UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
HOME FEDERAL CORPORATION
(Exact name of Registrant as specified in its charter)
Maryland 0-16463 52-1636831
State of Incorporation Commission I.R.S. Employer
File Number I.D. Number
122-128 West Washington Street, Hagerstown, Maryland 21740
(Address of Principal Executive Office)
Registrant's telephone number: (301) 733-6300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Number of Shares of Common Stock Outstanding
as of July 31, 1996: 2,519,010 Shares
<PAGE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Report on Review by Independent Certified Public
Accountants. . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Financial Condition as of
June 30, 1996 (Unaudited) and December 31, 1995 . . . . . . 4
Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended June 30, 1996
(Unaudited) and the Year Ended December 31, 1995 . . . . . . 5
Consolidated Statements of Operation for the Three and
Six Months Ended June 30, 1996 and 1995 (Unaudited). . . . . 6
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1996 and 1995 (Unaudited) . . . . . . 8
Notes to Consolidated Financial Statements (Unaudited) . . . .10
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three
and Six Months Ended June 30, 1996 . . . . . . . . . . . . .15
PART II: OTHER INFORMATION
Item 1: Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . .21
Item 2: Changes in Securities. . . . . . . . . . . . . . . . . . . . .21
Item 3: Defaults Upon Senior Securities. . . . . . . . . . . . . . . .21
Item 4: Submission of Matters to a Vote of Security Holders. . . . . .21
Item 5: Other Information. . . . . . . . . . . . . . . . . . . . . . .21
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . .21
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
The Board of Directors
Home Federal Corporation
We have reviewed the accompanying consolidated statement of financial
condition of Home Federal Corporation and Subsidiaries (Corporation) as of
June 30, 1996 and the related consolidated statement of changes in
stockholders' equity for the six months ended June 30, 1996 and the
consolidated statements of operation for the three and six months ended June 30,
1996 and 1995 and consolidated statements of cash flows for the six months ended
June 30, 1996 and 1995. These financial statements are the responsibility of the
Corporation's management.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the consolidated
financial statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the accompanying consolidated financial statements for
them to be in conformity with generally accepted accounting principles.
/s/ Smith Elliott Kearns & Company
SMITH ELLIOTT KEARNS & COMPANY
Hagerstown, Maryland
July 31, 1996
<PAGE>
<TABLE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 5,795,912 $ 5,083,293
Short-term interest-bearing deposits 4,383,981 7,343,565
Federal funds sold -- 28,449
Investment securities (approximate market
value of $2,023,837 in 1996) 2,031,326 --
Mortgage-backed securities available for sale
(at approximate market value) 6,855,883 17,373,035
Mortgage-backed securities (approximate market
value of $40,593,579 in 1996, and $29,979,853
in 1995) 41,474,284 29,748,031
Loans receivable, net 143,360,163 137,262,694
Real estate owned held for sale, net 5,402,134 7,075,233
Federal Home Loan Bank of Atlanta stock 1,581,800 1,500,000
Office properties and equipment, net 4,209,707 4,107,500
Prepaid expenses and other assets 4,641,616 5,092,948
------------ ------------
TOTAL ASSETS $219,736,806 $214,614,748
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Savings accounts $165,820,453 $163,663,302
Advances from the Federal Home Loan Bank
of Atlanta 31,796,678 30,156,927
Advances by borrowers for taxes and insurance 1,175,844 581,437
Other liabilities 1,719,824 1,831,180
------------ ------------
TOTAL LIABILITIES $200,512,799 $196,232,846
------------ ------------
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 1996 and 1995 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 (152,464) (175,378)
Retained income-substantially restricted 8,954,355 8,135,164
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 19,224,007 $ 18,381,902
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $219,736,806 $214,614,748
============ ============
<FN>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<TABLE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Unrealized Retained
Gain(Loss)on Income- Total
Additional Securities Substant- Stock-
Common Paid-in Available ially holders
Stock Capital for Sale,net Restricted Equity
---------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance,
December 31,
1994 $2,519,010 $7,903,106 $(1,531,298) $5,808,807 $14,699,625
Unrealized
gain on
mortgaged-
backed
securities
available
for sale, net 1,355,920 1,355,920
Dividends paid
and declared (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
Unrealized gain
on mortgaged-
backed
securities 22,914 22,914
Dividends paid
and declared (100,760) (100,760)
Net Income,
1996 919,951 919,951
---------- ---------- --------- ---------- -----------
Balance, June
30, 1996
(Unaudited) $2,519,010 $7,903,106 $(152,464) $8,954,355 $19,224,007
========== ========== ========= ========== ===========
<FN>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<TABLE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION (UNAUDITED)
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans
receivable $6,447,192 $6,235,531 $3,276,169 $3,160,016
Interest on mortgage-
backed securities 1,539,505 1,205,569 804,306 595,505
Interest or dividends
on investment
securities 85,541 243,256 57,833 119,418
Other interest income 160,459 107,275 41,505 58,826
---------- ---------- ---------- ----------
Total Interest
Income $8,232,697 $7,791,631 $4,179,813 $3,933,765
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on savings $3,402,961 $3,139,416 $1,678,592 $1,662,290
Interest on advances
from the Federal
Home Loan Bank of
Atlanta 906,255 1,087,649 443,788 512,297
---------- ---------- ---------- ----------
Total Interest
Expense $4,309,216 $4,227,065 $2,122,380 $2,174,587
---------- ---------- ---------- ----------
NET INTEREST
INCOME $3,923,481 $3,564,566 $2,057,433 $1,759,178
PROVISION FOR POSSIBLE
LOAN LOSSES -- -- -- --
---------- ---------- ---------- ----------
NET INTEREST INCOME
AFTER PROVISION FOR
