SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: O-18847
HOME FEDERAL BANCORP
--------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1807839
--------------------------- ----------------
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Origination) Identification No.)
222 West Second Street, Seymour, Indiana 47274-0648
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (812) 522-1592
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (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 the number of shares outstanding of each of the issuer's
classes of common stock, as of February 8, 1999:
Common Stock, no par value - 5,093,075 shares outstanding
<PAGE>
HOME FEDERAL BANCORP
FORM 10-Q
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(unaudited) ............................................. 3
Consolidated Statements of Income
(unaudited) ............................................. 4
Consolidated Statements of Cash Flows
(unaudited) ............................................. 5
Forward looking statements ................................... 6
Notes to Consolidated Financial
Statements .............................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................................. 9
PART II. OTHER INFORMATION
Item 3. Quantitative and Qualitative Analysis of Financial
Condition and Results of Operations .......................... 16
Item 4. Submission of Matters to a Vote of Security Holders ............... 16
Item 6. Exhibits and Reports on Form 8-K ................................. 16
Signatures ................................................................ 17
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<PAGE>
HOME FEDERAL BANCORP
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited) December 31, June 30,
1998 1998
------- ------
ASSETS:
Cash ...................................................... $ 19,391 $19,063
Interest-bearing deposits ................................. 12,688 5,304
------- -------
Total cash and cash equivalents ......................... 32,079 24,367
------- -------
Securities available for sale at fair value
(amortized cost $57,139 and $57,205) .................... 57,384 57,335
Securities held to maturity (fair
value $7,412 and $9,550) ............................... 7,097 9,565
Loans held for sale (fair value $19,445 and $12,840) ...... 19,274 12,711
Loans receivable, net of allowance for loan losses
of $4,413 and $4,243 ................................... 586,245 582,040
Investments in joint ventures ............................. 5,138 4,077
Federal Home Loan Bank stock .............................. 5,814 5,456
Accrued interest receivable, net .......................... 4,867 4,721
Premises and equipment, net ............................... 8,445 8,566
Real estate owned ......................................... 921 242
Prepaid expenses and other assets ......................... 3,517 2,964
Cash surrender value of life insurance .................... 5,951 5,808
Goodwill .................................................. 1,646 1,697
------- -------
TOTAL ASSETS ........................................... $738,378 $719,549
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits .................................................. $556,414 $543,989
Advances from Federal Home Loan Bank ...................... 106,220 98,070
Other borrowings .......................................... 1,807 4,396
Advance payments by borrowers for taxes and insurance ..... 491 320
Accrued expenses and other liabilities .................... 4,047 5,822
------- -------
Total liabilities ...................................... 668,979 652,597
------- -------
Shareholders' equity:
No par preferred stock; Authorized: 2,000,000 shares
Issued and outstanding: None
No par common stock; Authorized: 15,000,000 shares
Issued and outstanding: ................................. 6,173 7,963
5,079,051 shares at December 31, 1998
5,139,176 shares at June 30, 1998
Retained earnings, restricted ............................ 63,079 58,911
Accumulated other comprehensive income, net of taxes ...... 147 78
------- -------
Total shareholders' equity ............................. 69,399 66,952
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............. $738,378 $719,549
======= =======
See notes to unaudited consolidated financial statements
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<PAGE>
HOME FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months Ended Six Months Ended
December 31 December 31
-------------------- -------------------
Interest income: 1998 1997 1998 1997
-------------------- -------------------
<S> <C> <C> <C> <C>
Loans receivable .......................................... $ 12,676 $ 12,972 $ 25,324 $ 25,806
Securities available for sale and held to maturity ........ 931 900 1,916 1,751
Other interest income ..................................... 87 71 215 125
-------- -------- -------- --------
Total interest income ...................................... 13,694 13,943 27,455 27,682
-------- -------- -------- --------
Interest expense:
Deposits .................................................. 6,036 6,218 12,310 12,402
Advances and borrowings ................................... 1,626 1,667 3,139 3,148
-------- -------- -------- --------
Total interest expense ..................................... 7,662 7,885 15,449 15,550
-------- -------- -------- --------
Net interest income ........................................ 6,032 6,058 12,006 12,132
Provision for loan losses .................................. 230 341 474 634
-------- -------- -------- --------
Net interest income after provision for loan losses ........ 5,802 5,717 11,532 11,498
-------- -------- -------- --------
Other income:
Gain on sale of loans ..................................... 1,080 791 1,824 1,162
Gain(loss) on sale of securities .......................... -- 14 2 --
Income from joint ventures ................................ 80 124 169 164
Insurance, annuity income, other fees ..................... 319 414 704 829
