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, 1998
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)
Registrant's 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 ___ 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, 1998, was $113,310,393
The number of shares of the Registrants Common Stock, no par value, outstanding
as of September 10, 1998, was 5,142,288 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1998,
are incorporated into Part II. Portions of the Proxy Statement for the 1998
annual meeting of shareholders are incorporated into Part I and Part III.
Exhibit Index on Page 38
Page 2 of 41 Pages
2
<PAGE>
HOME FEDERAL BANCORP
FORM 10-K
INDEX
<TABLE>
<S> <C>
Forward Looking Statement ......................................................... 4
Item 1. Business ................................................................. 4
Item 2. Properties ............................................................... 31
Item 3. Legal Proceedings ........................................................ 32
Item 4. Submission of Matters to a Vote of Security Holders ...................... 32
Item 4.5 Executive Officers of Home Federal Bancorp ............................... 32
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .... 32
Item 6. Selected Financial Data .................................................. 34
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................... 34
Item 7. A Quantitative and Qualitative Disclosure About Market Risk .............. 34
Item 8. Financial Statements and Supplementary Data .............................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................... 35
Item 10. Directors and Executive Officers of the Registrant ....................... 35
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 ......... 36
SIGNATURES ........................................................................ 37
</TABLE>
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 nine 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) debit
cards; (vii) credit cards; (viii) annuity and life insurance products; (ix)
Individual Retirement Accounts and Keogh plans; (x) commercial loans; (xi) real
estate development; (xii) trust services: and (xiii) commercial demand deposit
accounts.
Home Federal's primary source of revenue is interest from lending
activities. Its principal lending activity is the origination of conventional
mortgage loans to enable borrowers to purchase or refinance one- to four-family
residential real property. These loans are generally secured by first mortgages
on the property. Virtually all of the real estate loans originated by Home
Federal are secured by properties located in Indiana, although Home Federal has
authority to make or purchase real estate loans throughout the United States. In
addition, Home Federal makes secured and unsecured consumer related loans
(including consumer auto loans, second mortgage, home equity, credit cards,
mobile home, and savings account loans) and commercial loans secured by
mortgages on the underlying property. At June 30, 1998, approximately 19.1% of
its loans were consumer-related loans and 15.8% of its loans were commercial
mortgage loans. Home Federal also makes construction loans, which constituted
12.5% of Home Federal's loans at June 30, 1998. Finally, Home Federal makes
commercial loans, which constituted 8.3% of its loans at June 30, 1998.
4
<PAGE>
Lending Activities
Loan Portfolio Data
The following two tables set forth the composition of Home Federal's loan
portfolio by loan type and security type as of the dates indicated. The
third table represents a reconciliation of gross loans receivable after
consideration of undisbursed portions of loans in process, deferred loans,
the allowance for loan losses, unearned discounts on loans and purchase
discounts. (Dollars in Thousands)
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------
TYPE OF LOAN
First mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family residential loans.. $268,133 43.5% $300,531 50.1% $278,118 51.3% $268,509 55.3% $278,383 60.1%
Commercial and multi-family .......... 97,469 15.8% 79,696 13.3% 73,853 13.6% 63,215 13.0% 59,830 12.9%
Loans on property under construction . 77,227 12.5% 54,504 9.1% 40,407 7.4% 23,982 4.9% 25,547 5.5%
Loans on unimproved acreage .......... 4,664 0.8% 4,192 0.7% 3,252 0.6% 2,554 0.5% 2,053 0.4%
Second mortgage, home equity .............. 65,321 10.6% 63,658 10.6% 50,372 9.3% 40,536 8.4% 29,376 6.3%
Commercial loans .......................... 50,890 8.3% 43,112 7.2% 40,609 7.5% 28,881 6.0% 21,660 4.7%
Consumer loans ............................ 10,347 1.7% 11,017 1.8% 11,952 2.2% 11,392 2.3% 4,381 0.9%
Auto loans ................................ 23,194 3.8% 23,086 3.8% 20,883 3.8% 21,506 4.4% 19,164 4.1%
Mobile home loans ......................... 14,349 2.3% 16,613 2.8% 18,833 3.5% 20,258 4.2% 19,287 4.2%
Savings accounts loans .................... 4,071 0.7% 3,989 0.7% 4,199 0.8% 4,407 0.9% 3,684 0.8%
- - ------------------------------------------------------------------------------------------------------------------------------------
Gross loans receivable ............... $615,665 100.0% $600,398 100.0% $542,478 100.0% $485,240 100.0% $463,365 100.0%
====================================================================================================================================
TYPE OF SECURITY
Residential:
One to four family ................... $366,319 59.3% $397,962 66.3% $358,003 66.0% $326,296 67.2% $326,055 70.4%
Multi-dwelling units ................. 19,003 3.1% 22,166 3.7% 23,807 4.4% 20,488 4.2% 22,004 4.7%
Commercial real estate .................... 122,828 20.0% 78,261 13.0% 60,940 11.2% 49,458 10.2% 45,077 9.7%
Commercial ................................ 50,890 8.3% 43,112 7.2% 40,609 7.5% 28,881 6.0% 21,660 4.7%
Mobile home ............................... 14,349 2.3% 16,613 2.8% 18,833 3.5% 20,258 4.2% 19,287 4.2%
Savings account ........................... 4,071 0.7% 3,989 0.7% 4,199 0.8% 4,407 0.9% 3,684 0.8%
Auto ...................................... 23,194 3.8% 23,086 3.8% 20,883 3.8% 21,506 4.4% 19,164 4.1%
Other consumer ............................ 10,347 1.7% 11,017 1.8% 11,952 2.2% 11,392 2.3% 4,381 0.9%
Land acquisition .......................... 4,664 0.8% 4,192 0.7% 3,252 0.6% 2,554 0.5% 2,053 0.4%
- - ------------------------------------------------------------------------------------------------------------------------------------
Gross loans receivable ............... $615,665 100.0% $600,398 100.0% $542,478 100.0% $485,240 100.0% $463,365 100.0%
====================================================================================================================================
LOANS RECEIVABLE-NET
Gross loans receivable .................... $615,665 105.7% $600,398 104.3% $542,478 104.3% $485,240 103.3% $463,365 103.9%
Deduct:
Undisbursed portion of loans in process ... (28,691) -4.9% (20,519) -3.6% (18,249 -3.5% (11,291) -2.4% (13,377) -3.0%
Deferred net loan fees .................... (690) -0.1% (560) -0.1% (963) -0.2% (1,069) -0.2% (1,204) -0.3%
Allowance for loan losses ................. (4,243) -0.7% (3,649) -0.6% (3,061) -0.6% (2,806) -0.6% (2,580) -0.6%
Unearned discounts ........................ (1) 0.0% (5) 0.0% (19) 0.0% (53) 0.0% (114) 0.0%
Purchase discount ......................... -- 0.0% (41) 0.0% (89) 0.0% (138) 0.0% (187) 0.0%
- - ------------------------------------------------------------------------------------------------------------------------------------
Net loans receivable ................. $582,040 100.0% $575,624 100.0% $520,097 100.0% $469,883 100.0% $445,903 100.0%
====================================================================================================================================
</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: (In Thousands)
<TABLE>
<CAPTION>
Maturities in Fiscal
Balance ----------------------------------------------------------------------------
Outstanding 2002 2004 2009 2013
At June 30, to to to and
1998 1999 2000 2001 2003 2008 2013 thereafter
---- ---- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate ............. $435,587 $ 6,229 $ 1,790 $ 5,734 $ 23,019 $ 88,892 $ 90,768 $219,155
Mortgage-backed
certificates,
collateralized
mortgage obligations 15,760 549 2,784 2,142 3,173 5,322 -- 1,790
Construction Loans ...... 77,227 9,830 2,305 5,717 4,000 5,202 6,006 44,167
Commercial loans ........ 50,890 18,679 7,225 2,864 6,341 10,352 4,318 1,111
Other loans ............. 51,961 15,498 5,061 6,632 14,407 7,019 3,161 183
- - ----------------------------------------------------------------------------------------------------------------
Total .............. $631,425 $ 50,785 $ 19,165 $ 23,089 $ 50,940 $116,787 $104,253 $266,406
================================================================================================================
</TABLE>
Interest Rate Sensitivity: (In Thousands)
Due After June 30, 1999
-----------------------
Fixed Variable Rate
Rate and Balloon
------------------------
Real estate ............................. $142,164 $287,193
Mortgage-backed certificates,
collateralized mortgage obligations 11,836 3,375
Construction Loans ...................... 528 66,869
Commercial loans ........................ 10,753 21,458
Other loans ............................. 36,464 --
- - ----------------------------------------------------------------
Total ............................. $201,745 $378,895
=================================================================
6
<PAGE>
Residential Mortgage Loans
Approximately 95.7% of Home Federal's residential mortgage lending
activity, exclusive of refinances, involve 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,
if the interest rate is adjustable, the interest rate 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, 1998, $301.0 million, or 48.9%,
of Home Federal's total loan portfolio consisted of residential first mortgage
loans, $268.1 million, or 43.6%, 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.
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.
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.
7
<PAGE>
Commercial Mortgage Loans
At June 30, 1998, 23.8% 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, 1998, had a balance of $4.5 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.
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, 1998, 12.5% 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, 1998, was $3.3 million.
Consumer Loans
Federal laws and regulations permit federally chartered savings
institutions to make secured and unsecured consumer loans in an aggregate amount
of up to 35% of the institution's total assets. In addition, a federally
chartered savings institution has lending authority above the 35% limit for
certain consumer loans, such as property improvement loans and loans secured by
savings accounts. However, the Qualified Thrift Lender test restricts some
thrift 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 $117.3 million on June 30, 1998, or approximately 19.1%
of Home Federal's total loan portfolio.
Second mortgage loans are made for terms of 5 - 15 years, and are
fixed-rate and variable rate line of credit 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,
1998, Home Federal had $30.3 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, 1998, Home Federal had
$35.1 million drawn on its home equity loans, or 5.7% of its total loan
portfolio, with $45.8 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,
1998, $23.2 million, or 3.8%, of Home Federal's total loan portfolio consisted
of automobile loans.
8
<PAGE>
As of June 30, 1998, $14.3 million, or 2.3%, 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, 1998, $4.1 million, or
0.7%, of Home Federal's total loan portfolio consisted of savings account loans.
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, 1998, $50.9 million, or
8.3%, 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.
9
<PAGE>
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 $201.8 million of fixed-rate loans in the fiscal year ended
June 30, 1998. 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 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, 1998, Home Federal serviced $385.2 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 1998, $1.1 million of the total $3.4 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, 1998, approximately
1.6%, or $9.6 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: (Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Gross loans receivable at beginning of periods ................. $ 600,398 $ 542,478 $ 469,883
- - ------------------------------------------------------------------------------------------------------
Loans Originated:
Mortgage loans and contracts:
Construction:
Residential ...................................... 45,857 39,116 45,336
Commercial ....................................... 38,310 22,784 12,058
Purchases:
Residential ...................................... 117,474 113,265 112,549
Commercial ....................................... 22,206 16,107 7,214
Refinancing .......................................... 169,202 56,911 88,861
Other ................................................ 3,188 6,462 1,302
- - ------------------------------------------------------------------------------------------------------
Total ............................................ 396,237 254,645 267,320
Commercial ............................................... 39,274 34,709 51,537
Consumer ................................................. 38,166 38,150 35,800
- - ------------------------------------------------------------------------------------------------------
Total loans originated ............................... 473,677 327,504 354,657
Loans purchased:
Residential .......................................... -- -- 2,140
Other ................................................ 6,815 947 1,477
- - ------------------------------------------------------------------------------------------------------
Total loans originated and purchased ............. 480,492 328,451 358,274
Real estate loans sold ................................... 211,365 81,309 107,500
Loan repayments and other deductions ..................... 253,860 189,222 178,179
- - ------------------------------------------------------------------------------------------------------
Total loans sold, loan repayments and other deductions 465,225 270,531 285,679
- - ------------------------------------------------------------------------------------------------------
Net loan activity ........................................ 15,267 57,920 72,595
- - ------------------------------------------------------------------------------------------------------
Gross loans receivable at end of period .................. 615,665 600,398 542,478
Adjustments .............................................. (33,625) (24,774) (22,381)
- - ------------------------------------------------------------------------------------------------------
Net loans receivable at end of period .................... $ 582,040 $ 575,624 $ 520,097
======================================================================================================
</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, 1998 under the 15% of capital limitation was $9.4
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.
11
<PAGE>
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 that range from 0% to 3.5% of the loan amount.
In addition Home Federal charges processing fees of $100 to $175 and
underwriting fees of from $0 to $100. 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.
Non-performing Assets
Home Federal assesses late charges on mortgage loans 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, 1998, Home Federal held $242,000 of real estate and other
repossessed collateral acquired as a result of foreclosure, voluntary deed, or
other means. Such assets are 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. When a consumer
loan reaches 90 days past due Home Federal determines the loan to value ratio by
performing an inspection of the collateral (if any). 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.
12
<PAGE>
The table below sets forth the amounts and categories of Home Federal's
non-performing assets (non-accrual loans, loans past due 90 days or more, real
estate owned, and other repossessed assets) for the last five years. It is the
policy of Home Federal that all earned but uncollected interest on conventional
loans be reviewed monthly to determine if any portion thereof should be
classified as uncollectible for any portion that is due but uncollected for a
period in excess of 90 days. The determination is based upon factors such as the
amount outstanding of the loan as a percentage of the appraised value of the
property and the delinquency record of the borrower.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Non-performing Assets:
Loans:
<S> <C> <C> <C> <C> <C>
Non-accrual ............................. $3,992 $2,930 $2,871 $2,431 $2,230
Past due 90 days or more ................ -- 40 89 81 115
Restructured loans .......................... -- 1 1 102 283
- - ----------------------------------------------------------------------------------------------
Total non-performing loans .................. 3,992 2,971 2,961 2,614 2,628
Real estate owned, net (1) .................. 117 51 -- -- --
Other repossessed assets, net ............... 125 88 48 41 98
Total non-performing assets (2) ......... $4,234 $3,110 $3,009 $2,655 $2,726
==============================================================================================
Total non-performing assets to total assets . 0.59% 0.46% 0.48% 0.45% 0.50%
==============================================================================================
Loans with allowance for uncollected interest $3,993 $2,930 $2,872 $2,531 $2,167
==============================================================================================
<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, 1998, 57.4% of Home Federal's non-performing assets consisted
of residential mortgage loans, .1% consisted of commercial real estate
loans, 12.3% consisted of commercial loans, 24.7% consisted of
consumer-related loans, 5.5% 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, 1998, the income that would have been
recorded under original terms on the above non-accrual and restructured loans
was $325,000 compared to actual income recorded of $250,000. At June 30, 1998,
Home Federal had approximately $6.7 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, 1998, Home Federal charged off loans
totaling $696,000 and realized recoveries of $97,000 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 $1.2 million to adjust the allowance to $4.2 million as of June 30,
1998.
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, 1998, 1997, and
1996, Home Federal had approximately $72.2 million, $56.7 million and $57.9
million in investments, respectively.
13
<PAGE>
Home Federal's investment portfolio is managed by its officers in
accordance with an investment policy approved by the Board of Directors. The
Board reviews all transactions and activities in the investment portfolio on a
monthly basis. Home Federal does not purchase corporate debt securities which
are not rated in one of the top four investment grade categories by one of
several generally recognized independent rating agencies. Home Federal's
investment strategy has enabled it to (i) shorten the average term to maturity
of its 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 4%. Monetary penalties may be imposed for
failure to meet the liquidity requirement. At June 30, 1998, Home Federal had
liquid assets of $85.8 million, and a liquidity ratio of 14.9%, 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.
14
<PAGE>
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.
Home Federal on a periodic basis establishes interest rates paid,
maturity terms, service fees and withdrawal penalties. Determination of rates
and terms are predicated on funds acquisition and liquidity requirements, rates
paid by competitors, growth goals, federal regulations, and market area of
solicitation.
Deposit accounts at Home Federal at June 30, 1998, were as follows:
(Dollars in Thousands)
Minimum Weighted
Opening Balance at % of Average
Type of Account Balance June 30, 1998 Deposits Rate
- - --------------- ------- ------------- -------- --------
Withdrawable:
Non-interest bearing ......... $ 1 $ 25,102 4.6%
Passbook ..................... 1 47,639 8.8% 2.75%
Money market savings ......... 1,000 77,133 14.2% 4.55%
NOW .......................... 1 50,185 9.2% 2.08%
- - ----------------------------------------------------------------------------
Total withdrawable ........ 200,059 36.8% 2.93%
- - ----------------------------------------------------------------------------
Certificates (original terms):
Less than 1 year ............. 500 103,920 19.1% 5.48%
12 to 23 months .............. 500 124,066 22.8% 5.64%
24 to 35 months .............. 500 52,296 9.6% 5.51%
36 to 59 months .............. 500 14,801 2.7% 5.59%
60 to 120 months ............. 500 48,847 9.0% 6.05%
- - ----------------------------------------------------------------------------
Total certificates ....... 343,930 63.2% 5.63%
- - ----------------------------------------------------------------------------
Total deposits ............... $543,989 100.0% 4.64%
============================================================================
The following table sets forth by nominal interest rate categories the
composition of deposits of Home Federal at the dates indicated: (Dollars in
Thousands)
At June 30,
-------------------------------
1998 1997 1996
---- ---- ----
Non-interest bearing and below 2.99% $123,348 $117,394 $130,424
3.00% - 4.99% ...................... 119,234 106,914 62,219
5.00% - 6.99% ...................... 298,774 298,811 289,019
7.00% - 9.00% ...................... 2,633 4,669 7,911
9.01% or greater ................... -- -- --
- - ---------------------------------------------------------------------
Total .............................. $543,989 $527,788 $489,573
=====================================================================
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
1998 Deposits (Decrease) 1997 Deposits (Decrease) 1996 Deposits (Decrease)
---- -------- ---------- ---- -------- ---------- ---- -------- ----------
Withdrawable:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing ........... $ 25,102 4.6% $ 1,596 $ 23,506 4.5% $ 1,528 $ 21,978 4.5% $ 21,978
Passbook ....................... 47,639 8.8% (804) 48,443 9.2% (10,545) 58,988 12.1% 58,988
Money market savings ........... 77,133 14.2% 12,370 64,763 12.2% 39,575 25,188 5.1% 25,188
NOW ............................ 50,185 9.2% 4,952 45,233 8.6% (3,645) 48,878 10.0% 48,878
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Withdrawable ....... 200,059 36.8% 18,114 181,945 34.5% 25,385 155,032 31.7% 155,032
- - ----------------------------------------------------------------------------------------------------------------------------------
Certificates:
Less than one year ............. 103,920 19.1% 6,619 97,301 18.4% 13,471 83,830 17.1% 83,830
12 to 23 months ................ 124,066 22.8% 13,824 110,242 20.9% 15,760 94,482 19.3% 94,482
24 to 35 months ................ 52,296 9.6% (7,561) 59,857 11.3% (11,375) 71,232 14.5% 71,232
36 to 59 months ................ 14,801 2.7% (7,795) 22,596 4.3% (4,312) 26,908 5.5% 26,908
60 to 120 months ............... 48,847 9.0% (7,000) 55,847 10.6% (2,242) 58,089 11.9% 58,089
- - ----------------------------------------------------------------------------------------------------------------------------------
Total certificate accounts 343,930 63.2% (1,913) 345,843 65.5% 11,302 334,541 68.3% 334,541
- - ----------------------------------------------------------------------------------------------------------------------------------
Total deposits ....... $543,989 100.0% $ 16,201 $527,788 100.0% $ 36,687 $489,573 100.0% $489,573
==================================================================================================================================
</TABLE>
16
<PAGE>
The following table represents, by various interest rate categories, the amounts
of deposits maturing during each of the three years following June 30, 1998, and
the percentage of such maturities to total deposits. Matured certificates which
have not been renewed as of June 30, 1998 have been allocated based upon certain
rollover assumptions. (Dollars in Thousands)
<TABLE>
<CAPTION>
DEPOSITS MATURITIES
-------------------
3.99% 4.00 5.00 6.00 7.00
or to to to to Percent of
less 4.99% 5.99% 6.99% 9.00% Total Total
---- ----- ----- ----- ----- ----- -----
Certificate accounts maturing in
the twelve-month period ending:
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 1999................. $ 1,227 $ 29,457 $205,146 $ 12,927 $ 1,584 $250,341 72.7%
June 30, 2000................. -- 10,915 22,861 19,970 589 54,335 15.8%
June 30, 2001................. -- 869 8,016 4,711 10 13,606 4.0%
Thereafter ................... -- 55 12,034 13,109 450 25,648 7.5%
- - ------------------------------------------------------------------------------------------------------------
$ 1,227 $ 41,296 $248,057 $ 50,717 $ 2,633 $343,930 100.0%
============================================================================================================
</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, 1998 of certificates of greater
than $100,000 by maturity. (Dollars in Thousands)
<TABLE>
<CAPTION>
ACCOUNTS GREATER THAN $100,000
------------------------------
2.00 4.00 5.00 6.00 7.00
to to to to to Percent of
3.99% 4.99% 5.99% 6.99% 7.99% Total Total
----- ----- ----- ----- ----- ----- -----
Certificate accounts maturing in
the twelve-month period ending:
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 1999 .......................... $ 347 $ 1,748 $62,388 $10,235 $ 314 $75,032 85.1%
June 30, 2000 .......................... -- 468 2,604 2,992 516 6,580 7.5%
June 30, 2001 .......................... -- -- 775 1,088 -- 1,863 2.1%
Thereafter ............................. -- 809 3,484 335 4,628 5.3%
- - ------------------------------------------------------------------------------------------------------------
$ 347 $ 2,216 $66,576 $17,799 $ 1,165 $88,103 100.0%
============================================================================================================
</TABLE>
17
<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, 1998, Home Federal had advances totaling $98.1
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 (8.50% at June 30, 1998) and was scheduled to mature on
November 1, 1999. The Company repaid the note in its entirety in June of 1998.
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.
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. (Dollars in Thousands)
For the year ended June 30,
1998 1997 1996
---- ---- ----
FHLB advances ............................... $38,800 $33,200 $16,000
Official check overnight remittance ......... $ 8,710 $ 4,621 $ 4,280
Money Order remittance ...................... $ 44 $ -- $ --
FHLB overnight remittance ................... $ 992 $ 49 $ 57
Average amount of total short-term borrowings
outstanding ................................. $32,934 $34,129 $ 6,822
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. (Dollars in Thousands)
At the year ended June 30,
1998 1997 1996
---- ---- ----
FHLB advances:
Amount .............. $ 36,000 $ 33,200 $ 26,000
Weighted average rate 6.1% 6.7% 6.2%
See Note 9 in the Notes to Consolidated Financial Statements included
in the 1998 Shareholder Annual Report incorporated into Item 8 hereof for a
description of the terms of these borrowings.
18
<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, 1998, Home Federal's aggregate investment in
HSC was $2.6 million. For the year ended June 30, 1998, HSC reported income of
$293,000 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, 1998.
<TABLE>
<CAPTION>
Date HSC Loans from
Entered Home Federal
into the Equity Outstanding at
Name Type of Project Project Investment June 30, 1998
---- --------------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Consortium Partners Owns Family Financial 11/31/83 $ 617,000 $ -
Life Insurance
Company of New
Orleans
Coventry Associates Real Estate development 8/31/89 $ 40,000 $ -
in Seymour, Indiana
Heritage Woods II Rental Apartment 11/15/89 $ 96,000 $ -
project of low income
housing (22 units)
Admirals Woods Real estate development 4/20/93 $ 19,000 $ -
In Indianapolis, Indiana
Home-Breeden Real estate development 7/1/94 $ 2,375,000 $ 1,939,000
in Columbus, Indiana
Crystal Lake at River Single family homes in 11/29/97 $ 930,000 $ 920,000
Ridge Indianapolis, Indiana
</TABLE>
HSC has a 20% 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 30,1998, Home
Federal had income of $397,000, on a consolidated basis, from commissions and
dividends paid on Family Financial activities.
19
<PAGE>
HSC markets Linsco Private Ledger full-service securities brokerage
services. For the year ended June 30, 1998, HSC received $979,000 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, 1998, reflects the development costs to date of all six
phases, the condominium site and commercial acreage.
On November 29, 1997, HSC entered into an LLC agreement with Curtis
Enterprises, Inc., and Gary B. Warstler to build up to eighty-five single family
homes at Crystal Lake at River Ridge in northern Indianapolis, Indiana. The LLC
will purchase finished lots from RN Thompson Development Corporation. HSC has a
line of credit in the amount of $2,100,000 to build the homes, and will receive
1/3 of the profits from their sale.
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, 1998, Home Federal employed 253 persons on a full-time
basis and 16 persons on a part-time basis. None of Home Federal's employees are
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
Competition
Home Federal operates in south central Indiana and makes almost all of
its loans to, and accepts almost all of its deposits from, residents of
Bartholomew, Jackson, Jefferson, Jennings, Scott, Ripley, Washington, Decatur,
Monroe and Marion counties in Indiana.
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<PAGE>
Home Federal is subject to competition from various financial
institutions, including state and national banks, state and federal thrift
associations, and other companies or firms, including brokerage houses, that
provide similar services in the areas of Home Federal's home and branch offices.
Also, in Seymour, 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; provided that acquisition or de novo formations of
branches by out-of-state banks are not permitted unless the laws of their home
states permit Indiana banks to acquire or establish branches on a reciprocal
basis. 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, provided that acquisitions
or de novo formations of branches by out-of-state banks are not permitted unless
the laws of their home states permit Indiana banks to acquire or establish
branches on a reciprocal basis. 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 that 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
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, or what impact it might have
on the powers of the Company and Home Federal.
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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, 1998 of
$705.4 million, is $76,000. The OTS has recently proposed a change to its
assessment regulations that would require assessments to be determined generally
on the basis of an institution's size, condition, and complexity of operations.
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
its 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, 1998, Home Federal's investment in stock of
the FHLB of Indianapolis was $5.5 million.
In past years, Home Federal has received dividends on its FHLB stock.
All 12 FHLBs 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. For
the year ending June 30, 1998, dividends paid to Home Federal by the FHLB of
Indianapolis totaled $409,000, for an annual rate of 8.0%. 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
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.
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<PAGE>
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 4%. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The monthly average liquidity of Home Federal for June,
1998 was 14.9% which exceeded the applicable 4% liquidity requirement. 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
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.
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<PAGE>
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, 1998, 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. The OTS
recently updated its standards regarding the management of interest rate risk to
include summary guidelines to assist savings associations in determining their
exposures to 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, 1998, would have no additional capital
requirement. The Bank's management continues to monitor its interest rate risk
position.
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The following is a summary of Home Federal's regulatory capital and
capital requirements at June 30, 1998:
<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, 1998
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to total assets) $58,514 8.20% $10,708 1.50% N/A N/A
Core capital (to total assets) ... $58,514 8.20 $28,554 4.00% N/A N/A
Total risk-based capital
(to risk-weighted assets) ...... $62,305 11.81 $42,206 8.00% $52,757 10.00%
Tier 1 risk-based capital
(to risk-weighted assets) ...... $58,514 11.09% N/A N/A $31,654 6.00%
Tier 1 leverage capital
(to average assets) ............ $58,514 8.35% N/A N/A $35,057 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,
1998, 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.
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A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of a) 100% of its net income to date during the calendar year plus an amount
that would reduce by one-half its "surplus capital ratio" (the excess over its
fully phased-in capital requirements) at the beginning of the calendar year, or
b) 75% of its net income over the most recent four quarter period. Any
additional amount of capital distributions would require prior regulatory
approval.
The OTS has proposed revisions to these regulations which would permit
a savings association, without filing a prior notice or application with the
OTS, to make a capital distribution to its shareholders in a maximum amount that
does not exceed the association's undistributed net income for the prior two
years plus the amount of its undistributed income from the current year. This
proposed rule would require a savings association, such as Home Federal, that is
a subsidiary of a savings and loans holding company to file a notice with the
OTS 30 days before making a capital distribution up the "maximum amount"
described above. The proposed rule would also require all savings associations,
whether under a holding company or not, to file an application with the OTS
prior to making any capital distribution where the association is not eligible
for "expedited processing" under the OTS "Expedited Processing Regulation" or
where the proposed distribution, together with any other distributions made in
the same year, would exceed the "maximum amount" described above.
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.
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<PAGE>
Holding Company Regulation
Under current law the Company (the "Holding Company") is regulated as a
"non-diversified unitary savings and loan holding company" within the meaning of
the Home Owners' Loan Act, as amended ("HOLA"), and subject to regulatory
oversight of the Director of the OTS. As such, the Holding Company is registered
with the OTS and thereby subject to OTS regulations, examinations, supervision
and reporting requirements. As a subsidiary of a savings and loan holding
company, Home Federal is subject to certain restrictions in its dealings with
the Holding Company and with other companies affiliated with the Holding
Company.
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 to
the extent permitted by law. There are generally no restrictions on the
permissible business activities of a unitary savings and loan holding company
under current law. 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, 1998, 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.
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<PAGE>
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the 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 primarily residential
mortgages and related investments including certain mortgage-related securities.
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).
28
<PAGE>
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, 1998, 70.9% 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.
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 beginning 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.
29
<PAGE>
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"), that 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. 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 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 require that an amount representing total
comprehensive income be reported in that statement. This statement will result
in additional financial statement disclosures upon adoption.
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.
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued in
June 1998 and is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
fair value hedge, a cash flow hedge, or a hedge of foreign currency exposure.
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. Management has not yet quantified the effect of this new standard
on the consolidated financial statements.
30
<PAGE>
Item 2. Properties.
At June 30, 1998, 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, 1998,
is presented in the following table: (Dollars in Thousands)
<TABLE>
<CAPTION>
Net Book
Value of
Property, Approximate
Description and Owned or Furniture and Square Lease
Address Leased Fixtures Footage Expiration
- - ----------------------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Principal Office Owned $ 2,835 9,200 N/A
222 West Second Street
Operations Center Owned $ 253 20,000 N/A
218 West Second Street
Loan Processing Center Owned $ 94 5,130 N/A
211 North Chestnut
Branch Offices:
Columbus Branches:
501 Washington Street Owned $ 585 14,800 N/A
3805 25th Street Owned $ 328 5,800 N/A
2751 Brentwood Drive Owned $ 483 3,200 N/A
4330 West Jonathon Moore Pike Owned $ 743 2,600 N/A
Hope Branch 1/2 Owned $ 36 2,000 4/99
332 Jackson Street 1/2 Leased
Austin Branch Owned $ 54 3,600 N/A
67 West Main Street
Brownstown Branch Leased $ 24 2,400 Month to
101 North Main Street Month
North Vernon Branches
111 North State Street Owned $ 379 1,900 N/A
1540 North State Street Leased $ 48 1,600 10/02
Osgood Branch Owned $ 115 1,280 N/A
South Buckeye Street
Salem Branch
1208 South Jackson Owned $ 912 1,860 N/A
Seymour Branch Owned $ 448 6,800 N/A
1117 East Tipton Street
Batesville Branch Owned $ 676 2,175 N/A
12 West Pearl Street
Madison Branch Owned $ 524 2,550 N/A
201 Clifty Drive
Greensburg Branch Leased $ 29 2,440 8/98
115 East North Street
</TABLE>
31
<PAGE>
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, 1998.
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
--------------------------
Gerald L. Armstrong Chief Operating Officer and
Executive Vice President
S. Elaine Pollert Senior Vice President
Retail Banking
Lawrence E. Welker Executive Vice President, Treasurer,
Chief Financial Officer and Secretary
Gerald L. Armstrong (age 58) 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.
S. Elaine Pollert (age 38) has been employed by Home Federal since
1986. She was elected Vice President Branch Administration in 1989 and Senior
Vice President Retail Banking in 1996.
Lawrence E. Welker (age 51) 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.
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 1998 Shareholder Annual Report (the "Shareholder
Annual Report"). As of June 30, 1998, there were 582 shareholders of record of
HFB's Common Stock.
32
<PAGE>
It is currently the policy of HFB's Board of Directors to continue to
pay quarterly dividends, but any future dividends are subject to the Board's
discretion based on its consideration of HFB's operating results, financial
condition, capital, income tax considerations, regulatory restrictions and other
factors.
Since HFB has no independent operations or other subsidiaries to
generate income, its ability to accumulate earnings for the payment of cash
dividends to its shareholders is directly dependent upon the ability of Home
Federal to pay dividends to the Company.
Under OTS regulations, a converted savings association may not declare
or pay cash dividends if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings association may
make a "capital distribution," which includes, among other things, cash
dividends, will depend upon in which one of three categories, based upon levels
of capital, that savings association is classified. Home Federal is a "tier one
institution" and therefore would be able to pay cash dividends to HFB during any
calendar year up to 100% of its net income during that calendar year plus the
amount that would reduce by one half its "surplus capital ratio" (the excess
over its capital requirements) at the beginning of the calendar year. See
"Regulation--Capital Distributions Regulation" in Item 1 hereof. Prior notice of
any dividend to be paid by Home Federal to the Company will have to be given to
the OTS.
