-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MfyORkjN/vAyCsHl2ElyjoPM+YS+uUy5iJ2DpZCemdgknImj8bfCxpMwUzXme3I3 lsDBMiQAuzLuaATCWYtO8w== 0000908834-99-000250.txt : 19991227 0000908834-99-000250.hdr.sgml : 19991227 ACCESSION NUMBER: 0000908834-99-000250 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOME FINANCIAL BANCORP CENTRAL INDEX KEY: 0001009242 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 351975585 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-28510 FILM NUMBER: 99718452 BUSINESS ADDRESS: STREET 1: 279 EAST MORGAN ST CITY: SPENCER STATE: IN ZIP: 47460 BUSINESS PHONE: 8128292095 MAIL ADDRESS: STREET 1: 279 EAST MORGAN STREET STREET 2: P O BOX 187 CITY: SPENCER STATE: IN ZIP: 47460 10-K405 1 HOME FINANCIAL BANCORP FORM 10-K FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _______________ Commission File Number 0-28510 HOME FINANCIAL BANCORP (Exact name of registrant as specified in its charter) INDIANA 35-1975585 (State or other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 279 East Morgan Street, Spencer, Indiana 47460 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (812) 829-2095 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, without par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the issuer's voting stock held by non-affiliates, as of August 31, 1999, was $5,104,990. The number of shares of the Registrant's Common Stock, without par value, outstanding as of August 31, 1999, was 885,200 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended June 30, 1999, are incorporated by reference into Part II. Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated in Part III. Exhibit Index on Page E-1 Page 1 of 33 Pages HOME FINANCIAL BANCORP Form 10-K INDEX Page Forward Looking Statements................................................. 3 PART I Item 1. Business....................................................... 3 Item 2. Properties..................................................... 29 Item 3. Legal Proceedings.............................................. 29 Item 4. Submission of Matters to a Vote of Security Holders............ 29 Item 4.5. Executive Officers of Registrant............................... 30 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................... 30 Item 6. Selected Financial Data........................................ 31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation........................... 31 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 31 Item 8. Financial Statements and Supplementary Data.................... 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 31 PART III Item 10. Directors and Executive Officers of Registrant................. 31 Item 11. Executive Compensation......................................... 31 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 31 Item 13. Certain Relationships and Related Transactions................. 31 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................................. 32 Signatures..................................................... 33 FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K ("Form 10-K") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief, outlook, estimate or expectations of the Company (as defined below), its directors or its officers primarily with respect to future events and the future financial performance of the Company. Readers of this Form 10-K are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-K identifies important factors that could cause such differences. These factors include changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or unanticipated results in pending legal proceedings. PART I Item 1. Business. General Home Financial Bancorp (the "Holding Company" and, together with the Bank (as defined below), the "Company") is an Indiana corporation organized in February, 1996, to become a bank holding company upon its acquisition of all the issued and outstanding capital stock of Owen Community Bank, s.b. (the "Bank") in connection with the Bank's conversion from mutual to stock form. The Holding Company became the Bank's holding company on July 1, 1996; therefore, historical financial and other data contained herein for periods prior to July 1, 1996 relate solely to the Bank, while historical financial and other data contained herein for the periods after July 1, 1996 relate to the Company. The principal asset of the Holding Company currently consists of 100% of the issued and outstanding shares of common stock of the Bank. The Bank was organized under the name Owen County Savings and Loan Association in 1911. In 1972, the Bank converted to a federally chartered savings and loan and changed its name to Owen County Federal Savings and Loan Association, and in 1989, the Bank converted to a federally chartered savings bank known as Owen Federal Savings Bank. In 1994, the Bank became an Indiana savings bank known as Owen Community Bank, s.b. As of May 1, 1999, the Bank converted back to a federal stock savings bank and the Company became a savings and loan holding company. The Bank's principal business consists of attracting deposits from the general public and originating long-term adjustable-rate loans secured primarily by first mortgage liens on one- to four-family real estate. The Bank's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is the oldest continuously operating financial institution headquartered in Owen County, Indiana. Management believes the Bank has developed a solid reputation among its loyal customer base because of its commitment to personal service and its strong support of the local community. The Bank offers a number of consumer and commercial financial services. These services include: (i) residential real estate loans; (ii) indemnification mortgage loans ("ID Mortgage Loans"); (iii) mobile home loans; (iv) combination land-mobile home loans ("Combo Loans"); (v) construction loans; (vi) share loans; (vii) nonresidential real estate loans; (viii) multi-family loans; (ix) installment loans; (x) home equity loans; (xi) NOW accounts; (xii) demand deposit accounts; (xiii) passbook savings accounts; and (xiv) certificates of deposit. The Company conducts business out of its main office located in Spencer, Indiana and its branch office in Cloverdale, Indiana. The Bank historically has concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase, construction or refinancing of one- to four-family residential real property. One- to four-family residential mortgage loans continue to be the major focus of the Bank's loan origination activities, representing 53.5% of the Bank's total loan portfolio at June 30, 1999. The Bank also offers mobile home loans, multi-family mortgage loans, nonresidential real estate loans, Combo Loans and consumer loans. Mobile home loans and Combo Loans totaled approximately 2.4% and 13.6% of the Bank's total loan portfolio at June 30, 1999, respectively. Mortgage loans secured by multi-family properties and nonresidential real estate totaled approximately 2.8% and 23.8%, respectively, of the Bank's total loan portfolio at June 30, 1999. Consumer loans constituted approximately 2.6% of the Bank's total loan portfolio at June 30, 1999. - 3 - 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.
At June 30, --------------------------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ------------------ Percent Percent Percent Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- (Dollars in thousands) TYPE OF LOAN Mortgage loans: Residential.......................... $20,952 53.46% $19,563 56.76% $19,898 57.22% Combo................................ 5,331 13.60 4,666 13.52 4,396 12.64 Nonresidential....................... 9,323 23.79 7,614 22.07 6,896 19.83 Multi-family......................... 1,096 2.80 904 2.62 980 2.82 Mobile home loans....................... 950 2.43 831 2.43 1,361 3.91 Commercial and industrial loans......... 538 1.37 242 0.70 634 1.82 Consumer loans.......................... 999 2.55 655 1.90 612 1.76 ------- ------ ------- ------ ------- ------ Gross loans receivable............. $39,189 100.00% $34,475 100.00% $34,777 100.00% ======= ====== ======= ====== ======= ====== TYPE OF SECURITY Residential real estate.............. $20,952 53.46% $19,563 56.76% $19,898 57.22% Mobile home and land................. 5,331 13.60 4,666 13.52 4,396 12.64 Nonresidental real estate............ 9,323 23.79 7,614 22.07 6,896 19.83 Multi-family real estate............. 1,096 2.80 904 2.62 980 2.82 Mobile home.......................... 950 2.43 831 2.43 1,361 3.91 Deposits............................. 154 0.39 152 .44 122 0.35 Other security....................... 1,383 3.53 745 2.16 1,124 3.23 ------- ------ ------- ------ ------- ------ Gross loans receivable............. 39,189 100.00 34,475 100.00 34,777 100.00 Deduct: Allowance for loan losses............... 336 0.86 320 0.93 231 0.66 Loans in process and deferred loan costs.................. 615 1.57 196 0.57 428 1.23 ------- ------ ------- ------ ------- ------ Net loans receivable................. $38,238 97.57% $33,959 98.50% $34,118 98.11% ======= ====== ======= ====== ======= ====== Mortgage Loans: Adjustable-rate...................... $23,748 64.70% $21,502 65.69% $22,296 69.31% Fixed-rate........................... 12,954 35.30 11,245 34.31 9,874 30.69 ------- ------ ------- ------ ------- ------ Total.............................. $36,702 100.00% $32,747 100.00% $32,170 100.00% ======= ====== ======= ====== ======= ======
The following table sets forth certain information at June 30, 1999, regarding the dollar amount of loans maturing in the Bank's loan portfolio based on the contractual terms to maturity. Demand loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter. - 4 -
Balance Due during years ended June 30, Outstanding 2003 2005 2010 2015 at June 30, to to to and 1999 2000 2001 2002 2004 2009 2014 following ------------------------------------------------------------------------------- (In thousands) Mortgage loans: Residential..................... $20,952 $176 $42 $144 $221 $2,315 $3,279 $14,775 Combo........................... 5,331 54 --- 38 99 698 1,042 3,400 Nonresidential.................. 9,323 1 --- 20 1,647 281 4,626 2,748 Multi-family.................... 1,096 --- --- 83 --- 578 150 285 Mobile home loans.................. 950 10 8 19 160 411 235 107 Commercial and industrial loans.... 538 --- --- --- 298 --- 240 --- Consumer loans..................... 999 557 100 221 121 --- --- --- ------- ---- ---- ---- ------ ------ ------ ------- Total......................... $39,189 $798 $150 $525 $2,546 $4,283 $9,572 $21,315 ======= ==== ==== ==== ====== ====== ====== =======
The following table sets forth, as of June 30, 1999, the dollar amount of all loans due after one year which have fixed interest rates and floating or adjustable rates.
Due After June 30, 2000 -------------------------------------------------------- Fixed Rates Variable Rates Total ----------- -------------- ----- (In thousands) Mortgage loans: Residential..................... $7,569 $13,207 $20,776 Combo........................... 2,826 2,451 5,277 Nonresidential.................. 1,304 8,018 9,322 Multi-family.................... 921 175 1,096 Mobile home loans.................. 940 --- 940 Commercial and industrial loans.... 240 298 538 Consumer loans..................... 442 --- 442 ------- ------- ------- Total......................... $14,242 $24,149 $38,391 ======= ======= =======
One- to Four- Family Residential Loans. Residential loans consist primarily of one- to four-family loans. Approximately $21.0 million, or 53.5% of the Bank's portfolio of loans at June 30, 1999, consisted of one- to four-family residential mortgage loans, of which approximately 63.0% had adjustable rates. Pursuant to federal regulations, such loans must require at least semi-annual payments and be for a term of not more than 40 years, and, if the interest rate is adjustable, the rate must be correlated with changes in a readily verifiable index. The Bank currently offers three (3) types of adjustable-rate one- to four-family residential mortgage loans ("ARMs"). The Bank offers ARMs which adjust annually and are indexed to the Auction Average of One Year U.S. Treasury Bills as published monthly by the Federal Reserve Board ("FRB") (the "Average One Year T-Bill"). The maximum rate adjustment per year and over the life of the loan for the Bank's one-year ARMs are 1% to 1.5% and 4% to 5%, respectively. These ARMs are generally underwritten for terms of up to 25 years. The Bank also offers three-year and five-year ARMs which are indexed to the National Average Contract Interest Rate for the Purchase of Previously Occupied Homes as published by the Federal Housing Finance Board (the "National Average Contract Rate") and have maximum rate adjustments per adjustment period and over the life of the loan of 3% and 5%, respectively. The Bank's three-year and five-year ARMs are generally underwritten for terms of up to 25 years. The Bank will not generally lend more than $100,000 for any residential loan with a Loan-to-Value Ratio of 90% or higher. The initial interest rate for each of the Bank's ARM loans is determined by the Executive Committee of the Bank's Board of Directors (the "Executive Committee") based upon prevailing rates in the Bank's market area, the credit history of the applicant and the Loan-to-Value Ratio. When the initial interest rate is determined for an ARM loan, a margin is calculated by subtracting the then-current index rate (i.e., the Average One Year T-Bill for one-year ARMs or the National Average Contract Rate for three-year and five-year ARMs) from the initial interest rate. Interest rate adjustments are thereafter determined based on fluctuations of the index rate with a specific loan's margin remaining constant. - 5 - Adjustable-rate loans decrease the risk associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrowers may rise to the extent permitted by the terms of the loan, thereby increasing the potential for default. Also, adjustable-rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the loan. At the same time, the market value of the underlying property may be adversely affected by higher interest rates. The Bank also currently offers fixed-rate loans which provide for the payment of principal and interest over a period not to exceed 20 years. At June 30, 1999, 37.0% of the Bank's residential mortgage loans had fixed rates of interest. The Bank does not currently originate residential mortgage loans if the Loan-to-Value Ratio exceeds 90% and does not currently require private mortgage insurance on its residential single-family mortgage loans. The maximum Loan-to-Value Ratio for non-owner occupied one- to four-family residential mortgage loans is 80%. Substantially all of the residential mortgage loans that the Bank originates include "due-on-sale" clauses, which give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. The Bank's residential mortgage loans are not originated on terms and conditions and using documentation that conform with the standard underwriting criteria required to sell such loans in the secondary market. The Bank generally retains its loans in its portfolio and does not anticipate the need to sell its non-conforming loans. See "-- Origination, Purchase and Sale of Loans." At June 30, 1999, residential loans amounting to $51,000, or 0.13% of total loans, were included in non-performing assets. See "-- Non-Performing and Problem Assets." The Bank offers mortgage loans for the construction of residential real estate. Such loans are made with respect to owner-occupied residential real estate and, in limited cases, to builders or developers constructing such properties on a speculative investment basis (i.e., before the builder/developer obtains a commitment from a buyer). Substantially all of such loans are made to owners who are to occupy the premises. These loans are written as permanent mortgage loans such that only disbursed principal and interest are payable during the construction phase, which is typically limited to six (6) months. Inspections are made prior to any disbursement under such a loan. Mortgage loans written for the construction of residential real estate, like construction loans generally, involve a higher level of risk than loans secured by existing properties. For example, if a project is not completed and the borrower defaults, the Bank may have to hire another contractor to complete the project at a higher cost. Also, a house may be completed, but not salable, resulting in the borrower defaulting and the Bank taking title to the house. The Bank originates a personal revolving line of credit loan secured by a first or second mortgage on the borrower's primary residence. The combined total of first and second mortgages on property securing Home Equity Loans is generally limited to 80%. The draw period for the Home Equity Loan product is generally limited to 10 years, with a maximum of 15 years. The Bank also offers ID Mortgage Loans. ID Mortgage Loans are similar to home equity loans in that such loans create a line of credit secured by a real estate mortgage against which a borrower may draw, and are typically written as second mortgage loans. The Bank generally writes its ID Mortgage Loans so that all future indebtedness of a borrower is secured by the ID Mortgage without the necessity of recording an additional security instrument. ID Mortgage loans carry fixed rates and are generally written for terms not exceeding 20 years. The maximum Loan-to-Value Ratio for ID Mortgage Loans is 90% if the subject real estate is not encumbered by another mortgage or the Bank holds the first mortgage on the subject real estate, and 80% if another lender holds the first mortgage on the subject real estate. If an appraisal has been completed on the subject property within five (5) years, the Bank does not generally require a new appraisal. Combo Loans. At June 30, 1999, $5.3 million, or 13.6% of the Bank's total loan portfolio, consisted of Combo Loans, of which approximately 46.0% had adjustable rates. The Bank currently offers three (3) types of adjustable-rate Combo Loans. The Bank's one-year adjustable-rate Combo Loans are indexed to the - 6 - Average One Year T-Bill and have maximum rate adjustments per year and over the life of the loan of 1.5% and 3%, respectively. The Bank also offers three-year and five-year adjustable-rate Combo Loans which are indexed to the National Average Contract Rate and have maximum rate adjustments per adjustment period and over the life of the loan of 3% and 5%, respectively. The Bank's Combo Loans are generally underwritten for terms of up to 25 years. The maximum Loan-to-Value Ratio for a Combo Loan is 90%. The initial interest rate for each of the Bank's Combo Loans is determined by the Executive Committee based upon prevailing rates in the Bank's market area, the applicant's credit history and the Loan-to-Value Ratio. The Bank generally establishes its base interest rates for Combo Loans at a level 100 basis points higher than the corresponding rates for residential ARM loans. An interest rate margin is determined for each Combo Loan in the same manner as described above for residential ARM loans. The Bank also offers fixed-rate Combo Loans with terms of 10 years, 15 years and 20 years. At June 30, 1999, 54.0% of the Bank's Combo Loans had fixed rates of interest. Mobile Home Loans. The Bank originates loans for the purchase of new and used mobile homes. At June 30, 1999, approximately $950,000, or 2.4% of the Bank's portfolio of loans, consisted of mobile home loans. The Company's mobile home loans are fixed-rate loans with maximum terms of 15 years for new mobile homes and 10 years for previously owned mobile homes. The maximum Loan-to-Value Ratio for mobile home loans is 90%. The Bank has emphasized mobile home loans because they generally have shorter terms to maturity and higher yields than the Bank's residential mortgage loans. In addition, the Bank is the primary lender in its market area making mobile home loans, and mobile home lending significantly enhances the Bank's compliance under the Community Reinvestment Act of 1977. The Bank anticipates that it will continue to be an active originator of mobile home loans. Mobile home lending entails greater risk than traditional residential mortgage lending. Loans secured by mobile homes involve more credit risk than residential mortgage loans because of the type and nature of the collateral, and because such loans generally are made to borrowers with low income levels, and mobile homes tend to rapidly depreciate in value. In many cases, any repossessed collateral for a defaulting mobile home loan will not provide an adequate source of repayment of the outstanding loan balance because of improper repair and maintenance of the underlying security. One of the Bank's mobile home loans was included in non-performing assets at June 30, 1999. Nonresidential Real Estate Loans. At June 30, 1999, $9.3 million, or 23.8% of the Bank's total loan portfolio, consisted of nonresidential real estate loans, of which $967,000 constituted loans secured by unimproved land only. The nonresidential real estate loans included in the Bank's portfolio are primarily secured by real estate that includes a motel, a warehouse, a medical facility, a funeral home, several churches and a residential real estate development project. At June 30, 1999, $1.4 million, or 15.0% of the Bank's nonresidential loan portfolio, was secured by real estate being developed for residential housing. At the same date, $477,000, or 5.1% of the Bank's nonresidential loan portfolio, was secured by churches. The Bank currently originates nonresidential real estate loans as one-year adjustable-rate and monthly floating-rate loans indexed to the prime rate with a margin of 1% to 3% above such index. In addition, the maximum rate adjustment per adjustment period and over the life of the loan is unrestricted. The Bank underwrites these loans on a case-by-case basis and, in addition to its normal underwriting criteria, the Bank evaluates the borrower's ability to service the debt from the net operating income of the property. The largest nonresidential real estate loan on June 30, 1999 was $950,000, net of participation portion sold. None of the Bank's nonresidential real estate loans was included in non-performing assets at that date. Loans secured by nonresidential real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. - 7 - Multi-Family Loans. Approximately $1.1 million, or 2.8% of the Bank's portfolio of loans at June 30, 1999, consisted of multi-family loans. The largest multi-family loan at June 30, 1999 had a balance of $512,000 and was secured by an apartment complex. All of the Bank's multi-family loans were fully performing as of June 30, 1999. The Bank's multi-family loans are written for maximum terms of 20 years, and the Bank does not originate multi-family loans if the Loan-to-Value Ratio exceeds 80%. Consumer Loans. The Bank's consumer loans, consisting primarily of installment and share loans, aggregated $999,000 as of June 30, 1999, or 2.6% of the Bank's total loan portfolio. The Bank consistently originates consumer loans to meet the needs of its customers and to assist in meeting its asset/liability management goals. All of the Bank's consumer loans are fixed-rate loans, and substantially all are secured loans. The Bank's installment loans are fixed-rate loans generally secured by collateral, including vehicle titles, and are made for maximum terms of up to five years (depending on the collateral). The Bank's share loans are made up to 80% of the original account balance and accrue at a rate of 2% over the underlying certificate of deposit rate. Interest on share loans is paid semi-annually. Consumer loans may entail greater credit risk than residential mortgage loans do, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. Further, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At June 30, 1999, consumer loans amounting to $28,000 were included in non-performing assets. See "--Non-Performing and Problem Assets." There can be no assurances, however, that additional delinquencies will not occur in the future. Origination, Purchase and Sale of Loans. The Bank currently originates its mortgage loans pursuant to its own underwriting standards, which are not in conformity with the standard criteria of the Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). If it desired to sell its mortgage loans, the Bank might experience some difficulty selling such non-conforming loans quickly in the secondary market. The Bank has no intention, however, of attempting to sell such loans. The Bank's ARMs vary from secondary market criteria in that, among other things, the Bank does not require escrow accounts for taxes and insurance and does not permit the conversion of those loans to fixed-rate loans in the first three years of their terms. The Bank confines its loan origination activities primarily to Owen, Putnam and surrounding counties in Indiana. At June 30, 1999, no loans were secured by property located outside of Indiana. The Bank's loan originations are generated from referrals from real estate dealers and existing customers, and newspaper and periodical advertising. All loan applications are processed and underwritten at the Bank's main office. The Bank's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, the Bank studies the employment and credit history and information on the historical and projected income and expenses of its mortgagors. Mortgage loans up to $150,000 and mobile home loans may be approved by the Executive Committee. All mortgage loans for more than $150,000 must be approved in advance by the Board of Directors. Consumer loans up to $5,000 may be approved by the Bank's Senior Installment Loan Officer. Consumer loans for more than $5,000 must be approved by the Executive Committee. The Bank generally requires appraisals on all property securing its loans and requires title insurance and a valid lien on its mortgaged real estate. Appraisals for residential real property valued at less than $250,000 are performed by an in-house appraiser. Appraisals for residential properties valued in excess of $250,000 and appraisals for all nonresidential real estate are performed by an appraiser who is a state-licensed residential appraiser. The Bank requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan and requires vandalism coverage on all mobile - 8 - home loans. It also requires flood insurance to protect the property securing its interest if the property is in a flood plane. The Bank does not require escrow accounts to be established by its borrowers for the payment of insurance premiums or taxes and does not require private mortgage insurance for its loans. The Bank's underwriting standards for consumer loans are intended to protect against some of the risks inherent in making consumer loans. Borrower character, paying habits and financial strengths are important considerations. The Bank historically has sold participations in its mortgage loans on a limited number of occasions to ensure compliance with the loans-to-one borrower restrictions. See "Regulation -- Loans to One Borrower." The Bank also occasionally purchases participations in nonresidential real estate and multi-family loans from other financial institutions. However, at June 30, 1999, the Bank did not hold any participation loans. The following table shows loan origination, purchase and repayment activity for the Bank during the periods indicated.
