429,865 417,718 844,973 1,077,868
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 324,060 249,603 659,330 325,852
Income tax expense 115,400 83,400 237,500 110,800
---------- ---------- ---------- ----------
NET INCOME $ 208,660 $ 166,203 $ 421,830 $ 215,052
========== ========== ========== ==========
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4.
<PAGE> 5
THE HOME LOAN SAVINGS BANK
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Three Months Six Months
Ended December 31, Ended December 31,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $10,592,141 $9,820,716 $10,370,264 $9,768,096
Net income 208,660 166,203 421,830 215,052
Net change in unrealized gain (loss)
on securities available for sale 1,258 3,340 9,965 7,111
----------- ---------- ----------- ----------
BALANCE, END OF PERIOD $10,802,059 $9,990,259 $10,802,059 $9,990,259
=========== ========== =========== ==========
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5.
<PAGE> 6
THE HOME LOAN SAVINGS BANK
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Six Months ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 421,830 $ 215,052
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation 42,300 38,400
Securities amortization and accretion (505) 1,410
Provision for loan losses 60,000 3,000
FHLB stock dividends (13,400) (12,100)
Gain on sale of securities available for sale (121) --
Net change in accrued interest receivable and other assets (47,691) (150,426)
Net change in accrued expenses and other liabilities 140,010 (56,315)
Net change in deferred loan fees 4,389 5,084
----------- -----------
Net cash from operating activities 606,812 44,105
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from maturities 500,020 --
Purchases -- (2,009,180)
Securities held to maturity:
Proceeds from maturities -- 2,000,000
Net change in loans (3,683,736) (3,033,889)
Premises and equipment expenditures (9,099) (19,682)
----------- -----------
Net cash from investing activities (3,192,815) (3,062,751)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (648,879) 1,576,337
Net change in Federal Home Loan Bank advances 1,000,000 --
----------- -----------
Net cash from financing activities 351,121 1,576,337
----------- -----------
Net change in cash and cash equivalents (2,234,882) (1,442,309)
Cash and cash equivalents at beginning of period 4,681,049 5,723,439
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,446,167 $ 4,281,130
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 962,040 $ 1,018,400
Income taxes 387,849 230,000
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</TABLE>
See accompanying notes to financial statements.
6.
<PAGE> 7
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of The Home Loan Savings Bank ("Bank") at December 31,
1997, and its results of operations and cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions for Form 10-QSB and, therefore, do not purport to contain all the
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances, and should be
read in conjunction with the financial statements and notes thereto of the Bank
for the fiscal year ended June 30, 1997. The accounting policies of the Bank
described in the notes to financial statements contained in the Bank's June 30,
1997, financial statements, have been consistently followed these policies in
preparing this Form 10-QSB.
The Bank is engaged in the business of residential mortgage lending and consumer
banking with operations conducted through its main and branch offices located in
Coshocton, Ohio. This community and the contiguous areas are the source of
substantially all the Bank's loan and deposit activities. The majority of the
Bank's income is derived from residential and consumer lending activities and
investments.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and disclosures provided, and future results could differ.
The collectibility of loans, fair values of financial instruments and status of
contingencies are particularly subject to change.
The provision for income taxes is based on the effective tax rate expected to be
applicable for the entire year. Income tax expense is the sum of the
current-year income tax due or refundable and the change in deferred tax assets
and liabilities. Deferred tax assets and liabilities are the expected future tax
consequences of temporary differences between the carrying amounts and tax basis
of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
was issued by the Financial Accounting Standards Board ("FASB") in 1996. It
revises the accounting for transfers of financial assets, such as loans and
securities, and for distinguishing between sales and secured borrowings. SFAS
No. 125 was originally effective for some transactions in 1997 and others in
1998. SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" which was issued in December 1996, defers for one year
the effective date of provisions related to securities lending, repurchase
agreements and other similar transactions. The remaining portions of SFAS 125
were effective January 1, 1997. SFAS No. 125 did not have a material impact on
the Bank's financial statements.
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(Continued)
7.
<PAGE> 8
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is
effective for periods ending after December 15, 1997, including interim periods.
