-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NOKMCmdMrALsnOCmqvIPUioLjSjI9m0hEKAkN67boCfDdhdf3gg3rJy0JHWcTBWr s7Bxm6QFQnQ4mEkqTPgYeQ== 0000908834-04-000198.txt : 20040315 0000908834-04-000198.hdr.sgml : 20040315 20040315154418 ACCESSION NUMBER: 0000908834-04-000198 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOME FEDERAL BANCORP CENTRAL INDEX KEY: 0000867493 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351807839 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18847 FILM NUMBER: 04669460 BUSINESS ADDRESS: STREET 1: 501 WASHINGTON STREET CITY: COLUMBUS STATE: IN ZIP: 47201 BUSINESS PHONE: 8125221592 MAIL ADDRESS: STREET 1: 501 WASHINGTON STREET CITY: SEYMOUR STATE: IN ZIP: 47201 10-K 1 hfb_10k.txt HOME FEDERAL FORM 10-K SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2003 or [ ] Transition report pursuant to Section 13 or 15(d) or the Securities Exchange Act of 1934 For the transition period from ___________ to _____________ Commission file number: 0-18847 HOME FEDERAL BANCORP (Exact name of registrant as specified in its charter) Indiana 35-1807839 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 501 Washington Street, Columbus, Indiana 47201 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (812) 522-1592 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value and Common Share Purchase Rights (Title of Class) Indicate by check mark whether the Registrant (l) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES __X___ NO ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act. YES __X___ NO ______ The aggregate market value of the issuer's voting stock held by non-affiliates, as of June 30, 2003, was $89.8 million. The number of shares of the registrant's Common Stock, no par value, outstanding as of March 10, 2004, was 4,247,006 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the twelve months ended December 31, 2003, are incorporated into Part II. Portions of the Proxy Statement for the annual meeting of shareholders to be held on April 27, 2004, are incorporated into Part I and Part III. Exhibit Index on Page 34 Page 2 of 40 Pages HOME FEDERAL BANCORP FORM 10-K INDEX Forward Looking Statements 4 Item 1. Business 4 Item 2. Properties 26 Item 3. Legal Proceedings 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 4.5 Executive Officers of Home Federal Bancorp 28 Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, And Issuer Purchases of Equity Securities 28 Item 6. Selected Financial Data 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 30 Item 7.A Quantitative and Qualitative Disclosures About Market Risk 30 Item 8. Financial Statements and Supplementary Data 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 30 Item 9A. Controls and Procedures 30 Item 10. Directors and Executive Officers of the Registrant 30 Item 11. Executive Compensation 31 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 31 Item 13. Certain Relationships and Related Transactions 31 Item 14. Principal Accountant Fees and Services 31 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 32 Signatures 33 Certifications 38 FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K ("Form 10-K") contains statements, which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief, outlook, estimate or expectations of the Company (as defined below), its directors or its officers primarily with respect to future events and the future financial performance of the Company. Readers of this Form 10-K are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-K identifies important factors that could cause such differences. These factors include changes in interest rates, loss of deposits and loan demand to other financial institutions, substantial changes in financial markets, changes in real estate values and the real estate market, regulatory changes, changes in the financial condition of the issuers of the Company's investments and borrowers, changes in the economic condition of the Company's market area, increases in compensation and employee expenses or unanticipated results in pending legal proceedings. PART I Item 1. Business General Home Federal Bancorp (the "Company" or "HFB") is an Indiana corporation organized as a bank holding company authorized to engage in activities permissible for a financial holding company. The principal asset of the Company consists of 100% of the issued and outstanding capital stock of HomeFederal Bank ("HomeFederal" or the "Bank"). HomeFederal Bank began operations in Seymour, Indiana under the name New Building and Loan Association in 1908. The Bank received its federal charter and changed its name to Home Federal Savings and Loan Association in 1950. On November 9, 1983, Home Federal Savings and Loan Association became a federal savings bank and its name was changed to Home Federal Savings Bank. On January 14, 1988, Home Federal Savings Bank converted to stock form and on March 1, 1993, Home Federal Savings Bank reorganized by converting each outstanding share of its common stock into one share of common stock of the Company, thereby causing the Company to be the holding company of Home Federal Savings Bank. On December 31, 2001 Home Federal Savings Bank completed a charter conversion to an Indiana commercial bank, which is a member of the Federal Reserve System. On September 24, 2002, the Company announced a change in its fiscal year end from June 30 to December 31. On October 22, 2002, Home Federal Savings Bank changed its name to HomeFederal Bank. HomeFederal Bank currently provides services through its main office at 501 Washington Street in Columbus, Indiana, seventeen full service branches located in south central Indiana and the STAR network of automated teller machines at sixteen locations in Seymour, Columbus, North Vernon, Salem, Madison, Bloomington, Edinburgh, Shelbyville, Batesville and Greenwood. As a result, HomeFederal serves primarily Bartholomew, Jackson, Jefferson, Jennings, Scott, Ripley, Decatur, Marion, Monroe, Johnson and Washington Counties in Indiana. HomeFederal also participates in the nationwide electronic funds transfer networks known as Plus System, Inc. and Cirrus System. Online banking and telephone banking are also available to HomeFederal Bank customers. Online banking services are accessed through the Company's website, www.homf.com. In addition to online banking services, the Company also makes available, free of charge at the website, the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with the SEC. The information on the Company's website is not incorporated into this Form 10-K. Management analyzes the operation of Home Federal Bancorp assuming one operating segment, community banking services. HomeFederal Bank directly and, through its service corporation subsidiary, indirectly offers a wide range of consumer and commercial community banking services. These services include: (i) residential and commercial real estate loans; (ii) NOW checking accounts; (iii) regular and term savings accounts and savings certificates; (iv) full-service securities brokerage services; (v) consumer loans; (vi) debit cards; (vii) business credit cards; (viii) annuity and life insurance products; (ix) Individual Retirement Accounts and Keogh plans; (x) commercial loans; (xi) trust services: and (xii) commercial demand deposit accounts. HomeFederal Bank's primary source of revenue is interest from lending activities. Its principal lending activity is the origination of conventional mortgage loans to enable borrowers to purchase or refinance one-to-four family residential real property. These loans are generally secured by first mortgages on the property and constituted 27.0% of the Bank's loans at December 31, 2003. Virtually all of the real estate loans originated by HomeFederal Bank are secured by properties located in Indiana, although HomeFederal Bank has authority to make or purchase real estate loans throughout the United States. In addition, HomeFederal Bank makes secured and unsecured consumer related loans (including consumer auto loans, second mortgage, home equity, mobile home, and savings account loans) and commercial loans secured by mortgages on the underlying property. At December 31, 2003, approximately 17.3% of its loans were consumer-related loans and 25.9% of its loans were commercial mortgage and multi-family loans. HomeFederal Bank also makes construction loans, which constituted 14.3% of HomeFederal Bank's loans at December 31, 2003. Finally, HomeFederal Bank makes commercial loans, which constituted 15.0% of its loans at December 31, 2003. Lending Activities Loan Portfolio Data The following two tables set forth the composition of HomeFederal Bank's loan porfolio by loan type and security type as of the dates indicated. The third table represents a reconciliation of gross loans receivable after consideration of undisbursed portions of loans in process, deferred loans, and the allowance for loan losses.
-------------------- ------------------- ----------------------------------------- Dec 31, 2003 Dec 31, 2002 June 30, 2002 June 30, 2001 Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- TYPE OF LOAN (Dollars in Thousands) First mortgage loans: One-to-four family residential loans $ 178,159 27.0% $ 195,255 29.9% $ 214,565 32.6% $ 270,124 38.2% Commercial and multi-family 171,397 25.9% 183,369 28.1% 172,495 26.2% 153,169 21.6% Loans on property under construction 94,431 14.3% 63,017 9.6% 54,639 8.3% 67,789 9.6% Loans on unimproved acreage 3,201 0.5% 2,795 0.4% 4,712 0.7% 5,017 0.7% Second mortgage, home equity 80,044 12.1% 80,274 12.3% 85,819 13.0% 94,140 13.3% Commercial loans 99,085 15.0% 90,063 13.8% 86,435 13.1% 74,687 10.5% Consumer loans 4,221 0.6% 4,681 0.7% 4,535 0.7% 5,864 0.8% Auto loans 23,244 3.5% 25,149 3.8% 25,355 3.9% 25,852 3.6% Mobile home loans 4,365 0.7% 5,834 0.9% 6,625 1.0% 8,308 1.2% Savings accounts loans 2,736 0.4% 3,018 0.5% 3,092 0.5% 3,738 0.5% -------------------- ------------------- ------------------- -------------------- Gross loans receivable $ 660,883 100.0% $ 653,455 100.0% $ 658,272 100.0% $ 708,688 100.0% ==================== =================== =================== ==================== TYPE OF SECURITY Residential: One-to-four family $ 280,942 42.5% $ 293,886 45.0% $ 320,256 48.6% $ 388,770 55.0% Multi-dwelling units 22,034 3.3% 22,767 3.5% 29,640 4.5% 34,008 4.8% Commercial real estate 221,055 33.5% 205,262 31.4% 177,622 27.0% 162,444 22.9% Commercial 99,085 15.0% 90,063 13.8% 86,435 13.1% 74,687 10.5% Mobile home 4,365 0.7% 5,834 0.9% 6,625 1.0% 8,308 1.2% Savings account 2,736 0.4% 3,018 0.5% 3,092 0.5% 3,738 0.5% Auto 23,244 3.5% 25,149 3.8% 25,355 3.9% 25,852 3.6% Other consumer 4,221 0.6% 4,681 0.7% 4,535 0.7% 5,864 0.8% Land acquisition 3,201 0.5% 2,795 0.4% 4,712 0.7% 5,017 0.7% -------------------- ------------------- ------------------- -------------------- Gross loans receivable $ 660,883 100.0% $ 653,455 100.0% $ 658,272 100.0% $ 708,688 100.0% ==================== =================== =================== ==================== LOANS RECEIVABLE-NET Gross loans receivable $ 660,883 104.8% $ 653,455 103.9% $ 658,272 104.2% $ 708,688 105.1% Deduct: Undisbursed portion of loans in process (22,150) -3.5% (16,856) -2.7% (19,498) -3.1% (27,999) -4.2% Deferred net loan fees (555) -0.1% (544) -0.1% (508) -0.1% (447) -0.1% Allowance for loan losses (7,506) -1.2% (7,172) -1.1% (6,451) -1.0% (5,690) -0.8% -------------------- ------------------- ------------------- -------------------- Net loans receivable $ 630,672 100.0% $ 628,883 100.0% $ 631,815 100.0% $ 674,552 100.0% ==================== =================== =================== ====================
TABLE CONTINUES ON FOLLOWING PAGE Lending Activities (Cont'd.)
------------------------------------- June 30, 2000 June 30, 1999 Amount Percent Amount Percent ------ ------- ------ ------- TYPE OF LOAN First mortgage loans: One-to-four family residential loans $ 282,555 41.3% $ 248,846 41.0% Commercial and multi-family 102,974 15.1% 107,908 17.8% Loans on property under construction 89,248 13.0% 65,997 10.9% Loans on unimproved acreage 17,440 2.5% 11,611 1.9% Second mortgage, home equity 85,300 12.5% 68,873 11.3% Commercial loans 60,948 8.9% 56,956 9.4% Consumer loans 9,446 1.4% 9,250 1.5% Auto loans 22,587 3.3% 21,764 3.6% Mobile home loans 9,963 1.5% 12,048 2.0% Savings accounts loans 3,625 0.5% 3,826 0.6% -------------------- ------------------- Gross loans receivable $ 684,086 100.0% $ 607,079 100.0% ==================== =================== TYPE OF SECURITY Residential: One-to-four family $ 409,174 59.9% $ 347,049 57.2% Multi-dwelling units 32,937 4.8% 30,358 5.0% Commercial real estate 117,966 17.2% 114,217 18.8% Commercial 60,948 8.9% 56,956 9.4% Mobile home 9,963 1.5% 12,048 2.0% Savings account 3,625 0.5% 3,826 0.6% Auto 22,587 3.3% 21,764 3.6% Other consumer 9,446 1.4% 9,250 1.5% Land acquisition 17,440 2.5% 11,611 1.9% -------------------- ------------------- Gross loans receivable $ 684,086 100.0% $ 607,079 100.0% ==================== =================== LOANS RECEIVABLE-NET Gross loans receivable $ 684,086 104.9% $ 607,079 103.4% Deduct: Undisbursed portion of loans in process (26,628) -4.1% (15,285) -2.6% Deferred net loan fees (502) -0.1% (527) -0.1% Allowance for loan losses (4,949) -0.8% (4,349) -0.7% -------------------- ------------------- Net loans receivable $ 652,007 100.0% $ 586,918 100.0% ==================== ===================
The following tables summarize the contractual maturities for HomeFederal Bank's loan portfolio (including participations and mortgage-backed certificates) for the fiscal periods indicated and the interest rate sensitivity of loans due after one year:
Balance Maturities in Fiscal Outstanding 2007 2009 At December 31, to to 2003 2004 2005 2006 2008 2013 ---- ---- ---- ---- ---- ---- (In Thousands) Real estate $ 352,757 $ 2,655 $ 773 $ 7,977 $ 24,247 $ 103,513 Mortgage-backed certificates, collateralized mortgage obligations 50,502 53 0 166 1,665 27,909 Construction Loans 94,431 29,113 10,435 0 12,438 17,518 Commercial loans 99,085 46,224 11,875 13,450 12,173 10,944 Other loans 114,610 8,001 7,556 14,221 38,497 26,494 ---------------- -------------- ------------- ------------- ------------ ------------ Total $ 711,385 $ 86,046 $ 30,639 $ 35,814 $ 89,020 $ 186,378 ================ ============== ============= ============= ============ ============
TABLE ABOVE CONTINUES BELOW
2014 2018 to and 2018 thereafter ---- ---------- Real estate $ 56,229 $ 157,363 Mortgage-backed certificates, collateralized mortgage obligations 6,640 14,069 Construction Loans 2,474 22,453 Commercial loans 1,731 2,688 Other loans 10,590 9,251 ----------- ------------- Total $ 77,664 $ 205,824 =========== =============
Interest Rate Sensitivity:
Due After December 31, 2004 --------------------------------------------- Fixed Variable Rate Rate and Balloon ----- ------------- (In Thousands) Real estate $ 43,259 $ 306,843 Mortgage-backed certificates, collateralized mortgage obligations 50,268 181 Construction Loans 4,173 61,145 Commercial loans 16,487 36,374 Other loans 75,555 31,054 -------------- ------------- Total $ 189,742 $ 435,597 ============== =============
Residential Mortgage Loans HomeFederal Bank is authorized to make one-to-four family residential loans without any limitation as to interest rate, amount, or number of interest rate adjustments. Pursuant to federal regulations, if the interest rate is adjustable, the interest rate must be correlated with changes in a readily verifiable index. HomeFederal Bank also makes residential and commercial mortgage loans secured by mid-size multi-family dwelling units and apartment complexes. The residential mortgage loans included in HomeFederal Bank's portfolio are primarily conventional loans. As of December 31, 2003, $202.3 million, or 30.6%, of HomeFederal Bank's total loan portfolio consisted of residential first mortgage loans, $178.2 million, or 27.0%, of which were secured by one- to four-family homes. Many of the residential mortgage loans currently offered by HomeFederal Bank have adjustable rates. These loans generally have interest rates which adjust (up or down) semi-annually or annually, with maximum rates which vary depending upon when the loans are written and contractual floors and ceilings. The adjustment for the majority of these loans is currently based upon the weekly average of the one-year Treasury constant maturity rate. The rates offered on HomeFederal Bank's adjustable-rate and fixed-rate residential mortgage loans are competitive with the rates offered by other financial institutions in its south central Indiana market area. Although HomeFederal Bank's residential mortgage loans are written for amortization terms up to 30 years, due to prepayments and refinancing, its residential mortgage loans in the past have generally remained outstanding for a substantially shorter period of time than the maturity terms of the loan contracts. All of the residential mortgages HomeFederal Bank currently originates include "due on sale" clauses, which give HomeFederal Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. HomeFederal Bank utilizes the due on sale clause as a means of protecting the funds loaned by insuring payoff on sale of the property collateralizing the loan. Under applicable banking policies, HomeFederal Bank must establish loan- to-value ratios consistent with supervisory loan-to-value limits. The supervisory limits are 65% for raw land loans, 75% for land development loans, 80% for construction loans consisting of commercial, multi-family and other non-residential construction, and 85% for improved property. Multi-family construction includes condominiums and cooperatives. A loan-to-value limit has not been established for permanent mortgage or home equity loans on owner-occupied one-to-four family residential property. However, for any such loan with a loan-to-value ratio that exceeds 90% at origination, an institution should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral. The Board of Directors of HomeFederal Bank approved a set of loan-to-value ratios consistent with these supervisory limits. It may be appropriate in individual cases to originate loans with loan-to-value ratios in excess of the FDIC limits based on the support provided by other credit factors. The aggregate amount of all loans in excess of these limits should not exceed 100 percent of total capital. Moreover, loans for all commercial, agricultural, multi-family or other non-one-to-four family residential properties should not exceed 30% of total capital. Commercial Mortgage Loans At December 31, 2003, 37.0% of HomeFederal Bank's total loan portfolio consisted of mortgage loans secured by commercial real estate, of which 10.8% were commercial construction loans. These properties consisted primarily of apartment buildings, office buildings, warehouses, motels, shopping centers, nursing homes, manufacturing plants, and churches located in central or south central Indiana. The commercial mortgage loans are generally adjustable-rate loans, written for terms not exceeding 20 years, and require an 85% loan-to-value ratio. Commitments for these loans in excess of $1.5 million must be approved in advance by HomeFederal Bank's Board of Directors. The largest such loan as of December 31, 2003 had a balance of $5.8 million. At that date, all of HomeFederal Bank's commercial real estate loans consisted of loans secured by real estate located in Indiana. Generally, commercial mortgage loans involve greater risk to HomeFederal Bank than residential loans. Commercial mortgage loans typically involve large loan balances to single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the successful operation of the related project and thus may be subject to adverse conditions in the real estate market or in the general economy. Construction Loans HomeFederal Bank offers conventional short-term construction loans. At December 31, 2003, 14.3% of HomeFederal Bank's total loan portfolio consisted of construction loans. Normally, a 95% or less loan-to-value ratio is required from owner-occupants of residential property, an 80% loan-to-value ratio is required from persons building residential property for sale or investment purposes, and an 80% loan-to-value ratio is required for commercial property. Construction loans are also made to builders and developers for the construction of residential or commercial properties on a to-be-occupied or speculative basis. Construction normally must be completed in six months for residential loans. The largest such loan on December 31, 2003 was $8.8 million. Consumer Loans Consumer-related loans, consisting of second mortgage and home equity loans, mobile home loans, automobile loans, loans secured by savings accounts and consumer loans were $114.6 million on December 31, 2003 or approximately 17.3% of HomeFederal Bank's total loan portfolio. Second mortgage loans are made for terms of 1 - 15 years, and are fixed-rate, fixed term or variable rate line of credit loans. HomeFederal Bank's minimum for such loans is $5,000. HomeFederal Bank will loan up to 90% of the appraised value of the property, less the existing mortgage amount(s). As of December 31, 2003, HomeFederal Bank had $44.5 million of second mortgage loans, which equaled 6.7% of its total loan portfolio. HomeFederal Bank markets home equity credit lines, which are adjustable-rate loans. As of December 31, 2003, HomeFederal Bank had $35.5 million drawn on its home equity loans, or 5.4% of its total loan portfolio, with $72.4 million of additional credit available to its borrowers under existing home equity loans. Automobile loans are generally made for terms of up to five years. The vehicles are required to be for personal or family use only. As of December 31, 2003, $23.2 million, or 3.5%, of HomeFederal Bank's total loan portfolio consisted of automobile loans. As of December 31, 2003, $4.4 million, or 0.7%, of HomeFederal Bank's total loan portfolio consisted of mobile home loans. Generally, these loans are made for terms of one year for each $1,000.00 of the sales price, with a maximum term of 15 years. On new mobile home loans, HomeFederal Bank permits a loan-to-value ratio of up to 125% of the manufacturer's invoice price plus sales tax or up to 90% of the actual sales price, whichever is lower. Also, HomeFederal Bank makes loans for previously occupied mobile homes up to a 90% loan-to-value ratio based upon the actual sales price or value as appraised, whichever is lower. Loans secured by savings account deposits may be made up to 95% of the pledged savings collateral at a rate 2% above the rate of the pledged savings account or a rate equal to HomeFederal Bank's highest seven-year certificate of deposit rate, whichever is higher. The loan rate will be adjusted as the rate for the pledged savings account changes. As of December 31, 2003, $2.7 million, or 0.4%, of HomeFederal Bank's total loan portfolio consisted of savings account loans. Although consumer-related loans generally involve a higher level of risk than one-to-four family residential mortgage loans, their relatively higher yields, lower average balance, and shorter terms to maturity are believed to be helpful in HomeFederal Bank's asset/liability management. Commercial Loans Collateral for HomeFederal Bank's commercial loans includes manufacturing equipment, real estate, inventory, accounts receivable, and securities. Terms of these loans are normally for up to ten years and have adjustable rates tied to the reported prime rate and treasury indexes. Generally, commercial loans are considered to involve a higher degree of risk than residential real estate loans. However, commercial loans generally carry a higher yield and are made for a shorter term than real estate loans. As of December 31, 