[Front Cover] Home Federal Bancorp
2000 Annual Report
[Picture omitted]
Solid navy cover with Home Federal logo enclosed in an embossed circle
with a small yellow triangle above the logo.
[Front Inside Cover]
Total Loan Portfolio in Thousands [pie graphs omitted, centered on page]
Fiscal 2000
Residential Mortgages $326,506 48%
Consumer $ 45,621 7%
Commercial $ 60,948 9%
Second & Home Equity $ 85,300 12%
Commercial Mortgages $165,711 24%
$684,086
Fiscal 1996
Residential Mortgages $307,631 57%
Consumer $ 55,867 10%
Commercial $ 37,651 7%
Second & Home Equity $ 50,372 9%
Commercial Mortgages $ 90,957 17%
$542,478
Letter to Shareholders 1
Selected Consolidated Financial Data 5
Quarterly Results of Operations 6
Management's Discussion & Analysis 7
Consolidated Balance Sheets 16
Consolidated Statements of Income 17
Consolidated Statements of Shareholders' Equity 18
Consolidated Statement of Cash Flows 19
Notes to Consolidated Financial Statements 20
Independent Auditor's Report 34
Board of Directors & Officers of Home Federal Bancorp
& Executive Officers of Home Federal Savings Bank 35
To Our Shareholders
Since its beginnings in the 19th Century, our native state of Indiana
has been known as the "Crossroads of America"-a nickname earned because
of its central location on intersecting arteries of national commerce.
As Hoosier enterprises made increasingly greater contributions to the
regional and national economies, local banking institutions like Home
Federal were formed to help manage Indiana's growing prosperity.
As each of us learns over time, life represents a series of crossroads,
some more appealing than others. But approaching a crossroads of any type, be it
literal or figurative, necessitates making decisions. Typically, the choices
are numerous, the alternatives each attractive to some degree, and the choices
seldom easy.
In our industry, the early crossroads were fewer and better defined.
Which market to serve?...Selecting more than one community was almost
never an option. Which products to offer?...Industry norms and government
regulations usually predefined the basic lending and deposit services. How
best to grow the business?...Often the institution's growth was dictated solely
by economic good fortune-or the absence of it-in the community it served.
Today, factors far beyond the reach of local financial institutions
create larger and more challenging crossroads each year. Products
have been redefined nationwide to meet the needs of an increasingly
mobile and diverse customer base. Ever-changing technology, essential but
expensive, has almost completely redefined operating practices.
Merger and acquisition activity has redrawn the map of the industry,
and regionalization of the economy has impacted the fortunes of local
financial institutions in ways unimaginable just a few
short years ago.
Diluted Earnings Per Share
[Bar graph in top center of page omitted]
Fiscal Year
1996 $1.43
1997 $1.63
1998 $1.90
1999 $1.95
2000 $1.88
[Caption below graph]
Net income divided by outstanding common and common share equivalents. As
noted in the letter to shareholders, we saw unusual income from gain on sale
of loans in fiscal years 1998 and 1999. For example, the after tax effect of
gain on sale of loans in fiscal 1999 was $2,028,000, or $.38 per share, compared
to $432,000, or $.09 per share, in fiscal 2000.
*Fiscal 1997 diluted earnings per share including the after tax effect of the
SAIF assessments was $1.30.
For Home Federal, this fiscal year's results reflected the effects of
these and other factors influencing institutions throughout the
banking industry. For the year, we reported net income of $9,438,000,
or $1.88 diluted earnings per common share. This compared to
$10,477,000, or $1.95 diluted earnings per common share, for the
prior fiscal year. Still, while the 2000 fiscal year figures fell
slightly below our record-breaking performance of previous years,
they represent solid results in a time of rising interest rates and
changing demand for financial products.
The effects of the rising interest rates were felt primarily in other
income, which was significantly lower than in the previous year,
primarily due to decreases in gain on sale of loans. The lower
interest rate environment experienced during fiscal years 1998 and
1999 caused unusually high demand for our fixed rate mortgage
products. Because we have typically sold our fixed rate mortgages on
the secondary market, these fiscal years saw unprecedented and
perhaps unrepeatable income from the gain on sale of loans. Recent
consumer interest in adjustable rate mortgage products, due to the
current interest rate environment, has influenced our portfolio mix,
reducing the fixed rate loans available for sale and creating growth
in our asset base.
As the new fiscal year begins, we continue to enjoy ongoing demand
for our products-but find ourselves at yet another crossroads as we seek
ways to prudently fund the strong demand for our lending products.
Our primary funding focuses are core deposits-for which we have
national, regional, and local competition; Federal Home Loan Bank
advances-which have regulatory limits; and alternative funding
sources such as brokered CD deposits. Indeed, funding consistent
growth might be our greatest challenge in the year ahead.
Total Assets (in thousands)
[Bar graph left side, top of page omitted]
Fiscal Year
1996 $630,015
1997 $682,796
1998 $719,549
1999 $744,509
2000 $832,154
[Caption below graph]
This graph demonstrates the consistent growth Home Federal has seen in total
assets and the continued demand for the Bank's consumer and commercial product
offerings.
Efficiency Ratio
[Bar graph right side, top of page omitted]
Fiscal Year
1996 56.90%
1997 51.90%
1998 51.55%
1999 50.57%
2000 50.31%
[Caption below graph]
Operating expenses as a percentage of the sum of net interest income and
non-interest income. For example, during fiscal 2000, every $.50 in expense
generated $1.00 in net income. This graph demonstrates Home Federal's
successful management of operating expenses.
These represent but a few of the strategic intersections leading to
one of the largest crossroads in today's fast-paced financial services
environment-the one that each institution ultimately must approach and
negotiate to determine its future course. Will it be a road that leads to
affiliation with others, a combined approach to reach a common destination?
Or will it be a path that calls for constant and careful maneuvering to better
serve the interests of regional customers and communities?
As we work to set our course at Home Federal, mindful of the changes
driving today's financial services enterprises, we continually
endeavor to better define our place in our industry and in our
region. Some, we know, expect us to match the efforts of nationwide competitors,
product for product, service for service, dividend for dividend.
Others urge us to maintain a tempo and corporate culture more
reminiscent of times past than one anticipative of times to come.
Our role, both in our business community and the local communities we
serve, is predicated by more than simply offering traditional lending
and deposit services. If we are to grow, we must continually provide
new products to meet the evolving needs of our customers. If we are
to compete, we must embrace the technology and other tools that make
both our institution and those of our peers more efficient and more
profitable. If we are to prosper, we must constantly maximize the
value of the institution and enhance shareholder value.
During this fiscal year, we will continue to direct our focus to
building more extensive relationships with both our retail and
commercial customers-by placing increased emphasis on investment
management services, small business lending, commercial real estate
and other non-traditional services. At the same time, we will
maintain our regional leadership in mortgage lending by providing
competitive and creative products. As appropriate, we will add technology
to increase convenience and productivity and marketing flair to increase
awareness of our products and to build our retail business.
Finally, we intend to focus even more on the active management of our
capital. In an effort to continue the successes of the stock
repurchase plan begun in fiscal year 2000, the Board of Directors
approved an additional 5% buy back plan for fiscal 2001. This buy
back was completed on August 21, 2000. In the coming years,
we will actively seek other such opportunities to leverage our
capital and enhance shareholder value.
We have endeavored and will continue to take each of these actions
with a measure of balance, striving to meet the expectations of Home
Federal's stakeholders in a fast-paced world, yet still mindful of
the corporate values and ideals that have consistently guided this
institution well for 92 years. And so, in our judgment, the path for Home
Federal is clear. No matter how many crossroads we may encounter, we will
chart a far-ranging course for growth-based on what we feel are the most
appropriate choices to meet the specialized needs of our
stakeholders-one decision at a time.
Sincerely,
/s/ John K. Keach, Jr.
John K. Keach, Jr.
