SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended June 30, 1996
or
Transition report pursuant to Section 13 or 15(d) or the Securities Exchange Act
of 1934
For the transition period from ___________ to _____________
Commission file number: 0-18847
HOME FEDERAL BANCORP
(Exact name of registrant as specified in its charter)
United States 35-1807839
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
222 West Second Street, Seymour, Indiana 47274
(Address of Principal Executive Offices) (Zip Code)
Registrants telephone number including area code: (812) 522-1592
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
and
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (l) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES ______ NO ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not 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-K
or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of September 20, 1996, was $56,981,839.
The number of shares of the Registrants Common Stock, no par value, outstanding
as of September 20, 1996, was 2,226,282 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1996,
are incorporated into Part II. Portions of the Proxy Statement for the 1996
annual meeting of shareholders are incorporated into Part I and Part III.
Exhibit Index on Page 37
Page l of 41 Pages
<PAGE>
HOME FEDERAL BANCORP
FORM 10-K
INDEX
Item 1. Business.................................................. 1
Item 2. Properties................................................ 29
Item 3. Legal Proceedings......................................... 30
Item 4. Submission of Matters to a Vote
of Security Holders..................................... 30
Item 4.5 Executive Officers of Home Federal Bancorp................ 30
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................. 30
Item 6. Selected Financial Data................................... 32
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................ 32
Item 8. Financial Statements and Supplementary Data............... 32
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial
Disclosure................................................ 32
Item 10. Directors and Executive Officers of the Registrant........ 32
Item 11. Executive Compensation.................................... 32
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................... 32
Item 13. Certain Relationships and Related Transactions............ 32
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................. 33
SIGNATURES .......................................................... 34
<PAGE>
PART I
Item 1. Business
General
Home Federal Bancorp (the "Company" or "HFB") is an Indiana corporation
organized in August, 1990 to become a unitary savings and loan holding company.
The principal asset of the Company consists of 100% of the issued and
outstanding capital stock of Home Federal Savings Bank ("Home Federal" or the
"Bank"). The Company was a shell corporation until Home Federal reorganized in
March, 1993.
Home Federal began operations in Seymour, Indiana under the name New
Building and Loan Association in 1908, and received its federal charter and
changed its name to Home Federal Savings and Loan Association in 1950. On
November 9, 1983, Home Federal Savings and Loan Association became a federal
savings bank and its name was changed to Home Federal Savings Bank. On January
14, 1988, Home Federal converted to stock form and on March 1, 1993, Home
Federal reorganized by converting each outstanding share of its common stock
into one share of common stock of the Company, thereby causing the Company to be
the holding company of Home Federal. Home Federal currently provides services
through its main office at 222 West Second Street in Seymour, Indiana, fifteen
full service branches located in south central Indiana, and the Magic Line(R)
network of automated teller machines at seven locations in Seymour, Columbus,
North Vernon and Batesville. In August, 1994, Home Federal opened a loan
production office in Greensburg, Indiana. As a result, Home Federal serves
primarily Bartholomew, Jackson, Jefferson, Jennings, Scott, Ripley, Decatur and
Washington Counties in Indiana. Home Federal also participates in the nationwide
electronic funds transfer networks known as Plus System, Inc.(R) and Cirrus(R)
System.
Home Federal directly and, through its service corporation subsidiary,
indirectly offers a wide range of consumer and commercial financial services.
These services include: (i) residential and commercial real estate loans; (ii)
NOW accounts; (iii) regular and term savings accounts and savings certificates;
(iv) Linsco Private Ledger Financial Services, Inc. ("Private Ledger")
full-service securities brokerage services; (v) consumer loans; (vi) annuity and
life insurance products; (vii) Individual Retirement Accounts and Keogh plans;
(viii) commercial loans; (ix) real estate development; and (x) commercial demand
deposit accounts.
Home Federal's primary source of revenue is interest from lending
activities. Its principal lending activity is the origination of conventional
mortgage loans to enable borrowers to purchase or refinance one- to four-family
residential real property. These loans are generally secured by first mortgages
on the property. Virtually all of the real estate loans originated by Home
Federal are secured by properties located in Indiana, although Home Federal has
authority to make or purchase real estate loans throughout the United States. In
addition, Home Federal makes secured and unsecured consumer related loans
(including consumer auto loans, second mortgage, home equity, mobile home, and
savings account loans) and commercial loans secured by mortgages on the
underlying property. At June 30, 1996, approximately 19.6% of its loans were
consumer-related loans and 13.6% of its loans were commercial mortgage loans.
Home Federal also makes construction loans, which constituted 7.4% of Home
Federal's loans at June 30, 1996. Finally, Home Federal makes commercial loans,
which constituted 7.5% of its loans at June 30, 1996.
<PAGE>
Lending Activities
Loan Portfolio Data
The following two tables set forth the composition of Home Federal's
loan portfolio by loan type and security type as of the dates indicated. The
third table represents a reconciliation of gross loans receivable after
consideration of undisbursed portions of loans in process, deferred loan fees,
the allowance for loan losses, unearned discounts on loans and purchase
discounts.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1996 1995 1994
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars In Thousands)
TYPE OF LOAN
First mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One-to four-family residential loans................... $275,975 50.9% $266,909 55.1% $276,648 59.7%
Commercial and multi-family............................ 73,853 13.6% 63,215 13.0% 59,830 12.9%
Loans on property under construction................... 40,407 7.4% 23,982 4.9% 25,547 5.5%
Loans on unimproved acreage............................ 3,252 0.6% 2,554 0.5% 2,053 0.4%
FHA and VA loans....................................... 2,143 0.4% 1,600 0.3% 1,735 0.4%
Second mortgage, home equity.............................. 50,372 9.3% 40,536 8.4% 29,376 6.3%
Commercial loans.......................................... 40,609 7.5% 28,881 6.0% 21,660 4.7%
Consumer loans............................................ 11,952 2.2% 11,392 2.3% 4,381 1.0%
Auto loans................................................ 20,883 3.8% 21,506 4.4% 19,164 4.1%
Mobile home loans......................................... 18,833 3.5% 20,258 4.2% 19,287 4.2%
Savings account loans..................................... 4,199 0.8% 4,407 0.9% 3,684 0.8%
-------- ----- -------- ----- -------- -----
Gross loans receivable................................. $542,478 100.0% $485,240 100.0% $463,365 100.0%
======== ===== ======== ===== ======== =====
TYPE OF SECURITY
Residential:
One- to four-family.................................... $358,003 66.0% $326,296 67.3% $326,055 70.4%
Multi-dwelling units................................... 23,807 4.4% 20,488 4.2% 22,004 4.7%
Commercial real estate.................................... 60,940 11.2% 49,458 10.2% 45,077 9.7%
Commercial................................................ 40,609 7.5% 28,881 6.0% 21,660 4.7%
Mobile home............................................... 18,833 3.5% 20,258 4.2% 19,287 4.2%
Savings account........................................... 4,199 0.8% 4,407 0.9% 3,684 0.8%
Auto ..................................................... 20,883 3.8% 21,506 4.4% 19,164 4.1%
Other consumer............................................ 11,952 2.2% 11,392 2.3% 4,381 1.0%
Land acquisition.......................................... 3,252 0.6% 2,554 0.5% 2,053 0.4%
-------- ----- -------- ----- -------- -----
Gross loans receivable............................... $542,478 100.0% $485,240 100.0% $463,365 100.0%
======== ===== ======== ===== ======== =====
LOANS RECEIVABLE-NET
Gross loans receivable.................................... $542,478 104.3% $485,240 103.2% $463,365 103.9%
Deduct:
Unidisbursed portion of loans in process.................. (18,249) (3.5) (11,291) (2.4) (13,377) (3.0)%
Deferred net loan fees.................................... (963) (0.2) (1,069) (0.2) (1,204) (0.3)%
Allowance for loan losses................................. (3,061) (0.6) (2,806) (0.6) (2,580) (0.6)%
Unearned discounts........................................ (19) 0.0 (53) --- (114) ---%
Purchase discount......................................... (89) 0.0 (138) --- (187) ---%
-------- ----- -------- ----- -------- -----
Net loans receivable................................... $520,097 100.0% $469,883 100.0% $445,903 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------
1993 1992
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
TYPE OF LOAN
First mortgage loans:
<S> <C> <C> <C> <C>
One-to four-family residential loans................... $255,074 61.4% $226,612 61.0%
Commercial and multi-family............................ 51,393 12.4% 46,466 12.5%
Loans on property under construction................... 21,760 5.2% 8,143 2.2%
Loans on unimproved acreage............................ 1,988 0.5% 1,502 0.4%
FHA and VA loans....................................... 2,531 0.6% 3,212 0.9%
Second mortgage, home equity.............................. 27,157 6.5% 27,694 7.4%
Commercial loans.......................................... 17,234 4.2% 17,697 4.8%
Consumer loans............................................ 5,796 1.4% 6,278 1.7%
Auto loans................................................ 11,719 2.8% 14,597 3.9%
Mobile home loans......................................... 16,416 4.0% 15,230 4.1%
Savings account loans..................................... 4,295 1.0% 4,225 1.1%
-------- ----- -------- -----
Gross loans receivable................................. $415,363 100.0% $371,656 100.0%
======== ===== ======== =====
TYPE OF SECURITY
Residential:
One- to four-family.................................... $298,478 71.8% $265,385 71.4%
Multi-dwelling units................................... 16,664 4.0% 8,678 2.3%
Commercial real estate.................................... 42,773 10.3% 38,064 10.3%
Commercial................................................ 17,234 4.2% 17,697 4.8%
Mobile home............................................... 16,416 4.0% 15,230 4.1%
Savings account........................................... 4,295 1.0% 4,225 1.1%
Auto ..................................................... 11,719 2.8% 14,597 3.9%
Other consumer............................................ 5,796 1.4% 6,278 1.7%
Land acquisition.......................................... 1,988 .5% 1,502 .4%
-------- ----- -------- -----
Gross loans receivable............................... $415,363 100.0% $371,656 100.0%
======== ===== ======== =====
LOANS RECEIVABLE-NET
Gross loans receivable.................................... $415,363 103.8% $371,656 102.1%
Deduct:
Unidisbursed portion of loans in process.................. (11,603) (2.9) (4,104) (1.1)%
Deferred net loan fees.................................... (1,082) (.3) (820) (.2)%
Allowance for loan losses................................. (2,257) (.5) (2,123) (.6)%
Unearned discounts........................................ (220) ---- (408) (.1)%
Purchase discount......................................... (221) (.1) (242) (.1)%
-------- ----- -------- -----
Net loans receivable................................... $399,980 100.0% $363,959 100.0%
======== ===== ======== =====
</TABLE>
The following tables summarize the contractual maturities for Home Federal's
loan portfolio (including participations and mortgage-backed certificates) for
the fiscal periods indicated and the interest rate sensitivity of loans due
after one year:
<TABLE>
<CAPTION>
Maturities in Fiscal
Balance ------------------------------------------------------------------------
Outstanding 2000 2002 2007 2012
At June 30, to to to and
1996 1997 1998 1999 2001 2006 2011 thereafter
---- ---- ---- ---- ---- ---- ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate............... $405,800 $7,174 $2,603 $5,027 $17,795 $90,628 $119,548 $163,025
Mortgage-backed
certificates,
collateralized mortgage
obligations............ 27,975 215 1,303 2,734 6,744 5,558 5,977 5,444
Construction loans........ 40,252 6,091 3,478 --- --- 2,582 1,115 26,986
Commercial loans.......... 40,618 12,098 7,675 4,110 5,427 8,048 2,972 288
Other loans.............. 55,808 11,591 4,124 6,952 15,827 5,893 11,311 110
-------- ------- ------- ------- ------- -------- -------- --------
Total.................. $570,453 $37,169 $19,183 $18,823 $45,793 $112,709 $140,923 $195,853
======== ======= ======= ======= ======= ======== ======== ========
</TABLE>
Interest Rate Sensitivity:
<TABLE>
<CAPTION>
Due After June 30, 1997
-------------------------------------------
Fixed Variable Rate
Rate and Balloon
--------- --------------
(In Thousands)
<S> <C> <C>
Real estate.............................................. $122,930 $275,696
Mortgage-backed certificates,
collateralized mortgage obligations................... 23,399 4,361
Construction loans....................................... 4,335 29,826
Commercial loans ........................................ 6,588 21,932
Other loans.............................................. 44,193 24
-------- --------
Total................................................. $201,445 $331,839
======== ========
</TABLE>
Residential Mortgage Loans
Approximately 96% of Home Federal's residential mortgage lending
activity involves the origination of loans secured by one-to four-family
residential properties. Home Federal is authorized to make one-to four-family
residential loans without any limitation as to interest rate, amount, or number
of interest rate adjustments. Pursuant to federal regulations, such loans must
require at least semi-annual payments and be for a term of not more than 40
years, and, if the interest rate is adjustable, it must be correlated with
changes in a readily verifiable index. Home Federal also makes residential
mortgage loans secured by mid-size multi-family dwelling units and apartment
complexes. The residential mortgage loans included in Home Federal's portfolio
are primarily conventional loans. As of June 30, 1996, $392 million, or 72.3%,
of Home Federal's total loan portfolio consisted of residential first mortgage
loans, $278 million, or 51.3%, of which were secured by one- to four-family
homes.
<PAGE>
Many of the residential mortgage loans currently offered by Home Federal have
adjustable rates. These loans generally have interest rates which adjust (up or
down) semi-annually or annually, with maximum rates which vary depending upon
when the loans are written. The adjustment is currently based upon the weekly
average of the one-year Treasury constant maturity rate.
The rates offered on Home Federal's adjustable-rate and fixed-rate
residential mortgage loans are generally competitive with the rates offered by
other financial institutions in its south central Indiana market area.
Although Home Federal's residential mortgage loans are written for
amortization terms up to 30 years, due to prepayments and refinancings, its
residential mortgage loans in the past have generally remained outstanding for a
substantially shorter period of time than the maturity terms of the loan
contracts.
All of the residential mortgages Home Federal currently originates
include "due on sale" clauses, which give Home Federal the right to declare a
loan immediately due and payable in the event that, among other things, the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not repaid. Qualified borrowers are not permitted to
assume mortgages at rates below the current market rate, unless the instrument
does not include a due on sale provision. Home Federal utilizes the due on sale
clause as a means of increasing the rate of interest on existing loans by
negotiating with the buyer new interest rates at the time of sale.
The Office of Thrift Supervision (the "OTS") requires institutions it
regulates to establish loan-to-value ratios consistent with their supervisory
loan-to-value limits. The supervisory limits adopted by the OTS are 65% for raw
land loans, 75% for land development loans, 80% for construction loans
consisting of commercial, multi-family and other non-residential construction,
and 85% for improved property. Multi-family construction includes condominiums
and cooperatives. A loan-to-value limit has not been established for permanent
mortgage or home equity loans on owner-occupied one-to four-family residential
property. However, for any such loan with a loan-to-value ratio that equals or
exceeds 90 percent at origination, an institution should require appropriate
credit enhancement in the form of either mortgage insurance or readily
marketable collateral. The Board of Directors of Home Federal Savings Bank
approved a set of loan-to-value ratios consistent with these supervisory limits.
In some instances, Home Federal's limits are more stringent than those set by
the OTS.
It may be appropriate in individual cases to originate loans with
loan-to-value ratios in excess of the OTS limits based on the support provided
by other credit factors. The aggregate amount of all loans in excess of these
limits should not exceed 100 percent of total capital. Moreover, loans for all
commercial, agricultural, multi-family or other non-one-to four-family
residential properties should not exceed 30 percent of total capital.
Commercial Mortgage Loans
At June 30, 1996, 13.6% of Home Federal's total loan portfolio
consisted of mortgage loans secured by commercial real estate. These properties
consisted primarily of shopping centers, office buildings, nursing homes,
manufacturing plants, warehouses, motels, apartment buildings and churches
located in central or south central Indiana. The commercial mortgage loans are
generally adjustable-rate loans, are written for terms not exceeding 30 years,
and require an 80% loan-to-value ratio. Commitments for these loans in excess of
$1 million must be approved in advance by Home Federal's Board of Directors. The
largest such loan as of June 30, 1996, had a balance of $3.8 million. At that
date, approximately 99% of Home Federal's commercial real estate loans consisted
of loans secured by real estate located in Indiana.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), a thrift's portfolio of commercial real estate loans is
limited to 400% of its capital. Also, FIRREA's Qualified Thrift Lender test
limits the amount of commercial real estate loans made by thrifts. See
"Regulation --Qualified Thrift Lender." However, Home Federal currently complies
with the commercial real estate loan
<PAGE>
limitation, and neither that limitation nor the Qualified Thrift Lender test
significantly limits the ability of Home Federal to make commercial real estate
loans in its market area.
Generally, commercial mortgage loans involve greater risk to Home
Federal than do residential loans. Commercial mortgage loans typically involve
large loan balances to single borrowers 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 project and
thus may be subject to adverse conditions in the real estate market or in the
general economy.
Construction Loans
Home Federal offers conventional short-term construction loans. At June
30, 1996, 7.4% of Home Federal's total loan portfolio consisted of construction
loans. Normally, a 95% or less loan-to-value ratio is required from
owner-occupants of residential property, an 80% loan-to-value ratio is required
from persons building residential property for sale or investment purposes, and
an 80% loan-to-value ratio is required for commercial property. Construction
loans are also made to builders and developers for the construction of
residential or commercial properties on a to-be-occupied or speculative basis.
Construction normally must be completed in six months for residential loans. The
largest such loan on June 30, 1996, was $3.3 million.
Consumer Loans
Federal laws and regulations permit federally chartered savings
institutions to make secured and unsecured consumer loans in an aggregate amount
of up to 35% of the institution's total assets. In addition, a federally
chartered savings institution has lending authority above the 35% limit for
certain consumer loans, such as property improvement loans and loans secured by
savings accounts. However, the Qualified Thrift Lender test restricts some
thrifts from making consumer loans. See "Regulation -- Qualified Thrift Lender."
Consumer-related loans, consisting of second mortgage and home equity
loans, mobile home loans, automobile loans, loans secured by savings accounts
and consumer loans were $106 million on June 30, 1996, or approximately 19.6% of
Home Federal's total loan portfolio.
Second mortgage loans are made for terms of 5 - 15 years, and are
fixed-rate loans. Home Federal's minimum for such loans is $5,000, and Home
Federal will loan up to 90% of the appraised value of the property, less the
existing mortgage amount(s). As of June 30, 1996, Home Federal had $22.3 million
of second mortgage loans, which equaled 4.1% of its total loan portfolio. Home
Federal aggressively markets home equity loans, which are adjustable-rate loans.
As of June 30, 1996, Home Federal had $28.0 million drawn on its home equity
loans, or 5.2% of its total loan portfolio, with $34.9 million of additional
credit available to its borrowers under existing home equity loans.
Automobile loans are generally made for terms of up to five years. The
vehicles are required to be for personal or family use only. As of June 30,
1996, $20.9 million, or 3.8%, of Home Federal's total loan portfolio consisted
of automobile loans.
As of June 30, 1996, $18.8 million, or 3.5%, of Home Federal's total
loan portfolio consisted of mobile home loans. Generally, these loans are made
for terms of one year for each $1,000 of the sales price, with a maximum term of
15 years. On new mobile home loans, Home Federal requires a loan-to-value ratio
of 125% of the manufacturer's invoice price plus sales tax or 90% of the actual
sales price, whichever is lower. Also, Home Federal makes loans for previously
occupied mobile homes up to a 90% loan-to-value ratio based upon the actual
sales price or value as appraised, whichever is lower.
Loans secured by savings account deposits may be made up to 95% of the
pledged savings collateral at a rate 2% above the rate of the pledged savings
account or a rate equal to Home Federal's highest seven-year certificate of
deposit rate, whichever is higher. The loan rate will be adjusted as the rate
for the pledged savings account changes. As of June 30, 1996, $4.2 million, or
.8%, of Home Federal's total loan portfolio consisted of savings account loans.
<PAGE>
Although consumer-related loans generally involve a higher level of
risk than one-to four-family residential mortgage loans, their relatively higher
yields and shorter terms to maturity are believed to be helpful in Home
Federal's asset/liability management.
Commercial Loans
Collateral for Home Federal's commercial loans includes manufacturing
equipment, securities, real estate, inventory and accounts receivable. Terms of
these loans are normally for up to ten years and have adjustable rates tied to
reported prime rates and treasury indexes. Generally, commercial loans are
considered to involve a higher degree of risk than residential real estate
loans. However, commercial loans generally carry a higher yield and are made for
a shorter term than real estate loans. As of June 30, 1996, $40.6 million, or
7.5%, of Home Federal's total loan portfolio consisted of commercial loans.
Origination, Purchase and Sale of Loans
Home Federal originates residential loans in conformity with standard
underwriting criteria of the Federal Home Loan Mortgage Corporation ("FHLMC")
and the Federal National Mortgage Association ("FNMA") to assure maximum
eligibility for possible resale in the secondary market. Although Home Federal
currently has authority to lend anywhere in the United States, it has confined
its loan origination activities primarily to the central and south central
Indiana area. Home Federal's loan originations are generated primarily from
referrals from real estate brokers, builders, developers and existing customers,
newspaper, radio and periodical advertising and walk-in customers. Home
Federal's loan approval process is intended to assess the borrower's ability to
repay the loan, the viability of the loan and the adequacy of the value of the
property that will secure the loan.
Home Federal studies the employment, credit history, and information on
the historical and projected income and expenses of its individual and corporate
mortgagors to assess their ability to repay its mortgage loans. It uses its
staff appraisers or independent appraisers to appraise the property securing its
loans. It requires title insurance or abstracts accompanied by an attorney's
opinion evidencing Home Federal's valid lien on its mortgaged real estate and a
mortgage survey or survey coverage on all first mortgage loans and on other
loans when appropriate. Home Federal requires fire and extended coverage
insurance in amounts at least equal to the principal amount of the loan. It may
also require flood insurance to protect the property securing its interest. When
private mortgage insurance is required, borrowers must make monthly payments to
an escrow account from which Home Federal makes disbursements for taxes and
insurance. Otherwise, such escrow arrangements are optional.
The procedure for approval of loans on property under construction is
the same as for residential mortgage loans, except that the appraisal obtained
evaluates the building plans, construction specifications and estimates of
construction costs. Home Federal also evaluates the feasibility of the
construction project and the experience and track record of the builder or
developer.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
In order to generate loan fee and servicing income and recycle funds
for additional lending activities, Home Federal seeks to sell loans in the
secondary market. Loan sales can enable Home Federal to recognize significant
fee income and to reduce interest rate risk while meeting local market demand.
Home Federal sold $107 million of fixed-rate loans in the fiscal year ended June
30, 1996. Home Federal's current lending policy is to sell fixed-rate
residential mortgage loans exceeding 15 year maturities. In addition, when in
the opinion of management cash flow demands and asset/liability concerns
warrant, Home Federal will consider selling fixed-rate loans with 15 year
maturities as well as adjustable-rate loans. Home Federal sells participating
interests in commercial real estate loans in order to share the risk with other
lenders. Mortgage loans held for sale are carried at lower of cost or market
value, determined on an aggregate basis. The servicing is retained on most loan
sales except Veteran's Administration ("VA"), Federal Housing Administration
("FHA") and Indiana Housing Finance Authority ("IHFA") loans.
