1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
Form 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996
[ ] 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: 0-24748
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HOME FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0508062
- - -------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1720 HARRISON STREET, HOLLYWOOD, FLORIDA 33020
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(Address of principal executive offices)
Registrant's telephone number, including area code: (954) 925-3211
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Former name, former address and former fiscal year, if changed
since last report
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 _____
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APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: There were 24,716,619 shares of the Registrant's common
stock outstanding as of August 5, 1996.
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Home Financial Corporation and Subsidiaries
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 1996,
and September 30, 1995 1
Consolidated Statements of Operations for the three month periods ended
June 30, 1996, and June 30, 1995 2
Consolidated Statements of Operations for the nine month periods ended
June 30, 1996, and June 30, 1995 3
Consolidated Statements of Cash Flows for the nine month periods ended
June 30, 1996, and June 30, 1995 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION 14
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Home Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
ASSETS
June 30, September 30,
1996 1995
(Unaudited)
----------- -------------
Cash
Non-interest bearing $ 5,005 $ 6,133
Interest-bearing 60,144 17,264
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Total cash 65,149 23,397
Mortgage securities available for sale 678,627 724,698
Other securities available for sale 216,813 185,522
Loans receivable, net 214,813 249,665
Federal Home Loan Bank stock, at cost 6,870 6,872
Accrued interest on loans receivable 459 343
Real estate acquired through foreclosure 1 1
Real estate held for investment, net -- 9,835
Premises and equipment, net 6,083 6,375
Prepaid taxes 1,894 3,650
Other assets 25,003 2,503
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Total assets $1,215,712 $1,212,861
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 888,326 $ 871,302
Advances from borrowers for taxes and insurance 4,500 7,425
Income taxes
Current 366 155
Deferred 10,551 11,802
Other liabilities 10,387 11,971
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Total liabilities 914,130 902,655
Commitments and contingencies -- --
Stockholders' equity
Preferred stock-authorized, 2,000,000 shares, none issued -- --
Common stock-authorized, 38,000,000 shares at $0.10 par
value; 24,716,619 and 24,585,413 shares issued and outstanding at
June 30, 1996 and September 30, 1995, respectively 2,486 2,459
Additional paid-in capital 194,317 193,577
Retained earnings, substantially restricted 132,430 137,207
Required contributions for shares acquired by ESOP and RRP (18,220) (19,562)
Net unrealized losses on securities available for sale (9,431) (3,475)
---------- ----------
Total stockholders' equity 301,582 310,206
---------- ----------
Total liabilities and stockholders' equity $1,215,712 $1,212,861
========== ==========
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Home Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Earnings Per Share)
(Unaudited)
For the Three Months Ended June 30,
-----------------------------------
1996 1995
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Interest income:
Loans $ 6,054 $ 5,918
Mortgage securities 11,720 11,890
Other securities 4,259 4,128
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Total interest income 22,033 21,936
Interest expense:
Deposits 11,213 11,083
Borrowings 34 --
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Total interest expense 11,247 11,083
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Net interest income 10,786 10,853
Provision for loan losses 50 30
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Net interest income after provision for loan losses 10,736 10,823
Other income:
Fees and service charges 332 601
Rental income 195 207
Net gain on sale of mortgage securities 258 24
Net gain on sale of other securities 34 30
Other income 67 15
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Total other income 886 877
Other expense:
Employee compensation and benefits 2,312 2,517
Occupancy and equipment 430 451
Federal deposit insurance premiums 504 490
Other operating 664 542
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Total other expense 3,910 4,000
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Income from continuing operations before income taxes 7,712 7,700
Income taxes:
Current (22) 12,116
Deferred 3,070 (9,200)
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Total income taxes 3,048 2,916
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Income from continuing operations 4,664 4,784
Income (loss) from discontinued operations
(net of related tax effects) (4,987) 551
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Net income (loss) $ (323) $ 5,335
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Earnings (loss) per common share:
Continuing operations $ 0.20 $ 0.21
Discontinued operations $ (0.21) $ 0.02
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Earnings (loss) per common share $ (0.01) $ 0.23
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Home Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Earnings Per Share)
(Unaudited)
For the Nine Months Ended June 30,
----------------------------------
1996 1995
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Interest income:
Loans $19,078 $ 17,900
Mortgage securities 36,387 33,063
Other securities 11,523 12,109
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Total interest income 66,988 63,072
Interest expense:
Deposits 34,200 29,996
Borrowings 48 --
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Total interest expense 34,248 29,996
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Net interest income 32,740 33,076
Provision for loan losses 125 90
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Net interest income after provision for loan losses 32,615 32,986
Other income:
Fees and service charges 1,065 1,626
Rental income 591 591
Net gain on sale of mortgage securities 1,000 62
Net gain on sale of other securities 434 110
Other income 287 328
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Total other income 3,377 2,717
Other expense:
Employee compensation and benefits 6,866 6,610
Occupancy and equipment 1,237 1,400
Federal deposit insurance premiums 1,496 1,465
Other operating 2,079 1,893
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Total other expense 11,678 11,368
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Income from continuing operations before income taxes 24,314 24,335
Income taxes:
Current 6,588 20,526
Deferred 2,872 (11,082)
