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, 1999
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
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(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.
<PAGE>
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of September 13, 1999, was $109,331,667.
The number of shares of the Registrant's Common Stock, no par value, outstanding
as of September 13, 1999, was 4,870,601 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1999,
are incorporated into Part II. Portions of the Proxy Statement for the 1999
annual meeting of shareholders are incorporated into Part I and Part III.
Exhibit Index on Page 40
Page 2 of 43 Pages
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<PAGE>
<TABLE>
<CAPTION>
HOME FEDERAL BANCORP
FORM 10-K
INDEX
<S> <C>
Forward Looking Statements......................................................... 4
Item 1. Business ................................................................. 4
Item 2. Properties ............................................................... 33
Item 3. Legal Proceedings ........................................................ 34
Item 4. Submission of Matters to a Vote of Security Holders ...................... 34
Item 4.5 Executive Officers of Home Federal Bancorp ............................... 34
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .... 34
Item 6. Selected Financial Data .................................................. 36
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................... 36
Item 7. A Quantitative and Qualitative Disclosures About Market Risk ............. 36
Item 8. Financial Statements and Supplementary Data .............................. 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................... 37
Item 10. Directors and Executive Officers of the Registrant ....................... 37
Item 11. Executive Compensation ................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management ........... 37
Item 13. Certain Relationships and Related Transactions ........................... 37
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......... 38
SIGNATURES ........................................................................ 39
</TABLE>
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<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"or "HFSB").
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 MAC network of
automated teller machines at nine locations in Seymour, Columbus, North Vernon
and Batesville. On line banking and telephone banking are also available to Home
Federal Savings Bank customers. 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.
Management analyzes the operation of Home Federal Bancorp assuming one
operating segment, community banking services. Home Federal directly and,
through its service corporation subsidiary, indirectly offers a wide range of
consumer and commercial community banking services. These services include: (i)
residential and commercial real estate loans; (ii) NOW accounts; (iii) regular
and term savings accounts and savings certificates; (iv) 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
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<PAGE>
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, 1999, approximately 19.0% of
its loans were consumer-related loans and 17.8% of its loans were commercial
mortgage and multi-family loans. Home Federal also makes construction loans,
which constituted 10.9% of Home Federal's loans at June 30, 1999. Finally, Home
Federal makes commercial loans, which constituted 9.4% of its loans at June 30,
1999.
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<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.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
TYPE OF LOAN (Dollars in Thousands)
First mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family residential loans $248,846 41.0% $268,133 43.6% $300,531 50.1% $278,118 51.3% $268,509 55.3%
Commercial and multi-family ........ 107,908 17.8% 97,469 15.8% 79,696 13.3% 73,853 13.6% 63,215 13.0%
Loans on property under construction 65,997 10.9% 77,227 12.5% 54,504 9.1% 40,407 7.4% 23,982 4.9%
Loans on unimproved acreage ........ 11,611 1.9% 4,664 0.8% 4,192 0.7% 3,252 0.6% 2,554 0.5%
Second mortgage, home equity ............ 68,873 11.3% 65,321 10.6% 63,658 10.6% 50,372 9.3% 40,536 8.4%
Commercial loans ........................ 56,956 9.4% 50,890 8.3% 43,112 7.2% 40,609 7.5% 28,881 6.0%
Consumer loans .......................... 9,250 1.5% 10,347 1.7% 11,017 1.8% 11,952 2.2% 11,392 2.3%
Auto loans .............................. 21,764 3.6% 23,194 3.8% 23,086 3.8% 20,883 3.8% 21,506 4.4%
Mobile home loans ....................... 12,048 2.0% 14,349 2.3% 16,613 2.8% 18,833 3.5% 20,258 4.2%
Savings accounts loans .................. 3,826 0.6% 4,071 0.7% 3,989 0.7% 4,199 0.8% 4,407 0.9%
--------------------------------------------------------------------------------------
Gross loans receivable ............. $607,079 100.0% $615,665 100.0% $600,398 100.0% $542,478 100.0% $485,240 100.0%
======================================================================================
TYPE OF SECURITY
Residential:
One to four family ................. $347,049 57.2% $366,319 59.5% $397,962 66.3% $358,003 66.0% $326,296 67.2%
Multi-dwelling units ............... 30,358 5.0% 19,003 3.1% 22,166 3.7% 23,807 4.4% 20,488 4.2%
Commercial real estate .................. 114,217 18.8% 122,828 20.0% 78,261 13.0% 60,940 11.2% 49,458 10.2%
Commercial .............................. 56,956 9.4% 50,890 8.3% 43,112 7.2% 40,609 7.5% 28,881 6.0%
Mobile home ............................. 12,048 2.0% 14,349 2.3% 16,613 2.8% 18,833 3.5% 20,258 4.2%
Savings account ......................... 3,826 0.6% 4,071 0.7% 3,989 0.7% 4,199 0.8% 4,407 0.9%
Auto .................................... 21,764 3.6% 23,194 3.8% 23,086 3.8% 20,883 3.8% 21,506 4.4%
Other consumer .......................... 9,250 1.5% 10,347 1.7% 11,017 1.8% 11,952 2.2% 11,392 2.3%
Land acquisition ........................ 11,611 1.9% 4,664 0.8% 4,192 0.7% 3,252 0.6% 2,554 0.5%
--------------------------------------------------------------------------------------
Gross loans receivable ............. $607,079 100.0% $615,665 100.0% $600,398 100.0% $542,478 100.0% $485,240 100.0%
======================================================================================
LOANS RECEIVABLE-NET
Gross loans receivable .................. $607,079 103.4% $615,665 105.8% $600,398 104.3% $542,478 104.3% $485,240 103.3%
Deduct:
Undisbursed portion of loans in process . (15,285) -2.6% (28,691) -4.9% (20,519) -3.6% (18,249) -3.5% (11,291) -2.4%
Deferred net loan fees .................. (527) -0.1% (690) -0.1% (560) -0.1% (963) -0.2% (1,069) -0.2%
Allowance for loan losses ............... (4,349) -0.7% (4,243) -0.7% (3,649) -0.6% (3,061) -0.6% (2,806) -0.6%
Unearned discounts ...................... -- 0.0% (1) 0.0% (5) 0.0% (19) 0.0% (53) 0.0%
Purchase discount ....................... -- 0.0% -- 0.0% (41) 0.0% (89) 0.0% (138) 0.0%
---------------------------------------------------------------------------------------
Net loans receivable ............... $586,918 100.0% $582,040 100.0% $575,624 100.0% $520,097 100.0% $469,883 100.0%
=======================================================================================
</TABLE>
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<PAGE>
The following tables summarize the contractual maturities for
Home Federal's loan portfolio (including participations and mortgage-backed
certificates) for the fiscal periods indicated and the interest rate sensitivity
of loans due after one year:
<TABLE>
<CAPTION>
Balance Maturites in Fiscal
Outstanding 2003 2005 2010 2014
At June 30, to to to and
1999 2000 2001 2002 2004 2009 2014 thereafter
---- ---- ---- ---- ---- ---- ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate .............. $368,365 $ 2,121 $ 2,249 $ 1,206 $13,949 $ 86,236 $70,980 $191,624
Mortgage-backed
certificates,
collateralized
mortgage obligations 9,660 339 880 554 2,899 1,238 2,942 808
Construction Loans ....... 65,997 9,412 5,670 4,180 7,641 4,985 7,647 26,462
Commercial loans ......... 56,956 19,157 9,137 5,919 7,295 9,764 3,488 2,196
Other loans .............. 115,761 10,137 8,830 7,779 36,644 38,227 13,129 1,015
-----------------------------------------------------------------------------
Total .............. $616,739 $41,166 $26,766 $19,638 $68,428 $140,450 $98,186 $222,105
=============================================================================
</TABLE>
Interest Rate Sensitivity:
Due After June 30, 2000
-----------------------
Fixed Variable Rate
Rate and Balloon
---- -----------
(In Thousands)
Real estate ............................ $ 73,156 $293,085
Mortgage-backed certificates,
collateralized mortgage obligations 8,768 554
Construction Loans ..................... 222 56,364
Commercial loans ....................... 12,700 25,099
Other loans ............................ 62,526 43,099
------- -------
Total ............................. $157,372 $418,201
======= =======
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<PAGE>
Residential Mortgage Loans
Approximately 97.5% 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, 1999, $281.4 million, or 46.4%,
of Home Federal's total loan portfolio consisted of residential first mortgage
loans, $248.8 million, or 41.0%, 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.
Commercial Mortgage Loans
At June 30, 1999, 25.2% 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
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<PAGE>
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, 1999, had a balance of $3.7 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, 1999, 10.9% 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, 1999, was $3.7 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 places some
restrictions on the ability of thrifts to make 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 $115.8 million on June 30, 1999, or approximately 19.0%
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,
1999, Home Federal had $29.2 million of second mortgage loans, which equaled
4.8% of its total loan portfolio. Home Federal aggressively markets home equity
credit lines, which are adjustable-rate loans. As of June 30, 1999, Home Federal
had $39.6 million drawn on its home equity loans, or 6.5% of its total loan
portfolio, with $54.5 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,
1999, $21.8 million, or 3.6%, of Home Federal's total loan portfolio consisted
of automobile loans.
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<PAGE>
As of June 30, 1999, $12.0 million, or 2.0%, 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, 1999, $3.8 million, or
0.6%, 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, 1999, $57.0 million, or
9.4%, 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. Additionally
HFSB utilizes Freddie Mac's Loan Prospector as an origination, processing, and
underwriting tool. 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, in conjunction with the land value. Home Federal also
evaluates the feasibility of the construction project and the experience and
track record of the builder or developer.
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<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 $217.5 million of fixed-rate loans in the fiscal year ended
June 30, 1999. 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 25 basis points per annum on the outstanding principal amount
of the loans serviced. The servicing fee is recognized as income over the life
of the loans. At June 30, 1999, Home Federal serviced $461.5 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.
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 financial analysis of the loan. Servicing of loans
purchased is generally done by the seller. At June 30, 1999, others serviced
approximately 1.8%, or $10.8 million, of Home Federal's gross loan portfolio.
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<PAGE>
The following table shows loan activity for Home Federal during the periods
indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of periods ................. $ 615,665 $ 600,398 $ 542,478
--------- --------- ---------
Loans Originated:
Mortgage loans and contracts:
Construction:
Residential ....................................... 39,624 45,857 39,116
Commercial ........................................ 14,547 38,310 22,784
Purchases:
Residential ....................................... 122,428 117,474 113,265
Commercial ........................................ 27,219 22,206 16,107
Refinancing ........................................... 169,425 169,202 56,911
Other ................................................. 1,527 3,188 6,462
--------- --------- ---------
Total ............................................. 374,770 396,237 254,645
Commercial ................................................ 73,439 39,274 34,709
Consumer .................................................. 34,501 38,166 38,150
--------- --------- ---------
Total loans originated ................................ 482,710 473,677 327,504
Loans purchased:
Commercial ............................................ 4,917 6,815 947
--------- --------- ---------
Total loans originated and purchased .............. 487,627 480,492 328,451
Real estate loans sold .................................... 217,530 211,365 81,309
Loan repayments and other deductions ...................... 278,683 253,860 189,222
--------- --------- ---------
Total loans sold, loan repayments and other deductions 496,213 465,225 270,531
--------- --------- ---------
Net loan activity ......................................... (8,586) 15,267 57,920
--------- --------- ---------
Gross loans receivable at end of period ................... 607,079 615,665 600,398
Adjustments ............................................... (20,161) (33,625) (24,774)
--------- --------- ---------
Net loans receivable at end of period ..................... $ 586,918 $ 582,040 $ 575,624
========= ========= =========
</TABLE>
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, 1999 under the 15% of capital limitation was $10.9 million.
At that date, the highest outstanding balance of loans by Home Federal to one
borrower and related entities was approximately $7.9 million, an amount within
such loans-to-one borrower limitations.
- 12 -
<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 commencing on the 16th day following a specific due date. Between the 30th
and 60th 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, 1999, Home Federal held $2.1 million 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.
- 13 -
<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,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Non-performing Assets:
Loans:
<S> <C> <C> <C> <C> <C>
Non-accrual .............................. $3,509 $3,992 $2,930 $2,871 $2,431
Past due 90 days or more ................. -- -- 40 89 81
Restructured loans ............................ 61 -- 1 1 102
Total non-performing loans .................... 3,570 3,992 2,971 2,961 2,614
Real estate owned, net (1) .................... 1,936 117 51 -- --
Other repossessed assets, net ................. 114 125 88 48 41
------ ------ ------ ------- ------
Total non-performing assets .............. $5,620 $4,234 $3,110 $3,009 $2,655
====== ====== ====== ====== ======
Total non-performing assets to total assets (2) .75% 0.59% 0.46% 0.48% 0.45%
Loans with allowance for uncollected interest . $3,509 $3,993 $2,930 $2,872 $2,531
<FN>
(1) Refers to real estate acquired by Home Federal through foreclosure,
voluntary deed, or insubstance foreclosure, net of reserve.
(2) At June 30, 1999, 43.6% of Home Federal's non-performing assets consisted
of residential mortgage loans, 0.1% consisted of commercial real estate
loans, 12.8% consisted of commercial loans, 5.9% consisted of
consumer-related loans, 1.1% consisted of restructured residential loans,
36.5% consisted of real estate owned and other repossessed assets, 59.1% of
which consisted of commercial real estate loans. The increase in real
estate owned is due primarily to the repossession of a single commercial
property of $1.2 million, represented by an apartment complex.
</FN>
</TABLE>
For the year ended June 30, 1999, the income that would have been
recorded under original terms on the above non-accrual and restructured loans
was $453,000 compared to actual income recorded of $233,000. At June 30, 1999,
Home Federal had approximately $3.8 million in loans that were 30-89 days past
due.
The allowance for loan losses represents amounts available to absorb
losses inherent in the loan portfolio. 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
appropriate by management.
For the year ended June 30, 1999, Home Federal charged off loans
totaling $1.1 million and realized recoveries of $85,000 on previously
charged-off loans. Based on management's continuing review of the loan
portfolio, historical charge-offs and current economic conditions, Home Federal
recorded a charge to earnings of $1.1 million to adjust the allowance to $4.3
million as of June 30, 1999.
- 14 -
<PAGE>
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, 1999, 1998, and
1997, Home Federal had approximately $90.0 million, $72.2 million and $56.7
million in investments, respectively.
Home Federal's investment portfolio is managed by its officers in
accordance with an investment policy approved by the Board of Directors. The
Board reviews all transactions and activities in the investment portfolio on a
monthly basis. Home Federal does not purchase corporate debt securities which
are not rated in one of the top four investment grade categories by one of
several generally recognized independent rating agencies. Home Federal's
investment strategy has enabled it to (i) shorten the average term to maturity
of its 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, 1999, Home Federal had
liquid assets of $110.6 million, and a liquidity ratio of 20.4%, 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)
- 15 -
<PAGE>
are prohibited from accepting brokered deposits. Adequately capitalized
institutions (those that are neither well-capitalized nor undercapitalized) are
prohibited from accepting brokered deposits unless they first obtain a waiver
from the FDIC. Under these standards, Home Federal would be deemed a
well-capitalized institution.
An undercapitalized institution may not solicit deposits by offering
rates of interest that are significantly higher than the prevailing rates of
interest on insured deposits (i) in such institution's normal market areas or
(ii) in the market area in which such deposits would otherwise be accepted.