Service fees on NOW accounts .............................. 521 519 1,032 965
Net gain (loss) on real estate owned and repossessed assets (8) 4 15 9
Loan servicing income ..................................... 219 242 415 492
Miscellaneous ............................................. 618 352 989 784
-------- -------- -------- --------
Total other income ......................................... 2,829 2,460 5,150 4,405
-------- -------- -------- --------
Other expenses:
Compensation and employee benefits ........................ 2,078 2,049 4,165 4,008
Occupancy and equipment ................................... 581 594 1,151 1,167
Service bureau expense .................................... 198 194 362 388
Federal insurance premium ................................. 78 83 158 164
Marketing ................................................. 152 143 258 319
Goodwill amortization ..................................... 25 25 50 50
Miscellaneous ............................................. 1,172 693 1,887 1,305
-------- -------- -------- --------
Total other expenses ....................................... 4,284 3,781 8,031 7,401
-------- -------- -------- --------
Income before income taxes ................................. 4,347 4,396 8,651 8,502
Income tax provision ....................................... 1,712 1,709 3,411 3,354
-------- -------- -------- --------
Net Income ................................................. $ 2,635 $ 2,687 $ 5,240 $ 5,148
======== ======== ======== ========
Basic earnings per common share $ 0.51 $ 0.53 $ 1.02 $ 1.01
Dilutive earnings per common share $ 0.49 $ 0.49 $ 0.96 $ 0.95
Basic weighted average number of shares 5,118,879 5,107,567 5,130,241 5,101,697
Dilutive weighted average number of shares 5,420,622 5,446,562 5,449,727 5,411,259
Dividends per share $ 0.110 $ 0.088 $ 0.210 $ 0.171
</TABLE>
See notes to unaudited consolidated financial statements
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<PAGE>
HOME FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Six Months Ended
(unaudited) December 31,
--------------------
1998 1997
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 5,240 $ 5,148
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of discounts, amortization and
depreciation ..................................... 463 424
Provision for loan losses .......................... 474 634
Net gain from sale of loans ........................ (1,824) (1,162)
Net gain from sale of investment securities ........ (2) --
Net gain from joint ventures; real estate owned .... (184) (173)
Loan fees deferred (recognized), net ............... (15) 38
Proceeds from sale of loans held for sale .......... 127,274 76,426
Origination of loans held for sale ................. (132,013) (68,548)
Increase (decrease) in accrued interest and other
assets ........................................... (9,562) 2,116
Increase (decrease) in other liabilities ........... (1,604) 467
--------- ---------
Net cash provided by (used in) operating activities ..... (11,753) 15,370
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net principal collected (disbursed) on loans ............ 3,603 (13,738)
Proceeds from:
Maturities/Repayments of:
Securities held to maturity .................... 3,322 1,249
Securities available for sale .................. 4,528 3,500
Sales of:
Securities available for sale .................. 11,144 7,226
Real estate owned and other asset sales ........ 356 484
Purchases of:
Loans .............................................. (1,033) (3,634)
Securities available for sale ...................... (15,718) (13,905)
Securities held to maturity ........................ (855) (4,285)
Federal Home Loan Bank stock ....................... (358) (950)
Increase in cash surrender value of life insurance ...... (143) (138)
Acquisition of property and equipment, net .............. (505) (1,001)
--------- ---------
Net cash provided by (used in) investing activities ..... 4,341 (25,192)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net ............................... 12,425 10,441
Proceeds from borrowings ................................ 48,450 51,200
Repayment of borrowings ................................. (40,300) (39,025)
Net proceeds from (net repayment of)
overnight borrowings .................................. (2,589) (991)
Common stock options exercised .......................... 243 113
Repurchase of common stock .............................. (2,033) --
Payment of dividends on common stock .................... (1,072) (873)
--------- ---------
Net cash provided by financing activities ............... 15,124 20,865
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............... 7,712 11,043
Cash and cash equivalents, beginning of period .......... 24,367 19,772
--------- ---------
Cash and cash equivalents, end of period ................ $ 32,079 $ 30,815
========= =========
Supplemental information:
Cash paid for interest $15,452 $ 15,340
Cash paid for income taxes $ 4,160 $ 3,236
Assets acquired through foreclosure $ 785 $ 316
See notes to unaudited consolidated financial statements
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<PAGE>
Forward Looking Statements
This Quarterly Report on Form 10-Q ("Form 10-Q") 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-Q 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-Q 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-Q
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.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements include the accounts of Home Federal
Bancorp (the "Company") and its wholly-owned subsidiary, Home Federal Savings
Bank (the "Bank"). These consolidated interim financial statements at December
31, 1998, and for the three and six month periods ended December 31, 1998, have
not been examined by independent auditors, but reflect, in the opinion of the
Company's management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations for such periods, including elimination of all significant
intercompany balances and transactions.
