UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
or
[ ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____ to ____.
Commission File Number: 0-16463
HOME FEDERAL CORPORATION
(Name of Small Business Issuer in its charter)
Maryland 52-1636831
(State or other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification Number)
122-128 West Washington Street, Hagerstown, Maryland 21740
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (301)733-6300
Securities registered under Section 12(b) of the Act: Not Applicable
Securities registered under Section 12(g) of the Act:
Common Stock ($1.00 par value per share)
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for the year ended December 31, 1995: $17,966,735
As of March 15, 1996, the aggregate market value of the 2,519,010 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
218,644 shares held by all directors and officers of the Registrant as a group,
was approximately $18.4 million. This figure is based on the closing price of
$8.00 per share of the Registrant's Common Stock on March 13, 1996.
Number of Shares of Common Stock outstanding as of December 31, 1995: 2,519,010
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-KSB into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1995 are incorporated into Part II, Items 5 - 8 of this Form
10-KSB.
(1) Portions of the definitive proxy statement for the 1996 Annual Meeting of
Stockholders are incorporated into Part III, Items 9 - 12 of this Form 10-KSB.
Transitional Small Business Issuers Format: Yes ___ No _X_.
<PAGE>
PART I
Item 1. Description of Business
The Corporation
Home Federal Corporation ("HFC" or the "Corporation"), a Maryland business
corporation located in Hagerstown, Maryland, is the savings and loan holding
company of Home Federal Savings Bank ("Home Federal" or the "Bank"). The
Corporation owns all of the outstanding common stock of the Bank, which is its
primary asset. On a consolidated basis, at December 31, 1995, HFC had total
assets of $214.6 million, total liabilities of $196.2 million and total
stockholders' equity of $18.4 million or $7.30 per share based on 2,519,010
shares of common stock $1.00 par value per share ("Common Stock") outstanding.
HFC had net income of $2.5 million for the year ended December 31, 1995.
The Bank's principal business presently consists of attracting deposits
from the general public and using these funds, together with other available
funds, to originate residential real estate loans, residential construction
loans and consumer loans, including automobile and property improvement loans.
Home Federal's operations also include stockbrokerage, insurance and other
financial services.
The Corporation, as a registered savings and loan holding company, is
subject to examination and regulation by the Office of Thrift Supervision
("OTS"), a department of the United States ("U.S.") Treasury, and is subject to
various reporting and other requirements under Federal securities laws and
regulations administered by the Securities and Exchange Commission ("SEC"). Home
Federal, as a federally chartered savings bank, is subject to examination and
comprehensive regulation by the OTS, and by the Federal Deposit Insurance
Corporation ("FDIC"). Customer deposits with the Bank are insured to the maximum
extent provided by law through the Savings Association Insurance Fund ("SAIF"),
which is administered by the FDIC. Home Federal is a member of the Federal Home
Loan Bank ("FHLB") of Atlanta, which is one of 12 regional banks comprising the
FHLB System. Home Federal also is subject to regulations administered by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board")
regarding reserves required to be maintained against deposits and certain other
matters.
The Corporation's and the Bank's principal executive offices are located at
122-128 West Washington Street, Hagerstown, Maryland 21740 and their telephone
number is (301) 733-6300.
Lending Activities
Loan Portfolio Composition. Home Federal's net loan and mortgage-backed
securities portfolio ("loan portfolio") totaled $184.4 million at December 31,
1995, representing approximately 85.9% of total assets at such date.
At December 31, 1995, single-family loans amounted to $71.8 million or
39.0% of the loan portfolio, loans on single-family residential properties are
primarily long-term and are either conventional (not insured or guaranteed by a
federal agency) or insured by the Federal Housing Administration ("FHA") or
partially guaranteed by the Department of Veterans Affairs ("VA"). The
mortgage-backed securities portfolio, which amounted to $46.8 million or 25.4%,
consists of Government National Mortgage Association ("GNMA") securities,
Federal Home Loan Mortgage Corporation ("FHLMC") participation certificates and
Federal National Mortgage Association ("FNMA") securities. GNMAs are guaranteed
by the full faith and credit of the U.S. while FNMA and FHLMC securities are
guaranteed by the respective quasi-governmental agency.
Over the periods presented the aggregate loan portfolio balance declined by
$40.1 million or 17.9%, as the Bank decreased its aggregate construction loans,
which include commercial and land acquisition and development loans, by $27.5
million or 56.1%. Significant portions of this portfolio in the early 1990's
became non-performing assets and real estate owned. See "- Nonperforming Loans,
Troubled Debt Restructurings and Real Estate Owned." However, in recent years
the Bank's loan portfolio has increased with major change in the Bank's
single-family loans and mortgage-backed securities. During the four year period
ended December 31, 1995 mortgage-backed securities increased from 3.1% of the
loan portfolio as of December 31, 1991 to 25.4% of the loan portfolio as of
December 31, 1995.
The following table sets forth the composition of the Bank's loan and
mortgage-backed securities portfolio by type of loan and mortgage-backed
security, respectively, as of the dates indicated.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------ ------------------
Real estate loans: Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential:
Single-family $ 71,821 38.95% $ 60,970 34.53%
Multi-family 11,824 6.41 13,259 7.51
-------- ------- -------- -------
Total residential 83,645 45.36 74,229 42.04
-------- ------- -------- -------
Commercial 16,921 9.18 20,588 11.66
-------- ------- -------- -------
Construction:
Residential 12,683 6.88 13,999 7.93
Commercial 350 0.19 700 0.40
Land acquisition and development 8,469 4.59 11,373 6.44
-------- ------- -------- -------
Total construction 21,502 11.66 26,072 14.77
-------- ------- -------- -------
Land 1,838 1.00 3,766 2.13
-------- ------- -------- -------
Total real estate loans 123,906 67.20 124,655 70.60
-------- ------- -------- -------
Consumer loans:
Automobile 5,241 2.84 4,901 2.77
Mobile home 10,742 5.83 10,359 5.87
Personal 2,643 1.43 2,477 1.40
Other 4,426 2.40 4,339 2.46
-------- ------- -------- -------
Total consumer loans 23,052 12.50 22,076 12.50
-------- ------- -------- -------
Commercial business loans 1,429 0.77 1,593 0.90
-------- ------- -------- -------
Accrued interest receivable 840 0.46 813 0.46
-------- ------- -------- -------
Total loans receivable 149,227 80.93 149,137 84.46
Less:
Loans in process (7,741) (4.20) (7,351) (4.16)
Allowances for possible
loan losses (3,632) (1.97) (5,641) (3.19)
Deferred fee income (246) (0.13) (211) (0.12)
Unearned discounts (345) (0.19) (381) (0.21)
-------- ------- -------- -------
Total loans receivable-net 137,263 74.44 135,553 76.78
-------- ------- -------- -------
Mortgage-backed securities:
GNMA 13,176 7.15 3,281 1.86
FHLMC 13,998 7.59 16,291 9.23
FNMA 19,630 10.65 21,188 12.00
-------- ------- -------- -------
Total mortgage-backed securities 46,804 25.39 40,760 23.09
Accrued interest receivable 321 0.17 277 0.16
Less - unearned discounts (4) (0.00) (33) (0.03)
-------- ------- -------- -------
Total mortgage-backed
securities - net 47,121 25.56 41,004 23.22
-------- ------- -------- -------
Total loans receivable and
mortgage-backed
securities - net $ 184,384 100.00% $ 176,557 100.00%
======== ======= ======== =======
<CAPTION>
December 31, 1993 December 31, 1994
------------------ ------------------
Real estate loans: Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Residential: (Dollars in Thousands)
Single-family $ 51,427 33.01% $ 58,496 32.09%
Multi-family 11,399 7.32 11,984 6.58
-------- ------- -------- -------
Total residential 62,826 40.33 70,480 38.67
-------- ------- -------- -------
Commercial 19,552 12.55 24,330 13.35
-------- ------- -------- -------
Construction:
Residential 15,233 9.78 13,263 7.28
Commercial 2,300 1.48 2,300 1.26
Land acquisition and development 12,136 7.79 14,288 7.84
-------- ------- -------- -------
Total construction 29,669 19.05 29,851 16.38
-------- ------- -------- -------
Land 6,129 3.93 6,624 3.63
-------- ------- -------- -------
Total real estate loans 118,176 75.86 131,285 72.03
-------- ------- -------- -------
Consumer loans:
Automobile 6,395 4.11 9,432 5.18
Mobile home 9,472 6.08 8,003 4.39
Personal 2,668 1.71 2,669 1.46
Other 4,392 2.82 5,148 2.83
-------- ------- -------- -------
Total consumer loans 22,927 14.72 25,252 13.86
-------- ------- -------- -------
Commercial business loans 2,179 1.40 2,434 1.34
-------- ------- -------- -------
Accrued interest receivable 777 0.50 933 0.51
-------- ------- -------- -------
Total loans receivable 144,059 92.48 159,904 87.74
Less:
Loans in process (9,685) (6.22) (7,697) (4.22)
Allowances for possible loan
losses (6,491) (4.17) (5,915) (3.25)
Deferred fee income (286) (0.18) (248) (0.14)
Unearned discounts (366) (0.23) (427) (0.23)
-------- ------- -------- -------
Total loans receivable-net 127,231 81.68 145,617 79.90
-------- ------- -------- -------
Mortgage-backed securities:
GNMA 798 0.51 1,076 0.59
FHLMC 10,846 6.96 14,241 7.81
FNMA 16,760 10.76 21,151 11.61
-------- ------- -------- -------
Total mortgage-backed securities 28,404 18.23 36,468 20.01
Accrued interest receivable 170 0.11 231 0.12
Less - unearned discounts (34) (0.02) (61) (0.03)
-------- ------- -------- -------
Total mortgage-backed
securities - net 28,540 18.32 36,638 20.10
-------- ------- -------- -------
Total loans receivable and
mortgage-backed
securities - net $ 155,771 100.00% $ 182,255 100.00%
======== ======= ======== =======
<CAPTION>
December 31, 1991
------------------
Real estate loans: Amount Percent
-------- -------
(Dollars in Thousands)
<S> <C> <C>
Residential:
Single-family $ 101,243 45.11%
Multi-family 14,060 6.27
-------- -------
Total residential 115,303 51.38
-------- -------
Commercial 31,880 14.20
-------- -------
Construction:
Residential 18,655 8.31
Commercial 2,510 1.12
Land acquisition and development 27,839 12.40
-------- -------
Total construction 49,004 21.83
-------- -------
Land 4,967 2.21
-------- -------
Total real estate loans 201,154 89.62
-------- -------
Consumer loans:
Automobile 14,138 6.30
Mobile home 6,230 2.78
Personal 3,190 1.42
Other 7,744 3.45
-------- -------
Total consumer loans 31,302 13.95
-------- -------
Commercial business loans 3,235 1.44
-------- -------
Accrued interest receivable 1,332 0.59
-------- -------
Total loans receivable 237,023 105.60
Less:
Loans in process (11,074) (4.93)
Allowances for possible loan losses (7,669) (3.42)
Deferred fee income (537) (0.24)
Unearned discounts (268) (0.12)
-------- -------
Total loans receivable-net 217,475 96.89
-------- -------
Mortgage-backed securities:
GNMA 1,448 0.64
FHLMC 5,466 2.44
FNMA -- --
-------- -------
Total mortgage-backed securities 6,914 3.08
Accrued interest receivable 104 0.05
Less - unearned discounts (37) (0.02)
-------- -------
Total mortgage-backed securities - net 6,981 3.11
-------- -------
Total loans receivable and
mortgage-backed securities - net $ 224,456 100.00%
======== =======
</TABLE>
Contractual Maturities. The following table sets forth the scheduled
contractual maturities of the Bank's loans and mortgage-backed securities at
December 31, 1995. Demand loans, loans having no stated schedule of repayments
and no stated maturity and overdraft loans are reported as due in one year or
less. The amounts shown for each period do not take into account loan
prepayments and normal amortization of the Bank's loan portfolio.
<TABLE>
<CAPTION>
Real Estate Loans Consumer
-------------------------------------------- and
Mortgaged- Commercial
Single- backed Multi- Comm- Constuc- Business
family securities family ercial tion Loans Total
------- ---------- ------- ------ --------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due in:
One year
or less $ 527 $ -- $ 418 $ 2,778 $20,592 $ 9,338 $33,653
After one
year
through
five
years 6,137 17,445 6,946 11,841 910 4,171 47,450
After
five
years 65,157 29,359 4,460 4,140 -- 10,972 114,088
------ ------ ------ ------ ------ ------- --------
Total<F1> $71,821 $46,804 $11,824 $18,759<F2>$21,502 $24,481 $195,191<F3>
====== ====== ====== ====== ====== ====== =======
<FN>
<F1> Does not include adjustments relating to loans in process, allowances for
possible loan losses, accrued interest, deferred fee income and unearned
discounts.
<F2> Includes $1.8 million in land loans.
<F3> Of the total loans due to mature after December 31, 1996, $87.8 million
have fixed-rates of interest and $73.7 million have floating or adjustable-rates
of interest.
</FN>
</TABLE>
Scheduled contractual maturities of loans and mortgage-backed securities do
not necessarily reflect the actual maturities of such assets. The average
maturity of loans is substantially less than their average contractual terms
because of loan payments and prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses, which give the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are substantially higher than rates on existing mortgage
loans and, conversely, decrease when current mortgage loan rates are
substantially lower than rates on existing mortgages (due to refinancings of
adjustable-rate and fixed-rate loans at lower rates). Under the latter
circumstances, the weighted average yield on loans decreases as higher yielding
loans are repaid or refinanced at lower rates.
Origination, Purchase and Sale of Loans. The Bank's primary lending area
is the State of Maryland, particularly Washington and Allegany Counties, and, to
a lesser extent, south central Pennsylvania, northern Virginia and the eastern
panhandle of West Virginia. In addition, the Bank has originated loans with
significant balances secured by property located in eastern Ohio and southern
New Jersey. The Bank's present policy is to emphasize the origination for
portfolio of 10-15 year fixed rate residential mortgage loans and loan products
such as adjustable-rate residential mortgage loans, short-term residential
construction loans to individuals and a variety of consumer loans. With respect
to Home Federal's single-family residential loan originations, the Bank
originates both fixed-rate and adjustable-rate loans. Single-family, 30 year
fixed-rate loans are originated primarily for resale in the secondary market,
thereby reducing the Bank's interest rate risk. The Bank generally retains
single-family adjustable-rate loans in portfolio. During 1995, 1994 and 1993,
the Bank originated $18.3 million, $18.1 million and $13.4 million,
respectively, of single-family residential loans which provided for periodic
adjustment of interest rates which constituted 61.7%, 60.0% and 36.1%,
respectively, of single-family residential originations. The Bank did not
actively engage in the purchase of loans during the three year period ended
December 31, 1995.
Residential and construction loan originations are attributable to
referrals from real estate brokers, builders and customers. Commercial real
estate loans are obtained primarily by direct solicitation or from mortgage
brokers. Consumer loan originations are attributable largely to depositors and
walk-in customers who have been made aware of Home Federal's programs by
advertising and through the purchase of existing consumer products.
During 1995, 1994 and 1993, the Bank undertook various actions (which
included purchasing mortgage-backed securities) in order to restructure its
assets and reduce its risk-weighted assets to enhance regulatory capital. The
Bank purchased $9.9 million, $22.4 million and $15.5 million of mortgage-backed
securities during 1995, 1994 and 1993, respectively, which was partially funded
by FHLB advances, principal repayments, loan sales and the sale of mortgage-
backed securities during 1993.
The following table shows origination, purchase and sale activity of the
Bank with respect to loans and mortgage-backed securities during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Real estate loan originations:
Residential:
Single-family $ 29,525 $ 29,453 $ 37,225
Multi-family 552 3,320 2,588
Land 1,201 963 578
Commercial 2,420 821 1,324
Construction:
Residential 9,647 10,145 10,815
Commercial 100 517 --
------- ------- -------
Total real estate loan
originations 43,445 45,219 52,530
Consumer 11,960 11,008 11,365
Commercial business 3,628 3,239 4,728
------- ------- -------
Total loan originations 59,033 59,466 68,623
Purchase of whole loans and participations -
Single-family 100 623 --
Purchase of mortgage-backed securities 9,970 22,372 15,446
------- ------- -------
Total originations and purchases 69,103 82,461 84,069
Less:
Principal loan repayments 52,872 52,565 69,928
Sales of single-family whole loans 7,843 8,410 29,260
Sales of commercial real estate loans 304 -- --
Sales of mortgage-backed securities -- -- 7,716
Unrealized loss (gain) on mortgage-backed
securities available for sale (2,209) 2,299 195
Transferred to real estate owned 3,820 1,945 1,144
Transferred from real estate owned -- -- (231)
Loans in process 390 (2,634) 1,988
Other, net (1,744) (910) 553
------- ------- -------
Net increase (decrease) $ 7,827 $ 20,786 $(26,484)
======= ======= =======
</TABLE>
Loan Underwriting Policies. On all loan transactions, the Bank obtains
detailed loan applications to determine the borrower's ability to repay. The
more significant items on these applications generally are verified through the
use of credit reports, financial statements and confirmations. After analysis of
the loan application and the property involved, including an appraisal of the
property by appraisers approved by the Bank's Board of Directors, the lending
decision is made in accordance with the written, non-discriminatory underwriting
guidelines of the Bank.
Federal regulations limit the amount that thrift institutions may lend to
specified percentages of the value of the real property securing the loans, as
determined by an appraisal at the time the loan is originated (referred to as
"loan-to-value ratios"). A real estate loan may not exceed 100% of the appraised
value of the security property at the time of origination. With respect to home
mortgage loans originated or refinanced in excess of 90% of the appraised value
of the security property, that part of the unpaid principal balance that exceeds
80% of the property's appraised value must be insured or guaranteed by a
mortgage insurance company approved by the FHLMC. Federal law does permit a
federally chartered thrift institution to originate loans in an amount up to 5%
of assets which do not otherwise conform to the above-referenced regulatory
requirements. Home Federal has in the past originated loans, in certain limited
circumstances, in an amount up to 95% of the property's appraised value without
requiring the borrower to obtain private mortgage insurance. As of December 31,
1995, the Bank had $4.8 million or 2.3% of its assets invested in loans which
did not conform to the loan-to-value regulations, of which $288,000 are
nonperforming.
It is the Bank's present policy to require borrowers to obtain title
insurance policies insuring that the Bank has a valid first lien on the
mortgaged residential real estate and that the property is free of encroachments
not disclosed to the Bank. Borrowers must also obtain hazard insurance policies
prior to closing and, when the real estate is located in a flood hazard area
designated by the Department of Housing and Urban Development, flood insurance
policies. Borrowers may be required to advance funds on a monthly basis together
with payment of principal and interest to a mortgage escrow account from which
the Bank makes disbursements for items such as real estate taxes, hazard
insurance premiums and private mortgage insurance premiums as they fall due.
Loan Concentrations. Under federal law, the permissible amount of
loans-to-one borrower may not exceed 15% of the Bank's unimpaired capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable securities. The maximum amount which the Bank could have loaned to
one borrower and the borrower's related entities at December 31, 1995 was
approximately $3.2 million.
As of December 31, 1995, the Bank had loans outstanding to one borrower
in excess of its loans-to-one borrower limitation. However, all extensions of
credit to such borrower were originated or committed to prior to the enactment
of, or under the exceptions contained within current laws and regulations. At
such date, loans and letters of credit in an aggregate amount of $6.4 million,
including the undisbursed portion thereof, or 3.0% of the Bank's loan portfolio
were outstanding to the borrower. In recent years, the Bank has refocused its
lending activities on single-family residential mortgage lending and consumer
lending and as a result, the Bank believes that significant loan concentration
will be avoided in the future.
Residential Real Estate Lending. Home Federal historically has been, and
continues to be, an originator of single-family residential real estate loans in
its primary market area. At December 31, 1995, $71.8 million or 39.0% of Home
Federal's loan portfolio consisted of single-family residential loans. Of this
amount, approximately $26.3 million or 36.6% of the single-family residential
loan portfolio had fixed-rates of interest and $45.5 million or 63.4% had
adjustable-rates of interest. In addition, at December 31, 1995, mortgage-backed
securities amounted to $46.8 million or 25.4% of the Bank's loan and
mortgage-backed securities portfolio.
Fixed-rate residential loans are generally originated by Home Federal with
25- to 30-year terms, although fixed-rate loans with 10-year, 15-year and
20-year terms are also offered by the Bank. Most of the Bank's fixed-rate
residential loans are originated in accordance with FHLMC terms, conditions and
documentation so that such loans may be sold in the secondary market. However,
the Bank has begun to originate for portfolio single-family fixed-rate loans
with terms of 10 and 15 years. Substantially all of the Bank's long-term,
fixed-rate residential mortgage loans have included "due-on-sale" clauses, which
are provisions giving the Bank the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells or otherwise
disposes of the real property subject to the mortgage and the loan is not
repaid.
The Bank's residential real estate loans have been originated predominately
in amounts up to 80% of appraised value for owner-occupied residences, although
Home Federal will originate loans up to the lesser of 95% of the property's
appraised value or the sales price if private mortgage insurance is obtained by
the borrower.
In addition to standard fixed-rate mortgage loans, the Bank has offered
various types of adjustable rate mortgage loans ("ARMs") on which the interest
rate adjusts every six months, one, three or five years based upon various
indices which generally reflect market rates of interest. The ARMs presently
originated by the Bank have interest rates which adjust annually based on the
rates paid on U.S. Treasury securities. The amount of any increase or decrease
in the interest rate is presently limited to two percentage points per annum and
six percentage points over the life of the loan. The Bank's ARMs contain minimum
rate provisions which limit the decrease in the interest rate on the loan to the
interest rate on the date of origination. Many of the ARMs offered by the Bank
contain an option to convert to a fixed-rate loan within the first 59 months of
the term of the loan. The conversion interest rate is determined by the FHLMC
interest rate at the time of conversion. During 1995 and 1994, $4.0 million and
$4.3 million, respectively, of adjustable-rate loans converted to fixed-rate
loans. As borrowers exercise their option to convert to a fixed-rate loan, the
Bank generally sells the loans to the FHLMC without recourse and with servicing
retained. The ARMs offered by Home Federal, as well as many other thrift
institutions, generally provide for initial rates of interest below the rates
which would prevail were the index used for repricing applied initially. Home
Federal expects to continue to emphasize ARMs in order to reduce the impact on
its operations of rapid increases in market rates of interest. Such loans,
however, generally do not adjust as rapidly as changes in the Bank's cost of
funds.
Multi-family residential mortgage loans are primarily secured by
multi-family rental units. The underwriting criteria used by the Bank when
evaluating such loans are designed to minimize risk to the Bank. In order to
evaluate a multi-family residential mortgage loan, the Bank conducts an analysis
of the project's cash flow to determine if the income from the completed project
will be sufficient to support the related debt and other associated costs. The
Bank also considers the market value of the completed project as well as the
costs to develop the project. At December 31, 1995, the Bank's multi-family
residential loan portfolio amounted to $11.8 million or 6.4% of the loan
portfolio. The portfolio of multi-family loans consists of 37 loans, three of
which have outstanding balances over $1.0 million. All three loans were
performing at December 31, 1995. The 37 loans have an average outstanding
balance of $320,000.
Multi-family residential real estate loans originated by the Bank are
generally priced at prevailing market interest rates on an adjustable rate
basis. These rates adjust every one, three or five years and are indexed to the
U.S. Treasury securities of comparable maturities or the FHLB of Atlanta rate
for comparable borrowings. Such loans include a floor and ceiling with respect
to the rate of interest that may be charged. The term of such loans is generally
ten years with a repayment schedule based on a 25- or 30-year amortization.
The Bank also offers home equity loans, which are secured by equity in the
borrower's residence. After taking into account first mortgage balances, the
Bank will lend up to 80% of the value of owner-occupied property. The rate of
interest charged is indexed to the six month U.S. Treasury Bill rate, adjusted
semi-annually. The Bank charges a minimum rate of interest on such loans. Such
loans are included under "single-family residential loans" and amounted to $5.9
million at December 31, 1995.
Construction Lending. Home Federal previously provided construction loans
for single-family and multi-family residential properties, including land
acquisition and development loans to developers for the purchase of land and the
subsequent development of such property for residential uses. The Bank has
significantly curtailed its construction lending and since 1990 has discontinued
speculative construction lending and lending on larger land acquisition and
development projects. Total construction loans have decreased from $49.0 million
or 21.8% of the loan portfolio at December 31, 1991 to $21.5 million or 11.7% of
such portfolio at December 31, 1995. The Bank's construction loan originations
have consisted primarily of loans to individuals to construct their own homes
through a pre-approved builder. The remaining portion of loan originations
consist of disbursements or extensions of non-owner-occupied construction loans
originated prior to such time and, during 1993, a $1.5 million construction line
of credit which was increased to $2.2 million during 1994 in connection with
the sale of real estate owned. The Bank has, in the past, originated
construction loans for commercial properties, including hotels and motels, small
shopping centers, office buildings and warehouses. During 1995 and 1994, the
Bank originated commercial construction loans totaling $100,000 and $517,000,
respectively, in connection with the sale of a real estate owned properties.
The portfolio of construction loans consists of 74 loans, four of which
have outstanding balances greater than $1.0 million. These four loans have an
average outstanding balance of $1.7 million. The Bank has three construction
loan relationships aggregating $6.1 million (including the undisbursed portion),
which is comprised of six loans, all of which were performing at December 31,
1995. At December 31, 1995, the largest construction loan amounted to $2.5
million (including the undisbursed portion) which is secured by residential and
commercial property located in Maryland. For a discussion of this loan, see "-
Potential Problem Assets and Other Items." At December 31, 1995, $3.8 million or
17.4% of the Bank's construction loan portfolio was nonperforming. See "-
Nonperforming Loans, Troubled Debt Restructurings and Real Estate Owned."
The Bank's construction loans to individuals are made in connection with
the granting of the permanent financing on the property. Residential
construction loans convert to an adjustable rate loan at the end of the one-year
construction term. Advances are generally made to the borrower to cover actual
construction costs. Construction loans originated by the Bank generally are for
a term of 12 to 18 months, although extensions may be granted for additional
consideration. Advances are generally made to the borrower to cover actual
construction costs incurred and may include a reserve for paying the stated
interest due on the loan. The Bank generally limits its exposure to 80% of the
projected market value of the completed project. These loans typically represent
80% to 100% of actual project costs.
Prior to making disbursements, Home Federal's processing procedures require
that construction and development loans be reviewed by in-house or outside
inspectors, which may include a review by independent architects or engineers
doing business where the property is located. Members of senior management also
make periodic visits to such projects.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. If the estimate of construction costs proves to be inaccurate,
Home Federal may be required to advance funds beyond the amount originally
committed to permit completion of the development. If the estimate of value
proves to be inaccurate, Home Federal may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
The underwriting criteria used by Home Federal are designed to evaluate the
risks of each construction loan. Among other things, Home Federal considers an
appraisal of the project, the reputation of the borrower and the contractor, the
amount of the borrower's equity in the project, independent valuations and
review of cost estimates, plans and specifications, preconstruction sales and
leasing information, current and expected economic conditions in the area of the
project, cash flow projections of the borrower, and guarantees by the borrower
and/or third parties with sufficient financial strength to service the debt and
operating/construction expenses. In an attempt to reduce the risk inherent in
construction lending, Home Federal may also require a cash reserve from the
borrower or bonds securing performance of construction contracts.
Commercial Real Estate Lending. The Bank's commercial real estate loans
are generally secured by motels and hotels, office buildings, small shopping
centers, warehouses and other income-producing properties. Such loans are
primarily secured by properties located in Maryland. The Bank's commercial real
estate loans amounted to $16.9 million at December 31, 1995 compared to $31.9
million at December 31, 1991. The Bank has significantly decreased this type of
lending since 1990. Originations and purchases of such loans amounted to $2.4
million, $821,000 and $1.3 million, respectively, during 1995, 1994 and 1993.
During 1995, the Bank originated two loans totaling $2.2 million in connection
with the sale of real estate owned properties.
Permanent commercial real estate loans originated for the Bank's portfolio
are priced at prevailing market interest rates. These rates are adjusted
generally over one or five years and are priced at net yields to the Bank over
an index, which is generally the U.S. Treasury Constant Maturity Index for the
period of comparable maturity. A majority of such loans are originated with
either five year balloon payment requirements or are subject to renegotiation at
the expiration of a five year term. Most of such loans also include a floor and
ceiling with respect to the rate of interest that may be charged. The maximum
term is generally not more than ten years with a repayment schedule based on not
more than a 25 year amortization.
At December 31, 1995, the commercial real estate loan portfolio consisted
of $8.7 million of loans secured by office buildings, $2.9 million secured by
motels or hotels, $1.4 million secured by industrial/warehouse property,
$833,000 secured by medical buildings and $3.1 million secured by other
commercial real estate property. As of such date, the portfolio of commercial
real estate loans consisted of 53 loans, four of which have outstanding balances
greater than $1.0 million. The four loans have an average outstanding balance of
$1.4 million. At December 31, 1995, the largest commercial real estate loan
amounted to $1.6 million which is secured by a motel in Ohio. This loan was
current at December 31, 1995. At such date, $769,000 or 4.5% of the Bank's
commercial real estate loan portfolio was nonperforming. See "- Nonperforming
Loans, Troubled Debt Restructurings and Real Estate Owned."
The Bank's loan-to-appraised value ratio on commercial real estate loans is
generally 80% or less. Appraised values are estimated by independent,
professionally designated qualified appraisers to determine that the property to
be mortgaged satisfies these loan-to-value requirements. Decisions to lend are
based on the economic viability of the property and the creditworthiness of the
borrower. Creditworthiness is determined by considering the character,
experience, management and financial strength of the borrower, and the ability
of the property to generate adequate funds to cover both operating expenses and
debt service. In evaluating the security property for a commercial real estate
loan, the Bank places great emphasis on the ratio of net cash flow to debt
service for the security property and generally requires a net cash flow to debt
service ratio of at least 115% in the first and second years, computed after
deduction for a vacancy factor deemed appropriate by the Bank. Generally, the
Bank requires the personal guarantee of the principal by the borrower and/or
cash reserves until the project achieves the required debt service coverage for
a minimum specified period.
Commercial real estate lending entails significant additional risk as
compared with residential mortgage lending. Commercial real estate lending
typically involves large loan balances concentrated in a single borrower or
groups of related borrowers. In addition, the payment experience on loans
secured by income producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market or in the economy
generally.
Consumer Lending. The Bank has been actively originating consumer loans in
recent years in order to provide a wide range of financial services to its
customers and because the shorter term and normally higher interest rates on
such loans help it maintain a profitable spread between its average loan yield
and its cost of funds. Originations of such loans amounted to $12.0 million,
$11.0 million and $11.4 million or 20.3%, 18.5% and 16.6% of total originations
during 1995, 1994 and 1993, respectively. Consumer loans generally involve
greater risk than mortgage loans because of the type and nature of the
collateral and, in certain cases, the absence of collateral. As a result,
consumer lending collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, personal bankruptcy and by adverse economic conditions.
The Bank offers a variety of consumer loans at interest rates generally
competitive with other financial institutions in Home Federal's market areas,
including personal loans, home improvement loans, and loans that are secured by
personal property, including automobiles. The Bank's automobile loans are
secured by liens on new and used vehicles, generally with terms of up to five
years for new cars and up to four years for used cars. In addition, the Bank
makes loans secured by new and used mobile homes. Loans on new mobile homes are
generally made with terms of 15 years although the Bank will extend the term to
20 years if the loan is in excess of $25,000 and is also secured by land. The
term for a loan on a used mobile home is limited to ten years. The Bank has not
experienced any significant payment difficulties with respect to its mobile home
loans. Loans are also made to depositors in an amount equal to up to 90% of
their account balances, with such borrowings secured by their deposit accounts.