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, 1999, were as follows:
Minimum Weighted
Opening Balance at % of Average
Type of Account Balance June 30, 1999 Deposits Rate
- --------------- ----------------------------------------
(Dollars in
Thousands)
Withdrawable:
Non-interest bearing ......... $ 1 $ 35,532 6.1%
Passbook ..................... 1 48,026 8.3% 2.08%
Money market savings ......... 1,000 106,586 18.4% 4.18%
NOW .......................... 1 53,040 9.1% 1.68%
-------- ------ ----
Total withdrawable ........ 243,184 41.9% 2.61%
-------- ------ ----
Certificates (original terms):
Less than 1 year ............. 500 87,499 15.1% 4.80%
12 to 23 months .............. 500 114,908 19.8% 5.02%
24 to 35 months .............. 500 75,914 13.1% 5.34%
36 to 59 months .............. 500 11,908 2.1% 5.29%
60 to 120 months ............. 500 46,469 8.0% 6.03%
-------- ------ ----
Total certificates ....... 336,698 58.1% 5.18%
-------- ------ ----
Total deposits ............... $579,882 100.0% 4.10%
======== ====== ====
The following table sets forth by nominal interest rate categories the
composition of deposits of Home Federal at the dates indicated:
At June 30,
-----------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Non-interest bearing and below 2.99% $136,598 $123,348 $117,394
3.00% - 4.99% ...................... 225,362 119,234 106,914
5.00% - 6.99% ...................... 216,808 298,774 298,811
7.00% - 9.00% ...................... 1,114 2,633 4,669
-------- -------- --------
Total .............................. $579,882 $543,989 $527,788
======== ======== ========
- 16 -
<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
1999 Deposits(Decrease) 1998 Deposits Decrease) 1997 Deposits (Decrease)
---- -------- -------- ---- ------- -------- ---- ------- --------
Withdrawable:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing ....... $ 35,532 6.1% $ 10,430 $ 25,102 4.6% $ 1,596 $ 23,506 4.5% $ 1,528
Passbook ................... 48,026 8.3% 387 47,639 8.8% (804) 48,443 9.3% (10,545)
Money market savings ....... 106,586 18.4% 29,453 77,133 14.2% 12,370 64,763 12.3% 39,575
NOW ........................ 53,040 9.1% 2,855 50,185 9.2% 4,952 45,233 8.6% (3,645)
------------------------------------------------------------------------------------
Total Withdrawable ....... 243,184 41.9% 43,125 200,059 36.8% 18,114 181,945 34.5% 26,913
------------------------------------------------------------------------------------
Certificates:
Less than one year ......... 87,499 15.1% (16,421) 103,920 19.1% 6,619 97,301 18.4% 13,471
12 to 23 months ............ 114,908 19.8% (9,158) 124,066 22.8% 13,824 110,242 20.9% 15,760
24 to 35 months ............ 75,914 13.1% 23,618 52,296 9.6% (7,561) 59,857 11.3% (11,375)
36 to 59 months ............ 11,908 2.1% (2,893) 14,801 2.7% (7,795) 22,596 4.3% (4,312)
60 to 120 months ........... 46,469 8.0% (2,378) 48,847 9.0% (7,000) 55,847 10.6% (2,242)
------------------------------------------------------------------------------------
Total certificate accounts 336,698 58.1% (7,232) 343,930 63.2% (1,913) 345,843 65.5% 11,302
------------------------------------------------------------------------------------
Total deposits ....... $579,882 100.0% $ 35,893 $543,989 100.0% $16,201 $527,788 100.0% $ 38,215
====================================================================================
</TABLE>
- 17 -
<PAGE>
The following table represents, by various interest rate categories, the amounts
of deposits maturing during each of the three years following June 30, 1999, and
the percentage of such maturities to total deposits. Matured certificates which
have not been renewed as of June 30, 1999 have been allocated based upon certain
rollover assumptions.
<TABLE>
<CAPTION>
DEPOSITS MATURITIES
(Dollars in Thousands)
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, 2000................. $ 1,145 $101,421 $101,255 $ 24,691 $ 620 $229,132 68.1%
June 30, 2001................. 126 11,962 52,671 5,757 11 70,527 20.9%
June 30, 2002................. -- 1,693 9,118 8,754 241 19,806 5.9%
Thereafter ................... -- 2,429 9,326 5,236 242 17,233 5.1%
---------------------------------------------------------------------------
$ 1,271 $117,505 $172,370 $ 44,438 $ 1,114 $336,698 100.0%
===========================================================================
</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, 1999 of certificates of greater
than $100,000 by maturity.
<TABLE>
<CAPTION>
ACCOUNTS GREATER THAN $100,000
(Dollars in Thousands)
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, 2000............................ $ 101 $21,744 $49,563 $ 4,882 $ 540 $76,830 85.9%
June 30, 2001............................ 126 -- 5,542 1,645 -- 7,313 8.2%
June 30, 2002............................ -- 110 534 1,934 136 2,714 3.0%
Thereafter .............................. -- -- 850 1,538 215 2,603 2.9%
------------------------------------------------------------------
$ 227 $21,854 $56,489 $ 9,999 $ 891 $89,460 100.0%
==================================================================
</TABLE>
- 18 -
<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, 1999, Home Federal had advances totaling $87.9
million outstanding from the FHLB of Indianapolis.
On October 8, 1998, the Company entered into a revolving note with
LaSalle Bank N.A. whereby the Company may borrow up to $7 million. The note
accrues interest at a variable rate based on the ninety-day LIBOR index, on the
date of the draw, plus 150 basis points. Interest payments are due ninety days
after the date of any principal draws made on the loan and every ninety days
thereafter. The principal balance is due in full as of October 1, 1999. As of
June 30, 1999 the Company had a $1 million balance, consisting of two $500,000
draws accruing interest as of June 30, 1999 at 6.50% and 6.53%, respectively.
The Company used the funds attained to buy back shares of the Company's common
stock. The note is collateralized by the assets of the Company. Under terms of
the agreement, the Company is bound by certain restrictive debt convenants
relating to earnings, net worth and various financial ratios.
Other than the FHLB advances and the Senior Debt, Home Federal's only
borrowings in recent years have been short-term borrowings. The following table
sets forth the maximum amount of each category of short-term borrowings
(borrowings with remaining maturities of one year or less) outstanding at any
month-end during the periods shown and the average aggregate balances of
short-term borrowings for such periods.
For the year ended June 30,
1999 1998 1997
----- ---- ----
(Dollars in Thousands)
FHLB advances ............................... $34,500 $38,800 $33,200
Official check overnight remittance ......... $ 6,273 $ 8,710 $ 4,621
Money Order remittance ...................... $ 57 $ 44 $ --
FHLB overnight remittance ................... $ 420 $ 992 $ 49
---------------------------
Average amount of total short-term borrowings
outstanding ................................. $26,309 $32,934 $34,129
===========================
The following table sets forth the amount of short term FHLB advances
outstanding at year end during the period shown and the weighted average rate of
such FHLB advances.
At the year ended June 30,
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
FHLB advances:
Amount................. $ 11,300 $ 36,000 $ 33,200
Weighted average rate.. 6.1% 6.1% 6.7%
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.
- 19 -
<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, 1999, Home Federal's aggregate investment in
HSC, including loans, was $7.1 million. For the year ended June 30, 1999, HSC
reported income of $412,000 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, 1999.
<TABLE>
<CAPTION>
Date
HSC Loans from
Entered Home Federal
into the Equity Outstanding
Name Type of Project Project Investment June 30, 1999
- ---- --------------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Consortium Partners Owns Family Financial Life Insurance 11/31/83 $ 617,000 $ -
Company of New Orleans
Coventry Associates Real Estate development 8/31/89 $ - $ -
in Seymour, Indiana
Heritage Woods II Rental Apartment project of low income 11/15/89 $ 85,000 $ -
housing (22 units)
Admirals Woods Real estate development 4/20/93 $ - $ -
in Indianapolis, Indiana
Home-Breeden Real estate development 7/1/94 $2,189,000 $ 1,714,557
in Columbus, Indiana
Crystal Lake at River Ridge Single family homes in Indianapolis, 11/29/97 $2,010,000 $ 2,031,217
Indiana
Bloomington Technology Industrial park in Bloomington, Indiana 11/10/97 $ 709,000 $ -
Park, LLC
Courtyard Homes at Single family homes in Indianapolis, 6/14/99 $1,480,000 $ 1,475,000
Sycamore Springs, LLC Indiana
</TABLE>
- 20 -
<PAGE>
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 30,1999, Home
Federal had income of $346,000, on a consolidated basis, from commissions and
dividends paid on Family Financial activities.
HSC markets Linsco Private Ledger full-service securities brokerage
services. For the year ended June 30, 1999, HSC received $605,000 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 is entitled to 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. The joint venture sold its final lot in fiscal 1999.
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 $1.7
million as of June 30, 1999, reflects the development costs to date of all six
phases, the condominium site and commercial acreage. HSC is entitled to 50% of
the profit from sale of lots within McCullough's Run.
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 is entitled
to 1/3 of the profits from their sale.
On November 10, 1997 HSC entered into an LLC agreement with
Wininger-Stolberg HC, II, Inc. to develop the Bloomington Technology Park in
Bloomington, IN. The City of Bloomington and Monroe County are providing an
$800,000 grant to build infrastructure. HSC will provide a matching amount. The
eighty-two acre site was purchased from Otis Elevator Company, Inc. and work
started late spring, 1998. HSC is entitled to a fee of $150,000 and 50% of all
profit from the sale of lots in Bloomington Technology Park.
On June 14, 1999, HSC entered into an LLC agreement with the Courtyard
Homes at Sycamore Springs, LLC to build 54 homes at the Sycamore Springs planned
community in Indianapolis, Indiana. The LLC purchased the land and will develop
lots and build the homes. HSC is entitled to one third of the profits from the
home sales.
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<PAGE>
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, 1999, Home Federal employed 255 persons on a full-time
basis and 12 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.
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 thrifts. Thrifts
may also acquire banks under federal law. To date, several bank holding company
acquisitions of healthy thrifts in Indiana have been completed. Affiliations
between banks and thrifts based in Indiana have increased 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 legislation also results 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.
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<PAGE>
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").
The U.S. Congress is currently considering broad financial reform
legislation, which could permit, subject to certain restrictions, bank holding
companies to acquire manufacturing and other nonfinancial companies, and permit
nonfinancial companies to acquire banks. Some versions of the proposed
legislation would also 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. Other versions of the proposed legislation
would require the Company to be regulated as a bank holding company rather than
as a savings and loan holding company, and 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.
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS and a schedule
of fees for the various types of applications and filings made by savings
associations with the OTS. The OTS recently amended how saving associations
calculate their semi-annual assessments under this regulation by establishing a
marginal assessment rate that decreases as the asset size of a savings
association increases, and includes a fixed-cost component that is assessed on
all savings associations. The assessment rate that applies to a savings
association depends upon the institution's size, condition, and the complexity
of its operations. Home Federal's semi-annual assessment under this revised
regulation is approximately $70,000.
Home Federal is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
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, 1999, Home Federal's investment in stock of
the FHLB of Indianapolis was $5.8 million.
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<PAGE>
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, 1999, dividends paid to Home Federal by the FHLB of
Indianapolis totaled $455,000, 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.
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
Federal law requires that savings associations maintain an average
daily balance of liquid assets in a minimum amount not less than 4% or more than
10% of their withdrawable accounts plus short-term borrowings. Liquid assets
include cash, certain time deposits, certain bankers' acceptances, specified
U.S. government, state or federal agency obligations, certain corporate debt
securities, commercial paper, certain mutual funds, certain mortgage-related
securities, and certain first-lien residential mortgage loans. The OTS recently
amended its regulation that implements this statutory liquidity requirement to
reduce the minimum amount of liquid assets a savings association must hold from
5% of net withdrawable accounts and short-term borrowings to 4%. The OTS also
eliminated the requirement that savings associations maintain short-term liquid
assets constituting at least 1% of their average daily balance of net
withdrawable deposit accounts and current borrowings. The revised OTS rule also
permits savings associations to calculate compliance with the liquidity
requirement based upon their average daily balance of liquid assets during each
quarter rather than during each month, as was required under the prior rule. The
OTS may impose monetary penalties on savings associations that fail to meet
these liquidity requirements. As of June 30, 1999, Home Federal had liquid
assets of $111.8 million, and a regulatory liquidity ratio of 20.4%.
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,
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<PAGE>
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.
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 with the highest supervisory rating for
safety and soundness maintain "core capital" of at least 3% of total assets. All
other savings associations must maintain core capital of at least 4% to 5%. 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, 1999, based on the capital
standards then in effect, Home Federal was in compliance with all capital
requirements.
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<PAGE>
The OTS has delayed implementation of a rule, which sets forth the
methodology for calculating an interest rate risk component to be incorporated
into the OTS regulatory capital rule. Under the rule, only savings associations
with "above normal" interest rate risk (institutions whose portfolio equity
would decline in value by more than 2% of assets in the event of a hypothetical
200-basis point move in interest rates) will be required to maintain additional
capital for interest rate risk under the risk-based capital framework. 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, 1999, would have no additional capital
requirement. The Bank's management continues to monitor its interest rate risk
position.
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<PAGE>
The following is a summary of Home Federal's regulatory capital and
capital requirements at June 30, 1999:
<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, 1999
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to total assets).. $ 61,711 8.38% $11,043 1.50% N/A N/A
Core capital (to total assets)...... $ 61,711 8.38% $29,447 4.00% N/A N/A
Total risk-based capital
(to risk-weighted assets)........ $ 65,235 11.44% $45,617 8.00% $57,021 10.00%
Tier 1 risk-based capital
(to risk-weighted assets)........ $ 61,711 10.82% N/A N/A $34,213 6.00%
Tier 1 leverage capital
(to average assets).............. $ 61,711 8.42% N/A N/A $36,664 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,
1999, 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
The OTS recently adopted a regulation, which became effective on April
1, 1999, that revised the restrictions that apply to "capital distributions" by
savings associations. The amended regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
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<PAGE>
The amended regulation exempts certain savings associations from the
requirement under the previous regulation that all savings associations file
either a notice or an application with the OTS before making any capital
distribution. As revised, the regulation requires a savings association to file
an application for approval of a proposed capital distribution with the OTS if
the association is not eligible for expedited treatment under OTS's application
processing rules, or the total amount of all capital distributions, including
the proposed capital distribution, for the applicable calendar year would exceed
an amount equal to the savings association's net income for that year to date
plus the savings association's retained net income for the preceding two years
(the "retained net income standard"). At June 30, 1999, Home Federal's retained
net income standard was $8.2 million. A savings association must also file an
application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because Home
Federal is a subsidiary of a savings and loan holding company, this latter
provision will require, at a minimum, that Home Federal file a notice with the
OTS 30 days before making any capital distributions to the Company.
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<PAGE>
In addition to these regulatory restrictions, Home Federal's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Company. The Plan of Conversion requires Home Federal to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders and prohibits Home Federal
from making capital distributions to the Company if its net worth would be
reduced below the amount required for the liquidation account.
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, earnings standards and interest rate sensitivity to the safety and
soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies.
The association's written real estate lending policies must be reviewed
and approved by the association's board of directors at least annually. Further,
each association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Federal Reserve System
Under FRB regulations, Home Federal is required to maintain reserves
against its transaction accounts (primarily checking and NOW accounts) and
non-personal money market deposit accounts. The effect of these reserve
requirements is to increase Home Federal's cost of funds. Home Federal is in
compliance with its reserve requirements. A federal savings association, like
other depository institutions maintaining reservable accounts, may borrow from
the FRB "discount window," to meet these requirements but the FRB's regulations
require the savings association to exhaust other reasonable alternative sources,
including borrowing from its regional FHLB, before borrowing from the FRB.