These statements should be read in conjunction with the consolidated financial
statements and related notes which are incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended June 30, 1998.
2. Reclassifications
Some items in the financial statements of previous periods have been
reclassified to conform to the current period presentation.
3. Earnings Per Share
The following is a reconciliation of the weighted average common shares for the
basic and diluted earnings per share computations:
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
Basic EPS:
Weighted average common shares . 5,118,879 5,107,567 5,130,241 5,101,697
========= ========= ========= =========
Diluted EPS:
Weighted average common shares . 5,118,879 5,107,567 5,130,241 5,101,697
Dilutive effect of stock options 301,743 338,995 319,486 309,562
Weighted average common --------- --------- --------- ---------
and incremental shares ........ 5,420,622 5,446,562 5,449,727 5,411,259
========= ========= ========= =========
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<PAGE>
4. New Accounting Pronouncements
The Corporation adopted FAS 130, "Comprehensive Income", effective July 1, 1998.
It requires that changes in the amounts of certain items, gains and losses on
certain securities be shown in the financial statements. FAS 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. All prior year financial
statements have been reclassified for comparative purposes.
The following is a summary of the Corporation's total comprehensive income for
the interim three and six month periods ended December 31, 1998 and 1997 under
FAS 130:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
---------------------------------------
1998 1997 1998 1997
---------------------------------------
<S> <C> <C> <C> <C>
Net Income .................................................. $ 2,635 $ 2,687 $ 5,240 $ 5,148
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period (303) 29 71 122
Reclassification adjustment for (gains) losses
included in net income ............................ -- -- (2) 14
------- ------- ------- -------
Other comprehensive income .................................. (303) 29 69 136
------- ------- ------- -------
Comprehensive Income ........................................ $ 2,332 $ 2,716 $ 5,309 $ 5,284
------- ------- ------- -------
</TABLE>
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. The
company will include the appropriate segment information beginning in the annual
financial statements for the year ending June 30, 1999 and all quarterly reports
thereafter. 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.
5. Adoption of Corporate Articles
At the Annual Meeting of Shareholders held on October 27, 1998 amendments of
Articles 5 and 6 of the Corporation's Articles of Incorporation were adopted
increasing the number of authorized shares of Common Stock to 15,000,000 shares.
The total number of shares which the Corporation shall have authority to issue
is 17,000,000 shares, all of which are without par value. The remaining
2,000,000 shares which the company may issue are preferred shares.
-7-
<PAGE>
6. Subsequent Event
For the period January 1, 1999 through February 10, 1999, Home Federal Bancorp
entered into commitments to repurchase 63,000 shares of common stock at an
average price of $23 per share. These repurchases of stock bring the total for
the fiscal year to 141,574 shares at an average price of $25 per share.
-8-
<PAGE>
Part I, Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 to provide 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.