For the Year Ended June 30, ------------------------------------------ 1999 1998 1997 ------- ------- ------- (In thousands) Gross loans receivable at beginning of period...................... $34,475 $34,777 $27,586 ------- ------- ------- Originations: Mortgage loans: Residential............................... 9,660 5,664 7,967 Other..................................... 2,044 641 4,380 ------- ------- ------- Total mortgage loans.................... 11,704 6,305 12,347 ------- ------- ------- Mobile home loans........................... 317 164 78 Consumer loans: Installment............................... 810 793 915 Share..................................... 101 97 131 ------- ------- ------- Total consumer loans.................... 911 890 1,046 ------- ------- ------- Total originations................. 12,932 7,359 13,471 Purchases (sales) of participation loans....... --- --- --- Repayments and other deductions................ 8,218 7,661 6,280 ------- ------- ------- Gross loans receivable at end of period..... $39,189 $34,475 $34,777 ======= ======= =======
Origination and Other Fees. The Bank realizes income from origination fees, late charges, checking account service charges, and fees for other miscellaneous services. The Bank does not currently charge any points on its loans. However, the Bank currently charges $300 plus closing costs on its residential mortgage loans. A late charge is generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. The Bank presently maintains two automated teller machines ("ATMs"). One is located at its main office in Spencer, Indiana. A second ATM is located at the Bank's branch office in Cloverdale, Indiana. The Bank's ATMs operate in the MAC(R) regional network and the CIRRUS(R) nationwide network. The Company does not derive significant income from the ATM cards. Mortgage-Backed Securities. At June 30, 1999, the Bank had $7.8 million of mortgage-backed securities outstanding, all of which were classified as available for sale. These fixed-rate mortgage-backed securities may be used as collateral for borrowings and, through repayments, as a source of liquidity. Mortgage-backed securities generally offer yields above those available for investments of comparable credit quality and duration. The following table sets forth the amortized cost and fair value of the Bank's mortgage-backed securities at the dates indicated. - 9 -
At June 30, ----------------------------------------------------------------------- 1999 1998 1997 ------------------- -------------------- ------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- (In thousands) Total mortgage-backed securities............ $7,771 $7,570 $537 $543 $788 $793 The following table sets forth the amount of mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at June 30, 1999. Amount at June 30, 1999, which matures in ----------------------------------------------------------------------- Less than 1 year Two through five years Over five years -------------------- ---------------------- ------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Value Yield ---- ----- ---- ----- ----- ----- (In thousands) Mortgage-backed securities available for sale.... --- --- --- --- $7,771 $6.4%
The following table sets forth the changes in the Bank's mortgage-backed securities portfolio for the years ended June 30, 1999, 1998 and 1997.
For the Year Ended June 30, --------------------------------------- 1999 1998 1997 ----- --------- ------ (In thousands) Beginning balance..................... $543 $ 793 $3,119 Purchases............................. 8,659 --- 929 Sales ............................... --- --- (2,904) Monthly repayments.................... (1,385) (249) (366) Premium and discount amortization, net.................. (46) (1) 10 Unrealized loss on securities available for sale................. (201) --- 5 ------ ------ ------- Ending balance........................ $7,570 $ 543 $ 793 ====== ====== =======
Non-Performing and Problem Assets Mortgage loans are reviewed by the Bank on a regular basis and are placed on a non-accrual status when the loans become contractually past due 90 days or more. It is the policy of the Bank that all earned but uncollected interest on all loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible for any loan past due less than 90 days. Delinquency notices are sent three times per month with respect to all mortgage loans for which payments have not been received. Contact by phone or in person is made, if feasible, with respect to all such loans. When loans are 40 days in default, an additional delinquency notice is sent and personal contact is made with the borrower to establish an acceptable repayment schedule. When loans are 60 days in default, contact is again made with the borrower to establish an acceptable repayment schedule. The Bank also provides free in-house credit counseling to all borrowers. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. All loans for which foreclosure proceedings have been commenced are placed on non-accrual status. Non-performing assets. At June 30, 1999, $79,000, or 0.15% of the Company's total assets, were non-performing loans (loans delinquent more than 90 days and non-accruing loans) compared to $279,000, or 0.66% of total assets at June 30, 1998. At June 30, 1999, residential loans and consumer loans accounted for 64.6% and 35.4%, respectively, of non-performing loans. There were no - 10 - non-accruing investments at June 30, 1999. As of June 30, 1999, the Bank held $6,000 of Real Estate Owned ("REO") properties and no other repossessed properties. The table below sets forth the amounts and categories of the Bank's non-performing assets.
At June 30, --------------------------------------- 1999 1998 1997 ---- ------- ---- (In thousands) Non-accruing loans (1)................. $79 $279 $ 562 Total non-performing assets............ 85 499 749 Non-performing loans to total loans.... 0.20% 0.81% 1.65% Non-performing assets to total assets.. 0.16 1.17 1.76
- --------------- (1) The Bank generally places loans on a non-accruing status when the loans become contractually past due 90 days or more. At June 30, 1999, $51,000 of non-accruing loans were residential loans and $28,000 were consumer loans. Additional interest income that would have been recorded had income on non-accruing loans been considered collectible and accounted for in accordance with their original terms was $5,000 for the year ended June 30, 1999. The following table reflects the amount of loans in a delinquent status as of the dates indicated:
June 30, -------------------------------------------------------------------------------- 1999 1998 1997 -------------------------- ------------------------- ----------------------- Percent Percent Percent of total of total of total Number Amount loans Number Amount loans Number Amount loans ------ ------ ----- ------ ------ ----- ------ ------ ----- (Dollars in thousands) Loans delinquent for (1): 30-89 days.......... 25 $630 1.61% 12 $293 0.86% 37 $ 905 2.65% 90 days and over.... 10 79 0.20 11 279 0.81 18 562 1.65 ---- ---- ---- -- ---- ---- -- ------ ---- Total delinquent loans.......... 35 $709(2) 1.81% 23 $572 1.67% 55 $1,467 4.30% ==== ==== ==== == ==== ==== == ====== ====
(1) The number of days a loan is delinquent is measured from the day the payment was due under the terms of the loan agreement. (2) Of such amount, $611,000 consisted of residential real estate loans and $98,000 consisted of nonresidential real estate and consumer loans. Classified assets. The Bank's Asset Classification Policy provides for the classification of loans and other assets such as debt and equity securities considered to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but do possess weaknesses are required to be designated "special mention" by management. An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risks associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the assets so classified or to charge off such amounts. - 11 - At June 30, 1999, the aggregate amount of the Bank's classified assets and of the Bank's general and specific loss allowances were as follows: At June 30, 1999 ----------------- (In thousands) Substandard loans.................................... $77 Doubtful loans....................................... 14 Loss loans........................................... --- Special mention loans................................ 657 ---- Total classified loans............................ $748 ==== General loss allowances.............................. $336 Specific loss allowances............................. --- ---- Total allowances.................................. $336 ==== The Company regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Not all of the Company's classified assets constitute non-performing assets. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The provision for loan losses is determined in conjunction with management's review and evaluation of current economic conditions (including those of the Bank's lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs, and other pertinent information derived from a review of the loan portfolio. In management's opinion, the Bank's allowance for loan losses is adequate to absorb anticipated future losses from loans at June 30, 1999. However, there can be no assurance that regulators, when reviewing the Bank's loan portfolio in the future, will not require increases in its allowances for loan losses or that changes in economic conditions will not adversely affect the Bank's loan portfolio. Summary of Loan Loss Experience. The following table analyzes changes in the allowance for loan losses during the past five (5) one-year periods ended June 30, 1999.
Year Ended June 30, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Balance of allowance at beginning of period................................ $320 $231 $150 $ 57 $ 26 ---- ---- ---- ---- ---- Less charge offs: Mortgage loans.............................. (26) (6) --- --- --- Consumer loans.............................. (2) (7) (4) (1) (6) Add recoveries: Consumer loans.............................. --- --- --- --- 1 ---- ---- ---- ---- ---- Net (charge-offs) recoveries................ (28) (13) (4) (1) (5) Provisions for losses on loans.............. 44 102 85 94 36 ---- ---- ---- ---- ---- Balance of allowance at end of period....... $336 $320 $231 $150 $ 57 ==== ==== ==== ==== ==== Net charge-offs to total average loans receivable for period.............. 0.08% 0.04% 0.01% --- % 0.02% Allowance at end of period to net loans receivable at end of period (1)............................ 0.88 0.94 0.67 0.55 0.22 Allowance to total non-performing loans at end of period................... 425.32 114.70 41.10 41.78 57.00
(1) Total loans less net loans in process and deferred loan costs. - 12 - 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.
At June 30, ---------------------------------------------------------------------------------- 1999 1998 1997 --------------------- ---------------------- --------------------- Percent Percent Percent of loans of loans of loans in each in each in each category category category of total of total of total Amount loans Amount loans Amount loans ------ ----- ------ ----- ------ ----- (Dollars in thousands) Balance at end of period applicable to: Residential......................... $ 45 53.46% $ 35 56.76% $ 25 57.22% Combo............................... 30 13.60 33 13.52 24 12.64 Nonresidential...................... 45 23.79 32 22.07 23 19.83 Multi-family........................ 20 2.80 12 2.62 2.82 Mobile home loans................... 45 2.43 35 2.43 25 3.91 Commercial and industrial loans............................ 15 1.37 6 0.70 5 1.82 Consumer loans...................... 25 2.55 19 1.90 14 1.76 Unallocated......................... 111 --- 148 --- 115 --- ---- ------ ---- ------ ---- ------ Total.......................... $336 100.00% $320 100.00% $231 100.00% ==== ====== ==== ====== ==== ======
Investments and FHLB Stock The Company's investment portfolio (excluding mortgage-backed securities) consists of U.S. government agency securities, equity securities and Federal Home Loan Bank ("FHLB") stock. At June 30, 1999, approximately $1.6 million, or 2.9% of the Company's total assets, consisted of such investments. All of the Company's securities, except for FHLB stock, were classified as available for sale at June 30, 1999. The following table sets forth the amortized cost and fair value of the Company's investments at the dates indicated.
At June 30, -------------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value --------- ------ --------- ------- --------- ------ (In thousands) Securities available for sale (1): Federal agencies......................... $100 $101 $100 $103 $ 925 $931 Marketable equity securities............. 813 617 1,320 1,272 344 378 ------ ------ ------ ------ ------ ------ Total securities available for sale................... 913 718 1,420 1,375 1,269 1,309 ------ ------ ------ ------ ------ ------ FHLB stock (2).............................. 660 660 500 500 500 500 ------ ------ ------ ------ ------ ------ Total investments...................... $1,573 $1,378 $1,920 $1,875 $1,769 $1,809 ====== ====== ====== ====== ====== ======
(1) In accordance with SFAS No. 115, securities available for sale are recorded at fair value in the financial statements. (2) Fair value approximates carrying value. - 13 - The following table sets forth investment securities excluding FHLB stock and marketable equity securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at June 30, 1999.
Amount at June 30, 1999, which matures in ---------------------------------------------------------------- One Year One to or Less Five Years ------------------------- -------------------------- Weighted Weighted Amortized Average Amortized Average Cost Yield Cost Yield --------- --------- --------- -------- (Dollars in thousands) Securities available for sale : Federal agencies..................... $100 7.84% --- ---% ---- ---- Total investments.................. $100 7.84 --- ---% ==== ====
Sources of Funds Deposits have traditionally been the Bank's primary source of funds for use in lending and investment activities. In addition to deposits, the Bank derives funds from scheduled loan payments, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis are also an important source of funding for the Bank. Deposits. Deposits are attracted, principally from within Owen and Putnam Counties, through the offering of a broad selection of deposit instruments including fixed-rate certificates of deposit, NOW and other transaction accounts, and savings accounts. Substantially all of the Bank's depositors are residents of Owen County and the five surrounding counties of Putnam, Clay, Greene, Monroe and Morgan. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. The Bank rarely pays a fee for any deposits it receives. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals, and applicable regulations. The Bank relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also closely prices its deposits in relation to rates offered by its competitors. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its passbook, NOW and non-interest-bearing checking accounts are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit, and the rates paid on these deposits, have been and will continue to be significantly affected by market conditions. - 14 - An analysis of the Bank deposit accounts by type, maturity, and rate at June 30, 1999, is as follows:
Minimum Balance at Weighted Opening June 30, % of Average Type of Account Balance 1999 Deposits Rate - --------------- --------- ---------- -------- -------- (Dollars in thousands) Withdrawable: Savings accounts.................................. $ 10 $3,782 11.58% 2.62% Money market accounts............................. 5,000 1,715 5.25 3.73 NOW and other transaction accounts................ 50 3,293 10.08 1.60 ------- ------ Total withdrawable.............................. 8,790 26.91 2.45 ------- ------ Certificates (original terms): 91 days........................................... 1,000 193 0.59 4.04 6 months.......................................... 1,000 918 2.81 4.46 12 months......................................... 1,000 11,816 36.21 5.21 24 months......................................... 1,000 2,911 8.91 5.37 30 months......................................... 1,000 2,572 7.88 5.99 36 months......................................... 1,000 416 1.27 6.09 48 months......................................... 1,000 671 2.05 5.61 60 months......................................... 1,000 4,017 12.30 5.95 IRAs (original terms): 12 months......................................... 1,000 265 0.81 6.17 36 months......................................... 1,000 8 0.02 6.00 60 months......................................... 1,000 80 0.24 5.08 ------- ------ Total certificates and IRAs..................... 23,867 73.09 5.44 ------- ------ Total deposits.................................. $32,657 100.00% 4.63% ======= ======
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, ------------------------------------------ 1999 1998 1997 ------- ------- ------- (In thousands) 4.00% and under.................... $ --- $ 65 $ 55 4.01 - 6.00 %...................... 19,682 14,971 14,174 6.01 - 8.00%....................... 4,185 4,020 5,304 ------- ------- ------- Total ............................ $23,867 $19,056 $19,533 ======= ======= =======
The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following June 30, 1999, and the total amount maturing thereafter. Matured certificates which have not been renewed as of June 30, 1999, have been allocated based upon certain rollover assumptions:
Amounts At June 30, 1999, Maturing in --------------------------------------------------------------- One Year Two Three Greater Than or Less Years Years Three Years ------- ----- ----- ----------- (In thousands) 4.00% and under................ $ --- $ --- $ --- $ --- 4.01 - 6.00 %.................. 14,686 2,562 324 2,110 6.01-8.00%..................... 3,117 177 520 371 ------- ------ ---- ------ Total ........................ $17,803 $2,739 $844 $2,481 ======= ====== ==== ======
- 15 - The following table indicates the amount of the Bank's certificates of deposit of $100,000 or more by time remaining until maturity as of June 30, 1999. Maturity (In thousands) Three months or less................................. $ 535 Greater than three months through six months.............................. 1,981 Greater than six months through twelve months........................... 1,327 Over twelve months................................... 1,305 ------ Total........................................... $5,148 ====== The following table sets forth the dollar amount of savings deposits in the various types of deposits programs offered by the Bank at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period.
Deposit Activity --------------------------------------------------------------------------------------------- Increase Increase (Decrease) (Decrease) Balance at from Balance at from Balance at June 30, % of June 30, June 30, % of June 30, June 30, % of 1999 Deposits 1998 1998 Deposits 1997 1997 Deposits ---------- -------- ------- ---------- -------- --------- --------- ---------- (Dollars in thousands) Withdrawable: Savings accounts................. $ 3,782 11.58% $511 $3,271 12.28% $ 329 $2,942 11.25% Money market accounts............ 1,715 5.25 203 1,512 5.67 (705) 2,217 8.48 NOW accounts and other transaction accounts..... 3,293 10.08 483 2,810 10.54 1,345 1,465 5.60 ------- ------ ------ ------- ------ ---- ------- ------ Total withdrawable............. 8,790 26.91 1,197 7,593 28.49 969 6,624 25.33 Certificates (original terms): 91 days.......................... 193 0.59 61 132 0.50 (24) 156 0.60 6 months......................... 918 2.81 209 709 2.66 45 664 2.54 12 months........................ 11,816 36.21 4,625 7,191 26.98 720 6,471 24.74 24 months........................ 2,911 8.91 547 2,364 8.87 (892) 3,256 12.43 30 months........................ 2,572 7.88 (251) 2,823 10.59 (207) 3,030 11.58 36 months........................ 416 1.27 11 405 1.52 (101) 506 1.93 48 months........................ 671 2.05 (50) 721 2.71 (94) 815 3.12 60 months........................ 4,017 12.30 (609) 4,626 17.36 12 4,614 17.64 IRAs (original terms): 12 months........................ 265 0.81 193 72 0.27 65 7 0.03 36 months........................ 8 0.02 1 7 0.03 --- 7 0.03 60 months........................ 80 0.24 74 6 0.02 (1) 7 0.03 ------- ------ ------ ------- ------ ---- ------- ------ Total certificates and IRAs.... 23,867 73.09 4,811 19,056 71.51 (477) 19,533 74.67 ------- ------ ------ ------- ------ ---- ------- ------ Total deposits............... $32,657 100.00% $6,008 $26,649 100.00% $492 $26,157 100.00% ======= ====== ====== ======= ====== ==== ======= ======
During fiscal year 1998, the Bank began offering to its customers a new deposit product called the "Money Management Account." The Money Management Account is similar to a money market checking account, but customers do not have check writing privileges. Funds may be transferred from non-interest-bearing accounts or interest-bearing accounts paying lower rates into the Money Management Account. Funds may also be transferred from the Money Management Account into other accounts at the Bank when such funds are needed by the customer. The number of fund transfers per month is limited by the Bank, and the Money Management Account has a minimum required balance of $5,000. The Bank also began offering individual retirement account ("IRA") certificates of deposit during fiscal year 1998. Borrowings. The Bank focuses on generating loans by utilizing the best source of funding from deposits, investments or borrowings. At June 30, 1999, the Bank had $13.2 million in borrowings from the FHLB of Indianapolis, which mature on various dates primarily during the years 2000 through 2005 and have interest rates ranging from 5.17% to 6.86%. The Bank does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. The Bank had $30.9 million in eligible assets available as collateral - 16 - for advances from the FHLB of Indianapolis as of June 30, 1999. Based on the Bank's blanket collateral agreements, advances from the FHLB of Indianapolis must be collateralized by 170% of eligible assets. Therefore, the Bank's eligible collateral would have supported approximately $19.2 million in advances from the FHLB of Indianapolis as of June 30, 1999. However, the Bank's Board of Directors has by resolution limited the amount of authorized borrowings to $16.0 million at June 30, 1999. The following table presents certain information relating to the Bank's FHLB borrowings for the years ended June 30, 1999, 1998 and 1997.