Income of Home Federal appropriated to bad debt reserves and deducted
for federal income tax purposes is not available for payment of cash dividends
or other distributions to HFB without the payment of federal income taxes by
Home Federal on the amount of such income deemed removed from the reserves at
the then-current income tax rate. At June 30, 1998, 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.
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 $27.67 (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.
33
<PAGE>
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 5 of the Shareholder Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
The information required by this item is incorporated by reference to
pages 7 to 16 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, 1998,
these price indications varied from 73.91 to 118.85 for fixed rate mortgages and
mortgage-backed securities and varied from 87.87 to 107.65 for adjustable rate
mortgages and mortgage-backed securities. Prepayment rates for June 30, 1998,
ranged from a constant prepayment rate ("CPR") or 6% to a CPR of 41%.
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, 1998, the retail CD price assumptions
varied from 76.03 to 125.61. 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, 1998, the retail CD intangible
price assumptions varied from .02 to .66.
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, 1998, the intangible prices
for transaction accounts, money market deposit accounts and passbook accounts
varied from -2.23 to 19.11, -. 58 to 12.37 and -1.01 to 14.56, respectively.
34
<PAGE>
The following table sets forth the Bank's interest rate sensitivity of NPV as of
June 30, 1998. (Dollars in thousands)
Net Portfolio Value NPV as % of PV of Assets
- - -------------------------------------------------------------------------
Change
In Rates $ Amount $ Change % Change NPV Ratio Change
- - -------------------------------------------------------------------------
+400 bp 65,996 -12,039 -15 9.44% (117) bp
+300 bp 70,552 -7,483 -10 9.95% (67) bp
+200 bp 74,375 -3,660 -5 10.34% (27) bp
+100 bp 77,029 -1,007 -1 10.58% (3) bp
0 bp 78,035 - - 10.61% -
- - -100 bp 78,602 567 1 10.59% (2) bp
- - -200 bp 79,256 1,221 2 10.58% (4) bp
- - -300 bp 81,531 3,496 4 10.76% 14 bp
- - -400 bp 84,425 6,390 8 11.00% 38 bp
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and Notes thereto
contained on pages 17 to 35 of the Shareholder Annual Report are incorporated
herein by reference. HFB's Quarterly Results of Operations contained on page 6
of the Shareholder Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
There are no such changes and disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 to 4 of the Company's Proxy Statement for
its 1998 annual shareholder meeting (the "1998 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 12 of the 1998 Proxy Statement.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 4 to 11 of the 1998 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 1998 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 11 of the 1998 Proxy Statement.
35
<PAGE>
PART IV
Item 14. Exhibits. Financial Statement Schedules and Reports on Form 8-K.
(a) List the following documents filed as a part of the report:
Page in 1998
Shareholder
Financial Statements Annual Report
-------------------- -------------
Consolidated Balance Sheets as of
June 30, 1998 and 1997 17
Consolidated Statements of Income for each of
the years in the three-year period ended
June 30, 1998 18
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended June 30, 1998 19
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
June 30, 1998 20
Notes to Consolidated Financial Statements 21
Report of Deloitte & Touche LLP
Independent Auditors 36
(b) Reports on Form 8-K
Registrant has filed no reports on Form 8-K for the quarter ending June
30, 1998.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page 39.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
notes.
36
<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, 1998.
HOME FEDERAL BANCORP
DATE: September 22, 1998 /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,
1998.
/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
37
<PAGE>
EXHIBIT INDEX
Reference to
Regulation S-K Sequential
Exhibit Number Document Page Number
- - -------------- -------- -----------
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 Registra-
tion 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));first amendment
thereto dated March 1, 1993; second amendment
thereto dated November 22, 1994; third amendment
thereto dated April 30,1996.
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));first amendment
thereto dated March 1, 1993; second amendment
thereto dated November 22, 1994; third amendment
thereto dated April 30,1996.
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)); first amendment
thereto dated November 22, 1994; second amendment
thereto dated April 30,1996..
10(g) April 1, 1989 Promissory Note and related
documents pertaining to the Illinois Building
(incorporated by reference from Exhibit 10(f) to
Home Federal Savings Bank's Form 10-K for the year
ended June 30, 1989).
10(i) Stock Option Agreement with Harvard W. Nolting, Jr.
(incorporated by reference from Exhibit 10(i) to Home
Federal Savings Bank's Form 10-K for the fiscal year
ended June 30, 1991).
38
<PAGE>
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); second amendment
thereto dated February 18, 1993; third amendment
thereto dated July 1, 1996.
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); second amendment thereto dated February
18, 1993; third amendment thereto dated
July 1, 1996.
10 (p) Executive Supplemental Retirement Income
Agreement with S. Elaine Pollert dated
May 22, 1991;first amendment thereto dated July 17,
1992; second amendment thereto dated February
18, 1993; third amendment thereto dated
July 1, 1996.
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);
second amendment thereto dated March 19, 1996.
10 (w) Employment Agreement with S. Elaine Pollert
dated December 17, 1996; first amendment
thereto dated December 17, 1996.
10 (x) Executive Supplemental Retirement Income
Agreement with Gerald L. Armstrong
(incorporated by reference from Exhibit
10(x) to Home Federal Savings Bank Form 10-K
for the fiscal year ended June 30, 1992) and
First Amendment to Executive Supplemental
Retirement Income Agreement (incorporated by
reference from Exhibit 10(x) to Registrant's
Form 10-K for the year ended June 30, 1994);
second amendment thereto dated February 18,
1993; third amendment thereto dated July 1, 1996.
39
<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);first
amendment thereto dated February 18, 1993; second admendment
thereto dated March 19, 1998.
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);first amendment thereto dated
February 18, 1993; second amendment
thereto dated March 19, 1998.
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);first amendment thereto dated
February 18, 1993; second amendment thereto
dated December 21, 1993; third amendment
thereto dated March 19, 1998.
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);first
amendment thereto dated February 18, 1993;
second amendment thereto dated December 21, 1993;
third amendment thereto dated March 19, 1998.
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);
first amendment thereto dated February 18, 1993;
second amendment thereto dated March 19, 1998.
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).
40
<PAGE>
10 (aj) Non-Qualified Stock Option Agreement,
dated December 22, 1992, with Harold Force
(incorporated by reference from Exhibit
10(aj) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (ak) Non-Qualified Stock Option Agreement, dated
December 22, 1992, with David W. Laitinen
(incorporated by reference from Exhibit 10(ak)
to Registrant's Form 10-K for the year ended
June 30, 1994).
10 (al) Non-Qualified Stock Option Agreement, dated
December 22, 1992, with Harvard W. Nolting, Jr
(incorporated by reference from Exhibit 10(al)
to Registrant's Form 10-K for the year ended
June 30, 1994).
10(am) Non-Qualified Stock Option Agreement, dated
August 24,1993, with John T. Beatty
(incorporated by reference from Exhibit
10(am) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (an) Non-Qualified Stock Option Agreement, dated
August 24,1993, with Lewis W. Essex (incorporated by
reference from Exhibit 10(an) to Registrant's
Form 10-K for the year ended June 30, 1994).
10 (ao) Non-Qualified Stock Option Agreement,
dated August 24, 1993, with Harold Force
(incorporated by reference from Exhibit
10(ao) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (ap) Non-Qualified Stock Option Agreement,
dated August 24, 1993, with David W.
Laitinen (incorporated by reference from
Exhibit 10(ap) to Registrant's Form 10-K for
the year ended June 30, 1994).
10 (aq) Non-Qualified Stock Option Agreement, dated
August 24, 1993, with Harvard W. Nolting, Jr.
(incorporated by reference from Exhibit 10(aq)
to Registrant's Form 10-K for the year ended
June 30, 1994).
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 1998 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)
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "Employment Agreement")
dated as of October 15, 1987, by and between Home Federal Savings Bank, a
federal savings bank ("Employer") and Lawrence E. Welker, a resident of Jackson
County, Indiana ("Employee").
W I T N E S S E T H
WHEREAS, Home Federal Bancorp ("HFB") has filed with the Office of
Thrift Supervision (the "OTS") an application on Form H-(e)1-S with respect to
its planned acquisition of Employer (the "Acquisition"); and
WHEREAS, the parties desire to amend the Agreement to incorporate
certain changes prescribed by OTS regulation and other changes required as a
result of the pending Acquisition;
NOW, THEREFORE, in consideration of the premises, and the mutual
promises herein contained, the parties agree that the Employment Agreement shall
be, and it hereby is, amended as follows:
1. The first sentence of Section 3 of the Employment Agreement
is hereby amended to read as follows:
The term of this Agreement shall begin on the date of
completion of the conversion of Employer from mutual to stock
form (the "Effective Date") and shall end on the date which is
three years following such date; provided, however, that such
term shall be extended for an additional year on each
anniversary of the Effective Date if Employer's Board of
Directors determines by resolution to extend this Agreement
prior to such anniversary of the Effective Date, unless either
party hereto gives written notice to the other party not to so
extend prior to such anniversary, in which case no further
automatic extension shall occur and the term of this Agreement
shall end two years subsequent to the anniversary as of which
the notice not to extend for an additional year is given (such
term including any extension thereof shall herein be referred
to as the "Term.")
2. Section 7(a)(vii) of the Employment Agreement shall be
amended to read as follows:
(vii) any material breach of any term, condition or covenant
of this Agreement.
3. The last sentence of Section 8(B) of the Employment
Agreement is amended to read as follows:
-1-
<PAGE>
For purposes of this Agreement, a "Change of Control"
shall mean an acquisition of "control" of Employer or any
direct or indirect holding company of Employer within the
meaning of 12 C.F.R. ss. 574.4(a) not approved in advance by
Employer's or such holding company's Board of Directors.
4. Section 8(D) of the Employment Agreement is amended to read
as follows:
Employer will permit Employee or his personal
representative(s) or heirs, during a period of three months
following Employee's termination of employment by Employer for
the reasons set forth in subsections 7(B) or (C), if such
termination follows a Change of Control, to require Employer,
upon written request, to purchase all outstanding stock
options previously granted to Employee under any stock option
plan of Employer or any direct or indirect holding company of
Employer then in effect whether or not such options are then
exercisable or have terminated at a cash purchase price equal
to the amount by which the aggregate "fair market value" of
the shares subject to such options exceeds the aggregate
option price for such shares. For purposes of this Agreement,
the term "fair market value" shall mean the higher of (1) the
average of the highest asked prices for Employer or holding
company shares in the over-the-counter market as reported on
the NASDAQ system if the shares are traded on such system for
the 30 business days preceding such termination, or (2) the
average per share price actually paid for the most highly
priced 1% of the Employer or holding company shares acquired
in connection with the Change of Control by any person or
group acquiring such control.
5. Sections 11 through 13 of the Employment Agreement
are amended to read as follows:
11. If Employee is suspended and/or temporarily
prohibited from participating in the conduct of Employer's
affairs by a notice served under section 8(e)(3) or (g)(1) of
the Federal Deposit Insurance Act (12 U.S.C. ss. 1818(e)(3)
and (g)(1)), Employer's obligations under this Agreement shall
be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are
dismissed, Employer may in its discretion (i) pay Employee all
or part of the compensation withheld while its obligations
under this Agreement were suspended and (ii) reinstate (in
whole or in part) any of its obligations which were suspended.
12. If Employee is removed and/or permanently
prohibited from participating in the conduct of Employer's
affairs by an order
-2-
<PAGE>
issued under section 8(e)(4) or (g)(1) of the Federal Deposit
Insurance Act (12 U.S.C. ss. 1818(e)(4) or (g)(1)), all
obligations of Employer under this Agreement shall terminate
as of the effective date of the order, but vested rights of
the parties to the Agreement shall not be affected. If
Employer is in default (as defined in section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations under this
Agreement shall terminate as of the date of default, but this
provision shall not affect any vested rights of Employer or
Employee.
13. All obligations under this Agreement may be
terminated except to the extent determined that the
continuation of the Agreement is necessary for the continued
operation of Employer: (i) by the Director of the Office of
Thrift Supervision, or his or her designee (the "Director"),
at the time the Federal Deposit Insurance Corporation or
Resolution Trust Corporation enters into an agreement to
provide assistance to or on behalf of Employer under the
authority contained in Section 13(c) of the Federal Deposit
Insurance Act; or (ii) by the Director at the time the
Director approves a supervisory merger to resolve problems
related to operation of Employer or when Employer is
determined by the Director to be in an unsafe and unsound
condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
IN WITNESS WHEREOF, the parties have caused this First Amendment to
Employment Agreement to be duly executed as of the first day of March, 1993.
HOME FEDERAL SAVINGS BANK
BY /s/ John K. Keach, Sr.
--------------------------
John K. Keach, Sr., Chairman
of the Board
"Employer"
/s/ Lawrence E. Welker
--------------------------
Lawrence E. Welker
"Employee"
-3-
<PAGE>
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (the "Employment Agreement")
dated as of October 15, 1987, as amended, by and between Home Federal Savings
Bank, a federal savings bank ("Employer"), Lawrence E. Welker, a resident of
Jackson County, Indiana ("Employee"), and Home Federal Bancorp, an Indiana
corporation (the "Holding Company").
W I T N E S S E T H:
WHEREAS, the parties to the Employment Agreement desire to add the
Holding Company as a party to such agreement to help assure that the terms shall
be enforceable as contemplated by the Employment Agreement;
WHEREAS, the Holding Company agrees to guarantee the obligations of
Employer under the Employment Agreement in order to assure to Employee the
benefits of the Employment Agreement contemplated at the time it was entered
into.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree that the Employment Agreement shall
be, and it hereby is, amended as follows:
A new section 23 shall be added to read in its entirety as follows:
23. Guarantee by Home Federal Bancorp. Home Federal Bancorp,
an Indiana corporation and the sole shareholder of Employer, agrees
that if it shall be determined for any reason that any obligation on
the part of Employer to continue to make any payments due under this
Agreement to Employee or to satisfy any other obligation under this
Agreement for the benefit of Employee is unenforceable for any reason,
Home Federal Bancorp agrees to honor the terms of this Agreement and
continue to make any such payments due hereunder to Employee or to
satisfy any such obligation pursuant to the terms of this Agreement, as
though it were the Employer hereunder.
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the 22nd day of November, 1994.
HOME FEDERAL SAVINGS BANK
BY /s/ John K. Keach, Sr.
--------------------------
John K. Keach, Sr., Chairman
"EMPLOYER"
HOME FEDERAL BANCORP
BY /s/ John K. Keach, Sr.
--------------------------
John K. Keach, Sr., Chairman
"HOLDING COMPANY"
/s/ Lawrence E. Welker
--------------------------
Lawrence E. Welker
"EMPLOYEE"
4
<PAGE>
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
This THIRD AMENDMENT TO EMPLOYMENT AGREEMENT is by and among Home
Federal Savings Bank, a federal savings bank ("Employer"), Lawrence E. Welker, a
resident of Jackson County, Indiana ("Employee"), and Home Federal Bancorp, an
Indiana corporation (the "Holding Company").
W I T N E S S E T H:
WHEREAS, Employer and Employee entered into an Employment Agreement
dated as of October 15, 1987, as subsequently amended by a First Amendment and
Second Amendment thereto (the "Employment Agreement");
WHEREAS, the parties desire to make certain additional changes to the
Employment Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree that the Employment Agreement shall
be, and it hereby is, amended as follows:
1. Section 8(B) shall be amended to read in its entirety as
follows:
"(B) In the event of termination pursuant to
subsection 7(B) or 7(C), compensation provided for herein
(including Base Compensation) shall continue to be paid, and
Employee shall continue to participate in the employee
benefit, retirement, and compensation plans and other
perquisites as provided in Sections 5 and 6 hereof, through
the date of termination specified in the notice of
termination. Any benefits payable under insurance, health,
retirement and bonus plans as a result of Employee's
participation in such plans through such date shall be paid
when due under those plans. In addition, Employee shall be
entitled to continue to receive from Employer his Base
Compensation at the rates in effect at the time of termination
(1) for three additional 12-month periods if the termination
follows a Change of Control or (2) for the remaining Term of
the Agreement if the termination does not follow a Change of
Control. In addition, during such periods, Employer will
maintain in full force and effect for the continued benefit of
Employee each employee welfare benefit plan and each employee
pension benefit plan (as such terms are defined in the
Employee Retirement Income Security Act of 1974, as amended)
in which Employee was entitled to participate immediately
prior to the date of his termination, unless an essentially
equivalent and no less favorable benefit is provided by a
subsequent employer of Employee. If the terms of any employee
welfare benefit plan or employee pension benefit plan of
Employer do not permit continued participation by Employee,
Employer will arrange to provide to Employee a benefit
substantially similar to, and no less favorable than, the
benefit he was
5
<PAGE>
entitled to receive under such plan at the end of the period
of coverage. For purposes of this Agreement, a "Change of
Control" shall mean an acquisition of "control" of the Holding
Company or of Employer within the meaning of 12 C.F.R.
ss.574.4(a) (other than a change of control resulting from a
trustee or other fiduciary holding shares of Common Stock
under an employee benefit plan of the Holding Company or any
of its subsidiaries)."
2. The following proviso shall be added to the end of Section 14
of the Employment Agreement:
"In the event the Employee is entitled to receive payments
following a Change in Control under his Supplemental
Retirement Agreement with the Employer which payments,
together with the amounts payable to the Employee under this
Agreement would result in a tax under ss.4999 of the Code, the
amounts payable to the Employee pursuant to this Agreement
shall be reduced first, before any reduction is made in
payments under the Supplemental Retirement Agreement, to the
extent necessary to avoid a tax imposed under ss.4999 of the
Code."
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the 30th day of April, 1996.
HOME FEDERAL SAVINGS BANK
BY /s/ John K. Keach, Jr.
--------------------------
John K. Keach, Jr., President
and Chief Executive Officer
"EMPLOYER"
HOME FEDERAL BANCORP
BY /s/ John K. Keach, Jr.
--------------------------
John K. Keach, Jr., President
and Chief Executive Officer
"HOLDING COMPANY"
/s/ Lawrence E. Welker
--------------------------
Lawrence E. Welker
"EMPLOYEE"
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "Employment
Agreement") dated as of October 15, 1987, by and between Home Federal Savings
Bank, a federal savings bank ("Employer") and John K. Keach, Jr., a resident of
Bartholomew County, Indiana ("Employee").
W I T N E S S E T H
WHEREAS, Home Federal Bancorp ("HFB") has filed with the Office of
Thrift Supervision (the "OTS") an application on Form H-(e)1-S with respect to
its planned acquisition of Employer (the "Acquisition"); and
WHEREAS, the parties desire to amend the Agreement to incorporate
certain changes prescribed by OTS regulation and other changes required as a
result of the pending Acquisition;
NOW, THEREFORE, in consideration of the premises, and the mutual
promises herein contained, the parties agree that the Employment Agreement shall
be, and it hereby is, amended as follows:
1. The first sentence of Section 3 of the Employment Agreement
is hereby amended to read as follows:
The term of this Agreement shall begin on the date of
completion of the conversion of Employer from mutual to stock
form (the "Effective Date") and shall end on the date which is
three years following such date; provided, however, that such
term shall be extended for an additional year on each
anniversary of the Effective Date if Employer's Board of
Directors determines by resolution to extend this Agreement
prior to such anniversary of the Effective Date, unless either
party hereto gives written notice to the other party not to so
extend prior to such anniversary, in which case no further
automatic extension shall occur and the term of this Agreement
shall end two years subsequent to the anniversary as of which
the notice not to extend for an additional year is given (such
term including any extension thereof shall herein be referred
to as the "Term.")
2. Section 7(a)(vii) of the Employment Agreement shall be
amended to read as follows:
(vii) any material breach of any term, condition or covenant
of this Agreement.
3. The last sentence of Section 8(B) of the Employment
Agreement is amended to read as follows:
-1-
<PAGE>
For purposes of this Agreement, a "Change of Control"
shall mean an acquisition of "control" of Employer or any
direct or indirect holding company of Employer within the
meaning of 12 C.F.R. ss. 574.4(a) not approved in advance by
Employer's or such holding company's Board of Directors.
4. Section 8(D) of the Employment Agreement is amended to read
as follows:
Employer will permit Employee or his personal
representative(s) or heirs, during a period of three months
following Employee's termination of employment by Employer for
the reasons set forth in subsections 7(B) or (C), if such
termination follows a Change of Control, to require Employer,
upon written request, to purchase all outstanding stock
options previously granted to Employee under any stock option
plan of Employer or any direct or indirect holding company of
Employer then in effect whether or not such options are then
exercisable or have terminated at a cash purchase price equal
to the amount by which the aggregate "fair market value" of
the shares subject to such options exceeds the aggregate
option price for such shares. For purposes of this Agreement,
the term "fair market value" shall mean the higher of (1) the
average of the highest asked prices for Employer or holding
company shares in the over-the-counter market as reported on
the NASDAQ system if the shares are traded on such system for
the 30 business days preceding such termination, or (2) the
average per share price actually paid for the most highly
priced 1% of the Employer or holding company shares acquired
in connection with the Change of Control by any person or
group acquiring such control.
5. Sections 11 through 13 of the Employment Agreement
are amended to read as follows:
11. If Employee is suspended and/or temporarily
prohibited from participating in the conduct of Employer's
affairs by a notice served under section 8(e)(3) or (g)(1) of
the Federal Deposit Insurance Act (12 U.S.C. ss. 1818(e)(3)
and (g)(1)), Employer's obligations under this Agreement shall
be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are
dismissed, Employer may in its discretion (i) pay Employee all
or part of the compensation withheld while its obligations
under this Agreement were suspended and (ii) reinstate (in
whole or in part) any of its obligations which were suspended.
-2-
<PAGE>
12. If Employee is removed and/or permanently
prohibited from participating in the conduct of Employer's
affairs by an order issued under section 8(e)(4) or (g)(1) of
the Federal Deposit Insurance Act (12 U.S.C. ss. 1818(e)(4) or
(g)(1)), all obligations of Employer under this Agreement
shall terminate as of the effective date of the order, but
vested rights of the parties to the Agreement shall not be
affected. If Employer is in default (as defined in section
3(x)(1) of the Federal Deposit Insurance Act), all obligations
under this Agreement shall terminate as of the date of
default, but this provision shall not affect any vested rights
of Employer or Employee.
13. All obligations under this Agreement may be
terminated except to the extent determined that the
continuation of the Agreement is necessary for the continued
operation of Employer: (i) by the Director of the Office of
Thrift Supervision, or his or her designee (the "Director"),
at the time the Federal Deposit Insurance Corporation or
Resolution Trust Corporation enters into an agreement to
provide assistance to or on behalf of Employer under the
authority contained in Section 13(c) of the Federal Deposit
Insurance Act; or (ii) by the Director at the time the
Director approves a supervisory merger to resolve problems
related to operation of Employer or when Employer is
determined by the Director to be in an unsafe and unsound
condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
IN WITNESS WHEREOF, the parties have caused this First Amendment to
Employment Agreement to be duly executed as of the 1st day of March, 1993.
HOME FEDERAL SAVINGS BANK
BY /s/ John K. Keach, Sr.
--------------------------
John K. Keach, Sr., Chairman
of the Board
"Employer"
/s/ John K. Keach, Jr
--------------------------
John K. Keach, Jr
"Employee"
-3-
<PAGE>
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (the "Employment Agreement")
dated as of October 15, 1987, as amended, by and between Home Federal Savings
Bank, a federal savings bank ("Employer"), John K. Keach, Jr., a resident of
Bartholomew County, Indiana ("Employee"), and Home Federal Bancorp, an Indiana
corporation (the "Holding Company").
W I T N E S S E T H:
WHEREAS, the parties to the Employment Agreement desire to add the
Holding Company as a party to such agreement to help assure that the terms shall
be enforceable as contemplated by the Employment Agreement;
WHEREAS, the Holding Company agrees to guarantee the obligations of
Employer under the Employment Agreement in order to assure to Employee the
benefits of the Employment Agreement contemplated at the time it was entered
into.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree that the Employment Agreement shall
be, and it hereby is, amended as follows:
A new section 23 shall be added to read in its entirety as follows:
23. Guarantee by Home Federal Bancorp. Home Federal Bancorp,
an Indiana corporation and the sole shareholder of Employer, agrees
that if it shall be determined for any reason that any obligation on
the part of Employer to continue to make any payments due under this
Agreement to Employee or to satisfy any other obligation under this
Agreement for the benefit of Employee is unenforceable for any reason,
Home Federal Bancorp agrees to honor the terms of this Agreement and
continue to make any such payments due hereunder to Employee or to
satisfy any such obligation pursuant to the terms of this Agreement, as
though it were the Employer hereunder.
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the 22nd day of November, 1994.
HOME FEDERAL SAVINGS BANK
BY /s/ John K. Keach, Sr.
--------------------------
John K. Keach, Sr., Chairman
"EMPLOYER"
HOME FEDERAL BANCORP
BY /s/ John K. Keach, Sr.
--------------------------
John K. Keach, Sr., Chairman
"HOLDING COMPANY"
/s/ John K. Keach, Jr
--------------------------
John K. Keach, Jr
"EMPLOYEE"
4
<PAGE>
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
This THIRD AMENDMENT TO EMPLOYMENT AGREEMENT is by and among Home
Federal Savings Bank, a federal savings bank ("Employer"), John K. Keach, Jr., a
resident of Bartholomew County, Indiana ("Employee"), and Home Federal Bancorp,
an Indiana corporation (the "Holding Company").
W I T N E S S E T H:
WHEREAS, Employer and Employee entered into an Employment Agreement
dated as of October 15, 1987, as subsequently amended by a First Amendment and
Second Amendment thereto (the "Employment Agreement");
WHEREAS, the parties desire to make certain additional changes to the
Employment Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree that the Employment Agreement shall
be, and it hereby is, amended as follows:
1. Section 8(B) shall be amended to read in its entirety as
follows:
"(B) In the event of termination pursuant to
subsection 7(B) or 7(C), compensation provided for herein
(including Base Compensation) shall continue to be paid, and
Employee shall continue to participate in the employee
benefit, retirement, and compensation plans and other
perquisites as provided in Sections 5 and 6 hereof, through
the date of termination specified in the notice of
termination. Any benefits payable under insurance, health,
retirement and bonus plans as a result of Employee's
participation in such plans through such date shall be paid
when due under those plans. In addition, Employee shall be
entitled to continue to receive from Employer his Base
Compensation at the rates in effect at the time of termination
(1) for three additional 12-month periods if the termination
follows a Change of Control or (2) for the remaining Term of
the Agreement if the termination does not follow a Change of
Control. In addition, during such periods, Employer will
maintain in full force and effect for the continued benefit of
Employee each employee welfare benefit plan and each employee
pension benefit plan (as such terms are defined in the
Employee Retirement Income Security Act of 1974, as amended)
in which Employee was entitled to participate immediately
prior to the date of his termination, unless an essentially
equivalent and no less favorable benefit is provided by a
subsequent employer of Employee. If the terms of any employee
welfare benefit plan or employee pension benefit plan of
Employer do not permit continued participation by Employee,
Employer will arrange to provide to Employee a benefit
substantially similar to, and no less favorable than, the
benefit he was
5
<PAGE>
entitled to receive under such plan at the end of the period
of coverage. For purposes of this Agreement, a "Change of
Control" shall mean an acquisition of "control" of the Holding
Company or of Employer within the meaning of 12 C.F.R.
ss.574.4(a) (other than a change of control resulting from a
trustee or other fiduciary holding shares of Common Stock
under an employee benefit plan of the Holding Company or any
of its subsidiaries)."
2. The following proviso shall be added to the end of Section 14
of the Employment Agreement:
"In the event the Employee is entitled to receive payments
following a Change in Control under his Supplemental
Retirement Agreement with the Employer which payments,
together with the amounts payable to the Employee under this
Agreement would result in a tax under ss.4999 of the Code, the
amounts payable to the Employee pursuant to this Agreement
shall be reduced first, before any reduction is made in
payments under the Supplemental Retirement Agreement, to the
extent necessary to avoid a tax imposed under ss.4999 of the
Code."
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the 30th day of April, 1996.
HOME FEDERAL SAVINGS BANK
By:/s/ Lawrence E. Welker
-------------------------
Lawrence E. Welker, Executive Vice
President and Chief Financial Officer
"EMPLOYER"
HOME FEDERAL BANCORP
By:/s/ Lawrence E. Welker
-------------------------
Lawrence E. Welker, Executive Vice
President and Chief Financial Officer
"HOLDING COMPANY"
/s/ John K. Keach, Jr.
----------------------
John K. Keach, Jr.
"EMPLOYEE"
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "Employment Agreement")
dated as of February 18, 1992, by and between Home Federal Savings Bank, a
federal savings bank ("Employer"), Gerald L. Armstrong, a resident of Jackson
County, Indiana ("Employee"), and Home Federal Bancorp, an Indiana corporation
(the "Holding Company").
W I T N E S S E T H:
WHEREAS, the parties to the Employment Agreement desire to add the
Holding Company as a party to such agreement to help assure that the terms shall
be enforceable as contemplated by the Employment Agreement;
WHEREAS, the Holding Company agrees to guarantee the obligations of
Employer under the Employment Agreement in order to assure to Employee the
benefits of the Employment Agreement contemplated at the time it was entered
into.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree that the Employment Agreement shall
be, and it hereby is, amended as follows:
A new section 24 shall be added to read in its entirety as follows:
24. Guarantee by Home Federal Bancorp. Home Federal Bancorp,
an Indiana corporation and the sole shareholder of Employer, agrees
that if it shall be determined for any reason that any obligation on
the part of Employer to continue to make any payments due under this
Agreement to Employee or to satisfy any other obligation under this
Agreement for the benefit of Employee is unenforceable for any reason,
Home Federal Bancorp agrees to honor the terms of this Agreement and
continue to make any such payments due hereunder to Employee or to
satisfy any such obligation pursuant to the terms of this Agreement, as
though it were the Employer hereunder.
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the 22nd day of November, 1994.
HOME FEDERAL SAVINGS BANK
BY /s/ John K. Keach, Sr.
--------------------------
John K. Keach, Sr., Chairman
of the Board
"Employer"
HOME FEDERAL BANCORP
BY /s/ John K. Keach, Sr.
--------------------------
John K. Keach, Sr., Chairman
"HOLDING COMPANY"
/s/ Gerald L. Armstrong
--------------------------
Gerald L. Armstrong
"Employee"
1
<PAGE>
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This SECOND AMENDMENT TO EMPLOYMENT AGREEMENT is by and among Home
Federal Savings Bank, a federal savings bank ("Employer"), Gerald L. Armstrong,
a resident of Jackson County, Indiana ("Employee"), and Home Federal Bancorp, an
Indiana corporation (the "Holding Company").
W I T N E S S E T H:
WHEREAS, Employer and Employee entered into an Employment Agreement
dated as of February 18, 1992, as subsequently amended by a First Amendment
thereto (the "Employment Agreement");
WHEREAS, the parties desire to make certain additional changes to the
Employment Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree that the Employment Agreement shall
be, and it hereby is, amended as follows:
1. Section 8(B) shall be amended to read in its entirety as
follows:
"(B) In the event of termination pursuant to
subsection 7(B) or 7(C), compensation provided for herein
(including Base Compensation) shall continue to be paid, and
Employee shall continue to participate in the employee
benefit, retirement, and compensation plans and other
perquisites as provided in Sections 5 and 6 hereof, through
the date of termination specified in the notice of
termination. Any benefits payable under insurance, health,
retirement and bonus plans as a result of Employee's
participation in such plans through such date shall be paid
when due under those plans. In addition, Employee shall be
entitled to continue to receive from Employer his Base
Compensation at the rates in effect at the time of termination
(1) for three additional 12-month periods if the termination
follows a Change of Control or (2) for the remaining Term of
the Agreement if the termination does not follow a Change of
Control. In addition, during such periods, Employer will
maintain in full force and effect for the continued benefit of
Employee each employee welfare benefit plan and each employee
pension benefit plan (as such terms are defined in the
Employee Retirement Income Security Act of 1974, as amended)
in which Employee was entitled to participate immediately
prior to the date of his termination, unless an essentially
equivalent and no less favorable benefit is provided by a
subsequent employer of Employee. If the terms of any employee
welfare benefit plan or employee pension benefit plan of
Employer do not permit continued participation by Employee,
Employer will arrange to provide to Employee a benefit
substantially similar to, and no less favorable than, the
benefit he was
2
<PAGE>
entitled to receive under such plan at the end of the period
of coverage. For purposes of this Agreement, a "Change of
Control" shall mean an acquisition of "control" of the Holding
Company or of Employer within the meaning of 12 C.F.R.
ss.574.4(a) (other than a change of control resulting from a
trustee or other fiduciary holding shares of Common Stock
under an employee benefit plan of the Holding Company or any
of its subsidiaries)."