Such loans are made at a rate equal to 200 basis points over the account rate.
On all consumer loans originated, the Bank's underwriting standards include a
determination of the applicant's payment history on other debts and an
assessment of the applicant's ability to meet existing obligations and payment
on the proposed loans.
Commercial Business Lending. At December 31, 1995, the Bank's commercial
business loans included $1.4 million of revolving secured lines of credit, of
which $979,000 was outstanding to automobile dealers for purposes of floor
planning. Floor plan loans are generally made at an interest rate indexed to the
prime rate of a local Maryland bank, have maximum limits established under the
line for each dealer, and are secured by the dealer's inventory. Commercial
business loan decisions are based on an evaluation of the borrower's ability to
repay from the normal operation of the business or from the liquidation of the
assets pledged to secure the loan.
Nonperforming Loans, Troubled Debt Restructurings and Real Estate Owned.
When a borrower fails to make a required loan payment on a real estate loan for
15 days, Home Federal generally will charge a late fee and send a first notice
to the borrower unless the loan is less than six months old, in which case the
borrower is contacted by telephone. When a borrower fails to make a required
loan payment to Home Federal for 30 days on a contractual basis, the loan is
classified as delinquent. Loans are placed on non-accrual status when, in the
judgment of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
If the delinquency persists and is not cured through Home Federal's normal
collection procedures, Home Federal will institute measures to remedy the
default including restructuring the loan, accepting from the mortgagor a
voluntary deed to the security property in lieu of foreclosure or commencing a
foreclosure action. If a foreclosure action is instituted, and the loan is not
reinstated, paid in full or refinanced, the property is sold at a judicial sale
at which, in some instances, Home Federal will acquire the property.
Thereafter, such acquired property is listed in Home Federal's REO account until
the property is resold. In some cases, such resales are financed by "loans to
facilitate," which involve a lower down payment or a longer term than would
generally be allowed by Home Federal's underwriting standards.
When property is acquired, at the date of acquisition, it is recorded at
the lower of its recorded investment or estimated fair market value and any
writedown resulting therefrom is charged to the allowances for possible loan
losses. Between the date a loan becomes delinquent and the date it is acquired
by the Bank, all costs incurred in maintaining the Bank's interest in the
property are capitalized in an amount which may not exceed the estimated fair
value. After the date of acquisition, all costs incurred in maintaining the
property are expensed and costs incurred for the improvement or development of
such property are capitalized in an amount which may not exceed the estimated
fair value less the estimated disposition costs.
In 1992, Home Federal adopted the American Institute of Certified Public
Accountants' Statement of Position ("SOP 92-3") which provided guidance on
measuring value for foreclosed assets and in-substance foreclosed assets after
foreclosure. The statement applies to all assets obtained through foreclosure or
repossession, except for inventories, marketable equity securities and real
estate previously owned by the lender under certain conditions. Under SOP 92-3,
companies are required to adjust the carrying value of foreclosed assets held
for sale to the lower of (i) fair value minus estimated costs to sell, or (ii)
cost. In years prior to 1992, the Bank initially recorded REO at the lower of
cost or estimated fair value and subsequently at the lower of (i) the initially
recorded amount plus capitalized costs less accumulated depreciation or (ii) net
realizable value. Under Statement of Financial Accounting Standards ("SFAS") No.
114 and 118, Home Federal is required to measure impaired loans on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. Home Federal
adopted SFAS No. 114 and SFAS No. 118 in 1994.
For REO properties, the Bank obtains appraisals at the time the asset is
classified as REO, or utilizes appraisals obtained within one year of such date.
Such properties consist primarily of commercial real estate and residential
development properties for which there is not an active market, or for which the
marketplace sets prices by discounting cash flows. As such, the Bank generally
valued such assets by projecting expected cash flows (which were discounted to
reflect the risk of commercial real estate or residential development properties
and the holding cost of the property) minus the estimated cost to sell the
property. Such projections of discounted cash flows were determined as part of
an independent appraisal, or by Bank personnel, updated on a quarterly basis.
The following table sets forth information regarding nonperforming loans
(net of the undisbursed portion), REO (net of related reserves), and troubled
debt restructurings at the dates indicated. At the dates shown, the Bank did not
have any loans 90 days or more delinquent on which it was accruing interest.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Non-accrual loans:
Real estate loans:
Residential $ 602 $ 499 $ 3,369 $ 8,959 $ 4,091
Commercial 38 38 3,129 4,074 4,874
Construction -- -- 3,231 2,804 8,739
Consumer and commercial 146 88 511 775 830
------ ------ ------ ------ ------
Total non-accrual loans 786 625 10,240 16,612 18,534
------ ------ ------ ------ ------
Impaired loans:<F1>
Real estate loans:
Residential 562 4,081 4,747 3,684 2,367
Commercial 731 4,920 1,960 2,420 3,017
Construction 3,712 6,292 3,521 4,229 11,230
Consumer and commercial -- 242 -- -- --
------ ------ ------ ------ ------
Total impaired loans 5,005 15,535 10,228 10,333 16,614
------ ------ ------ ------ ------
Total nonperforming loans $ 5,791 $16,160 $20,468 $26,945 $35,148
====== ====== ====== ====== ======
Real estate owned held for sale:
Acquired by foreclosure:
Residential $ 2,822 $ 816 $ 870 $ 945 $ 1,323
Commercial 3,917 4,723 3,323 3,879 1,013
Construction 1,952 3,436 6,226 6,183 2,722
------ ------ ------ ------ ------
Total REO, gross 8,691 8,975 10,419 11,007 5,058
Less:
Allowance for losses 1,492 2,337 2,308 2,231 624
Accumulated depreciation 124 188 133 186 65
------ ------ ------ ------ ------
Total REO, net $ 7,075 $ 6,450 $ 7,978 $ 8,590 $ 4,369
====== ====== ====== ====== ======
Total troubled debt
restructurings $ -- $ -- $ -- $ 1,502 $ 9,057
====== ====== ====== ====== ======
Total nonperforming loans,
troubled debt restructurings
and REO, net $12,866 $22,610 $28,446 $37,037 $48,574
====== ====== ====== ====== ======
Total nonperforming loans to
total loans receivable-net<F2> 4.22% 11.92% 16.09% 18.50% 16.16%
===== ===== ===== ===== =====
Total nonperforming loans,
troubled debt restructurings
and REO, net, to total
assets<F1> 5.99% 10.95% 14.60% 17.71% 18.29%
===== ===== ===== ===== =====
<FN>
<F1> SFAS No. 114 provides that a loan is impaired when, based on current
information and events, it is probable that the creditor will be unable to
collect all amounts due according to the contractual terms (both principal
and interest). Accordingly, the Bank reclassified $10.2 million, $10.3
million and $16.6 million as of December 31, 1993, 1992 and 1991 from real
estate owned (in substance foreclosed) to loans receivable.
<F2> From December 31, 1991 to December 31, 1995, total assets of the
Corporation declined by $51.0 million, or 19.2%, and total loans, net declined
by $80.2 million, or 36.9%. Because of such decreases, the reductions in
nonperforming loans and nonperforming assets, when considered as a percent of
total loans or total assets, may not be as apparent as they would have been had
total assets and total loans, net remained relatively constant during such
periods.
</FN>
</TABLE>
If the nonperforming loans at December 31, 1995 had been current in
accordance with their original terms for the period then ended (or from the date
of origination if originated during such period), the total interest income on
such loans for the year ended December 31, 1995 would have been $397,000.
Actual interest income collected and recognized on such loans totaled $166,000
which was recognized as income.
As a result of the significant difficulties experienced by the Bank
beginning in 1990, the Bank established a Special Assets Department to determine
an appropriate course of action with respect to each developer and/or project.
The significant additional resources employed by the Bank to resolve its problem
assets has resulted in substantial additional operating expenses since 1990.
During 1995 and 1994, such expenses (i.e., employee compensation and benefits,
occupancy and equipment and other) amounted to $323,000 and $295,000,
respectively.
The Board of Directors has also established a Special Assets and Real
Estate Owned Policy to provide a structure for dealing with the Bank's problem
assets. Pursuant to that policy, detailed asset classification reports are
prepared for loan relationships in excess of $500,000 and business plans are
prepared for all REO and for significant nonperforming loan relationships. In
addition, if the loan amount is in excess of $500,000, the Bank conducts a cash
flow analysis on a quarterly basis. All asset classification reports and
business plans are reviewed by a committee of senior management that includes
the President, Senior Vice President, Chief Financial Officer, and Executive
Vice President, Special Assets, and by a committee of the Board of Directors.
These committees also meet at least monthly to discuss changes that occur.
As a result of the foregoing actions, the Bank's total nonperforming loans,
troubled debt restructurings and REO, net, has decreased from a high of $55.1
million at September 30, 1991 to $12.9 million at December 31, 1995.
Potential Problem Assets and Other Items. The Bank had 12 loans outstanding
to various borrowers with aggregate principal balances equal to $8.5 million at
December 31, 1995; these loans have been slow making payments, have experienced
slow sales during 1995 or have other potential weaknesses or risk
characteristics that could result in future problems. In addition, at December
31, 1995, the Bank had 128 consumer loans and 52 single-family residential loans
aggregating $974,000 and $1.9 million, respectively, with similar deficiencies.
At December 31, 1995, the largest potential problem asset related to a $2.5
million line of credit to finance the purchase and construction of 135
townhouses in Maryland. The Bank's cash flow analysis of this property and an
updated 1995 land appraisal indicates a value in excess of the loan balance. The
second largest potential problem asset relationship involves two loans to one
borrower with an aggregate principal balance equal to $2.3 million secured by
approximately 166 acres in West Virginia of mixed use commercial and residential
property, which is subdivided into a planned unit development. The Bank's cash
flow analysis of this property and a 1995 appraisal indicates a value in excess
of the aggregate loan balance. At December 31, 1995, the two largest potential
problem assets were performing.
Allowances for Possible Loan and Real Estate Owned Losses. For financial
statement purposes, the Bank calculates its allowances for possible loan losses
based upon management's evaluation of the pertinent factors underlying the types
and the quality of loans, current and anticipated economic conditions,
collection experience, detailed analysis of individual loans for which full
collectibility may not be reasonably assured, and determination of the estimated
fair value of the loan collateral and guarantees securing such loans. REO is
reviewed regularly and valuation allowances are adjusted to reflect the carrying
values of the property at the estimated fair value less disposition costs. The
amounts the Bank could ultimately recover from the sale of REO could differ from
the amounts used in arriving at the net carrying value of the assets because of
future market factors beyond the Bank's control. These evaluations are
inherently subjective as it requires material estimates that may be susceptible
to significant change.
During the year ended December 31, 1995, the Bank recovered $349,000 and
provided $479,000 to the allowances for possible loan and REO losses,
respectively, compared to providing $278,000 and $339,000, respectively, for the
year ended December 31, 1994. The decrease in the provision to the allowances
for possible loan losses in 1995 was due to the significant decline in
nonperforming loans and troubled debt restructurings from $16.2 million at
December 31, 1994 to $5.8 million at December 31, 1995 and to the increase in
the allowances for possible loan losses as a percent of nonperforming loans and
troubled debt restructuring from 34.9% at December 31, 1994 to 62.7% at December
31, 1995. While the allowances for possible loan losses as a percent of
nonperforming loans and troubled debt restructurings has increased over the four
year period from December 31, 1991 to December 31, 1995 from 21.8% to 62.7%,
respectively, the Bank has experienced quarterly fluctuations in such ratio due
to uneven economic and market conditions which have affected the ability of
certain of the Bank's largest borrowers to make payments on their loan
obligations.
Although management believes that the Bank's allowances for possible loan
losses were adequate at December 31, 1995 and further believes that it uses the
best information available to recognize losses on loans and to determine the
fair value of REO, no assurance can be given that future significant additions
to the allowances for possible loan losses or further reductions in the net
carrying values may be necessary if economic conditions or other factors differ
substantially from the assumptions used in making the initial determinations.
Arriving at an appropriate level of allowances for possible losses on loans and
REO necessarily involves a high degree of judgment. In addition, the OTS and the
FDIC, as an integral part of their examination process, periodically review the
Bank's allowances for possible loan losses and the net carrying values of REO.
Such agencies may require the Bank to recognize additions to the allowances or
reductions in net carrying values based on their judgments about information
available to them at the time of examination. An examination of the Corporation
and the Bank was initiated by the OTS in February, 1996. The OTS examination was
based on financial and other information as of and for the period ended
December 31, 1995, respectively. The Bank's provision for loan losses in the
future will depend on, among others, the level of nonperforming loans and market
and economic conditions.
The following tables present information concerning Home Federal's
allowances for possible loan losses, allowance for losses on REO, charge-offs
and recoveries during the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Real Estate Loans:
Balance, beginning of period<F1> $4,880 $5,575 $4,832 $6,686 $5,710
Provision for possible loan losses (349) 278 1,687 278 6,511
Recoveries 408 -- 317 356 3
Reallocation of reserves from
consumer and commercial
loan losses 244 -- -- -- --
Charge-offs:
Construction (160) -- (155) (1,178) (4,353)
Commercial (808) (328) (35) (1,188) (703)
Single-family (530) (63) (161) (18) (11)
Multi-family (100) (141) (910) -- (471)
Land (453) (441) -- (104) --
------ ------ ------ ------ ------
Balance, end of period $3,132 $4,880 $5,575 $4,832 $6,686
====== ====== ====== ====== ======
Other Loans:
Balance, beginning of period $ 761 $ 916 $1,083 $ 983 $ 450
Additional provision -- -- -- 441 715
Reallocation of reserves to
real estate loans (244) -- -- -- --
Recoveries - consumer loans 104 64 35 30 17
Charge-offs - consumer loans (121) (219) (202) (371) (199)
------ ------ ------ ------ ------
Balance, end of period $ 500 $ 761 $ 916 $1,083 $ 983
====== ====== ====== ====== ======
Real Estate Owned:
Balance, beginning of period<F1> $2,337 $2,308 $2,231 $ 624 $ 311
Additional provision 479 339 369 2,223 2,017
Recoveries 2 69 126 101 106
Charge-offs (1,326) (379) (418) (717) (1,810)
------ ------ ------ ------ ------
Balance, end of period $1,492 $2,337 $2,308 $2,231 $ 624
====== ====== ====== ====== ======
Certain Ratios:
Allowances for possible loan
losses as a percent of loans, net 2.65% 4.16% 5.10% 4.06% 3.53%
==== ==== ==== ==== ====
Allowances for possible loan losses
as a percent of nonperforming
loans and troubled debt
restructurings 62.72% 34.91% 31.71% 21.95% 21.82%
===== ===== ===== ===== =====
Charge offs to average loans
receivable outstanding during
the period 1.59% 0.91% 1.07% 1.57% 2.41%
==== ==== ==== ==== ====
<FN>
<F1> During 1994, the Bank adopted SFAS No. 114 and accordingly reclassified
$2.6 million, $1.1 million, $935,000 and $160,000 from allowance for loss on
real estate owned held for sale to allowance for possible loan losses at
December 31, 1993, 1992, 1991 and 1990.
</FN>
</TABLE>
The following tables present the allocation of the allowances for possible
loan losses at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
% of Loans % of Loans % of Loans
to to to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential $ 439 57.61% $ 809 52.59% $2,162 48.13%
Commercial 1,059 11.40 2,417 13.88 1,823 13.64
Construction
(including land
acquisition and
development) 1,634 14.49 1,654 17.58 1,590 20.71
Consumer loans 439 15.54 671 14.88 709 16.00
Commercial loans 61 0.96 90 1.07 207 1.52
------ ------ ------ ------ ------ ------
$3,632 100.00% $5,641 100.00% $6,491 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
December 31,
------------------------------
1992 1991
-------------- ---------------
% of % of
Loans Loans
to to
Total Total
Amount Loans Amount Loans
------ ----- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential and commercial real estate loans $4,832 82.58% $6,686 85.35%
Consumer and commercial business loans 1,083 17.42 983 14.65
------ ------ ------ ------
Total $5,915 100.00% $7,669 100.00%
====== ====== ====== ======
</TABLE>
Investment Activities
The Bank's investment securities historically have been comprised primarily
of U.S. Treasury and U.S. government agency securities. The following table sets
forth the carrying value of investment securities of the Bank at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994 1993
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
U. S. Treasury and U.S. government
agency obligations $ -- $5,000 $ --
Accrued Interest -- 64 --
------ ------ ------
Total $ -- $5,064 $ --
====== ====== ======
</TABLE>
The decrease in the Bank's investment securities between 1995 and 1994 was
from the call of U.S. government agency obligations during 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity" in the Annual Report for a discussion of the Bank's
liquidity position.
Sources of Funds
General. Savings deposits are the primary source of the Bank's funds for
use in lending and for other general business purposes. In addition to savings
deposits, the Bank derives funds from amortization and prepayments of
outstanding loans and mortgage-backed securities, sales of loans and
mortgage-backed securities, from advances from the FHLB of Atlanta and other
borrowings. Amortization and prepayments of outstanding loans and
mortgage-backed securities are a relatively stable source of funds, while
savings inflows are significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in normal sources of funds such as savings inflows at less than
projected levels. They may also be used on a longer-term basis to support
expanded activities.
Deposits. The Bank emphasizes fixed-rate certificate accounts and other
types of deposits. The Bank has a number of different programs designed to
attract both short-term and long-term deposits of the general public by
providing a wide assortment of accounts and rates consistent with OTS
regulations. These programs include regular savings, NOW (checking) accounts,
Super NOW accounts, commercial (noninterest-bearing) checking accounts, money
market accounts and certificates of deposit ranging in terms from seven days to
five years. Included among these programs are individual retirement accounts
("IRAs"), simplified employee pension plans ("SEPs") and Keogh retirement
accounts.
The following table shows the distribution of, and certain other
information relating to, the Bank's deposits by type of deposit as of the dates
indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1995 1994
------------------ ------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Savings deposits $ 10,280 6.28% $ 10,211 6.75%
Money market deposit accounts 29,186 17.83 31,606 20.90
Time deposits 88,924 54.33 75,450 49.90
NOW and Super NOW accounts 35,178 21.50 33,860 22.40
Accrued interest 95 .06 76 0.05
-------- ------ -------- ------
Total deposits at end of period $163,663 100.00% $151,203 100.00%
======== ====== ======== ======
</TABLE>
The following table presents, by various interest rate categories, the
amount of certificate accounts at December 31, 1995 and 1994, and the amounts at
December 31, 1995 which mature during the periods indicated.
<TABLE>
<CAPTION>
Amounts at December 31, 1995
Maturing Within
---------------------------------------
Certificate December 31, One Two Three
Accounts 1995 1994 Year Years Years Thereafter
- ----------------- ------- ------- ------- ------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
2.500% to 5.24% $17,192 $55,096 $14,512 $ 880 $ 1,129 $ 671
5.250% to 7.00% 66,959 18,189 38,959 18,326 2,387 7,287
7.001% to 9.00% 4,758 2,152 925 111 701 3,021
11.001% to 13.00% 15 13 -- -- -- 15
- ----------------- ------- ------- ------- ------- ------- -------
Total certificate
accounts $88,924 $75,450 $54,396 $19,317 $ 4,217 $10,994
======= ======= ======= ======= ======= =======
</TABLE>
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type for the periods indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1995 1994 1993
--------------------------------------------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings deposits $ 10,190 2.96% $ 10,937 3.00% $ 11,092 3.18%
NOW and Super NOW
accounts 33,662 1.88 32,462 1.99 29,520 2.16
Money market deposit
accounts 29,226 3.22 32,694 3.15 29,976 3.31
Time deposits 85,154 5.61 72,854 4.39 78,460 4.61
Accrued interest 109 -- 84 -- 85 --
-------- ---- -------- ---- -------- ----
Total deposits $158,341 4.20% $149,031 3.49% $149,133 3.76%
======== ==== ======== ==== ======== ====
</TABLE>
The following table presents certain information concerning the Bank's
deposit accounts at December 31, 1995 and the scheduled quarterly maturities of
its certificate accounts.
<TABLE>
<CAPTION>
Weighted
Percentage of Average
Amount Total Deposits Nominal Rate
-------- -------------- ------------
(In Thousands)
<S> <C> <C> <C>
Savings deposits $ 10,280 6.28% 2.95%
NOW and Super NOW accounts 35,178 21.50 1.77
Money market deposit accounts 29,186 17.83 3.17
-------- -----
Total 74,644 45.61 2.48
-------- -----
Certificate accounts maturing
by quarter:
March 31, 1996 17,234 10.53 5.51
June 30, 1996 12,707 7.76 5.68
September 30, 1996 13,223 8.08 5.75
December 31, 1996 11,232 6.86 5.56
March 31, 1997 6,322 3.86 6.08
June 30, 1997 5,807 3.55 6.00
September 30, 1997 3,618 2.21 5.87
December 31, 1997 3,570 2.18 5.67
March 31, 1998 1,847 1.13 6.50
June 30, 1998 933 0.57 5.91
September 30, 1998 781 0.48 5.52
December 31, 1998 656 0.40 5.25
Thereafter 10,994 6.72 6.52
------- ----- ----
Total certificate accounts 88,924 54.33 5.82
------- ----- ----
Accrued interest 95 .06 --
------- ------ ----
Total deposits $163,663 100.00% 4.29%
======== ====== ====
</TABLE>
Certificates maturing within one year consist primarily of six month and
one and two year certificates. The Bank believes that by competitively pricing
certificates, deposit levels deemed appropriate by management can be achieved on
a continuing basis.
The following table sets forth the net savings flows of the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Increase (Decrease) before
interest credited $ 6,749 $ (1,852) $ (5,785)
Interest credited 5,711 4,658 5,413
-------- -------- --------
Net savings increase (decrease) $ 12,460 $ 2,806 $ (372)
======== ======== ========
</TABLE>
During 1995, the Bank experienced an increase in savings before interest
credited of $6.7 million. Such increase was due to the public's acceptance of
the Bank's checking account programs and its varied certificate of deposit
programs, the general economic conditions and the competitive rates offered by
the Bank on its deposits.
As of December 31, 1995, time certificates of deposit in amounts of
$100,000 or more in the Bank amounted to $5.0 million. The following table sets
forth the distribution of time deposits of $100,000 or more in the Bank at
December 31, 1995 by time remaining to maturity.
<TABLE>
<CAPTION>
Amounts in Thousands
--------------------
<S> <C>
Three months or less $1,539
Over three months through six months 810
Over six months through 12 months 2,181
Over 12 months 438
------
$4,968
======
</TABLE>
Borrowings. Home Federal obtains advances from the FHLB of Atlanta upon
the security of its capital stock in the FHLB of Atlanta, certain of its
mortgage loans and mortgage-backed securities, provided certain standards
related to credit worthiness have been met. See "Regulation -Regulation of the
Bank - Federal Home Loan Bank System." Such advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on either a fixed percentage of assets or the FHLB assessment
of the Bank's creditworthiness. At December 31, 1995, Home Federal had FHLB
advances totaling $30.2 million at a weighted average interest rate of 6.3%,
with maturities of $17.7 million in 1996, $5.7 million in 1997, $728,000 in
1998, $1.7 million in 1999, $728,000 in 2000, $1.7 million in 2001 and $1.6
million thereafter. Accrued interest payable amounted to $157,000 on FHLB
advances at December 31, 1995.
The Bank has in the past also obtained funds from sales of securities to
institutional investors under agreements to repurchase, or institutional
repurchase agreements, which are considered borrowings secured by the securities
sold. The advantage of institutional repurchase agreements derives from the
relatively low cost of this source of funds. The principal disadvantage of this
type of borrowing is the potential risk of the lender defaulting at the maturity
of the agreement and not returning the collateral. In order to minimize this
potential risk, the Bank only deals with large, established investment brokerage
firms when entering into these transactions. At December 31, 1995, the Bank did
not have any securities sold under agreements to repurchase. The Bank has not
engaged in reverse repurchase transactions since 1990.
The following table sets forth certain information regarding the borrowings
of the Bank as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Advances from FHLB of Atlanta $30,157 $38,184 $27,637
Other borrowings -- -- 92
------- ------- -------
Total borrowings $30,157 $38,184 $27,729
======= ======= =======
</TABLE>
The following table presents certain information regarding short-term
borrowings of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Securities sold under agreements to
repurchase and other borrowings
Average balance outstanding $ -- $ 7 $ 283
Maximum amount outstanding at any
month-end during the period -- 92 430
Weighted average interest rate
during the period <F1> --% 7.7% 9.5%
Amount outstanding at end of period -- 92
Weighted average rate at end of period --% --% 8.5%
Short-term FHLB advances
Average balance outstanding $26,686 $22,833 $18,544
Maximum amount outstanding at any
month-end during the period 32,500 33,000 23,170
Weighted average interest rate
during the period 6.3% 5.7% 5.1%
Amount outstanding at end of period $17,728 $33,000 $19,500
Weighted average rate at end of period 6.5% 6.1% 5.5%
<FN>
<F1> Weighted average interest rate calculated by monthly average.
</FN>
</TABLE>
Subsidiaries
At December 31, 1995, the Bank was authorized to have a maximum investment
of approximately $4.3 million in its subsidiaries, exclusive of an ability to
invest 1% of assets for community or inner-city purposes and an ability to make
conforming loans. As of such date, the Bank had aggregate investments in its
service corporation subsidiaries of $256,000 in stock, $622,000 in advances and
($1.6) million in undistributed earnings. The Bank did not have any conforming
loans outstanding to its subsidiary service corporations at December 31, 1995.
The Bank has four wholly-owned service corporation subsidiaries, Home
Appraisals, Inc. ("HAI"), Family Home Insurance Agency, Inc. ("FHI"), Maryland
General Insurance Agency, Inc. and Ronald Harris Parker Associates, Inc.
("RHP"), all of which are incorporated in the State of Maryland. The Bank has
two other subsidiaries, described herein, which were formed to obtain title to a
real estate project.
HAI is a corporation which previously performed property appraisals and
currently operates as a stockbrokerage company. HAI has a wholly-owned
subsidiary, T.J.W. Associates, Inc. ("TJW"), which is a real estate investment
company. TJW is presently inactive.
FHI and Maryland General Insurance Agency Inc. ("MGI") are Maryland-
licensed general insurance agencies. MGI in 1993 sold its commercial line and
recorded a gain on sale of $63,000. In addition, FHI and RHP hold title to
foreclosed real estate properties. The Bank also formed two additional
subsidiaries, RLC Associates, Inc. and CLC Associates, Inc. in 1988 in order to
obtain title to a real estate project in Pennsylvania. The project is presently
a 28 acre commercial site with a recorded investment of $1.3 million at December
31, 1995. In addition, RLC Associates, Inc. was utilized to take title to an
office building that the Bank had foreclosed upon in 1991.
Employees
At December 31, 1995, the Corporation had four executive officers, none of
whom were paid salaries. At December 31, 1995, the Bank and its subsidiaries had
113 full-time employees, including its executive officers, as well as 28
part-time employees. None of these employees are represented by a collective
bargaining agent, and the Bank has enjoyed harmonious relations with its
personnel.
<PAGE>
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Corporation and the Bank. The description
of these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
Regulation of the Corporation
Federal Regulation-General. The Corporation is a savings and loan holding
company within the meaning of the Home Owners' Loan Act. As such, the
Corporation was required to register with the OTS and is 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 Corporation and affiliates thereof.
Federal Activities Restrictions. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings association. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. 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 also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings association requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "- Regulation of the
Bank -Qualified Thrift Lender Test."
If the Corporation were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Corporation 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 Corporation and any of its subsidiaries (other than
the Bank or other subsidiary savings associations) would thereafter be subject
to further restrictions. 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,
upon prior notice to, and no objection by the OTS, 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 association;
(iv) holding or managing properties used or occupied by a subsidiary savings
association; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
savings and loan holding companies; or (vii) unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. Those activities described in (vii)
above also must be approved by the Director of the OTS prior to being engaged in
by a multiple savings and loan holding company.
Federal Limitations on Transactions with Affiliates. Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company of
a savings association (such as the Corporation) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans by savings associations to executive officers, directors
and principal stockholders of the Corporation and the Bank. Under Section 22(h),
loans to a director, an executive officer and to a greater than 10% stockholder
of a savings association or the company that controls the savings association,
and certain affiliated interests of such insiders, may not exceed, together with
all other outstanding loans to such person and affiliated interests, the
association's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings association to all
insiders cannot exceed the association's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1995, the Bank was in compliance with the above
restrictions.
Restrictions on Acquisitions. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% 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 acquire control of any savings association, other than
a subsidiary savings association, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987, (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"), or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations 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 associations).
The Federal Reserve Board may approve an application by a bank holding
company to acquire control of a savings association. A bank holding company that
controls a savings association may also merge or consolidate the assets and
liabilities of a savings association with, or transfer assets and liabilities
to, any subsidiary bank which is a member of the Bank Insurance Fund ("BIF")
with the approval of the appropriate federal banking agency and the Federal
Reserve Board. Federal savings associations may also now acquire or be acquired
by any insured depository institution. As a result of these provisions, there
have been a number of acquisitions of savings associations by bank holding
companies in recent years.
Regulation of the Bank
General. The OTS has extensive authority over the operations of savings
associations. As part of this authority, savings associations are required to
file periodic reports with the OTS and are subject to periodic examinations by
the OTS and the FDIC. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
The OTS' enforcement authority over all savings associations includes,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to initiate injunctive actions. In general,
these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS.
Insurance of Accounts. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
Both the SAIF and BIF are statutorily required to be capitalized to a ratio
of 1.25% of insured reserve deposits. While the BIF has reached the required
reserve ratio, the SAIF is no expected to be recapitalized until 2002 at the
earliest. Legislation has authorized $8 billion for the SAIF; however, such
funds only become available to the SAIF if the FDIC determines that the funds
are needed to cover losses of the SAIF and several other stringent criteria are
met.
The FDIC has established a new assessment rate schedule of 4-31 basis
points for BIF members which began on September 30, 1995. Under that schedule, a
substantial majority of members are now paying the lowest assessment rate of 4
basis points, while the existing assessment rate of 23-31 basis points
applicable to SAIF member institutions, described below, has been retained.
Under current FDIC regulations, SAIF member institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital -- "well capitalized," "adequately capitalized," and
"undercapitalized." These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from .23% for well capitalized, healthy
institutions to .31% for undercapitalized institutions with substantial
supervisory concerns. The insurance premiums for the Bank for 1995 was .26% (per
annum) of insured deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
Regulatory Capital Requirements. Federally insured savings institutions
are required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual institutions on a case-
by-case basis.
Current OTS capital standards require savings institutions to satisfy three
different capital requirements. Under these standards, savings institutions must
maintain "tangible" capital equal to at least 1.5% of adjusted total assets,
"core" capital equal to at least 3.0% of adjusted total assets and "total"
capital (a combination of core and "supplementary" capital) equal to at least
8.0% of "risk-weighted" assets. For purposes of the regulation, core capital
generally consists of common stockholder's equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings institution's intangible assets, with only a limited exception
for purchased mortgage servicing rights. The Bank had $286,000 in goodwill and
no other intangible assets at December 31, 1995. Both core and tangible capital
are further reduced by an amount equal to a savings institution's debt and
equity investments in subsidiaries engaged in activities not permissible to
national banks (other than subsidiaries engaged in activities undertaken as
agent for customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). These adjustments do not materially
affect the Bank's regulatory capital.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and general allowances for loan losses up
to a maximum of 1.25% of risk-weighted assets. In determining the required
amount of risk-based capital, total assets, including certain off-balance sheet
items, are multiplied by a risk weight based on the risks inherent in the type
of assets. The risk weights assigned by the OTS for principal categories of
assets are (i) 0% for cash and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the U.S. Government; (ii)
20% for securities (other than equity securities) issued by U.S. Government-
sponsored agencies and mortgage-backed securities issued by, or fully guaranteed
as to principal and interest by, the FNMA or the FHLMC, except for those classes
with residual characteristics or stripped mortgage-related securities; (iii) 50%
for prudently underwritten permanent one- to four-family first lien mortgage
loans not more than 90 days delinquent and having a loan-to-value ratio of not
more than 80% at origination unless insured to such ratio by an insurer approved
by the FNMA or the FHLMC, qualifying residential bridge loans made directly for
the construction of one- to four-family residences and qualifying multi-family
residential loans; and (iv) 100% for all other loans and investments, including
consumer loans, commercial loans, and one- to four-family residential real
estate loans more than 90 days delinquent, and for repossessed assets.