At or for the Year Ended June 30, ------------------------------------------- 1999 1998 1997 ------- ------ -------- (Dollars in thousands) FHLB Advances: Average balance outstanding....................... $10,242 $8,592 $ 7,725 Maximum amount outstanding at any month-end during the period..................... 13,200 10,000 10,000 Weighted average interest rate during the period............................... 5.83% 6.16% 6.30% Weighted average interest rate at end of period................................ 5.61% 6.01% 6.29%
Service Corporation Subsidiary BSF, Inc., the Bank's service corporation subsidiary ("BSF"), was organized in 1989 and has historically engaged in the purchasing and developing of large tracts of real estate. After land was acquired, BSF subdivided the real estate into lots, made improvements such as streets and sold individual lots, usually on contract. Each subdivision has separate restrictive covenants, but most permit mobile or modular homes. In connection with the Bank's conversion to an Indiana mutual savings bank in 1996, the FDIC required the Bank to cease BSF's land acquisitions and divest of BSF's non-conforming real estate holdings within five years, among other conditions. Recognizing the FDIC's mandate, BSF has methodically reduced its outstanding land contracts and real estate holdings. As of June 30, 1999, outstanding contracts on BSF subdivision lots were: Name of Subdivision Number of Contracts Contract Balance ------------------- ------------------- ---------------- 10 O'Clock Line 3 $ 39,340 Greene Woods 3 34,412 Autumn Hills 11 115,829 Coon Path 2 18,662 Purchased contracts 2 15,112 -- -------- Total outstanding contracts 21 $223,355 == ======== Additionally, at June 30, 1999, BSF had four unsold lots in Coon Path with a sale price of $44,900 and cost of $20,433. BSF, from time to time, keeps a number of its tracts of land for mobile home repossession. BSF purchases repossessed mobile homes from the Bank at book value, which would approximate market value. The mobile homes are then placed on the vacant tracts of land and sold by BSF, thereby protecting the Bank from related losses. Currently, the Bank has no mobile homes on lots waiting for sale. - 17 - BSF pays the Bank rent of $500 per month for the use of its facilities and management and staff support. The operations of BSF are managed by the Bank's and the Holding Company's Chairman, Frank R. Stewart. All of the Bank's directors serve as directors of BSF, and BSF's executive officers are as follows: Frank R. Stewart President Robert W. Raper Vice President Charles W. Chambers Secretary and Treasurer In order to permit the Company to continue its profitable real estate development activities through BSF, the Company and the Bank successfully sought charter conversions under the authority granted to the Office of Thrift Supervision ("OTS"). Effective May 1, 1999 the Company became a federally chartered savings and loan holding company and the Bank became a federal stock savings bank. Management expects the resumption of BSF activity to have a positive impact on Company earnings in future periods. At June 30, 1999, the Bank's aggregate investment in BSF was $305,000. The consolidated statements of income of the Bank and its subsidiary included elsewhere herein include the operations of BSF. All significant intercompany balances and transactions have been eliminated in the consolidation. The following are a condensed balance sheet for BSF at June 30, 1999, 1998 and 1997, and a condensed income statement for BSF for the years ended June 30, 1999, 1998 and 1997.
Condensed Balance Sheet June 30, --------------------------------------------------------- 1999 1998 1997 ---- ---- ---- (In thousands) Assets: Cash................................. $72 $ 14 $ 29 Investment securities................ --- 85 --- Loans, net........................... 223 329 370 Land acquired for development........ 20 21 21 ---- ---- ---- Total assets..................... $315 $449 $420 ==== ==== ==== Liabilities: Other liabilities.................... $10 10 3 ---- ---- ---- Total liabilities................ --- 10 3 Equity Capital.......................... 305 439 417 ---- ---- ---- Total liabilities and equity capital................. $315 $449 $420 ==== ==== ==== Condensed Income Statement June 30, ----------------------------------------------------------- 1999 1998 1997 ---- ---- ---- (In thousands) Interest income......................... $35 $ 39 $44 Interest expense........................ --- --- --- ---- ---- ---- Net interest income.................. 35 39 44 ---- ---- ---- Income from sale of real estate......... 6 7 31 Non-interest expense: Salaries and employee benefits....... 5 4 4 Printing and office supplies......... 1 --- 6 Other expenses....................... 8 7 8 ---- ---- ---- Total non-interest expense....... 14 11 18 ---- ---- ---- Income before income tax................ 27 35 57 Income tax expense................... 11 14 22 ---- ---- ---- Net income....................... $16 $ 21 $35 ==== ==== ====
- 18 - Income Tax Credits The Company's subsidiary Bank entered into a Partnership Agreement ("Agreement") with Area Ten Development, Inc. (the "General Partner"), a wholly owned subsidiary of Area 10 Council on Aging of Monroe and Owen Counties, Inc. to finance construction and development of a low income housing project. The project, Cunot Apartments, L.P., is a 24-unit apartment complex for senior living. The Bank purchased a 99% limited partnership interest for $732,000. Funds were dispersed by installments during project construction, which was completed during July 1999. The Bank's investment in the project is eligible for income tax credits over the fifteen-year life of the Agreement. As of June 30, 1999, the total capitalized building, land and organizational costs for the project were $1,373,000. Management estimates that the Bank will be able to utilize approximately $107,000 in low-income tax credit annually, beginning in fiscal year 2000. However, to maximize the benefit of the tax credits, the project must maintain an acceptable occupancy rate and prove that it qualifies for the tax credits on an annual basis. Additionally, there are no assurances that changes in tax laws will not affect the availability of low income tax credits in future years. Recent reports from the General Partner indicate an occupancy rate of approximately 80%. In accordance with the Agreement, the process of certifying the project's eligibility for tax credits if currently underway. Employees As of June 30, 1999, the Company employed 20 persons on a full-time basis and four persons on a part-time basis. None of the Company's employees is represented by a collective bargaining group. Management considers its employee relations to be excellent. The Company's employee benefits for full-time employees include, among other things, a Pentegra (formerly known as Financial Institutions Retirement Fund) defined benefit pension plan ("Pension Plan"), a Pentegra thrift plan, and major medical, dental, and short-term and long-term disability insurance. As part of the conversion to stock form, the Company established the Employee Stock Ownership Plan and Trust ("ESOP") and the Management Recognition and Retention Plan and Trust ("RRP"). In October, 1997, the shareholders approved the Stock Option Plan. The ESOP, RRP and the Stock Option Plan are employee benefit plans designed to provide directors and employees of the Bank and the Holding Company with ownership interest in the Company. Employee benefits are considered by management to be competitive with those offered by other financial institutions and major employers in the Bank's area. COMPETITION The Bank originates most of its loans to and accepts most of its deposits from residents of Owen County and Putnam County, Indiana. The Bank is the oldest continuously operating financial institution headquartered in Owen County, Indiana. The Bank is subject to competition from various financial institutions, including state and national banks, state and federal savings institutions, credit unions, and certain non-banking consumer lenders, and other companies or firms, including brokerage houses and mortgage brokers that provide similar services in Owen County. The Bank also competes with money market funds with respect to deposit accounts and with insurance companies with respect to individual retirement accounts. Under current law, bank holding companies may acquire savings associations. Savings associations may also acquire banks under federal law. To date, several bank holding company acquisitions of savings associations in Indiana have been completed. Affiliations between banks and healthy savings associations based in Indiana may also increase the competition faced by the Company. Because of recent changes in federal law, interstate acquisitions of banks are less restricted than they were under prior law. Savings associations have certain powers to acquire savings associations based in other states, and Indiana law expressly permits reciprocal acquisition of Indiana savings associations. In addition, Federal savings associations are permitted to branch on an interstate basis. See "Regulation--Acquisitions or Dispositions and Branching." - 19 - The primary factors in competing for deposits are interest rates and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services it provides borrowers and through interest rates and loan fees it charges. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors which are not readily predictable. REGULATION General The Bank, as a federally chartered savings bank, is a member of the Federal Home Loan Bank System ("FHLB System") and its deposits are insured by the Federal Deposit Insurance Corporaiton ("FDIC") and it is a member of the Savings Association Insurance Fund (the "SAIF"), which is administered by the FDIC. The Bank is subject to extensive regulation by the OTS. Federal associations may not enter into certain transactions unless certain regulatory tests are met or they obtain prior governmental approval and the associations must file reports with the OTS about their activities and their financial condition. Periodic compliance examinations of the Bank are conducted by the OTS which has, in conjunction with the FDIC in certain situations, examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and federal deposit insurance funds. The Bank is also subject to certain reserve requirements under regulations of the Board of Governors of the Federal Reserve System ("FRB"). An OTS regulation establishes a schedule for the assessment of fees upon all savings associations to fund the operations of the OTS. The regulation also establishes a schedule of fees for the various types of applications and filings made by savings associations with the OTS. The general assessment, to be paid on a semiannual basis, is based upon the savings association's total assets, including consolidated subsidiaries, as reported in a recent quarterly thrift financial report. Currently, the quarterly assessment rates range from .01164% of assets for associations with assets of $67 million or less to .00308% for associations with assets in excess of $35 billion. The Bank's semiannual assessment under this assessment scheme, based upon its total assets at March 31, 1999, was $9,151. The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirements of their own securities, and limitations upon other aspects of banking operations. In addition, the activities and operations of the Bank are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust laws. The U.S. Congress is currently considering broad financial reform legislation intended to modernize the financial services industry. Under the pending legislation, bank holding companies may be authorized, subject to certain conditions, to acquire manufacturing and other nonfinancial companies, and nonfinancial companies may be authorized to acquire banks. Other provisions of the pending legislation could affect the types of activities in which a unitary savings and loan holding company, such as the Holding Company, may engage. In addition, previous versions of banking reform legislation considered by Congress included provisions that would require all federal savings associations, including the Bank, to convert to either a state bank or a national bank and would require savings and loan holding companies to become bank holding companies. Because Congress is currently considering different versions of the proposed legislation, it cannot be determined which of these conflicting provisions might be included in any final legislation approved by Congress or how such legislation, if enacted, would affect the activities of the Holding Company or the Bank. Federal Home Loan Bank System The Bank is a member of the FHLB of Indianapolis, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its member savings associations and othe financial institutions within its assigned region. It is funded primarily from funds deposited by savings associations and proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB advances - 20 - must be fully secured by sufficient collateral as determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis. As a member, the Bank is required to purchase and maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. The Bank is currently in compliance with this requirement. At June 30, 1999, the Bank's investment in stock of the FHLB of Indianapolis was $660,000. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate-related collateral to 30% of a member's capital and limiting total advances to a member. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. All twelve FHLBs are required by law to provide funds for the resolution of troubled savings associations and to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low- and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations have adversely affected the level of FHLB dividends paid and could continue to do so in the future. For the fiscal year ended June 30, 1999, dividends paid by FHLB to the Bank totaled $45,000, for an annual rate of 8.01%. Liquidity Federal regulations require the Bank to maintain minimum levels of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of mutual funds and certain corporate debt securities and commercial paper) equal to an amount not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to an amount within the range of 4% to 10% depending upon economic conditions and savings flows of member institutions. The OTS recently lowered the level of liquid assets that must be held by a savings association from 5% to 4% of the association's net withdrawable accounts plus short-term borrowings based upon the average daily balance of such liquid assets for each quarter of the association's fiscal year. The Bank has historically maintained its liquidity ratio at a level in excess of that required. At June 30, 1999, the Bank's liquidity ratio was 38.4%. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. Insurance of Deposits The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial banks and state savings banks and the SAIF for savings associations such as the Bank and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. As of September 30, 1996, the reserves of the SAIF were below the level required by law, primarily because a significant portion of the assessments paid into the SAIF have been used to pay the cost of prior thrift failures, while the reserves of the BIF met the level required by law in May, 1995. However, on September 30, 1996, provisions designed to recapitalize the SAIF and eliminate the premium disparity between the BIF and SAIF were signed into law, as further described below. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. - 21 - On September 30, 1996, President Clinton signed into law legislation which included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, the Bank was charged a one-time special assessment equal to $.657 per $100 in assessable deposits at March 31, 1995. The Bank recognized this one-time assessment as a non-recurring operating expense of $142,000 ($86,000 after tax) during the three-month period ended September 30, 1996. The assessment was fully deductible for both federal and state income tax purposes. Beginning January 1, 1997, the Bank's annual deposit insurance premium was reduced from .23% to .06% of total assessable deposits. BIF institutions pay lower assessments than comparable SAIF institutions because BIF institutions pay only 20% of the rate being paid by SAIF institutions on their deposits with respect to obligations issued by the federally-chartered corporation which provided some of the financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for the merger of the SAIF and the BIF by 1999, but not until such time as bank and thrift charters are combined. Until the charters are combined, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees, and SAIF institutions will continue to pay higher FICO assessments. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met. Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. The OTS recently adopted a regulation, which became effective April 1, 1999, that requires savings associations that receive the highest supervisory rating for safety and soundness to maintain "core capital" of at least 3% of total assets. All other savings associations must maintain core capital of at least 4% of total assets. Core capital is generally defined as common shareholders' equity (including retained income), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights and purchased credit card relationships (subject to certain limits) less nonqualifying intangibles. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustment in an amount up to 100% of tangible capital) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the savings association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%). A credit risk-free asset, such as cash, requires no risk-based capital, while an asset with a significant credit risk, such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, its entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). At June 30, 1999, the Bank was in compliance with all capital requirements imposed by law. The OTS has promulgated a rule which sets forth the methodology for calculating an interest rate risk component to be used by savings associations in calculating regulatory capital. The OTS has delayed the implementation of this rule, however. The rule requires savings associations with "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200-basis-point move in interest rates) to maintain additional capital for interest rate risk under the risk-based capital framework. If the OTS were to implement this regulation, the Bank would be exempt from its provisions because it has less than $300 million in assets and its risk-based capital ratio exceeds 12%. The Bank nevertheless measures its interest rate risk in conformity with the OTS regulation and, as of June 30, 1999, the Bank's interest rate risk was within the parameters set forth in the regulation. - 22 - If an association is not in compliance with the capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and the FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements. These actions may include restricting the operations activities of the association, imposing a capital directive, cease and desist order, or civil money penalties, or imposing harsher measures such as appointing a receiver or conservator or forcing the association to merge into another institution. Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991, as amended ("FedICIA") requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At June 30, 1999, the Bank was categorized as "well capitalized," meaning that its total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The FDIC may order savings associations which have insufficient capital to take corrective actions. For example, a savings association which is categorized as "undercapitalized" would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a savings association would be required to guarantee that the savings association complies with the restoration plan. "Significantly undercapitalized" savings associations would be subject to additional restrictions. Savings associations deemed by the FDIC to be "critically undercapitalized" would be subject to the appointment of a receiver or conservator. Capital Distributions Regulation The OTS recently adopted a regulation, which became effective on April 1, 1999, that revised the restrictions that apply to "capital distributions" by savings associations. The amended regulation defines a capital distribution as a distribution of cash or other property to a savings association's owners, made on account of their ownership. This definition includes a savings association's payment of cash dividends to shareholders, or any payment by a savings association to repurchase, redeem, retire, or otherwise acquire any of its shares or debt instruments that are included in total capital, and any extension of credit to finance an affiliate's acquisition of those shares or interests. The amended regulation does not apply to dividends consisting only of a savings association's shares or rights to purchase such shares. The amended regulation exempts certain savings associations from the requirement under the previous regulation that all savings associations file either a notice or an application with the OTS before making any capital distribution. As revised, the regulation requires a savings association to file an application for approval of a proposed capital distribution with the OTS if the association is not eligible for expedited treatment under OTS's application processing rules, or the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the savings association's net income for that year to date plus the savings association's retained net income for the preceding two years - 23 - (the "retained net income standard"). At June 30, 1999, the Bank's retained net income standard was 554,000. A savings association must also file an application for approval of a proposed capital distribution if, following the proposed distribution, the association would not be at least adequately capitalized under the OTS prompt corrective action regulations, or if the proposed distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the association and the OTS or the FDIC. The amended regulation requires a savings association to file a notice of a proposed capital distribution in lieu of an application if the association or the proposed capital distribution do not meet the conditions described above, and: (1) the savings association will not be at least well capitalized (as defined under the OTS prompt corrective action regulations) following the capital distribution; (2) the capital distribution would reduce the amount of, or retire any part of the savings association's common or preferred stock, or retire any part of debt instruments such as notes or debentures included in the association's capital under the OTS capital regulation; or (3) the savings association is a subsidiary of a savings and loan holding company. Because the Bank is a subsidiary of a savings and loan holding company, this latter provision requires that, at a minimum, the Bank must file a notice with the OTS thirty days before making any capital distributions to the Holding Company. In addition to these regulatory restrictions, the Bank's Plan of Conversion imposes additional limitations on the amount of capital distributions it may make to the Holding Company. The Plan of Conversion requires the Bank to establish and maintain a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders and prohibits the Bank from making capital distributions to the Holding Company if its net worth would be reduced below the amount required for the liquidation account. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC pursuant to FedICIA place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in the institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. The Bank does not believe that these regulations will have a materially adverse effect on its current operations. Safety and Soundness Standards On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. On August 27, 1996, the federal banking agencies added asset quality and earning standards to the safety and soundness guidelines. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's board of directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Loans to One Borrower Under OTS regulations, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. In some cases, a savings association may lend up to 30 percent of unimpaired capital and surplus to one borrower for purposes of developing domestic residential housing, provided that the association meets its regulatory capital requirements and the OTS authorizes the association to use this expanded lending authority. At June 30, 1999, the Bank did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits. The Bank does not believe that the loans-to-one-borrower limits will have a significant impact on its business operations or earnings. - 24 - Transactions with Affiliates The Bank and Holding Company are subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. Holding Company Regulation The Holding Company is regulated as a "non-diversified unitary savings and loan holding company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and subject to regulatory oversight of the Director of the OTS. As such, the Holding Company is registered with the OTS and thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Holding Company and with other companies affiliated with the Holding Company. The HOLA generally prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from (i) acquiring control of any other savings association or savings and loan holding company or controlling the assets thereof or (ii) acquiring or retaining more than 5 percent of the voting shares of a savings association or holding company thereof which is not a subsidiary. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock may also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. The Holding Company's Board of Directors presently intends to continue to operate the Holding Company as a unitary savings and loan holding company. Under current OTS regulations, there are generally no restrictions on the permissible business activities of a unitary savings and loan holding company. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company would become subject to the activities restrictions applicable to multiple holding companies. (Additional restrictions on securing advances from the FHLB also apply). See "--Qualified Thrift Lender." At June 30, 1999, the Bank's asset composition was in excess of that required to qualify the Bank as a Qualified Thrift Lender. If the Holding Company were to acquire control of another savings institution other than through a merger or other business combination with the Bank, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Holding Company and any of its subsidiaries (other than the Bank or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution, (iv) holding or managing properties used or occupied by a subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by multiple holding companies or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS prior to being engaged in by a multiple holding company. - 25 - The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5,1987, or if the laws of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings association holding companies with their principal place of business in Indiana ("Indiana Savings Association Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings Association Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings associations holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions. No subsidiary savings association of a savings and loan holding company may declare or pay a dividend on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS thirty days advance notice of such declaration and payment. Any dividend declared during such period or without the giving of such notice shall be invalid. Federal Securities Law The shares of Common Stock of the Holding Company are registered with the SEC under the 1934 Act. The Holding Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. If the Holding Company has fewer than 300 shareholders, it may deregister the shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration or unless sold in accordance with the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including conditions that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Qualified Thrift Lender Savings associations must meet a QTL test. If the Bank maintains an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise qualifies as a QTL, the Bank will continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the association in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every twelve months. A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall not be eligible for any new FHLB advances; and (iv) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must (i) dispose of any investment or activity not permissible for a national bank and a savings association and (ii) repay all outstanding FHLB - 26 - advances. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). A savings association failing to meet the QTL test may requalify as a QTL if it thereafter meets the QTL test. In the event of such requalification it shall not be subject to the penalties described above. A savings association which subsequently again fails to qualify under the QTL test shall become subject to all of the described penalties without application of any waiting period. At June 30, 1999, 88.4% of the Bank's portfolio assets (as defined on that date) were invested in qualified thrift investments (as defined on that date), and therefore the Bank's asset composition was in excess of that required to qualify the Bank as a QTL. Also, the Bank does not expect to significantly change its lending or investment activities in the near future. The Bank expects to continue to qualify as a QTL, although there can be no such assurance. Acquisitions or Dispositions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the FRB restrict the branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks. Subject to certain exceptions, commonly controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. Finally, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion, provided that such transactions are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo banks on a reciprocal basis. The Indiana Branching Law became effective March 15, 1996. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating -- outstanding, satisfactory, unsatisfactory and needs improvement -- and a written evaluation of each institution's - 27 - performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The OTS examiners have determined that the Bank has a satisfactory record of meeting community credit needs. TAXATION Federal Taxation Historically, savings banks have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank is not able to use the percentage of taxable income method of computing its allocable tax bad debt deduction. The Bank will be required to compute its allocable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. In addition, the pre-1988 reserve, in which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Internal Revenue Code of 1986, as amended (the "Code"); or (ii) excess dividends are paid out by the Bank. Depending on the composition of its items of income and expense, a savings association may be subject to the alternative minimum tax. A savings association must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid can be credited against regular tax due in later years. For federal income tax purposes, the Bank has been reporting its income and expenses on the accrual method of accounting. The Bank's federal income tax returns have not been audited in recent years. State Taxation The Bank is subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications, the most notable of which is the required addback of interest that is tax-free for federal income tax purposes. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. The Bank's state income tax returns have not been audited in recent years. Item 2. Properties. The Company conducts business from its main office at 279 East Morgan Street, Spencer, Indiana 47460, and its branch office at 102 South Main Street, Cloverdale, Indiana 46120. The Company owns both of its offices. - 28 - The following table provides certain information with respect to the Company's offices as of June 30, 1999:
Net Book Value of Property, Owned or Year Total Furniture & Approximate Description and Address Leased Opened Deposits Fixtures Square Footage ----------------------- ------ ------ -------- -------- -------------- (Dollars in thousands) 279 East Morgan Street Owned 1987 $29,555 $1,037 11,300 Spencer, IN 47460 (including annex) 102 South Main Street Owned 1998 $ 3,102 $ 948 6,000 Cloverdale, IN 46120
The Cloverdale, Indiana branch office opened for business on October 1, 1998. As of June 30, 1999, the Bank also owned a parcel of real estate located across the street from its Spencer office that is used for employee parking. The Company owns computer and data processing equipment that is used for transaction processing, loan origination, and accounting. The Bank has also contracted for the data processing and reporting services of On-Line Financial Services, Inc. in Oak Brook, Illinois, which was acquired in April 1999 by GFS Holdings Co. The cost of these data processing services was approximately $8,000 per month for the twelve months ended June 30, 1999. Item 3. Legal Proceedings. Neither the Holding Company nor the Bank is a party to any pending legal proceedings, other than routine litigation incidental to the Bank's business. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the Holding Company's shareholders during the quarter ended June 30, 1999. Item 4.5. Executive Officers of the Registrant. Presented below is certain information regarding the executive officers of the Holding Company: Name Position ---- -------- Kurt J. Meier President, Chief Executive Officer and Treasurer Kurt D. Rosenberger Vice President and Chief Financial Officer Charles W. Chambers Secretary Kurt J. Meier (age 49) is President, Chief Executive Officer and Treasurer of the Holding Company. Mr. Meier has also served as President of the Bank since 1994. Theretofore, he served as Managing Officer of the Bank from 1990 to 1994. Kurt D. Rosenberger (age 40) is Vice President and Chief Financial Officer of the Holding Company. Mr. Rosenberger has also served as Vice President of the Bank since 1994. Theretofore, he served as Senior Financial Analyst for the Office of Thrift Supervision in Indianapolis, Indiana, from 1990 to 1994. Charles W. Chambers (age 84) is Secretary of the Holding Company. Mr. Chambers has also served as a Staff Appraiser of the Bank from 1991 to 1996 and as Secretary of the Bank since 1990. - 29 - PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. The Holding Company's common stock, without par value ("Common Stock"), is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), SmallCap Market, under the symbol "HWEN." As of August 23, 1999, there were approximately 450 holders of the Holding Company's Common Stock, including shares held in broker accounts. The following table sets forth the high and low bid prices and dividends paid per share of Common Stock for the quarters indicated. Such over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. Quarter Ended High Bid Low Bid Dividends Declared -------------------------------------------------------------------------- September 30, 1997 $ 8 5/8 $ 7 7/16 $ .025 December 31, 1997 9 1/4 8 1/8 .025 March 31, 1998 9 3/4 8 3/4 .025 June 30, 1998 9 1/2 8 7/16 .025 September 30, 1998 9 7 5/8 0.25 December 31, 1998 7 7/8 6 1/2 0.30 March 31, 1999 8 7 0.30 June 30, 1999 7 7/8 7 0.30 Since the Holding Company has no independent operations or other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to its shareholders is directly dependent upon the earnings on its investment securities and the ability of the Bank to pay dividends to the Holding Company. The Bank's ability to pay dividends is subject to certain regulatory restrictions. See "Regulations -- Capital Distributions Regulation." Under current federal income tax law, dividend distributions with respect to the Common Stock, to the extent that such dividends paid are from the current or accumulated earnings and profits of the Bank (as calculated for federal income tax purposes), will be taxable as ordinary income to the recipient and will not be deductible by the Bank. Any dividend distributions in excess of current or accumulated earnings and profits will be treated for federal income tax purposes as a distribution from the Bank's accumulated bad debt reserves, which could result in increased federal income tax liability for the Company. Moreover, the Bank may not pay dividends to the Holding Company if such dividends would result in the impairment of the liquidation account established in connection with the Conversion. Unlike the Bank, generally there is no regulatory restriction on the payment of dividends by the Holding Company. Indiana law, however, would prohibit the Holding Company from paying a dividend, if after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the ordinary course of business or if the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. Item 6. Selected Financial Data. The information required by this item is incorporated by reference to the material under the heading "Selected Consolidated Financial Data of Home Financial Bancorp and Subsidiary" on pages 2 through 3 of the Shareholder Annual Report. - 30 - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. The information required by this item is incorporated by reference to pages 4 through 17 of the Shareholder Annual Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is incorporated by reference to pages 5 through 7 of the Shareholder Annual Report. Item 8. Financial Statements and Supplementary Data. The Company's Consolidated Financial Statements and Notes thereto are contained on pages 18 through 37 of the Shareholder Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There were no such changes or disagreements during the applicable period. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item with respect to directors is incorporated by reference to pages 2 through 4 of the Company's Proxy Statement for its 1999 Shareholder Annual Meeting (the "1999 Proxy Statement"). Information concerning the Holding Company's executive officers is included in Item 4.5 in Part I of this report. Information concerning the Holding Company's executive officers is included in Item 4.5 in Part I of this report. Information concerning compliance with Section 16(a) of the Exchange Act is incorporated by reference to page 7 of the 1999 Proxy Statement. Item 11. Executive Compensation. The information required by this item with respect to executive compensation is incorporated by reference to pages 5 through 6 of the 1999 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated by reference to pages 1 through 3 of the 1999 Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to page 6 of the 1999 Proxy Statement. - 31 - PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) List the following documents filed as part of the report: Annual Report Financial Statements Page No. Independent Auditor's Report 18 Consolidated Statement of Financial Condition at June 30, 1999, and 1998 19 Consolidated Statement of Income for the Years Ended June 30, 1999, 1998, and 1997 20 Consolidated Statement of Stockholders' Equity for the Years Ended June 30, 1999, 1998, and 1997 21 Consolidated Statement of Cash Flows for the Years Ended June 30, 1999, 1998, and 1997 22 Notes to Consolidated Financial Statements 23-37 (b) Reports on Form 8-K. The Holding Company filed no reports on Form 8-K during the quarter ended June 30, 1999. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page E-1. Included in those exhibits are Executive Compensation Plans and Arrangements which are identified as Exhibits 10(1) through 10(5). (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes. - 32 - SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on behalf of the undersigned, thereto duly authorized. HOME FINANCIAL BANCORP Date: September 27, 1999 By: /s/ Kurt J. Meier -------------------------------------- Kurt J. Meier, President, Chief Executive Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 27th day of September, 1999. /s/ Kurt J. Meier - -------------------------------- Kurt J. Meier President, Chief Executive Officer, Treasurer and Director (Principal Executive Officer) /s/ Kurt D. Rosenberger - -------------------------------- Kurt D. Rosenberger Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer) /s/ Charles W. Chambers - -------------------------------- Charles W. Chambers, Secretary and Director /s/ John T. Gillaspy - -------------------------------- John T. Gillaspy, Director /s/ Gary Michael Monnett - -------------------------------- Gary Michael Monnett, Director /s/ Stephen Parrish - -------------------------------- Stephen Parrish, Director /s/ Robert W. Raper - -------------------------------- Robert W. Raper, Vice Chairman /s/ Frank R. Stewart - -------------------------------- Frank R. Stewart, Chairman /s/ Tad Wilson - -------------------------------- Tad Wilson, Director - 33 - EXHIBIT INDEX Exhibit Index* Page 3(1) The Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3(1) to the Registration Statement on Form S-1 (Registration No. 333-1746). 3(2) The Code of By-Laws of the Registrant are incorporated by reference to Exhibit 3(2) to the Report on Form 10-Q for the period ended March 31, 1997. 10(1) Exempt Loan and Share Purchase Agreement between ESOP Trust and Home Financial Bancorp is incorporated by reference to Exhibit 10(1) to the Report on Form 10-K for the period ended June 30, 1996. 10(2) Share Pledge Agreement between ESOP Trust and Home Financial Bancorp is incorporated by reference to Exhibit 10(2) to the Report on Form 10-K for the period ended June 30, 1996. 10(3) Employment Agreement between Owen Community Bank, s.b. and Kurt J. Meier is incorporated by reference to Exhibit 10(5) to the Registration Statement on Form S-1 (Registration No. 333-1746). 10(4) Employment Agreement between Owen Community Bank, s.b. and Kurt D. Rosenberger is incorporated by reference to Exhibit 10(6) to the Registration Statement on Form S-1 (Registration No. 333-1746). 10(5) Employment Contract between Owen Community Bank, s.b. and Frank R. Stewart is incorporated by reference to Exhibit 10(7) to the Registration Statement on Form S-1 (Registration No. 333-1746). 10(6) Home Financial Bancorp Stock Option Plan is incorporated by reference to Exhibit 10(6) to the Company's Form 10-Q for the Period Ended September 30, 1997. 13 1999 Shareholder Annual Report. _____ 21 Subsidiaries of the Registrant are incorporated by reference to Exhibit 21 to the Registration Statement on Form S-1 (Registration No. 333-1746). 23 Consent of Independent Auditor _____ 27 Financial Data Schedule (filed electronically). - ------------ * Management contracts and plans required to be filed as exhibits are included as Exhibits 10(1) - 10(6). EX-13 2 1999 SHAREHOLDER ANNUAL REPORT TABLE OF CONTENTS Description of Business....................................................Below Message to Shareholders.................................................... 1 Selected Consolidated Financial Data....................................... 2 Management's Discussion and Analysis....................................... 4 Independent Auditor's Report............................................... 18 Consolidated Statement of Financial Condition.............................. 19 Consolidated Statement of Income........................................... 20 Consolidated Statement of Stockholders' Equity ............................ 21 Consolidated Statement of Cash Flows....................................... 22 Notes to Consolidated Financial Statements................................. 23 Shareholder Information.................................................... 38 Directors and Officers..................................................... 39 DESCRIPTION OF BUSINESS Home Financial Bancorp (the "Holding Company" and together with the Bank (as defined below), "HFB" or the "Company") is an Indiana corporation organized in February 1996, to become a bank holding company upon its acquisition of all the issued and outstanding capital stock of Owen Community Bank, s.b. (the "Bank") in connection with the Bank's conversion from mutual to stock form. The Holding Company became the Bank's holding company on July 1, 1996; therefore, all historical financial and other data contained for periods prior to July 1, 1996 herein relate solely to the Bank while historical financial and other data contained herein for the period after July 1, 1996 relate to the Company. The principal asset of the Holding Company currently consists of 100% of the issued and outstanding shares of common stock, $.01 par value per share, of the Bank. The Bank was organized under the name Owen County Savings and Loan Association in 1911. In 1972, the Bank converted to a federally chartered savings and loan and changed its name to Owen County Federal Savings and Loan Association, and in 1989, the Bank converted to a federally chartered savings bank known as Owen Federal Savings Bank. In 1994, the Bank became an Indiana savings bank known as Owen Community Bank, s.b. Effective May 1, 1999, the Bank converted to a federally chartered stock savings bank and the Company became a savings and loan holding company. The Bank's principal business consists of attracting deposits from the general public and originating long-term adjustable-rate loans secured primarily by first mortgage liens on one- to four-family real estate. The Bank's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is the oldest continuously operating financial institution headquartered in Owen County, Indiana. Management believes the Bank has developed a solid reputation among its loyal customer base because of its commitment to personal service and its strong support of the local community. The Bank offers a number of consumer and commercial financial services. These services include: (i) residential real estate loans; (ii) indemnification mortgage loans ("ID Mortgage Loans"); (iii) mobile home loans; (iv) combination land-mobile home loans ("Combo Loans"); (v) construction loans; (vi) share loans; (vii) nonresidential real estate loans; (viii) multi-family loans; (ix) installment loans; (x) home equity loans; (xi) NOW accounts; (xii) demand deposit accounts; (xiii) passbook savings accounts; and (xiv) certificates of deposit. The Company conducts business out of its main office located in Spencer, Indiana. The Bank is and historically has been a significant real estate mortgage lender in Owen County, Indiana. FELLOW SHAREHOLDERS AND FRIENDS: On behalf of our colleagues and ourselves, we are pleased to present to you the 1999 Annual Report of Home Financial Bancorp. The decision to become a stock company three years ago presented management with choices. One option was to simply maintain the status quo operations of slow growth and average earnings. An alternative was to grow into our capital, and leverage the Bank into a larger institution. We chose the latter. We invested in a new branch in Cloverdale, we built an annex to the Spencer office location, and we invested in tax credits in the Cunot Apartments Retirement Community, among other growth oriented initiatives. We are mindful of the tremendous change occurring in the banking industry in recent years. The challenges facing a small community oriented lending institution have never seemed greater. Recently, mortgage brokers and other originators active in the secondary market have lured away many of our traditional customers with low rates on thirty year fixed rate mortgages. Just the other day we were reminded that approximately 75% of all mortgages originated in the United States last year were done through mortgage brokers. Like many small community banks, this Bank has responded to increased competition by re-inventing itself. Rather than chasing low rate competition and originating marginally profitable loans with excessive interest rate risk, we have evolved into a bank specializing in sub-prime mortgage loans. We make loans on non-conforming collateral to customers with tarnished credit records at risk-adjusted rates. Coupled with aggressive collections, this strategy offers a viable and profitable market niche for the Bank. Additionally, to grow the Bank we have aggressively pursued and acquired several sizable real estate-backed commercial loans extended to low credit risk customers. Although recent infrastructure investments dampened financial results for 1999, management believes that the Bank is better positioned than ever before for long-term growth and enhanced shareholder value. Further, the expansion of our physical facilities during the past year allows the Bank to be a larger, more visible presence in our local market communities. Our new Cloverdale branch is in full swing now and has been successful in attracting many new customers since its doors opened in October 1998. We are pleased with the level of initial deposit and loan growth at the branch and excited about the long-term growth prospects for this location. The branch staff has worked hard to cultivate new customer relationships and promote our services to the Cloverdale community. Our long-term commitment to the Cloverdale area is also reflected in our investment in the newly constructed Cunot Apartments Retirement Community complex. Although conceived of several years ago as a complement to the neighboring Cunot Community and Senior Center, actual groundbreaking for the apartment project was in July 1998. Based on the level of public interest and early occupancy numbers, we anticipate utilizing federal housing tax credits associated with this project as early as the first quarter of fiscal year 2000. Our ability to use these tax credits should have a favorable impact on future earnings. Throughout this past year, we worked hard to improve our existing products and services as well as introduce new ones. We introduced an enhanced construction loan product, two new commercial checking accounts and a new auto loan program. Also this past summer, we entered into a floor-plan financing arrangement with a new local modular and mobile home dealer. We believe this relationship has encouraging growth potential and fits well with our retail-lending niche. Earlier this year we also expanded our lending activities to include a limited number of real estate development loans. During fiscal year 2000, management intends to continue the active pursuit of prudent loan growth opportunities, primarily through mortgage lending. Effective May 1, 1999, Home Financial Bancorp converted from a bank holding company into a savings and loan holding company and Owen Community Bank became a federal stock savings bank. We are convinced that the broader powers afforded by this charter conversion offer greater flexibility and therefore provide more business opportunities for the Company as a whole. Also, as a result of the conversion, the Bank's real estate development subsidiary corporation, BSF, Inc., a reliable source of income in the past, will again be allowed to pursue profitable business opportunities. We believe the decision to convert was made in the best interest of the Bank and its shareholders. During the most recent two quarters, we have seen favorable loan growth while maintaining an attractive yield. During the same period, our overall deposits increased while the average cost on those deposits decreased. We will continue our existing strategy of increasing loan volume and lowering our cost of funds as we enter a new millennium. With our expanded facilities, new markets, and dedicated staff, the opportunity for stronger performance levels looks promising. Respectfully submitted, /s/ Frank R. Stewart /s/ Kurt J. Meier Frank R. Stewart, Chairman Kurt J. Meier, President - 1 -