POSSIBLE LOAN LOSSES $3,923,481 $3,564,566 $2,057,433 $1,759,178
---------- ---------- ---------- ----------
OTHER INCOME
Loan fees $ 225,013 $ 206,313 $ 114,191 $ 110,031
Gains on sales of
mortgage loans 70,099 10,371 6,023 6,294
Other 976,942 704,180 485,909 384,009
---------- ---------- ---------- ----------
Total Other Income $1,272,054 $ 920,864 $ 606,123 $ 500,334
---------- ---------- ---------- ----------
OTHER EXPENSES
Employee compensation
and benefits $1,733,502 $1,566,994 $ 813,938 $ 745,454
Occupancy and
equipment 835,826 795,123 424,239 401,780
Advertising and
promotion 129,414 106,661 63,064 46,361
Provision for losses
on real estate
owned held for
sale -- 130,000 -- --
Recoveries on real estate
held for development
and sale or rental -- (35,973) -- (35,973)
Federal insurance
premiums 209,419 215,655 105,176 107,827
Other 1,006,648 855,813 634,337 520,133
---------- ---------- ---------- ----------
Total Other
Expenses $3,914,809 $3,634,273 $2,040,754 $1,785,582
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES $1,280,726 $ 851,157 $ 622,802 $ 473,930
PROVISION FOR (BENEFIT
FROM) INCOME TAXES 360,775 (1,026,000) 87,775 (1,022,200)
---------- ---------- ---------- ----------
NET INCOME $ 919,951 $1,877,157 $ 535,027 $1,496,130
========== ========== ========== ==========
EARNINGS PER SHARE $ 0.37 $ 0.75 $ 0.21 $ 0.59
========== ========== ========== ==========
DIVIDENDS PER SHARE $ 0.04 $ -- $ -- $ --
========== ========== ========== ==========
<FN>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<TABLE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Six Months Ended
June 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 919,951 $ 1,877,157
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 341,360 317,093
Provision for losses on real estate
owned held for sale -- 130,000
(Recoveries) on real estate held for
development and sale or rental -- (35,973)
Amortization of intangible assets 59,170 59,170
Proceeds from sale of real estate held
for development and sale or rental, net -- 92,575
Decrease (Increase) in prepaids and other assets 287,245 (40,641)
Deferred tax provision 90,500 (1,444,000)
Origination of loans receivable originated
for sale (1,068,700) (855,450)
Proceeds from sale of loans receivable
originated for sale 2,009,407 393,480
(Decrease) in other liabilities (111,356) (153,997)
Increase in deferred fee income and unearned
discounts on loans receivable 39,861 87,975
Gains on sales of mortgage loans (70,099) (10,371)
Other, net 169,914 142,894
------------ -----------
Net cash provided by operating activities $ 2,667,253 $ 559,912
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of Federal Home
Loan Bank stock $ 68,200 $ 400,000
Purchase of Federal Home Loan Bank stock (150,000) (100,000)
Purchase of investment securities (2,000,000) --
Net (increase) in loans receivable (6,699,236) (5,780,770)
Principal collections from mortgage-backed
securities available for sale 2,339,361 1,775,734
Purchase of mortgage-backed securities
held to maturity (14,035,915) --
Principal collections from mortgage-backed
securities held to maturity 2,352,084 758,381
Proceeds from sale of mortgage-backed
securities held for sale 8,009,069 --
Proceeds from sale of real estate owned held
for sale 1,670,702 662,152
Net (increase) in real estate owned held
for sale (308,303) (377,095)
Proceeds from sale of property and equipment -- 143,072
Purchase of office property and equipment (475,397) (419,458)
------------ -----------
Net cash (used in) investing activities $ (9,229,435) $(2,937,984)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in savings accounts $ 2,157,151 $ 9,028,350
Payments at maturity of other FHLB advances (13,364,030) (43,000,000)
Proceeds from other FHLB advances 15,000,000 37,000,000
Net increase in advances for taxes and
insurance 594,407 629,675
Payment of dividends (100,760) --
------------ -----------
Net cash provided by financing activities $ 4,286,768 $ 3,658,025
------------ -----------
Net increase (decrease) in cash and cash
equivalents $ (2,275,414) $ 1,279,953
Beginning cash and cash equivalents 12,455,307 7,953,244
------------ -----------
Ending cash and cash equivalents $ 10,179,893 $ 9,233,197
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 4,307,215 $ 4,236,273
Income taxes $ 401,440 $ 310,150
Loans originated on sale of real estate
owned held for sale $ 469,450 $ 595,000
Net transfer to real estate owned held for
sale from loans receivable $ 160,748 $ 1,943,643
Unrealized (gain) on mortgage-backed
securities available for sale, net $ (22,914) $(1,000,670)
<FN>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Basis of Presentation
In the opinion of Home Federal Corporation (Home Federal or the
Corporation), the accompanying unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary for a fair presentation of Home Federal's financial condition as of
June 30, 1996 and the results of operations for the three and six months ended
June 30, 1996 and 1995 and cash flows for the six months ended June 30, 1996 and
1995.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-QSB. These financial
statements should be read in conjunction with the consolidated financial
statements and the notes included in Home Federal's Annual Report for the
year ended December 31, 1995.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Home Federal elected to continue to measure compensation cost
using APB No. 25, therefore, SFAS No. 123 will only require certain disclosures
in Home Federal's consolidated financial statements.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which eliminates the accounting distinction between rights to
service mortgage loans for others that are acquired through loan origination
activities and those acquired through purchase transactions. Accordingly, Home
Federal will recognize as assets all rights to service loans for others for
loans originated after January 1, 1996 and will amortize these assets in
proportion to and over the period of estimated net servicing income. These
capitalized servicing rights must also be evaluated for impairment based on the
fair value of those rights. Home Federal adopted SFAS No. 122 as of January 1,
1996. The amount of capitalized originated mortgage servicing rights was
immaterial at June 30, 1996. SFAS No. 122 will be superseded by SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities."