SFAS No. 128 simplifies the calculation of earnings per share ("EPS") by
replacing primary EPS with basic EPS. It also requires dual presentation of
basic EPS and diluted EPS for entities with complex capital structures. Basic
EPS includes no dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share in
earnings such as stock options, warrants or other common stock equivalents. All
prior period EPS data must be restated to conform with the new presentation.
SFAS No. 128 will apply to the Bank beginning with the interim period ending
March 31, 1998.
SFAS No. 129, "Disclosures of Information about Capital Structure," became
effective for the Bank as of December 31, 1997. SFAS No. 129 consolidated
existing accounting guidance relating to disclosure about a company's capital
structure. SFAS No. 129 did not affect the Bank's disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement, but requires an enterprise display
an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
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(Continued)
8.
<PAGE> 9
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement significantly changes the
way public business enterprises report information about operating segments in
annual financial statements, and requires those enterprises to report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about an
enterprise's reportable operating segments, based on reporting information the
way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, the Statement requires significantly more information be disclosed for
each reportable segment than is presently being reported in annual financial
statements. The Statement also requires selected information be reported in
interim financial statements. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997. SFAS No. 131 is not expected to
have a significant impact on the Bank.
NOTE 2 - ADOPTION OF PLAN OF CONVERSION
On November 12, 1997, the Board of Directors of the Bank unanimously adopted a
Plan of Conversion to convert from a state chartered mutual savings and loan
association to a state chartered stock savings and loan association with the
concurrent formation of a holding company. The conversion was consummated on
March 25, 1998, by amending the Bank's Articles of Incorporation and the sale of
the Holding Company's common stock in an amount equal to the pro forma market
value of the Bank after giving effect to the conversion. Common shares of the
Holding Company were offered in accordance with the Plan of Conversion. A total
of 2,248,250 common shares of the Holding Company were sold at $10.00 per share.
The Holding Company retained 50% of the net proceeds from the sale of common
shares. The remainder of the net proceeds was invested in the capital stock
issued by the Bank to the Holding Company as a result of the conversion.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 2 - ADOPTION OF PLAN OF CONVERSION (Continued)
At the time of the conversion, the Bank established a liquidation account in an
amount equal to its regulatory capital as of September 30, 1997. The liquidation
account will be maintained for the benefit of eligible depositors who continue
to maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible depositors have
reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible depositor will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held. The Bank may not
pay dividends that would reduce stockholders' equity below the required
liquidation account balance.
Under Office of Thrift Supervision (OTS) regulations, limitations have been
imposed on all "capital distributions" by savings institutions, including cash
dividends. The regulation establishes a three-tiered system of restrictions,
with the greatest flexibility afforded to thrifts that are both well capitalized
and given favorable qualitative examination ratings by the OTS.
Conversion costs are deferred and deducted from the proceeds of the shares sold
in the conversion. As of December 31, 1997, $43,283 in costs had been deferred.
NOTE 3 - SECURITIES
The amortized cost and estimated fair values of securities are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Government agencies $4,498,791 $22,174 $964 $4,520,001
========== ======= ==== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Government agencies $4,998,188 $10,477 $4,369 $5,004,296
========== ======= ====== ==========
</TABLE>
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(Continued)
10.
<PAGE> 11
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 3 - SECURITIES (Continued)
The amortized cost and estimated fair values of securities, by contractual
maturity, are as follows at December 31, 1997:
Estimated
Amortized Fair
Cost Value
---- -----
Due in one year or less $2,751,253 $2,754,141
Due after one year through five years 1,747,538 1,765,860
---------- ----------
$4,498,791 $4,520,001
========== ==========
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
During the six months ended December 31, 1997, a U.S. Treasury security
classified as available for sale was sold within ninety days of its maturity.
Proceeds from this transaction are reflected as a maturity in the Statement of
Cash Flows. The gain on this transaction was $121. No other securities were sold
during the three or six months ended December 31, 1997 and 1996.
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(Continued)
11.