2003, $99.1 million, or 15.0%, of HomeFederal Bank's total loan portfolio consisted of commercial loans. Origination, Purchase and Sale of Loans HomeFederal Bank originates residential loans in conformity with standard underwriting criteria of the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA") to assure maximum eligibility for possible resale in the secondary market. Although HomeFederal Bank currently has authority to lend anywhere in the United States, it has confined its loan origination activities primarily to the central and south central Indiana area. HomeFederal Bank's loan originations are generated primarily from referrals from real estate brokers, builders, developers and existing customers, newspaper, radio and periodical advertising and walk-in customers. HomeFederal Bank's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. HomeFederal Bank studies the employment, credit history, and information on the historical and projected income and expenses of its individual mortgagors to assess their ability to repay its mortgage loans. Additionally, HomeFederal Bank utilizes Freddie Mac's Loan Prospector and Fannie Mae's Desktop Underwriter as origination, processing, and underwriting tools. It uses staff appraisers or independent appraisers to appraise the property securing its loans. It requires title insurance evidencing HomeFederal Bank's valid lien on its mortgaged real estate and a mortgage survey or survey coverage on all first mortgage loans and on other loans when appropriate. HomeFederal Bank requires fire and extended coverage insurance in amounts at least equal to the value of the insurable improvements or the principal amount of the loan, whichever is lower. It may also require flood insurance to protect the property securing its interest. When private mortgage insurance is required, borrowers must make monthly payments to an escrow account from which HomeFederal Bank makes disbursements for taxes and insurance. Otherwise, such escrow arrangements are optional. The procedure for approval of loans on property under construction is the same as for residential mortgage loans, except that the appraisal obtained evaluates the building plans, construction specifications and estimates of construction costs, in conjunction with the land value. HomeFederal Bank also evaluates the feasibility of the construction project and the experience and track record of the builder or developer. Consumer loans are underwritten on the basis of the borrower's credit history and an analysis of the borrower's income and expenses, ability to repay the loan and the value of the collateral, if any. In order to generate loan fee and servicing income and recycle funds for additional lending activities, HomeFederal Bank seeks to sell loans in the secondary market. Loan sales can enable HomeFederal Bank to recognize significant fee income and to reduce interest rate risk while meeting local market demand. HomeFederal Bank sold $380.5 million of fixed-rate loans in the fiscal year ended December 31, 2003. HomeFederal Bank's current lending policy is to sell fixed-rate residential mortgage loans exceeding 10-year maturities. In addition, when in the opinion of management cash flow demands and asset/liability concerns warrant, HomeFederal Bank will consider keeping fixed-rate loans with 15-year maturities. Typically HomeFederal Bank retains adjustable-rate loans in portfolio. HomeFederal Bank may sell participating interests in commercial real estate loans in order to share the risk with other lenders. Mortgage loans held for sale are carried at lower of cost or market value, determined on an aggregate basis. The servicing is retained on most loan sales except Veteran's Administration ("VA"), Federal Housing Administration ("FHA") and Indiana Housing Finance Authority ("IHFA") loans. When loans are sold, HomeFederal Bank typically retains the responsibility for collecting and remitting loan payments, inspecting the properties securing the loans, making certain that monthly principal and interest payments and escrow payments are made on behalf of borrowers, and otherwise servicing the loans. HomeFederal Bank receives a servicing fee for performing these services. The amount of fees received by HomeFederal Bank varies, but is generally calculated as an amount equal to 25 basis points per annum on the outstanding principal amount of the loans serviced. The servicing fee is recognized as income over the life of the loans. At December 31, 2003, HomeFederal Bank serviced $611.6 million of loans sold to other parties. Gains and losses on sale of loans, loan participations and mortgage-backed securities are recognized at the time of sale. Management believes that purchases of loans and loan participations may be desirable and evaluates potential purchases as opportunities arise. Such purchases can enable HomeFederal Bank to take advantage of favorable lending markets in other parts of the state, diversify its portfolio and limit origination expenses. Any participation it acquires in commercial real estate loans requires a review of financial information on the borrower, a review of the appraisal on the property by a local designated appraiser, an inspection of the property by a senior loan officer, and a financial analysis of the loan. The seller generally does servicing of loans purchased. At December 31, 2003, others serviced approximately 4.0% or $26.4 million, of HomeFederal Bank's gross loan portfolio. The following table shows loan activity for HomeFederal Bank during the periods indicated:
Dec 31, 2003 Dec. 31, 2002 June 30, 2002 June 30, 2001 ------------ ------------- ------------- ------------- (Dollars in Thousands) Gross loans receivable at beginning of period $ 653,455 $ 658,272 $ 708,688 $ 684,086 ------------- -------------- -------------- -------------- Loans Originated: Mortgage loans and contracts: Construction loans: Residential 28,253 16,254 28,970 38,838 Commercial 33,643 20,627 29,468 48,752 Permanent loans: Residential 60,225 35,142 124,902 138,016 Commercial 18,721 17,506 32,874 29,723 Refinancing 333,727 205,771 202,000 83,017 Other 1,227 262 1,321 1,515 ------------- -------------- -------------- -------------- Total 475,796 295,562 419,535 339,861 Commercial 65,823 29,321 50,382 50,060 Consumer 24,200 13,610 28,598 37,155 ------------- -------------- -------------- -------------- Total loans originated 565,819 338,493 498,515 427,076 Loans purchased: Residential - - - 441 Other 10,605 7,384 4,271 8,694 ------------- -------------- -------------- -------------- Total loans originated and purchased 576,424 345,877 502,786 436,211 Real estate loans sold 381,764 208,264 260,022 132,517 Loan repayments and other deductions 187,232 142,430 293,180 279,092 ------------- -------------- -------------- -------------- Total loans sold, loan repayments and other deductions 568,996 350,694 553,202 411,609 Net loan activity 7,428 (4,817) (50,416) 24,602 ------------- -------------- -------------- -------------- Gross loans receivable at end of period 660,883 653,455 658,272 708,688 Adjustments (30,211) (24,572) (26,457) (34,136) ------------- -------------- -------------- -------------- Net loans receivable at end of period $ 630,672 $ 628,883 $ 631,815 $ 674,552 ============= ============== ============== ==============
A commercial bank generally may not make any loan to a borrower or its related entities if the total of all such loans by the commercial bank exceeds 15% of its capital (plus up to an additional 10% of capital in the case of loans fully collateralized by readily marketable collateral). The maximum amount that HomeFederal Bank could have loaned to one borrower and the borrower's related entities at December 31, 2003, under the 15% of capital limitation was $14.5 million. At that date, the highest outstanding balance of loans by HomeFederal Bank to one borrower and related entities was approximately $12.3 million, an amount within such loans-to-one borrower limitations. Origination and Other Fees HomeFederal Bank realizes income from loan related fees for originating loans, collecting late charges and fees for other miscellaneous loan services. HomeFederal Bank charges origination fees that range from 0% to 1.0% of the loan amount. HomeFederal Bank also charges processing fees of $150 to $225, underwriting fees from $0 to $150 and a $50 fee for any loan closed by HomeFederal Bank personnel. In addition, HomeFederal Bank makes discount points available to customers for the purpose of buying the rate down. The points vary from loan to loan and are quoted on an individual basis. In accordance with Financial Accounting Standards Board Statement No. 91, Accounting for Non Refundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, the Bank amortizes costs and fees associated with originating a loan, over the life of the loan as an adjustment to the yield earned on the loan. Late charges are assessed fifteen days after payment is due. Non-performing Assets HomeFederal Bank assesses late charges on mortgage loans if a payment is not received by the 15th day following its due date. Any borrower whose payment was not received by this time is mailed a past due notice. At the same time the notice is mailed, the delinquent account is downloaded to a PC- based collection system and assigned to a specific loan service representative. The loan service representative will attempt to make contact with the customer via a phone call to resolve any problem that might exist. If contact by phone is not possible, mail, in the form of preapproved form letters, will be used commencing on the 25th day following a specific due date. Between the 30th and 45th day following any due date, or at the time a second payment has become due, if no contact has been made with the customer, a personal visit will be conducted by a Loan Service Department employee to interview the customer and inspect the property to determine the borrower's ability to repay the loan. Prompt follow up is a goal of the Loan Service Department with any and all delinquencies. When an advanced stage of delinquency appears (generally around the 60th day of delinquency) and if repayment cannot be expected within a reasonable amount of time, HomeFederal Bank will make a determination of how to proceed to protect the interests of both the customer and HomeFederal Bank. It may be necessary for the borrower to attempt to sell the property at HomeFederal Bank's request. If a resolution cannot be arranged, HomeFederal Bank will consider avenues necessary to obtain title to the property which include foreclosure and/or accepting a deed-in-lieu of foreclosure, whichever may be most appropriate. However, HomeFederal Bank attempts to avoid taking title to the property if at all possible. HomeFederal Bank has acquired certain real estate in lieu of foreclosure by acquiring title to the real estate and then reselling it. HomeFederal Bank performs an updated title check of the property and, if needed, an appraisal on the property before accepting such deeds. On December 31, 2003, HomeFederal Bank held $1.7 million of real estate and other repossessed collateral acquired as a result of foreclosure, voluntary deed, or other means. Such assets are classified as "real estate owned" until sold. When property is so acquired, it is recorded at the lower of cost or fair market value less estimated cost to sell at the date of acquisition, and any subsequent write down resulting from this is charged to the allowance for losses on real estate owned. Interest accrual ceases on the date of acquisition. All costs incurred from the acquisition date in maintaining the property are expensed. Consumer loan borrowers who fail to make payments are contacted promptly by the loan service department in an effort to cure any delinquency. A notice of delinquency is sent 10 days after any specific due date when no payment has been received. The delinquent account is downloaded to a PC-based collection system and assigned to a specific loan service representative. The loan service representative will then attempt to contact the borrower via a phone call. Continued follow-up in the form of phone calls, letters, and personal visits (when necessary) will be conducted to resolve delinquency. If a consumer loan delinquency continues and advances to the 60-90 days past due status, a determination will be made by HomeFederal Bank on how to proceed. When a consumer loan reaches 90 days past due HomeFederal Bank determines the loan-to-value ratio by performing an inspection of the collateral (if any). HomeFederal Bank may initiate action to obtain the collateral, (if any) or collect the debt through available legal remedies. Collateral obtained as a result of loan default is retained by HomeFederal Bank as an asset until sold or otherwise disposed. The table below sets forth the amounts and categories of HomeFederal Bank's non-performing assets (non-accrual loans, loans past due 90 days or more, real estate owned and other repossessed assets) for the last five years. It is the policy of HomeFederal Bank that all earned but uncollected interest on conventional loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible, for any portion that is due but uncollected for a period in excess of 90 days. The determination is based upon factors such as the amount outstanding of the loan as a percentage of the appraised value of the property and the delinquency record of the borrower.
Non-performing Assets: Dec 31, 2003 Dec 31, 2002 June 30, 2002 June 30, 2001 June 30, 2000 June 30, 1999 -------------- -------------- -------------- -------------- -------------- -------------- Loans: Non-accrual $ 2,499 $ 3,264 $ 2,281 $ 6,351 $ 2,422 $ 3,509 Past due 90 days or more and still accuring 1,130 1,166 1,110 - - - Restructured loans 258 316 374 879 632 61 --------------- ------------------------------ ---------------------------------------------- Total non-performing loans 3,887 4,746 3,765 7,230 3,054 3,570 Real estate owned, net (1) 1,729 1,416 2,168 1,238 1,210 1,936 Other repossessed assets, net 10 56 71 60 25 114 --------------- ------------------------------ ---------------------------------------------- Total non-performing assets(2) $ 5,626 $ 6,218 $ 6,004 $ 8,528 $ 4,289 $ 5,620 =============== ============================== ============================================== Total non-performing assets to total assets .66% .70% .70% .99% .52% .75% Loans with allowance for uncollected interest $ 2,521 $ 3,343 $ 2,295 $ 6,440 $ 2,422 $ 3,509
(1) Refers to real estate acquired by HomeFederal Bank through foreclosure, voluntary deed, or insubstance foreclosure, net of reserve. (2) At December 31, 2003, 34.8% of HomeFederal Bank's non-performing assets consisted of residential mortgage loans, 10.5% consisted of home equities/second mortgages, 4.4% consisted of commercial real estate loans, 11.6% consisted of commercial loans, 3.2% consisted of consumer-related loans, 4.6% consisted of restructured loans, 21.1% consisted of residential real estate owned, 9.6% consisted of commercial real estate owned and .2% consisted of other repossessed assets. For the year ended December 31, 2003, the income that would have been recorded under original terms on the above non-accrual and restructured loans was $461,000 compared to actual income recorded of $253,000. At December 31, 2003, HomeFederal Bank had approximately $7.3 million in loans that were 30-89 days past due. Investments HomeFederal Bank's investment portfolio consists primarily of mortgage-backed securities, collateralized mortgage obligations, overnight funds with the FHLB of Indianapolis, U.S. Treasury obligations, U.S. Government agency obligations, corporate debt and municipal bonds. At December 31, 2003, December 31, 2002, June 30, 2002 and 2001, HomeFederal Bank had approximately $136.9 million, $143.8 million, $138.0 million, and $97.2 million in investments, respectively. HomeFederal Bank's investment portfolio is managed by its officers in accordance with an investment policy approved by the Board of Directors. The Board reviews all transactions and activities in the investment portfolio on a quarterly basis. HomeFederal Bank does not purchase corporate debt securities which are not rated in one of the top four investment grade categories by one of several generally recognized independent rating agencies. HomeFederal Bank's investment strategy has enabled it to (i) shorten the average term to maturity of its assets, (ii) improve the yield on its investments, (iii) meet federal liquidity requirements and (iv) maintain liquidity at a level that assures the availability of adequate funds. Effective March 31, 2002, HomeFederal Bank transferred the management of approximately $90 million in securities to its wholly owned subsidiary, Home Investments, Inc. Home Investments, Inc., a Nevada corporation, holds, services, manages, and invests that portion of the Bank's investment portfolio as may be transferred from time to time by the Bank to Home Investments, Inc. Home Investments Inc's investment policy mirrors that of the Bank. At December 31, 2003 of the $136.9 million in consolidated investments owned by HomeFederal Bank, $103.7 million was held by Home Investments, Inc. Source Of Funds General Deposits have traditionally been the primary source of funds of HomeFederal Bank for use in lending and investment activities. In addition to deposits, HomeFederal Bank derives funds from loan amortization, prepayments, borrowings from the FHLB of Indianapolis and income on earning assets. While loan amortization and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, money market conditions and levels of competition. Borrowings may be used to compensate for reductions in deposits or deposit inflows at less than projected levels and may be used on a longer-term basis to support expanded activities. See "-- Borrowings." Deposits Consumer and commercial deposits are attracted principally from within HomeFederal Bank's primary market area through the offering of a broad selection of deposit instruments including checking accounts, fixed-rate certificates of deposit, NOW accounts, individual retirement accounts, savings accounts and commercial demand deposit accounts. HomeFederal Bank does not actively solicit or advertise for deposits outside of the counties in which its branches are located, with the exception of brokered deposits. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. To attract funds, HomeFederal Bank may pay higher rates on larger balances within the same maturity class. Under regulations adopted by the FDIC, well-capitalized insured depository institutions (those with a ratio of total capital to risk-weighted assets of not less than 10%, with a ratio of core capital to risk-weighted assets of not less than 6%, with a ratio of core capital to total assets of not less than 5% and which have not been notified that they are in troubled condition) may accept brokered deposits without limitations. Undercapitalized institutions (those that fail to meet minimum regulatory capital requirements) are prohibited from accepting brokered deposits. Adequately capitalized institutions (those that are neither well-capitalized nor undercapitalized) are prohibited from accepting brokered deposits unless they first obtain a waiver from the FDIC. Under these standards, HomeFederal Bank would be deemed a well-capitalized institution. At December 31, 2003 HomeFederal had $33.4 million in brokered deposits. An undercapitalized institution may not solicit deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits (i) in such institution's normal market areas or (ii) in the market area in which such deposits would otherwise be accepted. HomeFederal Bank on a periodic basis establishes interest rates paid, maturity terms, service fees and withdrawal penalties. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals, federal regulations, and market area of solicitation. The following table sets forth by nominal interest rate categories the composition of deposits of HomeFederal Bank at the dates indicated:
Dec 31, 2003 Dec 31, 2002 June 30, 2002 June 30, 2001 ------------ ------------ ------------- ------------- (Dollars in Thousands) Non-interest bearing and below 1.99% $ 375,815 $ 325,605 $ 292,155 $ 95,143 2.00% - 2.99% 47,912 72,379 60,575 43,853 3.00% - 3.99% 59,853 71,880 58,294 136,431 4.00% - 4.99% 55,147 74,978 64,302 73,376 5.00% - 5.99% 42,250 53,695 53,631 67,285 Over 6.00% 7,938 10,821 48,521 160,455 ------------------ ------------------ ------------------ ------------------- Total $ 588,915 $ 609,358 $ 577,480 $ 576,543 ================== ================== ================== ===================
The following table sets forth the change in dollar amount of deposits in the various accounts offered by HomeFederal Bank for the periods indicated.
DEPOSIT ACTIVITY (Dollars in Thousands) Balance Balance Balance at at at Dec 31, % of Increase Dec 31, % of Increase June 30, % of 2003 Deposits (Decrease) 2002 Deposits (Decrease) 2002 Deposits ---- -------- ---------- ---- -------- ---------- ---- -------- Withdrawable: Non-interest bearing $ 55,535 9.4% $ 3,815 $ 51,720 8.5% $ 1,836 $ 49,884 8.6% Statement savings 50,269 8.5% 2,460 47,809 7.8% (573) 48,382 8.4% Money market savings 112,797 19.2% (8,147) 120,944 19.9% (1,034) 121,978 21.1% NOW 67,533 11.5% (6,157) 73,690 12.1% 6,328 67,362 11.7% ----------------------- ------------- ---------------------- ------------ ---------------------- Total Withdrawable 286,134 48.6% (8,029) 294,163 48.3% 6,557 287,606 49.8% ----------------------- ------------- ---------------------- ------------ ---------------------- Certificates: Less than one year 51,516 8.7% 6,477 45,039 7.4% 17,864 27,175 4.7% 12 to 23 months 38,270 6.5% (10,650) 48,920 8.0% (10,039) 58,959 10.2% 24 to 35 months 96,665 16.4% (11,404) 108,069 17.7% 661 107,408 18.6% 36 to 59 months 30,655 5.2% (13,110) 43,765 7.2% 16,206 27,559 4.8% 60 to 120 months 85,675 14.6% 16,273 69,402 11.4% 629 68,773 11.9% ----------------------- ------------- ---------------------- ------------ ---------------------- Total certificate accounts 302,781 51.4% (12,414) 315,195 51.7% 25,321 289,874 50.2% ----------------------- ------------- ---------------------- ------------ ---------------------- Total deposits $ 588,915 100.0% $ (20,443)$ 609,358 100.0% $ 31,878 $ 577,480 100.0% ======================= ============= ====================== ============ ======================
TABLE ABOVE CONTINUES BELOW
Balance at Increase June 30, % of Increase Decrease) 2001 Deposits (Decrease) --------- ---- -------- ---------- Withdrawable: Non-interest bearing $ 8,561 $ 41,323 7.2% $ 1,828 Statement savings 5,129 43,253 7.5% (1,530) Money market savings (9,536) 131,514 22.9% 23,084 NOW 13,543 53,819 9.3% (108) ------------- ----------------------- ------------- Total Withdrawable 17,697 269,909 46.8% 23,274 ------------- ----------------------- ------------- Certificates: Less than one year (13,453) 40,628 7.0% (16,515) 12 to 23 months (65,886) 124,845 21.7% (1,457) 24 to 35 months 13,201 94,207 16.3% (387) 36 to 59 months 15,650 11,909 2.1% 1,701 60 to 120 months 33,728 35,045 6.1% (2,966) ------------- ----------------------- ------------- Total certificate accounts (16,760) 306,634 53.2% (19,624) ------------- ----------------------- ------------- Total deposits $ 937 $ 576,543 100.0% $ 3,650 ============= ======================= =============
The following table represents, by various interest rate categories, the amounts of deposits maturing during each of the three years following December 31, 2003, and the percentage of such maturities to total deposits. Matured certificates which have not been renewed as of December 31, 2003 have been allocated based upon certain rollover assumptions.