RESULTS OF OPERATIONS:
Quarter Ended December 31, 1998 Compared to Quarter Ended December 31, 1997
General
The Company reported net income of $2,635,000 for the quarter ended December 31,
1998, compared to $2,687,000 for the quarter ended December 31, 1997, a decrease
of $52,000 or 1.9%. Basic earnings per common share for the current quarter were
$0.51 compared to $0.53 for the quarter ended December 31, 1997. Dilutive
earnings per common share remained constant at $.49 for both quarters ended
December 31, 1998 and 1997.
Net Interest Income
Net interest income before provision for loan losses decreased by $26,000 for
the quarter ended December 31, 1998, compared to the quarter ended December 31,
1997. The decrease is primarily due to a decrease in the net interest margin of
12 basis for the three month period ended December 31, 1998 as compared to the
three month period ended December 31, 1997. This decrease in net interest margin
is the result of rates dropping faster on interest earning assets than on
interest bearing liabilities due primarily to refinancing activity in the Bank's
loan products.
Net interest income after provision for loan losses increased by $85,000 or 1.5%
for the quarter ended December 31, 1998, compared to the quarter ended December
31, 1997. At December 31, 1998, the loan loss allowance covered 74% of
non-performing loans, real estate owned and other repossessed assets. To the
best of management's knowledge, and in its opinion, classified assets do not
represent material credits which would cause management to have serious doubts
as to the ability of such borrowers to comply with their loan repayment terms.
Based on management's analysis of classified assets, loss histories and current
future projections, the allowance balance appears adequate at December 31, 1998.
Quarter ending December 31: (in thousands) 1998 1997
------------------------------------------ ---- ----
Allowance beginning balance ......................... $ 4,325 $ 3,760
Provision for loan losses ........................... 230 341
Charge-offs ......................................... (161) (165)
Recoveries .......................................... 19 22
------- -------
Loan Loss Allowance ................................. $ 4,413 $ 3,958
======= =======
Allowance to Total Loans ............................ .72% .66%
Allowance to Nonperforming Assets ................... 74% 101%
Interest Income
Total interest income for the three-month period ended December 31, 1998,
decreased $249,000, or 1.8%, over the same period of the prior year. The average
balance of interest earning assets increased $11,871,000. This increase in
average balances was not enough to offset the negative effect on interest income
of a 39 basis points decline in the weighted average interest rate earned on
interest bearing assets for the quarter ended December 31, 1998 as compared to
the quarter ended December 31, 1997.
-9-
<PAGE>
Interest Expense
Total interest expense for the three-month period ended December 31, 1998
decreased $223,000, or 2.8%, as compared to the same period a year ago. The
decrease in interest expense for the three month period ended December 31, 1998,
compared to the same period ended December 31, 1997, was the net result of an
increase of $16,906,000 in the average balances of interest bearing liabilities,
being offset by a 24 basis point decline in the rates paid on interest bearing
liabilities.
Other Income
Total other income for the three-month period ended December 31, 1998, increased
$369,000 or 15.0% over the same period a year ago. This increase was due
primarily to an increase of $289,000 in the gain on sale of loans and a $266,000
increase in miscellaneous income for the three month period ended December 31,
1998, compared to the same period ended December 31, 1997. The $289,000 increase
in gain on sale for the quarter ended December 31, 1998 reflects an increase in
refinancing activity as the Bank sold, in the secondary market, the majority of
the fifteen and thirty year fixed rate loans which the Bank originated. The
increase in miscellaneous income reflects a lease buy out of $159,000 on a
building held for investment by the Company and a tax refund of $59,000 from
prior years returns.
Other Expenses
Total other expenses for the three-month period ended December 31, 1998,
increased $503,000 over the same period ended December 31, 1997. Ninety-five
percent of the increase in other expenses came from the miscellaneous expense
area. Miscellaneous expenses increased $479,000 due to a variety of factors
including a $298,000 write off of bad checks, a write down of $118,000 on the
value of the building held by the Company for investment reflecting the lease
buy out, and the expensing of $39,000 of deferred costs associated with the same
building.
Six-months Ended December 31, 1998 Compared to Six-months Ended December 31,
1997:
General
The Company reported net income of $5,240,000, or $.96 per dilutive common
share, for the six-months ended December 31, 1998, compared to $5,148,000, or
$.95 per dilutive common share, for the same period a year ago, an increase of
$92,000.