SELECTED CONSOLIDATED FINANCIAL DATA OF HOME FINANCIAL BANCORP AND SUBSIDIARY The following selected consolidated financial data of the Company is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements, including notes thereto, included elsewhere in this Annual Report. SELECTED FINANCIAL DATA At June 30 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Summary of Financial Condition: Total assets....................................... $53,136 $42,560 $42,508 $39,426 $30,839 Loans receivable, net.............................. 38,238 33,959 34,117 27,125 25,547 Cash and cash equivalents.......................... 2,475 3,802 4,184 5,721 1,386 Securities available for sale...................... 8,288 1,918 2,102 4,901 934 Securities held to maturity........................ --- --- --- --- 1,827 Deposits........................................... 32,657 26,649 26,157 28,726 22,500 Federal Home Loan Bank advances.................... 13,200 8,200 9,000 7,200 5,000 Stockholders' equity............................... 7,123 7,506 7,197 3,410 3,159 Year Ended June 30 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Summary of Operating Results: Interest and dividend income..................... $3,883 $3,690 $3,397 $2,955 $2,420 Interest expense................................. 2,032 1,812 1,703 1,593 1,174 ------ ------ ------ ------ ------ Net interest income........................... 1,851 1,878 1,694 1,362 1,246 Provision for loan losses........................ 44 102 85 94 36 ------ ------ ------ ------ ------ Net interest income after provision for loan losses.............................. 1,807 1,776 1,609 1,268 1,210 ------ ------ ------ ------ ------ Other income: Service charges on deposit accounts........... 84 55 43 37 27 Gain on sale of real estate acquired for development.......................... 6 7 31 57 78 Net realized gain on sales of available for sale securities ...................... 3 141 37 --- --- Other......................................... 32 64 53 47 43 ------ ------ ------ ------ ------ Total other income......................... 125 267 164 141 148 ------ ------ ------ ------ ------ Other expenses: Salaries and employee benefits................ 819 723 521 374 364 Net occupancy expense......................... 110 85 71 67 74 Equipment expense............................. 115 58 61 55 35 Deposit insurance expense..................... 17 16 165 54 49 Computer processing expense................... 152 120 95 75 63 Printing and office supplies.................. 65 41 38 33 32 Advertising................................... 60 47 34 24 26 Legal and professional fees................... 105 123 172 47 35 Directors and committee fees.................. 56 43 42 41 40 Other......................................... 190 188 169 155 148 ------ ------ ------ ------ ------ Total other expenses..................... 1,689 1,444 1,368 925 866 ------ ------ ------ ------ ------ Income before income tax......................... 243 599 405 484 492 Income tax expense............................... 99 206 153 196 203 ------ ------ ------ ------ ------ Net income.................................... $144 $ 393 $ 252 $ 288 $ 289 ====== ====== ====== ====== ======
- 2 -
Year Ended June 30 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Supplemental Data (1): Basic earnings per share......................... $.18 $ .47 $ .27 --- --- Diluted earnings per share....................... .18 .47 .27 --- --- Book value per common share at end of year....... 8.04 8.08 7.66 --- --- Dividends per share.............................. .12 .10 .08 --- --- Dividend payout ratio............................ 66.67% 21.28% 29.63% --- --- Return on assets (2) ............................ 0.30 .93 .63 .84% 1.00% Return on equity (3)............................. 1.99 5.34 3.31 8.71 9.59 Interest rate spread (4) ........................ 3.61 3.87 3.56 3.78 4.19 Net yield on interest-earning assets (5)......... 4.17 4.65 4.41 4.13 4.54 Other expenses to average assets ................ 3.52 3.42 3.40 2.70 2.99 Net interest income to other expenses............ 1.10x 1.30x 1.24x 1.47x 1.44x Equity-to-assets (6)............................. 13.41% 17.66% 16.93% 8.65% 10.24% Average equity to average total assets........... 15.08 17.42 18.90 9.64 10.42 Average interest-earning assets to average interest-bearing liabilities.................. 1.13x 1.17x 1.19x 1.07x 1.08x Non-performing assets to total assets............ .16% 1.17% 1.76% 1.03% .32% Non-performing loans to total loans.............. .20 .81 1.65 1.32 .39 Loan loss allowance to total loans, net.......... .88 .94 .68 .55 .22 Loan loss allowance to non-performing loans...... 425.32 114.70 41.10 41.78 57.00 Net charge-offs to average loans ................ .08 .04 .01 * .02
(1) All per share amounts have been restated to reflect a 2-for-1 stock split effective January 6, 1998. (2) Net income divided by average total assets. (3) Net income divided by average total equity. (4) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. (5) Net interest income divided by average interest-earning assets. (6) Total equity divided by total assets. * Less than .01% - 3 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Holding Company was formed as an Indiana corporation on February 21, 1996, for the purpose of issuing its common stock, without par value (the "Common Stock") and owning all of the outstanding common stock of the Bank to be issued in the Conversion as a unitary bank holding company. As a newly formed corporation, the Holding Company has no operating history prior to July 1, 1996. The principal business of savings banks, including the Bank, has historically consisted of attracting deposits from the general public and making loans secured by residential real estate. The Company's earnings are primarily dependent upon its net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on such loans and investments. Interest expense is a function of the amount of deposits and borrowings outstanding during the same period and interest rates paid on such deposits and borrowings. The Company's earnings are also affected by provisions for loan losses, service charges and other non-interest income, operating expenses and income taxes. The Company is significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid on competing investments, account maturities and level of personal income and savings within the Bank's market. In addition, deposit growth is affected by how customers perceive the stability of the financial services industry amid various current events such as regulatory changes, failures of other financial institutions and financing of the deposit insurance fund. Lending activities are influenced by the demand for and supply of housing lenders, the availability and cost of funds and various other items. Sources of funds for lending activities of the Company include deposits, payments on loans, borrowings and income provided from operations. STOCKHOLDER MATTERS The book value of HFB Common Stock was $8.04 at June 30, 1999. On this same date, the price of HFB Common Stock was $7.88 per share, representing a 98.0% price-to-book value ratio. For the year ended June 30, 1999, quarterly dividends totaling $.12 per share were paid to shareholders. Pursuant to two consecutive repurchase initiatives, the Company purchased and retired 42,852 shares of its Common Stock at an average cost of $7.93 per share during fiscal year 1999. At June 30, 1999, there were 886,200 shares of Common Stock outstanding. HFB Common Stock is traded on the Nasdaq SmallCap Market under the symbol HWEN. As of June 30, 1999, there were approximately 275 shareholders of record, and 170 holders who held stock in nominee or "street" name through various brokerage firms. INCOME TAX CREDITS The Company's subsidiary Bank entered into a Partnership Agreement ("Agreement") with Area Ten Development, Inc. (the "General Partner"), a wholly owned subsidiary of Area 10 Council on Aging of Monroe and Owen Counties, Inc. to finance construction and development of a low income housing project. The project, Cunot Apartments, L.P., is a 24 unit apartment complex for senior living. The Bank purchased a 99% limited partnership interest for $732,000. As of June 30, 1999, the Bank's investment in the Cunot project totaled $696,000. Funds were dispersed by installments during construction, which was completed during July 1999. The Bank's investment in the project is eligible for income tax credits over the fifteen-year life of the Agreement. As of June 30, 1999, the total capitalized building, land and organizational costs for the project was $1,373,000. Management estimates that the Bank will be able to utilize approximately $107,000 in low-income tax credit annually, beginning in fiscal year 2000. However, in order to maximize the benefit of the tax credits the project must maintain an acceptable occupancy rate and prove that it qualifies for the tax credits on an annual basis. - 4 - Additionally, there are no assurances that changes in tax laws will not affect the availability of low income tax credits in future years. Recent reports from the General Partner indicate an occupancy rate of approximately 80%. In accordance with the Agreement, the process of certifying the project's eligibility for tax credits is currently underway. THE YEAR 2000 ISSUE Management and the Board of Directors recognize and understand Year 2000 ("Y2K") risk and have ensured that all necessary resources are available to address this problem. For the remainder of calendar 1999, the project management team will test and evaluate contingency plans and work closely with critical business partners to make sure their systems will be ready for the Year 2000 date change. Management believes that the key to successfully meeting the Y2K challenge is prior testing of all affected systems. The testing phase of the Company's Year 2000 Project Management Plan was completed prior to June 30, 1999. As part of extensive critical date tests, system dates were advanced to the Year 2000 and beyond. No material problems were encountered during this testing process. The Company completed all phases of the Y2K compliance program on schedule and has shifted attention to contingency planning. As part of the Y2K planning process, contingency plans have been established for mission-critical systems. These plans will provide for alternative methods of doing business, which include provisions for a back-up power source and manual processing procedures, if needed. These contingency plans will continue to be reviewed, tested and refined as Year 2000 approaches. The Company has made, and will continue to make, investments in its systems and applications to ensure, to the degree possible, Y2K compliance. Certain minor equipment and software changes have been made in preparation for Year 2000. However, at this point, management anticipates little or no additional Y2K equipment and software changes. Systems testing accounted for over half of Y2K costs during fiscal year 1999. Due to the fact that the Company uses outside data service providers for most of its computer processing operations, it was unnecessary to invest heavily in system improvements to achieve Y2K compliance. For the twelve months ended June 30, 1999, direct costs incurred to address Y2K compliance totaled approximately $58,000. This amount includes expenses for fixing or replacing non-compliant in-house hardware and software, performing multiple systems tests, and contracting the assistance of information technology professionals. This figure does not include the cost of compensation for existing staff members involved in planning, testing and reporting on Y2K issues. Although management believes it has taken the necessary steps to address the Y2K compliance issue, no assurances can be given that some problems will not occur or that the Company will not incur significant additional expenses in future periods. In the event that the Company is ultimately required to purchase replacement computer systems, programs and equipment, or to incur substantial expenses to make its current systems, programs and equipment Y2K compliant, its financial position and results of operations could be adversely impacted. Amounts expensed in fiscal 1997 and 1998 for Y2K readiness were immaterial. ASSET/LIABILITY MANAGEMENT The Bank's profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and securities, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. The Bank, like other financial institutions, is subject to interest rate risk to the degree that its interest-earning assets reprice differently than its interest-bearing liabilities. The Bank manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds. The Bank seeks to control its interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Bank has adopted formal policies and practices to monitor and manage interest rate risk exposure. As part of this effort, the Bank uses the market value ("MV") methodology to gauge interest rate risk exposure. - 5 - Generally, MV is the discounted present value of the difference between incoming cash flows on interest-earning assets and other assets and outgoing cash flows on interest-bearing liabilities and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the MV which would result from a theoretical 200 and 400 basis point (1 basis point equals .01%) change in market interest rates. Both 200 and 400 basis point increases in market interest rates and 200 and 400 basis point decreases in market interest rates are considered. It is estimated that at June 30, 1999, MV would decrease 9.5% and 26.2% in the event of 200 and 400 basis point increases in market interest rates respectively, compared to 3.9% and 19.4% for the same increases at June 30, 1998. The Bank's MV at June 30, 1999 would decrease 10.9% and 19.5% in the event of 200 and 400 basis point decreases in market rates respectively. A year earlier, 200 and 400 basis point decreases in market rates would have decreased MV 8.7% and 14.4% respectively. Differences in MV performance resulting from changes in market rates reflect increases and decreases in cash flow for each asset and liability category. Changes in asset and liability mix, pricing assumptions, loan prepayment rates, transaction account decay rates, and other influences account for modified cash flows from one period to another. Presented below, as of June 30, 1999 and 1998, is an analysis of the Bank's interest rate risk as measured by changes in MV for instantaneous and sustained parallel shifts of 200 and 400 basis point increments in market interest rates. JUNE 30, 1999 MARKET VALUE SUMMARY PERFORMANCE
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 - 6 -
JUNE 30, 1998 MARKET VALUE SUMMARY PERFORMANCE MV as % of Present Value (PV) Change Market Value of Assets In Rates $ Amount $ Change % Change MV Ratio Change - -------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) + 400 bp* $5,058 $ (1,220) (19.44)% 13.26% (191) bp + 200 bp 6,035 (243) (3.87) 15.05 (12) bp 0 bp 6,278 0 0.00 15.17 --- - 200 bp 5,734 (544) (8.67) 13.68 (149) bp - 400 bp 5,376 (902) (14.37) 12.59 (258) bp Interest Rate Risk Measures: 200 Basis Point Rate Shock Pre-Shock MV Ratio: MV as % of PV of Assets................ 15.17% Exposure Measure: Post-Shock MV Ratio...................... 13.68% Sensitivity Measure: Change in MV Ratio.................... 149 bp - -------- * Basis points.
- 7 - AVERAGE BALANCES, INTEREST RATES AND YIELDS The following table presents for the years ended June 30, 1999, 1998 and 1997, the month-end average balances of each category of the Company's interest-earning assets and interest-bearing liabilities, and the average yields earned and interest rates paid on such balances. Such yields and costs are determined by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. AVERAGE BALANCE SHEET/YIELD ANALYSIS
Year Ended June 30, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ---------------------------------------------------------------------------------------- (Dollars in thousands) Assets: Interest-earning assets: Interest-earning deposits.......$ 3,242 $ 157 4.84% $ 3,214 $ 177 5.51% $ 2,692 $ 137 5.09% Investment securities (1)....... 6,022 335 5.55 2,318 167 7.20 4,899 315 6.43 Loans receivable (2)............ 34,547 3,346 9.69 34,366 3,306 9.62 30,418 2,912 9.57 Stock in FHLB of Indianapolis... 562 45 8.01 500 40 8.00 433 33 7.62 ------ ----- ------ ----- ------ ----- Total interest-earning assets. 44,373 3,883 8.75 40,398 3,690 9.13 38,442 3,397 8.84 ------ ------- ------- Non-interest earning assets, net of allowance for loan losses and including unrealized gain (loss) on securities available for sale.............. 3,676 1,860 1,804 ------- -------- -------- Total assets..................$48,049 $42,258 $40,246 ======= ======== ======== Liabilities and stockholders' equity: Interest-bearing liabilities: Savings accounts................$ 3,559 97 2.73 $3,399 103 3.03 $ 3,930 114 2.90 NOW accounts.................... 4,402 123 2.79 3,998 124 3.10 2,162 70 3.24 Certificates of deposit......... 21,364 1,215 5.69 18,482 1,056 5.71 18,465 1,032 5.59 FHLB advances................... 10,242 597 5.83 8,592 529 6.16 7,725 487 6.30 ------ ----- ------ ----- ------ ----- Total interest-bearing liabilities............... 39,567 2,032 5.14 34,471 1,812 5.26 32,282 1,703 5.28 ------ ------- ------- Other liabilities.................. 1,237 426 358 ------- -------- -------- Total liabilities............. 40,804 34,897 32,640 ------- -------- -------- Stockholders' equity............... 7,376 7,316 7,601 Net unrealized gain/(loss) on securities available for sale.............. (131) 45 5 ------- -------- -------- Total stockholders' equity.... 7,245 7,361 7,606 ------- -------- -------- Total liabilities and stockholders' equity......$48,049 $42,258 $40,246 ======= ======== ======== Net interest-earning assets........$ 4,806 $ 5,927 $ 6,160 ======= ======== ======== Net interest income................ $1,851 $ 1,878 $ 1,694 ====== ======= ======= Interest rate spread............... 3.61 3.87 3.56 Net yield on weighted average interest-earning assets......... 4.17 4.65 4.41 Average interest-earning assets to average interest- bearing liabilities............. 112.97% 117.19% 119.08%
(1) Yields for mortgage-backed securities and other investments available for sale are computed based upon amortized cost. (2) Non-accruing loans have been included in average balances. In the foregoing table, no adjustment of interest on tax-exempt securities to a tax-equivalent basis was made since the adjustment was less than $10,000 in each period presented. - 8 - INTEREST RATE SPREAD The Company's results of operations have been impacted primarily by net interest income. Net interest income is determined by the interest rate spread between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities and by the relative amounts of interest-earning assets and interest-bearing liabilities. The following table sets forth the weighted average effective interest rate earned by the Company on its loan, investment portfolios and total interest-earning assets. The table also includes weighted average effective cost of the Company's deposits and borrowings, the interest rate spread of the Company, and the net yield on weighted average interest-earning assets for the periods and as of the date shown. Average balances are based on month-end average balances. INTEREST RATE SPREAD ANALYSIS
Year Ended June 30, At June 30, ------------------------------------- 1999 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Weighted average interest rate earned on: Interest-earning deposits......................... 5.45% 4.84% 5.51% 5.09% Investment securities............................. 5.79 5.55 7.20 6.43 Loans receivable.................................. 9.35 9.69 9.62 9.57 Stock in FHLB of Indianapolis..................... 8.00 8.01 8.00 7.62 Total interest-earning assets................... 8.49 8.75 9.13 8.84 Weighted average interest rate cost of: Savings accounts.................................. 2.57 2.73 3.03 2.90 NOW and money market accounts..................... 2.61 2.79 3.10 3.24 Certificates of deposit........................... 5.36 5.69 5.71 5.59 FHLB advances..................................... 5.68 5.83 6.16 6.30 Total interest-bearing liabilities.............. 4.94 5.14 5.26 5.28 Interest rate spread (1)............................. 3.55 3.61 3.87 3.56 Net yield on weighted average interest-earning assets (2)....................... 4.17 4.65 4.41
(1) Interest rate spread is calculated by subtracting weighted average interest rate cost from weighted average interest rate earned for the period indicated. Interest rate spread figures must be considered in light of the relationship between the amounts of interest-earning assets and interest-bearing liabilities. (2) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. No net yield percentage is presented at June 30, 1999, because the computation of net yield is applicable only over a period rather than at a specific date. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Company's interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (i.e., changes in rate multiplied by old volume) and (2) changes in volume (i.e., changes in volume multiplied by old rate). Changes attributable to both rate and volume have been allocated proportionally to the change due to volume and the change due to rate. - 9 - RATE/VOLUME ANALYSIS
Increase (Decrease) in Net Interest Income ------------------------------------------------- Due to Due to Total Net Volume Rate Change ------------------------------------------------- YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998 - ---------------------------------------------------------------------------------------------------------------- (In thousands) Interest-earning assets: Interest-earning deposits.............................. $ 2 $ (22) $ (20) Investment securities.................................. 214 (46) 168 Loans receivable....................................... 17 23 40 Stock in FHLB of Indianapolis.......................... 5 --- 5 ----- ----- ----- Total................................................ 238 (45) 193 ----- ----- ----- Interest-bearing liabilities: Savings accounts....................................... 5 (11) (6) NOW and money market accounts.......................... 12 (12) --- Certificates of deposit................................ 164 (6) 158 FHLB advances.......................................... 97 (29) 68 ----- ----- ----- Total................................................ 278 (58) 220 ----- ----- ----- Change in net interest income............................. $ (40) $ 13 $ (27) ===== ===== ===== YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997 - ---------------------------------------------------------------------------------------------------------------- (In thousands) Interest-earning assets: Interest-earning deposits.............................. $ 28 $ 12 $ 40 Investment securities.................................. (186) 38 (148) Loans receivable....................................... 380 14 394 Stock in FHLB of Indianapolis.......................... 5 2 7 ----- ----- ----- Total................................................ 227 66 293 ----- ----- ----- Interest-bearing liabilities: Savings accounts....................................... (16) 5 (11) NOW and money market accounts.......................... 57 (4) 53 Certificates of deposit................................ 1 24 25 FHLB advances.......................................... 54 (12) 42 ----- ----- ----- Total................................................ 96 13 109 ----- ----- ----- Change in net interest income............................. $131 $ 53 $184 ===== ===== ===== YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996 - ---------------------------------------------------------------------------------------------------------------- Interest-earning assets: Interest-earning deposits.............................. $ (4) $ 5 $ 1 Investment securities.................................. 122 14 136 Loans receivable....................................... 336 (43) 293 Stock in FHLB of Indianapolis.......................... 12 --- 12 ----- ----- ----- Total................................................ 466 (24) 442 ----- ----- ----- Interest-bearing liabilities: Savings accounts....................................... (8) 5 (3) NOW and money market accounts.......................... (4) 16 12 Certificates of deposit................................ (12) (42) (54) Other borrowings....................................... (1) --- (1) FHLB advances.......................................... 141 15 156 ----- ----- ----- Total................................................ 116 (6) 110 ----- ----- ----- Change in net interest income............................. $350 $ (18) $332 ===== ===== =====