In August 1995, the OTS and other federal banking agencies published a
final rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the OTS must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank's capital adequacy. In addition, in August
1995, the OTS and the other federal banking agencies published a joint policy
statement for public comment that describes the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
changes in interest rates. Under the policy statement, the OTS will consider
results of supervisory and interest rate risk models as one factor in evaluating
capital adequacy. The OTS intends, at a future date, to incorporate explicit
minimum requirements for interest rate risk in its risk-based capital standards
through the use of a model developed from the policy statement, a future
proposed rule and the public comments received therefrom.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator or
receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety of
corrective actions.
The following table sets forth a reconciliation between the Bank's
stockholder's equity and each of its three capital requirements at December 31,
1995.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital<F1>
-------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Total stockholder's equity $18,160 $18,160 $18,160
Plus unrealized loss on mortgage-backed
securities available for sale, net 175 175 175
Minus nonallowable assets:
Intangible assets 286 286 286
Deferred tax assets -- -- --
Equity investments -- -- --
Plus general valuation allowances -- -- 1,679
------- ------- -------
Total regulatory capital $18,049 $18,049 $19,728
Minimum required capital 3,207 6,413 9,120
------- ------- -------
Excess regulatory capital $14,842 $11,636 $10,608
======= ======= =======
Regulatory capital as a percentage<F1> 8.44% 8.44% 14.88%
Minimum capital required as a percentage<F1> 1.50 3.00 8.00
Excess regulatory capital as a ---- ---- ----
percentage in excess of requirement 6.94% 5.44% 6.88%
==== ==== ====
<FN>
<F1> Tangible and core capital are computed as a percentage of adjusted total
assets of $213.8 million. Risk-based capital is computed as a percentage of
adjusted risk-weighted assets of $132.6 million.
</FN>
</TABLE>
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 5%. Short-term liquid assets currently must constitute at least
1% of an association's average daily balance of net withdrawable deposit
accounts and current borrowings. Monetary penalties may be imposed upon
associations for violations of liquidity requirements. For information
concerning the Bank's compliance with the foregoing requirements, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity" in the Annual Report.
QTL Test. The Home Owners' Loan Act requires savings institutions to meet a
qualified thrift lender ("QTL") test. Under the QTL test, a savings association
is required to maintain at least 65% of its "portfolio assets" (total assets
less (i) specified liquid assets up to 20% of total assets, (ii) intangibles,
including goodwill, and (iii) the value of property used to conduct business) in
certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
on a monthly basis in 9 out of every 12 months.
A savings association that fails the QTL test must either convert to a bank
charter or operate under certain restrictions. As of December 31, 1995, the Bank
maintained 85.4% of its portfolio assets in qualified thrift investments and,
therefore, met the QTL test.
Limitations on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters; provided that the institution would not be undercapitalized, as
that term is defined in the OTS Prompt Corrective Action regulations, following
the capital distribution. Any additional capital distributions would require
prior regulatory approval. In the event the Bank's capital fell below its
fully-phased in requirement or the OTS notified it that it was in need of more
than normal supervision, the Bank's ability to make capital distributions could
be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's latest quarterly thrift financial report. The assessment paid by
the Bank for the years ended December 31, 1995 and 1994, totaled $74,000 and
$87,000, respectively.
Branching. Under OTS regulations, federally chartered savings associations
are permitted to branch nationwide to the extent allowed by federal statute.
This permits federal savings associations with interstate networks to diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA rating system identifies four levels of performance
that may describe an institution's record of meeting community needs:
outstanding, satisfactory, needs to improve and substantial noncompliance. The
CRA also requires all institutions to make public disclosure of their CRA
ratings. The Bank received a "Satisfactory" CRA rating in its most recent
federal examination by the OTS.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring enforcement action against all
"institution-related parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Civil
penalties cover a wide range of violations and actions and range up to $25,000
per day unless a finding of reckless disregard is made, in which case penalties
may be as high as $1 million per day. Criminal penalties for most financial
institution crimes include fines of up to $1 million and imprisonment for up to
30 years. In addition, regulators have substantial discretion to impose
enforcement action on an institution that fails to comply with its regulatory
requirements, particularly with respect to the capital requirements. Possible
enforcement action ranges from the imposition of a capital plan and capital
directive to receivership, conservatorship or the termination of deposit
insurance. Under the FDIA, the FDIC has the authority to recommend to the
Director of OTS that enforcement action be taken with respect to a particular
savings institution. If action is not taken by the director, the FDIC has
authority to take such action under certain circumstances.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations and commercial banks. Each FHLB serves
as a source of liquidity for its members within its assigned region. It is
funded primarily from 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 its Board of Directors. As of
December 31, 1995, the Bank's advances from the FHLB of Atlanta amounted to
$30.2 million or 14.1% of its total assets.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. At December 31, 1995, the
Bank had $1.5 million in FHLB stock, which was in compliance with this
requirement.
As a result of Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), the FHLBs are required to provide funds for the resolution
of troubled savings associations and to contribute to affordable housing
programs through direct loans or interest subsidies on advances targeted for
community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future. For the year ended December 31,
1995, dividends paid by the FHLB of Atlanta to the Bank totaled $122,000.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. At
December 31, 1995, the Bank was in compliance with such requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an association's earning assets. The amount of
funds necessary to satisfy this requirement has not had a material affect on the
Bank's operations.
Miscellaneous. In addition to requiring a new system of risk-based
insurance assessments and a system of prompt corrective action with respect to
undercapitalized banks, as discussed above, recent legislation requires federal
banking regulators to adopt regulations in a number of areas to ensure bank
safety and soundness, including: internal controls; credit underwriting; asset
growth; management compensation; ratios of classified assets to capital; and
earnings. Recent legislation also restricts the activities of state-chartered
insured banks; amends various consumer banking laws; limits the ability of
"undercapitalized banks" to borrow from the Federal Reserve Board's discount
window; and requires regulators to perform annual on-site bank examinations and
set standards for real estate lending.
TAXATION
Federal Taxation
General. The Corporation and the Bank are subject to the generally
applicable corporate tax provisions of the Internal Revenue Code of 1986, as
amended ("Code"), as well as certain additional provisions of the Code which
apply to thrift and other types of financial institutions. The following
discussion of Federal taxation is intended only to summarize certain pertinent
income tax matters and is not a comprehensive description of the tax rules
applicable to the Corporation and the Bank.
Method of Accounting. The Corporation and the Bank maintain their books
and records for federal income tax purposes using the accrual method of
accounting. The accrual method of accounting generally requires that items of
income be recognized when all events have occurred that establish the right to
receive the income and the amount can be determined with reasonable accuracy and
that items of expense be deducted at the later of (i) the time when all events
have occurred that establish the liability to pay the expense and the amount of
such liability can be determined with reasonable accuracy or (ii) the time when
economic performance with respect to the item of expense has occurred.
Bad Debt Reserves. Savings institutions, such as Home Federal, which meet
certain definitional tests primarily relating to their assets and the nature of
their businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the Bank's taxable income. For purposes of
computing the deductible addition to its bad debt reserve, the Bank's loans are
separated into "qualifying real property loans" (generally those loans secured
by certain interests in real property) and all other loans ("non-qualifying
loans"). The deduction with respect to nonqualifying loans must be computed
under the experience method as described below, while a deduction with respect
to qualifying loans may be computed using a percentage based on actual loss
experience, or a percentage of taxable income. Additions to the reserve for
losses on nonqualifying loans must be based upon actual loss experience and
would reduce the current year's addition to the reserve for losses on qualifying
real property loans, unless that addition is also determined under the
experience method. The sum of the additions to each reserve for each year is the
Bank's annual bad debt deduction.
Under the experience method, the deductible annual addition to Home
Federal's bad debt reserves is the amount necessary to increase the balance of
the reserve at the close of the taxable year to the greater of (a) the amount
which bears the same ratio to loans outstanding at the close of the taxable year
as the total net bad debts sustained during the current and five preceding
taxable years bear to the sum of the loans outstanding at the close of those six
years, or (b) the lower of (i) the balance of the reserve account at December
31, 1987 (the "base year"), or (ii) if the amount of loans outstanding at the
close of the taxable year is less than the amount of loans outstanding at the
close of the base year, the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the balance of the reserve at
the close of the base year bears to the amount of loans outstanding at the close
of the base year.
Under the percentage of taxable income method, for taxable years beginning
on or after January 1, 1987, the portion of taxable income that may be deducted
as an addition to a reserve for bad debts under the percentage of taxable income
method is 8%. Any savings institution at least 60% of whose assets are
qualifying assets, as defined in the Code, is eligible for the full 8% of
taxable income deduction. As of December 31, 1995, at least 60% of the Bank's
assets were "qualifying assets" as defined in the Code, and the Bank anticipates
that at least 60% of its assets will continue to be qualifying assets in the
immediate future. If this ceases to be the case, the Bank may be required to
restore some portion of its bad debt reserve to taxable income in the future.
Under the percentage of taxable income method, the bad debt deduction for
an addition to the reserve for qualifying real property loans cannot exceed the
amount necessary to increase the balance in this reserve to an amount equal to
6% of such loans outstanding at the end of the taxable year. The bad debt
deduction is also limited to the amount which when added to the addition to the
reserve for loan losses on nonqualifying loans, equals the amount by which 12%
of deposits at the close of the year exceeds the sum of surplus, undivided
profits and reserves at the beginning of the year. Based on experience, it is
not expected that these restrictions will be a limiting factor for the Bank in
the foreseeable future. In addition, the deduction for qualifying real property
loans is reduced by an amount equal to all or part of the deduction for
non-qualifying loans.
Home Federal had generally used the percentage of taxable income method
with respect to qualifying real property loans. However, it used the experience
method in 1990 through 1994 and it is anticipated that the Bank will use the
experience method in the 1995 tax return. In future years, the Bank intends to
utilize whatever available method provides the maximum tax benefits. At December
31, 1995, the federal income tax reserves of the Bank included $7.1 million for
which no federal income tax has been provided.
Distributions. If the Bank distributes cash or property to its stockholder,
and the distribution is treated as being from its accumulated bad debt
reserves, the distribution will cause the Bank to have additional taxable
income. A distribution is deemed to have been made from accumulated bad debt
reserves to the extent that (a) the reserves exceed the amount that would have
been accumulated on the basis of actual loss experience, and (b) the
distribution is a "nondividend distribution." A distribution with respect to
stock is a non-dividend distribution to the extent that, for federal income
tax purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, exceeds the
current and post-1951 accumulated earnings and profits. The amount of additional
taxable income created by a nondividend distribution is an amount that when
reduced by the tax attributable to it is equal to the amount of the
distribution.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%.
The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and is payable to the extent that such AMTI is in excess of an exemption
amount. The Code provides that an item of tax preference is the excess of the
bad debt deduction allowable for a taxable year pursuant to the percentage of
taxable income method over the amount allowable under the experience method. The
other items of tax preference that constitute AMTI include (a) tax exempt
interest on private activity bonds other than certain qualified bonds and (b)
75% of the excess (if any) of adjusted current earnings as defined in the Code,
over AMTI (determined without regard to this preference and prior to reduction
by net operating losses).
Corporate Dividends-Received Deduction. The Corporate dividends-received
deduction is 80% in the case of dividends received from corporations with which
a corporate recipient does not file a consolidated tax return and corporations
which own less than 20% of the stock of a corporation distributing a dividend
may deduct only 70% of dividends received or accrued on their behalf. However, a
corporation may deduct 100% of dividends from a member of the same affiliated
group of corporations.
Other Matters. The Corporation and the Bank file consolidated federal
income tax returns, which has the effect of eliminating or deferring the tax
consequences of intercompany distributions, including dividends, in the
computation of consolidated taxable income. Any income of the Corporation would
not be subject to the bad debt deduction allowed the Bank, whether or not
consolidated tax returns are filed. However, any losses of the Corporation, its
subsidiaries or the Bank's subsidiaries included in consolidated tax returns may
reduce the bad debt deduction allowed the Bank if a deduction is claimed under
the percentage of taxable income method.
State Taxation
As a Maryland Corporation, the Corporation is subject to Maryland corporate
income tax at a rate of 7%.
Home Federal is subject to a Maryland annual franchise tax computed at a
rate of 7% of its net earnings allocated to Maryland. For the purpose of the 7%
franchise tax, net earnings are defined as the net income of Home Federal as
determined for state corporate income tax purposes, plus (i) interest income
from obligations of the United States, of any state, including Maryland, and of
any county, municipal or public corporation authority, special district or
political subdivision of any state, including Maryland, and (ii) any profit
realized from the sale or exchange of bonds issued by the State of Maryland or
any of its political subdivisions.
Item 2. Description of Property.
The following table presents property owned and leased by the Corporation,
the Bank and the Bank's subsidiaries.
<TABLE>
<CAPTION>
Net Book Value at
Location December 31, 1995
- -------- -----------------
<S> <C>
Home Federal Corporation $ --
122-128 West Washington Street
Hagerstown, MD 21740
Home Federal Savings Bank:
Main Office:<F1>
122-128 West Washington Street
Hagerstown, MD 21740 1,883,371
Virginia Avenue Branch:
17708 Virginia Avenue
Hagerstown, MD 21740 752,248
Pennsylvania Avenue Branch:
1413 Pennsylvania Avenue
Hagerstown, MD 21742 274,811
Dual Highway Branch:
1700 Dual Highway
Hagerstown, MD 21740 645,500
Hancock Branch<F2>:
333 East Main Street
Hancock, MD 21750 450,276
County Market Branch<F3>:
835 Hill Crest Road
Hagerstown, MD 21742 47,786
Allegany County Locations:
County Market Branch<F4>
1230 National Highway
LaVale, MD 21502 46,180
Loan Center<F5>
8 East Main Street
Frostburg, MD 21532 7,328
----------
$4,107,500
==========
<FN>
<F1> The Bank has three lease agreements for automated teller space.
<F2> The Bank leases the land on which the office is located. The present lease
term expires on April 30, 1997 with an option to extend the lease for two
additional five year periods.
<F3> The Bank leases the premises. The present lease expires on December 31,
1997 with an option to extend the lease for an additional five year term.
<F4> The Bank leases the premises. The present lease expires on April 15, 1999
with an option to extend the lease for an additional five year term.
<F5> The Bank leases the Frostburg Loan Center. The present lease expires on
April 30, 1997.
</FN>
</TABLE>
Item 3. Legal Proceedings.
The Corporation and its subsidiaries are not involved in any pending legal
proceedings other than routine, nonmaterial legal proceedings occurring in the
ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference from page 33
of the Corporation's Annual Report to Stockholders which is filed herewith as
Exhibit 13 ("1995 Annual Report").
Item 6. Management's Discussion and Analysis or Plan of Operation.
The information required herein is incorporated by reference from page 6 of
the 1995 Annual Report.
Item 7. Financial Statements.
The information required herein is incorporated by reference from page 5
and pages 13 to 32 of the 1995 Annual Report.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance With Section 16(a) of the Exchange Act.
The information required herein is incorporated by reference from the
definitive proxy statement of the Corporation filed with the SEC within 120
days of the Corporation's year end ("definitive proxy statement").
Item 10. Executive Compensation.
The information required herein is incorporated by reference from the
definitive proxy statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from the
definitive proxy statement.
Item 12. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from the
definitive proxy statement.
Item 13. Exhibits and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by reference
from Item 7 hereof:
Independent Auditor's Report
Consolidated Statements of Financial Condition as of December 31,
1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Income for the Years Ended December
31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in the
applicable accounting regulation of the SEC are omitted because
of the absence of conditions under which they are required or
because the required information is included in the consolidated
financial statements and related notes thereto.
(3) The following exhibits are filed as part of the Form 10-K and
this list includes the Exhibit Index.
No. Exhibits Page
3(i) Certificate of Incorporation *
3(ii) Bylaws *
4 Specimen of Stock Certificate *
10.1(a) Key Employee Stock Compensation Program **
10.1(b) 1988 Stock Option and Stock Appreciation Rights Plan ***
10.2(a) Employment Agreement between Home Federal Corporation
and Richard W. Phoebus, Sr. E-1
10.2(b) Employment Agreement between Home Federal Savings Bank
and Richard W. Phoebus, Sr. E-12
10.2(c) Employment Agreement between Home Federal Corporation
and Salvatore M. Savino E-24
10.2(d) Employment Agreement between Home Federal Savings Bank
and Salvatore M. Savino E-36
10.2(e) Employment Agreement between Home Federal Corporation
and Steven G. Hull ****
10.2(f) Employment Agreement between Home Federal Savings Bank
and Steven G. Hull ****
10.2(g) Employment Agreement between Home Federal Savings Bank
and Celia S. Ausherman ****
10.2(h) Employment Agreement between Home Federal Savings Bank
and Celia S. Ausherman ****
10.2(i) Consulting Agreement between Home Federal Savings Bank
and William H. Gelbach, Jr. *****
13 1995 Annual Report to Stockholders E-48
21 Subsidiaries -- Reference is made to Item 1,
"Business - Subsidiaries" for the required information
23 Consent of Independent Auditor E-82
* Exhibit is incorporated herein by reference from the Registrant's Form 8-B
Registration Statement filed with the SEC on August 1, 1989.
** Exhibit is incorporated herein by reference from the Registrant's Form 8-B
Registration Statement filed with the SEC on December 31, 1987.
*** Exhibit is incorporated herein by reference from the Registrant's
definitive proxy statement for its 1988 Annual Meeting of Stockholders,
dated March 30, 1988, filed with the SEC on March 30, 1988.
**** Employment agreements for Mr. Hull and Ms. Ausherman are similar to that
of Mr. Savino.
***** Exhibit is incorporated herein by reference from the Registrant's Form S-1
Registration Statement, Registration No. 33-22768, filed with the SEC on
June 24, 1988.
(b) Reports on Form 8-K. Not applicable.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit
Index.
(d) There are no other financial statements and financial statement
schedules which are excluded from the Annual Report to Stockholders
which are required to be included herein.
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HOME FEDERAL CORPORATION
March 28, 1996 By: /s/Richard W. Phoebus, Sr.
Date Richard W. Phoebus, Sr.
President and Chief
Executive Officer
In accordance with Section 13 or 15(d) of the Exchange Act, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
/s/Benjamin F. Kunkleman March 28, 1996
Benjamin F. Kunkleman, Chairman of the Board Date
/s/Richard W. Phoebus, Sr. March 28, 1996
Richard W. Phoebus, Sr., President and Date
Chief Executive Officer, Director
/s/Salvatore M. Savino March 28, 1996
Salvatore M. Savino, Vice President and Date
Treasurer, Chief Financial Officer, Director
(principal accounting and financial officer)
/s/Howard B. Bowen March 28, 1996
Howard B. Bowen, Director Date
/s/William H. Gelbach, Jr. March 28, 1996
William H. Gelbach, Jr., Director Date
/s/Lois S. Harrison March 28, 1996
Lois S. Harrison, Director Date
/s/John J. McElwee, Jr. March 28, 1996
John J. McElwee, Jr., Director Date
/s/J. Franklin Shank March 28, 1996
J. Franklin Shank, Director Date
/s/Ronald Z. Sulchek March 28, 1996
Ronald Z. Sulchek, Director Date
<PAGE>
Exhibit 10.2(a)
AGREEMENT
AGREEMENT, dated this 21st day of March 1996, between Home Federal
Corporation (the "Corporation"), a Maryland corporation and Richard W. Phoebus,
Sr. (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Corporation and Home
Federal Savings Bank (the "Savings Bank") (together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers and currently have a joint
agreement with the Executive dated July 1, 1995;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS") Regulatory
Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate
agreements with the Executive with respect to his employment by each of the
Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive by the Corporation in the event that his
employment with the Corporation is terminated under specified circumstances.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. Definitions. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) Base Salary. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(b) Cause. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
(c) Change in Control of the Corporation. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under Exchange Act; provided that, without limitation, such a change in
control shall be deemed to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Corporation representing 25% or more of the
combined voting power of the Corporation's then outstanding securities; or (ii)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof unless the election, or the
nomination for election by stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
(d) Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) Date of Termination. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(f) Disability. Termination by the Corporation of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) Good Reason. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive within one
year following a Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, a
reduction by either of the Employers in the
Executive's Base Salary as the same may be
increased from time to time or, except to the
extent permitted by Section 3(b) hereof, a
reduction in the package of fringe benefits
provided to the Executive, taken as a whole;
(ii) The principal executive office of either of the
Employers is relocated outside of the Hagerstown,
Maryland area or, without the Executive's express
written consent, either of the Employers require
the Executive to be based anywhere other than an
area in which the Employers' principal executive
office is located, except for required travel on
business of the Employers to an extent
substantially consistent with the Executive's
present business travel obligations;
(iii) Any purported termination of the Executive's
employment for Cause, Disability or Retirement
which is not effected pursuant to a Notice of
Termination satisfying the requirements of
paragraph (i) below; or
(iv) The failure by the Corporation to obtain the
assumption of and agreement to perform this
Agreement by any successor as contemplated in
Section 9 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) Notice of Termination. Any purported termination of the Executive's
employment by the Corporation for any reason, including without limitation for
Cause, Disability or Retirement, or by the Executive for any reason, including
without limitation for Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated, (iii)
specifies a Date of Termination, which shall be not less than thirty (30) nor
more than ninety (90) days after such Notice of Termination is given, except in
the case of the Corporation's termination of Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 10 hereof.
(j) Retirement. Termination by the Employers of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including early
retirement, generally applicable to their salaried employees.
2. Term of Employment.
(a) The Corporation hereby employs the Executive as President and Chief
Executive Officer and Executive hereby accepts said employment and agrees to
render such services to the Corporation on the terms and conditions set forth in
this Agreement. The term of employment under this Agreement shall be for three
years, commencing on the date of this Agreement and, upon approval of the Board
of Directors of the Corporation, shall extend for an additional year on each
annual anniversary of the date of this Agreement such that at any time the
remaining term of this Agreement shall be from two to three years. Prior to the
first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Board of Directors of the Corporation shall consider
and review (with appropriate corporate documentation thereof, and after taking
into account all relevant factors, including the Executive's performance
hereunder) extension of the term under this Agreement, and the term shall
continue to extend each year if the Board of Directors approves such extension
unless the Executive gives written notice to the Employers of the Executive's
election not to extend the term, with such written notice to be given not less
than thirty (30) days prior to any such anniversary date. If the Board of
Directors elects not to extend the term, it shall give written notice of such
decision to the Executive not less than thirty (30) days prior to any such
anniversary date. If any party gives timely notice that the term will not be
extended as of any annual anniversary date, then this Agreement shall terminate
at the conclusion of its remaining term. References herein to the term of this
Agreement shall refer both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Corporation as may be consistent with his titles and
from time to time assigned to him by the Corporation's Board of Directors.
3. Compensation and Benefits.
(a) The Employers shall compensate and pay Executive for his services
during the term of this Agreement at a minimum base salary of $111,000 per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Boards of Directors of the Employers and may not be
decreased without the Executive's express written consent. For purposes hereof,
Base Salary shall include any fees received for serving as a director of the
Employers.
(b) During the term of the Agreement, Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Corporation shall not
make any changes in such plans, benefits or privileges which would adversely
affect Executive's rights or benefits thereunder, unless such change occurs
pursuant to a program applicable to all executive officers of the Corporation
and does not result in a proportionately greater adverse change in the rights of
or benefits to Executive as compared with any other executive officer of the
Corporation. Nothing paid to Executive under any plan or arrangement presently
in effect or made available in the future shall be deemed to be in lieu of the
salary payable to Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, Executive shall be entitled to paid
annual vacation in accordance with the policies as established from time to time
by the Boards of Directors of the Employers, which shall in no event be less
than four weeks per annum. Executive shall not be entitled to receive any
additional compensation from the Employers for failure to take a vacation, nor
shall Executive be able to accumulate unused vacation time from one year to the
next, except to the extent authorized by the Boards of Directors of the
Employers.
(d) During the term of this Agreement, in keeping with past practices, the
Employers shall continue to provide the Executive with the automobile he
presently drives. The Employers shall be responsible and shall pay for all costs
of insurance coverage, repairs, maintenance and other incidental expenses,
including license, fuel and oil. The Employers shall provide the Executive
with a replacement automobile of a similar type as selected by the Executive at
approximately the time that his present automobile reaches three (3) years of
age and approximately every three (3) years thereafter, upon the same terms and
conditions.
(e) During the term of this Agreement, in keeping with past practices, the
Employers shall continue to pay the annual membership dues at the country clubs
which the Executive is currently a member of.
(f) In the event of the Executive's death during the term of this
Agreement, the Executive's spouse, estate, legal representative or named
beneficiaries (as directed by the Executive in writing) shall be paid on a
monthly basis the greater of (i) the death benefits which may be available under
one or more policies of the Employers or (ii) the Executive's Base Salary (as
defined in Section 3(a) hereof) in effect at the time of the Executive's death
for a period of eighteen (18) months from the date of the Executive's death.
(g) The Executive's compensation, benefits and expenses which are required
to be provided under this Agreement shall be paid by the Corporation and the
Savings Bank in the same proportion as the time and services actually expended
by the Executive on behalf of each respective Employer.
4. Expenses.
The Employers shall reimburse Executive or otherwise provide for or pay for
all reasonable expenses incurred by Executive in furtherance of, or in
connection with the business of the Employers, including, but not by way of
limitation, automobile expenses described in Section 3(d) hereof, and traveling
expenses, and all reasonable entertainment expenses (whether incurred at the
Executive's residence, while traveling or otherwise), subject to such reasonable
documentation and other limitations as may be established by the Boards of
Directors of the Employers. If such expenses are paid in the first instance by
Executive, the Employers shall reimburse the Executive therefor.
5. Termination.
(a) The Corporation shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder for any reason,
including without limitation termination for Cause, Disability or Retirement,
and Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by the
Corporation for Cause, or (ii) Executive terminates his employment hereunder
other than for Good Reason, Executive shall have no right pursuant to this
Agreement to compensation or other benefits for any period after the applicable
Date of Termination. In the event the Executive's employment is terminated due
to the Executive's death, the Executive's rights shall be as provided in Section
3(f) hereof.
(c) In the event that (i) Executive's employment is terminated by the
Corporation for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive due to a material
breach of this Agreement by the Corporation, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been given
by the Executive to the Employers, then the Corporation shall
(A) pay to the Executive, in equal monthly installments
beginning with the first business day of the month following
the Date of Termination, a cash severance amount equal to that
portion of the Executive's Base Salary which would be payable
by the Corporation to the Executive pursuant hereto for a
period ending at the later of (i) the expiration of the
remaining term of employment pursuant hereto prior to the
Notice of Termination or (ii) eighteen (18) months, and
(B) maintain and provide for a period ending at the
earlier of (i) the expiration of the remaining term of
employment pursuant hereto prior to the Notice of Termination
or (ii) the date of the Executive's full-time employment by
another employer (provided that the Executive is entitled
under the terms of such employment to benefits substantially
similar to those described in this subparagraph (B)), at no
cost to the Executive, the Executive's continued participation
in all group insurance, life insurance, health and accident,
disability and other employee benefit plans, programs and
arrangements offered by the Corporation in which the Executive
was entitled to participate immediately prior to the Date of
Termination (other than stock option and restricted stock
plans of the Employers), provided that in the event that the
Executive's participation in any plan, program or arrangement
as provided in this subparagraph (B) is barred, or during such
period any such plan, program or arrangement is discontinued
or the benefits thereunder are materially reduced, the
Corporation shall arrange to provide the Executive with
benefits substantially similar to those which the Executive
was entitled to receive under such plans, programs and
arrangements immediately prior to the Date of Termination.
(d) In the event of the failure by either of the Employers to elect or to
re-elect or to appoint or to re-appoint the Executive to the offices of
President and Chief Executive Officer of the Employers or a material adverse
change made by the either of Employers in the Executive's functions, duties or
responsibilities as President and Chief Executive Officer of the Employers
without the Executive's express written consent, the Executive shall be entitled
to terminate his employment hereunder and shall be entitled to the payments and
benefits provided for in Section 5(c)(A) and (B).
(e) In the event that the Executive terminates his employment hereunder
for Good Reason, then the Corporation shall, subject to the provisions of
Section 6 hereof, if applicable (i) pay to the Executive, in thirty-six (36)
equal monthly installments beginning with the first business day of the month
following the Date of Termination, a cash severance amount equal to three (3)
times that portion of the Executive's Base Salary paid by the Corporation, and
(ii) maintain the benefits provided for in Section 5(c)(B).
(f) In the event that the Executive takes employment with any banking
institution or affiliate thereof in the Corporation and the Bank's market area
after the Date of Termination, the Executive shall have no right pursuant to
this Agreement to continue to receive compensation or other benefits hereunder,
effective with the first business day of the month following the date the
Corporation and the Bank obtain confirmation of such employment, provided,
however, that if the Executive takes such employment following the Executive's
termination of employment with the Corporation and the Bank (i) following a
Change in Control, as defined in Section 1(c) hereof, or (ii) due to a material
breach of this Agreement by the Corporation, the compensation and benefits
provided for hereunder shall remain in full force and effect.
(g) Upon completion of the term of employment under this Agreement, as
defined in Section 2(a) hereof, the Executive shall be entitled to receive, and
the Corporation shall pay to the Executive in one (1) lump sum payment on the
date of termination of employment, a cash severance amount equal to one and
one-half (1.5) times the Executive's Base Salary in the year of such termination
of employment. In addition to such payment, the Employers shall provide
continued medical insurance in the Employers' health plan for the benefit of the
Executive and his spouse for a period of eighteen (18) months beginning with the
first business day of the month following the date of such termination of
employment, and such insurance shall be comparable to that which is provided to
the Executive as of the date of this Agreement notwithstanding anything to the
contrary in this Agreement and regardless of whether the Executive is eligible
to participate in the Employers' health plan. In the event of the Executive's
death before the completion of such eighteen (18) month period, the Employers
shall provide the Executive's spouse continued medical insurance in the
Employers' health plan comparable to that which is being provided to the
Executive's spouse at such time for the remainder of such period.