<PAGE> 12
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 4 - LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
---- ----
<S> <C> <C>
Residential real estate loans:
1 - 4 family $37,163,990 $35,155,726
Home equity 876,957 728,416
Nonresidential real estate 3,622,287 3,297,105
Real estate construction 836,001 553,833
Land 530,586 570,542
----------- -----------
Total real estate loans 43,029,821 40,305,622
Consumer and other loans
Home improvement 4,249,483 3,701,588
Automobile 2,696,895 2,505,823
Commercial 1,666,987 1,645,091
Deposit 181,548 219,264
Credit card 440,423 346,704
Other 1,193,115 1,047,289
----------- -----------
Total consumer and other 10,428,451 9,465,759
----------- -----------
Total loans 53,458,272 49,771,381
Less:
Allowance for loan losses (174,593) (119,218)
Loans in process (253,021) (245,240)
Net deferred loan fees and costs (111,187) (106,799)
----------- -----------
$52,919,471 $49,300,124
=========== ===========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning
of period $148,222 $119,013 $119,218 $117,513
Provision for losses 30,000 1,500 60,000 3,000
Charge-offs (4,101) -- (5,542) --
Recoveries 472 -- 917 --
-------- -------- -------- --------
Balance at end of period $174,593 $120,513 $174,593 $120,513
======== ======== ======== ========
</TABLE>
As of and for the three and six months ended December 31, 1997 and 1996, no
loans were considered impaired within the scope of SFAS No. 114.
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(Continued)
12.
<PAGE> 13
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on financial condition or results of operations.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers and to reduce exposure to interest rate changes.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. These involve, to varying degrees,
credit and interest-rate risk more than the amount reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on extension of credit is based on
management's credit evaluation and generally consists of residential or
commercial real estate.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
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 used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit and financial guarantees
written are conditional commitments to guarantee a customer's performance to a
third party.
A summary of the notional or contractual amounts of financial instruments with
off-balance sheet risk follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
---- ----
<S> <C> <C>
Lines of credit - variable rate $1,761,000 $1,595,000
1-4 family residential real estate - variable rate 462,000 446,000
Commercial real estate - variable rate -- 700,000
Credit card arrangements - fixed rate 700,000 671,000
</TABLE>
Fixed rate commitments had an interest rate of 13.90% at December 31, 1997 and
June 30, 1997. The interest rates on variable rate commitments range from 7.50%
to 8.25% at December 31, 1997 and 8.00% to 9.50% at June 30, 1997.
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 14
THE HOME LOAN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 6 - SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION
Included in SAIF deposit insurance premium expense in the Statement of Income
for the six months ended December 31, 1996 is $260,917 for a special assessment
resulting from legislation passed and enacted into law on September 30, 1996 to
recapitalize the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation. Thrifts such as the Bank paid a one-time assessment in
November 1996 of $0.657 for each $100 in deposits as of March 31, 1995. Because
of the recapitalization, the Bank began paying lower deposit insurance premiums
in January 1997.
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(Continued)
14.
<PAGE> 15
THE HOME LOAN SAVINGS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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INTRODUCTION
In the following pages, management presents an analysis of the financial
condition of The Home Loan Savings Bank as of December 31, 1997 compared to June
30, 1997, and results of operations for the three and six months ended December
31, 1997 compared with the same periods in 1996. This discussion is designed to
provide a more comprehensive review of the operating results and financial
position than could be obtained from an examination of the financial statements
alone. This analysis should be read in conjunction with the interim financial
statements and related footnotes included herein.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Bank's operations and the Bank's
actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Bank's general market area.
FINANCIAL CONDITION
Total assets at December 31, 1997 were $61.3 million compared to $60.4 million
at June 30, 1997, an increase of $923,000, or 1.5%. The increase in total assets
was primarily due to increases in loans of $3.6 million, partially offset by a
decrease in cash and cash equivalents of $2.2 million and a $484,000 decrease in
securities available for sale. The increase in loans was largely in one- to
four-family residential real estate loans, increasing $2.0 million, and consumer
and other loans, increasing $963,000. These increases are reflective of a stable
local economy coupled with the interest rate environment during the period. The
decrease in cash and cash equivalents was the result of the redirection of funds
to provide for loan growth.
The Bank's consumer loan portfolio increased $1.0 million between June 30, 1997
and December 31, 1997 with the largest change in home improvement loans which
increased $548,000. Consumer loans represented 19.5% and 19.0% of gross loans at
December 31, 1997 and June 30, 1997.