<PAGE>
When loans are sold, Home Federal typically retains the responsibility
for collecting and remitting loan payments, inspecting the properties securing
the loans, making certain that monthly principal and interest payments and real
estate tax payments are made on behalf of borrowers, and otherwise servicing the
loans. Home Federal receives a servicing fee for performing these services. The
amount of fees received by Home Federal varies, but is generally calculated as
an amount equal to 25 basis points per annum on the outstanding principal amount
of the loans serviced. The servicing fee is recognized as income over the life
of the loans. At June 30, 1996, Home Federal serviced $267 million of loans sold
to other parties. Gains and losses on sales of loans, loan participations and
mortgage-backed securities are recognized at the time of sale.
Management believes that purchases of loans and loan participations may
be desirable and evaluates potential purchases as opportunities arise. Such
purchases can enable Home Federal to take advantage of favorable lending markets
in other parts of the state, diversify its portfolio and limit origination
expenses. Any participations it acquires in commercial real estate loans require
a review of financial information on the borrower, a review of the appraisal on
the property by a local designated appraiser, an inspection of the property by a
senior loan officer, and a complete financial analysis of the loan. Servicing of
loans purchased is generally done by the seller. At June 30, 1996, approximately
1.1%, or $6.1 million, of Home Federal's gross loan portfolio was serviced by
others.
<PAGE>
The following table shows loan activity for Home Federal during the periods
indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1996 1995 1994
------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of periods.................... $469,883 $463,365 $415,363
Loans originated:
Mortgage loans and contracts:
Construction:
Residential................................................ 45,336 24,465 29,649
Commercial................................................. 12,058 6,361 9,814
Purchases:
Residential................................................ 112,549 88,692 57,937
Commercial................................................. 7,214 3,809 7,222
Refinancing.................................................. 88,861 26,723 111,938
Other........................................................ 1,302 1,054 867
------- -------- --------
Total...................................................... 267,320 151,104 217,427
Commercial..................................................... 51,537 28,556 14,909
Consumer....................................................... 35,800 42,037 52,211
------- -------- --------
Total loans originated....................................... 354,657 221,697 284,547
Loans purchased:
Residential.................................................... 2,140 --- ---
Other ......................................................... 1,477 --- 894
------- -------- --------
Total loans originated and purchased......................... 358,274 221,697 285,441
------- -------- --------
Real estate loans sold............................................ 107,500 52,686 109,584
Loan repayments and other deductions.............................. 178,179 147,136 127,855
------- -------- --------
Total loans sold, loan repayments and other deductions......... 285,679 199,822 237,439
------- -------- --------
Net loan activity................................................. 72,595 21,875 48,002
------- -------- --------
Gross loans receivable at end of period........................... 542,478 485,240 463,365
Adjustments....................................................... (22,381) (15,357) (17,462)
------- -------- --------
Net loans receivable at end of period............................. 520,097 $469,883 $445,903
======= ======== ========
</TABLE>
FIRREA contains a generally more stringent loans-to-one-borrower
limitation than that applicable to savings associations before FIRREA's
enactment. Under FIRREA, a savings association generally may not make any loan
to a borrower or its related entities if the total of all such loans by the
savings association exceeds 15% of its capital (plus up to an additional 10% of
capital in the case of loans fully collateralized by readily marketable
collateral); provided, however, that loans up to $500,000 irrespective of the
percentage limitations may be made and certain housing development loans of up
to $30 million or 30% of capital, whichever is less, are permitted. Loans made
prior to FIRREA, however, are not subject to these limitations. The maximum
amount which Home Federal could have loaned to one borrower and the borrower's
related entities at June 30, 1996 under the 15% of capital limitation was $8.2
million. At that date, the highest outstanding balance of loans by Home Federal
to one borrower and related entities was approximately $7.0 million, an amount
within such loans-to-one borrower limitations.
Origination and Other Fees
Home Federal realizes income from fees for originating loans, late
charges, NOW account fees and fees for other miscellaneous services. Home
Federal charges origination fees which range from 0% to 3.5% of the loan amount.
Late charges are assessed fifteen days after payment is due. Home Federal also
receives commissions on Linsco Private Ledger full-service securities brokerage
transactions which its subsidiary, Home Savings Corporation, offers to its
customers.
<PAGE>
Non-performing Assets
Late charges on mortgage loans are assessed by Home Federal if a
payment is not received by the 16th day following its due date. Any borrower
whose payment was not received by this time is mailed a past due notice. At the
same time the notice is mailed, the delinquent account is downloaded to a
PC-based collection system and assigned to a specific loan service
representative. The loan service representative will attempt to make contact
with the customer via a phone call to efficiently and effectively resolve any
problem that might exist. If contact by phone is not possible, mail, in the form
of preapproved form letters, will be used during the 16th and the 30th days
following a specific due date. After the 30th day following any due date, or at
the time a second payment has come due, if no contact has been made with the
customer, a personal visit will be conducted by a Loan Service Department
employee to interview the customer and inspect the property to determine the
borrower's ability to repay the loan. Prompt follow up is a goal of the Loan
Service Department with any and all delinquencies.
When an advanced stage of delinquency appears (generally around the
90th day of delinquency) and if repayment cannot be expected within a reasonable
amount of time, Home Federal will make a determination of how to proceed to
protect the interests of both the customer and Home Federal. It may be necessary
for the borrower to attempt to sell the property at Home Federal's request. If a
resolution cannot be arranged, Home Federal will consider avenues necessary to
obtain title to the property which include foreclosure and/or accepting a
deed-in-lieu of foreclosure, whichever may be most appropriate. However, Home
Federal attempts to avoid taking title to the property if at all possible.
Home Federal has acquired certain real estate in lieu of foreclosure by
acquiring title to the real estate and then reselling it. Home Federal performs
an updated title check of the property and, if needed, an appraisal on the
property before accepting such deeds.
On June 30, 1996, Home Federal held $48,000 of real estate and other
repossessed collateral acquired as a result of foreclosure, voluntary deed, or
other means. Such assets are is classified as "real estate owned" until sold.
When property is so acquired, it is recorded at the lower of cost or fair market
value less estimated cost to sell at the date of acquisition and any subsequent
writedown resulting therefrom is charged to the allowance for losses on real
estate owned. Interest accrual ceases on the date of acquisition and all costs
incurred from that date in maintaining the property are expensed.
Consumer loan borrowers who fail to make payments are contacted
promptly by the Loan Service Department in an effort to effectively and
efficiently cure any delinquency. A notice of delinquency is sent 10 days after
any specific due date when no payment has been received. The delinquent account
is downloaded to a PC-based collection system and assigned to a specific loan
service representative. The loan service representative will then attempt to
contact the borrower via a phone call.
Continued follow-up in the form of phone calls, letters, and personal
visits (when necessary) will be conducted to resolve delinquency. If a consumer
loan delinquency continues and advances to the 60-90 days past due status, a
determination will be made by Home Federal on how to proceed. Home Federal may
initiate action to obtain collateral (if any) or collect the debt through the
legal remedies available.
Collateral obtained as a result of loan default is retained by Home
Federal as an asset until sold or otherwise disposed.
The table below sets forth the amounts and categories of Home Federal's
non-performing assets (non-accrual loans, loans past due 90 days or more, real
estate owned, and other repossessed assets) for the last five years. It is the
policy of Home Federal that all earned but uncollected interest on conventional
loans be reviewed monthly to determine if any portion thereof should be
classified as uncollectible for any portion that is due but uncollected for a
period in excess of 90 days. The determination is based upon factors such as the
amount outstanding of the loan as a percentage of the appraised value of the
property and the delinquency record of the borrower.
<PAGE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-performing Assets:
Loans:
<S> <C> <C> <C> <C> <C>
Non-Accrual............................... $2,871 $2,431 $1,887 $1,428 $2,637
Past due 90 days or more.................. 89 81 115 1,292 755
Restructured loans.......................... 1 102 283 597 1,006
====== ====== ====== ====== ======
Total non-performing loans.................. 2,961 2,614 2,285 3,317 4,398
Real estate owned, net (1).................. --- --- 370 1,025 1,598
Other repossessed assets, net............... 48 41 71 25 35
Total non-performing assets (2)............. 3,009 $2,655 $2,726 $4,367 $6,031
------ ------ ------ ------ ------
Non-performing assets to total assets....... .48% .45% .50% .82% 1.19%
====== ====== ====== ====== ======
Loans with allowance for
uncollected interest...................... $2,872 $2,531 $2,167 $2,018 $2,989
</TABLE>
(1) Refers to real estate acquired by Home Federal through foreclosure,
voluntary deed, or in-substance foreclosure, net of reserve.
(2) At June 30, 1996, 54.2% of Home Federal's non-performing assets consisted
of residential mortgage loans, 20.3% consisted of commercial real estate
loans, 10.2% consisted of commercial loans, 13.7% consisted of
consumer-related loans, and 1.6% consisted of real estate owned and other
repossessed assets.
For the year ended June 30, 1996, the income that would have been
recorded under original terms on the above non-accrual and restructured loans
was $274,000 compared to actual income recorded of $155,000. At June 30, 1996,
Home Federal had approximately $5.5 million in loans that were 30-89 days past
due.
The allowance for loan losses represents amounts available to absorb
future loan losses. Loans or portions thereof are charged to the allowance when
losses are considered probable. Recoveries of amounts previously charged off are
added to the allowance and provisions for loan losses are charged or credited to
earnings to bring the allowance to a level considered necessary by management.
For the year ended June 30, 1996, Home Federal charged off loans
totaling $453,000 and realized recoveries of $70,000 on previously charged-off
loans. Based on management's continuing review of the loan portfolio, historical
charge-offs and current economic conditions, Home Federal recorded a charge to
earnings of $638,000 to adjust the allowance to $3.1 million as of June 30,
1996.
Investments
Home Federal's investment portfolio consists primarily of
mortgage-backed securities, collateralized mortgage obligations, overnight funds
with the FHLB of Indianapolis, U.S. Treasury obligations and U.S. Government
agency obligations. At June 30, 1996, 1995, and 1994, Home Federal had
approximately $57.9 million, $59.3 million and $60.4 million in investments,
respectively.
Home Federal's investment portfolio is managed by its officers in
accordance with an investment policy approved by the Board of Directors. The
Board reviews all transactions and activities in the investment portfolio on a
monthly basis. Home Federal does not purchase corporate debt securities which
are not rated in one of the top four investment grade categories by one of
several generally recognized independent rating agencies. Home Federal's
investment strategy has enabled it to (i) shorten the average term to maturity
of its
<PAGE>
assets, (ii) improve the yield on its investments, (iii) meet federal liquidity
requirements and (iv) maintain liquidity at a level that assures the
availability of adequate funds.
The OTS requires savings associations to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances, and
specified United States government, state or federal agency obligations,
corporate debt securities, commercial paper, certain mutual funds, certain
mortgage related securities, and certain first lien residential mortgage loans)
equal to a monthly average of not less than a specified percentage of its net
withdrawable savings deposits plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10%, and is currently 5%. Monetary penalties may be imposed for
failure to meet the liquidity requirement. At June 30, 1996, Home Federal had
liquid assets of $48.7 million, and a liquidity ratio of 10.1%, which exceeded
its liquidity requirement.
Source Of Funds
General
Deposits have traditionally been the primary source of funds of Home
Federal for use in lending and investment activities. In addition to deposits,
Home Federal derives funds from loan amortization, prepayments, borrowings from
the FHLB of Indianapolis and income on earning assets. While loan amortization
and income on earning assets are relatively stable sources of funds, deposit
inflows and outflows can vary widely and are influenced by prevailing interest
rates, money market conditions and levels of competition. Borrowings may be used
to compensate for reductions in deposits or deposit inflows at less than
projected levels and may be used on a longer-term basis to support expanded
activities. See "-- Borrowings."
Deposits
Consumer and commercial deposits are attracted principally from within
Home Federal's primary market area through the offering of a broad selection of
deposit instruments including checking accounts, fixed-rate certificates of
deposit, NOW accounts, individual retirement accounts, passbook accounts and
commercial demand deposit accounts. Home Federal does not actively solicit or
advertise for deposits outside of the counties in which its branches are
located. Deposit account terms vary, with the principal differences being the
minimum balance required, the amount of time the funds remain on deposit and the
interest rate. To attract funds, Home Federal pays higher rates on larger
balances within the same maturity class.
Under regulations adopted by the FDIC, well-capitalized insured
depository institutions (those with a ratio of total capital to risk-weighted
assets of not less than 10%, with a ratio of core capital to risk-weighted
assets of not less than 6%, with a ratio of core capital to total assets of not
less than 5% and which have not been notified that they are in troubled
condition) may accept brokered deposits without limitations. Undercapitalized
institutions (those that fail to meet minimum regulatory capital requirements)
are prohibited from accepting brokered deposits. Adequately capitalized
institutions (those that are neither well-capitalized nor undercapitalized) are
prohibited from accepting brokered deposits unless they first obtain a waiver
from the FDIC. Under these standards, Home Federal would be deemed a
well-capitalized institution.
An undercapitalized institution may not solicit deposits by offering
rates of interest that are significantly higher than the prevailing rates of
interest on insured deposits (i) in such institution's normal market areas or
(2) in the market area in which such deposits would otherwise be accepted.
Adequately capitalized institutions, whether or not they accept
brokered deposits pursuant to a waiver from the FDIC, are prohibited from paying
a rate of interest on such funds which, at the time such funds are accepted,
significantly exceeds (1) the rate paid on deposits of similar maturity in such
institution's normal market area for deposits accepted in the institution's
normal market area or (2) the "national rate" paid on deposits of comparable
maturity for deposits accepted outside the institution's normal market area. The
national rate is (1) 120 percent of the current yield on similar maturity U.S.
Treasury obligations or (2) in the
<PAGE>
case of any deposit at least half of which is uninsured (institutional or
wholesale deposits), 130 percent of such applicable yield. A rate is deemed to
be "significantly" higher or excessive if it exceeds by more than 75 basis
points the applicable benchmark (i.e., the local rate or national rate).
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by Home Federal on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, federal regulations, and market area of
solicitation.
Deposit accounts at Home Federal at June 30, 1996, were as follows:
<TABLE>
<CAPTION>
Minimum Weighted
Opening Balance at % of Average
Type of Account Balance June 30, 1996 Deposits Rate
- - --------------- ------- ------------- -------- --------
(Dollars in Thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Passbook......................................... $ 1 $58,988 12.05% 3.00%
Money market savings............................. 1,000 25,188 5.14% 3.05%
NOW.............................................. 1 70,856 14.48% 1.44%
Total withdrawable............................ 155,032 31.67% 2.30%
-------- -----
Certificates (original terms):
Less than 1 year................................. 500 83,830 17.12% 5.32%
12 to 23 months.................................. 500 94,482 19.30% 5.81%
24 to 35 months.................................. 500 71,232 14.55% 5.99%
36 to 59 months.................................. 500 26,908 5.50% 5.54%
60 to 120 months................................. 500 58,089 11.86% 6.24%
Total certificates............................ 334,541 68.33% 5.78%
-------- -----
Total deposits................................... $489,573 100.0% 4.68%
======== =====
</TABLE>
The following table sets forth by nominal interest rate categories the
composition of deposits of Home Federal at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------
1996 1995 1994
--------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-interest bearing and below 3%....................... $130,424 $124,334 $152,556
3.01% - 5.00%........................................... 62,219 78,023 191,395
5.01% - 7.00%........................................... 289,019 242,125 66,129
7.01% - 9.00%........................................... 7,911 22,238 34,891
9.01% or greater....................................... --- 366 1,016
----------- -------- --------
Total..................................................$ 489,573 $467,086 $445,987
=========== ======== ========
</TABLE>
<PAGE>
The following table represents, by various interest rate categories,
the amounts of deposits maturing during each of the three years following June
30, 1996, and the percentage of such maturities to total deposits. Matured
certificates which have not been renewed as of June 30, 1996, have been
allocated based upon certain rollover assumptions.
<PAGE>
DEPOSIT MATURITIES
(Dollars in Thousands)
<TABLE>
<CAPTION>
2.00 3.01 4.01 5.01 6.01 7.01 8.01
to to to to to to to Percent of
3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% Total Total
---- ------ ------- -------- ------- ------ ------ -------- ----------
Certificate accounts maturing in
the twelve-month period ending:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1997..................... $580 $1,165 $35,612 $119,897 $61,600 $3,316 $477 $222,647 66.6%
June 30, 1998..................... --- 5 247 48,821 7,584 605 1,676 58,938 17.6
June 30, 1999..................... --- --- 2 11,911 2,976 1,199 86 16,174 4.8
Thereafter........................ --- --- --- 12,534 23,696 493 59 36,782 11.0
---- ------ ------- -------- ------- ------ ------ -------- -----
$580 $1,170 $35,861 $193,163 $95,856 $5,613 $2,298 $334,541 100.0%
==== ====== ======= ======== ======= ====== ====== ======== =====
</TABLE>
Included in the deposit totals in the above table are savings
certificates of deposit with balances of over $100,000. The majority of these
deposits are from regular customers of Home Federal. None of these were brokered
deposits. The following table provides a breakdown at June 30, 1996 of
certificates of greater than $100,000 by maturity.
ACCOUNTS GREATER THAN $100,000
(Dollars in Thousands)
<TABLE>
<CAPTION>
2.00 3.01 4.01 5.01 6.01 7.01
to to to to to to Percent of
3.00% 4.00% 5.00% 6.00% 7.00% 8.00% Total Total
---- ---- ------ ------- ------- ------ ------- ----------
Certificate accounts maturing
in the twelve-month period ending:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1997....................... $301 $317 $4,534 $32,773 $10,822 $1,655 50,402 87.2%
June 30, 1998....................... --- --- --- 1,746 861 133 2,740 4.7
June 30, 1999....................... --- --- --- 380 132 272 784 1.4
Thereafter.......................... --- --- --- 586 2,798 463 3,847 6.7
---- ---- ------ ------- ------- ------ ------- -----
.................................... $301 $317 $4,534 $35,485 $14,613 $2,523 $57,773 100.0%
==== ==== ====== ======= ======= ====== ======= =====
</TABLE>
<PAGE>
The following table sets forth the change in dollar amount of deposits
in the various accounts offered by Home Federal for the periods indicated.
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
(Dollars in Thousands)
Balance Balance Balance
at at at
June 30, % of Increase June 30, % of Increase June 30, % of Increase
1996 Deposits (Decrease) 1995 Deposits (Decrease) 1994 Deposits (Decrease)
---------- -------- ---------- ---- -------- ---------- ---- -------- ----------
Withdrawable:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook ........................ $58,988 12.1% $2,991 $55,997 12.0% $(2,323) $58,320 13.1% $ 3,595
Money Market Savings............. 25,188 5.1 2,322 22,866 4.9 (3,517) 26,383 5.9 (1,080)
NOW ...................... 70,856 14.5 3,646 67,210 14.4 2,707 64,503 14.5 8,648
Total withdrawable............ 155,032 31.7 8,959 146,073 31.3 (3,133) 149,206 33.5 11,163
-------- ----- ------- -------- ----- ------- -------- ----- ---------
Certificates:
Less than one year............... 83,830 17.1 24,290 59,540 12.7 (23,486) 83,026 18.6 11,377
12 to 23 months.................. 94,482 19.3 (13,303) 107,785 23.1 50,164 57,621 12.9 (26,003)
24 to 35 months.................. 71,232 14.5 6,602 64,630 13.8 9,509 55,121 12.3 (7,223)
36 to 59 months.................. 26,908 5.5 (712) 27,620 5.9 (5,667) 33,287 7.5 7,662
60 to 120 months................. 58,089 11.9 (3,349) 61,438 13.2 (6,288) 67,726 15.2 3,533
-------- ----- ------- -------- ----- ------- -------- ----- ---------
Total certificate accounts.... 334,541 68.3 13,528 321,013 68.7 24,232 296,781 66.5 (10,654)
-------- ----- ------- -------- ----- ------- -------- ----- ---------
Total deposits.......... $489,573 100.0% $22,487 $467,086 100.0% $21,099 $445,987 100.0% $ 509
======== ===== ======= ======== ===== ======= ======== ===== =========
</TABLE>
<PAGE>
Borrowings
Home Federal relies upon advances (borrowings) from the FHLB of
Indianapolis to supplement its supply of lendable funds, meet deposit withdrawal
requirements and to extend the term of its liabilities. This facility has
historically been Home Federal's major source of borrowings. Advances from the
FHLB of Indianapolis are typically secured by Home Federal's stock in the FHLB
of Indianapolis and a portion of Home Federal's first mortgage loans and
mortgage-backed securities.
Each FHLB credit program has its own interest rate, which may be fixed
or variable, and range of maturities. Subject to the express limits in FIRREA,
the FHLB of Indianapolis may prescribe the acceptable uses to which these
advances may be put, as well as limitations on the size of the advances and
repayment provisions. At June 30, 1996, Home Federal had advances totaling $70.7
million outstanding from the FHLB of Indianapolis.
On June 30, 1993, the Company borrowed $13.0 million from LaSalle
National Bank of Chicago, with the stock of Home Federal and its subsidiaries
pledged as collateral (the "Senior Debt"). The Senior Debt bears interest at a
variable rate of prime plus .75%, which was 9.00% at June 30, 1996. Of the net
proceeds, the Company injected $10.0 million to Home Federal's Tier l capital.
Home Federal used the proceeds to prepay $9.0 million of subordinated debt plus
a prepayment penalty of $1.8 million. See Note 10 to the Consolidated Financial
Statements included in the 1996 Shareholder Annual Report incorporated into Item
8 hereof for a description of the terms of the Senior Debt.
Other than the FHLB advances and the Senior Debt, Home Federal's only
borrowings in recent years have been short-term borrowings. The following table
sets forth the maximum amount of each category of short-term borrowings
(borrowings with remaining maturities of one year or less) outstanding at any
month-end during the periods shown and the average aggregate balances of
short-term borrowings for such periods.
<TABLE>
<CAPTION>
For the year ended June 30,
---------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances.................................... $16,000 $29,000 $22,000
Official check overnight remittance.............. $ 4,280 $ 3,086 $ 3,416
FHLB overnight remittance........................ $ 57 $ 38 $ 60
Average amount of total
short-term borrowings outstanding............. $ 6,822 $ 24,225 $13,570
</TABLE>
The following table sets forth the maximum amount of short term FHLB
advances outstanding at any month end durig the period shown and the weighted
average rate of such FHLB advances.
For the year ended June 30,
------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
FHLB advances:
Amount 26,000 $15,500 $22,000
Weighted average rate 6.2% 6.8% 6.4%
See Note 9 in the Notes to Consolidated Financial Statements included in the
1996 Shareholder Annual Report incorporated into Item 8 hereof for a description
of the terms of these borrowings.
<PAGE>
Service Corporation Subsidiaries
Federal savings banks generally may invest up to 2% of their assets in
service corporations and make loans to such subsidiaries and joint ventures in
which such subsidiaries are participants in an aggregate amount not exceeding 2%
of an association's assets, plus an additional 1% of assets if the amount over
2% is used for specified community or inner-city development purposes. In
addition, federal regulations permit associations to make specified types of
loans to such subsidiaries (other than special-purpose finance subsidiaries), in
which the association owns more than 10% of the stock, in an aggregate amount
not exceeding 50% of the association's regulatory capital if the association's
regulatory capital is in compliance with applicable regulations.