6. Payment of Additional Benefits under Certain Circumstances.
(a) If the payments and benefits pursuant to Section 5 hereof, either
alone or together with other payments and benefits which Executive has the right
to receive from the Employers (including, without limitation, the payments and
benefits which Executive would have the right to receive from the Savings Bank
pursuant to Section 5 of the Agreement between the Savings Bank and Executive
dated March 7, 1996 ("Savings Bank Agreement"), before giving effect to any
reduction in such amounts pursuant to Section 6 of the Savings Bank Agreement),
would constitute a "parachute payment" as defined in Section 280G(b)(2) of the
Code (the "Initial Parachute Payment," which includes the amounts paid pursuant
to clause (A) below), then the Corporation shall pay to the Executive, in
thirty-six (36) equal monthly installments beginning with the first business day
of the month following the Date of Termination, a cash amount equal to the sum
of the following:
(A) the amount by which the payments and benefits that
would have otherwise been paid by the Savings Bank to the
Executive pursuant to Section 5 of the Savings Bank Agreement
are reduced by the provisions of Section 6 of the Savings Bank
Agreement;
(B) twenty (20) percent (or such other percentage equal
to the tax rate imposed by Section 4999 of the Code) of the
amount by which the Initial Parachute Payment exceeds the
Executive's "base amount" from the Employers, as defined in
Section 280G(b)(3) of the Code, with the difference between
the Initial Parachute Payment and the Executive's base amount
being hereinafter referred to as the "Initial Excess Parachute
Payment";
(C) such additional amount (tax allowance) as may be
necessary to compensate the Executive for the payment by the
Executive of state and federal income and excise taxes on the
payment provided under clause (B) above and on any payments
under this clause (C). In computing such tax allowance, the
payment to be made under clause (B) above shall be multiplied
by the "gross up percentage" ("GUP"). The GUP shall be
determined as follows:
Tax Rate
GUP = -----------
1- Tax Rate
The Tax Rate for purposes of computing the GUP shall be the
highest marginal federal and state income and employment-related
tax rate, including any applicable excise tax rate, applicable
to the Executive in the year in which the payment under clause
(B) above is made.
(b) Notwithstanding the foregoing, if it shall subsequently be determined
in a final judicial determination or a final administrative settlement to which
the Executive is a party that the actual excess parachute payment as defined in
Section 280G(b)(1) of the Code is different from the Initial Excess Parachute
Payment (such different amount being hereafter referred to as the "Determinative
Excess Parachute Payment"), then the Corporation's independent tax counsel or
accountants shall determine the amount (the "Adjustment Amount") which either
the Executive must pay to the Corporation or the Corporation must pay to the
Executive in order to put the Executive (or the Corporation, as the case may be)
in the same position the Executive (or the Corporation, as the case may be)
would have been if the Initial Excess Parachute Payment had been equal to the
Determinative Excess Parachute Payment. In determining the Adjustment Amount,
the independent tax counsel or accountants shall take into account any and all
taxes (including any penalties and interest) paid by or for the Executive or
refunded to the Executive or for the Executive's benefit. As soon as practicable
after the Adjustment Amount has been so determined, the Corporation shall pay
the Adjustment Amount to the Executive or the Executive shall repay the
Adjustment Amount to the Corporation, as the case may be.
(c) In each calendar year that the Executive receives payments of benefits
under this Section 6, the Executive shall report on his state and federal income
tax returns such information as is consistent with the determination made by the
independent tax counsel or accountants of the Corporation as described above.
The Corporation shall indemnify and hold the Executive harmless from
any and all losses, costs and expenses (including without limitation, reasonable
attorneys' fees, interest, fines and penalties) which the Executive incurs as a
result of so reporting such information. Executive shall promptly notify the
Corporation in writing whenever the Executive receives notice of the
institution of a judicial or administrative proceeding, formal or informal, in
which the federal tax treatment under Section 4999 of the Code of any amount
paid or payable under this Section 6 is being reviewed or is in dispute. The
Corporation shall assume control at its expense over all legal and accounting
matters pertaining to such federal tax treatment (except to the extent necessary
or appropriate for the Executive to resolve any such proceeding with respect to
any matter unrelated to amounts paid or payable pursuant to this Section 6) and
the Executive shall cooperate fully with the Corporation in any such proceeding.
The Executive shall not enter into any compromise or settlement or otherwise
prejudice any rights the Corporation may have in connection therewith without
the prior consent of the Corporation.
7. Mitigation; Exclusivity of Benefits.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. Withholding. All payments required to be made by the Corporation
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Corporation may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. Assignability. The Corporation may assign this Agreement and their
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Corporation may hereafter merge or
consolidate or to which the Corporation may transfer all or substantially all of
their assets, if in any such case said corporation, bank or other entity shall
by operation of law or expressly in writing assume all obligations of the
Corporation hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or its rights and obligations
hereunder. The Executive may not assign or transfer this Agreement or any rights
or obligations hereunder.
10. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Corporation: Secretary
Home Federal Corporation
122-128 West Washington Street
Hagerstown, Maryland 21740
To the Savings Bank: Secretary
Home Federal Savings Bank
122-128 West Washington Street
Hagerstown, Maryland 21740
To the Executive: Richard W. Phoebus, Sr.
1419 Lindsey Road
Hagerstown, Maryland 21742-3182
11. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Corporation to sign on
its behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
12. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of Maryland.
13. Nature of Obligations. Nothing contained herein shall create or
require the Corporation to create a trust of any kind to fund any benefits which
may be payable hereunder, and to the extent that the Executive acquires a right
to receive benefits from the Corporation hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Corporation.
14. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. Entire Agreement. This Agreement embodies the entire agreement
between the Corporation and the Executive with respect to the matters agreed to
herein. All prior agreements between the Corporation and the Executive with
respect to the matters agreed to herein, including without limitation the
Employment Agreement between the Employers and the Executive dated as of July 1,
1995, are hereby superseded and shall have no force or effect. Notwithstanding
the foregoing, nothing contained in this Agreement shall affect the agreement of
even date being entered into between the Savings Bank and the Executive.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: HOME FEDERAL CORPORATION
__________________________ By: /s/ Benjamin F. Kunkleman
Benjamin F. Kunkleman,
Chairman of the Board of Directors
EXECUTIVE
By: /s/ Richard W. Phoebus, Sr.
Richard W. Phoebus, Sr.
Exhibit 10.2(b)
AGREEMENT
AGREEMENT, dated this 21st day of March 1996, between Home Federal Savings
Bank (the "Savings Bank"), a federally chartered savings bank and Richard W.
Phoebus, Sr. (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of Home Federal Corporation
(the "Corporation") and the Savings Bank (together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers and currently have a joint
agreement with the Executive dated July 1, 1995;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS") Regulatory
Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate
agreements with the Executive with respect to his employment by each of the
Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive by the Savings Bank in the event that his
employment with the Savings Bank is terminated under specified circumstances.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. Definitions. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) Base Salary. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(b) Cause. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
(c) Change in Control of the Corporation. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the Exchange Act; provided that, without limitation, such a change in
control shall be deemed to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Corporation representing 25% or more of the
combined voting power of the Corporation's then outstanding securities; or (ii)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof unless the election, or the
nomination for election by stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
(d) Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) Date of Termination. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(f) Disability. Termination by the Savings Bank of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) Good Reason. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive within one
year following a Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, a reduction by
either of the Employers in the Executive's Base Salary as the
same may be increased from time to time or, except to the extent
permitted by Section 3(b) hereof, a reduction in the package of
fringe benefits provided to the Executive, taken as a whole;
(ii) The principal executive office of either of the Employers is
relocated outside of the Hagerstown, Maryland area or, without
the Executive's express written consent, either of the Employers
require the Executive to be based anywhere other than an area in
which the Employers' principal executive office is located,
except for required travel on business of the Employers to an
extent substantially consistent with the Executive's present
business travel obligations;
(iii) Any purported termination of the Executive's employment for
Cause, Disability or Retirement which is not effected pursuant to
a Notice of Termination satisfying the requirements of paragraph
(i) below; or (iv) The failure by the Savings Bank to obtain the
assumption of and agreement to perform this Agreement by any
successor as contemplated in Section 9 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) Notice of Termination. Any purported termination of the Executive's
employment by the Savings Bank for any reason, including without limitation for
Cause, Disability or Retirement, or by the Executive for any reason, including
without limitation for Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated, (iii)
specifies a Date of Termination, which shall be not less than thirty (30) nor
more than ninety (90) days after such Notice of Termination is given, except in
the case of the Savings Bank termination of Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 10 hereof.
(j) Retirement. Termination by the Employers of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including early
retirement, generally applicable to their salaried employees.
2. Term of Employment.
(a) The Savings Bank hereby employs the Executive as President and Chief
Executive Officer and Executive hereby accepts said employment and agrees to
render such services to the Savings Bank on the terms and conditions set forth
in this Agreement. The term of employment under this Agreement shall be for
three years, commencing on the date of this Agreement and, upon approval of the
Board of Directors of the Savings Bank, shall extend for an additional year on
each annual anniversary of the date of this Agreement such that at any time the
remaining term of this Agreement shall be from two to three years. Prior to the
first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Board of Directors of the Savings Bank shall
consider and review (with appropriate corporate documentation thereof, and after
taking into account all relevant factors, including the Executive's performance
hereunder) extension of the term under this Agreement, and the term shall
continue to extend each year if the Board of Directors approves such extension
unless the Executive gives written notice to the Employers of the Executive's
election not to extend the term, with such written notice to be given not less
than thirty (30) days prior to any such anniversary date. If the Board of
Directors elects not to extend the term, it shall give written notice of such
decision to the Executive not less than thirty (30) days prior to any such
anniversary date. If any party gives timely notice that the term will not be
extended as of any annual anniversary date, then this Agreement shall terminate
at the conclusion of its remaining term. References herein to the term of this
Agreement shall refer both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Savings Bank as may be consistent with his titles and
from time to time assigned to him by the Savings Bank's Board of Directors.
3. Compensation and Benefits.
(a) The Employers shall compensate and pay Executive for his services
during the term of this Agreement at a minimum base salary of $111,000 per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Boards of Directors of the Employers and may not be
decreased without the Executive's express written consent. For purposes hereof,
Base Salary shall include any fees received for serving as a director of the
Employers.
(b) During the term of the Agreement, Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Savings Bank shall not
make any changes in such plans, benefits or privileges which would adversely
affect Executive's rights or benefits thereunder, unless such change occurs
pursuant to a program applicable to all executive officers of the Savings Bank
and does not result in a proportionately greater adverse change in the rights of
or benefits to Executive as compared with any other executive officer of the
Savings Bank. Nothing paid to Executive under any plan or arrangement presently
in effect or made available in the future shall be deemed to be in lieu of the
salary payable to Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, Executive shall be entitled to paid
annual vacation in accordance with the policies as established from time to time
by the Boards of Directors of the Employers, which shall in no event be less
than four weeks per annum. Executive shall not be entitled to receive any
additional compensation from the Employers for failure to take a vacation,
nor shall Executive be able to accumulate unused vacation time from one year to
the next, except to the extent authorized by the Boards of Directors of the
Employers.
(d) During the term of this Agreement, in keeping with past practices, the
Employers shall continue to provide the Executive with the automobile he
presently drives. The Employers shall be responsible and shall pay for all costs
of insurance coverage, repairs, maintenance and other incidental expenses,
including license, fuel and oil. The Employers shall provide the Executive with
a replacement automobile of a similar type as selected by the Executive at
approximately the time that his present automobile reaches three (3) years of
age and approximately every three (3) years thereafter, upon the same terms and
conditions.
(e) During the term of this Agreement, in keeping with past practices, the
Employers shall continue to pay the annual membership dues at the country clubs
which the Executive is currently a member of.
(f) In the event of the Executive's death during the term of this
Agreement, the Executive's spouse, estate, legal representative or named
beneficiaries (as directed by the Executive in writing) shall be paid on a
monthly basis the greater of (i) the death benefits which may be available under
one or more policies of the Employers or (ii) the Executive's Base Salary (as
defined in Section 3(a) hereof) in effect at the time of the Executive's death
for a period of eighteen (18) months from the date of the Executive's death.
(g) The Executive's compensation, benefits and expenses which are required
to be provided under this Agreement shall be paid by the Corporation and the
Savings Bank in the same proportion as the time and services actually expended
by the Executive on behalf of each respective Employer.
4. Expenses.
The Employers shall reimburse Executive or otherwise provide for or pay for
all reasonable expenses incurred by Executive in furtherance of, or in
connection with the business of the Employers, including, but not by way of
limitation, automobile expenses described in Section 3(d) hereof, and traveling
expenses, and all reasonable entertainment expenses (whether incurred at the
Executive's residence, while traveling or otherwise), subject to such reasonable
documentation and other limitations as may be established by the Boards of
Directors of the Employers. If such expenses are paid in the first instance by
Executive, the Employers shall reimburse the Executive therefor.
5. Termination.
(a) The Savings Bank shall have the right, at any time upon prior Notice
of Termination, to terminate the Executive's employment hereunder for any
reason, including without limitation termination for Cause, Disability or
Retirement, and Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by the
Savings Bank for Cause, or (ii) Executive terminates his employment hereunder
other than for Good Reason, Executive shall have no right pursuant to this
Agreement to compensation or other benefits for any period after the applicable
Date of Termination. In the event the Executive's employment is terminated due
to the Executive's death, the Executive's rights shall be as provided in Section
3(f) hereof.
(c) In the event that (i) Executive's employment is terminated by the
Savings Bank for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive due to a material
breach of this Agreement by the Savings Bank, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been given
by the Executive to the Employers, then the Savings Bank shall
(A) pay to the Executive, in equal monthly installments beginning
with the first business day of the month following the Date of Termination,
a cash severance amount equal to that portion of the Executive's Base
Salary which would be payable by the Savings Bank to the Executive pursuant
hereto for a period ending at the later of (i) the expiration of the
remaining term of employment pursuant hereto prior to the Notice of
Termination or (ii) eighteen (18) months, and
(B) maintain and provide for a period ending at the earlier of (i)
the expiration of the remaining term of employment pursuant hereto prior to
the Notice of Termination or (ii) the date of the Executive's full-time
employment by another employer (provided that the Executive is entitled
under the terms of such employment to benefits substantially similar to
those described in this subparagraph (B)), at no cost to the Executive, the
Executive's continued participation in all group insurance, life insurance,
health and accident, disability and other employee benefit plans, programs
and arrangements offered by the Savings Bank in which the Executive was
entitled to participate immediately prior to the Date of Termination (other
than stock option and restricted stock plans of the Employers), provided
that in the event that the Executive's participation in any plan, program
or arrangement as provided in this subparagraph (B) is barred, or during
such period any such plan, program or arrangement is discontinued or the
benefits thereunder are materially reduced, the Savings Bank shall arrange
to provide the Executive with benefits substantially similar to those which
the Executive was entitled to receive under such plans, programs and
arrangements immediately prior to the Date of Termination.
(d) In the event of the failure by either of the Employers to elect or to
re-elect or to appoint or to re-appoint the Executive to the offices of
President and Chief Executive Officer of the Employers or a material adverse
change made by either of the Employers in the Executive's functions, duties or
responsibilities as President and Chief Executive Officer of the Employers
without the Executive's express written consent, the Executive shall be entitled
to terminate his employment hereunder and shall be entitled to the payments and
benefits provided for in Section 5(c)(A) and (B).
(e) In the event that the Executive terminates his employment hereunder
for Good Reason, then the Savings Bank shall, subject to the provisions of
Section 6 hereof, if applicable (i) pay to the Executive, in thirty-six (36)
equal monthly installments beginning with the first business day of the month
following the Date of Termination, a cash severance amount equal to three (3)
times that portion of the Executive's Base Salary paid by the Savings Bank, and
(ii) maintain the benefits provided for in Section 5(c)(B).
(f) In the event that the Executive takes employment with any banking
institution or affiliate thereof in the Corporation and the Bank's market area
after the Date of Termination, the Executive shall have no right pursuant to
this Agreement to continue to receive compensation or other benefits hereunder,
effective with the first business day of the month following the date the
Corporation and the Bank obtain confirmation of such employment, provided,
however, that if the Executive takes such employment following the Executive's
termination of employment with the Corporation and the Bank (i) following a
Change in Control, as defined in Section 1(c) hereof, or (ii) due to a material
breach of this Agreement by the Savings Bank, the compensation and benefits
provided for hereunder shall remain in full force and effect.
(g) Upon the completion of the term of employment under this Agreement, as
defined in Section 2(a) hereof, the Executive shall be entitled to receive, and
the Savings Bank shall pay to the Executive in one (1) lump sum payment on the
date of termination of employment, a cash severance amount equal to one and
one-half (1.5) times the Executive's Base Salary in the year of such termination
of employment. In addition to such payment, the Employers shall provide
continued medical insurance in the Employers' health plan for the benefit of the
Executive and his spouse for a period of eighteen (18) months beginning with the
first business day of the month following the date of such termination of
employment, and such insurance shall be comparable to that which is provided to
the Executive as of the date of this Agreement notwithstanding anything to the
contrary in this Agreement and regardless of whether the Executive is eligible
to participate in the Employers' health plan. In the event of the Executive's
death before the completion of such eighteen (18) month period, the Employers
shall provide the Executive's spouse continued medical insurance in the
Employers' health plan comparable to that which is being provided to the
Executive's spouse at such time for the remainder of such period.
6. Limitation of Benefits under Certain Circumstances. If the payments
and benefits pursuant to Section 5 hereof, either alone or together with other
payments and benefits which Executive has the right to receive from the Savings
Bank, would constitute a "parachute payment" under Section 280G of the Code, the
payments and benefits payable by the Savings Bank pursuant to Section 5 hereof
shall be reduced, in the manner determined by the Executive, by the amount, if
any, which is the minimum necessary to result in no portion of the payments and
benefits paid by the Savings Bank under Section 5 being non-deductible to the
Savings Bank pursuant to Section 280G of the Code and subject to the excise tax
imposed under Section 4999 of the Code. The parties hereto agree that the
payments and benefits payable pursuant to this Agreement to the Executive upon
termination shall be limited to three times the Executive's average annual
compensation (based upon the most recent five taxable years) in accordance with
OTS Regulatory Bulletin 27a. The determination of any reduction in the payments
and benefits to be made pursuant to Section 5 shall be based upon the opinion of
independent tax counsel selected by the Savings Bank's independent public
accountants and paid by the Savings Bank. Such counsel shall be reasonably
acceptable to the Savings Bank and the Executive; shall promptly prepare the
foregoing opinion, but in no event later than thirty (30) days from the Date of
Termination; and may use such actuaries as such counsel deems necessary or
advisable for the purpose. Nothing contained herein shall result in a reduction
of any payments or benefits to which the Executive may be entitled upon
termination of employment under any circumstances other than as specified in
this Section 6, or a reduction in the payments and benefits specified in Section
5 below zero.
7. Mitigation; Exclusivity of Benefits.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. Withholding. All payments required to be made by the Savings Bank
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Savings Bank may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. Assignability. The Savings Bank may assign this Agreement and their
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Savings Bank may hereafter merge or
consolidate or to which the Savings Bank may transfer all or substantially all
of its assets, if in any such case said corporation, bank or other entity shall
by operation of law or expressly in writing assume all obligations of the
Savings Bank hereunder as fully as if it had been originally made a party
hereto, but may not otherwise assign this Agreement or its rights and
obligations hereunder. The Executive may not assign or transfer this Agreement
or any rights or obligations hereunder.
10. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Corporation: Secretary
Home Federal Corporation
122-128 West Washington Street
Hagerstown, Maryland 21740
To the Savings Bank: Secretary
Home Federal Savings Bank
122-128 West Washington Street
Hagerstown, Maryland 21740
To the Executive: Richard W. Phoebus, Sr.
419 Lindsey Road
Hagerstown, Maryland 21742-3182
11. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Savings Bank to sign on
its behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
12. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of Maryland.
13. Nature of Obligations. Nothing contained herein shall create or
require the Savings Bank to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that the Executive acquires a
right to receive benefits from the Savings Bank hereunder, such right shall be
no greater than the right of any unsecured general creditor of the Savings Bank.
14. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. Regulatory Actions. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings association and its employees pursuant to Section
563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R.
Sect. 563.39(b), or any successor thereto, and shall be controlling in the event
of a conflict with any other provision of this Agreement, including without
limitation Section 5 hereof.
(a) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Savings Bank's affairs pursuant to
notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA")(12 U.S.C. Sect. 1818(e)(3) and 1818(g)(1)), the Savings
Bank's obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Savings Bank may, in its discretion: (i) pay Executive all
or part of the compensation withheld while its obligations under this Agreement
were suspended, and (ii) reinstate (in whole or in part) any of its obligations
which were suspended.
(b) If Executive is removed from office and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sect. 1818(e)(4)
and (g)(1)), all obligations of the Savings Bank under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
Executive and the Saving Bank as of the date of termination shall not be
affected.
(c) If the Savings Bank is in default, as defined in Section 3(x)(1) of
the FDIA (12 U.S.C. Sect. 1813(x)(1)), all obligations under this Agreement
shall terminate as of the date of default, but vested rights of the Executive
and the Savings Bank as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to
12 C.F.R. Sect. 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Savings Bank is
necessary): (i) by the Director of the OTS, or his/her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Savings Bank under the authority
contained in Section 13(c) of the FDIA (12 U.S.C. Sect. 1823(c)); or (ii) by the
Director of the OTS, or his/her designee, at the time the Director or his/her
designee approves a supervisory merger to resolve problems related to operation
of the Savings Bank or when the Savings Bank is determined by the Director of
the OTS to be in an unsafe or unsound condition, but vested rights of the
Executive and the Employers as of the date of termination shall not be affected.
18. Regulatory Prohibition. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Sect. 1828(k)) and any regulations
promulgated thereunder.
19. Entire Agreement. This Agreement embodies the entire agreement
between the Savings Bank and the Executive with respect to the matters agreed to
herein. All prior agreements between the Savings Bank and the Executive with
respect to the matters agreed to herein, including without limitation the
Employment Agreement between the Employers and the Executive dated as of July 1,
1995, are hereby superseded and shall have no force or effect. Notwithstanding
the foregoing, nothing contained in this Agreement shall affect the agreement of
even date being entered into between the Corporation and the Executive.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: HOME FEDERAL SAVINGS BANK
__________________________ By: /s/ Benjamin F. Kunkleman
Benjamin F. Kunkleman,
Chairman of the Board of Directors
EXECUTIVE
By: /s/Richard W. Phoebus, Sr.
Richard W. Phoebus, Sr.
Exhibit 10.2(c)
AGREEMENT
AGREEMENT, dated this 21st day of March 1996, between Home Federal
Corporation (the "Corporation"), a Maryland corporation and Salvatore M. Savino
(the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Corporation and Home
Federal Savings Bank (the "Savings Bank") (together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers and currently have a joint
agreement with the Executive dated July 1, 1995;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS") Regulatory
Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate
agreements with the Executive with respect to his employment by each of the
Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive by the Corporation in the event that his
employment with the Corporation is terminated under specified circumstances.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. Definitions. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) Base Salary. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(b) Cause. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
(c) Change in Control of the Corporation. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under Exchange Act; provided that, without limitation, such a change in control
shall be deemed to have occurred if (i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing 25% or more of the
combined voting power of the Corporation's then outstanding securities; or (ii)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof unless the election, or the
nomination for election by stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
(d) Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) Date of Termination. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(f) Disability. Termination by the Corporation of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) Good Reason. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive within one
year following a Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, a reduction by
either of the Employers in the Executive's Base Salary as the
same may be increased from time to time or, except to the extent
permitted by Section 3(b) hereof, a reduction in the package of
fringe benefits provided to the Executive, taken as a whole;
(ii) The principal executive office of either of the Employers is
relocated outside of the Hagerstown, Maryland area or, without
the Executive's express written consent, either of the Employers
require the Executive to be based anywhere other than an area in
which the Employers' principal executive office is located,
except for required travel on business of the Employers to an
extent substantially consistent with the Executive's present
business travel obligations;
(iii) Any purported termination of the Executive's employment for
Cause, Disability or Retirement which is not effected pursuant to
a Notice of Termination satisfying the requirements of paragraph
(i) below; or
(iv) The failure by the Corporation to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 9 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) Notice of Termination. Any purported termination of the Executive's
employment by the Corporation for any reason, including without limitation for
Cause, Disability or Retirement, or by the Executive for any reason, including
without limitation for Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated, (iii)
specifies a Date of Termination, which shall be not less than thirty (30) nor
more than ninety (90) days after such Notice of Termination is given, except in
the case of the Corporation's termination of Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 10 hereof.
(j) Retirement. Termination by the Employers of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including early
retirement, generally applicable to their salaried employees.
2. Term of Employment.
(a) The Corporation hereby employs the Executive as Vice President and
Chief Financial Officer and Executive hereby accepts said employment and agrees
to render such services to the Corporation on the terms and conditions set forth
Consent of Independent Auditor
in this Agreement. The term of employment under this Agreement shall be for
three years, commencing on the date of this Agreement and, upon approval of the
Board of Directors of the Corporation, shall extend for an additional year on
each annual anniversary of the date of this Agreement such that at any time the
remaining term of this Agreement shall be from two to three years. Prior to the
first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Board of Directors of the Corporation shall consider
and review (with appropriate corporate documentation thereof, and after taking
into account all relevant factors, including the Executive's performance
hereunder) extension of the term under this Agreement, and the term shall
continue to extend each year if the Board of Directors approves such extension
unless the Executive gives written notice to the Employers of the Executive's
election not to extend the term, with such written notice to be given not less
than thirty (30) days prior to any such anniversary date. If the Board of
Directors elects not to extend the term, it shall give written notice of such
decision to the Executive not less than thirty (30) days prior to any such
anniversary date. If any party gives timely notice that the term will not be
extended as of any annual anniversary date, then this Agreement shall terminate
at the conclusion of its remaining term. References herein to the term of this
Agreement shall refer both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Corporation as may be consistent with his titles and
from time to time assigned to him by the Corporation's Board of Directors.
3. Compensation and Benefits.
(a) The Employers shall compensate and pay Executive for his services
during the term of this Agreement at a minimum base salary of $83,500 per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Boards of Directors of the Employers and may not be
decreased without the Executive's express written consent. For purposes hereof,
Base Salary shall include any fees received for serving as a director of the
Employers.
(b) During the term of the Agreement, Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Corporation shall not
make any changes in such plans, benefits or privileges which would adversely
affect Executive's rights or benefits thereunder, unless such change occurs
pursuant to a program applicable to all executive officers of the Corporation
and does not result in a proportionately greater adverse change in the rights of
or benefits to Executive as compared with any other executive officer of the
Corporation. Nothing paid to Executive under any plan or arrangement presently
in effect or made available in the future shall be deemed to be in lieu of the
salary payable to Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, Executive shall be entitled to paid
annual vacation in accordance with the policies as established from time to time
by the Boards of Directors of the Employers, which shall in no event be less
than three weeks per annum. Executive shall not be entitled to receive any
additional compensation from the Employers for failure to take a vacation,
nor shall Executive be able to accumulate unused vacation time from one year to
the next, except to the extent authorized by the Boards of Directors of the
Employers.
(d) In the event of the Executive's death during the term of this
Agreement, the Executive's spouse, estate, legal representative or named
beneficiaries (as directed by the Executive in writing) shall be paid on a
monthly basis the greater of (i) the death benefits which may be available under
one or more policies of the Employers or (ii) the Executive's Base Salary (as
defined in Section 3(a) hereof) in effect at the time of the Executive's death
for a period of eighteen (18) months from the date of the Executive's death.
(e) The Executive's compensation, benefits and expenses which are required
to be provided under this Agreement shall be paid by the Corporation and the
Savings Bank in the same proportion as the time and services actually expended
by the Executive on behalf of each respective Employer.
4. Expenses.
The Employers shall reimburse Executive or otherwise provide for or pay for
all reasonable expenses incurred by Executive in furtherance of, or in
connection with the business of the Employers, including, but not by way of
limitation, traveling expenses and all reasonable entertainment expenses
(whether incurred at the Executive's residence, while traveling or otherwise),
subject to such reasonable documentation and other limitations as may be
established by the Boards of Directors of the Employers. If such expenses are
paid in the first instance by Executive, the Employers shall reimburse the
Executive therefor.
5. Termination.
(a) The Corporation shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder for any reason,
including without limitation termination for Cause, Disability or Retirement,
and Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by the
Corporation for Cause, or (ii) Executive terminates his employment hereunder
other than for Good Reason, Executive shall have no right pursuant to this
Agreement to compensation or other benefits for any period after the applicable
Date of Termination. In the event the Executive's employment is terminated due
to the Executive's death, the Executive's rights shall be as provided in Section
3(d) hereof.
(c) In the event that (i) Executive's employment is terminated by the
Corporation for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive due to a material
breach of this Agreement by the Corporation, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been
given by the Executive to the Employers, then the Corporation shall
(A) pay to the Executive, in equal monthly installments beginning
with the first business day of the month following the Date of Termination,
a cash severance amount equal to that portion of the Executive's Base
Salary which would be payable by the Corporation to the Executive pursuant
hereto for a period ending at the later of (i) the expiration of the
remaining term of employment pursuant hereto prior to the Notice of
Termination or (ii) eighteen (18) months, and
(B) maintain and provide for a period ending at the earlier of (i)
the expiration of the remaining term of employment pursuant hereto prior to
the Notice of Termination or (ii) the date of the Executive's full-time
employment by another employer (provided that the Executive is entitled
under the terms of such employment to benefits substantially similar to
those described in this subparagraph (B)), at no cost to the Executive, the
Executive's continued participation in all group insurance, life insurance,
health and accident, disability and other employee benefit plans, programs
and arrangements offered by the Corporation in which the Executive was
entitled to participate immediately prior to the Date of Termination (other
than stock option and restricted stock plans of the Employers), provided
that in the event that the Executive's participation in any plan, program
or arrangement as provided in this subparagraph (B) is barred, or during
such period any such plan, program or arrangement is discontinued or the
benefits thereunder are materially reduced, the Corporation shall arrange
to provide the Executive with benefits substantially similar to those which
the Executive was entitled to receive under such plans, programs and
arrangements immediately prior to the Date of Termination.
(d) In the event of the failure by either of the Employers to elect or to
re-elect or to appoint or to re-appoint the Executive to the offices of Vice
President and Chief Financial Officer of the Corporation and Senior Vice
President and Chief Financial Officer of the Savings Bank or a material adverse
change made by the either of Employers in the Executive's functions, duties or
responsibilities as Vice President and Chief Financial Officer of the
Corporation and Senior Vice President and Chief Financial Officer of the Savings
Bank without the Executive's express written consent, the Executive shall be
entitled to terminate his employment hereunder and shall be entitled to the
payments and benefits provided for in Section 5(c)(A) and (B).
(e) In the event that the Executive terminates his employment hereunder
for Good Reason, then the Corporation shall, subject to the provisions of
Section 6 hereof, if applicable (i) pay to the Executive, in thirty-six (36)
equal monthly installments beginning with the first business day of the month
following the Date of Termination, a cash severance amount equal to three (3)
times that portion of the Executive's Base Salary paid by the Corporation, and
(ii) maintain the benefits provided for in Section 5(c)(B).
(f) In the event that the Executive takes employment with any banking
institution or affiliate thereof in the Corporation and the Bank's market area
after the Date of Termination, the Executive shall have no right pursuant to
this Agreement to continue to receive compensation or other benefits hereunder,
effective with the first business day of the month following the date the
Corporation and the Bank obtain confirmation of such employment, provided,
however, that if the Executive takes such employment following the Executive's
termination of employment with the Corporation and the Bank (i) following a
Change in Control, as defined in Section 1(c) hereof, or (ii) due to a material
breach of this Agreement by the Corporation, the compensation and benefits
provided for hereunder shall remain in full force and effect.
(g) Upon completion of the term of employment under this Agreement, as
defined in Section 2(a) hereof, the Executive shall be entitled to receive, and
the Corporation shall pay to the Executive in one (1) lump sum payment on the
date of termination of employment, a cash severance amount equal to one and
one-half (1.5) times the Executive's Base Salary in the year of such termination
of employment. In addition to such payment, the Employers shall provide
continued medical insurance in the Employers' health plan for the benefit of the
Executive, his spouse and dependents for a period of eighteen (18) months
beginning with the first business day of the month following the date of such
termination of employment, and such insurance shall be comparable to that which
is provided to the Executive as of the date of this Agreement notwithstanding
anything to the contrary in this Agreement and regardless of whether the
Executive is eligible to participate in the Employers' health plan. In the event
of the Executive's death before the completion of such eighteen (18) month
period, the Employers shall provide the Executive's spouse and dependents
continued medical insurance in the Employers' health plan comparable to that
which is being provided to the Executive's spouse and dependents at such time
for the remainder of such period.