Total deposits decreased $649,000 from $49.2 million at June 30, 1997 to $48.6
million at December 31, 1997. The Bank experienced modest increases in savings
accounts, negotiable order of withdrawal ("NOW") accounts, money market accounts
and noninterest-bearing demand deposit accounts, which partially offset a
decrease of $760,000 in certificates of deposit. The reduction in certificates
of deposit was due to the maturity of a large public fund deposit which was not
renewed. The certificate of deposit portfolio as a percent of total deposits
decreased slightly from 59.3% at June 30, 1997 to 58.6% at December 31, 1997.
Almost all certificates of deposit held by the Bank mature in less than three
years with the majority maturing in the next year.
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15.
<PAGE> 16
THE HOME LOAN SAVINGS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
As a secondary source of liquidity, the Bank maintains a $5 million cash
management arrangement with the Federal Home Loan Bank of Cincinnati, under
which it held advances of $1.0 million at December 31, 1997. There were no
advances outstanding at June 30, 1997. Due to continued loan demand, the Bank
used these funds to originate mortgage loans as well as provide for short-term
liquidity needs. The advances are variable rate and can be prepaid at any time
without a penalty. Additional advances may be obtained from the Federal Home
Loan Bank to fund future loan growth and liquidity as needed.
RESULTS OF OPERATIONS
The general economic conditions, the monetary and fiscal policies of federal
agencies and the regulatory policies of agencies that regulate financial
institutions affect the operating results of the Bank. Interest rates on
competing investments and general market rates of interest influence the Bank's
cost of funds. Lending activities are influenced by the demand for real estate
loans and other types of loans, which in turn is affected by the interest rates
at which such loans are made, general economic conditions and the availability
of funds for lending activities.
The Bank's net income primarily depends on its net interest income, which is the
difference between the interest income earned on interest-earning assets, such
as loans and securities, and interest expense incurred on interest-bearing
liabilities, such as deposits and borrowings. The level of net interest income
is dependent on the interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities. Provisions for loan
losses, service charges, gains on the sale of assets, other income, noninterest
expense and income taxes also affect net income.
Net income was $209,000 and $422,000 for the three and six months ended December
31, 1997, compared to $166,000 and $215,000 for the three and six months ended
December 31, 1996. The increase in net income for the three months ended
December 31, 1997 was the result of an increase in net interest income partially
offset by a higher provision for loan losses. The increase in net income for the
six months ended December 31, 1997 was primarily the result of a special deposit
insurance assessment, as more fully discussed below.
Net interest income totaled $740,000 and $1,477,000 for the three and six months
ended December 31, 1997, as compared to $623,000 and $1,318,000 for the three
and six months ended December 31, 1996, representing increases of $117,000, or
18.8%, and $159,000, or 12.1%. The change in net interest income is attributable
to an increase in the interest rate spread combined with a slight increase in
the ratio of average interest-earning assets to average interest-bearing
liabilities.
- --------------------------------------------------------------------------------
16.
<PAGE> 17
THE HOME LOAN SAVINGS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Interest and fees on loans increased approximately $170,000 and $291,000, or
16.8% and 14.4%, from $1,009,000 and $2,025,000 for the three and six months
ended December 31, 1996 to $1,179,000 and $2,316,000 for the three and six
months ended December 31, 1997. The increase in interest income was due to
higher average loans.
Interest earned on securities totaled $68,000 and $143,000 for the three and six
months ended December 31, 1997, as compared to $63,000 and $134,000 for the
three and six months ended December 31, 1996. The increase was a result of
higher average balances of securities combined with an increased yield earned.
Interest on interest-bearing deposits and overnight deposits decreased
approximately $35,000 and $39,000 for the three and six months ended December
31, 1997, as compared to the three and six months ended December 31, 1996. The
decline was the result of lower average balances of interest-bearing deposits
and overnight funds.
Dividends on Federal Home Loan Bank (FHLB) stock increased slightly for the
three and six months ended December 31, 1997, compared to the three and six
months ended December 31, 1996, primarily due to an increase in the number of
shares of FHLB stock owned.
Interest paid on deposits increased approximately $27,000 and $107,000 for the
three and six months ended December 31, 1997, compared to the three and six
months ended December 31, 1996. The increase in interest expense was due to an
increase in the cost of funds combined with an increase in the average balances
of deposits.