FedICIA imposes certain limitations on the ability of undercapitalized
depository institutions to borrow from FRBs.
Holding Company Regulation
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
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<PAGE>
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, 1999, Home Federal's asset composition was in excess
of that required to qualify Home Federal as a QTL.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with Home
Federal, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than Home Federal or other subsidiary savings
associations) would thereafter be subject to further restrictions. HOLA provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings association shall commence or continue
for a limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies or (vii) those activities
authorized by the FRB as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of the OTS prior to being engaged in by a
multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
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.
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<PAGE>
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).
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, 1999, 66.5% 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
- 31 -
<PAGE>
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.
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 is no longer able to use the percentage of
taxable income method of computing its allocable tax bad debt deduction. Home
Federal is 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 began recapturing
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.
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. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," was issued in June 1998 and
amended by Statement of Financial Accounting Standards No. 137 ("SFAS 137"),
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS 133". SFAS 133, as amended by SFAS 137, is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. This
statement establishes accounting and reporting standards for derivative
- 32 -
<PAGE>
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.
Item 2. Properties.
At June 30, 1999, 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, 1999,
is presented in the following table:
<TABLE>
<CAPTION>
Net Book Value of
Property, Approximate
Description and Owned or Furniture and Square Lease
Address Leased Fixtures Footage Expiration
------- ------ -------- ------- ----------
(Dollars in Thousands)
Principal Office
<S> <C> <C> <C> <C>
222 West Second Street Owned $ 2,212 9,200 N/A
Operations Center
218 West Second Street Owned $ 504 20,000 N/A
Loan Processing Center
211 North Chestnut Owned $ 304 5,130 N/A
Branch Offices:
Columbus Branches:
501 Washington Street Owned $ 1,277 14,800 N/A
3805 25th Street Owned $ 321 5,800 N/A
2751 Brentwood Drive Owned $ 495 3,200 N/A
4330 West Jonathon Moore Pike Owned $ 717 2,600 N/A
Hope Branch 1/2 Owned $ 49 2,000
332 Jackson Street 1/2 Leased 4/2002
Austin Branch
67 West Main Street Owned $ 61 3,600 N/A
Brownstown Branch Month to
101 North Main Street Leased $ 28 2,400 Month
North Vernon Branches
111 North State Street Owned $ 400 1,900 N/A
1540 North State Street Leased $ 54 1,600 10/2002
Osgood Branch
South Buckeye Street Owned $ 125 1,280 N/A
Salem Branch
1208 South Jackson Owned $ 871 1,860 N/A
</TABLE>
- 33 -
<PAGE>
<TABLE>
<CAPTION>
Net Book Value of
Property, Approximate
Description and Owned or Furniture and Square Lease
Address Leased Fixtures Footage Expiration
------- ------ -------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Seymour Branch
1117 East Tipton Street Owned $ 527 6,800 N/A
Batesville Branch
12 West Pearl Street Owned $ 657 2,175 N/A
Madison Branch
201 Clifty Drive Owned $ 496 2,550 N/A
Greensburg Branch
115 East North Street Leased $ 31 2,440 8/99
</TABLE>
Home Federal owns its computer and data processing equipment that is
used for accounting, financial forecasting, and general ledger work. Home
Federal also has contracted for the data processing and reporting services of
NCR headquartered in Dayton, Ohio.
The contract with NCR expires in October 2000.
Item 3. Legal Proceedings.
The Bank has sued one of its depositors in the Jackson County Circuit
Court in Brownstown, Indiana, to recover amounts lost as a result of his
cashing of bad checks (in the aggregate amount of $298,000), plus treble
damages, costs, and fees. The depositor has counterclaimed for damages
resulting from certain actions the Bank has taken to protect its rights
with respect to this matter, including the freezing of the depositor's
savings account at the Bank.
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, 1999.
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 59) 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 39) 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 52) 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
- 34 -
<PAGE>
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 1999 Shareholder Annual Report (the "Shareholder
Annual Report"). As of June 30, 1999, there were 526 shareholders of record of
HFB's Common Stock.
It is currently the policy of HFB's Board of Directors to continue to
pay quarterly dividends, but any future dividends are subject to the Board's
discretion based on its consideration of HFB's operating results, financial
condition, capital, income tax considerations, regulatory restrictions and other
factors.
Since HFB has no independent operations or other subsidiaries to
generate income, its ability to accumulate earnings for the payment of cash
dividends to its shareholders is directly dependent upon the ability of Home
Federal to pay dividends to the Company.
Under OTS regulations, a converted savings association may not declare
or pay cash dividends if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings association may
make a "capital distribution," which includes, among other things, cash
dividends, is limited. 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, 1999, 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.
- 35 -
<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 Operations.
The information required by this item is incorporated by reference to
pages 6 to 15 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
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 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, 1999,
these price indications varied from 75.60 to 115.25 for fixed rate mortgages and
mortgage-backed securities and varied from 91.47 to 106.52 for adjustable rate
mortgages and mortgage-backed securities. Prepayment rates for June 30, 1999,
ranged from a constant prepayment rate ("CPR") of 6% to a CPR of 43%.
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, 1999, the retail CD price assumptions
varied from 77.35 to 118.2. 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, 1999, the retail CD intangible
price assumptions varied from .07 to 1.14.
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, 1999, the intangible prices
for transaction accounts, money market deposit accounts and passbook accounts
varied from -1.67 to 18.02 , -.43 to 11.45 and -.65 to 13.32, respectively.
- 36 -
<PAGE>
The following table sets forth the Bank's interest rate sensitivity of NPV as of
June 30, 1999. (dollars in thousands)
Net Portfolio Value NPV as % of PV of Assets
Change
In Rates $ Amount $ Change % Change NPV Ratio Change
+300 bp 82,148 ( 6,483) (7) 11.15 % ( 50) bp
+200 bp 85,508 ( 3,123) (4) 11.46 % ( 18) bp
+100 bp 87,790 ( 842) (1) 11.64 % - bp
0 bp 88,631 - - 11.65 % -
-100 bp 88,040 ( 592) (1) 11.48 % ( 16) bp
-200 bp 87,932 ( 700) (1) 11.38 % ( 27) bp
-300 bp 88,809 177 - 11.38 % ( 27) bp
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and Notes thereto
contained on pages 16 to 33 of the Shareholder Annual Report are incorporated
herein by reference. HFB's Quarterly Results of Operations contained on page 5
of the Shareholder Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
There are no such changes and disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 to 4 of the Company's Proxy Statement for
its 1999 annual shareholder meeting (the "1999 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 16 of the 1999 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 1999 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 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 11 of the 1999 Proxy Statement.
- 37 -
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) List the following documents filed as a part of the report:
Financial Statements Page in
1999
Shareholder
Annual Report
Consolidated Balance Sheets as of
June 30, 1999 and 1998 16
Consolidated Statements of Income for each of
the years in the three-year period ended
June 30, 1999 17
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended June 30, 1999 18
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
June 30, 1999 19
Notes to Consolidated Financial Statements 20
Report of Deloitte & Touche LLP
Independent Auditors 34
(b) Reports on Form 8-K
Registrant has filed no reports on Form 8-K for the quarter ending June
30, 1999.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page 40.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
- 38 -
<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 28th day
of September, 1999.
HOME FEDERAL BANCORP
DATE: September 28, 1999 /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 28th day of September,
1999.
/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. Laitinen /s/ Harvard W. Nolting. Jr.
- --------------------- ---------------------------
David W. Laitinen, Director Harvard W. Nolting, Jr., Director
- 39 -
<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 Registration Statement
on Form S-4 (Registration No. 33-55234)).
10(b) 1993 Stock Option Plan (incorporated by reference from
Exhibit 10(b) to Registrant's Form 10-K for the year ended
June 30, 1994).
10(c) Employment Agreement with Lawrence E. Welker
(incorporated by reference from Exhibit 10(c) to
Registrants Registration Statement on Form S-4
(Registration No. 33-55234)); first, second and third
amendments thereto incorporated by reference to
Exhibit 10(c) of Registrants Form 10-K for
the year ended June 30, 1998.
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, second and third
amendments thereto incorporated by reference to
Exhibit 10(d) of Registrants Form 10-K for
the year ended June 30, 1998.
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 and second
amendments thereto incorporated by reference to
Exhibit 10(f) of Registrants Form 10-K for
the year ended June 30, 1998.
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).
- 40 -
<PAGE>
10(i) Stock Option Agreement with Harvard W. Nolting, Jr.
(incorporated by reference from Exhibit 10(i) to Home
Federal Savings Bank's Form 10-K for the fiscal year
ended June 30, 1991).
10(j) Stock Option Agreement with David W. Laitinen
(incorporated by reference from Exhibit 10(j) to Home
Federal Savings Bank's Form 10-K for the
fiscal year ended June 30, 1991).
10(k) Stock Option Agreement with John T. Beatty
(incorporated by reference from Exhibit 10(k) to Home
Federal Savings Bank's Form 10-K for the fiscal year
ended June 30, 1991).
10(l) Stock Option Agreement with Harold Force
(incorporated by reference from Exhibit 10(l) to
Home Federal Savings Bank's Form 10-K for the fiscal
year ended June 30, 1991).
10(n) Executive Supplemental Retirement Income Agreement with John
K. Keach, Jr. (incorporated by reference from Exhibit 10(n)
to Home Federal Savings Bank's Form 10-K for the fiscal year
ended June 30, 1991) and First Amendment to Executive
Supplemental Retirement Income Agreement (incorporated by
reference from Exhibit 10(n) to Registrant's Form 10-K for
the fiscal year ended June 30, 1992); second and third
amendments thereto incorporated by reference to Exhibit
10(n) of Registrants Form 10-K for the year ended June 30,
1998.
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 and third amendments thereto
incorporated by reference to Exhibit 10(o)
of Registrants Form 10-K for the year ended
June 30, 1998.
10(p) Executive Supplemental Retirement Income
Agreement with Elaine Pollert (incorporate
by reference from Exhibit 10(p) to Home
Federal Saving Bank's Form 10-K for the
fiscal year ended June 30, 1998) and First,
Second and Third Amendments to Executive
Supplemental Retirement Income Agreement
(incorporated by reference from Exhibit
10(p) to Registrant's Form 10-K for the
fiscal year ended June 30, 1998).
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).
and Second Amendment to Deferred
Compensation Agreement (incorporated by
reference from Exhibit 10(v) to Registrant's
Form 10-K for the year ended June 30, 1998).
- 41 -
<PAGE>
10(w) Employment Agreement with S. Elaine Pollert (incorporated by
reference from Exhibit l0(w) to Home Federal Savings Bank
Form 10-K for the fiscal year ended June 30, 1998); and
First Amendment to Employment Agreement (incorporated by
reference from Exhibit 10(w) to Registrant's Form 10-K for
the year ended June 30, 1998).
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);
and Second and Third Amendments 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, 1998).
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 and second amendments
thereto (incorporated by reference from
Exhibit 10(ac) to Registrant's Form 10-K for
the year ended June 30, 1998).
10(ad) Director Deferred Compensation Agreement
with Lewis Essex (incorporated by reference
from Exhibit 10(ad) to Home Federal Savings
Bank Form 10-K for the fiscal year ended
June 30, 1992); first and second amendments
thereto (incorporated by reference from
Exhibit 10(ad) to Registrant's Form 10-K for
the year ended June 30, 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, second and third
amendments thereto (incorporated by
reference from Exhibit 10(ae) to
Registrant's Form 10-K for the year ended
June 30, 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, second and third amendments
thereto (incorporated by reference from Exhibit 10(af) to
Registrant's Form 10-K for the year ended June 30, 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
and second amendments thereto (incorporated
by reference from Exhibit 10(ag) to
Registrant's Form 10-K for the year ended
June 30, 1998).
- 42 -
<PAGE>
10(ah) Non-Qualified Stock Option Agreement, dated
December 22, 1992, with John T. Beatty
(incorporated by referencefrom Exhibit
10(ah) to Registrant's Form 10-K for theyear
ended June 30, 1994).
10(ai) Non-Qualified Stock Option Agreement,
dated December 22, 1992, with Lewis W. Essex
(incorporated by reference from Exhibit
10(ai) to Registrant's Form 10-K for the
year ended June 30, 1994).
10(aj) Non-Qualified Stock Option Agreement,
dated December 22, 1992, with Harold Force
(incorporated by reference from Exhibit
10(aj) to Registrant's Form 10-K for the
year ended June 30, 1994).
10(ak) Non-Qualified Stock Option Agreement, dated December 22,
1992, with David W. Laitinen (incorporated by reference from
Exhibit 10(ak) to Registrant's Form 10-K for the year ended
June 30, 1994).
10(al) Non-Qualified Stock Option Agreement, dated December 22,
1992, with Harvard W. Nolting, Jr (incorporated by reference
from Exhibit 10(al) to Registrant's Form 10-K for the year
ended June 30, 1994).
10(am) Non-Qualified Stock Option Agreement, dated
August 24,1993, with John T. Beatty
(incorporated by reference from Exhibit
10(am) to Registrant's Form 10-K for the
year ended June 30, 1994).
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 1999 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).
- 43 -
[Front Cover]
Home Federal Bancorp
1999 Annual Report
[Picture omitted]
Blue sky, green grass filled with numbers, Home Federal logo on the horizon.
<PAGE>
The 1999 fiscal year was punctuated by many changes in the financial
marketplace. During the year, Home Federal Bancorp positioned itself to meet the
changing needs of its customers, communities and shareholders. Innovative
approaches to traditional banking services kept us competitive and at the top of
our markets. As the decade draws to a close, we will continue to focus on
diversification and steady growth--while constantly broadening our horizons.
Table of Contents
Letter to Shareholders 1
Selected Consolidated Financial Data 4
Quarterly Results of Operations 5
Management's Discussion & Analysis 6
Consolidated Balance Sheets 16
Consolidated Statements of Income 17
Consolidated Statements of Shareholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Independent Auditors' Report 34
Board of Directors & Officers of Home Federal Bancorp
& Executive Officers of Home Federal Savings Bank 35
In Memoriam 36
<PAGE>
To Our Shareholders
While our clocks tick toward the much-anticipated arrival of the year 2000, we
find ourselves--like you, perhaps--filled with increasing wonder, anticipation
and more than just a bit of apprehension. We know that we are soon to be
eyewitnesses to an historic event--and recipients of a once-in-a-lifetime
opportunity to compare our achievements in one century with our prospects for
the next.
In that context, 1999, more than most years, has been a time for taking stock.
For Home Federal, fiscal year 1999 was another period of solid performance. For
the year, we reported net income of $10,477,000, or $1.95 diluted earnings per
share, compared to $10,390,000, or $1.90 diluted earnings per share, for the
prior year.
And yet 1999 has also been a year of transition. For example, what could only be
described as a modern-day bull market in mortgage refinancing--a major
contributor to our income statement in recent years--essentially expired during
the last quarter of fiscal year 1999, underscoring the need for us to
continually seek new and diverse sources of income. We pride ourselves on
staying abreast of changes in our marketplace and to adjusting competitively to
changes in the economy. This year, we also foresee a need to prepare for changes
in the regulatory environment. While we are uncertain of the outcome, we feel
that the current discussions in Washington, as they relate to financial
modernization, will not have an overall negative effect on our business
strategies.