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Total income taxes 9,460 9,444
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Income from continuing operations 14,854 14,891
Income (loss) from discontinued operations
(net of related tax effects) (4,987) 585
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Net income $ 9,867 $ 15,476
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Earnings per common share:
Continuing operations $ 0.63 $ 0.64
Discontinued operations $ (0.21) $ 0.03
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Earnings per common share $ 0.42 $ 0.67
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Home Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
For the Nine Months Ended June 30,
----------------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 2,470 $ 22,928
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations and principal collections on loans 33,210 (12,172)
Proceeds from sale of real estate acquired through
foreclosure 22 1,205
Proceeds from sale of loans 478 197
Proceeds from repayments of mortgage securities 83,153 36,734
Proceeds from sale of mortgage securities 89,275 10,936
Proceeds from sale of other securities 159,064 81,547
Proceeds from sale of real estate held for investment 253 303
Purchase of mortgage securities (132,185) (137,400)
Purchase of other securities (194,674) (161,100)
Purchase of other operating and non-operating assets (139) (272)
--------- ---------
Net cash provided by (used in) investing activities 38,457 (180,022)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 17,024 (38,612)
Net proceeds from issuance of common stock 2,310 157,120
Dividends paid on common stock (13,568) (7,482)
Decrease in advances from borrowers for taxes and insurance (2,925) (787)
Repurchase of common shares (2,016) (8,020)
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Net cash provided by financing activities 825 102,219
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Increase (decrease) in cash and cash equivalents 41,753 (54,875)
Cash and cash equivalents at beginning of period 23,397 79,044
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Cash and cash equivalents at end of period $ 65,149 $ 24,169
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SUPPLEMENTAL DISCLOSURES:
Interest paid on deposits and borrowings $ 34,190 $ 29,933
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Income taxes paid $ 4,509 $ 11,400
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Transfers from loans to real estate acquired through foreclosure $ 10 $ 29
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Transfers from real estate acquired through foreclosure to loans $ 13 $ --
========= =========
Transfers from loans to other assets $ 13,072 $ --
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Transfers from real estate held for investment to others assets $ 7,397 $ --
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NON-CASH TRANSACTION:
Loss from discontinued operations $ (4,987) $ --
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Home Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies which have
been consistently applied in the preparation of the consolidated financial
statements:
1. Basis of Presentation and Principles of Consolidation
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On October 24, 1994, Home Financial Corporation, M.H.C. (the "Holding
Company"), which owned approximately 72% of Home Savings Bank, F.S.B.'s (the
"Bank") common stock, consummated a Plan of Conversion and Reorganization (the
"Plan"), pursuant to which the Holding Company changed its name to Home
Financial Corporation ("Home Financial") and converted from the mutual to stock
form of organization, resulting in an increase in Home Financial's capital of
approximately $169.3 million and the ownership of Home Financial being
transferred from the Bank's depositors (and certain borrowers) to persons
(including the Bank's Employee Stock Ownership Plan), who purchased stock in
the Conversion stock offering and persons who exchanged common stock of the
Bank for common stock of Home Financial.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions for Form 10-Q; and therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles (GAAP). However, all adjustments (consisting
only of normal recurring adjustments) which, in the opinion of management, are
necessary for a fair presentation of the consolidated financial statements have
been included. Operating results for the three and nine month periods ended
June 30, 1996, are not necessarily indicative of the results which may be
expected for the year ended September 30, 1996. For further information, refer
to the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1995.
The accompanying consolidated financial statements include the accounts of Home
Financial Corporation, and its wholly owned subsidiaries Home Savings Bank,
F.S.B. (the "Bank"), and American Home Service Corporation ("AHSC"), which
primarily invests in real estate, collectively referred to as the "Company" or
the "Registrant". All significant intercompany transactions and balances have
been eliminated in consolidation.
2. Financial Statement Reclassifications
-------------------------------------
Certain amounts in the three and nine month periods ended June 30, 1995 have
been reclassified to conform to the June 30, 1996 consolidated financial
statement presentation for the respective periods.
3. Mortgage Securities
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The Registrant purchases mortgage-backed securities and mortgage related
securities, such as collateralized mortgage obligations ("CMOs") and real
estate mortgage investment conduits ("REMICs"), collectively referred to as
"mortgage securities".
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgage loans. Issuers of these securities may
be private issuers, or agencies including FHLMC, FNMA or GNMA that guarantee
the payment of principal and interest to investors.
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Home Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
CMOs and REMICs are typically issued by a special purpose entity, organized as
a trust, corporation, or partnership. The issuer aggregates pools of
mortgage-backed securities and/or whole mortgage loans, which are used to
collateralize the CMO or REMIC. The Registrant only invests in CMOs rated AA
or higher. Such securities are debt obligations of the issuer and are
generally divided into tranches whereby cash flows from the underlying
collateral are split among three, four, or more tranches. Interest is paid on
each tranche, then the principal is paid to retire the securities according to
the priority of the tranches, frequently in descending order of priority. The
Registrant invests primarily in the following tranches: first and second
sequential, planned amortization class ("PAC"), and targeted amortization class
("TAC") with an average life at the time of purchase of three years not to
extend to more than six years if rates rise 400 basis points, and support or
companion floating rate tranches.