Chairman of the Board
and Chief Executive Officer
Summary of Selected Consolidated Financial Data
(in thousands except per share data)
At or For the Year Ended June 30,
------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------
Selected Balance Sheet Data:
Total assets.................................... $832,154 $744,509 $719,549 $682,796 $630,015
Securities available for sale................... $ 99,364 $ 73,521 $ 57,335 $ 40,119 $ 44,651
Securities held to maturity..................... $ 7,776 $ 4,987 $ 9,565 $ 13,115 $ 6,990
Loans receivable, net........................... $652,007 $586,918 $582,040 $575,624 $520,097
Deposits........................................ $572,893 $579,882 $543,989 $527,788 $489,573
Total borrowings................................ $184,433 $ 90,410 $102,466 $ 92,393 $ 84,137
Shareholders' equity............................ $ 69,486 $ 69,635 $ 66,952 $ 57,917 $ 51,517
Selected Operations Data:
Total interest income........................... $ 57,809 $ 54,211 $ 55,103 $ 51,531 $ 47,156
Total interest expense.......................... 32,169 30,135 30,864 28,640 27,251
Net interest income............................. 25,640 24,076 24,239 22,891 19,905
Provision (credit) for loan losses 1,441 1,124 1,193 1,129 638
Net interest income after provision
for loan losses............................ 24,199 22,952 23,046 21,762 19,267
Gain on sale of loans........................... 720 3,380 3,410 1,267 1,321
Gain (loss) on sale of securities............... (116) 2 8 19 1
Other income.................................... 7,060 6,622 6,297 5,900 6,126
Other expense (1)............................... 16,446 15,851 15,726 17,789 14,431
Income before income taxes...................... 15,417 17,105 17,035 11,159 12,284
Income tax provision ........................... 5,979 6,628 6,645 4,313 4,932
------------------------------------------------------
Net income (2).................................. $ 9,438 $ 10,477 $ 10,390 $ 6,846 $ 7,352
======================================================
Basic earnings per common share................. $ 1.97 $ 2.06 $ 2.03 $ 1.36 $ 1.47
Diluted earnings per common share............... $ 1.88 $ 1.95 $ 1.90 $ 1.30 $ 1.43
Cash dividends per share........................ $ 0.54 $ 0.45 $ 0.37 $ 0.27 $ 0.20
Selected Financial and Statistical Data:
Return on average assets........................ 1.20% 1.42% 1.47% 1.05% 1.23%
Return on average shareholders' equity.......... 13.84% 15.13% 16.66% 12.62% 15.14%
Interest rate spread during the period.......... 3.46% 3.36% 3.50% 3.59% 3.40%
Net interest margin on average earning assets... 3.56% 3.53% 3.69% 3.76% 3.56%
Average shareholders' equity to average assets.. 8.70% 9.41% 8.85% 8.35% 8.12%
Efficiency ratio (3)............................ 50.31% 50.57% 51.55% 51.90% 56.90%
Nonperforming loans to total loans.............. 0.46% 0.60% 0.67% 0.51% 0.56%
Nonperforming assets to total assets............ 0.52% 0.75% 0.59% 0.46% 0.48%
Loss allowance to nonperforming loans........... 162.05% 121.82% 106.26% 122.82% 103.38%
Loss allowance to total loans................... 0.75% 0.73% 0.71% 0.63% 0.58%
Dividend payout ratio........................... 27.11% 21.49% 18.28% 20.13% 13.59%
Loan servicing portfolio........................ $451,768 $461,462 $385,207 $297,982 $266,814
Allowance for loan losses....................... $ 4,949 $ 4,349 $ 4,243 $ 3,649 $ 3,061
Number of full service offices.................. 16 16 16 16 15
------------------
(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 million 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.
Quarterly Results of Operations
The following table presents certain selected unaudited data relating to results
of operations for the three month periods ending on the dates indicated. (in
thousands except share data)
Three Months Ended
--------------------------------------------------------
September 30, December 31, March 31, June 30,
Fiscal Year 2000 1999 1999 2000 2000
--------------------------------------------------------
Total interest income................ $ 13,454 $ 14,121 $ 14,765 $ 15,469
Total interest expense............... 7,216 7,812 8,273 8,868
--------------------------------------------------------
Net interest income.................. 6,238 6,309 6,492 6,601
Provision for loan losses............ 192 441 404 404
--------------------------------------------------------
Net interest income after
provision for loan losses.......... 6,046 5,868 6,088 6,197
Gain on sale of loans................ 226 223 106 165
Other income......................... 1,635 1,647 1,678 1,984
Other expense........................ 3,935 4,140 4,060 4,311
--------------------------------------------------------
Income before income taxes........... 3,972 3,598 3,812 4,035
Income tax provision................. 1,579 1,471 1,389 1,540
--------------------------------------------------------
Net Income........................... $ 2,393 $ 2,127 $ 2,423 $ 2,495
========================================================
Basic earnings per common share...... $ 0.48 $ 0.44 $ 0.51 $ 0.54
========================================================
Diluted earnings per common share.... $ 0.46 $ 0.42 $ 0.49 $ 0.51
========================================================
Dividends per share $ 0.125 $ 0.138 $ 0.138 $ 0.138
Stock sales price range: High (1)... $ 29.75 $ 23.50 $ 23.75 $ 17.56
Low ....... $ 21.38 $ 20.69 $ 16.69 $ 16.13
Three Months Ended
--------------------------------------------------------
September 30, December 31, March 31, June 30,
Fiscal Year 1999 1998 1998 1999 1999
--------------------------------------------------------
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
(1) The Company's common stock trades on the NASDAQ stock market under the
symbol "HOMF". As of June 30, 2000, the Company had 533 holders of record of
its shares.
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 $19.3 million in fiscal 1996 to $24.2 million in fiscal 2000. 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
18% for fixed rate mortgage loans and mortgage-backed securities; 10% to 23% for
adjustable rate mortgage loans; and 9% to 45% for commercial and consumer loans,
depending on their maturity and yield. For deposit accounts, it has been assumed
that fixed maturity deposits are not withdrawn prior to maturity and that other
deposits will suffer attrition at rates shown in the following table:
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, 2000.
(dollars in thousands)
Maturity or Repricing as of June 30, 2000
6 Months 6-12 1-3 3-5 Over 5
or Less Months Years Years Years Total
---------------------------------------------------------------------------
Interest-Earning Assets:
Loans:
Adjustable rate.................... $ 99,440 $ 35,843 $ 74,211 $ 42,196 $ 6,263 $ 257,953
Fixed rate......................... 17,768 8,669 21,511 14,942 5,663 68,553
Commercial real estate............. 44,994 45,796 44,723 26,559 3,639 165,711
Non-mortgage....................... 114,998 23,905 40,352 9,489 3,125 191,869
Securities and other................. 36,903 4,654 44,101 17,893 3,601 107,152
---------------------------------------------------------------------------
Total................................ 314,103 118,867 224,898 111,079 22,291 791,238
---------------------------------------------------------------------------
Interest-Bearing Liabilities:
Fixed maturity deposits.............. 135,494 80,234 95,777 12,214 2,539 326,258
Other deposits....................... 185,878 17,514 22,525 8,049 12,669 246,635
FHLB advances........................ 89,900 5,000 41,000 27,600 11,986 175,486
Other borrowings..................... 8,947 - - - - 8,947
---------------------------------------------------------------------------
Total................................ 420,219 102,748 159,302 47,863 27,194 757,326
---------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities........ $ (106,116) $ 16,119 $ 65,596 $ 63,216 $ (4,903)
===============================================================
Cumulative interest rate
sensitivity gap..................... $ (106,116) $ (89,997) $ (24,401) $ 38,815 $ 33,912
===============================================================
Cumulative interest rate gap
as a percentage of total assets..... -12.75% -10.81% -2.93% 4.66% 4.08%
===============================================================
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)
Years Ended June 30,
---------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
---------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans.................. $ 510,957 $ 41,525 8.13% $ 496,632 $ 39,922 8.04% $ 491,306 $ 41,218 8.39%
Commercial loans................ 56,107 4,925 8.78% 53,907 4,643 8.61% 45,636 4,260 9.33%
Consumer loans.................. 45,655 4,606 10.09% 49,541 5,037 10.17% 53,911 5,536 10.27%
Securities...................... 100,324 6,316 6.30% 69,031 4,005 5.80% 61,432 3,786 6.16%
Interest-bearing deposits....... 8,013 437 5.45% 12,350 604 4.89% 5,369 303 5.64%
---------------------------------------------------------------------------------------------------------
Total interest-earning
assets (1)..................... $ 721,056 $ 57,809 8.02% $ 681,461 $ 54,211 7.96% $ 657,654 $ 55,103 8.38%
=========================================================================================================
Interest-bearing liabilities:
Deposits - Transaction accounts. $ 246,193$ 6,758 2.75% $ 221,304 $ 5,900 2.67% $ 191,557 $ 5,425 2.83%
Certificate accounts. 324,390 17,153 5.29% 333,971 18,137 5.43% 339,379 19,090 5.62%
FHLB advances................... 129,155 7,832 6.06% 99,380 6,068 6.11% 94,008 5,891 6.27%
Other borrowings................ 6,196 426 6.88% 1,530 30 1.96% 7,471 458 6.13%
---------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities.................... $ 705,934 $ 32,169 4.56% $ 656,185 $ 30,135 4.59% $ 632,415 $ 30,864 4.88%
=========================================================================================================
Net Interest Income.............. $ 25,640 $ 24,076 $ 24,239
=========================================================================================================
Net Interest Rate Spread......... 3.46% 3.36% 3.50%
=========================================================================================================
Net Earning Assets............... $ 15,122 $ 25,276 $ 25,239
=========================================================================================================
Net Interest Margin (2).......... 3.56% 3.53% 3.69%
=========================================================================================================
Average interest-earning
assets to average interest-
bearing liabilities............. 102.14% 103.85% 103.99%
=========================================================================================================
(1) Average balances are net of non-performing loans, and interest income
includes loan fee amortization of $29,840, $171,000 and $90,000 for the years
ended June 30, 2000, 1999 and 1998, respectively.
2) Net interest income divided by the average balance of interest-earning assets.
