Home Financial Bancorp came through 2009 bruised, but healthy. Despite operating in an industry gripped by unprecedented crises and challenges, we conducted business as usual, as much as possible. Our veteran team of directors, officers and staff, worked each day to uphold our end of the bargain made with shareholders, customers, and the communities we serve. Our focus remains earnings growth, service excellence and community support. In these troubled times, when others have lost sight of some timeless, common-sense ideas about banking and personal responsibility, OCB’s Board of Directors thought it important to acknowledge borrowers who hold up their end of the loan bargain. So they recently took time to personally sign a letter of appreciation to each borrower that has always made their loan payments on time. These borrowers represent about 95% of our loan portfolio but are often overlooked because the other 5% dominate so much of our time and attention.
Ultimately, it doesn’t take many defaults to seriously damage net earnings. Problem asset costs siphoned away most of the otherwise strong revenue stream in 2009. Provisions for loan losses drained $375,000 from the bottom line and repossessed property expense diverted another $330,000. That’s why a continued emphasis on loan quality remains essential to improving net income.
Loan quality improvement is a long, difficult process. It involves making sure new loans are restricted to higher creditquality
borrowers and removing risky credits from the balance sheet. I’m pleased to report progress in this direction. Mortgage loans originated in calendar year 2008 and the first half of 2009 average a FICO credit score of 718. Nonmortgage loans made during that time average a score of about 710. In contrast, loans made during 2001 averaged credit scores of 668 and 660 for mortgage and non-mortgage borrowers, respectively.
Like many other lenders, we use FICO scores as one method to estimate a loan applicant’s credit risk. People with high scores are likely to repay loans more consistently than people with low credit scores. As a group, borrowers in the 700- 749 credit score range have a predicted delinquency rate (or credit risk) of 5%. This means that for every 100 borrowers in this range, approximately five will default on a loan, file for bankruptcy, or fall 90 days past due on at least one credit account in the next two years.
In 2004, approximately one-third of our mortgage loan portfolio consisted of borrowers with FICO scores greater than 700. Currently over 50% of our mortgage borrowers have a score above 700. Ninety-five percent of our delinquent loans were made more than two years ago and most of these had a credit score below 670 at time of loan origination. This steady progress in loan quality is crucial to long-term earnings growth for the Company.
A strong capital base, robust net interest income and adherence to honest, principled banking practices will steer the company through this period of troubled assets and a weak economy. We continue to do the right thing, even when it is not convenient. We don’t delay recognizing credit losses that we can estimate based on current information and events. For the foreseeable future, loss provision levels will likely continue to impact bottom-line earnings. We work with borrowers who work with us in good faith, but we act to protect our security interest when necessary. We seek quick sales at the best price, but realize the markets for sale of repossessed property are still depressed and seem likely to
remain so for some time.
As we look toward 2010, we see more uncertainty. Although community banks were not the cause of the recent economic devastation, we are clearly targeted for “reform” under pending and recently enacted legislation. It is a political pattern repeated time and time again – punish all, instead of holding accountable the few who commit the misdeeds. One of the punishments already imposed is higher regular FDIC premiums and an emergency assessment that increased deposit insurance expense by $72,000 in 2009. Additional emergency assessments are expected in 2010.
Another anticipated punishment comes in the form of regulatory restructuring proposed by Congress and the Obama Administration. Though still subject to changes, current proposals would eliminate the federal thrift charter, merge together the Office of Thrift Supervision and the Office of the Comptroller of the Currency into a new National Bank Supervisor, and create a new banking agency devoted exclusively to consumer protection.
The uninvited burden of changing corporate charters and adjusting to a new, unfamiliar regulatory regime would be costly and sidetrack critical operating priorities. Further, the unprecedented powers contemplated for the new Consumer Financial Protection Agency constitute a clear and present danger to community banking as we know it. This agency would heap on an additional layer of regulatory command and control over all bank products.
Nobody disagrees that consumers need to be protected from abusive practices, but community banks aren’t the problem. Data shows that 94% of high-cost mortgages that caused the economic crisis occurred outside the regulated banking sector. Consumer protection should be focused on the less-regulated financial services providers that – unlike community banks – are not carefully regulated and supervised. The proposed mega-regulator approach would undermine small community banks like ours and cause more harm than good.
We continue to follow the prudent, common-sense banking practices that have guided us for nearly a century. These practices kept us healthy through any number of other tough economic times. We have every confidence that they will serve us well during this time of uncertainty. Sadly, we face this future without our long-time leader.
Frank Stewart, Chairman of Home Financial Bancorp since inception and whom we lost a year ago at age 83, was one of the most interesting and intelligent men any of us will likely encounter. Steeped in traditional midwestern values, he never changed who he was, and was someone everyone, even those with whom he clashed, respected. He is missed greatly, and quoted often at board meetings. But he left a great path to follow and a great Board of Directors to follow it. We are grateful to have known and to have worked with such a fine man and confident leader.
Thanks to all of our Directors for their service and to our employees, customers and shareholders, for their continued
support.
Kurt D. Rosenberger
President and Chief Executive Officer

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