- 10 - CHANGES IN FINANCIAL POSITION AND RESULTS OF OPERATIONS - YEAR ENDED JUNE 30, 1999, COMPARED TO YEAR ENDED JUNE 30, 1998: General. HFB earned net income totaling $144,000 for the year ended June 30, 1999 compared to $393,000 for the year ended June 30, 1998. The investment of current resources for the goal of long-term growth and expansion lowered net earnings for the year. During fiscal year 1999, the Company experienced various cost increases associated with constructing and operating a new branch office as well as higher overall interest expenses related to leveraged loan and investment growth. The return on average assets for the year ended June 30, 1999 was .30%, compared to .93% the prior year. The return on average equity was 1.99% for the year ended June 30, 1999, compared to 5.34% for the prior year ended June 30, 1998. Earnings per share were $.18 for the year ended June 30, 1999 and $.47 for the year ended June 30, 1998. Assets. Total assets at June 30, 1999 were $53,136,000, compared to total assets of $42,560,000 at June 30, 1998. Cash and cash equivalents decreased $1,327,000 or 34.9%, to $2,475,000 at June 30, 1999, compared to $3,802,000 a year earlier. The decrease in cash and cash equivalents combined with cash inflows from deposits and new borrowings were used to purchase mortgage-backed securities, fund loan growth and acquire additional premises and equipment. Investment securities increased $6,370,000 to $8,288,000 at June 30, 1999, compared to $1,918,000 at June 30, 1998. Total loans increased $4,295,000 or 12.5% during fiscal 1999. At June 30, 1999 total loans were $38,574,000 compared to $34,279,000 at prior year-end June 30, 1998. The year-end level of stock in the FHLB of Indianapolis stood at $660,000 and $500,000 for 1999 and 1998, respectively. Net premises and equipment increased $298,000 or 17.7%, to $1,985,000 at June 30, 1999 compared to $1,687,000 at June 30, 1998. This increase is due to costs for the completion of construction for the Bank's first branch office, which is located in the Putnam County town of Cloverdale. Foreclosed real estate and repossessed assets decreased $214,000 or 97.3% to $6,000 compared to $220,000 at June 30, 1998. The total at June 30, 1999 consists of one mobile home. Average assets increased $5,791,000 or 13.7%, to $48,049,000 for the year ended June 30, 1999, compared to $42,258,000 for the prior year-ended June 30, 1998. Average interest-earning assets increased $4,300,000 or 10.6%, to $44,373,000 for the year ended June 30, 1999 and represented 92.4% of total average assets. The increase was due to average mortgage-backed securities which increased $4,295,000 to $4,982,000 for the year ended June 30, 1999, compared to $687,000 for the year ended June 30, 1998. The average level of other interest-earning assets was $39,391,000 for the year ended June 30, 1999, compared to $39,711,000 for the same period a year ago. Much of the loan growth in fiscal year 1999 occurred in the fourth quarter, reducing the impact on the average loans receivable calculation for the year. Liabilities and Stockholders' Equity. Primarily attributed to a successful beginning for the new branch, all deposit categories posted increases as of June 30, 1999, as compared to a year earlier. Total deposits were $32,657,000 at June 30, 1999, a $6,008,000 or 22.5% increase from $26,649,000 at June 30, 1998. The change is traced to a $4,809,000 or 25.2% increase in certificates of deposit to $23,867,000 at June 30, 1999, compared to $19,058,000 at June 30, 1998. Passbook and statement savings deposits increased by $511,000 or 15.6%. Transaction deposits increased by $561,000 or 20.0% while money market deposits also increased by $203,000 or 13.4%. In addition to deposits, FHLB advances are an important source of both short-term and long-term funding for the Bank. FHLB advances increased $5,000,000 and totaled $13,200,000 at June 30, 1999, compared to $8,200,000 at June 30, 1998. Average liabilities increased $5,907,000 or 16.9%, to $40,804,000 for the year ended June 30, 1999, compared to $34,897,000 for the prior year-ended June 30, 1998. Average interest-bearing liabilities increased $5,096,000 or 14.8%, to $39,567,000 for the year ended June 30, 1999. The increase was primarily due to increases in average certificates of deposit and FHLB advances. Average certificates of deposit increased by $2,882,000 or 15.6% to $21,364,00 for the year ended June 30, 1999, compared to $18,482,000 for the year ended June 30, 1998. Average FHLB advances increased by $1,650,000 or 19.2% to $10,242,000 for the year ended June 30, 1999, compared to $8,592,000 for the prior year ended June 30, 1998. - 11 - HFB's stockholders' equity decreased $383,000 or 5.1%, to $7,123,000 at June 30, 1999, compared to $7,506,000 at June 30, 1998. Contributing to the decrease were common stock repurchases totaling $340,000, an increase of $216,000 in net unrealized losses on securities available for sale, and cash dividends of $94,000. The decrease was partially offset by net income of $144,000 and the amortization of employee stock ownership plans. The ratio of stockholders' equity to total assets decreased to 13.4% at June 30, 1999 compared to 17.6% at June 30, 1998. Net Interest Income. Net interest income decreased by $27,000 or 1.4%, to $1,851,000 for the year ended June 30, 1999, compared to $1,878,000 for the year ended June 30, 1998. Impacting net interest income were interest rate changes on rate-sensitive assets and liabilities during the current period and average balance increases or decreases applicable to the rate-sensitive portion of the balance sheet. As a result of these factors, total interest income increased by $193,000 or 5.2% while total interest expense increased by $220,000 or 12.1%, compared to the same period a year earlier. Interest income on loans totaled $3,346,000 for the year ended June 30, 1999, compared to $3,306,000 for the year ended June 30, 1998; an increase of $40,000 or 1.2%. The increase can be attributed to a larger average balance of loans receivable outstanding for the current year and an increase in the average yield earned, compared to the same period one year ago. Interest and dividend income from total investments increased $266,000 to $334,000 for the year ended June 30, 1999, compared to $167,000 for the year ended June 30, 1998. The increase can be attributed to an increase in the average balance outstanding for the current year, which was partially offset by an decline in the average yield compared to the same period a year earlier. At June 30, 1999, investment securities included an average balance of $946,000 in equity stock, some of which earned dividends. Dividend income on FHLB stock totaled $45,000 for the year ended June 30, 1999, compared to $40,000 for the year ended June 30, 1998; an increase of $5,000 or 12.5%. The increase can be attributed to a larger average balance outstanding compared to the same period a year earlier. The combined weighted average yield on the balance of interest-earning assets outstanding for the year ended June 30, 1999 decreased to 8.75%, compared to 9.13% for the prior year ended June 30, 1998. Interest expense on deposits increased $152,000 or 11.8%, to $1,435,000 for the year ended June 30, 1999, compared to $1,283,000 for the year ended June 30, 1998. The change was the result of an increase in the average deposit balance outstanding for the current year compared to the same period a year earlier. The average cost of deposits declined to 4.89% for the year ended June 30, 1999, compared to 4.96% for the year ended 1998. Interest expense on borrowings increased by $68,000 or 12.9%, to $597,000 for the year ended June 30, 1999, compared to $529,000 for the year ended June 30, 1998. The increase was the result of a larger average balance outstanding for the current year, which was partially offset by a decline in the average cost of borrowings. The combined weighted average rate paid on deposits and borrowings was 5.1% for the year ended June 30, 1999, compared to 5.3% for the prior year. The Bank's interest rate spread decreased 26 basis points to 3.61% for the year ended June 30, 1999, compared to 3.87% for the year ended June 30, 1998. The net interest margin decreased to 4.17% for the year ended June 30, 1999, compared to 4.65% for the year ended June 30, 1998. Decreases in both interest rate spread and interest rate margin were the result of larger average balances of mortgage-backed securities and a decline in the average yield earned on all investment securities. The decreases in interest rate spread and interest rate margin were partially offset by larger average balances in loans receivable earning a higher average yield than a year earlier, and larger average balances in lower costing liabilities, such as transaction accounts. Provisions for Loan Losses. For the year ended June 30, 1999, the Bank provided $44,000 for future loan losses. During the prior year, provisions of $102,000 were made. The allowance for loan losses totaled $336,000 or .88% of net loans at June 30, 1999, compared to $320,000 or .94% of net loans at June 30, 1998; an increase of $16,000 or 5.0%. Management considers the Bank's allowance for loan losses to be adequate based on general economic conditions, historical net charge-offs and other factors such as the size, condition and characteristics of the loan portfolio. In assessing loan loss allowance adequacy, consideration is also given to the volume and composition of loan portfolio growth as well as the level of allowances maintained by peers. - 12 - Noninterest Income. Noninterest income decreased by $142,000 or 53.2% to $125,000 for the year ended June 30, 1999, compared to $267,000 for the prior year ended June 30, 1998. A major reason for the decrease was a $138,000 decrease in gains on the sale of investments to $3,000 for the year ended June 30, 1999, compared to $141,000 for the year ended June 30, 1998. Partially offsetting this decrease and a decrease in other income was an increase of $29,000 or 52.7% in service fee income to $84,000 for the year ended June 30, 1999 compared to $55,000 for the same period a year ago. BSF Inc., the Bank's service corporation subsidiary ("BSF"), was organized in 1989 and has historically engaged in the purchasing and developing of large tracts of real estate. Management has utilized the sale of lots and residences to provide an additional source of income for the Company. In connection with the Bank's conversion to an Indiana mutual savings bank in 1996, the FDIC required the Bank to cease BSF's land acquisitions and divest of BSF's non-conforming real estate holdings within five years, among other conditions. In order to permit the Company to continue its profitable real estate development activities through BSF, the Company and the Bank successfully sought charter conversions under authority granted to the Office of Thrift Supervision. Effective May 1, 1999 the Company became a federally chartered savings and loan holding company and the Bank became a federal stock savings bank. The level of income from BSF fluctuates widely since it is primarily dependent on the volume of lots sold, and profits on residential properties. Income from this source declined in recent years due to operating restrictions imposed by the Bank's charter. Gains on the sale of real estate for development was $6,000 for the year ended June 30, 1999 and $7,000 for the year ended June 30, 1998. Management is hopeful that the resumption of BSF activity will have a favorable impact on future net income. Noninterest Expense. Noninterest expense increased by $245,000 or 17.0%, to $1,689,000 for the year ended June 30, 1999, compared to $1,444,000 for the year ended June 30, 1998. The increase can be traced to expense increases for staff, equipment and general overhead to support the Company's growth during the fiscal year ended June 30, 1999. Salaries and employee benefits increased $96,000 or 13.3% to $819,000 for the year ended June 30, 1999, compared to $723,000 for the prior year ended June 30, 1998. The increase was primarily the result of new staff members hired for the Bank's Cloverdale branch. Also related to the new branch, equipment expenses increased $57,000 or 98.3% to $115,000 for the year ended June 30, 1999, compared to $58,000 for the year ended June 30, 1998. Further, computer processing fees increased $32,000 or 26.7% to $152,000 compared to $120,000 for the prior year. Other increases related to net occupancy, advertising, and director fees. These increases were partially offset by a decline in legal and professional fees of $18,000 or 14.6%, to $105,000 for the year ended June 30, 1999, compared to $123,000 for the year ended June 30, 1998. Income Tax Expense. Income tax expense decreased $107,000 or 51.9%, to $99,000 for the year ended June 30, 1999, compared to $206,000 for the prior year ended June 30, 1998. The decrease was due to a decrease in income before taxes of $356,000 or 59.4% and an increase in the effective combined federal and state income tax rate to 40.9% for the year ended June 30, 1999, compared to 34.4% for the same period a year ago. - 13 - CHANGES IN FINANCIAL POSITION AND RESULTS OF OPERATIONS - YEAR ENDED JUNE 30, 1998, COMPARED TO YEAR ENDED JUNE 30, 1997: General. HFB earned record net income totaling $393,000 for the year ended June 30, 1998, representing a $141,000 or 55.7% increase from the year ended June 30, 1997, in which net income of $252,000 was earned. Major contributions to improved earnings for the year were higher net interest income and lower deposit insurance expense. The return on average assets for the year ended June 30, 1998 was .93%, compared to .63% the prior year June 30, 1997. The return on average equity was 5.34% for the year ended June 30, 1998, compared to 3.31% for the prior year ended June 30, 1997. Earnings per share was $.47 for the year ended June 30, 1998, compared to $.27 for the year ended June 30, 1997. Without the special assessment imposed by federal legislation to recapitalize the SAIF, net income for the prior year ended June 30, 1997 would have been $338,000 for returns on average assets and average equity of .84% and 4.45% respectively. Assets. Total assets at June 30, 1998 were $42,560,000, compared to total assets of $42,508,000 at June 30, 1997. Cash and cash equivalents decreased $382,000 or 9.1%, to $3,802,000 at June 30, 1998, compared to $4,184,000 a year earlier. The decrease in cash and cash equivalents combined with cash inflows from deposits and sales of investment securities were used to repay borrowings and acquire additional premises and equipment. Investment securities decreased $184,000 or 8.8% to $1,918,000 at June 30, 1998, compared to $2,102,000 at June 30, 1997. Total loans at June 30, 1998 were $34,279,000 compared to total loans of $34,349,000 at prior year-end June 30, 1997. The year-end level of stock in the Federal Home Loan Bank ("FHLB") of Indianapolis stood at $500,000 for 1998 and 1997. Net premises and equipment increased $724,000 or 75.1%, to $1,687,000 at June 30, 1998 compared to $964,000 at June 30, 1997. The increase is due to costs for the nearly completed construction of the Bank's first branch office site in the Putnam County town of Cloverdale, as well as costs for finishing construction on new facilities adjacent to the Bank's main office in Spencer. Foreclosed real estate and repossessed assets increased $33,000 or 17.6% to $220,000 compared to $187,000 at June 30, 1997. The total at June 30, 1998 consists of three residential single family properties and one mobile home. Average assets increased $2,012,000 or 5.0%, to $42,258,000 for the year ended June 30, 1998, compared to $40,246,000 for the prior year-ended June 30, 1997. Average interest-earning assets increased $1,956,000 or 5.1%, to $40,398,000 for the year ended June 30, 1998 and represented 95.6% of total average assets. The increase was due to average loans receivable which increased $3,948,000 or 13.0%, to $34,366,000 for the year ended June 30, 1998, compared to $30,418,000 for the year ended June 30, 1997. The average level of other interest-earning assets decreased $1,992,000 or 24.8%, to $6,032,000 for the year ended June 30, 1998, compared to $8,024,000 the same period a year earlier. Liabilities and Stockholders' Equity. Total deposits were $26,649,000 at June 30, 1998, a $492,000 or 1.9% increase from $26,157,000 at June 30, 1997. The change is traced to a $1,339,000 or 91.0% increase in transaction deposits to $2,810,000 at June 30, 1998, compared to $1,471,000 at June 30, 1997. Passbook and statement savings deposits also increased by $330,000 or 11.2%. These increases were offset by declines of $705,000 or 31.8%, and $473,000 or 2.4%, in money market deposits and certificates of deposit, respectively. In addition to deposits, FHLB advances are an important source of both short-term and long-term funding for the Bank. FHLB advances totaled $8,200,000 at June 30, 1998, compared to $9,000,000 at June 30, 1997. Average liabilities increased $2,257,000 or 6.9%, to $34,897,000 for the year ended June 30, 1998, compared to $32,640,000 for the prior year-ended June 30, 1997. Average interest-bearing liabilities increased $2,189,000 or 6.8%, to $34,471,000 for the year-ended June 30, 1998. The increase was primarily due to average transaction and money market deposits which together increased $1,836,000 or 84.9%, to $3,998,000 for the 1998, compared to $2,162,000 for the prior year. HFB's stockholders' equity increased $309,000 or 4.3%, to $7,506,000 at June 30, 1998, compared to $7,197,000 at June 30, 1997. Contributing to the - 14 - increase was net income of $393,000. The increase was partially offset by cash dividends of $85,000 paid for the year ended June 30, 1998. The ratio of stockholders' equity to total assets increased to 17.6% at June 30, 1998, compared to 16.9% at June 30, 1997. During the year ended June 30, 1998, 10,000 shares of Common Stock were purchased and retired by the Company pursuant to a 10% stock repurchase program. These repurchases reduced total outstanding shares of Common Stock to 929,052 at June 30, 1998. The $78,000 cost of these repurchased shares represented a reduction in total stockholders' equity. Net Interest Income. Net interest income increased by $185,000 or 10.9%, to $1,878,000 for the year ended June 30, 1998, compared to $1,693,000 for the year ended June 30, 1997. Impacting net interest income were interest rate changes on rate-sensitive assets and liabilities during the current period and average balance increases or decreases applicable to the rate-sensitive portion of the balance sheet. As a result of these factors, total interest income increased by $294,000 or 8.6% while total interest expense increased by $109,000 or 6.4%, compared to the same period a year earlier. Interest income on loans totaled $3,306,000 for the year ended June 30, 1998, compared to $2,912,000 for the year ended June 30, 1997; an increase of $394,000 or 13.5%. The increase can be attributed to a larger average balance of loans receivable outstanding for the current year and an increase in the average yield earned, compared to the same period one year earlier. At June 30, 1998, investment securities included $1,320,000 in equity stocks which earned dividends rather than interest income. Interest and dividend income from total investments decreased $141,000 or 40.4% to $207,000 for the year ended June 30, 1998 compared to $348,000 for the year ended June 30, 1997. The decline can be attributed to a decrease in average balance outstanding for the year ended June 30, 1998, which was partially offset by an increase in the average yield compared to the same period a year earlier. Interest income on FHLB stock totaled $40,000 for the year ended June 30, 1998, compared to $33,000 for the year ended June 30, 1997; an increase of $7,000 or 21.2%. The increase can be attributed to a larger average balance outstanding and an increase in the average yield earned, compared to the same period a year earlier. The combined weighted average yield on the balance of interest-earning assets outstanding for the year ended June 30, 1998 increased to 9.13%, compared to 8.84% for the prior year ended June 30, 1997. Interest expense on deposits increased $73,000 or 6.0%, to $1,283,000 for the year ended June 30, 1998, compared to $1,210,000 for the year ended June 30, 1997. The change was the result of an increase in the average deposit balance outstanding for the year ended June 30, 1998 compared to the same period a year earlier. The average cost of deposits remained unchanged at 5.0%. Interest expense on borrowings increased by $42,000 or 8.6%, to $529,000 for the year ended June 30, 1998, compared to $487,000 for the year ended June 30, 1997. The increase was the result of a larger average balance outstanding for fiscal year 1998, which was partially offset by a decline in the average cost of borrowings. The combined weighted average rate paid on deposits and borrowings was 5.3% for the year ended June 30, 1998 and the prior year. The Company's interest rate spread increased to 3.87% for the year ended June 30, 1998, compared to 3.56% for the year ended June 30, 1997. The net interest margin increased to 4.65% for the year ended June 30, 1998, compared to 4.41% for the year ended June 30, 1997. Increases in both interest rate spread and interest rate margin were the result of larger average balances in loans receivable, which are the Company's highest yielding assets, and larger average balances in lower costing liabilities, such as transaction accounts. Provisions for Loan Losses. For the year ended June 30, 1998, the Bank provided $102,000 for future loan losses. During the prior year, provisions of $85,000 were made. The allowance for loan losses totaled $320,000 or .94% of net loans at June 30, 1998, compared to $231,000 or .68% of net loans at June 30, 1997, an increase of $89,000 or 38.5%. Noninterest Income. Noninterest income increased by $103,000 or 62.9% to $267,000 for the year ended June 30, 1998, compared to $164,000 for the prior year ended June 30, 1997. A major contributor to the increase was a $104,000 or 279.3% increase in gains on the sale of investments to $141,000 for the year ended June 30, 1998, compared to $37,000 for the year ended June 30, 1997. Partially offsetting this increase and an increase in service fee income was a decline of $24,000 in gains on the sale of real estate acquired for development to $7,000 for the year ended June 30, 1998, compared to $31,000 for the same period a year earlier. - 15 - Noninterest Expense. Noninterest expense increased by $77,000 or 5.6%, to $1,444,000 for the year ended June 30, 1998, compared to $1,368,000 for the year ended June 30, 1997. The increase can be primarily attributed the $202,000 or 38.8% increase in salaries and employee benefits to $723,000 for the year ended June 30, 1998, compared to $521,000 for the prior year ended June 30, 1997. The increase was the result of new staff members hired for the Bank's Cloverdale branch and costs associated with employee benefit plans adopted during fiscal year 1997. Partially offsetting this increase was a drop in deposit insurance expense of $149,000 or 90.3%, to $16,000 for the year ended June 30, 1998, compared to $165,000 for the year ended June 30, 1997. Deposit insurance expense for the year ended June 30, 1997 included the one-time special assessment expense of $142,000 imposed by federal legislation to recapitalize the SAIF. Other increases related to occupancy, advertising, foreclosed property, and data processing expenses. These increases were partially offset by a decline in legal and professional fees of $48,000 or 28.2%, to $123,000 for the year ended June 30, 1998, compared to $172,000 for the year ended June 30, 1997. Income Tax Expense. Income tax expense increased $54,000 or 35.3%, to $206,000 for the year ended June 30, 1998, compared to $152,000 for the prior year ended June 30, 1997. The increase was due to an increase in income before taxes of $194,000 or 48.0%, which was partially offset by a decline in the effective combined federal and state income tax rate to 34.4% for the year ended June 30, 1998, compared to 37.7% for the same period a year ago. IMPACT OF INFLATION The consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of financial institutions such as the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Bank's performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturity structure of the Bank's assets and liabilities are critical to the maintenance of acceptable performance levels. The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of noninterest expense. Such expense items as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans made by the Bank. The Bank is unable to determine the extent, if any, to which properties securing the Bank's loans have appreciated in dollar value due to inflation. - 16 - CURRENT ACCOUNTING ISSUES Accounting for Derivative Instruments and Hedging Activities. Statement of Financial Accounting Standards ("SFAS") No. 133 requires companies to record derivatives on the balance sheet at their fair value. SFAS No. 133 also acknowledges that the method of recording a gain or loss depends on the use of the derivative. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. o For a derivative designated as hedging the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. o For a derivative designated as hedging the exposure to variable cash flows of a forecasted transaction (referred to as a cash flow hedge), the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. o For a derivative designated as hedging the foreign currency exposure of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income (outside earnings) as part of the cumulative translation adjustment. The accounting for a fair value hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of an unrecognized firm commitment or an available-for-sale security. Similarly, the accounting for a cash flow hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of a foreign-currency-denominated forecasted transaction. o For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. The new Statement applies to all entities. If hedge accounting is elected by the entity, the method of assessing the effectiveness of the hedging derivative and the measurement approach of determining the hedge's ineffectiveness must be established at the inception of the hedge. SFAS No. 133 amends SFAS No. 52 and supercedes SFAS Nos. 80, 105, and 119. SFAS No. 107 is amended to include the disclosure provisions about the concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task Force consensuses are also changed or nullified by the provisions of SFAS No. 133. SFAS No. 133 was to be effective for all fiscal years beginning after June 15, 1999. The implementation date has been deferred and SFAS No. 133 will now be effective for all fiscal quarters for all fiscal years beginning after June 15, 2000. The adoption of this Statement is not currently expected to have a material impact on the Company's financial statements. Early application is encouraged; however, this Statement may not be applied retroactively to financial statements of prior periods. - 17 - INDEPENDENT AUDITOR'S REPORT Board of Directors Home Financial Bancorp Spencer, Indiana We have audited the consolidated statement of financial condition of Home Financial Bancorp and subsidiary as of June 30, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Home Financial Bancorp and subsidiary as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. Olive LLP /s/ Olive LLP Indianapolis, Indiana July 23, 1999 - 18 - HOME FINANCIAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30 1999 1998 - ---------------------------------------------------------------------------------------------- Assets Cash $ 296,490 $ 318,043 Short-term interest-bearing deposits 2,178,313 3,484,060 -------------------------------- Total cash and cash equivalents 2,474,803 3,802,103 Investment securities-- available for sale 8,288,028 1,917,734 Loans, net of allowance for loan losses of $336,235 and $319,595 38,237,683 33,959,130 Premises and equipment 1,984,842 1,687,355 Federal Home Loan Bank stock 660,000 500,000 Interest receivable 318,241 263,859 Other assets 1,172,853 429,562 -------------------------------- Total assets $ 53,136,450 $ 42,559,743 ================================ Liabilities Deposits Noninterest bearing $ 578,267 $ 510,423 Interest-bearing deposits 32,079,166 26,138,187 -------------------------------- Total deposits 32,657,433 26,648,610 Federal Home Loan Bank advances 13,200,000 8,200,000 Other liabilities 155,794 205,227 -------------------------------- Total liabilities 46,013,227 35,053,837 -------------------------------- Commitments and Contingencies Stockholders' Equity Preferred stock, without par value: Authorized and unissued - 2,000,000 shares Common stock, without par value Authorized - 5,000,000 shares Issued - 886,200 and 929,052 shares 4,100,034 4,314,294 Additional paid-in capital 88,667 58,327 Retained earnings 3,613,425 3,689,484 Unearned compensation (181,456) (228,169) Unearned ESOP shares (257,908) (304,310) Accumulated other comprehensive loss (239,539) (23,720) -------------------------------- Total stockholders' equity 7,123,223 7,505,906 -------------------------------- Total liabilities and stockholders' equity $ 53,136,450 $ 42,559,743 ================================