Interest on Federal Home Loan Bank advances totaled $7,000 for the three and six
months ended December 31, 1997. The Bank borrowed funds for the first time from
the Federal Home Loan Bank of Cincinnati during fiscal 1998. The borrowings were
used as a source of short-term liquidity to provide funding for loan demand.
The Bank maintains an allowance for loan losses in an amount that, in
management's judgment, is adequate to absorb reasonably foreseeable losses
inherent in the loan portfolio. While management utilizes its best judgment and
information available, the ultimate adequacy of the allowance is dependent on a
variety of factors, including the performance of the Bank's loan portfolio, the
economy, changes in real estate values and interest rates and the view of the
regulatory authorities toward loan classifications. The provision for loan
losses is determined by management as the amount to be added to the allowance
for loan losses after net charge-offs have been deducted to bring the allowance
to a level which is considered adequate to absorb losses inherent in the loan
portfolio. The amount of the provision is based on management's monthly review
of the loan portfolio and consideration of such factors as historical loss
experience, general prevailing economic conditions, changes in the size and
composition of the loan portfolio and specific borrower considerations,
including the ability of the borrower to repay the loan and the estimated value
of the underlying collateral.
- --------------------------------------------------------------------------------
17.
<PAGE> 18
THE HOME LOAN SAVINGS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The provision for loan losses for the three and six months ended December 31,
1997 totaled $30,000 and $60,000 compared to $2,000 and $3,000 for the three and
six months ended December 31, 1996, representing increases of $28,000 and
$57,000. The Bank has not experienced significant net charge-offs in any of the
periods presented. The Bank's low historical charge-off history is the product
of a variety of factors, including the Bank's underwriting guidelines, which
generally require a loan-to-value or projected completed value ratio of 80% for
the purchase or construction of one- to four-family residential properties and
75% for commercial real estate and land loans, established income information
and defined ratios of debt to income. In spite of the low historical charge-off
history, management increased the allowance for loan losses due to growth of the
total loan portfolio; an increase in nonresidential real estate and consumer
loans compared to the total portfolio; and, management's decision to raise the
nonspecific percentage allocation for higher risk, nonresidential real estate
loans. The Bank previously used the same percentage allocation for nonspecific
reserves on nonresidential and residential real estate loans. The allowance for
loan losses totaled $175,000, or .33% of gross loans at December 31, 1997,
compared with $121,000, or .24% of gross loans at June 30, 1997.
Noninterest income includes service fees and other miscellaneous income. For the
three and six months ended December 31, 1997, noninterest income totaled $43,000
and $87,000 compared to $46,000 and $88,000 for the three and six months ended
December 31, 1996. During the 1997 periods, the Bank experienced a slight
decrease in service charges and fees which was partially offset by an increase
in miscellaneous operating income.
Noninterest expense remained relatively stable at $430,000 for the three months
ended December 31, 1997 compared to $418,000 for same period in 1996, while
decreasing $233,000 from $1,078,000 for the six months ended December 31, 1996
to $845,000 for the six months ended December 31, 1997. During the comparable
three-month periods, increases in compensation and benefits and other expenses
were offset by a decrease in federal deposit insurance premiums. The increase in
compensation and benefits was the result of normal, annual merit increases.
Federal deposit insurance premiums decreased because of the full capitalization
of the Savings Bank Insurance Fund (SAIF) of the Federal Deposit Insurance
Corporation (FDIC) as further discussed below.
The decrease in noninterest expense during the comparable six-month periods was
due to a special deposit insurance assessment of $261,000 resulting from
legislation passed and enacted into law on September 30, 1996 to recapitalize
the SAIF. The legislation called for a one-time assessment of $0.657 for each
$100 in deposits held as of March 31, 1995. Because of the recapitalization of
the SAIF, the disparity between Bank and thrift insurance assessments was
reduced. Thrifts had been paying assessments of $.23 per $100 of deposits,
which, for most thrifts, was reduced to $.064 per $100 in deposits in January
1997 and will be reduced to $.024 per $100 in deposits by no later than January
2000.
- --------------------------------------------------------------------------------
18.
<PAGE> 19
THE HOME LOAN SAVINGS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Salaries and employee benefits increased $41,000, or 9.5%, for the comparable
six-month periods due to normal, annual merit increases and higher bonuses paid
in 1997 based on increased earnings. Other noninterest expense items had
insignificant fluctuations for the comparable six month periods.
