SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the fiscal year ended June 30, 1997
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 X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (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.
<PAGE>
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of September 10, 1997, was $96,586,080.
The number of shares of the Registrants Common Stock, no par value, outstanding
as of September 10, 1997, was 3,398,114 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1997,
are incorporated into Part II. Portions of the Proxy Statement for the 1997
annual meeting of shareholders are incorporated into Part I and Part III.
Exhibit Index on Page 37
Page l of 40 Pages
-2-
<PAGE>
HOME FEDERAL BANCORP
FORM 10-K
INDEX
Forward Looking Statement ................................................ 4
Item 1. Business ..................................................... 4
Item 2. Properties ................................................... 30
Item 3. Legal Proceedings ............................................ 31
Item 4. Submission of Matters to a Vote of
Security Holders ........................................... 31
Item 4.5 Executive Officers of Home Federal Bancorp ................... 31
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters ............................ 32
Item 6. Selected Financial Data ...................................... 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 33
Item 7.A Quantitative and Qualitative Disclosure About
Market Risk ................................................ 33
Item 8. Financial Statements and Supplementary Data .................. 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ..................... 34
Item 10. Directors and Executive Officers of the Registrant ........... 34
Item 11. Executive Compensation ....................................... 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................................. 35
Item 13. Certain Relationships and Related Transactions ............... 35
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K .................................... 35
SIGNATURES ............................................................... 36
-3-
<PAGE>
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-K are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-K
identifies important factors that could cause such differences. These factors
include changes in interest rates, loss of deposits and loan demand to other
savings and financial institutions, substantial changes in financial markets;
changes in real estate values and the real estate market; regulatory changes, or
unanticipated results in pending legal proceedings.
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
network of automated teller machines at eight locations in Seymour, Columbus,
North Vernon and Batesville. 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. and Cirrus 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; (x) trust services: and
(xi) 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
-4-
<PAGE>
(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, 1997, approximately 19.7% of its loans were
consumer-related loans and 13.3% of its loans were commercial mortgage loans.
Home Federal also makes construction loans, which constituted 9.1% of Home
Federal's loans at June 30, 1997. Finally, Home Federal makes commercial loans,
which constituted 7.2% of its loans at June 30, 1997.
Lending Activities
Loan Portfolio Data
The following two tables set forth the composition of Home Federal's loan
porfolio 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 loans, the allowance for
loan losses, unearned discounts on loans and purchase discounts.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF LOAN
First mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family residential loans.....$300,531 50.1% $278,118 51.3% $268,509 55.3% $278,383 60.1% $257,605 62.0%
Commercial and multi-family ............. 79,696 13.3% 73,853 13.6% 63,215 13.0% 59,830 12.9% 51,393 12.4%
Loans on property under construction .... 54,504 9.1% 40,407 7.4% 23,982 4.9% 25,547 5.5% 21,760 5.2%
Loans on unimproved acreage ............ 4,192 0.7% 3,252 0.6% 2,554 0.5% . 2,053 0.4% 1,988 0.5%
Second mortgage, home equity ............. 63,658 10.6% 50,372 9.3% 40,536 8.4% 29,376 6.3% 27,157 6.5%
Commercial loans .......................... 43,112 7.2% 40,609 7.5% 28,881 6.0% 21,660 4.7% 17,234 4.1%
Consumer loans ............................ 11,017 1.8% 11,952 2.2% 11,392 2.3% 4,381 0.9% 5,796 1.4%
Auto loans ................................ 23,086 3.8% 20,883 3.8% 21,506 4.4% 19,164 4.1% 11,719 2.8%
Mobile home loans ......................... 16,613 2.8% 18,833 3.5% 20,258 4.2% 19,287 4.2% 16,416 4.0%
Savings accounts loans .................... 3,989 0.7% 4,199 0.8% 4,407 0.9% 3,684 0.8% 4,295 1.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross loans receivable ...............$600,398 100.0% $542,478 100.0% $485,240 100.0% $463,365 100.0% $415,363 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
TYPE OF SECURITY
Residential:
One to four family....................$397,962 66.3$ $358,003 66.0% $326,296 67.2% $326,055 70.4% $298,478 71.9%
Multi-dwelling units.................. 22,166 3.7% 23,807 4.4% 20,488 4.2% 22,004 4.7% 16,664 4.0%
Commercial real estate..................... 78,261 13.0% 60,940 11.2% 49,458 10.2% 45,077 9.7% 42,773 10.3%
Commercial................................. 43,112 7.2% 40,609 7.5% 28,881 6.0% 21,660 4.7% 17,234 4.1%
Mobile home................................ 16,613 2.8% 18,833 3.5% 20,258 4.2% 19,287 4.2% 16,416 4.0%
Savings account............................ 3,989 0.7% 4,199 0.8% 4,407 0.9% 3,684 0.8% 4,295 1.0%
Auto....................................... 23,086 3.8% 20,883 3.8% 21,506 4.4% 19,164 4.1% 11,719 2.8%
Other consumer............................. 11,017 1.8% 11,952 2.2% 11,392 2.3% 4,381 0.9% 5,796 1.4%
Land acquisition........................... 4,192 0.7% 3,252 0.6% 2,554 0.5% 2,053 0.4% 1,988 0.5%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross loans receivable................$600,398 100.0$ $542,478 100.0% $485,240 100.0% $463,365 100.0% $415,363 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
LOANS RECEIVABLE-NET
Gross loans receivable.....................$600,398 104.3% $542,478 104.3% $485,240 103.3% $463,365 103.9% $415,363 103.8%
Deduct:
Undisbursed portion of loans in process.... (20,519) -3.6% (18,249) -3.5% (11,291) -2.4% (13,377) -3.0% (11,603) -2.9%
Deferred net loan fees..................... (560) -0.1% (963) -0.2% (1,069) -0.2% (1,204) -0.3% (1,082) -0.3%
Allowance for loan losses.................. (3,649) -0.6% (3,061) -0.6% (2,806) -0.6% (2,580) -0.6% (2,257) -0.6%
Unearned discounts......................... (5) 0.0% (19) 0.0% (53) 0.0% (114) 0.0% (220) -0.1%
Purchase discount.......................... (41) 0.0% (89 0.0% (138) 0.0% (187) 0.0% (221) -0.1%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Net loans receivable......................$575,624 100.0% $520,097 100.0$ $469,883 100.0% $445,903 100.0% $399,980 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
-5-
<PAGE>
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>
Maturites in Fiscal
Balance ---------------------------------------------------------------------------
Outstanding 2001 2003 2008 2013
At June 30, to to to and
1997 1998 1999 2000 2002 2007 2012 thereafter
---- ---- ---- ---- ---- ---- ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate .............. $448,077 $ 6,841 $ 3,228 $ 3,419 $ 15,386 $ 83,505 $113,748 $221,950
Mortgage-backed
certificates,
collateralized
mortgage obligations 24,961 1,068 795 3,897 4,506 6,293 3,243 5,159
Construction Loans ....... 54,504 18,919 4,498 2,000 -- 3,980 1,079 24,028
Commercial loans ......... 43,112 17,399 3,341 3,711 6,888 8,229 2,668 876
Other loans .............. 54,705 10,078 4,972 9,333 15,632 5,989 8,568 133
-------- -------- -------- -------- -------- -------- -------- --------
Total .............. $625,359 $ 54,305 $ 16,834 $ 22,360 $ 42,412 $107,996 $129,306 $252,146
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Interest Rate Sensitivity:
Due After June 30, 1998
-----------------------
Fixed Variable Rate
Rate and Balloon
---- -----------
(In Thousands)
Real estate ........................... $134,846 $306,390
Mortgage-backed certificates,
collateralized mortgage obligations 19,686 4,207
Construction Loans .................... 2,434 33,151
Commercial loans ...................... 8,555 17,158
Other loans ........................... 44,627 --
-------- --------
Total ......................... $210,148 $360,906
======== ========
Residential Mortgage Loans
Approximately 98.2% 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, 1997, $356.5 million, or 59.4%,
of Home Federal's total loan portfolio consisted of residential first mortgage
loans, $300.5 million, or 50.1%, of which were secured by one- to four-family
homes.
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.
-6-
<PAGE>
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, 1997, 13.0% 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 20 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, 1997, had a balance of $3.3 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." Home Federal currently complies with the
commercial real estate loan 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.
-7-
<PAGE>
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, 1997, 9.1% 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, 1997, was $2.8 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 $118.4 million on June 30, 1997, or approximately 19.7%
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, 1997, Home Federal had $29.3 million
of second mortgage loans, which equaled 4.9% of its total loan portfolio. Home
Federal aggressively markets home equity loans, which are adjustable-rate loans.
As of June 30, 1997, Home Federal had $34.3 million drawn on its home equity
loans, or 5.7% of its total loan portfolio, with $39.1 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,
1997, $23.1 million, or 3.8%, of Home Federal's total loan portfolio consisted
of automobile loans.
As of June 30, 1997, $16.6 million, or 2.8%, 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, 1997, $4.0 million, or
0.7%, of Home Federal's total loan portfolio consisted of savings account loans.
-8-
<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, 1997, $43.1 million, or
7.2%, 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 $63.7 million of fixed-rate loans in the fiscal year ended June 30, 1997.
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 keeping fixed-rate loans with 15 year maturities as well as
adjustable-rate loans. Home Federal may sell 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
-9-
<PAGE>
except Veteran's Administration ("VA"), Federal Housing Administration
("FHA") and Indiana Housing Finance Authority ("IHFA") loans.
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 38 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, 1997, Home Federal serviced $298.0 million of loans
sold to other parties. Gains and losses on sale of loans, loan participations
and mortgage-backed securities are recognized at the time of sale.
The Company adopted Statement of Financial Accounting Standards No. 122
("SFAS 122") on July 1, 1996. SFAS 122 specifies conditions under which mortgage
servicing rights should be accounted for separately from the underlying mortgage
loans. In fiscal 1997, $420,000 of the total $1.3 million gain on sale of loans
was attributable to mortgage servicing rights.
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, 1997, approximately
0.8%, or $5.0 million, of Home Federal's gross loan portfolio was serviced by
others.
-10-
<PAGE>
The following table shows loan activity for Home Federal during the
periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of periods ............. $ 520,097 $ 469,883 $ 463,365
Loans Originated:
Mortgage loans and contracts:
Construction:
Residential .......................................... 39,116 45,336 24,465
Commercial ........................................... 22,784 12,058 6,361
Purchases:
Residential .......................................... 113,265 112,549 88,692
Commercial ........................................... 16,107 7,214 3,809
Refinancing ............................................ 56,911 88,861 26,723
Other .................................................. 6,462 1,302 1,054
Total ................................................ 254,645 267,320 151,104
Commercial ............................................. 34,709 51,537 28,556
Consumer ............................................... 38,150 35,800 42,037
Total loans originated ............................... 327,504 354,657 221,697
Loans purchased:
Residential .......................................... -- 2,140 --
Other ................................................ 947 1,477 --
Total loans originated and purchased ............... 328,451 358,274 221,697
Real estate loans sold ................................. 81,309 107,500 52,686
Loan repayments and other deductions ................... 166,841 178,179 147,136
Total loans sold, loan repayments and other deductions 248,150 285,679 199,822
Net loan activity ...................................... 80,301 72,595 21,875
Gross loans receivable at end of period ................ 600,398 542,478 485,240
Adjustments ............................................ (24,774) (22,381) (15,357)
Net loans receivable at end of period ................ $ 575,624 $ 520,097 $ 469,883
</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. The maximum
amount which Home Federal could have loaned to one borrower and the borrower's
related entities at June 30, 1997 under the 15% of capital limitation was $8.7
million. At that date, the highest outstanding balance of loans by Home Federal
to one borrower and related entities was approximately $6.3 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.
-11-
<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, 1997, Home Federal held $139,000 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
write down 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
-12-
<PAGE>
amount outstanding of the loan as a percentage of the appraised value of the
property and the delinquency record of the borrower.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-performing Assets:
Loans:
<S> <C> <C> <C> <C> <C>
Non-accrual ............................ $2,930 $2,871 $2,431 $1,887 $1,428
Past due 90 days or more ............... 40 89 81 115 1,292
Restructured loans .......................... 1 1 102 283 597
------ ------ ------ ------ ------
Total non-performing loans .................. 2,971 2,961 2,614 2,285 3,317
Real estate owned, net (1) .................. 51 -- -- 370 1,025
Other repossessed assets, net ............... 88 48 41 71 25
------ ------ ------ ------ ------
Total non-performing assets (2) ........ $3,110 $3,009 $2,655 $2,726 $4,367
====== ====== ====== ====== ======
Total non-performing assets to total assets.. 0.46% 0.48% 0.45% 0.50% 0.82%
Loans with allowance for
uncollected interest...................... $2,930 $2,872 $2,531 $2,167 $2,018
<FN>
- ----------
(1) Refers to real estate acquired by Home Federal through foreclosure,
voluntary deed, or in-substance foreclosure, net of reserve.
(2) At June 30, 1997, 58.5% of Home Federal's non-performing assets consisted
of residential mortgage loans, 8.3% consisted of commercial loans, 28.7%
consisted of consumer-related loans, 4.5% consisted of real estate owned
and other repossessed assets, none of which were commercial real estate
loans.
</FN>
</TABLE>
For the year ended June 30, 1997, 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 $266,000. At June 30, 1997,
Home Federal had approximately $6.4 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, 1997, Home Federal charged off loans
totaling $620,000 and realized recoveries of $78,000 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 $1.1 million to adjust the allowance to $3.6 million as of June 30,
1997.
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, U.S. Government agency
obligations, corporate debt and municipal bonds. At June 30, 1997, 1996, and
1995, Home Federal had approximately $56.7 million, $57.9 million and $59.3
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
-13-
<PAGE>
several generally recognized independent rating agencies. Home Federal's
investment strategy has enabled it to (i) shorten the average term to maturity
of its 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%, although the OTS has proposed a
reduction to 4%. Monetary penalties may be imposed for failure to meet the
liquidity requirement. At June 30, 1997, Home Federal had liquid assets of $54.1
million, and a liquidity ratio of 10.0%, 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
(ii) in the market area in which such deposits would otherwise be accepted.
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,
-14-
<PAGE>
rates paid by competitors, growth goals, federal regulations, and market area of
solicitation.