2. The following proviso shall be added to the end of Section 14
of the Employment Agreement:
"In the event the Employee is entitled to receive payments
following a Change in Control under his Supplemental
Retirement Agreement with the Employer which payments,
together with the amounts payable to the Employee under this
Agreement would result in a tax under ss.4999 of the Code, the
amounts payable to the Employee pursuant to this Agreement
shall be reduced first, before any reduction is made in
payments under the Supplemental Retirement Agreement, to the
extent necessary to avoid a tax imposed under ss.4999 of the
Code."
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the 30th day of April, 1996.
HOME FEDERAL SAVINGS BANK
BY /s/ John K. Keach, Jr.
--------------------------
John K. Keach, Jr., President
and Chief Executive Officer
"EMPLOYER"
HOME FEDERAL BANCORP
BY /s/ John K. Keach, Jr.
--------------------------
John K. Keach, Jr., President
and Chief Executive Officer
"HOLDING COMPANY"
/s/ Gerald L. Armstrong
--------------------------
Gerald L. Armstrong
"EMPLOYEE"
SECOND
AMENDMENT
TO
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENTS
OF
JOHN KEACH, JR.
This Second Amendment to the Executive Supplemental Retirement Income Agreement
between Home Federal Savings Bank and John Keach, Jr., dated February 18, 1993
for the purpose of inserting Section 10. 11 into the Agreement with the
following:
10.11 No Effect on Employment Rights. Nothing contained herein will confer
upon the Executive the right to be retained in the service of the
Bank nor limit the right of the Bank to discharge or otherwise deal
with Executive without regard to the existence of the Agreement.
Pursuant to 12 C.F.R. ss. 563.39(b), the following conditions shall
apply to this Agreement:
(1) The Bank's Board of Directors may terminate the Executive at any time,
but any termination by the Bank's Board of Directors other than
termination for Cause, shall not prejudice the Executive's vested right
to compensation or other benefits under the contract. As provided in
Section 8.2, if the Executive is terminated for Cause pursuant to the
Bylaws of the Bank, his benefits under this Agreement shall be
forfeited. He shall have no right to receive additional compensation or
other benefits for any period after termination for Cause.
(2) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1) the Bank's obligations under the
contract shall be suspended as of the date of termination of service
unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Executive all
or part of the compensation withheld while its contract obligations
were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(3) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) or (g)(1), all non-vested obligations of the Bank
under the contract shall terminate as of the effective date of the
order. As provided in Section 8. 1, the Executive shall be entitled to
an amount equal to the Executive's Vested Accrued Benefit as of the
date of termination. Payment of the Vested Accrued Benefit shall
commence within thirty (30) days of his termination in the event he is
terminated pursuant to such order.
(4) If the Bank is in default (as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act), all non-vested obligations under the contract
shall terminate as of the date of default.
(5) AU non-vested obligations under the contract shall be terminated, except
to the extent determined that continuation of the contract is necessary
for the continued operation of the Bank:
(i) by the Executive or his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the
authority contained in ss. 13(c) of the Federal Deposit Insurance Act;
or
(ii) by the Executive or his designee, at the time the Executive or his
designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to
be in an unsafe or unsound condition.
<PAGE>
Any rights of the party that have already vested (i.e., the Executive's Vested
Accrued Benefit), however, shall not be affected by such action.
IN WITNESS WHEREOF, the parties have executed this Amendment, in triplicate, the
day and year written here above.
Date : February 19, 1993 /s/ John Keach, Jr.
- - ------------------------ -------------------
John Keach, Jr.
HOME FEDERAL SAVINGS BANK
COLUMBUS, INDIANA
Date : February 19, 1993 By: /s/ John Keach, Sr.
- - ------------------------- ----------------------
John Keach, Sr., Chairman
<PAGE>
THIRD AMENDMENT TO
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
OF JOHN K. KEACH, JR.
Pursuant to rights reserved under Section 12.1 of the Executive
Supplemental Retirement Income Agreement (the "Agreement") initially entered
into May 22, 1991, by and between Home Federal Savings Bank (the "Bank") and
John K. Keach, Jr. (the "Executive"), the Bank and the Executive amend the
Agreement, effective as of July 1, 1996, as follows:
1. Section 2.4 is amended to provide, in its entirety, as follows:
2.4 Death Following Voluntary Termination. With exceptions for
Early Retirement or Disability, if Executive dies following voluntary
termination of employment and if his termination of employment occurs
prior to Normal Retirement Date, Executive's Beneficiary shall, within
thirty (30) days of Executive's death, be paid a lump sum death benefit
equal to Two Hundred Fifty Thousand ($250,000) Dollars. In the event
Executive's termination of employment results from Disability, whether
or not Executive's termination was voluntary, payments shall be made
according to Subsection 3.3. If Executive's death follows his election
to take Early Retirement, Subsection 2.2 of this Agreement shall apply.
2. Section 8.3 is amended to provide, in its entirety, as follows:
8.3 Termination Following Change in Control. If Executive's
termination of employment is related to a Change in Control, Executive
shall be entitled to receive his Supplemental Retirement Income Benefit
in a lump sum, discounted to present value using a discount rate to be
determined by multiplying the Bank's Cost of Funds by a factor equal to
one (1) minus the Bank's Tax Rate, which single lump sum payment shall
be made within thirty (30) days of Executive's termination. (A
termination of employment shall be considered related to a Change in
Control if, at any time during the 36-month period following said
Change in Control, the employment of the Executive is terminated by the
Bank or if, at any time during such period, the Executive is demoted or
undergoes a material change in his title, position, duties or
responsibilities, or has a material reduction in his compensation,
including fringe benefits, and the Executive terminates employment with
the Bank.) Should Executive die after being terminated following a
Change in Control, but prior to beginning to receive retirement
benefits, his Beneficiary shall be entitled to receive the Survivor's
Benefit, payment of which shall commence within thirty (30) days
following Executive's death. It is not the intent of this Agreement to
have the Executive taxed as a result of payments made pursuant to a
Change in Control, under Internal Revenue Code Section 4999. In the
event Executive is entitled to receive payments following a Change in
Control, pursuant to any other agreements in effect between Executive
and Bank at the date of such Change in Control and unless the other
agreements provide otherwise, the payments under such other agreements
shall
-1-
<PAGE>
be reduced first, but only to the extent necessary to avoid the tax
imposed under Code Section 4999, and, if the Code Section 4999 limits
are still exceeded, payments under this Agreement shall be reduced but
again only to the extent necessary to avoid the tax imposed under Code
Section 4999.
3. A new Section 8.4 is amended to provide, in its entirety, as
follows:
8.4 Deferral of Payment. Notwithstanding anything contained in
this Agreement to the contrary, the Bank, in its sole discretion, may
(but is not required to) defer the payment of all or a portion of any
amounts payable under this Agreement but only to the extent necessary
to preserve the federal income tax deductibility of the cash payment of
the payments under Code Section 162(m); provided, however, that if the
Bank defers payment, the amount of any deferred payment shall begin to
accrue interest at the Current Interest Rate (as defined below)
beginning on the first calendar day of the calendar year immediately
following the calendar year during which the payment would have
otherwise been made but for the deferral. Payments may not be deferred
beyond the first calendar year or years in which the payment would be
deductible in full by the Bank for federal income tax purposes under
Code Section 162(m). The term "Current Interest Rate" shall change each
January 1 and shall be equal to the Prime Rate as published in The Wall
Street Journal on the first business day following such January 1.
4. A new Section 10.12 is added to the Agreement to provide in
its entirety, as follows:
10.12 Litigation Expenses. Any legal expenses incurred by the
Executive or his Beneficiary relating to the enforcement or
enforceability of any benefit obligations hereunder shall be paid or
reimbursed by the Bank to the extent permitted by law; provided,
however, that except as provided below, the maximum aggregate payment
and reimbursement of legal expenses under this Section 10.12 with
respect to the Executive or his Beneficiary shall not exceed Ten
Thousand Dollars ($10,000.00); provided, further, that this Ten
Thousand Dollar ($10,000.00) limitation shall be reduced by the amount
of any legal expenses incurred by the Executive or his Beneficiary
which were paid or reimbursed by the Bank under any other plan or
arrangement entered into by the Bank and Executive. Notwithstanding
anything contained in this paragraph 10.12 to the contrary, the
Executive or his Beneficiary shall be entitled to payment or
reimbursement of legal expenses in excess of Ten Thousand Dollars
($10,000.00) if the expenses were incurred as a result of a dispute
under this Agreement in which the Executive or his Beneficiary obtains
a final judgment in his favor from a court of competent jurisdiction or
his claim is settled by the Bank prior to the rendering of a judgment
by such a court.
This Third Amendment has been executed this 27th day of February, 1998
to be effective as of July 1, 1996.
HOME FEDERAL SAVINGS BANK
By:/s/ Lawrence E. Welker
-------------------------
Lawrence E. Welker
Its: Executive Vice President
Executive
SECOND
AMENDMENT
TO
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENTS
OF
LAWRENCE WELKER
This Second Amendment to the Executive Supplemental Retirement Income Agreement
between Home Federal Savings Bank and Lawrence Welker, dated February 18, 1993
for the purpose of inserting Section 10. 11 into the Agreement with the
following:
10.11 No Effect on Employment Rights. Nothing contained herein will confer
upon the Executive the right to be retained in the service of the
Bank nor limit the right of the Bank to discharge or otherwise deal
with Executive without regard to the existence of the Agreement.
Pursuant to 12 C.F.R. ss. 563.39(b), the following conditions shall
apply to this Agreement:
(1) The Bank's Board of Directors may terminate the Executive at any time,
but any termination by the Bank's Board of Directors other than
termination for Cause, shall not prejudice the Executive's vested right
to compensation or other benefits under the contract. As provided in
Section 8.2, if the Executive is terminated for Cause pursuant to the
Bylaws of the Bank, his benefits under this Agreement shall be
forfeited. He shall have no right to receive additional compensation or
other benefits for any period after termination for Cause.
(2) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1) the Bank's obligations under the
contract shall be suspended as of the date of termination of service
unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Executive all
or part of the compensation withheld while its contract obligations
were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(3) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) or (g)(1), all non-vested obligations of the Bank
under the contract shall terminate as of the effective date of the
order. As provided in Section 8. 1, the Executive shall be entitled to
an amount equal to the Executive's Vested Accrued Benefit as of the
date of termination. Payment of the Vested Accrued Benefit shall
commence within thirty (30) days of his termination in the event he is
terminated pursuant to such order.
(4) If the Bank is in default (as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act), all non-vested obligations under the contract
shall terminate as of the date of default.
(5) AU non-vested obligations under the contract shall be terminated, except
to the extent determined that continuation of the contract is necessary
for the continued operation of the Bank:
(i) by the Executive or his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the
authority contained in ss. 13(c) of the Federal Deposit Insurance Act;
or
(ii) by the Executive or his designee, at the time the Executive or his
designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to
be in an unsafe or unsound condition.
<PAGE>
Any rights of the party that have already vested (i.e., the Executive's Vested
Accrued Benefit), however, shall not be affected by such action.
IN WITNESS WHEREOF, the parties have executed this Amendment, in triplicate, the
day and year written here above.
Date : February 18, 1993 /s/ Lawrence Welker
- - ------------------------ -------------------
Lawrence Welker
HOME FEDERAL SAVINGS BANK
COLUMBUS, INDIANA
Date : February 18, 1993 By: /s/ John Keach, Sr.
- - ------------------------- ----------------------
John Keach, Sr., Chairman
<PAGE>
THIRD AMENDMENT TO
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
OF Lawrence E. Welker
Pursuant to rights reserved under Section 12.1 of the Executive
Supplemental Retirement Income Agreement (the "Agreement") initially entered
into May 22, 1991, by and between Home Federal Savings Bank (the "Bank") and
Lawrence E. Welker (the "Executive"), the Bank and the Executive amend the
Agreement, effective as of July 1, 1996, as follows:
1. Section 2.4 is amended to provide, in its entirety, as follows:
2.4 Death Following Voluntary Termination. With exceptions for
Early Retirement or Disability, if Executive dies following voluntary
termination of employment and if his termination of employment occurs
prior to Normal Retirement Date, Executive's Beneficiary shall, within
thirty (30) days of Executive's death, be paid a lump sum death benefit
equal to Two Hundred Fifty Thousand ($250,000) Dollars. In the event
Executive's termination of employment results from Disability, whether
or not Executive's termination was voluntary, payments shall be made
according to Subsection 3.3. If Executive's death follows his election
to take Early Retirement, Subsection 2.2 of this Agreement shall apply.
2. Section 8.3 is amended to provide, in its entirety, as follows:
8.3 Termination Following Change in Control. If Executive's
termination of employment is related to a Change in Control, Executive
shall be entitled to receive his Supplemental Retirement Income Benefit
in a lump sum, discounted to present value using a discount rate to be
determined by multiplying the Bank's Cost of Funds by a factor equal to
one (1) minus the Bank's Tax Rate, which single lump sum payment shall
be made within thirty (30) days of Executive's termination. (A
termination of employment shall be considered related to a Change in
Control if, at any time during the 36-month period following said
Change in Control, the employment of the Executive is terminated by the
Bank or if, at any time during such period, the Executive is demoted or
undergoes a material change in his title, position, duties or
responsibilities, or has a material reduction in his compensation,
including fringe benefits, and the Executive terminates employment with
the Bank.) Should Executive die after being terminated following a
Change in Control, but prior to beginning to receive retirement
benefits, his Beneficiary shall be entitled to receive the Survivor's
Benefit, payment of which shall commence within thirty (30) days
following Executive's death. It is not the intent of this Agreement to
have the Executive taxed as a result of payments made pursuant to a
Change in Control, under Internal Revenue Code Section 4999. In the
event Executive is entitled to receive payments following a Change in
Control, pursuant to any other agreements in effect between Executive
and Bank at the date of such Change in Control and unless the other
agreements provide otherwise, the payments under such other agreements
shall
-1-
<PAGE>
be reduced first, but only to the extent necessary to avoid the tax
imposed under Code Section 4999, and, if the Code Section 4999 limits
are still exceeded, payments under this Agreement shall be reduced but
again only to the extent necessary to avoid the tax imposed under Code
Section 4999.
3. A new Section 8.4 is amended to provide, in its entirety, as
follows:
8.4 Deferral of Payment. Notwithstanding anything contained in
this Agreement to the contrary, the Bank, in its sole discretion, may
(but is not required to) defer the payment of all or a portion of any
amounts payable under this Agreement but only to the extent necessary
to preserve the federal income tax deductibility of the cash payment of
the payments under Code Section 162(m); provided, however, that if the
Bank defers payment, the amount of any deferred payment shall begin to
accrue interest at the Current Interest Rate (as defined below)
beginning on the first calendar day of the calendar year immediately
following the calendar year during which the payment would have
otherwise been made but for the deferral. Payments may not be deferred
beyond the first calendar year or years in which the payment would be
deductible in full by the Bank for federal income tax purposes under
Code Section 162(m). The term "Current Interest Rate" shall change each
January 1 and shall be equal to the Prime Rate as published in The Wall
Street Journal on the first business day following such January 1.
4. A new Section 10.12 is added to the Agreement to provide in
its entirety, as follows:
10.12 Litigation Expenses. Any legal expenses incurred by the
Executive or his Beneficiary relating to the enforcement or
enforceability of any benefit obligations hereunder shall be paid or
reimbursed by the Bank to the extent permitted by law; provided,
however, that except as provided below, the maximum aggregate payment
and reimbursement of legal expenses under this Section 10.12 with
respect to the Executive or his Beneficiary shall not exceed Ten
Thousand Dollars ($10,000.00); provided, further, that this Ten
Thousand Dollar ($10,000.00) limitation shall be reduced by the amount
of any legal expenses incurred by the Executive or his Beneficiary
which were paid or reimbursed by the Bank under any other plan or
arrangement entered into by the Bank and Executive. Notwithstanding
anything contained in this paragraph 10.12 to the contrary, the
Executive or his Beneficiary shall be entitled to payment or
reimbursement of legal expenses in excess of Ten Thousand Dollars
($10,000.00) if the expenses were incurred as a result of a dispute
under this Agreement in which the Executive or his Beneficiary obtains
a final judgment in his favor from a court of competent jurisdiction or
his claim is settled by the Bank prior to the rendering of a judgment
by such a court.
This Third Amendment has been executed this 27th day of February, 1998
to be effective as of July 1, 1996.
HOME FEDERAL SAVINGS BANK
By:/s/ John K. Keach, Jr.
-------------------------
John K. Keach, Jr.
Its: President
Executive
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
This Agreement, made and entered into this 22nd dav of May, 1991, by
and between HOME FEDERAL SAVINGS BANK, Columbus, Indiana (the "Bank"), a
federally chartered banking corporation organized and existing under the laws of
the State of Indiana, and ELAINE POLLERT (the "Executive"), a key employee and
executive.
WITNESSETH:
WHEREAS, the Executive is employed by the Bank; and
WHEREAS, the Bank recognizes the valuable services heretofore performed for it
by Executive and wishes to encourage continued employment; and
WHEREAS, the Executive wishes to be assured that she will be entitled
to a certain amount of additional compensation for some definite period of time
from and after her retirement from active service with the Bank or other
termination of her employment and wishes to provide her beneficiary with
benefits from and after her death; and
WHEREAS , the parties hereto wish to provide the terms and conditions
upon which the Bank shall pay such additional compensation to Executive after
her retirement or other termination of her employment and/or death benefits to
her beneficiary after her death; and
WHEREAS, the parties hereto intend that this Agreement be considered
an unfunded arrangement, maintained primarily to provide supplemental retirement
income for the Executive, a member of a select group of management or highly
compensated employees of the Bank, for purposes of the Employee Retirement
Income Security Act of 1974, as amended; and
WHEREAS, the Bank has adopted this Executive Supplemental
Retirement Income Agreement which controls all issues relating to the
Supplemental Retirement Income Benefit as described herein;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
herein contained, the parties hereto agree as follows:
SECTION I
DEFINITIONS
When used herein, the following words shall have the meanings below unless the
context clearly indicates otherwise:
1.1 "Accrued Benefit" means that portion of the Supplemental Retirement
Income Benefit which is required to be expensed and accrued under
generally accepted accounting principles by any appropriate
methodology which the Board of Directors may require in the
exercise of its sole discretion. Such Accrued Benefit shall be paid
to Executive in one hundred eighty (180) equal monthly
installments. The interest factor used to annuitize the Accrued
Benefit shall be equal to the average Cost of Funds of the Bank for
the prior twelve (12) month period.
1.2 "Act" means the Employee Retirement Income Security Act of 1974,
as amended from time to time.
1.3 "Bank" means HOME FEDERAL SAVINGS BANK and any successor thereto.
1.4 "Beneficiary" means the person or persons designated as Beneficiary
in writing to the Bank to whom the share of a deceased Executive's
account is payable. If no Beneficiary is so designated, then the
Executive's Spouse, if living, will be deemed the Beneficiary. If
the Executive's Spouse is not living, then the Children of the
Executive will be deemed Beneficiaries and will take on a per
stirpes basis. If there are no Children, then the Estate of the
Executive will be deemed the Beneficiary.
1.5 "Cause" means failure to perform the duties incident to her
position with the Bank in such a way as to be in reasonable
conformity with industry standards. This would include negligent
performance of said duties, as well as willful misconduct,
willful malfeasance or gross negligence.
1.6 "Change in Control" means that the Bank is merged with or
acquired by another corporation or entity, or undergoes any other
organic change in its structure. Change in Control shall also be
deemed to have occurred if.-
(i) any "person', including a "group" as determined in accordance with
Section 13(d)(3) of the Securities Exchange Act of 1934 (the
"Exchange Act"), is or becomes the beneficial owner, directly or
indirectly, of securities of the Bank representing 20% or more of
the combined voting power of the Bank's then outstanding
securities; or
(ii) as a result of, or in connection with, any tender offer or exchange
offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions
(a "Transaction"), the persons who were directors of the Bank before
the Transaction shall cease to constitute a majority of the Board of
Directors of the Bank or any successor to the Bank; or
(iii) the Bank is merged or consolidated with another corporation or entity
and as a result of the merger or consolidation less than 80% of the
outstanding voting securities of the surviving or resulting
corporation shall then be owned in the aggregate by the former
stockholders of the Bank, other than (1) affiliates within the
meaning of the Exchange Act or (2) any party to the merger or
consolidation; or
(iv) a tender offer or exchange offer is made and consummated for the
ownership of securities of the Bank representing 20% or more of the
combined voting power of the Bank's then outstanding voting
securities; or
(V) the Bank transfers substantially all of its assets to another
corporation which is not a wholly-owned subsidiary of the Bank.
1.7 "Children' means the Executive's children, both natural and adopted.
1.8 'Code" means the Internal Revenue Code of 1986 as amended from time
to time.
1.9 "Cost of Funds" shall be equal to total interest expense,
divided by the monthly weighted average of total interest-bearing
liabilities. The time frame for measuring Cost of Funds shall be
the last twelve (12) complete months immediately prior to the
event which triggered the need for measurement.
1.10 "Early Retirement Date" means retirement from service, upon meeting
certain conditions as specified in this Agreement, which is
effective prior to the Normal Retirement Date.
1.11 "Effective Date" shall be the date of execution of this agreement.
1.12 "Estate" means the Estate of the Executive.
1.13 "Normal Retirement Date' means the first day of the month
coincident with or next following the Executive's sixty-fifth
(65th) birthday.
1.14 "Permanently and Totally Disabled" means Executive has, for at
least six (6) months, been unable to perform the services incident
to her position with the Bank as a result of accidental bodily
injury or sickness and that the status is likely to continue for an
indefinite period, as reasonably determined subsequent to the
expiration of the six (6) month period by a duly licensed physician
selected in good faith by the Bank.
1.15 "Postponed Retirement Date" means the first day of the month
coincident with or next following the Executive's termination of
employment with the Bank after her Normal Retirement Date.
1.16 "Spouse" means the individual to whom the Executive is legally
married at the time of the Executive's death.
1.17 "Suicide" means the act of intentionally killing oneself.
1.18 "Supplemental Retirement Income Benefit" means an annual amount
equal to an annualized benefit of Forty-Four Thousand Six Hundred
Sixty-Four ($44,664) Dollars. Payments shall be made in equal
monthly installments for one hundred eighty (180) months.
1.19 "Survivor's Benefit" means monthly level payments totalling
Forty-Four Thousand Six Hundred Sixty-Four ($44,664) Dollars
annually for fifteen (15) years.
1.20 "Vested" means the non-forfeitable portion of the benefit to
which the Executive is entitled.
1.21 "Vested Accrued Benefit" means that portion of the Executive's
Accrued Benefit in which she is vested. It is computed by
multiplying the Accrued Benefit by the vesting percentage specified
in Subsection 3.5.
1.22 "Years of Service" means the total number of complete calendar
years of continuous employment (including authorized leaves of
absence), beginning from the date of execution of this Agreement.
SECTION II
PRE-RETEREMEENT AND POST-RETIREMENT DEATH BENEFITS
2.1 Death Prior to Termination of Employment. In the event of
Executive's death prior to termination of employment with the
Bank, while covered by the provisions of this Agreement,
Executive's Beneficiary shall be paid the Survivor's Benefit.
Payments shall commence within thirty (30) days after the date of
death of Executive.
2.2 Death During Receipt of Benefit. In the event of death of
Executive while receiving monthly benefits under this Agreement,
then Executive's Beneficiary shall be entitled to receive a death
benefit which shall be payable for the balance of the one hundred
eighty (I 80) month period, in an amount equal to the benefit
payments made to Executive prior to her death.
2.3 Death by Reason of Suicide. In the event Executive dies by
reason of suicide at any time prior to May 1, 1993, the Bank
shall be under no obligation to provide any benefits to the
Executive's Beneficiary.
2.4 Additional Death Benefit - Burial Expenses. In addition to the
above-described death benefits, upon her death, Executive's
Beneficiary shall be entitled to receive a onetime lump sum death
benefit in the amount of Fifteen Thousand ($15,000) Dollars.
SECTION III
SUPPLEMENTAL RETIREMENT INCOME BENEFIT
AND DISABILITY BENEFIT
3. 1 Normal Retirement Benefit. At Normal Retirement Date, if
Executive is still covered by this Agreement, the Bank shall
commence payments of the Supplemental Retirement Income Benefit.
Subject to the provisions and limitations of this Agreement, the
Bank shall pay to the Executive annual benefits of Forty-Four
Thousand Six Hundred Sixty-Four ($44,664) Dollars, payable in one
hundred eighty (180) equal monthly installments. Such payments
shall commence the first day of the month next following the
Executive's retirement date and shall be payable monthly
thereafter until all payments have been made.
3.2 Early Retirement Benefit. Executive shall have the elective right
to receive early retirement benefits, provided she shall have
attained the age of sixty (60) and completed five (5) Years of
Service. Approval of the Board of Directors of the Bank is required
as a condition precedent to receiving early retirement benefits.
Upon Executive's election to receive such benefits and upon
obtaining the requisite Board approval, Executive shall be entitled
to receive the Supplemental Retirement Income Benefit specified in
Subsection 3. 1, reduced by 4.5 % per year for each year that early
retirement precedes Normal Retirement Date and discounted to
present value by an interest factor equal to the Bank's average
Cost of Funds for the twelve (12) month period prior to Early
Retirement Date. Payment of this early retirement benefit shall
commence within thirty (30) days after Executive's Early Retirement
Date.
Absent Board approval, Executive early retirement benefit shall be
limited to her Vested Accrued Benefit at the date Executive elects
early retirement. Early retirement benefits payments shall commence
within thirty (30) days after Executive's Early Retirement Date.
3.3 Postponed Retirement Benefit. The postponed retirement benefit of
Executive shall be the Supplemental Retirement Income Benefit as
set forth in Subsection 3. 1. However, the Board of Directors, in
the exercise of its sole discretion, may elect to increase
benefits if retirement is postponed past the Normal Retirement
Date. The postponed retirement benefit shall not be paid to
Executive until the Postponed Retirement Date.
3.4 Disability. If Executive becomes Permanently and Totally Disabled
prior to reaching her retirement, Executive shall be entitled to
her Accrued Benefit at the time of disability. Payments shall
begin within thirty (30) days after Executive becomes Permanently
and Totally Disabled. In the event Executive dies while receiving
payments pursuant to this Subsection, or after becoming eligible
for such payments but before the actual commencement of such
payments, her Beneficiary shall be entitled to receive monthly
payments in an annualized amount of Forty-Four Thousand Six
Hundred Sixty-Four ($44,664) Dollars for a period of one hundred
eighty (180) months, reduced by the number of months disability
payments were made. At Executive's death, to the extent the
combined disability benefits received and death benefits received
or to be received under this Subsection are less than Six Hundred
Sixty-Nine Thousand Nine Hundred Sixty ($669,960) Dollars,
Executive's Beneficiary shall be entitled to a lump sum payment
to make up the difference.
3.5 Vesting. The benefits provided by the Bank to the Executive
under this Agreement shall vest in the Executive according to the
following schedule:
Percentage of
Total Benefit
Years of Service Vested
1 year 20%
2 years 40%
3 years 60%
4 years 80%
5 years 100%
SECTION IV
EXECUTIVE'S RIGHT TO ASSETS
The rights of the Executive, any Beneficiary of the Executive, or any other
person claiming through the Executive under this Agreement, shall be solely
those of an unsecured general creditor of the Bank. The Executive, the
Beneficiary of the Executive, or any other person claiming through the
Executive, shall only have the right to receive from the Bank those payments as
specified under this Agreement. The Executive agrees that he, her Beneficiary,
or any other person claiming through him shall have no rights or interests
whatsoever in any asset of the Bank, including any insurance policies or
contracts which the Bank may possess or obtain to informally fund this
Agreement. Any asset used or acquired by the Bank in connection with the
liabilities it has assumed under this Agreement, except as expressly provided,
shall not be deemed to be held under any trust for the benefit of the Executive
or her Beneficiaries, nor shall it be considered security for the performance of
the obligations of the Bank. It shall be, and remain, a general, unpledged, and
unrestricted asset of the Bank.
SECTION V
RESTRICTIONS UPON FUNDING
Bank shall have no obligation to set aside, k or entrust any fund or money with
which to pay its obligations under this Agreement. The Executive, her
Beneficiaries or any successor in interest to him shall be and remain simply a
general creditor of the Bank in the same manner as any other creditor having a
general claim for matured and unpaid compensation. The Bank reserves the
absolute right, at its sole discretion, to either fund the obligations
undertaken by this Agreement or to refrain from funding the same and to
determine the extent, nature, and method of such informal funding. Should the
Bank elect to fund this Agreement, in whole or in part, through the purchase of
life insurance, mutual funds, disability policies or annuities, the Bank
reserves the absolute right, in its sole discretion, to terminate such funding
at any time, in whole or in part. At no time shall Executive be deemed to have
any lien nor right, title or interest in or to any specific funding investment
or to any assets of the Bank. If the Bank elects to invest in a life insurance,
disability or annuity policy upon the life of the Executive, then Executive
shall assist the Bank by freely submitting to a physical examination and
supplying such additional information necessary to obtain such insurance or
annuities.
SECTION VI
ACCELERATION OF PAYMENTS
The Bank reserves the right to accelerate the payment of any benefits payable
under this Agreement without the consent of the Executive, her Estate, her
Beneficiaries, or any other person claiming through the Executive. In the event
that the Bank accelerates the payment, the benefit shall be discounted by a rate
equal to the average Cost of Funds of the Bank for the prior twelve (12) month
period.
SECTION VII
ALIENABILITY AND ASSIGNMENT PROHIBTION
Neither Executive nor any Beneficiary under this Agreement shall have any power
or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify
or otherwise encumber in advance any of the benefits payable hereunder, nor
shall any of said benefits be subject to seizure for the payment of any debts,
judgments, alimony or separate maintenance owed by the Executive or her
Beneficiary, nor be transferrable by operation of law in the event of
bankruptcy, insolvency or otherwise. In the event Executive or any Beneficiary
attempts assignment, communication, hypothecation, transfer or disposal of the
benefits hereunder, the Bank's liabilities shall forthwith cease and terminate.
SECTION VIII
TERMINATION OF EMPLOYMENT
8.1 Termination of Service Prior to Retirement Date. If, prior to
Executive's Normal Retirement Date, the Executive voluntarily resigns
or is terminated without Cause by the Bank, the Bank shall pay to the
Executive an amount equal to the Executive's Vested Accrued Benefit
existing at the date of termination. Payment of the Vested Accrued
Benefit shall commence within thirty (30) days after termination of
employment.
8.2 Termination of Service for Cause. Should Executive be terminated for
Cause, her benefits under this Agreement shall be forfeited and this
Agreement shall become null and void.
8.3 Termination Following Change in Control. If Executive's termination of
employment is related to a Change in Control, Executive shall be
entitled to receive her Accrued Benefit, which shall begin within
thirty (30) days of Executive's Termination. (A termination of
employment shall be considered related to a Change in Control if, at
any time during the 36-month period following said Change in Control,
the employment of the Executive is terminated by the Bank or if, at any
time during such period, the Executive is demoted or undergoes a
material change in her title, position, duties or responsibilities, or
has a material reduction in her compensation, including fringe
benefits, and the Executive terminates employment with the Bank.)
Should Executive die while receiving her Accrued Benefit after being
terminated following a Change in Control, her Beneficiary shall be
entitled to receive the Survivor's Benefit for the remainder of the one
hundred eighty (180) month period.
SECTION IX
ACT PROVISIONS
9.1 Named Fiduciary And Administrator. Financial Institution Consulting
Corporation (FICC) or its successor in interest shall be the Named
Fiduciary And Agreement Administrator (the "Administrator") of this
Agreement. As Administrator, FICC shall be responsible for the
management, control and administration of the Agreement as established
herein. It may delegate to others certain aspects of the management and
operation responsibilities of the Agreement including the employment of
advisors and the delegation of ministerial duties to qualified
individuals. Bank shall have the right to replace FICC as Administrator
should Bank become dissatisfied with the services being rendered by
FICC.
9.2 Claims Procedure And Arbitration. In the event that benefits under this
Agreement are not paid to the Executive (or to her Beneficiary in the
case of the Executive's death) and such claimants feel they are
entitled to receive such benefits, then a written claim must be made to
the Bank named above within sixty (60) days from the date payments are
refused. The Bank shall review the written claim and, if the claim is
denied, in whole or in part, it shall provide in writing, within ninety
(90) days of receipt of such claim their specific reasons for such
denial, reference to the provisions of this Agreement upon which the
denial is based and any additional material or information necessary to
perfect the claim. Such written notice shall further indicate the
additional steps to be taken by claimants if a further review of the
claim denial is desired.
If claimants desire a second review, they shall notify the Bank in writing
within sixty (60) days of the first claim denial. Claimants may review the
Agreement or any documents relating thereto and submit any written issues and
comments they may feel appropriate. In its sole discretion, the Bank shall then
review the second claim and provide a written decision within sixty (60) days of
receipt of such claim. This decision shall likewise state the specific reasons
for the decision and shall include reference to specific provisions of the
Agreement upon which the decision is based.