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," establishing
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. Those standards are based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. A transfer of financial assets
in which the tranferor surrenders control over those assets is accounted for as
a sale to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. In addition, SFAS No. 125 requires
the following:
That liabilities and derivatives incurred or obtained by transferors
as part of a transfer of financial assets be initially measured at fair
value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer.
That servicing assets and liabilities be subsequently measured by (a)
amortization in proportion to and over the period of estimated net
servicing income or loss and (b) assessment for asset impairment or
increased obligation based on their fair values.
That debtors reclassify financial assets pledged as collateral and
that secured parties recognize those assets and their obligation to return
them in certain circumstances in which the secured party has taken control
of those assets.
That a liability be derecognized if and only if either (a) the debtor
pays the creditor and is relieved of its obligation for the liability or
(b) the debtor is legally released from being the primary obligor under
the liability either judicially or by the creditor. Therefore, a liability
is not considered extinguished by an in-substance defeasance.
Also, SFAS No. 125 amends SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," to clarify that a debt security may not be
classified as held-to-maturity if it can be prepaid or otherwise settled in such
a way that the holder of the security would not recover substantially all of its
recorded investment.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
Accordingly, Home Federal will adopt SFAS No. 125 as of January 1, 1997. The
effects of adopting SFAS No. 125 on Home Federal's consolidated financial
condition or results of operations is presently being analyzed; however, it is
not expected to have a material impact.
NOTE B - Proposed Merger
On April 2, 1996, Home Federal entered into a Plan and Agreement to Merge
("Acquisition Agreement") with F&M Bancorp, Frederick, Maryland, a Maryland
corporation and bank holding company ("F&M"), which provides for the acquisition
of Home Federal by F&M.
Under the terms of the Acquisition Agreement, Home Federal will merge with
and into F&M (the "Merger"), with F&M to be the surviving corporation. Pursuant
to the Acquisition Agreement, upon the effective date of the Merger ("Effective
Date"), each outstanding share of common stock of Home Federal, par value $1.00
per share ("Home Federal Stock"), will be converted into the right to receive
shares of common stock, par value $5.00 per share, of F&M ("F&M Stock"), in an
amount equal to 165% of Home Federal's book value (calculated as specified in
the Acquisition Agreement) as determined as of the end of the month immediately
prior to the Effective Date (the "Calculation Date"). The number of shares of
F&M Stock to be received will be based on the arithmetic average of F&M Stock
closing prices reported for the twenty (20) consecutive days preceding the
Calculation Date (the "Average Market Value"), subject to certain adjustments.
If the Average Market Value of F&M Stock is greater than 1.9 times the book
value per share of F&M as of the Calculation Date, the number of shares of F&M
Stock to be received by Home Federal stockholders shall be based on a F&M Stock
price equal to 1.9 times the book value per share of F&M as of such Calculation
Date.
In connection with the execution of the Acquisition Agreement, Home Federal
entered into a Stock Option Agreement with F&M pursuant to which it granted F&M
an option to acquire, upon the occurrence of certain events defined in the Stock
Option Agreement ("Purchase Events"), up to an aggregate of 501,282 authorized
but unissued shares of Home Federal Stock (the "Option") (or 19.9% of the shares
outstanding) at a price of $8.25 per share. The provisions of the Stock Option
Agreement concerning the Option will terminate upon consummation of the Merger
or upon termination of the Acquisition Agreement; however, if such termination
occurs as a result of a willful breach by Home Federal of the Acquisition
Agreement or failure of Home Federal's stockholders to approve the Acquisition
Agreement, then the Option shall terminate 12 months after termination of the
Acquisition Agreement. The Option is intended to increase the likelihood that
the Merger will be consummated by making it more difficult and expensive for a
third party to acquire control of Home Federal.
The consummation of the transaction is subject to, among other things,
receipt of regulatory approval and the receipt of the requisite vote of
stockholders of each of Home Federal and F&M approving the Acquisition
Agreement. In addition, the Acquisition Agreement may be terminated by either
party in the event the Average Market Value of F&M Stock calculated as of the
Calculation Date is less than 1.6 times the book value of F&M Stock as of such
date; provided that if F&M elects and Home Federal agrees, the parties could
agree to proceed with the transactions contemplated by the Acquisition Agreement
using an Average Market Value of F&M Stock equal to 1.6 times its book value per
share as of such date.