Deposit accounts at Home Federal at June 30, 1997, were as follows:
Minimum Weighted
Opening Balance at % of Average
Type of Account Balance June 30, 1997 Deposits Rate
- --------------- ------- ------------- -------- ----
(Dollars in
Thousands)
Withdrawable:
Non-interest bearing ......... $ 1 $ 23,506 4.4%
Passbook ..................... 1 48,443 9.2% 2.85%
Money market savings ......... 1,000 64,763 12.3% 4.41%
NOW .......................... 1 45,233 8.6% 2.10%
-------- -----
Total withdrawable ........ $181,945 34.5% 2.85%
-------- -----
Certificates (original terms):
Less than 1 year ............. 500 97,301 18.4% 5.46%
12 to 23 months .............. 500 110,242 20.9% 5.56%
24 to 35 months .............. 500 59,857 11.3% 5.62%
36 to 59 months .............. 500 22,596 4.3% 5.61%
60 to 120 months ............. 500 55,847 10.6% 6.15%
-------- -----
Total certificates ....... $345,843 65.5% 5.64%
-------- -----
Total deposits ............... $527,788 100.0% 4.68%
======== ======
The following table sets forth by nominal interest rate categories the
composition of deposits of HomeFederal at the dates indicated:
At June 30,
-----------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Non-interest bearing and below 2.99% $117,394 $130,424 $124,334
3.00% - 4.99% ...................... 106,914 62,219 78,023
5.00% - 6.99% ...................... 298,811 289,019 242,125
7.00% - 9.00% ...................... 4,669 7,911 22,238
9.01% or greater ................... -- -- 366
-------- -------- --------
Total .............................. $527,788 $489,573 $467,086
======== ======== ========
-15-
<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
1997 Deposits (Decrease) 1996 Deposits (Decrease) 1995 Deposits (Decrease)
---- -------- ---------- ---- -------- ---------- ---- -------- ----------
Withdrawable:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing ........ $ 23,506 4.5% $ 1,528 $ 21,978 4.5% $ 2,796 $ 19,182 4.1% $ 2,508
Passbook .................... 48,443 9.2% (10,545) 58,988 12.1% 2,991 55,997 12.0% (2,323)
Money market savings ........ 64,763 12.2% 39,575 25,188 5.1% 2,322 22,866 4.9% (3,517)
NOW ......................... 45,233 8.6% (3,645) 48,878 10.0% 850 48,028 10.3% 199
-------- ------ -------- -------- ------ ------- -------- ------ -------
Total Withdrawable ....... 181,945 34.5% 25,385 155,032 31.7% 8,959 146,073 31.3% (3,133)
-------- ------ -------- -------- ------ ------- -------- ------ -------
Less than one year .......... 97,301 18.4% 13,471 83,830 17.1% 24,290 59,540 12.7% (23,486)
12 to 23 months ............. 110,242 20.9% 15,760 94,482 19.3% (13,303) 107,785 23.1% 50,164
24 to 35 months ............. 59,857 11.3% (11,375) 71,232 14.5% 6,602 64,630 13.8% 9,509
36 to 59 months ............. 22,596 4.3% (4,312) 26,908 5.5% (712) 27,620 5.9% (5,667)
60 to 120 months ............ 55,847 10.6% (2,242) 58,089 11.9% (3,349) 61,438 13.2% (6,288)
-------- ------ -------- -------- ------ ------- -------- ------ -------
Total certificate accounts 345,843 65.5% 11,302 334,541 68.3% 13,528 321,013 68.7% 24,232
-------- ------ -------- -------- ------ ------- -------- ------ -------
Total deposits ...... $527,788 100.0% $ 36,687 $489,573 100.0% $ 22,487 $467,086 100.0% $ 21,099
======== ====== ======== ======== ====== ======== ======== ====== ========
</TABLE>
The following table represents, by various interest rate categories,
the amounts of deposits maturing during each of the three years following June
30, 1997, and the percentage of such maturities to total deposits. Matured
certificates which have not been renewed as of June 30, 1997, have been
allocated based upon certain rollover assumptions.
<TABLE>
<CAPTION>
DEPOSITS MATURITIES
-------------------
(Dollars in Thousands)
2.00 3.00 4.00 5.00 6.00 7.00 8.00
to to to to to to to Percent of
2.99% 3.99% 4.99% 5.99% 6.99% 7.99% 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, 1998......................$ 212 $ 1,444 $ 29,757 $166,672 $ 19,928 $ 742 $ 1,605 $220,360 63.8%
June 30, 1999...................... -- -- 9,976 37,719 24,890 1,432 84 74,101 21.4%
June 30, 2000...................... -- -- 939 4,832 14,517 488 67 20,843 6.0%
Thereafter ........................ -- -- 35 13,908 16,345 251 -- 30,539 8.8%
------ ------- -------- -------- -------- ------- -------- -------- -----
Total............................$ 212 $ 1,444 $ 40,707 $223,131 $ 75,680 $ 2,913 $ 1,756 $345,843 100.0%
====== ======= ======== ======== ======== ======= ======== ======== =====
</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, 1997 of
certificates of greater than $100,000 by maturity.
<TABLE>
<CAPTION>
ACCOUNTS GREATER THAN $100,000
------------------------------
(Dollars in Thousands)
3.00 4.00 5.00 6.00 7.00 8.00
to to to to to to Percent of
3.99% 4.99% 5.99% 6.99% 7.99% 9.00% Total Total
----- ----- ----- ----- ----- ----- ----- -----
Certificate accounts maturing
in the twelve-month period ending:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1998......................$ 302 $ 112 $ 785 $55,035 $10,287 $ 612 $ 67,133 86.1%
June 30, 1999...................... -- -- 111 2,243 3,342 292 5,988 7.7%
June 30, 2000...................... -- -- -- 303 488 -- 791 1.0%
Thereafter ........................ -- 111 469 3,269 242 -- 4,091 5.2%
------- ------- ------- ------- ------- ------- --------- -----
Total............................$ 302 $ 223 $ 1,365 $60,850 $14,359 $ 904 $ 78,003 100.0%
======= ======= ======= ======= ======= ======= ========= =====
</TABLE>
-16-
<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, 1997, Home Federal had advances totaling $79.9
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 that was 8.50% at June 30, 1997. 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 1997 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.
For the year ended June 30,
---------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
FHLB advances .................................... $33,200 $16,000 $29,000
Official check overnight remittance .............. $ 4,621 $ 4,280 $ 3,086
FHLB overnight remittance ........................ $ 49 $ 57 $ 38
Average amount of total short-term
borrowings outstanding .......................... $34,129 $ 6,822 $24,225
The following table sets forth the amount of short term FHLB advances
outstanding at year end during the period shown and the weighted average rate of
such FHLB advances.
At the year ended June 30,
--------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
FHLB advances:
Amount ......................... $ 33,200 $ 26,000 $ 15,500
Weighted average rate .......... 6.7% 6.2% 6.9%
See Note 9 in the Notes to Consolidated Financial Statements included
in the 1997 Shareholder Annual Report incorporated into Item 8 hereof for a
description of the terms of these borrowings.
-17-
<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, 1997, Home Federal's aggregate investment in
HSC was $2.2 million. For the year ended June 30, 1997, HSC reported income of
$415,000 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, 1997.
<TABLE>
<CAPTION>
Date HSC Loans from
Entered Home Federal
into the Equity Outstanding at
Name Type of Project Project Investment June 30, 1997
- ---- --------------- ------- ---------- -------------
<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 $ 38,000 $ --
in Seymour, Indiana
Heritage Woods II Rental Apartment 11/15/89 $ 107,000 $ --
project of low income
housing (22 units)
Admirals Woods Real estate development 4/20/93 $ 22,000 $ --
in Indianapolis, Indiana
Home-Breeden Real estate development 7/1/94 $2,312,000 $2,337,000
in Columbus, Indiana
</TABLE>
-18-
<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 30,1997, Home
Federal had income of $397,000, on a consolidated basis, from commissions and
dividends paid on Family Financial activities.
HSC markets Linsco Private Ledger full-service securities brokerage
services. At June 30, 1997, HSC received $932,000 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. 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 320 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. Subsequent closings have
encompassed the balance of the six phases. The outstanding loan balance of $2.3
million as of June 30, 1997, reflects the development costs to date of all six
phases.
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, 1997, Home Federal employed 243 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.
-19-
<PAGE>
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,
Monroe and Marion counties in Indiana.
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, Columbus, North Vernon and Batesville, 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 enacted legislation 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. This new legislation may also
result in increased competition for Home Federal and the Company.
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 is 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").
Congress is considering legislation that would require all federal
savings associations, such as Home Federal, either to convert to a national bank
or a state-chartered bank by a specified date to be determined. In addition,
under the legislation, the Company likely would no longer be regulated as a
savings and loan holding company but rather as a bank holding company. This
-20-
<PAGE>
proposed legislation would abolish the OTS and transfer its functions among the
other federal banking regulators. It cannot be predicted with certainty whether,
or in what form, the legislation will be enacted.
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 quarterly assessment rates range from
.01164% of assets for associations with assets of $67.0 million or less to
.00308% for associations with assets in excess of $35.0 billion. Home Federal's
current semiannual assessment, based upon total assets at March 31, 1997 of
$663.3 million, is $72,000.
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
it's 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, 1997, Home Federal's investment in stock of
the FHLB of Indianapolis was $4.3 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, 1997, dividends paid to Home Federal by the FHLB of
Indianapolis totaled $315,000, for an annual rate of 7.8%. 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. FIRREA proscribes eligible collateral as 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 readily ascertainable value in which a perfected
security interest may be obtained. Other forms of collateral may be accepted as
-21-
<PAGE>
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%, although the OTS has proposed a reduction of the percentage
to 4%. OTS regulations also require each member savings association 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. The OTS has proposed
abolishing this latter requirement. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The monthly average liquidity of
Home Federal for June, 1997 was 10.0% which exceeded the applicable 5% liquidity
requirement. Its average short-term liquidity ratio for June, 1997, was 4.6%.
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. As of September 30, 1996,
the reserves of the SAIF were 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
levels required by law in May, 1995. However, on September 30, 1996, provisions
designed to recapitalize the SAIF and eliminate the premium disparity between
the BIF and the SAIF were signed into law. See "--Assessments" below.
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 these rates if the 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. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
Home Federal was charged a one-time special assessment equal to $.657 per $100
in assessable deposits at March 31, 1995. Home Federal recognized this one-time
assessment as a non-recurring operating expense of $3,001,000, ($1,726,000 after
tax), during the three-month period ending September 30, 1996, and Home Federal
paid the assessment on November 27, 1996. The assessment was fully deductible
for both federal and state income tax purposes. Beginning January 1, 1997, Home
-22-
<PAGE>
Federal's annual deposit insurance premium was reduced from .23% to .0644% of
total assessable deposits. BIF institutions pay lower assessments than
comparable SAIF institutions because BIF institutions pay only 20% of the rate
paid by SAIF institutions on their deposits with respect to obligations issued
by the federally-chartered corporation which provided some of the financing to
resolve the thrift crisis in the 1980's, ("FICO"). The 1996 law also provides
for the merger of the SAIF and the BIF by 1999, but not until such time as bank
and thrift charters are combined. Until the charters are combined, savings
associations with SAIF deposits may not transfer deposits into the BIF system
without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
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 purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) 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 in an amount up to 100% of tangible capital) 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, 1997, based on the
capital standards then in effect, Home Federal was in compliance with all
capital requirements.
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. A savings
association 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 a savings association's
existing risk-based capital requirement. 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 savings associations and it retains the
authority, on a case-by-case basis, to impose additional capital requirements
for individual savings associations with significant interest rate risk.
In periods of rapidly changing interest rates, the Bank's balance sheet
is subject to significant fluctuations in market value (interest rate risk
exposure). However, as the delayed interest rate risk rules proposed by the OTS
currently read, the Bank at June 30, 1997, would have no additional capital
requirement. The Bank's management remains cognizant of the proposed rules and
continues to monitor its interest rate risk position.
-23-
<PAGE>
The following is a summary of Home Federal's regulatory capital and
capital requirements at June 30, 1997:
<TABLE>
<CAPTION>
To Be Categorized
as "Well Capitalized"
Under Prompt
For Capital Corrective Action
(dollars in thousands) Actual Adequacy Purposes Provisions
- ---------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
As of June 30, 1997
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to total assets) $54,655 8.07% $10,158 1.50% $ N/A $ N/A
Core capital (to total assets) ... $54,655 8.07% $20,317 3.00% $ N/A $ N/A
Total risk-based capital
(to risk-weighted assets) .... $57,980 12.06% $38,454 8.00% $48,068 10.00%
Tier 1 risk-based capital
(to risk-weighted assets) .... $54,655 11.37% $ N/A $ N/A $28,841 6.00%
Tier 1 leverage capital
(to average assets) .......... $54,655 8.45% $ N/A $ N/A $32,355 5.00%
</TABLE>
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,
1997, Home Federal was categorized as "well capitalized," meaning that Home
Federal's total risk-based capital ratio exceeded 10%, Home Federal's Tier I
risk-based capital ratio exceeded 6%, Home Federal's leverage ratio exceeded 5%,
and Home Federal was not subject to a regulatory order, agreement or directive
to meet and maintain a specific capital level for any capital measure.
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
-24-
<PAGE>
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. On August 27, 1996, the federal banking agencies added asset
quality and earnings standards to the safety and soundness guidelines.
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 FRB "discount window," to meet these requirements 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 FRB.
FedICIA imposes certain limitations on the ability of undercapitalized
depository institutions to borrow from FRBs.
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
-25-
<PAGE>
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.
The 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 association, other
than a subsidiary association, 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
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, 1997, Home Federal's asset composition was in excess
of that required to qualify Home Federal as a QTL.
If the Holding Company were to acquire control of another savings
association 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 association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi) those activities
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
-26-
<PAGE>
company involved controls a savings association which operated a home or branch
office in the state of the savings association to be acquired as of March 5,
1987, or if the laws of the state in which the savings association to be
acquired is located specifically permit associations to be acquired by
state-chartered associations or savings and loan holding companies located in
the state where the acquiring entity is located (or by a holding company that
controls such state-chartered savings associations). 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.
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 one-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
Savings associations must meet a QTL test which requires a savings
association to 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 Federal
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.
-27-
<PAGE>
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.