And so the events of fiscal year 1999 have had dual significance for all of us
at Home Federal. We recognize that no institution can survive for 91 years
without foresight and fundamental strengths in day-to-day management, qualities
we feel were fully reflected in our recent performance. This performance was
recognized in the SNL Securities publication, ThriftINVESTOR, in which
Total Loan Portfolio in thousands [pie graphs omitted, right hand margin]
1999
Residential Mortgages 46.37% $281,481
Consumer 7.72% $ 46,888
Commercial 9.38% $ 56,956
Second & Home Equity 11.34% $ 68,873
Commercial Mortgages 25.18% $152,881
$607 079
1995
Residential Mortgages 59.89% $285,760
Consumer 11.86% $ 57,563
Commercial 5.93% $ 28,763
Second & Home Equity 8.35% $ 40,536
Commercial Mortgages 14.97% $ 72,618
$485,240
- 1 -
<PAGE>
Home Federal Bancorp ranked 15th among the top 100 largest publicly-owned
thrifts. The ranking is based on measurements of profitability, efficiency,
credit quality and earnings per share growth. This recognition is certainly
something we are proud of. However, we know that finding comfort in historical
performance is a poor way to plan for the future.
We know--in part through wisdom gained through past experience--that times and
circumstances change for all businesses. Economies, markets, policies and
products all change, and, perhaps most importantly, opportunities change. Our
challenge in these transitional times is to prudently recast our traditional,
20th Century strategies to meet the opportunities of the 21st. Accordingly, we
have chosen this year as a time to thoroughly analyze every aspect of our
business--and to prepare to begin the year 2000 with a fresh approach to each.
For example, we have placed even greater importance on the diversification of
our loan portfolio, with particular emphasis on general commercial lending
activities and commercial real estate lending. We are encouraged by our progress
in this area and fully intend to tap into our existing and ever-expanding
markets to the greatest extent possible. This strategy provides Home Federal
with the potential for offering both commercial and consumer services to this
valuable market segment.
Additionally, we continue to allocate resources to the development of other
non-interest income sources, such as fee-based services, which can effectively
diversify our income stream. We made significant progress in this regard by
combining our trust and brokerage service areas into one unit, Home Federal
Investment Management Services. During the year we also joined forces with the
Frank Russell Investment Management group of Tacoma, Washington. Through this
partnership, we will further enhance our ability to offer Home Federal's
customers a comprehensive range of financial products and services--including
investment counseling and management services, personal and employee benefit
trust and brokerage services, and estate administration services.
We have also expanded our activity in the realm of joint ventures. This area is
one that has seen considerable growth over the past few years; income earned
from joint ventures increased 63% between 1995 and 1999, and we expect that
number to increase again in fiscal year 2000.
In addition to diversifying our income sources, we are striving to increase
customer convenience while also decreasing expenses. We understand that our
customers are more geographically diverse than ever, and we are using
aggressively-marketed contemporary technology--such as our new Web site
(www.homf.com) and Online Banking services--to make it easier for our customers
to contact us and to avail themselves of our products and services. These
innovative channels position Home Federal as a leader in delivery technology in
our marketplace.
Ironically, the same wondrous new technology that makes
it possible for us to offer electronic banking products and customer services is
also threatening to disarm customer confidence in our operations as we approach
New Year's Day 2000. Home Federal technology managers have been implementing and
testing all electronic data systems for Year 2000 compliance since 1997, and we
have been communicating news of our preparatory actions and contingency measures
to our customers. We have great confidence in our level of preparation and are
working to see that our suppliers are equally well prepared.
- 2 -
<PAGE>
Today, our southeastern Indiana service area, which prospered through the last
decade, continues to enjoy economic diversification and steady growth--key
factors in assuring that its prosperity will continue. Our intent is that Home
Federal will continue to contribute to that prosperity--and to share in it as
well.
As we progress through these exciting times, we thank each of our predecessors
and present-day partners, including our employees and shareholders, for their
commitments to helping this institution prosper throughout the 20th Century
- --and for their contributions toward its preparedness for the challenges that
await it in the 21st.
Sincerely,
John K. Keach, Sr.
Chairman of the Board
John K. Keach, Jr.
President and Chief Executive Officer
Total Non-Interest Income to Average Assets [Bar graph in right hand margin
omitted]
[Caption to the left of graph]
Total non-interest income as a percentage of average assets. To weather
fluctuations in the interest rate environment, Home Federal has placed a
stronger emphasis on non-interest income. In comparisons of this ratio, Home
Federal Bancorp has consistently outperformed regional and national thrift peer
groups.
Fiscal Year 95 .84%
Fiscal Year 96 1.24%
Fiscal Year 97 1.11%
Fiscal Year 98 1.38%
Fiscal Year 99 1.36%
Diluted Earnings Per Share [Bar graph in right hand margin omitted]
[Caption to the left of graph]
Net income divided by outstanding common and common share equivalents.
Fiscal Year 95 $1.29
Fiscal Year 96 $1.43
Fiscal Year 97 $1.30
Fiscal Year 98 $1.90
Fiscal Year 99 $1.95
Efficiency Ratio [Bar graph in right hand margin omitted]
[Caption to the left of graph]
Operating expenses as a percentage of the sum of net interest income and
non-interest income. For example, during fiscal 1999, every $.51 in expense
generated $1.00 in net income.
Fiscal Year 95 58.70%
Fiscal Year 96 56.90%
Fiscal Year 97 51.90%
Fiscal Year 98 51.55%
Fiscal Year 99 50.57%
- 3 -
<PAGE>
Summary of Selected Consolidated Financial Data
(in thousands except per share data)
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------
Selected Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total assets ................................. $ 744,509 $ 719,549 $ 682,796 $ 630,015 $ 588,543
Securities available for sale ................ $ 73,521 $ 57,335 $ 40,119 $ 44,651 $ 34,221
Securities held to maturity .................. $ 4,987 $ 9,565 $ 13,115 $ 6,990 $ 17,451
Loans receivable, net ........................ $ 586,918 $ 582,040 $ 575,624 $ 520,097 $ 469,883
Deposits ..................................... $ 579,882 $ 543,989 $ 527,788 $ 489,573 $ 467,086
Total borrowings ............................. $ 90,410 $ 102,466 $ 92,393 $ 84,137 $ 72,900
Shareholders' equity ......................... $ 69,635 $ 66,952 $ 57,917 $ 51,517 $ 45,279
Selected Operations Data:
Total interest income ........................ $ 54,211 $ 55,103 $ 51,531 $ 47,156 $ 43,013
Total interest expense ....................... 30,135 30,864 28,640 27,251 24,289
Net interest income .......................... 24,076 24,239 22,891 19,905 18,724
Provision (credit) for loan losses ........... 1,124 1,193 1,129 638 (314)
Net interest income after provision
for loan losses ......................... 22,952 23,046 21,762 19,267 19,038
Gain on sale of loans ........................ 3,380 3,410 1,267 1,321 667
Gain (loss) on sale of securities ............ 2 8 19 1 (437)
Other income ................................. 6,622 6,297 5,900 6,126 4,508
Other expense (1) ............................ 15,851 15,726 17,789 14,431 13,483
Income before income taxes ................... 17,105 17,035 11,159 12,284 10,293
Income tax provision ......................... 6,628 6,645 4,313 4,932 3,757
-------------------------------------------------------------
Net income (2) ............................... $ 10,477 $ 10,390 $ 6,846 $ 7,352 $ 6,536
=============================================================
Basic earnings per common share .............. $ 2.06 $ 2.03 $ 1.36 $ 1.47 $ 1.32
Diluted earnings per common share ............ $ 1.95 $ 1.90 $ 1.30 $ 1.43 $ 1.29
Cash dividends per share ..................... $ 0.45 $ 0.37 $ 0.27 $ 0.20 $ 0.17
Selected Financial and Statistical Data:
Return on average assets ..................... 1.42% 1.47% 1.05% 1.23% 1.15%
Return on average shareholders' equity ....... 15.13% 16.66% 12.62% 15.14% 15.66%
Interest rate spread during the period ....... 3.36% 3.50% 3.59% 3.40% 3.43%
Net interest margin on average earning assets 3.53% 3.69% 3.76% 3.56% 3.54%
Average shareholders' equity to average assets 9.41% 8.85% 8.35% 8.12% 7.37%
Efficiency ratio (3) ......................... 50.57% 51.55% 51.90% 56.90% 58.70%
Nonperforming loans to total loans ........... 0.60% 0.67% 0.51% 0.56% 0.55%
Nonperforming assets to total assets ......... 0.75% 0.59% 0.46% 0.48% 0.45%
Loss allowance to nonperforming loans ........ 121.82% 106.26% 122.82% 103.38% 107.35%
Loss allowance to total loans ................ 0.73% 0.71% 0.63% 0.58% 0.58%
Dividend payout ratio ........................ 21.49% 18.28% 20.13% 13.59% 12.64%
Loan servicing portfolio ..................... $ 461,462 $ 385,207 $ 297,982 $ 266,814 $ 224,690
Allowance for loan losses .................... $ 4,349 $ 4,243 $ 3,649 $ 3,061 $ 2,806
Number of full service offices ............... 16 16 16 15 15
<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>
- 4 -
<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 1999 1998 1998 1999 1999
------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income ............... $13,761 $13,694 $13,299 $13,457
Total interest expense .............. 7,787 7,662 7,400 7,286
Net interest income ................. 5,974 6,032 5,899 6,171
Provision for loan losses ........... 244 230 301 349
Net interest income after
provision for loan losses ......... 5,730 5,802 5,598 5,822
Gain on sale of loans ............... 744 1,080 1,012 544
Other income ........................ 1,577 1,749 1,621 1,677
Other expense ....................... 3,747 4,284 4,013 3,807
Income before income taxes .......... 4,304 4,347 4,218 4,236
Income tax provision ................ 1,699 1,712 1,663 1,554
Net Income .......................... $ 2,605 $ 2,635 $ 2,555 $ 2,682
Basic earnings per common share ..... $ 0.51 $ 0.51 $ 0.50 $ 0.54
Diluted earnings per common share ... $ 0.48 $ 0.49 $ 0.48 $ 0.50
Dividends per share ................. $ 0.100 $ 0.110 $ 0.110 $ 0.125
Stock sales price range: High (1) .. $ 30.25 $ 26.75 $ 23.38 $ 29.00
Low ....... $ 22.75 $ 20.50 $ 21.88 $ 20.75
Three Months Ended
------------------------------------------------
September 30, December 31, March 31, June 30,
Fiscal Year 1998 1997 1997 1998 1998
------------------------------------------------
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
Diluted 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
<FN>
(1) The Company's common stock trades on the NASDAQ stock market under the symbol "HOMF".
As of June 30, 1999, the Company had 526 holders of record of its shares.
</FN>
</TABLE>
- 5 -
<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
improved from $19.0 million in fiscal 1995 to $23.0 million in fiscal 1999. The
increase in net interest income is primarily the result of an increase in
interest-earning assets over interest-bearing liabilities.
Asset/Liability Management
The Bank follows a program designed to decrease its vulnerability to material
and prolonged increases in interest rates. This strategy includes 1) selling
certain longer term, fixed rate loans from its portfolio; 2) increasing the
origination of adjustable rate mortgage loans; 3) improving its interest rate
gap by increasing the interest rate sensitivity and shortening the maturities of
its interest-earning assets and extending the maturities of its interest-bearing
liabilities; and 4) increasing its non-interest income.
A significant part of the Bank's program of asset and liability
management has been the increased emphasis on the origination of adjustable rate
and/or short-term loans, which include adjustable rate residential mortgages and
construction loans, commercial loans and consumer-related loans. The Bank
continues to offer fixed rate residential mortgage loans. The Bank retains the
servicing function on most of the 15-year and 30-year loans sold, thereby
increasing non-interest income. The proceeds of these loan sales are used to
reinvest in other interest-earning assets or 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 12% to
30% for fixed rate mortgage loans and mortgage-backed securities; 0% to 20% for
adjustable rate mortgage loans; and 10% to 85% 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 the rates shown in the following
table:
- 6 -
<PAGE>
6 Months 6-12 1-3 3-5 Over 5
or Less Months Years Years Years
---------------------------------------------
Passbook, money market accounts .. 100.00% 0.00% 0.00% 0.00% 0.00%
Public fund money market accounts. 54.18% 24.82% 11.00% 5.24% 4.76%
NOW accounts ..................... 20.61% 16.37% 33.87% 9.06% 20.09%
Non-interest bearing NOW accounts. 44.55% 19.47% 17.61% 9.15% 9.22%
The prepayment and attrition rates are selected after considering the current
interest rate environment, industry asset and liability price tables developed
by the Office of Thrift Supervision ("OTS") and the Company's historical
experience. All other interest-earning assets and interest-bearing liabilities
are shown based on their contractual maturity or repricing date.
The following table sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at June 30, 1999.
(dollars in thousands)
<TABLE>
<CAPTION>
Maturity or Repricing as of June 30, 1999
---------------------------------------------------------------------------
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 .............. $ 90,812 $ 29,057 $ 68,346 $ 20,724 $ 108 $ 209,047
Fixed rate ................... 12,314 9,297 22,418 13,399 15,006 72,434
Commercial real estate ....... 47,562 34,280 47,256 18,940 4,843 152,881
Non-mortgage ................. 109,837 16,649 30,804 9,414 6,013 172,717
Securities and other ........... 29,945 5,965 32,701 16,272 5,154 90,037
Total .......................... 290,470 95,248 201,525 78,749 31,124 697,116
Interest-Bearing Liabilities:
Fixed maturity deposits ........ 143,896 85,221 90,323 13,477 3,781 336,698
Other deposits ................. 182,464 16,383 22,050 7,689 14,598 243,184
FHLB advances .................. 8,000 4,188 24,798 24,032 26,877 87,895
Other borrowings ............... 1,515 1,000 -- -- -- 2,515
Total .......................... 335,875 106,792 137,171 45,198 45,256 670,292
Interest-earning assets less
interest-bearing liabilities .. $ (45,405) $ (11,544) $ 64,354 $ 33,551 $ (14,132)
Cumulative interest rate
sensitivity gap ............... $ (45,405) $ (56,949) $ 7,405 $ 40,956 $ 26,824
Cumulative interest rate gap
as a percentage of total assets -6.10% -7.65% 0.99% 5.50% 3.60%
</TABLE>
- 7 -
<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,
-------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
-------------------------------------------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans ................ $496,632 $ 39,922 8.04% $491,306 $ 41,218 8.39% $455,225 $ 38,633 8.49%
Commercial loans .............. 53,907 4,643 8.61% 45,636 4,260 9.33% 39,892 3,638 9.12%
Consumer loans ................ 49,541 5,037 10.17% 53,911 5,536 10.27% 56,040 5,651 10.08%
Securities .................... 69,031 4,005 5.80% 61,432 3,786 6.16% 50,752 3,307 6.52%
Interest-bearing deposits ..... 12,350 604 4.89% 5,369 303 5.64% 7,044 302 4.29%
Total interest-earning
assets (1) ................... $681,461 $ 54,211 7.95% $657,654 $ 55,103 8.38% $608,953 $ 51,531 8.46%
Interest-bearing liabilities:
Deposits - Transaction accounts $221,304 $ 5,900 2.67% $191,557 $ 5,425 2.83% $169,890 $ 4,420 2.60%
Certificate accounts 333,971 18,137 5.43% 339,379 19,090 5.62% 333,057 18,866 5.66%
FHLB advances ................. 99,380 6,068 6.11% 94,008 5,891 6.27% 74,267 4,652 6.26%
Other borrowings .............. 1,530 30 1.96% 7,471 458 6.13% 10,368 702 6.77%
Total interest-bearing
liabilities .................. $656,185 $ 30,135 4.59% $632,415 $ 30,864 4.88% $587,582 $ 28,640 4.87%
Net Interest Income............. $ 24,076 $ 24,239 $ 22,891
Net Interest Rate Spread........ 3.36% 3.50% 3.59%
Net Earning Assets.............. $ 25,276 $ 25,239 $ 21,371
Net Interest Margin (2)......... 3.53% 3.69% 3.76%
Average interest-earning
assets to average interest-
bearing liabilities............ 103.85% 103.99% 103.64%
<FN>
(1) Average balances are net of non-performing loans, and interest income includes loan fee amortization of $171,000, $90,000 and
$320,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
(2) Net interest income divided by the average balance of interest-earning assets.