The actual maturity of a mortgage security varies, depending on when the
mortgagors repay or prepay the underlying mortgages collateralizing a
mortgage-backed security, CMO, or REMIC. Prepayments of the underlying
mortgages may shorten the life of the mortgage security, thereby affecting its
yield to maturity and its related market value, based upon the amount of
premium or discount at purchase. The yield is based upon the interest income
and the amortization of premium or accretion of discount related to the
mortgage security. The Registrant utilizes the level yield method to amortize
premiums and accrete discounts. The prepayment assumptions used to determine
the period for premium amortization or discount accretion can significantly
affect the yield calculation of mortgage securities; accordingly, such
assumptions are reviewed periodically to reflect the actual prepayment
experience. The actual prepayments of the underlying mortgages serving as
collateral for mortgage securities depend on many factors, including mortgage
type, coupon rate, age of the mortgages, geographical location of the
underlying real estate collateralizing the mortgages, general levels of market
interest rates, and general economic conditions. The difference between the
interest rates on the underlying mortgages and the prevailing mortgage interest
rates is an important determinant in the rate of prepayments. During periods
of falling mortgage interest rates, prepayments generally increase. If the
interest rates of underlying mortgages significantly exceed the prevailing
market interest rates offered for mortgage loans, refinancing generally
increases, resulting in accelerated prepayments of the underlying mortgages.
Conversely, if the underlying interest rates are significantly below prevailing
market rates, refinancing generally decreases, resulting in slower prepayments.
The Registrant, as an investor in mortgage securities, is inherently subject to
reinvestment risk. As the mortgage securities amortize or prepay, the
Registrant may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable yield, particularly if the mortgage securities were
acquired in a higher interest rate environment.
4. Mortgage Securities and Other Securities Available for Sale
-----------------------------------------------------------
Mortgage securities and other securities available for sale are carried at fair
value (market value), inclusive of unrealized gains and/or losses, and net of
discount accretion and premium amortization computed using the level yield
method. Net unrealized gains and losses are reflected as a separate component
to stockholders' equity, net of applicable deferred taxes.
Mortgage securities and other securities are designated for the available for
sale portfolio at the time of purchase. It is management's intention to
classify the majority of its mortgage securities and other securities as
available for sale, as the Registrant will actively manage these assets to
ensure it has adequate liquidity and capital. Should any of these assets be
sold, gains and losses will be recognized based on the specific-identification
method.
5. Trading Securities
------------------
Mortgage securities and other securities held in the Registrant's trading
account are carried at market value, adjusted for premiums and discounts that
are recognized in interest income using the level yield method over the period
to maturity. Realized and unrealized gains and losses are recognized in the
statement of income as incurred. The Registrant held no trading securities as
of June 30, 1996 and September 30, 1995, and has no intention of entering into
trading activities at this time.
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Home Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Mortgage Securities and Other Securities Held to Maturity
---------------------------------------------------------
Mortgage securities and other securities held to maturity are carried at
amortized cost. Mortgage securities and other securities which the Registrant
has the positive intent and ability to hold to maturity, are designated as
held-to-maturity securities. Such securities may be sold or transferred to
the available for sale or trading securities classification only as a result of
isolated, nonrecurring, or unusual changes in circumstances which the
Registrant could not have reasonably anticipated, such as a change in statutory
or regulatory requirements regarding investment limitations or a significant
deterioration in a security issuer's credit-worthiness.
7. Income Taxes
------------
Deferred income taxes have been provided for elements of income and expense
which are recognized for financial reporting purposes in periods different than
such items are recognized for income tax purposes. The Company accounts for
deferred taxes utilizing the liability method, which applies the enacted
statutory rates in effect at the statement of financial condition date, to
differences between the book and tax basis of assets and liabilities. The
resulting deferred tax liabilities and assets are adjusted to reflect changes
in tax laws.
8. Required Contributions for Shares Acquired by ESOP and RRP
----------------------------------------------------------
In connection with the consummation of the Plan, the ESOP, sponsored by the
Registrant for eligible employees, borrowed funds from the Registrant to
purchase 8.0% of the common stock issued by the Registrant in the Conversion
stock offering. The loan will be repaid principally from the Registrant's
contributions to the ESOP over a period of up to 10 years. Accordingly, an
amount representing unearned employee compensation, equivalent in value to the
unpaid balance of the loan to the ESOP, is recorded as a deduction from
stockholders' equity. The Registrant purchased shares for the RRP after
receiving stockholder approval on January 25, 1995 in an amount equal to
approximately 4% of total stock sold in the Conversion stock offering. The
cost of these shares is being amortized over a period of 5 years, allocated at
20.0% per year beginning one year from the date of stockholder approval with
the unamortized balance being recorded as a reduction to stockholders' equity.