One of Home Federal's subsidiaries, Home Savings Corporation ("HSC"),
an Indiana corporation, is currently engaged in three types of activities: (i)
real estate development; (ii) sales of life insurance products and annuities;
and (iii) full-service securities brokerage services. With the exception of its
securities brokerage services, all of HSC's activities are conducted through
joint ventures in which it is an equity investor. HSC has undertaken these
activities as a part of Home Federal's business strategy of diversifying its
operations into areas which, although related to traditional activities in which
Home Federal has expertise and often involving a similar pool of potential
customers, provide opportunities to earn income that are not as sensitive to
changes in interest rates as is net interest income, and also to meet the needs
of its customers by becoming a full-service financial center. Although these
activities create a potential for a higher rate of return than mortgage lending,
either directly through operations or indirectly through appreciation in value
of the business or real property, these activities involve greater and different
risks than those associated with thrift lending and can affect adversely the
savings association's regulatory capital calculations. See "Regulation --
Regulatory Capital." At June 30, 1996, Home Federal's aggregate investment in
HSC was $2.9 million. For the year ended June 30, 1996, HSC reported income of
$455,000 from these operations. HSC's office is located at 222 West Second
Street, Seymour, Indiana. The consolidated statements of operations of Home
Federal and its subsidiaries included elsewhere herein include the operations of
HSC. Intercompany balances and transactions have been eliminated in the
consolidation.
The following table sets forth certain information regarding each of
the joint ventures in which HSC was involved at June 30, 1996.
<TABLE>
<CAPTION>
Loans from
Home Federal
Outstanding
Date HSC Entered Equity at June 30,
Name Type of Project into the Project Investment 1996
- - -------------------- --------------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Consortium Partners Owns Family Financial 11/31/83 $ 605,000 $ ---
Life Insurance
Company of New
Orleans
Coventry Associates Real estate development 8/31/89 $ 156,000 $ ---
in Seymour, Indiana
Heritage Woods II Rental Apartment 11/15/89 $ 132,000 $ 145,000
project of low income
housing (22 units)
Admirals Woods Real estate development 4/20/93 $ 301,000 $ ---
in Indianapolis, Indiana
Home-Breeden Real estate development 7/1/94 $1,224,000 $ ---
in Columbus, Indiana
</TABLE>
<PAGE>
HSC has a 19% interest in Consortium Partners, a Louisiana partnership,
which owns 50% of the outstanding shares of the Family Financial Life Insurance
Company of New Orleans ("Family Financial"). The remaining 50% of the
outstanding shares of Family Financial is owned proportionately by the partners
of Consortium Partners. Family Financial sells life, accident, and health
insurance as well as annuity products to the customers of the partners'
parent-thrifts. HSC receives (1) dividends paid on Family Financial shares owned
directly by it, (2) a pro rata allocation of dividends received on shares held
by Consortium Partners, which are divided among the partners based on the
actuarially determined value of Family Financial's various lines of insurance
generated by customers of these partners, and (3) commissions on sales of
insurance products made to customers. For the year ended June 30,1996, Home
Federal had income of $366,000, on a consolidated basis, from commissions and
dividends paid on Family Financial activities.
HSC markets LINSCO Private Ledger full-service securities brokerage
services. For fiscal 1996, HSC received $935,000 in commissions from its LINSCO
Private Ledger activities.
In August, 1989, HSC entered into a financing agreement with Greemann
Real Estate, Inc. to purchase and develop Coventry Place, a residential real
estate subdivision in Seymour, Indiana. HSC is to receive a development fee
equal to 4% of total development costs. For the year ended June 30, 1996,
development fees of $3,000 were accrued. In addition to the interest on the loan
which was paid off in April, 1996, HSC will receive 65% of the net profit after
the payment of all interest, development and sales fees.
In November, 1989, HSC invested $184,000 as a limited partner in
Heritage Woods II, a low income housing project in Columbus, Indiana. Over the
next six years, HSC will receive tax credits equal to approximately 9% of its
investment in the project.
On April 20, 1993, HSC entered into a joint venture agreement with Gary
L. Sager and Emily Sager to develop a moderately-priced 27 lot subdivision in
Marion County, Indiana, called Admirals Woods. The joint venture subsequently
executed loan documents with HSC for an acquisition and development loan in the
amount of $980,000. In addition to interest on the loan, HSC will receive 50% of
the profits after all interest, development and sales costs. The loan was paid
off in December, 1995.
On July 1, 1994, HSC entered into a joint venture agreement with
Breeden Investment Group, Inc. to develop a 221 lot starter home subdivision
with additional multi-family and commercial land ("McCullough's Run").
McCullough's Run is located on the east side of Columbus, Indiana. Loan
documents were executed on July 1, 1994 for land acquisition and development of
phases I and II in an amount not to exceed $1,700,000. As additional phases are
developed for sale, additional financing will be required. In addition to
interest on the loan, HSC will receive 50% of all profits.
Home Federal also organized another service corporation subsidiary
under Indiana law, HomeFed Financial Corp., as a financing subsidiary to issue
subordinated debt, collateralized mortgage obligations, and similar securities.
This corporation is currently a shell corporation and has never engaged in any
business operations.
Employees
As of June 30, 1996, Home Federal employed 240 persons on a full-time
basis and 13 persons on a part-time basis. None of Home Federal's employees are
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
Competition
Home Federal operates in south central Indiana and makes almost all of
its loans to, and accepts almost all of its deposits from, residents of
Bartholomew, Jackson, Jefferson, Jennings, Scott, Ripley, Washington, Decatur
and Marion counties in Indiana.
<PAGE>
Home Federal is subject to competition from various financial
institutions, including state and national banks, state and federal thrift
associations, and other companies or firms, including brokerage houses, that
provide similar services in the areas of Home Federal's home and branch offices.
Also, in Seymour and Columbus, Home Federal must compete with banks and savings
institutions in Indianapolis. To a lesser extent, Home Federal competes with
financial and other institutions in the market areas surrounding Cincinnati,
Ohio and Louisville, Kentucky. Home Federal also competes with money market
funds which currently are not subject to reserve requirements, and with
insurance companies with respect to its Individual Retirement and annuity
accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of healthy savings associations
in Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by Home
Federal and the Company.
In addition, The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to
acquire banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana recently passed a law establishing
interstate branching provisions for Indiana state chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion and authorizes out-of-state banks meeting certain requirements
to branch into Indiana by merger or de novo expansion. The Indiana Branching Law
became effective March 15, 1996, provided that prior to June 1, 1997, interstate
mergers and de novo branches are not permitted to out-of-state banks unless the
laws of their home states permit Indiana banks to merge or establish de novo
branches on a reciprocal basis. This new legislation may also result in
increased competition for Home Federal and the Company.
Because of recent changes in Federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings associations
have certain powers to acquire savings associations based in other states, and
Indiana law expressly permits reciprocal acquisition of Indiana savings
associations. In addition, Federal savings associations are permitted to branch
on an interstate basis.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors that
are not readily predictable.
Regulation
General
Home Federal, as a federally chartered stock savings bank, is a member
of the Federal Home Loan Bank System ("FHLB System") and its deposits are
insured by the Savings Association Insurance Fund ("SAIF") which is administered
by the FDIC. Home Federal is subject to extensive regulation by the OTS. Federal
associations may not enter into certain transactions unless certain regulatory
tests are met or they obtain prior governmental approval, and the associations
must file reports with the OTS about their activities and their financial
condition. Periodic compliance examinations of Home Federal are conducted by the
OTS which has, in conjunction with the FDIC in certain situations, examination
and enforcement powers. This supervision and regulation are intended primarily
for the protection of depositors and federal deposit insurance funds. Home
Federal is also subject to certain reserve requirements under regulations of the
Board of Governors of the Federal Reserve System ("FRB").
<PAGE>
Congress is considering legislation that would consolidate the
supervision and regulation of all U.S. financial institutions in one
administrative body (the "Legislation"). It cannot be predicted with certainty
whether or when the Legislation will be enacted or the extent to which Home
Federal would be affected thereby.
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS. The regulation
also establishes a schedule of fees for the various types of applications and
filings made by savings associations with the OTS. The general assessment, to be
paid on a semiannual basis, is based upon the savings association's total
assets, including consolidated subsidiaries, as reported in a recent quarterly
thrift financial report. Currently, the assessment rates range from .0172761% of
assets for associations with assets of $67.0 million or less to .0045864% for
associations with assets in excess of $35.0 billion. Home Federal's current
semiannual assessment, based upon total assets at March 31, 1996, is $67,000.
Home Federal is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
their own securities, and limitations upon other aspects of banking operations.
In addition, the activities and operations of Home Federal are subject to a
number of additional detailed, complex and sometimes overlapping federal and
state laws and regulations. These include state usury and consumer credit laws,
state laws relating to fiduciaries, the Federal Truth-In-Lending Act and
Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the
Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining
legislation and anti-trust laws.
Federal Home Loan Bank System
Home Federal is a member of the FHLB System, which consists of 12
regional banks. The Federal Housing Finance Board ("FHFB"), an independent
agency, controls the FHLB System including the FHLB of Indianapolis. The FHLB
System provides a central credit facility primarily for member savings
associations and other member financial institutions. Home Federal is required
to hold shares of capital stock in the FHLB of Indianapolis in an amount at
least equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, .3% of its assets or 1/20 (or such greater
fraction established by the FHLB) of outstanding FHLB advances, commitments,
lines of credit and letters of credit. Home Federal is currently in compliance
with this requirement. At June 30, 1996, Home Federal's investment in stock of
the FHLB of Indianapolis was $3.8 million.
In past years, Home Federal has received dividends on its FHLB stock.
All 12 FHLB's are required by law to provide funds for the resolution of
troubled savings associations and to establish affordable housing programs
through direct loans or interest subsidies on advances to members to be used for
lending at subsidized interest rates for low- and moderate-income,
owner-occupied housing projects, affordable rental housing, and certain other
community projects. These contributions and obligations could adversely affect
the FHLB's ability to pay dividends and the value of FHLB stock in the future.
For the year ending June 30, 1996, dividends paid to Home Federal by the FHLB of
Indianapolis totaled $271,000, for an annual rate of 7.9%. A reduction in value
of such stock may result in a corresponding reduction of Home Federal's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral includes first mortgage loans less
than 90 days delinquent or securities evidencing interests therein, securities
(including mortgage-backed securities) issued, insured or guaranteed by the
federal government or any agency thereof, FHLB deposits and, to a limited
extent, real estate with
<PAGE>
readily ascertainable value in which a perfected security interest may be
obtained. Other forms of collateral may be accepted as over collateralization
or, under certain circumstances, to renew outstanding advances. All long-term
advances are required to provide funds for residential home financing and the
FHLB has established standards of community service that members must meet to
maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Under current law, savings associations which cease to be Qualified Thrift
Lenders are ineligible to receive advances from their FHLB.
Liquidity
For each calendar month, Home Federal is required to maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to an amount not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings
during the preceding calendar month. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5%. OTS regulations also require each member savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently l %) of the total of its net withdrawable
deposit accounts and short-term borrowings during the preceding calendar month.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The monthly average liquidity of Home Federal for June, 1996 was
10.1% which exceeded the applicable 5% liquidity requirement. Its average
short-term liquidity ratio for June, 1996 was 5.3%. Home Federal has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, the BIF for commercial banks
and state savings banks and the SAIF for savings associations and banks that
have acquired deposits from savings associations. The FDIC is required to
maintain designated levels of reserves in each fund. The reserves of the SAIF
are currently below the level required by law, primarily because a significant
portion of the assessments paid into the SAIF have been used to pay the cost of
prior thrift failures, while the reserves of the BIF met the level required by
law in May, 1995. Thrifts are generally prohibited from converting from one
insurance fund to the other until the SAIF meets its designated reserve level,
except with the prior approval of the FDIC in certain limited cases, and
provided certain fees are paid. The insurance fund conversion provisions to not
prohibit a SAIF member from converting to a bank charter or merging with a bank
during the moratorium as long as the resulting bank continues to pay the
applicable insurance assessments to the SAIF during such period and as long as
certain other conditions are met.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. Such risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Because of the differing reserve levels of the SAIF and the BIF,
deposit insurance assessments paid by well-capitalized BIF-insured institutions
were recently reduced significantly below the level paid by well-capitalized
SAIF-insured institutions. Assessments paid by well-capitalized SAIF-insured
institutions exceeded those paid by well-capitalized BIF-insured institutions by
approximately $0.19 per $100 in deposits in late
<PAGE>
1995 and exceeded them by $0.23 per $100 in deposits beginning in 1996. Such
premium disparity could have a negative competitive impact on Home Federal and
other institutions with SAIF deposits.
Congress has recently considered many proposals designed to
recapitalize the SAIF and eliminate the significant premium disparity between
the BIF and the SAIF. Among those considered is a recapitalization plan
providing for a special assessment, estimated at approximately $0.85 per $100 of
SAIF deposits held at some time in 1995, in order to increase SAIF reserves to
the level required by law. Certain BIF-insured banks holdings SAIF-insured
deposits would pay a lower special assessment. In addition, the cost of prior
thrift failures would be shared by both the SAIF and the BIF. Such cost sharing
might increase BIF assessments by $0.02 to $0.025 per $100 in deposits. SAIF
assessments for well-capitalized SAIF-insured institutions would be set at a
significantly lower level after the legislation is adopted and could never be
reduced below the level set for well-capitalized BIF-insured institutions. The
recapitalization plan also provides for the merger of the SAIF and the BIF on
January 1, 1998, subject to certain conditions. It has also been proposed that
the savings association charter be eliminated in connection with the proposed
merger of the BIF and SAIF.
Home Federal had $486.3 million in deposits subject to SAIF assessments
at June 30, 1996. If the one-time special assessment in the legislative proposal
is enacted into law, Home Federal will pay an additional after-tax assessment of
approximately $2.5 million (based upon deposits at June 30, 1996) which will
reduce capital and earnings for the quarter in which any such assessment is
recorded. However, it is expected that quarterly SAIF assessments would be
reduced significantly sometime after adoption of the legislation.
No assurances can be given that the SAIF recapitalization plan
discussed above or any other plan will be enacted into law or in which form it
may be enacted. In addition, the Company can give no assurances that the
disparity between BIF and SAIF assessments will be eliminated. If the proposed
legislation is not adopted, SAIF premiums may increase and the disparity between
BIF and SAIF premiums may become greater, with a resulting adverse effect on the
Company's operations.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill (on a declining basis until 1995), purchased mortgage
servicing rights (which may be included in an amount up to 50% of core capital,
but which are to be reported on an association's balance sheet at the lesser of
90% of their fair market value, 90% of their original pruchase price, or 100% of
their remaining unamortized book value), and purchased credit card relationships
(which may be included in an amount up to 25% of core capital) less
nonqualifying intangibles. Under the tangible capital requirement, a savings
association must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights which may be included after
making the above-noted adjustments) of at least 1.5% of total assets. Under the
risk-based capital requirements, a minimum amount of capital must be maintained
by a savings association to account for the relative risks inherent in the type
and amount of assets held by the savings association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%) with a credit risk-free asset such as cash requiring no risk-based
capital and an asset with a significant credit risk such as a non-accrual loan
being assigned a factor of 100%. At June 30, 1996, based on the capital
standards then in effect, Home Federal was in compliance with all capital
requirements.
<PAGE>
The OTS has delayed implementation of a rule which sets forth the
methodology for calculating an interest rate risk component to be incorporated
into the OTS regulatory capital rule. Under the rule, only savings associations
with "above normal" interest rate risk (institutions whose portfolio equity
would decline in value by more than 2% of assets in the event of a hypothetical
200-basis point move in interest rates) will be required to maintain additional
capital for interest rate risk under the risk-based capital framework. An
institution with an "above normal" level of exposure will have to maintain
additional capital equal to one-half the difference between its measured
interest rate risk (the most adverse change in the market value of its portfolio
resulting from a 200-basis point move in interest rates divided by the estimated
market value of its assets) and 2%, multiplied by the market value of its
assets. That dollar amount of capital is in addition to an institution's
existing risk-based capital requirement. The OTS has stated that it intends to
reduce or eliminate the leverage ratio capital requirements once the interest
rate risk component rule is implemented. Although the OTS has decided to delay
implementation of this rule, it will continue to closely monitor the level of
interest rate risk at individual institutions and it retains the authority, on a
case-by-case basis, to impose additional capital requirements for individual
institutions with significant interest rate risk.
The following is a summary of Home Federal's regulatory capital and
capital requirements at June 30, 1996:
Tangible Core Risk-based
capital capital capital
------- ------- -------
(Dollars in Thousands)
Regulatory capital $51,859 $51,859 $54,513
Minimum capital requirement 9,396 18,791 35,320
------- ------- -------
Excess capital $42,463 $33,068 $19,193
======= ======= =======
Regulatory capital ratio 8.28% 8.28% 12.35%
Minimum capital ratio 1.50% 3.00% 8.00%
If an association is not in compliance with its capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition to the specific sanctions provided in FIRREA for
failing to meet the capital requirements, the OTS and the FDIC generally are
authorized to take enforcement actions against a savings association that fails
to meet its capital requirements, which actions may include restrictions on
operations and banking activities, the imposition of a capital directive, a
cease and desist order, civil money penalties or harsher measures such as the
appointment of a receiver or conservator or a forced merger into another
institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, federal bank regulatory authorities to
take "prompt corrective action" with respect to institutions that do not meet
minimum capital requirements. For these purposes, FedICIA establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
1996, Home Federal was categorized as "well capitalized."
An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital of 4% or greater, and generally a leverage ratio of 4%
greater. An institution is deemed to be "undercapitalized" if it has a total
risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of
less than 4%, or generally a leverage ratio of less than 4%; and (d)
<PAGE>
"significantly undercapitalized" if it has a total risk-based capital ratio of
less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" institutions are subject to growth limitations and
are required to submit a capital restoration plan. If an "undercapitalized"
institution fails to submit, or fails to implement in a material respect, an
acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" institutions are subject to one or more of a
number of requirements and restrictions, including an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks, and
restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically undercapitalized" institutions are subject to appointment of a
receiver or conservator.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier l institution ("Tier 1
Institution"). An institution that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 institution may be designated
by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the
institution is "in need of more than normal supervision." Home Federal is
currently a Tier l Institution.
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to 100% of its
net income to date during the calendar year plus an amount that would reduce by
one-half its "surplus capital ratio" (the excess over its fully phased-in
capital requirements) at the beginning of the calendar year. Any additional
amount of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a notice with the OTS
concerning such dividend declaration.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. Additional standards on earnings and classified assets are expected
to be issued in the near future.
<PAGE>
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies.
The association's written real estate lending policies must be reviewed
and approved by the association's board of directors at least annually. Further,
each association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Federal Reserve System
Under FRB regulations, Home Federal is required to maintain reserves
against its transaction accounts (primarily checking and NOW accounts) and
non-personal money market deposit accounts. The effect of these reserve
requirements is to increase Home Federal's cost of funds. Home Federal is in
compliance with its reserve requirements. A federal savings association, like
other depository institutions maintaining reservable accounts, may borrow from
the Federal Reserve Bank "discount window," but the FRB's regulations require
the savings association to exhaust other reasonable alternative sources,
including borrowing from its regional FHLB, before borrowing from the Federal
Reserve Bank. FedICIA imposes certain limitations on the ability of
undercapitalized depository institutions to borrow from Federal Reserve Banks.
Holding Company Regulation
The Company (the "Holding Company") is regulated as a "non-diversified
unitary savings and loan holding company" within the meaning of the Home Owners'
Loan Act, as amended ("HOLA"), and subject to regulatory oversight of the
Director of the OTS. As such, the Holding Company is registered with the OTS and
thereby subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, Home
Federal is subject to certain restrictions in its dealings with the Holding
Company and with other companies affiliated with the Holding Company.
HOLA generally prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from (i) acquiring control of any
other savings association or savings and loan holding company or controlling the
assets thereof or (ii) acquiring or retaining more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary.
Additionally, under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
previously unissued voting shares of an under-capitalized savings association
for cash without that savings association being deemed controlled by the holding
company. 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 also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
The Holding Company's Board of Directors presently intends to continue
to operate the Holding Company as a unitary savings and loan holding company.
There are generally no restrictions on the permissible business activities of a
unitary savings and loan holding company. However, if the Director of 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 of the OTS may impose such restrictions as deemed
necessary to address such risk and limiting (i) payment of dividends by the
savings association, (ii) transactions between the savings association and its
<PAGE>
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 would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply). See "--Qualified
Thrift Lender." At June 30, 1996, Home Federal's asset composition was in excess
of that required to qualify Home Federal as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
institution other than through a merger or other business combination with Home
Federal, the Holding Company 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 Holding Company and any of
its subsidiaries (other than Home Federal or other subsidiary savings
associations) would thereafter be subject to further restrictions. HOLA provides
that, 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 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 institution,
(iv) holding or managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies or (vii) those activities
authorized by the FRB as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of the OTS prior to being engaged in by a
multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
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 institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
No subsidiary saving association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period, or without
the giving of such notice, shall be invalid.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with
the SEC under the Securities Exchange Act of 1934 (the "1934 Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the 1934 Act and the rules of the SEC
thereunder. If the Holding Company has fewer than 300 shareholders, it may
deregister its shares under the 1934 Act and cease to be subject to the
foregoing requirements.
<PAGE>
Shares of Common Stock held by persons who are affiliates of the
Holding Company may not be resold without registration unless sold in accordance
with the resale restrictions of Rule 144 under the Securities Act of 1933 (the
"1933 Act"). If the Holding Company meets the current public information
requirements under Rule 144, each affiliate of the Holding Company who complies
with the other conditions of Rule 144 (including a two-year holding period and
conditions that require the affiliate's sale to be aggregated with those of
certain other persons) will be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) l % of the outstanding shares of the Holding Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings
association have at least 65% of its portfolio assets invested in "qualified
thrift investments" on a monthly average basis in 9 out of every 12 months.
Qualified thrift investments under the QTL test include: (i) loans made to
purchase, finance, construct, improve or repair domestic residential housing or
manufactured housing; (ii) home equity loans; (iii) mortgage-backed securities;
(iv) direct or indirect existing obligations of either the FDIC or the Fedeal
Savings and Loan Insurance Corporation ("FSLIC") for ten years from the date of
issuance, if issued prior to July 1, 1989; (v) obligations of the FDIC, FSLIC,
FSLIC Resolution Fund and the Resolution Trust Corporation for a five year
period from July 1, 1989, if issued after such date; (vi) FHLB stock; (vii) 50%
of the dollar amount of residential mortgage loans originated and sold within 90
days of origination; (viii) investments in service corporations that derive at
least 80% of their gross revenues from activities directly related to
purchasing, refinancing, constructing, improving or repairing domestic
residential real estate or manufactured housing; (ix) 200% of the dollar amount
of loans and investments made to acquire, develop and construct
one-to-four-family residences that are valued at no more than 60% of the median
value of homes constructed in the area; (x) 200% of the dollar amount of loans
for the acquisition or improvement of residential real property, churches,
schools, and nursing homes located within, and loans for any purpose to any
small business located within, an area where credit needs of its low and
moderate income residents are determined not to have been adequately met; (xi)
loans for the purchase, construction, improvement or upkeep of churches,
schools, nursing homes and hospitals not qualified under (x); (xii) up to 10% of
portfolio assets held in consumer loans or loans for educational purposes; and
(xiii) FHLMC and FNMA stock. However, the aggregate amount of investments in
categories (vii)-(xiii) which may be taken into account for the purpose of
whether an institution meets the QTL test cannot exceed 15% of portfolio assets.