NOTE C - Investment Securities
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------
Gross Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal Home Loan Bank
(FHLB) bond $1,999,394 $ 681 $ 8,170 $1,991,905
Accrued interest receivable 31,932 -- -- 31,932
---------- --------- ---------- ----------
Total Investment Securities $2,031,326 $ 681 $ 8,170 $2,023,837
========== ========= ========== ==========
</TABLE>
During 1996, the Savings Bank purchased investment securities in the amount
of $2,000,000.
NOTE D - Mortgage-Backed Securities
A summary of mortgage-backed securities available for sale is as follows:
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation
(FHLMC) $3,854,621 $28,454 $25,536 $3,857,539
Government National
Mortgage Association
(GNMA) 2,990,658 9,233 68,888 2,931,003
---------- ------- ------- ----------
$6,845,279 $37,687 $94,424 $6,788,542
Accrued Interest
Receivable 67,341 -- -- 67,341
---------- ------- ------- ----------
Total Mortgage-Backed
Securities Available
for Sale $6,912,620 $37,687 $94,424 $6,855,883
========== ======= ======= ==========
<CAPTION>
December 31, 1995
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
FHLMC $14,029,515 $ 85,836 $117,087 $13,998,264
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
=========== ======== ======== ===========
</TABLE>
Mortgage-backed securities held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
GNMA $ 9,542,576 $ -- $279,880 $ 9,262,696
Federal National Mortgage
Association (FNMA) 18,042,018 26,306 296,912 17,771,412
Collateralized Mortgage
Obligations 13,651,365 -- 330,219 13,321,146
----------- ------- -------- -----------
$41,235,959 $26,306 $907,011 $40,355,254
Accrued Interest
Receivable 238,325 -- -- 238,325
----------- ------- -------- -----------
Total Mortgage-Backed
Securities Held-to-
Maturity $41,474,284 $26,306 $907,011 $40,593,579
=========== ======= ======== ===========
<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>
The June 30, 1996 and December 31, 1995 mortgage-backed securities held to
maturity amortized cost includes $191,657 and $232,090, respectively, in gross
unrealized losses resulting from the reclassification to held-to-maturity.
GNMA, FHLMC, and FNMA mortgage-backed securities in the amortized cost
amount of $24,357,986 and $22,061,250 were pledged as collateral for Federal
Home Loan Bank advances at June 30, 1996 and December 31, 1995, respectively.
During 1996 the Savings Bank purchased mortgage-backed securities in the
amount of $14,035,915. Proceeds from the sale of mortgage-backed securities
during 1996 amounted to $8,009,069. Net losses of $30,369 were realized on sales
of such securities in 1996.
NOTE E - Loans Receivable
<TABLE>
Loans receivable are summarized as follows:
<CAPTION>
June 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Real Estate Loans:
Residential $ 92,889,029 $ 85,483,281
Commercial 17,882,647 16,920,576
Construction 18,712,784 21,501,651
------------ ------------
$129,484,460 $123,905,508
Less:
Loans in process (8,340,432) (7,740,530)
Allowances for possible loan losses (3,249,312) (3,132,147)
Deferred fee income and
unearned discounts (528,327) (562,661)
Unrealized loss on loans held for sale (37,500) --
------------ ------------
Total Real Estate Loans $117,328,889 $112,470,170
------------ ------------
Consumer Loans $ 23,915,878 $ 23,052,450
Less:
Loans in process (19,713) --
Allowances for possible loan losses (468,917) (500,157)
Unearned discounts (102,657) (28,860)
------------ ------------
Total Consumer Loans $ 23,324,591 $ 22,523,433
------------ ------------
Commercial Business Loans $ 1,811,509 $ 1,429,015
------------ ------------
Accrued Interest Receivable $ 895,174 $ 840,076
------------ ------------
Total Loans Receivable, net $143,360,163 $137,262,694
============ ============
</TABLE>
Non-Performing loans consist of nonaccrual and impaired loans and loans
which are 90 days or more delinquent. Loans are placed on nonaccrual status or
are considered impaired when, in the judgement of management, the probability
of collection of principal or interest is deemed to be insufficient to warrant
further accrual. A summary of nonaccrual and impaired loans as of June 30, 1996
and 1995 and December 31, 1995 is as follows:
<TABLE>
<CAPTION>
June 30,
------------------- December 31,
1996 1995 1995
---- ---- ------------
<S> <C> <C> <C>
Non-Performing Loans:
Non-Accrual Loans:
Real Estate Loans:
Residential $ 522,371 $ 464,052 $ 601,902
Commercial 593,750 126,150 37,732
Consumer Loans 231,984 73,899 145,948
---------- ----------- ----------
Total Non-Accrual
Loans $1,348,105 $ 664,101 $ 785,582
---------- ----------- ----------
Impaired Loans:
Real Estate Loans:
Residential $ 121,560 $ 3,136,853 $ 561,571
Commercial 80,354 1,774,827 731,330
Construction 3,499,565 9,309,876 3,712,557
Consumer Loan -- 127,300 --
---------- ----------- ----------
Total Impaired Loans $3,701,479 $14,348,856 $5,005,458
---------- ----------- ----------
Total Non-Performing
Loans $5,049,584 $15,012,957 $5,791,040
========== =========== ==========
<CAPTION>
An analysis of the allowances for possible loan losses follows:
Real Estate Loans
-------------------------------------------
Six Months Ended June 30, Year Ended
---------------------------- December 31,
1996 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Beginning Balance $3,132,147 $4,879,682 $4,879,682
Additional provision -- -- (349,000)
Recoveries 153,585 405,000 407,500
Reallocation of reserves
from consumer and
commercial loan losses -- -- 244,000
Charge-offs:
Construction -- (121,000) (160,000)
Commercial -- (161,007) (808,331)