The volatility of income tax expense is primarily attributable to the change in
net income before income taxes. The provision for income taxes totaled $115,000
and $238,000 for the three and six months ended December 31, 1997 compared to
$83,000 and $111,000 for the three and six months ended December 31, 1996. The
decrease in tax expense for the comparable six-month periods was largely due to
the tax effect of $(89,000) for the special assessment discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity, primarily represented by cash and cash equivalents, is a
result of its operating, investing and financing activities. These activities
are summarized below for the six months ended December 31, 1997 and 1996.
Six Months
Ended December 31,
--------------------
1997 1996
------- -------
(Dollars in thousands)
Net income $ 421 $ 215
Adjustments to reconcile net income to net cash from
operating activities 186 (171)
------- -------
Net cash from operating activities 607 44
Net cash from investing activities (3,193) (3,062)
Net cash from financing activities 351 1,576
------- -------
Net change in cash and cash equivalents (2,235) (1,442)
Cash and cash equivalents at beginning of period 4,681 5,723
------- -------
Cash and cash equivalents at end of period $ 2,446 $ 4,281
======= =======
The Bank's principal sources of funds are deposits, loan repayments, maturities
of securities, and other funds provided by operations. The Bank also has the
ability to borrow from the FHLB. While scheduled loan repayments and maturing
securities are relatively predictable, deposit flows and early loan prepayments
are influenced by interest rates, general economic conditions, and competition.
The Bank maintains investments in liquid assets based on management's assessment
of (1) need for funds, (2) expected deposit flows, (3) yields available on
short-term liquid assets and (4) objectives of the asset/liability management
program.
- --------------------------------------------------------------------------------
19.
<PAGE> 20
THE HOME LOAN SAVINGS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OTS regulations presently require the Bank to maintain an average daily balance
of investments in United States Treasury, federal agency obligations and other
investments having maturities of five years or less in an amount equal to 5% of
the sum of the Bank's average daily balance of net withdrawable deposit accounts
and borrowings payable in one year or less. The liquidity requirement, which may
be changed from time to time by the OTS to reflect changing economic conditions,
is intended to provide a source of relatively liquid funds on which the Bank may
rely, if necessary, to fund deposit withdrawals or other short-term funding
needs. At December 31, 1997, the Bank's regulatory liquidity was 14.3%. At such
date, the Bank had commitments to originate variable rate residential real
estate mortgage loans totaling $462,000. Loan commitments are generally for 30
days. The Bank considers its liquidity and capital reserves sufficient to meet
its outstanding short- and long-term needs. See Note 5 of the Notes to Financial
Statements.
The Bank is subject to various regulatory capital requirements administered by
federal regulatory agencies. Failure to meet minimum capital requirements can
initiate certain mandatory actions that, if undertaken, could have a direct
material affect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by regulators about
the Bank's components, risk weightings and other factors. At December 31, 1997,
and June 30, 1997, the Bank complies with all regulatory capital requirements.
Based on the Bank's computed regulatory capital ratios, the Bank is considered
well capitalized under the Federal Deposit Act at December 31, 1997 and June 30,
1997.
- --------------------------------------------------------------------------------
20.
<PAGE> 21
THE HOME LOAN SAVINGS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
At December 31, 1997, and June 30, 1997 the Bank's actual capital levels and
minimum required levels were:
<TABLE>
<CAPTION>
Minimum
Required To Be
Minimum Required Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Total capital (to risk-
weighted assets) $10,962 30.1% $2,912 8.0% $3,640 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 10,788 29.6 1,456 4.0 2,184 6.0
Tier 1 (core) capital (to
adjusted total assets) 10,788 17.6 1,839 3.0 3,066 5.0
Tangible capital (to
adjusted total assets) 10,788 17.6 920 1.5 N/A
JUNE 30, 1997
Total capital (to risk-
weighted assets) $10,485 30.7% $2,736 8.0% $3,420 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 10,366 30.3 1,368 4.0 2,052 6.0
Tier 1 (core) capital (to
adjusted total 10,366 17.2 1,812 3.0 3,020 5.0
Tangible capital (to
adjusted total assets) 10,366 17.2 906 1.5 N/A
</TABLE>
At December 31, 1997, the Bank had no material commitments for capital
expenditures.