DEPOSIT MATURITIES (Dollars in Thousands) 1.99% 2.00% 3.00% 4.00% 5.00% or to to to to Over Percent of less 2.99% 3.99% 4.99% 5.99% 6.00% Total Total ---- ----- ----- ----- ----- ----- ----- ----- Certificate accounts maturing in the twelve-month period ending: December 31, 2004 $74,060 $ 24,596 $ 49,152 $ 9,710 $ 4,326 $ 2,033 $ 163,877 54.1% December 31, 2005 14,502 21,096 1,509 9,511 4,081 4,023 54,722 18.1% December 31, 2006 1,119 1,607 1,620 9,913 7,501 471 22,231 7.3% Thereafter - 613 7,572 26,013 26,342 1,411 61,951 20.5% -------------------------------------------------------------------------------------------- Total $89,681 $ 47,912 $ 59,853 $55,147 $42,250 $ 7,938 $ 302,781 100.0% ============================================================================================
Included in the deposit totals in the above table are savings certificates of deposit with balances exceeding $100,000. The majority of these deposits are from regular customers of HomeFederal Bank, excluding $33.4 million, which were from brokered deposits. The following table provides a maturity breakdown at December 31, 2003, of certificates of deposits with balances greater than $100,000, by various interest rate categories.
ACCOUNTS GREATER THAN $100,000 (Dollars in Thousands) 1.99% 2.00% 3.00% 4.00% 5.00% or to to to to Over ercent of less 2.99% 3.99% 4.99% 5.99% 6.00% Total Total ---- ----- ----- ----- ----- ----- ----- ----- Certificate accounts maturing in the twelve-month period ending: December 31, 2004 $29,065 $ 7,304 $ 9,536 $ 5,952 $ 1,099 $ 1,066 $ 54,022 52.8% December 31, 2005 526 3,582 100 6,171 432 2,555 13,366 13.0% December 31, 2006 - 473 - 1,320 1,692 100 3,585 3.5% Thereafter - 127 1,535 15,291 13,787 698 31,438 30.7% --------------------------------------------------------------------------------- Total $29,591 $11,486 $11,171 $28,734 $17,010 $ 4,419 $102,411 100.0% ====================================================================================
Borrowings HomeFederal Bank relies upon advances (borrowings) from the FHLB of Indianapolis to supplement its supply of lendable funds, meet deposit withdrawal requirements and to extend the term of its liabilities. This facility has historically been HomeFederal Bank's major source of borrowings. Advances from the FHLB of Indianapolis are typically secured by HomeFederal Bank's stock in the FHLB of Indianapolis and a portion of HomeFederal Bank's mortgage loans. Each FHLB credit program has its own interest rate, which may be fixed or variable, and a range of maturities. Subject to the express limits in FIRREA, the FHLB of Indianapolis may prescribe the acceptable uses to which these advances may be put, as well as limitations on the size of the advances and repayment provisions. At December 31, 2003, HomeFederal Bank had advances totaling $154.3 million outstanding from the FHLB of Indianapolis. The Company has a revolving note with LaSalle Bank N.A. whereby the Company may borrow $17.5 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. The ninety-day LIBOR index was 1.15% at December 31, 2003. Interest payments are due ninety days after the date of any principal draws made on the loan and every ninety days thereafter. Maturities of senior debt based on minimum scheduled payments as of December 31, 2003 are: 2004 - $4.6 million and 2006 - $7.6 million. The Company used the funds to buy back shares of the Company's common stock. The assets of the Company collateralize the note. 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 December 31, 2003, the Company was in compliance with the debt covenants. As of December 31, 2003, the company has two swap agreements with LaSalle Bank N.A. In the first agreement the Company will make fixed rate payments at 5.6% and receive variable rate payments at the three-month LIBOR on a notional amount of $4.6 million. The maturity date of the first swap agreement is May 1, 2004. In the second agreement the Company will make fixed rate payments at 5.77% and receive variable rate payments at the three-month LIBOR on a notional amount of $4.6 million. The maturity date of the second swap agreement is February 1, 2006. The two interest rate swaps are settled on a net basis. The Company is exposed to credit loss, in the event of nonperformance by LaSalle Bank N.A., for the net interest rate differential when floating rates exceed the fixed maximum rate. However, the Company does not anticipate nonperformance by the counter party. Other than the FHLB advances and the Senior Debt, HomeFederal Bank's only borrowings in recent years have been short-term borrowings. The following table sets forth the maximum amount of each category of short-term borrowings (borrowings with remaining maturities of one year or less) outstanding at any month-end during the periods shown and the average aggregate balances of short-term borrowings for such periods.
Twelve Six Months Months Ended Ended Year Ended ------------------ ------------------ ---------------------------------------- (Dollars in Thousands) Dec 31, 2003 Dec 31, 2002 June 30, 2002 June 30, 2001 ------------------ ------------------ ---------------------------------------- Official check overnight remittance $ 6,419 $ 4,727 $ 9,248 $ 4,961 FHLB advances $37,200 $ 1,400 $ 46,400 $ 73,500 Money Order remittance $ - $ - $ 42 $ 53 FHLB overnight remittance $ 2,043 $ - $ - $ 2,875 Average amount of total short-term borrowings outstanding $31,491 $30,946 $ 40,385 $ 57,222
The following table sets forth the amount of short term FHLB advances outstanding at period end during the period shown and the weighted average rate of such FHLB advances.
(Dollars in Thousands) Dec 31, 2003 Dec 31, 2002 June 30, 2002 June 30, 2001 ---------------- ----------------- ------------------------------------ FHLB advances: Amount $ 37,200 $ 30,900 $ 30,600 $ 39,900 Weighted average rate 5.4% 6.0% 6.4% 5.8%
Service Corporation Subsidiaries On December 31, 2001 HomeFederal Bank changed its charter from a Federal savings bank charter to an Indiana commercial bank charter. Commercial banks are not permitted to participate in real estate development joint ventures. One of HomeFederal Bank's subsidiaries, Home Savings Corporation ("HSC"), is a partner in five real estate development joint ventures for which exit strategies are either developed, or are currently being developed. HFB is currently mandated to divest itself of these activities by December 31, 2004, with two one-year extensions available, subject to regulatory approval. HSC, an Indiana corporation, is currently engaged in two types of activities: (i) real estate development and (ii) full-service securities brokerage services. With the exception of its securities brokerage services, all of HSC's activities are conducted through joint ventures in which it is an equity investor. At December 31, 2003, HomeFederal Bank's aggregate investment in HSC, including loans, was $5.5 million. For the year ended December 31, 2003, HSC reported pretax income of $668,000 from these operations. HSC's office is located at 501 Washington Street, Columbus, Indiana. The consolidated statements of operations of HomeFederal Bank and its subsidiaries included elsewhere herein includes the operations of HSC. Intercompany balances and transactions have been eliminated in the consolidation. The following table sets forth certain information regarding each of the joint ventures in which HSC was involved at December 31, 2003.
Date HSC Loans from Home Entered Savings Corp. into the Equity Outstanding Name Type of Project Project Investment December 31, 2003 - ---- --------------- -------- ---------- ----------------- Heritage Woods II Rental Apartment project of low income 11/15/89 $ 46,000 $ - housing (22 units) Broadmoor North Real estate development 12/15/99 $ 1,227,000 $ 1,168,000 /Heathfield in Columbus, Indiana McCulloughs Run Real estate development 7/1/94 $ 1,600,000 $ 1,707,000 in Columbus, Indiana Bloomington Technology Industrial park in Bloomington, Indiana 11/10/97 $ 273,000 $ - Park, LLC Courtyard Homes at Single family homes in Indianapolis, 6/14/99 $ 1,581,000 $ 1,299,000 Sycamore Springs, LLC Indiana
HSC markets Raymond James Financial full-service securities brokerage services. For the year ended December 31, 2003, HSC received $813,000 in commissions from its Raymond James Financial activities. In November 1989, HSC invested $184,000 as a limited partner in Heritage Woods II, a low income housing project in Columbus, Indiana. HSC received low-income housing tax credits for 10 years from this project and must maintain the investment for 15 years to avoid any tax credit recapture. On December 15, 1999, HSC entered into a joint venture agreement with Breeden Investment Group, Inc. to develop a 100 lot residential real estate subdivision ("Broadmoor North/Heathfield"). Broadmoor North/Heathfield is located on the north central side of Columbus, Indiana. Loan documents were executed on December 23, 1999 for land acquisition and development of phases I and II in an amount not to exceed $2.2 million. In addition to interest on the loan, HSC will receive 35% of the profits after all interest, development and sales costs. On July 1, 1994, HSC entered into a joint venture agreement with Breeden Investment Group, Inc. to develop a 320 lot starter home subdivision with additional multi-family and commercial land ("McCullough's Run"). McCullough's Run is located on the east side of Columbus, Indiana. Loan documents were executed on July 1, 1994 for land acquisition and development of phases I and II. Subsequent closings have encompassed the balance of six phases and on March 6, 2000 loan documents were executed in an amount not to exceed $2.1 million. The outstanding loan balance of $1.7 million as of December 31, 2003, reflects the development costs to date of all six phases, the condominium site and commercial acreage. HSC is entitled to 50% of the profit from sale of lots within McCullough's Run. On November 29, 1997, HSC entered into an LLC agreement with Curtis Enterprises, Inc., and Gary B. Warstler to build up to eighty-five single family homes at Crystal Lake at River Ridge in northern Indianapolis, Indiana. On May 1, 2000, the LLC agreement was amended when Mr. Warstler desired to withdraw from the LLC and assign his percentage share in the LLC equally between the two remaining members. The LLC purchases finished lots from RN Thompson Development Corporation. HSC has provided a line of credit in the amount of $3 million to build the homes. HSC is entitled to one third of the profits from homes started before Mr. Warstler withdrew and 50% of the profits from homes started after Mr. Warstler withdrew. An agreement was signed on August 13, 2001, with RN Thompson Development Corporation to buy back the ten undeveloped lots owned by the LLC. The final lots were repurchased in June of 2003. On November 10, 1997 HSC entered into an LLC agreement with Wininger-Stolberg HC, II, Inc. to develop the Bloomington Technology Park in Bloomington, IN. The City of Bloomington and Monroe County are providing an $800,000 grant to build infrastructure. HSC provided a matching amount, which has been repaid along with a fee of $150,000. The eighty-two acre site was purchased from Otis Elevator Company, Inc. and work started late spring, 1998. HSC is entitled to 50% of all profit from the sale of lots in Bloomington Technology Park. On June 14, 1999, HSC entered into an LLC agreement with Curtis Enterprises, Inc. to build 54 homes at Courtyard Homes at Sycamore Springs, a planned community in Indianapolis, Indiana. The LLC purchased the land and will develop lots and build the homes. HSC has provided a line of credit in the amount of $2 million to build the homes, and is entitled to one third of the profits from the home sales. In addition to the joint ventures that HSC participates in, the Company has another joint venture which is not a real estate development joint venture. HomeFederal Bank organized another service corporation subsidiary under Indiana law, HomeFed Financial Corp, ("HFF"). As a result of HomeFederal Bank's charter conversion to a state commercial bank, HomeFederal Bank's subsidiary, HSC, was required to divest itself of its ownership interest in Consortium Partners. On December 31, 2001, Home Federal Bancorp purchased HFF from HomeFederal Bank. On the same date, HFF purchased the investment in Consortium Partners from HSC. HFF has a 14% interest in Consortium Partners, a Louisiana partnership, which owns 50% of the outstanding shares of the Family Financial Life Insurance Company of New Orleans ("Family Financial"). The remaining 50% of the outstanding shares of Family Financial is owned proportionately by the partners of Consortium Partners. Family Financial administers programs for debt protection services, life, accident, and health insurance as well as annuity products to the customers of the partners' parent-thrifts and banks. HFF receives (1) dividends paid on Family Financial shares owned directly by it, (2) a pro rata allocation of dividends received on shares held by Consortium Partners, which are divided among the partners based on the actuarially determined value of Family Financial's various lines of insurance generated by customers of these partners, and (3) commissions on sales of insurance products made to customers. For the year ended December 31, 2003, HomeFederal Bank had income of $316,000, on a consolidated basis, from commissions and dividends paid on Family Financial activities. HomeFederal Bank also organized a subsidiary under Nevada law, Home Investments, Inc., ("HII"). Effective March 31, 2002, HomeFederal Bank transferred the management of approximately $90 million in securities to HII. Home Investments, Inc. holds, services, manages, and invests that portion of the Bank's investment portfolio as may be transferred from time to time by the Bank to HII. Home Investments Inc.'s, investment policy mirrors that of the Bank. At December 31, 2003, of the $136.9 million in consolidated investments owned by HomeFederal Bank, $103.7 million was held by Home Investments, Inc. Employees As of December 31, 2003, the Company employed 280 persons on a full-time basis and 13 persons on a part-time basis. None of the Company's employees are represented by a collective bargaining group. Management considers its employee relations to be excellent. Competition HomeFederal Bank operates in south central Indiana and makes almost all of its loans to, and accepts almost all of its deposits from, residents of Bartholomew, Jackson, Jefferson, Jennings, Johnson, Scott, Ripley, Washington, Decatur, Monroe and Marion counties in Indiana. HomeFederal Bank is subject to competition from various financial institutions, including state and national banks, state and federal thrift associations, credit unions and other companies or firms, including brokerage houses, that provide similar services in the areas of HomeFederal Bank's home and branch offices. Also, in Seymour, Columbus, North Vernon, Batesville, and the Greenwood area, HomeFederal Bank must compete with banks and savings institutions in Indianapolis. To a lesser extent, HomeFederal Bank competes with financial and other institutions in the market areas surrounding Cincinnati, Ohio and Louisville, Kentucky. HomeFederal Bank also competes with money market funds that currently are not subject to reserve requirements, and with insurance companies with respect to its Individual Retirement and annuity accounts. Under current law, bank holding companies may acquire thrifts. Thrifts may also acquire banks under federal law. Affiliations between banks and thrifts based in Indiana have increased the competition faced by HomeFederal Bank and the Company. See "Acquisitions or Dispositions and Branching." The Gramm-Leach-Bliley Act allows insurers and other financial service companies to acquire banks; removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. These provisions in the Act may increase the level of competition HomeFederal Bank faces from securities firms and insurance companies. The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors that are not readily predictable. REGULATION Both the Company and HomeFederal operate in highly regulated environments and are subject to supervision, examination and regulation by several governmental regulatory agencies, including the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Federal Deposit Insurance Corporation (the "FDIC"), and the Indiana Department of Financial Institutions (the "DFI"). The laws and regulations established by these agencies are generally intended to protect depositors, not shareholders. Changes in applicable laws, regulations, governmental policies, income tax laws and accounting principles may have a material effect on the Company's business and prospects. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Home Federal Bancorp The Bank Holding Company Act. Because the Company owns all of the outstanding capital stock of HomeFederal, it is registered as a bank holding company under the federal Bank Holding Company Act of 1956 and is subject to periodic examination by the Federal Reserve and required to file periodic reports of its operations and any additional information that the Federal Reserve may require. Investments, Control, and Activities. With some limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before acquiring another bank holding company or acquiring more than 5% of the voting shares of a bank (unless it already owns or controls the majority of such shares). Bank holding companies are prohibited, with certain limited exceptions, from engaging in activities other than those of banking or of managing or controlling banks. They are also prohibited from acquiring or retaining direct or indirect ownership or control of voting shares or assets of any company which is not a bank or bank holding company, other than subsidiary companies furnishing services to or performing services for their subsidiaries, and other subsidiaries engaged in activities which the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be incidental to these operations. The Bank Holding Company Act does not place territorial restrictions on such nonbank activities. Effective March 11, 2000, the Gramm-Leach Bliley Act of 1999, which was signed into law on November 12, 1999, allows a bank holding company to qualify as a "financial holding company" and, as a result, be permitted to engage in a broader range of activities that are "financial in nature" and in activities that are determined to be incidental or complementary to activities that are financial in nature. The Gramm-Leach-Bliley Act amends the Bank Holding Company Act of 1956 to include a list of activities that are financial in nature, and the list includes activities such as underwriting, dealing in and making a market in securities, insurance underwriting and agency activities and merchant banking. The Federal Reserve is authorized to determine other activities that are financial in nature or incidental or complementary to such activities. The Gramm-Leach-Bliley Act also authorizes banks to engage through financial subsidiaries in certain of the activities permitted for financial holding companies. In order for a bank holding company to engage in the broader range of activities that are permitted by the Gramm-Leach-Bliley Act (1) all of its depository institutions must be well capitalized and well managed and (2) it must file a declaration with the Federal Reserve that it elects to be a "financial holding company." In addition, to commence any new activity permitted by the Gramm-Leach-Bliley Act, each insured depository institution of the financial holding company must have received at least a "satisfactory" rating in its most recent examination under the Community Reinvestment Act. The Company has elected to be a financial holding company. Dividends. The Federal Reserve's policy is that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Source of Strength. In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to HomeFederal and to commit resources to support HomeFederal in circumstances in which the Company might not otherwise do so. HomeFederal Bank General Regulatory Supervision. HomeFederal as an Indiana commercial bank and a member of the Federal Reserve System is subject to examination by the DFI and the Federal Reserve. The DFI and the Federal Reserve regulate or monitor virtually all areas of HomeFederal's operations. HomeFederal must undergo regular on-site examinations by the Federal Reserve and DFI and must submit periodic reports to the Federal Reserve and the DFI. Lending Limits. Under Indiana law, HomeFederal may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. At December 31, 2003, HomeFederal did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits. Deposit Insurance. Deposits in HomeFederal are insured by the Savings Association Insurance Fund of the FDIC up to a maximum amount, which is generally $100,000 per depositor subject to aggregation rules. HomeFederal is subject to deposit insurance assessments by the FDIC pursuant to its regulations establishing a risk-related deposit insurance assessment system, based upon the institution's capital levels and risk profile. HomeFederal is also subject to assessment for the Financing Corporation (FICO) to service the interest on its bond obligations. The amount assessed on individual institutions, including HomeFederal, by FICO is in addition to the amount paid for deposit insurance according to the risk-related assessment rate schedule. HomeFederal paid deposit insurance assessments of $95,000 during the year ended December 31, 2003. Future increases in deposit insurance premiums or changes in risk classification would increase HomeFederal's deposit related costs. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe and unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Transactions with Affiliates and Insiders. HomeFederal is subject to limitations on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. Compliance is also required with certain provisions designed to avoid the acquisition of low quality assets. HomeFederal is also prohibited from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. Extensions of credit by HomeFederal to its executive officers, directors, certain principal shareholders, and their related interests must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and not involve more than the normal risk of repayment or present other unfavorable features. Dividends. Under Indiana law, HomeFederal is prohibited from paying dividends in an amount greater than its undivided profits, or if the payment of dividends would impair HomeFederal's capital. Moreover, HomeFederal is required to obtain the approval of the DFI and the Federal Reserve for the payment of any dividend if the aggregate amount of all dividends paid by HomeFederal during any calendar year, including the proposed dividend, would exceed the sum of HomeFederal's retained net income for the year to date combined with its retained net income for the previous two years. For this purpose, "retained net income" means the net income of a specified period, calculated under the consolidated report of income instructions, less the total amount of all dividends declared for the specified period. Federal law generally prohibits HomeFederal from paying a dividend to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. Branching and Acquisitions. Branching by HomeFederal requires the approval of the Federal Reserve and the DFI. Under current law, Indiana chartered banks may establish branches throughout the state and in other states, subject to certain limitations. Congress authorized interstate branching, with certain limitations, beginning in 1997. Indiana law authorizes an Indiana bank to establish one or more branches in states other than Indiana through interstate merger transactions and to establish one or more interstate branches through de novo branching or the acquisition of a branch. There are some states where the establishment of de novo branches by out-of-state financial institutions is prohibited. Capital Regulations. The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and account for off-balance sheet items. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories of 0%, 20%, 50%, or 100%, with higher levels of capital being required for the categories perceived as representing greater risk. The capital guidelines divide a bank holding company's or bank's capital into two tiers. The first tier ("Tier I") includes common equity, certain non-cumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary ("Tier II") capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Banks and bank holding companies are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier I capital. The federal banking regulations may, however, set higher capital requirements when a bank's particular circumstances warrant. Banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels. Also required by the regulations is the maintenance of a leverage ratio designed to supplement the risk-based capital guidelines. This ratio is computed by dividing Tier I capital, net of all intangibles, by the quarterly average of total assets. The minimum leverage ratio is 3% for the most highly rated institutions, and 1% to 2% higher for institutions not meeting those standards. Pursuant to the regulations, banks must maintain capital levels commensurate with the level of risk, including the volume and severity of problem loans, to which they are exposed. The following is a summary of the Company's and HomeFederal's regulatory capital and capital requirements at December 31, 2003.