9. Earnings (Loss) Per Share
-------------------------
Earnings (loss) per share for the three and nine months ended June 30, 1996,
were calculated based on weighted average shares outstanding of 23,497,784 and
23,432,322 respectively, excluding unallocated ESOP shares in accordance with
AICPA Statement of Position No. 93-6. Earnings per share for the three and
nine months ended June 30, 1995 was calculated based on weighted average shares
outstanding of 23,240,494 and 23,180,731, respectively excluding unallocated
ESOP shares in accordance with AICPA Statement of Position No. 93-6. Stock
options are considered common stock equivalents unless their inclusion would be
antidilutive.
10. Quarterly Cash Dividend
-----------------------
On May 28, 1996, the Board of Directors declared a $0.20 per common share cash
dividend payable to stockholders of record on July 5, 1996. This dividend was
paid on July 12, 1996.
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Home Financial Corporation and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 1995,
- - ------------------------------------------------------------------
TO JUNE 30, 1996.
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ASSETS.
Total assets increased by $2.9 million, or 0.2% from $1.213 billion at
September 30, 1995 to $1.216 billion at June 30, 1996, due to net increases in
interest-bearing cash and other securities available for sale which were
partially offset by net decreases in the mortgage securities available for
sale, and mortgage loan portfolios.
Non-interest bearing cash decreased by $1.1 million or 18.4%, from $6.1 million
at September 30, 1995 to $5.0 million at June 30, 1996. Interest-bearing cash
increased by $42.9 million or 248.4% from $17.3 million at September 30, 1995
to $60.1 million at June 30, 1996, primarily due to the net increase in cash
from investing activities of $38.5 million, and net increases in cash and cash
equivalents by operating and financing activities of $3.3 million.
The Registrant's mortgage securities available for sale portfolio decreased
$46.1 million or 6.4% at June 30, 1996 as compared to September 30, 1995, due
to the net effect of $132.2 million of purchases, $79.5 million of repayments,
$78.6 million of sales, $14.3 million of payoffs, $100,000 of calls, $0.5
million of write downs, and a $5.3 million decrease in the aggregate market
value of the mortgage securities available for sale portfolio. The
Registrant's other securities available for sale portfolio increased by $31.3
million or 16.9% at June 30,1996 as compared to September 30, 1995 due to the
net effect of $194.6 million of purchases, $100,000 of repayments, $18.5
million of sales, $5.0 million of payoffs, $64.2 million of calls, $71.2
million of maturities, and a $4.3 million decrease in the aggregate market
value of the other securities available for sale portfolio. The net $9.6
million market value decline of the mortgage securities and other securities
available for sale portfolios was principally due to interest rates increasing
an average of 16 basis points in the three month through one year sector of the
treasury curve and an average of 37 basis points in the two year through five
year sector as well as the volatility in the market caused by the concern
regarding whether the Federal Reserve would move to tighten policy by raising
the fed funds rate. Additionally, prepayments decreased resulting in a longer
average life for the mortgage securities portfolio.
Management believes that the Bank is currently in full compliance with Office
of Thrift Supervision (" OTS") guidelines governing securities, including
Thrift Bulletin ("TB") 52. Among other things, TB-52 sets forth certain
guidelines with respect to depository institutions' investments in certain
"High-Risk Mortgage Securities". "High-Risk Mortgage Securities" are defined
as any mortgage derivative product that at the time of purchase, or at any
subsequent date, meets any of the following three tests: (i) the expected
remaining weighted average life (i.e., the expected time until repayment of
principal on a mortgage-backed security) of the security exceeds ten years;
(ii) the expected remaining weighted average life of the security extends by
more than four years in the event of an immediate and sustained parallel shift
in the yield curve of plus 300 basis points; (iii) the expected remaining
weighted average life of the security shortens by more than six years in the
event of an immediate and sustained parallel shift in the yield curve of
negative 300 basis points; or (iv) the estimated change in the price of the
security is more than 17 percent in the event of an immediate and sustained
parallel shift in the yield curve of plus or minus 300 basis points.
Additionally, floating-rate tranches that are tied to a conventional
widely-used index are subject only to test (iv) above if the current interest
rate on the tranche is below the maximum contractual interest rate on the
tranche (i.e., the "cap rate"). Floating rate tranches tied to other indices
are subject to all four tests. Superfloaters and inverse floaters are also
subject to all four tests. These High-Risk Mortgage Securities may be
purchased only in limited circumstances, and if held in portfolio, must be
reported as either trading securities or as available for sale securities, in
accordance with SFAS No. 115 (which essentially states that these securities
will be carried at market value, with fluctuations in market value of trading
securities reported as adjustments to earnings in the current reporting period
and fluctuations of securities classified as available for sale being reported
as adjustments to stockholders' equity). In certain circumstances, OTS
examiners may seek orderly divestiture of such High-Risk Mortgage Securities.