At June 30, 1997, 75.2% 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 homebuyers. 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.
-28-
<PAGE>
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. Home Federal will recapture
approximately $2.5 million over a six-year period that will begin in fiscal
1999. 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
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.
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. 128 ("SFAS 128"),
"Earnings per Share," was issued in February 1997 and is effective for both
interim and annual fiscal periods ending after December 15, 1997. Early adoption
is not permitted. SFAS 128 establishes new standards for computing and
presenting earnings per share ("EPS"). Specifically, SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS, requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Management has determined that the
adoption of SFAS 128 will not have a material effect on the consolidated
financial statements.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Comprehensive Income", was issued in June 1997 and becomes effective for fiscal
periods beginning after December 15, 1997. SFAS 130 requires reclassification of
earlier financial statements for comparative purposes. SFAS No. 130 requires
that changes in the amounts of certain items, including foreign currency
translation adjustments and gain and losses on certain securities be shown in
the financial statements. SFAS No. 130 does not require a specific format for
the financial statement in which comprehensive income is reported, but does
-29-
<PAGE>
require that an amount representing total comprehensive income be reported in
that statement. Management has not yet quantified the effect of the new standard
on the consolidated financial statements.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," was
issued in June 1997 and is effective for fiscal periods beginning after December
15, 1997. This statement will change the way public companies report information
about segments of their business in their annual financial statements and
requires them to report selected segment information in their quarterly reports
issued to shareholders. It also requires entity-wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. Management has not
yet quantified the effect of this new standard on the consolidated financial
statements.
Item 2. Properties.
At June 30, 1997, Home Federal conducted its business from its main
office at 222 West Second Street, Seymour, Indiana and 15 full-service branches.
Home Federal owns two buildings that it uses for certain administrative
operations located at 218 West Second Street, Seymour, and 211 Chestnut Street,
Seymour. 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, 1997,
is presented in the following table:
<TABLE>
<CAPTION>
Net Book
Value of
Property, Approximate
Owned or Furniture and Square Lease
Description and Address Leased Fixtures Footage Expiration
- ----------------------- ------ -------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Principal Office Owned $ 3,207 9,200 N/A
222 West Second Street
Operations Center Owned $ 255 20,000 N/A
218 West Second Street
Loan Processing Center Owned $ 100 5,130 N/A
211 North Chestnut
Branch Offices:
Columbus Branches:
501 Washington Street Owned $ 614 14,800 N/A
3805 25th Street Owned $ 358 5,800 N/A
2751 Brentwood Drive Owned $ 428 3,200 N/A
4330 West Jonathon Moore Pike Owned $ 794 2,600 N/A
Hope Branch 1/2 Owned $ 35 2,000 4/99
332 Jackson Street 1/2 Leased
Austin Branch Owned $ 45 3,600 N/A
67 West Main Street
Brownstown Branch Leased $ 8 2,400 Month to
101 North Main Street Month
North Vernon Branches
111 North State Street Owned $ 394 1,900 N/A
-30-
<PAGE>
1540 North State Street Leased $ 42 1,600 10/02
Osgood Branch Owned $ 110 1,280 N/A
South Buckeye Street
Salem Branch
R.R, #1, Highway 60 West (old) Owned $ 33 2,000 N/A
1208 South Jackson (new) Owned $ 196 1,860 N/A
Seymour Branch Owned $ 407 6,800 N/A
1117 East Tipton Street
Batesville Branch Owned $ 678 2,175 N/A
12 West Pearl Street
Madison Branch Owned $ 445 2,550 N/A
201 Clifty Drive
Greensburg Branch Leased $ 22 2,440 8/97
115 East North Street
</TABLE>
Home Federal owns its computer and data processing equipment that is
used for accounting, financial forecasting, and general ledger work. Home
Federal also has contracted for the data processing and reporting services of
NCR headquartered in Dayton, Ohio. The contract with NCR expires in October
2000.
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, 1997.
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 50) 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 57) 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.
-31-
<PAGE>
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 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 5 of HFB's 1997 Shareholder Annual Report (the "Shareholder
Annual Report"). As of June 30, 1997, there were 582 shareholders of record of
HFB's Common Stock.
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, 1997, approximately $6 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.
-32-
<PAGE>
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
LaSalle National Bank, Chicago, Illinois, (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
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 4 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 6 to 13 of the Shareholder Annual Report.
Item 7. A Quantitative and Qualitative Analysis of Financial Condition
and Results of Operations
The OTS requires each thrift institution to calculate the estimated
change in the institution's net portfolio value ("NPV") assuming an
instantaneous, parallel shift in the Treasury yield curve of 100 to 400 basis
points either up or down in 100 basis point increments. NPV represents the sum
of future cash flows of assets discounted to present value less the sum of
future cash flows of liabilities discounted to present value. The OTS permits
institutions to utilize the OTS' model, which is based upon data submitted in
the institution's quarterly thrift financial reports.
In estimating the NPV of mortgage loans and mortgage-backed securities,
the OTS model utilizes various price indications and prepayment rates. At June
30, 1997, these price indications varied from 69.02 to 119.82 for fixed rate
mortgages and mortgage-backed securities and varied from 88.73 to 108.46 for
adjustable rate mortgages and mortgage-backed securities. Prepayment rates for
June 30, 1997 ranged from a CPR or 4% to a CPR of 37%.
The value of deposit accounts appears on both the asset and liability
side of the NPV calculation in the OTS model. In estimating the value of
certificate of deposit accounts, ("CDs"), retail price estimates represent the
-33-
<PAGE>
value of the liability implied by the CD and reflect the difference between the
CD coupon and secondary-market CD rates. As of June 30, 1997, the retail CD
price assumptions varied from 73.44 to 121.08. The retail CD intangible prices
represent the value of the "customer relationship" due to the rollover of CD
deposits and are an intangible asset for an institution. As of June 30, 1997,
the retail CD intangible price assumptions varied from .04 to .93.
Other deposit accounts such as transaction accounts, money market
deposit accounts, passbook accounts and non-interest bearing accounts are valued
at 100% of their respective outstanding balances in all nine interest rate
scenarios on the liability side of the OTS model. On the asset side of the
model, intangible prices are used to reflect the value of the "customer
relationship" of the various types of deposit accounts. As of June 30, 1997, the
intangible prices for transaction accounts, money market deposit accounts,
passbook accounts and non-interest-bearing accounts varied from -2.06 to 20.94,
- -. 57 to 11.69, -. 84 to 17.55 and 4.31 to 18.04 respectively.
The following table sets forth the institution's interest rate
sensitivity of NPV as of June 30, 1997, (in thousands).
Net Portfolio Value NPV as % of PV of Assets
------------------- ------------------------
Change
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
+400 bp 64,517 (18,900) (23) 9.73 % (214) bp
+300 bp 70,516 (12,901) (15) 10.46 % (141) bp
+200 bp 75,939 ( 7,479) ( 9) 11.10 % ( 78) bp
+100 bp 80,440 ( 2,978) (4) 11.59 % ( 29) bp
0 bp 83,417 - - 11.87 % -
-100 bp 84,467 1,049 1 11.91 % 4 bp
-200 bp 83,866 449 1 11.74 % ( 13) bp
-300 bp 83,698 281 - 11.63 % ( 25) bp
-400 bp 85,153 1,736 2 11.71 % ( 17) bp
Item 8. Financial Statements and Supplementary Data.
The Company'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 5
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 Company's Proxy Statement for
its 1997 annual shareholder meeting (the "1997 Proxy Statement"). Information
concerning the Company'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 1997 Proxy Statement.
-34-
<PAGE>
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 1997 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 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 10 of the 1997 Proxy Statement.
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 1997
Shareholder
Annual Report
Consolidated Balance Sheets as of
June 30, 1997 and 1996................................... 14
Consolidated Statements of Income for each of
the years in the three-year period ended
June 30, 1997............................................ 15
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended June 30, 1997...................................... 16
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
June 30, 1997............................................ 17
Notes to Consolidated Financial Statements........................ 18
Report of Deloitte & Touche LLP
Independent Auditors..................................... 33
(b) Reports on Form 8-K
Registrant has filed no reports on Form 8-K for the quarter ending June
30, 1997.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page 37.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
notes.
-35-
<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 22nd day
of September, 1997.
HOME FEDERAL BANCORP
DATE: September 22, 1997 /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 22nd day of September,
1997.
/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/ Melissa M. Arnold /s/ John K. Keach, Jr.
- --------------------- ----------------------
Melissa M. Arnold, 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
-36 -
<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)).
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).
-37-
<PAGE>
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 (incorporate 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).
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
endedJune 30, 1994).
-38-
<PAGE>
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
December22, 1992, with John T. Beatty
(incorporated by referencefrom Exhibit
10(ah) to Registrant's Form 10-K for theyear
ended June 30, 1994)
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).
-39-
<PAGE>
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).
10(ar) Rights Agreement, dated as of November 22, 1994,
between Registrant and LaSalle National Bank,
Chicago, Illinois, 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 1997 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)
-40-
[Front Cover]
Company Logo 1997 ANNUAL REPORT HOME FEDERAL BANCORP
[Oblong shaped cutout in front cover near bottom of page omitted showing runner
on the next page running along the beach]
[Caption under cutout] STRENGTH FOR THE LONG RUN
<PAGE>
[Inside front cover blank with oblong cutout near bottom of page.]
<PAGE>
1997 ANNUAL REPORT HOME FEDERAL BANCORP
[Caption above picture]
At Home Federal, we continually seek to solidify our position for the road
ahead. We're setting a steady pace that's challenging but that does not exhaust
our resources. Our goal is not to break records but rather to build strength for
the long run. We want the communities, customers and shareholders we serve to be
confident that they can rely on us both now and in the future.
[picture omitted bottom of page]
Runner running along the beach.
<PAGE>
[picture omitted 3/4th of page]
Runner running on cobblestones.
TABLE OF CONTENTS
Letter to Shareholders 1 Selected Consolidated Financial Data 4 Quarterly
Results of Operations 5 Management's Discussion & Analysis 6 Consolidated
Balance Sheets 14 Consolidated Statements of Income 15 Consolidated Statements
of Shareholders' Equity 16 Consolidated Statements of Cash Flows 17 Notes to
Consolidated Financial Statements 18 Independent Auditors' Report 33 Board of
Directors & Officers of Home Federal Bancorp & Executive Officers of Home
Federal Savings Bank 34
<PAGE>
TO OUR SHAREHOLDERS
During the past year, we at Home Federal continued our long-standing policy
of carefully and successfully developing our business at a steady pace - step by
step, product by product, customer by customer. As in previous years, we enjoyed
the rewards that come with careful planning and hard work: increased strength in
our core businesses, continued customer satisfaction with our products and
services, and gratifying financial results.
For the 1997 fiscal year, Home Federal reported net income of $6,846,000 or
$1.96 per share, compared to $7,352,000 or $2.15 per share for the previous
year. Had it not been for a special assessment during the first quarter to
recapitalize the FDIC Savings Association Insurance Fund, net income would have
been $8,572,000 or $2.45 per share, fully 16.6 percent higher than the total for
fiscal year 1996.
Net interest income after the provision for loan losses - a primary
barometer of Home Federal's performance - increased by $2,495,000, despite a
loan loss provision $492,000 higher than the 1996 provision. It should be noted
that the increased size and diversification of the portfolio prompted us to
raise the provision. We feel that this increase in the provision is consistent
with the change in the portfolio mix.
Residential mortgage lending, Home Federal's primary business, grew at a
rate of less than 10 percent in fiscal year 1997, but that slow growth was more
than offset by significant gains in other areas. We enjoyed strong growth in our
consumer lending categories: our home equity lending and second mortgage
businesses, for example, grew by just over 26 percent during the year. Our
commercial real estate lending business grew by approximately 15 percent.
TOTAL LOAN PORTFOLIO IN THOUSANDS [pie graphs omitted bottom of page]
1993
Commercial Mortgages 14.74% $ 61,245
Second & Home Equity 6.54% $ 27,157
Commercial 4.15% $ 17,234
Consumer 9.20% $ 38,226
Residential Mortgages 65.37% $271,501
$415,363
1997
Commercial Mortgages 17.42% $104,612
Second & Home Equity 10.60% $ 63,658
Commercial 7.18% $ 43,112
Consumer 9.11% $ 54,705
Residential Mortgages 55.69% $334,311
$600,398
EARNINGS PER SHARE [Bar Graph omitted left column]
[Caption below graph]
Net income divided by outstanding common and common share equivalents. Growth in
earnings per share was 11% and 14% for fiscal years 1996 and 1997, respectively.
*The fiscal 1997 figure does not include the one time SAIF assessment.
FY93 $ 1.92
FY94 $ 2.09
FY95 $ 1.93
FY96 $ 2.15
FY97 $ 2.45
[Photo of John K. Keach, Jr. omitted right column]
[Quote above picture in right column]
"In fiscal year 1997, we continued to diversify our product offerings to meet
the ever-changing needs. At Home Federal, we strive to set a steady pace and
move consistently forward - to grow with and for the communities we serve."-John
K. Keach, Jr.
<PAGE>
TO OUR SHAREHOLDERS
In today's spirited economy, financial institutions like Home Federal have
found it difficult to compete for savings deposits to fund loan growth when the
stock market in general - and mutual funds in particular - have offered
investors the prospect of considerably higher returns. Our response has been to
develop competitive products like our Easy Advantage Money Fund. A strong
performer in our product lineup, this new money market account attracted
balances totaling more than $43 million during its first year.
To better manage our growth, we have been striving to balance the upward
trends in administrative costs that all businesses face with the self-imposed
discipline in spending. We were particularly successful in establishing a
healthy efficiency ratio in 1997, and we intend to maintain the discipline that
made it possible. As in other years, we will continue to investigate investment
opportunities in new technology to build Home Federal's assets while holding the
line on non-essential spending.
One of Home Federal's greatest assets is our proven track record in creating
shareholder value. During the year, Home Federal stock appreciated 64 percent.
In December we announced a three-for-two stock split, concurrent with a 20
percent dividend increase. Our intent was to make our stock more attractive to
investors, improving its liquidity and tangibly demonstrating the results of
Home Federal's recent performance. We subsequently announced a second dividend
increase of 25 percent, reaffirming the recent growth and upside potential that
made the earlier increase and stock split possible. A dividend reinvestment
program will be offered to our shareholders beginning in September of 1997.