Net Interest Income
Net interest income before provision for loan losses decreased $126,000 for the
six-month period ended December 31, 1998, compared to the same period ended
December 31, 1997. The reasons for this decrease were primarily the same as for
the three-month period ended December 31, 1998. Net interest income after
provision for loan losses increased by $34,000 for the six-month period ended
December 31, 1998.
The change to the loan loss allowance for the six-month period ended December
31, 1998 is as follows:
Six months ending December 31: (in thousands) 1998 1997
--------------------------------------------- ---- ----
Allowance beginning balance ........................... $ 4,243 $ 3,649
Provision for loan losses ............................. 473 634
Charge-offs ........................................... (336) (367)
Recoveries ............................................ 33 42
------- -------
Loan Loss Allowance ................................... $ 4,413 $ 3,958
======= =======
Allowance to Total Loans .............................. .72% .66%
Allowance to Nonperforming Assets ..................... 74% 101%
Interest Income
Total interest income for the six-month period ended December 31, 1998 decreased
$227,000, compared to the six-month period ended December 31, 1997. The decrease
in interest income was due to a decline of 36 basis points in the weighted
average interest rate earned on interest bearing assets. The decrease in
interest income was mitigated by an increase in average balances of $12,539,000
for the six-month period ended December 31, 1998 as compared to the six-month
period ended December 31, 1997.
Interest Expense
Total interest expense for the six-months ended December 31, 1998 decreased
$101,000, compared to the six-month period ended December 31, 1997. This
decrease was due primarily to the same reasons as discussed in the three-month
period ended December 31, 1998. These reasons include increased average balances
of deposits and borrowings outstanding, being offset by declining rates paid on
these same liabilities.
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<PAGE>
Other Income
Total other income for the six-month period ended December 31, 1998 increased
$745,000 as compared to the same period one year ago. The increases in gain on
sale of loans and miscellaneous income accounts are reflective of the second
quarter increases detailed above. These increases in other income were offset by
a $125,000 decrease in insurance, annuity income and other fees due to a
$101,000 decrease in income from annuity and brokerage sales. The reduction in
annuity and brokerage sales was the result of a downturn in the market, which in
turn reduced the volume of client transactions completed in the annuity and
brokerage area.
Other Expenses
Total other expenses for the six-month period ended December 31, 1998 increased
$630,000. This increase reflects the previously mentioned increases in other
expenses discussed in the three month period ended December 31, 1998. In
addition to the increases in other expenses, compensation and occupancy expense
increased $157,000 due to normal salary increases and compensation costs related
to increased loan activity.
FINANCIAL CONDITION:
Total assets increased by $18,829,000 from June 30, 1998, to December 31, 1998.
Securities held to maturity decreased by $2,468,000 primarily due to these
securities being called and the funds being used for loan originations. Loans
held for sale and net loans receivable increased by $6,563,000 and $4,205,000,
respectively for the sixth month period ended December 31, 1998. Joint ventures
increased $1,061,000 as the Bank was in the initial stages of two new joint
ventures.
Total liabilities showed an increase of $16,382,000 from June 30, 1998, to
December 31, 1998. The majority of the increase came from two areas as deposits
increased $12,425,000 and advances from the Federal Home Loan Bank increased
$8,150,000. These increases were offset by decreases of $2,589,000 in other
borrowings and $1,775,000 in accrued expenses and other liabilities.
Shareholders' equity increased $2,447,000 during the same period. Retained
earnings increased $5,240,000 million from net income and decreased $1,072,000
for dividends paid. Common stock decreased $1,790,000 due to stock repurchases
of $2,033,000 and $243,000 stock options exercised during the period. In
accordance with Statement of Accounting Standards 115, "Accounting for Certain
Investments in Debt and Equity Securities", the Company had accumulated other
comprehensive income from unrealized gains in its available for sale portfolio
of $147,000, or a $69,000 increase in shareholders' equity from the June 30,
1998 gain position of $78,000.