6. Payment of Additional Benefits under Certain Circumstances.
(a) If the payments and benefits pursuant to Section 5 hereof, either
alone or together with other payments and benefits which Executive has the right
to receive from the Employers (including, without limitation, the payments and
benefits which Executive would have the right to receive from the Savings Bank
pursuant to Section 5 of the Agreement between the Savings Bank and Executive
dated March 7, 1996 ("Savings Bank Agreement"), before giving effect to any
reduction in such amounts pursuant to Section 6 of the Savings Bank Agreement),
would constitute a "parachute payment" as defined in Section 280G(b)(2) of the
Code (the "Initial Parachute Payment," which includes the amounts paid pursuant
to clause (A) below), then the Corporation shall pay to the Executive, in
thirty-six (36) equal monthly installments beginning with the first business day
of the month following the Date of Termination, a cash amount equal to the sum
of the following:
(A) the amount by which the payments and benefits that would have
otherwise been paid by the Savings Bank to the Executive pursuant to
Section 5 of the Savings Bank Agreement are reduced by the provisions of
Section 6 of the Savings Bank Agreement;
(B) twenty (20) percent (or such other percentage equal to the tax
rate imposed by Section 4999 of the Code) of the amount by which the
Initial Parachute Payment exceeds the Executive's "base amount" from the
Employers, as defined in Section 280G(b)(3) of the Code, with the
difference between the Initial Parachute Payment and the Executive's base
amount being hereinafter referred to as the "Initial Excess Parachute
Payment";
(C) such additional amount (tax allowance) as may be necessary to
compensate the Executive for the payment by the Executive of state and
federal income and excise taxes on the payment provided under clause (B)
above and on any payments under this clause (C). In computing such tax
allowance, the payment to be made under clause (B) above shall be
multiplied by the "gross up percentage" ("GUP"). The GUP shall be
determined as follows:
Tax Rate
GUP = -----------
1- Tax Rate
The Tax Rate for purposes of computing the GUP shall be the highest
marginal federal and state income and employment-related tax rate,
including any applicable excise tax rate, applicable to the Executive in
the year in which the payment under clause (B) above is made.
(b) Notwithstanding the foregoing, if it shall subsequently be determined
in a final judicial determination or a final administrative settlement to which
the Executive is a party that the actual excess parachute payment as defined in
Section 280G(b)(1) of the Code is different from the Initial Excess Parachute
Payment (such different amount being hereafter referred to as the "Determinative
Excess Parachute Payment"), then the Corporation's independent tax counsel or
accountants shall determine the amount (the "Adjustment Amount") which either
the Executive must pay to the Corporation or the Corporation must pay to the
Executive in order to put the Executive (or the Corporation, as the case may be)
in the same position the Executive (or the Corporation, as the case may be)
would have been if the Initial Excess Parachute Payment had been equal to the
Determinative Excess Parachute Payment. In determining the Adjustment Amount,
the independent tax counsel or accountants shall take into account any and all
taxes (including any penalties and interest) paid by or for the Executive or
refunded to the Executive or for the Executive's benefit. As soon as practicable
after the Adjustment Amount has been so determined, the Corporation shall pay
the Adjustment Amount to the Executive or the Executive shall repay the
Adjustment Amount to the Corporation, as the case may be.
(c) In each calendar year that the Executive receives payments of benefits
under this Section 6, the Executive shall report on his state and federal income
tax returns such information as is consistent with the determination made by the
independent tax counsel or accountants of the Corporation as described above.
The Corporation shall indemnify and hold the Executive harmless from any and all
losses, costs and expenses (including without limitation, reasonable attorneys'
fees, interest, fines and penalties) which the Executive incurs as a result of
so reporting such information. Executive shall promptly notify the Corporation
in writing whenever the Executive receives notice of the institution of a
judicial or administrative proceeding, formal or informal, in which the federal
tax treatment under Section 4999 of the Code of any amount paid or payable under
this Section 6 is being reviewed or is in dispute. The Corporation shall assume
control at its expense over all legal and accounting matters pertaining to such
federal tax treatment (except to the extent necessary or appropriate for the
Executive to resolve any such proceeding with respect to any matter unrelated
to amounts paid or payable pursuant to this Section 6) and the Executive shall
cooperate fully with the Corporation in any such proceeding. The Executive shall
not enter into any compromise or settlement or otherwise prejudice any rights
the Corporation may have in connection therewith without the prior consent of
the Corporation.
7. Mitigation; Exclusivity of Benefits.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. Withholding. All payments required to be made by the Corporation
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Corporation may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. Assignability. The Corporation may assign this Agreement and their
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Corporation may hereafter merge or
consolidate or to which the Corporation may transfer all or substantially all of
their assets, if in any such case said corporation, bank or other entity shall
by operation of law or expressly in writing assume all obligations of the
Corporation hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or its rights and obligations
hereunder. The Executive may not assign or transfer this Agreement or any rights
or obligations hereunder.
10. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Corporation: Secretary
Home Federal Corporation
122-128 West Washington Street
Hagerstown, Maryland 21740
To the Savings Bank: Secretary
Home Federal Savings Bank
122-128 West Washington Street
Hagerstown, Maryland 21740
To the Executive: Salvatore M. Savino
13212 Briarcliff Drive
Hagerstown, Maryland 21742
11. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Corporation to sign on
its behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
12. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of Maryland.
13. Nature of Obligations. Nothing contained herein shall create or
require the Corporation to create a trust of any kind to fund any benefits which
may be payable hereunder, and to the extent that the Executive acquires a right
to receive benefits from the Corporation hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Corporation.
14. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. Entire Agreement. This Agreement embodies the entire agreement
between the Corporation and the Executive with respect to the matters agreed to
herein. All prior agreements between the Corporation and the Executive with
respect to the matters agreed to herein, including without limitation the
Employment Agreement between the Employers and the Executive dated as of July 1,
1995, are hereby superseded and shall have no force or effect. Notwithstanding
the foregoing, nothing contained in this Agreement shall affect the agreement of
even date being entered into between the Savings Bank and the Executive.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: HOME FEDERAL CORPORATION
__________________________ By: /s/ Benjamin F. Kunkleman
Benjamin F. Kunkleman,
Chairman of the Board of Directors
EXECUTIVE
By: /s/ Salvatore M. Savino
Salvatore M. Savino
Exhibit 10.2(d)
AGREEMENT
AGREEMENT, dated this 21st day of March 1996, between Home Federal Savings
Bank (the "Savings Bank"), a federally chartered savings bank and Salvatore M.
Savino (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of Home Federal Corporation
(the "Corporation") and the Savings Bank (together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers and currently have a joint
agreement with the Executive dated July 1, 1995;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS") Regulatory
Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate
agreements with the Executive with respect to his employment by each of the
Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive by the Savings Bank in the event that his
employment with the Savings Bank is terminated under specified circumstances.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. Definitions. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) Base Salary. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(b) Cause. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
(c) Change in Control of the Corporation. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the Exchange Act; provided that, without limitation, such a change in
control shall be deemed to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Corporation representing 25% or more of the
combined voting power of the Corporation's then outstanding securities; or (ii)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof unless the election, or the
nomination for election by stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
(d) Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) Date of Termination. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(f) Disability. Termination by the Savings Bank of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) Good Reason. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive within one
year following a Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, a reduction by
either of the Employers in the Executive's Base Salary as the
same may be increased from time to time or, except to the extent
permitted by Section 3(b) hereof, a reduction in the package of
fringe benefits provided to the Executive, taken as a whole;
(ii) The principal executive office of either of the Employers is
relocated outside of the Hagerstown, Maryland area or, without
the Executive's express written consent, either of the Employers
require the Executive to be based anywhere other than an area in
which the Employers' principal executive office is located,
except for required travel on business of the Employers to an
extent substantially consistent with the Executive's present
business travel obligations;
(iii) Any purported termination of the Executive's employment for
Cause, Disability or Retirement which is not effected pursuant to
a Notice of Termination satisfying the requirements of paragraph
(i) below; or (iv) The failure by the Savings Bank to obtain the
assumption of and agreement to perform this Agreement by any
successor as contemplated in Section 9 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) Notice of Termination. Any purported termination of the Executive's
employment by the Savings Bank for any reason, including without limitation for
Cause, Disability or Retirement, or by the Executive for any reason, including
without limitation for Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated, (iii)
specifies a Date of Termination, which shall be not less than thirty (30) nor
more than ninety (90) days after such Notice of Termination is given, except in
the case of the Savings Bank termination of Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 10 hereof.
(j) Retirement. Termination by the Employers of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including early
retirement, generally applicable to their salaried employees.
2. Term of Employment.
(a) The Savings Bank hereby employs the Executive as Senior Vice President
and Chief Financial Officer and Executive hereby accepts said employment and
agrees to render such services to the Savings Bank on the terms and conditions
set forth in this Agreement. The term of employment under this Agreement shall
be for three years, commencing on the date of this Agreement and, upon approval
of the Board of Directors of the Savings Bank, shall extend for an additional
year on each annual anniversary of the date of this Agreement such that at any
time the remaining term of this Agreement shall be from two to three years.
Prior to the first annual anniversary of the date of this Agreement and each
annual anniversary thereafter, the Board of Directors of the Savings Bank shall
consider and review (with appropriate corporate documentation thereof, and after
taking into account all relevant factors, including the Executive's performance
hereunder) extension of the term under this Agreement, and the term shall
continue to extend each year if the Board of Directors approves such extension
unless the Executive gives written notice to the Employers of the Executive's
election not to extend the term, with such written notice to be given not less
than thirty (30) days prior to any such anniversary date. If the Board of
Directors elects not to extend the term, it shall give written notice of such
decision to the Executive not less than thirty (30) days prior to any such
anniversary date. If any party gives timely notice that the term will not be
extended as of any annual anniversary date, then this Agreement shall terminate
at the conclusion of its remaining term. References herein to the term of this
Agreement shall refer both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Savings Bank as may be consistent with his titles and
from time to time assigned to him by the Savings Bank's Board of Directors.
3. Compensation and Benefits.
(a) The Employers shall compensate and pay Executive for his services
during the term of this Agreement at a minimum base salary of $83,500 per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Boards of Directors of the Employers and may not be
decreased without the Executive's express written consent. For purposes hereof,
Base Salary shall include any fees received for serving as a director of the
Employers.
(b) During the term of the Agreement, Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Savings Bank shall not
make any changes in such plans, benefits or privileges which would adversely
affect Executive's rights or benefits thereunder, unless such change occurs
pursuant to a program applicable to all executive officers of the Savings
Bank and does not result in a proportionately greater adverse change in the
rights of or benefits to Executive as compared with any other executive officer
of the Savings Bank. Nothing paid to Executive under any plan or arrangement
presently in effect or made available in the future shall be deemed to be in
lieu of the salary payable to Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, Executive shall be entitled to paid
annual vacation in accordance with the policies as established from time to time
by the Boards of Directors of the Employers, which shall in no event be less
than three weeks per annum. Executive shall not be entitled to receive any
additional compensation from the Employers for failure to take a vacation, nor
shall Executive be able to accumulate unused vacation time from one year to the
next, except to the extent authorized by the Boards of Directors of the
Employers.
(d) In the event of the Executive's death during the term of this
Agreement, the Executive's spouse, estate, legal representative or named
beneficiaries (as directed by the Executive in writing) shall be paid on a
monthly basis the greater of (i) the death benefits which may be available under
one or more policies of the Employers or (ii) the Executive's Base Salary (as
defined in Section 3(a) hereof) in effect at the time of the Executive's death
for a period of eighteen (18) months from the date of the Executive's death.
(e) The Executive's compensation, benefits and expenses which are required
to be provided under this Agreement shall be paid by the Corporation and the
Savings Bank in the same proportion as the time and services actually expended
by the Executive on behalf of each respective Employer.
4. Expenses.
The Employers shall reimburse Executive or otherwise provide for or pay for
all reasonable expenses incurred by Executive in furtherance of, or in
connection with the business of the Employers, including, but not by way of
limitation, traveling expenses and all reasonable entertainment expenses
(whether incurred at the Executive's residence, while traveling or otherwise),
subject to such reasonable documentation and other limitations as may be
established by the Boards of Directors of the Employers. If such expenses are
paid in the first instance by Executive, the Employers shall reimburse the
Executive therefor.
5. Termination.
(a) The Savings Bank shall have the right, at any time upon prior Notice
of Termination, to terminate the Executive's employment hereunder for any
reason, including without limitation termination for Cause, Disability or
Retirement, and Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by the
Savings Bank for Cause, or (ii) Executive terminates his employment hereunder
other than for Good Reason, Executive shall have no right pursuant to this
Agreement to compensation or other benefits for any period after the applicable
Date of Termination. In the event the Executive's employment is terminated due
to the Executive's death, the Executive's rights shall be as provided in Section
3(d) hereof.
(c) In the event that (i) Executive's employment is terminated by the
Savings Bank for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive due to a material
breach of this Agreement by the Savings Bank, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been
given by the Executive to the Employers, then the Savings Bank shall
(A) pay to the Executive, in equal monthly installments beginning
with the first business day of the month following the Date of Termination,
a cash severance amount equal to that portion of the Executive's Base
Salary which would be payable by the Savings Bank to the Executive pursuant
hereto for a period ending at the later of (i) the expiration of the
remaining term of employment pursuant hereto prior to the Notice of
Termination or (ii) eighteen (18) months, and
(B) maintain and provide for a period ending at the earlier of (i)
the expiration of the remaining term of employment pursuant hereto prior to
the Notice of Termination or (ii) the date of the Executive's full-time
employment by another employer (provided that the Executive is entitled
under the terms of such employment to benefits substantially similar to
those described in this subparagraph (B)), at no cost to the Executive, the
Executive's continued participation in all group insurance, life insurance,
health and accident, disability and other employee benefit plans, programs
and arrangements offered by the Savings Bank in which the Executive was
entitled to participate immediately prior to the Date of Termination (other
than stock option and restricted stock plans of the Employers), provided
that in the event that the Executive's participation in any plan, program
or arrangement as provided in this subparagraph (B) is barred, or during
such period any such plan, program or arrangement is discontinued or the
benefits thereunder are materially reduced, the Savings Bank shall arrange
to provide the Executive with benefits substantially similar to those which
the Executive was entitled to receive under such plans, programs and
arrangements immediately prior to the Date of Termination.
(d) In the event of the failure by either of the Employers to elect or to
re-elect or to appoint or to re-appoint the Executive to the offices of Vice
President and Chief Financial Officer of the Company and Senior Vice President
and Chief Financial Officer of the Savings Bank or a material adverse change
made by either of the Employers in the Executive's functions, duties or
responsibilities as Vice President and Chief Financial Officer of the Company
and Senior Vice President and Chief Financial Officer of the Savings Bank
without the Executive's express written consent, the Executive shall be entitled
to terminate his employment hereunder and shall be entitled to the payments and
benefits provided for in Section 5(c)(A) and (B).
(e) In the event that the Executive terminates his employment hereunder
for Good Reason, then the Savings Bank shall, subject to the provisions of
Section 6 hereof, if applicable (i) pay to the Executive, in thirty-six (36)
equal monthly installments beginning with the first business day of the month
following the Date of Termination, a cash severance amount equal to three (3)
times that portion of the Executive's Base Salary paid by the Savings Bank, and
(ii) maintain the benefits provided for in Section 5(c)(B).
(f) In the event that the Executive takes employment with any banking
institution or affiliate thereof in the Corporation and the Bank's market area
after the Date of Termination, the Executive shall have no right pursuant to
this Agreement to continue to receive compensation or other benefits hereunder,
effective with the first business day of the month following the date the
Corporation and the Bank obtain confirmation of such employment, provided,
however, that if the Executive takes such employment following the Executive's
termination of employment with the Corporation and the Bank (i) following a
Change in Control, as defined in Section 1(c) hereof, or (ii) due to a material
breach of this Agreement by the Savings Bank, the compensation and benefits
provided for hereunder shall remain in full force and effect.
(g) Upon completion of the term of employment under this Agreement, as
defined in Section 2(a) hereof, the Executive shall be entitled to receive, and
the Savings Bank shall pay to the Executive in one (1) lump sum payment on the
date of termination of employment, a cash severance amount equal to one and
one-half (1.5) times the Executive's Base Salary in the year of such termination
of employment. In addition to such payment, the Employers shall provide
continued medical insurance in the Employers' health plan for the benefit of the
Executive, his spouse and dependents for a period of eighteen (18) months
beginning with the first business day of the month following the date of such
termination of employment, and such insurance shall be comparable to that which
is provided to the Executive as of the date of this Agreement notwithstanding
anything to the contrary in this Agreement and regardless of whether the
Executive is eligible to participate in the Employers' health plan. In the event
of the Executive's death before the completion of such eighteen (18) month
period, the Employers shall provide the Executive's spouse and dependents
continued medical insurance in the Employers' health plan comparable to that
which is being provided to the Executive's spouse and dependents at such time
for the remainder of such period.
6. Limitation of Benefits under Certain Circumstances.
If the payments and benefits pursuant to Section 5 hereof, either alone or
together with other payments and benefits which Executive has the right to
receive from the Savings Bank, would constitute a "parachute payment" under
Section 280G of the Code, the payments and benefits payable by the Savings Bank
pursuant to Section 5 hereof shall be reduced, in the manner determined by the
Executive, by the amount, if any, which is the minimum necessary to result in no
portion of the payments and benefits paid by the Savings Bank under Section 5
being non-deductible to the Savings Bank pursuant to Section 280G of the Code
and subject to the excise tax imposed under Section 4999 of the Code. The
parties hereto agree that the payments and benefits payable pursuant to this
Agreement to the Executive upon termination shall be limited to three times the
Executive's average annual compensation (based upon the most recent five taxable
years) in accordance with OTS Regulatory Bulletin 27a. The determination of any
reduction in the payments and benefits to be made pursuant to Section 5 shall be
based upon the opinion of independent tax counsel selected by the Savings Bank's
independent public accountants and paid by the Savings Bank. Such counsel shall
be reasonably acceptable to the Savings Bank and the Executive; shall promptly
prepare the foregoing opinion, but in no event later than thirty (30) days from
the Date of Termination; and may use such actuaries as such counsel deems
necessary or advisable for the purpose. Nothing contained herein shall result in
a reduction of any payments or benefits to which the Executive may be entitled
upon termination of employment under any circumstances other than as specified
in this Section 6, or a reduction in the payments and benefits specified in
Section 5 below zero.
7. Mitigation; Exclusivity of Benefits.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. Withholding. All payments required to be made by the Savings Bank
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Savings Bank may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. Assignability. The Savings Bank may assign this Agreement and their
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Savings Bank may hereafter merge or
consolidate or to which the Savings Bank may transfer all or substantially all
of their assets, if in any such case said corporation, bank or other entity
shall by operation of law or expressly in writing assume all obligations of the
Savings Bank hereunder as fully as if it had been originally made a party
hereto, but may not otherwise assign this Agreement or its rights and
obligations hereunder. The Executive may not assign or transfer this Agreement
or any rights or obligations hereunder.
10. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Corporation: Secretary
Home Federal Corporation
122-128 West Washington Street
Hagerstown, Maryland 21740
To the Savings Bank: Secretary
Home Federal Savings Bank
122-128 West Washington Street
Hagerstown, Maryland 21740
To the Executive: Salvatore M. Savino
13212 Briarcliff Drive
Hagerstown, Maryland 21742
11. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Savings Bank to sign on
its behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
12. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of Maryland.
13. Nature of Obligations. Nothing contained herein shall create or
require the Savings Bank to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that the Executive acquires a
right to receive benefits from the Savings Bank hereunder, such right shall be
no greater than the right of any unsecured general creditor of the Savings Bank.
14. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. Regulatory Actions. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings association and its employees pursuant to Section
563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R.
Sect. 563.39(b), or any successor thereto, and shall be controlling in the event
of a conflict with any other provision of this Agreement, including without
limitation Section 5 hereof.
(a) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Savings Bank's affairs pursuant to
notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA")(12 U.S.C. Sect. 1818(e)(3) and 1818(g)(1)), the Savings
Bank's obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Savings Bank may, in its discretion: (i) pay Executive all
or part of the compensation withheld while its obligations under this Agreement
were suspended, and (ii) reinstate (in whole or in part) any of its obligations
which were suspended.
(b) If Executive is removed from office and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sect. 1818(e)(4)
and (g)(1)), all obligations of the Savings Bank under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
Executive and the Saving Bank as of the date of termination shall not be
affected.
(c) If the Savings Bank is in default, as defined in Section 3(x)(1) of
the FDIA (12 U.S.C. Sect. 1813(x)(1)), all obligations under this Agreement
shall terminate as of the date of default, but vested rights of the Executive
and the Savings Bank as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to
12 C.F.R. Sect. 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Savings Bank is
necessary): (i) by the Director of the OTS, or his/her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Savings Bank under the authority
contained in Section 13(c) of the FDIA (12 U.S.C. Sect. 1823(c)); or (ii) by the
Director of the OTS, or his/her designee, at the time the Director or his/her
designee approves a supervisory merger to resolve problems related to operation
of the Savings Bank or when the Savings Bank is determined by the Director of
the OTS to be in an unsafe or unsound condition, but vested rights of the
Executive and the Employers as of the date of termination shall not be affected.
18. Regulatory Prohibition. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Sect. 1828(k)) and any regulations
promulgated thereunder.
19. Entire Agreement. This Agreement embodies the entire agreement
between the Savings Bank and the Executive with respect to the matters agreed to
herein. All prior agreements between the Savings Bank and the Executive with
respect to the matters agreed to herein, including without limitation the
Employment Agreement between the Employers and the Executive dated as of July 1,
1995, are hereby superseded and shall have no force or effect. Notwithstanding
the foregoing, nothing contained in this Agreement shall affect the agreement of
even date being entered into between the Corporation and the Executive.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: HOME FEDERAL SAVINGS BANK
__________________________ By: /s/ Benjamin F. Kunkleman
Benjamin F. Kunkleman,
Chairman of the Board of Directors
EXECUTIVE
By: /s/ Salvatore M. Savino
Salvatore M. Savino
Exhibit 13
Home Federal Corporation 1995 Annual Report
Main Office
122-128 West Washington Street
Hagerstown, Maryland 21740
(301) 733-6300
Branch Offices
17708 Virginia Avenue
Hagerstown, Maryland 21740
1413 Pennsylvania Avenue
Hagerstown, Maryland 21742
1700 Dual Highway
Hagerstown, Maryland 21740
333 East Main Street
Hancock, Maryland 21750
(301) 678-7205
County Market
835 West Hillcrest Road
Hagerstown, Maryland 21742
County Market
1230 National Highway
LaVale, Maryland 21502
(301) 729-4400
Loan Center
8 East Main Street
Frostburg, Maryland 21532
(301) 689-1983
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
1995 1994
At Year-end
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C>
Total assets $214,615 $206,517
Loans receivable, net 137,263 135,553
Real estate owned held for sale, net 7,075 6,450
Savings accounts 163,663 151,203
Advances from the Federal Home Loan
Bank of Atlanta 30,157 38,184
Stockholders' equity 18,382 14,700
Average equity-to-average assets ratio 7.86% 7.30%
For The Year
Net interest income $ 7,270 $ 7,504
Net income 2,528 1,497
Return on average assets 1.20% 0.75%
Return on average equity 15.28% 10.21%
Average interest rate spread 3.88% 4.28%
Per Share Data
Earnings per share $ 1.00 $ 0.59
Cash dividends per share .08 --
Book value per share 7.30 5.84
</TABLE>
<PAGE>
TO OUR STOCKHOLDERS, CUSTOMERS AND FRIENDS:
Careful planning and the ability to focus efforts on the completion of the
critical elements of the plan usually will produce a favorable result.
Throughout the past four fiscal years Home Federal has been able to show
consistent improvement in operating results and to deliver superior returns for
our stockholders.
During 1995, we experienced the following outstanding results:
Net Earnings - Increased 69% over year end 1994 to $2,528,000.
This represents the largest annual profit in the
98 year history of Home Federal.
Book Value - Increased 25% to $7.30 per share.
Nonperforming Assets - Decreased 43% from 10.95% to 5.99% of total
assets.
These improvements have been reflected in the steady increase in
stockholder value. At close of business in December 1991, Home Federal stock was
trading at $1.06 per share. Years end 1992, 1993 and 1994 saw closing prices of
$1.25, $3.63 and $6.00, respectively. Home Federal shares closed 1995 at $7.75
per share. The compounded return for the four year period, exclusive of
dividends, was approximately 65%.
The numbers are impressive and it is our goal to continue steady progress
in building the franchise. The numbers do not, however, tell the whole story for
a community financial institution. Total return for such institutions includes
benefits to the individuals who work for Home Federal, their families and the
community which they serve. Home Federal employs more than 125 people. Among
other things, our loan programs have facilitated the building of homes which
provide jobs for salespersons, mechanics, craftsmen, lawyers, accountants,
suppliers, builders, developers and others too numerous to mention. Further, the
value of volunteer efforts of our employees on behalf of non-profit
organizations represents a return to our community which is nearly impossible to
measure.
Because of the dedication of our employees and the loyalty of our
customers, efforts to rebuild and deliver value to our stockholders, employees,
customers, suppliers and the community have been successful. Our goal is to
improve on this record by consistently producing a broad array of high quality
financial products and services to serve the needs of individuals, families and
the small businesses in our market. By focusing our efforts on this goal, we
believe we can produce consistent, high quality returns to our stockholders.
Sincerely,
/s/ Richard W. Phoebus, Sr.
Richard W. Phoebus, Sr.
President
/s/ Benjamin F. Kunkleman
Benj. F. Kunkleman
Chairman of the Board
<PAGE>
BOARD OF DIRECTORS AND OFFICERS
BOARD OF DIRECTORS*
Benjamin F. Kunkleman
Chairman of the Board
Home Federal Corporation
President
The American Cedarworks, Inc.
(Wood Products Manufacturer)
Howard B. Bowen
President
Ewing Oil Company, Inc.
(Petroleum Distributor)
William H. Gelbach, Jr.
Consultant-Home Federal Savings Bank
Former President of Waynesboro Savings Association
Lois S. Harrison
Member, Board of Trustees
Hood College
(Private College)
John J. McElwee, Jr.
President
Antietam Health Services, Inc.
(Diversified Health Care)
Richard W. Phoebus, Sr.
President and Chief Executive Officer
Home Federal Corporation and Home Federal Savings Bank
Salvatore M. Savino
Vice President and Treasurer, Chief Financial Officer
Home Federal Corporation
Senior Vice President and Treasurer, Chief Financial Officer
Home Federal Savings Bank
J. Franklin Shank
Realtor
Coldwell Banker
(Real Estate Brokerage)
Ronald Z. Sulchek
President
Sulchek & Co.
(Accounting Firm)
Directors Emeritus
M. William Dutton, Jr.
E. Leister Mobley, Jr.
*Also Directors of Home Federal Savings Bank
OFFICERS
Home Federal Corporation
Richard W. Phoebus, Sr.
President and Chief Executive Officer
Steven G. Hull
Executive Vice President
Celia S. Ausherman
Vice President and Secretary
Salvatore M. Savino
Vice President and Treasurer, Chief Financial Officer
Home Federal Savings Bank
Richard W. Phoebus, Sr.
President and Chief Executive Officer
Steven G. Hull
Executive Vice President, Special Assets
Celia S. Ausherman
Senior Vice President and Secretary, Chief Retail Banking Officer
Salvatore M. Savino
Senior Vice President and Treasurer, Chief Financial Officer
Julie A. Donat
Vice President, Operations
Thomas D. Earley
Vice President, Marketing
James C. Failor
Vice President, Loan Officer
Jacqueline M. Gaver
Vice President, Special Assets
Richard L. Kidd
Vice President, Western Region
Douglas E. Metz
Vice President, Special Assets
Patricia C. Muldoon
Vice President, Controller
Edward L. Yonker
Vice President, Technology
Debra A. Doyle
Asst. Vice President, Loan Servicing
Judy L. Raidt
Asst. Vice President, Residential Lending
Helga M. Stoner
Asst. Secretary
<PAGE>
<TABLE>
<CAPTION>
SELECTED HISTORICAL FINANCIAL DATA
As of December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets $214,615 $206,517 $194,848 $209,132 $265,625
Loans receivable, net 137,263 135,553 127,232 145,616 217,475
Mortgage-backed
securities available
for sale 17,373 29,782 24,497 -- --
Mortgage-backed
securities 29,748 11,222 4,043 36,638 6,981
Investment securities -- 5,064 -- -- 10,045
Real estate owned held
for sale, net 7,075 6,450 7,978 8,590 4,369
Savings accounts 163,663 151,203 148,397 148,769 201,656
Advances from the
Federal Home Loan
Bank of Atlanta 30,157 38,184 27,637 46,382 49,978
Stockholders' equity 18,382 14,700 14,614 11,219 10,857
Book value per share<F1> 7.30 5.84 5.80 8.35 8.08
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Interest income $15,987 $14,487 $14,931 $18,877 $24,164
Interest expense 8,717 6,983 7,696 12,058 18,747
------- ------- ------- ------- -------
Net interest income $ 7,270 $ 7,504 $ 7,235 $ 6,819 $ 5,417
Provision for possible
loan losses (349) 278 1,687 719 7,226
------- ------- ------- ------- -------
Net interest income
(loss) after provision
for possible loan
losses $ 7,619 $ 7,226 $ 5,548 $ 6,100 $(1,809)
Other income 1,979 1,993 2,863<F3> 5,054<F2> 2,855
Provision for losses on
real estate owned held
for sale 479 339 369 2,223 2,017
Provision for losses
(recovery) on real
estate held for
development and sale
or rental (36) (22) (91) 307 950
Other expense 7,181 7,099 7,513<F3> 8,222 8,209
------- ------- ------- ------- -------
Income (loss) before
income taxes, loss
from discontinued
operation, cumulative
effect of an
accounting change and
extraordinary item $ 1,974 $ 1,803 $ 620 $ 402 $(10,130)
Provision for (benefit
from) income taxes (554) 306 (154)<F3> 414 (2,771)
------- ------- ------- ------- -------
Income (loss) before
loss from discontinued
operation, cumulative
effect of an
accounting change and
extraordinary item $ 2,528 $ 1,497 $ 774 $ (12) $(7,359)
Loss from discontinued
operation -- -- (71)<F3> (33) (48)
Cumulative effect of
change in accounting
for income taxes -- -- 245 -- --
Extraordinary item -
tax benefit of net
operating loss
carryforward -- -- -- 407 --
------- ------- ------- ------- -------
Net income (loss) $ 2,528 $ 1,497 $ 948 $ 362 $(7,407)
======= ======= ======= ======= =======
Earnings (loss)
per share<F1> $ 1.00 $ 0.59 $ 0.49 $ 0.27 $ (5.51)
======= ======= ======= ======= =======
Dividends per share $ .08 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Other Selected Data:
Average yield earned
on interest-earning
assets 8.44% 8.15% 8.26% 9.47% 9.76%
Average rate paid on
interest-bearing
liabilities 4.56 3.87 4.14 5.44 7.00
Average interest rate
spread 3.88 4.28 4.12 4.03 2.76
Net yield on interest-
earning assets 3.84 4.22 4.00 3.42 2.19
Ratio of interest-
earning assets to
interest-bearing
liabilities 99.09 98.62 97.36 89.85 92.44
Return on average assets 1.20 0.75 0.47 0.15 (2.58)
Return on average equity 15.28 10.21 7.34 3.28 (50.87)
Ratio of average equity
to average assets 7.86 7.30 6.39 4.65 5.07
Dividend payout ratio 8.00 N/A N/A N/A N/A
Ratio of nonperforming
loans, troubled debt
restructurings and
real estate owned held
for sale to total
assets at end of period 5.99 10.95 14.60 17.71 18.29
Full-service offices at
end of period 7 7 7 7 8
<FN>
<F1> Per share data is based on 2,519,010 shares outstanding as of December 31,
1995, 1994 and 1993 and 1,343,265 shares outstanding as of December 31, 1992 and
1991, respectively, except for earnings per share data as of December 31, 1993
which is based on 1,931,138 weighted average shares outstanding.