To Be Categorized As "Well Capitalized" Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions ---------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------- As of December 31, 2003 Total risk-based capital (to risk-weighted assets) HomeFederal Bank $ 96,739 14.35% $ 53,927 8.0% $ 67,409 10.0% Home Federal Bancorp Consolidated $ 90,164 13.36% $ 54,003 8.0% $ 67,504 10.0% Tier 1 risk-based capital (to risk-weighted assets) HomeFederal Bank $ 89,233 13.24% $ 26,964 4.0% $ 40,446 6.0% Home Federal Bancorp Consolidated $ 82,658 12.24% $ 27,002 4.0% $ 40,503 6.0% Tier 1 leverage capital (to average assets) HomeFederal Bank $ 89,223 10.36% $ 34,437 4.0% $ 43,046 5.0% Home Federal Bancorp Consolidated $ 82,658 9.61% $ 34,418 4.0% $ 43,022 5.0%
Prompt Corrective Regulatory Action. Federal law provides the federal banking regulators with broad powers to take prompt corrective action to resolve the problems of under-capitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized," as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and, ultimately, appointing a receiver for the institution. At December 31, 2003, HomeFederal was categorized as "well capitalized," meaning that HomeFederal's total risk-based capital ratio exceeded 10%, HomeFederal's Tier I risk-based capital ratio exceeded 6%, HomeFederal's leverage ratio exceeded 5%, and HomeFederal was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. Other Regulations. Interest and other charges collected or contracted for by HomeFederal are subject to state usury laws and federal laws concerning interest rates. HomeFederal's loan operations are also subject to federal laws applicable to credit transactions, such as the: o Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; o Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; o Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; o Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; o Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and o Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of HomeFederal also are subject to the: o Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and o Electronic Funds Transfer Act, and Regulation E issued by the Federal Reserve to implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking service. State Bank Activities. Under federal law, as implemented by regulations adopted by the FDIC, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law, as implemented by FDIC regulations, also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and could continue to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be divested or discontinued within certain time frames set by the FDIC. It is not expected that these restrictions will have a material impact on the operations of HomeFederal. Enforcement Powers. Federal regulatory agencies may assess civil and criminal penalties against depository institutions and certain "institution-affiliated parties," including management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution's affairs. In addition, regulators may commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, regulators may issue cease-and-desist orders to, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the regulator to be appropriate. Recent Legislative Developments. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 -- federal legislation which modernizes the laws governing the financial services industry. The new law establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. As a result of this legislation, bank holding companies are permitted to engage in a wider variety of financial activities than permitted under prior law, particularly with respect to insurance and securities activities. To the extent the law permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer wider varieties of financial services than are currently offered by the Company and that could aggressively compete in the markets currently served by the Company. The law also increases commercial banks' access to loan funding by the Federal Home Loan Bank System, and includes new provisions in the privacy area, restricting the ability of financial institutions to share nonpublic personal customer information with third parties. On October 26, 2001, President Bush signed the USA Patriot Act of 2001 (the "Patriot Act"). The Patriot Act is intended to strengthen the ability of U.S. Law Enforcement to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions is significant and wide-ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all the following matters, among others: money laundering, suspicious activities and currency transaction reporting, and currency crimes. In addition, financial institutions are required under this statute to adopt reasonable procedures to verify the identity of any person seeking to open an account and maintain records to verify such person's identity. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reportings. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition. Effect of Governmental Monetary Policies. HomeFederal's earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve's monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies. Federal Home Loan Bank System HomeFederal is a member of the FHLB of Indianapolis, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. The FHLB is funded primarily from funds deposited by banks and savings associations and proceeds derived from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis. As a member of the FHLB, HomeFederal is required to purchase and maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. At December 31, 2003, HomeFederal's investment in stock of the FHLB of Indianapolis was $10.0 million. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate-related collateral to 30% of a member's capital and limiting total advances to a member. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. For the year ended December 31, 2003, dividends paid by the FHLB of Indianapolis to HomeFederal totaled approximately $487,000, for an annualized rate of 4.9%. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in the institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well-capitalized," "adequately-capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FDICIA. Management does not believe that these regulations will have a materially adverse effect on HomeFederal's current operations. Federal Reserve System Under regulations of the Federal Reserve, HomeFederal is required to maintain reserves against its transaction accounts (primarily checking and NOW accounts) and non-personal money market deposit accounts. The effect of these reserve requirements is to increase HomeFederal's cost of funds. HomeFederal is in compliance with its reserve requirements. Federal Securities Law The shares of Common Stock of the Company are registered with the SEC under the Securities Exchange Act of 1934 (the "1934 Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. If the Company has fewer than 300 shareholders, it may deregister its shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of the Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the Securities Act of 1933 (the "1933 Act"). If the Company meets the current public information requirements under Rule 144, each affiliate of the Company who complies with the other conditions of Rule 144 (including a one-year holding period for restricted securities and conditions that require the affiliate's sale to be aggregated with those of certain other persons) will be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) l % of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating -- using terms such as satisfactory and unsatisfactory -- and a written evaluation of each institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time homebuyers. The FHLBs have established an "Affordable Housing Program" to subsidize the interest rate of advances to member associations engaged in lending for long-term, low- and moderate-income, owner-occupied and affordable rental housing at subsidized rates. HomeFederal is participating in this program. The examiners have determined that HomeFederal has a satisfactory record of meeting community credit needs. Taxation Federal Taxation Beginning with the six months ended December 31, 2002, the Company and its subsidiary file a consolidated federal income tax return on the accrual basis for each fiscal year ending December 31. Previously, the Company's fiscal and tax years ended June 30th. The consolidated federal income tax return has the effect of eliminating intercompany distributions, including dividends, in the computation of consolidated taxable income. Income of the Company generally would not be taken into account in determining the bad debt deduction allowed to HomeFederal, regardless of whether a consolidated tax return is filed. However, certain "functionally related" losses of the Company would be required to be taken into account in determining the permitted bad debt deduction which, depending upon the particular circumstances, could reduce the bad debt deduction. Historically, HomeFederal had been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, HomeFederal was no longer able to use the percentage of taxable income method of computing its allocable tax bad debt deduction. HomeFederal is required to compute its allocable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. HomeFederal began recapturing approximately $2.3 million over a six-year period beginning in fiscal 1999. In addition, the pre-1988 reserve, in which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) HomeFederal no longer qualifies as a bank under the Code, or (ii) excess dividends are paid out by HomeFederal. Depending on the composition of its items of income and expense, a bank may be subject to the alternative minimum tax. A bank must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid that is attributable to most preferences (although not to post-August 7, 1986 tax-exempt interest) can be credited against regular tax due in later years. State Taxation HomeFederal is subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Code, and thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. HomeFederal's state income tax returns have not been audited in the last five years. Item 2. Properties. At December 31, 2003, HomeFederal conducted its business from its main office at 501 Washington Street, Columbus, Indiana, and 17 full-service branches. HomeFederal owns two buildings that it uses for certain administrative operations located at 218 West Second Street, Seymour, and 211 North Chestnut Street, Seymour. The headquarters of its securities operations, conducted through its service Company subsidiary, are located at 501 Washington Street, Columbus, Indiana. Information concerning these properties, as of December 31, 2003, is presented in the following table:
Net Book Value of Property, Approximate Description and Owned or Furniture and Square Lease Address Leased Fixtures Footage Expiration --------------- -------- ----------------- ----------- ---------- Principal Office 501 Washington Street Owned $ 4,257,312 21,600 N/A Operations Center 218 West Second Street Owned $ 1,352,543 20,000 N/A Loan Processing Center 211 North Chestnut Owned $ 305,065 5,130 N/A Branch Offices: Columbus Branches: 1020 Washington Street Owned $ 439,306 800 N/A 3805 25th Street Owned $ 277,428 5,800 N/A 2751 Brentwood Drive Owned $ 426,875 3,200 N/A 4330 West Jonathon Moore Pike Owned $ 562,770 2,600 N/A Hope Branch Leased $ 8475 North State Road 9, Suite 4 126,247 1,500 03/2007 Austin Branch 67 West Main Street Owned $ 55,636 3,600 N/A Brownstown Branch Month to 101 North Main Street Leased $ 13,757 2,400 Month North Vernon Branches 111 North State Street Owned $ 306,070 1,900 N/A 1540 North State Street Leased $ 22,948 1,600 Month to Month Osgood Branch South Buckeye Street Owned $ 98,567 1,280 N/A Salem Branch 1208 South Jackson $ Owned 665,855 1,860 N/A Seymour Branches 222 W. Second Street Owned $ 1,667,487 9,200 N/A 1117 East Tipton Street Owned $ 366,799 6,800 N/A Batesville Branch 12 West Pearl Street Owned $ 531,275 2,175 N/A Madison Branch 201 Clifty Drive Owned $ 412,494 2,550 N/A Greensburg Branch 115 East North Street Leased $ 10,077 2,440 Month to Month Greenwood Branch 8740 South Emerson Avenue Owned $ 2,084,720 5,000 N/A Closed Office: 10204 Lantern Rd., Fishers, Indiana Leased $ 6,649 1,000 7/04
HomeFederal owns its computer and data processing equipment that is used for accounting, financial forecasting, and general ledger work. HomeFederal also has contracted for the data processing and reporting services of Bisys headquartered in Cherry Hill, New Jersey. The contract with Bisys expires in October 2006. Item 3. Legal Proceedings. The Company and the Bank are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of these proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these proceedings should not have a material effect on the Company's consolidated financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the Company's shareholders during the quarter ended December 31, 2003. Item 4.5. Executive Officers of Home Federal Bancorp. Presented below is certain information regarding the executive officers of HFB who are not also directors. Position with HFB S. Elaine Pollert Executive Vice President Lawrence E. Welker Executive Vice President, Treasurer, Chief Financial Officer and Secretary Charles R. Farber Executive Vice President S. Elaine Pollert (age 44) has been employed by HomeFederal since 1986. She was elected Vice President Branch Administration in 1989, Senior Vice President Retail Banking in 1996, and Executive Vice President in 1998. Lawrence E. Welker (age 56) has been employed by HomeFederal since 1979. He was Controller from 1979 to 1982. In 1982, he was elected as Chief Financial Officer and Treasurer, and in 1994 he became an Executive Vice President. Charles R. Farber (age 54) has been employed by HomeFederal since March 2002 as its Executive Vice President. He served as Law Firm Administrator for the Indianapolis, Indiana law firm Locke Reynolds LLP from 2000 to 2002. Prior thereto, he served for 28 years at Peoples Bank and Trust Company in Indianapolis, Indiana, with his final position at Peoples Bank and Trust being Executive Vice President. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities. HFB's common stock ("Common Stock") is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), National Market System, under the symbol "HOMF." For certain information related to the stock prices and dividends paid by HFB, see "Quarterly Results of Operations" on page 4 of HFB's Shareholder Annual Report for the year ended December 31, 2003 (the "Shareholder Annual Report"). As of December 31, 2003, there were 470 shareholders of record of HFB's Common Stock. It is currently the policy of HFB's Board of Directors to continue to pay quarterly dividends, but any future dividends are subject to the Board's discretion based on its consideration of HFB's operating results, financial condition, capital, income tax considerations, regulatory restrictions and other factors. Since HFB has no independent operations or other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to its shareholders is directly dependent upon the ability of HomeFederal to pay dividends to the Company. For a discussion of the regulatory limitations on HomeFederal's ability to pay dividends see Item 1, "Business-Regulation - HomeFederal Savings Bank - Dividends", and on the Company's ability to pay dividends, see Item 1, "Business-Regulation - Home Federal Bancorp - Dividends". Income of HomeFederal appropriated to bad debt reserves and deducted for federal income tax purposes is not available for payment of cash dividends or other distributions to HFB without the payment of federal income taxes by HomeFederal on the amount of such income deemed removed from the reserves at the then-current income tax rate. At December 31, 2003, approximately $2.1 million of HomeFederal's retained income represented bad debt deductions for which no federal income tax provision had been made. See "Taxation--Federal Taxation" in Item 1 hereof. On November 22, 1994, the Board of Directors of HFB declared a dividend of one common share purchase right (a "Right" or "Rights") for each outstanding share of Common Stock. The dividend was paid on December 6, 1994 to the shareholders of record as of November 22, 1994. If and when Rights become exercisable, each Right will entitle the registered holder to purchase from HFB one Common Share at a purchase price of $80.00 (the "Purchase Price"), subject to adjustment as described in the Rights Agreement between the Company and LaSalle National Bank, Chicago, Illinois, (the "Rights Agreement") which specifies the terms of the Rights. The Rights will be represented by the outstanding Common Share certificates and the Rights cannot be bought, sold or otherwise traded separately from the Common Shares until the "Distribution Date," which is the earliest to occur of (i) 10 calendar days following a public announcement that a person or group (an "Acquiring Person") has (a) acquired beneficial ownership of 15% or more of the outstanding Common Shares or (b) become the beneficial owner of an amount of the outstanding Common Shares (but not less than 10%) which the Board of Directors determines to be substantial and which ownership the Board of Directors determines is intended or may be reasonably anticipated, in general, to cause HFB to take actions determined by the Board of Directors to be not in HFB's best long-term interests (an "Adverse Person"), or (ii) 10 business days following the commencement or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 30% or more of such outstanding Common Shares. The Rights have certain anti-takeover effects. The Rights may cause substantial dilution to a person or group that attempts to acquire HFB on terms not approved by the Board of Directors of HFB, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since the Rights may be redeemed by HFB at $.01 per Right prior to the time that a person or group has acquired beneficial ownership of 15% or more of the Common Shares. The Rights will expire at the close of business on November 22, 2004. The Company sold no equity securities during the period covered by this report that were not registered under the Securities Act of 1933. The Company repurchased no shares during the fiscal quarter ended December 31, 2003. The disclosures regarding equity compensation plans required by Reg. ss. 229.201(d) is set forth in Item 12 hereof. Item 6. Selected Financial Data. The information required by this item is incorporated by reference to the material under the heading "Summary of Selected Consolidated Financial Data" on page 3 of the Shareholder Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required by this item is incorporated by reference to pages 6 to 18 of the Shareholder Annual Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item is incorporated by reference to page 14 of the Shareholder Annual Report. Item 8. Financial Statements and Supplementary Data. The Company's Consolidated Financial Statements and Notes thereto contained on pages 20 to 40 of the Shareholder Annual Report are incorporated herein by reference. HFB's Quarterly Results of Operations contained on page 5 of the Shareholder Annual Report are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There are no such changes and disagreements during the applicable period. Item 9A. Controls and Procedures. As of December 31, 2003, an evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Our Chief Executive Officer and Chief Financial Officer have concluded that, during the Company's fiscal quarter ended December 31, 2003, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item with respect to directors is incorporated by reference to page 2 to 3 of the Company's Proxy Statement for its annual shareholder meeting to be held in April 2004 (the "2004 Proxy Statement"). Information concerning the Company's executive officers who are not also directors is included in Item 4.5 in Part I of this report. The information required by this item with respect to the compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to page 13 of the 2004 Proxy Statement. The information required by this item with respect to members of the Company's Audit Committee and whether any such members qualify as an Audit Committee Financial Expert is incorporated by reference to page 6 of the 2004 Proxy Statement. The Company has adopted an Ethics Policy that applies to all officers, employees, and directors of the Company and its subsidiaries. A copy of the Ethics Policy is attached as Exhibit 14 to this Annual Report. Item 11. Executive Compensation. The information required by this item with respect to executive compensation is incorporated by reference to page 6 through page 12 of the 2004 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Other information referred by this item is incorporated by reference to pages 1 to 3 of the 2004 Proxy Statement. Equity Compensation Plan Information The following table provides the information about the Company's common stock that may be issued upon the exercise of options and rights under all existing equity compensation plans as of December 31, 2003.