At December 31, 1998, the Bank exceeded all current OTS regulatory capital
requirements as follows:
<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 December 31, 1998
<S> <C> <C> <C> <C> <C>
Tangible capital (to total assets) $61,677 8.42% $10,982 1.50% N/A N/A
Core capital (to total assets) ... $61,677 8.42% $29,286 4.00% N/A N/A
Total risk-based capital
(to risk-weighted assets) ..... $65,095 11.73% $44,391 8.00% $55,488 10.00%
Tier 1 risk-based capital
(to risk-weighted assets) ..... $61,677 11.12% N/A N/A $33,293 6.00%
Tier 1 leverage capital
(to average assets) ........... $61,677 8.48% N/A N/A $36,367 5.00%
</TABLE>
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<PAGE>
Liquidity and Capital Resources
The minimum liquidity level is 4%, the lowest amount allowed by law. At December
31, 1998, the Bank's average liquidity ratio was 15.9%. 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
investment securities and loan sales and repayments, and may be generated
through increases in deposits. 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 December 31,
1998, the Bank had $106,222,000 in such borrowings. As of that date, the Bank
had commitments to fund loan originations and purchases of approximately
$31,894,000 and commitments to sell loans of $32,063,000. In the opinion of
management, the Bank has sufficient cash flow and borrowing capacity to meet
current and anticipated funding commitments.
YEAR 2000 READINESS DISCLOSURE
The Problem
The Year 2000 issue is the result of potential problems with computer systems or
any equipment with computer chips that use dates where the year portion of the
date has been stored 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 schedule is being monitored
for any indication that they may not be able to address the problem in time.
Most of the significant providers have compliant versions available and have
significantly completed the validation phase and are preparing to test with
their users. The Company has already conducted Year 2000 user testing for
several of its mission critical systems. This is ahead of the March 31, 1999
schedule as recommended by the Federal Financial Institutions Examination
Council for institutions that rely on service providers for their
mission-critical systems. 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.
-12-
<PAGE>
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 with existing customers has been significantly completed, and an
evaluation of the risk posed by the Company's material customers is well
underway. The underwriting procedures of the Company were amended to include an
evaluation in all new requests for credit that determines whether Year 2000
issues will materially affect the customer's cash flows, balance sheet or value
of the collateral. Based upon the results of this evaluation, appropriate action
will be taken to minimize the risk to the Company.
Current Status
The project team estimates that the Company's Year 2000 readiness project is 84%
complete and that the activities involved in assessing external risks and
operational issues are 90% completed overall. These estimates and the
projections in the following table are derived from the Year 2000 Checklist
Version 2, a project-tracking tool provided by the Office of Thrift Supervision.
This table provides a summary of the current status of the five project phases
and a projected timetable for completion.
<TABLE>
<CAPTION>
- ---------------------------- ----------------- -------------------------- ---------------------------
Project Phase % Completed Projected Completion Comments
- ---------------------------- ----------------- -------------------------- ---------------------------
<S> <C> <C> <C>
Awareness 100% Completed
Assessment 100% Completed
Renovation 100% Completed
Validation 78% March 31, 1999 Target for critical systems
Implementation 66% June 30, 1999 Target for critical systems
- ---------------------------- ----------------- -------------------------- ---------------------------
OVERALL 84% (As of January 31, 1999)
- ---------------------------- ----------------- -------------------------- ---------------------------
</TABLE>
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.
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. Critical business functions
have been identified and the development of temporary procedures for the
continued operations of those functions has been completed. Updating and testing
these business resumption procedures is an ongoing process which will continue
throughout 1999.
-13-
<PAGE>
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.