Single-family (36,420) (102,443) (528,704)
Multi-family -- (100,000) (100,000)
Land -- -- (453,000)
---------- ---------- ----------
Ending Balance $3,249,312 $4,800,232 $3,132,147
========== ========== ==========
<CAPTION>
Consumer and Commercial Loans
-------------------------------------------
Six Months Ended June 30, Year Ended
---------------------------- December 31,
1996 1995 1995
-------- -------- ------------
<S> <C> <C> <C>
Beginning Balance $500,157 $761,521 $761,521
Additional provision -- -- --
Reallocation of reserves
to real estate loans -- -- (244,000)
Recoveries 36,207 58,536 103,516
Charge-offs (67,447) (82,550) (120,880)
-------- -------- --------
Ending Balance $468,917 $737,507 $500,157
======== ======== ========
</TABLE>
NOTE F - Real Estate Owned Held for Sale
<TABLE>
Real estate owned held for sale is summarized as follows:
<CAPTION>
June 30,
------------------ December 31,
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Real estate owned acquired
by foreclosure $1,544,323 $2,676,107 $2,535,651
Real estate owned acquired by
deed in lieu of foreclosure 3,609,162 6,754,254 4,715,104
Real estate owned in substance 1,440,490 -- 1,440,490
---------- ---------- ----------
$6,593,975 $9,430,361 $8,691,245
Less:
Allowance for losses 1,191,841 1,859,217 1,492,012
Accumulated depreciation -- 214,500 124,000
---------- ---------- ----------
Total Real Estate Owned
held for sale, net $5,402,134 $7,356,644 $7,075,233
========== ========== ==========
<CAPTION>
An analysis of the allowance for losses on real estate owned held for
sale follows:
Six Months Ended June 30, Year Ended
---------------------------- December 31,
1996 1995 1995
---- ---- ------------
<S> <C> <C> <C>
Beginning Balance $1,492,012 $2,336,945 $2,336,945
Additional provision -- 130,000 479,000
Recoveries 13,834 -- 1,643
Charge-offs (314,005) (607,728) (1,325,576)
---------- ---------- ----------
Ending Balance $1,191,841 $1,859,217 $1,492,012
========== ========== ==========
</TABLE>
NOTE G - Advances from the Federal Home Loan Bank of Atlanta
Advances from the Federal Home Loan Bank of Atlanta (FHLB) totaling
$31,796,678 at June 30, 1996 are at a 6.0% weighted average interest rate
per annum with $11,364,000 maturing in 1996, $13,728,000 maturing in 1997,
$728,000 maturing in 1998, $1,728,000 maturing in 1999, $728,000 maturing in
2000, $1,728,000 maturing in 2001, $732,000 maturing in 2002 and $300,000
maturing in 2003, 2004 and 2005, respectively. Such advances are secured by
assets amounting to $41,522,210 at June 30, 1996. Such amount is composed of
capital stock in the FHLB, certain of the Savings Bank's mortgage loans and
mortgage-backed securities, and certain other assets. Accrued interest payable
on advances from the FHLB totaled $160,709 at June 30, 1996.
NOTE H - Provision for (Benefit from) Income Taxes
Federal and state income taxes consisted of the following:
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended
--------------------------- December 31,
1996 1995 1995
----------- ----------- ----------
<S> <C> <C> <C>
State income tax current expense $ 65,275 $ 75,700 $ 49,300
Federal income tax current expense 205,000 342,300 180,000
Deferred income tax expense 90,500 32,000 693,000
Change in valuation allowance -- (1,476,000) (1,476,000)
----------- ----------- ----------
$ 360,775 $(1,026,000) $ (553,700)
=========== =========== ==========
Home Federal's income tax differs from the tax determined by applying the
statutory Federal income tax rate to income before taxes for the following
reasons:
<CAPTION>
Six Months Ended June 30, Year Ended
--------------------------- December 31,
1996 1995 1995
----------- ----------- ------------
<S> <C> <C> <C>
Tax at Federal income tax rate $ 435,447 $ 289,393 $ 671,221
Bad debt deduction (106,591) (4,080) 177,704
State income tax 65,275 75,700 49,300
Change in valuation allowance -- (1,476,000) (1,476,000)
Other - net (33,356) 88,987 24,075
----------- ----------- -----------
$ 360,775 $(1,026,000) $ (553,700)
=========== =========== ===========
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 June 30, 1996 and 1995 and December 31, 1995 relate
to the following:
<CAPTION>
June 30,
------------------------- December 31,
1996 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Deferred Tax Assets:
Allowances for losses $1,576,000 $2,331,000 $1,723,000
Unrealized loss on securities
available for sale 96,000 334,000 110,000
Intangible asset 369,000 323,000 343,000
Deferred fees on loans 91,000 198,000 133,000
Deferred directors' fees 140,000 146,000 150,000
Other, net 140,000 45,000 45,000
---------- ---------- ----------
Total deferred tax assets $2,412,000 $3,377,000 $2,504,000
Less valuation allowances 474,000 474,000 474,000
---------- ---------- ----------
Total Deferred Tax Assets
less Valuation Allowances $1,938,000 $2,903,000 $2,030,000
Deferred Tax Liabilities -
Depreciation and amortization 333,000 308,000 320,000
---------- ---------- ----------
Net Deferred Tax Assets $1,605,000 $2,595,000 $1,710,000
========== ========== ==========
Federal and state current income taxes payable is as follows:
<CAPTION>
June 30,
-------------------- December 31,
1996 1995 1995
-------- ------- ------------
<S> <C> <C> <C>
Current (refundable) payable:
State $ (38,000) $ 18,000 $ (65,000)
Federal (316,000) 105,000 (290,000)
</TABLE>
NOTE I - Common Stock and Earnings Per Share
Earnings per share have been computed based on 2,519,010 average shares
outstanding in 1995 and 1994. On March 29, 1996, Home Federal paid a $100,760
or $0.04 per share dividend to stockholders of record on March 15, 1996.