</FN>
</TABLE>
- 8 -
<PAGE>
Rate/Volume Analysis
The following table sets forth the changes in the Bank's interest income and
interest expense resulting from changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities. Changes not
solely attributable to volume or rate changes have been allocated in proportion
to the changes due to volume or rate. (in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
----------------------------- -----------------------------
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 ................................. $(1,749) $ 453 $(1,296) $ (436) $ 3,021 $ 2,585
Commercial loans ............................... (284) 667 383 88 534 622
Consumer loans ................................. (54) (445) (499) 108 (223) (115)
Securities ..................................... (197) 416 219 (166) 645 479
Interest-bearing deposits ...................... (34) 335 301 4 (3) 1
Total .................................. $(2,318) $ 1,426 $ (892) $ (402) $ 3,974 $ 3,572
Interest Expense on Interest-Bearing Liabilities:
Deposits - Transaction accounts ................ (288) 763 475 412 593 1,005
Certificate accounts ........... (652) (301) (953) (131) 355 224
FHLB advances .................................. (144) 321 177 2 1,237 1,239
Other borrowings ............................... (197) (231) (428) (61) (183) (244)
Total .................................. (1,281) 552 (729) 222 2,002 2,224
Net Change in Net Interest Income ............... $(1,037) $ 874 $ (163) $ (624) $ 1,972 $ 1,348
============================= =============================
</TABLE>
- 9 -
<PAGE>
RESULTS OF OPERATIONS
Comparison of Year Ended June 30, 1999 and Year Ended June 30, 1998:
General
The Company reported net income of $10.5 million for the year ended June 30,
1999. Net income for the year ended June 30, 1998 was $10.4 million, an increase
of $87,000 or 0.8%.
Net Interest Income
Net interest income before provision for loan losses decreased $163,000, or 0.7%
for the year ended June 30, 1999, compared to the prior year. This decrease was
primarily the result of the lower interest rate environment experienced in
fiscal 1999 as compared to fiscal 1998. Rates on interest-earning assets
declined more rapidly than the interest rates on interest-bearing liabilities,
which was reflected in a 14 basis point drop in the Company's net interest rate
spread.
Net interest income after provision for loan losses remained relatively
stable, decreasing by $94,000, or 0.4% over that of the prior year, to $23.0
million. 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, the change in the portfolio mix and current economic
conditions. The balance of the allowance for loan losses was $4.3 million at
June 30, 1999.
Interest Income
The Company's total interest income for the year ended June 30, 1999, decreased
$892,000, or 1.6%, as compared to the year ended June 30, 1998. Interest income
decreased primarily due to the decrease in the average yield earned on
interest-bearing assets, which fell to 8.0% in fiscal 1999 from 8.4% in fiscal
1998. The decrease in interest income due to the decline in average yield was
partially mitigated by a $23.8 million increase in the average balance of
interest-earning assets. This growth in average balance was attributed to a
relatively strong local economy and continued 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, 1999, decreased $729,000, or
2.4%, as compared to the year ended June 30, 1998. The decrease in interest
expense mirrored the decrease in interest income. Although declining rates paid
on deposits decreased interest expense, increasing average balances of
interest-bearing liabilities partially offset the decrease in interest expense.
Other Income
Other income increased $289,000 from $9.7 million in fiscal year 1998 to $10.0
million in fiscal year 1999. This increase was due to an increase of $262,000 in
loan servicing income, an increase of $259,000 in miscellaneous income and a
$119,000 increase in income from joint ventures. The increase in loan servicing
income was due to an increase in the servicing portfolio of $76.3 million in
fiscal 1999. The growth in the servicing portfolio resulted from the heavy
refinancing activity started in fiscal 1998 which continued into the first nine
months of fiscal 1999 due to the low interest rate environment experienced
during that period. The Bank sells most of its fixed rate loan originations,
thus causing the large increase in the servicing portfolio. The increase in
miscellaneous income resulted from the lease buy out of a building held for
investment of $159,000, $59,000 of tax refunds from prior years' returns and a
$34,000 credit for insurance expense paid in prior years. The increase in joint
venture income reflects the income received from a joint venture begun in fiscal
1998, which has moved out of the development phase and is producing income.
These increases were offset by decreases in insurance, annuity income, and other
fees of $340,000. The decrease in insurance, annuity income and other fees was
due primarily to decreased income of $374,000 from annuity and brokerage sales.
The reduction in annuity and brokerage sales was the result of several factors,
including: 1) a market change resulting in reduced volume of client transactions
completed in the annuity area; 2) a change in personnel of the brokerage staff;
and 3) a change in the way the Bank is compensated for brokerage sales which
reduces initial fees received, but will generate future income from the
management of clients' accounts.
Other Expenses
Other expense remained fairly stable, increasing $125,000, or 0.8% over the
prior fiscal year, to $15.9 million from $15.7 million. While total other
expenses were fairly constant, certain categories within other expenses
experienced fluctuations. Compensation and employee benefits decreased $373,000,
or 4.2%, reflecting the reduction of bonus expense in fiscal 1999 compared to
fiscal 1998 of $678,000. The reduction to compensation and employee benefits
from reduced bonus expenses was partially diminished by increases in the cost of
health care and salary increases. Miscellaneous expenses increased $579,000, or
20.9%, due to a variety of factors including: 1) a write off of bad checks of
$298,000; 2) a write down of $118,000 on the value of a building held by the
Company for investment reflecting the lease buy out; 3) the expensing of
deferred costs associated with the same building of $39,000 and; 4) increased
loan costs of $94,000 due primarily to the use of new underwriting software.
- 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 after-tax assessment of $1.8
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 of 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 last 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 $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. The increase was primarily due to the increase in 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. Accounting standards specify 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>
FINANCIAL CONDITION
The Company's total assets increased $25.0 million to $744.5 million at June 30,
1999, from $719.5 million at June 30, 1998. Cash and interest-bearing deposits
increased $8.5 million. In addition, loans receivable, net increased $4.9
million. Securities available for sale increased $16.2 million, while securities
held to maturity decreased $4.6 million.
The Company's total liabilities increased $22.3 million with deposits
increasing $35.9 million and Federal Home Loan Bank advances decreasing $10.2
million. The Company borrowed $1.0 million of senior debt during fiscal year
1999 to finance the repurchase of the Company's stock.
Shareholders' equity increased $2.7 million, primarily due to an
increase in retained earnings of $8.2 million. Retained earnings increased $10.5
million from net income and decreased $2.3 million as a result of dividends paid
to shareholders. Common stock had a net decrease of $4.9 million: $5.8 million
from the repurchase of Company stock and increases of $812,000 from options
exercised and $84,000 from the related tax benefit of non-qualified dispositions
of such options. In accordance with Statement of Accounting Standards 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
had an accumulated other comprehensive loss from unrealized losses in its
available for sale portfolio of $576,000, or a $654,000 decrease in
shareholders' equity from the June 30, 1998, gain position of $78,000.
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 300 basis points either up
or down in 100 basis point increments. NPV represents 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, 1999, these price indications varied from 75.60 to 115.25 for fixed rate
mortgages and mortgage-backed securities and varied from 91.47 to 106.52 for
adjustable rate mortgages and mortgage-backed securities. Prepayment rates for
June 30, 1999, ranged from a constant prepayment rate ("CPR") of 6% to a CPR of
43%.
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, 1999, the retail CD
price assumptions varied from 77.35 to 118.2. 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, 1999, the
retail CD intangible price assumptions varied from .07 to 1.14.
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, 1999, the
intangible prices for transaction accounts, money market deposit accounts and
passbook accounts varied from -1.67 to 18.02 , -.43 to 11.45 and -.65 to 13.32,
respectively.
The following table sets forth the Bank's interest rate sensitivity of
NPV as of June 30, 1999. (dollars in thousands)
Net Portfolio Value NPV as % of PV of Assets
Change
In Rates $ Amount $ Change % Change NPV Ratio Change
+300 bp 82,148 ( 6,483) (7) 11.15 % ( 50) bp
+200 bp 85,508 ( 3,123) (4) 11.46 % ( 18) bp
+100 bp 87,790 ( 842) (1) 11.64 % - bp
0 bp 88,631 - - 11.65 % -
-100 bp 88,040 ( 592) (1) 11.48 % ( 16) bp
-200 bp 87,932 ( 700) (1) 11.38 % ( 27) bp
-300 bp 88,809 177 - 11.38 % ( 27) 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.
- 12 -
<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 net realizable value. (dollars in thousands)
At June 30,
-------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------
Non-accruing loans:
Mortgage $ 2,457 $ 3,004 $ 2,182 $ 2,153 $ 1,904
Commercial 718 522 258 307 197
Consumer 334 466 490 411 330
-------- -------- -------- --------- --------
Total 3,509 3,992 2,930 2,871 2,431
-------------------------------------------------
Accruing loans:
Mortgage - - 2 88 69
Commercial - - 36 - -
Consumer - - 2 1 12
-------- -------- -------- --------- --------
Total - - 40 89 81
-------------------------------------------------
Troubled debt restructured 61 - 1 1 102
-------------------------------------------------
Total non-performing loans 3,570 3,992 2,971 2,961 2,614
Real estate owned 2,050 242 139 48 41
-------------------------------------------------
Total Non-Performing Assets $ 5,620 $ 4,234 $ 3,110 $ 3,009 $ 2,655
=================================================
Non-performing assets to
total assets 0.75% 0.59% 0.46% 0.48% 0.45%
=================================================
Non-performing loans to
total loans 0.60% 0.67% 0.51% 0.56% 0.55%
=================================================
Allowance for loan losses to
non-performing loans 121.82% 106.29% 122.82% 103.38% 107.35%
=================================================
In addition, at June 30, 1999, there were $2.4 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 $1.4 million to $5.6 million in fiscal
1999. The majority of the increase in non-performing assets was in the real
estate owned area. Real estate owned increased $1.8 million due primarily to the
repossession of a single commercial property of $1.2 million, represented by an
apartment complex.
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,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year .......... $ 4,243 $ 3,649 $ 3,061 $ 2,806 $ 2,580
Provision for loan losses ............. 1,124 1,193 1,129 638 (314)
Loan charge-offs:
Mortgage ............................ (431) (20) (9) (10) (6)
Commercial .......................... (66) (11) -- (9) --
Consumer ............................ (606) (665) (610) (434) (369)
Total charge-offs ................. (1,103) (696) (619) (453) (375)
Recoveries:
Mortgage ............................ -- 5 9 16 2
Commercial .......................... 1 -- -- -- 822
Consumer ............................ 84 92 69 54 91
Total recoveries ................. 85 97 78 70 915
Net loan recoveries(charge-offs)(1,018) (599) (541) (383) 540
Balance ............................... $ 4,349 $ 4,243 $ 3,649 $ 3,061 $ 2,806
Net charge-offs to average loans 0.17% 0.10% 0.11% 0.08% -0.12%
Allowance balance to total loans 0.73% 0.71% 0.63% 0.58% 0.58%
</TABLE>
- 13 -
<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, 1999, the Bank's liquidity ratio was 20.4%.
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, 1999, the Bank had $87.9 million in
borrowings from the FHLB of Indianapolis. As of that date, the Bank had
commitments to fund loan originations and purchases of approximately $31.6
million and commitments to sell loans of $13.1 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, 1999, there was a net increase of $8.5 million in cash and cash
equivalents. The major uses of cash during the year were loan originations, net
of repayments, of $213.2 million; purchases of investment and mortgage-backed
securities of $45.2 million; and repayment of FHLB advances of $63.7 million.
Partially offsetting these uses of cash, the major sources of cash provided
during the year included $223.5 million from selling fixed rate mortgage loans
to the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"); maturities and sales of investment securities of
$32.2 million; and proceeds from FHLB advances of $53.5 million.
Impact of Inflation
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation. The primary assets and
liabilities of thrifts such as the Bank are monetary in nature. As a result,
interest rates have a more significant impact on the Bank's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or with the same magnitude as the price of goods and
services. In the current interest rate environment, the liquidity, maturity
structure and quality of the Bank's assets and liabilities are critical to the
maintenance of acceptable performance levels.
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. 99 for 1999). 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 Home Federal's operations 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 consisting 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 Home Federal's
computer systems was completed. The scope of the project includes other
operational and environmental systems since they may be impacted if embedded
computer chips control the functionality of those systems. From the assessment,
we identified those systems deemed to be mission critical or those that have a
significant impact on normal operations.
Home Federal relies heavily 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. At that time, a process for the on-going monitoring of
their progress in meeting their targeted schedule was implemented. All systems,
critical and non-critical, have been deemed Year 2000 compliant by the vendors
and service providers.
To validate the readiness of each major system, Home Federal requested
detailed documentation of the testing procedures used and of test results from
each vendor and service provider. The project team has evaluated the
effectiveness of testing performed by the vendors to determine the level of
further testing required by Home Federal. To the extent possible, Home Federal
has completed Year 2000 testing in its own environment for all critical systems.
Testing will continue throughout 1999 as needed for non-critical systems and as
required for changes made to compliant systems.
- 14 -
<PAGE>
Current Status
With the exception of the brokerage system for which Home Federal is awaiting
final test documentation, all mission-critical systems have met the required
criteria to be given a status of "Y2K Ready" by the project team. While all
systems have been certified as Year 2000 compliant by the vendors, some of the
less critical ones are in the final stages of our internal validation process
and are close to receiving our full "Y2K Ready" status.
With testing and implementation of its critical systems essentially
100% complete, the Home Federal Year 2000 project team will focus on monitoring
system readiness and testing of any required system changes as needed.
Preparations for the transition weekend and refining business contingency plans
will continue through the months remaining in 1999.
Customer Risk
In 1998, Home Federal also implemented a plan to manage the potential risk posed
by the impact of the Year 2000 issue on its major customers. Procedures were
amended to include an evaluation of the Year 2000 risk posed by major borrowers
in all new requests for credit, and appropriate action is being taken to
minimize the risk to Home Federal. Additionally, we have completed an assessment
of the risk posed by existing customers and have determined that, while an
increase in delinquency may occur for a short period of time, the risk for
actual loss is low. This determination is based, in part, upon information
provided by the customers concerning their Year 2000 readiness progress and our
best estimates of their overall sensitivity to Year 2000 risk.
Contingency Plan
Realizing that some disruption may occur despite our best efforts, we have
developed 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.
Key employees, from both the business and systems operational areas,
will be on hand over the Year 2000 weekend to test the functionality of critical
systems and to implement contingency procedures if needed.
Risk Assessment
Based upon current information related to the progress of our major vendors and
service providers and our internal testing progress, we have determined that the
Year 2000 issue will not pose significant operational problems for Home
Federal's computer systems. This determination is based on the continued Year
2000 readiness of the products and services of third party vendors and service
providers on which our systems rely, the availability of certain resources and
other external factors.
The goal of our Year 2000 project is to ensure that all products and
services offered by Home Federal Savings Bank are ready for the Year 2000 with
no disruption in service and minimal inconvenience to our customers. As with any
effort of this scale and involving resources of so many third party providers,
it is impossible to guarantee that no system or customer will be impacted in
some way by the Year 2000 transition.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement No. 137, which
amends FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," that the Company will be required to adopt in future periods. See
Note 1 to the consolidated financial statements for further discussion of this
pronouncement.