Rate/Volume Analysis
The following table sets forth the changes in the Bank's interest income and
interest expense resulting from changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities. Changes not
solely attributable to volume or rate changes have been allocated in proportion
to the changes due to volume or rate. (in thousands)
Years Ended June 30,
----------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
----------------------------------------------------------------
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:
Mortgage loans............................... $ 442 $ 1,161 $ 1,603 $ (1,749) $ 453 $ (1,296)
Commercial loans............................. 90 192 282 (284) 667 383
Consumer loans............................... (39) (392) (431) (54) (445) (499)
Securities................................... 365 1,946 2,311 (197) 416 219
Interest-bearing deposits.................... 82 (249) (167) (34) 335 301
----------------------------- --------------------------------
Total................................ 940 2,658 3,598 (2,318) 1,426 (892)
----------------------------- --------------------------------
Interest Expense on Interest-Bearing Liabilities:
Deposits - Transaction accounts.............. 179 679 858 (288) 763 475
Certificate accounts.............. (471) (513) (984) (652) (301) (953)
FHLB advances................................ (42) 1,806 1,764 (144) 321 177
Other borrowings............................. 178 218 396 (197) (231) (428)
---------------------------- --------------------------------
Total................................ (156) 2,190 2,034 (1,281) 552 (729)
---------------------------- --------------------------------
Net Change in Net Interest Income.......... $ 1,096 $ 468 $ 1,564 $ (1,037) $ 874 $ (163)
============================ ================================
RESULTS OF OPERATIONS
Comparison of Year Ended June 30, 2000 and Year Ended June 30, 1999:
General
The Company reported net income of $9.4 million for the year ended June 30,
2000. This compared to net income of $10.5 million for the year ended June 30,
1999, representing a decrease of $1.0 million, or 9.9%.
Net Interest Income
Net interest income before provision for loan losses increased $1.6 million, or
6.5%, for the year ended June 30, 2000, compared to the prior year. A
significant factor affecting this increase was the changing mix of interest
bearing liabilities as the average balance in higher yielding certificates of
deposit declined and lower yielding money market funds increased, bringing the
average rate paid on interest bearing liabilities down slightly. Additionally,
the rate earned on interest earning assets was up slightly due to the rising
interest rate environment experienced in the year ended June 30, 2000, as
compared to the year ended June 30, 1999.
Net interest income after provision for loan losses increased by $1.2
million, or 5.4% over that of the prior year, to $24.2 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 $4.9 million at June 30, 2000.
Interest Income
The Company's total interest income for the year ended June 30, 2000, increased
$3.6 million, or 6.6%, as compared to the year ended June 30, 1999. The increase
in interest income was due primarily to increases in average balances of $39.0
million of interest earning assets for the year ended June 30, 2000, as compared
to the year ended June 30, 1999.
Interest Expense
Total interest expense for the year ended June 30, 2000, increased $2.0 million,
or 6.8%, as compared to the year ended June 30, 1999. This increase was due to
increases in average balances of deposits and borrowings outstanding of $49.7
million.
Other Income
Other income decreased $2.3 million from $10.0 million in fiscal year 1999 to
$7.7 million in fiscal year 2000. This decrease was due primarily to a decrease
in the gain on loan sales of $2.7 million. Loan sales in the secondary market
fell $168.2 million, or 79.5%, to $43.3 million in fiscal year 2000 from sales
of $211.5 million in fiscal year 1999. The decline in loan sales is attributable
to the rise in interest rates, which has in turn reduced the Bank's fixed rate
loan originations. The Bank currently only sells fixed rate loans in the
secondary market. Therefore, as the Bank's fixed rate loan originations decline,
so does the income from the sale of these loans.
Factors that offset the decrease in other income include increases of
$377,000 in income from joint ventures and $207,000 in the net gain on real
estate owned and repossessed assets. The increase in joint venture income
reflects the income received from the continued expansion of the joint venture
projects. The increase in the net gain on real estate owned and repossessed
assets reflects the profitable sale of real estate owned throughout fiscal 2000.
Other Expenses
Other expenses remained fairly stable, increasing $595,000, or 3.8%, over the
prior fiscal year, to $16.4 million from $15.9 million. The majority of the
increase occurred in compensation and employee benefits, which increased
$510,000 in fiscal year 2000 compared to fiscal year 1999. Increased funding
requirements of the Bank's pension plan caused increases in compensation and
other employee benefits. Another factor increasing other expenses was a $143,000
increase in occupancy and equipment expenses related to increased depreciation
associated with shorter lived technology assets.
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. This compared to net income of $10.4 million for the year ended June 30,
1998, representing 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% under 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 in
the first nine months of fiscal year 1999. 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 expenses 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.
FINANCIAL CONDITION
The Company's total assets increased $87.6 million to $832.2 million at June 30,
2000, from $744.5 million at June 30, 1999. Cash and interest-bearing deposits
decreased $11.7 million. In addition, loans receivable, net increased $65.1
million. Securities available for sale increased $25.8 million.
The Company's total liabilities increased $87.8 million with deposits
decreasing $7.0 million and Federal Home Loan Bank advances increasing $87.6
million. The Company had net borrowings of $5.2 million of senior debt during
fiscal year 2000 to finance the repurchase of the Company's stock.
Shareholders' equity decreased $149,000, primarily due to decreases in
retained earnings of $6.3 million, from the repurchase of Company stock.
Retained earnings decreased an additional $2.6 million as a result of dividends
paid to shareholders. These decreases in retained earnings were offset by an
increase in net income of $9.4 million. Common stock had a net decrease of
$177,000: a decrease of $415,000 from the repurchase of Company stock and
increases of $204,000 from options exercised and of $34,000 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 $1.1 million,
a decrease of $524,000 in shareholders' equity from June 30, 1999.
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, 2000, these price indications varied from 74.07 to 111.95 for fixed rate
mortgages and mortgage-backed securities and varied from 87.61 to 104.13 for
adjustable rate mortgages and mortgage-backed securities. Prepayment rates for
June 30, 2000, ranged from a constant prepayment rate ("CPR") of 6% to a CPR of
37%.
The value of deposit accounts appears on both the asset and liability
side of the NPV calculation in the OTS model. In estimating the value of
certificate of deposit accounts ("CDs"), retail price estimates represent the
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, 2000, the retail CD
price assumptions varied from 74.28 to 113.32. 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, 2000, the
retail CD intangible price assumptions varied from 0.02 to 0.48.
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 seven 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, 2000, the intangible prices
for transaction accounts, money market deposit accounts, passbook accounts and
non-interest bearing accounts varied from -1.38 to 20.35, -0.29 to 13.00, -0.43
to 16.23 and 7.81 to 17.78, respectively.
The following table sets forth the Bank's interest rate sensitivity of NPV
as of June 30, 2000. (dollars in thousands)
Net Portfolio Value NPV as % of PV of Assets
-----------------------------------------------------------------------------
Change
In Rates $ Amount $ Change % Change NPV Ratio Change
-----------------------------------------------------------------------------
+300 bp 76,329 (14,905) (16) 9.43 % (141) bp
+200 bp 82,885 (8,349) (9) 10.09 % (75) bp
+100 bp 88,256 (2,977) (3) 10.60 % (24) bp
0 bp 91,234 10.84 %
-100 bp 91,476 243 10.79 % (5) bp
-200 bp 90,043 (1,191) (1) 10.56 % (28) bp
-300 bp 89,890 ( 1,344) (1) 10.46 % (38) bp
ASSET QUALITY
In accordance with the Company's classification of assets policy, management
evaluates the loan and investment portfolio each month to identify substandard
assets that may contain the potential for loss. In addition, management
evaluates the adequacy of its allowance for possible loan losses.
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 nnet realizable value. (dollars in
thousands)
At June 30,
----------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------
Non-accruing loans:
Mortgage................. $ 1,826 $ 2,457 $ 3,004 $ 2,182 $ 2,153
Commercial............... 165 718 522 258 307
Consumer................. 431 334 466 490 411
----------------------------------------------
Total............... 2,422 3,509 3,992 2,930 2,871
----------------------------------------------
Accruing loans:
Mortgage................. - - - 2 88
Commercial............... - - - 36 -
Consumer................. - - - 2 1
----------------------------------------------
Total............... - - - 40 89
----------------------------------------------
Troubled debt restructured. 632 61 - 1 1
----------------------------------------------
Total non-performing loans. 3,054 3,570 3,992 2,971 2,961
Real estate owned.......... 1,235 2,050 242 139 48
----------------------------------------------
Total Non-Performing Assets $ 4,289 $ 5,620 $ 4,234 $ 3,110 $ 3,009
==============================================
Non-performing assets to
total assets............. 0.52% 0.75% 0.59% 0.46% 0.48%
==============================================
Non-performing loans to
total loans.............. 0.46% 0.60% 0.67% 0.51% 0.56%
==============================================
Allowance for loan losses to
non-performing loans..... 162.05% 121.82% 106.29% 122.82% 103.38%
==============================================
In addition, at June 30, 2000, 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 decreased $1.3 million to $4.3 million in fiscal
2000. This decrease was due to a decrease in real estate owned of $0.8 million
and a decrease in non-performing loans of $0.5 million.