SECTION X
MISCELLANEOUS
10.1 No Employment Contract. This Agreement shall in no way be construed to
create an employment contract between the Bank and the Executive.
Nothing contained herein will confer upon any Executive the right to be
retained in the service of the Bank nor limit the right of the Bank to
discharge or otherwise deal with Executive without regard to the
existence of this Agreement.
10.2 Disclosure. Each Executive shall receive a copy of her Agreement and
the Administrator will make available, upon request, a copy of the
rules and regulations that govern this type of Agreement.
10.3 State Law. The Agreement is established under, and will be construed
according to, the laws of the State of Indiana, to the extent that such
laws are not preempted by the Act and valid regulations published
thereunder.
10.4 Severability. In the event that any of the provisions of this Agreement
or portion thereof, are held to be inoperative or invalid by any court
of competent jurisdiction, then: (1) insofar as is reasonable, effect
will be given to the intent manifested in the provisions held invalid
or inoperative, and (2) the validity and enforceability of the
remaining provisions will not be affected thereby.
10.5 Incapacity of Recipient. In the event Executive is declared incompetent
and a conservator or other person legally charged with the care of her
person or of her Estate is appointed, any benefits under the Agreement
to which such Executive is entitled shall be paid to such conservator
or other person legally charged with the care of her person or her
Estate. Except as provided above in this paragraph, when the Bank's
Board of Directors in its sole discretion, determines that an Executive
is unable to manage her financial affairs, the Board may direct the
Bank to make distributions to any person for the benefit of such
Executive.
10.6 Unclaimed Benefit. Each Executive shall keep the Bank informed of her
current address and the current address of her Beneficiaries. The Bank
shall not be obligated to search for the whereabouts of any person. If
the location of an Executive is not made known to the Bank within three
years after the date on which any payment of the Executive's
Supplemental Retirement Income Benefit may be made, payment may be made
as though the Executive had died at the end of the three-year period.
If, within one additional year after such three-year period has
elapsed, or, within three years after the actual death of the
Executive, the Bank is unable to locate any Beneficiary of the
Executive, then the Bank may fury discharge its obligation by payment
to the Estate.
10.7 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Agreement, neither the Bank, nor any individual
acting as an employee or agent of the Bank or as a member of the Board
of Directors shall be liable to any Executive, former Executive, or any
other person for any claim, loss, liability or expense incurred in
connection with the Agreement.
10.8 Gender. Whenever, in this Agreement, words are used in the masculine or
neuter gender, they shall be read and construed as in the masculine,
feminine or neuter gender, whenever they should so apply.
10.9 Affect on Other Corporate Benefit Agreements. Nothing contained in this
Agreement shall affect the right of the Executive to participate in, or
be covered by, any qualified or non-qualified pension, profit sharing,
group, bonus or other supplemental compensation or fringe benefit
agreement constituting a part of the Bank's existing or future
compensation structure.
10.10 Headings. Headings and sub-headings in this Agreement are
inserted for reference and convenience only and shall not be
deemed a part of this Agreement.
SECTION XI
NON-COMPETITION AFTER NORMAL RETIREMENT
Non-Compete Clause. The Executive expressly agrees that, as consideration for
the agreements of the Bank contained herein and as a condition to the
performance by the Bank of its obligations hereunder, throughout the entire
period beginning with the date of this Agreement and continuing until the final
payment is made to Executive, as provided herein, she will not, without the
prior written consent of the Bank, engage in, become interested, directly or
indirectly, as a sole proprietor, as a partner in a partnership, or as a
substantial shareholder in a corporation, nor become associated with, in the
capacity of an employee, director, officer, principal, agent, trustee or in any
other capacity whatsoever, any enterprise conducted in the trading area of the
business of the Bank which enterprise is, or may deemed to be, competitive with
any business carried on by the Bank as of the date of the termination of the
Executive's employment or her retirement.
11.2 Change in Control. The conditions set forth in Subsection I 1. 1 shall
not be applicable if the Executive is discharged without Cause or if
the Executive is discharged for any reason following a Change in
Control.
11.3 Breach. In the event of any breach by the Executive of the agreements
and covenants contained herein, the Board of Directors of the Bank
shall direct that any unpaid balance of any payments to the Executive
under this Agreement be suspended. and shall thereupon notify the
Executive of such suspensions, in writing. Thereupon, if the Board of
Directors of the Bank shall determine that said breach by the Executive
has continued for a period of one (1) month following, notification of
such suspension, all rights of the Executive and her Beneficiaries
under this Agreement, including rights to further payments hereunder,
shall thereupon terminate.
SECTION XII
AMENDMENT AND TERMINATION
12.1 Amendment or Termination. The Bank intends the Agreement to be
permanent, but reserves the right to amend or terminate the Agreement
when, in the sole opinion of the Bank, such amendment or termination is
advisable. Any such amendment or termination shall be made pursuant to
a resolution of the Board of Directors of the Bank and shall be
effective as of the date of such resolution. No amendment or
termination of the Agreement shall directly or indirectly deprive any
Executive of all or any portion of any Supplemental Retirement Income
Benefit payment or Accrued Benefit payment which has commenced prior to
the effective date of the resolution amending or terminating the
Agreement.
12.2 Termination Benefit. In the case of a termination of this Agreement,
the Executive shall be entitled to her Accrued Benefit as of the
termination date. Payment of an Executive's Accrued Benefit shall not
be dependent upon her continuation of employment with the Bank
following the Agreement termination date, and such Accrued Benefit
shall become payable at the date for commencement of payment of a
Supplemental Retirement Income Benefit.
12.3 Amendment - Reduction. in Benefits. The Board may, in its sole
discretion, elect to amend the Agreement so as to reduce all classes of
benefits payable under the Agreement by up to 30%.
12.4 Change in Control. In the event of amendment or termination of this
Agreement in anticipation of a Change in Control, the Change of Control
provision of this Agreement . shall continue to be effective even after
termination of other provisions of the Agreement. Such termination
shall be conclusively presumed to have been in anticipation of a Change
in Control if the termination occurs within two years of a Change in
Control.
ARTICLE XIII
EXECUTION
13.1 This Agreement sets forth the entire understanding of the parties
hereto with respect to the transactions contemplated hereby, and any
previous agreements or understandings between the parties hereto
regarding the subject matter hereof are merged into and superseded by
this Agreement.
13.2 This Agreement shall be executed in duplicate, each copy of which, when
so executed and delivered, shall be an original, but both copies shall
together constitute one and the same instrument.
In witness hereof, the parties have caused this Agreement to be executed on this
22nd day of May, 1991.
/s/ Elaine Pollert
Elaine Pollert
Executive
Home Federal Savings Bank
BY: /s/ John K. Keach
John K. Keach
Chairman
<PAGE>
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
BENEFICIARY DESIGNATION
Executive, Elaine Pollert, under the terms of a certain Executive Supplemental
Retirement Income Agreement by and between him and HOME FEDERAL SAVINGS BANK,
Columbus, Indiana, dated May 22nd, 1991 hereby designates the following
Beneficiary to receive any guaranteed payments or death benefits under such
Agreement, following his death:
PRIMARY BENEFICIARY: Hilary L. and Emma E. Pollert, share and share alike
SECONDARY BENEFICIARY:
This Beneficiary Designation hereby revokes any prior Beneficiary Designation
which may have been in effect.
Such Beneficiary Designation is revocable.
DATE: May 222nd, 1991
/s/ Nina Loesch /s/ Elaine Pollert
Nina Loesch Elaine Pollert
Witness Executive
/s/ Linda K. Scheidt
Linda K. Scheidt
Witness
<PAGE>
FIRST
AMENDMENT
TO
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEEMENT
OF
ELAINE POLLERT
This First Amendment to the Executive Supplemental Retirement Income
between Home Federal Savings Bank and Elaine Pollert, dated May 22nd, 1991, for
the purpose of deleting Section 10. 1 from the Agreement and replacing Section
8.2 of the Agreement with the following:
8.2 Termination of Service for Cause. Should Executive be
terminated for Cause pursuant to the Bylaws of the Bank, her
benefits under this Agreement shall be forfeited and this
Agreement shall become null and void.
IN WITNESS WHEREOF, the parties have executed this Amendment, in triplicate, the
day and year written here below.
Date: July 1, 1992 /s/ Elaine Pollert
Elaine Pollert
HOME FEDERAL SAVINGS BANK
COLUMBUS, INDIANA
Date: July 17, 1992 BY: /s/ John K. Keach, Jr.
John K. Keach, Jr.
<PAGE>
SECOND
AMENDMENT
TO
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENTS
OF
ELAINE POLLERT
This Second Amendment to the Executive Supplemental Retirement Income Agreement
between Home Federal Savings Bank and Elaine Pollert, dated February 18, 1993
for the purpose of inserting Section 10. 11 into the Agreement with the
following:
10.11 No Effect on Employment Rights. Nothing contained herein will confer
upon the Executive the right to be retained in the service of the
Bank nor limit the right of the Bank to discharge or otherwise deal
with Executive without regard to the existence of the Agreement.
Pursuant to 12 C.F.R. ss. 563.39(b), the following conditions shall
apply to this Agreement:
(1) The Bank's Board of Directors may terminate the Executive at any time,
but any termination by the Bank's Board of Directors other than
termination for Cause, shall not prejudice the Executive's vested right
to compensation or other benefits under the contract. As provided in
Section 8.2, if the Executive is terminated for Cause pursuant to the
Bylaws of the Bank, his benefits under this Agreement shall be
forfeited. He shall have no right to receive additional compensation or
other benefits for any period after termination for Cause.
(2) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1) the Bank's obligations under the
contract shall be suspended as of the date of termination of service
unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Executive all
or part of the compensation withheld while its contract obligations
were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(3) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) or (g)(1), all non-vested obligations of the Bank
under the contract shall terminate as of the effective date of the
order. As provided in Section 8. 1, the Executive shall be entitled to
an amount equal to the Executive's Vested Accrued Benefit as of the
date of termination. Payment of the Vested Accrued Benefit shall
commence within thirty (30) days of his termination in the event he is
terminated pursuant to such order.
(4) If the Bank is in default (as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act), all non-vested obligations under the contract
shall terminate as of the date of default.
(5) AU non-vested obligations under the contract shall be terminated, except
to the extent determined that continuation of the contract is necessary
for the continued operation of the Bank:
(i) by the Executive or his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the
authority contained in ss. 13(c) of the Federal Deposit Insurance Act;
or
(ii) by the Executive or his designee, at the time the Executive or his
designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to
be in an unsafe or unsound condition.
<PAGE>
Any rights of the party that have already vested (i.e., the Executive's Vested
Accrued Benefit), however, shall not be affected by such action.
IN WITNESS WHEREOF, the parties have executed this Amendment, in triplicate, the
day and year written here above.
Date : February 18, 1993 /s/ Elaine Pollert
- - ------------------------ ------------------
Elaine Pollert
HOME FEDERAL SAVINGS BANK
COLUMBUS, INDIANA
Date : February 18, 1993 By: /s/ John Keach, Sr.
- - ------------------------- ----------------------
John Keach, Sr., Chairman
<PAGE>
THIRD AMENDMENT TO
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
OF ELAINE POLLERT
Pursuant to rights reserved under Section 12.1 of the Executive
Supplemental Retirement Income Agreement (the "Agreement") initially entered
into May 22, 1991, by and between Home Federal Savings Bank (the "Bank") and
Elaine Pollert (the "Executive"), the Bank and the Executive amend the
Agreement, effective as of July 1, 1996, as follows:
1. Section 8.3 is amended to provide, in its entirety, as follows:
8.3 Termination Following Change in Control. If Executive's
termination of employment is related to a Change in Control, Executive
shall be entitled to receive her Accrued Benefit in a lump sum, which
single lump sum payment shall be made within thirty (30) days of
Executive's termination. (A termination of employment shall be
considered related to a Change in Control if, at any time during the
36-month period following said Change in Control, the employment of the
Executive is terminated by the Bank or if, at any time during such
period, the Executive is demoted or undergoes a material change in her
title, position, duties or responsibilities, or has a material
reduction in her compensation, including fringe benefits, and the
Executive terminates employment with the Bank.) Should Executive die
while receiving her Accrued Benefit after being terminated following a
Change in Control, her Beneficiary shall be entitled to receive the
Survivor's Benefit for the remainder of the one hundred eighty (180)
month period. It is not the intent of this Agreement to have the
Executive taxed as a result of payments made pursuant to a Change in
Control, under Internal Revenue Code Section 4999. In the event
Executive is entitled to receive payments following a Change in
Control, pursuant to any other agreements in effect between Executive
and Bank at the date of such Change in Control and unless the other
agreements provide otherwise, the payments under such other agreements
shall be reduced first, but only to the extent necessary to avoid the
tax imposed under Code Section 4999, and, if the Code Section 4999
limits are still exceeded, payments under this Agreement shall be
reduced but again only to the extent necessary to avoid the tax imposed
under Code Section 4999.
2. A new Section 8.4 is amended to provide, in its entirety, as
follows:
8.4 Deferral of Payment. Notwithstanding anything contained in
this Agreement to the contrary, the Bank, in its sole discretion, may
(but is not required to) defer the payment of all or a portion of any
amounts payable under this Agreement but only to the extent necessary
to preserve the federal income tax deductibility of the cash payment of
the payments under Code Section 162(m); provided, however, that if the
Bank defers payment, the amount of any deferred payment shall begin to
accrue interest at the Current Interest Rate (as defined below)
beginning on the first calendar day of the calendar year immediately
following the calendar year during which the payment would have
otherwise been made but for the deferral. Payments may not be deferred
beyond the first calendar year or years in
<PAGE>
which the payment would be deductible in full by the Bank for federal
income tax purposes under Code Section 162(m). The term "Current
Interest Rate" shall change each January 1 and shall be equal to the
Prime Rate as published in The Wall Street Journal on the first
business day following such January 1.
3. A new Section 10.12 is added to the Agreement to provide in
its entirety, as follows:
10.12 Litigation Expenses. Any legal expenses incurred by the
Executive or her Beneficiary relating to the enforcement or
enforceability of any benefit obligations hereunder shall be paid or
reimbursed by the Bank to the extent permitted by law; provided,
however, that except as provided below, the maximum aggregate payment
and reimbursement of legal expenses under this Section 10.12 with
respect to the Executive or her Beneficiary shall not exceed Ten
Thousand Dollars ($10,000.00); provided, further, that this Ten
Thousand Dollar ($10,000.00) limitation shall be reduced by the amount
of any legal expenses incurred by the Executive or her Beneficiary
which were paid or reimbursed by the Bank under any other plan or
arrangement entered into by the Bank and Executive. Notwithstanding
anything contained in this paragraph 10.12 to the contrary, the
Executive or her Beneficiary shall be entitled to payment or
reimbursement of legal expenses in excess of Ten Thousand Dollars
($10,000.00) if the expenses were incurred as a result of a dispute
under this Agreement in which the Executive or her Beneficiary obtains
a final judgment in her favor from a court of competent jurisdiction or
her claim is settled by the Bank prior to the rendering of a judgment
by such a court.
This Third Amendment has been executed this 27th day of February, 1998,
to be effective as of July 1, 1996.
HOME FEDERAL SAVINGS BANK
By:/s/ John K. Keach, Jr.
-------------------------
John K. Keach, Jr.
Its: President
SECOND AMENDMENT TO
DEFERRED COMPENSATION AGREEMENT
OF JOHN K. KEACH, SR.
Pursuant to rights reserved under Section 12.2 of the Deferred
Compensation Agreement (the "Agreement") initially entered into as of the 29th
day of June, 1992, by and between Home Federal Savings Bank (the "Bank") and
John K. Keach, Sr. ("Executive"), the Bank and Executive amend the Agreement,
effective as of July 1, 1996, by the addition of a new Section 10.10 which
provides, in its entirety, as follows:
10.10 Litigation Expenses. Any legal expenses incurred by the
Executive or his beneficiary relating to the enforcement or
enforceability of any benefit obligations hereunder shall be paid or
reimbursed by the Bank to the extent permitted by law; provided,
however, that except as provided below, the maximum aggregate payment
and reimbursement of legal expenses under this Section 10.10 with
respect to the Executive or his beneficiary shall not exceed Ten
Thousand Dollars ($10,000.00); provided, further, that this Ten
Thousand Dollar ($10,000.00) limitation shall be reduced by the amount
of any legal expenses incurred by the Executive or his beneficiary
which were paid or reimbursed by the Bank under any other plan or
arrangement entered into by the Bank and Executive. Notwithstanding
anything contained in this paragraph 13.11 to the contrary, the
Executive or his beneficiary shall be entitled to payment or
reimbursement of legal expenses in excess of Ten Thousand Dollars
($10,000.00) if the expenses were incurred as a result of a dispute
under this Agreement in which the Executive or his beneficiary obtains
a final judgment in his favor from a court of competent jurisdiction or
his claim is settled by the Bank prior to the rendering of a judgment
by such a court.
This Second Amendment has been executed this 19th day of March, 1998 to
be effective as of July 1, 1996.
HOME FEDERAL SAVINGS BANK
By:/s/ John K. Keach, Jr.
-------------------------
John K. Keach, Jr.
Its: President
-1-
EMPLOYMENT AGREEMENT
This Agreement, made and dated as of December 17, 1996, by and between
Home Federal Savings Bank, a federal savings bank ("Employer"), Home Federal
Bancorp, an Indiana corporation, which owns all of the capital stock of the
Employer (the "Holding Company"), and S. Elaine Pollert, a resident of Jackson
County, Indiana ("Employee").
W I T N E S S E T H
WHEREAS, Employee is employed by Employer as a Senior Vice President
and has made valuable contributions to the profitability and financial strength
of Employer;
WHEREAS, Employer desires to encourage Employee to continue to make
valuable contributions to Employer's business operations and not to seek or
accept employment elsewhere;
WHEREAS, Employee desires to be assured of a secure minimum
compensation from Employer for her services over a defined term;
WHEREAS, Employer desires to assure the continued services of Employee
on behalf of Employer on an objective and impartial basis and without
distraction or conflict of interest in the event of an attempt by any person to
obtain control of Employer or of the Holding Company.
WHEREAS, Employer recognizes that when faced with a proposal for a
change of control of Employer, Employee will have a significant role in helping
the Board of Directors assess the options and advising the Board of Directors on
what is in the best interests of Employer and its shareholders, and it is
necessary for Employee to be able to provide this advice and counsel without
being influenced by the uncertainties of her own situation;
WHEREAS, Employer desires to provide fair and reasonable benefits to
Employee on the terms and subject to the conditions set forth in this Agreement;
WHEREAS, Employer desires reasonable protection of its confidential
business and customer information which it has developed over the years at
substantial expense and assurance that Employee will not compete with Employer
for a reasonable period of time after termination of her employment with
Employer, except as otherwise provided herein.
NOW, THEREFORE, in consideration of these premises, the mutual
covenants and undertakings herein contained and the continued employment of
Employee by Employer as one of its Senior Vice Presidents, Employer and
Employee, each intending to be legally bound, covenant and agree as follows:
1. Upon the terms and subject to the conditions set forth in this
Agreement, Employer employs Employee as a Senior Vice President of Employer, and
Employee accepts such employment.
2. Employee agrees to serve as a Senior Vice President of Employer and
to perform such duties in that office as may reasonably be assigned to her by
Employer's Board of Directors; provided, however that such duties shall be
performed in or from the offices of Employer currently located at Seymour,
Indiana. Employee shall not be required to be absent from the location of the
<PAGE>
principal executive offices of Employer on travel status or otherwise more than
45 days in any calendar year. Employer shall not, without the written consent of
Employee, relocate or transfer Employee to a location more than 30 miles from
her principal residence. Although while employed by Employer, Employee shall
devote substantially all her business time and efforts to Employer's business
and shall not engage in any other related business, Employee may use her
discretion in fixing her hours and schedule of work consistent with the proper
discharge of her duties.
3. The term of this Agreement shall begin on the date hereof (the
"Effective Date") and shall end on the date which is three years following such
date; provided, however, that such term shall be extended for an additional year
on each anniversary of the Effective Date if Employer's Board of Directors
determines by resolution to extend this Agreement prior to such anniversary of
the Effective Date, unless either party hereto gives written notice to the other
party not to so extend prior to such anniversary, in which case no further
automatic extension shall occur and the term of this Agreement shall end two
years subsequent to the anniversary as of which the notice not to extend for an
additional year is given (such term including any extension thereof shall herein
be referred to as the "Term"). Notwithstanding the foregoing, this Agreement
shall automatically terminate (and the Term of this Agreement shall thereupon
end) without notice when Employee attains 65 years of age.
4. Employee shall receive an annual salary of $90,000 ("Base
Compensation") payable at regular intervals in accordance with Employer's normal
payroll practices now or hereafter in effect. Employer may consider and declare
from time to time increases in the salary it pays Employee and thereby increases
in her Base Compensation. Prior to a Change of Control, Employer may also
declare decreases in the salary it pays Employee if the operating results of
Employer are significantly less favorable than those for the fiscal year ending
June 30, 1987, and Employer makes similar decreases in the salary it pays to
other executive officers of Employer. After a Change in Control, Employer shall
consider and declare salary increases based upon the following standards:
Inflation;
Adjustments to the salaries of other senior management personnel; and
Past performance of Employee and the contribution which Employee makes
to the business and profits of Employer during the Term.
Any and all increases or decreases in Employee's salary pursuant to this section
shall cause the level of Base Compensation to be increased or decreased by the
amount of each such increase or decrease for purposes of this Agreement. The
increased or decreased level of Base Compensation as provided in this section
shall become the level of Base Compensation for the remainder of the Term of
this Agreement until there is a further increase or decrease in Base
Compensation as provided herein.
5. So long as Employee is employed by Employer pursuant to this
Agreement, she shall be included as a participant in all present and future
employee benefit, retirement, and compensation plans generally available to
employees of Employer, consistent with her Base Compensation and her position as
a Senior Vice President of Employer, including, without limitation, Employer's
Pension Plan, 401(k) Plan, Stock Option Plan, and hospitalization, major
medical, disability and group life
-2-
<PAGE>
insurance plans, each of which Employer agrees to continue in effect on terms no
less favorable than those currently in effect as of the date hereof (as
permitted by law) during the Term of this Agreement unless prior to a Change of
Control the operating results of Employer are significantly less favorable than
those for the fiscal year ended June 30, 1987, and unless (either before or
after a Change of Control) changes in the accounting or tax treatment of such
plans would adversely affect Employer's operating results or financial condition
in a material way, and the Board of Directors of Employer concludes that
modifications to such plans need to be made to avoid such adverse effects.
6. So long as Employee is employed by Employer pursuant to this
Agreement, Employee shall receive reimbursement from Employer for all reasonable
business expenses incurred in the course of her employment by Employer, upon
submission to Employer of written vouchers and statements for reimbursement. So
long as Employee is employed by Employer pursuant to the terms of this
Agreement, Employer shall continue in effect reasonable vacation policies
applicable to Employee.
7. Subject to the respective continuing obligations of the parties,
including but not limited to those set forth in subsections 9(A), 9(B), 9(C) and
9(D) hereof, Employee's employment by Employer may be terminated prior to the
expiration of the Term of this Agreement as follows:
(A) Employer, by action of its Board of Directors and upon
written notice to Employee, may terminate Employee's
employment with Employer immediately for cause. For purposes
of this subsection 7(A), "cause" shall be defined as (i)
personal dishonesty, (ii) incompetence, (iii) willful
misconduct, (iv) breach of fiduciary duty involving personal
profit, (v) intentional failure to perform stated duties,
(vi) willful violation of any law, rule, or regulation
(other than traffic violations or similar offenses) or final
cease-and-desist order, or (vii) any material breach of any
term, condition or covenant of this Agreement.
(B) Employer, by action of its Board of Directors, may terminate
Employee's employment with Employer without cause at any
time.
(C) Employee, by written notice to Employer, may terminate her
employment with Employer immediately for cause. For purposes
of this subsection 7(C), "cause" shall be defined as (i) any
action by Employer's Board of Directors to remove the
Employee as a Senior Vice President of Employer, except
where the Employer's Board of Directors properly acts to
remove Employee from such office for "cause" as defined in
subsection 7(A) hereof, (ii) any action by Employer's Board
of Directors to materially limit, increase, or modify
Employee's duties and/or authority as a Senior Vice
President of Employer (including her authority, subject to
corporate controls no more restrictive than those in effect
on the date hereof, to hire and discharge employees who are
not bona fide officers of Employer), (iii) any failure of
Employer to obtain the assumption of the obligation to
perform this Agreement by any successor or the reaffirmation
of such obligation by Employer, as contemplated in section
19 hereof; or (iv) any intentional breach by Employer of a
term, condition or covenant of this Agreement.
-3-
<PAGE>
(D) Employee, upon thirty (30) days written notice to Employer,
may terminate her employment with Employer without cause.
(E) Employee's employment with Employer shall terminate in the
event of Employee's death or disability. For purposes
hereof, "disability" shall be defined as Employee's
inability by reason of illness or other physical or mental
incapacity to perform the duties required by her employment
for any consecutive One Hundred Eighty (180) day period,
provided that notice of any termination by Employer because
of Employee's "disability" shall have been given to Employee
prior to the full resumption by him of the performance of
such duties.
8. In the event of termination of Employee's employment with Employer
pursuant to section 7 hereof, compensation shall continue to be paid by Employer
to Employee as follows:
(A) In the event of termination pursuant to subsection 7(A) or
7(D), compensation provided for herein (including Base
Compensation) shall continue to be paid, and Employee shall
continue to participate in the employee benefit, retirement,
and compensation plans and other perquisites as provided in
sections 5 and 6 hereof, through the date of termination
specified in the notice of termination. Any benefits payable
under insurance, health, retirement and bonus plans as a
result of Employee's participation in such plans through
such date shall be paid when due under those plans. The date
of termination specified in any notice of termination
pursuant to Subsection 7(A) shall be no later than the last
business day of the month in which such notice is provided
to Employee.
(B) In the event of termination pursuant to subsection 7(B) or
7(C), compensation provided for herein (including Base
Compensation) shall continue to be paid, and Employee shall
continue to participate in the employee benefit, retirement,
and compensation plans and other perquisites as provided in
sections 5 and 6 hereof, through the date of termination
specified in the notice of termination. Any benefits payable
under insurance, health, retirement and bonus plans as a
result of Employee's participation in such plans through
such date shall be paid when due under those plans. In
addition, Employee shall be entitled to continue to receive
from Employer her Base Compensation at the rates in effect
at the time of termination (1) for three additional l2-month
periods (or such shorter period as shall constitute the
remaining Term of the Agreement) if the termination follows
a Change of Control or (2) for one additional 12-month
period (or such shorter period as shall constitute the
remaining Term of the Agreement) if the termination does not
follow a Change of Control. In addition, during such
periods, Employer will maintain in full force and effect for
the continued benefit of Employee each employee welfare
benefit plan (as such term is defined in the Employee
Retirement Income Security Act of 1974, as amended) in which
Employee was entitled to participate immediately prior to
the date of her termination, unless an essentially
equivalent and no less favorable benefit is provided by a
subsequent employer of Employee. If the terms of any
employee welfare benefit plan of Employer do not permit
continued participation by Employee, Employer will arrange
to provide to Employee a benefit substantially similar to,
and no less
-4-
<PAGE>
favorable than, the benefit she was entitled to receive
under such plan at the end of the period of
coverage.For purposes of this Agreement, a "Change of
Control" shall mean an acquisition of "control" of
Employer or the Holding Company within the meaning of
12 C.F.R. ss. 574.4(a) not approved in advance by
Employer's or the Holding Company's Board of Directors.
(C) In the event of termination pursuant to subsection
7(E), compensation provided for herein (including Base
Compensation) shall continue to be paid, and Employee
shall continue to participate in the employee benefit,
retirement, and compensation plans and other
perquisites as provided in sections 5 and 6 hereof, (i)
in the event of Employee's death, through the date of
death, or (ii) in the event of Employee's disability,
through the date of proper notice of disability as
required by subsection 7(E). Any benefits payable under
insurance, health, retirement and bonus plans as a
result of Employer's participation in such plans
through such date shall be paid when due under those
plans.
(D) Employer will permit Employee or her personal
representative(s) or heirs, during a period of three
months following Employee's termination of employment
by Employer for the reasons set forth in subsections
7(B) or (C), if such termination follows a Change of
Control, to require Employer, upon written request, to
purchase all outstanding stock options previously
granted to Employee under any stock option plan of
Employer or any Holding Company of Employer then in
effect whether or not such options are then exercisable
or have terminated at a cash purchase price equal to
the amount by which the aggregate "fair market value"
of the shares subject to such options exceeds the
aggregate option price for such shares. For purposes of
this Agreement, the term "fair market value" shall mean
the higher of (1) the average of the highest asked
prices for Employer or Holding Company shares in the
over-the-counter market as reported on the NASDAQ
system if the shares are traded on such system for the
30 business days preceding such termination, or (2) the
average per share price actually paid for the most
highly priced 1% of the Employer or Holding Company
shares acquired in connection with the Change of
Control by any person or group acquiring such control.
9. In order to induce Employer to enter into this Agreement, Employee
hereby agrees as follows:
(A) While Employee is employed by Employer and for a period
of three years after termination of such employment for
reasons other than those set forth in subsections 7(B)
or (C) of this Agreement, Employee shall not divulge or
furnish any trade secrets (as defined in IND. CODEss.
24-2-3-2) of Employer or any confidential information
acquired by him while employed by Employer concerning
the policies, plans, procedures or customers of
Employer to any person, firm or corporation, other than
Employer or upon its written request, or use any such
trade secret or confidential information directly or
indirectly for Employee's own benefit or for the
benefit of any person, firm or corporation other than
Employer, since such trade
-5-
<PAGE>
secrets and confidential information are confidential and
shall at all times remain the property of Employer.
(B) For a period of three years after termination of
Employee's employment by Employer for reasons other
than those set forth in subsections 7(B) or (C) of this
Agreement, Employee shall not directly or indirectly
provide banking or bank-related services to or solicit
the banking or bank-related business of any customer of
Employer at the time of such provision of services or
solicitation which Employee served either alone or with
others while employed by Employer in any city, town,
borough, township, village or other place in which
Employee performed services for Employer while employed
by it, or assist any actual or potential competitor of
Employer to provide banking or bank-related services to
or solicit any such customer's banking or bank-related
business in any such place.
(C) While Employee is employed by Employer and for a period
of one year after termination of Employee's employment
by Employer for reasons other than those set forth in
subsections 7(B) or (C) of this Agreement, Employee
shall not, directly or indirectly, as principal, agent,
or trustee, or through the agency of any corporation,
partnership, trade association, agent or agency, engage
in any banking or bank-related business or venture
which competes with the business of Employer as
conducted during Employee's employment by Employer
within a radius of fifty (50) miles of Employer's main
office.
(D) If Employee's employment by Employer is terminated for
reasons other than those set forth in subsections 7(B)
or (C) of this Agreement, Employee will turn over
immediately thereafter to Employer all business
correspondence, letters, papers, reports, customers'
lists, financial statements, credit reports or other
confidential information or documents of Employer or
its affiliates in the possession or control of
Employee, all of which writings are and will continue
to be the sole and exclusive property of Employer or
its affiliates.
If Employee's employment by Employer is terminated during the Term of this
Agreement for reasons set forth in subsections 7(B) or (C) of this Agreement,
Employee shall have no obligations to Employer with respect to trade secrets,
confidential information or noncompetition under this section 9.
10. Any termination of Employee's employment with Employer as
contemplated by section 7 hereof, except in the circumstances of Employee's
death, shall be communicated by written "Notice of Termination" by the
terminating party to the other party hereto. Any "Notice of Termination"
pursuant to subsections 7(A), 7(C) or 7(E) shall indicate the specific
provisions of this Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for such
termination.
11. If Employee is suspended and/or temporarily prohibited from
participating in the conduct of Employer's affairs by a notice served under
section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. ss.
1818(e)(3) and (g)(1)), Employer's obligations under this
-6-
<PAGE>
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, Employer
may in its discretion (i) pay Employee all or part of the compensation withheld
while its obligations under this Agreement were suspended and (ii) reinstate (in
whole or in part) any of its obligations which were suspended.
12. If Employee is removed and/or permanently prohibited from
participating in the conduct of Employer's affairs by an order issued under
section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. ss.
1818(e)(4) or (g)(1)), all obligations of Employer under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
parties to the Agreement shall not be affected. If Employer is in default (as
defined in section 3(x)(1) of the Federal Deposit Insurance Act), all
obligations under this Agreement shall terminate as of the date of default, but
this provision shall not affect any vested rights of Employer or Employee.