- 15 -
<PAGE>
Consolidated Balance Sheets
(in thousands except share data)
<TABLE>
<CAPTION>
June 30,
----------------------
ASSETS: 1999 1998
---------- ---------
<S> <C> <C>
Cash .............................................................. $ 21,377 $ 19,063
Interest-bearing deposits ......................................... 11,529 5,304
---------- ---------
Total cash and cash equivalents ................................. 32,906 24,367
---------- ---------
Securities available for sale at fair value (amortized cost $74,482
and $57,205) (Note 2) ......................................... 73,521 57,335
Securities held to maturity at amortized cost
(fair value $4,960 and $9,550 ) (Note 2) ....................... 4,987 9,565
Loans held for sale (market value $5,136 and $12,840) (Note 4) .... 5,102 12,711
Loans receivable, net of allowance for loan losses of $4,349
and $4,243 (Note 3) ............................................ 586,918 582,040
Investments in joint ventures (Note 5) ............................ 7,090 4,077
Federal Home Loan Bank stock (Note 9) ............................. 5,814 5,456
Accrued interest receivable, net (Note 6) ......................... 4,897 4,721
Premises and equipment, net (Note 7) .............................. 9,129 8,566
Real estate owned ................................................. 2,050 242
Prepaid expenses and other assets ................................. 4,404 2,964
Cash surrender value of life insurance ........................... 6,095 5,808
Goodwill, net ..................................................... 1,596 1,697
---------- ---------
TOTAL ASSETS ................................................... $ 744,509 $ 719,549
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits (Note 8) ................................................. $ 579,882 $ 543,989
Federal Home Loan Bank Advances (Note 9) .......................... 87,895 98,070
Senior debt (Note 10) ............................................. 1,000 --
Other borrowings (Note 10) ........................................ 1,515 4,396
Advance payments by borrowers for taxes and insurance ............. 270 320
Accrued expenses and other liabilities ............................ 4,312 5,822
---------- ---------
Total liabilities .............................................. $ 674,874 $ 652,597
---------- ---------
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: 15,000,000 shares
Issued and outstanding: ......................................... 3,074 7,963
4,984,814 shares at June 30, 1999
5,139,176 shares at June 30, 1998
Retained earnings, restricted .................................... 67,137 58,911
Accumulated other comprehensive income (loss), net ................ (576) 78
---------- ---------
Total shareholders' equity ..................................... 69,635 66,952
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $ 744,509 $ 719,549
========== =========
</TABLE>
See notes to consolidated financial statements
- 16 -
<PAGE>
Consolidated Statements of Income
(in thousands except per share data)
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------
Interest Income: 1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Loans receivable (Note 3) ........................ $ 49,602 $ 51,014 $ 47,923
Securities available for sale and held to maturity 4,005 3,786 3,306
Other interest income ............................ 604 303 302
-------- -------- --------
Total interest income ............................. 54,211 55,103 51,531
-------- -------- --------
Interest Expense:
Deposits (Note 8) ................................ 24,037 24,515 23,286
Advances from Federal Home Loan Bank (Note 9) .... 6,068 5,884 4,651
Other borrowings (Note 10) ....................... 30 465 703
-------- -------- --------
Total interest expense ............................ 30,135 30,864 28,640
-------- -------- --------
Net interest income ............................... 24,076 24,239 22,891
Provision for loan losses ......................... 1,124 1,193 1,129
-------- -------- --------
Net interest income after provision for loan losses 22,952 23,046 21,762
-------- -------- --------
Other Income:
Gain on sale of loans ............................ 3,380 3,410 1,267
Gain on sale of securities available for sale .... 2 8 19
Income from joint ventures (Note 5) .............. 412 293 432
Insurance, annuity income, other fees ............ 1,243 1,583 1,474
Service fees on NOW accounts ..................... 2,054 1,976 1,673
Net gain (loss) on real estate owned ............. (34) 19 (24)
Loan servicing income ............................ 1,103 841 1,030
Miscellaneous .................................... 1,844 1,585 1,315
-------- -------- --------
Total other income ................................ 10,004 9,715 7,186
-------- -------- --------
Other Expenses:
Compensation and employee benefits (Note 13) ..... 8,417 8,790 8,153
Occupancy and equipment .......................... 2,359 2,305 2,104
Service bureau expense ........................... 784 796 779
Federal insurance premium (Note 12) .............. 320 328 3,652
Marketing ........................................ 514 629 503
Goodwill amortization ............................ 101 101 100
Miscellaneous .................................... 3,356 2,777 2,498
-------- -------- --------
Total other expenses .............................. 15,851 15,726 17,789
-------- -------- --------
Income before income taxes ........................ 17,105 17,035 11,159
Income tax provision (Note 11) .................... 6,628 6,645 4,313
-------- -------- --------
Net Income ........................................ $ 10,477 $ 10,390 $ 6,846
======== ======== ========
Basic Earnings per Common Share ................... $ 2.06 $ 2.03 $ 1.36
Diluted Earnings per Common Share ................. $ 1.95 $ 1.90 $ 1.30
======== ======== ========
</TABLE>
See notes to consolidated financial statements
- 17 -
<PAGE>
Consolidated Statements of Shareholders' Equity
(in thousands except shares outstanding)
<TABLE>
<CAPTION>
Accumulated
Other Total
Shares Common Retained Comprehensive Shareholders'
Outstanding Stock Earnings Income (Loss) Equity
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 ...................... 2,226,282 6,819 44,953 (255) 51,517
Comprehensive income:
Net income ................................. 6,846 6,846
Change in unrealized gain (loss)
on securities available for sale, net of
reclassification adjustment and tax effect 202 202
--------
Total comprehensive income .............. 7,048
--------
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 ($.41 per share) ............... (1,378) (1,378)
---------------------------------------------------------------------
Balance at June 30, 1997 ...................... 3,396,329 7,549 50,421 (53) 57,917
Comprehensive income:
Net income ................................. 10,390 10,390
Change in unrealized gain (loss)
on securities available for sale, net of
reclassification adjustment and tax effect 131 131
--------
Total comprehensive income .............. 10,521
--------
Stock split 3 for 2;
fractional shares ........................ 1,698,000 (4) (4)
Stock options exercised ....................... 44,847 304 304
Tax benefit related to exercise
of non-qualified stock options ............ 114 114
Cash dividends ($.371 per share) .............. (1,900) (1,900)
----------------------------------------------------------------------
Balance at June 30, 1998 ...................... 5,139,176 7,963 58,911 78 66,952
Comprehensive income:
Net income ................................. 10,477 10,477
Change in unrealized gain (loss)
on securities available for sale, net of
reclassification adjustment and tax effect (654) (654)
--------
Total comprehensive income .............. 9,823
--------
Stock options exercised ....................... 79,097 812 812
Stock repurchased ............................. (233,459) (5,785) (5,785)
Tax benefit related to exercise
of non-qualified stock options ............ 84 84
Cash dividends ($.445 per share) .............. (2,251) (2,251)
----------------------------------------------------------------------
Balance at June 30, 1999 ...................... 4,984,814 $ 3,074 $ 67,137 $ (576) $ 69,635
======================================================================
</TABLE>
See notes to consolidated financial statements
- 18 -
<PAGE>
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1999 1998 1997
----------------------------------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net income .................................................. $ 10,477 $ 10,390 $ 6,846
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of discounts, amortization and depreciation ... 815 731 1,191
Provision for loan losses ............................... 1,124 1,193 1,129
Net gain from sale of loans ............................. (3,380) (3,410) (1,267)
Net gain from sale of securities available for sale ..... (2) (8) (19)
Net gain from joint ventures; real estate owned ......... (378) (312) (408)
Net loan fees deferred (recognized) ..................... (163) 130 (403)
Proceeds from sale of loans held for sale ............... 223,527 216,227 79,552
Origination of loans held for sale ...................... (212,538) (220,899) (78,291)
Decrease in accrued interest and other assets .......... (3,403) (1,444) (1,134)
Increase (decrease) in other liabilities ................ (1,560) 1,444 (90)
----------------------------------
Net Cash Provided by Operating Activities ................... 14,519 4,042 7,106
----------------------------------
Cash Flows From Investing Activities:
Net principal disbursed on loans ............................ (669) (880) (55,244)
Proceeds from:
Maturities/Repayments of:
Securities held to maturity .......................... 5,430 9,142 346
Securities available for sale ........................ 8,175 7,181 12,337
Sales of:
Securities available for sale ........................ 18,644 11,632 8,572
Real estate owned and other asset sales .............. 1,262 762 504
Purchases of:
Loans ................................................... (5,170) (6,815) (947)
Securities available for sale ........................... (44,386) (35,870) (16,085)
Securities held to maturity ............................. (855) (5,585) (6,453)
Federal Home Loan Bank stock ............................ (358) (1,196) (462)
Investment in joint ventures, net ........................... (2,601) (700) 301
Increase in cash surrender value of life insurance .......... (287) (279) (525)
Acquisition of property and equipment, net .................. (1,862) (1,627) (1,129)
----------------------------------
Net Cash Used in Investing Activities ....................... (22,677) (24,235) (58,785)
----------------------------------
Cash Flows From Financing Activities:
Increase in deposits, net ................................... 35,893 16,201 38,215
Proceeds from advances from Federal Home Loan Bank .......... 53,506 89,000 50,800
Repayment of advances from Federal Home Loan Bank ........... (63,681) (70,875) (41,555)
Proceeds from senior debt ................................... 1,000 -- --
Repayment of senior debt .................................... -- (7,800) (1,300)
Net proceeds from overnight borrowings ...................... (2,881) (252) 311
Common stock options exercised, net of fractional shares paid 896 414 730
Repurchase of common stock .................................. (5,785) -- --
Payment of dividends on common stock ........................ (2,251) (1,900) (1,378)
----------------------------------
Net Cash Provided by Financing Activities ................... 16,697 24,788 45,823
----------------------------------
Net increase (decrease) in cash and cash equivalents ........ 8,539 4,595 (5,856)
Cash and cash equivalents, beginning of year ................ 24,367 19,772 25,628
----------------------------------
Cash and Cash Equivalents, End of Year ...................... $ 32,906 $ 24,367 $ 19,772
==================================
Supplemental Information:
Cash paid for interest....................................... $ 30,226 $ 30,635 $ 28,474
Cash paid for income taxes................................... $ 6,900 $ 6,727 $ 4,224
Assets acquired through foreclosure.......................... $ 2,864 $ 844 $ 192
==================================
</TABLE>
See notes to consolidated financial statements
- 19 -
<PAGE>
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 market value determined on an
aggregate basis. Gains and losses on the sale of these mortgage loans are
included in other income.
Mortgage Banking Activities
Accounting standards require 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, MSRs are 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.
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 these
standards, 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 the 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.
- 20 -
<PAGE>
Uncollected Interest
An allowance for the loss of uncollected interest is provided on loans which are
more than 90 days past due. The allowance is established by a charge to interest
income equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments returns to normal, in which case the loan is returned to
accrual status.
Provision for Losses
A provision for estimated losses on loans and real estate owned is charged to
operations based upon management's evaluation of the potential losses. Such an
evaluation, which includes a review of all loans for which full collectibility
may not be reasonably assured, considers, among other matters, the estimated net
realizable value of the underlying collateral, as applicable, economic
conditions, historical loan loss experience and other factors that are
particularly susceptible to changes that could result in a material adjustment
in the near term. While management endeavors to use the best information
available in making its evaluations, future allowance adjustments may be
necessary if economic conditions change substantially from the assumptions used
in making the evaluations.
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 fair value and carrying
amount. When property is acquired, it is recorded at net realizable 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 has entered into
interest rate swap agreements as a means of managing its interest rate exposure
on certain fixed rate commercial loans. The interest rate swaps are accounted
for under the accrual method. Under this method, the differential to be paid or
received on the interest rate swap agreements is recognized over the life of the
agreement in interest income. Changes in fair value of interest rate swaps
accounted for under the accrual method are not reflected in the accompanying
financial statements. Realized gains and losses on terminated interest rate
swaps are deferred as an adjustment to the carrying amount of the designated
instruments and amortized over the remaining original life of the agreements. If
the designated instruments are disposed of, the fair value of the interest rate
swap or unamortized deferred gains or losses are included in the determination
of the gain or loss on the disposition of such instruments. To qualify for such
accounting, the interest rate swaps are designated to specific commercial loans
and alter the loan's interest rate characteristics. The notional amount of the
Company's two outstanding interest rate swap agreements totaled approximately
$5.6 million as of June 30, 1999, and mature in 2008 and 2009, respectively. The
Company did not have any interest rate swap agreements outstanding at June 30,
1998.
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 1999, 1998 and
1997, was $101,000, $101,000 and $100,000, respectively. Management reviews
intangible assets for possible impairment if there is a significant event that
detrimentally affects operations. Impairment is measured using estimates of the
future earnings potential of the entity or assets acquired.
Income Taxes
The Company and its wholly-owned subsidiary file consolidated income tax
returns. Deferred income tax assets and liabilities reflect the impact of
temporary differences between amounts of assets and liabilities for financial
reporting purposes and basis of such assets and liabilities as measured by tax
laws and regulations.
Earnings per Common Share
Earnings per share of common stock are based on the weighted average number of
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:
Years Ended June 30,
---------------------------------
1999 1998 1997
---------------------------------
Basic Earnings per Share:
Weighted average common shares . 5,087,398 5,114,091 5,043,353
========= ========= =========
Diluted Earnings per Share:
Weighted average common shares . 5,087,398 5,114,091 5,043,353
Dilutive effect of stock options 294,931 355,259 206,365
--------- --------- ---------
Weighted average common and
incremental shares ............. 5,382,329 5,496,350 5,249,718
========= ========= =========
- 21 -
<PAGE>
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Comprehensive Income," as of July 1, 1998. Accounting principles
generally require that recognized revenue, expenses, gains and losses be
included in net income, although certain changes in assets and liabilities, such
as unrealized gains and losses on available-for-sale securities, are reported as
a separate component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income. The adoption of
SFAS 130 had no effect on the Company's net income or shareholders' equity. All
prior year financial statements have been reclassified for comparative purposes.
The following is a summary of the Company's comprehensive income for
fiscal years 1999, 1998 and 1997 under SFAS 130:(dollars in thousands)
<TABLE>
<CAPTION>
Fiscal years ended June 30,
--------------------------------
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Net Income ......................................... $ 10,477 $ 10,390 $ 6,846
Other comprehensive income:
Unrealized holding gains (losses) from securities
available for sale ............................. (1,089) 227 354
Reclassification adjustment for (gains) losses
realized in income ............................ (2) (8) (19)
-------- -------- --------
Net unrealized gains (losses) ...................... (1,091) 219 335
Tax effect ......................................... 437 (88) (133)
-------- -------- --------
Other comprehensive income, net of tax ............. (654) 131 202
-------- -------- --------
Comprehensive Income ............................... $ 9,823 $ 10,521 $ 7,048
======== ======== ========
</TABLE>
Segments
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." SFAS 131 redefines how operating segments are determined
and requires disclosure of certain financial and descriptive information about a
company's operating segments. In accordance with SFAS 131, management has
concluded that the Company is comprised of a single operating segment, community
banking activities, and has disclosed all required information relating to its
one operating segment. Management considers parent company activity to represent
an overhead function rather than an operating segment. The Company does not have
a single external customer from which it derives 10 percent or more of its
revenue and which operates in one geographical area.