Allowance for Loan Losses
The following table sets forth an analysis of the allowance for possible loan
losses. See Note 1 to the Consolidated Financial Statements for a discussion of
the Company's policy for establishing the allowance for loan losses. (dollars in
thousands)
Years Ended June 30,
--------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------
Balance at beginning of year..... $4,349 $4,243 $3,649 $3,061 $2,806
Provision for loan losses........ 1,441 1,124 1,193 1,129 638
Loan charge-offs:
Mortgage....................... (222) (431) (20) (9) (10)
Commercial..................... (397) (66) (11) - (9)
Consumer....................... (318) (606) (665) (610) (434)
--------------------------------------------
Total charge-offs............ (937) (1,103) (696) (619) (453)
--------------------------------------------
Recoveries:
Mortgage....................... 5 - 5 9 16
Commercial..................... - 1 - - -
Consumer....................... 91 84 92 69 54
--------------------------------------------
Total recoveries............ 96 85 97 78 70
--------------------------------------------
Net loan recoveries (charge-offs) (841) (1,018) (599) (541) (383)
--------------------------------------------
Balance.......................... $4,949 $4,349 $4,243 $3,649 $3,061
============================================
Net charge-offs to average loans. 0.14% 0.17% 0.10% 0.11% 0.08%
============================================
Allowance balance to total loans. 0.75% 0.73% 0.71% 0.63% 0.58%
============================================
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, 2000, the Bank's liquidity ratio was 19.0%.
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, 2000, the Bank had $175.5 million in
borrowings from the FHLB of Indianapolis. As of that date, the Bank had
commitments to fund loan originations and purchases of approximately $29.9
million and commitments to sell loans of $7.0 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, 2000, there was a net decrease of $11.7 million in cash and cash
equivalents. The major uses of cash during the year were loan originations, net
of repayments, of $62.5 million; purchases of investment and mortgage-backed
securities of $51.1 million; and repayment of FHLB advances of $56.2 million.
Partially offsetting these uses of cash, the major sources of cash provided
during the year included $46.6 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
$24.8 million; and proceeds from FHLB advances of $143.8 million.
Impact of Inflation
The consolidated financial statements and related data presented herein have
been prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation. The primary assets and liabilities of thrifts such as the Bank are
monetary in nature. As a result, interest rates have a more significant impact
on the Bank's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the price of goods and services. In the current interest rate
environment, liquidity, maturity structure and quality of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Year 2000 Readiness Disclosure
Transition from 1999 to 2000
Home Federal Bancorp entered the Year 2000 smoothly and unaffected by the date
change. Key employees at all offices worked during the rollover weekend to check
the functionality of all major systems and reported the test results to a
central command center. The technical project team monitored all testing and
immediately investigated all reported incidents or problems to determine if a
Year 2000 problem existed. No problems reported were directly related to the
Year 2000 date change-only typical computer problems that occur during the
normal course of business.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statements No. 138 and No.
137, which amend SFAS 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 these pronouncements.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
June 30,
----------------------
ASSETS: 2000 1999
----------------------
Cash.................................................. $ 21,184 $ 21,377
Interest-bearing deposits............................. 12 11,529
--------- ---------
Total cash and cash equivalents..................... 21,196 32,906
--------- ---------
Securities available for sale at fair value
(amortized cost $101,198 and $74,482) (Note 2).... 99,364 73,521
Securities held to maturity at amortized cost
(fair value $7,622 and $4,960 ) (Note 2)........... 7,776 4,987
Loans held for sale (market value $2,409 and
$5,136) (Note 4)................................... 2,376 5,102
Loans receivable, net of allowance for loan
losses of $4,949 and $4,349 (Note 3)............... 652,007 586,918
Investments in joint ventures (Note 5)................ 10,333 7,090
Federal Home Loan Bank stock (Note 9)................. 9,037 5,814
Accrued interest receivable, net (Note 6)............. 5,750 4,897
Premises and equipment, net (Note 7).................. 9,084 9,129
Real estate owned..................................... 1,235 2,050
Prepaid expenses and other assets..................... 6,114 4,404
Cash surrender value of life insurance............... 6,387 6,095
Goodwill, net......................................... 1,495 1,596
--------- ---------
TOTAL ASSETS....................................... $ 832,154 $ 744,509
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits (Note 8)..................................... $ 572,893 $ 579,882
Federal Home Loan Bank Advances (Note 9).............. 175,486 87,895
Senior debt (Note 10)................................. 6,205 1,000
Other borrowings (Note 10)............................ 2,742 1,515
Advance payments by borrowers for taxes and insurance. 406 270
Accrued expenses and other liabilities................ 4,936 4,312
--------- ---------
Total liabilities.................................. 762,668 674,874
--------- ---------
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:............................. 8,335 8,512
4,734,585 shares at June 30, 2000
4,984,814 shares at June 30, 1999
Retained earnings, restricted........................ 62,251 61,699
Accumulated other comprehensive loss, net............. (1,100) (576)
--------- ---------
Total shareholders' equity......................... 69,486 69,635
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 832,154 $ 744,509
========= =========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
Years Ended June 30,
---------------------------------
2000 1999 1998
---------------------------------
Interest Income:
Loans receivable (Note 3).................... $ 51,056 $ 49,602 $ 51,014
Securities available for sale and held to
maturity.................................. 6,316 4,005 3,786
Other interest income........................ 437 604 303
---------------------------------
Total interest income......................... 57,809 54,211 55,103
---------------------------------
Interest Expense:
Deposits (Note 8............................. 23,911 24,037 24,515
Advances from Federal Home Loan Bank (Note 9) 7,832 6,068 5,884
Other borrowings (Note 10)................... 426 30 465
---------------------------------
Total interest expense........................ 32,169 30,135 30,864
---------------------------------
Net interest income........................... 25,640 24,076 24,239
Provision for loan losses..................... 1,441 1,124 1,193
---------------------------------
Net interest income after provision for
loan losses................................ 24,199 22,952 23,046
---------------------------------
Other Income:
Gain on sale of loans........................ 720 3,380 3,410
Gain on sale of securities available for sale (116) 2 8
Income from joint ventures (Note 5).......... 789 412 293
Insurance, annuity income, other fees........ 1,192 1,243 1,583
Service fees on NOW accounts................. 2,174 2,054 1,976
Net gain (loss) on real estate owned......... 173 (34) 19
Loan servicing income........................ 1,064 1,103 841
Miscellaneous................................ 1,668 1,844 1,585
---------------------------------
Total other income............................ 7,664 10,004 9,715
---------------------------------
Other Expenses:
Compensation and employee benefits (Note 13). 8,927 8,417 8,790
Occupancy and equipment...................... 2,502 2,359 2,305
Service bureau expense....................... 853 784 796
Federal insurance premium (Note 12).......... 224 320 328
Marketing.................................... 479 514 629
Goodwill amortization........................ 101 101 101
Miscellaneous................................ 3,360 3,356 2,777
---------------------------------
Total other expenses.......................... 16,446 15,851 15,726
---------------------------------
Income before income taxes.................... 15,417 17,105 17,035
Income tax provision (Note 11)................ 5,979 6,628 6,645
---------------------------------
Net Income.................................... $ 9,438 $ 10,477 $ 10,390
=================================
Basic Earnings per Common Share............... $ 1.97 $ 2.06 $ 2.03
Diluted Earnings per Common Share............. $ 1.88 $ 1.95 $ 1.90
=================================
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except shares outstanding)
Accumulated
Other Total
Shares Common Retained Comprehensive Shareholders'
Outstanding Stock Earnings Income (Loss) Equity
--------------------------------------------------------------------
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 ($.371 per share)............... (1,900) (1,900)
----------------------------------------------------------------
Balance at June 30, 1998....................... 5,139,176 7,963 58,911 78 66,952
Comprehensive income:
Net income.................................. 10,477 10,477
Change in unrealized gain (loss)
on securities available for sale, net of
reclassification adjustment and tax effect (654) (654)
---------
Total comprehensive income............... 9,823
---------
Stock options exercised........................ 79,097 812 812
Stock repurchased.............................. (233,459) (347) (5,438) (5,785)
Tax benefit related to exercise
of non-qualified stock options............. 84 84
Cash dividends ($.445 per share)............... (2,251) (2,251)
----------------------------------------------------------------
Balance at June 30, 1999....................... 4,984,814 8,512 61,699 (576) 69,635
Comprehensive income:
Net income.................................. 9,438 9,438