<F2> In June, 1992, the Savings Bank sold an office in Waynesboro, Pennsylvania
resulting in a gain of $1.5 million.
<F3> In August, 1993, the Corporation sold its real estate agency and,
accordingly, restated the consolidated financial statements for the discontinued
operation.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Home Federal Corporation (Corporation) is the unitary savings and loan holding
company of Home Federal Savings Bank (Savings Bank) and its subsidiaries. The
Corporation and its subsidiaries are sometimes collectively referred to herein
as "Home Federal." The Corporation currently owns 100% of the issued and
outstanding common stock of the Savings Bank, which is the principal asset of
the Corporation.
The Savings Bank is a member of the Federal Home Loan Bank of Atlanta
(FHLB), which is one of the twelve regional banks comprising the Federal Home
Loan Bank System. Home Federal's primary regulators are the Office of Thrift
Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC). Home
Federal is also subject to regulations administered by the Board of Governors of
the Federal Reserve System regarding reserves required to be maintained against
deposits and certain other matters.
The Savings Bank's deposits are presently insured by the Savings
Association Insurance Fund ("SAIF"). The SAIF is statutorily required to be
recapitalized to a ratio of 1.25% of insured reserve deposits, which is not
expected to occur until 2002 at the earliest. The Bank Insurance Fund ("BIF")
met its required capitalization levels in 1995 and, as a result, most BIF
insured banks are paying significantly lower premiums than SAIF insured
institutions. Due to the disparity between the insurance funds, the U.S.
Congress is currently considering legislation which will recapitalize the SAIF
by a one-time charge of approximately $0.85 to $0.90 for every $100 of
assessable deposits held at March 31, 1995, and an eventual merger of the SAIF
with the BIF. Based on deposits as of March 31, 1995, the Savings Bank's pro
rata share of the assessment would amount to approximately $819,000 to $867,000
after taxes, respectively. If the legislation is enacted, future earnings would
be enhanced due to lower insurance premiums.
Financial Condition
General. Total assets increased $8.1 million or 3.9% to $214.6 million at
December 31, 1995 compared to $206.5 million at December 31, 1994. Such increase
was primarily due to increases in loans receivable, net and mortgage-backed
securities, which increases were partially offset by decreases in investment
securities. Total liabilities increased by $4.4 million or 2.3% to $196.2
million at December 31, 1995 compared to $191.8 million at December 31, 1994.
Such increase was primarily due to increases in savings accounts, which
increases were partially offset by decreases in borrowings. Stockholders' equity
increased $3.7 million or 25.0% to $18.4 million at December 31, 1995, compared
to $14.7 million at December 31, 1994 due to a $2.3 million increase in retained
income and a $1.4 million decrease in unrealized losses on mortgage-backed
securities available for sale, net.
Loans. Loans receivable, net, increased $1.7 million or 1.3% during 1995
due to increases primarily in single-family residential loans and consumer
loans, which were partially offset by decreases in multi-family, commercial and
construction loans.
Mortgage-backed Securities. Mortgage-backed securities amounted to $47.1
million at December 31, 1995 compared to $41.0 million at December 31, 1994, an
increase of $6.1 million during 1995. The $47.1 million of mortgage-backed
securities at December 31, 1995 consisted of $17.4 million of such securities
classified as available for sale and $29.7 million of such securities classified
as held-to-maturity. At December 31, 1994, $29.8 million of such securities were
classified as available for sale and $11.2 million of such securities were
classified as held-to-maturity. The Savings Bank purchased $10.0 million and
$22.4 million of mortgage-backed securities during 1995 and 1994, respectively,
which was partially funded by savings accounts, FHLB advances, principal
repayments and loan sales.
Nonperforming Assets. The following tables set forth the Savings Bank's
nonperforming assets by property type and related ratios at December 31, 1995
and 1994.
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Non-performing loans: (In thousands)
Non-accrual loans:
Residential $ 602 $ 499
Commercial real estate 38 38
Consumer and commercial 146 88
------- -------
Total nonaccrual loans $ 786 $ 625
------- -------
Impaired loans:
Residential $ 562 $ 4,081
Commercial real estate 731 4,920
Construction 3,712 6,292
Consumer and commercial -- 242
------- -------
Total impaired loans $ 5,005 $15,535
------- -------
Total nonperforming loans $ 5,791 $16,160
------- -------
Real estate owned held for sale, net (REO):
Residential $ 2,822 $ 816
Commercial 3,917 4,723
Construction 1,952 3,436
------- -------
$ 8,691 $ 8,975
Less:
Allowance for losses 1,492 2,337
Accumulated depreciation 124 188
------- -------
Total REO $ 7,075 $ 6,450
------- -------
Total nonperforming loans and REO $12,866 $22,610
======= =======
Total nonperforming loans to total
loans receivable-net 4.22% 11.92%
==== =====
Total nonperforming loans and REO
to total assets 5.99% 10.95%
==== =====
</TABLE>
The Savings Bank's nonperforming loans decreased from $16.2 million or 7.8%
of total assets at December 31, 1994 to $5.8 million or 2.7% of total assets at
December 31, 1995 and total nonperforming loans and REO decreased by $9.7
million or 43.1%. The decrease in nonperforming loans were primarily due to five
loans with an aggregate principal balance of $4.2 million being transferred to
REO at an aggregate amount of $3.9 million, 15 loans which had principal
reductions totaling $5.9 million which included net charge-offs of $1.0 million,
and one loan totaling $417,000 which was reclassified to performing.
At December 31, 1995, the Savings Bank's allowances for possible loan
losses amounted to $3.6 million or 2.6% of the net loans receivable portfolio
and 62.7% of total nonperforming loans, and its allowance for losses on REO
amounted to $1.5 million or 21.1% of total REO. Although management believes
that it uses the best information available to recognize losses on loans and to
estimate fair value less disposition costs of REO, no assurance can be given
that future significant additions to the allowances for possible loan losses or
further reductions in the net carrying values of REO may be necessary if
economic conditions or other factors differ substantially from the assumptions
used in making the initial determinations. In addition, the OTS and the FDIC, as
an integral part of their examination process, periodically review the Savings
Bank's allowances for possible loan losses and the net carrying values of REO.
Such agencies may require the Savings Bank to recognize additions to the
allowances or reductions in net carrying values based on their judgments about
information available to them at the time of examination. See Notes 4 and 5 of
the Notes to Consolidated Financial Statements.
Deposits. Deposits increased by $12.5 million or 8.2% to $163.7 million at
December 31, 1995 from $151.2 million at December 31, 1994. Such increase was
due to the public's acceptance of the Savings Bank's checking account programs
and its varied certificate of deposit programs, the general economic conditions
and the competitive rates offered by the Savings Bank on its deposits.
Borrowings. Advances from the FHLB of Atlanta decreased by $8.0 million or
21.0% to $30.2 million at December 31, 1995 from $38.2 million at December 31,
1994. The decrease in borrowing was primarily due to the Savings Bank utilizing
cash generated from savings deposits to repay borrowings.
Stockholders' Equity. At December 31, 1995, the Corporation's
stockholders' equity amounted to $18.4 million or 8.6% of total assets.
Results of Operations
Home Federal's results of operations in recent years reflect the fundamental
changes that have occurred in the regulatory, economic and competitive
environment in which thrift institutions operate. Like most thrift institutions,
Home Federal's results of operations are primarily dependent upon its net
interest income, which is determined by (i) the difference between yields earned
on interest-earning assets and rates paid on interest-bearing liabilities
(interest rate spread) and (ii) the amounts of interest-earning assets and
interest-bearing liabilities outstanding. Deposit flows and the cost of funds
are influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for mortgage
financing and for consumer and other types of loans, which in turn are impacted
by the interest rates at which such financing may be offered and by other
factors affecting the supply of housing and the availability of funds. Home
Federal's operating results also are affected by the level of its other income,
including loan origination and other fees, and operating expenses. Also of
importance is the level of nonperforming assets and the amount of Home Federal's
provisions for possible loan losses and for losses on REO, the former reducing
interest income on loans, and the latter being a significant element of expense.
Summary of Net Interest Income. Net interest income totaled $7.3 million,
$7.5 million and $7.2 million for the years ended December 31, 1995, 1994 and
1993, respectively.
The decrease of $234,000 in 1995 was due to increased interest expense
resulting primarily from an increase in the average balance of savings accounts
and advances from the FHLB of Atlanta and rates paid thereon, which more than
offset the increase in interest income resulting primarily from an increase in
the average balance of loans and the rates earned thereon.
The increase of $269,000 in 1994 was due to a decrease in interest expense
resulting primarily from a decline in the average balance of advances from the
FHLB of Atlanta and rates paid on savings accounts, which more than offset a
decrease in interest income resulting primarily from a decline in the average
balance of loans and the rates earned thereon.
In addition, the Savings Bank's interest rate spread decreased from 4.3% in
1994 to 3.9% in 1995, and the ratio of interest-earning assets to
interest-bearing liabilities increased from 98.6% in 1994 to 99.1% in 1995. The
change in the interest rate spread in 1995 and 1994 is attributable to changes
in the asset and liability mix during the respective periods.
The following average balance sheet table sets forth for the periods
indicated, information on Home Federal regarding: (i) the total dollar amounts
of interest income on interest-earning assets and the resulting average yields;
(ii) the total dollar amounts of interest expense on interest-bearing
liabilities and the resulting average yields; (iii) net interest income; (iv)
interest rate spread; (v) net interest-bearing liabilities; (vi) the net yield
earned on interest-earning assets; and (vii) the ratio of total interest-earning
assets to total interest-bearing liabilities. Average balances are calculated on
a monthly basis. Non-accrual and impaired loans are included in loans receivable
for purposes of these tables.
<TABLE>
<CAPTION>
Year Ended December 31, 1995
--------------------------------
Average Average
Balance Interest Yield/Rate
-------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets: (Dollars in thousands)
Loans receivable $139,086 $12,925 9.29%
Mortgage-backed securities 42,144 2,387 5.66
Investment securities 5,519 417 7.56
Short-term interest-bearing deposits 1,244 163 13.11
Federal funds sold 1,334 95 7.11
-------- -------
Total interest-earning assets $189,327 $15,987 8.44%
------- =====
Noninterest-earning assets 21,042
--------
Total assets $210,369
========
Interest-bearing liabilities:
Savings accounts $158,341 $6,652 4.20%
Advances from the FHLB of Atlanta 32,729 2,065 6.31
-------- -------
Total interest-bearing liabilities $191,070 $ 8,717 4.56%
-------- ------- =====
Noninterest-bearing liabilities 2,468
--------
Total liabilities $193,538
Stockholders' equity 16,831
--------
Total liabilities and stockholders' equity $210,369
========
Net interest-bearing liabilities $ (1,743)
========
Net interest income/interest rate spread $7,270 3.88%
====== =====
Net yield on interest-earning assets<F1> 3.84%
=====
Ratio of interest-earning assets to
interest-bearing liabilities 99.09%
=====
<CAPTION>
Year Ended December 31, 1994
--------------------------------
Average Average
Balance Interest Yield/Rate
-------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets: (Dollars in thousands)
Loans receivable $126,655 $11,561 9.13%
Mortgage-backed securities 40,578 2,319 5.72
Investment securities 5,226 355 6.79
Short-term interest-bearing deposits 3,721 192 5.16
Federal funds sold 1,551 60 3.86
-------- -------
Total interest-earning assets $177,731 $14,487 8.15%
------- ====
Noninterest-earning assets 20,415
--------
Total assets $198,146
========
Interest-bearing liabilities:
Savings accounts $149,031 $ 5,202 3.49%
Advances from the FHLB of Atlanta 31,188 1,780 5.71
Other 7 1 7.70
-------- -------
Total interest-bearing liabilities $180,226 $ 6,983 3.87%
------- ====
Noninterest-bearing liabilities 3,299
--------
Total liabilities $183,525
Stockholders' equity 14,621
--------
Total liabilities and stockholders' equity $198,146
========
Net interest-bearing liabilities $ (2,495)
========
Net interest income/interest rate spread $7,504 4.28%
====== =====
Net yield on interest-earning assets<F1> 4.22%
=====
Ratio of interest-earning assets to
interest-bearing liabilities 98.62%
=====
<CAPTION>
Year Ended December 31, 1993
--------------------------------
Average Average
Balance Interest Yield/Rate
-------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets: (Dollars in thousands)
Loans receivable $136,789 $12,578 9.20%
Mortgage-backed securities 33,031 1,883 5.70
Investment securities 2,658 148 5.56
Short-term interest-bearing deposits 6,428 257 4.00
Federal funds sold 1,950 65 3.31
-------- -------
Total interest-earning assets $180,856 $14,931 8.26%
------- ====
Noninterest-earning assets 20,896
--------
Total assets $201,752
========
Interest-bearing liabilities:
Savings accounts $149,133 $ 5,600 3.76%
Advances from the FHLB of Atlanta 36,343 2,069 5.69
Other 283 27 9.46
-------- -------
Total interest-bearing liabilities $185,759 $ 7,696 4.14%
------- ====
Noninterest-bearing liabilities 3,038
--------
Total liabilities $188,797
Stockholders' equity 12,955
--------
Total liabilities and stockholders' equity $201,752
========
Net interest-bearing liabilities $ (4,903)
========
Net interest income/interest rate spread $ 7,235 4.12%
======= =====
Net yield on interest-earning assets<F1> 4.00%
=====
Ratio of interest-earning assets to
interest-bearing liabilities 97.36%
=====
<FN>
<F1> Net interest income divided by interest-earning assets.
</FN>
</TABLE>
The following table shows, for the periods indicated, the changes in
interest income and interest expense attributable to (i) changes in volume
(changes in volume multiplied by prior year); (ii) changes in rate (changes in
rate multiplied by prior year volume); and (iii) changes in rate/volume
(determined by multiplying the change in rate by the change in volume).
<TABLE>
<CAPTION>
1995 Compared to 1994
Increase (Decrease) Due to
-----------------------------------
Rate/
Volume Rate Volume Total
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income on interest-earning assets: (In thousands)
Loans receivable $1,134 $ 209 $ 21 $1,364
Mortgage-backed securities 90 (21) (1) 68
Investment securities 20 40 2 62
Short-term interest-bearing deposits (128) 296 (197) (29)
Federal funds sold (8) 50 (7) 35
------ ------ ----- ------
Total $1,108 $ 574 $(182) $1,500
------ ------ ----- ------
Interest expense on interest-bearing liabilities:
Savings accounts $ 325 $1,059 $ 66 $1,450
Advances from the FHLB of Atlanta 88 188 9 285
Other (1) -- -- (1)
------ ------ ----- ------
Total $ 412 $1,247 $ 75 $1,734
------ ------ ----- ------
Net change in net interest income $ 696 $ (673) $(257) $ (234)
====== ====== ===== ======
<CAPTION>
1994 Compared to 1993
Increase (Decrease) Due to
------------------------------------
Rate/
Volume Rate Volume Total
------ ------ ------ -------
<S> <C> <C> <C> <C>
Interest income on interest-earning assets: (In thousands) (In thousands)
Loans receivable $(932) $ (92) $ 7 $(1,017)
Mortgage-backed securities 430 5 1 436
Investment securities 143 33 31 207
Short-term interest-bearing deposits (108) 74 (31) (65)
Federal funds sold (13) 10 (2) (5)
----- ----- ---- -------
Total $(480) $ 30 $ 6 $ (444)
----- ----- ---- -------
Interest expense on interest-bearing liabilities:
Savings accounts $ (4) $(394) $ -- $ (398)
Advances from the FHLB of Atlanta (293) 5 (1) (289)
Other (26) (5) 5 (26)
----- ----- ---- -------
Total $(323) $(394) $ 4 $ (713)
----- ----- ---- -------
Net change in net interest income $(157) $ 424 $ 2 $ 269
===== ===== ==== =======
</TABLE>
Interest Income. Interest on loans increased by $1.4 million or 11.8% in
1995 compared to the prior year. The increase was due to a $12.4 million or 9.8%
increase in the average balance of loans receivable and a 16 basis point
increase in the average yield earned on such assets. The primary reason for the
increase on the average balance of loans receivable during 1995 was the Savings
Bank's emphasis on originations of adjustable rate mortgages, fixed rate 10 to
15 year mortgages and consumer loans. Interest on loans decreased by $1.0
million or 8.1% in 1994 compared to the prior year. The decrease was due to a
$10.1 million or 7.4% decrease in the average balance of loans receivable and a
7 basis point decrease in the average yield earned on such assets. During 1994,
the decrease in the average balance of loans receivable was due to continued
lower general market rates of interest and, accordingly, the continued
refinancing of loans receivable into fixed rate instruments which the Savings
Bank sells into the secondary market without recourse.
Interest on mortgage-backed securities increased by $68,000 or 2.9% in 1995
compared to 1994 and by $436,000 or 23.2% in 1994 over the prior year. Such
increases were due to an increase in the average balance of such securities. The
average balance of mortgage-backed securities increased in 1995 and 1994 due to
the Savings Bank's utilization of excess cash flow from loan sales, repayments,
savings accounts and FHLB advances to invest in mortgage-backed securities.
Interest and dividends on investment securities increased by $62,000 or
17.5% in 1995 compared to 1994 and by $207,000 or 139.9% in 1994 compared to the
prior year. Such increases were due to an increase in the average balance of
investment securities and the rates earned thereon.
Other interest income, which consists primarily of income from short-term
interest-bearing deposits in the FHLB of Atlanta and federal funds, increased by
$6,000 or 2.4% during the year ended December 31, 1995 compared to the prior
period. The increase was primarily due to an increase in the average yield on
such investments which was partially offset by a decrease in the average balance
outstanding. Other interest income decreased by $70,000 or 21.7% during the year
ended December 31, 1994 compared to the prior period. The decrease was primarily
due to a decrease in the average balance outstanding which was partially offset
by an increase in the average yield on such investments. The changes in the
average balance of other interest-earning assets during 1995 and 1994 were due
to management's investment of funds in short-term investments prior to either
purchasing mortgage-backed securities or repaying borrowings. The changes in the
average yield on such investments were primarily due to general market rates of
interest.
Interest Expense. Interest expense on savings accounts increased by $1.5
million or 27.9% during the year ended December 31, 1995 as a result of a $9.3
million or 6.2% increase in the average balance of savings accounts and a 71
basis point increase in the average rate paid on such accounts. The increase in
the average balance of savings accounts during 1995 was due to competitive
pricing as the Savings Bank sought funds in order to originate loans and repay
advances. Interest expense on savings accounts decreased by $398,000 or 7.1%
during the year ended December 31, 1994 as a result of a 27 basis point decrease
in the average rate paid on such accounts. Such decrease in the rate paid
thereon in 1994 was due, in general, to lower market rates of interest.
Interest on advances from the FHLB of Atlanta increased by $285,000 or
16.0% in 1995 compared to the prior year. The increase was primarily a result of
a $1.5 million or 4.9% increase in the average balance of advances from the FHLB
of Atlanta as well as a 60 basis point increase in the average rate paid on such
advances. During 1995, the average balance of such advances increased primarily
due to the Savings Bank utilizing advances from the FHLB of Atlanta to purchase
investment and mortgage-backed securities, and during 1994, to originate loans.
Interest on advances from the FHLB of Atlanta decreased by $289,000 or 14.0%
during 1994, compared to the prior period. The decrease was due to a $5.2
million or 14.2% decrease in the average balance of FHLB advances, due to the
maturity and repayment of certain advances.
Provision for Possible Loan Losses. The provision for possible loan losses
represents the charge against earnings that is required to fund the allowances
for possible loan losses to levels deemed adequate by management. The level of
the allowances for possible loan losses is determined by management based upon
their evaluation of the known as well as the inherent risks within the Savings
Bank's loan portfolio. This evaluation consists of an ongoing analysis of
individual loans and the overall risk characteristics and size of the different
loan portfolios. The Savings Bank also considers, among other things, present
and prospective industry trends and regional and national economic conditions,
past estimates of possible loan losses as compared to actual losses, potential
problems with sizable loans, large loan concentrations and historical losses on
loans. This ongoing managerial assessment is reviewed periodically by the
Savings Bank's independent public accountants. As adjustments become identified,
they are reported in the earnings of the period in which they become known.
At December 31, 1995, the Savings Bank's nonaccrual and impaired loans
amounted to $5.8 million, a $10.4 million or 64.2% decrease as compared to $16.2
million at December 31, 1994 and a $14.7 million or 71.7% decrease as compared
to $20.5 million at December 31, 1993. During 1995, the Savings Bank recovered
provisions to the allowances for possible loan losses of $349,000. The recovery
in 1995 was the result of the significantly reduced level of nonperforming loans
in 1995. The Savings Bank established provisions to the allowances for possible
loan losses of $278,000 and $1.7 million during 1994 and 1993, respectively. The
level of the provision for possible loan losses during these periods was due to
the significant levels of nonperforming loans and was necessitated in part to
restore the allowances for possible loan losses, which were reduced by aggregate
net charge-offs of $1.1 million and $1.1 million during 1994 and 1993,
respectively. At December 31, 1995, the Savings Bank had $3.6 million in its
allowances for possible loan losses, or 2.6% of the Savings Bank's net loan
portfolio and 62.7% of nonperforming loans.
Although management utilizes its best judgement in providing for possible
losses and believes that the Savings Bank's allowances for possible loan losses
were adequate as of December 31, 1995, there can be no assurance that the
Savings Bank will not have to increase its provision for possible loan losses in
the future. Arriving at an appropriate level of allowances for possible loan
losses necessarily involves a high degree of judgement. See Note 4 of the Notes
to Consolidated Financial Statements.
Other Income. Other income, which consists primarily of income from loan
origination and other fees, insurance and stockbrokerage commissions, fees on
checking and savings accounts, gains on sales of mortgage loans and
mortgage-backed securities and gross profit and rental income associated with
real estate held for development and sale or rental, decreased by $13,000 or
0.7% during 1995 compared to the prior period. The decrease in 1995 was
primarily due to decreased profits on sales of investment securities and real
estate owned held for development and sale or rental, which was partially offset
by increases in stockbrokerage commissions and increased fees on checking and
savings accounts.
Other income decreased by $870,000 or 30.4% during 1994 over the prior
comparable period. The decrease in 1994 was primarily due to decreased gains on
sales of mortgage loans and mortgage-backed securities, decreased loan fee
income and stockbrokerage and insurance commissions. See Note 10 of the Notes to
Consolidated Financial Statements.
Other Expenses. Total other expenses increased by $208,000 or 2.8% in 1995
and decreased by $375,000 or 4.8% in 1994, compared to the prior respective
period. The increase in 1995 was primarily due to increased provision for losses
on REO, increased employee compensation and benefits and occupancy and equipment
expenses. The decrease in 1994 was primarily due to a decrease in real estate
owned operations, net and impaired loan expenses.
Employee compensation and benefits increased by $67,000 or 2.1% in 1995
compared to the prior respective period. The increase in 1995 was attributable
to increased profit sharing expenses due to retirement plan contributions and
merit increases which were offset by decreased health insurance costs. Employee
compensation and benefits increased by $107,000 or 3.5% in 1994 compared to the
prior respective period. The increase in 1994 was attributable to increased
profit sharing expenses due to retirement plan contributions and increased
health insurance costs.
Occupancy and equipment expenses increased by $73,000 or 4.8% during 1995
and $97,000 or 6.9% in 1994 compared to the respective prior period. The
increase in 1995 was primarily due to increased depreciation on office
properties and equipment primarily due to a branch renovation in 1994. The
increase in 1994 was primarily due to expenses related to the consolidation of
several departments and the renovation of a branch location.
Advertising and promotion expenses decreased by $99,000 or 36.2% in 1995
and increased by $129,000 or 89.9% in 1994 compared to the respective prior
period. The decrease in 1995 was primarily the result of decreased use of sales
promotions and direct mailings associated with checking accounts. The increase
in 1994 was primarily the result of increased use of sales promotions,
advertising and direct mailings associated with checking accounts and
stockbrokerage operations and increased expenses related to the grand opening of
a renovated branch location.
The provision for losses on REO and the provision for losses on real estate
held for development and sale or rental amounted to $443,000, $317,000 and
$277,000 in the aggregate in 1995, 1994 and 1993, respectively. The provisions
were the result of management's evaluation of the fair value less disposition
costs or the estimated net realizable value of such real estate. See Note 5 of
the Notes to Consolidated Financial Statements for a further discussion of REO.
Real estate owned operations, net and impaired loan expenses decreased by
$58,000 or 27.3% in 1995 and $589,000 or 73.4% in 1994 over the respective prior
periods. Such decreases were due to decreased costs associated with such
properties, particularly appraisal, legal, depreciation, real estate tax
and operating expenses.
Federal insurance premiums decreased by $10,000 in 1995 and increased by
$16,000 in 1994 in each case over the prior respective year. The decrease in
1995 is primarily attributable to a decrease in deposit premiums from $0.29 per
$100 of deposits to $0.26 per $100 of deposits. The increase in 1994 is
primarily attributable to Home Federal receiving the final distribution of the
secondary reserve credit during 1993, which was partially offset by a decrease
in deposit premiums from $0.31 per $100 of deposits to $0.29 per $100 of
deposits.
Other expenses, which consist primarily of professional fees, ATM network
expenses, administrative expenses and provision for loss on other assets,
increased by $109,000 or 7.1% in 1995 and decreased by $174,000 or 10.2% in 1994
over the prior comparable periods. The increase in 1995 was primarily
attributable to increases in professional fees, postage expense and provision
for losses on bad checks. The decrease in 1994 was primarily attributable to a
$223,000 decrease in the provision for losses on other assets (accounts
receivable associated with standby letters of credit issued in connection with
two housing bonds). See Note 11 of the Notes to Consolidated Financial
Statements.
Income Taxes. Home Federal's income tax (benefit) expense totalled
$(554,000) and $306,000 for the year ended December 31, 1995 and 1994,
respectively. The decrease in the provision for income taxes in 1995 is
primarily attributable to a reduction in the valuation allowance on deferred tax
assets. The increase in income tax expense in 1994 is primarily attributable to
increased taxable income. See Note 12 of the Notes to Consolidated Financial
Statements.
Asset and Liability Management
Home Federal maintains a program designed to decrease its vulnerability to
material and prolonged increases in interest rates. The principal determinant of
the exposure of Home Federal's earnings to interest rate risk is the timing
difference between the repricing or maturity of Home Federal's interest-earning
assets and the repricing or maturity of its interest-bearing liabilities. Home
Federal's asset and liability management policies seek to increase the interest
rate sensitivity and shorten the maturities of its interest-earning assets and
extend the maturities of its interest-bearing liabilities. Although Home Federal
has taken steps to reduce overall vulnerability to increases in interest rates,
Home Federal will be vulnerable to material and prolonged increases in interest
rates whenever interest-rate sensitive liabilities exceed its interest-rate
sensitive assets.
Asset and liability management is the responsibility of the Asset and
Liability Management Committee, which is comprised of the Executive Committee of
the Board of Directors, and the Chief Financial Officer. The committee generally
meets monthly and establishes strategies designed to regulate Home Federal's
flow of funds and coordinates the sources, uses and pricing of such funds. The
first priority in structuring and pricing Home Federal's assets and liabilities
is to maintain an acceptable interest rate spread while reducing the effects of
changes in interest rates. Senior executive officers of Home Federal meet weekly
to set rates on the various deposits and, as required, loan products offered by
Home Federal and to review alternative investments or sources of funds.
Home Federal has undertaken a variety of strategies to better match the
interest-rate sensitivities of its assets and liabilities. Home Federal's
present policy is to emphasize the origination for portfolio of
interest-sensitive loan products such as adjustable-rate residential
mortgage-loans, short-term residential construction loans to individuals and a
variety of consumer loans. With respect to Home Federal's single-family
residential loan originations, Home Federal originates both fixed-rate and
adjustable-rate loans. Single-family, fixed-rate loans are originated primarily
for resale in the secondary market, thereby reducing Home Federal's interest
rate risk. Home Federal generally retains single-family adjustable-rate loans in
the portfolio. During 1995, 1994 and 1993, Home Federal originated and purchased
$29.6 million, $30.1 million and $37.2 million, respectively, of single-family
residential loans. Of such amounts, $18.3 million, $18.1 million and $13.4
million provided for periodic adjustment of interest rates, or 61.7%, 60.0% and
36.1% of single-family residential loans originated by Home Federal during the
respective periods.
Home Federal also originates residential construction loans, which
generally have shorter terms or rates that vary with shorter term market rate
indices. During 1995, 1994 and 1993, construction loan originations amounted to
$9.7 million, $10.7 million and $10.8 million, respectively, or 16.5%, 17.7% and
15.8% of total loan originations and purchases during the respective periods.
Home Federal originates both commercial business (primarily automobile
floor plan loans) and consumer loans, which generally have shorter terms and/or
rates that vary with interest rate indices and higher yields than residential
mortgage loans. Consumer and commercial business loan originations amounted to
$15.6 million, $14.2 million and $16.1 million in 1995, 1994 and 1993,
respectively.
During 1995, 1994 and 1993, Home Federal purchased investment and
mortgage-backed securities to maintain its asset mix. Purchases of investment
and mortgage-backed securities amounted to $10.0 million, $32.4 million and
$15.4 million during 1995, 1994 and 1993, respectively.
Rates of interest paid on deposits at Home Federal are priced to be
sufficiently competitive in its primary market area in order to meet its
asset/liability management objectives and requirements for funds, but are
typically not the highest rates available. This policy helps Home Federal
control its cost of funds. Home Federal maintains a tiered pricing program for
some of its certificate accounts, pursuant to which higher rates of interest are
paid for longer-term certificate accounts. Home Federal relies on savings
deposits, loan repayments and advances from the FHLB of Atlanta to fund loan
originations and commitments.
Liquidity
Home Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments, including U.S. government and federal
agency securities and other investments. Regulations currently in effect require
Home Federal to maintain liquid assets of not less than 5% of its net
withdrawable accounts plus short-term borrowings, of which short-term liquid
assets must consist of not less than 1%. These levels are changed from time to
time by the OTS to reflect economic conditions. Liquidity is influenced by
general economic conditions, financial market conditions and fluctuations in the
interest rates and products offered by competing entities. Home Federal's
regulatory liquidity ratio averaged 10.3% and 6.7% for the months ended December
31, 1995 and 1994, respectively. At December 31, 1995, Home Federal was required
to maintain liquid investments amounting to $9.4 million, none of which were
pledged to secure advances from the FHLB of Atlanta.
The principal sources of funds to Home Federal are savings accounts,
amortization and prepayments of outstanding loans and mortgage-backed
securities, sales of loans and mortgage-backed securities, FHLB advances and
other borrowings. During the past several years, Home Federal has used FHLB
advances primarily to meet its ongoing commitments to fund maturing savings
certificates and savings withdrawals, fund existing and continuing loan
commitments and maintain its liquidity. The use of FHLB of Atlanta advances,
rather than savings deposits, has a slight negative impact on the Savings Bank's
net interest margin due to the typically higher weighted average cost of such
borrowings compared to savings deposits.