<PAGE>
HOME FEDERAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1996
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.
On April 2, 1996, Home Federal entered into the Acquisition Agreement with
F&M which provides for the acquisition of Home Federal by F&M. See Note B of the
unaudited notes to consolidated financial statements.
Financial Condition
The Corporation's total assets increased $5.1 million or 2.4% to $219.7
million from December 31, 1995 to June 30, 1996, due primarily to a $6.1 million
increase in net loans, a $1.2 million increase in mortgage-backed securities and
a $2.0 million increase in investment securities, which increases were partially
offset by a $2.3 million decrease in cash and cash equivalents and a $1.7
million decrease in real estate owned, net. The Corporation's total liabilities
increased by $4.3 million or 2.2% to $200.5 million from December 31, 1995 to
June 30, 1996, primarily due to a $2.2 million increase in savings accounts, and
a $1.6 million increase in borrowings. Stockholders' equity increased $842,000
to $19.2 million at June 30, 1996, due primarily to a $819,000 increase in
retained earnings.
Nonperforming Assets
The Corporation's nonperforming assets decreased by $2.4 million or 18.8%
from $12.9 million or 6.0% of total assets at December 31, 1995 to $10.5 million
or 4.8% of total assets at June 30, 1996. At June 30, 1996, the allowances for
possible loan losses amounted to $3.7 million or 2.6% of loans, net, and 73.6%
of total nonperforming loans. At June 30, 1996, the allowance for losses on
real estate owned held for sale (REO) amounted to $1.2 million or 22.1% of REO,
net. While management presently believes that its allowances for possible loan
losses and REO losses are adequate, no assurance can be given that future
provisions for possible loan or REO losses may not be necessary. See Notes E and
F of the unaudited notes to consolidated financial statements.
RESULTS OF OPERATIONS
Net Income
Net income for the six months ended June 30, 1996 amounted to $920,000,
compared to net income of $1.9 million during the comparable period in 1995. Net
income for the three months ended June 30, 1996 amounted to $535,000 compared to
net income of $1.5 million during the comparable period in 1995. The decrease in
net income during both the three and six month periods ended June 30, 1996 was
due primarily to increased provisions for income taxes and increased other
expenses which was partially offset by increases in other income and net
interest income.
Net Interest Income
Net interest income for the six months ended June 30, 1996 increased by
$359,000 or 10.1%, over the same period in 1995, due to increased interest
income which more than offset increased interest expense. Interest income for
the six months ended June 30, 1996 increased by $441,000 or 5.7% compared to
the same period in 1995, while interest expense increased by $82,000 or 1.9%
during the six months ended June 30, 1996 as compared to the same period in
the prior year. Net interest income for the three months ended June 30, 1996
increased by $298,000 or 17.0% over the same period in 1995 due to increased
interest income and decreased interest expense. Interest income for the three
months ended June 30, 1996 increased by $246,000 or 6.3% compared to the same
period in 1995, while interest expense decreased by $52,000 or 2.4% during the
three months ended June 30, 1996 as compared to the same period in the prior
year.
During each of the three and six month periods, the increase in interest
income was due primarily to an increase in the average balances of loans
receivable, mortgage-backed securities and short-term interest bearing deposits
and an increase in the average rate earned on loans receivable and
mortgage-backed securities. Such increases were offset by decreases in the
average balances of investment securities and federal funds. The primary reason
for the increase in the average balance of short-term interest bearing deposits
was the Savings Bank's investment of funds in short-term investments prior to
purchasing mortgage-backed securities. The increase in the average balance of
mortgage- backed securities in 1996 was due to the Savings Bank's purchasing
$14.0 million in mortgage-backed securities, which was funded by the sale of
$8.0 million in mortgage-backed securities and funds from increased savings
accounts, loan repayments and loan sales. The increase in interest expense
during the six months ended June 30, 1996 was primarily the result of increases
in the average balances of savings accounts and the average rates paid thereon
which were partially offset by a decrease in the average balance of advances
from the Federal Home Loan Bank of Atlanta ("FHLB"). The increase in the average
balance of savings accounts was due to competitive pricing, as the Savings Bank
sought funds in order to originate loans, purchase mortgage-backed and
investment securities and repay advances. The average balance of advances from
the FHLB of Atlanta decreased primarily due to the Savings Bank utilizing excess
funds to repay advances. The decrease in interest expense during the three
months ended June 30, 1996 as compared to the comparable period in 1995 was
primarily due to decreases in the average balance of FHLB advances and the rates
paid on FHLB advances and savings accounts which was partially offset by
increases in the average balance of savings accounts.