Change in unrealized gain (loss)
on securities available for sale, net of
reclassification adjustment and tax effect (524) (524)
------------
Total comprehensive income............... 8,914
------------
Stock options exercised........................ 28,551 204 204
Stock repurchased.............................. (278,780) (415) (6,327) (6,742)
Tax benefit related to exercise
of non-qualified stock options............. 34 34
Cash dividends ($.538 per share)............... (2,559) (2,559)
-------------------------------------------------------------------
Balance at June 30, 2000....................... 4,734,585 $ 8,335 $ 62,251 $ (1,100) $ 69,486
===================================================================
See notes to consolidated financial statements
Consolidated Statements Of Cash Flows
(in thousands) Years Ended June 30,
---------------------------------------
2000 1999 1998
---------------------------------------
Net income................................................... $ 9,438 $ 10,477 $ 10,390
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of discounts, amortization and depreciation.... 2,279 815 731
Provision for loan losses................................ 1,441 1,124 1,193
Net gain from sale of loans.............................. (721) (3,380) (3,410)
Net gain from sale of securities available for sale...... 116 (2) (8)
Net gain from joint ventures; real estate owned.......... (961) (378) (312)
Net loan fees deferred (recognized)...................... 51 (163) 130
Proceeds from sale of loans held for sale................ 46,579 223,527 216,227
Origination of loans held for sale....................... (43,132) (212,538) (220,899)
Decrease in accrued interest and other assets........... (5,324) (3,403) (1,444)
Increase (decrease) in other liabilities................. 760 (1,560) 1,444
---------------------------------------
Net Cash Provided by Operating Activities................. 10,526 14,519 4,042
---------------------------------------
Cash Flows From Investing Activities:
Net principal disbursed on loans............................. (62,543) (669) (880)
Proceeds from:
Maturities/Repayments of:
Securities held to maturity.......................... 1,033 5,430 9,142
Securities available for sale........................ 2,604 8,175 7,181
Sales of:
Securities available for sale........................ 17,573 18,644 11,632
Real estate owned and other asset sales.............. 3,605 1,262 762
Purchases of:
Loans.................................................... (4,038) (5,170) (6,815)
Securities available for sale............................ (47,122) (44,386) (35,870)
Securities held to maturity.............................. (4,016) (855) (5,585)
Federal Home Loan Bank stock............................. (3,223) (358) (1,196)
Investment in joint ventures, net............................ (2,454) (2,601) (700)
Increase in cash surrender value of life insurance........... (292) (287) (279)
Acquisition of property and equipment, net................... (1,334) (1,862) (1,627)
---------------------------------------
Net Cash Used in Investing Activities..................... (100,207) (22,677) (24,235)
---------------------------------------
Cash Flows From Financing Activities:
Increase in deposits, net.................................... (6,989) 35,893 16,201
Proceeds from advances from Federal Home Loan Bank........... 143,800 53,506 89,000
Repayment of advances from Federal Home Loan Bank............ (56,209) (63,681) (70,875)
Proceeds from senior debt.................................... 6,345 1,000 -
Repayment of senior debt..................................... (1,140) - (7,800)
Net proceeds from overnight borrowings....................... 1,227 (2,881) (252)
Common stock options exercised, net of fractional shares paid 204 896 414
Repurchase of common stock................................... (6,742) (5,785) -
Payment of dividends on common stock......................... (2,525) (2,251) (1,900)
---------------------------------------
Net Cash Provided by Financing Activities.................... 77,971 16,697 24,788
---------------------------------------
Net increase (decrease) in cash and cash equivalents......... (11,710) 8,539 4,595
Cash and cash equivalents, beginning of year................. 32,906 24,367 19,772
---------------------------------------
Cash and Cash Equivalents, End of Year....................... $ 21,196 $ 32,906 $ 24,367
=======================================
Supplemental Information:
Cash paid for interest....................................... $ 31,844 $ 30,226 $ 30,635
Cash paid for income taxes................................... $ 5,540 $ 6,900 $ 6,727
Assets acquired through foreclosure.......................... $ 2,196 $ 2,864 $ 844
See notes to consolidated financial statements ======================================
Notes to Consolidated Financial Statements for the Three Years in the
Period Ended June 30,2000
1. Summary of Significant Accounting Policies
The accounting policies of Home Federal Bancorp (the "Company") conform to
accounting principles generally accepted in the United States of America 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 accounting principles
generally accepted in the United States of America 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. Those available for sale and trading
are reported at fair value, with unrealized gains and losses included in
accumulated other comprehensive income or net income. 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 mortgage loans conforming to established
guidelines and held for sale to the secondary market. Mortgage loans held for
sale are carried at the lower of cost or fair value determined on an aggregate
basis. Gains and losses on the sale of these mortgage loans are included in
other income.
Mortgage Banking Activities
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 Mortgage Servicing Rights ("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 in 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.
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 or 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 and any 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 $5.4 million as of June 30, 2000, and mature in 2008 and
2009, respectively. The notional amount of these same interest rate swap
agreements totaled approximately $5.6 million as of June 30, 1999.
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 2000, 1999 and
1998 was $101,000 for each year. Management reviews intangible assets for
possible impairment if there is a significant event that detrimentally affects
operations. Impairment is measured using estimates of the future earnings
potential of the entity or assets acquired.
Income Taxes
The Company and its wholly-owned subsidiary file consolidated income tax
returns. Deferred income tax assets and liabilities reflect the impact of
temporary differences between amounts of assets and liabilities for financial
reporting purposes and the basis of such assets and liabilities as measured by
tax laws and regulations.
Earnings per Common Share
Earnings per share of common stock are based on the weighted average number of
basic shares and dilutive shares outstanding during the year. All per share
information has been restated to reflect the Company's three for two stock split
in November 1997. The Company adopted SFAS No. 128, "Earnings per Share," for
fiscal year 1998 with all prior period earnings per share data restated. This
statement established new accounting standards for the calculation of basic
earnings per share as well as diluted earnings per share. The adoption of the
statement did not have a material effect on the Company's calculation of
earnings per share. The following is a reconciliation of the weighted average
common shares for the basic and diluted earnings per share computations:
Years Ended June 30,
-------------------------------------
2000 1999 1998
-------------------------------------
Basic Earnings per Share:
Weighted average common shares ....... 4,802,240 5,087,398 5,114,091
========= ========= =========
Diluted Earnings per Share:
Weighted average common shares ....... 4,802,240 5,087,398 5,114,091
Dilutive effect of stock options ..... 220,213 294,931 355,259
--------- --------- ---------
Weighted average common
and incremental shares ............... 5,022,453 5,382,329 5,469,350
========= ========= =========
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Comprehensive Income," as of July 1, 1998, which requires 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 2000, 1999 and
1998 under SFAS 130:(dollars in thousands)
Fiscal years ended June 30,
------------------------------
2000 1999 1998
------------------------------
Net Income ............................. $9,438 $ 10,477 $ 10,390
Other comprehensive income:
Unrealized holding gains (losses)
from securities available for sale . (989) (1,089) 227
Reclassification adjustment for
(gains) losses realized in income . 116 (2) (8)
------------------------------
Net unrealized gains (losses) .......... (873) (1,091) 219
Tax effect ............................. 349 437 (88)
------------------------------
Other comprehensive income, net of tax . (524) (654) 131
------------------------------
Comprehensive Income ................... $8,914 $ 9,823 $ 10,521
==============================
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 operates in one geographical area.
Changes in Presentation
Certain amounts and items appearing in the fiscal 1999 and 1998 financial
statements have been reclassified to conform to the fiscal 2000 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 Accounting Standards No. 137 ("SFAS 137"),
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS 133" and Statement of Financial Accounting Standards No.
138 ("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain
Hedging Activities". SFAS 133, as amended, is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. As a result, on July 1, 2000,
the Company implemented SFAS 133. The Company designated its interest rate swaps
as fair value hedge instruments which are recorded as assets or liabilities on
the balance sheet and measured at fair value. The effect of this new standard
resulted in $271,000 being recorded in comprehensive income on July 1, 2000.
There was no income statement impact as the fair value hedges were determined by
management to be highly effective in accordance with SFAS 133.