At December 31, 1995, the total of approved loan origination commitments
amounted to $1.5 million, exclusive of loans in process. The amount of savings
certificates which are scheduled to mature during the 12 months ended December
31, 1995 is $54.4 million. Management believes that, by evaluating competitive
instruments and prices in its market area, it can, in most circumstances, manage
and control maturing deposits so that a portion of such maturing deposits will
be redeposited in the Savings Bank.
Regulatory Capital Requirements
The Savings Bank is subject to regulations of the OTS that impose certain
minimum regulatory capital requirements. At December 31, 1995, the Savings Bank
exceeded the tangible, core and risk-based capital requirements currently
imposed by the OTS. The following table presents the Savings Bank's capital
requirements and the current excess, on both a dollar and percentage basis, as
of December 31, 1995.
<TABLE>
<CAPTION>
Current Actual
Capital Savings Bank Capital
Requirement Capital Excess
------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible $ 3,207 1.5% $18,049 8.4% $14,842 6.9%
Core 6,413 3.0 18,049 8.4 11,636 5.4
Risk-Based 10,608 8.0 19,728 14.9 9,120 6.9
There can be no assurance that the Savings Bank will not be subject to
additional capital requirements in the future, either as a result of
regulations, guidelines and policies of general applicability or individual
regulatory capital requirements which may be applied to the Savings Bank.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles which
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.
Unlike many industrial corporations, virtually all of the assets and
liabilities of Home Federal are monetary in nature. As a result, interest rates
have a more significant impact on Home Federal's performance than the effects of
general levels of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services, since such prices are affected by inflation to a larger
extent than interest rates.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements: Page
Independent Auditor's Report 14
Consolidated Statements of Financial Condition as of
December 31, 1995 and 1994 15
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1995 16
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1995 17
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1995 18
Notes to Consolidated Financial Statements 20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
Home Federal Corporation
We have audited the consolidated statements of financial condition of Home
Federal Corporation and Subsidiaries (Corporation) as of December 31, 1995 and
1994, and the related consolidated statements of changes in stockholders'
equity, income and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 referred to above
present fairly, in all material respects, the financial position of Home Federal
Corporation and Subsidiaries as of December 31, 1995 and 1994, the results of
their operations and cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Corporation changed its method of accounting for loans in 1994 and its methods
of accounting for income taxes and investments in 1993.
/s/ Smith Elliott Kearns & Co.
Hagerstown, Maryland
February 16, 1996
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Home Federal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 5,083,293 $ 6,044,795
Short-term interest-bearing deposits 7,343,565 315,861
Federal funds sold 28,449 1,592,588
Investment securities (approximate market
value of $4,839,097 in 1994) -- 5,064,097
Mortgage-backed securities available for sale
(at approximate market value) 17,373,035 29,781,620
Mortgage-backed securities (approximate market
value of $29,979,853 in 1995 and
$10,814,726 in 1994) 29,748,031 11,222,245
Loans receivable, net 137,262,694 135,553,111
Real estate owned held for sale, net 7,075,233 6,450,058
Federal Home Loan Bank of Atlanta stock 1,500,000 1,900,000
Office properties and equipment, net 4,107,500 4,035,817
Deferred tax assets, net 1,710,000 1,780,000
Prepaid expenses and other assets 3,382,948 2,776,557
------------ ------------
TOTAL ASSETS $214,614,748 $206,516,749
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Savings accounts $163,663,302 $151,202,667
Advances from Federal Home Loan Bank of Atlanta 30,156,927 38,184,372
Advances by borrowers for taxes and insurance 581,437 611,990
Other liabilities 1,831,180 1,818,095
------------ ------------
TOTAL LIABILITIES $196,232,846 $191,817,124
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value,
authorized 5,000,000 shares (None issued) $ -- $ --
Common stock, $1.00 par value,
authorized 10,000,000 shares, issued and
outstanding 2,519,010 shares in 1995 and 1994 2,519,010 2,519,010
Additional paid-in capital 7,903,106 7,903,106
Unrealized loss on mortgage-backed securities
available for sale, net (175,378) (1,531,298)
Retained income--substantially restricted 8,135,164 5,808,807
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 18,381,902 $ 14,699,625
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $214,614,748 $206,516,749
============ ============
<FN>
<F1> The Notes to Consolidated Financial Statements are an integral part of
these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Home Federal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized Retained
Gain(Loss)on Income Total
Additional Securities Substan- Stock
Common Paid-in Available tially holders'
Stock Capital for Sale, net Restricted Equity
---------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1992 $1,343,265 $6,511,836 $ $3,363,840 $11,218,941
Proceeds from
issuance of
shares of
common stock 1,175,745 1,391,270 2,567,015
Unrealized loss
on mortgage-
backed securities
available for
sale, net (119,817) (119,817)
Net Income, 1993 947,508 947,508
---------- ---------- ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1993 $2,519,010 $7,903,106 $ (119,817) $4,311,348 $14,613,647
Unrealized loss
on mortgage-
backed
securities
available for
sale, net (1,411,481) (1,411,481)
Net Income, 1994 1,497,459 1,497,459
---------- ---------- ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1994 $2,519,010 $7,903,106 $(1,531,298) $5,808,807 $14,699,625
Unrealized gain
on mortgage-
backed
securities
available for
sale, net 1,355,920 1,355,920
Dividends
declared and
paid, 1995 (201,521) (201,521)
Net Income, 1995 2,527,878 2,527,878
---------- ---------- ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1995 $2,519,010 $7,903,106 $ (175,378) $8,135,164 $18,381,902
========== ========== =========== ========== ===========
<FN>
<F1> The Notes to Consolidated Financial Statements are an integral part of
these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Home Federal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans receivable $12,925,124 $11,560,941 $12,578,429
Interest on mortgage-backed
securities 2,387,271 2,319,685 1,882,715
Interest or dividends on investment
securities 416,979 354,757 147,765
Other interest income 257,979 251,821 321,570
----------- ----------- -----------
Total Interest Income $15,987,353 $14,487,204 $14,930,479
----------- ----------- -----------
INTEREST EXPENSE
Interest on savings $ 6,652,035 $ 5,202,473 $ 5,600,213
Interest on advances from the
Federal Home Loan Bank of Atlanta 2,065,614 1,780,083 2,068,743
Interest on other borrowings -- 546 26,776
----------- ----------- -----------
Total Interest Expense $ 8,717,649 $ 6,983,102 $ 7,695,732
----------- ----------- -----------
NET INTEREST INCOME $ 7,269,704 $ 7,504,102 $ 7,234,747
PROVISION FOR POSSIBLE LOAN LOSSES (349,000) 278,000 1,687,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN
LOSSES $ 7,618,704 $ 7,226,102 $ 5,547,747
----------- ----------- -----------
OTHER INCOME
Loan origination and other fees $ 414,866 $ 452,759 $ 541,552
Gain on sales of mortgage-backed
securities, net -- -- 199,019
Gain on sales of mortgage loans 47,506 82,968 370,354
Other 1,517,010 1,456,849 1,752,096
----------- ----------- -----------
Total Other Income $ 1,979,382 $ 1,992,576 $ 2,863,021
----------- ----------- -----------
OTHER EXPENSES
Employee compensation and benefits $ 3,204,774 $ 3,137,783 $ 3,030,574
Occupancy and equipment 1,579,087 1,506,480 1,409,651
Advertising and promotion 173,728 272,359 143,401
Provision for losses on real
estate owned held for sale 479,000 339,000 368,667
Recoveries on real estate held for
development and sale or rental (35,973) (22,495) (91,331)
Real estate owned operations, net
and impaired loan expenses 154,901 213,143 802,146
Federal insurance premiums 420,703 430,617 414,325
Other 1,647,688 1,538,732 1,713,217
----------- ----------- -----------
Total Other Expenses $ 7,623,908 $ 7,415,619 $ 7,790,650
----------- ----------- -----------
INCOME BEFORE INCOME TAXES, LOSS
FROM DISCONTINUED OPERATION
AND CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE $ 1,974,178 $ 1,803,059 $ 620,118
PROVISION FOR (BENEFIT FROM)
INCOME TAXES (553,700) 305,600 (154,034)
----------- ----------- -----------
INCOME BEFORE LOSS FROM
DISCONTINUED OPERATION AND
CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE $ 2,527,878 $ 1,497,459 $ 774,152
LOSS FROM DISCONTINUED OPERATION -- -- (71,644)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING FOR INCOME TAXES -- -- 245,000
----------- ----------- -----------
NET INCOME $ 2,527,878 $ 1,497,459 $ 947,508
=========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Before discontinued operation and
cumulative effect of an
accounting change $ 1.00 $ 0.59 $ 0.40
Discontinued operation -- -- (0.04)
Cumulative effect of an
accounting change -- -- 0.13
----------- ----------- -----------
EARNINGS PER COMMON SHARE $ 1.00 $ 0.59 $ 0.49
=========== =========== ===========
<FN>
<F1> The Notes to Consolidated Financial Statements are an integral part of
these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Home Federal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,527,878 $ 1,497,459 $ 947,508
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 631,289 622,619 591,000
Provision for possible loan losses (349,000) 278,000 1,687,000
Provision for losses on real estate
owned held for sale 479,000 339,000 368,667
Recovery on real estate held for
development and sale or rental (35,973) (22,495) (91,331)
Amortization of intangible assets 118,340 118,340 117,297
(Increase) in real estate held for
development and sale or rental, net -- (2,860) (82,004)
Proceeds from sale of real estate
held for development and sale or
rental 92,575 178,281 1,710,469
(Increase) in prepaids and other
assets (178,310) (90,322) (981,238)
Deferred tax provision (783,000) (267,000) (305,000)
Origination of loans receivable
originated for sale (2,502,600) (2,323,550) (22,878,932)
Proceeds from sale of loans
receivable originated for sale 2,223,198 3,883,527 21,783,228
Increase (decrease) in other
liabilities 13,085 (1,660,318) 310,997
(Decrease) in deferred fee income
and unearned discounts on loans
receivable (197) (60,201) (23,822)
(Gain) on sales of mortgage-backed
securities, net -- -- (199,019)
(Gain) on sales of mortgage loans (47,506) (82,968) (370,354)
Loss on sales of property and
equipment 47,145 -- --
Other, net 301,408 168,447 448,361
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 2,537,332 $ 2,575,959 $ 3,032,827
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of
Federal Home Loan Bank stock $ 500,000 $ 1,283,500 $ --
Purchase of Federal Home Loan
Bank stock (100,000) (525,000) --
Proceeds from maturity and sales
of investment securities 5,000,000 5,018,750 --
Purchase of investment securities -- (10,000,000) --
Net (increase) decrease in loans
receivable (4,861,678) (11,857,599) 18,889,174
Purchase of mortgage-backed
securities available for sale -- (13,314,627) (15,445,500)
Purchase of mortgage-backed
securities held-to-maturity (9,969,957) (9,056,985) --
Proceeds from sales of mortgage-
backed securities available
for sale -- -- 7,915,059
Principal collections from
mortgage-backed securities
available for sale 3,988,293 5,706,181 1,105,955
Principal collections from
mortgage-backed securities
held-to-maturity 1,808,600 1,895,195 14,493,150
Proceeds from sales of real
estate owned held for sale 2,492,943 3,552,108 1,985,423
Net (increase) in real estate
owned held for sale (415,593) (575,892) (1,197,132)
Proceeds from sales of office
property and equipment 143,072 -- 29,216
Purchase of office property
and equipment (849,510) (1,029,468) (321,960)
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES $(2,263,830) $(28,903,837) $27,453,385
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in
savings accounts $12,460,635 $ 2,805,549 $ (371,858)
Proceeds from other FHLB advances 53,000,000 41,000,000 7,000,000
Payments at maturity of other
FHLB advances (61,000,000) (30,500,000) (22,670,000)
Proceeds from short term FHLB
advances -- 7,000,000 5,500,000
Payments at maturity of short
term FHLB advances -- (7,000,000) (8,500,000)
Net (decrease) in other borrowings -- (92,192) (337,953)
Net (decrease) in advances for
taxes and insurance (30,553) (18,436) (33,784)
Proceeds from issuance of
common stock -- -- 2,567,015
Payment of dividends (201,521) -- --
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES $ 4,228,561 $13,194,921 $(16,846,580)
----------- ----------- ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 4,502,063 $(13,132,957) $ 13,639,632
BEGINNING CASH AND CASH EQUIVALENTS 7,953,244 21,086,201 7,446,569
----------- ------------ ------------
ENDING CASH AND CASH EQUIVALENTS $12,455,307 $ 7,953,244 $ 21,086,201
=========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period:
Interest $ 8,725,861 $ 6,921,440 $ 7,762,954
Income taxes 482,735 755,600 152,480
Loans originated on sale of real
estate owned held for sale 595,000 62,000 2,034,210
Net transfer to real estate
owned held for sale from loans
receivable 3,820,525 1,903,532 1,379,113
Loan receivable established in
anticipation of draw on letter
of credit -- -- 1,500,000
Net proceeds due from foreclosure
sale of properties securing
impaired loans 602,676 -- 185,000
Unrealized (gain) loss on
mortgage-backed securities
available for sale, net (1,355,920) 1,411,481 119,817
=========== =========== ===========
<FN>
<F1> The Notes to Consolidated Financial Statements are an integral part of
these statements.
</FN>
</TABLE>
<PAGE>
Home Federal Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Home Federal Corporation (Corporation) is incorporated in the state of Maryland.
The Corporation, a registered savings and loan holding company, is subject to
examination and regulation by the Office of Thrift Supervision (OTS). The
Corporation is also subject to various reporting and other requirements of the
Securities and Exchange Commission. The Corporation currently owns 100% of the
issued and outstanding common stock of Home Federal Savings Bank (Savings Bank),
which is the principal asset of the Corporation. The Corporation also owns 100%
of the stock of DMP, Inc. (formerly Maryland General Realty, Inc.) In August
1993, the Corporation completed the sale of certain assets, liabilities and the
name of Maryland General Realty, Inc., a real estate brokerage firm.
The consolidated financial statements conform to generally accepted
accounting principles and include the accounts of the Corporation and its
subsidiaries. All intercompany accounts and transactions have been eliminated.
The following summarizes the more significant accounting policies and
procedures.
Nature of Operations and Customer Concentration:
The Savings Bank's principal business presently consists of attracting
deposits from the general public and using these funds, together with other
available funds, to originate real estate loans, residential construction loans
and consumer loans, including automobile and property improvement loans. Home
Federal's operations also include stockbrokerage, insurance and other financial
services.
Home Federal's primary marketing area is the state of Maryland,
particularly Washington and Allegany Counties, and to a lesser extent, South
Central Pennsylvania, Northern Virginia and the eastern panhandle of West
Virginia.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principals 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.
Cash and Cash Equivalents:
Cash and cash equivalents are defined as those amounts included in the
consolidated statements of financial condition captions "Cash, Short-term
interest-bearing deposits and Federal funds sold." Cash and cash equivalents
have an original maturity of three months or less. For purposes of the
consolidated statements of cash flows, the Corporation and its subsidiaries do
not include liquid debt instruments in cash equivalents.
Investment and Mortgage-Backed Securities (Securities):
Securities held-to-maturity are securities that management has the intent, and
the Corporation and its subsidiaries have the ability to hold until maturity.
These securities are carried at cost, adjusted for amortization of premium and
accretion of discounts on a method that approximates a level yield.
Available-for-sale securities consist of mortgage-backed securities not
classified as trading securities nor as held-to-maturity securities. Unrealized
holding gains and losses, net of tax, on available-for-sale securities are
reported as a net amount in a separate component of stockholders' equity until
realized. Premiums and discounts are recognized in interest income using a
method that approximates a level yield. Gains and losses realized from the sale
of securities are included in noninterest income and are based on specific
identification method.
In May, 1993, the Financial Accounting Standards Board (FASB) of the
Financial Accounting Foundation issued Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities affecting the accounting for investments in debt and equity
securities, which are to be classified into one of three categories. Securities
which management has positive intent and ability to hold until maturity are to
be classified as held-to-maturity and reported at amortized cost. Securities
that are bought and held principally for the purpose of selling them in the near
term are to be classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. All other securities are to be
classified as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of equity until realized.
The Corporation and its subsidiaries adopted SFAS No. 115 as of December
31, 1993.
Loans Held for Sale:
Mortgage loans that are originated and held for sale to investors are classified
as held for sale. These loans are recorded at the lower of cost or market value
with the net unrealized losses recognized through a valuation allowance by
charges to income. Gains and losses realized from the sale of these loans and
adjustments to market value are included in noninterest income.
Allowances for Possible Loan Losses:
A provision for possible loan losses is charged to operations based on
management's evaluation of potential risk inherent in the loan portfolio. Such
evaluation, which includes a review of all loans of which full collectibility
may not be reasonably assured, considers among other matters the estimated fair
value of the underlying collateral. This evaluation is inherently subjective as
it requires material estimates including the amounts and timing of future cash
flows expected to be received on impaired loans and the fair value of the
collateral for certain collateral dependent loans that may be susceptible to
significant change. Because of the uncertainties inherent in the estimation
process, management's estimate of the allowance for possible loan losses may
change in the near term. However, the amount of the change that is reasonably
possible cannot be estimated.
In May 1993, the FASB issued SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, an amendment of FASB Statements No. 5 and 15. SFAS No.
114, which is effective for years beginning after December 15, 1994, establishes
accounting measurement, recognition and reporting standards for impaired loans.
SFAS No. 114 provides that a loan is impaired when, based on current information
and events, it is probable that the creditor will be unable to collect all
amounts due according to the contractual terms (both principal and interest).
SFAS No. 114 requires that when a loan is impaired, impairment should be
measured based on the present value of the expected cash flows, discounted at
the loan's effective interest rate. If the loan is collateral dependent, as a
practical expedient, impairment can be based on a loan's observable market price
or the fair value of the collateral. The value of the loan is adjusted through a
valuation allowance created through a charge against income. Mortgages, consumer
installment obligations and credit card loans which are homogeneous in nature
are excluded. Loans that were treated as in-substance foreclosures under
previous accounting pronouncements are considered to be impaired loans and
remain in the loan portfolio under SFAS No. 114. SFAS No. 114 was amended in
October 1994 by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures." SFAS No. 118 amended SFAS No. 114
primarily to remove its income recognition requirements and add some disclosure
requirements.
The Corporation and its subsidiaries adopted SFAS No. 114 as of January 1,
1994 and, accordingly, determined that loans with a recorded investment of
$14,922,292 were impaired at such date and that the allowances for possible loan
losses applicable thereto amounted to $2,882,000 with no impact on results of
operations. The adoption of the statement resulted in the reclassification of
$10,227,513 from real estate owned in substance foreclosed to loans receivable
and $2,592,000 from allowance for loss on real estate owned held for sale to
allowances for possible loan losses at December 31, 1993. The Corporation and
its subsidiaries adopted SFAS No. 118 upon its issuance in October 1994.
Non-Accrual Loans:
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual or impaired loans. The accrual of interest is discontinued when
serious doubt exists as to the full, timely collection of interest or principal.
All interest previously accrued but not collected is reversed against current
period interest income. Interest received on such loans is generally either
applied against principal or reported as interest income to the extent that cash
is received and/or where the future collection of principal is probable.
Interest accruals are resumed when such loans are brought current with respect
to principal and interest, and when in the judgement of management are deemed to
be fully collectible.
Deferred Loan Fees and Unearned Discounts:
Loan origination and commitment fees and certain direct costs of originating
loans are deferred and the net amount amortized over the contractual life of the
loan as an adjustment of the loan's yield.
Unearned discounts are accreted to income on a method that approximates a
level yield over the estimated remaining period of maturities of the loans.
Real Estate Owned Held for Sale:
Properties acquired by foreclosure or deed in lieu of foreclosure or loans
deemed real estate owned in substance are initially recorded at the lower of
cost or estimated fair value and subsequently at the lower of the initially
recorded amount and capitalized costs less accumulated depreciation or estimated
fair value less estimated disposition costs. Costs relating to the development
and improvement of property are capitalized, but not to exceed estimated fair
value less estimated disposition costs, whereas those relating to holding the
property are charged to expense.
Loans are generally considered foreclosed in substance when the Corporation
or its subsidiaries have taken possession of the collateral regardless of
whether formal foreclosure proceeding take place. Loans previously classified as
in-substance foreclosure but for which the Corporation or its subsidiaries had
not taken possession of the collateral have been reclassified to loans. This
reclassification did not impact the Corporation's financial condition or results
of operations.
Real estate owned held for sale is reviewed regularly and valuation
allowances are adjusted to reflect the carrying values of the property at the
estimated fair value less estimated disposition costs. The amounts the
Corporation could ultimately recover from real estate owned held for sale could
differ from the amounts used in arriving at the net carrying value of the assets
because of future market factors beyond the Corporation's control. Because of
the uncertainties inherent in the estimation process, management's estimate of
the allowance for losses on real estate owned may change in the near term.
However, the amount of the change that is reasonably possible cannot be
estimated.
Real Estate Held for Development and Sale or Rental:
Real estate held for development and sale or rental was carried at the lower of
cost less accumulated depreciation or net realizable value. Development costs,
including capitalized interest and other holding costs, were capitalized up to,
but not in excess of, net realizable value.
Office Properties and Equipment:
Office properties and equipment are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets.
Income Taxes:
The Corporation, DMP, Inc., the Savings Bank and the Savings Bank's subsidiaries
file a consolidated federal income tax return. Deferred income taxes are
provided on elements of income and expense that are recognized for financial
accounting purposes in periods different than such items are recognized for
income tax return purposes and for the differences between the tax bases of
assets and liabilities and their reported amounts in the consolidated financial
statements.
The Savings Bank is permitted under the Internal Revenue Code to deduct an
annual addition to a reserve for bad debts in determining taxable income,
subject to certain limitations. This addition may differ significantly from the
bad debt deduction used for financial accounting purposes. Bad debt deductions
for income tax purposes are included in taxable income of later years if the bad
debt reserves are used subsequently for purposes other than to absorb bad debt
losses. Because the Savings Bank does not intend to use the reserve for purposes
other than to absorb losses, no deferred income taxes have been provided.
In 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes." The
statement calls for a balance sheet approach in determining income tax expense.
The Corporation and its subsidiaries adopted this statement on January 1, 1993.
Intangible Assets:
Intangible assets represent the premium on purchased deposits and the excess of
cost over net assets of acquired subsidiaries (goodwill). The "premium on
purchased deposits" represents identified intangible assets amortized using the
straight-line basis over a 10 year period.
Stock Plans:
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" establishing financial accounting and reporting standards for
stock-based employee compensation plans. This statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the fair value method. However, it also allows
an entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
statement is effective for fiscal years beginning after December 15, 1995. The
effect of adopting SFAS No. 123 is not expected to have a material impact on the
Corporation's consolidated financial condition or results of operations.
Reclassifications:
Certain reclassifications have been made to the consolidated financial
statements for the years ended December 31, 1993 and 1994 to conform to the
presentations used in the consolidated financial statements for the year ended
December 31, 1995.
Note 2. Investment Securities
During 1995, proceeds from the call of investment securities amounted to
$5,000,000.
During 1994, the Savings Bank purchased investment securities in the amount
of $10,000,000. Proceeds from sales of investment securities amounted to
$5,018,750. Net gains of $18,750 were realized on sales of such investment
securities.
Note 3. Mortgage-Backed Securities
A summary of mortgage-backed securities available for sale is as follows:
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation (FHLMC) $14,029,515 $ 85,836 $117,087 $13,998,264
Government National
Mortgage Association (GNMA) 3,247,299 16,049 38,433 3,224,915
----------- -------- -------- -----------
$17,276,814 $101,885 $155,520 $17,223,179
Accrued Interest Receivable 149,856 -- -- 149,856
----------- -------- -------- -----------
Total Mortgage-Backed
Securities Available
for Sale $17,426,670 $101,885 $155,520 $17,373,035
=========== ======== ======== ===========
<CAPTION>
December 31, 1994
------------------------------------------
Gross
Amortized Unrealized Market
Cost Losses Value
----------- ---------- -----------
<S> <C> <C> <C>
FHLMC $14,923,923 $ 896,389 $14,027,534
Federal National Mortgage
Association (FNMA) 14,237,052 1,353,846 12,883,206
GNMA 2,930,137 244,064 2,686,073
----------- ---------- -----------
$32,091,112 $2,494,299 $29,596,813
Accrued Interest Receivable 184,807 -- 184,807
----------- ---------- -----------
Total Mortgage-Backed
Securities Available for Sale $32,275,919 $2,494,299 $29,781,620
=========== ========== ===========
</TABLE>
There were no gross unrealized gains in 1994 on mortgage-backed securities
available for sale.
A comparison of the principal amount, amortized cost and approximate market
value by final maturity date of the mortgage-backed securities available for
sale at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Principal Amortized Market
Amount Cost Value
----------- ----------- -----------
<S> <C> <C> <C>
December 31, 1995
- -----------------
Maturing beyond 12 months but
less than five years $ 4,905,208 $ 4,976,661 $ 4,929,669
Maturing beyond five years but
less than ten years 650,011 648,009 665,701
Maturing beyond ten years 11,390,820 11,652,144 11,627,809
Principal Amortized Market
Amount Cost Value
----------- ----------- -----------
<S> <C> <C> <C>
December 31, 1994
- -----------------
Maturing beyond 12 months but
less than five years $ 5,657,450 $ 5,823,894 $ 5,487,726
Maturing beyond five years but
less than ten years 13,927,790 14,237,052 12,883,206
Maturing beyond ten years 11,678,927 12,030,166 11,225,881
</TABLE>
Mortgage-backed securities held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------
Gross
Amortized Unrealized Market
Cost Gains Value
----------- ---------- -----------
<S> <C> <C> <C>
GNMA $ 9,946,527 $ 66,219 $10,012,746
FNMA 19,630,214 165,603 19,795,817
----------- -------- -----------
$29,576,741 $231,822 $29,808,563
Accrued interest receivable 171,290 -- 171,290
----------- -------- -----------
Total Mortgage-Backed Securities
Held-to-Maturity $29,748,031 $231,822 $29,979,853
=========== ======== ===========
</TABLE>
There were no gross unrealized losses in 1995 on mortgage-backed securities
held-to-maturity. However, the December 31, 1995 amortized cost includes
$232,090 in gross unrealized losses resulting from the reclassification to held-
to-maturity.
<TABLE>
<CAPTION>
December 31, 1994
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
GNMA $ 562,505 $ 30,663 $ 12,453 $ 580,715
FHLMC 2,263,222 3,744 106,482 2,160,484
FNMA 8,304,786 -- 322,991 7,981,795
----------- -------- -------- -----------
$11,130,513 $ 34,407 $441,926 $10,722,994
Accrued interest receivable 91,732 -- -- 91,732
----------- -------- -------- -----------
Total Mortgage-Backed
Securities Held-to-Maturity $11,222,245 $ 34,407 $441,926 $10,814,726
=========== ======== ======== ===========
</TABLE>
A comparison of the principal amount, amortized cost and approximate market
value by final maturity date of the mortgage-backed securities held-to-maturity
at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Principal Amortized Market
Amount Cost Value
----------- ----------- -----------
<S> <C> <C> <C>
December 31, 1995
- -----------------
Maturing beyond 12 months but
less than five years $12,510,079 $12,511,807 $12,528,719
Maturing beyond five years but
less than ten years 4,619,907 4,660,167 4,743,161
Maturing beyond ten years 12,127,699 12,404,767 12,536,683
December 31, 1994
- -----------------
Maturing beyond 12 months but
less than five years $ 48,726 $ 20,955 $ 47,690
Maturing beyond five years but
less than ten years 895,284 885,215 878,669
Maturing beyond ten years 10,054,814 10,224,343 9,796,635
</TABLE>
GNMA, FHLMC and FNMA mortgage-backed securities in the amortized cost
amount of $22,061,250 and $20,522,236 were pledged as collateral for Federal
Home Loan Bank advances at December 31, 1995 and 1994, respectively.
Mortgage-backed securities in the amortized cost amount of $36,553,525
were fixed-rate and $10,300,030 were adjustable rate at December 31, 1995.
During 1995 and 1994, the Savings Bank purchased mortgage-backed
securities in the amount of $9,969,957 and $22,371,612, respectively. There were
no sales of mortgage-backed securities during 1995 or 1994.
On November 15, 1995, the FASB released a Special Report entitled "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities". The report was issued in question and answer format and
provided for the one-time opportunity to reclassify securities between held-to-
maturity and available for sale. Accordingly, on December 21, 1995
mortgaged-backed securities in the amortized cost amount of $12,743,896 and the
related unrealized loss of $237,445 were reclassified to held-to-maturity from
available for sale and mortgage-backed securities in the amortized cost amount
of $2,225,089 and the related unrealized gain of $25,667 were reclassified to
available for sale from held-to-maturity.
Note 4. Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Real Estate Loans:
Residential:
Single-family:
FHA/VA $ 524,129 $ 668,170
Conventional 71,297,016 60,301,834
Multi-family 11,824,433 13,258,387
Land 1,837,703 3,765,657
Commercial 16,920,576 20,588,201
------------ ------------
$102,403,857 $ 98,582,249
------------ ------------
Construction:
Residential $ 12,683,288 $ 13,999,432
Commercial 350,000 700,000
Land acquisition and development 8,468,363 11,372,831
------------ ------------
Total Construction $ 21,501,651 $ 26,072,263
------------ ------------
$123,905,508 $124,654,512
Less:
Loans in process (7,740,530) (7,350,158)
Allowances for possible
loan losses (3,132,147) (4,879,682)
Deferred fee income (246,399) (210,801)
Unearned discounts (316,262) (353,906)
------------ ------------
Total Real Estate Loans $112,470,170 $111,859,965
------------ ------------
Consumer Loans:
Home improvement $ 336,119 $ 404,860
Auto 5,241,057 4,900,744
Personal 2,643,409 2,477,271
Savings 568,576 416,093
Mobile homes 10,741,702 10,359,248
Other 3,521,587 3,517,595
------------ ------------
$ 23,052,450 $ 22,075,811
Less:
Allowances for possible
loan losses (500,157) (761,521)
Unearned discounts (28,860) (27,285)
------------ ------------
Total Consumer Loans $ 22,523,433 $ 21,287,005
------------ ------------
Commercial Loans $ 1,429,015 $ 1,593,131
------------ ------------
Accrued Interest Receivable $ 840,076 $ 813,010
------------ ------------
Total Loans Receivable, net $137,262,694 $135,553,111
============ ============
</TABLE>
The Savings Bank originates loans for sale to investors without recourse,
with servicing retained or released. At December 31, 1995 and 1994, the Savings
Bank had loans held for sale in the amount of $246,300 and $40,000,
respectively.
At December 31, 1995, 1994 and 1993, the Savings Bank serviced loans for
others amounting to $47,734,928, $48,238,440 and $56,481,142, respectively.
Non-performing loans consist of nonaccrual and impaired loans and loans
which are 90 days or more delinquent. Loans are placed on nonaccrual when, in
the judgement of management, the probability of collection of interest is
deemed to be insufficient to warrant further accrual. A summary of nonperforming
loans is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Non-accrual and impaired loans $ 5,791,040 $16,160,354
Accruing loans which are 90 days
or more delinquent -- --
----------- -----------
$ 5,791,040 $16,160,354
=========== ===========
</TABLE>
A summary of nonaccrual and impaired loans at recorded investment is as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
--------- -----------
<S> <C> <C>
Non-Performing Loans:
Non-Accrual Loans:
Real Estate Loans:
Residential:
Single-family $ 441,154 $ 194,627
Multi-family 160,748 --
Land -- 304,185
Commercial 37,732 38,579
Consumer and Commercial Loans 145,948 87,782
---------- -----------
Total Non-Accrual Loans $ 785,582 $ 625,173
---------- -----------
Impaired Loans:
Real Estate Loans:
Residential:
Single-family $ 433,464 $ 1,113,872
Multi-family -- 1,000,000
Land 128,107 1,967,027
Commercial 731,330 4,919,359
Construction:
Residential -- 735,198
Land acquisition and development 3,712,557 5,557,425
Consumer and Commercial loans -- 242,300
---------- -----------
Total Impaired Loans $5,005,458 $15,535,181
---------- -----------
Total Non-Performing Loans $5,791,040 $16,160,354
========== ===========
</TABLE>
During 1995, a total of seven loans with an aggregate principal balance of
$3,960,525 became real estate owned held for sale, of which five loans with an
aggregate principal balance of $3,878,013 were nonaccrual or impaired at
December 31, 1994. These loans were transferred to real estate owned held for
sale at a carrying value of $3,820,525.