Portfolio assets under the QTL test include all of an association's assets less
(i) goodwill and other intangibles, (ii) the value of property used by the
association to conduct its business, and (iii) its liquid assets as required to
be maintained under law up to 20% of total assets.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to SAIF) or be subject to the following penalties: (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test, the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification,
it shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
<PAGE>
At June 30, 1996, 81.4% of Home Federal's portfolio assets (as defined
on that date) were invested in qualified thrift investments (as defined on that
date), and therefore Home Federal's asset composition was in excess of that
required to qualify Home Federal as a QTL. Home Federal does not expect to
significantly change its lending or investment activities in the near future,
and therefore expects to continue to qualify as a QTL, although there can be no
such assurance.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- using terms such as satisfactory and
unsatisfactory -- and a written evaluation of each institution's performance.
Each FHLB is required to establish standards of community investment or service
that its members must maintain for continued access to long-term advances from
the FHLBs. The standards take into account a member's performance under the CRA
and its record of lending to first-time home buyers. The FHLBs have established
an "Affordable Housing Program" to subsidize the interest rate of advances to
member associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. Home Federal
is participating in this program. The examiners have determined that Home
Federal has an outstanding record of meeting community credit needs.
Taxation
Federal Taxation
The Holding Company and its subsidiary file a consolidated federal
income tax return on the accrual basis for each fiscal year ending June 30. The
consolidated federal income tax return has the effect of eliminating
intercompany distributions, including dividends, in the computation of
consolidated taxable income. Income of the Holding Company generally would not
be taken into account in determining the bad debt deduction allowed to Home
Federal, regardless of whether a consolidated tax return is filed. However,
certain "functionally related" losses of the Holding Company would be required
to be taken into account in determining the permitted bad debt deduction which,
depending upon the particular circumstances, could reduce the bad debt
deduction. Home Federal's federal income tax returns have not been audited in
the last five years.
Historically, savings associations, such as Home Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, Home Federal will no longer be able to use the percentage of
taxable income method of computing its allocable tax bad debt deduction. Home
Federal will be required to compute its allocable deduction using the experience
method. As a result of the repeal of the percentage of taxable income method,
reserves taken after 1987 using the percentage of taxable income method
generally must be included in future taxable income over a six-year period,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. In addition, the pre-1988 reserve,
in which no deferred taxes have been recorded, will not have to be recaptured
into income unless (i) Home Federal no longer qualifies as a bank under the
Code, or (ii) excess dividends are paid out by Home Federal.
Depending on the composition of its items of income and expense, a
savings institution may be subject to the alternative minimum tax. A savings
institution must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
<PAGE>
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences (although not to post-August 7, 1986
tax-exempt interest) can be credited against regular tax due in later years.
On August 20, 1996, the "Small Business Job Protection Act of 1996" was
passed into law. One provision of this act repeals the special bad debt reserve
method for thrift institutions currently provided for in Section 593 of the
Internal Revenue Code ("IRC"). The provision requires thrifts to recapture any
reserves accumulated after 1987 but forgives taxes owed on reserves accumulated
prior to 1988. Thrift institutions will be given six years to account for the
recaptured excess reserves, beginning with the first taxable year after 1995,
and will be permitted to delay the timing of this recapture for one or two years
subject to whether they meet certain residential loan test requirements.
Management does not believe that this legislation will have a material adverse
effect on the Home Federal's consolidated financial position.
State Taxation
Home Federal is subject to Indiana's Financial Institutions Tax
("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income."
"Adjusted gross income," for purposes of FIT, begins with taxable income as
defined by Section 63 of the Code, and thus, incorporates federal tax law to the
extent that it affects the computation of taxable income. Federal taxable income
is then adjusted by several Indiana modifications. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes.
Home Federal's state income tax returns have not been audited in the
last five years.
Current Accounting Issues
Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," is effective for fiscal years beginning after December 15,
1995. This statement establishes accounting standards for the impairment of
long-lived assets, certain liabilities, certain intangibles and goodwill.
Management does not believe the adoption of this statement will have a material
effect on the financial position or results of operations of Home Federal.
Statement of Financial Accounting Standards No. 122 ("SFAS 122"),
"Accounting for Mortgage Servicing Rights - an Amendment of FASB Statement No.
65," is effective for fiscal years beginning after December 15, 1995. This
Statement specifies condition under which mortgage servicing rights should be
accounted for separately from the underlying mortgage loans. Management has not
yet quantified the effect of this new standard on the consolidated financial
statements.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," was issued in October 1995 and is
effective for fiscal years beginning after December 15, 1995. Companies can
either elect the new method of accounting or disclose in a note to the financial
statements the pro forma effect of adopting the standard. The Company has not
yet determined if it will elect to change to the fair value method, nor has it
determined the effect the new standard will have on net income and earnings per
share should it elect to make such a change. Adoption of the new standard will
have no effect on the Company's cash flows.
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," was issued in June 1996 and provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 125 applies to transactions occurring after December 31, 1996.
Management has not yet quantified the effect of this new standard on the
consolidated financial statements.
<PAGE>
Item 2. Properties.
At June 30, 1996, Home Federal conducted its business from its main
office at 222 West Second Street, Seymour, Indiana and 15 full-service branches.
Home Federal owns one building located at 218 West Second Street, Seymour, which
it uses for certain administrative operations. The headquarters of its Private
Ledger operations, conducted through its service corporation subsidiary, are
located at 501 Washington Street, Columbus, Indiana. Information concerning
these properties, as of June 30, 1996, is presented in the following table:
<TABLE>
<CAPTION>
Net Book
Value of
Property, Approximate
Description and Owned or Furniture & Square Lease
Address Leased Fixtures Footage Expiration
------- ------ -------- ------- ----------
(Dollars in Thousands)
<C> <C> <C> <C> <C>
Principal Office
222 West Second Street Owned $ 1,061 9,200 N/A
Operations Center
218 West Second Street Owned $ 1,668 20,000 N/A
Branch Offices:
Columbus Branches:
501 Washington Street Owned $ 647 14,800 N/A
3805 25th Street Owned $ 314 4,500 N/A
2751 Brentwood Drive Owned $ 574 3,200 N/A
4330 West Jonathon Moore Pike Owned $ 842 2,600 N/A
Hope Branch 1/2 Owned $ 43 2,000 4/99
332 Jackson Street 1/2 Leased
Austin Branch
67 West Main Street Owned $ 53 3,600 N/A
Brownstown Branch Month to
101 North Main Street Leased $ 11 2,400 Month
North Vernon Branches
111 North State Street Owned $ 426 1,900 N/A
1540 North State Street Leased $ 66 1,600 10/02
Osgood Branch
S. Buckeye Street Owned $ 117 1,280 N/A
Salem Branch
R.R. #1, Highway 60 W. Owned $ 63 2,000 N/A
Seymour Branch
1117 E. Tipton Street Owned $ 450 6,800 N/A
Batesville Branch
12 W. Pearl Street Owned $ 716 2,175 N/A
Madison Branch
201 Clifty Drive Owned $ 474 2,550 N/A
Loan Origination Office:
115 East North Street Leased $ 23 2,440 8/97
Greensburg, Indiana
</TABLE>
<PAGE>
Home Federal owns its computer and data processing equipment which is
used for accounting, financial forecasting, and general ledger work. Home
Federal also has contracted for the data processing and reporting services of
AT&T GIS headquartered in Dayton, Ohio. The contract with AT&T expires in
October 2000. The cost of these data processing services is currently $43,400
per month through October, 1998.
Item 3. Legal Proceedings.
Neither the Company, Home Federal nor its subsidiaries is a party to
any pending legal proceedings, other than routine litigation incidental to its
business activities.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the Corporation's or Home Federal's
shareholders during the quarter ended June 30, 1996.
Item 4.5. Executive Officers of Home Federal Bancorp.
Presented below is certain information regarding the executive officers
of HFB who are not also directors.
Position with HFB
Lawrence E. Welker Executive Vice President, Treasurer,
Chief Financial Officer and Secretary
Gerald L. Armstrong Chief Operating Officer and
Executive Vice President
Lawrence E. Welker (age 49) has been employed by Home Federal since
1979. He was Controller from 1979 to 1982. In 1982, he was elected as Chief
Financial Officer and Treasurer, and in 1994 he became an Executive Vice
President.
Gerald L. Armstrong (age 56) has been employed by Home Federal since
February, 1992 as its Executive Vice President, and Chief Operating Officer.
Before being employed by Home Federal, he was President, Chief Executive Officer
and a Director of Seymour National Bank, a commercial bank located in Seymour,
Indiana.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Home Federal converted from mutual to stock form effective January 14,
1988 (the "Conversion). Home Federal then reorganized effective March 1, 1993 by
converting each outstanding share of its common stock, par value $.01 per share,
into one share of common stock, without par value, of Home Federal Bancorp
("HFB"), a unitary savings and loan holding company organized in Indiana (the
"Reorganization"). HFB's principal asset is 100% of the outstanding capital
stock of Home Federal. HFB's common stock ("Common Stock") is quoted on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"), National Market System, under the symbol "HOMF." HFB's Common Stock
was substituted on the NASDAQ, National Market System for Home Federal's common
stock on March 1, 1993, subject to the Reorganization. Home Federal's common
stock had been quoted on the NASDAQ, National Market System since its initial
issuance pursuant to the Conversion on January 14, 1988. For certain information
related to the stock prices and dividends paid by HFB, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Quarterly Results of Operations" on page 6 of HFB's 1996 Shareholder Annual
Report (the "Shareholder Annual Report"). As of August 30, 1996, there were 595
shareholders of record of HFB's Common Stock.
<PAGE>
It is currently the policy of HFB's Board of Directors to continue to
pay quarterly dividends, but any future dividends are subject to the Board's
discretion based on its consideration of HFB's operating results, financial
condition, capital, income tax considerations, regulatory restrictions and other
factors.
Since HFB has no independent operations or other subsidiaries to
generate income, its ability to accumulate earnings for the payment of cash
dividends to its shareholders is directly dependent upon the ability of Home
Federal to pay dividends to the Company.
Under OTS regulations, a converted savings association may not declare
or pay cash dividends if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings association may
make a "capital distribution," which includes, among other things, cash
dividends, will depend upon in which one of three categories, based upon levels
of capital, that savings association is classified. Home Federal is a "tier one
institution" and therefore would be able to pay cash dividends to HFB during any
calendar year up to 100% of its net income during that calendar year plus the
amount that would reduce by one half its "surplus capital ratio" (the excess
over its capital requirements) at the beginning of the calendar year. See
"Regulation--Capital Distributions Regulation" in Item 1 hereof. Prior notice of
any dividend to be paid by Home Federal to the Company will have to be given to
the OTS.
Income of Home Federal appropriated to bad debt reserves and deducted
for federal income tax purposes is not available for payment of cash dividends
or other distributions to HFB without the payment of federal income taxes by
Home Federal on the amount of such income deemed removed from the reserves at
the then-current income tax rate. At June 30, 1996, approximately $6.0 million
of Home Federal's retained income represented bad debt deductions for which no
federal income tax provision had been made. See "Taxation--Federal Taxation" in
Item 1 hereof.
Unlike Home Federal, generally there is no regulatory restriction on
the payment of dividends by HFB, subject to the determination of the Director of
the OTS that there is reasonable cause to believe that the payment of dividends
constitutes a serious risk to the financial safety, soundness or stability of
Home Federal. Indiana law, however, would prohibit HFB from paying a dividend
if, after giving effect to the payment of that dividend, HFB would not be able
to pay its debts as they become due in the usual course of business or HFB's
assets would be less than the sum of its total liabilities plus preferential
rights of holders of preferred stock, if any.
On November 22, 1994, the Board of Directors of HFB declared a dividend
of one common share purchase right (a "Right" or "Rights") for each outstanding
share of Common Stock. The dividend was paid on December 6, 1994 to the
shareholders of record as of November 22, 1994. If and when the Rights become
exercisable, each Right will entitle the registered holder to purchase from HFB
one Common Share at a purchase price of $60.00 (the "Purchase Price"), subject
to adjustment as described in the Rights Agreement between the Company and Bank
One, Indianapolis, NA (the "Rights Agreement") which specifies the terms of the
Rights. The Rights will be represented by the outstanding Common Share
certificates and the Rights cannot be bought, sold or otherwise traded
separately from the Common Shares until the "Distribution Date," which is the
earliest to occur of (i) 10 calendar days following a public announcement that a
person or group (an "Acquiring Person") has (a) acquired beneficial ownership of
15% or more of the outstanding Common Shares or (b) become the beneficial owner
of an amount of the outstanding Common Shares (but not less than 10%) which the
Board of Directors determines to be substantial and which ownership the Board of
Directors determines is intended or may be reasonably anticipated, in general,
to cause HFB to take actions determined by the Board of Directors to be not in
HFB's best long-term interests (an "Adverse Person"), or (ii) 10 business days
following the commencement or announcement of an intention to make a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 30% or more of such outstanding Common Shares.
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire HFB on terms
not approved by the Board of Directors of HFB, except pursuant to an offer
<PAGE>
conditioned on a substantial number of Rights being acquired. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors since the Rights may be redeemed by HFB at $.01 per Right
prior to the time that a person or group has acquired beneficial ownership of
15% or more of the Common Shares.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to
the material under the heading "Summary of Selected Consolidated Financial Data"
on page 5 of the Shareholder Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information required by this item is incorporated by reference to
pages 7 to 13 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Corporation's Consolidated Financial Statements and Notes thereto
contained on pages 14 to 32 of the Shareholder Annual Report are incorporated
herein by reference. HFB's Quarterly Results of Operations contained on page 6
of the Shareholder Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There are no such changes and disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 to 4 of the Corporation's Proxy Statement
for its 1996 annual shareholder meeting (the "1996 Proxy Statement").
Information concerning the Corporation's executive officers who are not also
directors is included in Item 4.5 in Part I of this report.
The information required by this item with respect to the compliance
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to page 11 of the 1996 Proxy Statement.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 4 to 11 of the 1996 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information referred by this item is incorporated by reference to
pages 1 to 3 of the 1996 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 10 of the 1996 Proxy Statement.
<PAGE>
PART IV
Item 14. Exhibits. Financial Statement Schedules. and Reports on Form 8-K.
(a) List the following documents filed as a part of the report:
Financial Statements Page in 1996
Shareholder
Annual Report
Consolidated Balance Sheets as of
June 30, 1996 and 1995...........................................14
Consolidated Statements of Income for each of
the years in the three-year period ended
June 30, 1996....................................................15
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended June 30, 1996..............................................16
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
June 30, 1996....................................................17
Notes to Consolidated Financial Statements............................18
Report of Deloitte & Touche LLP
Independent Auditors.............................................32
(b) Reports on Form 8-K
Registrant has filed no reports on Form 8-K for the quarter ending June
30, 1996.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page 35.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
notes.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized, this 26th day
of September, 1996.
HOME FEDERAL BANCORP
DATE: September 26, 1996 /s/ John K. Keach. Jr.
John K. Keach, Jr., President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 26th day of September,
1996.
/s/ Lawrence E. Welker /s/ John K. Keach. Jr.
- - ------------------------------------- -----------------------------------
Lawrence E. Welker, Executive John K. Keach, Jr.,
Vice President, Treasurer, President and Chief
Chief Financial Officer and Secretary Executive Officer
(Principal Financial Officer) (Principal Executive
Officer)
/s/ Mark A. Dennis /s/John K. Keach. Jr.
- - ------------------------------------- -----------------------------------
Mark A. Dennis, Vice John K. Keach, Jr., Director
President and Controller
(Principal Accounting Officer)
/s/ John K. Keach. Sr. /s/ John T. Beatty
- - ------------------------------------- -----------------------------------
John K. Keach, Sr., Director John T. Beatty, Director
/s/Lewis Essex /s/ Harold Force
- - ------------------------------------- -----------------------------------
Lewis Essex, Director Harold Force, Director
/s/ David W. Laitinenen /s/ Harvard W. Nolting. Jr.
- - ------------------------------------- -----------------------------------
David W. Laitinen, Director Harvard W. Nolting, Jr., Director
<PAGE>
EXHIBIT INDEX
Reference to
Regulation S-K Sequential
Exhibit Number Document Page Number
2 Agreement and Plan of Reorganization
(incorporated by reference from Exhibit A to
Registrant's Registration Statement on Form S-4
(Registration No. 33-55234)).
3(a) Articles of Incorporation (incorporated by
reference from Exhibit B to Registrant's
Registration Statement on Form S-4 (Registration
No. 33-55234)).
3(b) Code of By-Laws (incorporated by reference from
Exhibit C to Registrant's Registration Statement on
From S-4 (Registration No. 33-55234)).
4(a) Article 6 of the Articles of Incorporation
(incorporated by reference from Exhibit B to
Registrant's Registration Statement on Form
S-4 (Registration No.
33-55234)).
4(b) Article III of the Code of By-Laws (incorporated by
reference from Exhibit C to Registrant's Registration
Statement on From S-4 (Registration No. 33-55234)).
10(a) Stock Option Plan (incorporated by reference from
Exhibit 10(a) to Registrant's Registration Statement
on Form S-4 (Registration No. 33-55234)).
10(b) 1993 Stock Option Plan (incorporated by reference
from Exhibit 10(b) to Registrant's Form 10-K for the
year ended June 30, 1994).
10(c) Employment Agreement with Lawrence E. Welker
(incorporated by reference from Exhibit 10(c) to
Registrants Registration Statement on Form S-4
(Registration No. 33-55234)).
10(d) Employment Agreement with John K. Keach, Jr.
(incorporated by reference from Exhibit 10(d) to
Registrant's Registration Statement on Form S-4
(Registration No. 33-55234)).
10(f) Employment Agreement with Gerald L. Armstrong
(incorporated by reference from Exhibit 10(f) to
Registrant's Registration Statement on Form S-4
(Registration No. 33-55234)).
<PAGE>
10(g) April 1, 1989 Promissory Note and related
documents pertaining to the Illinois Building
(incorporated by reference from Exhibit 10(f) to
Home Federal Savings Bank's Form 10-K for the year
ended June 30, 1989).
10(i) Stock Option Agreement with Harvard W. Nolting, Jr.
(incorporated by reference from Exhibit 10(i) to Home
Federal Savings Bank's Form 10-K for the fiscal year
ended June 30, 1991).
10(j) Stock Option Agreement with David W. Laitinen
(incorporated by reference from Exhibit 10(j) to Home
Federal Savings Bank's Form 10-K for the
fiscal year ended June 30, 1991).
10(k) Stock Option Agreement with John T. Beatty
(incorporated by reference from Exhibit 10(k) to Home
Federal Savings Bank's Form 10-K for the fiscal year
ended June 30, 1991).
10(l) Stock Option Agreement with Harold Force
(incorporated by reference from Exhibit 10(l) to
Home Federal Savings Bank's Form 10-K for the fiscal
year ended June 30, 1991).
10(n) Executive Supplemental Retirement Income
Agreement with John K. Keach, Jr.
(incorporated by reference from Exhibit
10(n) to Home Federal Savings Bank's Form
10-K for the fiscal year ended June 30,
1991) and First Amendment to Executive
Supplemental Retirement Income Agreement
(incorporated by reference from Exhibit
10(n) to Registrant's Form 10-K for the
fiscal year ended June 30, 1992).
10(o) Executive Supplemental Retirement Income
Agreement with Lawrence E. Welker
(incorporated by reference from Exhibit
10(o) to Home Federal Saving Bank's Form
10-K for the fiscal year ended June 30,
1991) and First Amendment to Executive
Supplemental Retirement Income Agreement
(incorporated by reference from Exhibit
10(o) to Registrant's Form 10-K for the
fiscal year ended June 30, 1992).
10(p) Executive Supplemental Retirement Income
Agreement with Buryl S. Line (incorporated by
reference from Exhibit 10(p) to
Home Federal Savings Bank's Form 10-K for
the fiscal year ended June 30, 1991).
10(v) Deferred Compensation Agreement with John K.
Keach, Sr. (incorporated by reference from
Exhibit 10(v) to Home Federal Savings Bank
Form 10-K for the fiscal year ended June 30,
1992) and First Amendment to Deferred
Compensation Agreement (incorporated by
reference from Exhibit 10(v) to Registrant's
Form 10-K for the year ended June 30, 1994).
<PAGE>
10(w) Deferred Compensation Agreement with Buryl S. Line
(incorporated by reference from Exhibit 10(w) to Home
Federal Savings Bank Form 10-K for the fiscal year ended
June 30, 1992).
10(x) Executive Supplemental Retirement Income
Agreement with Gerald L. Armstrong
(incorporated by reference from Exhibit
10(x) to Home Federal Savings Bank Form 10-K
for the fiscal year ended June 30, 1992) and
First Amendment to Executive Supplemental
Retirement Income Agreement (incorporated by
reference from Exhibit 10(x) to Registrant's
Form 10-K for the year ended June 30, 1994).
10(y) Employment Agreement with Gerald L.
Armstrong (incorporated by reference from
Exhibit l0(aa) to Home Federal Savings Bank
Form 10-K for the fiscal year ended June 30,
1992).
10(ab) Stock Option Agreement with Gerald L.
Armstrong (incorporated by reference from
Exhibit 10(ab) to Home Federal Savings Bank
Form 10-K for the fiscal year ended June 30,
1992).
10(ac) Director Deferred Compensation Agreement
with John Beatty (incorporated by reference
from Exhibit l0(ac) to Home Federal Savings
Bank Form 10-K for the fiscal year ended
June 30, 1992).
10(ad) Director Deferred Compensation Agreement
with Lewis Essex (incorporated by reference
from Exhibit 10(ad) to Home Federal Savings
Bank Form 1 0-K for the fiscal year ended
June 30, 1992).
10(ae) Director Deferred Compensation Agreement
with Harold Force (incorporated by reference
from Exhibit 10(ae) to Home Federal Savings
Bank Form l0-K for the fiscal year ended
June 30, 1992).
10(af) Director Deferred Compensation Agreement with
David W. Laitinen (incorporated by reference from
Exhibit 10(af) to Home Federal Savings Bank Form 10-K
for the fiscal year ended June 30, 1992).
10(ag) Director Deferred Compensation Agreement with
William Nolting (incorporated by reference from
Exhibit 10(ag) to Home Federal Savings Bank Form 10-K
for the fiscal year ended June 30, 1992).
10(ah) Non-Qualified Stock Option Agreement, dated December
22, 1992, with John T. Beatty (incorporated by reference
from Exhibit 10(ah) to Registrant's Form 10-K for the
year ended June 30, 1994).
<PAGE>
10 (ai) Non-Qualified Stock Option Agreement, dated December
22, 1992, with Lewis W. Essex (incorporated by reference
from Exhibit 10(ai) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (aj) Non-Qualified Stock Option Agreement, dated December
22, 1992, with Harold Force (incorporated by reference
from Exhibit 10(aj) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (ak) Non-Qualified Stock Option Agreement, dated December
22, 1992, with David W. Laitinen (incorporated by reference
from Exhibit 10(ak) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (al) Non-Qualified Stock Option Agreement, dated December
22, 1992, with Harvard W. Nolting, Jr (incorporated by
reference from Exhibit 10(al) to Registrant's Form 10-K
for the year ended June 30, 1994).
10(am) Non-Qualified Stock Option Agreement, dated
August 24, 1993, with John T. Beatty
(incorporated by reference from Exhibit
10(am) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (an) Non-Qualified Stock Option Agreement, dated August 24,
1993, with Lewis W. Essex (incorporated by reference
from Exhibit 10(an) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (ao) Non-Qualified Stock Option Agreement, dated August 24,
1993, with Harold Force (incorporated by reference
from Exhibit 10(ao) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (ap) Non-Qualified Stock Option Agreement, dated August 24,
1993, with David W. Laitinen (incorporated by reference
from Exhibit 10(ap) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (aq) Non-Qualified Stock Option Agreement, dated August 24,
1993, with Harvard W. Nolting, Jr. (incorporated by reference
from Exhibit 10(aq) to Registrant's Form 10-K for the
year ended June 30, 1994).