2. Securities
Securities are summarized as follows: (in thousands)
June 30, 2000 June 30, 1999
------------------------------------------ --------------------------------------
Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------------ --------------------------------------
Held to Maturity:
Agency bonds............... $ 2,000 $ - $ (31) $ 1,969 $ - $ - $ - $ -
Municipal bonds............ 2,790 - (73) 2,717 3,550 11 (23) 3,538
Collateralized mortgage
obligations........ 611 - (24) 587 883 - (16) 867
Pass-thru certificates..... 2,375 - (26) 2,349 554 1 - 555
------------------------------------------ --------------------------------------
Total Held to Maturity..... $ 7,776 $ $ (154) $ 7,622 $ 4,987 $ 12 $ (39) $ 4,960
========================================== ======================================
Available for Sale:
Agency bonds............... $ 25,975 $ 7 $ (393) $ 25,589 $ 27,008 $ 41 $ (193) $ 26,856
Collateralized mortgage
obligations........ 37,629 165 (563) 37,231 5,657 - (87) 5,570
Pass-thru certificates..... 3,333 - (96) 3,237 2,699 1 (47) 2,653
Corporate debt............. 29,526 10 (899) 28,637 34,656 10 (672) 33,994
Mutual funds............... 4,660 - (65) 4,595 4,387 - (14) 4,373
Equity securities.......... 75 - - 75 75 - - 75
------------------------------------------ --------------------------------------
Total Available for Sale... $ 101,198 $ 182 $(2,016) $ 99,364 $ 74,482 $ 52 $(1,013) $ 73,521
========================================== ======================================
Certain securities, with amortized cost of $2.9 million and fair value of $2.8
million at June 30, 2000 and amortized cost and fair value of $3.3 million at
June 30, 1999, 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, 2000, by contractual
maturity are summarized as follows: (in thousands)
Held to Maturity Available for Sale
-------------------------------- ------------------------------
Amortized Fair Market Amortized Fair Market
Cost Value Yield Cost Value Yield
-------------------------------- ------------------------------
Agency bonds:
Due after 1 year through 5 years........ $ - $ - - $ 4,465 $ 4,441 5.53%
Due after 5 years through 10 years...... 2,000 1,969 7.00% 19,159 18,831 6.44%
Due after 10 years...................... - - - 2,000 1,967 7.41%
Municipal bonds: 351 350 6.85%
Due in one year or less................. 615 613 5.85% - - -
Due after 1 year through 5 years........ 1,400 1,339 6.13% - - -
Due after 5 years through 10 years...... - - - - - -
Due after 10 years...................... 775 765 7.37% - - -
Collateralized mortgage obligations........ 611 587 6.21% 37,629 37,231 7.38%
Pass-thru certificates..................... 2,375 2,349 7.13% 3,333 3,237 6.39%
Corporate debt: 5.83%
Due after 1 year through 5 years........ - - - 27,616 26,717 7.95%
Due after 5 years through 10 years...... - - - 945 954 7.50%
Due after 10 years...................... - - - 965 966 6.13%
Mutual funds............................... - - - 4,660 4,595 6.67%
Equity securities.......................... - - 75 75 -
-------------------------------- ------------------------------
Total...................................... $ 7,776 $ 7,622 6.77% $ 101,198 $ 99,364 6.64%
================================ ==============================
Activities related to the sales of securities available for sale are summarized
as follows: (in thousands)
Years Ended June 30,
----------------------------------
2000 1999 1998
----------------------------------
Proceeds from sales... $ 17,378 $ 19,644 $ 11,632
Gross gains on sales.. $ 3 $ 12 $ 25
Gross losses on sales. $ 119 $ 10 $ 17
3. Loans Receivable
Loans receivable are summarized as follows: (in thousands)
JUNE
---------------------------
2000 1999
---------------------------
First mortgage loans:
Residential single family ............... $ 282,555 $ 248,846
Commercial and multi-family ............. 102,974 107,908
Property under construction ............. 89,248 65,997
Unimproved land ......................... 17,440 11,611
Home equity .................................. 49,585 39,654
Second mortgage .............................. 35,715 29,219
Commercial ................................... 60,948 56,956
Mobile home .................................. 9,963 12,048
Automobile ................................... 22,587 21,764
Consumer ..................................... 9,446 9,250
Savings account .............................. 3,625 3,826
--------- ---------
Gross loans receivable .................. 684,086 607,079
Allowance for loan losses .................... (4,949) (4,349)
Deferred loan fees ........................... (502) (527)
Undisbursed loan proceeds .................... (26,628) (15,285)
--------- ---------
Loans Receivable, Net ........................ $ 652,007 $ 586,918
========= ==========
The Bank originates both adjustable and fixed rate loans. The adjustable rate
loans have interest rate adjustment limitations and are indexed to various
indices. Adjustable residential mortgages are generally 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
$2.4 million and $3.5 million at June 30, 2000 and 1999, respectively. The Bank
would have recorded interest income of $268,000 in 2000, $453,000 in 1999 and
$325,000 in 1998 if loans on non-accrual status had been current in accordance
with their original terms. Actual interest received was $227,000, $233,000 and
$250,000 for fiscal years ending 2000, 1999 and 1998, 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, 2000 and 1999 on these restructured loans was $313,000 and $64,000,
respectively.
The Bank's primary lending area is south-central Indiana. Virtually
all of the Bank's loans originated and purchased are to borrowers located within
the state of Indiana. The Bank originates and purchases commercial real estate
loans, which totaled $103.0 million and $107.9 million at June 30, 2000 and
1999, 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,
$32.9 million and $30.4 million were collateralized by multi-family residential
property at June 30, 2000 and 1999, 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 $299.4 million and
$281.2 million at June 30, 2000 and 1999, respectively. Also, under FIRREA, the
loans-to-one-borrower limitation is generally 15% of unimpaired capital and
surplus, which, for the Bank, was approximately $11.8 million and $10.9 million
at June 30, 2000 and 1999, respectively. As of June 30, 2000 and 1999, the Bank
was in compliance with these limitations.
Aggregate loans to officers and directors included above were $8.5 million
and $6.4 million as of June 30, 2000 and 1999, 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, 2000, loans of $3.5 million were
disbursed to officers and directors and repayments of $1.4 million were received
from officers and directors.
An analysis of the allowance for loan losses is as follows: (in thousands)
Years ended June 30,
-----------------------------
2000 1999 1998
-----------------------------
Beginning balance ........... $ 4,349 $ 4,243 $ 3,649
Provision for loan losses ... 1,441 1,124 1,193
Charge-offs ................. (937) (1,103) (696)
Recoveries .................. 96 85 97
----------------------------- ------- ------- -------
Ending Balance .............. $ 4,949 $ 4,349 $ 4,243
============================= ======= ======= =======
The following is a summary of information pertaining to impaired loans:
(in thousands)
Years ended June 30,
--------------------
2000 1999
---- ----
Impaired loans with a valuation reserve $165 $735
Impaired loans with no valuation reserve 171 117
---------------------------------------- ---- ----
Total Impaired Loans ................... $336 $852
======================================== ==== ====
Valuation reserve on impaired loans .... $196 $603
Average impaired loans ................. $523 $812
4. Mortgage Banking Activities
At June 30, 2000, 1999 and 1998, the Bank was servicing loans for others
amounting to $451.8 million, $461.5 million and $385.2 million, respectively.
Net gain on sales of loans was $390,000, $2.1 million and $2.3 million for the
years ended June 30, 2000, 1999 and 1998. 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, 2000 and 1999, these obligations were limited to approximately $155,000 and
$160,000, respectively.
The following analysis reflects the changes in mortgage servicing rights (MSRs)
acquired: (in thousands)
Years Ended June 30,
--------------------
2000 1999
---- ----
Beginning carrying value ........... $ 1,977 $ 1,088
Additions ....................... 331 1,230
Amortization .................... (562) (449)
Net change in valuation allowance 65 108
------------------------------------ ------- -------
Ending carrying value .............. $ 1,811 $ 1,977
======= =======
The carrying value approximates fair value at June 30, 2000 and 1999. 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,
2000 and 1999 was $71,000 and $137,000, 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 2000 1999
---------------------------
Family Financial Life .... 14% $ 715 $ 617
Heritage Woods ........... 33% 78 85
Home-Breeden ............. 50% 2,058 2,189
Coventry Associates ...... 65% 19 --
Crystal Lake ............. 34% 1,918 2,010
Broadmoor North/Heathfield 35% 1,374 --
Sycamore Springs ......... 33% 3,602 1,480
Bloomington Technology ... 50% 569 709
---------------------------------------------------------
Total Investment $ 10,333 $ 7,090
=========================================================
Summarized condensed unaudited financial statements for these joint ventures are
as follows: (in thousands)
June 30,
-----------------
2000 1999
---- ----
Balance Sheets:
Cash ......................................... $ 932 $ 838
Investments .................................. 5,184 5,763
Property and equipment, net .................. 808 769
Inventory of developed lots .................. 12,656 9,298
Other assets ................................. 515 915
---------------------------------------------- ------- -------
Total Assets ................................. $20,095 $17,583
============================================== ======= =======
Notes payable ................................ $11,059 $ 7,315
Insurance liabilities ........................ 1,328 1,387
Other liabilities ............................ 424 754
---------------------------------------------- ------- -------
Total liabilities ............................ 12,811 9,456
---------------------------------------------- ------- -------
Shareholders´ equity ......................... 7,284 8,127
---------------------------------------------- ------- -------
Total Liabilities and Shareholders´ Equity .. $20,095 $17,583
============================================== ======= =======
Years Ended June 30,
--------------------
2000 1999 1998
---- ---- ----
Income Statements:
Income:
Insurance premiums and commissions ...... $2,227 $2,408 $3,735
Investment income ....................... 401 362 357
Net lot sales ........................... 610 496 234
Other income ............................ 109 102 104
------------------------------------------- ------ ------ ------
Total income ............................ 3,347 3,368 4,430
------------------------------------------- ------ ------ ------
Expenses:
Commissions ............................. 1,096 1,234 2,026
Insurance benefits ...................... 497 461 654
Interest expense ........................ 76 92 47
Other expense ........................... 1,246 1,215 1,377
------------------------------------------- ------ ------ ------
Total expense ........................... 2,915 3,002 4,104
------------------------------------------- ------ ------ ------
Net Income ................................ $ 432 $ 366 $ 326
======================================================================
The notes payable included $8.4 million and $5.2 million due to HSC and $2.3
million and $1.8 million due to the Bank at June 30, 2000 and 1999,
respectively. At June 30, 2000 and 1999, open commitments to these joint
ventures included letters of credit totaling $1.1 million and $1.6 million,
respectively.