Number of securities remaining available for future issuance under Number of securities to equity compensation be issued upon exercise Weighted-average plans as of of outstanding options, exercise price of December 31, 2003 warrants and rights as outstanding (excluding securities of options, warrants reflected in December 31, 2003 and rights column (a)) Plan category (a) (b) (c) - -------------------------- ------------------------- --------------------------- ---------------------------- Equity compensation plans approved by security holders 771,268(1) $ 20.30(1) 310,631(1) Equity compensation plans not approved by security holders --- --- --- ------------------------- --------------------------- ---------------------------- Total 771,268 $ 20.30 310,631 ========================= =========================== ============================
(1) Includes the following plans: the Company's 1993 stock option plan, 1995 stock option plan, 1997 stock option plan and 2001 stock option plan, and individual awards of options to directors. Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to page 13 of the 2004 Proxy Statement. Item 14. Principal Accountant Fees and Services. The information required by this item is incorporated by reference to page 14 of the 2004 Proxy Statement. PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) List the following documents filed as a part of the report:
Financial Statements Page in 2003 Shareholder Annual Report Consolidated Balance Sheets as of December 31, 2003, December 31, 2002, and June 30, 2002 20 Consolidated Statements of Income for the twelve month period ended December 31, 2003 and the six month period ended December 31, 2002, and for each of the years in the two-year period ended June 30, 2002 21 Consolidated Statements of Shareholders' Equity for the twelve month period ended December 31, 2003 and the six month period ended December 31, 2002, and for each of the years in the two-year period ended June 30, 2002 22 Consolidated Statements of Cash Flows for the twelve month period ended December 31, 2003 and the six month period ended December 31, 2002, and for each of the years in the two-year period ended June 30, 2002 23 Notes to Consolidated Financial Statements 24 Report of Deloitte & Touche LLP Independent Auditor 41
(b) Reports on Form 8-K Registrant filed a Form 8-K dated October 17, 2003 concerning the Registrant's financial results for the quarter ended September 30, 2003. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page 34. (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on behalf of the undersigned, thereto duly authorized, this 10th day of March 2004. HOME FEDERAL BANCORP DATE: March 10, 2004 By:/s/ John K. Keach. Jr. -------------------------- John K. Keach, Jr., President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 10th day of March 2004. /s/ Lawrence E. Welker /s/ John K. Keach. Jr. - ----------------------------- -------------------------------- Lawrence E. Welker, Executive John K. Keach, Jr., Vice President, Treasurer, Chairman of the Board, Chief Financial Officer and Secretary President and Chief (Principal Financial Officer) Executive Officer (Principal Executive Officer) /s/ Melissa A. McGill /s/John K. Keach. Jr. - ----------------------------- -------------------------------- Melissa A. McGill, John K. Keach, Jr., Director Sr. Vice President and Controller (Principal Accounting Officer) /s/ Gregory J. Pence /s/ John T. Beatty - ----------------------------- -------------------------------- Gregory J. Pence, Director John T. Beatty, Director /s/ David W. Laitinen /s/ Harold Force - ----------------------------- -------------------------------- David W. Laitinen, Director Harold Force, Director /s/ John M. Miller /s/ Harvard W. Nolting. Jr. - ----------------------------- -------------------------------- John M. Miller, Director Harvard W. Nolting, Jr., Director EXHIBIT INDEX Reference to Regulation S-K Exhibit Sequential Number Document Page Number 3(a) Articles of Incorporation (incorporated by reference from Exhibit B to Registrant's Registration Statement on Form S-4 (Registration No. 33-55234)). 3(b) Code of By-Laws (incorporated by reference from Exhibit C to Registrant's Registration Statement on From S-4 (Registration No. 33-55234)); amendment thereto dated October 22, 2002 (incorporated by reference from Exhibit 3(b) of Registrant's Transition Report on Form 10-K Transition Report for the six months ended December 31, 2002) 4(a) Articles of Incorporation (incorporated by reference from Exhibit B to Registrant's Registration Statement on Form S-4 (Registration No.33-55234)). 4(b) Code of By-Laws (incorporated by reference from Exhibit C to Registrant's Registration Statement on From S-4 (Registration No. 33-55234). 10(a) Stock Option Plan (incorporated by reference from Exhibit 10(a) to Registrant's Registration Statement on Form S-4 (Registration No. 33-55234). 10(b) 1993 Stock Option Plan (incorporated by reference from Exhibit 10(b) to Registrant's Form 10-K for the year ended June 30, 1994). 10(c) Employment Agreement with Lawrence E. Welker (incorporated by reference from Exhibit 10(c) to Registrants Registration Statement on Form S-4 (Registration No. 33-55234)); first, second and third Amendments thereto (incorporated by reference to Exhibit 10(c) of Registrant's Form 10-K for the year ended June 30, 1998); fourth amendment thereto (incorporated by reference to Exhibit 10(c) of Registrant's Form 10-K for the year ended June 30, 2001); fifth amendment thereto (incorporated by reference from Exhibit l0(c) to Registrant's Form 10-K the fiscal year ended June 30, 2002). 10(d) Employment Agreement with John K. Keach, Jr. (incorporated by reference from Exhibit 10(d) to Registrant's Registration Statement on Form S-4 (Registration No. 33-55234)); first, second and third amendments thereto (incorporated by reference to Exhibit 10(d) of Registrant's Form 10-K for the year ended June 30, 1998); fourth amendment thereto (incorporated by reference to Exhibit 10 (d) of Registrant's Form 10-K for the year ended June 30, 2001); fifth amendment thereto (incorporated by reference from Exhibit l0(d) to Registrant's Form 10-K for the fiscal year ended June 30, 2002). 10(f) HomeFederal Savings Bank Excess Benefit Plan Agreement with John K. Keach, Jr. dated April 1, 2001 (incorporated by reference to Exhibit 10 (f) of Registrant's Form 10-K for the year ended June 30, 2001). 10(g) 1999 Stock option plan incorporated by reference to Exhibit J to the registrant's proxy statement for its 1999 Annual shareholder's meeting. 10(i) Stock Option Agreement with Harvard W. Nolting, Jr. (incorporated by reference from Exhibit 10(i) to HomeFederal Bank's Form 10-K for the fiscal year ended June 30, 1991). 10(j) Stock Option Agreement with David W. Laitinen (incorporated by reference from Exhibit 10(j) to HomeFederal Bank's Form 10-K for the fiscal year ended June 30, 1991). 10(k) Stock Option Agreement with John T. Beatty (incorporated by reference from Exhibit 10(k) to HomeFederal Bank's Form 10-K for the fiscal year ended June 30, 1991). 10(l) Stock Option Agreement with Harold Force (incorporated by reference from Exhibit 10(l) to HomeFederal Bank's Form 10-K for the fiscal year ended June 30, 1991). 10(n) Supplemental Executive Retirement Plan with John K. Keach, Jr. dated April 1, 2001(incorporated by reference from Exhibit 10(n) to Registrant's Form 10-K for the year ended June 30, 2002). 10(o) Supplemental Executive Retirement Plan with Lawrence E. Welker dated April 1, 2001 (incorporated by reference from Exhibit 10(o) to Registrant's Form 10-K for the year ended June 30, 2002). 10(p) Supplemental Executive Retirement Plan with Elaine Pollert dated April 1, 2001(incorporated by reference from Exhibit 10(p) to Registrant's Form 10-K for the year ended June 30, 2002). 10(v) Deferred Compensation Agreement with John K. Keach, Sr (incorporated by reference from Exhibit 10(v) to HomeFederal Bank Form 10-K for the fiscal year ended June 30, 1992) and First Amendment to Deferred Compensation Agreement (incorporated by Reference from Exhibit 10(v) to Registrant's Form 10-K for the year ended June 30, 1994) and Second Amendment to Deferred Compensation Agreement (incorporated by reference from Exhibit 10(v) to Registrant's Form 10-K for the year ended June 30, 1998). 10(w) Employment Agreement with S. Elaine Pollert (incorporated by reference from Exhibit l0(w) to HomeFederal Bank Form 10-K for the fiscal year ended June 30, 1998); and First Amendment to Employment Agreement (incorporated by reference from Exhibit 10(w) to Registrant's Form 10-K for the year ended June 30, 1998); second amendment thereto (incorporated by reference from Exhibit 10(w) to Registrant's Form 10-K for the year ended June 30, 2002); third amendment to Employment Agreement (incorporated by reference from Exhibit l0(w) to Registrant's Form 10-K for the fiscal year ended June 30, 2002). 10(x) Supplemental Executive Retirement Plan with Gerald L. Armstrong dated April 1, 2001(incorporated by reference from Exhibit 10(x) to Registrant's Form 10-K for the year ended June 30, 2002). 10(ab) Stock Option Agreement with Gerald L. Armstrong (incorporated by reference from Exhibit 10(ab) to HomeFederal Bank Form 10-K for the fiscal year ended June 30, 1992). 10(ac) Director Deferred Compensation Agreement with John Beatty (incorporated by reference from Exhibit l0(ac) to HomeFederal Bank Form 10-K for the fiscal year ended June 30, 1992); first and second amendments thereto (incorporated by reference from Exhibit 10(ac) to Registrant's Form 10-K for the year ended June 30, 1998). 10(ad) Director Deferred Compensation Agreement with Lewis Essex (incorporated by reference from Exhibit 10(ad) to HomeFederal Bank Form 10-K for the fiscal year ended June 30, 1992); first and second amendments thereto (incorporated by reference from Exhibit 10(ad) to Registrant's Form 10-K for the year ended June 30, 1998). 10(ae) Director Deferred Compensation Agreement with Harold Force (incorporated by reference from Exhibit 10(ae) to HomeFederal Bank Form l0-K for the fiscal year ended June 30, 1992); first, second and third amendments thereto (incorporated by reference from Exhibit 10(ae) to Registrant's Form 10-K for the year ended June 30, 1998). 10(af) Director Deferred Compensation Agreement with David W. Laitinen (incorporated by reference from Exhibit 10(af) to HomeFederal Bank Form 10-K for the fiscal year ended June 30, 1992); first, second and third amendments thereto (incorporated by reference from Exhibit 10(af) to Registrant's Form 10-K for the year ended June 30, 1998). 10(ag) Director Deferred Compensation Agreement with William Nolting (incorporated by reference from Exhibit 10(ag) to HomeFederal Bank Form 10-K for the fiscal year ended June 30, 1992); ); first and second amendments thereto (incorporated by reference from Exhibit 10(ag) to Registrant's Form 10-K for the year ended June 30, 1998). 10(ah) Non-Qualified Stock Option Agreement, dated December 22, 1992, with John T. Beatty (incorporated by reference from Exhibit 10(ah) to Registrant's Form 10-K for the year ended June 30, 1994). 10(ai) Non-Qualified Stock Option Agreement, dated December 22, 1992, with Lewis W. Essex (incorporated by reference from Exhibit 10(ai) to Registrant's Form 10-K for the year ended June 30, 1994). 10(aj) Non-Qualified Stock Option Agreement, dated December 22, 1992, with Harold Force (incorporated by reference from Exhibit 10(aj) to Registrant's Form 10-K for the year ended June 30, 1994). 10(ak) Non-Qualified Stock Option Agreement, dated December 22, 1992, with David W. Laitinen (incorporated by reference from Exhibit 10(ak) to Registrant's Form 10-K for the year ended June 30, 1994). 10(al) Non-Qualified Stock Option Agreement, dated December 22, 1992, with Harvard W. Nolting, Jr (incorporated by reference from Exhibit 10 (al) to Registrant's Form 10-K for the year ended June 30, 1994). 10(am) Non-Qualified Stock Option Agreement, dated August 24,1993, with John T. Beatty (incorporated by reference from Exhibit 10(am) to Registrant's Form 10-K for the year ended June 30, 1994). 10(an) Non-Qualified Stock Option Agreement, dated August 24,1993, with Lewis W. Essex (incorporated by reference from Exhibit 10(an) to Registrant's Form 10-K for the year ended June 30, 1994). 10(ao) Non-Qualified Stock Option Agreement, dated August 24, 1993, with Harold Force (incorporated by reference from Exhibit 10(ao) to Registrant's Form 10-K for the year ended June 30, 1994). 10(ap) Non-Qualified Stock Option Agreement, dated August 24, 1993, with David W. Laitinen (incorporated by reference from Exhibit 10(ap) to Registrant's Form 10-K for the year ended June 30, 1994). 10(aq) Non-Qualified Stock Option Agreement, dated August 24, 1993, with Harvard W. Nolting, Jr. (incorporated by reference from Exhibit 10 (aq) to Registrant's Form 10-K for the year ended June 30, 1994). 10(ar) Rights Agreement, dated as of November 22, 1994, between Registrant and LaSalle National Bank, Chicago, Illinois, as Rights Agent (incorporated by reference from Exhibit 1 to Registrant's Registration Statement on Form 8-A filed with the SEC on December 5, 1994), first amendment thereto dated November 25, 1994 (incorporated by reference to Exhibit 10(ar) to Registrant's Form 10-K for the fiscal year ended June 30, 2000). 10(as) 1995 Stock Option Plan (incorporated by reference from Exhibit A to Registrant's Proxy Statement for its 1995 annual shareholder meeting). 10(at) 2001 stock option plan (incorporated by reference from Exhibit B to the Registrant's Proxy Statement for its 2001 annual shareholder meeting. 10(au) Employment Agreement with Charles R. Farber (incorporated by reference from Exhibit l0(au) to Registrant's Form 10-K for the fiscal year ended June 30, 2002). 10(av) Executive Supplemental Retirement Income Agreement with Charles R. Farber dated November 1, 2002 (incorporates by reference to Exhibit 10(av) to Registrant's Transition Report on Form 10-K for the six months ended December 31, 2003). 13 Home Federal Bancorp Annual Report December 31, 2003. 14 Code of Ethics 21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 of the Registrant's Transition Report on Form 10-K for the six months ended December 31, 2002). 23.1 Independent Auditors' Consent. 31.1 Certification of John K. Keach, Jr. required by 12 C.F.R.ss.240.13a-14(a) 31.2 Certification of Lawrence E. Welker required by 12 C.F.R.ss.240.13a-14(a) 32 Certification pursuant to 18 U.S.C.ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-13 3 hfb_annrpt.txt EX-13, ANNUAL REPORT TO SHAREHOLDERS HOME FEDERAL BANCORP ANNUAL REPORT 2003 [PHOTO OMITTED] (A collage of square pictures showing customer and bank related items is omitted.) 1 Letter To Shareholders 4 Selected Consolidated Financial Data 5 Quarterly Results Of Operations 6 Management's Discussion & Analysis 20 Consolidated Balance Sheets 21 Consolidated Statements Of Income 22 Consolidated Statements Of Shareholders' Equity 23 Consolidated Statement Of Cash Flows 24 Notes To Consolidated Financial Statements 41 Independent Auditors' Report 42 Board Of Directors & Officers Of Home Federal Bancorp Executive Officers Of HomeFederal Bank To our shareholders: For many Americans, 2003 - a year marked by ongoing international conflict and continuing economic uncertainty at home - will be a time not soon forgotten. It was a time marked by contrasts, in which encouraging results generated through implementation of our strategies for growth were occasionally offset by irregular changes in economic indicators and activities. For HomeFederal, the low interest rate environment that prevailed throughout 2003 and its restricting effects on net interest margins contributed to a decrease in net income. Earnings were $9,643,000, or $2.26 basic and $2.15 diluted earnings per common share, compared to $10,501,000 or $2.41 basic and $2.30 diluted earnings per common share in 2002. Operating expenses were higher than in the previous year, largely due to increased costs that impact all businesses, such as the ever-increasing costs of health insurance, technology expenses, regulatory compliance and retirement costs. In our industry, higher levels of business also generate higher expenses, and our operating expenses rose in response to increased loan activity during the first three quarters of the year. Symbolic of this year of contrasts, refinancing activity decreased dramatically during the final three months of 2003, and operating expenses for the fourth quarter fell back to a level parallel with the fourth quarter of the previous year. In such a low rate environment, fee income and savings deposits tend to decrease as consumers seek lower borrowing rates and higher yields on investments. For financial institutions like HomeFederal, whose regulated products are replicated by an increasing number of nonregulated financial providers, strategies for growth must necessarily be based on service advantages rather than product advantages. During 2003 we continued to benefit from the unwavering commitment to customer service that has long made HomeFederal a respected and profitable institution. Over the past fifteen years we have capitalized on our specialized style of personalized financial service to customers throughout greater Indianapolis by offering a wide array of commercial products and services. Building on these efforts, we opened our first full-service branch in Greenwood, on the city's southern border. The response from the community has been very gratifying, leading us to make plans for a second Indianapolis facility on Southport Road. This full-service branch, to be located in the heart of a rapidly-developing suburban sector on the city's south side, is scheduled to open for business in the fall of 2004. Throughout the year, we expanded our initiatives in commercial services, an important cornerstone of our strategies for growth as a commercial bank. In the first segment of a two-tier program, we introduced a comprehensive program of cash management strategies designed especially for small businesses. This year, we will initiate the second tier - a new lockbox service designed to help high-volume commercial customers better manage their receivables through an automated payment system. We have been actively presenting these new commercial services to current and potential customers, often through direct visits, and have been very encouraged by the results. We know that -- in situations ranging from presentations by our officers to prospective business clients to the most basic transactions at our branches -- there is no better way to convey our style of business than through effective personal interaction with our customers. During the past year we devoted considerable time to identifying the qualities that differentiate HomeFederal from other financial institutions - the qualities that, taken together, constitute our brand. As in our broader experience, it could be observed that our brand, too, is a study in contrasts. While we are dedicated to offering the most contemporary financial products and services to meet the ever-changing needs of our customers, we are equally dedicated to maintaining the traditional levels of professionalism and personalized service that have been a HomeFederal hallmark for generations. We believe our success in meeting the needs of our customers through individualized attention to their particular needs is not only our greatest asset, but also our greatest source of opportunity for future growth and success. Accordingly, we have worked to underscore our unique commitment to personalized service through broad-scale marketing campaigns, individual advertising programs, and enhanced employee training and recognition initiatives. These programs will be maintained and expanded in the future, in concert with our ongoing development of new products and services designed to meet the needs of a growing base of diverse customers in our expanding service area. Entering our ninety-sixth year in business, we mark with regret the retirement of a distinguished colleague. Gerald Armstrong, professional banker, community leader and friend to all who worked with him, served with distinction as executive vice president and was instrumental in helping shape the modern-day HomeFederal. We extend our best wishes to him for a productive and rewarding retirement. As others step in to continue the excellent work of earlier members of the HomeFederal team, we rededicate ourselves to the essential tenets of our brand: the best products and services for contemporary needs, blended unfailingly with dedicated, personalized customer service. No matter how unpredictable daily events or economic conditions may be, we firmly believe that placing our customers' needs first - and consistently responding to them with well-planned products and courteous professionalism -- embodies a proven business model that will never go out of style. Sincerely, John K. Keach, Jr. Chairman of the Board and Chief Executive Officer SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA (in thousands except per share data) Twelve Six Months Months Ended Ended Year Ended - ------------------------------------------------------------------------------------------------------------------------------------ Dec 2003 Dec 2002 June 2002 June 2001 June 2000 June 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Selected Balance Sheet Data: Total assets $ 853,328 $ 886,505 $ 856,012 $ 863,393 $ 832,154 $ 744,509 Cash and cash equivalents 34,178 53,692 44,478 35,424 21,196 32,906 Loans available for sale 6,272 30,560 6,302 12,383 2,376 5,102 Securities available for sale 123,638 114,440 114,989 80,316 99,364 73,521 Securities held to maturity 1,828 3,026 3,493 7,296 7,776 4,987 Loans receivable, net 630,672 628,883 631,815 674,552 652,007 586,918 Deposits 588,915 609,358 577,480 576,543 572,893 579,882 Borrowings 169,162 187,744 188,680 207,608 184,433 90,410 Shareholders' equity 84,022 77,794 77,086 72,044 69,486 69,635 Selected Operations Data: Interest income $ 45,602 $ 26,240 $ 56,298 $ 64,757 $ 57,809 $ 54,211 Interest expense 22,264 13,145 30,635 39,516 32,169 30,135 ------------ ------------ ------------ ------------ ------------ ----------- Net interest income 23,338 13,095 25,663 25,241 25,640 24,076 Provision for loan losses 1,268 1,221 1,423 1,680 1,441 1,124 ------------ ------------ ------------ ------------ ------------ ----------- Net interest income after provision for loan losses 22,070 11,874 24,240 23,561 24,199 22,952 Gain on sale of loans 7,492 3,740 4,456 1,975 720 3,380 Gain (loss) on sale of securities (83) 4 92 (196) (116) 2 Other income 7,679 3,125 7,841 7,241 7,060 6,622 Other expense 22,495 10,375 20,045 17,513 16,446 15,851 ------------ ------------ ------------ ------------ ------------ ----------- Income before income taxes 14,663 8,368 16,584 15,068 15,417 17,105 Income tax provision 5,020 3,071 6,245 5,519 5,979 6,628 ------------ ------------ ------------ ------------ ------------ ----------- Net Income $ 9,643 $ 5,297 $ 10,339 $ 9,549 $ 9,438 $ 10,477 ============ ============ ============ ============ ============ =========== Basic earnings per common share $ 2.26 $ 1.23 $ 2.34 $ 2.13 $ 1.97 $ 2.06 Diluted earnings per common share $ 2.15 $ 1.17 $ 2.25 $ 2.07 $ 1.88 $ 1.95 Cash dividends per share $ 0.70 $ 0.31 $ 0.58 $ 0.55 $ 0.54 $ 0.45 Selected Financial and Statistical Data: Return on average assets (2) 1.10% 1.21% 1.20% 1.12% 1.20% 1.42% Return on average shareholders' equity (2) 11.95% 13.59% 13.73% 13.76% 13.84% 15.13% Interest rate spread during the period (2) 2.84% 3.19% 3.20% 3.13% 3.46% 3.36% Net interest margin on average earning assets (2) 2.91% 3.26% 3.27% 3.22% 3.56% 3.53% Average shareholders' equity to average assets 9.20% 8.93% 8.76% 8.15% 8.70% 9.41% Efficiency ratio (1) 67.03% 57.01% 57.02% 50.75% 49.50% 50.00% Nonperforming loans to total loans 0.60% 0.71% 0.57% 1.02% 0.46% 0.60% Nonperforming assets to total assets 0.66% 0.70% 0.70% 0.99% 0.52% 0.75% Loss allowance to nonperforming loans 193.11% 151.12% 171.34% 78.70% 162.05% 121.82% Loss allowance to total loans 1.16% 1.08% 1.01% 0.82% 0.75% 0.73% Dividend payout ratio 31.08% 25.12% 24.45% 25.53% 27.11% 21.49% Loan servicing portfolio $ 611,636 $ 564,856 $ 551,402 $ 484,628 $ 451,768 $ 461,462 Allowance for loan losses $ 7,506 $ 7,172 $ 6,451 $ 5,690 $ 4,949 $ 4,349 Number of full service offices 18 17 17 17 16 16 __________________ (1) 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, OMSR amortization, impairment of OMSR and non-recurring items. (2) For comparative purposes, the December 2002 ratios have been annualized.