The Bank currently has not classified any of its securities as trading
securities, nor, at the present time, does it maintain any trading accounts. A
mortgage derivative product that was not a High-Risk Mortgage Security when it
was purchased may later fall into such category. Once a mortgage derivative
product has been classified as high-risk, it may be reclassified as
nonhigh-risk only if, at the end of two consecutive quarters, it does not meet
the definition of a High-Risk Mortgage Security.
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Home Financial Corporation and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
The Bank has established strict policy guidelines concerning the purchase of
securities classified as High-Risk Mortgage Securities. At June 30, 1996, the
Registrant had 10 mortgage securities classified as "high risk" under TB-52,
totalling $14.1 million in aggregate market value, or 2.1% of the mortgage
securities portfolio, as compared to September 30, 1995, at which time the
Registrant had so classified 13 of such securities with an aggregate market
value of $31.1 million or 4.3% of the mortgage securities portfolio. During
the nine months ended June 30, 1996, three securities with a market value of
$14.5 million were removed from the "high risk" classification because they
passed the TB-52 stress test for two consecutive quarters. The decrease in the
amount of "high risk" mortgage securities is reflective of a lower interest
rate environment and more stable prepayments during the period ended June 30,
1996, as compared to the period ended September 30, 1995. Of the $14.1 million
High Risk Mortgage Securities, $1.0 million are Inverse and Leveraged Floating
Rate collateralized mortgage obligations ("CMO's") and $1.6 million are
Principal Only mortgage-backed securities. The remaining $11.5 million are
considered High Risk Mortgage Securities because the average life extends more
than four years or the price changes by 17.0% or more when subjected to the
TB-52 stress test. Because of the Registrant's large portfolio of mortgage
securities and the prepayment uncertainty exhibited by such securities, there
is a possibility that market interest rate increases would result in additional
mortgage securities being classified as High Risk Mortgage Securities. The
reclassification would not necessarily result in any loss of principal to the
Registrant, although market value declines are likely to adversely affect
stockholders' equity.
At June 30, 1996 the Registrant's other securities available for sale portfolio
contained $24.3 million of Structured Notes, as described in TB-65, or 11.2% of
the total other securities portfolio. Of the $24.3 million of Structured
Notes, $10.0 million are dual-indexed U.S. Government agency securities using a
multiple of the Prime rate minus 3-month LIBOR, $9.6 million are step-up U.S.
Government agency securities, and $4.7 million are de-leveraged U.S. Government
agency securities. These securities contain no credit or liquidity risk, but
do contain market risk. The $24.3 million market value at June 30, 1996 is
$1.0 million, or 4.0% less than the historical amortized cost basis of the
securities of $25.3 million.
The Registrant's net loan portfolio decreased by $34.9 million, or 14.0% to
$214.8 million at June 30, 1996 from $249.7 million at September 30, 1995. The
decrease was primarily attributable to the sale, by American Home Service
Corporation ("AHSC"), of seven loans totalling $18.7 million in the quarter
ended June 30, 1996, in addition to principal repayments of approximately $67.3
million outpacing loan originations of $49.9 million. Commercial real estate
loans accounted for the most significant loan originations totalling
approximately $34.1 million, followed by single-family loans totalling $9.3
million, and multi-family loans totalling $6.5 million.
The Registrant's nonperforming assets (e.g., loans over 90 days or more past
due, nonaccruing loans and real estate acquired through foreclosure) increased
by $2.9 million to a total of $4.6 million at June 30, 1996 from $1.7 million
at September 30, 1995. The increase was primarily due to the classification of
four multi-family loans with an aggregate principal balance of $3.9 million to
substandard during the quarter ended June 30, 1996, 16 single-family loans
totalling $0.4 million, and one commercial real estate loan with a principal
balance of 44,000, offset by the removal of 26 one-to-four family residential
loans with principal balances totalling approximately $0.6 million from
non-accrual status due to reclassification to current or being repaid in full,
and the reclassification of one land loan with a principal balance of $0.6
million from non-accrual to current.
Other assets increased by $22.5 million, or 898.9% to $25.0 million at June 30,
1996 from $2.5 million at September 30, 1995. This increase was primarily due
to the reclassification of the assets related to discontinued operations at net
realizable value. Such assets consisted substantially of real estate held for
investment in the amount of $7.1 million and certain loans receivable in the
amount of $13.0 million.
LIABILITIES.
Deposits increased by $17.0 million, or 2.0% to $888.3 million at June 30, 1996
from $871.3 million at September 30, 1995. Increases were primarily recorded
in certificates of deposits of $22.7 million during the nine month period ended
June 30, 1996 due to the Registrant continuing to offer competitive short-term
deposit rates within the marketplace.
Advances from borrowers for taxes and insurance decreased by $2.9 million, or
39.4% to $4.5 million at June 30, 1996 from $7.4 million at September 30, 1995,
due to the Registrant making seasonal and periodic tax and insurance payments
for its borrowers.