The Savings Bank's interest rate spread increased from 3.8% during the six
months ended June 30, 1995 to 4.0% during the six months ended June 30, 1996,
and the ratio of interest earning assets to interest-bearing liabilities
increased from 98.9% during the six months ended June 30, 1995 to 100.4% during
the six months ended June 30, 1996. The Savings Bank's interest rate spread
increased from 3.8% during the three months ended June 30, 1996 to 4.1% during
the three months ended June 30, 1995, and the ratio of interest earning assets
to interest-bearing liabilities increased from 98.7% during the three months
ended June 30, 1995 to 100.9% during the three months ended June 30, 1996.
Other Income
Other income totaled $1.3 million and $921,000 for the six months ended
June 30, 1996 and 1995, respectively. Other income totaled $606,000 and $500,000
for the three months ended June 30, 1996 and 1995, respectively. The $351,000 or
38.1% increase during the six months ended June 30, 1996 and the $106,000, or
21.1% increase during the three months ended June 30, 1996 was primarily due to
increases in income related to loan originations, loan sales, stockbrokerage and
insurance commissions, fees on checking and savings accounts and gain on sales
of real estate owned, which was partially offset by losses on sales of
mortgage-backed securities.
Operating Expenses
Operating expenses amounted to $3.9 million and $3.6 million for the six
months ended June 30, 1996 and 1995, respectively. Operating expenses amounted
to $2.0 million and $1.8 million for the three months ended June 30, 1996 and
1995, respectively. During the six months ended June 30, 1996, the Corporation
experienced increases in employee compensation and benefits, office occupancy
and equipment expenses and other expenses, which were substantially offset by
deceases in provision for losses on REO. Employee compensation and benefits
increased due to increased profit sharing expenses, deferred directors'
compensation expenses, merit increases and incentive compensation expenses.
Office occupancy and equipment expenses increased due to increased depreciation
on office properties and equipment due to computer technology upgrades during
1995 and 1996 and the renovation of a branch location in 1995. Other operating
expenses increased due to increases in professional fees and unrealized losses
on mortgage loans held for sale which were offset by decreases in insurance
expense, ATM expenses and expenses associated with REO operations, net and
impaired loan expenses.
Provision for losses on real estate owned amounted to $130,000 for the
six months ended June 30, 1995. The decrease in 1996 reflects managements
evaluation of the fair value less disposition costs of such real estate. See
Note F of the unaudited notes to consolidated financial statements.
During the three months ended June 30, 1996, the Corporation experienced
increases in employee compensation and benefits, occupancy and equipment
expenses, advertising and promotion expenses and other expenses. Employee
compensation and benefits increased due to increased profit sharing expenses,
deferred directors compensation expenses, merit increases and incentive
compensation expenses. Office occupancy and equipment increased due to increased
depreciation on office properties and equipment due to computer technology
upgrades and the renovation of a branch location. Advertising and promotion
increased due to marketing expenses attributable to the promotion of Home
Federal's products and the sponsorship of several community events. Other
expenses increased due to increased professional fees and expenses associated
with REO operations, net.
Income Taxes
Home Federal's income tax expense totaled $88,000 and $361,000 for the
three and six months ended June 30, 1996 as compared to an income tax benefit of
$1.0 million during each of such periods in the prior year, respectively. The
increase in income tax expense for the three and six months ended June 30, 1996
as compared to the prior year was attributable to more normalized income tax
provisions during the 1996 periods, while the provisions for the 1995 periods
were impacted by a reduction in the valuation allowance on deferred tax assets
due to management's determination that a significant portion of such deferred
tax assets were realizable, which resulted in a tax benefit.
ASSET AND LIABILITY MANAGEMENT
Home Federal has undertaken a variety of strategies to better match the
interest-rate sensitivity of its assets and liabilities. Home Federal's
present policy is to emphasize the origination for portfolio of 10-15 year fixed
rate residential mortgage loan products 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 Savings Bank
originates both fixed-rate and adjustable-rate loans. Single-family, fixed-rate
loans originated with terms greater that 20 years are 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 portfolio.
During the six months ended June 30, 1996 and 1995, Home Federal originated
$17.9 million and $13.6 million, respectively, of single-family residential
loans. Of such amounts, $8.7 million and $9.1 million provided for periodic
adjustment of interest rates, or 48.6% and 66.7% of single-family residential
loans originated by Home Federal during the respective periods. During 1996,
Home Federal originated $2.2 million of fixed-rate loans with 10 or 15 year
maturities.
Home Federal also has continued to originate 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 $8.7 million during the six months ended June 30, 1996
as compared to $7.5 million during the comparable period in 1995.
During 1996, Home Federal purchased investment and mortgage-backed
securities to maintain its asset mix. The Savings Bank purchased $2.0 million
and $14.0 million of investment and mortgage-backed securities, respectively,
which was funded by savings deposits, loan sales and repayments, and the
proceeds of $8.0 million from the sale of mortgage-backed securities available
for sale.
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 and mortgage-backed securities repayments and advances from the
FHLB of Atlanta to fund loan originations and commitments.