<PAGE>
10 (ar) Rights Agreement, dated as of November 22, 1994,
between Registrant and Bank One, Indianapolis, NA,
as Rights Agent (incorporated by reference from Exhibit 1
to Registrant's Registration Statement on Form 8-A filed
with the SEC on December 5, 1994).
10 (as) 1995 Stock Option Plan (incorporated by reference
from Exhibit A to Registrant's Proxy Statement for its
1995 annual shareholder meeting).
13 1996 Shareholder Annual Report. _______
21 Subsidiaries of the Registrant (incorporated by
reference from Exhibit 21 to Registrant's Form
10-K for the year ended June 30, 1993).
23.1 Independent Auditors' Consent. _______
27 Financial Data Schedule (to be filed electronically)
[FRONT COVER]
HOME FEDERAL
BANCORP
1996 Annual Report
[Company Logo]
Building Relationships
<PAGE>
HOME FEDERAL
BANCORP
[Company Logo]
"Out mission is to develop and strengthen mutually profitable consumer and
commercial customer relatinships through a motivated, knowledgeable,
service-oriented staff sensitive to the changing needs to the customers and
markets we serve.
"We will meet customer needs by selling quality financial products and services
delivered in a highly convenient and efficient manner, serve as a resourceful
corporate citizen, and operate in a fiscally prudent manner by providing an
equitable return to our employees and shareholders."
<PAGE>
Financial Highlights
Net Interest Margin
[Bar Graph omitted]
Net interest income as a percentage of average earning assets. We are please
with the increase depicted on the graph and feel that it reflects the on-going
diversification of Home Federal's loan portfolio.
FY92 3.03%
FY94 3.39%
FY94 3.36%
FY95 3.52%
FY96 3.58%
Stock Price
[Bar Graph omitted]
Price for one share of Home Federal Bancorp stock at close on June 30, 1996.
FY92 $ 9.889
FY94 $19.667
FY94 $19.500
FY95 $23.500
FY96 $26.000
Net Interest Income after Provision for Loan Losses
[Bar Graph omitted]
Net interest income as adjusted for changes in the Bank's provision for loan
losses. The fiscal 1995 figure reflects a $721,000 loan los recovery credited to
the 1995 provision. The insurance recovery responsible for the credit was a one
time event.
FY92 $13,278
FY94 $15,918
FY94 $16,245
FY95 $19,038
FY96 $19,267
Letter to Shareholders...................................................... 2
Selected Consolidated Financial Data........................................ 5
Quarterly Results of Operations............................................. 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition.................................. 7
Consolidated Balance Sheets................................................. 14
Consolidated Statements of Income........................................... 15
Consolidated Statements of Stockholders' Equity............................. 16
Consolidated Statements of Cash Flows....................................... 17
Notes to Consolidated Financial Statements.................................. 18
Independent Auditors' Report................................................ 32
Board of Directors of Home Federal Bancorp and
Executive Officers of Home Federal Savings Bank........................ 33
<PAGE>
To Our Shareholders
Throughout its 1996 fiscal year, Home Federal maintained a leadership role
in assisting in the development of the economy of south-central Indiana. As in
each of its 86 preceding years of service to the region, it was another year in
which Home Federal enhanced its longstanding reputation for progressive product
development and outstanding customer service.
As we depict in these pages, our institution's long record of achievement
has been made possible by the strength of the relationships we have established
with generation after generation of Home Federal's stakeholders-its
shareholders, its customers and its employees. During the past twelve months,
our efforts to broaden and strengthen those relationships were rewarded with
another year of strong financial performance. For the 1996 fiscal year, Home
Federal reported net income of $7,352,000 or $3.22 per share, an increase of
12.5 percent from fiscal year 199S. Our record earnings contributed to a 15.14
percent return on equity which exceeds industry averages.
Real estate lending, our core business, was bolstered by a strong regional
economy and low local unemployment rates. Although rising interest rates slowed
mortgage origina- tion rates this spring, nonperforming loans and delinquencies
remained level, reflecting the strength of the economy. A committed sales staff,
offering a diverse product mix, helped produce a 34 percent increase in new
purchase and construction loans as well as ongoing growth in refinancing
activities. Throughout the year, Home Federal maintained a strong 25 percent
share of the real estate market in its eight-county service area.
We also increased interest income through commercial and consumer lending
programs. Commercial and commer- cial real estate originations increased by 36
percent during the year, and we believe our activities in this market segment
will continue to attract new customers who can benefit from a variety of Home
Federal products and services.
During fiscal 1996 we also generated non-interest in come through Linsco
Private Ledger, our brokerage ivision, which posted a 147 percent increase in
annuity and brokerage conunissions. Total fee income for all services produced
growth in non-interest income of 57.2 percent over the previous fiscal year, a
strong indication of our success in attracting new customers to Home Federal for
non-traditional financial products and services.
[Photo of Lawrence E. Welker omitted Left Column with heading above: BUILDING]
LAWRENCE E. WELKER
Executive Vice President, Chief Financial Officer
Treasurer & Secretary
[CONTINUING DOWN LEFT COLUMN] Inverstor Relationships As in previous years, we
dedicated ourselves in fiscal 1996 to maintaining developing our relationships
with Home Federal's investors. We continue to be sensitive to the importance of
enhancing shareholder value. Our tow objective were -- and still are -- growing
earnings and continuing our efforts to increase the investment community's
awareness of the success Home Federal has enjoyed in recent years.
<PAGE>
[box in upper left hand corner of page: Building Customer Relationships]
[Photos of C.Scott Ballard, Mary D. Dystrad, David A. Coffey, Kim L.Misamore,
Christopher Ertel, Ruth M. Moeller, William J. Kalb, Patricia J. Hampton, Terry
L. Darlage, Mary Sue Thompson, Albert L. Thormyer, Jennifer A. Morgan and J.
Andrew Applewhite at top margin and right margin.]
We anticipate another strong year in 1997 for both mortgage and commercial
lending, and-through timely adjustments to our product mix--continued growth in
our balance sheet. We will continue to utilize Federal Home Loan Bank resources
to help fund Home Federal's growth. We also plan to develop additional retail
deposit products, such as our recently-introduced Easy Advantage Money Fund
account, to help fund future growth.
As in past years, we will continue to enhance our products, services and
facilities to meet the ever-changing needs of our customers. Early in the 1997
fiscal year, for example, we will open an attractive new banking center in
Salem, Indiana, which-in addition to being larger than the facility it
replaces-will also introduce additional Home Federal products and services in
that important market.
Ours is a business of many variables-new and traditional products,
fluctuating interest rates, rising or failing employment statistics, a strong or
weak housing market. However, no matter how encouraging or discouraging the
economic news may be during a given year, our responsibility is to help our
shareholders, our customers and our employees continually find value and
financial rewards through the products and services we offer.
Over the years, Home Federal's success, in both good times and bad, has
been inseparably linked to its ability to develop and maintain strong
relationships with all stakeholders, including our employees, customers, and
shareholders. Today, our success remains dependent on our ability to understand
their evolving needs and their concerns for the future.
Throughout fiscal 1996, we worked diligently to strengffien each of ffiose
relationships. Our efforts to increase shareholder value are detailed throughout
the pages of this annual report. Our recent focus on internal training and
ongoing investments in new technology symbolize our commitment to providing
rewarding employment opportunities within a progressive organization. And,
through a comprehensive mix of products and services designed to meet both
<PAGE>
long- and short-term financial goals, we strive to maintain the unexcelled
reputation for customer service that has characterized Home Federal's operations
for many years. We salute all Home Federal employees for their invaluable
contributions to what we've come to call "relationship banking.'
What form will Home Federal's relationship banking take in the months and
years ahead? just as new electronic technology revolutionized banking operations
over the past two decades, the evolution of today's technology may make
once-unimaginable banking relationships-including services completely removed
from a traditional banking center--commonplace in the near future.
[photo of keith El Luken and a informational box titled: Building Community
Relationships: Playing an integral role in the communities in which we live and
work is an honor we feel fortunate to accept. My fellow employees and I are
closely involved in our communities through both the professional relationships
we develop and the countless volunteer activities all of us at Home Federal take
part in every day. Through our diverse interests and efforts, we all play a part
in the distribution of the Bank's finanacial, and human resources.]
But, no matter what form Home Federal's stakeholder relationhips may
assume, we know they will share two common characteristics: the most progressive
products and services available in the modem-day financial services marketplace,
balanced with an equal measure of old-fashioned customer service that promises
never to go out of style.
We look forward to watching those future relationships develop, just as we
have enjoyed watching Home Federal's past relationships create sound financial
futures for our customers and a stronger economy for the region they- and
we-call home.
Sincerely,
/s/ John K. Keach, Sr. /s/ John K. Keach, Jr.
John K. Keach, Sr. John K. Keach, Jr.
Chairman of the Board President and
Chief Executive Officer
<PAGE>
Summary of Selected Consolidated Financial Data
(in thousands except per share data)
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------------
Selected Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total assets $ 630,015 $ 588,543 $ 545,228 $ 534,390 $ 505,136
Securities available for sale $ 44,651 $ 34,221 $ 38,986 $ 7,489 $ 6,600
Securities held to maturity $ 6,990 $ 17,451 $ 17,225 $ 76,727 $ 72,682
Loans receivable, net $ 520,097 $ 469,883 $ 445,903 $ 399,980 $ 363,959
Deposits $ 489,573 $ 467,086 $ 445,987 $ 445,478 $ 432,659
Total borrowings $ 84,137 $ 72,900 $ 57,418 $ 52,900 $ 43,047
Shareholders' equity $ 51,517 $ 45,279 $ 38,589 $ 32,523 $ 26,504
Selected Operations Data:
Total interest income $ 47,156 $ 43,013 $ 38,059 $ 40,174 $ 44,610
Total interest expense 27,251 24,289 21,323 23,842 30,286
- - ------------------------------------------------------------------------------------------------------------
Net interest income 19,905 18,724 16,736 16,332 14,324
Provision (credit) for loan losses 638 (314) 491 414 1,046
- - ------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 19,267 19,038 16,245 15,918 13,278
Gain on sale of loans 1,321 667 2,072 2,152 1,110
Gain (loss) on sale of securities 1 (437) 905 387 350
Other income 6,126 4,508 4,371 4,055 3,522
Other expense 14,431 13,483 12,534 12,078 11,219
- - ------------------------------------------------------------------------------------------------------------
Income before income taxes,
extraordinary item and cumulative effect
of change in accounting principle 12,284 10,293 11,059 10,434 7,041
Income tax provision 4,932 3,757 4,069 3,691 3,006
- - ------------------------------------------------------------------------------------------------------------
Income before extraordinary item and
cumulative effect of change in
accounting principle 7,352 6,536 6,990 6,743 4,035
Extraordinary item (1) -- -- -- (1,222) --
Cumulative effect of change in
accounting principle (2) -- -- -- 849 --
- - ------------------------------------------------------------------------------------------------------------
Net income $ 7,352 $ 6,536 $ 6,990 $ 6,370 $ 4,035
============================================================================================================
Net income per common and
equivalent share $ 3.22 $ 2.9 $ 3.14 $ 2.88 $ 1.9
Cash dividends per share $ 0.45 $ 0.375 $ 0.3 $ 0.25 $ 0.2
Selected Financial and Statistical Data:
Return on average assets 1.23% 1.15% 1.31% 1.23% 0.79%
Return on average shareholders' equity 15.14% 15.66% 19.29% 21.03% 16.39%
Interest rate spread during the period 3.53% 3.39% 3.29% 3.36% 3.07%
Net interest margin on average earning assets 3.58% 3.52% 3.36% 3.39% 3.03%
Average shareholders' equity to average assets 8.12% 7.37% 6.78% 5.86% 4.85%
Nonperforming assets to total assets 0.48% 0.45% 0.50% 0.82% 1.19%
Loss allowance to nonperforming loans 103.38% 107.35% 112.91% 68.04% 48.27%
Loss allowance to total loans 0.58% 0.58% 0.57% 0.55% 0.57%
Dividend payout ratio 13.59% 12.64% 9.27% 5.55% 7.00%
Loan servicing portfolio $ 266,814 $ 224,690 $ 196,522 $ 163,319 $ 139,282
Allowance for loan losses $ 3,061 $ 2,806 $ 2,580 $ 2,257 $ 2,123
Number of full service offices 15 15 13 13 13
</TABLE>
- - ------------------
(1) Prepayment penalty for extinguishment of debt.
(2) Change in accounting for income taxes.
<PAGE>
Quarterly Results of Operations
The following table presents certain selected unaudited data relating to results
of operations for the three month periods ending on the dates indicated.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
September 30, December 31 March 31, June 30,
Fiscal Year 1996 1995 1995 1996 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 11,624 $ 11,781 $ 11,814 $ 11,937
Total interest expense 6,890 6,877 6,718 6,766
- - ------------------------------------------------------------------------------------------------------------
Net interest income 4,734 4,904 5,096 5,171
Provision for loan losses 67 182 154 235
- - ------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,667 4,722 4,942 4,936
Gain on sale of loans 422 345 401 153
Other income 1,455 1,400 1,391 1,881
Other expense 3,595 3,329 3,610 3,897
- - ------------------------------------------------------------------------------------------------------------
Income before income taxes 2,949 3,138 3,124 3,073
Income tax provision 1,156 1,234 1,244 1,298
- - ------------------------------------------------------------------------------------------------------------
Net Income $ 1,793 $ 1,904 $ 1,880 $ 1,775
============================================================================================================
Earnings per common and
equivalent share $ 0.79 $ 0.83 $ 0.82 $ 0.78
============================================================================================================
Dividends per share $ 0.1 $ 0.1 $ 0.125 $ 0.125
Stock sales price range: High (1) $ 25 $ 27.25 $ 27.00 $ 27.25
Low $ 22.25 $ 23.5 $ 24.5 $ 24.5
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
September 30, December 31 March 31, June 30,
Fiscal Year 1995 1994 1994 1995 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $10214 $ 10,633 $ 10,977 $ 11,189
Total interest expense 5,587 5,977 6,241 6,484
- - ------------------------------------------------------------------------------------------------------------
Net interest income 4,627 4,656 4,736 4,705
Provision (credit) for loan losses 69 107 (599) 109
- - ------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,558 4,549 5,335 4,596
Gain on sale of loans 155 183 96 233
Other income 1,032 1,085 542 1,412
Other expense 3,166 2,978 3,464 3,875
- - ------------------------------------------------------------------------------------------------------------
Income before income taxes 2,579 2,839 2,509 2,366
Income tax provision 984 1,003 898 872
- - ------------------------------------------------------------------------------------------------------------
Net Income $ 1,595 $ 1,836 $ 1,611 $ 1,494
============================================================================================================
Earnings per common and
equivalent share $ 0.71 $ 0.81 $ 0.72 $ 0.66
============================================================================================================
Dividends per share $ 0.075 $ 0.10 $ 0.10 $ 0.10
Stock sales price range: High (1) $ 29.00 $ 27.00 $ 25.50 $23.50
Low $ 18.75 $ 21.00 $ 21.50 $20.00
</TABLE>
- - -----------------
(1) The Company's common stock trades on the NASDAQ stock market under the
symbol "HOMF". As of August 30 , 1996, the Company had 595 holders of
record of its shares.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following financial review presents an analysis of the asset and liability
structure of Home Federal Bancorp and a discussion of the results of operations
for each of the periods presented in the annual report as well as a discussion
of Home Federal Bancorp's sources of liquidity and capital resources.
Holding Company Business
Home Federal Bancorp (the "Company") is organized as a unitary savings and loan
holding company and owns all the outstanding capital stock of Home Federal
Savings Bank (the "Bank"). The business of the Bank and therefore, the Company,
is providing consumer and business banking services to certain markets in the
south-central portions of the State of Indiana. The Bank does business through
15 full service banking branches and one loan production office.
General
The Bank's earnings in recent years reflect the fundamental changes that have
occurred in the regulatory, economic, and competitive environment in which
savings institutions operate. The Bank's earnings are primarily dependent upon
its net interest income. Interest income is a function of the average balances
of loans and investments outstanding during a given period and the average
yields earned on such loans and investments. Interest expense is a function of
the average amount of deposits and borrowings outstanding during the same period
and the average rates paid on such deposits and borrowings. Net interest income
is the difference between interest income and interest expense.
The Bank is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits and borrowings with short- and
medium-term maturities, mature or reprice more rapidly, or on a different basis,
than its interest-earning assets. While having liabilities that mature or
reprice more frequently on average than assets will be beneficial in times of
declining interest rates, such an asset/liability structure will result in lower
net income or net losses during periods of rising interest rates, unless offset
by other factors such as non-interest income. The Bank's net income is also
affected by such factors as fee income and gains or losses on sales of loans.
The Bank's net interest income after provision for loan losses has consistently
improved from $13.3 million in fiscal 1992 to $19.3 million in fiscal 1996. The
significant increase in net interest income is primarily the result of the
generally lower interest rate environment and an increase of interest-earning
assets over interest-bearing liabilities.
<PAGE>
Asset/Liability Management
The Bank follows a program designed to decrease its vulnerability to material
and prolonged increases in interest rates. This strategy includes 1) selling
certain longer term, fixed-rate loans from its portfolio; 2) increasing the
origination of adjustable-rate mortgage loans; 3) improving its interest rate
gap by increasing the interest rate sensitivity and shortening the maturities of
its interest-earning assets and extending the maturities of its interest-bearing
liabilities; and 4) increasing its non-interest income.
A significant part of the Bank's program of asset and liability management has
been the increased emphasis on the origination of adjustable-rate and/or
short-term loans, which include adjustable-rate residential mortgages and
construction loans, commercial loans, and consumer-related loans. The Bank
continues to offer fixed-rate residential mortgage loans. The Bank retains the
servicing function on most of the 30-year loans sold thereby increasing
non-interest income. The proceeds of these loan sales are used to reinvest in
other interest-sensitive assets or used to repay short-term debt.
Liability Related Activities
The Bank has taken several steps to stabilize interest costs and match the
maturities of liabilities to assets. In an effort to lengthen the maturities of
its savings deposits, the Bank has, in the past, aggressively priced deposits
with maturities of three years or greater in order to lengthen the weighted
average maturity of the entire savings portfolio. However, when rates rise, the
Bank becomes less aggressive in locking in higher rate instruments for longer
terms. When deposit funds have become unavailable due to increased competition,
the Bank employs Federal Home Loan Bank of Indianapolis ("FHLB") advances to
maintain the necessary liquidity to fund lending operations.
The Bank has endeavored to spread its maturities of FHLB advances over a seven
year period so that only a limited amount of advances come due each year. This
avoids a concentration of maturities in any one year and thus reduces the risk
of having to renew all advances when rates may not be favorable.
The Bank applies early withdrawal penalties to protect the maturity and cost
structure of its deposits and utilizes longer term fixed-rate borrowings when
the cost and availability permit the proceeds of such borrowings to be invested
profitably.
As a result of its asset restructuring efforts, the Bank has foregone, and will
likely forego in the future, certain opportunities for improving income on a
short-term basis in exchange for a reduction in long-term interest rate risk.
For instance, the Bank's increased emphasis on the origination of
adjustable-rate mortgages may cause it to sacrifice the initially higher rates
of interest available to lenders on fixed-rate loans. Similarly, market
conditions usually have dictated that financial institutions pay substantially
higher interest rates on long-term deposits than on short-term deposits. Also,
the Bank has elected to keep its liquidity in excess of regulatory requirements
in order to maintain a short-term portfolio better able to react to interest
rate volatility.
<PAGE>
The following table sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at June 30, 1996. The
interest-sensitivity "gap" is defined as the amount by which liabilities
repricing within the respective period exceed assets repricing within such
period. The annual prepayment assumptions used in this table range from 20% to
25% for fixed-rate mortgage loans and mortgage-backed securities; 7% to 27% for
adjustable-rate mortgage loans; and 0% to 60% for commercial and consumer loans,
depending on their maturity and yield. For deposit accounts, it has been assumed
that fixed maturity deposits are not withdrawn prior to maturity, and other
deposits will suffer attrition at rates shown as follows:
<TABLE>
<CAPTION>
6 Months 6-12 1-3 3-5 Over 5
or Less Months Years Years Years
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Passbook, Money Market accounts 100.00% 0.00% 0.00% 0.00% 0.00%
Public Fund Money Market accounts 54.18% 24.82% 11.00% 5.24% 4.76%
NOW accounts 20.61% 16.37% 33.87% 9.06% 20.09%
Non-interest bearing NOW accounts 44.55% 19.47% 17.61% 9.15% 9.22%
</TABLE>
The prepayment and attrition rates are selected after considering the current
interest rate environment, industry asset and liability price tables developed
by the OTS and the Company's historical experience. All other interest-earning
assets and interest-bearing liabilities are shown based on their contractual
maturity or repricing date.
<TABLE>
<CAPTION>
Maturity or Repricing as of June 30, 1996
--------------------------------------------------------------------------
6 Months 6-12 1-3 3-5 Over 5
or Less Months Years Years Years Total
--------------------------------------------------------------------------
Interest-earning assets:
Loans:
<S> <C> <C> <C> <C> <C> <C>
Adjustable rate $ 120,268 $ 21,746 $ 24,590 $ 25,986 $ 3,845 $ 196,435
Fixed rate 15,293 15,112 36,480 19,111 17,439 103,435
Commercial real estate 34,983 13,872 20,350 8,135 2,884 80,224
Non-mortgage 89,242 16,353 27,494 6,935 5,843 145,867
Securities and other 16,170 9,834 14,661 10,905 11,726 63,296
- - --------------------------------------------------------------------------------------------------------------
Total 275,956 76,917 123,575 71,072 41,737 58,9257
- - --------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits 148,033 74,586 75,142 22,260 14,521 334,542
Other deposits 105,447 12,634 19,467 6,279 11,204 155,031
FHLB Advances 19,500 6,500 31,400 10,700 2,600 70,700
Other borrowings 4,987 650 7800 -- -- 13437
- - --------------------------------------------------------------------------------------------------------------
Total 277,967 94,370 133,809 39,239 28,325 573,710
- - --------------------------------------------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities$ (2,011) $(17,453) $ (10,234) $ 31,833 $ 13,412
================================================================================================
Cumulative interest-rate
sensitivity gap $ (2,011) $ (19,464) $ (29,698) $ 2,135 $ 15,547
================================================================================================
Cumulative interest-rate gap
as a percentage of total assets -0.32% -3.09% -4.71% 0.34% 2.47%
================================================================================================
</TABLE>
<PAGE>
Interest Rate Spread
The following table sets forth information concerning the Bank's
interest-earning assets, interest-bearing liabilities, net interest income,
interest-rate spreads and net yield on average interest-earning assets during
the periods indicated (including fees which are considered adjustments of
yields). Average balance calculations were based on daily and monthly balances.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------- ----------------------------- ---------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
----------------------------------------------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans $404,268 $345,210 8.54% $390,986 $31,682 8.10% $365,563 $ 28,229 7.72%
Commercial loans 32,044 29,990 9.63% 24,489 2,382 9.73% 18,072 1,565 8.66%
Consumer loans 60,224 57,790 9.60% 53,293 5,167 9.70% 41,006 4,121 0.05%
Securities 51,332 32,720 6.37% 53,502 3,443 6.44% 65,043 3,900 6.00%
Interest-bearing deposits 11,786 5,850 4.96% 7,365 339 4.60% 8,546 244 2.86%
- - -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets (1) $559,654 $471,560 8.43% $529,635 $43,013 8.12% $498,230 $ 38,059 7.64%
- - -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
- - -----------------------------------------------------------------------------------------------------------------------------------
Deposits -
Transaction accounts $148,065 $ 3,393 2.29% $145,420 $ 3,345 2.30% $134,092 $ 3,069 2.29%
Certificate accounts 322,38 619,103 5.93% 310,212 16,722 5.39% 308,498 14,754 4.78%
FHLB Advances 60,188 38,550 6.40% 51,263 3,211 6.26% 35,345 2,334 6.60%
Other borrowings 11,625 900 7.74% 11,223 1,011 9.01% 12,540 1,166 9.30%
- - -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $542,264 $ 27,251 5.03% $518,118 $24,289 4.69% $490,475 $ 21,323 4.35%
- - -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 19,905 $ 18,724 $ 16,736
- - -----------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread 3.40 3.43% 3.29%
- - -----------------------------------------------------------------------------------------------------------------------------------
Net earning assets $ 17,390 $ 11,517 $ 7,755
- - -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin (2) 3.56% 3.54% 3.36%
Average interest-earning
assets to average interest-
bearing liabilities 103.21% 102.22% 101.58%
====================================================================================================================================
</TABLE>
(1) Average balances are net of non-performing loans, and interest income
includes loan fee amortization of $217,000, $100,000 and $296,000 for the
years ended June 30, 1996, 1995 and 1994, respectively.
