From the President

It was a mixed year with many positives, but frankly, I will not remember 2007 fondly.  We made significant strides toward improved asset quality, but it was costly.  We added excellent new directors, but also suffered illness and loss within our leadership.  Most importantly, through the hard work and dedication, Home Financial Bancorp remains strong, focused and well prepared for a dynamic future.
Continued high expenses for bad loans and inflated funding costs lead to disappointing earnings for the year.   In order to protect assets and recover investments, we were forced to foreclose on a lot of residential properties in 2007.  We never want to foreclose on a mortgage.  It is costly to both the Bank and to our borrowers.  Whenever possible, we try to work out an arrangement that will allow borrowers to retain their home.  But when they are unable or unwilling to honor agreed repayment terms, our only option is to seek repayment through liquidation of collateral.  Loan charge-offs totaled $199,000 and repossession costs were $302,000 for the year.
Important progress was made in reducing problem assets during the year.  Loans delinquent 90 days or more decreased $714,000 or 41% and repossessed assets fell $148,000 or 20%, compared to twelve months earlier.  Problem asset levels are still too high, but I believe we have implemented changes that will result in long-term asset quality improvement.  Evidence to this point is the fact that no loan originated during the past two years was in non-performing status at June 30, 2007.
Even though we have not changed our focus from residential mortgage lending, we have changed our procedures greatly; both in how we make loans and handle collections.  Our underwriting standards are higher and the difference is reflected in better average credit scores and lower loan-to-value percentages.  We have also successfully expanded our focus to include selling secondary market loans.
Administrative and software changes were implemented to make collections more effective.  Monitoring, tracking and reporting capabilities are much better now, and we are set up to communicate directly with delinquent borrowers earlier in the collection process.  In 2007, we also got more aggressive with recovery efforts for assets we were forced to repossess; liquidating 33 foreclosed properties during the year. 
Delaying recovery efforts was not a viable option.  Mounting loan defaults throughout the mortgage industry are dumping more houses onto the market and eroding home prices, especially at the low end.  Consequently, credit recovery risk will likely continue, and may worsen.  In preparation for this operating environment, allowances for loan losses increased 13% and totaled $565,000, or .92% of total loans at fiscal year-end.  Rather than merely making enough provisions for loan losses to replace reserves depleted by charge-offs, we added to reserves for future problems. 
Fortunately, we do not have non-traditional mortgages – such as “piggyback” mortgages, low-doc and no-doc loans, interest only loans and loans with optional payment terms that allow negative amortization.  All of theses risky loan types have grown quickly in popularity over the last several years – especially in areas that experienced record home-price growth in recent years.  Our loan originations have been, and will continue to be, dominated by conventional fixed rate residential mortgage products.
Higher funding costs also hurt earnings in 2007.  Interest expense increased by $420,000 or 20% due to an upward shift in the average rate paid on deposits and borrowed money.  
Despite higher interest costs and intensely competitive loan pricings, our net interest margin remains healthy at 3.8%, and compares well to our national peer group’s 3.0% average. 
I sincerely appreciate the efforts of our staff during a difficult year.  We made vital progress in many areas.  On-line banking was introduced, loan quality improved, problem assets declined, fee revenue increased, cost-control measures were applied, and a number of service-oriented technology improvements were implemented. 
I do not take for granted the patience and support of our shareholders as we work to restore profitability to a more acceptable level – thank you!  Finally, I want to express my deepest appreciation to the Board of Directors for its firm guidance during a period of significant change.  With the welcome addition of two directors, we also confronted the temporary absence of both our Chairman and Vice Chairman due to illnesses, and the loss of our extraordinary friend, John T. Gillaspy.  He contributed a lifetime of service and leadership to this community, including 20 years of distinction as a director of Home Financial Bancorp and Owen Community Bank.  We continue to grieve the loss of his wise and steady counsel.

Kurt D. Rosenberger
President and Chief Executive Officer

Home Financial Bancorp’s common stock trades publicly
and is quoted under the
symbol "HWEN.PK" as a pink sheet stock.

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