QUARTERLY RESULTS OF OPERATIONS (in thousands except share data) The following table presents certain selected unaudited data relating to results of operations for the three month periods ending on the dates indicated. Three Months Ended --------------------------------------------------------------------------- Fiscal Year Ended December 31, 2003 March 31, 2003 June 30, 2003 Sept 30, 2003 Dec 31, 2003 - ----------------------------------------------------------------------------------------------------------------------------- Total interest income $ 12,058 $ 11,542 $ 11,160 $ 10,842 Total interest expense 6,016 5,674 5,429 5,145 ----------------- ----------------- ----------------- ----------------- Net interest income 6,042 5,868 5,731 5,697 Provision for loan losses 210 450 286 322 ----------------- ----------------- ----------------- ----------------- Net interest income after provision for loan losses 5,832 5,418 5,445 5,375 Gain on sale of loans 2,144 2,155 2,479 714 Other income 1,993 1,658 2,103 1,842 Other expense 5,282 5,639 5,937 5,637 ----------------- ----------------- ----------------- ----------------- Income before income taxes 4,687 3,592 4,090 2,294 Income tax provision 1,733 1,318 1,462 507 ----------------- ----------------- ----------------- ----------------- Net Income $ 2,954 $ 2,274 $ 2,628 $ 1,787 ================= ================= ================= ================= Basic earnings per common share $ 0.70 $ 0.53 $ 0.62 $ 0.42 ================= ================= ================= ================= Diluted earnings per common share $ 0.66 $ 0.50 $ 0.59 $ 0.40 ================= ================= ================= ================= Dividends per share $ 0.163 $ 0.163 $ 0.188 $ 0.188 Stock sales price range: High (1) $ 25.12 $ 27.57 $ 27.00 $ 29.35 Low $ 22.95 $ 24.26 $ 25.15 $ 26.45 Three Months Ended -------------------------------------- Six Months Ended December 31, 2002 Sept 30, 2002 Dec 31, 2002 - ---------------------------------------------------------------------------------------- Total interest income $ 13,277 $ 12,963 Total interest expense 6,703 6,442 ----------------- ----------------- Net interest income 6,574 6,521 Provision for loan losses 460 761 ----------------- ----------------- Net interest income after provision for loan losses 6,114 5,760 Gain on sale of loans 1,386 2,354 Other income 1,457 1,672 Other expense 4,807 5,568 ----------------- ----------------- Income before income taxes 4,150 4,218 Income tax provision 1,559 1,512 ----------------- ----------------- Net Income $ 2,591 $ 2,706 ================= ================= Basic earnings per common share $ 0.60 $ 0.63 ================= ================= Diluted earnings per common share $ 0.57 $ 0.60 ================= ================= Dividends per share $ 0.150 $ 0.163 Stock sales price range: High (1) $ 24.30 $ 25.14 Low $ 21.60 $ 21.76 Three Months Ended --------------------------------------------------------------------------- Fiscal Year Ended June 30, 2002 Sept 30, 2001 Dec 31, 2001 March 31, 2002 June 30, 2002 - ----------------------------------------------------------------------------------------------------------------------------- Total interest income $ 15,168 $ 14,370 $ 13,290 $ 13,470 Total interest expense 8,968 7,879 6,946 6,842 ----------------- ----------------- ----------------- ----------------- Net interest income 6,200 6,491 6,344 6,628 Provision for loan losses 306 415 509 193 ----------------- ----------------- ----------------- ----------------- Net interest income after provision for loan losses 5,894 6,076 5,835 6,435 Gain on sale of loans 873 1,930 1,018 635 Other income 1,574 1,820 2,494 2,045 Other expense 4,591 5,277 5,158 5,019 ----------------- ----------------- ----------------- ----------------- Income before income taxes 3,750 4,549 4,189 4,096 Income tax provision 1,386 1,779 1,596 1,484 ----------------- ----------------- ----------------- ----------------- Net Income $ 2,364 $ 2,770 $ 2,593 $ 2,612 ================= ================= ================= ================= Basic earnings per common share $ 0.53 $ 0.62 $ 0.59 $ 0.60 ================= ================= ================= ================= Diluted earnings per common share $ 0.51 $ 0.61 $ 0.56 $ 0.57 ================= ================= ================= ================= Dividends per share $ 0.138 $ 0.138 $ 0.150 $ 0.150 Stock sales price range: High (1) $ 22.22 $ 19.75 $ 22.00 $ 25.00 Low $ 16.00 $ 16.80 $ 18.60 $ 21.68 (1) The Company's common stock trades on the NASDAQ National Market under the symbol "HOMF." As of December 31, 2003, the Company had 470 holders of record of its shares.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS This Annual Report contains statements, which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Annual Report and include statements regarding the intent, belief, outlook, estimate or expectations of the Company (as defined below), its directors or its officers primarily with respect to future events and the future financial performance of the Company. Readers of this Annual Report are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Annual Report identifies important factors that could cause such differences. These factors include changes in interest rates, loss of deposits and loan demand to other financial institutions, substantial changes in financial markets, changes in real estate values and the real estate market, regulatory changes, changes in the financial condition of issuers of the Company's investments and borrowers, changes in the economic condition of the Company's market area, increases in compensation and employee expenses, or unanticipated results in pending legal proceedings. The following financial information 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 bank holding company authorized to engage in activities permissible for a financial holding company and owns all of the outstanding capital stock of HomeFederal 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 18 full service banking offices. GENERAL The Bank's earnings in recent years reflect the fundamental changes that have occurred in the regulatory, economic and competitive environment in which commercial banks 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. MD&A OVERVIEW In reviewing the Company's performance in 2003 the driving force was the low interest rate environment and the record setting year for loan refinances. The refinancing activity in 2003 not only affected the residential loan portfolio but also the commercial portfolio and the investment portfolio. Each of these portfolios experienced prepayments, calls, or refinancing activity that caused the yield on these assets to decline significantly during the year. The low rates also caused the deposit and borrowing costs of the Company to decline, but not as fast as the interest earning assets did. This situation occurred for two primary reasons. First, the Company was asset sensitive meaning that it had more assets maturing or repricing in 2003 than liabilities. Second, competition prevents repricing the deposit base of the Bank any lower and still retain customers. Because the yields on assets declined more rapidly than the cost of liabilities the Company experienced a tightening of its net interest margin that caused net interest income to decline in 2003 over 2002. The other result of the refinancing activity was a record year for the Company with respect to gain on sale of loans. The Company earned approximately $7.5 million from selling loans in 2003, $2.0 million more that the year before. It is management's opinion that rates will not decline further in 2004 and therefore this level of income for gain on sale of loans will be significantly lower in 2004. It is our opinion that loan refinancing activity in 2004 could be half of the level of refinancing activity experienced in 2003 thus reducing the gain on sale of loans by about the same percentage. If however, mortgage loan rates decline below levels experienced in 2003 then the Company could experience another wave of refinancings that would cause the income from gain on sale of loans to remain at the level experienced in 2003. A strategy to improving the Company's net interest margin will be to replace wholesale funding sources, such as Federal Home Loan Advances, brokered certificates of deposit, and public funds with core retail deposits. The Bank opened a new branch in the southern Indianapolis metropolitan market in December of 2003. A second branch in the same market is planned for 2004. The expansion into this growing market plus a new emphasis on gaining core deposits in existing markets is anticipated to increase core deposits in 2004. Both consumer and commercial core deposit growth will be the Company's focus. It is important the Company increase this source of funds in order to continue future profitable growth in coming years. Non-interest expense in 2003 increased by $1.9 million compared to 2002. Over $1.0 million of the increase came from compensation and employee benefit cost. The increases were due to increased retirement and health insurance costs as well as increased staffing costs for regulatory compliance areas and technology staffing. Some of the reductions will be offset by the costs associated with the new branches in Indianapolis and normal salary increases for 2004. Consultant fees increased by $347,000 in 2003 compared to 2002 due to outsourcing the internal audit function in 2003 and special audits of the technology systems. These expenses will stay approximately the same in 2004. Another area that will receive close scrutiny in 2004 is that of capital management. The Company has seen total shareholder equity increase while total assets have declined in the past year. The Company has had several stock repurchase plans in place over the past several years and will continue to look at these plans as one way to improve both return on equity and earnings per share in the coming year. In summary the Company faces several challenges in 2004 and subsequent years. The major challenge is to replace the anticipated reduction in gain on sale of loans with other less cyclical sources of income. The second is to grow the earning assets of the Company in such a way that net interest margins are improved. The third is to increase other sources of non-interest income while at the same time reducing the rate of increase in non-interest expense, especially those related to compensation and employee benefits. It will take more than one year to accomplish these goals but plans are in place to begin in 2004. 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 loans; 3) improving its interest rate gap by increasing the interest rate sensitivity by 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 and brokered deposits 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 five to 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. 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 balances. (dollars in thousands)
Twelve Months Ended Six Months Ended Year Ended ---------------------------------------------------------------------------------------------- Dec 2003 Dec 2002 June 2002 ---------------------------------------------------------------------------------------------- (3) Average Average Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets: Residential mortgage loan $ 219,059 $ 13,155 6.01% $ 244,399 $ 8,371 6.85% $ 262,194 $ 19,678 7.51% Commercial real estate mortgages 221,860 13,927 6.28% 208,117 7,126 6.85% 191,303 14,113 7.38% Home equities/ second mortgages 76,754 5,708 7.44% 82,489 3,284 7.96% 88,061 7,218 8.20% Commercial loans 93,713 5,414 5.78% 86,416 2,724 6.30% 76,947 5,271 6.85% Consumer loans 36,167 3,109 8.60% 39,414 1,792 9.09% 40,978 3,950 9.64% Securities 123,273 3,955 3.21% 117,938 2,772 4.70% 97,787 5,488 5.61% Interest-bearing deposits 30,567 334 1.09% 24,807 171 1.38% 26,991 580 2.15% ------------------------------------------------------------------------------------------- Total interest-earning assets (1) $ 801,393 $ 45,602 5.69% $ 803,580 $ 26,240 6.53% $ 784,261 $ 56,298 7.18% =========================================================================================== Interest-bearing liabilities: Deposits- Transaction account $ 296,267 $ 2,060 0.70% $ 290,629 $ 1,715 1.17% $ 283,295 $ 4,914 1.73% Certificate accounts 305,506 10,144 3.32% 303,610 5,799 3.79% 289,600 13,802 4.77% FHLB advances 163,369 9,221 5.64% 174,387 5,205 5.92% 185,453 11,106 5.99% Other borrowings 16,312 839 5.14% 11,823 426 7.15% 11,173 813 7.28% ------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 781,454 $ 22,264 2.85% $ 780,449 $ 13,145 3.34% $ 769,521 $ 30,635 3.98% =========================================================================================== Net Interest Income $ 23,338 $ 13,095 $ 25,663 ======== ======== ======== Net Interest Rate Spread 2.84% 3.19% 3.20% ===== ===== ===== Net Earning Assets $ 19,939 $ 23,131 $ 14,740 ========= ========= ========= Net Interest Margin (2) 2.91% 3.26% 3.27% ===== ===== ===== Average Interest-earning Assets to Average Interest-bearing Liabilities 102.55% 102.96% 101.92% ====== ====== ======
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[TABLE CONTINUED FROM FOLLOWING PAGE] Year Ended -------------------------------- June 2001 -------------------------------- Average Average Balance Interest Yield/Rate - ----------------------------------------------------------------------- Interest-earning assets: Residential mortgage loan $ 305,512 $24,631 8.06% Commercial real estate mortgages 171,766 14,473 8.43% Home equities/ second mortgages 91,655 8,485 9.26% Commercial loans 64,431 5,696 8.84% Consumer loans 43,558 4,305 9.88% Securities 98,597 6,622 6.72% Interest-bearing deposits 9,449 545 5.77% ---------------------------- Total interest-earning assets (1) $ 784,968 $64,757 8.25% ============================ Interest-bearing liabilities: Deposits- Transaction account $ 249,647 $ 6,505 2.61% Certificate accounts 324,358 20,205 6.23% FHLB advances 187,272 11,987 6.40% Other borrowings 11,270 819 7.27% ---------------------------- Total interest-bearing liabilities $ 772,547 $39,516 5.12% ============================ Net Interest Income $25,241 ======= Net Interest Rate Spread 3.13% ======== Net Earning Assets $ 12,421 ========== Net Interest Margin (2) 3.22% ======== Average Interest-earning Assets to Average Interest-bearing Liabilities 101.61% ========== (1) Average balances are net of non-performing loans. (2) Net interest income divided by the average balance of interest-earning assets. (3) For comparative purposes, the ratios in the December 2002 average yield/rate column have been annualized.
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)
Year Ended Six Months Ended -------------------------------------------------------------------------- Dec 2003 vs. Dec 2002 Dec 2002 vs. Dec 2001 -------------------------------------------------------------------------- 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: Residential mortgage loans $ (222) $ (3,901) $ (4,123) $ (1,070) $ (1,424) $ (2,494) Commercial real estate loans 2,857 (2,962) (105) 529 (559) (30) Home equities/second mortgages (513) (442) (955) (189) (366) (555) Commercial loans (314) 488 174 126 (139) (13) Consumer loans (234) (274) (508) (168) (140) (308) Securities (2,212) 434 (1,778) (288) 533 245 Interest-bearing deposits (189) 86 (103) (173) 30 (143) ----------- ----------- ------------- ---------- ---------- ---------- Total (827) (6,571) (7,398) (1,233) (2,065) (3,298) ----------- ----------- ------------- ---------- ---------- ---------- Interest Expense on Interest-Bearing Liabilities: Deposits - Transaction accounts (2,002) 598 (1,404) (1,592) 141 (1,451) Certificate accounts (1,982) 76 (1,906) (1,969) 217 (1,752) FHLB advances (561) (808) (1,369) (33) (482) (515) Other borrowings (30) 40 10 (6) 22 16 ----------- ----------- ------------- ---------- ---------- ---------- Total (4,575) (94) (4,669) (3,600) (102) (3,702) ----------- ----------- ------------- ---------- ---------- ---------- Net Change in Net Interest Income $ 3,748 $ (6,477) $ (2,729) $ 2,367 $ (1,963) $ 404 =========== =========== ============= ========== ========== ==========
Year Ended --------------------------------------- June 2002 vs. June 2001 --------------------------------------- Increase/(Decrease) Due to Due to Total Rate Volume Change - -------------------------------------------------------------------------------------------- Interest Income on Interest-Earning Assets: Residential mortgage loans $ (1,623) $ (3,330) $ (4,953) Commercial real estate loans (4,188) 3,828 (360) Home equities/second mortgages (944) (323) (1,267) Commercial loans (3,104) 2,679 (425) Consumer loans (104) (251) (355) Securities (1,080) (54) (1,134) Interest-bearing deposits (18) 53 35 ----------- ----------- ------------ Total (11,061) 2,602 (8,459) ----------- ----------- ------------ Interest Expense on Interest-Bearing Liabilities: Deposits - Transaction accounts (2,665) 1,074 (1,591) Certificate accounts (4,397) (2,006) (6,403) FHLB advances (766) (115) (881) Other borrowings 1 (7) (6) ----------- ----------- ------------ Total (7,827) (1,054) (8,881) ----------- ----------- ------------ Net Change in Net Interest Income $ (3,234) $ 3,656 $ 422 =========== =========== ============
RESULTS OF OPERATIONS Comparison of Twelve Month Period Ended December 31, 2003 and Twelve Month Period Ended December 31, 2002: General On September 24, 2002, the Company announced a change in its fiscal year end from June 30 to December 31. Therefore, the current year-to-date numbers being reported will refer to the twelve month period ended December 31, 2003, while the prior year-to-date numbers being reported will refer to the twelve month period ended December 31, 2002. The Company reported net income of $9.6 million for the twelve month period ended December 31, 2003. This compared to net income of $10.5 million for the twelve month period ended December 31, 2002, representing a decrease of $858,000 or 8.2%. Net Interest Income Net interest income before provision for loan losses decreased $2.7 million or 10.5% for the twelve month period ended December 31, 2003, compared to the twelve month period ended December 31, 2002. This decrease in net interest income was due to tightening net interest margins and a decrease in total assets. Year-to-date net interest income after provision for loan losses decreased by $2.1 million, from $24.1 million one year ago to $22.1 million for the twelve month period ended December 31, 2003. The decrease in net interest income after provision for loan losses was due to the same reasons described above for net interest income before provision for loan losses. The loan loss provision decreased in 2003 compared to 2002 by $655,000. The decrease was due to the low number of loan charge offs the Bank has experienced in recent years. Even with the lower loan loss provision for the year, the allowance for loan losses increased by $334,000. For further information about the allowance for loan losses see the discussion under the Allowance for Loan Losses section. For the twelve month period ended December 31, 2003, the net interest margin declined by 35 basis points (a basis point equals 0.01%) compared to the same period a year ago. The current low interest rate environment continues to see loan and investment rates decrease more rapidly than deposit and borrowing rates. The yield on the investment portfolio has decreased because much of it was comprised of mortgage backed securities that have pre-paid ahead of schedule as well as U.S. Government agency securities that had call features exercised. In addition, the investment portfolio has increased due to increased cash flows resulting from the refinancing of adjustable rate loans held in portfolio into fixed rate loans that are sold in the secondary mortgage market. This turnover in the investment portfolio has seen higher yielding assets move into lower yielding assets that in turn tightens interest margins. On the liability side of the balance sheet, competition for retail deposits has caused rates to decrease slower than they otherwise might have given the overall rate environment, which has also kept interest margins from widening. Interest Income Total interest income for the twelve month period ended December 31, 2003, decreased $7.4 million, or 14.0%, as compared to the twelve month period ended December 31, 2002. The decrease in interest income was due primarily to the 94 basis point decrease in yield on interest earning assets for the twelve month period ended December 31, 2003 as compared to the same period a year ago. Interest Expense Total interest expense for the twelve month period ended December 31, 2003, decreased $4.7 million, or 17.3%, as compared to the twelve month period ended December 31, 2002. This decrease was due to a 58 basis point decrease in the cost of interest bearing liabilities for the twelve month period ended December 31, 2003 as compared to the same period a year ago. Other Income Other income for the current twelve month period was $15.1 million. This represented an increase of $2.0 million, or 15.5%, over the same twelve month period ended December 31, 2002. This increase was due to several factors including the increase in gain on sale of loans of $2.1 million in the current twelve month period compared to the same period one year ago. The increase was due to increased refinancing activity and loan sales. Insurance, annuity income and other fees were up $176,000 over 2002 and service fees on deposit accounts were up $316,000 over 2002. Offsetting these increases were declines in joint venture income and gains on real estate owned of $248,000 and $165,000, respectively. The decline in joint ventures was due in part to reduced activity in joint ventures as the Company continues to divest itself of these projects. The decline in real estate owned ("REO") income was due to reduced REO activity in 2003. Loan servicing income was basically unchanged as early impairment charges were recovered in part in the fourth quarter of 2003. The originated mortgage servicing rights asset is reviewed for impairment each quarter. This asset is created when mortgage loans are sold and the lender retains the servicing rights. The asset is then amortized as an expense to mortgage servicing income over the life of the loan. The impairment charge is the recognition of the change in value of mortgage servicing rights that results with changes in interest rates. Mortgage servicing portfolios typically decline in value as interest rates drop and increase in value as rates rise. The reason for this decline in value is that as rates drop, prepayment speeds increase causing the average life of the servicing portfolio to shorten. This reduces the amount of servicing income the Bank receives over time and thus reduces the value of the servicing portfolio. If rates rise the opposite occurs--prepayments slow and the average life of the mortgage servicing portfolio lengthens, increasing the amount of servicing income the Bank receives over time and the value of the servicing portfolio. In 2003 the impairment charge was $83,000 compared to the same period ending December 31, 2002 where the charge was $469,000. The amortization charge in the current period was $1.4 million compared to $905,000 for the same period a year ago. Future impairment charges will depend on future interest rate changes. If rates continue to decrease there will be more impairment charges; if they increase the impairment charges may be recovered. Other Expenses Other expenses increased $1.9 million or 9.5%, over the prior fiscal year, to $22.5 million from $20.6 million. The increases were primarily in compensation and employee benefits. Compensation and employee benefits increased $1.0 million due to various factors including increased staffing, normal salary increases, and increased funding expenses for the Bank's pension plans. Occupancy and equipment expense increased due to increased technology expenditures and the opening of a new branch in Indianapolis. RESULTS OF OPERATIONS Comparison of Six Month Period Ended December 31, 2002 and Six Month Period Ended December 31, 2001: General On September 24, 2002, the Company announced a change in its fiscal year end from June 30 to December 31. The Company reported net income of $5.3 million for the six month period ended December 31, 2002. This compared to net income of $5.1 million for the six month period ended December 31, 2001, representing an increase of $163,000 or 3.2%. Net Interest Income Net interest income before provision for loan losses increased $404,000 or 3.2% for the six month period ended December 31, 2002, compared to the six month period ended December 31, 2001. This increase was primarily the result of a $13.4 million increase in average interest earning assets compared to a $4.5 million increase in average interest bearing liabilities. Net interest income after provision for loan losses decreased by $96,000, from $11,970,000 for the six month period ended December 31, 2001 to $11,874,000 for the six month period ended December 31, 2002. The decrease in net interest income after provision for loan losses was due to an increase in the loan loss provision of $500,000 in the six month period ended December 31, 2002. The loan loss provision has increased primarily due to the deteriorating economic data regarding bankruptcies and unemployment trends in the Bank's market area. The increases in the loan loss provision have also increased the allowance for loan losses from $6,451,000 at June 30, 2002 to $7,172,000 at December 31, 2002, a $721,000 increase. For further information about the allowance for loan losses see the discussion under the Allowance for Loan Losses section. For the six month period ended December 31, 2002 compared to the same period in 2001 the net interest margin improved slightly. The low interest rate environment contributed to loan and investment rates decreasing more rapidly than deposit and borrowing rates. The yield on the investment portfolio has decreased because much of it was comprised of mortgage backed securities that have pre-paid ahead of schedule as well as U.S. Government agency securities that had call features exercised. In addition, the investment portfolio grew due to increased cash flows created by the refinancing of adjustable rate loans held in portfolio into fixed rate loans that are sold in the secondary mortgage market. This turnover in the investment portfolio has seen higher yielding assets move into lower yielding assets that in turn tightens interest margins. On the liability side of the balance sheet competition for retail deposits has caused rates to decrease slower than they otherwise might have given the overall rate environment, which has also kept interest margins from widening. Interest Income Total interest income for the six month period ended December 31, 2002, decreased $3.3 million, or 11.2%, as compared to the six month period ended December 31, 2001. The decrease in interest income was due primarily to the 95 basis point decrease in yield on interest earning assets for the six month period ended December 31, 2002 as compared to the same period in 2001. A factor offsetting the decrease in interest income was the $13.4 million increase in the average balance of the Company's interest earning assets. Interest Expense Total interest expense for the six month period ended December 31, 2002, decreased $3.7 million, or 22.0%, as compared to the six month period ended December 31, 2001. This decrease was due to a 97 basis point decrease in the cost of interest bearing liabilities for the six month period ended December 31, 2002 as compared to the same period the previous year. A factor that offsets the decrease in interest expense was the increase in average balances of deposits and borrowings of $4.5 million for the six month period ended December 31, 2002. Other Income Other income for the six month period ended December 31, 2002 was $6,869,000. This represented an increase of $672,000, or 10.8%, over the same six month period ended December 31, 2001. This increase was due to several factors including the increase in gain on sale of loans of $937,000 in the six month period ended December 31, 2002 compared to the six month period ended December 31, 2001. The increase was due to increased refinancing activity and loan sales. Offsetting this increase in other income was a $517,000 decrease in loan servicing income due primarily to an impairment charge reducing the value of originated mortgage servicing rights. In the six month period ended December 31, 2002 the impairment charge was $617,000 compared to the same period ending December 31, 2001 where the charge was $177,000. The amortization charge in the six month period ended December 31, 2002 was $478,000 compared to $302,000 for the same period ended December 2001. Future impairment charges will depend on future interest rate changes. If rates continue to decrease there will be more impairment charges; if they increase the impairment charges may be recovered. Other Expenses Other expenses increased $507,000 or 5.1%, over the six month period ended December 31, 2001, to $10.4 million from $9.9 million. The increases were primarily in compensation and employee benefits. Compensation and employee benefits increased $670,000 due to various factors including increased staffing, normal salary increases, bonus expense and increased funding expenses for the Bank's pension plans. A factor that reduced the increase in other expenses was a $156,000 reduction in service bureau expenses. The Company completed a data processing conversion in the six month period ended December 31, 2001. Data processing expenses were higher than normal during the conversion process as the Company incurred charges from both the old and new data processors for a period of time. RESULTS OF OPERATIONS Comparison of Year Ended June 30, 2002 and Year Ended June 30, 2001: General The Company reported net income of $10.3 million for the year ended June 30, 2002. This compared to net income of $9.5 million for the year ended June 30, 2001, representing an increase of $790,000 or 8.3%. Net Interest Income Net interest income before provision for loan losses increased $422,000 or 1.7% for the year ended June 30, 2002, compared to the prior year. This increase was primarily the result of rates on interest bearing liabilities declining more rapidly than the interest rates on interest earning assets, and was reflected in a 7 basis point increase in the Company's net interest rate spread. Compared to the prior year, net interest income after provision for loan losses increased by $679,000, or 2.9% to $24.2 million for the year ended June 30, 2002. 