(2) Net interest income divided by the average balance of interest-earning
assets.
Rate/Volume Analysis
The following table sets forth the changes in the Bank's interest income and
interest expense resulting from changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities. Changes not
solely attributable to volume or rate changes have been allocated in proportion
to the changes due to volume or rate.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
Increase/Decrease Increase/Decrease
----------------------------- ----------------------------
Due to Due to Total Due to Due to Total
Rate Volume Change Rate Volume Change
------------------------------------------------------------------
Interest income on
<S> <C> <C> <C> <C> <C> <C>
interest-earning assets:
Mortgage loans 1,740 1,099 2,839 1,439 2,020 3,453
Commercial loans (86) 703 617 211 606 817
Consumer loans (52) 664 612 (139) 1,185 1,046
Securities (33) (138) (171) 322 (779) (457)
Interest-bearing deposits 29 217 246 123 (28) 95
- - -----------------------------------------------------------------------------------------------------------
Total 1,598 2,545 4,143 1,950 3,004 4,954
- - -----------------------------------------------------------------------------------------------------------
Interest expense on
interest-bearing liabilities:
Deposits - Transaction accounts (13) 61 48 15 261 276
Certificate accounts 1,706 675 2,381 1,886 82 1,968
FHLB Advances 73 571 644 (113) 990 877
Other borrowings (149) 38 (111) (35) (155)
- - -----------------------------------------------------------------------------------------------------------
Total 1,617 1,345 2,962 1,753 1,213 2,966
- - -----------------------------------------------------------------------------------------------------------
Net change in net interest income $ (19) $ 1,200 $ 1,181 $ 197 $ 1,791 $ 1,988
===========================================================================================================
</TABLE>
RESULTS OF OPERATIONS
Comparison of Year Ended June 30, 1996 and Year Ended June 30, 1995:
General The Company reported net income of $7.4 million for the year ended June
30, 1996, compared to $6.5 million for the year ended June 30, 1995, an increase
of $816,000, or 12.5%. The increase was due to a $2.7 million increase in
non-interest income and a $229,000 increase in net interest income after loan
loss provision which was partially offset by a $948,000 increase in non-interest
expense and a $1.2 million increase in income taxes.
Net Interest Income Net interest income before provision for loan losses
increased $1.2 million, or 6.3% for the year ended June 30, 1996, compared to
the prior year. This increase was the result of assets growing $41.5 million, or
7.0%, while interest margins remained comparable to a year ago. This growth, as
well as a gain in interest-sensitive assets to liabilities, caused net interest
income to increase over the prior year.
Net interest income after provision for loan losses increased by $229,000, or
1.2% over that of the prior year, to $19.3 million even though the loan loss
provision in fiscal 1996 was $952,000 higher than the provision in fiscal 1995.
The increase in the loan loss provision in 1996 compared to 1995 was primarily
attributed to a $721,000 loan loss recovery credited to the 1995 provision. The
Company received insurance payments of $821,000 from insurance policies which
had been assigned to the Company for loans written off in prior periods and
accordingly were treated as loan loss recoveries. After consideration of the
insurance proceeds, the Company credited the provision for loan losses for
$721,000. The insurance recovery was a one time event that will not recur in
future periods. In each period, the provision and allowance for loan losses are
based on a analysis of individual credits, prior and current loss experience,
overall growth in the portfolio and current economic conditions. The balance of
the allowance for loan losses was $3.1 million at June 30, 1996.
Interest Income The Company's total interest income for the year ended June 30,
1996 increased $4.1 million, or 9.6%, as compared to the year ended June 30,
1995. Interest income increased primarily due to growth in commercial real
estate loans, second mortgages, home equity loans and commercial loans. This
growth was attributed to a relatively strong local economy and increased
emphasis on the part of the Company to expand its market share of non-mortgage
loan products.
Interest Expense Total interest expense for the year ended June 30, 1996
increased $3.0 million, or 12.2%, as compared to the year ended June 30, 1995.
Increased deposit and borrowing balances as well as higher interest rates
accounted for the increase in total interest expense.
Other Income Total other income increased $2.7 million, or 57.2%, for the year
ended June 30, 1996 as compared to the year ended June 30, 1995. This increase
was due in part to increases in gains on loan sales over the prior fiscal year
due to increased loan activity earlier in the current year compared to the prior
year. In addition, the increases in gains on security sales were due to
restructuring losses taken in fiscal year 1995 and no gains or losses taken in
fiscal 1996. Joint venture income, fee income, and miscellaneous other income
all showed improvement in fiscal 1996. Included in the miscellaneous other
income was a $387,000 interest payment due the Company from The Internal Revenue
Service for amended tax returns for prior periods. The after-tax impact of the
amended tax returns to net income was $0.06 per share. Fee income increased due
to increased activity in the Linsco Private Ledger brokerage area as well as
growth in checking account income.
<PAGE>
Other Expenses Total other expenses increased $948,000, or 7.0%, for the year
ended June 30, 1996 as compared to the year ended June, 30 1995. Compensation
and employee benefits increased $1.1 million, or 16.4%, due to normal salary
increases as well as higher commission payments due to the improved activity in
the loan and brokerage areas. Health insurance costs increased by $190,000 due
to higher experience costs. Increases in occupancy and equipment expense and
service bureau expense were due to the opening of a new branch in Columbus,
Indiana. The data communication system of the Company and its check processing
system were replaced with upgraded systems in the third quarter of fiscal year
1995. The higher costs resulted in an increase in occupancy and equipment in the
year ended June 30, 1996.
Comparison of Year Ended June 30, 1995 and Year Ended June 30, 1994:
General The Company reported net income of $6.5 million for the year ended June
30, 1995, compared to $7.0 million for the year ended June 30, 1994, a decrease
of $454,000, or 6.5%. The decrease was due to a $2.6 million decrease in other
income and a $949,000 increase in other expenses which was partially offset by a
$2.8 million increase in net interest income after provision for loan losses and
a $312,000 decrease in income taxes.
Net Interest Income
Net interest income before provision for loan losses
increased $2.0 million, or 11.9% for the year ended June 30, 1995, compared to
fiscal 1994. This increase was the result of assets growing $43.3 million, or
7.9%, while interest margins remained comparable to fiscal 1994. This growth, as
well as a gain in interest sensitive assets to liabilities, caused net interest
income to increase over fiscal 1994.
<PAGE>
Net interest income after provision for loan losses increased by $2.8 million,
or 17.2% over that of fiscal 1994, to $19.0 million. The loan loss provision
decreased by $805,000. The Company received insurance payments of $821,000 from
insurance policies which had been assigned to the Company for loans written off
in prior periods and accordingly were treated as loan loss recoveries. After
consideration of the insurance proceeds, the Company credited the provision for
loan losses for $721,000. The insurance recovery was a one time event that will
not recur in future periods. In each period, the provision and allowance for
loan losses are based on an analysis of individual credits, prior and current
loss experience, overall growth in the portfolio and current economic
conditions. The balance of the allowance for loan losses was $2.8 million at
June 30, 1995.
Interest
Income The Company's total interest income for the year ended June 30, 1995
increased $5.0 million, or 13.0%, as compared to the year ended June 30, 1994.
Rising rates, reduced refinancing activity and net increases in loans
outstanding caused the interest income to increase.
Interest Expense
Total interest expense for the year ended June 30, 1995 increased $3.0 million,
or 13.9%, as compared to the year ended June 30, 1994. Rising rates and
increased deposit balances and borrowings accounted for the increase in total
interest expense.
Other Income
Total other income decreased $2.6 million, or 35.5%, for the year ended June 30,
1995 as compared to the year ended June 30, 1994. Gain on sale of loans
decreased by $1.4 million due to rising rates which greatly reduced loan
refinancing activity as well as purchase activity. In addition, fewer borrowers
elected to originate fixed rate loans that the Company normally sells to the
secondary market, instead opting for lower rate adjustable loans that are
normally held in the portfolio.
Gain on sale of securities decreased $1.3 million primarily because the prior
period included a profit of $848,000 on the sale of CMO collateral previously
held by Fidelity Federal Savings & Loan which was acquired by the Bank in April,
1990. In addition, the Company sold securities in fiscal year 1995 at a loss of
$498,000. These securities were CMO's held in the available for sale portfolio
of the Company that were not performing in a manner satisfactory to the Company.
The proceeds of these sales were reinvested in higher yielding, shorter term
securities that more closely meet the interest rate risk objectives of the
Company.
<PAGE>
Insurance, late charges, and other fees increased $326,000, or 25.9%. The bulk
of this increase came from servicing fees of $157,000 on loans sold; $72,000 of
credit card income; and $83,000 of brokerage income.
Other Expenses Total other expenses increased $949,000, or 7.6%, for the year
ended June 30, 1995 as compared to the year ended June 30, 1994. Compensation
and employee benefits increased $310,000, or 4.9%, due to normal salary
increases and benefit cost increases.
FINANCIAL CONDITION
The Company's total assets increased $41.5 million to $630.0 million at June 30,
1996, from $588.5 million at June 30, 1995. Cash, interest bearing deposits and
securities decreased $1.4 million. Loans held for sale and net loans receivable
increased $42.0 million. Mortgage loans increased $32.0 million while
non-mortgage loans increased $10.0 million.
The Company's total liabilities increased $35.2 million with deposits increasing
$22.5 million, Federal Home Loan Bank advances increasing $10.7 million and
senior debt decreasing $1.3 million.
Shareholders' equity increased $6.2 million, primarily due to an increase in
retained earnings of $6.4 million. Retained earnings increased $7.4 million from
net income and decreased $999,000 as a result of dividends paid to shareholders.
Common stock increased $71,000; $63,000 from options exercised and $8,000 from
the related tax benefit of non-qualified dispositions of such options. Finally,
an increase in unrealized losses on securities classified as available for sale
pursuant to SFAS 115 decreased shareholders' equity by $186,000.
ASSET QUALITY
In accordance with the Company's classification of assets policy, management
evaluates the loan and investment portfolio each month to identify substandard
assets that may contain the potential for loss. In addition, management
evaluates the adequacy of its allowance for possible loan losses.
<PAGE>
Nonperforming Assets - The following table sets forth information concerning
non-performing assets of the Bank. Real estate owned includes property acquired
in settlement of foreclosed loans which are carried at the lower of cost or
estimated fair value less estimated cost to sell.
At June 30,
----------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------
Non-accruing loans:
Mortgage $2,153 $1,904 $1,837 $1,491 $3,040
Commercial 307 197 205 326 794
Consumer 411 330 188 170 200
- - -----------------------------------------------------------------------------
Total 2,871 2,431 2,230 1,987 4,034
- - -----------------------------------------------------------------------------
Accruing loans:
Mortgage 88 69 77 1,292 755
Commercial -- -- -- -- --
Consumer 1 12 38 -- --
- - -----------------------------------------------------------------------------
Total 89 81 115 1,292 755
- - -----------------------------------------------------------------------------
Troubled debt restructured 1 102 283 597 1,006
Total non-performing loans 2,961 2,614 2,628 3,876 5,795
Real estate owned 48 41 98 491 236
- - -----------------------------------------------------------------------------
Total non-performing assets $3,009 $2,655 $2,726 $4,367 $6,031
=============================================================================
Non-performing assets to
total assets 0.48% 0.45% 0.5% 0.82% 1.19%
=============================================================================
Non-performing loans to
total loans 0.56% 0.55% 0.59% 0.96% 1.58%
=============================================================================
Allowance for loan losses to
non-performing loans 103.38% 107.35% 98.17% 58.23% 36.64%
=============================================================================
In addition, at June 30, 1996, there were $560,000 in current performing loans
that were classified as special mention or substandard for which potential
weaknesses exist which may result in the future inclusion of such items in the
non-performing category.
Allowance for Loan Losses - The following table sets forth an analysis of the
allowance for possible loan losses. See Note 1 to the Consolidated Financial
Statements for a discussion of the Company's policy for establishing the
allowance for loan losses.
Years Ended June 30,
---------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
Balance at beginning of year 2,806 2,580 2,257 2,123 1,683
Provision for loan losses 638 (314) 491 414 1,046
Loan charge-offs:
Mortgage (10) (6) (47) (82) (64)
Commercial (9) -- -- (51) (176)
Consumer (434) (369) (262) (302) (490)
- - --------------------------------------------------------------------------------
Total charge-offs (453) (375) (309) (435) (730)
- - --------------------------------------------------------------------------------
Recoveries:
Mortgage 16 2 15 49 24
Commercial 0 822 34 -- --
Consumer 54 91 92 106 100
- - --------------------------------------------------------------------------------
Total recoveries 70 915 141 155 124
- - --------------------------------------------------------------------------------
Net loan charge-offs (383) 540 (168) (280) (606)
- - --------------------------------------------------------------------------------
Balance 3,061 2,806 2,580 2,257 2,123
- - --------------------------------------------------------------------------------
Net charge-offs
to average loans 0.08 (0.12) 0.04 0.07 0.15
- - --------------------------------------------------------------------------------
Allowance balance
to total loans 0.58 0.58 0.57 0.55 0.57
- - --------------------------------------------------------------------------------
<PAGE>
Liquidity and Capital Resources
The standard measure of liquidity for the thrift industry is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year. The minimum required level is currently set by
OTS regulation at 5%. At June 30, 1996, the Bank's liquidity ratio was 10.05%.
Historically, the Bank has maintained its liquid assets which qualify for
purposes of the OTS liquidity regulations above the minimum requirements imposed
by such regulations and at a level believed adequate to meet requirements of
normal daily activities, repayment of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. Cash for these purposes is generated
through the sale or maturity of securities and loan prepayments and repayments,
and may be generated through increases in deposits or borrowings. Loan payments
are a relatively stable source of funds, while deposit flows are influenced
significantly by the level of interest rates and general money market
conditions.
Borrowings may be used to compensate for reductions in other sources of funds
such as deposits. As a member of the FHLB System, the Bank may borrow from the
FHLB of Indianapolis. At June 30, 1996, the Bank had $70.7 million in borrowings
from the FHLB of Indianapolis. As of that date, the Bank had commitments to fund
loan originations and purchases of approximately $27.6 million and commitments
to sell loans of $9.8 million. In the opinion of management, the Bank has
sufficient cash flow and borrowing capacity to meet current and anticipated
funding commitments.
The Bank's liquidity, represented by cash and cash equivalents, is a result of
its operating, investing and financing activities. During the year ended June
30, 1996, there was a net decrease of $1.4 million in cash and cash equivalents.
The major uses of cash during the year were net loan originations of $152.3
million; purchase of investment and mortgage-backed securities of $14.0 million;
repayment of FHLB advances of $17.5 million; and repayment of senior debt of
$1.3 million. Partially offsetting these uses of cash, the major sources of cash
provided during the year included $107.5 million from selling fixed rate
mortgage loans to FNMA and FHLMC; maturities and sales of investment securities
of $13.6 million; and proceeds from FHLB advances of $28.2 million.
Impact of Inflation
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles. These
principles 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. The primary assets and
liabilities of thrifts such as the Bank are monetary in nature. As a result,
interest rates have a more significant impact on the Bank's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or with the same magnitude as the price of goods and
services. In the current interest rate environment, liquidity, maturity
structure and quality of the Bank's assets and liabilities are critical to the
maintenance of acceptable performance levels.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement Nos. 121, 122, 123
and 125 that the Company will be required to adopt in future periods. See Note 1
to the consolidated financial statements for further discussion of these
pronouncements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
June 30,
----------------------
1996 1995
----------------------
ASSETS:
<S> <C> <C>
Cash $ 19,327 $ 19,418
Interest-bearing deposits 6,301 7,590
- - -------------------------------------------------------------------------------------------------
Total cash and cash equivalents 25,628 27,008
- - -------------------------------------------------------------------------------------------------
Securities available for sale at fair value (amortized cost $45,075
and $34,334) (Note 2) 44,651 34,221
Securities held to maturity (fair value $6,753 and $17,179 ) (Note 2) 6,990 17,451
Loans held for sale (fair value $4,666 and $12,949) (Note 4) 4,623 12,788
Loans receivable, net of allowance for loan losses of $3,061
and $2,806 (Notes 3, 9) 520,097 469,883
Investments in joint ventures (Note 5) 2,855 2,418
Federal Home Loan Bank stock (Note 9) 3,798 3,419
Accrued interest receivable, net (Note 6) 3,893 3,445
Premises and equipment, net (Note 7) 8,090 8,446
Real estate owned 48 41
Prepaid expenses and other assets 2,440 2,658
Cash surrender value of life insurance 5,004 4,766
Goodwill 1,898 1,999
- - -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 630,015 $ 588,543
=================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 8) $ 489,573 $ 467,086
Advances from Federal Home Loan Bank (Note 9) 70,700 60,000
Senior debt (Note 10) 9,100 10,400
Other borrowings (Note 10) 4,337 2,500
Advance payments by borrowers for taxes and insurance 621 733
Accrued expenses and other liabilities 4,167 2,545
- - -------------------------------------------------------------------------------------------------
Total liabilities 578,498 543,264
- - -------------------------------------------------------------------------------------------------
Shareholders' equity (Notes 10, 12, 14):
No par common stock; Authorized: 5,000,000 shares
Issued and outstanding: 6,819 6,748
2,226,282 shares at June 30, 1996
2,216,407 shares at June 30, 1995
Retained earnings, restricted 44,953 38,600
Unrealized loss on securities available for sale, net of deferred taxes (255) (69)
- - -------------------------------------------------------------------------------------------------
Total shareholders' equity 51,517 45,279
- - -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 630,015 $ 588,543
=================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<TABLE>
<CAPTION>
Years Ended June 30
-------------------------------
Interest income: 1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Loans receivable (Note 3) $ 4,299 $ 39,231 $ 33,915
Securities available for sale and held to maturity 3,272 3,443 3,900
Other interest income 585 339 244
- - --------------------------------------------------------------------------------------
Total interest income 47,156 43,013 38,059
- - --------------------------------------------------------------------------------------
Interest expense:
Deposits (Note 8) 22,496 20,067 17,823
Advances from Federal Home Loan Bank (Note 9) 3,855 3,211 2,334
Borrowings - long term (Note 10) 900 1,011 1,166
- - --------------------------------------------------------------------------------------
Total interest expense 27,251 24,289 21,323
- - --------------------------------------------------------------------------------------
Net interest income 19,905 18,724 16,736
Provision (credit) for loan losses 638 (314) 491
- - --------------------------------------------------------------------------------------
Net interest income after provision for loan losses 19,267 19,038 16,245
- - --------------------------------------------------------------------------------------
Other income:
Gain on sale of loans 1321 667 2,072
Gain (loss) on sale of securities 1 (437) 905
Income from joint ventures (Note 5) 530 252 247
Insurance, late charges, other fees 1,406 778 620
Service fees on NOW accounts 1,635 1,494 1,504
Net gain (loss) on real estate owned (18) 161 111
Loan servicing income 945 805 637
Miscellaneous 1,628 1,018 1,252
- - --------------------------------------------------------------------------------------
Total other income 7,448 4,738 7,348
- - --------------------------------------------------------------------------------------
Other expenses:
Compensation and employee benefits (Note 13) 7,662 6,581 6,271
Occupancy and equipment 1,929 1,659 1,497
Service bureau expense 777 694 607
Federal insurance premium 1,065 1,029 1,014
Marketing 498 549 549
Goodwill amortization 101 101 101
Miscellaneous 2,399 2,870 2,495
Total other expenses 14,431 13,483 12,534
- - --------------------------------------------------------------------------------------
Income before income taxes 12,284 10,293 11,059
Income tax provision (Note 11) 4,932 3,757 4,069
Net Income $ 7,352 $ 6,536 $ 6,990
Earnings per common and common share
equivalent $ 3.22 $ 2.9 $ 3.14
</TABLE>
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except shares outstanding)
<TABLE>
<CAPTION>
Unrealized
Loss net Total
Shares Common Retained of Deferred Shareholders'
Outstanding Stock Earnings Taxes Equity
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1993 1,415,474 $ 5,975 $ 26,548 $ -- $ 32,523
Stock split 3 for 2;
fractional shares 712,800 (6) (6)
Stock options exercised 38,200 198 198
Tax benefit related to exercise
of non-qualified stock options 145 145
Cash dividends ($.30 per share) (648) (648)
Net income 6,990 6,990
Effect of change in accounting for
securities available for sale (613) (613)
Balance at June 30, 1994 2,166,474 6,312 32,890 (613) 38,589
Stock options exercised 49,933 360 360
Tax benefit related to exercise
of non-qualified stock options 76 76
Cash dividends ($.38 per share) (826) (826)
Net income 6,536 6,536
Change in unrealized loss on
securities available for sale 544 544
Balance at June 30, 1995 2216407 6,748 3,600 (69) 45,279
Stock options exercised 9,875 63 63
Tax benefit related to exercise
of non-qualified stock options 8 8
Cash dividends ($.45 per share) (999) (999)
Net income 7,352 7,352
Change in unrealized loss on
securities available for sale (186) (186)
Balance at June 30, 1996 2,226,282 $ 6,819 $ 44,953 $ (255) $ 51,517
========================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended June 30,
-----------------------------------
1996 1995 1994
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 7,352 $ 6,536 $ 6,990
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of discounts, amortization and depreciation 1,234 1,044 773
Provision (credit) for loan losses 638 (314) 491
Net gain from sale of loans (1,321) (667) (2,072)
Net (gain) loss from sale of securities (1) 437 (905
Net gain from joint ventures; real estate owned (504) (396) (353
Net loan fees deferred (recognized) (106) (149) 30
Proceeds from sale of loans held for sale 107,500 57,155 111,656
Origination of loans held for sale (98,014) (67,219) (103,067)
Decrease in accrued interest and other assets 6,339 1,058 1,290
Increase (decrease) in other liabilities 1,510 206 (255)
- - ------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 24,627 (2,309) 14,578
- - ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net principal disbursed on loans (54,248) (26,948) (46,336)
Proceeds from:
Maturities/Repayments of:
Securities held to maturity 3,580 2,761 13,765
Securities available for sale 4,513 3,193 17,068
Sales of:
Securities available for sale 5,507 9,932 18,021
Real estate owned and other asset sales 436 962 1,328
Federal Home Loan Bank stock -- -- 879
Purchases of:
Loans (3,365) -- (894)
Securities available for sale (13,955) (7,970) (20,003)
Securities held to maturity -- (2,985) (1,000)
Federal Home Loan Bank stock (379) (301) --
Increase in cash surrender value of life insurance (238) (170) (267)
Acquisition of property and equipment, net (654) (2,329) (1,163)
- - ------------------------------------------------------------------------------------------------
Net cash used in investing activities (58,803) (23,855) (18,602)
- - ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net 22,487 21,099 509
Proceeds from advances from Federal Home Loan Bank 28,200 63,500 24,400
Repayment of advances from Federal Home Loan Bank (17,500) (47,500) (18,500)
Repayment of senior debt (1,300) (1,300) (1,300)
Net proceeds from (repayment of) overnight borrowings 1,837 782 (82)
Common stock options exercised 71 436 337
Payment of dividends on common stock (999) (826) (648
- - ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 32,796 36,191 4716
- - ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,380) 10,027 692
Cash and cash equivalents, beginning of year 27,008 16,981 16289
- - ------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 25,628 $ 27,008 $ 16,981
================================================================================================
Supplemental information:
Cash paid for interest $ 27,050 $ 24,197 $ 21,237
Cash paid for income taxes $ 4,450 $ 3,394 $ 3,341
Assets acquired through foreclosure $ 133 $ 44 $ 424
Reclassification of securities available and held for sale $- $- $ 41,735
</TABLE>
Noncash activities occurred consisting of the reclassification of $6,939
from the held to maturity securities portfolio to the available for sale
securities portfolio in 1996.
See notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Home Federal Bancorp (the "Company"), conform to
generally accepted accounting principles and prevailing practices within the
banking and thrift industry. A summary of the more significant accounting
policies follows: Basis of Presentation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, Home
Federal Savings Bank (the "Bank") and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Description of Business - The Company is a unitary savings and loan holding
company. The Bank provides financial services to south-central Indiana through
its main office in Seymour, 14 other full service branches and one loan
production office.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Estimates
most susceptible to change in the near term include the allowance for loan
losses and the fair value of securities.
Cash and Cash Equivalents - All highly liquid investments with an original
maturity of three months or less are considered to be cash equivalents.
Securities - Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities," requires
securities to be classified as held to maturity, available for sale or trading.
Only those securities classified as held to maturity are reported at amortized
cost, with those available for sale and trading reported at fair value with
unrealized gains and losses included in shareholders' equity or income,
respectively. The Company adopted this statement effective July 1, 1993. Gain or
loss on sale of securities is based on the specific identification method.
In November 1995, the Financial Accounting Standards Board allowed a one time
reclassification of all securities. In December 1995, the Company reclassified
$6,919,000 held to maturity securities to available for sale securities.
<PAGE>
Loans Held for Sale - Loans held for sale consist of fixed rate mortgage loans
conforming to established guidelines and held for sale to the secondary market.
Mortgage loans held for sale are carried at the lower of cost or fair value
determined on an aggregate basis. Gains and losses on the sale of these mortgage
loans are included in other income.
Loans - Interest on real estate, commercial and installment loans is accrued
over the term of the loans on a level yield basis. The recognition of interest
income is discontinued when, in management's judgement, the interest will not be
collectible in the normal course of business.
The Company adopted Statement of Financial Accounting Standards No.114 and 118
("SFAS 114 and 118"), "Accounting by Creditors for Impairment of a Loan and
Income Recognition and Disclosures," as amended, effective July 1, 1995. These
statements require that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the fair value of the underlying collateral, and specifies alternative methods
for recognizing interest income on loans that are impaired or for which there
are credit concerns. For purposes of applying this standard, impaired loans have
been identified as all nonaccrual loans that have not been collectively
evaluated for impairment. The adoption of SFAS 114 and 118 did not have any
effect on the total reserve for credit losses or related provision.
Loan Origination Fees - Nonrefundable origination fees, net of certain direct
origination costs, are deferred and recognized as a yield adjustment over the
life of the underlying loan. Any unamortized fees on loans sold are credited to
gain on sale of loans at time of sale.
Unearned Discounts - Unearned discounts on mobile home loans are amortized over
the terms of the loans. Amortization is computed by methods which approximate
the interest method.
Uncollected Interest - An allowance for the loss of uncollected interest is
provided on loans which are more than 90 days past due. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments returns to normal, in which case
the loan is returned to accrual status.
Provision for Losses - A provision for estimated losses on loans and real estate
owned is charged to operations based upon management's evaluation of the
potential losses. Such an evaluation, which includes a review of all loans for
which full collectibility may not be reasonably assured, considers, among other
matters, the estimated net realizable value of the underlying collateral, as
applicable, economic conditions, historical loan loss experience and other
factors that are particularly susceptible to changes that could result in a
material adjustment in the near term. While management endeavors to use the best
information available in making its evaluations, future allowance adjustments
may be necessary if economic conditions change substantially from the
assumptions used in making the evaluations.
<PAGE>
Real Estate Owned - Real estate owned represents real estate acquired through
foreclosure, deed in lieu of foreclosure and is recorded at the lower of cost or
fair market value less estimated cost to sell. When property is acquired, it is
recorded at the lower of cost or estimated fair value at the date of
acquisition, with any resulting write-down charged against the allowance for
loan losses. Any subsequent deterioration of the property is charged directly to
real estate owned expense. Costs relating to the development and improvement of
real estate owned are capitalized, whereas costs relating to holding and
maintaining the property are charged to expense.
Premises and Equipment - Premises and equipment are carried at cost less
accumulated depreciation. Depreciation is computed on the straight-line method
over estimated useful lives that range from three to thirty-two years.
Derivatives - The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company entered into
an interest rate swap agreement as a means of managing the interest rate
exposure of its senior debt obligation. The interest rate swap is accounted for
under the accrual method. Under this method, the differential to be paid or
received on the interest rate swap agreement is recognized over the life of the
agreement in interest expense. Changes in market value of interest rate swaps
accounted for under the accrual method are not reflected in the accompanying
financial statements. Realized gains and losses on terminated interest rate
swaps are deferred as an adjustment to the carrying amount of the designated
instruments and amortized over the remaining original life of the agreements. If
the designated instruments are disposed of, the fair value of the interest rate
swap or unamortized deferred gains or losses are included in the determination
of the gain or loss on the disposition of such instruments. To qualify for such
accounting, the interest rate swap is designated to the senior debt obligation
and alters its interest rate characteristics.
Goodwill - The excess of cost over the fair value of assets acquired in
connection with the purchase of another savings institution is being amortized
using the straight line method over 25 years. Amortization expense for fiscal
years 1996, 1995 and 1994 was $101,000 per year.
Income Taxes - The Company and its wholly-owned subsidiary file consolidated
income tax returns. Deferred income tax assets and liabilities reflect the
impact of temporary differences between amounts of assets and liabilities for
financial reporting purposes and basis of such assets and liabilities as
measured by tax laws and regulations.
Earnings per Common Share - Earnings per share of common stock is based on the
weighted average number of common shares and common share equivalents
outstanding during the year. The adjusted weighted average number of common
shares and common share equivalents outstanding was 2,279,939 for 1996,
2,252,663 for 1995, and 2,228,282 for 1994.
Changes in Presentation - Certain amounts and items appearing in the fiscal 1995
and 1994 financial statements have been reclassified to conform with the fiscal
1996 presentation.
New Accounting Pronouncements - Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," is effective for fiscal years beginning
after December 15, 1995. This statement establishes accounting standards for the
impairment of long-lived assets, certain liabilities, certain intangibles and
goodwill. Management does not believe the adoption of this statement will have a
material effect on the financial position or results of operations of the
Company.
Statement of Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting
for Mortgage Servicing Rights - an Amendment of FASB Statement No. 65," is
effective for fiscal years beginning after December 15, 1995. This statement
specifies conditions under which mortgage servicing rights should be accounted
for separately from the underlying mortgage loans. Management has not yet
quantified the effect of this new standard on the consolidated financial
statements.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," was issued in October 1995 and is effective for
fiscal years beginning after December 15, 1995. Companies can either elect the
new method of accounting or disclose in a note to the financial statements the
pro forma effect of adopting the standard. The Company has not yet determined if
it will elect to change to the fair value method, nor has it determined the
effect the new standard will have on net income and earnings per share should it
elect to make such a change. Adoption of the new standard will have no effect on
the Company's cash flows.
Statement of Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," was issued in June 1996 and provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 125 applies to transactions occurring after December 31, 1996.
Management has not yet quantified the effect of this new standard on the
consolidated financial statements.
<PAGE>
2. INVESTMENT SECURITIES
Securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
----------------------------------- ------------------------------------
Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
Held to maturity:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Obligations $-- $ -- $ -- $ -- $ 2,956 $ -- $ 6 $ 2,950
Collateralized mortgage
obligations 6,588 -- 225 6,363 13,174 6 285 12,895
Pass-thru certificates 402 -- 12 390 1,321 22 9 1,334
- - -----------------------------------------------------------------------------------------------------------
Total held to maturity $ 6,990 $- $ 237 $ 6,753 $17,451 $ 28 $ 300 $17,179
===========================================================================================================
Available for sale:
U.S. Obligations $15,910 $ 29 $ 117 $15,822 $14,523 $ 62 $ 97 $14,488
Collateralized mortgage
obligations 11,542 8 250 11,300 3,947 4 94 3,857
Pass-thru certificates 9,804 24 143 9,685 8,180 66 39 8,207
Corporate debt 4,043 28 4 4,067 4,110 32 63 4,079
Mutual funds 3,701 2 1 3,702 3,493 16 -- 3,509
Equity securities 75 -- -- 75 81 -- -- 81
- - -----------------------------------------------------------------------------------------------------------
Total available for sale $45,075 $ 91 $ 515 $44,651 $34,334 $ 180 $ 293 $34,221
===========================================================================================================
</TABLE>
Certain securities, with both amortized cost and fair value of $3.1 million at
June 30, 1996, were pledged as collateral for the Bank's treasury, tax and loan
account at the Federal Reserve and for certain IRA and KEOGH accounts.
The one time reclassification under SFAS 115 occurred in December 1995 and
reclassified securities with amortized cost of $6,919,000 from held to maturity
to available for sale. The unrealized gain at the time of the transfer was
$20,000.
The amortized costs and fair values of securities at June 30, 1996, by
contractual maturity are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
---------------------------------- -------------------------------------
Amortized Fair Market Amortized Fair Market
Cost Value Yield Cost Value Yield
<S> <C> <C> <C> <C> <C> <C>
U.S. Obligations:
Due in one year or less $ -- $ -- -- $ 7,002 $ 7,020 6.06
Due after 1 year though 5 years -- -- -- 7,994 7,885 6.24
Due after 10 years -- -- -- 914 917 6.07
Collateralized mortgage obligations 6,588 6,363 6.02 11,542 11,300 6.15
Pass-thru certificates 402 390 6.09 9,804 9,685 6.64
Corporate debt:
Due in one year or less -- -- -- 3,043 3,047 5.92
Due after 1 year though 5 years -- -- -- 1,000 1,020 7.78
Mutual funds -- -- -- 3,701 3,702 0.58
Equity securities -- -- -- 75 75 --
- - --------------------------------------------------------------------------------------------------------------------
Total $ 6,990 $ 6,753 6.03 $45,075 $44,651 6.22
====================================================================================================================
</TABLE>
Activities related to the sales of securities are summarized as follows (in
thousands):
Years Ended June 30,
1996 1995 1994
----------------------------
Proceeds from sales $ 5,507 $ 9,932 $ 1,021
Gross gains on sales $ 1 $ 61 $ 952
Gross losses on sales $ - $ 498 $ 47
<PAGE>
3. LOANS RECEIVABLE
Loans receivable are summarized as follows (in thousands):
June 30,
----------------------
1996 1995
----------------------
First mortgage loans:
Residential single family $ 278,118 $ 268,509
Commercial and multi-family 73,853 63,215
Property under construction 40,407 23,982
Unimproved land 3,252 2,554
Home equity 28,073 23,222
Second mortgage 22,299 17,314
Commercial 40,609 28,881
Mobile home 18,833 20,258
Automobile 20,883 21,506
Consumer 11,952 11,392
Savings account 4,199 4,407
--------- ---------
Gross loans receivable 542,478 485,240
Allowance for loan losses (3,061) (2,806)
Deferred loan fees (963) (1,069)
Undisbursed loan proceeds (18,249) (11,291)
Unearned interest and unearned discounts (19) (53)
Purchase discount (89) (138)
--------- ---------
Loans receivable, net $ 520,097 $ 469,883
========= =========
The Bank originates both adjustable and fixed rate loans. The adjustable rate
loans have interest rate adjustment limitations and are generally indexed to the
one year Treasury constant maturity rate. Future market factors may affect the
correlation of the interest rates the Bank pays on the short-term deposits that
have been primarily utilized to fund these loans. The principal balance of loans
in nonaccrual status totaled approximately $2.9 million and $2.5 million at June
30, 1996 and 1995, respectively. The Bank would have recorded interest income of
$274,000 in 1996 and $189,000 in 1995 if loans in non-accrual status had been
current in accordance with their original terms. Actual interest received was
$155,000 and $237,000 for fiscal years ending 1996 and 1995, respectively.
The Bank agreed to modify the terms of certain loans to customers who were
experiencing financial difficulties. Modifications included forgiveness of
interest, reduced interest rates and/or extensions of the loan term. The
principal balance at June 30, 1996 and 1995 on these restructured loans totaled
$1,000 and $102,000, respectively.
The Bank's primary lending area is south-central Indiana. Virtually all of the
Bank's loans originated and purchased are to borrowers located within the state
of Indiana. The Bank originates and purchases commercial real estate loans,
which totaled $73.9 million and $63.2 million at June 30, 1996 and 1995,
respectively. These loans are considered by management to be of somewhat greater
risk of uncollectibility due to the dependency on income production or future
development of the real estate. Of the commercial real estate loans, $20.4
million and $20.0 million are collateralized by multi-family residential
property at June 30, 1996 and 1995, respectively.
As a federally-chartered savings bank, aggregate commercial real estate loans
may not exceed 400% of capital as determined under the capital standards
provisions of FIRREA. This limitation was approximately $207.4 million and
$193.0 million at June 30, 1996 and 1995, respectively. Also, under FIRREA, the
loans-to-one-borrower limitation is generally 15% of unimpaired capital and
surplus which, for the Bank, was approximately $7.8 million and $7.2 million at
June 30, 1996 and 1995, respectively. As of June 30, 1996 and 1995, the Bank was
in compliance with these limitations.
<PAGE>
Aggregate loans to officers and directors included above were $5.4 million and
$3.4 million as of June 30, 1996 and 1995, respectively. Such loans are made in
the ordinary course of business and are made on substantially the same terms as
those prevailing at the time for comparable transactions with other borrowers.
For the year ended June 30, 1996, loans of $3.1 million were disbursed to
officers and directors and repayments of $1.1 million were received from
officers and directors.
An analysis of the allowance for loan losses is as follows (in thousands):
Years Ended June 30,
------------------------------
1996 1995 1994
- - ------------------------------------------------------------------
Beginning balance $ 2,806 $ 2,580 $ 2,257
Provision (credit) for loan losses 638 (314) 491
Charge-offs (453) (375) (309)
Recoveries 70 915 141
- - ------------------------------------------------------------------
Ending balance $ 3,061 $ 2,806 $ 2,580
===================================================================
The recorded investment in loans considered impaired at June 30, 1996 was
$307,000 of which $100,000 related to loans with a specific valuation reserve of
$100,000 and $207,000 related to loans with no valuation reserve. For the year
ended June 30, 1996, the average recorded investment in impaired loans was
approximately $286,000.
4. MORTGAGE BANKING ACTIVITIES
The Bank originates mortgage loans for portfolio investment or sale in the
secondary market. During the period of origination, mortgage loans are
designated as held either for sale or investment purposes. Mortgage loans held
for sale are carried at the lower of cost or fair value, determined on an
aggregate basis.
At June 30, 1996, 1995 and 1994, the Bank was servicing loans for others
amounting to $266.8 million, $224.7 million and $196.5 million, respectively.
Servicing loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing. Loan servicing income includes servicing fees from investors and
certain charges collected from borrowers, such as late payment fees.
The Bank is obligated to repurchase certain loans sold to and serviced for
others which become delinquent as defined by the various agreements. At June 30,
1996 and 1995, these obligations were limited to approximately $559,000 and
$958,000, respectively.
5. INVESTMENTS IN JOINT VENTURES
The Bank has invested in joint ventures through its subsidiary, Home Savings
Corporation ("HSC"). The investments, including loans, are accounted for by the
equity method. The Bank's interest in these investments is as follows (in
thousands):
Equity June 30,
Interest 1996 1995
------ ------
Family Financial Life 19% $ 605 $ 605
Heritage Woods 33% 132 132
Home-Breeden 50% 1,990 1,224
Coventry Associates 65% 25 156
Admiral's Woods 50% 103 301
- - -------------------------------------------------
Total investment $2,855 $2,418
=================================================
<PAGE>
Summarized condensed unaudited financial statements for these joint ventures are
as follows (in thousands):
June 30,
-------------------
1996 1995
-------------------
Balance Sheets:
Cash $ 552 $ 358
Investments 3,384 3,413
Property and equipment, net 782 819
Inventory of developed lots 2,603 1,864
Other assets 948 816
---------------
Total assets $8,269 $7,270
===============
Notes payable $2,183 $1,843
Insurance liabilities 1,453 1,332
Other liabilities 141 235
---------------
Total liabilities 3,777 3,410
---------------
Shareholders' equity 4,492 3,860
---------------
Total liabilities and
shareholders' equity $8,269 $7,270
===============
The notes payable include $1,747,000 and $1,444,000 due to HSC and $145,000 and
$146,000 due to the Bank at June 30, 1996 and 1995, respectively. At June 30,
1996, open commitments to these joint ventures included letters of credit
totaling $1,131,000.
Years Ended June 30,
-------------------------------------------
1996 1995 1994
-------------------------------------------
Income Statements:
Income:
Insurance premiums
and commissions $3,569 $3,372 $3,477
Investment income
Net lot sales 989 127 238
Other income 107 106 94
- - ---------------------------------------------------------------------------
Total income 4,937 3,878 4,088
- - ---------------------------------------------------------------------------
Expenses:
Commissions 1,807 1,732 1,876
Insurance benefits 613 563 658
- - ---------------------------------------------------------------------------
Interest expense 52 55 63
- - ---------------------------------------------------------------------------
Other expense 1,612 1,340 1,209
---------------------------------------------------------------------------
Total expense 4,084 3,690 3,806
- - ---------------------------------------------------------------------------
Net income $ 853 $ 188 $ 282
===========================================================================
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following (in thousands):
June 30
----------------------------------------
1996 1995
----------------------------------------
Loans, less reserve of $202 and $193 $3,497 $3,016
Securities 393 412
Interest-bearing deposits 3 17
- - --------------------------------------------------------------------------------
Total accrued interest receivable $3,893 $3,445
================================================================================
7. PREMISES AND EQUIPMENT
Premises and equipment consists of the following (in thousands)
June 30,
--------------------
1996 1995
-------- --------
Land $ 1,386 $ 1,386
Buildings and improvements 7,861 7,736
Furniture and equipment 5,559 5,095
-------- --------
Total 14,806 14,217
========
Accumulated depreciat (6,716) (5,771)
--------
Total premises and eq$ 8,090 $ 8,446
========
Depreciation expense included in operations for the years ended June 30, 1996,
1995 and 1994 totaled $1,010,000, $813,000 and $695,000, respectively.
<PAGE>
8. DEPOSITS
Deposits are summarized as follows (in thousands):
June 30,
1996 1995
----------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
- - --------------------------------------------------------------------------------
Non-interest bearing $ 21,978 $19,182
NOW accounts 48,878 2.09% 48,028 2.20%
Passbook savings 58,988 3.00% 55,997 3.00%
Money market savings 25,188 3.05% 22,866 3.25%
- - --------------------------------------------------------------------------------
Total transaction accounts 155,032 2.30% 146,073 2.38%
- - --------------------------------------------------------------------------------
Certificates of deposit:
Less than one year 83,830 5.32% 59,540 5.51%
12-23 months 94,482 5.81% 107,785 5.95%
24-35 months 71,232 5.99% 64,630 5.68%
36-59 months 26,908 5.54% 27,620 5.44%
60-120 months 58,089 6.24% 61,438 6.73%
- - --------------------------------------------------------------------------------
Total certificate accounts 334,541 5.78% 321,013 5.92%
- - --------------------------------------------------------------------------------
Total deposits $489,573 4.68%$ 467,086 4.81%
================================================================================
At June 30, 1996, certificates of deposit in amounts of $100,000 or more totaled
$58 million.
A summary of certificate accounts by scheduled maturities at June 30, 1996 is as
follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 Thereafter Total
- - ----------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
3.00% or less $ 580 -- $ -- $ -- $ -- $ -- $ 580
3.01% - 5.00% 36,777 252 2 -- -- -- 37,031
5.01% - 7.00% 181,497 56,405 14,888 11,962 9,372 14,895 289,019
7.01% - 9.00% 3,793 2,281 1,284 527 10 16 7,911
-------------------------------------------------------------------------------------------
$ 222,647 $ 58,938 $ 16,174 $ 12,489 $ 9,382 $ 14,911 $ 334,541
============ ============ ============ =========== ============ =========== =============
</TABLE>
A summary of interest expense for the past three fiscal years is as follows (in
thousands):
Years Ended June 30,
1996 1995 1994
---------------------------
NOW accounts $ 1,004 $ 1,104 $ 931
Passbook savings 1,657 1,654 1,425
Money market savings 729 587 713
Certificates of deposit 19,106 16,722 14,754
- - ------------------------------------------------------
Total interest expense $22,496 $20,067 $17,823
=====================================================
9. FEDERAL HOME LOAN BANK ADVANCES
The Bank may receive advances from the FHLB up to $159.9 million at June 30,
1996, which represents 50% of the Bank's eligible assets. The Bank has pledged
qualifying mortgage loans and Federal Home Loan Bank stock as collateral on the
following advances from the Federal Home Loan Bank (in thousands):
June 30, 1996 June 30, 1995
--------------------------------------------
Weighted Weighted
Fiscal Year Average Average
Maturity Amount Rate Amount Rate
1996 $ -- $15,500 6.84%
1997 26,000 6.15% 9,000 6.53%
1998 16,900 6.30% 13,300 6.42%
1999 14,500 6.67% 12,500 6.46%
2000 3,300 5.95% 2,300 5.83%
2001 7,400 5.55% 7,400 5.57%
Thereafter 2,600 6.00% --
--------------------------------------------
Total FHLB advances $70,700 6.22% $60,000 6.43%
===========================================
10. OTHER BORROWINGS
Senior Debt On June 30, 1993, the Company borrowed $13 million from LaSalle
National Bank. The note bears interest at a variable rate of prime plus .75%
(9.00% at June 30, 1996). Of the net proceeds, the Company injected $10 million
to the Bank's Tier 1 capital. The note is collateralized by the outstanding
common shares of the Bank and its subsidiaries. Under the terms of the
agreement, the Company is bound by certain restrictive debt covenants relating
to earnings, net worth and various financial ratios. As of June 30, 1996, the
Company was in compliance with the debt covenants. Maturities of senior debt
based on minimum scheduled payments as of June 30, 1996 are: 1997 - $1,300; 1998
- - - $7,800.