See notes to consolidated financial statements. - 19 - HOME FINANCIAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME
Year Ended June 30 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Interest Income Loans $3,346,281 $3,305,864 $2,912,085 Deposits with financial institutions 156,845 177,192 136,538 Investment securities Taxable 334,463 166,965 284,785 Tax exempt 30,073 Federal Home Loan Bank stock 44,994 40,315 33,189 ------------------------------------------ Total interest and dividend income 3,882,583 3,690,336 3,396,670 ------------------------------------------ Interest Expense Deposits 1,434,612 1,282,778 1,210,207 Federal Home Loan Bank advances 596,927 529,325 487,217 Other interest expense 5,758 ------------------------------------------ Total interest expense 2,031,539 1,812,103 1,703,182 ------------------------------------------ Net Interest Income 1,851,044 1,878,233 1,693,488 Provision for loan losses 44,000 102,000 85,000 ------------------------------------------ Net Interest Income After Provision for Loan Losses 1,807,044 1,776,233 1,608,488 ------------------------------------------ Other Income Service charges on deposit accounts 84,148 55,182 42,494 Gain on sale of real estate acquired for development 5,973 7,108 31,437 Net realized gain on sales of available-for-sale securities 3,325 140,925 37,155 Other income 31,963 63,736 52,750 ------------------------------------------ Total other income 125,409 266,951 163,836 ------------------------------------------ Other Expenses Salaries and employee benefits 819,296 722,886 521,142 Net occupancy expenses 110,326 84,653 70,825 Equipment expenses 115,268 57,932 61,044 Deposit insurance expense 16,510 15,881 164,550 Computer processing fees 151,936 120,133 94,869 Printing and office supplies 64,670 40,839 38,274 Legal and professional fees 104,660 123,218 171,674 Director and committee fees 56,450 43,450 42,000 Advertising expense 60,403 46,931 34,004 Other expenses 189,597 188,217 169,184 ------------------------------------------ Total other expenses 1,689,116 1,444,140 1,367,566 ------------------------------------------ Income Before Income Tax 243,337 599,044 404,758 Income tax expense 99,603 206,266 152,441 ------------------------------------------ Net Income $ 143,734 $ 392,778 $ 252,317 ========================================== Net Income Per Share Basic $ .18 $ .47 $ .27 Diluted .18 .47 .27
See notes to consolidated financial statements. - 20 - HOME FINANCIAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Additional Unearned Common Stock Paid-in Comprehensive Retained Unearned ESOP Shares Amount Capital Income Earnings Compensation Shares - --------------------------------------------------------------------------------------------------------------------------------- Balances, July 1, 1996 $3,427,201 Comprehensive income Net income $252,317 252,317 Other comprehensive income (loss), net of tax Unrealized gains on securities, net of reclassification adjustment 44,322 -------- Comprehensive income $296,639 ======== Common stock issued in conversion, net of costs 1,011,852 $4,728,294 Cash dividends ($.075 per share) (68,818) Contributions for unearned ESOP shares $(404,740) ESOP shares earned $25,404 40,476 Contribution for unearned RRP shares $(290,172) RRP shares earned 25,391 Purchase of stock (72,800) (364,000) (201,412) ------------------------------- --------------------------------------- Balances, June 30, 1997 939,052 4,364,294 25,404 3,409,288 (264,781) (364,264) Comprehensive income Net income $392,778 392,778 Other comprehensive income (loss), net of tax Unrealized loss on securities, net of reclassification adjustment (50,913) -------- Comprehensive income $341,865 ======== Cash dividends ($.10 per share) (85,082) ESOP shares earned 32,923 59,954 RRP shares earned 36,612 Purchase of stock (10,000) (50,000) (27,500) ------------------------------- --------------------------------------- Balances, June 30, 1998 929,052 4,314,294 58,327 3,689,484 (228,169) (304,310) Comprehensive income Net income $143,734 143,734 Other comprehensive income (loss), net of tax Unrealized loss on securities, net of reclassification adjustment (215,819) -------- Comprehensive loss $ (72,085) ======== Cash dividends ($.115 per share) (94,386) ESOP shares earned 23,718 46,402 RRP shares earned 46,713 Purchase of stock (42,852) (214,260) (125,407) Tax benefit on RRP shares 6,622 ------------------------------- --------------------------------------- Balances, June 30, 1999 886,200 $4,100,034 $88,667 $3,613,425 $(181,456) $(257,908) =============================== =======================================
Accumulated Other Comprehensive Income (Loss) Total - ------------------------------------------------------------------- Balances, July 1, 1996 $ (17,129) $3,410,072 Comprehensive income Net income 252,317 Other comprehensive income (loss), net of tax Unrealized gains on securities, net of reclassification adjustment 44,322 44,322 Comprehensive income Common stock issued in conversion, net of costs 4,728,294 Cash dividends ($.075 per share) (68,818) Contributions for unearned ESOP shares (404,740) ESOP shares earned 65,880 Contribution for unearned RRP shares (290,172) RRP shares earned 25,391 Purchase of stock (565,412) --------------------------- Balances, June 30, 1997 27,193 7,197,134 Comprehensive income Net income 392,778 Other comprehensive income (loss), net of tax Unrealized loss on securities, net of reclassification adjustment (50,913) (50,913) Comprehensive income Cash dividends ($.10 per share) (85,082) ESOP shares earned 92,877 RRP shares earned 36,612 Purchase of stock (77,500) --------------------------- Balances, June 30, 1998 (23,720) 7,505,906 Comprehensive income Net income 143,734 Other comprehensive income (loss), net of Unrealized loss on securities, net of reclassification adjustment (215,819) (215,819) Comprehensive loss Cash dividends ($.115 per share) (94,386) ESOP shares earned 70,120 RRP shares earned 46,713 Purchase of stock (339,667) Tax benefit on RRP shares 6,622 --------------------------- Balances, June 30, 1999 $(239,539) $7,123,223 =========================== See notes to consolidated financial statements.
- 21 - HOME FINANCIAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended June 30 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 143,734 $ 392,778 $ 252,317 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 44,000 102,000 85,000 Investment securities amortization, net 46,163 981 2,630 ESOP shares earned 70,120 92,877 65,880 RRP shares earned 46,713 36,612 25,391 Depreciation and amortization 149,874 87,912 83,193 Deferred income tax benefit (4,336) (50,485) (35,294) Gain on sale of real estate acquired for development (5,973) (7,108) (31,437) Gain on sale of other real estate (37,466) (35,016) (21,964) Gain on sale of securities available for sale (3,325) (140,925) (37,155) Change in Interest receivable (54,382) 4,789 (32,970) Other assets (154,877) 62,331 (74,794) Other adjustments (42,811) 50,372 64,038 ------------------------------------------------ Net cash provided by operating activities 197,434 597,118 344,835 ------------------------------------------------ Investing Activities Purchases of securities available for sale (8,658,915) (1,905,142) (3,261,591) Proceeds from sales of securities available for sale 568,350 1,895,041 4,824,600 Proceeds from maturities and paydowns of securities available for sale 1,320,049 250,523 1,342,922 Net changes in loans (4,090,925) (258,317) (7,371,895) Improvements to real estate owned (31,552) (12,621) Proceeds from real estate owned sales 13,000 345,119 204,501 Purchase of premises and equipment (447,361) (811,610) (569,082) Proceeds from disposal of premises and equipment 35,000 Purchase of real estate acquired for development (2,911) Proceeds from sale of real estate acquired for development 6,298 7,108 185,170 Purchase of FHLB of Indianapolis stock (160,000) (140,000) Other investing activities (650,000) ------------------------------------------------ Net cash used by investing activities (12,099,504) (508,830) (4,765,907) ------------------------------------------------ Financing Activities Net change in NOW and savings deposits 1,199,675 (467,983) (3,456,237) Certificates of deposit 4,809,148 960,077 887,053 Advances from Federal Home Loan Bank of Indianapolis 7,000,000 5,000,000 4,300,000 Payments on advances from Federal Home Loan Bank of Indianapolis (2,000,000) (5,800,000) (2,500,000) Sale of stock 4,578,341 Purchase of stock (339,667) (77,500) (565,412) Dividends paid (94,386) (85,082) (68,818) Contribution of RRP shares (290,172) ------------------------------------------------ Net cash provided (used) by financing activities 10,574,770 (470,488) 2,884,755 ------------------------------------------------ Net Change in Cash and Cash Equivalents (1,327,300) (382,200) (1,536,317) Cash and Cash Equivalents, Beginning of Year 3,802,103 4,184,303 5,720,620 ------------------------------------------------ Cash and Cash Equivalents, End of Year $2,474,803 $3,802,103 $4,184,303 ================================================ Additional Cash Flows and Supplementary Information Interest paid $2,021,539 $1,805,250 $1,703,182 Income tax paid 211,053 174,710 178,988 Transfers from loans to other real estate (231,628) 314,438 294,368 Stock issuance costs transferred from other assets to stockholders' equity 254,787 Common stock issued to ESOP leveraged with an employer loan 404,740
See notes to consolidated financial statements. - 22 - [**THE FOLLOWING HEADING APPEARS AT THE TOP OF EVERY PAGE THROUGHOUT THE NOTES**] HOME FINANCIAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) Note 1 -- Nature of Operations and Summary of Significant Accounting Policies The accounting and reporting policies of Home Financial Bancorp ("Company") and its wholly owned subsidiary, Owen Community Bank, s.b. ("Bank") and the Bank's wholly owned subsidiary, BSF, Inc. ("BSF"), conform to generally accepted accounting principles and reporting practices followed by the thrift industry. The more significant of the policies are described below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is a savings and loan holding company whose principal activity is the ownership and management of the Bank. Commencing May 1, 1999, the Bank operates under a federal thrift charter, known as a federal stock savings bank, and provides full banking services. Prior to May 1, 1999, the Bank operated under a state thrift charter, known as a stock savings bank. As a federally chartered thrift, the Bank is subject to regulation by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation ("FDIC"). The Bank generates mortgage and consumer loans and receives deposits from customers located primarily in Owen, Putnam and surrounding counties. The Bank's loans are generally secured by specific items of collateral including real property and consumer assets. BSF engages in purchasing and developing large tracts of real estate. After land is purchased, BSF subdivides the real estate into lots, makes improvements such as streets, and sells individual lots, usually on contract for deed. In connection with the Bank's conversion to an Indiana mutual savings bank in 1995, the FDIC required the Bank to cease BSF's land acquisitions, divest of BSF's nonconforming real estate holdings by November 16, 2000 and maintain the Bank's capital at levels sufficient to classify the Bank as a well-capitalized institution. Prior to May 1, 1999, BSF had ceased land acquisitions and was in the process of divesting of its real estate holdings. Effective with the Bank's change to a federal thrift charter on May 1, 1999 discussed above, BSF resumed its normal activities. Consolidation--The consolidated financial statements include the accounts of the Company and subsidiary after elimination of all material intercompany transactions and accounts. Investment Securities--Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately, net of tax, in accumulated other comprehensive income. Amortization of premiums and accretion of discounts are recorded using the interest method as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. Loans are carried at the principal amount outstanding. A loan is impaired when, based on current information or events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Loans whose payments have insignificant delays not exceeding 90 days outstanding are not considered impaired. The Bank considers its investment in one-to-four family residential loans and consumer loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans over the contractual lives of the loans. When a loan is paid off or sold, any unamortized loan origination fee balance is credited to income. - 23 - Allowance for loan losses is maintained to absorb loan losses based on management's continuing review and evaluation of the loan portfolio and its judgment as to the impact of economic conditions on the portfolio. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolio, the current condition and amount of loans outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of June 30, 1999, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the area within which the Bank operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. Real estate acquired for development is carried at the lower of cost or fair value. Costs relating to development and improvements of property are allocated to individual lots and capitalized, whereas costs relating to holding the property are expensed. Gains on sales of lots are determined on the specific-identification method. Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the accelerated and straight-line methods based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Federal Home Loan Bank ("FHLB") stock is a required investment for institutions that are members of the FHLB system. The required investment in the common stock is based on a predetermined formula. Pension plan costs are based on actuarial computations and charged to current operations. The funding policy is to pay at least the minimum amounts required by ERISA. Stock options are granted for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for and will continue to account for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. Income tax in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company and Bank file consolidated tax returns. Earnings per share have been computed based upon the weighted average common shares and potential common shares outstanding during the period subsequent to the Bank's conversion to a stock savings bank on July 1, 1996. Unearned Employee Stock Ownership Plan ("ESOP") shares have been excluded from the computation of average common shares and potential common shares outstanding. Reclassifications of certain amounts in the 1998 consolidated financial statements have been made to conform to the 1999 presentation. Note 2 -- Conversion to State Stock Savings Bank On July 1, 1996, the Bank completed the conversion from a state chartered mutual savings bank to a state chartered stock savings bank and the formation of the Company as the holding company of the Bank. As part of the conversion, the Company issued 505,926 (before restatement for the 2 for 1 stock split discussed in Note 10) shares of common stock at $10 per share. Net proceeds of the Company's stock issuance, after costs and excluding the shares issued for the ESOP, were approximately $4,320,000 of which $2,472,548 was used to acquire 100% of the stock and ownership of the Bank. Costs associated with the conversion were deducted from the proceeds of stock sold by the Company. The transaction was accounted for in a manner similar to a pooling of interests. - 24 - Note 3 -- Investment Securities
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 ============================================================= 1998 ------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair June 30 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------ Available for sale Federal agencies $ 100 $3 $ 103 Marketable equity securities 1,320 $(48) 1,272 Mortgage-backed securities 537 6 543 ------------------------------------------------------------- Total investment securities $1,957 $9 $(48) $1,918 =============================================================
- 25 - The amortized cost and fair value of securities available for sale at June 30, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 1999 ------------------------ Maturity Distribution Amortized Fair at June 30 Cost Value - -------------------------------------------------------- One to five years $ 100 $ 101 Marketable equity securities 813 617 Mortgage-backed securities 7,771 7,570 ------------------------ Totals $8,684 $8,288 ======================== Securities with a carrying value of $7,600,000 and $528,000 were pledged at June 30, 1999 and 1998 to secure FHLB advances. Proceeds from sales of securities available for sale during 1999, 1998 and 1997 were $569,000, $1,895,000 and $4,825,000. Gross gains of $12,000, $141,000 and $71,000 in 1999, 1998 and 1997 and gross losses of $8,700 and $34,000 in 1999 and 1997 were realized on the sales. The tax expense for net gains on security transactions for June 30, 1999, 1998 and 1997 was $1,300, $55,800 and $14,700, respectively. Note 4 -- Loans and Allowance
June 30 1999 1998 - --------------------------------------------------------------------------- Real estate mortgage loans Residential $ 20,952 $ 19,563 Mobile home and land 5,331 4,666 Nonresidential 9,323 7,614 Multi-family 1,096 904 Mobile home loans 950 831 Commercial and industrial 538 242 Consumer loans 999 655 ----------------------------- 39,189 34,475 ----------------------------- Undisbursed portion of loans (619) (198) Deferred loan costs 4 2 Allowance for loan losses (336) (320) ----------------------------- (951) (516) ----------------------------- Total loans $ 38,238 $ 33,959 ============================= Year Ended June 30 1999 1998 1997 - -------------------------------------------------------------------------------- Allowance for loan losses Balances, July 1 $ 320 $ 231 $ 150 Provision for loan losses 44 102 85 Loans charged off (28) (13) (4) ----------------------------------- Balances, June 30 $ 336 $ 320 $ 231 =================================== Note 5 -- Premises and Equipment June 30 1999 1998 - -------------------------------------------------------------------------------- Land $ 302 $ 302 Buildings 1,846 1,697 Equipment 749 450 ----------------------------- Total cost 2,897 2,449 Accumulated depreciation (912) (762) ----------------------------- Net $ 1,985 $ 1,687 =============================
- 26- Note 6 -- Deposits June 30 1999 1998 - -------------------------------------------------------------------------------- Noninterest bearing demand $ 578 $ 510 Interest-bearing demand 2,715 2,298 Money market deposits 1,715 1,512 Savings 3,782 3,271 Certificates of $100,000 or more 5,148 3,319 Other certificates 18,719 15,739 ----------------------------- Total deposits $32,657 $26,649 ============================= Certificates maturing in years ending June 30: 2000 $17,803 2001 2,739 2002 844 2003 982 2004 1,499 ------- $23,867 ======= Note 7 -- Federal Home Loan Bank Advances 1999 --------------------------- Weighted Average June 30 Amount Rate - -------------------------------------------------------------------------------- Maturities in years ending 2000 $ 3,000 5.85% 2001 3,000 5.90 2002 5,000 5.17 2003 2,000 5.85 2006 200 6.86 ------- $13,200 5.61% ======= The terms of the security agreement with the FHLB require the Bank to pledge as collateral for advances qualifying first mortgage loans in an amount equal to at least 170 percent of these advances and all stock in the FHLB. Advances are subject to restrictions or penalties in the event of prepayment. Note 8 -- Income Tax Year Ended June 30 1999 1998 1997 - -------------------------------------------------------------------------------- Income tax expense Currently payable Federal $ 82 $ 199 $ 141 State 22 57 46 Deferred Federal (6) (39) (25) State 2 (11) (10) ----------------------------------- Total income tax expense $ 100 $ 206 $ 152 =================================== Year Ended June 30 1999 1998 1997 - -------------------------------------------------------------------------------- Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $ 83 $ 204 $ 138 Effect of state income taxes 16 31 24 Tax exempt dividends and interest (5) (24) (9) Other 6 (5) (1) ----------------------------------- Actual tax expense $ 100 $ 206 $ 152 =================================== A cumulative net deferred tax asset is included in other assets. The components of the asset are as follows: June 30 1999 1998 - -------------------------------------------------------------------------------- Assets Allowance for loan losses $117 $ 98 Deferred compensation 23 26 Securities available for sale 78 16 Other 1 1 ------------------------- Total assets 219 141 ------------------------- Liabilities Depreciation 19 6 State income tax 10 10 Loan fees 2 3 ------------------------- Total liabilities 31 19 ------------------------- $188 $122 ========================= No valuation allowance was necessary for the years ended June 30, 1999 and 1998. - 27 - Retained earnings at June 30, 1999, include approximately $700,000 for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of June 30, 1988 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses including redemption of bank stock or excess dividends, or loss of "bank status" would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred federal income tax liability on the above amounts was approximately $280,000 at June 30, 1999. Note 9 -- Other Comprehensive Income