6. Accrued Interest Receivable
Accrued interest receivable consists of the following: (in thousands)
June 30,
--------
2000 1999
---- ----
Loans, less reserve of $182 and $260 $4,282 $3,686
Securities ......................... 1,463 1,191
Interest-bearing deposits .......... 5 20
------------------------------------ ------ ------
Total Accrued Interest Receivable .. $5,750 $4,897
======================================================
7. Premises and Equipment
Premises and equipment consists of the following: (in thousands)
June 30,
--------
2000 1999
---- ----
Land ....................... $ 1,521 $ 1,521
Buildings and improvements . 11,191 10,352
Furniture and equipment .... 6,477 6,083
---------------------------- -------- --------
Total ................. 19,189 17,956
Accumulated depreciation ... (10,105) (8,827)
---------------------------- -------- --------
Total Premises and Equipment $ 9,084 $ 9,129
===================================================
Depreciation expense included in operations for the years ended June 30, 2000,
1999 and 1998, totaled $1.4 million, $1.3 million and $1.2 million,
respectively.
8. Deposits
Deposits are summarized as follows: (in thousands)
June 30, 2000 June 30, 1999
--------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------------------------------------
Non-interest bearing ................. $ 39,496 $ 35,532
NOW accounts ......................... 53,927 1.63% 53,040 1.68%
Passbook savings ..................... 44,783 2.00% 48,026 2.08%
Money market savings ................. 108,430 5.29% 106,586 4.18%
-------------------------------------- -------- ---- ------- ----
Total transaction accounts ...... 246,635 3.04% 243,184 2.61%
-------------------------------------- -------- ---- ------- ----
Certificates of deposit:
Less than one year .............. 57,143 6.02% 87,499 4.80%
12-23 months .................... 126,302 5.60% 114,908 5.02%
24-35 months .................... 94,594 5.59% 75,914 5.34%
36-59 months .................... 10,208 5.39% 11,908 5.29%
60-120 months ................... 38,011 5.89% 46,469 6.03%
-------------------------------------- -------- ---- ------- ----
Total certificate accounts ...... 326,258 5.70% 336,698 5.18%
-------------------------------------- -------- ---- ------- ----
Total Deposits ....................... $572,893 4.56% $579,882 4.10%
====================================== ======== ==== ======== ====
At June 30, 2000 and 1999, certificates of deposit in amounts of $100,000 or
more totaled $99.4 million and $89.6 million, respectively.
A summary of certificate accounts by scheduled maturities at June 30, 2000, is
as follows: (in thousands)
2001 2002 2003 2004 2005 Thereafter Total
--------------------------------------------------------------------------
3.99% or less . $ 521 $ -- $ 100 $ -- $ -- $ -- $ 621
4.00% - 4.99%.. 52,338 7,468 2,071 1,523 886 1,076 65,362
5.00% - 5.99%.. 93,190 25,484 3,860 3,780 2,344 605 129,263
6.00% - 6.99%.. 60,454 38,877 6,520 831 2,478 575 109,735
7.00% - 9.00%.. 9,327 4,602 6,852 29 350 117 21,277
---------------------------------------------------------------------------
Total Certificate
Amounts ....... $215,830 $ 76,431 $ 19,403 $ 6,163 $ 6,058 $ 2,373 $326,258
==========================================================================
A summary of interest expense for the past three fiscal years is as follows: (in thousands)
Years Ended June 30,
---------------------------
2000 1999 1998
---------------------------
NOW accounts .......... $ 559 $ 731 $ 889
Passbook savings ...... 922 1,106 1,316
Money market savings .. 5,277 4,063 3,218
Certificates of deposit 17,153 18,137 19,092
----------------------- ------- ------- -------
Total Interest Expense $23,912 $24,037 $24,515
======================= ===========================
9. Federal Home Loan Bank Advances
The Bank was eligible to receive advances from the FHLB up to $209.3 million and
$172.0 million at June 30, 2000 and 1999, 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, 2000 June 30, 1999
---------------------------------------------
Weighted Weighted
Fiscal Year Average Average
Maturity Amount Rate Amount Rate
------------------------------------------------------------------
2000.......... $ - - $ 11,300 6.05%
2001.......... 69,900 6.54% 8,400 5.64%
2002.......... 21,500 6.31% 17,000 6.02%
2003.......... 19,500 6.41% 14,500 5.99%
2004.......... 14,600 6.16% 11,600 5.86%
2005.......... 38,000 6.37% 25,095 5.95%
Thereafter.... 11,986 5.77% - -
------------------------------------------------------------------
Total FHLB Advances $ 175,486 6.36% $ 87,895 5.94%
==================================================================
10. Other Borrowings
Senior Debt
On June 1, 2000, the Company entered into a revolving note with LaSalle Bank
N.A. whereby the Company may borrow up to $12.5 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 November 29, 2000. As of June 30,
2000the Company had a $6.2 million balance, consisting of two draws of $5.1
million and $1.1 million accruing interest as of June 30, 2000 at 8.34% and
8.29%, 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. As of June 30, 2000, the Company was in compliance with the debt
covenants.
Other Borrowings
In addition to the other borrowings scheduled below, the Bank has a $5.0 million
overdraft line of credit with the Federal Home Loan Bank, $4.7 million and $5.0
million of which was unused, as of June 30, 2000 and June 30, 1999,
respectively. (in thousands)
June 30,
--------------
2000 1999
---- ----
FHLB line of credit ............................... $ 251 $ --
Official check overnight remittance ............... 2,462 1,497
Money order remittance ............................ 29 18
--------------------------------------------------- ------ ------
Total Other Borrowings ............................ $2,742 $1,515
=================================================== ====== ======
11. Income Taxes
An analysis of the income tax provision is as follows: (in thousands)
Years Ended June 30,
------------------------------
2000 1999 1998
Current: ------- ------- -------
Federal .................... $ 4,698 $ 5,617 $ 5,425
State ...................... 1,211 1,551 1,522
Deferred ........................ 69 (540) (302)
--------------------------------- ------- ------- -------
Income Tax Provision ............ $ 5,978 $ 6,628 $ 6,645
================================================================
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,
---------------------------
2000 1999 1998
------- ------- -------
Income tax provision at federal statutory rate ... $ 5,242 $ 5,807 $ 5,792
State tax, net of federal tax benefit ............ 842 1,016 976
Tax exempt interest .............................. (108) (102) (96)
Increase in cash surrender value of life insurance (99) (88) (95)
Other ............................................ 101 (5) 68
-------------------------------------------------- ------- ------- -------
Income Tax Provision ............................. $ 5,978 $ 6,628 $ 6,645
================================================== ======= ======= =======
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, which total $6.0 million, for years prior to
1988. 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, 2000 and 1999, 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,
---------------
2000 1999
Deferred tax assets: ---------------
Bad debt reserves, net ........................... $1,402 $1,049
Unrealized losses on securities available for sale 734 385
Deferred compensation ............................ 814 773
Other ............................................ -- 9
---------------------------------------------------- ------ ------
Total deferred tax assets ........................ 2,950 2,216
---------------------------------------------------- ------ ------
Deferred tax liabilities:
Difference in basis of fixed assets .............. 320 371
FHLB dividend .................................... 205 205
Unrealized gain on securities available for sale . -- --
Deferred fees .................................... 982 454
Other ............................................ 29 2
---------------------------------------------------- ------ ------
Total deferred tax liabilities ................... 1,536 1,032
---------------------------------------------------- ------ ------
Net Deferred Tax Asset ............................. $1,414 $1,184
======================================================================
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, 2000, the Bank met all
capital adequacy requirements to which it is subject.
As of June 30, 2000 and 1999, 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.
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, 2000
Tangible capital (to total assets) $63,558 7.74% $12,316 1.50% N/A N/A
Core capital (to total assets) ... $63,558 7.74% $32,843 4.00% N/A N/A
Total risk-based capital
(to risk-weighted assets) ..... $67,271 10.76% $50,033 8.00% $62,542 10.00%
Tier 1 risk-based capital
(to risk-weighted assets) ..... $63,558 10.16% N/A N/A $37,525 6.00%
Tier 1 leverage capital
(to average assets) ........... $63,558 8.10% N/A N/A $39,242 5.00%
To Be Categorized
As "Well Capitalized"
Under Prompt
For Capital Corrective Action
(dollars in thousands) Actual Adequacy Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------
As of June 30, 1999
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%
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, 2000,
approximately $12.2 million of retained earnings were available for dividend
declaration without prior regulatory approval.
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, 1999, 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 2000, 1999 and 1998 was $171,000, $155,000 and $153,000,
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 $87,000, $88,000 and $85,000 during fiscal
years 2000, 1999 and 1998, respectively.