As we do each year, we continually sought better ways to serve each of Home
Federal's customers throughout fiscal 1997. We began to implement a
comprehensive new approach to blending both consumer and commercial financial
services, a marketing strategy signaling Home Federal's ability to meet every
financial need of its many customers who require both consumer and business
financial products and services.
At the same time, we developed more aggressive retail marketing strategies
to make present and potential customers more aware of our diverse product
offerings. A recent addition to Home Federal's product line is our trust and
asset management services, another investment in establishing long-term customer
relationships and one that we expect to generate strong returns in the future.
The appeal of such services was demonstrated by the fine performance of Linsco
Private Ledger - our brokerage division, which reported another year of
outstanding results. With these complimentary service offerings, we are
positioning ourselves to be
[Quote in left column above picture] "With the unprecedented pace of change
throughout the banking industry, few people talk about tradition. Yet, it's
rewarding to realize that Home Federal still derives strength and stability from
its customer-oriented focus. That tradition has served Home Federal and our
customers well for almost 90 years." - John K. Keach, Sr. [picture of John K.
Keach, Sr. omitted left column]
EFFICIENCY RATIO [Bar Graph omitted right column]
[Caption below graph]
Operating expenses as a percentage of the sum of net interest income and
non-interest income. For example, during fiscal 1997, every $.52 in expense
generated $1.00 in net income.
FY93 59.0%
FY94 61.2%
FY95 58.7%
FY96 56.9%
FY97 51.9%
<PAGE>
TO OUR SHAREHOLDERS
able to meet the needs of the growing number of people who have come to expect
a diversification of their personal assets.
Continuing our program of updating our retail facilities and taking
advantage of our growing market share in the Washington County area, we
relocated in the community of Salem, Indiana, during June of 1997. And, at our
headquarters facilities, we initiated a new central loan processing system which
creates many corporate-wide efficiencies while maintaining decision-making
autonomy throughout our branch network. We also instituted a new call center,
staffed by four customer service representatives, to better answer customer
inquiries and provide accurate and timely product information.
Beyond our doors, the business of funding and operating financial
institutions continues to evolve rapidly - and in many ways our predecessors
could not imagine. Mergers, restructuring, dramatic regulatory changes and new
product offerings occur with stunning speed, challenging us to constantly
enhance our own products and processes while maintaining the traditional
standards of service our customers have expected and enjoyed for almost 90
years.
Our mission in 1998 is to effectively build Home Federal's strength for the
long run. And our commitment is to continually leverage our unique strengths and
resources for the ongoing benefit of all of our stakeholders - shareholders,
customers and employees - one carefully-planned step at a time.
Sincerely,
/s/ John K. Keach, Sr. /s/ John K. Keach, Jr.
John K. Keach, Sr. John K. Keach, Jr.
Chairman of President and Chief
the Board Executive Officer
STOCK PRICE [Bar Graph omitted left column]
[Caption below graph]
Price for one share of Home Federal Bancorp stock at close on June 30.
FY93 $13,111
FY94 $13,000
FY95 $15,667
FY96 $17,333
FY97 $28,500
[picture omitted bottom of page]
Runner running along a country road.
<PAGE>
<TABLE>
<CAPTION>
Summary of Selected Consolidated Financial Data
(in thousands except per share data) At or For the Year Ended June 30,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------
Selected Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total assets ................................. $ 682,796 $ 630,015 $ 588,543 $ 545,228 $ 534,390
Securities available for sale ................ $ 40,119 $ 44,651 $ 34,221 $ 38,986 $ 7,489
Securities held to maturity .................. $ 13,115 $ 6,990 $ 17,451 $ 17,225 $ 76,727
Loans receivable, net ........................ $ 575,624 $ 520,097 $ 469,883 $ 445,903 $ 399,980
Deposits ..................................... $ 527,788 $ 489,573 $ 467,086 $ 445,987 $ 445,478
Total borrowings ............................. $ 92,393 $ 84,137 $ 72,900 $ 57,418 $ 52,900
Shareholders' equity ......................... $ 57,917 $ 51,517 $ 45,279 $ 38,589 $ 32,523
Selected Operations Data:
Total interest income ........................ $ 51,531 $ 47,156 $ 43,013 $ 38,059 $ 40,174
Total interest expense ....................... 28,640 27,251 24,289 21,323 23,842
--------- --------- --------- --------- ---------
Net interest income .......................... 22,891 19,905 18,724 16,736 16,332
Provision (credit) for loan losses ........... 1,129 638 (314) 491 414
Net interest income after provision --------- --------- --------- --------- ---------
for loan losses ......................... 21,762 19,267 19,038 16,245 15,918
Gain on sale of loans ........................ 1,267 1,321 667 2,072 2,152
Gain (loss) on sale of securities ............ 19 1 (437) 905 387
Other income ................................. 5,900 6,126 4,508 4,371 4,055
Other expense (3) ............................ 17,789 14,431 13,483 12,534 12,078
Income before income taxes, --------- --------- --------- --------- ---------
extraordinary item and cumulative effect
of change in accounting principle ....... 11,159 12,284 10,293 11,059 10,434
Income tax provision ......................... 4,313 4,932 3,757 4,069 3,691
Income before extraordinary item and --------- --------- --------- --------- ---------
cumulative effect of change in
accounting principle .................... 6,846 7,352 6,536 6,990 6,743
Extraordinary item (1) ....................... -- -- -- -- (1,222)
Cumulative effect of change in
accounting principle (2) ................ -- -- -- -- 849
--------- --------- --------- --------- ---------
Net income (4) ............................... $ 6,846 $ 7,352 $ 6,536 $ 6,990 $ 6,370
========= ========= ========= ========= =========
Earnings per common and common
share equivalents (4)......................... $ 1.96 $ 2.15 $ 1.93 $ 2.09 $ 1.92
Cash dividends per share ..................... $ 0.41 $ 0.30 $ 0.25 $ 0.20 $ 0.17
Selected Financial and Statistical Data:
Return on average assets ..................... 1.05% 1.23% 1.15% 1.31% 1.23%
Return on average shareholders' equity ....... 12.62% 15.14% 15.66% 19.29% 21.03%
Interest rate spread during the period ....... 3.59% 3.40% 3.43% 3.29% 3.36%
Net interest margin on average earning assets 3.76% 3.56% 3.54% 3.36% 3.39%
Average shareholders' equity to average assets 8.35% 8.12% 7.37% 6.78% 5.86%
Efficiency ratio (5) ......................... 51.90% 56.90% 58.70% 61.20% 59.00%
Nonperforming assets to total assets ......... 0.46% 0.48% 0.45% 0.50% 0.82%
Loss allowance to nonperforming loans ........ 122.82% 103.38% 107.35% 112.91% 68.04%
Loss allowance to total loans ................ 0.63% 0.58% 0.58% 0.57% 0.55%
Dividend payout ratio ........................ 20.13% 13.59% 12.64% 9.27% 5.55%
Loan servicing portfolio ..................... $ 297,982 $ 266,814 $ 224,690 $ 196,522 $ 163,319
Allowance for loan losses .................... $ 3,649 $ 3,061 $ 2,806 $ 2,580 $ 2,257
Number of full service offices ............... 16 15 15 13 13
<FN>
- ------------------
(1) Prepayment penalty for extinguishment of debt.
(2) Change in accounting for income taxes.
(3) Fiscal 1997 other expense includes a one time SAIF assessment of $3.0 million.
(4) Fiscal 1997 net income excluding the after tax effect of the SAIF assessment would have been $8.6 milllion or $2.45 per share.
(5) Operating Expsenses as a percentage of the sum of net interest income and non-interest income, excluding real estate income
and expenses, securities gains and losses, gains and losses on sale of loans, amortiaztion of intangibles, and
non-recurring items.
</FN>
</TABLE>
<PAGE>
Quarterly Results of Operations
(In thousands except share data)
The following table presents certain selected unaudited data relating to results
of operations for the three month periods ending on the dates indicated.
Three Months Ended
--------------------------------------------------
September 30, December 31, March 31, June 30,
Fiscal Year 1997 1996 1996 1997 1997
--------------------------------------------------
Total interest income ..... $12,491 $12,819 $12,933 $13,288
Total interest expense .... 7,028 7,158 7,101 7,353
------- ------- ------- -------
Net interest income ....... 5,463 5,661 5,832 5,935
Provision for loan losses . 167 267 379 316
------- ------- ------- -------
Net interest income after
provision for loan losses 5,296 5,394 5,453 5,619
Gain on sale of loans ..... 387 351 264 265
Other income .............. 1,518 1,404 1,416 1,581
Other expense ............. 6,530 3,602 3,592 4,065
------- ------- ------- -------
Income before income taxes 671 3,547 3,541 3,400
Income tax provision ...... 240 1,381 1,370 1,322
------- ------- ------- -------
Net Income ................ $ 431 $ 2,166 $ 2,171 $ 2,078
======= ======= ======= =======
Earnings per common and common
share equivalents......... $ 0.13 $ 0.63 $ 0.61 $ 0.59
======= ======= ======= =======
Dividends per share........ $ 0.083 $ 0.100 $ 0.100 $ 0.125
Stock sales price range:
High (1) $ 19.75 $ 25.75 $ 28.00 $ 28.75
Low.... $ 17.33 $ 19.50 $ 24.25 $ 25.00
Three Months Ended
--------------------------------------------------
September 30, December 31, March 31, June 30,
Fiscal Year 1996 1995 1995 1996 1996
--------------------------------------------------
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 common
share equivalents......... $ 0.53 $ 0.55 $ .055 $ .052
======= ======= ======= =======
Dividends per share........ $ 0.067 $ 0.067 $ 0.083 $ 0.083
Stock sales price range:
High (1) $ 16.67 $ 18.17 $ 18.00 $ 18.17
Low.... $ 14.83 $ 15.67 $ 16.33 $ 16.33
- ----------
(1) The Company's common stock trades on the NASDAQ stock market under the
symbol "HOMF". As of June 30 , 1997, the Company had 582 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
16 full service banking branches.
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 sale of loans.
The Bank's net interest income after provision for loan losses has
consistently improved from $15.9 million in fiscal 1993 to $21.8 million in
fiscal 1997. The significant increase in net interest income is primarily the
result of an increase in interest-earning assets over interest-bearing
liabilities.
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 15-year and 30-year loans sold, thereby
increasing non-interest income. The proceeds of these loan sales are used to
reinvest in other interest-earning assets or 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. Retail deposit specials are competitively
priced to attract deposits in the Bank's market area. When retail deposit funds
become unavailable due to competition, the Bank employs Federal Home Loan Bank
of Indianapolis ("FHLB") advances to maintain the necessary liquidity to fund
lending operations. In addition, the Bank utilizes FHLB advances to match
maturities with select commercial loans.
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.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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.
The interest-sensitivity "gap" is defined as the amount by which assets
repricing within the respective period exceed liabilities 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:
6 Months 6-12 1-3 3-5 Over 5
or Less Months Years Years Years
-------------------------------------------
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%
The prepayment and attrition rates are selected after considering the current
interest rate environment, industry asset and liability price tables developed
by the Office of Thrift Supervision ("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.
The following table sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at June 30, 1997,
(dollars in thousands):
<TABLE>
<CAPTION>
Maturity or Repricing as of June 30, 1997
-------------------------------------------------------------
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 .............. $ 122,962 $ 24,899 $ 53,406 $ 39,115 $ 528 $ 240,910
Fixed rate ................... 12,940 9,274 26,414 18,358 26,015 93,001
Commercial real estate ....... 38,589 25,768 23,634 14,643 3,459 106,093
Non-mortgage ................. 97,048 17,963 30,950 8,556 5,877 160,394
Securities and other ........... 11,088 4,349 7,694 27,441 6,160 56,732
--------- --------- --------- --------- --------- ---------
Total ...................... 282,627 82,253 142,098 108,113 42,039 657,130
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Fixed maturity deposits ........ 156,288 69,338 95,017 22,786 7,688 351,117
Other deposits ................. 129,112 12,331 18,515 6,092 10,621 176,671
FHLB advances .................. 21,900 12,174 29,568 12,198 4,105 79,945
Other borrowings ............... 12,448 -- -- -- -- 12,448
--------- --------- --------- --------- --------- ---------
Total ...................... 319,748 93,843 143,100 41,076 22,414 620,181
--------- --------- --------- --------- --------- ---------
Interest-earning assets less
interest-bearing liabilities .. $ (37,121)$ (11,590)$ (1,002)$ 67,037 $ 19,625
========= ========= ========= ========= =========
Cumulative interest-rate
sensitivity gap ............... $ (37,121)$ (48,711)$ (49,713)$ 17,324 $ 36,949
========= ========= ========= ========= =========
Cumulative interest-rate gap
as a percentage of total assets (5.44%) (7.13%) (7.28%) 2.54% 5.41%
========= ========= ========= ========= =========
</TABLE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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.
(Dollars in thousands.)
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------------
Average Average Average
Average Yield Average Yield Average Yield
Balance Interest /Rate Balance Interest /Rate Balance Interest /Rate
-----------------------------------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans ........................ $ 455,225 $ 38,633 8.49% $ 404,268 $ 34,521 8.54% $ 390,986 $ 31,682 8.10%
Commercial loans ...................... 39,892 3,638 9.12% 32,044 2,999 9.36% 24,489 2,382 9.73%
Consumer loans ........................ 56,040 5,651 10.08% 60,224 5,779 9.60% 53,293 5,167 9.70%
Securities ............................ 50,752 3,307 6.52% 51,332 3,272 6.37% 53,502 3,443 6.44%
Interest-bearing deposits ............. 7,044 302 4.29% 11,786 585 4.96% 7,365 339 4.60%
--------- --------- ----- --------- --------- ----- --------- -------- -----
Total interest-earning
assets (1) ........................... $ 608,953 $ 51,531 8.46% $ 559,654 $ 47,156 8.43% $ 529,635 $ 43,013 8.12%
========= ========= ===== ========= ========= ===== ========= ======== =====
Interest-bearing liabilities:
Deposits - Transaction accounts ....... $ 169,890 $ 4,420 2.60% $ 148,065 $ 3,393 2.29% $ 145,420 $ 3,345 2.30%
Certificate accounts ....... 333,057 18,866 5.66% 322,386 19,103 5.93% 310,212 16,722 5.39%
FHLB advances ......................... 74,267 4,652 6.26% 60,188 3,855 6.40% 51,263 3,211 6.26%
Other borrowings ...................... 10,368 702 6.77% 11,625 900 7.74% 11,223 1,011 9.01%
--------- --------- ----- --------- --------- ----- --------- -------- -----
Total interest-bearing liabilities .... $ 587,582 $ 28,640 4.87% $ 542,264 $ 27,251 5.03% $ 518,118 $ 24,289 4.69%
========= ========= ===== ========= ========= ===== ========= ======== =====
Net interest income .................... $ 22,891 $ 19,905 $ 18,724
=========================================================================================
Net interest rate spread ............... 3.59% 3.40% 3.43%
=========================================================================================
Net earning assets ..................... $ 21,371 $ 17,390 $ 11,517
=========================================================================================
Net interest margin (2) ................ 3.76% 3.56% 3.54%
=========================================================================================
Average interest-earning assets to
average interest-bearing liabilities .. 103.64% 103.21% 102.22%
========================================================================================
<FN>
- ----------
(1) Average balances are net of non-performing loans, and interest income includes loan fee amortization of $320,000, $217,000 and
$100,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
(2) Net interest income divided by the average balance of interest-earning assets.