9
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Home Financial Corporation and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Other liabilities decreased by $1.6 million, or 13.2% to $10.4 million at June
30, 1996 from $11.9 million at September 30, 1995. The decrease was the net
result of an the absence of a $5.0 million item which represented the recording
of an investment which was purchased at September 30, 1995, however the funds
were not disbursed until the next business day, a $0.4 million decrease in real
estate taxes accrued due to the sale of real estate held by AHSC, offset by a
$1.3 million increase of common stock cash dividends payable, an increase of
approximately $0.9 million in the Employee Stock Ownership Plan and the
Recognition and Retention Plan benefit accruals, and a $1.7 million increase
in security deposits held in connection with the AHSC's sale of loans and real
estate.
CAPITAL.
The Registrant's total stockholders' equity decreased by $8.6 million, or 2.8%
to $301.6 million at June 30, 1996 from $310.2 million at September 30, 1995.
The decrease was primarily the net result of the Registrant recording net
income of $9.9 million consisting of income from continuing operations of $14.9
million and a loss from discontinued operations of $5.0 million, receiving $2.8
million upon the issuance of common stock as options were exercised, and a
reduction of the ESOP and RRP capital accounts due to paydowns of $1.3 million,
all of which were partially offset by the payment of cash dividends in the
amount of $14.6 million during the first three quarters of fiscal 1996, the
repurchase of common stock for benefit plans during the third quarter of $2.0
million, and a change in net unrealized losses on the securities available for
sale portfolio of $6.0 million. The OTS requires that the Registrant's
subsidiary, Home Savings Bank, F.S.B. (the "Bank") meet the minimum regulatory
tangible, core, and risk-based capital requirements. At June 30, 1996, the
Registrant exceeded all such regulatory capital requirements.
The Bank's required, actual and excess regulatory capital levels as of June 30,
1996 were as follows:
REQUIRED ACTUAL EXCESS OF
----------------- --------------------- ACTUAL OVER
% OF % OF REGULATORY
AMOUNT ASSETS AMOUNT ASSETS REQUIREMENT
------ ------ ------ -------- -----------
(Dollars in Thousands)
Tangible Capital $17,354 1.5% $236,263 20.42% $218,909
Core Capital $34,707 3.0% $236,263 20.42% $201,556
Risk-Based Capital $30,310 8.0% $239,409 63.19% $209,099
LIQUIDITY.
The Registrant maintains an average daily balance of liquid assets (e.g., cash,
certain time deposits, and specified United States government, state or federal
agency obligations, etc.) equal to a monthly average of not less than 5% of its
net withdrawable deposits plus short-term borrowings as required by the OTS.
At June 30, 1996, the Registrant's regulatory liquidity position was $192.3
million, or 21.7%, compared to $187.2 million, or 21.3% at September 30, 1995.
The Registrant adjusts its liquidity levels in order to meet funding needs for
deposit outflows, repayment of borrowings, when applicable, and loan
commitments. The Registrant also adjusts liquidity as appropriate to meet its
asset and liability management objectives.
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Home Financial Corporation and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTH PERIODS ENDED
- - --------------------------------------------------------------------------
JUNE 30, 1996 AND 1995.
- - -----------------------
INTEREST INCOME.
Total interest income increased by $0.1 million, or 0.4% to $22.0 million for
the three months ended June 30, 1996 compared to $21.9 million for the three
months ended June 30, 1995. Total interest income increased by $3.9 million,
or 6.2% to $67.0 million for the nine months ended June 30, 1996 compared to
$63.1 million for the nine months ended June 30, 1995. The increases reflect
growth of $43.1 million in average interest-earning assets to $1.20 billion for
the three months ended June 30, 1996 from $1.15 billion for the three months
ended June 30, 1995, partially offset by a decrease in the average yield to
7.4% from 7.6%, respectively, and an increase of $88.0 million in average
interest-earning assets to $1.20 billion for the nine months ended June 30,
1996, from $1.11 billion for the nine months ended June 30, 1995, which was
partially offset by a decrease in the average yield to 7.5% from 7.6%,
respectively.
Interest income on loans increased by $0.1 million or 2.3% to $6.1 million for
the three months ended June 30, 1996 as compared to $5.9 million for the three
months ended June 30, 1995. Although the average balance of loans decreased by
$13.1 million, or 5.6% to $222.4 million for the three months ended June 30,
1996 from $235.5 million for the three months ended June 30, 1995, the average
yield on loans increased to 10.9% from 10.1%, for the three month periods,
respectively. Interest income on loans increased by $1.2 million or 6.6% to
$19.1 million for the nine months ended June 30, 1996, compared to $17.9
million for the nine months ended June 30, 1995. The increase was primarily
due to the average yield on loans increasing to 10.7% for the nine months ended
June 30, 1996 from 10.4% for the nine months ended June 30, 1995, as well as
the average balance of loans increasing by $7.8 million to $238.4 million for
the nine months ended June 30, 1996 from $230.6 million for the nine months
ended June 30, 1995.