Changes in Presentation
Certain amounts and items appearing in the fiscal 1998 and 1997 financial
statements have been reclassified to conform to the fiscal 1999 presentation.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," was issued in June 1998 and
amended by Statement of Financial Standard No. 137 ("SFAS 137"), "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
SFAS 133." SFAS 133, as amended by SFAS 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. 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.
- 22 -
<PAGE>
2. Securities
Securities are summarized as follows: (in thousands)
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
--------------------------------------------------- ---------------------------------
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
Municipal bonds ........ 3,550 11 (23) 3,538 2,840 24 (35) 2,829
Collateralized mortgage
obligations .......... 883 -- (16) 867 3,976 -- (22) 3,954
Pass-thru certificates . 554 1 -- 555 1,262 12 -- 1,274
------- ------ ------- ------- ------- ------ ------ -------
Total Held to Maturity . $ 4,987 $ 12 $ (39) $ 4,960 $ 9,565 $ 42 (57) $ 9,550
======= ====== ======= ======= ======= ====== ====== =======
Available for Sale:
Agency bonds ........... $27,008 $ 41 $ (193) $26,856 $29,148 $ 227 $ (9) $29,366
Collateralized mortgage
obligations .......... 5,657 -- (87) 5,570 6,678 2 (31) 6,649
Pass-thru certificates . 2,699 1 (47) 2,653 3,844 6 (6) 3,844
Corporate debt ......... 34,656 10 (672) 33,994 13,301 1 (78) 13,224
Mutual funds ........... 4,387 -- (14) 4,373 4,159 18 -- 4,177
Equity securities ...... 75 -- -- 75 75 -- -- 75
------- ------ ------- ------- ------- ------ ------ -------
Total Available for Sale $74,482 $ 52 $(1,013) $73,521 $57,205 $ 254 $ (124) $57,335
======= ====== ======= ======= ======= ====== ====== =======
</TABLE>
Certain securities, with both amortized cost and fair value of $3.3 million and
$3.5 million at June 30, 1999 and 1998, 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.
The amortized cost and fair value of securities at June 30, 1999,
by contractual maturity are summarized as follows: (in thousands)
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
------------------------------ ----------------------------------
Amortized Fair Market Amortized Fair Market
Cost Value Yield Cost Value Yield
------------------------------ ----------------------------------
Agency bonds:
<S> <C> <C> <C> <C> <C> <C>
Due after 1 year through 5 years.. $ - $ - - $24,486 $24,386 5.89%
Due after 5 years through 10 years - - - 1,997 1,945 6.44%
Due after 10 years................ - - - 525 525 5.59%
Municipal bonds:
Due in one year or less........... 110 111 7.00% - - -
Due after 1 year through 5 years.. 1,365 1,374 6.06% - - -
Due after 5 years through 10 years 1,300 1,277 5.86% - - -
Due after 10 years................ 775 776 7.37% - - -
Collateralized mortgage obligations.. 883 867 6.09% 5,657 5,570 5.94%
Pass-thru certificates............... 554 555 7.00% 2,699 2,653 5.91%
Corporate debt:
Due after 1 year through 5 years.. - - - 32,748 32,083 5.80%
Due after 5 years through 10 years - - - 943 952 6.44%
Due after 10 years................ - - - 965 959 6.13%
Mutual funds......................... - - - 4,387 4,373 5.51%
Equity securities.................... - - - 75 75 -
-------- -------- ----- ------- ------- -----
Total $ 4,987 $ 4,960 6.34% $74,482 $73,521 5.85%
======== ======== ===== ======= ======= =====
</TABLE>
- 23 -
<PAGE>
Activities related to the sales of securities available for sale are summarized
as follows: (in thousands)
Years Ended June 30,
---------------------------------
1999 1998 1997
---------------------------------
Proceeds from sales ............... $19,644 $11,632 $8,572
Gross gains on sales .............. $ 12 $ 25 $ 38
Gross losses on sales ............. $ 10 $ 17 $ 19
Loans receivable are summarized as follows: (in thousands)
June 30,
----------------------
1999 1998
---- ----
First mortgage loans:
Residential single family ............... $ 248,846 $ 268,133
Commercial and multi-family ............. 107,908 97,469
Property under construction ............. 65,997 77,227
Unimproved land ......................... 11,611 4,664
Home equity .................................. 39,654 35,065
Second mortgage .............................. 29,219 30,256
Commercial ................................... 56,956 50,890
Mobile home .................................. 12,048 14,349
Automobile ................................... 21,764 23,194
Consumer ..................................... 9,250 10,347
Savings account .............................. 3,826 4,071
- ---------------------------------------------- --------- ---------
Gross loans receivable .................. 607,079 615,665
Allowance for loan losses .................... (4,349) (4,243)
Deferred loan fees ........................... (527) (690)
Undisbursed loan proceeds .................... (15,285) (28,691)
Unearned interest and unearned discounts ..... - (1)
- ---------------------------------------------- ---------- ---------
Loans Receivable, Net $ 586,918 $ 582,040
============================================== ========== =========
The Bank originates both adjustable and fixed rate loans. The adjustable rate
loans have interest rate adjustment limitations and are generally indexed to
various indices. Adjustable residential mortgages are indexed to the one year
Treasury constant maturity rate; adjustable consumer loans are generally indexed
to the prime rate; adjustable commercial loans are generally indexed to either
the prime rate or the one, three, or five 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 $3.5 million and $4.0 million at June 30, 1999 and 1998,
respectively. The Bank would have recorded interest income of $453,000 in 1999,
$325,000 in 1998 and $274,000 in 1997, if loans on non-accrual status had been
current in accordance with their original terms. Actual interest received was
$233,000, $250,000 and $266,000 for fiscal years 1999, 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, 1999 and 1998, on these restructured loans was
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 $107.9 million and $97.5 million at June 30, 1999 and 1998,
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, $30.4
million and $14.5 million were collateralized by multi-family residential
property at June 30, 1999 and 1998, 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 $281.2 million and
$257.1 million at June 30, 1999 and 1998, respectively. Also, under FIRREA, the
loans-to-one-borrower limitation is generally 15% of unimpaired capital and
surplus, which, for the Bank, was approximately $10.9 million and $9.4 million
at June 30, 1999 and 1998, respectively. As of June 30, 1999 and 1998, the Bank
was in compliance with these limitations.
Aggregate loans to officers and directors included above were $6.4
million and $5.8 million as of June 30, 1999 and 1998, 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, 1999, loans of $3.0 million were
disbursed to officers and directors and repayments of $2.4 million were received
from officers and directors.
An analysis of the allowance for loan losses is as follows:
(in thousands)
Years ended June 30,
--------------------
1999 1998 1997
---- ---- ----
Beginning balance ........... $ 4,243 $ 3,649 $ 3,061
Provision for loan losses ... 1,124 1,193 1,129
Charge-offs ................. (1,103) (696) (619)
Recoveries .................. 85 97 78
- ----------------------------- ------- ------- -------
Ending Balance .............. $ 4,349 $ 4,243 $ 3,649
============================= ======= ======= =======
The following is a summary of information pertaining to impaired loans:
(in thousands)
Years Ended June 30,
--------------------
1999 1998
---- ----
Impaired loans with a valuation reserve ........... $735 $327
Impaired loans with no valuation reserve .......... 117 206
- --------------------------------------------------- ---- ----
Total Impaired Loans .............................. $852 $533
=================================================== ==== ====
Valuation reserve on impaired loans ............... $603 $ 66
Average impaired loans ............................ $812 $350
- 24 -
<PAGE>
4. Mortgage Banking Activities
At June 30, 1999, 1998 and 1997, the Bank was servicing loans for others
amounting to $461.5 million, $385.2 million and $298.0 million, respectively.
Gain on sales of loans, net of originated mortgage servicing rights, was $2.1
million, $2.3 million and $1.3 million, for the years ended June 30, 1999, 1998
and 1997. 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, 1999 and 1998, these obligations were limited to approximately $160,000 and
$539,000, respectively.
The following analysis reflects the changes in mortgage servicing rights (MSRs)
acquired: (in thousands)
Years Ended June 30,
--------------------
1999 1998
---- ----
Beginning carrying value ........... $ 1,088 $ 387
Additions ....................... 1,230 1,115
Amortization .................... (449) (170)
Net change in valuation allowance 108 (244)
- ------------------------------------ ------- -------
Ending carrying value .............. $ 1,977 $ 1,088
==================================== ======= =======
The carrying value approximates fair value at June 30, 1999 and 1998. 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,
1999 and 1998, was $137,000 and $244,000 respectively.
5. Investments in Joint Ventures
The Bank has invested in joint ventures through its subsidiary,
Home Savings Corporation ("HSC"). The investments, including loans, are
accounted for by the equity method. The Bank's interest in
these investments is as follows: (in thousands)
June 30,
-----------------------
Equity
Interest 1999 1998
-------- ---- ----
Family Financial Life .................. 20% $ 617 $ 617
Heritage Woods ......................... 33% 85 96
Home-Breeden ........................... 50% 2,189 2,375
Coventry Associates .................... 65% -- 40
Crystal Lake ........................... 33% 2,010 930
Admirals Woods ......................... 50% -- 19
Sycamore Springs ....................... 33% 1,480 --
Bloomington Technology ................. 50% 709 --
- ---------------------------------------- ----- -----
Total Investment ....................... $7,090 $4,077
======================================== ====== ======
Summarized condensed unaudited financial statements for these joint ventures are
as follows: (in thousands)
June 30,
--------
1999 1998
---- ----
Balance Sheets:
Cash ...................................... $ 826 $ 964
Investments ............................... 5,763 3,566
Property and equipment, net ............... 678 712
Inventory of developed lots ............... 2,448 2,741
Other assets .............................. 5,370 1,515
- ------------------------------------------- ------ ------
Total Assets .............................. $15,085 $ 9,498
=========================================== ====== ======
Notes payable ............................. $ 5,684 $ 3,314
Insurance liabilities ..................... 1,833 1,633
Other liabilities ......................... 221 104
- ------------------------------------------- ------ ------
Total liabilities ......................... 7,738 5,051
- ------------------------------------------- ------ ------
Shareholders' equity ...................... 7,347 4,447
- ------------------------------------------- ------ ------
Total Liabilities and Shareholders' Equity $15,085 $ 9,498
=========================================== ====== ======
Years Ended June 30,
--------------------
1999 1998 1997
---- ---- ----
Income Statements:
Income:
Insurance premiums and commissions ...... $2,408 $3,735 $3,484
Investment income ....................... 361 357 334
Net lot sales ........................... 417 234 653
Other income ............................ 102 104 107
- ---------------------------------------------- ----- ----- -----
Total income ............................ 3,288 4,430 4,578
----- ----- -----
Expenses:
Commissions ............................. 1,169 2,026 1,892
Insurance benefits ...................... 461 654 443
Interest expense ........................ 47 47 48
Other expense ........................... 1,140 1,377 1,439
----- ----- -----
Total expense ........................... 2,817 4,104 3,822
----- ----- -----
Net Income ................................... $ 471 $ 326 $ 756
============================================== ===== ===== =====
The notes payable included $5.2 million and $2.9 million due to HSC and $140,000
and $143,000 due to the Bank at June 30, 1999 and 1998, respectively. At June
30, 1999 and 1998, open commitments to these joint ventures included letters of
credit totaling $1.6 million and $1.3 million, respectively.
- 25 -
<PAGE>
6. Accrued Interest Receivable
Accrued interest receivable consists of the following : (in thousands)
June 30,
----------------
1999 1998
---- ----
Loans, less reserve of $260 and $259 .... $ 3,686 $ 3,912
Securities .............................. 1,191 802
Interest-bearing deposits ............... 20 7
- ----------------------------------------- ----- -----
Total Accrued Interest Receivable ....... $ 4,897 $ 4,721
========================================= ===== =====
7. Premises and Equipment
Premises and equipment consists of the following: (in thousands)
June 30,
------------------
1999 1998
---- ----
Land ......................................... $ 1,521 $ 1,465
Buildings and improvements ................... 10,352 9,470
Furniture and equipment ...................... 6,083 5,648
- ---------------------------------------------- ------- -------
Total ................................... 17,956 16,583
Accumulated depreciation ..................... (8,827) (8,017)
------- -------
Total Premises and Equipment ................. $ 9,129 $ 8,566
============================================== ======= =======
Depreciation expense included in operations for the years ended June 30, 1999,
1998 and 1997, totaled $1.3 million, $1.2 million and $1.0 million,
respectively.
8. Deposits
Deposits are summarized as follows: (in thousands)
June 30, 1999 June 30, 1998
------------- -------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Non-interest bearing ............. $ 35,532 $ 25,102
NOW accounts ..................... 53,040 1.68% 50,185 2.08%
Passbook savings ................. 48,026 2.08% 47,639 2.75%
Money market savings ............. 106,586 4.18% 77,133 4.55%
- ---------------------------------- ------- ---- ------- ----
Total transaction accounts .. 243,184 2.61% 200,059 2.93%
- ---------------------------------- ------- ---- ------- ----
Certificates of deposit:
Less than one year .......... 87,499 4.80% 103,920 5.48%
12-23 months ................ 114,908 5.02% 124,066 5.64%
24-35 months ................ 75,914 5.34% 52,296 5.51%
36-59 months ................ 11,908 5.29% 14,801 5.59%
60-120 months ............... 46,469 6.03% 48,847 6.05%
- ---------------------------------- ------- ---- ------- ----
Total certificate accounts .. 336,698 5.18% 343,930 5.63%
- ---------------------------------- ------- ---- ------- ----
Total Deposits ................... $579,882 4.10% $543,989 4.64%
================================== ======= ===== ======= =====
At June 30, 1999 and 1998, certificates of deposit in amounts of $100,000 or
more totaled $89.6 million and $88.1 million, respectively.
- 26 -
<PAGE>
At June 30, 1999 and 1998, certificates of deposit in amounts of $100,000 or
more totaled $89.6 million and $88.1 million, respectively.
A summary of certificate accounts by scheduled maturities at June 30, 1999 is as
follows: (in thousands)
<TABLE>
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
3.99% or less ......... $ 1,145 $ 126 $ -- $ -- $ -- $ -- $ 1,271
4.00% - 4.99% ......... 101,421 11,962 1,693 163 1,537 729 117,505
5.00% - 5.99% ......... 101,255 52,671 9,118 4,004 3,608 1,714 172,370
6.00% - 6.99% ......... 24,691 5,757 8,754 3,721 298 1,217 44,438
7.00% - 9.00% ......... 620 11 241 242 -- -- 1,114
- --------------------------- -------- ------- ------- ------- ------ ------ --------
Total Certificate Amounts $229,132 $70,527 $19,806 $8,130 $5,443 $3,660 $336,698
=========================== ======== ======= ======= ======= ====== ====== ========
</TABLE>
A summary of interest expense for the past three fiscal years is as follows: (in
thousands)
Years Ended June 30,
1999 1998 1997
---- ---- ----
NOW accounts .......... $ 731 $ 889 $ 880
Passbook savings ...... 1,106 1,316 1,509
Money market savings .. 4,063 3,218 2,030
Certificates of deposit 18,137 19,092 18,867
------ ------ ------
Total Interest Expense $24,037 $24,515 $23,286
======================= ====== ====== ======
9. Federal Home Loan Bank Advances
The Bank was eligible to receive advances from the FHLB up to $172.0 million and
$210.4 million at June 30, 1999 and 1998, respectively. 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, 1999 June 30, 1998
--------------- ---------------
Weighted Weighted
Fiscal Year Average Average
Maturity Amount Rate Amount Rate
-------- ------ ---- ------ ----
1999................ $ -- -- $36,000 6.12%
2000................ 11,300 6.05% 9,300 6.36%
2001................ 8,400 5.64% 8,400 5.67%
2002................ 17,000 6.02% 12,800 6.40%
2003................ 14,500 5.99% 10,500 6.18%
2004................ 11,600 5.86% 21,070 6.37%
Thereafter.......... 25,095 5.95% -- --
------ ---- ------ ----
Total FHLB Advances $87,895 5.94% $98,070 6.23%
==================== ====== ==== ====== ====
10. Other Borrowings
Senior Debt
On October 8, 1998, the Company entered into a revolving note with LaSalle Bank
N.A. whereby the Company may borrow up to $7 million. The note accrues interest
at a variable rate based on the ninety-day LIBOR index, on the date of the draw,
plus 150 basis points. Interest payments are due ninety days after the date of
any principal draws made on the loan and every ninety days thereafter. The
principal balance is due in full as of October 1, 1999. As of June 30, 1999, the
Company had a $1 million balance, consisting of two $500,000 draws accruing
interest as of June 30, 1999, at 6.50% and 6.53%, respectively. The Company used
the funds attained to buy back shares of the Company's common stock. The note
is collateralized by the assets of the Company. Under terms of the agreement,
the Company is bound by certain restrictive debt covenants relating to earnings,
net worth and various financial ratios.