</FN>
</TABLE>
Rate/Volume Analysis
The following table sets forth the changes in the Bank's interest income and
interest expense (in thousands) 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,
---------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
-------------------------------- ----------------------------
Increase/Decrease Increase/Decrease
Due to Due to Total Due to Due to Total
Rate Volume Change Rate Volume Change
-------------------------------- ----------------------------
Interest income on interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans.................................. $ (212) $ 4,324 $ 4,112 $ 1,740 $ 1,099 $ 2,839
Commercial loans................................ (75) 715 640 (86) 703 617
Consumer loans.................................. 350 (478) (128) (52) 664 612
Securities....................................... 71 (37) 34 (33) (138) (171)
Interest-bearing deposits....................... (72) (211) (283) 29 217 246
-------------------------------- ----------------------------
Total................................... 62 4,313 4,375 1,598 2,545 4,143
-------------------------------- ----------------------------
Interest expense on interest-bearing liabilities:
Deposits - Transaction accounts................. 491 536 1,027 (13) 61 48
Certificate accounts................. (955) 718 (237) 1,706 675 2,381
FHLB advances................................... (83) 879 796 73 571 644
Other borrowings................................ (106) (91) (197) (149) 38 (111)
-------------------------------- --------------------------
Total................................... (653) 2,042 1,389 1,617 1,345 2,962
-------------------------------- --------------------------
Net change in net interest income................ $ 715 $ 2,271 $ 2,986 $ (19) $ 1,200 $ 1,181
================================ ============================
</TABLE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Comparison of Year Ended June 30, 1997 and Year Ended June 30, 1996:
General
The Company reported net income of $6.8 million for the year ended June 30,
1997, compared to $7.4 million for the year ended June 30, 1996, a decrease of
$506,000, or 6.9%. The decrease was due to a legislated special pre-tax
assessment of $3.0 million to help recapitalize the FDIC Savings Association
Insurance Fund (SAIF). Without the SAIF assessment, net income for the period
ended June 30, 1997, would have been $8.6 million, an increase of $1.2 million
or 16.6%.
Net Interest Income
Net interest income before provision for loan losses increased $3.0 million, or
15.0% for the year ended June 30, 1997, compared to the prior year. This
increase was the result of assets growing $52.8 million, or 8.4%, in addition to
increased net interest margins, as well as a gain in interest-sensitive assets
to liabilities.
Net interest income after provision for loan losses increased by $2.5
million, or 12.9% over that of the prior year, to $21.8 million even though the
loan loss provision in fiscal 1997 was $492,000 higher than the provision in
fiscal 1996. In each period, the provision and allowance for loan losses were
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 $3.6 million at June 30, 1997.
Interest Income
The Company's total interest income for the year ended June 30, 1997, increased
$4.4 million, or 9.3%, as compared to the year ended June 30, 1996. Interest
income increased primarily due to growth in the loan portfolio as well as
increased yields on the loan portfolio. 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, 1997, increased $1.4 million,
or 5.1%, as compared to the year ended June 30, 1996. Increased deposit and
borrowing balances accounted for the increase in total interest expense.
Other Income
Total other income decreased $262,000, or 3.5%, for the year ended June 30,
1997, as compared to the year ended June 30, 1996. This decrease was due in part
to a decrease in gains on loan sales over the prior fiscal year attributable to
diminished spreads available in the secondary market in the current year
compared to the prior year. Miscellaneous other income decreased $313,000 or
19.2% because of a one time interest payment of $387,000 from the Internal
Revenue Service for amended tax returns for prior periods, which was accrued in
fiscal 1996. These decreases were offset by increases of $85,000, or 9.0%, in
loan servicing income resulting from the increase in the loan servicing
portfolio as well as the increase in insurance, late charges and other fee
income of $68,000, or 4.8%, and the increase of $38,000, or 2.3%, from service
fees on NOW accounts.
The Company adopted Statement of Financial Accounting Standards No. 122
("SFAS 122") on July 1, 1996. SFAS 122 specifies conditions under which mortgage
servicing rights should be accounted for separately from the underlying mortgage
loans. In fiscal 1997, $420,000 of the total $1.3 million gain on sale of loans
was attributable to mortgage servicing rights.
Other Expenses
Total other expenses increased $ 3.4 million, or 23.3%, for the year ended June
30, 1997, as compared to the year ended June 30, 1996. Federal insurance
premiums increased $2.6 million due to the previously discussed SAIF
legislation. Compensation and employee benefits increased $491,000, or 6.4%, due
to normal salary increases as well as increases in accrued vacation pay,
retirement plan expenses, and health insurance costs. An increase in occupancy
and equipment expense of $175,000, or 9.1%, was due to increased depreciation
charges, as well as increased equipment expense related primarily to the upgrade
and maintenance of data processing equipment.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and 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 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 $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.
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.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION
The Company's total assets increased $52.8 million to $682.8 million at June 30,
1997, from $630.0 million at June 30, 1996. Cash, interest-bearing deposits and
securities decreased $4.3 million. Loans held for sale and net loans receivable
increased $55.5 million. Mortgage loans increased $53.6 million while
non-mortgage loans increased $4.3 million.
The Company's total liabilities increased $46.4 million with deposits
increasing $38.2 million, Federal Home Loan Bank advances increasing $9.2
million and senior debt decreasing $1.3 million.
Shareholders' equity increased $6.4 million, primarily due to an increase
in retained earnings of $5.5 million. Retained earnings increased $6.8 million
from net income and decreased $1.4 million as a result of dividends paid to
shareholders. Common stock had a net increase of $730,000; $670,000 from options
exercised, $65,000 from the related tax benefit of non-qualified dispositions of
such options and a $5,000 decrease from the purchase of fractional shares
resulting from a three-for-two stock split which occurred in December 1996.
Finally, a decrease in unrealized losses on securities classified as available
for sale pursuant to SFAS 115 increased shareholders' equity by $202,000.
INTEREST RATE SENSITIVITY
The OTS requires each thrift institution to calculate the estimated change in
the institution's net portfolio value ("NPV") assuming an instantaneous,
parallel shift in the Treasury yield curve of 100 to 400 basis points either up
or down in 100 basis point increments. NPV represents the sum of future cash
flows of assets discounted to present value less the sum of future cash flows of
liabilities discounted to present value. The OTS permits institutions to utilize
the OTS' model, which is based upon data submitted in the institution's
quarterly thrift financial reports.
In estimating the NPV of mortgage loans and mortgage-backed securities, the
OTS model utilizes various price indications and prepayment rates. At June 30,
1997, these price indications varied from 69.02 to 119.82 for fixed rate
mortgages and mortgage-backed securities and varied from 88.73 to 108.46 for
adjustable rate mortgages and mortgage-backed securities. Prepayment rates for
June 30, 1997, ranged from a CPR or 4% to a constant prepayment rate ("CPR") of
37%.
The value of deposit accounts appears on both the asset and liability side
of the NPV calculation in the OTS model. In estimating the value of certificate
of deposit accounts, ("CDs"), retail price estimates represent the value of the
liability implied by the CD and reflect the difference between the CD coupon and
secondary-market CD rates. As of June 30, 1997, the retail CD price assumptions
varied from 73.44 to 121.08. The retail CD intangible prices represent the value
of the "customer relationship" due to the rollover of CD deposits and are an
intangible asset for the Bank. As of June 30, 1997, the retail CD intangible
price assumptions varied from .04 to .93.
Other deposit accounts such as transaction accounts, money market deposit
accounts, passbook accounts and non-interest-bearing accounts are valued at 100%
of their respective outstanding balances in all nine interest rate scenarios on
the liability side of the OTS model. On the asset side of the model, intangible
prices are used to reflect the value of the "customer relationship" of the
various types of deposit accounts. As of June 30, 1997, the intangible prices
for transaction accounts, money market deposit accounts, passbook accounts and
non-interest-bearing accounts varied from -2.06 to 20.94, -. 57 to 11.69, -. 84
to 17.55 and 4.31 to 18.04 respectively.
The following table sets forth the Bank's interest rate sensitivity of NPV
as of June 30, 1997, (dollars in thousands).
Net Portfolio Value NPV as % of PV of Assets
------------------- ------------------------
Change
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
+400 bp 64,517 (18,900) (23) 9.73 % (214) bp
+300 bp 70,516 (12,901) (15) 10.46 % (141) bp
+200 bp 75,939 ( 7,479) ( 9) 11.10 % ( 78) bp
+100 bp 80,440 ( 2,978) (4) 11.59 % ( 29) bp
0 bp 83,417 - - 11.87 % -
-100 bp 84,467 1,049 1 11.91 % 4 bp
-200 bp 83,866 449 1 11.74 % ( 13) bp
-300 bp 83,698 281 - 11.63 % ( 25) bp
-400 bp 85,153 1,736 2 11.71 % ( 17) bp
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>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Non-performing 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 that are carried at the lower of cost or
estimated fair value less estimated cost to sell, (dollars in thousands.)
At June 30,
---------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------
Non-accruing loans:
Mortgage .................. $ 2,182 $ 2,153 $ 1,904 $ 1,837 $ 1,491
Commercial ................ 258 307 197 205 326
Consumer .................. 490 411 330 188 170
------- ------- ------- ------- -------
Total ................ 2,930 2,871 2,431 2,230 1,987
------- ------- ------- ------- -------
Mortgage .................. 2 88 69 77 1,292
Commercial ................ 36 -- -- -- --
Consumer .................. 2 1 12 38 --
------- ------- ------- ------- -------
Total ................ 40 89 81 115 1,292
------- ------- ------- ------- -------
Troubled debt restructured.. 1 1 102 283 597
------- ------- ------- ------- -------
Total non-performing loans 2,971 2,961 2,614 2,628 3,876
Real estate owned ........... 139 48 41 98 491
------- ------- ------- ------- -------
Total non-performing assets.. $ 3,110 $ 3,009 $ 2,655 $ 2,726 $ 4,367
======= ======= ======= ======= =======
Non-performing assets to
total assets .............. 0.46% 0.48% 0.45% 0.50% 0.82%
======= ======= ======= ======= =======
Non-performing loans to
total loans ............... 0.51% 0.56% 0.55% 0.59% 0.96%
======= ======= ======= ======= =======
Allowance for loan losses
to non-performing loans ... 122.82% 103.38% 107.35% 98.17% 58.23%
======= ======= ======= ======= =======
In addition, at June 30, 1997, there were $279,000 in current performing loans
that were classified as special mention or substandard for which potential
weaknesses exist which may result in the future inclusion of such items in the
non-performing category.
Allowance for Loan Losses
The following table sets forth an analysis of the allowance for possible loan
losses. See Note 1 to the Consolidated Financial Statements for a discussion of
the Company's policy for establishing the allowance for loan losses. (Dollars in
thousands.)
Years Ended June 30,
------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------
Balance at beginning of year ...$ 3,061 $ 2,806 $ 2,580 $ 2,257 $ 2,123
Provision for loan losses ...... 1,125 638 (314) 491 414
Loan charge-offs:
Mortgage ..................... (9) (10) (6) (47) (82)
Commercial ................... -- (9) -- -- (51)
Consumer ..................... (606) (434) (369) (262) (302)
------- ------- ------- ------- -------
Total charge-offs .......... (615) (453) (375) (309) (435)
------- ------- ------- ------- -------
Recoveries:
Mortgage ..................... 9 16 2 15 49
Commercial ................... -- -- 822 34 --
Consumer ..................... 69 54 91 92 106
------- ------- ------- ------- -------
Total recoveries .......... 78 70 915 141 155
------- ------- ------- ------- -------
Net loan charge-offs ........... (537) (383) 540 (168) (280)
------- ------- ------- ------- -------
Balance ........................$ 3,649 $ 3,061 $ 2,806 $ 2,580 $ 2,257
======= ======= ======= ======= =======
Net charge-offs to average loans 0.10% 0.08% (0.12%) 0.04% 0.07%
======= ======= ======= ======= =======
Allowance balance to total loans 0.63% 0.58% 0.58% 0.57% 0.55%
======= ======= ======= ======= =======
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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, 1997, the Bank's liquidity ratio was 9.98%.
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, 1997, the Bank had $79.9 million in
borrowings from the FHLB of Indianapolis. As of that date, the Bank had
commitments to fund loan originations and purchases of approximately $40.0
million and commitments to sell loans of $15.3 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, 1997, there was a net decrease of $5.9 million in cash and cash equivalents.