1999 ------------------------------------------------------ Before-Tax Tax Net-of-Tax Year Ended June 30 Amount Benefit Amount - ------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities Unrealized holding losses arising during the year $(354) $140 $(214) Less: reclassification adjustment for gains realized in net income 3 (1) 2 ------------------------------------------------------ Other comprehensive loss $(357) $141 $(216) ====================================================== 1998 ------------------------------------------------------ Before-Tax Tax Net-of-Tax Year Ended June 30 Amount Benefit Amount - ------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities Unrealized holding gains arising during the year $84 $(33) $51 Less: reclassification adjustment for gains realized in net income 141 (39) 102 ------------------------------------------------------ Other comprehensive loss $(57) $ 6 $(51) ====================================================== 1997 ------------------------------------------------------ Before-Tax Tax Net-of-Tax Year Ended June 30 Amount Benefit Amount - ------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities: Unrealized holding gains arising during the year $110 $(44) $66 Less: reclassification adjustment for gains realized in net income 37 (15) 22 ------------------------------------------------------ Other comprehensive income $73 $(29) $44 ======================================================
- 28 - Note 10 -- Commitments and Contingent Liabilities In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit, which are not included in the accompanying financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated statement of financial condition. Financial instruments whose contract amount represents credit risk as of June 30 were as follows: 1999 1998 - -------------------------------------------------------------------------------- Mortgage loan commitments At variable rates $747 $827 At fixed rates 348 553 Unused lines of credit 717 510 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include residential real estate, or other assets of the borrower. The Bank has entered into agreements with three officers which provide for salary continuation for a three-year period under certain circumstances, primarily related to change of control of the Bank, as defined. Under the terms of the agreements, these payments could occur if, following a change of control, such officers are terminated other than for cause or unreasonable changes are made in their employment relationships. These agreements extend automatically for one year on each anniversary date unless certain conditions are met. One of the agreements was effective January 1, 1996 and the other two agreements were effective July 1, 1996. The Company and Bank are also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate determination of such possible claims or lawsuits will not have a material adverse effect on the consolidated financial position of the Company. Note 11 -- Year 2000 Like all entities, the Company and subsidiaries are exposed to risks associated with the Year 2000 Issue, which affects computer software and hardware; transactions with customers, vendors, and other entities; and equipment dependent upon microchips. The Company has completed the process of identifying and remediating potential Year 2000 problems. It is not possible for any entity to guarantee the results of its own remediation efforts or to accurately predict the impact of the Year 2000 Issue on third parties with which the Company and subsidiaries do business. If remediation efforts of the Company or third parties with which the Company and subsidiaries do business are not successful, the Year 2000 Issue could have negative effects on the Company's financial condition and results of operations in the near term. Note 12 -- Stockholders' Equity On December 9, 1997, the Company approved a 2-for-1 stock split, under which every share of its common stock outstanding at the close of business on December 23, 1997 was converted into two shares of common stock. The additional certificates were distributed to stockholders on January 6, 1998. As a result of the stock split, the number of shares outstanding increased from 464,526 to 929,052 shares. Unless otherwise noted, all share and per share data have been restated for the 2-for-1 stock split. - 29 - The Company's board of directors has approved the repurchase of up to 15 percent of the Company's outstanding shares of common stock. Such purchases will be made subject to market conditions in open market or block transactions. During the years ended June 30, 1999, 1998 and 1997, the Company had repurchased 42,852, 10,000 and 72,800 of its outstanding shares. Note 13 -- Dividends and Capital Restrictions The Company is not subject to any regulatory restriction on the payment of dividends to its stockholders. Without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding retained net profits for the current calendar year to date plus those for the previous two calendar years. The Bank normally restricts dividends to a lesser amount because of the need to maintain an adequate capital structure. At the time of conversion, a liquidation account was established in an amount equal to the Bank's net worth as reflected in the latest statement of condition used in its final conversion offering circular. The liquidation account is maintained for the benefit of eligible deposit account holders who maintain their deposit account in the Bank after conversion. In the event of a complete liquidation (and only in such event), each eligible deposit account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted subaccount balance for deposit accounts then held, before any liquidation distribution may be made to stockholders. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of net worth. The initial balance of the liquidation account was $3,295,000. At June 30, 1999, total stockholder's equity of the Bank was $6,242,000, of which approximately $669,000 was available for the payment of dividends. Note 14 -- Regulatory Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At June 30, 1999 and 1998, the Bank is categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since June 30, 1999 that management believes has changed the Bank's classification. - 30 - The Bank's actual and required capital amounts and ratios are as follows:
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 2,476 8.0 3,095 10.0 Core capital1 (to adjusted tangible assets) 6,363 12.1 2,103 4.0 3,154 6.0 Core capital1 (to adjusted total) 6,363 12.1 2,103 4.0 2,629 5.0 1998 Required for Adequate To Be Well Actual Capital 1 Capitalized 1 June 30 Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------- Total capital1 (to risk weighted assets) $6,543 26.2% $1,994 8.0% $2,493 10.0% Tier I capital1 (to risk weighted assets) 6,223 25.0 997 4.0 1,496 6.0 Tier I capital1 (to average assets) 6,223 15.1 1,648 4.0 2,060 5.0
1 As defined by the regulatory agencies Note 15 -- Employee Benefit Plans The Bank is a participant in a pension fund known as the Pentegra Group. This plan is a multi-employer plan; separate actuarial valuations are not made with respect to each participating employer. According to the plan administrators, the market value of the fund's assets exceeded the value of vested benefits in the aggregate as of June 30, 1999, the date of the latest actuarial valuation. The plan required contributions in the amount of $11,900, $2,700 and $13,000 for the years ended June 30, 1999, 1998 and 1997. The plan provides pension benefits for substantially all of the Bank's employees. The Bank has a retirement savings Section 401(k) plan in which substantially all employees may participate. The Bank matches employees' contributions at the rate of 50 percent of the first 6 percent of base salary contributed by participants. The Bank's expense for the plan was $8,900 and $12,000 and $10,100 for the years ended June 30, 1999, 1998 and 1997. As part of the conversion, the Company established an ESOP covering substantially all employees of the Bank. The ESOP acquired 40,474 (before restatement for the 2 for 1 stock split discussed in Note 12) shares of the Company common stock at $10 per share in the conversion with funds provided by a loan from the Company. Accordingly, the $404,740 of common stock acquired by the ESOP is shown as a reduction of stockholders' equity. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends on unallocated shares, which will be distributed to participants, are treated as compensation expense. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Bank, are made to the ESOP. The expense under the ESOP was $70,100, $93,000 and $66,000 for the years ended June 30, 1999, 1998 and 1997. At June 30, 1999 and 1998, the ESOP had 24,374 and 15,094 allocated shares, 52,051 and 61,096 suspense shares and 4,523 and 4,758 committed-to-be released shares. The fair value of the unearned ESOP shares at June 30, 1999 and 1998 was $229,415 and $547,758. - 31 - In January 1997, the Company's stockholders approved the Recognition and Retention Plan and Trust ("RRP"). The RRP may acquire up to 40,474 shares of the Company's common stock for awards to management. Shares awarded to management under the RRP vest at a rate of 20 percent at the end of each full 12 months of service with the Bank after the date of grant. During the year ended June 30, 1997, the Bank contributed $290,172 to the RRP for the purchase of 40,474 shares of the Company's common stock of which 30,356 shares were awarded to management and recorded as unearned compensation. Expense under the RRP was $47,000, $37,000 and $25,000 for the years ended June 30, 1999, 1998 and 1997. Note 16 -- Related Party Transactions The Bank has entered into transactions with certain directors and officers. Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans, as defined, to such related parties were as follows: - -------------------------------------------------------------------------------- Balances, June 30, 1998 $ 409 New loans, including renewals 65 Payments, etc. including renewals (146) ------- Balances, June 30, 1999 $ 328 ======= Deposits from related parties held by the Bank at June 30, 1999 totaled $609,882. Note 17 -- Stock Option Plan On October 14, 1997, the stockholders approved a stock option plan, reserving 101,184 shares of Company stock for the granting of options to certain directors, officers and other key employees of the Company and its subsidiary. The plan is accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations. Since the plan's adoption, incentive stock options for 55,000 shares of common stock have been granted with ten year terms that expire October 13, 2007 and a exercise price of $8.50 per share. These options became exercisable in full on April 14, 1998. In addition, non-qualified options for 15,000 shares and 1,500 shares have been granted with ten year terms that expire October 14, 2007 and August 25, 2008 with an exercise price of $8.50 and $8.25 per share, respectively. These options were exercisable in full on April 14, 1998 and February 25, 1999. The exercise price of each option was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized. - 32 - Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model with the following assumptions: 1999 1998 - -------------------------------------------------------------------------------- Risk-free interest rates 5.07% 6.12% Dividend yields 1.42% 1.17% Volatility factors of expected market price of common stock 20.5% 16.67% Weighted-average expected life of the options 6 years 6 years Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting period. The pro forma effect on net income and earnings per share of this statement are as follows: 1999 1998 - -------------------------------------------------------------------------------- Net income As reported $144 $393 Pro forma 140 238 Basic earnings per share As reported .18 .47 Pro forma .17 .28 Diluted earnings per share As reported .18 .47 Pro forma .17 .28 The following is a summary of the status of the Company's stock option plan and changes in that plan as of and for the years ended June 30, 1999 and 1998:
Year Ended June 30 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Weighted- Weighted- Average Average Options Shares Exercise Price Shares Exercise Price - --------------------------------------------------------------------------------------------------------------------- Outstanding, beginning of year 70,000 $8.50 Granted 1,500 8.25 70,400 $8.50 Forfeited (2,200) 8.50 (400) 8.50 -------- -------- Outstanding and exercisable, end of year 69,300 8.50 70,000 8.50 ======== ======== Weighted-average fair value of options granted during the year $2.22 $2.41
As of June 30, 1999, 67,800 options outstanding have an exercise price of $8.50 and a remaining contractual life of nine years and 1,500 options outstanding have an exercise prices of $8.25 and a remaining contractual life of ten years. There were 31,884 shares available for grant at June 30, 1999. - 33 - Note 18 -- Earnings Per Share
Earnings per share were computed as follows: 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 ================================================== Year Ended June 30, 1997 -------------------------------------------------- Weighted Per- Net Average Share Income Shares Amount - -------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share Income available to common stockholders $252 923,972 $.27 Effect of Dilutive Securities Stock options and awards 1,864 ------------------------------- Diluted Earnings Per Share Income available to common stockholders and assumed conversions $252 925,836 $.27 ==================================================
- 34 - Note 19 -- Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents--The fair value of cash and cash equivalents approximates carrying value. Securities Available for Sale--Fair values are based on quoted market prices. Loans--For both short-term loans and variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value for other loans, are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. FHLB Stock--Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Interest Receivable--The fair values of interest receivable approximate carrying values. Deposits--The fair values of interest-bearing demand, NOW, money market deposit and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. FHLB Advances--The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt. Fair value approximates carrying value. Off-Balance Sheet Commitments--Commitments include commitments to originate mortgage loans, and extend lines of credit and are generally of a short-term nature. The fair value of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing.
1999 1998 ------------------------------------------------------- Carrying Fair Carrying Fair June 30 Amount Value Amount Value - ------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $2,475 $2,475 $3,802 $3,802 Securities available for sale 8,288 8,288 1,918 1,918 Loans, net 38,238 38,885 33,959 34,496 Stock in FHLB 660 660 500 500 Interest receivable 318 318 264 264 Liabilities Deposits 32,657 32,937 26,649 26,662 FHLB advances 13,200 13,127 8,200 8,215
Off-Balance Sheet Assets Commitments to extend credit - 35 - Note 20 -- Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company: Condensed Balance Sheet June 30 1999 1998 - -------------------------------------------------------------------------------- Assets Cash $ 34 $ 12 Securities available for sale 692 1,213 Premises and equipment 14 15 Investment in subsidiary 6,242 6,230 Other assets 143 39 ----------------------- Total assets $7,125 $7,509 ======================= Liabilities Other liabilities $ 2 $ 3 Stockholders' Equity 7,123 7,506 ----------------------- Total liabilities and stockholders' equity $7,125 $7,509 ======================= Condensed Statement of Income Year Ended June 30 1999 1998 1997 - -------------------------------------------------------------------------------- Income Interest income $ 48 $ 137 $ 118 Other income 4 141 36 --------------------------------- Total income 52 278 154 --------------------------------- Expenses Salaries and employee benefits 39 60 31 Legal and professional fees 38 64 97 Other expenses 40 56 34 --------------------------------- Total expenses 117 180 162 --------------------------------- Income (loss) before income tax benefit and equity in undistributed income of subsidiary (65) 98 (8) Income tax benefit (expense) (23) 7 (11) --------------------------------- Income before equity in undistributed income of subsidiary (42) 91 3 Equity in undistributed income of subsidiary 186 302 249 --------------------------------- Net Income $ 144 $ 393 $ 252 ================================= - 36 - Condensed Statement of Cash Flows
Year Ended June 30, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Operating Activities Net income $144 $393 $252 Adjustments to reconcile net income to net cash provided (used) by operating activities (115) (289) (258) -------------------------------------------- Net cash provided (used) by operating activities 29 104 (6) -------------------------------------------- Investing Activities Purchases of securities available for sale (58) (1,848) (2,216) Proceeds from sales of securities available for sale 485 1,895 1,080 Purchases of premises and equipment (1) (16) -------------------------------------------- Net cash provided (used) by investing activities 427 46 (1,152) -------------------------------------------- Financing Activities Sale of stock 4,578 Dividends (94) (85) (69) Purchase of stock (340) (78) (565) Capital contributions to Bank (2,471) Contribution of RRP shares (290) -------------------------------------------- Net cash provided (used) by financing activities (434) (163) 1,183 -------------------------------------------- Net Change in Cash and Cash Equivalents 22 (13) 25 Cash and Cash Equivalents at Beginning of Year 12 25 -------------------------------------------- Cash and Cash Equivalents at End of Year $ 34 $ 12 $ 25 ============================================ Additional Cash Flows and Supplementary Information Common stock issued to ESOP leveraged with an employer loan 404,740
- 37 - SHAREHOLDER INFORMATION MARKET INFORMATION The Bank converted from an Indiana mutual savings bank to an Indiana stock savings bank effective July 1, 1996, and simultaneously formed a bank holding company, the Holding Company. The Holding Company's Common Stock is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), SmallCap Market, under the symbol "HWEN." As of August 23, 1999, there were approximately 450 holders of the Holding Company's Common Stock including shares held in broker accounts. Since the Holding Company has limited independent operations and no other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to its shareholders is directly dependant upon the earnings on its investment securities and the ability of the Bank to pay dividends to the Holding Company. Under current federal income tax law, dividend distributions with respect to the Common Stock, to the extent that such dividends paid are from the current or accumulated earnings and profits of the Company (as calculated for federal income tax purposes), will be taxable as ordinary income to the recipient and will not be deductible by the Company. Any dividend distributions in excess of current or accumulated earnings and profits will be treated for federal income tax purposes as a distribution from the Bank's accumulated bad debt reserves, which could result in increased federal income tax liability for the Company. Moreover, the Bank may not pay dividends to the Holding Company if such dividends would result in the impairment of the liquidation account established in connection with the Conversion. The Holding Company's ability to pay dividends on the Common Stock is subject to certain regulatory restrictions. In addition, Indiana law would prohibit the Holding Company from paying a dividend if, after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the ordinary course of business or if the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any, of which there were none. The stock information provided below has been adjusted to reflect the 2-for-1 stock split effective January 6 ,1998. Stock Price Dividends Quarter Ended High Low Per Share September 30, 1997 $8 5/8 $7 7/16 $.025 December 31, 1997 9 1/4 8 1/8 .025 March 31, 1998 9 3/4 8 3/4 .025 June 30, 1998 9 1/2 8 7/16 .025 September 30, 1998 9 7 5/8 .025 December 31, 1998 7 7/8 6 1/2 .030 March 31, 1999 8 7 .030 June 30, 1999 7 7/8 7 .030 TRANSFER AGENT AND REGISTRAR Fifth Third Bank Corporate Trust Operations 38 Fountain Square Plaza, MD - 1090F5 Cincinnati, Ohio 45202 (513) 579-5320 or (800) 837-2755 GENERAL COUNSEL Barnes & Thornburg 11 South Meridian Street Indianapolis, Indiana 46204 INDEPENDENT AUDITOR Olive LLP 201 N. Illinois Indianapolis, Indiana 46204 SHAREHOLDER AND GENERAL INQUIRIES The Company is required to file an Annual Report on Form 10-K for its fiscal year ended June 30, 1999 with the Securities and Exchange Commission. Copies of this annual report may be obtained without charge upon written request to: Kurt D. Rosenberger Vice President and Chief Financial Officer Home Financial Bancorp 279 East Morgan Street Spencer, Indiana 47460 HOME PAGE AND E-MAIL www.hfbancorp.com homebanc@bluemarble.net - 38 - DIRECTORS AND OFFICERS
BOARD OF DIRECTORS Frank R. Stewart Charles W. Chambers John T. Gillaspy Chairman of the Board Secretary President and President, BSF, Inc. Chief Executive Officer, Spencer Evening World, Inc. Kurt J. Meier Robert W. Raper Tad Wilson President Vice Chairman of the Board President, Metropolitan Owen Community Bank, s.b. Printing Services, Inc. Stephen Parrish Kurt D. Rosenberger Gary Michael Monnett Funeral Director, Vice President Mike Monnett, CPA West-Parrish-Pedigo Funeral Home Owen Community Bank, s.b.
OFFICERS OF HOME FINANCIAL BANCORP Frank R. Stewart Kurt J. Meier Chairman President, Chief Executive Officer and Treasurer Kurt D. Rosenberger Charles W. Chambers Vice President and Secretary Chief Financial Officer OFFICERS OF OWEN COMMUNITY BANK, s.b. Frank R. Stewart Kurt J. Meier Charles W. Chambers Chairman President and Secretary Chief Executive Officer Kurt D. Rosenberger Judith A. Terrell Christie Leach Vice President and Branch Manager and Assistant Branch Manager Chief Financial Officer Mortgage Loan Officer and Mortgage Loan Officer Nancy Logan Carole Eder Lisa K. Sherfield Accounting Manager Teller Supervisor Mortgage Loan Officer Julie A. Hedden Lisa Wilson Rodger Samuels Mortgage Loan Officer Compliance and Commercial Loan Officer Special Projects - 39 - DIRECTORS AND OFFICERS Charles W. Chambers (age 84) has served as a director of the Holding Company since its formation and of the Bank since 1978. Mr. Chambers has also served as a staff appraiser for the Bank since 1991 and as Secretary of the Bank since 1990. Mr. Chambers is Secretary of the Holding Company and the Bank. John T. Gillaspy (age 71) has served as a director of the Holding Company since its formation and of the Bank since 1986. Mr. Gillaspy has also served as President and Chief Executive Officer of the Spencer Evening World, Inc., a newspaper based in Spencer, Indiana, for more than the past five years. Kurt J. Meier (age 49) has served as President and a director of the Holding Company since its formation and as a director of the Bank since 1991. Mr. Meier has also served as President of the Bank since 1994. From 1990 to 1994, Mr. Meier served as Managing Officer of the Bank. Steven Parrish (age 59) has served as a director of the Holding Company since its formation and of the Bank since 1982. Mr. Parrish has also served as a funeral director for the West-Parrish-Pedigo Funeral Home in Spencer, Indiana, for more than five years. Gary Michael Monnett (age 39) was named a director of the Holding Company in 1998. He has been a self-employed certified public accountant since 1993, providing tax and accounting services to individuals and small businesses. Robert W. Raper (age 82) has served as a director of the Holding Company since its formation and of the Bank since 1970, with which he has served as Vice Chairman since 1994. Prior to 1994, Mr. Raper served as Vice President of the Bank. Kurt D. Rosenberger (age 40) is a director and Vice President and Chief Financial Officer of the Holding Company. Mr. Rosenberger has also served as Vice President of the Bank since 1994. Theretofore, he served as Senior Financial Analyst for the Office of Thrift Supervision in Indianapolis, Indiana, from 1990 to 1994. Frank R. Stewart (age 74) has served as a director of the Holding Company since its formation and of the Bank since 1963. Mr. Stewart served as President of the Bank from 1982 until 1994. Mr. Stewart has also served as President of BSF, Inc. since its formation in 1989. Mr. Stewart has extensive experience in real estate development and sales. Tad Wilson (age 64) has served as a director of the Holding Company since its formation and of the Bank since 1978. Mr. Wilson is also the President of Metropolitan Printing Services, Inc., a printing company based in Bloomington, Indiana, and is the owner of a retail book store and various rental properties located in Bloomington, Indiana. - 40 - [PHOTO OF BOARD OF DIRECTORS] EX-23 3 CONSENT OF INDEPENDENT AUDITOR Exhibit 23 - Consent of Independent Public Accountants We hereby consent to the incorporation by reference to the Registration Statement on Form S-8, File Number 333-45413, of our report dated July 23, 1999, on the consolidated financial statements of Home Financial Bancorp, Spencer, Indiana, which report is incorporated by reference in the Annual Report on Form 10-K of Home Financial Bancorp, Spencer, Indiana. /s/ Olive LLP OLIVE LLP Indianapolis, IN September 24, 1999 EX-27 4 FDS FOR HOME FINANCIAL BANCORP
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001009242 Home Financial Bancorp 1,000 U.S. Dollars 12-MOS JUN-30-1999 JUL-1-1998 JUN-30-1999 1.000 296 2,178 0 0 8,288 0 0 38,574 336 53,136 32,657 3,000 158 10,200 4,189 0 0 2,934 53,136 3,346 379 157 3,883 1,435 2,032 1,851 44 3 1,689 243 243 0 0 144 .18 .18 8.75 79 0 0 0 320 28 0 336 336 0 0
-----END PRIVACY-ENHANCED MESSAGE-----