Interest income on mortgage securities decreased by $0.2 million, or 1.4% to
$11.7 million from $11.9 million for the three months ended June 30, 1996 as
compared to June 30, 1995. This decrease was the net result of an increase of
$22.8 million in the average mortgage securities portfolio balance to $704.1
million for the three months ended June 30, 1996 from $681.3 million for the
same period in 1995, partially offset by the average yield on mortgage
securities decreasing to 6.7% for the three month period ended June 30, 1996
from 7.0% for the three month period ended June 30, 1995. Interest income on
mortgage securities increased by $3.3 million, or 10.1% to $36.4 million from
$33.1 million for the nine months ended June 30, 1996 as compared to the nine
months ended June 30, 1995. This increase is due primarily to an increase of
$80.5 million in the average mortgage securities portfolio balance to $719.2
million for the nine months ended June 30, 1996 from $638.7 million for the
same period in 1995, offset by a slight decrease in the average yield to 6.8%
from 6.9% for the nine month periods, respectively.
Interest income on other securities increased by $0.1 million, or 3.2% to $4.3
million for the three months ended June 30, 1996 from $4.1 million for the same
period in the previous year. The increase was attributable to the increase in
the average balance of the other securities portfolio to $270.4 million from
$236.9 million for the three month period ended June 30, 1996 compared to the
three months ended June 30, 1995, offset by a decrease in the average yield to
6.3% from 7.0% for the three month periods, respectively. Interest income on
other securities decreased by $0.6 million, or 4.8% to $11.5 million for the
nine months ended June 30, 1996 as compared to $12.1 million for the nine
months ended June 30, 1995. Although the average balance of other securities
showed no change at $240.4 million for the nine months ended June 30, 1996 and
for the nine months ended June 30, 1995, a decrease in the average yield to
6.4% from 6.7% primarily resulted in the decrease of interest income.
INTEREST EXPENSE.
Interest expense increased by $0.2 million, or 1.5% to $11.2 million for the
three month period ended June 30, 1996 from $11.1 million for the three month
period ended June 30, 1995. Interest expense increased by $4.3 million, or
14.2% to $34.2 million for the nine months ended June 30, 1996 from $30.0
million for the nine months ended June 30, 1995. These increases were
primarily attributable to the increase in the average balance of deposits by
$37.6 million to $886.9 million for the three months ended June 30, 1996 from
$849.3 million for the three months ended June 30, 1995, and by $36.9 million
to $884.1 million for the nine months ended June 30, 1996 from $847.2 million
for the nine months ended June 30, 1995.
11
14
Home Financial Corporation and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
NET INTEREST INCOME.
Net interest income decreased by $0.1 million, or 0.6% to $10.8 million for
the three months ended June 30, 1996 from $10.9 million for the three months
ended June 30, 1995 and by $0.3 million, or 1.0% to $32.7 million for the nine
months ended June 30, 1996 from $33.1 million for the nine months ended June
30, 1995. These decreases were primarily the result of the net interest rate
spread decreasing to 2.3% from 2.4% for the three month periods ended June 30,
1996 and June 30, 1995 and to 2.3% from 2.9% for the nine month periods ended
June 30, 1996 and June 30, 1995, respectively. The decreases were also the
result of the net interest margin decreasing to 3.6% from 3.8% for the three
months ended June 30, 1996 as compared to June 30, 1995, and to 3.6% from 4.0%
for the nine months ended June 30, 1996 as compared to June 30, 1995,
respectively.
PROVISION FOR LOAN LOSSES.
The provision for loan losses remained relatively stable at $50,000 and
$125,000 for the three and nine month periods ended June 30, 1996 as compared
to $30,000 and $90,000 for the three and nine month periods ended June 30,
1995. It is management's determination that these provisions were adequate for
the respective periods based upon management's review of the loan portfolio.
OTHER INCOME.
Total other income was relatively stable, increasing by $9,000, or 1.0% for the
three month period ended June 30, 1996 as compared to the same period in the
previous year. The increase was primarily due to the net effect of a $238,000
increase in net gain on sale of mortgage securities and other securities, an
increase of $52,000 in other operating income, partially offset by a decrease
of $269,000 in fees and service charges, and a decrease of $12,000 in rental
income. Total other income for the nine month period ended June 30, 1996
increased by $0.7 million, or 24.3% to $3.4 million from $2.7 million for the
nine months ended June 30, 1995. The increase was primarily due to an increase
of $1.3 million in net gains on the sale of mortgage securities and other
securities, partially offset by a decrease of $0.6 in fees and service charges,
as well as by a $41,000 decrease in other operating income. The $0.2 million
increase in net gain on sales of mortgage securities and other securities for
the three months ended June 30, 1996, and the $1.3 million increase in net gain
on sales of mortgage securities and other securities for the nine months ended
June 30, 1996 were primarily as a result of the Registrant selling $3.2 million
high coupon GNMAs at a premium because they were experiencing higher than
expected prepayments, and selling a portion of the floating-rate CMO portfolio
which was indexed to the Eleventh District Cost of Funds because the portfolio
was overweighted in this lagging index, based upon management's asset/liability
management objectives. Proceeds from the sales were invested in adjustable
rate GNMAs and FHLMCs, fixed rate CMOs with a weighted average life of five
years, callable agency securities and five-year U.S. Treasury Notes. The
decreases in fees and service charges for the three month period ending June
30, 1996 are primarily attributable to the absence of $247,000 in non-recurring
mortgage loan late charge fees, release fees, and transfer fees which were
recorded during the three month period ended June 30, 1995. The decreases in
fees and service charges for the nine month period ended June 30, 1996 are
primarily attributable to the absence of $344,000 in non-recurring mortgage
loan late charges, release fees, and appraisal fees which were collected during
the nine month period ended June 30, 1995, as well as $175,000 less in
penalties on early withdrawal of certificates of deposit.