The major uses of cash during the year were loan originations net of repayments
of $136.2 million; purchases of investment and mortgage-backed securities of
$22.5 million; repayment of FHLB advances of $41.6 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 $79.6 million from selling
fixed rate mortgage loans to FNMA and FHLMC; maturities and sales of investment
securities of $21.2 million; and proceeds from FHLB advances of $50.8 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. 128, 130 and
131 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)
June 30,
----------------------
1997 1996
--------- ---------
ASSETS:
Cash ................................................. $ 16,274 $ 19,327
Interest-bearing deposits ............................ 3,498 6,301
--------- ---------
Total cash and cash equivalents .................... 19,772 25,628
--------- ---------
Securities available for sale at fair value
(amortized cost $40,208 and $45,075) (Note 2) ....... 40,119 44,651
Securities held to maturity (fair value $13,012
and $6,753 ) (Note 2) ............................... 13,115 6,990
Loans held for sale (fair value $4,688 and
$4,666) (Note 4) .................................... 4,629 4,623
Loans receivable, net of allowance for loan
losses of $3,649 and $3,061 (Notes 3, 9) ............. 575,624 520,097
Investments in joint ventures (Note 5) ............... 3,084 2,855
Federal Home Loan Bank stock (Note 9) ................ 4,260 3,798
Accrued interest receivable, net (Note 6) ............ 4,272 3,893
Premises and equipment, net (Note 7) ................. 8,171 8,090
Real estate owned .................................... 139 48
Prepaid expenses and other assets .................... 2,284 2,440
Cash surrender value of life insurance .............. 5,529 5,004
Goodwill, net ........................................ 1,798 1,898
--------- ---------
TOTAL ASSETS ...................................... $ 682,796 $ 630,015
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits (Note 8) .................................... $ 527,788 $ 489,573
Advances from Federal Home Loan Bank (Note 9) ........ 79,945 70,700
Senior debt (Note 10) ................................ 7,800 9,100
Other borrowings (Note 10) ........................... 4,648 4,337
Advance payments by borrowers for taxes
and insurance ....................................... 296 621
Accrued expenses and other liabilities ............... 4,402 4,167
--------- ---------
Total liabilities ................................. 624,879 578,498
--------- ---------
Shareholders' equity (Notes 10, 11, 12, 14):
No par common stock; Authorized: 5,000,000 shares
Issued and outstanding: ............................ 7,549 6,819
3,396,329 shares at June 30, 1997
3,339,423 shares at June 30, 1996
Retained earnings, restricted ....................... 50,421 44,953
Unrealized loss on securities available for sale,
net of deferred taxes of $ 36 and $ 170 ......... (53) (255)
Total shareholders' equity ........................ 57,917 51,517
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $ 682,796 $ 630,015
========= =========
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: 1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Loans receivable (Note 3) .......................... $ 47,923 $ 43,299 $ 39,231
Securities available for sale and held to maturity . 3,306 3,272 3,443
Other interest income .............................. 302 585 339
-------- -------- --------
Total interest income .............................. 51,531 47,156 43,013
-------- -------- --------
Interest expense:
Deposits (Note 8) .................................. 23,286 22,496 20,067
Advances from Federal Home Loan Bank (Note 9) ...... 4,651 3,855 3,211
Borrowings - long term (Note 10) ................... 703 900 1,011
-------- -------- --------
Total interest expense ............................. 28,640 27,251 24,289
-------- -------- --------
Net interest income ................................. 22,891 19,905 18,724
Provision (credit) for loan losses .................. 1,129 638 (314)
-------- -------- --------
Net interest income after provision for loan losses . 21,762 19,267 19,038
-------- -------- --------
Other income:
Gain on sale of loans .............................. 1,267 1,321 667
Gain (loss) on sale of securities available for sale 19 1 (437)
Income from joint ventures (Note 5) ................ 432 530 252
Insurance, annuity income, other fees .............. 1,474 1,406 778
Service fees on NOW accounts ....................... 1,673 1,635 1,494
Net gain (loss) on real estate owned ............... (24) (18) 161
Loan servicing income .............................. 1,030 945 805
Miscellaneous ...................................... 1,315 1,628 1,018
-------- -------- --------
Total other income ................................. 7,186 7,448 4,738
-------- -------- --------
Other expenses:
Compensation and employee benefits (Note 13) ....... 8,153 7,662 6,581
Occupancy and equipment ............................ 2,104 1,929 1,659
Service bureau expense ............................. 779 777 694
Federal insurance premium (Note 12) ................ 3,652 1,065 1,029
Marketing .......................................... 503 498 549
Goodwill amortization .............................. 100 101 101
Miscellaneous ...................................... 2,498 2,399 2,870
-------- -------- --------
Total other expenses ............................... 17,789 14,431 13,483
-------- -------- --------
Income before income taxes .......................... 11,159 12,284 10,293
Income tax provision (Note 11) ...................... 4,313 4,932 3,757
-------- -------- --------
Net Income .......................................... $ 6,846 $ 7,352 $ 6,536
======== ======== ========
Earnings per common and common share
equivalents .................................. $ 1.96 $ 2.15 $ 1.93
======== ======== ========
</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, 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 ($.25 per share) .. (826) (826)
Net income ....................... 6,536 6,536
Change in unrealized loss on
securities available for sale 544 544
-----------------------------------------------------------------
Balance at June 30, 1995 ......... 2,216,407 6,748 38,600 (69) 45,279
Stock options exercised .......... 9,875 63 63
Tax benefit related to exercise
of non-qualified stock options 8 8
Cash dividends ($.30 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
Stock split 3 for 2;
fractional shares ............ 1,113,000 (5) (5)
Stock options exercised .......... 57,047 670 670
Tax benefit related to exercise
of non-qualified stock options 65 65
Cash dividends ($.41 per share) .. (1,378) (1,378)
Net income ....................... 6,846 6,846
Change in unrealized loss on
securities available for sale 202 202
-----------------------------------------------------------------
Balance at June 30, 1997 ......... 3,396,329 $ 7,549 $ 50,421 $ (53) $ 57,917
=================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1997 1996 1995
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income ..................................................... $ 6,846 $ 7,352 $ 6,536
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of discounts, amortization and depreciation .... 1,191 1,234 1,044
Provision (credit) for loan losses ....................... 1,129 638 (314)
Net gain from sale of loans .............................. (1,267) (1,321) (667)
Net (gain) loss from sale of securities available for sale (19) (1) 437
Net gain from joint ventures; real estate owned .......... (408) (504) (396)
Net loan fees deferred (recognized) ...................... (403) (106) (149)
Proceeds from sale of loans held for sale ................ 79,552 107,500 57,155
Origination of loans held for sale ....................... (78,291) (98,014) (67,219)
Decrease in accrued interest and other assets ........... 1,468 6,339 1,058
Increase (decrease) in other liabilities ................. (90) 1,510 206
--------- --------- ---------
Net cash provided by (used in) operating activities ............ 9,708 24,627 (2,309)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net principal disbursed on loans ............................... (57,545) (54,248) (26,948)
Proceeds from:
Maturities/Repayments of:
Securities held to maturity .......................... 346 3,580 2,761
Securities available for sale ........................ 12,337 4,513 3,193
Sales of:
Securities available for sale ........................ 8,572 5,507 9,932
Real estate owned and other asset sales .............. 504 436 962
Purchases of:
Loans .................................................... (947) (3,365) --
Securities available for sale ............................ (16,085) (13,955) (7,970)
Securities held to maturity .............................. (6,453) -- (2,985)
Federal Home Loan Bank stock ............................. (462) (379) (301)
Increase in cash surrender value of life insurance ............. (525) (238) (170)
Acquisition of property and equipment, net ..................... (1,129) (654) (2,329)
--------- --------- ---------
Net cash used in investing activities .......................... (61,387) (58,803) (23,855)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net ...................................... 38,215 22,487 21,099
Proceeds from advances from Federal Home Loan Bank ............. 50,800 28,200 63,500
Repayment of advances from Federal Home Loan Bank .............. (41,555) (17,500) (47,500)
Repayment of senior debt ....................................... (1,300) (1,300) (1,300)
Net proceeds from overnight borrowings ......................... 311 1,837 782
Common stock options exercised, net of fractional shares paid .. 730 71 436
Payment of dividends on common stock ........................... (1,378) (999) (826)
--------- --------- ---------
Net cash provided by financing activities ...................... 45,823 32,796 36,191
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........... (5,856) (1,380) 10,027
Cash and cash equivalents, beginning of year ................... 25,628 27,008 16,981
--------- --------- ---------
Cash and cash equivalents, end of year ......................... $ 19,772 $ 25,628 $ 27,008
========= ========= =========
Supplemental information:
Cash paid for interest ......................................... $ 28,474 $ 27,050 $ 24,197
Cash paid for income taxes ..................................... $ 4,224 $ 4,450 $ 3,394
Assets acquired through foreclosure ............................ $ 192 $ 133 $ 44
========= ========= =========
</TABLE>
Noncash activities occurred consisting of the reclassification of $6.9 million
from the held to maturity securities portfolio to the available for sale
securities portfolio in fiscal year 1996.
See notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
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
and 15 other full service branches.
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
Securities are required to be classified as held to maturity, available for sale
or trading. Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held to maturity. Debt and equity
securities not classified as either held to maturity or trading securities are
classified as available for sale. 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. Premiums and discounts are
amortized over the contractual lives of the related securities using the level
yield method. 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 $6.9 million held to maturity securities to available for sale
securities.
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.
Mortgage Banking Activities
The Company adopted Statement of Financial Accounting Standards No. 122 ("SFAS
122"), "Accounting for Mortgage Servicing Rights" ("MSRs"), effective July 1,
1996. SFAS 122 requires that the Company recognize as separate assets, rights to
service mortgage loans for others that have been acquired through either the
purchase or origination of a loan. An entity that sells or securitizes those
loans with servicing rights retained should allocate the total cost of the
mortgage loans to the MSRs and the loans based on their relative fair values.
These costs are initially capitalized and subsequently amortized in proportion
to, and over the period of , estimated net loan servicing income.
Additionally, SFAS 122 requires that MSRs be reported on the Consolidated
Balance Sheet at the lower of cost or fair value. The Company is required to
assess its capitalized MSRs for impairment based upon the fair value of the
rights. MSRs are stratified based upon one or more of the predominant risk
characteristics of the underlying loans. Impairment is recognized through a
valuation allowance for each impaired stratum. The provisions of SFAS 122 were
applied prospectively beginning in fiscal 1997. The ongoing impact of SFAS 122
is dependent upon, among other things, the volume of loan originations, the
general levels of market interest rates and the rate of estimated loan
prepayments. Accordingly, management is unable to predict with any reasonable
certainty what effect SFAS 122 will have on the Company's future results of
operations or its financial condition. SFAS 122 prohibits restatement of prior
years' financial statements.
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 Nos. 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
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 change 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.
Real Estate Owned
Real estate owned represents real estate acquired through foreclosure or 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 fair 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 1997, 1996 and
1995, was $100,000, $101,000 and $101,000, respectively. Management reviews
intangible assets for possible impairment if there is a significant event that
detrimentally affects operations. Impairment is measured using estimates of the
future earnings potential of the entity or assets acquired.
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 are 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 3,494,829 for 1997, 3,419,909 for 1996 and 3,378,995 for 1995.
All per share information has been restated to reflect the Company's
three-for-two stock split in December 1996.
Changes in Presentation
Certain amounts and items appearing in the fiscal 1996 and 1995 financial
statements have been reclassified to conform with the fiscal 1997 presentation.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share," was issued in February 1997 and is effective for both interim and annual
fiscal periods ending after December 15, 1997. Early adoption is not permitted.
SFAS 128 establishes new standards for computing and presenting earnings per
share ("EPS"). Specifically, SFAS 128 replaces the presentation of primary EPS
with a presentation of basic EPS, requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Management has determined that the adoption of SFAS 128
will not have a material effect on the consolidated financial statements.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Comprehensive Income", was issued in June 1997 and becomes effective for fiscal
periods beginning after December 15, 1997. SFAS 130 requires reclassification of
earlier financial statements for comparative purposes. SFAS No. 130 requires
that changes in the amounts of certain items, including foreign currency
translation adjustments and gains and losses on certain securities be shown in
the financial statements. SFAS No. 130 does not require a specific format for
the financial statement in which comprehensive income is reported, but does
require that an amount representing total comprehensive income be reported in
that statement. Management has not yet quantified the effect of the new standard
on the consolidated financial statements.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," was
issued in June 1997 and is effective for fiscal periods beginning after December
15, 1997. This statement will change the way public companies report information
about segments of their business in their annual financial statements and
requires them to report selected segment information in their quarterly reports
issued to shareholders. It also requires entity-wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. Management has not
yet quantified the effect of this new standard on the consolidated financial
statements.