13. All obligations under this Agreement may be terminated except to
the extent determined that the continuation of the Agreement is necessary for
the continued operation of Employer: (i) by the Director of the Office of Thrift
Supervision, or his or her designee (the "Director"), at the time the Federal
Deposit Insurance Corporation or Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of Employer under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the
Director at the time the Director approves a supervisory merger to resolve
problems related to operation of Employer or when Employer is determined by the
Director to be in an unsafe and unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
14. Anything in this Agreement to the contrary notwithstanding, in the
event that the Employer's independent public accountants determine that any
payment by the Employer to or for the benefit of the Employee, whether paid or
payable pursuant to the terms of this Agreement, would be non-deductible by the
Employer for federal income tax purposes because of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), then the amount payable to or for
the benefit of the Employee pursuant to this Agreement shall be reduced (but not
below zero) to the Reduced Amount. For purposes of this section 14, the "Reduced
Amount" shall be the amount which maximizes the amount payable without causing
the payment to be non-deductible by the Employer because of Section 280G of the
Code.
15. If a dispute arises regarding the termination of Employee pursuant
to section 7 hereof or as to the interpretation or enforcement of this Agreement
and Employee obtains a final judgment in her favor in a court of competent
jurisdiction or her claim is settled by Employer prior to the rendering of a
judgment by such a court, all reasonable legal fees and expenses incurred by
Employee in contesting or disputing any such termination or seeking to obtain or
enforce any right or benefit provided for in this Agreement or otherwise
pursuing her claim shall be paid by Employer, to the extent permitted by law.
16. Should Employee die after termination of her employment with
Employer while any amounts are payable to her hereunder, this Agreement shall
inure to the benefit of and be enforceable by Employee's executors,
administrators, heirs, distributees, devisees and legatees and all amounts
payable hereunder shall be paid in accordance with the terms of this Agreement
to Employee's devisee, legatee or other designee or, if there is no such
designee, to her estate.
-7-
<PAGE>
17. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to Employee: S. Elaine Pollert
587 Lasher Drive
Seymour, IN 47274
If to Employer: Home Federal Savings Bank
501 Washington Street
Columbus, IN 47201
or to such address as either party hereto may have furnished to the other party
in writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
18. The validity, interpretation, and performance of this Agreement
shall be governed by the laws of the State of Indiana.
19. Employer shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of Employer, by agreement in form and substance
satisfactory to Employee to expressly assume and agree to perform this Agreement
in the same manner and same extent that Employer would be required to perform it
if no such succession had taken place. Failure of Employer to obtain such
agreement prior to the effectiveness of any such succession shall be a material
intentional breach of this Agreement and shall entitle Employee to terminate her
employment with Employer pursuant to subsection 7(C) hereof. As used in this
Agreement, "Employer" shall mean Employer as hereinbefore defined and any
successor to its business or assets as aforesaid.
20. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by Employee and Employer. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of dissimilar provisions or conditions at the same or any prior
subsequent time. No agreements or representation, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement.
20. The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement which shall remain in full force and effect.
21. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same agreement.
-8-
<PAGE>
22. This Agreement is personal in nature and neither party hereto
shall, without consent of the other, assign or transfer this Agreement or any
rights or obligations hereunder except as provided in section 16 and section 19
above. Without limiting the foregoing, Employee's right to receive compensation
hereunder shall not be assignable or transferable, whether by pledge, creation
of a security interest or otherwise, other than a transfer by her will or by the
laws of descent or distribution as set forth in section 16 hereof, and in the
event of any attempted assignment or transfer contrary to this paragraph,
Employer shall have no liability to pay any amounts so attempted to be assigned
or transferred.
23. If any of the provisions in this Agreement shall conflict with 12
C.F.R. ss.563.39(b), as it may be amended from time to time, the requirements of
such regulation shall supersede any contrary provisions herein and shall
prevail.
24. The Holding Company agrees that if it shall be determined for any
reason that any obligation on the part of Employer to continue to make any
payments due under this Agreement to Employee or to satisfy any other obligation
under this Agreement for the benefit of Employee is unenforceable for any
reason, the Holding Company agrees to honor the terms of this Agreement and
continue to make any such payments due hereunder to Employee or to satisfy any
such obligation pursuant to the terms of this Agreement, as though it were the
Employer hereunder.
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the day and year first above set forth.
HOME FEDERAL SAVINGS BANK
By: /s/ John K. Keach, Jr.
--------------------------
John K. Keach, Jr., President and
Chief Executive Officer
"Employer"
/s/ S. Elaine Pollert
---------------------
S. Elaine Pollert
"Employee"
HOME FEDERAL BANCORP
By: /s/ John K. Keach, Jr.
--------------------------
John K. Keach, Jr., President and
Chief Executive Officer
"Holding Company"
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT is by and among Home
Federal Savings Bank, a federal savings bank ("Employer"), S. Elaine Pollert, a
resident of Jackson County, Indiana ("Employee"), and Home Federal Bancorp, an
Indiana corporation (the "Holding Company").
W I T N E S S E T H:
WHEREAS, Employer and Employee entered into an Employment Agreement
dated as of December 17, 1996 (the "Employment Agreement");
WHEREAS, the parties desire to make certain additional changes to the
Employment Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties agree that the Employment Agreement shall
be, and it hereby is, amended as follows:
1. Section 8(B) shall be amended to read in its entirety as
follows:
"(B) In the event of termination pursuant to
subsection 7(B) or 7(C), compensation provided for herein
(including Base Compensation) shall continue to be paid, and
Employee shall continue to participate in the employee
benefit, retirement, and compensation plans and other
perquisites as provided in Sections 5 and 6 hereof, through
the date of termination specified in the notice of
termination. Any benefits payable under insurance, health,
retirement and bonus plans as a result of Employee's
participation in such plans through such date shall be paid
when due under those plans. In addition, Employee shall be
entitled to continue to receive from Employer his Base
Compensation at the rates in effect at the time of termination
(1) for three additional 12-month periods if the termination
follows a Change of Control or (2) for the remaining Term of
the Agreement if the termination does not follow a Change of
Control. In addition, during such periods, Employer will
maintain in full force and effect for the continued benefit of
Employee each employee welfare benefit plan and each employee
pension benefit plan (as such terms are defined in the
Employee Retirement Income Security Act of 1974, as amended)
in which Employee was entitled to participate immediately
prior to the date of his termination, unless an essentially
equivalent and no less favorable benefit is provided by a
subsequent employer of Employee. If the terms of any employee
welfare benefit plan or employee pension benefit plan of
Employer do not permit continued participation by Employee,
Employer will arrange to provide to Employee a benefit
substantially similar to, and no less favorable than, the
benefit he was entitled to receive under such plan at the end
of the period of coverage. For
<PAGE>
purposes of this Agreement, a "Change of Control" shall mean
an acquisition of "control" of the Holding Company or of
Employer within the meaning of 12 C.F.R. ss.574.4(a) (other
than a change of control resulting from a trustee or other
fiduciary holding shares of Common Stock under an employee
benefit plan of the Holding Company or any of its
subsidiaries)."
2. The following proviso shall be added to the end of Section 14
of the Employment Agreement:
"In the event the Employee is entitled to receive payments
following a Change in Control under his Supplemental
Retirement Agreement with the Employer which payments,
together with the amounts payable to the Employee under this
Agreement would result in a tax under ss.4999 of the Code, the
amounts payable to the Employee pursuant to this Agreement
shall be reduced first, before any reduction is made in
payments under the Supplemental Retirement Agreement, to the
extent necessary to avoid a tax imposed under ss.4999 of the
Code."
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the 17th day of December, 1996.
HOME FEDERAL SAVINGS BANK
By: /s/John K. Keach Jr.
-------------------------
John K. Keach, Jr., President and
Chief Executive Officer
"EMPLOYER"
HOME FEDERAL BANCORP
By: /s/John K. Keach Jr.
------------------------
John K. Keach, Jr., President and
Chief Executive Officer
"HOLDING COMPANY"
/s/ S. Elaine Pollert
----------------------
S. Elaine Pollert
"EMPLOYEE"
SECOND
AMENDMENT
TO
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENTS
OF
GERALD ARMSTRONG
This Second Amendment to the Executive Supplemental Retirement Income Agreement
between Home Federal Savings Bank and Gerald Armstrong, dated February 18, 1993
for the purpose of inserting Section 10. 11 into the Agreement with the
following:
10.11 No Effect on Employment Rights. Nothing contained herein will confer
upon the Executive the right to be retained in the service of the
Bank nor limit the right of the Bank to discharge or otherwise deal
with Executive without regard to the existence of the Agreement.
Pursuant to 12 C.F.R. ss. 563.39(b), the following conditions shall
apply to this Agreement:
(1) The Bank's Board of Directors may terminate the Executive at any time,
but any termination by the Bank's Board of Directors other than
termination for Cause, shall not prejudice the Executive's vested right
to compensation or other benefits under the contract. As provided in
Section 8.2, if the Executive is terminated for Cause pursuant to the
Bylaws of the Bank, his benefits under this Agreement shall be
forfeited. He shall have no right to receive additional compensation or
other benefits for any period after termination for Cause.
(2) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1) the Bank's obligations under the
contract shall be suspended as of the date of termination of service
unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Executive all
or part of the compensation withheld while its contract obligations
were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(3) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) or (g)(1), all non-vested obligations of the Bank
under the contract shall terminate as of the effective date of the
order. As provided in Section 8. 1, the Executive shall be entitled to
an amount equal to the Executive's Vested Accrued Benefit as of the
date of termination. Payment of the Vested Accrued Benefit shall
commence within thirty (30) days of his termination in the event he is
terminated pursuant to such order.
(4) If the Bank is in default (as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act), all non-vested obligations under the contract
shall terminate as of the date of default.
(5) AU non-vested obligations under the contract shall be terminated, except
to the extent determined that continuation of the contract is necessary
for the continued operation of the Bank:
(i) by the Executive or his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the
authority contained in ss. 13(c) of the Federal Deposit Insurance Act;
or
(ii) by the Executive or his designee, at the time the Executive or his
designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to
be in an unsafe or unsound condition.
<PAGE>
Any rights of the party that have already vested (i.e., the Executive's Vested
Accrued Benefit), however, shall not be affected by such action.
IN WITNESS WHEREOF, the parties have executed this Amendment, in triplicate, the
day and year written here above.
Date : February 18, 1993 /s/ Gerald Armstrong
- - ------------------------ --------------------
Gerald Armstrong
HOME FEDERAL SAVINGS BANK
COLUMBUS, INDIANA
Date : February 18, 1993 By: /s/ John Keach, Sr.
- - ------------------------- ----------------------
John Keach, Sr., Chairman
<PAGE>
THIRD AMENDMENT TO
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
OF GERALD ARMSTRONG
Pursuant to rights reserved under Section 12.1 of the Executive
Supplemental Retirement Income Agreement (the "Agreement") initially entered
into May 22, 1991, by and between Home Federal Savings Bank (the "Bank") and
Gerald Armstrong (the "Executive"), the Bank and the Executive amend the
Agreement, effective as of July 1, 1996, as follows:
1. Section 2.4 is amended to provide, in its entirety, as follows:
2.4 Death Following Voluntary Termination. With exceptions for
Early Retirement or Disability, if Executive dies following voluntary
termination of employment and if his termination of employment occurs
prior to Normal Retirement Date, Executive's Beneficiary shall, within
thirty (30) days of Executive's death, be paid a lump sum death benefit
equal to Two Hundred Fifty Thousand ($250,000) Dollars. In the event
Executive's termination of employment results from Disability, whether
or not Executive's termination was voluntary, payments shall be made
according to Subsection 3.3. If Executive's death follows his election
to take Early Retirement, Subsection 2.2 of this Agreement shall apply.
2. Section 8.3 is amended to provide, in its entirety, as follows:
8.3 Termination Following Change in Control. If Executive's
termination of employment is related to a Change in Control, Executive
shall be entitled to receive his Supplemental Retirement Income Benefit
in a lump sum, discounted to present value using a discount rate to be
determined by multiplying the Bank's Cost of Funds by a factor equal to
one (1) minus the Bank's Tax Rate, which single lump sum payment shall
be made within thirty (30) days of Executive's termination. (A
termination of employment shall be considered related to a Change in
Control if, at any time during the 36-month period following said
Change in Control, the employment of the Executive is terminated by the
Bank or if, at any time during such period, the Executive is demoted or
undergoes a material change in his title, position, duties or
responsibilities, or has a material reduction in his compensation,
including fringe benefits, and the Executive terminates employment with
the Bank.) Should Executive die after being terminated following a
Change in Control, but prior to beginning to receive retirement
benefits, his Beneficiary shall be entitled to receive the Survivor's
Benefit, payment of which shall commence within thirty (30) days
following Executive's death. It is not the intent of this Agreement to
have the Executive taxed as a result of payments made pursuant to a
Change in Control, under Internal Revenue Code Section 4999. In the
event Executive is entitled to receive payments following a Change in
Control, pursuant to any other agreements in effect between Executive
and Bank at the date of such Change in Control and unless the other
agreements provide otherwise, the payments under such other agreements
shall
-1-
<PAGE>
be reduced first, but only to the extent necessary to avoid the tax
imposed under Code Section 4999, and, if the Code Section 4999 limits
are still exceeded, payments under this Agreement shall be reduced but
again only to the extent necessary to avoid the tax imposed under Code
Section 4999.
3. A new Section 8.4 is amended to provide, in its entirety, as
follows:
8.4 Deferral of Payment. Notwithstanding anything contained in
this Agreement to the contrary, the Bank, in its sole discretion, may
(but is not required to) defer the payment of all or a portion of any
amounts payable under this Agreement but only to the extent necessary
to preserve the federal income tax deductibility of the cash payment of
the payments under Code Section 162(m); provided, however, that if the
Bank defers payment, the amount of any deferred payment shall begin to
accrue interest at the Current Interest Rate (as defined below)
beginning on the first calendar day of the calendar year immediately
following the calendar year during which the payment would have
otherwise been made but for the deferral. Payments may not be deferred
beyond the first calendar year or years in which the payment would be
deductible in full by the Bank for federal income tax purposes under
Code Section 162(m). The term "Current Interest Rate" shall change each
January 1 and shall be equal to the Prime Rate as published in The Wall
Street Journal on the first business day following such January 1.
4. A new Section 10.12 is added to the Agreement to provide in
its entirety, as follows:
10.12 Litigation Expenses. Any legal expenses incurred by the
Executive or his Beneficiary relating to the enforcement or
enforceability of any benefit obligations hereunder shall be paid or
reimbursed by the Bank to the extent permitted by law; provided,
however, that except as provided below, the maximum aggregate payment
and reimbursement of legal expenses under this Section 10.12 with
respect to the Executive or his Beneficiary shall not exceed Ten
Thousand Dollars ($10,000.00); provided, further, that this Ten
Thousand Dollar ($10,000.00) limitation shall be reduced by the amount
of any legal expenses incurred by the Executive or his Beneficiary
which were paid or reimbursed by the Bank under any other plan or
arrangement entered into by the Bank and Executive. Notwithstanding
anything contained in this paragraph 10.12 to the contrary, the
Executive or his Beneficiary shall be entitled to payment or
reimbursement of legal expenses in excess of Ten Thousand Dollars
($10,000.00) if the expenses were incurred as a result of a dispute
under this Agreement in which the Executive or his Beneficiary obtains
a final judgment in his favor from a court of competent jurisdiction or
his claim is settled by the Bank prior to the rendering of a judgment
by such a court.
This Third Amendment has been executed this 27th day of February, 1998
to be effective as of July 1, 1996.
HOME FEDERAL SAVINGS BANK
By:/s/ John K. Keach, Jr.
-------------------------
John K. Keach, Jr.
Its: President
Executive
FIRST
AMENDMENT
TO
DIRECTOR DEFERRED COMPENSATION AGREEMENT
OF
JOHN BEATTY
This First Amendment to the Director Deferred Compensation Agreement
between Home Federal Savings Bank and John Beatty, dated February 18, 1993 is
for the purpose of amending the Agreement as follows:
Section 1.8 shall be replaced with the following:
1.8 "Deferred Compensation Benefit" means Five Thousand Two Hundred Sixty
($5,260.00) Dollars per month payable for a one hundred eighty (180)
month period, such period to begin at Director's Normal Retirement Date.
Section II shall have the following language added to the end of the
Section:
The Director elects to have an additional Two Hundred ($200.00) Dollars
per month deferred beginning January 1993. This additional amount represents an
increase in the monthly board fee earned by the Director and approved by the
Board of Directors. Commencing January 1993 and continuing through the end of
the Deferral Period, the Director and the Bank agree that the Director shall
defer into his Retirement Account monthly Director's fees totalling One Thousand
One Hundred Fifty ($1,150.00) Dollars that the Director would otherwise be
entitled to receive from the Bank for each remaining month of the Deferral
Period.
Section 4.2 shall be replaced with the following:
4.2 Retirement Benefit - Shortened Deferral Period. In the event
Director defer fees for a period less than sixty (60) months,
whether through termination of service on the Board, election to
discontinue deferrals, absenteeism from meetings, or disability,
Director shall be entitled to receive, upon reaching Normal
Retirement Age, a Deferred Compensation Benefit determined by
multiplying Five Thousand One Hundred Sixty-Four ($5,164.00) Dollars
by a fraction, the numerator of which is equal to the total Board
fees actually deferred by the Director and the denominator of which
is equal to total Board fees which would have been deferred during
the entire sixty (60) month deferral period. Such benefit payments
will be made according to the provisions of the Payout Period.
Section 13.1 shall be replaced with the following:
13.1 No Effect on Directorship Rights. Nothing contained herein will confer
upon the Director the right to be retained in the service of the Bank
nor limit the right of the Bank to discharge or otherwise deal with the
Director without regard to the existence of the Agreement. Pursuant to
12 C.F.R. ss. 563.39(b), the following conditions shall apply to this
Agreement:
(1) The Bank's Board of Directors may remove the Director at any time, but
any removal by the Bank's Board of Directors other than for Cause,
shall not prejudice the Director's vested right to compensation or
other benefits under the contract. As provided in Section 14.3, the
Director shall be paid his deferred fees plus accrued interest, as of
the date of removal, in a lump sum within thirty (30) days of his
removal in the event he is removed for Cause. He shall have no right
to receive additional compensation or other benefits for any period
after removal for Cause.
(2) If the Director is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)) the Bank's obligations under the
contract shall be suspended as of the date of termination of service
unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Director all
or part of the compensation withheld while its contract obligations
were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(3) If the Director is removed and/or permanently prohibited from
participating in the conduct of the Bank, s affairs by an order issued
under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) or (g)(1)), all non-vested obligations of the
Bank under the contract shall terminate as of the effective date of
the order, but vested rights of the Director shall not be affected.
(4) If the Bank is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all non-vested obligations under the
contract shall terminate as of the date of default.
(5) All non-vested obligations under the contract shall be terminated,
except to the extent determined that continuation of the contract is
necessary for the continued operation of the Bank:
(i) by the Director or his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into
an agreement to provide assistance to or on behalf of the Bank under
the authority contained in ss. 13(c) of the Federal Deposit Insurance
Act; or
(ii) by the Director or his designee, at the time the Director or his
designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director
to be in an unsafe or unsound condition.
Any rights of the parties that have already vested (i.e., the Director's
deferred fees plus accrued interest), however, shall not be affected by such
action.
IN WITNESS
OF, the parties have executed this Amendment, in triplicate, the day and year
written here below.
Date : February 23, 1993 /s/ John Beatty
- - ------------------------ ---------------
John Beatty
<PAGE>
SECOND AMENDMENT TO
DIRECTOR DEFERRED COMPENSATION AGREEMENT
OF JOHN T. BEATTY
Pursuant to rights reserved under Section 14.1 of the Director Deferred
Compensation Agreement (the "Agreement") initially entered into as of the 1st
day of April, 1992, by and between Home Federal Savings Bank (the "Bank") and
John T. Beatty (the "Director"), the Bank and the Director amend the Agreement,
effective as of July 1, 1996, by the addition of a new Section 13.11 which
provides, in its entirety, as follows:
13.11 Litigation Expenses. Any legal expenses incurred by the
Director or his beneficiary relating to the enforcement or
enforceability of any benefit obligations hereunder shall be paid or
reimbursed by the Bank to the extent permitted by law; provided,
however, that except as provided below, the maximum aggregate payment
and reimbursement of legal expenses under this Section 13.11 with
respect to the Director or his beneficiary shall not exceed Ten
Thousand Dollars ($10,000.00); provided, further, that this Ten
Thousand Dollar ($10,000.00) limitation shall be reduced by the amount
of any legal expenses incurred by the Director or his beneficiary which
were paid or reimbursed by the Bank under any other plan or arrangement
entered into by the Bank and Director. Notwithstanding anything
contained in this paragraph 13.11 to the contrary, the Director or his
beneficiary shall be entitled to payment or reimbursement of legal
expenses in excess of Ten Thousand Dollars ($10,000.00) if the expenses
were incurred as a result of a dispute under this Agreement in which
the Director or his beneficiary obtains a final judgment in his favor
from a court of competent jurisdiction or his claim is settled by the
Bank prior to the rendering of a judgment by such a court.
This Second Amendment has been executed this 19th day of March, 1998 to
be effective as of July 1, 1996.
HOME FEDERAL SAVINGS BANK
By:/s/ John K. Keach, Jr.
-------------------------
John K. Keach, Jr.
Its: President
FIRST
AMENDMENT
TO
DIRECTOR DEFERRED COMPENSATION AGREEMENT
OF
LEWIS ESSEX
This First Amendment to the Director Deferred Compensation Agreement
between Home Federal Savings Bank and Lewis Essex, dated February 18, 1993 is
for the purpose of amending the Agreement as follows:
Section 1.8 shall be replaced with the following:
1.8 "Deferred Compensation Benefit" means Two Thousand Three Hundred Sixty
($2,360.00) Dollars per month payable for a one hundred eighty (180)
month period, such period to begin at Director's Normal Retirement Date.
Section II shall have the following language added to the end of the
Section:
The Director elects to have an additional Two Hundred ($200.00) Dollars
per month deferred beginning January 1993. This additional amount represents an
increase in the monthly board fee earned by the Director and approved by the
Board of Directors. Commencing January 1993 and continuing through the end of
the Deferral Period, the Director and the Bank agree that the Director shall
defer into his Retirement Account monthly Director's fees totalling One Thousand
One Hundred Fifty ($1,150.00) Dollars that the Director would otherwise be
entitled to receive from the Bank for each remaining month of the Deferral
Period.
Section 4.2 shall be replaced with the following:
4.2 Retirement Benefit - Shortened Deferral Period. In the event Director
defer fees for a period less than sixty (60) months, whether through
termination of service on the Board, election to discontinue
deferrals, absenteeism from meetings, or disability, Director shall be
entitled to receive, upon reaching Normal Retirement Age, a Deferred
Compensation Benefit determined by multiplying Two Thousand Three
Hundred Eighteen ($2,318.00) Dollars by a fraction, the numerator of
which is equal to the total Board fees actually deferred by the
Director and the denominator of which is equal to total Board fees
which would have been deferred during the entire sixty (60) month
deferral period. Such benefit payments will be made according to the
provisions of the Payout Period.
Section 13.1 shall be replaced with the following:
13.1 No Effect on Directorship Rights. Nothing contained herein will confer
upon the Director the right to be retained in the service of the Bank
nor limit the right of the Bank to discharge or otherwise deal with the
Director without regard to the existence of the Agreement. Pursuant to
12 C.F.R. ss. 563.39(b), the following conditions shall apply to this
Agreement:
(1) The Bank's Board of Directors may remove the Director at any time, but
any removal by the Bank's Board of Directors other than for Cause,
shall not prejudice the Director's vested right to compensation or
other benefits under the contract. As provided in Section 14.3, the
Director shall be paid his deferred fees plus accrued interest, as of
the date of removal, in a lump sum within thirty (30) days of his
removal in the event he is removed for Cause. He shall have no right
to receive additional compensation or other benefits for any period
after removal for Cause.
(2) If the Director is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)) the Bank's obligations under the
contract shall be suspended as of the date of termination of service
unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Director all
or part of the compensation withheld while its contract obligations
were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(3) If the Director is removed and/or permanently prohibited from
participating in the conduct of the Bank, s affairs by an order issued
under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) or (g)(1)), all non-vested obligations of the
Bank under the contract shall terminate as of the effective date of the
order, but vested rights of the Director shall not be affected.
(4) If the Bank is in default (as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act), all non-vested obligations under the contract
shall terminate as of the date of default.
(5) All non-vested obligations under the contract shall be terminated,
except to the extent determined that continuation of the contract is
necessary for the continued operation of the Bank:
(i) by the Director or his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into
an agreement to provide assistance to or on behalf of the Bank under
the authority contained in ss. 13(c) of the Federal Deposit Insurance
Act; or
(ii) by the Director or his designee, at the time the Director or his
designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director
to be in an unsafe or unsound condition.
Any rights of the parties that have already vested (i.e., the Director's
deferred fees plus accrued interest), however, shall not be affected by such
action.
IN WITNESS
OF, the parties have executed this Amendment, in triplicate, the day and year
written here below.
Date : February 20, 1993 /s/ Lewis Essex
- - ------------------------ ---------------
Lewis Essex
HOME FEDERAL SAVINGS BANK
COLUMBUS, INDIANA
<PAGE>
SECOND AMENDMENT TO
DIRECTOR DEFERRED COMPENSATION AGREEMENT
OF LEWIS ESSEX
Pursuant to rights reserved under Section 14.1 of the Director Deferred
Compensation Agreement (the "Agreement") initially entered into as of the 1st
day of April, 1992, by and between Home Federal Savings Bank (the "Bank") and
Lewis Essex (the "Director"), the Bank and the Director amend the Agreement,
effective as of July 1, 1996, by the addition of a new Section 13.11 which
provides, in its entirety, as follows:
13.11 Litigation Expenses. Any legal expenses incurred by the
Director or his beneficiary relating to the enforcement or
enforceability of any benefit obligations hereunder shall be paid or
reimbursed by the Bank to the extent permitted by law; provided,
however, that except as provided below, the maximum aggregate payment
and reimbursement of legal expenses under this Section 13.11 with
respect to the Director or his beneficiary shall not exceed Ten
Thousand Dollars ($10,000.00); provided, further, that this Ten
Thousand Dollar ($10,000.00) limitation shall be reduced by the amount
of any legal expenses incurred by the Director or his beneficiary which
were paid or reimbursed by the Bank under any other plan or arrangement
entered into by the Bank and Director. Notwithstanding anything
contained in this paragraph 13.11 to the contrary, the Director or his
beneficiary shall be entitled to payment or reimbursement of legal
expenses in excess of Ten Thousand Dollars ($10,000.00) if the expenses
were incurred as a result of a dispute under this Agreement in which
the Director or his beneficiary obtains a final judgment in his favor
from a court of competent jurisdiction or his claim is settled by the
Bank prior to the rendering of a judgment by such a court.
This Second Amendment has been executed this 19th day of March, 1998 to
be effective as of July 1, 1996.
HOME FEDERAL SAVINGS BANK
By:/s/ John K. Keach, Jr.
-------------------------
John K. Keach, Jr.
Its: President
FIRST
AMENDMENT
TO
DIRECTOR DEFERRED COMPENSATION AGREEMENT
OF
HAROLD FORCE
This First Amendment to the Director Deferred Compensation Agreement
between Home Federal Savings Bank and Harold Force, dated February 18, 1993 is
for the purpose of amending the Agreement as follows:
Section 1.8 shall be replaced with the following:
1.8 "Deferred Compensation Benefit" means Five Thousand Eight Hundred Eleven
($5,811.00) Dollars per month payable for a one hundred eighty (180)
month period, such period to begin at Director's Normal Retirement Date.
Section II shall have the following language added to the end of the
Section:
The Director elects to have an additional Two Hundred ($200.00) Dollars
per month deferred beginning January 1993. This additional amount represents an
increase in the monthly board fee earned by the Director and approved by the
Board of Directors. Commencing January 1993 and continuing through the end of
the Deferral Period, the Director and the Bank agree that the Director shall
defer into his Retirement Account monthly Director's fees totalling One Thousand
One Hundred Fifty ($1,150.00) Dollars that the Director would otherwise be
entitled to receive from the Bank for each remaining month of the Deferral
Period.
Section 4.2 shall be replaced with the following:
4.2 Retirement Benefit - Shortened Deferral Period. In the event Director
defer fees for a period less than sixty (60) months, whether through
termination of service on the Board, election to discontinue
deferrals, absenteeism from meetings, or disability, Director shall be
entitled to receive, upon reaching Normal Retirement Age, a Deferred
Compensation Benefit determined by multiplying Five Thousand Seven
Hundred Five ($5,705.00) Dollars by a fraction, the numerator of which
is equal to the total Board fees actually deferred by the Director and
the denominator of which is equal to total Board fees which would have
been deferred during the entire sixty (60) month deferral period. Such
benefit payments will be made according to the provisions of the
Payout Period.
Section 13.1 shall be replaced with the following:
13.1 No Effect on Directorship Rights. Nothing contained herein will confer
upon the Director the right to be retained in the service of the Bank
nor limit the right of the Bank to discharge or otherwise deal with the
Director without regard to the existence of the Agreement. Pursuant to
12 C.F.R. ss. 563.39(b), the following conditions shall apply to this
Agreement:
(1) The Bank's Board of Directors may remove the Director at any time, but
any removal by the Bank's Board of Directors other than for Cause,
shall not prejudice the Director's vested right to compensation or
other benefits under the contract. As provided in Section 14.3, the
Director shall be paid his deferred fees plus accrued interest, as of
the date of removal, in a lump sum within thirty (30) days of his
removal in the event he is removed for Cause. He shall have no right
to receive additional compensation or other benefits for any period
after removal for Cause.
(2) If the Director is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)) the Bank's obligations under the
contract shall be suspended as of the date of termination of service
unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Director all
or part of the compensation withheld while its contract obligations
were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(3) If the Director is removed and/or permanently prohibited from
participating in the conduct of the Bank, s affairs by an order issued
under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) or (g)(1)), all non-vested obligations of the
Bank under the contract shall terminate as of the effective date of
the order, but vested rights of the Director shall not be affected.
(4) If the Bank is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all non-vested obligations under the
contract shall terminate as of the date of default.
(5) All non-vested obligations under the contract shall be terminated,
except to the extent determined that continuation of the contract is
necessary for the continued operation of the Bank:
(i) by the Director or his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters
into an agreement to provide assistance to or on behalf of the
Bank under the authority contained in ss. 13(c) of the Federal
Deposit Insurance Act; or
(ii) by the Director or his designee, at the time the Director or his
designee approves a supervisory merger to resolve problems
related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition.
Any rights of the parties that have already vested (i.e., the Director's
deferred fees plus accrued interest), however, shall not be affected by such
action.
IN WITNESS
OF, the parties have executed this Amendment, in triplicate, the day and year
written here below.
Date : February 22, 1993 /s/ Harold Force
- - ------------------------ ----------------
Harold Force
HOME FEDERAL SAVINGS BANK
COLUMBUS, INDIANA
Date : February 18, 1993 By: /s/ John Keach, Sr.
- - ------------------------- ----------------------
John Keach, Sr., Chairman
<PAGE>
SECOND AMENDMENT
TO THE
DIERECTOR DEFERRED COMPENSATION AGREEMENT
OF
HAROLD FORCE
This Second Amendment, dated the 21st day of December, 1993, hereby
amends the Director Deferred Compensation Agreement, ("Agreement"), effective as
of the 1st day of June, 1992, by and between Harold Force and Home Federal
Savings Bank ("Bank"), of Seymour, Indiana, as follows:
Section 1.8 of the Agreement shall be replaced with the following:
1.8 "Deferred Compensation Benefit" means Six Thousand Four Hundred
Fifty One Dollars ($6,451.00) per month payable for a one hundred
eighty (180) month period, such period to begin at Director's
Normal Retirement Date.
The following language shall be added to Section II of the Agreement:
The Director elects to have an additional Two Hundred ($200.00) Dollars
per month deferred beginning January 1994. This additional amount represents an
increase in the monthly board fee earned by the Director and approved by the
Board of Directors. Commencing January 1994 and continuing through the end of
the Deferral Period, the Director and the Bank agree that the Director shall
defer into his Retirement Account monthly Director's fees totaling One Thousand
Three Hundred Fifty Dollars ($1,350.00) that the Director would otherwise be
entitled to receive from the Bank for each remaining month of the Deferral
Period.
Section 4.2 of the Agreement shall be replaced with the following:
4.2 Retirement Benefit - Shortened Deferral Period. In the event
Director defer fees for a period less than sixty (60) months,
whether through termination of service on the Board, election to
discontinue deferrals, absenteeism from meetings, or disability,
Director shall be entitled to receive, upon reaching Normal
Retirement Age, a Deferred Compensation Benefit determined by
multiplying Six Thousand Four Hundred Fifty One Dollars
($6,451.00) by a fraction, the numerator of which is equal to the
total Board fees actually deferred by the Director and the
denominator of which is equal to total Board fees which would
have been deferred during the entire sixty (60) month deferral
period. Such benefit payments will be made according to the
provisions of the Payout Period.