REGULATORY CAPITAL REQUIREMENTS
The Savings Bank is subject to regulations of the Office of Thrift
Supervision ("OTS") that impose certain minimum regulatory capital requirements.
At June 30, 1996 the Savings Bank's tangible, core and risk-based capital
exceeded regulatory requirements. The following table summarizes, as of June 30,
1996, the Savings Bank's regulatory capital requirements, the amount of its
actual capital and the amount of its excess capital on a dollar and percentage
basis.
<TABLE>
<CAPTION>
June 30, 1996
---------------------------------
Capital Capital
Capital Requirement Excess
------- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Dollar basis:
Tangible $18,907 $ 3,281 $15,626
Core 18,907 6,561 12,346
Risk-based 20,643 10,976 9,667
Percentage basis:
Tangible 8.6% 1.5% 7.1%
Core 8.6 3.0 5.6
Risk-based 15.1 8.0 7.1
</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.
Liquidity
Home Federal is required under applicable Federal regulations to maintain
specified levels of "liquid" investments including United States 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 12.5% for the month ended June 30, 1996. At
June 30, 1996, Home Federal was required to maintain liquid investments
amounting to $9.1 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, FHLB advances and other borrowings. During the
past several years, Home Federal has used such funds primarily to meet its
ongoing commitments to fund maturing savings certificates and savings
withdrawals, fund existing and continuing loan commitments, purchase
mortgage-backed securities and maintain its liquidity.
At June 30, 1996, the total of approved loan origination commitments
amounted to $2.2 million, exclusive of loans in process. The amount of savings
certificates which are scheduled to mature during the twelve months ended June
30, 1997 is $59.2 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. During the six months ended June 30, 1996,
the Savings Bank experienced a $2.2 million increase in savings accounts. The
Savings Bank utilized these funds to repay FHLB advances and purchase investment
and mortgage-backed securities during the six months ended June 30, 1996.
IMPACT OF INFLATION ON 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.
RECAPITALIZATION OF SAIF AND RELATED LEGISLATIVE PROPOSALS
The deposits of the Savings Bank are currently insured by the Savings
Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation
(FDIC). Both the SAIF and the Bank Insurance Fund (BIF), the federal deposit
insurance fund that covers commercial bank deposits, are required by law to
attain and thereafter maintain a reserve ratio of 1.25% of insured deposits. The
BIF has achieved a fully funded status in contrast to the SAIF and, therefore,
as discussed below, the FDIC recently substantially reduced the average deposit
insurance premium paid by BIF-insured commercial banks to a level substantially
below the average premium paid by SAIF-insured institutions.
In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semiannual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000) for
institutions in the lowest risk category. Deposit insurance premiums for SAIF
members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category). Accordingly, in the absence of
further legislative action, SAIF members such as the Savings Bank will be
competitively disadvantaged as compared to commercial banks by the resulting
premium differential. It is anticipated that, under present conditions, it will
be at least several years before the SAIF reaches a reserve ratio of 1.25% of
insured deposits.
The U.S. House of Representatives and Senate have actively considered
legislation which would have eliminated the premium differential between SAIF
- -insured institutions and BIF-insured institutions by recapitalizing the SAIF's
reserves to the required ratio. The proposed legislation would have provided
that all SAIF member institutions pay a special one-time assessment to
recapitalize the SAIF, which in the aggregate would have been sufficient to
bring the reserve ratio in the SAIF to 1.25% of insured deposits. Based on the
current level of reserves maintained by the SAIF, it was anticipated that the
amount of the special assessment required to recapitalize the SAIF would have
been approximately 80 to 85 basis points of the SAIF-assessable deposits. It was
anticipated that after the recapitalization of the SAIF, premiums paid by SAIF-
insured institutions would be reduced to match those currently being assessed
BIF-insured commercial banks. The legislation also provided for the merger of
the BIF and the SAIF, with such merger being conditioned upon the prior
elimination of the thrift charter.
The legislation discussed above had been, for some time, included as part
of a fiscal 1996 federal budget bill, but was eliminated prior to the bill being
enacted on April 26, 1996. In light of the legislation's elimination and the
uncertainty of the legislative process generally, management cannot predict
whether legislation reducing SAIF premiums and/or imposing a special one-time
assessment will be adopted, or, if adopted, the amount of the assessment, if
any, that would be imposed on the Savings Bank.
If legislation were to be enacted in the future which would assess a one
- -time special assessment of 85 basis points, the Savings Bank would (based upon
the Savings Bank's SAIF deposits as of June 30, 1996) pay approximately
$865,000, net of related tax benefits. In addition, the enactment of such
legislation might have the effect of immediately reducing the Savings Bank's
capital by such an amount. Nevertheless, management does not believe, based upon
the foregoing assumptions, that a one-time assessment of this nature would have
a material adverse effect on Home Federal's consolidated financial condition.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and its subsidiaries are involved in various legal
proceedings occurring in the ordinary course of business. There are no
material legal proceedings to which the Corporation or any of its
subsidiaries is a part, or to which any of their property is subject.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HOME FEDERAL CORPORATION
BY: /s/ Richard W. Phoebus
August 13, 1996
Date Richard W. Phoebus
President and
Chief Executive Officer
BY: /s/ Salvatore M. Savino
August 13, 1996
Date Salvatore M. Savino
Vice President and Treasurer,
Chief Financial Officer
(principal financial and
accounting officer)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,796
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0
0
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</TABLE>