The contractual amount of interest that would have been recorded on
nonaccrual and impaired loans during 1995 and 1994 was $397,446 and $1,999,327,
respectively. Actual interest income collected and recognized on such loans
totaled $166,479 and $494,613, of which $166,479 and $340,598 was recognized as
income and $0 and $154,015 was applied to principal in 1995 and 1994,
respectively.
At December 31, 1995, $5,005,458 of impaired loans had related allowance
for credit losses of $152,407. The average recorded investment in impaired loans
during the year ended December 31, 1995 was approximately $13,430,983.
An analysis of the allowances for possible loan losses follows:
<TABLE>
<CAPTION>
Real Estate Loans
-------------------------------------------
Years Ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Beginning Balance $ 4,879,682 $ 5,575,336 $ 4,832,483
Provision for possible
loan losses (349,000) 278,000 1,687,000
Reallocation of reserves
from consumer and
commercial loans 244,000 -- --
Recoveries 407,500 -- 317,477
Charge-offs (2,050,035) (973,654) (1,261,624)
----------- ----------- -----------
Ending Balance $ 3,132,147 $ 4,879,682 $ 5,575,336
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Consumer and Commercial Loans
-------------------------------------------
Years Ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Beginning Balance $ 761,521 $ 916,317 $ 1,082,733
Reallocation of reserves
to real estate loans (244,000) -- --
Recoveries 103,516 63,746 35,836
Charge-offs (120,880) (218,542) (202,252)
----------- ----------- -----------
Ending Balance $ 500,157 $ 761,521 $ 916,317
=========== =========== ===========
</TABLE>
The maximum aggregate amount of loans that the Savings Bank may make to any
one borrower, including related entities, subject to certain exceptions, is
limited to 15% of its unimpaired capital and surplus, or $3,216,935 at December
31, 1995. As of December 31, 1995, the Savings Bank had loans outstanding to one
borrower which exceeded its loans-to-one borrower limitation. However, all
extensions of credit to such borrower were originated or committed to prior to
the enactment of, or under the exceptions contained within current laws and
regulations. At such date, loans in an aggregate amount of $6,420,704, including
the undisbursed portion of such loans, were outstanding to the borrower.
Note 5. Real Estate Owned Held for Sale
Real estate owned held for sale is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Real Estate Owned Held for Sale:
Acquired by foreclosure:
Single-family $ 33,728 $ 139,974
Multi-family 1,239,715 427,554
Commercial 972,140 1,705,544
Land 290,068 40,000
Acquired by deed in lieu of foreclosure:
Single-family 60,963 60,963
Commercial 1,504,754 1,580,502
Land 1,197,589 1,583,640
Land acquisition and development 1,951,798 3,436,326
In substance - land 1,440,490 --
---------- ----------
Total Real Estate Owned Held for Sale $8,691,245 $8,974,503
Less:
Allowance for losses 1,492,012 2,336,945
Accumulated depreciation 124,000 187,500
---------- ----------
Total Real Estate Owned Held for Sale, net $7,075,233 $6,450,058
========== ==========
</TABLE>
An analysis of the allowance for losses on real estate owned held for sale
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Beginning Balance $2,336,945 $2,307,763 $2,231,253
Additional provision 479,000 339,000 368,667
Recoveries 1,643 69,561 126,343
Charge-offs (1,325,576) (379,379) (418,500)
---------- ---------- ----------
Ending Balance $1,492,012 $2,336,945 $2,307,763
========== ========== ==========
</TABLE>
Note 6. Office Properties and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Land $ 445,489 $ 475,489
Land improvements 246,648 256,020
Buildings and leasehold improvements 3,333,313 3,391,001
Furniture, fixtures, equipment and automobiles 5,451,836 5,133,174
---------- ----------
$9,477,286 $9,255,684
Less accumulated depreciation 5,369,786 5,219,867
---------- ----------
Total Office Properties and Equipment, net $4,107,500 $4,035,817
========== ==========
</TABLE>
Note 7. Prepaid Expenses and Other Assets
Prepaid expenses and other assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Prepaid expenses $ 253,527 $ 283,902
Intangible assets 285,988 404,328
Prepaid dealer interest on mobile home loans 1,501,773 1,453,237
Accounts receivable 1,053,561 365,050
Other, net 288,099 270,040
---------- ----------
Total Prepaid Expenses and Other Assets $3,382,948 $2,776,557
========== ==========
</TABLE>
Note 8. Savings Accounts
Savings accounts consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Savings deposits $ 10,280,093 $ 10,211,133
Money market accounts 29,186,383 31,605,316
Time deposits 88,923,590 75,450,393
Interest-bearing NOW accounts 25,487,338 25,219,129
Non-interest-bearing NOW accounts 9,690,599 8,640,630
------------ ------------
$163,568,003 $151,126,601
Accrued interest 95,299 76,066
------------ ------------
Total Savings Accounts $163,663,302 $151,202,667
============ ============
</TABLE>
The composition of interest-bearing savings accounts by interest rates was
as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1994
----------------- -----------------
Amount % Amount %
------------ -- ------------ --
<S> <C> <C> <C> <C>
2.40% - 5.24% $ 82,146,088 53% $122,131,995 86%
5.25% - 7.00% 66,959,169 44 18,188,931 13
7.01% - 9.00% 4,757,411 3 2,151,870 1
11.01% - 13.00% 14,736 -- 13,175 --
------------ --- ------------ ---
$153,877,404 100% $142,485,971 100%
============ === ============ ===
Weighted average interest
rate of all accounts 4.29% 3.74%
==== ====
</TABLE>
Certificates of deposit classified by maturity date consisted of the
following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1995 1994
------------------ ------------------
Amount % Amount %
----------- -- ----------- --
<S> <C> <C> <C> <C>
Due within first year $54,397,204 61% $52,098,689 69%
Due within second year 19,317,316 22 14,068,628 19
Due within third year 4,215,776 5 3,284,212 4
Due within fourth year 3,674,123 4 1,883,043 2
Due in over four years 7,319,171 8 4,115,821 6
----------- --- ----------- ---
$88,923,590 100% $75,450,393 100%
=========== === =========== ===
</TABLE>
Certificates of deposit in the amount of $71,655,941 were fixed rate
and $17,267,649 were adjustable rate at December 31, 1995.
Note 9. Advances from the Federal Home Loan Bank of Atlanta
At December 31, 1995 and 1994, advances from the Federal Home Loan Bank of
Atlanta (FHLB) mature as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
Maturities Interest Rate 1995 1994
- ---------- ------------- ----------- -----------
<S> <C> <C> <C>
1995 4.50% - 6.99% $ -- $33,000,000
1996 5.85% - 8.03% 17,728,000 3,000,000
1997 5.79% - 6.18% 5,728,000 --
1998 6.12% - 6.18% 728,000 --
1999 5.46% - 6.18% 1,728,000 1,000,000
2000 6.12% - 6.18% 728,000 --
2001 6.12% - 6.20% 1,728,000 1,000,000
2002 6.12% - 6.18% 732,000 --
2003 6.12% 300,000 --
2004 6.12% 300,000 --
2005 6.12% 300,000 --
----------- -----------
$30,000,000 $38,000,000
Accrued Interest 156,927 184,372
----------- -----------
$30,156,927 $38,184,372
=========== ===========
</TABLE>
The weighted average interest rate on FHLB advances outstanding at December
31, 1995 was 6.3%. Advances are secured by assets amounting to $40,157,729 at
December 31, 1995. Such amount is composed of capital stock in the FHLB and
certain of the Savings Bank's mortgage loans and mortgage-backed securities.
Note 10. Other Income
Other income is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Loan origination and other loan fees $ 414,866 $ 452,759 $ 541,552
Gain on sales of mortgage loans 47,506 82,968 370,354
Gain on sales of mortgage-backed
securities, net -- -- 199,019
Stockbrokerage commissions 171,109 48,892 229,112
Insurance commissions 107,805 126,431 174,280
Service fees on checking and
savings accounts 1,154,324 1,046,538 1,036,410
Other 83,772 234,988 312,294
---------- ---------- ----------
Total Other Income $1,979,382 $1,992,576 $2,863,021
========== ========== ==========
</TABLE>
Note 11. Other Expenses - Other
Other expenses - other is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Professional fees $ 254,687 $ 213,238 $ 265,875
Supplies 153,433 141,034 130,800
Postage 215,065 199,477 193,635
ATM expenses 200,319 212,821 196,614
Provision (recovery) for loss
on other assets -- (70,047) 153,000
Insurance expense 145,352 168,476 207,377
Other 678,832 673,733 565,916
---------- ---------- ----------
Total Other Expenses - Other $1,647,688 $1,538,732 $1,713,217
========== ========== ==========
</TABLE>
Note 12. Provision for (Benefit from) Income Taxes
Federal and state income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1994 1993
----------- -------- ---------
<S> <C> <C> <C>
State income tax current expense $ 49,300 $108,100 $ 69,966
Federal income tax current expense 180,000 464,500 81,000
Deferred income tax expense (credit) 693,000 187,000 (418,000)
Change in valuation allowance (1,476,000) (454,000) 113,000
---------- -------- ---------
$ (553,700) $305,600 $(154,034)
========== ======== =========
</TABLE>
The Savings Bank is permitted under the Internal Revenue Code to deduct an
addition to a reserve for bad debts. This deduction for income tax purposes can
be significantly greater than the bad debts actually incurred by the Savings
Bank. The excess bad debt deduction over the amount that would have been
allowable had the reserve for bad debts been maintained for all taxable years on
the basis of actual experience is deemed to be a tax preference item and is
subject to a minimum tax. Retained income at December 31, 1995 includes
additions to the tax bad debt reserve of approximately $7,100,000 for which no
provision for income taxes has been made. The deferred tax liability related to
the tax bad debt reserve that has not been recognized would amount to
$2,745,000. If the bad debt reserve is used for any purpose other than to absorb
loan losses, Federal income taxes may be imposed at the then current tax rates.
The Savings Bank does not contemplate that such reserve will be used in any
manner that will create income tax liabilities.
The Corporation's income tax provision (benefit) differs from the tax
determined by applying the statutory Federal income tax rate to income before
taxes for the following reasons:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Tax at Federal income tax rate $ 671,221 $ 613,040 $ 210,840
Bad debt deduction 177,704 44,730 (105,000)
State income tax 49,300 108,100 69,966
Net operating loss carryforward -- -- (329,000)
Change in valuation allowance (1,476,000) (454,000) 113,000
Other - net 24,075 (6,270) (113,840)
---------- --------- ---------
$ (553,700) $ 305,600 $(154,034)
========== ========= =========
</TABLE>
The tax effects of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities that are included in net
deferred tax assets at December 31, 1995 and 1994 relate to the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Allowances for losses $1,723,000 $2,391,000
Unrealized loss on securities
available for sale 110,000 963,000
Intangible assets 343,000 301,000
Deferred fees on loans 133,000 162,000
Deferred directors fees 150,000 158,000
Other, net 45,000 48,000
---------- ----------
Total deferred tax assets $2,504,000 $4,023,000
Less valuation allowance 474,000 1,950,000
---------- ----------
Total Deferred Tax Assets
less Valuation Allowance $2,030,000 $2,073,000
Deferred Tax Liabilities -
Depreciation and amortization 320,000 293,000
---------- ----------
Deferred Tax Assets, net $1,710,000 $1,780,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Federal and state current income taxes payable are as follows:
December 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Current (refundable) payable:
State $ (65,500) $ --
Federal (290,000) (70,000)
========= ========
</TABLE>
Note 13. Profit Sharing Plans
The Corporation provides a retirement savings plan and trust which is a deferred
compensation plan (401(k)) and a profit sharing plan for all employees who are
at least 21 years of age and worked at least 1,000 hours in a calendar year. The
plan permits eligible participants to defer up to 15% of their annual salary and
the Corporation or its subsidiaries to contribute to the 401(k) part of the plan
on a matching basis. Also, the Corporation or its subsidiaries can elect to
contribute a portion of its profits to the profit sharing portion of the plan.
The Corporation or its subsidiaries did not contribute to the 401(k)
portion of the plan in 1993 but in 1994 and 1995 contributions were made based
on matching 20 cents and 30 cents, respectively, on every dollar up to 5% of the
employees' salary. The Corporation and its subsidiaries made a $185,000,
$117,000 and $75,000 contribution to the profit sharing portion of the plan in
1995, 1994 and 1993, respectively.
The retirement savings plan expenses (including matching and contribution)
for 1995, 1994 and 1993 were $206,496, $141,077 and $81,930, respectively.
Note 14. Employee Benefits Other Than Pensions and Stock Options
The Corporation and/or the Savings Bank provides certain health care and life
and disability insurance benefits for active employees and certain retirees. The
Corporation and its subsidiaries do not provide postemployment or postretirement
benefits other than pensions and stock options to current employees. The Savings
Bank maintains a director's deferred compensation program pursuant to which
directors of the Savings Bank may elect to defer their fees for attending
meetings in order to provide retirement benefits. The expense for these benefits
was $220,165, $246,672 and $207,984 for 1995, 1994 and 1993, respectively.
In addition, employment agreements with several officers of the Corporation
and the Savings Bank provide severance payments and certain benefits in the
event of an involuntary termination of employment in connection with a change in
control of the Corporation, as defined in the contract. If the employment of the
officers were to be terminated pursuant to a change in control, they would be
entitled to receive severance payments computed based on average compensation as
defined in the contracts.
Note 15. Financial Instruments With Off-Balance-Sheet Risk
The Savings Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk which are not reflected in the consolidated
statements of financial condition. The contractual amounts of those instruments
reflect the extent of involvement the Savings Bank has in particular classes of
financial instruments.
customer's creditworthiness and related real estate collateral on a case-by-case
basis.
Standby letters of credit are conditional commitments issued by the Savings
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including construction loan tri-party agreements, bond financing,
and similar transactions. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending a loan to customers.
A summary of commitments is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
----------- ----------
<S> <C> <C>
Commitments, excluding
Loans in Process:
To originate:
Fixed rate loans $ 241,000 $ --
Adjustable rate loans 1,249,125 1,399,500
----------- ----------
$1,490,125 $1,399,500
To sell:
Fixed rate loans 246,300 40,000
----------- ----------
Net Commitments $1,243,825 $1,359,500
========== ==========
</TABLE>
A summary of the letter of credit instruments is as follows:
<TABLE>
<CAPTION>
December 31,
----------- ----------
1995 1994
----------- ----------
<S> <C> <C>
Letters of Credit:
Construction loans $1,400,124 $1,821,280
Other 141,330 170,973
---------- ----------
Total Letters of Credit $1,541,454 $1,992,253
========== ==========
</TABLE>
No loan commitments are outstanding to any borrowers whose loans are
nonperforming. Approximately $1,118,454 of letters of credit are outstanding on
construction loans to borrowers associated with nonperforming assets.
The Savings Bank is currently obligated by seven long-term operating
leases. The first lease obligates the Savings Bank for the land on which a
branch office is located. Three lease agreements obligate the Savings Bank for
office space for branch and loan production offices and three lease agreements
obligate the Savings Bank for automated teller machine space. At December 31,
1995, minimum future rental commitments for operating leases were as follows:
Year Amount
---- ------
1996 $61,081
1997 61,386
1998 64,119
1999 64,119
2000 64,119
Rent expense amounted to $78,492, $71,662 and $55,786 for the years ended
December 31, 1995, 1994 and 1993, respectively.
Note 16. Stockholders' Equity and Regulatory Capital
On June 30, 1993, the Corporation completed a Rights and Community Offering (the
Offering). The Corporation sold 1,175,745 shares of common stock at $2.50 per
share. The total amount of proceeds received was $2,939,363 which resulted in
net proceeds of $2,567,015 after giving effect to related expenses. The
Corporation contributed substantially all of the net proceeds to the Savings
Bank.
At December 31, 1995, the Corporation's stockholders' equity amounted to
$18,381,902 or 8.6% of total assets. As of such date, the Savings Bank's
stockholder's equity amounted to $18,159,842 or 8.5% of the Savings Bank's total
assets.
The Savings Bank is required to maintain a specified minimum amount of
capital in accordance with regulatory requirements. The Savings Bank's
regulatory capital at December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Components Actual Required
of Capital Ratio Ratio
---------- ------ --------
(In thousands)
<S> <C> <C> <C>
Tangible capital $18,049 8.4% <F1> 1.5% <F1>
Core capital 18,049 8.4% <F1> 3.0% <F1>
Risk-based capital 19,728 14.9% <F1> 8.0% <F1>
<FN>
<F1> Tangible capital and core capital are computed as a percentage of adjusted
total assets while risk-based capital is computed as a percentage of total
risk-weighted assets.
</FN>
</TABLE>
There can be no assurance that the Savings Bank will not be subject to
additional capital requirements in the future, either as a result of
regulations, guidelines and policies of general applicability or individual
regulatory capital requirements which may be applied to the Savings Bank.
Note 17. Earnings Per Share and Dividends
Earnings per share has been computed based on 2,519,010, 2,519,010 and 1,931,138
weighted average number of shares outstanding in 1995, 1994 and 1993,
respectively.
The Savings Bank's earnings appropriated to bad debt reserves for losses
and deducted for federal income tax purposes are not available for dividends
without the payment of taxes at the then current income tax rates on the amount
used.
On December 29, 1995 and September 29, 1995, the Corporation paid a $0.04
per share dividend on common stock totaling $201,521. The Corporation had
suspended dividend payments on the common stock after the first quarter of 1990
until 1995. The Corporation's ability to pay dividends on the common stock
depend on the receipt of dividends from the Savings Bank which is somewhat
constricted by federal regulations.
Note 18. Stock Plans
Under the Corporation's Employee Stock Compensation Program (Program) which
terminated on February 10, 1994, options previously granted have terms of ten
years from date of grant and are still exercisable although no new awards may be
granted.
Four kinds of rights, evidenced by four plans, are contained in the Program
and were available for grant: incentive stock options, compensatory stock
options, stock appreciation rights and performance share awards. The option
price per share may not be less than the fair market value of the common stock
on the date of grant.
At December 31, 1995, incentive options for 12,092 shares (as adjusted for
stock splits and dividends) had been granted and are unexpired at exercise
prices ranging from $9.25 per share to $11.79 per share (as adjusted). All of
such options were exercisable at December 31, 1995. No options granted had been
exercised during 1995, 1994 or 1993, and no stock appreciation rights or
performance shares had been granted or awarded under the Program as of December
31, 1995.
An aggregate of 120,563 shares of authorized but unissued common stock of
the Corporation (as adjusted) has been reserved for grant under the 1988 Stock
Option and Stock Appreciation Rights Plan (Option Plan) to full-time employees,
officers and directors of the Corporation and the Savings Bank. The Option Plan
shall remain in effect until March 17, 1998, unless sooner terminated in
accordance with the provisions of the Option Plan.
Three kinds of rights are contained in the Option Plan and are available
for grant: incentive stock options, non-qualified stock options and stock
appreciation rights. For incentive stock options, the option price per share may
not be less than the fair market value of the common stock on the date of grant.
For non-qualified stock options, the option price may be less than the fair
market value of the common stock on the date of grant. The maximum number of
shares of common stock for which non-qualified stock options may be granted to
all directors who are not full-time salaried employees of the Corporation or a
subsidiary company shall not exceed 35% of the shares of common stock covered by
the Option Plan.
On October 28, 1988, non-qualified stock options for 4,882 shares (as
adjusted) were granted to a former director of Waynesboro Savings. Such options
are exercisable at a price of $8.03 per share (as adjusted) and became
exercisable on October 28, 1988. On November 16, 1995, non-qualified and
qualified stock options for 51,627 shares were granted. Such options are
exercisable on May 16, 1996 at a price of $7.50 per share. No options granted
had been exercised during 1995, 1994 or 1993.
Note 19. Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash, short-term interest-bearing deposits and Federal funds sold
For those short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Investment and Mortgage-backed securities
For securities, fair values are based on quoted market prices or dealer quotes.
Loans receivable
The Savings Bank has utilized data provided by the OTS market value model to
estimate the fair value of performing loans receivable. Such fair value
estimates are determined by either (1) the stated discounted cash flow approach,
where the market value of a financial instrument is estimated by discounting the
cash flows the instrument is expected to generate by the yields currently
available to investors from other instruments of comparable risk and duration,
or (2) the option-based pricing approach, where the market value of a financial
instrument is estimated by generating cash flows for each point along an
interest rate path using scheduled amortizations, coupon payments, and
prepayments and such cash flows are then discounted by interest rates associated
with the cash flows plus an option-adjusted spread.
Fair value for significant nonperforming loans is based on recent internal
or external appraisals. If appraisals are not available, estimated cash flows
are discounted using a rate commensurate with the risk associated with the
estimated cash flows.
Federal Home Loan Bank of Atlanta Stock
The carrying amount of the stock is a reasonable estimate of fair value.
Savings accounts
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using data provided by
the OTS market value model. Such fair value estimate is based on the discounted
value of contractual cash flows.
Advances from the Federal Home Loan Bank of Atlanta and other borrowings
The Savings Bank utilized data provided by the OTS market value model to
estimate fair value of existing debt. Such fair value estimate is based on the
discounted value of contractual cash flows.
Commitments to extend credit and standby letters of credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date.
The estimated fair values of the Savings Bank's financial instruments at
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31, 1995
------------------------------
Carrying Amount Fair Value
--------------- ----------
(In thousands)
<S> <C> <C>
Financial Assets:
Cash, short-term interest-bearing
deposits and Federal funds sold $ 12,455 $ 12,455
Mortgage-backed securities 47,121 47,353
Loans 140,895
Less: allowances for possible loan losses (3,632)
---------
$ 137,263 141,502
Federal Home Loan Bank of Atlanta Stock 1,500 1,500
Financial Liabilities:
Savings accounts (163,663) (164,713)
Advances from Federal Home Loan
Loan Bank of Atlanta (30,157) (30,439)
Advances by borrowers for taxes
and insurance (581) (581)
Unrecognized Financial Instruments:
Commitments to extend credit (15) (30)
Standby letters of credit (0) (19)
<CAPTION>
December 31, 1994
------------------------------
Carrying Amount Fair Value
--------------- ----------
(In thousands)
<S> <C> <C>
Financial Assets:
Cash, short-term interest-bearing
deposits and Federal funds sold $ 7,953 $ 7,953
Investment securities 5,064 4,839
Mortgage-backed securities 41,003 40,596
Loans 141,194
Less: allowances for possible loan losses (5,641)
---------
$ 135,553 140,247
Federal Home Loan Bank of Atlanta Stock 1,900 1,900
Financial Liabilities:
Savings accounts (151,203) (150,029)
Advances from Federal Home Loan
Bank of Atlanta (38,184) (37,858)
Advances by borrowers for taxes
and insurance (612) (612)
Unrecognized Financial Instruments:
Commitments to extend credit (14) (28)
Standby letters of credit (0) (25)
</TABLE>
Limitations
The fair value estimates are made at a discreet point in time based on relevant
market information and information about the financial instruments. Because no
market exists for a significant portion of the Savings Bank's financial
instruments, fair value estimates are based on judgements regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and such other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgement and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
In addition, the fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. For example, the Savings Bank has a
substantial mortgage servicing portfolio that contributes net fee income
annually. The mortgage servicing portfolio is not considered a financial
instrument and its value has not been incorporated into the fair value
estimates. Also, the fair value estimates do not include the benefit that
results from the low-cost funding provided by the deposit liabilities compared
to the cost of borrowing funds in the market. Other significant assets and
liabilities that are not considered financial assets or liabilities include the
brokerage operation, net deferred tax assets, office properties and equipment,
and intangibles. In addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in many of the estimates.
Note 20. Condensed Financial Information (Parent Company Only)
<TABLE>
<CAPTION>
Statements of Financial Condition
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Assets:
Cash on deposit with Home
Federal Savings Bank $ 51,141 $ 154,322
Equity in net assets of Home
Federal Savings Bank 18,159,842 14,354,438
Due (to) from Home Federal Savings Bank (83,213) 92,698
Prepaids and other assets 254,507 98,541
----------- -----------
Total Assets $18,382,277 $14,699,999
=========== ===========
Liabilities:
Other liabilities $ 375 $ 374
----------- -----------
Total Liabilities $ 375 $ 374
----------- -----------
Stockholders' Equity:
Common stock $ 2,519,010 $ 2,519,010
Additional paid-in capital 7,903,106 7,903,106
Unrealized loss on Home Federal
Savings Bank's mortgage-backed
securities available for sale (175,378) (1,531,298)
Retained income 8,135,164 5,808,807
----------- -----------
Total Stockholders' Equity $18,381,902 $14,699,625
----------- -----------
Total Liabilities and
Stockholders' Equity $18,382,277 $14,699,999
=========== ===========
<CAPTION>
Statements of Income
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest income $ 4,770 $ 6,250 $ 15,394
Dividend income 105,000 -- --
---------- ---------- ----------
Total Income $ 109,770 $ 6,250 $ 15,394
---------- ---------- ----------
Expenses:
Occupancy and equipment $ 4,500 $ 7,992 $ 11,507
Provision for losses (recovery) on
real estate owned held for sale -- -- (10,333)
Other 28,842 35,239 22,750
---------- ---------- ----------
Total Expenses $ 33,342 $ 43,231 $ 23,924
---------- ---------- ----------
(Loss) before equity in net income
of subsidiaries $ 76,428 $ (36,981) $ (8,530)
Equity in undistributed net income
of subsidiaries 2,451,450 1,534,440 956,038
---------- ---------- ----------
Net Income $2,527,878 $1,497,459 $ 947,508
========== ========== ==========
<CAPTION>
Statements of Cash Flows
Years Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $2,527,878 $1,497,459 $ 947,508
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net (income)
of subsidiaries (2,451,450) (1,534,440) (956,038)
Depreciation -- -- 3,943
Provision (recoveries) for losses on
real estate owned held for sale -- -- (10,333)
(Increase) decrease in prepaids and other
assets and refundable income taxes 21,912 (72,178) (34,421)
Increase (decrease) in liabilities -- (1,923) 300
---------- ---------- ----------
Net cash provided by (used in)
operating activities $ (6,660) $ (111,082) $ (49,041)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of real estate
owned held for sale $ -- $ -- $ 165,939
Investment in Home Federal Savings Bank -- -- (2,500,000)
---------- ---------- -----------
Net cash provided by (used in)
investing activities $ -- $ -- $(2,334,061)
---------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock $ -- $ -- $ 2,567,015
Payment of dividends (201,521) -- --
---------- ---------- -----------
Net cash provided by (used in)
financing activities $ (201,521) $ -- $ 2,567,015
---------- ---------- -----------
Net increase (decrease) in cash $ (103,181) $ (111,082) $ 183,913
Cash, beginning of year 154,322 265,404 81,491
---------- ---------- -----------
Cash, end of year $ 51,141 $ 154,322 $ 265,404
========== ========== ===========
</TABLE>
Supplementary Data - Income taxes paid in 1995, 1994 and 1993 amounted to
$355,000, $595,000 and $97,111, respectively.
Note 21. Selected Quarterly Operations Data (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
1995:
Interest income $3,858 $3,934 $4,001 $4,194
Interest expense 2,052 2,174 2,248 2,243
Provision for possible loan losses -- -- -- (349)
Provision for losses on real
estate owned held for sale 130 -- -- 349
Net Income 381 1,496 343 308
====== ====== ====== ======
Earnings Per Share $ 0.15 $ 0.59 $ 0.14 $ 0.12
====== ====== ====== ======
1994:
Interest income $3,476 $3,575 $3,694 $3,742
Interest expense 1,655 1,655 1,784 1,889
Provision for possible loan losses -- 58 -- 220
Provision for losses on real
estate owned held for sale 204 89 46 --
Net Income 340 408 333 416
====== ====== ====== ======
Earnings Per Share $ 0.13 $ 0.16 $ 0.13 $ 0.17
====== ====== ====== ======
</TABLE>
<PAGE>
CORPORATE INFORMATION
Market for Common Stock and Related Matters
The Corporation's common stock is traded on the Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol: "HFMD." As of March 8, 1996, there
were two market makers in the stock, Ferris Baker Watts, Inc. and Herzog, Heine,
Geduld, Inc. On December 31, 1995, there were 2,519,010 shares outstanding.
The high and low quotations for 1995 and 1994 listed below were obtained
from Nasdaq.
<TABLE>
<CAPTION>
Market Price
---------------------------------
1995 1994
--------------- ---------------
Quarter Ended High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
December 31 $8 3/4 $7 1/4 $6 $5 1/4
September 30 9 6 1/4 5 3/4 4 3/4
June 30 6 3/4 5 1/2 5 3/4 4 1/4
March 31 6 5 1/4 5 3 5/8
</TABLE>
As of March 15, 1996, there were approximately 1,600 stockholders of record
of the Corporation.
In September 1995, the Corporation's Board of Directors determined to
resume the payment of cash dividends to its stockholders. The Corporation has
paid cash dividends on the following dates:
Record Date Payable Date Cash Dividend Per Share
Sept. 22, 1995 Sept. 29, 1995 $.04
Dec. 15, 1995 Dec. 29, 1995 $.04
The payment of cash dividends by the Corporation is subject to
determination and declaration by the Corporation's Board of Directors.
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Home Federal Corporation
We hereby consent to the incorporation by reference in Registration
Statement No. 33-20330 on Form S-8 dated February 26, 1988, as amended, and in
Registration Statement No. 33-24328 on Form S-8 dated September 28, 1988, as
amended, of our report dated February 16, 1996, on the condolidated financial
statements included in the Annual Report on Form 10-K of Home Federal
Corporation for the year ended December 31, 1995.
/s/ Smith Elliott Kearns & Company
SMITH ELLIOTT KEARNS & COMPANY
Hagerstown, Maryland
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,083
<INT-BEARING-DEPOSITS> 7,344
<FED-FUNDS-SOLD> 28
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,373
<INVESTMENTS-CARRYING> 29,748
<INVESTMENTS-MARKET> 29,980
<LOANS> 141,486
<ALLOWANCE> 3,632
<TOTAL-ASSETS> 214,615
<DEPOSITS> 163,663
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,413
<LONG-TERM> 30,157
0
0
<COMMON> 2,519
<OTHER-SE> 15,863
<TOTAL-LIABILITIES-AND-EQUITY> 214,615
<INTEREST-LOAN> 13,340
<INTEREST-INVEST> 2,804
<INTEREST-OTHER> 258
<INTEREST-TOTAL> 16,402
<INTEREST-DEPOSIT> 6,652
<INTEREST-EXPENSE> 8,717
<INTEREST-INCOME-NET> 7,270
<LOAN-LOSSES> (349)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,624
<INCOME-PRETAX> 1,974
<INCOME-PRE-EXTRAORDINARY> 1,974
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,528
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 3.84
<LOANS-NON> 12,866
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,348
<ALLOWANCE-OPEN> 5,641
<CHARGE-OFFS> 2,171
<RECOVERIES> 511
<ALLOWANCE-CLOSE> 3,632
<ALLOWANCE-DOMESTIC> 2,563
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,064
</TABLE>