- 27 -
<PAGE>
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, 1999 or 1998. (in thousands)
June 30,
--------------
1999 1998
---- ----
Official check overnight remittance $1,497 $4,376
Money order remittance ............ 18 20
- ----------------------------------- ----- -----
Total Other Borrowings ............ $1,515 $4,396
=================================== ===== =====
11. Income Taxes
An analysis of the income tax provision is as follows: (in thousands)
Years Ended June 30,
--------------------
1999 1998 1997
---- ---- ----
Current:
Federal ....... $5,617 $5,425 $3,435
State ......... 1,551 1,522 947
Deferred ........... (540) (302) (69)
- -------------------- ------ ------ ------
Income Tax Provision $6,628 $6,645 $4,313
==================== ====== ====== ======
The difference between the financial statement provision and
amounts computed by using the statutory rate of 34% is reconciled
as follows: (in thousands)
Years Ended June 30,
--------------------
1999 1998 1997
---- ---- ----
Income tax provision at federal statutory rate ... $5,807 $5,792 $3,794
State tax, net of federal tax benefit ............ 1,016 976 615
Tax exempt interest .............................. (102) (96) (64)
Increase in cash surrender value of life insurance (88) (95) (92)
Other ............................................ (5) 68 60
------ ------ ------
Income Tax Provision ............................. $6,628 $6,645 $4,313
================================================== ====== ====== ======
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, 1999 and 1998, 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 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 six year recovery period for the excess reserves began 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)
June 30,
--------
1999 1998
---- ----
Deferred tax assets:
Bad debt reserves, net ........................... $1,049 $ 652
Unrealized losses on securities available for sale 385 --
Deferred compensation ............................ 773 702
Other ............................................ 9 --
----- -----
Total deferred tax assets ........................ 2,216 1,354
----- -----
Deferred tax liabilities:
Difference in basis of fixed assets .............. 371 639
FHLB dividend .................................... 205 205
Unrealized gain on securities available for sale . -- 52
Deferred fees .................................... 454 254
Other ............................................ 2 16
----- -----
Total deferred tax liabilities ................... 1,032 1,166
----- -----
Net Deferred Tax Asset ................................ $1,184 $ 188
======================================================= ===== =====
- 28 -
<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, 1999, the Bank met all
capital adequacy requirements to which it is subject.
As of June 30, 1999 and 1998, 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, 1999
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to total assets).. $ 61,711 8.38% $11,043 1.50% N/A N/A
Core capital (to total assets)...... $ 61,711 8.38% $29,447 4.00% N/A N/A
Total risk-based capital
(to risk-weighted assets)........ $ 65,235 11.44% $45,617 8.00% $57,021 10.00%
Tier 1 risk-based capital
(to risk-weighted assets)........ $ 61,711 10.82% N/A N/A $34,213 6.00%
Tier 1 leverage capital
(to average assets).............. $ 61,711 8.42% N/A N/A $36,664 5.00%
</TABLE>
<TABLE>
<CAPTION>
To Be Categorized
As "Well Capitalized"
Under Prompt
For Capital Corrective Action
(dollars in thousands) Actual Adequacy Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
-------------- ----------------- -----------------
As of June 30, 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>
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, 1999,
approximately $13.0 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.
- 29 -
<PAGE>
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, 1998, 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 1999, 1998 and 1997, was $155,000, $153,000 and
$350,000, 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 $88,000, $85,000 and $75,000 during fiscal
years 1999, 1998 and 1997, respectively.
14. Stock Options
The Company has stock option plans for the benefit of officers, other key
employees and directors. As of June 30, 1999, the plans were authorized to grant
options to purchase 207,487 additional shares of the Company's common stock. 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, 1999, and the stock options outstanding
at the end of the respective periods:
Weighted
Average
Options Shares Price
- ------- ------ -----
Outstanding June 30, 1996 ................ 496,570 $ 8.33
Fractional shares dropped in 3 for 2 split (6) $ 8.69
Granted .................................. 226,530 $16.21
Forfeited................................. -- 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
Forfeited ................................ -- N/A
Exercised ................................ (44,847) $ 6.79
-------
Outstanding June 30, 1998 ................ 704,559 $13.89
Granted .................................. 105,155 $23.01
Forfeited ................................ (9,000) $26.17
Exercised ................................ (79,097) $10.26
-------
Outstanding June 30, 1999 ................ 721,617 $15.46
=======
As of June 30, 1999, options outstanding have exercise prices between $2.52 and
$26.56 and a weighted average remaining contractual life of 6.4 years. The
majority of options outstanding have exercise prices ranging from $10.62 to
$26.56 with a weighted average remaining contractual life of 7.6 years.
- 30 -
<PAGE>
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,
--------------------
1999 1998 1997
---- ---- ----
Net income:
As reported ..................... $10,477 $10,390 $ 6,846
Pro forma ....................... $10,005 $ 9,961 $ 6,475
Net income per share:
As reported
Basic earnings per share ...... $ 2.06 $ 2.03 $ 1.36
Diluted earnings per share .... $ 1.95 $ 1.90 $ 1.30
Pro forma
Basic earnings per share ...... $ 1.97 $ 1.95 $ 1.28
Diluted earnings per share .... $ 1.86 $ 1.82 $ 1.23
The weighted average fair value of options granted was $5.94 in 1999, $8.04 in
1998 and $5.44 in 1997. 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 2.17%, risk-free interest rates ranging
from 4.50% to 8.04%, expected volatility ranging from 25.53% to 30.13% and
expected life of 5.04 to 5.39 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, 1999 and 1998, the Bank had loan commitments
approximating $24.6 million and $24.1 million, respectively, excluding
undisbursed portions of loans in process. Loan commitments at June 30, 1999,
included commitments to originate fixed rate loans with interest rates ranging
from 6.9% to 10.0% totaling $4.3 million and adjustable rate loan commitments
with interest rates ranging from 6.2% to 8.9% totaling $20.3 million.
Commitments, which are disbursed subject to certain limitations, extend over
various periods of time. Generally, unused commitments are canceled upon
expiration of the commitment term as outlined in each individual contract.
Outstanding letters of credit were $3.4 million and $2.8 million for
1999 and 1998, respectively. Additionally, the Bank had approximately $7.8
million in commitments to sell fixed rate residential loans and $5.3 million in
commitments to sell adjustable rate commercial loans at June 30, 1999.
The Bank's exposure to credit loss for commitments to extend credit, in
the event of nonperformance by the other parties to the financial instruments,
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.
- 31 -
<PAGE>
16. Fair Value of Financial Instruments
The disclosure of the estimated fair value of financial instruments is as
follows: (in thousands)
June 30, 1999 June 30, 1998
------------------ -----------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Assets:
Cash ................................. 21,377 21,377 19,063 19,063
Interest-bearing deposits ............ 11,529 11,529 5,304 5,304
Securities available for sale ........ 73,521 73,521 57,335 57,335
Securities held to maturity .......... 4,987 4,960 9,565 9,550
Loans held for sale .................. 5,102 5,136 12,711 12,840
Loans, net ........................... 586,918 585,187 582,040 587,290
Accrued interest receivable .......... 4,897 4,897 4,721 4,721
Federal Home Loan Bank stock ......... 5,814 5,814 5,456 5,456
Cash surrender value of life insurance 6,095 6,095 5,808 5,808
Liabilities:
Deposits ............................ 579,882 579,781 543,989 545,025
Federal Home Loan Bank advances ..... 87,895 88,516 98,070 99,987
Senior debt ......................... 1,000 1,013 -- --
Other borrowings .................... 1,515 1,515 4,396 4,395
Advance payments by borrowers
for taxes and insurance .......... 270 270 320 320
Accrued interest payable ............ 473 473 572 572
Unrecognized Financial Instruments:
Interest rate swap................... N/A 79 N/A N/A
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,
Accrued Interest Payable 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 mark to market value is derived from proprietary models based upon well
recognized financial principles which management believes provide a reasonable
approximation of the fair market value of the interest rate swap transactions.
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, 1999 and 1998. 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.
- 32 -
<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) 1999 1998
------------------
<S> <C> <C>
Cash.................................................... $ 228 $ 1,862
Investment in subsidiary................................ 70,881 64,205
Other................................................... 266 1,020
------------------
Total Assets.......................................... $71,375 $67,087
==================
Liabilities:
Senior debt............................................. $ 1,000 $ -
Other................................................... 164 212
------------------
Total liabilities..................................... 1,164 212
------------------
Shareholders' equity.................................... 70,211 66,875
------------------
Total Liabilities and Shareholders' Equity............ $71,375 $67,087
==================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income For the Years Ended June 30,
-----------------------------
(Parent Company only) 1999 1998 1997
-----------------------------
<S> <C> <C> <C>
Dividends from subsidiary............................... $ 3,871 $ 6,442 $ 3,457
Other................................................... 809 598 497
-----------------------------
Total income.......................................... 4,680 7,040 3,954
-----------------------------
Interest on senior debt................................. 24 458 703
Other expenses.......................................... 888 659 600
-----------------------------
Total expenses........................................ 912 1,117 1,303
-----------------------------
Income before taxes and change in
undistributed earnings of subsidiary................... 3,768 5,923 2,651
Applicable income tax credit............................ (32) (204) (323)
-----------------------------
Income before change in undistributed
earnings of subsidiary................................. 3,800 6,127 2,974
Increase in undistributed earnings of subsidiary........ 6,677 4,263 3,872
-----------------------------
Net Income $10,477 $10,390 $ 6,846
=============================
Condensed Statements of Cash Flows For the Years Ended June 30,
-----------------------------
(Parent Company only) 1999 1998 1997
-----------------------------
Operating Activities:
Net income ............................................. $10,477 $10,390 $ 6,846
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in other assets .................. 754 (516) 73
Increase (decrease) in accrued expenses and
other liabilities ................................... (48) (97) (159)
Increase in undistributed earnings
of subsidiary ....................................... (6,677) (4,263) (3,872)
-----------------------------
Net cash provided by operating activities .............. 4,506 5,514 2,888
-----------------------------
Financing Activities:
Repayment of senior debt ............................... -- (7,800) (1,300)
Funds provided by senior debt .......................... 1,000 -- --
Payment of dividends ................................... (2,251) (1,900) (1,378)
Repurchase shares of common stock ...................... (5,785) -- --
Exercise of stock options, net of fractional shares paid 896 414 730
-------
Net cash used in financing activities .................. (6,140) (9,286) (1,948)
-------
Net (decrease)/increase in cash ........................ (1,634) (3,772) 940
Cash at beginning of year .............................. 1,862 5,634 4,694
-----------------------------
Cash at End of Year .................................... $ 228 $ 1,862 $ 5,634
=============================
</TABLE>
- 33 -
<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, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1999,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
July 22, 1999
- 34 -
<PAGE>
Board of Directors
& Officers
of Home Federal Bancorp
Board of Directors
John K. Keach, Sr.
Chairman of the Board,
Home Federal Bancorp
John K. Keach, Jr.
President and
Chief Executive Officer,
Home Federal Bancorp
John T. Beatty
President,
Beatty Insurance, Inc.
Lewis W. Essex
Retired from Essex
Castings, Inc.
Harold Force
President,
Force Construction
Company, Inc.
David W. Laitinen, MD
Orthopedic Surgeon
Harvard W. Nolting, Jr.
Retired from Nolting
Foods, Inc.
Eugene E. Burke
Director Emeritus
Retired
The Directors of Home Federal Bancorp also serve as Directors of Home Federal
Savings Bank.
Officers
John K. Keach, Jr.
President and
Chief Executive Officer
Gerald L. Armstrong
Executive Vice President
and Chief Operating Officer
Lawrence E. Welker
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
S. Elaine Pollert
Executive Vice President
Retail Banking
Executive Officers
of Home Federal
Savings Bank
John K. Keach, Jr.
President and
Chief Executive Officer
Gerald L. Armstrong
Executive Vice President
and Chief Operating Officer
Lawrence E. Welker
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
S. Elaine Pollert
Executive Vice President
Retail Banking
Melissa M. Arnold
Vice President
Controller
Shareholder Information
Stock Listing
The common stock of Home Federal Bancorp is traded on the National Association
of Securities Dealers Automated Quotation System, National Market System,
under the symbol HOMF. Home Federal Bancorp stock appears in The Wall Street
Journal under the abbreviation HomFedBcpIN, and in other publications under
the abbreviation HFdBcp.
Transfer Agent & Registrar
To change name, address or ownership of stock, to report lost certificates, or
to consolidate accounts, contact:
LaSalle Bank N.A.
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, 1999, 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
- 35 -
<PAGE>
(800) 952-6646
In Memoriam
Robert Weber
1919-1999
Robert Weber became a director of Home Federal in May of 1970. He served
honorably and with great dedication, as both director and director emeritus,
until the time of his death on February 12, 1999. The Board of Directors and the
staff of Home Federal Bancorp wish to express their deep sense of loss at his
passing and to commemorate his loyal and able service.
- 36 -
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 22, 1999 appearing in this Annual Report on Form 10-K of Home
Federal Bancorp for the year ended June 30, 1999.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
September 27, 1999
<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, 1999 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-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 21,377
<INT-BEARING-DEPOSITS> 11,529
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 73,521
<INVESTMENTS-CARRYING> 4,987
<INVESTMENTS-MARKET> 4,960
<LOANS> 586,918
<ALLOWANCE> 4,349
<TOTAL-ASSETS> 744,509
<DEPOSITS> 579,882
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,312
<LONG-TERM> 0
0
0
<COMMON> 3,074
<OTHER-SE> 67,137
<TOTAL-LIABILITIES-AND-EQUITY> 744,509
<INTEREST-LOAN> 49,602
<INTEREST-INVEST> 4,005
<INTEREST-OTHER> 604
<INTEREST-TOTAL> 54,211
<INTEREST-DEPOSIT> 24,037
<INTEREST-EXPENSE> 30,135
<INTEREST-INCOME-NET> 24,076
<LOAN-LOSSES> 1,124
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 3,356
<INCOME-PRETAX> 17,105
<INCOME-PRE-EXTRAORDINARY> 17,105
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,477
<EPS-BASIC> 2.06
<EPS-DILUTED> 1.95
<YIELD-ACTUAL> 7.95
<LOANS-NON> 3,509
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,243
<CHARGE-OFFS> 1,103
<RECOVERIES> 85
<ALLOWANCE-CLOSE> 4,349
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