Effective July 1, 1993, the Company entered into an interest rate swap agreement
with LaSalle National Bank to make fixed rate payments at 7.24% and to receive
variable rate payments at the LaSalle National Bank prime rate (8.25% at June
30, 1996) on a notional amount of $13 million with quarterly amortization of
$325,000. The maturity date of the swap agreement is October 1, 1997 which
coincides with the due date of related senior debt. The interest rate swap
agreement is accounted for on a settlement basis. The Company is exposed to
credit loss in the event of nonperformance by LaSalle National Bank for the net
interest rate differential when floating rates exceed the fixed maximum rate.
However, the Company does not anticipate nonperformance by the counterparty.
Other Borrowings In addition to the other borrowings scheduled below (in
thousands), the Bank also has a $5 million overdraft line of credit with the
Federal Home Loan Bank, none of which was used as of June 30, 1996 or 1995.
June 30,
1996 1995
Official check overnight remittance $4,280 $2,476
Wrap mortgage liability -- 12
FHLB overnight remittance 57 12
------ ------
Total other borrowings $4,337 $2,500
====== ======
11. INCOME TAXES
An analysis of the income tax provision is as follows (in thousands):
Years Ended June 30,
1996 1995 1994
---------------------------------------------------
Current:
Federal $ 3,256 $ 2,400 $ 3,376
State 1,063 648 904
Deferred 613 709 (211)
----------------------------------------------------
Income tax provision $ 4,932 $ 3,757 $ 4,069
=====================================================
The difference between the financial statement provision and amounts computed by
using the statutory rate of 34% is reconciled as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Income tax provision at federal statutory rate $ 4,177 $ 3,500 $ 3,760
State tax, net of federal tax benefit 701 582 597
Increase in cash surrender value of life insurance (81) (58) (91)
Other 135 (267) (197)
-------
Income tax provision $ 4,932 $ 3,757 $ 4,069
==================================================================================
</TABLE>
The Company is allowed to deduct an addition to a reserve for bad debts in
determining taxable income. This addition differs from the provision for loan
losses for financial reporting purposes. No deferred taxes have been provided on
the income tax bad debt reserves prior to 1988, which total $6 million. This tax
reserve for bad debts is included in taxable income of later years only if the
bad debt reserves are subsequently used for purposes other than to absorb bad
debt losses. Because the Company does not intend to use the reserves for
purposes other than to absorb losses, deferred income taxes of $2.4 million were
not provided. Pursuant to SFAS 109, the Company has recognized the deferred tax
consequences of differences between the financial statement and income tax
treatment of allowances for loan losses arising after June 30, 1987.
On August 20, 1996, the "Small Business Job Protection Act of 1996" was passed
into law. One provision of this act repeals the special bad debt reserve method
for thrift institutions currently provided for in Section 593 of the IRC. The
provision requires thrifts to recapture any reserves accumulated after 1987 but
forgives taxes owed on reserves accumulated prior to 1988. Thrift institutions
will be given six years to account for the recaptured excess reserves, beginning
with the first taxable year after 1995, and will be permitted to delay the
timing of this recapture for one or two years subject to whether they meet
certain residential loan test requirements. Management does not believe that
this legislation will have a material adverse effect on the Company's
consolidated financial position.
The Company's deferred income tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
June 30,
1996 1995
--------------------------
Deferred tax assets:
<S> <C> <C>
Bad debt reserves $ 195 $ 510
Unrealized losses on securities available for sale 170 46
Deferred compensation 556 443
Deferred fees 106 233
Other 123 116
-------------------------------
Total deferred tax assets 1,150 1,348
-------------------------------
Deferred tax liabilities:
Difference in basis of fixed assets 639 196
FHLB dividend 207 207
Other 196 224
-------------------------------
Total deferred tax liabilities 1,042 627
-------------------------------
Net deferred tax asset $ 108 $ 721
===============================
</TABLE>
12. REGULATORY MATTERS
Effective December 7, 1989, the Office of Thrift Supervision ("OTS") set forth
capital standards applicable to all thrifts. These standards include a core
capital requirement, a tangible capital requirement and a risk-based capital
requirement. The Bank exceeds all of the requirements at June 30, 1996. The
Bank's capital (in thousands) and capital ratios are as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------
1996 1995
------------------------------ ---------------------------------
Required Capital as Capital
Capital Actual a % of Required Actual a % of Required
Ratio Capital(1) Assets(1) Capital Capital(1) Assets(1) Capital
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total consolidated shareholders' equity $ 51,517 $ 45,279
Holding company capital infusion 4,299 5,978
- - -------------------------------------------------------------------------------------------------------------------------------
Total Bank consolidated capital 55,816 51,257
Adjustments for tangible, core
and risk-based capital:
Goodwill (1,898) (1,999)
Investments in non-includable subsidiaries (1,791) (1,051)
Purchased mortgage loan servicing rights (13) (16)
Unrealized loss on available-
for-sale securities (255) 68
- - -------------------------------------------------------------------------------------------------------------------------------
Total Bank tangible capital 1.50% 51,859 8.28%$ 9,396 48,259 8.25% $ 8,774
- - -------------------------------------------------------------------------------------------------------------------------------
Total Bank core capital 3.00% 51,859 8.28% 18,791 48,259 8.25% 17,548
- - -------------------------------------------------------------------------------------------------------------------------------
General loan loss allowances 2,916 2,660
Assets required to be deducted (262) (286)
- - -------------------------------------------------------------------------------------------------------------------------------
Total Bank risk-based capital 8.00% $ 54,513 12.35%$ 35,320 $ 50,633 12.91% $ 35,320
================================================================================================================================
</TABLE>
(1) Tangible and core capital are computed as a percentage of adjusted total
assets of $626.4 million and $584.9 million, at June 30, 1996 and 1995,
respectively. Risk-based capital is computed as a percentage of adjusted
risk-weighted assets of $441.5 million and $392.3 million at June 30, 1996
and 1995, respectively.
The various federal banking agencies adopted the final Prompt Corrective Action
regulations that are required by the Federal Deposit Insurance Company
Improvement Act of 1991 ("FDICIA"). Such regulations require specific
supervisory actions as capital levels decrease. As of June 30, 1996, the most
recent notification from the OTS categorized the Bank as well-capitalized under
the regulatory framework for prompt corrective action. There are no conditions
or events since that notification that management believes have changed the
institution's category. The specifications of the capital categories are shown
below (in thousands):
<TABLE>
<CAPTION>
Total Tier 1 Tier 1
Risk-Based Risk-Based Leverage
Ratio Ratio (1) Ratio
------------------------------------
Capital Category:
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Under capitalized 8% 4% 4%
Significantly under capitalized 6% 3% 3%
Critically under capitalized n/a n/a n/a
Bank capital as of June 30, 1996 $54,513 $51,859 $51,859
Bank capital as of June 30, 1995 $50,633 $48,259 $48,259
Bank capital as a percentage of risk-weighted assets:
As of June 30, 1996 12.35% 11.75% 8.28%
As of June 30, 1995 12.91% 12.30% 8.25%
</TABLE>
(1) The Tier 1 Risk-based ratio is defined as total core capital (Tier 1
capital) divided by risk-weighted assets.
The OTS also has an interest-rate risk component of the risk-based capital
requirement, for any institution carrying "abovenormal" interest rate risk.
"Above normal" interest rate risk would be determined based on the change in the
net market value of the institution's assets, liabilities and off-balance sheet
items under specific interest rate scenarios. Interest rate risk determined to
be "above normal" would likely require additional risk-based capital. Based on
the Bank's risk-based and interest-rate risk profiles and the level of interest
rates at June 30, 1996, as well as the Bank's level of risk-based capital, the
Bank is not required to maintain additional capital for compliance with the
interest-rate risk component.
<PAGE>
Dividend Restrictions - The principal source of income and funds for the Company
are dividends from the Bank. The Bank is subject to certain restrictions on the
amount of dividends that it may declare without prior regulatory approval. At
June 30, 1996, approximately $12.2 million of retained earnings were available
for dividend declaration without prior regulatory approval.
Recapitalization of SAIF and Related Legislative Proposals - The deposits of the
Bank are currently insured by the Savings Association Insurance Fund ("SAIF") of
the 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 commercial banks to a level approximately 75% below
the average premium paid by savings institutions.
On November 14, 1995, the FDIC approved a final rule regarding deposit insurance
premiums. The final rule reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to a $2,000 minimum) for institutions
in the lowest risk category, while holding deposit insurance premiums for SAIF
members at their current levels (23 basis points for institutions in the lowest
risk category). The reduction was effective with respect to the semiannual
premium assessment beginning January 1, 1996. Accordingly, in the absence of
further legislative action, SAIF members such as the Bank will be competitively
disadvantaged as compared to commercial banks by the resulting premium
differential.
<PAGE>
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. If legislation were to be enacted in the future which
would assess a one-time special assessment of 85 basis points, the Bank would
(based upon the Bank's SAIF deposits as of March 31, 1996) pay approximately
$2,418,000, net of related tax benefits. In addition, the enactment of such
legislation may have the effect of immediately reducing the capital of
SAIF-member institutions by the amount of the special assessment. Nevertheless,
management does not believe that this one-time charge to the Bank, if incurred,
will have a material adverse effect on the Company's consolidated financial
condition.
In light of the different proposals currently under consideration 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 Company.
13. EMPLOYEE BENEFIT PLANS
Multi-employer Pension Plan The Bank participates in a noncontributory
multi-employer pension plan covering all qualified employees. The plan is
administered by the trustees of the Financial Institutions Retirement Fund.
There is no separate valuation of the plan benefits nor segregation of plan
assets specifically for the Bank because the plan is a multi-employer plan and
separate actuarial valuations are not made with respect to each employer.
However, as of June 30, 1995, the latest actuarial valuation, the total plan
assets exceeded the actuarially determined value of accrued benefits.
Supplemental Retirement Program The Bank has entered into supplemental
retirement agreements for certain officers and directors. Benefits under these
agreements are generally paid over a 15 year period. The present value of the
benefit to be paid is accrued over the active period of employment of individual
participants. The amount of benefit expense for fiscal years 1996, 1995 and 1994
was $281,000, $243,000 and $170,000, respectively.
401(k) Plan The Bank has an employee thrift plan established for substantially
all full-time employees. Effective January 1, 1991, the Bank elected to make
matching contributions equal to 50% of the employee contributions up to a
maximum of 1.5% of an individual's total eligible salary. The Bank contributed
$71,000, $61,000 and $60,000 during fiscal years 1996, 1995 and 1994,
respectively.
14. STOCK OPTIONS
The Company has a stock option plan for the benefit of officers, other key
employees and directors. The plan is authorized to grant options to purchase an
additional 242,632 shares of the Company's common stock. The option price is not
to be less than the fair market value of the common stock on the date the option
is granted and the stock options are exercisable at any time within the maximum
term of 10 years and one day from the grant date. The options are
nontransferable and are forfeited upon termination of employment.
The following is an analysis of the stock option plan activity for each of the
years in the three year period ended June 30, 1996 and the stock options
outstanding at the end of the respective periods:
Weighted
Average
Options Shares Price
- - --------------------------------------------------------------------------------
Outstanding July 1, 1993 127,348 $ 6.46
Granted 119,625 $ 21.24
Exercised (43,450) $ 4.54
- - --------------------------------------------------------------------------------
Outstanding June 30, 1994 203,523 $ 15.56
Granted 48,930 $ 23.83
Expired 501 $ 21.88
Exercised (39,058) $ 7.49
- - --------------------------------------------------------------------------------
Outstanding June 30, 1995 212,894 $ 18.93
Granted 3,180 $ 25.13
Expired (7,250) $ 21.89
Exercised (9,875) $ 6.39
- - --------------------------------------------------------------------------------
Outstanding June 30, 1996 198,949 $ 19.54
================================================================================
15. COMMITMENTS
Financial Instruments with Off-Balance Sheet Risk - In the normal course of
business, the Bank makes various commitments to extend credit which are not
reflected in the accompanying consolidated financial statements. At June 30,
1996 and 1995, the Bank had loan commitments approximating $27.6 million and
$17.2 million, respectively, excluding undisbursed portions of loans in process.
Loan commitments at June 30, 1996 include commitments to originate fixed-rate
loans with interest rates ranging from 8.41% to 9.00% totaling $3.6 million and
adjustable-rate loan commitments with interest rates ranging from 7.63% to 9.25%
totaling $19.5 million. Commitments, which are disbursed subject to certain
limitations, extend over various periods of time. Generally, unused commitments
are canceled upon expiration of the commitment term as outlined in each
individual contract.
Outstanding letters of credit were $3.0 million and $2.3 million for 1996 and
1995, respectively. Additionally, the Bank had approximately $3.8 million in
commitments to sell fixed-rate residential loans and $6.0 million in commitments
to sell adjustable rate commercial loans at June 30, 1996.
The Bank's exposure to credit loss in the event of nonperformance by the other
parties to the financial instruments for commitments to extend credit is
represented by the contract amount of those instruments. The Bank uses the same
credit policies and collateral requirements in making commitments as it does for
on-balance sheet instruments.
Employment Agreements - The Company has entered into employment agreements with
certain executive officers. Under certain circumstances provided in the
agreements, the Company may be obligated to continue the officer's salary for a
period of three years.
<PAGE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
(in thousands):
<TABLE>
<CAPTION>
June 30,
----------------------------------------
1996 1995
----------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Assets:
Cash $ 19,327 $ 19,327 $ 19,418 $ 19,418
<S> <C> <C> <C> <C>
Interest-bearing deposits 6,301 6,301 7,590 7,590
Securities available for sale 44,651 44,651 34,221 34,221
Securities held to maturity 6,990 6,753 17,451 17,179
Loans held for sale 4,623 4,666 12,788 12,949
Loans, net 520,097 519,002 469,893 473,168
Accrued interest receivable 3,893 3,893 3,445 3,445
Federal Home Loan Bank stock 3,798 3,798 3,419 3,419
Cash surrender value of life insurance 5,004 5,004 4,766 4,766
Liabilities:
Deposits 489,573 488,649 467,086 468,572
Federal Home Loan Bank advances 70,700 70,397 60,000 60,732
Senior debt 9,100 9,100 10,400 10,400
Other borrowings 4,337 4,337 2,500 2,500
Advance payments by borrowers
for taxes and insurance 621 621 733 733
Unrecognized financial instruments:
Interest rate swap -- 175 -- 290
</TABLE>
The estimated fair (market) values of financial instruments have been determined
by the Company, using available market information and appropriate valuation
methodologies. Considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Cash, Interest-bearing Deposits, Accrued Interest Receivable, Cash Surrender
Value of Life Insurance, Advance Payments by Borrowers for Taxes and Insurance
and Other Borrowings - The carrying amount as reported in the Consolidated
Balance Sheets is a reasonable estimate of fair value.
Securities Held to Maturity and Available for Sale - Fair values are based on
quoted market prices and dealer quotes.
Loans Held for Sale and Loans, net - The fair value is estimated by discounting
the future cash flows using the current rates for loans of similar credit risk
and maturities.
Federal Home Loan Bank Stock - The fair value is estimated to be the carrying
value which is par.
Deposits - The fair value of demand deposits, savings accounts and money market
deposit accounts is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using rates
currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank Advances - The fair value is estimated by discounting
future cash flows using rates currently available to the Company for advances of
similar maturities.
Senior Debt - Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.
Interest Rate Swap - The fair value of the interest rate swap agreement is the
estimated amount the Company would have to pay to enter into an equivalent
agreement at June 30, 1996 and 1995, with the counterparty to the swap
agreement.
Commitments - The commitments to originate and purchase loans have terms that
are consistent with current market conditions. Accordingly, the Company
estimated that the face amounts of these commitments approximate carrying
values.
The fair value estimates presented herein are based on information available to
management at June 30, 1996 and 1995. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these financial
statements since that date and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
<PAGE>
17. PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of Home Federal Bancorp are as follows (in
thousands):
18. PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of Home Federal Bancorp are as follows (in
thousands):
Condensed Balance Sheets June 30,
-----------------------------
(Parent Company only) 1996 1995
-----------------------------
Assets:
Cash$ $ 4,694 $ 3,367
Investment in subsidiary 55,817 51,258
Other 577 1,142
- - --------------------------------------------------------------------------------
Total assets$ 61,088 55,767
================================================================================
Liabilities:
Senior debt$ 9,100 10,400
Other 471 88
- - --------------------------------------------------------------------------------
Total liabilities 9,571 10,488
- - --------------------------------------------------------------------------------
Shareholders' equity 51,517 45,279
- - --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $61,088 55,767
================================================================================
<TABLE>
<CAPTION>
Condensed Statements of Income For the Years Ended June 30:
-----------------------------
(Parent Company only) 1996 1995 1994
-----------------------------
<S> <C> <C> <C>
Dividends from subsidiary $ 3,247 $ 3,152 $ 3,016
Other 514 463 221
- - --------------------------------------------------------------------------------
Total income 3,761 3615 3,237
- - --------------------------------------------------------------------------------
Interest on senior debt 900 1,010 1,162
Other expenses 674 717 420
- - --------------------------------------------------------------------------------
Total expenses 1,574 1,727 1,582
- - --------------------------------------------------------------------------------
Income before taxes and change in
undistributed earnings of subsidiary 2,187 1,888 1,655
Applicable income tax credit (420) (505) (484)
- - --------------------------------------------------------------------------------
Income before change in undistributed
earnings of subsidiary 2,607 2,393 2,139
Increase in undistributed earnings of subsidiary 4745 4,143 4,851
- - --------------------------------------------------------------------------------
Net income $ 7,352 $ 6,536 $ 6,990
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows For the Years Ended June 30:
-----------------------------
(Parent Company only) 1996 1995 1994
-----------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 7,352 $ 6,536 $ 6,990
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in other assets 565 (354) 172
Increase (decrease) in accrued expenses and
other liabilities 383 (28) (10)
Increase in undistributed earnings
of subsidiary (4,745) (4,143) (4,851)
Net cash provided by operating activities 3,555 2,011 2,301
Financing activities:
Proceeds from senior debt -- -- --
Repayment of senior debt (1,300) (1,300) (1,300)
Payment of dividends (999) (826) (648)
Exercise of stock options 71 436 337
- - --------------------------------------------------------------------------------
Net cash used in financing activities (2,228) (1,690) (1,611)
- - --------------------------------------------------------------------------------
Net increase in cash 1,327 321 690
Cash at beginning of year 3,367 3,046 2,356
- - --------------------------------------------------------------------------------
Cash at end of year $ 4,694 $ 3,367 $ 3,046
================================================================================
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors of Home Federal Bancorp:
We have audited the accompanying consolidated balance sheets of Home Federal
Bancorp and its subsidiary (the "Company") as of June 30, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company'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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Home Federal Bancorp and its
subsidiary at June 30, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1996
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for debt and equity securities effective July
1, 1993.
Deloitte & Touche LLP
Indianapolis, Indiana
July 25, 1996
(August 20, 1996 as to Note 11)
<PAGE>
Board of Directors
& Officers
of Home Federal Bancorp
Board of Directors
John K. Keach, Sr.
Chairman of the Board,
Home Federal Bancorp
John K. Keach, Jr.
President and
Chief Executive Officer,
Home Federal Bancorp
John T. Beatty
President,
Beatty Insurance, Inc.
Lewis W. Essex
Chairman of the Board,
Essex Castings, Inc.
Harold Force
President,
Force Construction
Company, Inc.
David W. Laitinen, MD
Orthopedic Surgeon
Harvard W. Nolting, Jr.
Retired
from Nolting Foods, Inc.
Eugene E. Burke
Director Emeritus
Retired
Robert Weber
Director Emeritus
Retired
Officers
John K. Keach Jr.
President and
Chief Executive Officer
Gerald L. Armstrong
Executive Vice President
Chief Operating Officer
Lawrence E. Welker
Executive Vice President
Chief Financial Officer
Treasurer and Secretary
The Directors of Home Federal Bancorp also serve as Directors of Home Federal
Savings Bank.
<PAGE>
Executive Officers
of Home Federal
Savings Bank
John K. Keach Jr.
President and
Chief Executive Officer
Gerald L. Armstrong
Executive Vice President
Chief Operating Officer
Lawrence E. Welker
Executive Vice President
Chief Financial Officer
Treasurer and Secretary
S. Elaine Pollert
Senior Vice President
Retail Banking
John F. Schilling
Senior Vice President
Commercial Lending
Keith E. Luken
Senior Vice President
Mortgage Lending
Mark A. Dennis
Vice President
Controller
<PAGE>
Shareholder Information
Stock Listing
The common stock of Home Federal Bancorp is traded on the National Association
of Securities Dealers Automated Quotation System, National Market System, under
the symbol HOME, Home Federal Bancorp stock appears in the Wall Street Journal
under the abbreviation HomeFedBcpIN, and in other publications under the
abbreviation HFdBcp.
Transfer Agent & Registrar
To change name, address or ownership of stock, to report lost certificates, or
to consolidate accounts, contract:
LaSalle National Trust, N.A.
135 South LaSalle Street,
Room 360
Chicago, Illinois 60690
(312) 904-2450
General Counsel
Barnes & Thornburg
1313 Merchants Bank Building
11 South Meridian Street
Indianapolis, IN 46204
Shareholder & General Inquiries
Home Federal Bancorp is required to file an Annual Report on Form 10-K for its
fiscal year ended June 30, 1996, with the Securities and Exchange Commission.
For copies of the Annual Report and Home Federal Bancorp's Quarterly Reports,
contact:
Donna Maxie
Home Federal Bancorp
222 West Second Street
Seymour, IN 47274
(812) 522-1592
(800) 952-6646
For financial information and security analyst inquires please contact:
Lawrence E. Welker
222 West Second Street
Seymour, IN 47274
(812) 522-1592
(800) 952-6646
Exhibit 23.1
We consent to the incorporation by reference in Registration Statement No.'s
33-58914, 33-76036 and 33-99096 of Home Federal Bancorp on Form S-8 of our
report dated July 25, 1996 (August 20, 196 as to Note 11 of the consolidated
financial statements) appearing in this Annual Report on Form 10-K of Home
Federal Bancorp for the years ended June 30, 1996.
/s/ Deloitte & Touche, LLP
DELOITTE & TOUCHE, LLP
Indianapolis, Indiana
September 27, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000867493
<NAME> Home Federal Bancorp
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.000
<CASH> 19,327
<INT-BEARING-DEPOSITS> 6,301
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,651
<INVESTMENTS-CARRYING> 6,990
<INVESTMENTS-MARKET> 6,753
<LOANS> 520,097
<ALLOWANCE> 3,061
<TOTAL-ASSETS> 630,015
<DEPOSITS> 489,573
<SHORT-TERM> 70,700
<LIABILITIES-OTHER> 88,925
<LONG-TERM> 578,498
<COMMON> 6,819
0
0
<OTHER-SE> 18,225
<TOTAL-LIABILITIES-AND-EQUITY> 630,015
<INTEREST-LOAN> 43,299
<INTEREST-INVEST> 3,272
<INTEREST-OTHER> 585
<INTEREST-TOTAL> 47,156
<INTEREST-DEPOSIT> 22,496
<INTEREST-EXPENSE> 27,251
<INTEREST-INCOME-NET> 19,905
<LOAN-LOSSES> 638
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 14,431
<INCOME-PRETAX> 12,284
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,352
<EPS-PRIMARY> 3.22
<EPS-DILUTED> 3.22
<YIELD-ACTUAL> 8.43
<LOANS-NON> 2,871
<LOANS-PAST> 89
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,806
<CHARGE-OFFS> 453
<RECOVERIES> 70
<ALLOWANCE-CLOSE> 3,061
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