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 loan loss provision in the fiscal year ended June 30, 2002 was $1.4 million. This charge to the provision for loan losses increased the allowance for loan losses to $6.5 million, an increase of $761,000 over the prior fiscal year balance of $5.7 million. This increase to the allowance for loan losses related to two primary factors, the deteriorating economic data regarding bankruptcies and unemployment trends in the Bank's market area and the continuing shift of the Bank's loan portfolio in the direction of increasing the commercial real estate and commercial loan portfolios, while reducing the residential loan portfolio. For further information about the allowance for loan losses see the discussion under the Allowance for Loan Losses section. Interest Income Total interest income for the year ended June 30, 2002, decreased $8.5 million, or 13.1%, as compared to the year ended June 30, 2001. The decrease in interest income was due primarily to the 107 basis point decrease in yield on interest earning assets for the twelve month period ended June 30, 2002 as compared to the same period ended June 30, 2001. Interest Expense Total interest expense for the year ended June 30, 2002, decreased $8.9 million, or 22.5%, as compared to the year ended June 30, 2001. This decrease was due to a 114 basis point decrease in the cost of interest bearing liabilities for the twelve-month period ended June 30, 2002 as compared to the same period ended June 30, 2001. An additional factor that decreased interest expense was the decline in average balances of deposits and borrowings of $3.0 million for the fiscal year ended June 30, 2002. Other Income Other income increased $3.4 million from $9.0 million in fiscal year 2001 to $12.4 million in fiscal year 2002. This increase was due primarily to an increase in the gain on sale of loans of $2.5 million. The increased gain on sale of loans was primarily due to increases in refinancing activity that occurred, as borrowers took advantage of the available lower rates. Other factors affecting the increase in other income include increases of $288,000 in gain on sale of securities, a $241,000 increase in insurance, annuity and other fees, a $164,000 increase in gain of sale on real estate owned and repossessed assets and a $195,000 increase in loan servicing income. The gain on sale of securities was the result of a $196,000 loss incurred in the fiscal year ended June 30, 2001 due to restructuring the portfolio, compared with a $92,000 gain realized in the fiscal year ended June 30, 2002. The increase in insurance, annuity and other fees came primarily from commissions earned on brokerage sales, which increased $171,000 over the previous fiscal year, as well as a $90,000 increase in fees earned from trust services. The increase in net gain on real estate owned resulted from increased activity in real estate owned and repossessed assets sales, with a total of 78 sales with proceeds of $4.5 million occurring in the June 30, 2002 fiscal year compared to 53 sales with proceeds of $1.5 million for the prior fiscal year. The increase in loan servicing income primarily resulted from a $66.8 million net increase in the servicing portfolio. Other Expenses Other expenses increased $2.5 million or 14.5%, over the June 30, 2001 fiscal year, to $20.0 million from $17.5 million. The increases came primarily from three areas, compensation and employee benefits, occupancy and equipment expenses, and miscellaneous expenses. Compensation and employee benefits increased $1.5 million principally due to funding expenses for the Bank's pension plans, health insurance costs and overtime associated with the data processing conversion. Occupancy and equipment expenses increased $320,000 or 12.7% for the fiscal year ended June 30, 2002, as compared to the prior fiscal year. These increases reflect expenses connected with rising depreciation costs associated with equipment and software purchases for the third party data processing change, as well as depreciation related to the remodeling of the main office located in Columbus, Indiana. Miscellaneous expense increases of $666,000 or 16.6% included $353,000 of expenses associated with taxes, repairs, maintenance and improvement of various real estate owned properties to place them in a condition for sale. Additional increases to miscellaneous expenses of $373,000 are associated with increases in postage, office supplies and communications charges, resulting from process changes associated with the data processing conversion. An increase of $60,000 to miscellaneous expenses is related to the Bank's charter conversion from a federal savings bank charter to a state commercial bank charter. FINANCIAL CONDITION The Company's total assets decreased $33.2 million to $853.3 million at December 31, 2003, from $886.5 million at December 31, 2002. Loans held for sale decreased $24.2 million as a result of the decrease in refinancing activity experienced in the last quarter of 2003. Additionally, cash and cash equivalents decreased $19.5 million primarily due to funding the payoff of advances from the Federal Home Loan Bank, which decreased $17.4 million during the year ended 2003. The primary decrease in liabilities occurred in deposits that decreased $20.4 million from December 31, 2002 to December 31, 2003. This decrease in deposits reflects a decrease in public funds and jumbo certificates of deposits of $14.5 million and $7.8 million, respectively. Shareholders' equity increased $6.2 million to $84.0 million. Retained earnings increased $9.6 million from net income and decreased $3.0 million for dividends paid and decreased $3.3 million from the repurchase of the Company's common stock. Common stock had a net increase of $3.4 million: a decrease of $209,000 from the repurchase of Company stock and increases of $3.1 million from options exercised and $513,000 from the related tax benefit of disqualifying dispositions of such options. The Company had accumulated other comprehensive loss, net, of $30,000, a decrease of $484,000 over the prior fiscal year. This decrease was the net result of a $686,000 decrease from unrealized losses in the available for sale portfolio and a $202,000 increase from the change in fair value of a cash flow hedge. INTEREST RATE SENSITIVITY Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Interest rate sensitivity in the Company is a result of repricing, option, and basis risks. Repricing risk represents timing mismatches in the Company's ability to alter contractual rates earned on financial assets or paid on liabilities in response to changes in market interest rates. For example, when interest-bearing liabilities reprice or mature more quickly than interest-earning assets, an increase in market rates could adversely affect net interest income. Conversely, if interest-earning assets reprice or mature more quickly than interest-bearing liabilities, a decrease in market rates could adversely affect net interest income. Option risk arises from embedded options present in many financial instruments such as loan prepayment options and deposit early withdrawal options. These provide customers opportunities to take advantage of directional changes in rates, which could have an adverse impact on the Company's net interest income. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in a narrowing of the spread earned on a loan or investment relative to its cost of funds. Net interest income represents the Company's principal component of income. Consistency of the Company's net interest income is largely dependent upon the effective management of interest rate risk. The Company has established risk measures, limits and policy guidelines in its Interest Rate Risk Management Policy. The responsibility for management of interest rate risk resides with the Company's Asset/Liability Committee, ("ALCO"), with oversight by the Board of Directors. The Company uses an earnings simulation analysis that measures the sensitivity of net interest income to various interest rate movements. The base-case scenario is established using current interest rates. The comparative scenarios assume an immediate parallel shock in increments of 100 basis point rate movements. The Company did not prepare rate shocks for decreases of 200 and 300 basis points due to the unlikeliness of these rate scenarios based on the historically low current interest rate environment. The interest rate scenarios are used for analytical purposes and do not necessarily represent management's view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may introduce into the earnings of the Company. Modeling the sensitivity of earnings to interest rate risk is highly dependent on numerous assumptions embedded in the model. These assumptions include, but are not limited to, management's best estimates of the effect of changing interest rates on the prepayment speeds of certain assets and liabilities, projections for activity levels in each of the product lines offered by the Company and historical behavior of deposit rates and balances in relation to changes in interest rates. These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions. The Company's 12-month net interest income sensitivity profile as of fiscal year-end December 31, 2003 is as follows: --------------------------- -------------- Change in Rates % Change --------------------------- -------------- + 300 basis points (14.55) --------------------------- -------------- + 200 basis points (9.14) --------------------------- -------------- + 100 basis points (4.79) --------------------------- -------------- - 100 basis points .74 --------------------------- -------------- All of the above estimated changes in net interest income are within established policy guidelines. ASSET QUALTIY 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 net realizable value. (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 June 2001 June 2000 June 1999 - ---------------------------------------------------------------------------------------------------------------------- Non-accruing loans: Residential mortgages $ 832 $ 1,749 $ 795 $ 2,613 $ 1,375 $ 1,818 Commercial real estate mortgages 247 137 96 2,783 61 6 Home equities/second mortgages 591 606 740 504 390 633 Commercial 647 566 461 226 165 718 Consumer 182 206 189 225 431 334 -------- -------- -------- -------- -------- -------- Total 2,499 3,264 2,281 6,351 2,422 3,509 --------- ---------- ---------- --------- --------- ---------- Accruing loans: Residential mortgages 1,125 1,166 1,094 - - - Commercial real estate mortgages - - - - - - Home equities/second mortgages - - - - - - Commercial 5 - - - - - Consumer - - 16 - - - -------- -------- -------- -------- -------- -------- Total 1,130 1,166 1,110 - - - --------- ---------- ---------- --------- --------- ---------- Troubled debt restructured 258 316 374 879 632 61 --------- ---------- ---------- --------- --------- ---------- Total non-performing loans 3,887 4,746 3,765 7,230 3,054 3,570 Real estate owned 1,739 1,472 2,239 1,298 1,235 2,050 --------- ---------- ---------- --------- --------- ---------- Total Non-Performing Assets $ 5,626 $ 6,218 $ 6,004 $ 8,528 $ 4,289 $ 5,620 ========= ========== ========== ========= ========= ========== Non-performing assets to total assets 0.66% 0.70% 0.70% 0.99% 0.52% 0.75% ========= ========== ========== ========= ========= ========== Non-performing loans to loans 0.60% 0.71% 0.57% 1.02% 0.46% 0.60% ========= ========== ========== ========= ========= ========== Allowance for loan losses to non-performing loans 193.11% 151.12% 171.34% 78.70% 162.05% 121.82% ========= ========== ========== ========= ========= ==========
In addition, at December 31, 2003, there were $21.7 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 $592,000 to $5.6 million at December 31, 2003. This decrease resulted from a $859,000 decrease in non-performing loans that was offset by an increase of $267,000 in real estate owned. During fiscal year June 2002, the Company changed its method of classifying loans that are 90 days or more delinquent. In prior fiscal years, any loan that was 90 days or more delinquent was placed in a nonaccrual status. Beginning in fiscal 2002, loans that are 90 days or more delinquent, which have a mortgage insurance contract or a government agency, such as Rural Development, guaranteeing the payment of delinquent interest, are further reviewed to determine if the insurance coverage is adequate to cover both the anticipated principal loss as well as the accrued interest. If the insurance coverage is determined to be adequate the loan is then classified as nonperforming but still accruing. If management believes there is any question as to the adequacy of the insurance coverage, the loan is classified as nonaccrual. As of December 31, 2003, the Bank had $1.4 million of loans, including troubled debt restructed loans that were nonperforming but still accruing. ALLOWANCE FOR LOAN LOSSES The provision for loan losses for the fiscal year ended December 31, 2003 was $1.3 million, which resulted in an allowance for loan losses balance of $7.5 million as of December 31, 2003 as compared to $7.2 million as of December 31, 2002. The growth in the allowance for loan losses primarily reflects the changing mix of the Bank's loans from primarily residential real estate to an increasing commercial real estate and commercial loan portfolio. Commercial loans typically involve large loan balances to single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the successful operation of the related project and thus may be subject to adverse conditions in the real estate market or in the general economy. For the year ended December 31, 2003, commercial real estate loans, including commercial construction loans, increased $12.7 million or 6.5%, while commercial installment loans increased $9.0 million or 10%. See the Critical Accounting Policies, Allowance for Loan Losses section on page 25 for a description of the systematic analysis the Bank uses to determine its allowance for loan losses. The following table sets forth an analysis of the allowance for possible loan losses.
- --------------------------------------------------------------------------------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 June 2001 June 2000 June 1999 - --------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 7,172 $ 6,451 $ 5,690 $ 4,949 $ 4,349 $ 4,243 Provision for loan losses 1,268 1,221 1,423 1,680 1,441 1,124 Loan charge-offs: Residential mortgages (176) (74) (137) (81) (118) (137) Commercial real estate mortgages (60) - (86) (50) - (200) Home equities/second mortgages (163) (44) (138) (87) (104) (94) Commercial (255) (240) (38) (303) (397) (66) Consumer (425) (186) (331) (498) (318) (606) ---------- ---------- ---------- ---------- ---------- ---------- Total charge-offs (1,079) (544) (730) (1,019) (937) (1,103) ---------- ---------- ---------- ---------- ---------- ---------- Recoveries: Residential mortgages 28 18 3 3 5 - Commercial real estate mortgages - - - - - - Home equities/second mortgages - - 1 - - - Commercial 65 1 8 - - 1 Consumer 52 25 56 77 91 84 ---------- ---------- ---------- ---------- ---------- ---------- Total recoveries 145 44 68 80 96 85 ---------- ---------- ---------- ---------- ---------- ---------- Net loan recoveries (charge-offs) (934) (500) (662) (939) (841) (1,018) ---------- ---------- ---------- ---------- ---------- ---------- Balance $ 7,506 $ 7,172 $ 6,451 $ 5,690 $ 4,949 $ 4,349 ========== ========== ========== ========== ========== ========== Net charge-offs to average loans 0.14% 0.08% 0.10% 0.14% 0.14% 0.17% ========== ========== ========== ========== ========== ========== Allowance balance to total loans 1.16% 1.08% 1.01% 0.82% 0.75% 0.73% ========== ========== ========== ========== ========== ==========
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The following table indicates the portion of the loan loss reserve management has allocated to each loan type at December 31, 2003: (dollars in thousands) Loan type Allowance - --------------------------------------------- ----------- Residential mortgages $ 1,535 Commercial real estate 1,839 Home equities/second mortgages 712 Commercial other 2,491 Consumer loans 929 - --------------------------------------------- ----------- Total allowance for loan losses $ 7,506 ============================================= =========== LIQUIDITY AND CAPITAL RESOURCES The Bank maintains its liquid assets 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 December 31, 2003, the Bank had $154.3 million in borrowings from the FHLB of Indianapolis. As of that date, the Bank had commitments to fund loan originations of approximately $23.2 million and commitments to sell loans of $18.5 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 fiscal year ended December 31, 2003, there was a net decrease of $19.5 million in cash and cash equivalents. The major uses of cash during the year were: originations of mortgages held for sale of $350.0 million; purchases of investment and mortgage-backed securities of $182.3 million; repayment of FHLB advances of $32.0 million; and decreases in deposits of $20.4 million. The major sources of cash provided during the year included $381.8 million from selling fixed rate mortgage loans primarily to Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"); maturities and sales of investment securities of $172.5 million; and proceeds from FHLB advances of $14.7 million. SIGNIFICANT COMMITMENTS In the normal course of business, the Bank is a party to various activities that contain credit and market risk that are not reflected in the financial statements. Such activities include commitments to extend credit, sell loans and standby letters of credit. For further information on off-balance sheet credit related financial obligations see note 15 to the financial statements. Commitments that are not reflected in the accompanying consolidated financial statements are summarized as follows: (in thousands) Commitments to extend credit: Commercial $63,094 Residential real estate 18,332 Revolving home equity lines of credit 72,443 Other 1,864 Standby letters of credit 1,904 Commitments to sell loans: Mortgage 11,675 Commercial 6,851 Commitments to extend credit, including loan commitments and standby letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon. OFF-BALANCE SHEET ARRANGEMENTS The term "off-balance sheet arrangement" generally means any transaction, agreement, or other contractual arrangement to which an entity unconsolidated with the Company is a party under which the company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets. The Company does not have any off-balance sheet arrangements with unconsolidated entities that have or are reasonably likely to have a current or future effect on the Company's financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. JOINT VENTURES The Company has invested in joint ventures through its subsidiaries, Home Savings Corporation ("HSC") and HomeFed Financial Corp. On December 31, 2001, the Bank changed its charter from a Federal savings bank charter to an Indiana commercial bank charter. Commercial banks are not permitted to participate in real estate development joint ventures. HSC is a partner in five real estate development joint ventures for which exit strategies are either developed, or are currently being developed. The Company, as mandated by its charter change, is in the process of divesting itself of these investments by December 31, 2004, with two one-year extensions available, subject to regulatory approval. The investments are accounted for by the equity method. DERIVIATIVE FINANCIAL INSTRUMENTS On July 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. All derivatives, whether designated as a hedge, or not, are required to be recorded on the balance sheet at fair value. The Company designates its fixed rate and variable rate interest rate swaps as fair value and cash flow hedge instruments, respectively. If the derivative is designated as a fair value hedge, the changes in fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the changes in fair value of the derivative and of the hedged item attributable to the hedged risk are recorded in accumulated other comprehensive income (OCI), net of income taxes. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. See Note 1 for further discussion of derivative financial instruments. 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 commercial banks 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. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board, ("FASB") has issued Statements No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" and No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The FASB also issued FASB Interpretation No. 45, ``Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,'' and FASB Interpretation No. 46, ``Consolidation of Variable Interest Entities - an Interpretation of Accounting Research Bulletin (ARB) No. 51." The Company adopted these new pronouncements during the twelve month period ended December 31, 2003. See Note 1 to the consolidated financial statements for further discussion of these pronouncements. Adoption of these pronouncements did not have a material effect on the Company's consolidated financial statements. CRITICAL ACCOUNTING POLICIES The notes to the consolidated financial statements contain a summary of the Company's significant accounting policies. Certain of these policies are critical to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include a determination of the allowance for loan losses and the valuation of mortgage servicing rights. Allowance for Loan Losses A loan is considered impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the loan's observable market price or the estimated fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged to operating expense. Loan losses are charged against the allowance when management believes the loans are uncollectible. Subsequent recoveries, if any, are credited to the allowance. The Company maintains an allowance for loan losses to absorb probable loan losses inherent in the portfolio. The allowance for loan losses is maintained at a level management considers to be adequate to absorb probable loan losses inherent in the portfolio, based on evaluations of the collectibility and historical loss experience of loans. The allowance is based on ongoing assessments of the probable estimated losses inherent in the loan portfolio. The Company's methodology for assessing the appropriate allowance level consists of several key elements, as described below. All delinquent loans that meet regulatory requirements are included on the Asset Watch List. The Asset Watch List is reviewed quarterly by the Asset Watch Committee for any classification beyond the regulatory rating based on a loan's delinquency. Commercial and commercial real estate loans are individually risk rated per the loan policy. Homogenous loans such as consumer and residential mortgage loans are not individually risk rated by management. They are risk rated based on computer file data that management believes will provide a good basis for the loans' quality. For all loans not listed individually on the Asset Watch List, historical loss rates based on the last four years are the basis for developing expected charge-offs for each pool of loans. Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management's judgment, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the local economy, trends in the nature and volume of loans (delinquencies, charge-offs, nonaccrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and the Company's internal credit review function. A portion of the allowance is not allocated to any particular loan type and is maintained in recognition of the inherent inability to precisely determine the loss potential in any particular loan or pool of loans. Among the factors used by management in determining the unallocated portion of the allowance are current economic conditions, trends in the Company's loan portfolio delinquency, losses and recoveries; level of under performing and nonperforming loans; and concentrations of loans in any one industry. Valuation of Mortgage Servicing Rights The Company recognizes the rights to service mortgage loans as separate assets, which are included in other assets in the consolidated balance sheet. The total cost of loans when sold is allocated between loans and mortgage servicing rights ("MSR's") based on the relative fair values of each. MSR's are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value. MSR's are evaluated for impairment based on the fair value of those rights. The Company uses a present value cash flow valuation model to establish the fair value of the MSR's. Factors included in the calculation of fair value of the MSR's include estimating the present value of future net cash flows, market loan prepayment speeds for similar loans, discount rates, servicing costs, and other economic factors. Servicing rights are amortized over the estimated period of net servicing revenue. It is likely that these economic factors will change over the life of the MSR's, resulting in different valuations of the MSR's. The differing valuations will affect the carrying value of the MSR's on the balance sheet as well as the income recorded from loan servicing in the income statement.