IN WITNESS WHEREOF, the parties have executed this Amendment, in triplicate, the
day and year written here below.
Date : December 21, 1993 /s/ Harold Force
- - ------------------------ ----------------
Harold Force
HOME FEDERAL SAVINGS BANK
COLUMBUS, INDIANA
Date : December 21, 1993 By: /s/ John Keach, Sr.
- - ------------------------- ----------------------
John Keach, Sr., Chairman CEO
<PAGE>
THIRD AMENDMENT TO
DIRECTOR DEFERRED COMPENSATION AGREEMENT
OF HAROLD FORCE
Pursuant to rights reserved under Section 14.1 of the Director Deferred
Compensation Agreement (the "Agreement") initially entered into as of the 1st
day of April, 1992, by and between Home Federal Savings Bank (the "Bank") and
Harold Force (the "Director"), the Bank and the Director amend the Agreement,
effective as of July 1, 1996, by the addition of a new Section 13.11 which
provides, in its entirety, as follows:
13.11 Litigation Expenses. Any legal expenses incurred by the
Director or his beneficiary relating to the enforcement or
enforceability of any benefit obligations hereunder shall be paid or
reimbursed by the Bank to the extent permitted by law; provided,
however, that except as provided below, the maximum aggregate payment
and reimbursement of legal expenses under this Section 13.11 with
respect to the Director or his beneficiary shall not exceed Ten
Thousand Dollars ($10,000.00); provided, further, that this Ten
Thousand Dollar ($10,000.00) limitation shall be reduced by the amount
of any legal expenses incurred by the Director or his beneficiary which
were paid or reimbursed by the Bank under any other plan or arrangement
entered into by the Bank and Director. Notwithstanding anything
contained in this paragraph 13.11 to the contrary, the Director or his
beneficiary shall be entitled to payment or reimbursement of legal
expenses in excess of Ten Thousand Dollars ($10,000.00) if the expenses
were incurred as a result of a dispute under this Agreement in which
the Director or his beneficiary obtains a final judgment in his favor
from a court of competent jurisdiction or his claim is settled by the
Bank prior to the rendering of a judgment by such a court.
This Second Amendment has been executed this 19th day of March, 1998 to
be effective as of July 1, 1996.
HOME FEDERAL SAVINGS BANK
By:/s/ John K. Keach, Jr.
-------------------------
John K. Keach, Jr.
Its: President
FIRST
AMENDMENT
TO
DIRECTOR DEFERRED COMPENSATION AGREEMENT
OF
DAVID W. LAITINEN
This First Amendment to the Director Deferred Compensation Agreement
between Home Federal Savings Bank and David W. Laitinen, dated February 18, 1993
is for the purpose of amending the Agreement as follows:
Section 1.8 shall be replaced with the following:
1.8 "Deferred Compensation Benefit" means Six Thousand Six Hundred
Forty-eight ($6,648.00) Dollars per month payable for a one hundred
eighty (180) month period, such period to begin at Director's Normal
Retirement Date.
Section II shall have the following language added to the end of the
Section:
The Director elects to have an additional Two Hundred ($200.00) Dollars
per month deferred beginning January 1993. This additional amount represents an
increase in the monthly board fee earned by the Director and approved by the
Board of Directors. Commencing January 1993 and continuing through the end of
the Deferral Period, the Director and the Bank agree that the Director shall
defer into his Retirement Account monthly Director's fees totalling One Thousand
One Hundred Fifty ($1,150.00) Dollars that the Director would otherwise be
entitled to receive from the Bank for each remaining month of the Deferral
Period.
Section 4.2 shall be replaced with the following:
4.2 Retirement Benefit - Shortened Deferral Period. In the event Director
defer fees for a period less than sixty (60) months, whether through
termination of service on the Board, election to discontinue
deferrals, absenteeism from meetings, or disability, Director shall be
entitled to receive, upon reaching Normal Retirement Age, a Deferred
Compensation Benefit determined by multiplying Six Thousand Five
Hundred Thirty ($6,530.00) Dollars by a fraction, the numerator of
which is equal to the total Board fees actually deferred by the
Director and the denominator of which is equal to total Board fees
which would have been deferred during the entire sixty (60) month
deferral period. Such benefit payments will be made according to the
provisions of the Payout Period.
Section 13.1 shall be replaced with the following:
13.1 No Effect on Directorship Rights. Nothing contained herein will confer
upon the Director the right to be retained in the service of the Bank
nor limit the right of the Bank to discharge or otherwise deal with the
Director without regard to the existence of the Agreement. Pursuant to
12 C.F.R. ss. 563.39(b), the following conditions shall apply to this
Agreement:
(1) The Bank's Board of Directors may remove the Director at any time, but
any removal by the Bank's Board of Directors other than for Cause,
shall not prejudice the Director's vested right to compensation or
other benefits under the contract. As provided in Section 14.3, the
Director shall be paid his deferred fees plus accrued interest, as of
the date of removal, in a lump sum within thirty (30) days of his
removal in the event he is removed for Cause. He shall have no right
to receive additional compensation or other benefits for any period
after removal for Cause.
(2) If the Director is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)) the Bank's obligations under the
contract shall be suspended as of the date of termination of service
unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Director all
or part of the compensation withheld while its contract obligations
were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(3) If the Director is removed and/or permanently prohibited from
participating in the conduct of the Bank, s affairs by an order issued
under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) or (g)(1)), all non-vested obligations of the
Bank under the contract shall terminate as of the effective date of
the order, but vested rights of the Director shall not be affected.
(4) If the Bank is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all non-vested obligations under the
contract shall terminate as of the date of default.
(5) All non-vested obligations under the contract shall be terminated,
except to the extent determined that continuation of the contract is
necessary for the continued operation of the Bank:
(i) by the Director or his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters
into an agreement to provide assistance to or on behalf of the
Bank under the authority contained in ss. 13(c) of the Federal
Deposit Insurance Act; or
(ii) by the Director or his designee, at the time the Director or his
designee approves a supervisory merger to resolve problems
related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition.
Any rights of the parties that have already vested (i.e., the Director's
deferred fees plus accrued interest), however, shall not be affected by such
action.
IN WITNESS
OF, the parties have executed this Amendment, in triplicate, the day and year
written here below.
Date : February 23, 1993 /s/ David W. Laitinen
- - ------------------------ ---------------------
David W. Laitinen
HOME FEDERAL SAVINGS BANK
COLUMBUS, INDIANA
Date : February 18, 1993 By: /s/ John Keach, Sr.
- - ------------------------- ----------------------
John Keach, Sr., Chairman
<PAGE>
SECOND AMENDMENT
TO THE
DIERECTOR DEFERRED COMPENSATION AGREEMENT
OF
DAVID W. LAITINEN
This Second Amendment, dated the 21st day of December, 1993, hereby
amends the Director Deferred Compensation Agreement, ("Agreement"), effective as
of the 1st day of June, 1992, by and between David W. Laitinen and Home Federal
Savings Bank ("Bank"), of Seymour, Indiana, as follows:
Section 1.8 of the Agreement shall be replaced with the following:
1.8 "Deferred Compensation Benefit" means Seven Thousand Three
Hundred Eighty Dollars ($7,380.00) per month payable for a one
hundred eighty (180) month period, such period to begin at
Director's Normal Retirement Date.
The following language shall be added to Section II of the Agreement:
The Director elects to have an additional Two Hundred ($200.00) Dollars
per month deferred beginning January 1994. This additional amount represents an
increase in the monthly board fee earned by the Director and approved by the
Board of Directors. Commencing January 1994 and continuing through the end of
the Deferral Period, the Director and the Bank agree that the Director shall
defer into his Retirement Account monthly Director's fees totaling One Thousand
Three Hundred Fifty Dollars ($1,350.00) that the Director would otherwise be
entitled to receive from the Bank for each remaining month of the Deferral
Period.
Section 4.2 of the Agreement shall be replaced with the following:
4.2 Retirement Benefit - Shortened Deferral Period. In the event
Director defer fees for a period less than sixty (60) months,
whether through termination of service on the Board, election to
discontinue deferrals, absenteeism from meetings, or disability,
Director shall be entitled to receive, upon reaching Normal
Retirement Age, a Deferred Compensation Benefit determined by
multiplying Seven Thousand Three Hundred Eighty Dollars
($7,380.00) by a fraction, the numerator of which is equal to the
total Board fees actually deferred by the Director and the
denominator of which is equal to total Board fees which would
have been deferred during the entire sixty (60) month deferral
period. Such benefit payments will be made according to the
provisions of the Payout Period.
IN WITNESS WHEREOF, the parties have executed this Amendment, in triplicate, the
day and year written here below.
Date : December 21, 1993 /s/ David W. Laitinen
- - ------------------------ ---------------------
David W. Laitinen
HOME FEDERAL SAVINGS BANK
COLUMBUS, INDIANA
Date : December 21, 1993 By: /s/ John Keach, Jr.
- - ------------------------- ----------------------
John Keach, Jr., President
<PAGE>
THIRD AMENDMENT TO
DIRECTOR DEFERRED COMPENSATION AGREEMENT
OF DAVID W. LAITINEN
Pursuant to rights reserved under Section 14.1 of the Director Deferred
Compensation Agreement (the "Agreement") initially entered into as of the 1st
day of April, 1992, by and between Home Federal Savings Bank (the "Bank") and
David W.Laitinen (the "Director"),the Bank and the Director amend the Agreement,
effective as of July 1, 1996, by the addition of a new Section 13.11 which
provides, in its entirety, as follows:
13.11 Litigation Expenses. Any legal expenses incurred by the
Director or his beneficiary relating to the enforcement or
enforceability of any benefit obligations hereunder shall be paid or
reimbursed by the Bank to the extent permitted by law; provided,
however, that except as provided below, the maximum aggregate payment
and reimbursement of legal expenses under this Section 13.11 with
respect to the Director or his beneficiary shall not exceed Ten
Thousand Dollars ($10,000.00); provided, further, that this Ten
Thousand Dollar ($10,000.00) limitation shall be reduced by the amount
of any legal expenses incurred by the Director or his beneficiary which
were paid or reimbursed by the Bank under any other plan or arrangement
entered into by the Bank and Director. Notwithstanding anything
contained in this paragraph 13.11 to the contrary, the Director or his
beneficiary shall be entitled to payment or reimbursement of legal
expenses in excess of Ten Thousand Dollars ($10,000.00) if the expenses
were incurred as a result of a dispute under this Agreement in which
the Director or his beneficiary obtains a final judgment in his favor
from a court of competent jurisdiction or his claim is settled by the
Bank prior to the rendering of a judgment by such a court.
This Second Amendment has been executed this 19th day of March, 1998 to
be effective as of July 1, 1996.
HOME FEDERAL SAVINGS BANK
By:/s/ John K. Keach, Jr.
-------------------------
John K. Keach, Jr.
Its: President
FIRST
AMENDMENT
TO
DIRECTOR DEFERRED COMPENSATION AGREEMENT
OF
WILLIAM NOLTING
This First Amendment to the Director Deferred Compensation Agreement
between Home Federal Savings Bank and William Nolting, dated February 18, 1993
is for the purpose of amending the Agreement as follows:
Section 1.8 shall be replaced with the following:
1.8 "Deferred Compensation Benefit" means Two Thousand Six Hundred Nine
($2,609.00) Dollars per month payable for a one hundred eighty (180)
month period, such period to begin at Director's Normal Retirement Date.
Section II shall have the following language added to the end of the
Section:
The Director elects to have an additional Two Hundred ($200.00) Dollars
per month deferred beginning January 1993. This additional amount represents an
increase in the monthly board fee earned by the Director and approved by the
Board of Directors. Commencing January 1993 and continuing through the end of
the Deferral Period, the Director and the Bank agree that the Director shall
defer into his Retirement Account monthly Director's fees totalling One Thousand
One Hundred Fifty ($1,150.00) Dollars that the Director would otherwise be
entitled to receive from the Bank for each remaining month of the Deferral
Period.
Section 4.2 shall be replaced with the following:
4.2 Retirement Benefit - Shortened Deferral Period. In the event Director
defer fees for a period less than sixty (60) months, whether through
termination of service on the Board, election to discontinue
deferrals, absenteeism from meetings, or disability, Director shall be
entitled to receive, upon reaching Normal Retirement Age, a Deferred
Compensation Benefit determined by multiplying Two Thousand Three
Hundred Forty-Two ($2,342.00) Dollars by a fraction, the numerator of
which is equal to the total Board fees actually deferred by the
Director and the denominator of which is equal to total Board fees
which would have been deferred during the entire sixty (60) month
deferral period. Such benefit payments will be made according to the
provisions of the Payout Period.
Section 13.1 shall be replaced with the following:
13.1 No Effect on Directorship Rights. Nothing contained herein will confer
upon the Director the right to be retained in the service of the Bank
nor limit the right of the Bank to discharge or otherwise deal with the
Director without regard to the existence of the Agreement. Pursuant to
12 C.F.R. ss. 563.39(b), the following conditions shall apply to this
Agreement:
(1) The Bank's Board of Directors may remove the Director at any time, but
any removal by the Bank's Board of Directors other than for Cause,
shall not prejudice the Director's vested right to compensation or
other benefits under the contract. As provided in Section 14.3, the
Director shall be paid his deferred fees plus accrued interest, as of
the date of removal, in a lump sum within thirty (30) days of his
removal in the event he is removed for Cause. He shall have no right
to receive additional compensation or other benefits for any period
after removal for Cause.
(2) If the Director is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)) the Bank's obligations under the
contract shall be suspended as of the date of termination of service
unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Director all
or part of the compensation withheld while its contract obligations
were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(3) If the Director is removed and/or permanently prohibited from
participating in the conduct of the Bank, s affairs by an order issued
under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) or (g)(1)), all non-vested obligations of the
Bank under the contract shall terminate as of the effective date of
the order, but vested rights of the Director shall not be affected.
(4) If the Bank is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all non-vested obligations under the
contract shall terminate as of the date of default.
(5) All non-vested obligations under the contract shall be terminated,
except to the extent determined that continuation of the contract is
necessary for the continued operation of the Bank:
(i) by the Director or his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters
into an agreement to provide assistance to or on behalf of the
Bank under the authority contained in ss. 13(c) of the Federal
Deposit Insurance Act; or
(ii) by the Director or his designee, at the time the Director or his
designee approves a supervisory merger to resolve problems
related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition.
Any rights of the parties that have already vested (i.e., the Director's
deferred fees plus accrued interest), however, shall not be affected by such
action.
IN WITNESS
OF, the parties have executed this Amendment, in triplicate, the day and year
written here below.
Date : February 23, 1993 /s/ William Nolting
- - ------------------------ -------------------
William Nolting
HOME FEDERAL SAVINGS BANK
COLUMBUS, INDIANA
Date : February 18, 1993 By: /s/ John Keach, Sr.
- - ------------------------- ----------------------
John Keach, Sr., Chairman
<PAGE>
SECOND AMENDMENT TO
DIRECTOR DEFERRED COMPENSATION AGREEMENT
OF HARVARD W. NOLTING, JR.
Pursuant to rights reserved under Section 14.1 of the Director Deferred
Compensation Agreement (the "Agreement") initially entered into as of the 1st
day of April, 1992, by and between Home Federal Savings Bank (the "Bank") and
Harvard W. Nolting, Jr. (the "Director"), the Bank and the Director amend the
Agreement, effective as of July 1, 1996, by the addition of a new Section
13.11 which provides, in its entirety, as follows:
13.11 Litigation Expenses. Any legal expenses incurred by the
Director or his beneficiary relating to the enforcement or
enforceability of any benefit obligations hereunder shall be paid or
reimbursed by the Bank to the extent permitted by law; provided,
however, that except as provided below, the maximum aggregate payment
and reimbursement of legal expenses under this Section 13.11 with
respect to the Director or his beneficiary shall not exceed Ten
Thousand Dollars ($10,000.00); provided, further, that this Ten
Thousand Dollar ($10,000.00) limitation shall be reduced by the amount
of any legal expenses incurred by the Director or his beneficiary which
were paid or reimbursed by the Bank under any other plan or arrangement
entered into by the Bank and Director. Notwithstanding anything
contained in this paragraph 13.11 to the contrary, the Director or his
beneficiary shall be entitled to payment or reimbursement of legal
expenses in excess of Ten Thousand Dollars ($10,000.00) if the expenses
were incurred as a result of a dispute under this Agreement in which
the Director or his beneficiary obtains a final judgment in his favor
from a court of competent jurisdiction or his claim is settled by the
Bank prior to the rendering of a judgment by such a court.
This Second Amendment has been executed this 19th day of March, 1998 to
be effective as of July 1, 1996.
HOME FEDERAL SAVINGS BANK
By:/s/ John K. Keach, Jr.
-------------------------
John K. Keach, Jr.
Its: President
[Front Cover]
Company Logo Home Federal Bancorp
1998 Annual Report
[Picture omitted]
Vertical oblong shaped picture of various geometric designs in yellows,
greens, blues, and gray.
<PAGE>
[Inside front cover]
[Picture omitted]
The entire page is covered with various geometric designs in greens, blues and
yellows.
Company Logo Table of Contents
1998 Annual Report
Letter to Shareholders 2
Selected Consolidated Financial Data 5
Quarterly Results of Operations 6
Management's Discussion & Analysis 7
Consolidated Balance Sheets 17
Consolidated Statements of Income 18
Consolidated Statements of Shareholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
Independent Auditors' Report 36
Board of Directors & Officers of Home Federal
Bancorp & Executive Officers of Home Federal
Savings Bank 37
<PAGE>
Home Federal Bancorp enjoyed great
success in the 1998 fiscal year-
success that benefited our
communities, customers, and
shareholders. Through expansion of
our products and services and a more
aggressive retail approach, we have
capitalized on opportunities in the
marketplace.
As evidenced by the trends in our
loan portfolio, we strive to balance
our services and revenue sources to
ensure that Home Federal has the
strength, stability, and vitality to
grow in a variety of economic
environments.
Total Loan Portfolio in thousands [Pie graphs omitted, bottom half of page]
1994
Residential Mortgages 64.03% $296,679
Consumer 10.04% $ 46,516
Commercial 4.67% $ 21,660
Second & Home Equity 6.34% $ 29,396
Commercial Mortgages 14.92% $ 69,134
$463,365
1998
Residential Mortgages 48.89% $300,998
Consumer 8.44% $ 51,961
Commercial 8.27% $ 50,890
Second & Home Equity 10.61% $ 65,321
Commercial Mortgages 23.79% $146,495
$615,665
1
<PAGE>
To Our Shareholders
As part of last year's annual letter to shareholders, we observed that our
mission was "to effectively build Home Federal's strength for the long run... to
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."
At the close of our 1998 fiscal year, we can look back with considerable
satisfaction at the milestones we have marked: record annual earnings, a 70
percent increase in loan originations, and rewarding growth in our commercial
loan portfolio.
For the year, net income rose to $10,390,000, or $1.90 per dilutive common
share, compared to $8,572,000, or $1.63 per dilutive common share for the
previous year, an increase of 16.6 percent. The fiscal year 1997 number has been
adjusted for the $1.7 million after tax special assessment to help recapitalize
the FDIC Savings Association Insurance Fund. In fiscal 1998, net interest income
after provision for loan losses grew by $1,284,000, or 5.9 percent, while other
income-largely gain on sale of loans, service fees, and miscellaneous
income-increased by $2,529,000, or 35.2 percent. This fiscal year's strong
performance was fueled by an interest rate environment which proved attractive
to consumers and which led to substantial increases in Home Federal Savings
Bank's loan originations.
The lowest interest rate environment since the 1970s has brought both
opportunities and obstacles to Home Federal. On one hand, we welcome the
increasing numbers of new and existing customers attracted to our products by
lower rates. On the other hand, higher volumes of loan originations at lower
rates produce lower interest margins. In the 1998 fiscal year, the interest rate
environment drove refinance activity and fixed rate loan originations to record
levels. Because of our policy to sell the majority of our fixed rate mortgage
originations, Home Federal saw a substantial increase in gain on sale of loans
this fiscal year.
We know that the ongoing success of our primary mortgage business is directly
linked to consumer confidence in the economy. If we continue to enjoy months or
even years of the prosperity our nation has known throughout most of this
decade, we would expect our fixed rate loan volume to remain high and would
foresee selling such loans at a good return. But, if the economy slows for a
protracted period and if interest rates increase, we know that we will find
ourselves depending more on adjustable rate mortgage originations-and facing an
overall decline in loan production. We also know that we must be well prepared
for either eventuality.
To do so, we have placed and will continue to place a stronger emphasis on the
diversification of our loan portfolio. During the past year our commercial
lending activities grew to represent 8.3 percent of the loan portfolio, while
commercial real estate lending grew to represent 23.8 percent, and non-mortgage
consumer lending 8.4 percent. We will actively pursue a greater level of
activity in the commercial services realm in the years ahead.
In addition to diversifying our asset base, we continue to diversify our sources
of income. Service fees from our growing deposit and loan account base and
increased business in areas such as our Linsco Private Ledger brokerage division
have contributed to recent increases in non-interest income. We view the
development of our Trust and Asset Management Department as another way of both
bringing new customers to Home Federal's facilities and increasing our potential
for non-interest income.
Total 1-4 family mortgage recordings $1.2 billion [Pie graph omitted, bottom
left hand column]
Home Federal Savings Bank $300.7 million 25%
Competitors 75%
[Caption to the left of graph]
Home Federal Savings Bank's market share of residential mortgage recordings
increased to 25 percent in the 1998 fiscal year. Total 1-4 family mortgage
recordings* for our eight-county market area were $1.2 billion, of which $300.7
million were originated by Home Federal.
*Includes second mortgages and home equities
2
<PAGE>
Return on Average Shareholders' Equity [Bar graph omitted, top of page,
left hand column]
[Caption to the right of graph]
Return on Average Shareholders' Equity
Net income as a percentage of shareholders' equity. This is a ratio used to
measure a company's performance in terms of an individual's investment in that
company. We are pleased to show that this ratio has been above 15% for the last
five fiscal years.
Fiscal Year End 94 19.29%
Fiscal Year End 95 15.66%
Fiscal Year End 96 15.14%
Fiscal Year End 97* 15.80%
Fiscal Year End 98 16.66%
Efficiency Ratio [Bar graph omitted, middle of page, right hand side]
[Caption to the left of graph]
Efficiency Ratio
Operating expenses as a percentage of the sum of net interest income and
non-interest income. For example, during fiscal 1998, every $.52 in expense
generated $1.00 in net income.
Fiscal Year End 94 61.20%
Fiscal Year End 95 58.70%
Fiscal Year End 96 56.90%
Fiscal Year End 97* 51.90%
Fiscal Year End 98 51.55%
Commercial Loan Growth (in thousands) [Bar graph omitted, bottom of page, left
hand side]
[Caption to the right of graph]
Commercial Loan Growth (in thousands)
Between June 30, 1994, and June 30, 1998, total commercial loan balances grew
117% from $90,794 to $197,385.
Fiscal Year End 94 $ 90,794
Fiscal Year End 95 $101,381
Fiscal Year End 96 $128,608
Fiscal Year End 97 $147,724
Fiscal Year End 98 $197,385
* excluding the SAIF assessment
3
<PAGE>
To achieve long-term growth targets, we must be focused on attracting both new
and existing customers to our ever-expanding product and service offerings. To
foster this growth and awareness, we have taken a more aggressive approach to
our marketing program, a program designed to target products to customers
through the increased use of advertising, direct mail promotions, and customer
database technology. One rewarding result of our marketing program has been the
success of our Free Checking product, which was introduced less than a year ago
and which exceeded internal fiscal year growth estimates. Another addition to
our service offerings will be available in the fall of 1998 when we introduce
internet banking and a comprehensive Home Federal Bancorp website. Through these
and other diversification activities, we intend to bring better balance to our
operations-and to be well prepared for fluctuations, either agreeable or
adversarial, in the economic environment that shapes our business.
Like other financial institutions of its type and size, Home Federal continues
to encounter new challenges-ranging from such fundamental issues as funding our
growth and addressing shrinking margins to more specific concerns, such as the
potential effects of pending and proposed legislation, on both our business and
other businesses in the region we serve. One challenge we view as urgent is
assessing the potential impact of the Year 2000 issue-we are addressing this
issue on many fronts which include operations, customer relations, and employee
awareness.
We recognize the challenges we face in our eight-county marketplace and in the
world economy as a whole, but we cannot forget the growth of our region, the
prosperity it has generated in recent years, and the growth it suggests for the
future. Since 1990, the population of our south-central Indiana service region
has grown at a rate more than nine times greater than it experienced during the
1980s. During the 1990s, our regional labor force has grown by over 14 percent
and employment by more than 17 percent. As in the past, our challenge is to
provide customers in an ever-changing marketplace with financial products and
services that will help assure their economic success as well as ours.
"To improve is to change, so, to be perfect is to have changed often," reflected
Winston Churchill. As our predecessors strived to fulfill the changing needs of
Home Federal's earlier stakeholders, they observed the spirit of Churchill's
observation-and built a customer-focused financial institution that has now
prospered for 90 years. Today, in our ongoing quest for the perfect balance of
products and profitability, we pledge ourselves to the continuation of carefully
calculated, constructive change designed to build an even stronger Home Federal
in the years ahead.
Thank you for sharing our confidence in the future of Home Federal Bancorp.
Sincerely,
/s/ John K. Keach, Sr.
John K. Keach, Sr.
Chairman of the Board
/s/ John K. Keach, Jr.
John K. Keach, Jr.
President and Chief Executive Officer
4
<PAGE>
<TABLE>
<CAPTION>
Summary of Selected Consolidated Financial Data (in thousands except per share
data)
At or For the Year Ended June 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------
Selected Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total assets ................................. $ 719,549 $ 682,796 $ 630,015 $ 588,543 $ 545,228
Securities available for sale ................ $ 57,335 $ 40,119 $ 44,651 $ 34,221 $ 38,986
Securities held to maturity .................. $ 9,565 $ 13,115 $ 6,990 $ 17,451 $ 17,225
Loans receivable, net ........................ $ 582,040 $ 575,624 $ 520,097 $ 469,883 $ 445,903
Deposits ..................................... $ 543,989 $ 527,788 $ 489,573 $ 467,086 $ 445,987
Total borrowings ............................. $ 102,466 $ 92,393 $ 84,137 $ 72,900 $ 57,418
Shareholders' equity ......................... $ 66,952 $ 57,917 $ 51,517 $ 45,279 $ 38,589
Selected Operations Data:
Total interest income ........................ $ 55,103 $ 51,531 $ 47,156 $ 43,013 $ 38,059
Total interest expense ....................... 30,864 28,640 27,251 24,289 21,323
- - ---------------------------------------------------------------------------------------------------------------
Net interest income .......................... 24,239 22,891 19,905 18,724 16,736
Provision (credit) for loan losses ........... 1,193 1,129 638 (314) 491
- - ---------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses ......................... 23,046 21,762 19,267 19,038 16,245
Gain on sale of loans ........................ 3,410 1,267 1,321 667 2,072
Gain (loss) on sale of securities ............ 8 19 1 (437) 905
Other income ................................. 6,297 5,900 6,126 4,508 4,371
Other expense (1) ............................ 15,726 17,789 14,431 13,483 12,534
- - ---------------------------------------------------------------------------------------------------------------
Income before income taxes ................... 17,035 11,159 12,284 10,293 11,059
Income tax provision ......................... 6,645 4,313 4,932 3,757 4,069
- - ---------------------------------------------------------------------------------------------------------------
Net income (2) ............................... $ 10,390 $ 6,846 $ 7,352 $ 6,536 $ 6,990
===============================================================================================================
Basic earnings per common share .............. $ 2.03 $ 1.36 $ 1.47 $ 1.32 $ 1.44
Dilutive earnings per common share ........... $ 1.90 $ 1.30 $ 1.43 $ 1.29 $ 1.39
Cash dividends per share ..................... $ 0.37 $ 0.27 $ 0.20 $ 0.17 $ 0.13
Selected Financial and Statistical Data:
Return on average assets ..................... 1.47% 1.05% 1.23% 1.15% 1.31%
Return on average shareholders' equity ....... 16.66% 12.62% 15.14% 15.66% 19.29%
Interest rate spread during the period ....... 3.50% 3.59% 3.40% 3.43% 3.29%
Net interest margin on average earning assets 3.69% 3.76% 3.56% 3.54% 3.36%
Average shareholders' equity to average assets 8.85% 8.35% 8.12% 7.37% 6.78%
Efficiency ratio (3) ......................... 51.55% 51.90% 56.90% 58.70% 61.20%
Nonperforming assets to total assets ......... 0.59% 0.46% 0.48% 0.45% 0.50%
Loss allowance to nonperforming loans ........ 106.26% 122.82% 103.38% 107.35% 112.91%
Loss allowance to total loans ................ 0.71% 0.63% 0.58% 0.58% 0.57%
Dividend payout ratio ........................ 18.28% 20.13% 13.59% 12.64% 9.27%
Loan servicing portfolio ..................... $ 385,207 $ 297,982 $ 266,814 $ 224,690 $ 196,522
Allowance for loan losses .................... $ 4,243 $ 3,649 $ 3,061 $ 2,806 $ 2,580
Number of full service offices ............... 16 16 15 15 13
<FN>
_____________
(1) Fiscal 1997 other expense includes a one time SAIF assessment of $3.0 million.
(2) Fiscal 1997 net income excluding the after tax effect of the SAIF assessment would have been $8.6 milllion
or $1.63 per share.
(3) Operating Expenses 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,
amortization of intangibles, and non-recurring items.
</FN>
</TABLE>
5
<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.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
September 30, December 31, March 31, June 30,
Fiscal Year 1998 1997 1997 1998 1998
--------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income ............. $ 13,739 $ 13,943 $ 13,746 $ 13,675
Total interest expense ............ 7,665 7,885 7,663 7,651
- - -------------------------------------------------------------------------------------
Net interest income ............... 6,074 6,058 6,083 6,024
Provision for loan losses ......... 293 341 197 362
- - -------------------------------------------------------------------------------------
Net interest income after
provision for loan losses ....... 5,781 5,717 5,886 5,662
Gain on sale of loans ............. 371 791 1,425 823
Other income ...................... 1,574 1,669 1,352 1,710
Other expense ..................... 3,620 3,781 4,172 4,153
- - -------------------------------------------------------------------------------------
Income before income taxes ........ 4,106 4,396 4,491 4,042
Income tax provision .............. 1,645 1,709 1,739 1,552
- - -------------------------------------------------------------------------------------
Net Income ........................ $ 2,461 $ 2,687 $ 2,752 $ 2,490
=====================================================================================
Basic earnings per common share ... $ 0.47 $ 0.53 $ 0.54 $ 0.49
=====================================================================================
Dilutive earnings per common share. $ 0.46 $ 0.49 $ 0.50 $ 0.45
=====================================================================================
Dividends per share ................$ 0.083 $ 0.088 $ 0.100 $ 0.100
Stock sales price range: High (1) $ 22.83 $ 28.25 $ 32.75 $ 33.75
Low ..... $ 18.83 $ 21.33 $ 26.00 $ 28.50
Three Months Ended
--------------------------------------------------
September 30, December 31, March 31, June 30,
Fiscal Year 1998 1997 1997 1998 1998
--------------------------------------------------
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
=====================================================================================
Basic earnings per common share ... $ 0.09 $ 0.43 $ 0.43 $ 0.41
=====================================================================================
Dilutive earnings per common share $ 0.08 $ 0.42 $ 0.41 $ 0.39
=====================================================================================
Dividends per share ............... $ 0.056 $ 0.067 $ 0.067 $ 0.083
Stock sales price range: High (1) $ 13.17 $ 17.17 $ 18.67 $ 19.17
Low ..... $ 11.55 $ 13.00 $ 16.17 $ 16.67
<FN>
(1) The Company's common stock trades on the NASDAQ stock market under the symbol
"HOMF". As of June 30, 1998, the Company had 564 holders of record of its shares.
</FN>
</TABLE>
6
<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 $16.2 million in fiscal 1994 to $23.0 million in
fiscal 1998. The significant increase in net interest income is primarily the
result of an increase in interest-earning assets over interest-bearing
liabilities.
Certain Factors Affecting Income for Fiscal 1997 and 1998 and Future Income
In fiscal 1998 the Company originated approximately $281.6 million in
residential mortgages of which $210.1 million were sold. Of the $281.6
million in originations, $139.5 million were refinances of existing loans both
within the Company's portfolio and from competitors' portfolios.
In fiscal 1997 the Company originated approximately $162.7 million in
residential mortgages of which $73.9 million were sold. Of the $162.7 million in
originations, $28.6 were refinances of existing loans both within the Company's
portfolio and from competitors' portfolios.
Fiscal 1998 originations were 73% higher than fiscal 1997, sales were 184%
higher and refinances were 388% higher.