2. SECURITIES
Securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------
1997 1996
--------------------------------------- ---------------------------------------
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 ....... $ 3,883 $ 17 $ (1) $ 3,899 $ -- $ -- $ -- $ --
Municipal bonds ........ 820 -- -- 820 -- -- -- --
Collateralized mortgage
obligations .... 6,342 -- (123) 6,219 6,588 -- (225) 6,363
Pass-thru certificates . 2,070 5 (1) 2,074 402 -- (12) 390
-------- ------ ------- -------- -------- ------- ------- ---------
Total held to maturity . $ 13,115 $ 22 $ (125) $ 13,012 $ 6,990 $ -- $ (237) $ 6,753
======== ====== ======= ======== ======== ======= ======= =========
Available for sale:
U.S. obligations ....... $ 17,970 $ 73 $ (52) $ 17,991 $ 15,910 $ 29 $ (117) $ 15,822
Other agencies ......... 689 -- (2) 687 -- -- -- --
Collateralized mortgage
obligations .... 10,487 5 (138) 10,354 11,542 8 (250) 11,300
Pass-thru certificates . 6,062 28 (29) 6,061 9,804 24 (143) 9,685
Corporate debt ......... 1,000 7 -- 1,007 4,043 28 (4) 4,067
Mutual funds ........... 3,925 19 -- 3,944 3,701 2 (1) 3,702
Equity securities ...... 75 -- -- 75 75 -- -- 75
-------- ------ ------- -------- -------- ------- ------- ---------
Total available for sale $ 40,208 $ 132 $ (221) $ 40,119 $ 45,075 $ 91 $ (515) $ 44,651
======== ====== ======= ======== ======== ======= ======= =========
</TABLE>
Certain securities, with both amortized cost and fair value of $3.0 million and
$3.1 million at June 30, 1997 and 1996, respectively, 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 $6.9 million from held to
maturity to available for sale. The unrealized gain at the time of the transfer
was $20,000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
The amortized cost and fair value of securities at June 30, 1997, 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
----------------------------- ------------------------------
U.S. obligations:
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less ......... $ -- $ -- -- $ 998 $ 996 5.60%
Due after 1 year though 5 years . 3,883 3,899 6.80% 16,972 16,995 6.67%
Other agencies:
Due after 10 years ............... -- -- -- 689 687 6.33%
Municipal bonds:
Due after 1 year though 5 years . 565 565 6.80% -- -- --
Due after 5 years though 10 years 255 255 7.12% -- -- --
Collateralized mortgage obligations 6,342 6,219 6.04% 10,487 10,354 6.14%
Pass-thru certificates ............. 2,070 2,074 6.83% 6,062 6,061 6.24%
Corporate debt:
Due in one year or less ......... -- -- -- 1,000 1,007 7.68%
Mutual funds ....................... -- -- -- 3,925 3,944 5.90%
Equity securities .................. -- -- -- 75 75 --
-------- -------- ----- -------- -------- -----
Total .............................. $ 13,115 $ 13,012 6.45% $ 40,208 $ 40,119 6.37%
======== ======== ===== ======== ======== =====
</TABLE>
Activities related to the sales of securities available for sale are summarized
as follows (in thousands):
Years Ended June 30,
----------------------------
1997 1996 1995
----------------------------
Proceeds from sales ... $ 8,572 $ 5,507 $ 9,932
Gross gains on sales... $ 38 $ 1 $ 61
Gross losses on sales.. $ 19 $ -- $ 498
3. LOANS RECEIVABLE
Loans receivable are summarized as follows (in thousands):
June 30,
----------------------
1997 1996
First mortgage loans: ----------------------
Residential single family ......... $ 300,531 $ 278,118
Commercial and multi-family ....... 79,696 73,853
Property under construction ....... 54,504 43,365
Unimproved land ................... 4,192 3,252
Home equity ............................ 34,391 28,073
Second mortgage ........................ 29,267 22,299
Commercial ............................. 43,112 37,651
Mobile home ............................ 16,613 18,833
Automobile ............................. 23,086 20,883
Consumer ............................... 11,017 11,952
Savings account ........................ 3,989 4,199
--------- ---------
Gross loans receivable ............ 600,398 542,478
Allowance for loan losses .............. (3,649) (3,061)
Deferred loan fees ..................... (560) (963)
Undisbursed loan proceeds .............. (20,519) (18,249)
Unearned interest and unearned discounts (5) (19)
Purchase discount ...................... (41) (89)
--------- ---------
Loans receivable, net .................. $ 575,624 $ 520,097
========= =========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
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 on nonaccrual status totaled approximately
$2.9 million at June 30, 1997 and 1996. The Bank would have recorded interest
income of $274,000 in 1997 and 1996 if loans on non-accrual status had been
current in accordance with their original terms. Actual interest received was
$266,000 and $155,000 for fiscal years ending 1997 and 1996, 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 balances at June 30, 1997 and 1996 on these restructured loans were
immaterial each year.
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 $79.7 million and $73.9 million at June 30, 1997 and 1996,
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, $20.2
million and $20.4 million were collateralized by multi-family residential
property at June 30, 1997 and 1996, 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 $218.6 million and
$207.4 million at June 30, 1997 and 1996, respectively. Also, under FIRREA, the
loans-to-one-borrower limitation is generally 15% of unimpaired capital and
surplus which, for the Bank, was approximately $8.2 million and $7.8 million at
June 30, 1997 and 1996, respectively. As of June 30, 1997 and 1996, the Bank was
in compliance with these limitations.
Aggregate loans to officers and directors included above were $5.7 million
and $5.4 million as of June 30, 1997 and 1996, 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, 1997, loans of $1.2 million were
disbursed to officers and directors and repayments of $881,000 were received
from officers and directors.
An analysis of the allowance for loan losses is as follows (in thousands):
Years Ended June 30,
-----------------------------
1997 1996 1995
-----------------------------
Beginning balance ................ $ 3,061 $ 2,806 $ 2,580
Provision (credit) for loan losses 1,130 638 (314)
Charge-offs ...................... (620) (453) (375)
Recoveries ....................... 78 70 915
------- ------- -------
Ending balance ................... $ 3,649 $ 3,061 $ 2,806
======= ======= ========
Impaired loan information under SFAS 114 and 118 is as follows (in thousands):
June 30,
------------------
1997 1996
------------------
Impaired loans with a valuation reserve $265 $100
Impaired loans with no valuation reserve 29 207
---- ----
Total impaired loans ................... $294 $307
==== ====
Valuation reserve on impaired loans .... $265 $100
Average impaired loans ................. $363 $286
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
4. MORTGAGE BANKING ACTIVITIES
At June 30, 1997, 1996 and 1995, the Bank was servicing loans for others
amounting to $298.0 million, $266.8 million and $224.7 million, respectively.
Net gain on sales of loans was $1.3 million, $1.3 million and $667,000 for the
years ended June 30, 1997, 1996 and 1995. 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,
1997 and 1996, these obligations were limited to approximately $730,000 and
$559,000, respectively.
The following analysis reflects the changes in mortgage servicing rights
("MSRs") acquired for the year ended June 30, 1997, (in thousands)
Carrying Value July 1, 1996 .......... $ --
Additions ....................... 420
Amortization .................... (33)
Net change in valuation allowance --
-----
Carrying Value June 30, 1997 ......... $ 387
=====
The carrying value approximates fair value at June 30, 1997. Fair value is
estimated by discounting the net servicing income to be received over the
estimated servicing term using a current market rate. The significant risk
characteristics of the underlying loans used to stratify MSRs for impairment
measurement were term and rate of note. No valuation allowance existed as of
June 30, 1997.
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):
June 30,
Equity ----------------
Interest 1997 1996
-------------------------
Family Financial Life 19% $ 605 $ 605
Heritage Woods ...... 33% 107 132
Home-Breeden ........ 50% 2,312 1,990
Coventry Associates . 65% 38 25
Admiral's Woods ..... 50% 22 103
------ ------
Total investment .... $3,084 $2,855
====== ======
Summarized condensed unaudited financial statements for these joint ventures are
as follows (in thousands):
June 30,
----------------
1997 1996
Balance Sheets: ----------------
Cash ...................... $ 668 $ 552
Investments ............... 3,615 3,384
Property and equipment, net 748 782
Inventory of developed lots 2,896 2,603
Other assets .............. 759 948
------ ------
Total assets . ........... $8,686 $8,269
====== ======
Notes payable ............. $2,337 $2,183
Insurance liabilities ..... 1,524 1,453
Other liabilities ......... 148 141
------ ------
Total liabilities ....... 4,009 3,777
------ ------
Shareholders' equity ...... 4,677 4,492
------ ------
Total liabilities and
Shareholders' equity .. $8,686 $8,269
====== ======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
Years Ended June 30,
------------------------
1997 1996 1995
Income Statements: ------------------------
Income:
Insurance premiums and commissions .. $3,484 $3,569 $3,372
Investment income ................... 334 272 273
Net lot sales ....................... 653 989 127
Other income ........................ 107 107 106
------ ------ ------
Total income ........................ 4,578 4,937 3,878
------ ------ ------
Expenses:
Commissions ......................... 1,892 1,807 1,732
Insurance benefits .................. 443 613 563
Interest expense .................... 48 52 55
Other expense ....................... 1,439 1,612 1,340
------ ------ ------
Total expense........................ 3,822 4,084 3,690
------ ------ ------
Net income ............................ $ 756 $ 853 $ 188
====== ====== ======
The notes payable include $1.9 million and $1.7 million due to HSC and $144,000
and $145,000 due to the Bank at June 30, 1997 and 1996, respectively. At June
30, 1997and 1996, open commitments to these joint ventures included letters of
credit totaling $391,000 and $1.1 million, respectively.
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following (in thousands):
June 30,
----------------
1997 1996
----------------
Loans, less reserve of $173 and $202............ $ 3,896 $ 3,497
Securities ..................................... 371 393
Interest-bearing deposits ...................... 5 3
------- -------
Total accrued interest receivable .............. $ 4,272 $ 3,893
======= =======
7. PREMISES AND EQUIPMENT
Premises and equipment consists of the following (in thousands):
June 30,
-----------------
1997 1996
-----------------
Land ........................................... $ 1,480 $ 1,386
Buildings and improvements ..................... 8,056 7,861
Furniture and equipment ........................ 5,816 5,559
------- -------
Total ......................................... 15,352 14,806
Accumulated depreciation ....................... (7,181) (6,716)
------- -------
Total premises and equipment.................... $ 8,171 $ 8,090
======= =======
Depreciation expense included in operations for the years ended June 30, 1997,
1996 and 1995 totaled $1.0 million, $1.0 million and $813,000, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
8. DEPOSITS
Deposits are summarized as follows (in thousands):
June 30,
---------------------------------------
1997 1996
---------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------------------------------------
Non-interest-bearing ................. $ 23,506 $ 21,978
NOW accounts ......................... 45,233 2.10% 48,878 2.09%
Passbook savings ..................... 48,443 2.85% 58,988 3.00%
Money market savings ................. 64,763 4.41% 25,188 3.05%
-------- ----- -------- -----
Total transaction accounts....... 181,945 2.85% 155,032 2.30%
-------- ----- -------- -----
Certificates of deposit:
Less than one year ................. 97,301 5.46% 83,830 5.32%
12-23 months ....................... 110,242 5.56% 94,482 5.81%
24-35 months ....................... 59,857 5.62% 71,232 5.99%
36-59 months ....................... 22,596 5.61% 26,908 5.54%
60-120 months ...................... 55,847 6.15% 58,089 6.24%
-------- ----- -------- -----
Total certificate accounts....... 345,843 5.64% 334,541 5.78%
-------- ----- -------- -----
Total deposits ....................... $527,788 4.68% $489,573 4.68%
======== ===== ======== =====
At June 30, 1997 and 1996, certificates of deposit in amounts of $100,000 or
more totaled $78.0 million and $58.0 million respectively.
A summary of certificate accounts by scheduled maturities at June 30, 1997, is
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Thereafter Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
3.99% or less $ 1,656 $ -- $ -- $ -- $ -- $ -- $ 1,656
4.00% - 4.99% 29,757 9,976 939 35 -- -- 40,707
5.00% - 5.99% 166,672 37,719 4,832 6,576 4,907 2,425 223,131
6.00% - 6.99% 19,928 24,890 14,517 4,549 11,575 221 75,680
7.00% - 9.00% 2,347 1,516 555 9 242 -- 4,669
--------------------------------------------------------------------------
$220,360 $ 74,101 $ 20,843 $ 11,169 $ 16,724 $ 2,646 $345,843
==========================================================================
</TABLE>
A summary of interest expense for the past three fiscal years is as follows (in
thousands):
Years Ended June 30,
---------------------------
1997 1996 1995
---------------------------
NOW accounts ......................... $ 880 $ 1,004 $ 1,104
Passbook savings ..................... 1,509 1,657 1,654
Money market savings ................. 2,030 729 587
Certificates of deposit............... 18,867 19,106 16,722
---------------------------
Total interest expense................ $23,286 $22,496 $20,067
===========================
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
9. FEDERAL HOME LOAN BANK ADVANCES
The Bank was eligible to receive advances from the FHLB up to $206.7 million and
$159.9 million at June 30, 1997 and 1996, respectively, which represented 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,
-----------------------------------------
1997 1996
-----------------------------------------
Weighted Weighted
Fiscal Year Average Average
Maturity Amount Rate Amount Rate
-----------------------------------------
1997..................... $ -- -- $26,000 6.15%
1998..................... 33,200 6.63% 16,900 6.30%
1999..................... 18,500 6.55% 14,500 6.67%
2000..................... 9,300 6.29% 3,300 5.95%
2001..................... 7,400 5.55% 7,400 5.55%
2002..................... 7,000 6.34% 2,600 6.00%
Thereafter............... 4,545 6.32% -- --
-----------------------------------------
Total FHLB advances......... $79,945 6.43% $70,700 6.22%
=========================================
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 (8.50% at
June 30, 1997) and matures on November 1, 1999. 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,
1997, the Company was in compliance with the debt covenants. Maturities of
senior debt based on minimum scheduled payments as of June 30, 1997 are: 1998 -
$1,300 and 1999 - $6,500.
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 (8.50% at
June 30, 1997) on a notional amount of $13 million with quarterly amortization
of $325,000. The maturity date of the swap agreement is October 1, 1997. 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, 1997 or 1996.
June 30,
---------------
1997 1996
---------------
Official check overnight remittance........................ $4,621 $4,280
FHLB overnight remittance ................................. 27 57
---------------
Total other borrowings .................................... $4,648 $4,337
===============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
11. INCOME TAXES
An analysis of the income tax provision is as follows (in thousands):
Years Ended June 30,
----------------------------
1997 1996 1995
----------------------------
Current:
Federal ..................................... $ 3,435 $ 3,163 $ 2,400
State ....................................... 947 1,032 648
Deferred ........................................ (69) 737 709
----------------------------
Income tax provision......................... $ 4,313 $ 4,932 $ 3,757
============================
The difference between the financial statement provision and amounts computed by
using the statutory rate of 34% is reconciled as follows (in thousands):
Years Ended June 30,
----------------------------
1997 1996 1995
----------------------------
Income tax provision at federal statutory rate ... $ 3,794 $ 4,177 $ 3,500
State tax, net of federal tax benefit ............ 615 701 582
Increase in cash surrender value of life insurance (92) (81) (58)
Other ............................................ (4) 135 (267)
----------------------------
Income tax provision ............................. $ 4,313 $ 4,932 $ 3,757
============================
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 at June 30, 1997 and 1996, respectively. 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.
In August 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. The adoption of the act did not 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):
June 30,
---------------
1997 1996
---------------
Deferred tax assets:
Bad debt reserves ................................ $ 486 $ 337
Unrealized losses on securities available for sale 36 170
Deferred compensation ............................ 639 550
Deferred fees .................................... -- 105
---------------
Total deferred tax assets .................... 1,161 1,162
---------------
Deferred tax liabilities:
Difference in basis of fixed assets .............. 721 805
FHLB dividend .................................... 205 205
Deferred fees .................................... 175 --
Other ............................................ 17 44
---------------
Total deferred tax liabilities ............... 1,118 1,054
---------------
Net deferred tax assets .......................... $ 43 $ 108
===============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
12. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possible additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures that have been established by regulation to ensure
capital adequacy require the Bank to maintain minimum capital amounts and ratios
(set forth in the table below). The Bank's primary regulatory agency, the OTS,
requires that the Bank maintain minimum ratios of tangible capital (as defined
in the regulations) of 1.5%, core capital (as defined) of 3%, and total
risk-based capital (as defined) of 8%. The Bank is also subject to prompt
corrective action capital requirement regulations set forth by the Federal
Deposit Insurance Corporation ("FDIC"). The FDIC requires the Bank to maintain
minimum of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). As of June 30, 1997, the Bank met all capital adequacy
requirements to which it is subject.