14. Stock Options
The Company has stock option plans for the benefit of officers, other key
employees and directors. As of June 30, 2000, the plans were authorized to grant
options to purchase 145,802 additional shares of the Company's common stock. The
option price is not to be less than the fair market value of the common stock on
the date the option is granted, and the stock options are exercisable at any
time within the maximum term of 10 years and one day from the grant date. The
options are nontransferable and are forfeited upon termination of employment.
The following is an analysis of the stock option activity for each of the years
in the three year period ended June 30, 2000 and the stock options outstanding
at the end of the respective periods:
Weighted
Average
Options Shares Price
------- ------ -----
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
Granted .................................. 222,155 $ 23.07
Forfeited ................................ (6,625) $ 24.95
Exercised ................................ (28,551) $ 7.15
------- ---------
Outstanding June 30, 2000 ................ 908,596 $ 17.52
========================================== ======= =========
As of June 30, 2000, options outstanding have exercise prices between $2.52 and
$26.56 and a weighted average remaining contractual life of 6.6 years. The
majority of options outstanding have exercise prices ranging from $16.25 to
$26.56 with a weighted average remaining contractual life of 8.1 years.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the plan. No
compensation cost has been recognized for the plan, because the stock option
price is equal to or greater than the fair value at the grant date. Had
compensation cost for the plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the fair value method of
SFAS 123, "Accounting for Stock-Based Compensation," the Company's net income
and net income per share would have decreased to the pro forma amounts indicated
below: (in thousands, except per share data)
Years Ended June 30,
----------------------------
2000 1999 1998
---- ---- ----
Net income:
As reported ................... $ 9,438 $ 10,477 $ 10,390
Pro forma ..................... $ 8,590 $ 10,005 $ 9,961
Net income per share:
As reported
Basic earnings per share . $ 1.97 $ 2.06 $ 2.03
Diluted earnings per share $ 1.88 $ 1.95 $ 1.90
Pro forma
Basic earnings per share . $ 1.79 $ 1.97 $ 1.95
Diluted earnings per share $ 1.71 $ 1.86 $ 1.82
The weighted average fair value of options granted was $6.31 in 2000, $5.94 in
1999 and $8.04 in 1998. 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 2.38%, risk-free interest rates ranging
from 4.50% to 8.04%, expected volatility ranging from 24.13% 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, 2000 and 1999, the Bank had loan commitments
approximating $23.1 million and $24.6 million, respectively, excluding
undisbursed portions of loans in process. Loan commitments at June 30, 2000
included commitments to originate fixed rate loans with interest rates ranging
from 8.4% to 9.5% totaling $2.5 million and adjustable rate loan commitments
with interest rates ranging from 6.8% to 11.5% totaling $20.6 million.
Commitments, which are disbursed subject to certain limitations, extend over
various periods of time. Generally, unused commitments are canceled upon
expiration of the commitment term as outlined in each individual contract.
Outstanding letters of credit were $2.5 million and $3.4 million for 2000
and 1999, respectively. Additionally, the Bank had approximately $3.4 million in
commitments to sell fixed rate residential loans and $3.6 million in commitments
to sell adjustable rate commercial loans at June 30, 2000.
The Bank's exposure to credit loss in the event of nonperformance by the
other parties to the financial instruments for commitments to extend credit is
represented by the contract amount of those instruments. The Bank uses the same
credit policies and collateral requirements in making commitments as it does for
on-balance sheet instruments.
Employment Agreements
The Company has entered into employment agreements with certain executive
officers. Under certain circumstances provided in the agreements, the Company
may be obligated to continue the officer's salary for a period of up to three
years.
16. Fair Value of Financial Instruments
The disclosure of the estimated fair value of financial instruments is as
follows: (in thousands)
June 30, 2000 June 30, 1999
--------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------------------
Assets:
Cash ................................. $ 21,184 $ 21,184 $ 21,377 $ 21,377
Interest-bearing deposits ............ 12 12 11,529 11,529
Securities available for sale ........ 99,364 99,364 73,521 73,521
Securities held to maturity .......... 7,776 7,622 4,987 4,960
Loans held for sale .................. 2,376 2,409 5,102 5,136
Loans, net ........................... 652,007 652,509 586,918 585,187
Accrued interest receivable .......... 5,750 5,750 4,897 4,897
Federal Home Loan Bank stock ......... 9,037 9,037 5,814 5,814
Cash surrender value of life insurance 6,387 6,387 6,095 6,095
Liabilities:
Deposits ............................ 572,893 576,611 579,882 579,781
Federal Home Loan Bank advances ..... 175,486 173,347 87,895 88,516
Senior debt ......................... 6,205 6,206 1,000 1,013
Other borrowings .................... 2,742 2,742 1,515 1,515
Advance payments by borrowers
for taxes and insurance .......... 406 406 270 270
Accrued interest payable ............ 792 792 473 473
Unrecognized Financial Instruments:
Interest rate swap .................. N/A 271 N/A 79
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 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, 2000 and 1999. 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.
17. Parent Company Financial Statements
The condensed financial statements of Home Federal Bancorp are as follows: (in
thousands)
June 30,
Condensed Balance Sheets --------------------
(Parent Company only) 2000 1999
--------------------
Assets:
Cash ......................................... $ 708 $ 228
Investment in subsidiary ..................... 75,957 70,881
Other ........................................ 245 266
-------- --------
Total Assets ............................... $ 76,910 $ 71,375
-------- --------
Liabilities:
Senior debt .................................. $ 6,205 $ 1,000
Other ........................................ 119 164
-------- --------
Total liabilities .......................... 6,324 1,164
-------- --------
Shareholders' equity ......................... 70,586 70,211
-------- --------
Total Liabilities and Shareholders' Equity . $ 76,910 $ 71,375
-------- --------
Condensed Statements of Income ............... For the Years ended June 30,
--------------------------------
(Parent Company only) 2000 1999 1998
--------------------------------
Dividends from subsidiary .................... $ 4,760 $ 3,871 $ 6,442
Other ........................................ 485 809 598
-------- -------- --------
Total income ............................... 5,245 4,680 7,040
-------- -------- --------
Interest on senior debt ...................... 408 24 458
Other expenses ............................... 719 888 659
-------- -------- --------
Total expenses ............................. 1,127 912 1,117
-------- -------- --------
Income before taxes and change in
undistributed earnings of subsidiary ........ 4,118 3,768 5,923
Applicable income tax credit ................. (244) (32) (204)
-------- -------- --------
Income before change in undistributed
earnings of subsidiary ...................... 4,362 3,800 6,127
Increase in undistributed earnings of
subsidiary ................................. 5,076 6,677 4,263
-------- -------- --------
Net Income ................................... $ 9,438 $ 10,477 $ 10,390
-------- -------- --------
Condensed Statements of Cash Flows ........... For the Years ended June 30,
--------------------------------
(Parent Company only) 2000 1999 1998
--------------------------------
Operating Activities:
Net income ................................... $ 9,438 $ 10,477 $ 10,390
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in other assets ........ 21 754 (516)
Increase (decrease) in accrued expenses and
other liabilities ......................... (45) (48) (97)
Increase in undistributed earnings
of subsidiary ............................. (5,076) (6,677) (4,263)
-------- -------- --------
Net cash provided by operating activities .... 4,338 4,506 5,514
-------- -------- --------
Financing Activities:
Repayment of senior debt ..................... (1,140) -- (7,800)
Funds provided by senior debt ................ 6,345 1,000 --
Payment of dividends ......................... (2,559) (2,251) (1,900)
Repurchase shares of common stock ............ (6,742) (5,785) --
Exercise of stock options, net of fractional
shares paid.................................. 238 896 414
-------- -------- --------
Net cash used in financing activities ........ (3,858) (6,140) (9,286)
-------- -------- --------
Net (decrease)/increase in cash .............. 480 (1,634) (3,772)
Cash at beginning of year .................... 228 1,862 5,634
-------- -------- --------
Cash at End of Year .......................... $ 708 $ 228 $ 1,862
-------- -------- --------
Independent Auditor's 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, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended June 30, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2000,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
July 20, 2000
Board of Directors Executive Officers
& Officers of Home Federal
of Home Federal Bancorp Savings Bank
Board of Directors
John K. Keach, Jr. John K. Keach, Jr.
Chairman of the Board, Chairman of the Board,
President and Chief President and Chief
Executive Officer, Executive Officer
Home Federal Bancorp
Gerald L. Armstrong
John T. Beatty Executive Vice President
President, and Chief Operating Officer
Beatty Insurance, Inc.
Lawrence E. Welker
Lewis W. Essex Executive Vice President,
Retired from Essex Chief Financial Officer,
Castings, Inc. Treasurer and Secretary
Harold Force S. Elaine Pollert
President, Executive Vice President
Force Construction Retail Banking
Company, Inc.
Melissa A. McGill
David W. Laitinen, MD Vice President
Orthopedic Surgeon Controller
Harvard W. Nolting, Jr.
Retired from Nolting
Foods, Inc.
Gregory J. Pence
President,
Kiel Bros. Oil
Company, Inc. and President,
KP Oil Company, Inc.
John K. Keach, Sr.
Chairman Emeritus
Retired
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.
Chairman of the Board,
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
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
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, 2000, 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