The low interest rate environment of fiscal 1998 caused most of the loan
origination volume to be made in low rate fixed rate mortgages, which the
Company sells to either Fannie Mae or Freddie Mac. The refinances can come from
either higher rate fixed rate loans where the borrower wants to lock in a lower
rate or from adjustable rate mortgages ("ARMs") where the borrower wants to lock
in a fixed rate that is not subject to future changes.
These increased loan originations and sales in fiscal 1998 caused the gain
on sale of loans to increase $2.1 million over fiscal 1997.
If loan originations and sales of fixed rate loans were to drop in fiscal
1999 to levels more in line with fiscal 1997, it is possible that the Company
would not be able to make up the subsequent loss of revenue from loan sales
through growth in the loan portfolio or other income generating areas and would
therefore experience flat or even declining revenues in fiscal 1999.
Refinance activity and loan originations are in large part driven by
overall interest rate levels. If rates are low, borrowers refinance and lock in
fixed rates. If rates are higher they tend not to refinance and are more likely
to finance with ARM products until rates drop again.
The Company's balance sheet and income are dramatically impacted by these
rate environments making it difficult to forecast with any certainty future
income levels.
In general if rates stay at current levels (around 7.00% and 7.25% for 15-
and 30-year fixed rate loans, respectively) the Company's management would
expect fewer refinances in fiscal 1999 and therefore reduced loan sales.
Management would also expect that most originations would be fixed rate
mortgages but not enough to equal the volume of fiscal 1998.
If mortgage loan rates drop another 25 to 50 basis points in fiscal 1999,
the Company's management would expect to see more refinances and thus more loan
sale income. Whether refinances would equal fiscal 1998 volumes is unknown.
If rates rise, the Company's management would expect to see refinances
slow, possibly to the levels of fiscal 1997, and ARM production increase.
Increases in ARM production would help the loan portfolio grow (the Company does
not typically sell its ARM products), thus interest income should grow.
In conclusion, the Company's fiscal 1999 income will be affected by a
number of components which could change materially from the components affecting
fiscal 1998 income under different rate scenarios.
The Company's core earnings should continue to match and even exceed most
thrift peer groups on a return on asset (ROA) and return on equity (ROE) basis.
The foregoing discussion and statements appearing elsewhere in this
Shareholder Annual Report contain forward-looking statements, within the meaning
of the Private Securities Litigation Reform Act of 1995, which involve a number
of risks and uncertainties. A number of factors could cause results to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements. These factors include, but are not
limited to, changes in economic conditions including fluctuations in interest
rates and inflation, regulatory developments, changes in monetary and fiscal
policies of the U. S. Treasury and the Board of Governors of the Federal Reserve
System, demand for loan products (including the relative demand for fixed rate
vs. adjustable rate loan products), the level of loan repayments and refinances,
deposit flows, competition and demand for financial services in the Company's
markets, changes in accounting policies, principles or guidelines, and other
factors set forth in this Shareholder Annual Report and in the Company's Form
10-K for the fiscal year ended June 30, 1998. These factors should be considered
in evaluating any forward-looking statements, and undue reliance should not be
placed on such statements. The Company does not undertake and specifically
disclaims any obligation to update any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
7
<PAGE>
Asset/Liability Management
The Bank follows a program designed to decrease its vulnerability to material
and prolonged increases in interest rates. This strategy includes 1) selling
certain longer term, fixed rate loans from its portfolio; 2) increasing the
origination of adjustable rate mortgage loans; 3) improving its interest rate
gap by increasing the interest rate sensitivity and shortening the maturities of
its interest-earning assets and extending the maturities of its interest-bearing
liabilities; and 4) increasing its non-interest income.
A significant part of the Bank's program of asset and liability management
has been the increased emphasis on the origination of adjustable rate and/or
short-term loans, which include adjustable rate residential mortgages and
construction loans, commercial loans, and consumer-related loans. The Bank
continues to offer fixed rate residential mortgage loans. The Bank retains the
servicing function on most of the 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 to repay short-term debt.
Liability Related Activities
The Bank has taken several steps to stabilize interest costs and match the
maturities of liabilities to assets. 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. 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 15% to
30% for fixed rate mortgage loans and mortgage-backed securities; 15% to 20% for
adjustable rate mortgage loans; and 0% to 75% 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 that 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.
8
<PAGE>
The following table sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at June 30, 1998.
(Dollars in thousands)
<TABLE>
<CAPTION>
Maturity or Repricing as of June 30, 1998
----------------------------------------------------------------------
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 .............. $ 99,989 $ 28,834 $ 67,216 $ 24,091 $ 343 $ 220,473
Fixed rate ................... 14,998 9,552 22,855 14,165 16,122 77,692
Commercial real estate ....... 53,040 42,409 34,805 16,138 2,935 149,327
Non-mortgage ................. 103,566 17,565 31,561 9,047 6,403 168,142
Securities and other ........... 24,650 8,999 18,726 15,527 3,928 71,830
- - ---------------------------------------------------------------------------------------------------------
Total .......................... 296,243 107,359 175,163 78,968 29,731 687,464
- - ---------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits ........ 160,709 89,620 68,384 20,596 4,621 343,930
Other deposits ................. 148,775 13,539 19,767 6,683 11,296 200,060
FHLB advances .................. 25,501 11,381 19,482 21,114 20,592 98,070
Other borrowings ............... 4,396 -- -- -- -- 4,396
- - ---------------------------------------------------------------------------------------------------------
Total .......................... 339,381 114,540 107,633 48,393 36,509 646,456
- - ---------------------------------------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities .. $ (43,138) $ (7,181) $ 67,530 $ 30,575 $ (6,778)
=========================================================================================================
Cumulative interest rate
sensitivity gap ............... $ (43,138) $ (50,319) $ 17,211 $ 47,786 $ 41,008
=========================================================================================================
Cumulative interest rate gap
as a percentage of total assets (6.00%) (6.99%) 2.39% 6.64% 5.70%
=========================================================================================================
</TABLE>
9
<PAGE>
Interest Rate Spread
The following table sets forth information concerning the Bank's
interest-earning assets, interest-bearing liabilities, net interest income,
interest rate spreads and net yield on average interest-earning assets during
the periods indicated (including fees which are considered adjustments of
(yields). Average balance calculations were based on daily and monthly balances.
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------
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 .................. $ 491,306 $ 41,218 8.39% $ 455,225 $ 38,633 8.49% $ 404,268 $ 34,521 8.54%
Commercial loans ................ 45,636 4,260 9.33% 39,892 3,638 9.12% 32,044 2,999 9.36%
Consumer loans .................. 53,911 5,536 10.27% 56,040 5,651 10.08% 60,224 5,779 9.60%
Securities ...................... 61,432 3,786 6.16% 50,752 3,307 6.52% 51,332 3,272 6.37%
Interest-bearing deposits ....... 5,369 303 5.64% 7,044 302 4.29% 11,786 585 4.96%
------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets (1) ..................... $ 657,654 $ 55,103 8.38% $ 608,953 $ 51,531 8.46% $ 559,654 $ 47,156 8.43%
===============================================================================================================================
Interest-bearing liabilities:
Deposits - Transaction accounts . $ 191,557 $ 5,425 2.83% $ 169,890 $ 4,420 2.60% $ 148,065 $ 3,393 2.29%
Certificate accounts . 339,379 19,090 5.62% 333,057 18,866 5.66% 322,386 19,103 5.93%
FHLB advances ................... 94,008 5,891 6.27% 74,267 4,652 6.26% 60,188 3,855 6.40%
Other borrowings ................ 7,471 458 6.13% 10,368 702 6.77% 11,625 900 7.74%
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities .................... $ 632,415 $ 30,864 4.88% $ 587,582 $ 28,640 4.87% $ 542,264 $ 27,251 5.03%
===============================================================================================================================
Net interest income .............. $ 24,239 $ 22,891 $ 19,905
===============================================================================================================================
Net interest rate spread ......... 3.50% 3.59% 3.40%
===============================================================================================================================
Net earning assets ............... $ 25,239 $ 21,371 $ 17,390
===============================================================================================================================
Net interest margin (2) .......... 3.69% 3.76% 3.56%
===============================================================================================================================
Average interest-earning
assets to average interest-
bearing liabilities ............. 103.99% 103.64% 103.21%
===============================================================================================================================
<FN>
________________
(1) Average balances are net of non-performing loans, and interest income includes loan fee amortization of $90,000, $320,000 and
$217,000 for the years ended June 30, 1998, 1997 and 1996, 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,
-----------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
-----------------------------------------------------------
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 ................................. $ (436) $ 3,021 $ 2,585 $ (212) $ 4,324 $ 4,112
Commercial loans ............................... 88 534 622 (75) 715 640
Consumer loans ................................. 108 (223) (115) 350 (478) (128)
Securities ..................................... (166) 645 479 71 (37) 34
Interest-bearing deposits ...................... 4 (3) 1 (72) (211) (283)
------------------------------------------------------------------------------------------------------------
Total .......................................... (402) 3,974 3,572 62 4,313 4,375
-----------------------------------------------------------------------------------------------------------
Interest expense on interest-bearing liabilities:
Deposits - Transaction accounts ................ 412 593 1,005 491 536 1,027
Certificate accounts ................ (131) 355 224 (955) 718 (237)
FHLB advances .................................. 2 1,237 1,239 (83) 879 796
Other borrowings ............................... (61) (183) (244) (106) (91) (197)
------------------------------------------------------------------------------------------------------------
Total .......................................... 222 2,002 2,224 (653) 2,042 1,389
-----------------------------------------------------------------------------------------------------------
Net change in net interest income ............... $ (624) $ 1,972 $ 1,348 $ 715 $ 2,271 $ 2,986
===========================================================================================================
</TABLE>
10
<PAGE>
Results of Operations
Comparison of Year Ended June 30, 1998 and Year Ended June 30, 1997:
General
The Company reported net income of $10.4 million for the year ended June 30,
1998. Net income for the year ended June 30, 1997 was $6.8 million which
included a charge for the 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. Comparing fiscal year 1998 net income to the SAIF adjusted
net income of fiscal year 1997, Home Federal showed an increase of $1.8 million,
or 21.2%.
Net Interest Income
Net interest income before provision for loan losses increased $1.3 million, or
5.9%, for the year ended June 30, 1998, compared to the prior year. This
increase was the result of assets growing $36.8 million, or 5.4%.
Net interest income after provision for loan losses also increased by $1.3
million, or 5.9% over that of the prior year, to $23.0 million even though the
loan loss provision in fiscal 1998 was $64,000 higher than the provision in
fiscal 1997. 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 $4.2 million at June 30, 1998.
Interest Income
The Company's total interest income for the year ended June 30, 1998 increased
$3.6 million, or 6.9%, as compared to the year ended June 30, 1997. Interest
income increased primarily due to growth in 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-residential mortgage loan
products.
Interest Expense
Total interest expense for the year ended June 30, 1998 increased $2.2 million,
or 7.8%, as compared to the year ended June 30, 1997. Increased deposit and
borrowing balances accounted for the increase in total interest expense.
Other Income
Other income increased $2.5 million from $7.2 million in fiscal year 1997 to
$9.7 million in fiscal year 1998. This increase was due to an increase of $2.1
million in gain on sale of loans, as well as increases in service fees and
miscellaneous income. The increase in gain on sale of loans was due to the low
interest rate environment in the second half of fiscal year 1998 that helped
cause loan originations to increase over 70% from the prior year. The Bank sells
most of its fixed rate loan originations, which increased 166% over the prior
year, thus causing the large increase in gain on sale of loans in the current
year. Service fees on NOW accounts increased $303,000 to $2.0 million in fiscal
1998 compared to $1.7 million in fiscal 1997 due primarily to new checking
account products that increased the number of accounts and related fees. The
growth in miscellaneous fees was due to the sale of a previous branch site and
increased appraisal fees due to increased volumes resulting from the lower rate
environment. Other increases included a $109,000 increase in insurance, annuity
income and other fees for the year ended June 30, 1998, as compared to the year
ended June 30, 1997. This increase was primarily due to fees generated by the
Bank's brokerage department. These increases were offset by decreases in loan
servicing income of $189,000 and decreases of $139,000 in income from joint
ventures. Loan servicing income of $841,000 included a $244,000 charge relating
to the impairment of the Bank's originated mortgage servicing rights. Statement
of Financial Accounting Standards No. 122 ("SFAS 122") specifies conditions
under which mortgage servicing rights should be accounted for separately from
the underlying mortgage loans. The impairment of these rights resulted from the
lower rate environment experienced primarily in the second half of fiscal 1998
causing the devaluation of the prior year's originated mortgage servicing rights
which were derived from the sale of higher rate loans in fiscal 1997. Joint
venture income decreased, as several joint ventures are reaching their
conclusion and a new joint venture formed to start residential lots is still in
the development stage.
Other Expenses
Other expense decreased over the prior fiscal year to $15.7 million from $17.8
million, a $2.1 million decrease. The FDIC assessment represented $3.0 million
of the $2.1 million decrease. Without the one time assessment, non-interest
expense would have increased $938,000, or 6.3%. Most of the adjusted increase in
non-interest expense came from personnel cost increases due to normal salary
increases and increased commissions due to the increased loan activity discussed
previously, totaling $806,000, and increased bonus payouts of $172,000 due to
increased after tax earnings. Additionally, occupancy and equipment expense
increased $201,000, or 9.6%, due to two primary factors: 1) depreciation charges
for the relocated Salem branch office and 2) increased equipment expense related
primarily to the upgrade and maintenance of data processing equipment.
Miscellaneous expenses increased $279,000, or 11.2%, due to a variety of factors
including: 1) increased loan expenses of $20,000 related to increased loan
volume, as well as a one time charge of $30,000 to write off miscellaneous loan
charges, 2) increased checking account related charges of $82,000 due to the
growth in checking accounts, 3) increased real estate owned expenses of $39,000
and 4)increases in office supplies of $53,000.
11
<PAGE>
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
relative 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 gain 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, annuity income 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.
12
<PAGE>
Financial Condition
The Company's total assets increased $36.8 million to $719.5 million at June 30,
1998, from $682.8 million at June 30, 1997. Cash and interest-bearing deposits
increased $4.6 million. In addition, loans held for sale and net loans
receivable increased $14.5 million. Mortgage loans increased $10.2 million while
non-mortgage loans increased $5.0 million. Securities available for sale
increased $17.2 million, while securities held to maturity decreased $3.6
million.
The Company's total liabilities increased $27.7 million with deposits
increasing $16.2 million and Federal Home Loan Bank advances increasing $18.1
million. The Company paid off $7.8 million of senior debt outstanding during
fiscal year 1998.
Shareholders' equity increased $9.0 million, primarily due to an increase
in retained earnings of $8.5 million. Retained earnings increased $10.4 million
from net income and decreased $1.9 million as a result of dividends paid to
shareholders. Common stock had a net increase of $414,000; $304,000 from options
exercised, $114,000 from the related tax benefit of non-qualified dispositions
of such options and a $4,000 decrease from the purchase of fractional shares
resulting from a three-for-two stock split which occurred in November 1997. In
accordance with Statement of Accounting Standards 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company had unrealized gains in
its available for sale portfolio of $78,000, or a $131,000 increase in
shareholders' equity from the June 30, 1997 loss position of $53,000.
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,
1998 these price indications varied from 73.91 to 118.85 for fixed rate
mortgages and mortgage-backed securities and varied from 87.87 to 107.65 for
adjustable rate mortgages and mortgage-backed securities. Prepayment rates for
June 30, 1998 ranged from a constant prepayment rate ("CPR") of 6% to a CPR of
41%.
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, 1998, the retail CD price assumptions
varied from 76.03 to 125.61. 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, 1998, the retail CD intangible
price assumptions varied from .02 to .66.
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, 1998, the intangible prices
for transaction accounts, money market deposit accounts and passbook accounts
varied from -2.23 to 19.11, -.58 to 12.37 and -1.01 to 14.56, respectively.
The following table sets forth the Bank's interest rate sensitivity of NPV
as of June 30, 1998. (Dollars in thousands)
Net Portfolio Value NPV as % of PV of Assets
- - -------------------------------------------------------------------------
Change
In Rates $ Amount $ Change % Change NPV Ratio Change
- - -------------------------------------------------------------------------
+400 bp 65,996 -12,039 -15 9.44% (117) bp
+300 bp 70,552 -7,483 -10 9.95% (67) bp
+200 bp 74,375 -3,660 -5 10.34% (27) bp
+100 bp 77,029 -1,007 -1 10.58% (3) bp
0 bp 78,035 - - 10.61% -
- - -100 bp 78,602 567 1 10.59% (2) bp
- - -200 bp 79,256 1,221 2 10.58% (4) bp
- - -300 bp 81,531 3,496 4 10.76% 14 bp
- - -400 bp 84,425 6,390 8 11.00% 38 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.
13
<PAGE>
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 is carried at the lower of cost or estimated fair value
less estimated cost to sell. (Dollars in thousands)
At June 30,
--------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------
Non-accruing loans:
Mortgage .................. $3,004 $2,182 $2,153 $1,904 $1,837
Commercial ................ 522 258 307 197 205
Consumer .................. 466 490 411 330 188
----------------------------------------------------------------------------
Total ..................... 3,992 2,930 2,871 2,431 2,230
----------------------------------------------------------------------------
Accruing loans:
Mortgage .................. -- 2 88 69 77
Commercial ................ -- 36 -- -- --
Consumer .................. -- 2 1 12 38
----------------------------------------------------------------------------
Total ..................... -- 40 89 81 115
----------------------------------------------------------------------------
Troubled debt restructured .. -- 1 1 102 283
- - ------------------------------------------------------------------------------
Total non-performing loans .. 3,992 2,971 2,961 2,614 2,628
Real estate owned ........... 242 139 48 41 98
- - ------------------------------------------------------------------------------
Total non-performing assets $4,234 $3,110 $3,009 $2,655 $2,726
==============================================================================
Non-performing assets to
total assets .............. 0.59% 0.46% 0.48% 0.45% 0.50%
==============================================================================
Non-performing loans to
total loans ............... 0.67% 0.51% 0.56% 0.55% 0.59%
==============================================================================
Allowance for loan losses to
non-performing loans ...... 106.29% 122.82% 103.38% 107.35% 98.17%
==============================================================================
In addition, at June 30, 1998, there were $2.2 million 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. Total non-performing assets increased $1.1 million to
$4.2 million in fiscal 1998. The majority of the increase in non-performing
loans was in the residential mortgage area, which rose $822,000, with an
additional increase of $264,000 coming from commercial loans. The increase in
residential non-performing loans was due primarily to increased bankruptcies.
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)
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ... $ 3,649 $ 3,061 $ 2,806 $ 2,580 $ 2,257
Provision for loan losses ...... 1,193 1,130 638 (314) 491
Loan charge-offs:
Mortgage ..................... (20) (9) (10) (6) (47)
Commercial ................... (11) -- (9) -- --
Consumer ..................... (665) (611) (434) (369) (262)
-----------------------------------------------------------------------------------------
Total charge-offs ............ (696) (620) (453) (375) (309)
-----------------------------------------------------------------------------------------
Recoveries:
Mortgage ..................... 5 9 16 2 15
Commercial ................... -- -- -- 822 34
Consumer ..................... 92 69 54 91 92
----------------------------------------------------------------------------------------
Total recoveries ............. 97 78 70 915 141
----------------------------------------------------------------------------------------
Net loan recoveries(charge-offs) (599) (542) (383) 540 (168)
==========================================================================================
Balance ........................ $ 4,243 $ 3,649 $ 3,061 $ 2,806 $ 2,580
- - ------------------------------------------------------------------------------------------
Net charge-offs to average loans 0.10% 0.11% 0.08% -0.12% 0.04%
==========================================================================================
Allowance balance to total loans 0.71% 0.63% 0.58% 0.58% 0.57%
==========================================================================================
</TABLE>
14
<PAGE>
Liquidity and Capital Resources
The standard measure of liquidity for the thrift industry is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year. The minimum required level is currently set by
OTS regulation at 4%. At June 30, 1998, the Bank's liquidity ratio was 14.90%.
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, 1998, the Bank had $98.1 million in
borrowings from the FHLB of Indianapolis. As of that date, the Bank had
commitments to fund loan originations and purchases of approximately $25.4
million and commitments to sell loans of $17.4 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, 1998, there was a net increase of $4.6 million in cash and cash equivalents.
The major uses of cash during the year were loan originations net of repayments
of $229.2 million; purchases of investment and mortgage-backed securities of
$41.5 million; repayment of FHLB advances of $70.9 million; and repayment of
senior debt of $7.8 million. Partially offsetting these uses of cash, the major
sources of cash provided during the year included $196.0 million from selling
fixed rate mortgage loans to Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC"); selling $20.2 million of fixed
and adjustable rate mortgages to First Tennessee Bank; maturities and sales of
investment securities of $28.7 million; and proceeds from FHLB advances of $89.0
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 do
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.
Year 2000 Disclosure
The Problem
The Year 2000 issue is the result of potential problems with computer systems or
any equipment with computer chips that store the year portion of the date as
just two digits (e.g. 98 for 1998). Systems using this two-digit approach will
not be able to determine whether "00" represents the year 2000 or 1900. The
problem, if not corrected, will make those systems fail altogether or, even
worse, allow them to generate incorrect calculations causing a disruption of
normal operations.
Readiness Efforts
In 1997, a comprehensive project plan to address the Year 2000 issue as it
relates to the Company's operation was developed, approved by the Board of
Directors and implemented. The scope of the plan includes five phases of
Awareness, Assessment, Renovation, Validation and Implementation as defined by
federal banking regulatory agencies. A project team that consists of key members
of the technology staff, representatives of functional business units and senior
management was developed. Additionally, the duties of the Vice President of Data
Processing Compliance were realigned to serve primarily as the Year 2000 project
manager.
An assessment of the impact of the Year 2000 issue on the Company's
computer systems has been completed. The scope of the project also includes
other operational and environmental systems since they may be impacted if
embedded computer chips control the functionality of those systems. From the
assessment, the Company has identified and prioritized those systems deemed to
be mission critical or those that have a significant impact on normal
operations.
The Company relies on third party vendors and service providers for its
data processing capabilities and to maintain its computer systems. Formal
communications with these providers and other external counterparties were
initiated in 1997 to assess the Year 2000 readiness of their products and
services. Their progress in meeting their targeted schedules is being monitored
for any indication that they may not be able to address the problems in time.
Thus far, responses indicate that most of the significant providers currently
have compliant versions available or are well into the renovation and testing
phases with completion scheduled for sometime in 1998. However, the Company can
give no guarantee that the systems of these service providers and vendors on
which the Company's systems rely will be timely renovated.
Additionally, the Company has implemented a plan to manage the potential
risk posed by the impact of the Year 2000 issue on its major customers. Formal
communications have been initiated, and the assessment is scheduled to be
significantly completed by September 30, 1998.
15
<PAGE>
Current Status
The project team estimates that the Company's Year 2000 readiness project is 53%
complete and that the activities involved in assessing external risks and
operational issues are 69% completed overall. The following table provides a
summary of the current status of the five phases involved and a projected
timetable for completion.
Projected
Project Phase % Completed Completion Comments
- - --------------------------------------------------------------------------------
Awareness 100% Completed
Assessment 100% Completed
Renovation 88% 31-Dec-98 Target date for critical systems
Validation 62% 31-Mar-99
Implementation 0% 30-Jun-99
- - --------------------------------------------------------------------------------
OVERALL 53%
================================================================================
Costs
The Company has thus far primarily used and expects to continue to primarily use
internal resources to implement its readiness plan and to upgrade or replace and
test systems affected by the Year 2000 issue. The total cost to the Company of
these Year 2000 compliance activities has not been and is not anticipated to be
material to its financial position or results of operations in any given year.
In total, the Company estimates that its costs, excluding personnel expenses,
for Year 2000 remediation and testing of its computer systems will amount to
less than $50,000 over the three-year period from 1997 through 1999. Not
included in this estimate is the cost to replace fully depreciated systems
during this period, which occurs in the normal course of business and is not
directly attributable to the Year 2000 issue.
The costs and the timetable in which the Company plans to complete the Year
2000 readiness activities are based on management's best estimates, which were
derived using numerous assumptions of future events including the continued
availability of certain resources, third party readiness plans and other
factors. The Company can make no guarantee that these estimates will be
achieved, and actual results could differ from such plans.
Risk Assessment
Based upon current information related to the progress of its major vendors and
service providers, management has determined that the Year 2000 issue will not
pose significant operational problems for its computer systems. This
determination is based on the ability of those vendors and service providers to
renovate, in a timely manner, the products and services on which the Company's
systems rely. However, the Company can give no guarantee that the systems of
these suppliers will be timely renovated.
Contingency Plan
Realizing that some disruption may occur despite its best efforts, the Company
is in the process of developing contingency plans for each critical system in
the event that one or more of those systems fail. While this is an ongoing
process, the Company expects to have the plan substantially documented by
September 30, 1998.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement Nos. 130, 131 and
133 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.
16
<PAGE>
Consolidated Balance Sheets (in thousands except share data)
<TABLE>
<CAPTION>
June 30,
-------------------
ASSETS: 1998 1997
-------------------
<S> <C> <C>
Cash ................................................................ $ 19,063 $ 16,274
Interest-bearing deposits ........................................... 5,304 3,498
-------- --------
Total cash and cash equivalents ................................... 24,367 19,772
-------- --------
Securities available for sale at fair value (amortized cost $57,205
and $40,208) (Note 2) ........................................... 57,335 40,119
Securities held to maturity (fair value $9,550 and $13,012 ) (Note 2) 9,565 13,115
Loans held for sale (fair value $12,840 and $4,688) (Note 4) ........ 12,711 4,629
Loans receivable, net of allowance for loan losses of $4,243
and $3,649 (Notes 3, 9) .......................................... 582,040 575,624
Investments in joint ventures (Note 5) .............................. 4,077 3,084
Federal Home Loan Bank stock (Note 9) ............................... 5,456 4,260
Accrued interest receivable, net (Note 6) ........................... 4,721 4,272
Premises and equipment, net (Note 7) ................................ 8,566 8,171
Real estate owned ................................................... 242 139
Prepaid expenses and other assets ................................... 2,964 2,284
Cash surrender value of life insurance ............................. 5,808 5,529
Goodwill, net ....................................................... 1,697 1,798
-------- --------
TOTAL ASSETS ..................................................... $719,549 $682,796
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits (Note 8) ................................................... $543,989 $527,788
Advances from Federal Home Loan Bank (Note 9) ....................... 98,070 79,945
Senior debt (Note 10) ............................................... -- 7,800
Other borrowings (Note 10) .......................................... 4,396 4,648
Advance payments by borrowers for taxes and insurance ............... 320 296
Accrued expenses and other liabilities .............................. 5,822 4,402
-------- --------
Total liabilities ................................................ 652,597 624,879
-------- --------
Shareholders' equity (Notes 10, 11, 12, 14):
No par preferred stock; Authorized: 2,000,000 shares
Issued and outstanding: None
No par common stock; Authorized: 7,500,000 shares
Issued and outstanding: ........................................... 7,963 7,549
5,139,176 shares at June 30, 1998
5,094,493 shares at June 30, 1997
Retained earnings, restricted ...................................... 58,911 50,421
Unrealized gain (loss) on securities available for sale,
net of deferred taxes of $52 and $36 ............................. 78 (53)
-------- --------
Total shareholders' equity ....................................... 66,952 57,917
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....................... $719,549 $682,796
======== ========
</TABLE>
See notes to consolidated financial statements
17
<PAGE>
Consolidated Statements of Income (in thousands except per share data)
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------
Interest income: 1998 1997 1996
----------------------------
<S> <C> <C> <C>
Loans receivable (Note 3) ........................ $51,014 $47,923 $43,299
Securities available for sale and held to maturity 3,786 3,306 3,272
Other interest income ............................ 303 302 585
------- ------- -------
Total interest income ............................. 55,103 51,531 47,156
------- ------- -------
Interest expense:
Deposits (Note 8) ................................ 24,515 23,286 22,496
Advances from Federal Home Loan Bank (Note 9) .... 5,884 4,651 3,855
Borrowings - long term (Note 10) ................. 465 703 900
------- ------- -------
Total interest expense ............................ 30,864 28,640 27,251
------- ------- -------
Net interest income ............................... 24,239 22,891 19,905
Provision for loan losses ......................... 1,193 1,129 638
------- ------- -------
Net interest income after provision for loan losses 23,046 21,762 19,267
------- ------- -------
Other income:
Gain on sale of loans ............................ 3,410 1,267 1,321
Gain on sale of securities available for sale .... 8 19 1
Income from joint ventures (Note 5) .............. 293 432 530
Insurance, annuity income, other fees ............ 1,583 1,474 1,406
Service fees on NOW accounts ..................... 1,976 1,673 1,635
Net gain (loss) on real estate owned ............. 19 (24) (18)
Loan servicing income ............................ 841 1,030 945
Miscellaneous .................................... 1,585 1,315 1,628
------- ------- -------
Total other income ................................ 9,715 7,186 7,448
------- ------- -------
Other expenses:
Compensation and employee benefits (Note 13) ..... 8,790 8,153 7,662
Occupancy and equipment .......................... 2,305 2,104 1,929
Service bureau expense ........................... 796 779 777
Federal insurance premium (Note 12) .............. 328 3,652 1,065
Marketing ........................................ 629 503 498
Goodwill amortization ............................ 101 100 101
Miscellaneous .................................... 2,777 2,498 2,399
------- ------- -------
Total other expenses .............................. 15,726 17,789 14,431
Income before income taxes ........................ 17,035 11,159 12,284
Income tax provision (Note 11) .................... 6,645 4,313 4,932
------- ------- -------
Net Income ........................................ $10,390 $ 6,846 $ 7,352
======= ======= =======
Basic earnings per common share ................... $ 2.03 $ 1.36 $ 1.47
Dilutive earnings per common share ................ $ 1.90 $ 1.30 $ 1.43
======= ======= =======
</TABLE>
See notes to consolidated financial statements
18
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except shares outstanding)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
net of Total
Shares Common Retained Deferred Shareholders'
Outstanding Stock Earnings Taxes Equity
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 ($.30 per share) .. (999) (999)
Net income ....................... 7,352 7,352
Change in unrealized gain (loss)
on securities available for sale (186) (186)
--------------------------------------------------------------------------------------------------
Balance at June 30, 1996 ......... 2,226,282 6,819 44,953 (255) 51,517
Stock split 3 for 2;
fractional shares ........... 1,113,000 (5) (5)
Stock options exercised .......... 57,047 670 670
Tax benefit related to exercise
of non-qualified stock options 65 65
Cash dividends ($.41 per share) .. (1,378) (1,378)
Net income ....................... 6,846 6,846
Change in unrealized gain (loss)
on securities available for sale 202 202
--------------------------------------------------------------------------------------------------
Balance at June 30, 1997 ......... 3,396,329 7,549 50,421 (53) 57,917
Stock split 3 for 2;
fractional shares ........... 1,698,000 (4) (4)
Stock options exercised .......... 44,847 304 304
Tax benefit related to exercise
of non-qualified stock options 114 114
Cash dividends ($.3695 per share) (1,900) (1,900)
Net income ....................... 10,390 10,390
Change in unrealized gain (loss)
on securities available for sale 131 131
--------------------------------------------------------------------------------------------------
Balance at June 30, 1998 ......... 5,139,176 $ 7,963 $58,911 $ 78 $66,952
==================================================================================================
</TABLE>
See notes to consolidated financial statements
19
<PAGE>
Consolidated Statements of Cash Flows (in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1998 1997 1996
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income .................................................. $ 10,390 $ 6,846 $ 7,352
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of discounts, amortization and depreciation .. 731 1,191 1,234
Provision for loan losses .............................. 1,193 1,130 638
Net gain from sale of loans ............................ (3,410) (1,267) (1,321)
Net gain from sale of securities available for sale .... (8) (19) (1)
Net gain from joint ventures; real estate owned ........ (312) (408) (504)
Net loan fees deferred (recognized) .................... 130 (403) (106)
Proceeds from sale of loans held for sale .............. 216,227 79,551 107,500
Origination of loans held for sale ..................... (220,899) (78,291) (98,014)
Decrease in accrued interest and other assets ......... 6,013 1,468 6,339
Increase (decrease) in other liabilities ............... 1,444 (90) 1,510
- - ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities ................... 11,499 9,708 24,627
- - ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net principal disbursed on loans ............................ (9,037) (57,545) (54,248)
Proceeds from:
Maturities/Repayments of:
Securities held to maturity ......................... 9,142 346 3,580
Securities available for sale ....................... 7,181 12,337 4,513
Sales of:
Securities available for sale ....................... 11,632 8,572 5,507
Real estate owned and other asset sales ............. 762 504 436
Purchases of:
Loans .................................................. (6,815) (947) (3,365)
Securities available for sale .......................... (35,870) (16,085) (13,955)
Securities held to maturity ............................ (5,585) (6,453) --
Federal Home Loan Bank stock ........................... (1,196) (462) (379)
Increase in cash surrender value of life insurance .......... (279) (525) (238)
Acquisition of property and equipment, net .................. (1,627) (1,129) (654)
- - ---------------------------------------------------------------------------------------------------
Net cash used in investing activities ....................... (31,692) (61,387) (58,803)
- - ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net ................................... 16,201 38,215 22,487
Proceeds from advances from Federal Home Loan Bank .......... 89,000 50,800 28,200
Repayment of advances from Federal Home Loan Bank ........... (70,875) (41,555) (17,500)
Repayment of senior debt .................................... (7,800) (1,300) (1,300)
Net proceeds from overnight borrowings ...................... (252) 311 1,837
Common stock options exercised, net of fractional shares paid 414 730 71
Payment of dividends on common stock ........................ (1,900) (1,378) (999)
- - ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities ................... 24,788 45,823 32,796
- - ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ........ 4,595 (5,856) (1,380)
Cash and cash equivalents, beginning of year ................ 19,772 25,628 27,008
- - ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year ...................... $ 24,367 $ 19,772 25,628
===================================================================================================
Supplemental information:
Cash paid for interest ...................................... $ 30,635 $ 28,474 $ 27,050
Cash paid for income taxes .................................. $ 6,727 $ 4,224 $ 4,450
Assets acquired through foreclosure ......................... $ 844 $ 192 $ 133
===================================================================================================
</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
20
<PAGE>
Notes to Consolidated Financial Statements
for the Three Years in the Period Ended June 30, 1998
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, mortgage
servicing rights 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.