As of June 30, 1997 and 1996, the most recent notifications from the OTS
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well capitalized" the Bank must
maintain minimum total risk based, Tier 1 risk based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
<TABLE>
<CAPTION>
To Be Categorized
as "Well Capitalized"
Under Prompt
For Capital Corrective Action
(dollars in thousands) Actual Adequacy Purposes Provisions
- ---------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
As of June 30, 1997
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to total assets) $54,655 8.07% $10,158 1.50% $ N/A $ N/A
Core capital (to total assets) ... $54,655 8.07% $20,317 3.00% $ N/A $ N/A
Total risk-based capital
(to risk-weighted assets) .... $57,980 12.06% $38,454 8.00% $48,068 10.00%
Tier 1 risk-based capital
(to risk-weighted assets) .... $54,655 11.37% $ N/A $ N/A $28,841 6.00%
Tier 1 leverage capital
(to average assets) .......... $54,655 8.45% $ N/A $ N/A $32,355 5.00%
</TABLE>
<TABLE>
<CAPTION>
To Be Categorized
as "Well Capitalized"
Under Prompt
For Capital Corrective Action
(dollars in thousands) Actual Adequacy Purposes Provisions
- ---------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
As of June 30, 1996
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to total assets) $51,859 8.28% $ 9,396 1.50% $ N/A $ N/A
Core capital (to total assets) ... $51,859 8.28% $18,791 3.00% $ N/A $ N/A
Total risk-based capital
(to risk-weighted assets) .... $54,513 12.35% $35,320 8.00% $44,149 10.00%
Tier 1 risk-based capital
(to risk-weighted assets) .... $51,859 11.75% $ N/A $ N/A $26,489 6.00%
Tier 1 leverage capital
(to average assets) ........... $51,859 8.67% $ N/A $ N/A $29,924 5.00%
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
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, 1997,
approximately $11.9 million of retained earnings were available for dividend
declaration without prior regulatory approval.
Recapitalization of SAIF
On September 30, 1996, the President of the United States signed into law an
omnibus appropriations act for fiscal year 1997 that included, among other
things, the recapitalizaition of the Savings Association Insurance Fund (SAIF)
in a section entitled "The Deposit Insurance Funds Act of 1996" ("the Act"). The
Act included a provision where all insured depository institutions would be
charged a one-time special assessment on their SAIF assessable deposits as of
March 31, 1995. The Company recorded a pre-tax charge of $3,001,000 during the
year ended June 30, 1997, which represented 65.7 basis points of the March 31,
1995, assessable deposits.
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, 1996, 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 1997, 1996 and 1995, was $350,000, $281,000 and
$243,000, respectively.
401(k) Plan
The Bank has an employee thrift plan established for substantially all full-time
employees. The Bank has 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 $75,000, $71,000 and $61,000 during fiscal
years 1997, 1996 and 1995, respectively.
14. STOCK OPTIONS
The Company has stock option plans for the benefit of officers, other key
employees and directors. The plans are authorized to grant options to purchase
212,928 additional shares of the Company's common stock. The option price is not
to be less than the fair 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 activity for each of the
years in the three year period ended June 30, 1997, and the stock options
outstanding at the end of the respective periods:
Weighted
Average
Options Shares Price
- ------- ------ -----
Outstanding July 1, 1994 .................. 354,221 $ 9.83
Granted ................................... 73,395 $ 15.89
Expired ................................... (752) $ 14.59
Exercised ................................. (74,899) $ 4.80
-------
Outstanding June 30, 1995 ................. 351,965 $ 12.16
Granted ................................... 4,770 $ 16.75
Expired ................................... (10,875) $ 14.59
Exercised ................................. (14,813) $ 4.26
-------
Outstanding June 30, 1996 ................. 331,047 $ 12.50
Fractional shares dropped in 3 for 2 split (4) $ 13.03
Granted ................................... 151,020 $ 24.31
Expired ................................... -- $ N/A
Exercised ................................. (57,047) $ 11.75
-------
Outstanding June 30, 1997 ................. 425,016 $ 16.76
=======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
As of June 30, 1997, options outstanding had exercise prices between $2.23 and
$27.375 and a weighted average remaining contractual life of 7.3 years. The
majority of options outstanding have exercise prices ranging from $12.87 to
$27.375 with a weighted average remaining contractual life of 7.8 years.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the plan. No
compensation cost has been recognized for the plan because the stock option
price is equal to or greater than the fair value at the grant date. Had
compensation cost for the plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the fair value method of
SFAS 123, " Accounting for Stock-Based Compensation," the Company's net income
and net income per share would have decreased to the pro forma amounts indicated
below (in thousands, except per share data):
Years ended June 30,
-----------------------
1997 1996
-----------------------
Net income:
As reported .......................... $ 6,846 $ 7,352
Pro forma ............................ $ 6,108 $ 7,335
Net income per share:
As reported .......................... $ 1.96 $ 2.15
Pro forma ............................ $ 1.75 $ 2.14
The weighted average fair value of options granted was $8.15 in 1997 and $ 5.96
in 1996. The fair value of the option grants are estimated on the date of grant
using an option pricing model with the following assumptions: dividend yield
ranging from 1.46% to 1.97%, risk-free interest rates ranging from 7.32% to
8.04%, expected volatility ranging from 27.9% to 30.3% and expected life of 5
years. The pro forma amounts are not representative of the effects on reported
net income for future years.
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, 1997 and 1996, the Bank had loan commitments
approximating $38.5 million and $27.6 million, respectively, excluding
undisbursed portions of loans in process. Loan commitments at June 30, 1997,
include commitments to originate fixed rate loans with interest rates ranging
from 7.6% to 9.8% totaling $3.7 million and adjustable-rate loan commitments
with interest rates ranging from 6.5% to 9.5% totaling $34.8 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 $2.3 million and $3.0 million for 1997 and
1996, respectively. Additionally, the Bank had approximately $5.9 million in
commitments to sell fixed rate residential loans and $9.4 million in commitments
to sell adjustable rate commercial loans at June 30, 1997. 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 up to three
years.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------------------------------
Assets:
<S> <C> <C> <C> <C>
Cash ................................. $ 16,274 $ 16,274 $ 19,327 $ 19,327
Interest-bearing deposits ............ 3,498 3,498 6,301 6,301
Securities available for sale ........ 40,119 40,119 44,651 44,651
Securities held to maturity .......... 13,115 13,012 6,990 6,753
Loans held for sale .................. 4,629 4,688 4,623 4,666
Loans, net ........................... 575,624 576,597 520,097 519,002
Accrued interest receivable .......... 4,272 4,272 3,893 3,893
Federal Home Loan Bank stock ......... 4,260 4,260 3,798 3,798
Cash surrender value of life insurance 5,529 5,529 5,004 5,004
Liabilities:
Deposits ............................ 527,788 527,405 489,573 488,649
Federal Home Loan Bank advances ..... 79,945 80,105 70,700 70,397
Senior debt ......................... 7,800 7,831 9,100 9,100
Other borrowings .................... 4,648 4,648 4,337 4,337
Advance payments by borrowers
for taxes and insurance .......... 296 296 621 621
Unrecognized financial instruments:
Interest rate swap .................. -- 2 -- 175
</TABLE>
The estimated fair 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, 1997 and 1996, 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, 1997 and 1996. 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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
17. PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of Home Federal Bancorp are as follows (in
thousands):
<TABLE>
<CAPTION>
June 30,
Condensed Balance Sheets --------------------
(Parent Company only) 1997 1996
Assets: --------------------
<S> <C> <C>
Cash ................................................... $ 5,634 $ 4,694
Investment in subsidiary ............................... 59,891 55,817
Other .................................................. 504 577
--------------------
Total assets ......................................... $ 66,029 $ 61,088
Liabilities:
Senior debt ............................................ $ 7,800 $ 9,100
Other .................................................. 312 471
--------------------
Total liabilities .................................... 8,112 9,571
--------------------
Shareholders' equity ................................... 57,917 51,517
--------------------
Total liabilities and shareholders' equity ........... $ 66,029 $ 61,088
====================
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended June 30:
Condensed Statements of Income --------------------------------
(Parent Company only) 1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Dividends from subsidiary .............................. $ 3,457 $ 3,247 $ 3,152
Other .................................................. 497 514 463
--------------------------------
Total income ......................................... 3,954 3,761 3,615
--------------------------------
Interest on senior debt ................................ 703 900 1,010
Other expenses ......................................... 600 674 717
--------------------------------
Total expenses ....................................... 1,303 1,574 1,727
--------------------------------
Income before taxes and change in
undistributed earnings of subsidiary .................. 2,651 2,187 1,888
Applicable income tax credit ........................... (323) (420) (505
--------------------------------
Income before change in undistributed
earnings of subsidiary ................................ 2,974 2,607 2,393
Increase in undistributed earnings of subsidiary ....... 3,872 4,745 4,143
--------------------------------
Net income ............................................. $ 6,846 $ 7,352 $ 6,536
================================
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended June 30:
Condensed Statements of Cash Flows : --------------------------------
(Parent Company only) 1997 1996 1995
--------------------------------
Operating activities:
<S> <C> <C> <C>
Net income ............................................. $ 6,846 $ 7,352 $ 6,536
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in other assets .................. 73 565 (354)
Increase (decrease) in accrued expenses and
other liabilities ................................... (159) 383 (28)
Increase in undistributed earnings
of subsidiary ....................................... (3,872) (4,745) (4,143)
--------------------------------
Net cash provided by operating activities .............. 2,888 3,555 2,011
Financing activities:
Repayment of senior debt ............................... (1,300) (1,300) (1,300)
Payment of dividends ................................... (1,378) (999) (826)
Exercise of stock options, net of fractional shares paid 730 71 436
--------------------------------
Net cash used in financing activities .................. (1,948) (2,228) (1,690)
--------------------------------
Net increase in cash ................................... 940 1,327 321
Cash at beginning of year .............................. 4,694 3,367 3,046
--------------------------------
Cash at end of year .................................... $ 5,634 $ 4,694 $ 3,367
================================
</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, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended June 30, 1997. 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, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1997
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights", on July 1, 1996.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
July 23, 1997
<PAGE>
BOARD OF DIRECTORS & OFFICERS
of Home Federal Bancorp
BOARD OF Eugene E. Burke
DIRECTORS Director Emeritus
Retired
John K. Keach, Sr.
Chairman of the Board, Robert Weber
Home Federal Bancorp Director Emeritus
Retired
John K. Keach, Jr.
President and
Chief Executive Officer
Home Federal Bancorp OFFICERS
John T. Beatty John K. Keach, Jr.
President, President and
Beatty Insurance, Inc. Chief Executive Officer
Lewis W. Essex Gerald L. Armstrong
Retired from Essex Executive Vice President
Castings, Inc. and Chief Operating Officer
Harold Force Lawrence E. Welker
President, Executive Vice President,
Force Construction Chief Financial Officer,
Company, Inc. Treasurer and Secretary
David W. Laitinen, MD The Directors of
Orthopedic Surgeon Home Federal Bancorp
Also Serve As Directors of
Harvard W. Nolting, Jr. Home Federal Savings Bank.
Retired form Nolting
Foods, Inc.
Executive Officers
of Home Federal Savings Bank
John K. Keach, Jr. John F. Schilling
President and Senior Vice President
Chief Executive Officer Commercial Lending
Gerald L. Armstrong Keith E. Luken
Executive Vice President Senior Vice President
and Chief Operating Officer Mortgage Lending
Lawrence E. Welker Mark A. Dennis
Executive Vice President, First Vice President
Chief Financial Officer, MIS
Treasurer and Secretary
Melissa M. Arnold
S. Elaine Pollert Vice President
Senior Vice President Controller
Retail Banking
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 HOMF. Home Federal Bancorp stock
appears in the Wall Street Journal under the abbreviation
HomFedBcpIN, 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, contact:
LaSalle National Bank
c/o Corporate Trust Operations
135 South LaSalle Street, Room 1811
Chicago, Illinois 60603
(800) 246-5761
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,
1997, with the Securities and Exchange Commission.
For copies of the Annual Report and Home Federal
Bancorp's Quarterly Reports, contact:
Cora Laymon
Home Federal Bancorp
222 West Second Street
P.O. Box 648
Seymour, IN 47274
(812) 522-1592
(800) 952-6646
For financial information and security analyst inquiries
please contact:
Lawrence E. Welker
Home Federal Bancorp
222 West Second Street
P.O. Box 648
Seymour, IN 47274
(812) 522-1592
(800) 952-6646
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
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 23, 1997 appearing in this Annual Report on Form 10-K of Home
Federal Bancorp for the year ended June 30, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
September 25, 1997
<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, 1997 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-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 16,274
<INT-BEARING-DEPOSITS> 3,498
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,119
<INVESTMENTS-CARRYING> 13,115
<INVESTMENTS-MARKET> 13,012
<LOANS> 575,624
<ALLOWANCE> 3,649
<TOTAL-ASSETS> 682,796
<DEPOSITS> 527,788
<SHORT-TERM> 37,848
<LIABILITIES-OTHER> 4,402
<LONG-TERM> 54,545
0
0
<COMMON> 7,549
<OTHER-SE> 50,368
<TOTAL-LIABILITIES-AND-EQUITY> 682,796
<INTEREST-LOAN> 47,923
<INTEREST-INVEST> 3,306
<INTEREST-OTHER> 302
<INTEREST-TOTAL> 51,531
<INTEREST-DEPOSIT> 23,286
<INTEREST-EXPENSE> 28,640
<INTEREST-INCOME-NET> 22,891
<LOAN-LOSSES> 1,129
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 2,498
<INCOME-PRETAX> 11,159
<INCOME-PRE-EXTRAORDINARY> 11,159
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,846
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.96
<YIELD-ACTUAL> 8.46
<LOANS-NON> 2,930
<LOANS-PAST> 40
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,061
<CHARGE-OFFS> 615
<RECOVERIES> 78
<ALLOWANCE-CLOSE> 3,649
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