YEAR 2000 ISSUE
The Bank's operations, like those of most financial institutions, depend almost
entirely on computer systems. The Bank is addressing the potential problems
associated with the possibility that the computers which control or operate the
Bank's operating systems, facilities and infrastructure may not be programmed to
read four-digit date codes and, upon arrival of the Year 2000, may recognized
the two-digit code "00" as the year 1900, causing systems to fail to function or
to generate erroneous data. The Bank is working with the companies that supply
or service its computer-operated or -dependent systems to identify and remedy
any Year 2000 related problems.
- --------------------------------------------------------------------------------
21.
<PAGE> 22
THE HOME LOAN SAVINGS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
At this time, the Bank has not identified any specific expenses which are
reasonably likely to be incurred by the Bank in connection with Year 2000 issues
and the Bank does not expect to incur significant expense to implement
corrective measures. No assurance can be given at this time, however, that
significant expense will not be incurred in the future periods. In the event
that the Bank is ultimately required to purchase replacement computer systems,
programs and equipment, or that substantial expense must be incurred to make the
Bank's current systems, programs and equipment Year 2000 compliant, the Bank's
net income and financial condition could be adversely affected. While the Bank
is endeavoring to ensure that its computer-dependent operations are Year 2000
compliant, no assurance can be given that some Year 2000 problems will not
occur.
In addition to possible expense related to its own systems, the Bank could incur
losses if Year 2000 issues adversely affect the Bank's depositors or borrowers.
Such problems could include delayed loan payments due to Year 2000 problems
affecting any of the Bank's significant borrowers or impairing the payroll
systems of large employers in the Bank's primary market area. Because the Bank's
loan portfolio is highly diversified with regard to individual borrowers and
types of businesses, and the Bank's primary market area is not significantly
dependent upon one employer or industry, the Bank does not expect any
significant or prolonged Year 2000 related difficulties that will affect net
earnings or cash flow.
- --------------------------------------------------------------------------------
22.
<PAGE> 23
THE HOME LOAN SAVINGS BANK
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
The small business issuer was incorporated in December 1997. 100
common shares were issued at incorporation.
Item 3. Defaults On Senior Securities
-----------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On incorporation, the sole shareholder elected by an action in
writing Robert C. Hamilton, Robert D. Mauch, Neal J. Caldwell,
Douglas L. Randles, and Charles H. Durmis as directors.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit No. 27: Financial Data Schedule
(b) No current reports on Form 8-K were filed by the small business
issuer during the quarter ended December 31, 1997.
- --------------------------------------------------------------------------------
23.
<PAGE> 24
THE HOME LOAN SAVINGS BANK
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirement of the Securities Exchange Act of 1934, the small
business issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 27, 1998 /s/ Robert C. Hamilton
------------------------------ ----------------------
Robert C. Hamilton
President
Date: March 27, 1998 /s/ Preston W. Bair
------------------------------ -------------------
Preston W. Bair
Treasurer
- --------------------------------------------------------------------------------
24.
<PAGE> 25
THE HOME LOAN SAVINGS BANK
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
27 Financial Data Schedule 26
- --------------------------------------------------------------------------------
25.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF
INCOME FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-QSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,600
<INT-BEARING-DEPOSITS> 886
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,899
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 52,919
<ALLOWANCE> 175
<TOTAL-ASSETS> 61,324
<DEPOSITS> 48,587
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 935
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 10,802
<TOTAL-LIABILITIES-AND-EQUITY> 61,324
<INTEREST-LOAN> 2,317
<INTEREST-INVEST> 156
<INTEREST-OTHER> 51
<INTEREST-TOTAL> 2,524
<INTEREST-DEPOSIT> 1,039
<INTEREST-EXPENSE> 7
<INTEREST-INCOME-NET> 1,046
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 845
<INCOME-PRETAX> 659
<INCOME-PRE-EXTRAORDINARY> 422
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 422
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 5.09
<LOANS-NON> 0
<LOANS-PAST> 38
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 119
<CHARGE-OFFS> 5
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 175
<ALLOWANCE-DOMESTIC> 175
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