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 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 Sheets 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.
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 judgment, the interest will not be
collectible
in the normal course of business.
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," 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.
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.
21
<PAGE>
Provision for Losses
A provision for estimated losses on loans and real estate owned is charged to
operations based upon management's evaluation of the potential losses. Such an
evaluation, which includes a review of all loans for which full collectibility
may not be reasonably assured, considers, among other matters, the estimated net
realizable value of the underlying collateral, as applicable, economic
conditions, historical loan loss experience and other factors that are
particularly susceptible to changes that could result in a material adjustment
in the near term. While management endeavors to use the best information
available in making its evaluations, future allowance adjustments may be
necessary if economic conditions change substantially from the assumptions used
in making the evaluations.
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 did not have any
derivative financial instruments outstanding at June 30, 1998. The Company
previously entered into an interest rate swap agreement as a means of managing
the interest rate exposure of its senior debt obligation which was repaid during
fiscal year 1998. The interest rate swap was accounted for under the accrual
method. Under this method, the differential to be paid or received on the
interest rate swap agreement was recognized over the life of the agreement in
interest expense. Changes in fair value of interest rate swaps accounted for
under the accrual method were 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 was designated to the senior debt obligation
and altered the debt's 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 1998, 1997 and
1996 was $101,000, $100,000 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 the 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
basic shares and dilutive shares outstanding during the year. All per share
information has been restated to reflect the Company's three for two stock split
in November 1997.
The Company adopted SFAS No. 128, "Earnings per Share," for fiscal year
1998 with all prior period earnings per share data restated. This statement
established new accounting standards for the calculation of basic earnings per
share as well as diluted earnings per share. The adoption of the statement did
not have a material effect on the Company's calculation of earnings per share.
The following is a reconciliation of the weighted average common shares for the
basic and diluted earnings per share computations:
1998 1997 1996
----------------------------------
Basic Earnings per Share:
Weighted average common shares.........5,114,091 5,043,353 4,994,658
==================================
Weighted average common shares.........5,114,091 5,043,353 4,994,658
Dilutive effect of stock options....... 355,259 206,365 135,205
----------------------------------
Weighted average common and
incremental shares.................5,496,350 5,249,718 5,129,863
==================================
22
<PAGE>
Changes in Presentation
Certain amounts and items appearing in the fiscal 1997 and 1996 financial
statements have been reclassified to conform to the fiscal 1998 presentation.
New Accounting Pronouncements
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 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. This statement will result in additional
financial statement disclosures upon adoption.
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.
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued in
June 1998 and is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
fair value hedge, a cash flow hedge, or a hedge of foreign currency exposure.
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. 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, 1998 June 30, 1997
---------------------------------------- --------------------------------------
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>
Agency bonds ............ $ 1,487 $ 6 $ -- $ 1,493 $ 3,883 $ 17 $ (1) $ 3,899
Municipal bonds ......... 2,840 24 (35) 2,829 820 -- -- 820
Collateralized mortgage
obligations ..... 3,976 -- (22) 3,954 6,342 -- (123) 6,219
Pass-thru certificates .. 1,262 12 0 1,274 2,070 5 (1) 2,074
- - ---------------------------------------------------------------------------------------------------------
Total held to maturity .. $ 9,565 $ 42 $ (57) $ 9,550 $13,115 $ 22 $ (125) $13,012
=========================================================================================================
Available for sale:
Agency bonds ............ $29,148 $ 227 $ (9) $29,366 $18,659 $ 73 $ (54) $18,678
Collateralized mortgage
obligations ..... 6,678 2 (31) 6,649 10,487 5 (138) 10,354
Pass-thru certificates .. 3,844 6 (6) 3,844 6,062 28 (29) 6,061
Corporate debt .......... 13,301 1 (78) 13,224 1,000 7 -- 1,007
Mutual funds ............ 4,159 18 -- 4,177 3,925 19 -- 3,944
Equity securities ....... 75 -- -- 75 75 $ -- $ -- $ 75
- - ---------------------------------------------------------------------------------------------------------
Total available for sale $57,205 $ 254 $(124) $57,335 $40,208 $ 132 $ (221) $40,119
=========================================================================================================
</TABLE>
Certain securities, with both amortized cost and fair value of $3.5 million and
$3.0 million at June 30, 1998 and 1997, respectively, were pledged as collateral
for the Bank's treasury, tax and loan account at the Federal Reserve and for
certain trust, IRA and KEOGH accounts.
23
<PAGE>
The amortized cost and fair value of securities at June 30, 1998, by contractua
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
------------------------------ ----------------------------
Agency bonds:
<S> <C> <C> <C> <C> <C> <C>
Due after 1 year though 5 years . $1,487 $ 1,493 6.89% $ 28,477 $ 28,696 6.43%
Due after 10 years .............. -- -- -- 671 670 6.38%
Municipal bonds:
Due in one year or less ......... 105 105 6.59% -- -- --
Due after 1 year though 5 years . 660 668 7.00% -- -- --
Due after 5 years though 10 years 1,300 1,266 5.83% -- -- --
Due after 10 years .............. 775 790 7.34% -- -- --
Collateralized mortgage obligations 3,976 3,954 6.08% 6,678 6,649 5.87%
Pass-thru certificates ............. 1,262 1,274 6.96% 3,844 3,844 6.20%
Corporate debt:
Due after 1 year though 5 years . -- -- -- 13,301 13,223 7.66%
Mutual funds ....................... -- -- -- 4,159 4,178 5.60%
Equity securities .................. -- -- -- 75 75 --
- - -------------------------------------------------------------------------------------------------
Total .............................. $9,565 $ 9,550 6.46% $ 57,205 $ 57,335 6.56%
=================================================================================================
</TABLE>
Activities related to the sales of securities available for sale are summarized
as follows: (In thousands)
Years Ended June 30,
------------------------------------
1998 1997 1996
-------------------------------------
Proceeds from sales................ $ 11,632 $ 8,572 $ 5,507
Gross gains on sales............... $ 25 $ 38 $ 1
Gross losses on sales.............. $ 17 $ 19 $ -
3. Loans Receivable
Loans receivable are summarized as follows: (In thousands)
1998 1997
First mortgage loans: -------------------------
Residential single family ................... $ 268,133 $ 300,531
Commercial and multi-family ................. 97,469 79,696
Property under construction ................. 77,227 54,504
Unimproved land ............................. 4,664 4,192
Home equity ...................................... 35,065 34,391
Second mortgage .................................. 30,256 29,267
Commercial ....................................... 50,890 43,112
Mobile home ...................................... 14,349 16,613
Automobile ....................................... 23,194 23,086
Consumer ......................................... 10,347 11,017
Savings account .................................. 4,071 3,989
- - -------------------------------------------------------------------------------
Gross loans receivable ...................... 615,665 600,398
Allowance for loan losses ........................ (4,243) (3,649)
Deferred loan fees ............................... (690) (560)
Undisbursed loan proceeds ........................ (28,691) (20,519)
Unearned interest and unearned discounts ......... (1) (5)
Purchase discount ................................ -- (41)
- - --------------------------------------------------------------------------------
Loans Receivable, Net ............................ $ 582,040 $ 575,624
================================================================================
24
<PAGE>
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
$4.0 million and $2.9 million at June 30, 1998 and 1997, respectively. The Bank
would have recorded interest income of $325,000 in 1998 and $274,000 in 1997 if
loans on nonaccrual status had been current in accordance with their original
terms. Actual interest received was $250,000 and $266,000 for fiscal years
ending 1998 and 1997, respectively. The Bank agreed to modify the terms of
certain loans to customers who were experiencing financial difficulties.
Modifications included forgiveness of interest, reduced interest rates and/or
extensions of the loan term. The principal balance at June 30, 1998 and 1997 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 $97.5 million and $79.7 million at June 30, 1998 and 1997,
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, $14.5
million and $20.2 million were collateralized by multi-family residential
property at June 30, 1998 and 1997, 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 $257.1 million and
$218.6 million at June 30, 1998 and 1997, respectively. Also, under FIRREA, the
loans-to-one-borrower limitation is generally 15% of unimpaired capital and
surplus, which, for the Bank, was approximately $9.4 million and $8.2 million at
June 30, 1998 and 1997, respectively. As of June 30, 1998 and 1997, the Bank was
in compliance with these limitations.
Aggregate loans to officers and directors included above were $5.8 million
and $5.7 million as of June 30, 1998 and 1997, 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, 1998, loans of $1.2 million were
disbursed to officers and directors and repayments of $1.1 million were received
from officers and directors.
An analysis of the allowance for loan losses is as follows: (In thousands)
Years Ended June 30,
------------------------------
1998 1997 1996
------------------------------
Beginning balance.............. $ 3,649 $ 3,061 $ 2,806
Provision for loan losses...... 1,193 1,129 638
Charge-offs.................... (696) (619) (453)
Recoveries..................... 97 78 70
- - --------------------------------------------------------------
Ending Balance $ 4,243 $ 3,649 $ 3,061
==============================================================
Impaired loan information under SFAS 114 and 118 is as follows: (In thousands)
1998 1997
-------------------
Impaired loans with a valuation reserve $ 327 $ 265
Impaired loans with no valuation reserve 206 29
- - ------------------------------------------------------------------
Total Impaired Loans $ 533 $ 294
==================================================================
Valuation reserve on impaired loans $ 66 $ 265
Average impaired loans $ 350 $ 363
25
<PAGE>
4. Mortgage Banking Activities
At June 30, 1998, 1997 and 1996, the Bank was servicing loans for others
amounting to $385.2 million, $298.0 million and $266.8 million, respectively.
Net gain on sale of loans was $2.3 million, $1.3 million and $1.3 million for
the years ended June 30, 1998, 1997 and 1996. 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,
1998 and 1997, these obligations were limited to approximately $539,000 and
$730,000, respectively.
The following analysis reflects the changes in mortgage servicing rights (MSRs)
acquired: (In thousands)
1998 1997
-------------------
Beginning carrying value .............. $ 387 $ --
Additions .......................... 1,115 420
Amortization ....................... (170) (33)
Net change in valuation allowance .. (244) --
- - ----------------------------------------------------------------
Ending Carrying Value ................. $ 1,088 $ 387
================================================================
The carrying value approximates fair value at June 30, 1998 and 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. The valuation allowance as of June 30,
1998 was $244,000, while 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)
Equity
Interest 1998 1997
------------------------------
Family Financial Life ............... 20% $ 617 $ 605
Heritage Woods ...................... 33% 96 107
Home-Breeden ........................ 50% 2,375 2,312
Coventry Associates ................. 65% 40 38
Crystal Lake ........................ 33% 930 --
Admiral's Woods ..................... 50% 19 22
- - ---------------------------------------------------------------------
Total Investment .................... $ 4,077 $ 3,084
=====================================================================
Summarized condensed unaudited financial statements for
these joint ventures are as follows: (In thousands)
1998 1997
Balance Sheets: -------------------
Cash ................................................... $ 964 $ 668
Investments ............................................ 3,566 3,615
Property and equipment, net ............................ 712 748
Inventory of developed lots ............................ 2,741 2,896
Other assets ........................................... 1,515 759
- - --------------------------------------------------------------------------------
Total Assets ........................................... $ 9,498 $ 8,686
================================================================================
Notes payable .......................................... $ 1,633 $ 2,337
Insurance liabilities .................................. 3,314 1,524
Other liabilities ...................................... 104 148
- - --------------------------------------------------------------------------------
Total liabilities ...................................... 5,051 4,009
- - --------------------------------------------------------------------------------
Shareholders' equity ................................... 4,447 4,677
- - --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ............. $ 9,498 $ 8,686
================================================================================
26
<PAGE>
Years Ended June 30,
---------------------------
1998 1997 1996
Income Statements: ---------------------------
Income:
Insurance premiums and commissions ......... $ 3,735 $ 3,484 $ 3,569
Investment income .......................... 234 334 272
Net lot sales .............................. 357 653 989
Other income ............................... 104 107 107
- - --------------------------------------------------------------------------------
Total income ............................... 4,430 4,578 4,937
================================================================================
Expenses:
Commissions ................................ 2,026 1,892 1,807
Insurance benefits ......................... 654 443 613
Interest expense ........................... 47 48 52
Other expense .............................. 1,377 1,439 1,612
Total expense .............................. 4,104 3,822 4,084
- - --------------------------------------------------------------------------------
Net Income .................................... $ 326 $ 756 $ 853
================================================================================
The notes payable include $2.9 million and $1.9 million due to HSC and $143,000
and $144,000 due to the Bank at June 30, 1998 and 1997, respectively. At June
30, 1998 and 1997, open commitments to these joint ventures included letters of
credit totaling $1.3 million and $391,000, respectively.
6. Accrued Interest Receivable
Accrued interest receivable consists of the following: (In thousands)
1998 1997
---------------------
Loans, less reserve of $259 and $173 ............... $ 3,893 $ 3,896
Securities ......................................... 821 371
Interest-bearing deposits .......................... 7 5
- - --------------------------------------------------------------------------------
Total Accrued Interest Receivable .................. $ 4,721 $ 4,272
================================================================================
7. Premises and Equipment
Premises and equipment consists of the following: (In thousands)
1998 1997
Land ......................................... $ 1,465 $ 1,480
Buildings and improvements ................... 9,470 8,056
Furniture and equipment ...................... 5,648 5,816
- - -------------------------------------------------------------------------------
Total ................................... 16,583 15,352
Accumulated depreciation ..................... (8,017) (7,181)
- - --------------------------------------------------------------------------------
Total Premises and Equipment ................. $ 8,566 $ 8,171
================================================================================
Depreciation expense included in operations for the years ended June 30, 1998,
1997 and 1996 totaled $1.2 million, $1.0 million and $1.0 million, respectively.
27
<PAGE>
8. Deposits
Deposits are summarized as follows: (In thousands)
June 30, 1998 June 30, 1997
----------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------------------------------------
Non-interest bearing ........... $ 25,102 $ 23,506
NOW accounts ................... 50,185 2.08% 45,233 2.10%
Passbook savings ............... 47,639 2.75% 48,443 2.85%
Money market savings ........... 77,133 4.55% 64,763 4.41%
- - --------------------------------------------------------------------------
Total transaction accounts 200,059 2.93% 181,945 2.85%
- - --------------------------------------------------------------------------
Certificates of deposit:
Less than one year ........ 103,920 5.48% 97,301 5.46%
12-23 months .............. 124,066 5.64% 110,242 5.56%
24-35 months .............. 52,296 5.51% 59,857 5.62%
36-59 months .............. 14,801 5.59% 22,596 5.61%
60-120 months ............. 48,847 6.05% 55,847 6.15%
- - --------------------------------------------------------------------------
Total certificate accounts 343,930 5.63% 345,843 5.64%
- - --------------------------------------------------------------------------
Total Deposits ................. $543,989 4.64% $527,788 4.68%
==========================================================================
At June 30, 1998 and 1997, certificates of deposit in amounts of $100,000 or
more totaled $88.1 million and $78.0 million, respectively.
A summary of certificate accounts by scheduled maturities at June 30, 1998 is as
follows: (In thousands)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
3.99% or less.......... $ 1,227 $ - $ - $ - $ - $ - $ 1,227
4.00% - 4.99%.......... 29,457 10,915 869 5 50 - 41,296
5.00% - 5.99%.......... 205,146 22,861 8,016 4,117 4,168 3,749 248,057
6.00% - 6.99%.......... 12,927 19,970 4,711 8,494 3,765 850 50,717
7.00% - 9.00%.......... 1,584 589 10 229 221 - 2,633
- - ------------------------------------------------------------------------------------------------------------------
Total Certificate
Accounts $ 250,341 $ 54,335 $ 13,606 $ 12,845 $ 8,204 $ 4,599 $ 343,930
==================================================================================================================
</TABLE>
A summary of interest expense for the past three fiscal years is as follows: (In
thousands)
1998 1997 1996
-----------------------------------
NOW accounts ......................... $ 1,648 $ 880 $ 1,004
Passbook savings ..................... 1,316 1,509 1,657
Money market savings ................. 2,459 2,030 729
Certificates of deposit .............. $19,092 $18,867 $19,106
- - --------------------------------------------------------------------------------
Total Interest Expense ............... $24,515 23,286 22,496
================================================================================
28
<PAGE>
9. Federal Home Loan Bank Advances
The Bank was eligible to receive advances from the FHLB up to $210.4 million and
$206.7 million at June 30, 1998 and 1997, 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, 1998 June 30, 1997
---------------------------------------
Weighted Weighted
Fiscal Year Average Average
Maturity Amount Rate Amount Rate
- - -----------------------------------------------------------------
1998 $ -- $33,200 6.63%
1999 36,000 6.12% 18,500 6.55%
2000 9,300 6.36% 9,300 6.29%
2001 8,400 5.67% 7,400 5.55%
2002 12,800 6.40% 7,000 6.34%
2003 10,500 6.18% 4,545 6.32%
Thereafter 21,070 6.37% -- --
- - -----------------------------------------------------------------
Total FHLB Advances $98,070 6.23% $79,945 6.43%
=================================================================
10. Other Borrowings
Senior Debt
On June 30, 1993, the Company borrowed $13 million from LaSalle National Bank.
The note accrued interest at a variable rate of prime (8.50% at June 30, 1998)
and was scheduled to mature on November 1, 1999. The Company repaid the note in
its entirety in June of 1998. Of the net proceeds, the Company injected $10
million to the Bank's Tier 1 capital.
Other Borrowings
In addition to the other borrowings scheduled below, 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, 1998 or 1997. (In thousands)
June 30,
-------------------
1998 1997
-------------------
Official check overnight remittance.. $ 4,376 $ 4,621
Money order remittance............... 20 -
FHLB overnight remittance............ - 27
- - ------------------------------------------------------------
Total Other Borrowings $ 4,396 $ 4,648
============================================================
29
<PAGE>
11. Income Taxes
An analysis of the income tax provision is as follows: (In thousands)
1998 1997 1996
Current: -----------------------------
Federal .................... $ 5,425 $ 3,435 $ 3,163
State ...................... 1,522 947 1,032
Deferred ........................ (302) (69) 737
- - ----------------------------------------------------------------------
Income Tax Provision ............ $ 6,645 $ 4,313 $ 4,932
======================================================================
The difference between the financial statement provision and amounts computed by
using the statutory rate of 34% is reconciled as follows: (In thousands)
1998 1997 1996
---------------------------
Income tax provision at federal statutory rate ... $ 5,792 $ 3,794 $ 4,177
State tax, net of federal tax benefit ............ 976 615 701
Tax exempt interest .............................. (96) (64) (67)
Increase in cash surrender value of life insurance (95) (92) (81)
Other ............................................ 68 60 202
- - -------------------------------------------------------------------------------
Income Tax Provision ............................. $ 6,645 $ 4,313 $ 4,932
===============================================================================
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, 1998 and 1997, 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 Internal
Revenue Code. The provision requires thrifts to recapture any reserves
accumulated after 1987 but forgives taxes owed on reserves accumulated prior to
1988. The Bank has delayed the timing of this recapture for taxable years 1998
and 1997 as certain residential loan test requirements were met. The six year
recovery period for the excess reserves will begin in taxable year 1999. The
adoption of the act did not have a material adverse effect on the Company's
consolidated financial position or results of operations.
The Company's deferred income tax assets and liabilities are as follows:
(In thousands)
1998 1997
---------------
Deferred tax assets:
Bad debt reserves ................................ $ 652 $ 417
Unrealized losses on securities available for sale -- 36
Deferred compensation ............................ 702 639
- - -------------------------------------------------------------------------
Total deferred tax assets ........................ 1,354 1,092
- - -------------------------------------------------------------------------
Deferred tax liabilities:
Difference in basis of fixed assets .............. 639 721
FHLB dividend .................................... 205 205
Unrealized gain on securities available for sale . 52 --
Deferred fees .................................... 254 175
Other ............................................ 16 17
- - -------------------------------------------------------------------------
Total deferred tax liabilities ................... 1,166 1,118
- - -------------------------------------------------------------------------
Net Deferred Tax Assets (Liabilities) ................. $ 188 $ (26)
=========================================================================
30
<PAGE>
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 4%, 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
capital amounts and ratios 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, 1998, the Bank met all
capital adequacy requirements to which it is subject.
As of June 30, 1998 and 1997, 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, 1998
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to total assets) $58,514 8.20% $10,708 1.50% N/A N/A
Core capital (to total assets) ... $58,514 8.20 $28,554 4.00% N/A N/A
Total risk-based capital
(to risk-weighted assets) ...... $62,305 11.81 $42,206 8.00% $52,757 10.00%
Tier 1 risk-based capital
(to risk-weighted assets) ...... $58,514 11.09% N/A N/A $31,654 6.00%
Tier 1 leverage capital
(to average assets) ............ $58,514 8.35% N/A N/A $35,057 5.00%
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
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>
31
<PAGE>
Dividend Restrictions
The principal source of income and funds for the Company are dividends from the
Bank. The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At June 30, 1998,
approximately $11.8 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 recapitalization 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 whereby 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, 1997, 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 1998, 1997 and 1996 was $153,000, $350,000 and
$281,000, 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 $85,000, $75,000 and $71,000 during fiscal
years 1998, 1997 and 1996, 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
207,487 additional shares of the Company's common stock. The option price is not
to be less than the fair market value of the common stock on the date the option
is granted, and the stock options are exercisable at any time within the maximum
term of 10 years and one day from the grant date.The options are nontransferable
and are forfeited upon termination of employment.
The following is an analysis of the stock option activity for each of the years
in the three year period ended June 30, 1998 and the stock options outstanding
at the end of the respective periods:
Weighted
Average
Share Price
----------------------
Outstanding July 1, 1995 ................. 527,948 $ 8.11
Granted .................................. 7,155 $ 11.17
Expired .................................. (16,313) $ 9.73
Exercised ................................ (22,220) $ 2.84
- - -----------------------------------------------------
Outstanding June 30, 1996 ................ 496,570 $ 8.33
Fractional shares dropped in 3 for 2 split (6) $ 8.69
Granted .................................. 226,530 $ 16.21
Expired .................................. -- N/A
Exercised ................................ (85,571) $ 7.83
- - -----------------------------------------------------
Outstanding June 30, 1997 ................ 637,523 $ 11.17
Fractional shares dropped in 3 for 2 split (22) $ 10.55
Granted .................................. 111,905 $ 26.37
Expired .................................. -- N/A
Exercised ................................ (44,847) $ 6.79
- - -----------------------------------------------------
Outstanding June 30, 1998 ................ 704,559 $ 13.89
=====================================================
32
<PAGE>
As of June 30, 1998, options outstanding have exercise prices between $2.52 and
$26.563 and a weighted average remaining contractual life of 7.0 years. The
majority of options outstanding have exercise prices ranging from $9.73 to
$26.563 with a weighted average remaining contractual life of 7.6 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,
------------------------------
1998 1997 1996
------------------------------
Net income:
As reported ................. $10,390 $ 6,846 $ 7,352
Pro forma ................... $ 9,961 $ 6,475 $ 7,335
Net income per share:
As reported
Basic earnings per share .... $ 2.03 $ 1.36 $ 1.47
Dilutive earnings per share $ 1.90 $ 1.30 $ 1.43
Pro forma
Basic earnings per share .. $ 1.95 $ 1.28 $ 1.47
Dilutive earnings per share $ 1.82 $ 1.23 $ 1.43
The weighted average fair value of options granted was $8.04 in 1998, $5.44 in
1997 and $5.96 in 1996. The fair value of the option grants is estimated on the
date of grant using an option pricing model with the following assumptions:
dividend yield ranging from 1.32% to 1.97%, risk-free interest rates ranging
from 5.71% to 8.04%, expected volatility ranging from 26.6% to 30.3% and
expected life of 5.04 to 5.11 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, 1998 and 1997, the Bank had loan commitments
approximating $24.1 million and $38.5 million, respectively, excluding
undisbursed portions of loans in process. Loan commitments at June 30, 1998
include commitments to originate fixed rate loans with interest rates ranging
from 6.0% to 9.5% totaling $8.9 million and adjustable rate loan commitments
with interest rates ranging from 6.0% to 10.5% totaling $15.2 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 $2.8 million and $2.3 million for 1998
and 1997, respectively. Additionally, the Bank had approximately $17.4 million
in commitments to sell fixed rate residential loans. There were not any
commitments to sell adjustable rate commercial loans at June 30, 1998. In the
event of nonperformance by the other parties to the financial instruments, the
Bank's exposure to credit loss 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.
33
<PAGE>
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, 1998 June 30, 1997
-----------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-----------------------------------------
Assets:
<S> <C> <C> <C> <C>
Cash ................................. $ 19,063 $ 19,063 $ 16,274 $ 16,274
Interest-bearing deposits ............ 5,304 5.304 3,498 3,498
Securities available for sale ........ 57,335 57,335 40,119 40,119
Securities held to maturity .......... 9,565 9,550 13,115 13,012
Loans held for sale .................. 12,711 12,840 4,629 4,688
Loans, net ........................... 582,040 587,290 575,624 576,597
Accrued interest receivable .......... 4,721 4,721 4,272 4,272
Federal Home Loan Bank stock ......... 5,456 5,456 4,260 4,260
Cash surrender value of life insurance 5,808 5,808 5,529 5,529
Liabilities:
Deposits ............................. 543,989 545,025 527,788 527,405
Federal Home Loan Bank advances ...... 98,070 99,987 79,945 80,105
Senior debt .......................... -- -- 7,800 7,831
Other borrowings ..................... 4,396 4,395 4,648 4,648
Advance payments by borrowers
for taxes and insurance ............ 320 320 296 296
Unrecognized Financial Instruments:
Interest rate swap ................... N/A N/A N/A 2
</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, 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, 1998 and 1997. 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.
34
<PAGE>
17. PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of Home Federal Bancorp are as follows:
(In thousands)
<TABLE>
<CAPTION>
Condensed Balance Sheets June 30,
---------------------
(Parent Company only) 1998 1997
---------------------
Assets:
<S> <C> <C>
Cash ................................................... $ 1,862 $ 5,634
Investment in subsidiary ............................... 64,205 59,891
Other .................................................. 1,020 504
- - -------------------------------------------------------------------------------------------
Total assets ........................................... $ 67,087 $ 66,029
===========================================================================================
Liabilities:
Senior debt ............................................ $ -- $ 7,800
Other .................................................. 212 312
- - -------------------------------------------------------------------------------------------
Total liabilities ...................................... 212 8,112
- - -------------------------------------------------------------------------------------------
Shareholders' equity ................................... 66,875 57,917
- - -------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ............. $ 67,087 $ 66,029
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended June 30,
Condensed Statements of Income 1998 1997 1996
(Parent Company only) --------------------------------
<S> <C> <C> <C>
Dividends from subsidiary .............................. $ 6,442 $ 3,457 $ 3,247
Other .................................................. 598 497 514
- - -------------------------------------------------------------------------------------------
Total income ........................................... 7,040 3,954 3,761
- - -------------------------------------------------------------------------------------------
Interest on senior debt ................................ 458 703 900
Other expenses ......................................... 659 600 674
- - -------------------------------------------------------------------------------------------
Total expenses ......................................... 1,117 1,303 1,574
- - -------------------------------------------------------------------------------------------
Income before taxes and change in
undistributed earnings of subsidiary .................. 5,923 2,651 2,187
Applicable income tax credit ........................... (204) (323) (420)
- - -------------------------------------------------------------------------------------------
Income before change in undistributed
earnings of subsidiary ................................ 6,127 2,974 2,607
Increase in undistributed earnings of subsidiary ....... 4,263 3,872 4,745
- - -------------------------------------------------------------------------------------------
Net income ............................................. $ 10,390 $ 6,846 $ 7,352
===========================================================================================
Condensed Statements of Cash Flows For the Years Ended June 30,
--------------------------------
(Parent Company only) 1998 1997 1996
--------------------------------
Operating activities:
Net income ............................................. $ 10,390 $ 6,846 $ 7,352
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in other assets .................. (516) 73 565
Increase (decrease) in accrued expenses and
other liabilities ................................... (97) (159) 383
Increase in undistributed earnings
of subsidiary ....................................... (4,263) (3,872) (4,745)
- - -------------------------------------------------------------------------------------------
Net cash provided by operating activities .............. 5,514 2,888 3,555
- - -------------------------------------------------------------------------------------------
Financing activities:
Repayment of senior debt ............................... (7,800) (1,300) (1,300)
Payment of dividends ................................... (1,900) (1,378) (999)
Exercise of stock options, net of fractional shares paid 414 730 71
- - -------------------------------------------------------------------------------------------
Net cash used in financing activities .................. (9,286) (1,948) (2,228)
- - -------------------------------------------------------------------------------------------
Net increase in cash ................................... (3,772) 940 1,327
Cash at beginning of year .............................. 5,634 4,694 3,367
- - -------------------------------------------------------------------------------------------
Cash at end of year .................................... $ 1,862 5,634 4,694
===========================================================================================
</TABLE>
35
<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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1998
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 21, 1998
36
<PAGE>
[Inside back cover]
Board of Directors & Officers
of Home Federal Bancorp
John K. Keach, Sr. Eugene E. Burke
Chairman of the Board, Director Emeritus
Home Federal Bancorp Retired
John K. Keach, Jr. Robert Weber
President and Director Emeritus
Chief Executive Officer, Retired
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 S. Elaine Pollert
Orthopedic Surgeon Senior Vice President
Retail Banking
Harvard W. Nolting, Jr.
Retired from Nolting The Directors of Home
Foods, Inc. Federal Bancorp also serve
as Directors of Home Federal
Savings Bank.
Executive Officers
of Home Federal Savings Bank
John K. Keach, Jr. S. Elaine Pollert
President and Senior Vice President
Chief Executive Officer Retail Banking
Gerald L. Armstrong Melissa M. Arnold
Executive Vice President Vice President
and Chief Operating Officer Controller
Lawrence E. Welker
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
Shareholder Information
Stock Listing
The common stock of Home Federal Bancorp is traded on the National Association
of Securities Dealers Auto mated 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 1960
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, 1998, 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 21, 1998 appearing in this Annual Report on Form 10-K of Home
Federal Bancorp for the year ended June 30, 1998.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
September 28, 1998
<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, 1998 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-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 19,063
<INT-BEARING-DEPOSITS> 5,304
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,335
<INVESTMENTS-CARRYING> 9,565
<INVESTMENTS-MARKET> 9,550
<LOANS> 582,040
<ALLOWANCE> 4,243
<TOTAL-ASSETS> 719,549
<DEPOSITS> 543,989
<SHORT-TERM> 40,396
<LIABILITIES-OTHER> 5,822
<LONG-TERM> 62,070
0
0
<COMMON> 7,963
<OTHER-SE> 58,911
<TOTAL-LIABILITIES-AND-EQUITY> 719,549
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<INTEREST-INVEST> 3,786
<INTEREST-OTHER> 303
<INTEREST-TOTAL> 55,301
<INTEREST-DEPOSIT> 24,515
<INTEREST-EXPENSE> 30,864
<INTEREST-INCOME-NET> 24,239
<LOAN-LOSSES> 1,193
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 2,777
<INCOME-PRETAX> 17,035
<INCOME-PRE-EXTRAORDINARY> 17,035
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,390
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 1.90
<YIELD-ACTUAL> 8.38
<LOANS-NON> 3,992
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<RECOVERIES> 97
<ALLOWANCE-CLOSE> 4,243
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