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Home Financial Corporation and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
OTHER EXPENSE.
Total other expense was relatively stable, decreasing $0.1 million, or 2.3% for
the three month period ended June 30, 1996 as compared to the same period in
the previous year. The decrease was the net result of a decrease of $205,000
in employee compensation and benefits, a $21,000 decrease in occupancy and
equipment costs, offset by an increase of $14,000 in FDIC premiums, and an
increase in other operating expense of $122,000. Total other expense for the
nine months ended June 30, 1996 increased by $0.3 million, or 2.7% to $11.7
million from $11.4 million for the nine months ended June 30, 1995, primarily
due to the increase of $0.3 million in employee compensation and benefits, an
increase of $0.2 million in other operating expense, offset by a decrease of
$0.2 million in occupancy and equipment costs.
The Bank's deposit liabilities are insured by the Savings Association Insurance
Fund (the "SAIF") of the FDIC. A number of proposals to more adequately fund
the SAIF are being discussed by the Congress. Among the proposals is a one
time assessment on thrift deposits of 85 to 90 basis points per $100 of SAIF
insured deposits, based on deposits as of March 31, 1995. If this proposal is
enacted, the Bank will incur a liability of approximately $7.2 million. This
amount would be reflected by a charge against income in the period the
liability is incurred. Management is unable to predict whether this proposal
will become law or, if enacted, whether the amount of the proposal assessment
would remain as stated above.
TAXES.
The Registrant's income taxes on continuing operations for the three months and
nine months ended June 30, 1996 as compared to the three months and nine months
ended June 30, 1995, increased by $132,000 and $16,000 respectively, primarily
as a result of changes in taxable income before income taxes.
PENDING BUSINESS COMBINATION
On June 16, 1996 Home Financial Corporation entered into a merger agreement
(the Merger Agreement) with First Union Corporation whereby each outstanding
share of the Registrant's common stock will be converted into 0.2233 (the
Exchange Ratio) shares of the common stock of First Union Corporation, subject
to adjustment under certain circumstances. In connection with the Merger
Agreement, the Registrant agreed to dispose of assets of AHSC, which were
recorded at net realizable value and included in other assets. On July 1,
1996, AHSC entered into a Purchase and Sale agreement, pursuant to which the
AHSC Assets were sold for a purchase price, subject to possible adjustment due
to AHSC's warranty at title with respect to the assets sold, of $20.3 million,
or 70% of the $29.0 million book value of such assets on the date of the
disposition. The transaction closed on July 5, 1996, and the total
consideration was received in cash on that date. By the terms of the Merger
Agreement, the Exchange Ratio will be adjusted to the extent the purchase price
paid in the AHSC disposition, as increased by the amount which equals the
marginal tax rate with respect to the loss recognized by AHSC for tax purposes,
is greater than 70% of the book value of the AHSC Assets. For tax purposes,
AHSC recognized a tax benefit of approximately $4.6 million on the AHSC Asset
disposition. Because the aggregate tax adjusted purchase price, for purposes
of determining the Exchange Ratio exceeded 70% of the book value of the AHSC
Assets, management estimates that as a result of the sale the Registrant's
shareholders will receive approximately $0.17 per share additional value in
connection with the aquisition in the form of an increase in the Exchange
Ratio. The actual increase in the Exchange Ratio will be determined based on
the average of the closing sale price of First Union Corporation common stock
for the ten trading days prior to the closing date, and cannot be determined
until such time. Due to the sale, aloss from discontinued operations of $5.0
million, or $0.21 per share, was recognized net of the related tax effects for
both the three and nine month periods ended June 30, 1996.
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16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are various claims and lawsuits in which the Registrant is periodically
involved incidental to the Registrant's business. In the opinion of
management, no material loss or gain is expected from any of such pending
claims or lawsuits.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Stockholders
No matters were submitted to a vote of stockholders during the three months
ended June 30, 1996.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule (for SEC use only)
Exhibit 99 Press release relating to the sale of American Home Service
Corporation assets
14
17
Home Financial Corporation and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed by the
undersigned thereunto duly authorized.
HOME FINANCIAL CORPORATION
Date: August 12, 1996 By: /s/ Harry K. MacDougall
--------------------------------
Harry K. MacDougall
Executive Vice President and
Chief Operating Officer
Date: August 12, 1996 By: /s/ Elaine W. Hedleston
--------------------------------
Elaine W. Hedleston
Vice President / Treasurer
15