-14-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Data: Three Months Ended Year to Date
December 31 December 31
------------------ ---------------
1998 1997 1998 1997
---- ---- ----- ----
<S> <C> <C> <C> <C>
Weighted average interest rate earned
on total interest-earning assets ........... 8.06% 8.45% 8.12% 8.48%
Weighted average cost of total
interest-bearing liabilities ............... 4.69% 4.93% 4.89% 4.74%
Interest rate spread during period ............. 3.37% 3.51% 3.23% 3.74%
Net yield on interest-earning assets
(net interest income divided by average
interest-earning assets on annualized basis) 3.55% 3.67% 3.55% 3.71%
Total interest income divided by average
total assets (on annualized basis) ......... 7.45% 7.92% 7.53% 7.93%
Total interest expense divided by
average total assets (on annualized basis) . 4.14% 4.44% 4.20% 4.42%
Net interest income divided by average
total assets (on annualized basis) ......... 3.28% 3.44% 3.29% 3.48%
Return on assets (net income divided by
average total assets on annualized basis) .. 1.43% 1.53% 1.44% 1.47%
Return on equity (net income divided by
average total equity on annualized basis) .. 15.16% 17.58% 15.25% 17.15%
Net interest margin to average earning assets .. 3.55% 3.67% 3.55% 3.71%
Net interest margin to average assets .......... 3.28% 3.44% 3.29% 3.48%
</TABLE>
At December 31,
----------------
1998 1997
---- ----
Book value per share outstanding ........... $13.66 $12.21
Interest rate spread ....................... 3.36% 3.52%
Nonperforming Assets:
Loans: Non-accrual ................ $5,079 $3,787
Past due 90 days or more ... 0 6
Restructured ............... 0 1
------ ------
Total nonperformng loans ............. 5,079 3,794
Real estate owned, net ............... 801 58
Other repossessed assets, net ........ 120 57
------ ------
Total Nonperforming Assets ........... $6,000 $3,909
Nonperforming assets divided by total assets 0.81% 0.55%
Nonperforming loans divided by total loans . 0.83% 0.64%
Balance in Allowance for Loan Losses ....... $4,413 $3,958
-15-
<PAGE>
PART II. OTHER INFORMATION
Item 3. Quantitative and Qualitative Analysis of Financial Condition and Results
of Operations.
In the opinion of management the results for the quarter ended December 31, 1998
will not be materially different from the results presented on page 13 of the
annual report for fiscal year 1998.
Item 4. Submission of Matters to a Vote of Security Holders.
On October 27, 1998 the Annual Meeting of Shareholders was held, the results of
which were as follows:
1. Election of the following director nominees:
Votes
For Withheld
--- --------
Election of John T. Beatty for a three year term .... 4,632,766 19,166
Election of Harold Force for a three year term ..... 4,632,766 19,166
Election of John K. Keach, Sr. for a three year term 4,630,591 21,341
2. Amendment of Articles of Incorporation to increase authorized shares of
Common Stock to 15,000,000 shares.
For Against Abstain
--- ------- -------
4,418,963 171,876 61,093
Item 5. Other information
N/A
Item 6. Exhibits and Reports on Form 8-K
(a) N/A
(b) Reports on Form 8-K.
On December 24, 1998 the registrant filed a Form 8-K regarding
a press release issued by Home Federal Bancorp concerning a
second quarter charge to earnings resulting from bad checks
cashed by a customer of Home Federal Savings Bank.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
Home Federal Bancorp
DATE: February 10, 1999 /S/ Lawrence E. Welker
------------------- ------------------------------------
Lawrence E. Welker, Executive Vice President,
Treasurer, and Chief Financial Officer
-17-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial
information extracted from the registrant's
unaudited consolidated financial statements
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000867493
<NAME> Home Federal Bancorp
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,391
<INT-BEARING-DEPOSITS> 12,688
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,384
<INVESTMENTS-CARRYING> 7,097
<INVESTMENTS-MARKET> 7,412
<LOANS> 586,245
<ALLOWANCE> 4,413
<TOTAL-ASSETS> 738,378
<DEPOSITS> 556,414
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,047
<LONG-TERM> 0
0
0
<COMMON> 6,173
<OTHER-SE> 63,226
<TOTAL-LIABILITIES-AND-EQUITY> 738,378
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<INTEREST-TOTAL> 27,455
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<EXPENSE-OTHER> 1,887
<INCOME-PRETAX> 8,651
<INCOME-PRE-EXTRAORDINARY> 8,651
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,240
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 0.96
<YIELD-ACTUAL> 8.12
<LOANS-NON> 5,079
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 4,243
<CHARGE-OFFS> 336
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</TABLE>