CONSOLIDATED BALANCE SHEETS (in thousands except share data) ------------------------------------ Dec 2003 Dec 2002 June 2002 - --------------------------------------------------------------------------------------------------------------------------- Assets: Cash $ 22,734 $ 27,404 $ 25,006 Interest-bearing deposits 11,444 26,288 19,472 ----------- ---------- ----------- Total cash and cash equivalents 34,178 53,692 44,478 ----------- ---------- ----------- Securities available for sale at fair value (amortized cost $123,243, $113,000 and $113,132)(Note 2) 123,638 114,440 114,989 Securities held to maturity at amortized cost (fair value $1,883, $3,147 and $3,619) (Note 2) 1,828 3,026 3,493 Loans held for sale (fair value $6,357, $31,055 and $6,383) (Note 4) 6,272 30,560 6,302 Loans receivable, net of allowance for loan losses of $7,506, $7,172 and $6,451 (Note 3) 630,672 628,883 631,815 Investments in joint ventures (Note 5) 5,501 6,710 8,153 Federal Home Loan Bank stock (Note 9) 9,965 9,965 9,965 Accrued interest receivable, net (Note 6) 3,733 4,289 4,431 Premises and equipment, net (Note 7) 13,987 12,973 12,192 Real estate owned 1,739 1,472 2,239 Prepaid expenses and other assets 9,061 8,259 6,768 Cash surrender value of life insurance 11,359 10,841 9,792 Goodwill, net 1,395 1,395 1,395 ----------- ---------- ----------- Total Assets $ 853,328 $ 886,505 $ 856,012 =========== ========== =========== Liabilities and Shareholders' Equity: Liabilities: Deposits (Note 8) $ 588,915 $ 609,358 $ 577,480 Federal Home Loan Bank advances (Note 9) 154,296 171,635 174,139 Senior debt (Note 10) 14,242 14,242 11,200 Other borrowings (Note 10) 624 1,867 3,341 Advance payments by borrowers for taxes and insurance 76 229 442 Accrued expenses and other liabilities 11,153 11,380 12,324 ----------- ---------- ----------- Total liabilities 769,306 808,711 778,926 ----------- ---------- ----------- 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: 12,616 9,184 9,086 4,312,805 shares at December 31, 2003 4,228,859 shares at December 31, 2002 4,336,515 shares at June 30, 2002 Retained earnings, restricted 71,436 68,156 67,150 Accumulated other comprehensive income, net (30) 454 850 ----------- ---------- ----------- Total shareholders' equity 84,022 77,794 77,086 ----------- ---------- ----------- Total Liabilities and Shareholders' Equity $ 853,328 $ 886,505 $ 856,012 =========== ========== ========== See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share data) Twelve Six Months Months Ended Ended Year Ended ------------------------------------------------------ Dec 2003 Dec 2002 June 2002 June 2001 - ------------------------------------------------------------------------------------------------------------- Interest Income: Loans receivable (Note 3) $ 41,313 $ 23,297 $ 50,230 $ 57,590 Securities available for sale and held to maturity 3,932 2,772 5,488 6,622 Other interest income 357 171 580 545 ------------ ------------ ------------ ------------ Total interest income 45,602 26,240 56,298 64,757 ------------ ------------ ------------ ------------ Interest Expense: Deposits (Note 8) 12,204 7,514 18,716 26,710 Advances from Federal Home Loan Bank (Note 9) 9,221 5,205 11,106 11,987 Other borrowings (Note 10) 839 426 813 819 ------------ ------------ ------------ ------------ Total interest expense 22,264 13,145 30,635 39,516 ------------ ------------ ------------ ------------ Net interest income 23,338 13,095 25,663 25,241 ------------ ------------ ------------ ------------ Provision for loan losses 1,268 1,221 1,423 1,680 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 22,070 11,874 24,240 23,561 ------------ ------------ ------------ ------------ Other Income: Gain on sale of loans 7,492 3,740 4,456 1,975 Gain (loss) on sale of securities available for sale (83) 4 92 (196) Income from joint ventures (Note 5) 668 141 880 811 Insurance, annuity income, other fees 1,677 717 1,400 1,159 Service fees on NOW accounts 2,715 1,316 2,241 2,316 Net gain on real estate owned 197 114 271 107 Loan servicing income, net of impairments 575 (136) 1,031 836 Miscellaneous 1,847 973 2,018 2,012 ------------ ------------ ------------ ------------ Total other income 15,088 6,869 12,389 9,020 ------------ ------------ ------------ ------------ Other Expenses: Compensation and employee benefits (Note 13) 12,520 5,745 10,813 9,270 Occupancy and equipment 3,027 1,453 2,850 2,530 Service bureau expense 957 428 1,029 938 Federal insurance premium (Note 12) 95 49 104 113 Marketing 655 223 571 549 Goodwill amortization - - - 101 Miscellaneous 5,241 2,477 4,678 4,012 ------------ ------------ ------------ ------------ Total other expenses 22,495 10,375 20,045 17,513 ------------ ------------ ------------ ------------ Income before income taxes 14,663 8,368 16,584 15,068 Income tax provision (Note 11) 5,020 3,071 6,245 5,519 ------------ ------------ ------------ ------------ Net Income $ 9,643 $ 5,297 $ 10,339 $ 9,549 ============ ============ ============ ============ Basic Earnings per Common Share $ 2.26 $ 1.23 $ 2.34 $ 2.13 Diluted Earnings per Common Share $ 2.15 $ 1.17 $ 2.25 $ 2.07 See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands except share data) ---------------------------------------------------------------------------- Accumulated Other Total Shares Common Retained Comprehensive Shareholders' Outstanding Stock Earnings Income (Loss) Equity - ---------------------------------------------------------------------------------------------------------------------------- Balance at June 2000 4,734,585 $ 8,335 $ 62,251 $ (1,100) $ 69,486 Comprehensive income: Net income 9,549 9,549 Change in unrealized gain on securities available for sale, net of reclassification adjustment and tax effect 1,394 1,394 Change in fair value of cash flow hedge, net of tax (70) (70) - ---------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 10,873 - ---------------------------------------------------------------------------------------------------------------------------- Stock options exercised 17,848 117 117 Stock repurchased (336,729) (501) (5,575) (6,076) Tax benefit related to exercise of non-qualified stock options 82 82 Cash dividends ($.550 per share) (2,438) (2,438) - ---------------------------------------------------------------------------------------------------------------------------- Balance at June 2001 4,415,704 8,033 63,787 224 72,044 Comprehensive income: Net income 10,339 10,339 Change in unrealized gain on securities available for sale, net of reclassification adjustment and tax effect 924 924 Change in fair value of cash flow hedge, net of tax (298) (298) - ---------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 10,965 - ---------------------------------------------------------------------------------------------------------------------------- Stock options exercised 132,961 1,311 1,311 Stock repurchased (212,150) (316) (4,448) (4,764) Tax benefit related to exercise of non-qualified stock options 58 58 Cash dividends ($.576 per share) (2,528) (2,528) - ---------------------------------------------------------------------------------------------------------------------------- Balance at June 2002 4,336,515 9,086 67,150 850 77,086 Comprehensive income: Net income 5,297 5,297 Change in unrealized gain on securities available for sale, net of reclassification adjustment and tax effect (272) (272) Change in fair value of cash flow hedge, net of tax (124) (124) - ---------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 4,901 - ---------------------------------------------------------------------------------------------------------------------------- Stock options exercised 22,344 292 292 Stock repurchased (130,000) (194) (2,960) (3,154) Cash dividends ($.313 per share) (1,331) (1,331) - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 2002 4,228,859 9,184 68,156 454 77,794 Comprehensive income: Net income 9,643 9,643 Change in unrealized gain on securities available for sale, net of reclassification adjustment and tax effect (687) (687) Change in fair value of cash flow hedge, net of tax 203 203 - ---------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 9,159 - ---------------------------------------------------------------------------------------------------------------------------- Stock options exercised 224,346 3,128 3,128 Stock repurchased (140,400) (209) (3,366) (3,575) Tax benefit related to exercise of non-qualified stock options 513 513 Cash dividends ($.700 per share) (2,997) (2,997) - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 2003 4,312,805 $ 12,616 $ 71,436 $ (30) $ 84,022 ============================================================================================================================ See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Twelve Six Months Months Ended Ended Year Ended ------------------------------------------------------- Dec 2003 Dec 2002 June 2002 June 2001 ------------------------------------------------------- Cash Flows From Operating Activities: Net income $ 9,643 $ 5,297 $ 10,339 $ 9,549 Adjustments to reconcile net income to net cash from operating activities: Accretion of discounts, amortization and depreciation 2,212 924 1,197 768 Provision for loan losses 1,268 1,221 1,423 1,680 Net gain from sale of loans (7,492) (3,740) (4,456) (1,975) Net (gain) loss from sale of securities available for sale 83 (4) (92) 196 Income from joint ventures and net gain from real estate owned (865) (255) (1,151) (918) Net loan fees deferred (recognized) (22) 36 61 (56) Proceeds from sale of loans held for sale 381,764 210,692 256,579 131,580 Origination of loans held for sale (349,984) (231,210) (246,042) (139,612) Decrease (increase) in accrued interest and other assets (2,805) (1,893) (7,377) 218 Increase in other liabilities (177) (1,281) 5,270 1,786 ----------- ---------- ---------- ---------- Net Cash From Operating Activities 33,625 (20,213) 15,751 3,216 ----------- ---------- ---------- ---------- Cash Flows From Investing Activities: Net principal received (disbursed) on loans 7,570 9,059 45,525 (15,034) Proceeds from: Maturities/Repayments of: Securities held to maturity 1,304 472 1,822 1,498 Securities available for sale 131,136 38,395 27,772 8,417 Sales of: Securities available for sale 40,078 7,360 20,237 74,471 Real estate owned and other asset sales 2,328 1,305 4,545 1,505 Purchases of: Loans (10,605) (7,384) (4,272) (9,135) Securities available for sale (182,214) (45,822) (79,349) (61,853) Securities held to maturity (100) - - (1,010) Federal Home Loan Bank stock - - (99) (829) Investment in joint ventures, net 1,877 1,584 2,802 1,069 Investment in cash surrender value of life insurance - (785) - (2,500) Acquisition of property and equipment (2,557) (1,506) (1,766) (4,097) ----------- ---------- ---------- ---------- Net Cash From Investing Activities (11,183) 2,678 17,217 (7,498) ----------- ---------- ---------- ---------- Cash Flows From Financing Activities: Net increase (decrease) in deposits (20,443) 31,878 937 3,650 Proceeds from advances from Federal Home Loan Bank 14,700 17,600 29,700 154,400 Repayment of advances from Federal Home Loan Bank (32,039) (20,104) (47,628) (137,819) Proceeds from senior debt - 3,042 - 5,500 Repayment of senior debt - - - (505) Net increase (decrease) from overnight borrowings (1,243) (1,474) (1,000) 1,599 Common stock options exercised, net of fractional shares paid 3,641 292 1,369 198 Repurchase of common stock (3,575) (3,154) (4,764) (6,075) Payment of dividends on common stock (2,997) (1,331) (2,528) (2,438) ----------- ---------- ---------- ---------- Net Cash From Financing Activities (41,956) 26,749 (23,914) 18,510 ----------- ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (19,514) 9,214 9,054 14,228 Cash and cash equivalents, beginning of period 53,692 44,478 35,424 21,196 ----------- ---------- ---------- ---------- Cash and Cash Equivalents, End of Period $ 34,178 $ 53,692 $ 44,478 $ 35,424 =========== ========== ========== ========== Supplemental Information: Cash paid for interest $ 22,398 $ 13,032 $ 31,191 $ 38,825 Cash paid for income taxes $ 5,840 $ 3,570 $ 6,574 $ 6,853 Assets acquired through foreclosure $ 3,606 $ 1,104 $ 4,342 $ 1,427 See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Twelve Months Ended December 31, 2003 And The Six Months Ended December 31, 2002 And For Each Of The Years In The Two Year Period Ended June 30, 2002 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 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 subsidiaries, HomeFed Financial Corp. and HomeFederal Bank (the "Bank") and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. On September 24, 2002, the Company changed its fiscal year end from June 30 to December 31. Description of Business The Company is a bank holding company. The Bank provides financial services to south-central Indiana through its main office in Columbus and 17 other full service banking offices. 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, the valuation of mortgage servicing rights, the valuation of investments in joint ventures and the fair value of securities. Cash and Cash Equivalents All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. Securities Securities are required to be classified as held to maturity, available for sale or trading. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity. Debt and equity securities not classified as either held to maturity or trading securities are classified as available for sale. Only those securities classified as held to maturity are reported at amortized cost, with those available for sale and trading reported at fair value with unrealized gains and losses included in shareholders' equity or income, respectively. Premiums and discounts are amortized over the contractual lives of the related securities using the level yield method. Gain or loss on sale of securities is based on the specific identification method. Loans Held for Sale Loans held for sale consist of fixed rate mortgage loans conforming to established guidelines and held for sale to the secondary market. Mortgage loans held for sale are carried at the lower of cost or fair value determined on an aggregate basis. Gains and losses on the sale of these mortgage loans are included in other income. Mortgage Servicing Rights The Company recognizes the rights to service mortgage loans as separate assets, which are included in other assets in the consolidated balance sheet. The total cost of loans when sold is allocated between loans and mortgage servicing rights, ("MSR's"), based on the relative fair values of each. MSR's are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value. MSR's are evaluated for impairment based on the fair value of those rights. The Company uses a present value cash flow valuation model to establish the fair value of the MSR's. Factors included in the calculation of fair value of the MSR's include estimating the present value of future net cash flows, market loan prepayment speeds for similar loans, discount rates, servicing costs, and other economic factors. Servicing rights are amortized over the estimated period of net servicing revenue. It is likely that these economic factors will change over the life of the MSR's, resulting in different valuations of the MSR's. The differing valuations will affect the carrying value of the MSR's on the balance sheet as well as the income recorded from loan servicing in the income statement. 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. 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. Uncollected Interest An allowance for the loss of uncollected interest is generally provided on loans which are more than 90 days past due. The only loans which are 90 days past due and do not have an allowance for the loss of interest, are loans where the Bank is guaranteed reimbursement of interest by either a mortgage insurance contract or by a government agency such as Rural Development. If neither of these criteria is met an 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. Allowance for Loan Losses A loan is considered impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the loan's observable market price or the estimated fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged to operating expense. Loan losses are charged against the allowance when management believes the loans are uncollectible. Subsequent recoveries, if any, are credited to the allowance. The Company maintains an allowance for loan losses to absorb probable loan losses inherent in the portfolio. The allowance for loan losses is maintained at a level management considers to be adequate to absorb probable loan losses inherent in the portfolio, based on evaluations of the collectibility and historical loss experience of loans. The allowance is based on ongoing assessments of the probable estimated losses inherent in the loan portfolio. The Company's methodology for assessing the appropriate allowance level consists of several key elements, as described below. All delinquent loans that meet regulatory requirements are included on the Asset Watch List. The Asset Watch List is reviewed quarterly by the Asset Watch Committee for any classification beyond the regulatory rating based on the loans' delinquency. Commercial and commercial real estate loans are individually risk rated per the loan policy. Homogeneous loans such as consumer and residential mortgage loans are not individually risk rated by management. They are risk rated based on computer file data that management believes will provide a good basis for the loans' quality. For all loans not listed individually on the Asset Watch List, historical loss rates based on the last four years are the basis for developing expected charge-offs for each pool of loans. Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management's judgment, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the local economy, trends in the nature and volume of loans (delinquencies, charge-offs, nonaccrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and the Company's internal credit review function. A portion of the allowance is not allocated to any particular loan type and is maintained in recognition of the inherent inability to precisely determine the loss potential in any particular loan or pool of loans. Among the factors used by management in determining the unallocated portion of the allowance are current economic conditions; trends in the Company's loan portfolio delinquency, losses and recoveries; level of under performing and nonperforming loans; and concentrations of loans in any one industry. 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 properties 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-nine years. Derivative Financial Instruments On July 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. All derivatives, whether designated as a hedge, or not, are required to be recorded on the balance sheet at fair value. The Company designates its fixed rate and variable rate interest rate swaps as fair value and cash flow hedge instruments, respectively. If the derivative is designated as a fair value hedge, the changes in fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the changes in fair value of the derivative and of the hedged item attributable to the hedged risk are recorded in accumulated other comprehensive income (OCI), net of income taxes. The adoption of this standard resulted in a fair value hedge asset of $271,000 being recorded on July 1, 2000 and an offsetting contra asset for the same amount being applied as a reduction to commercial real estate loans. 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 and variable rate debt obligations. As of December 31, 2003, the notional amount of the Company's two outstanding interest rate swaps on commercial loans was $5.1 million with maturities in 2008 and 2009, as discussed in Note 3. The notional amount of the Company's two outstanding interest rate swaps on debt obligations was $9.2 million with maturities in 2004 and 2006, as discussed in Note 10. As of December 31, 2003, the fair value of the fair value hedge liability was adjusted to $620,000. As of December 31, 2003, the fair value of the cash flow hedge liability was $480,000. The total income statement impact resulting from the fair value and cash flow hedges was zero, as management has determined there to be no ineffectiveness in accordance with SFAS 133. Goodwill On July 1, 2001, the Company early adopted, as permitted, Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." In accordance with SFAS 142, the Company ceased annual goodwill amortization of approximately $101,000. The new rules also require an initial goodwill impairment assessment in the year of adoption and at least annual impairment tests thereafter. Management determined that there was no impairment charge resulting from the adoption of SFAS 142 and its annual impairment test. Income Taxes The Company and its wholly owned subsidiaries file consolidated income tax returns. Deferred income tax assets and liabilities reflect the impact of temporary differences between amounts of assets and liabilities recorded for financial reporting purposes and basis of such assets and liabilities as measured by tax laws and regulations. Earnings per Common Share Earnings per share of common stock are based on the weighted average number of basic shares and dilutive shares outstanding during the year. The following is a reconciliation of the weighted average common shares for the basic and diluted earnings per share computations:
Twelve Six Months Months Ended Ended Year Ended ------------------------------------------------------------------- Dec 2003 Dec 2002 June 2002 June 2001 - ----------------------------------------------------------------------------------------------------------- Basic Earnings per Share: Weighted average common shares 4,267,257 4,300,578 4,409,829 4,485,583 =============== =============== =============== =============== Diluted Earnings per Share: Weighted average common shares 4,267,257 4,300,578 4,409,829 4,485,583 Dilutive effect of stock options 216,088 214,551 178,765 137,836 --------------- --------------- --------------- --------------- Weighted average common and incremental shares 4,483,345 4,515,129 4,588,594 4,623,419 =============== =============== =============== ===============
Comprehensive Income The following is a summary of the Company's comprehensive income: (dollars in thousands) Twelve Six Months Months Ended Ended Year Ended ----------------------------------------------------- Dec 2003 Dec 2002 June 2002 June 2001 ----------------------------------------------------------------------------------------------------- Net Income $ 9,643 $ 5,297 $10,339 $ 9,549 Other comprehensive income: Unrealized holding gains (losses) from securities available for sale (1,127) (418) 1,482 2,128 Reclassification adjustment for (gains) losses realized in income 83 (4) (92) 196 Unrealized gains (losses) from cash flow hedge 336 (205) (494) (117) -------- ------- ------- ------- Net unrealized gains (losses) (708) (627) 896 2,207 Tax effect 224 231 (270) (883) -------- ------- ------- ------- Other comprehensive income, net of tax (484) (396) 626 1,324 -------- ------- ------- ------- Comprehensive Income $ 9,159 $ 4,901 $10,965 $10,873 ======== ======= ======= =======
Segments In accordance with Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information," 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 operates in one geographical area and does not have a single external customer from which it derives 10 percent or more of its revenue. Stock Based Compensation The Company has stock-based employee compensation plans, which are described more fully in Note 14. The company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
Twelve Six Months Months Ended Ended Year Ended ------------------------------------------------------------------------------ (dollars in thousands, except share data) Dec 2003 Dec 2002 June 2002 June 2001 - --------------------------------------------------------------------------------------------------------------------------- Net income, as reported $ 9,643 $ 5,297 $10,339 $ 9,549 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (206) (63) (401) (296) ------- ------- ------- ------- Pro forma net income $ 9,437 $ 5,234 $ 9,938 $ 9,253 ======= ======== ======= ======= Earnings per share: Basic---as reported $ 2.26 $ 1.23 $ 2.34 $ 2.13 Basic---pro forma $ 2.21 $ 1.22 $ 2.25 $ 2.06 Diluted---as reported $ 2.15 $ 1.17 $ 2.25 $ 2.07 Diluted---pro forma $ 2.10 $ 1.16 $ 2.17 $ 2.00
The pro forma amounts are not representative of the effects on reported net income for future years. Changes in Presentation Certain amounts and items appearing in the prior periods' financial statements have been reclassified to conform to the current presentation. New Accounting Pronouncements Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities," was issued in June 2002. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. Management does not believe this statement had a material effect on its consolidated financial statements. As of December 31, 2003, there were no such exit or disposal activities. Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation--Transition and Disclosure, an amendment of FASB Statement No. 123," was issued in December 2002 and is effective for fiscal years ending after December 15, 2002. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results. Management has included the new disclosure requirements in its consolidated financial statements. Statement of Financial Accounting Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," was issued in April 2003 and is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. In addition, except as stated below, all provisions of SFAS 149 are to be applied prospectively. The provisions of SFAS 149 that relate to Statement 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, will continue to be applied in accordance with their respective effective dates. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." Management has determined the adoption of SFAS 149 did not have a material effect on its consolidated financial statements. Statement of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," was issued in May 2003 and is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The requirements of SFAS 150 apply to issuers' classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS 150 does not apply to features that are embedded in a financial instrument that is not a derivative in its entirety. Management has determined the adoption of SFAS 150 did not have a material effect on its consolidated financial statements. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.'' FIN 45 requires that certain guarantees must be recognized at fair value. FIN 45 also requires disclosure of detailed information about each guarantee or group of guarantees. The disclosure requirements are effective for financial statements ending after December 15, 2002. The recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002. Management has determined the adoption of FIN 45 did not have a material effect on its consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities - an Interpretation of Accounting Research Bulletin (ARB) No. 51." FIN 46 requires the primary beneficiary to consolidate a variable interest entity ("VIE") if it has a variable interest that will absorb a majority of the entity's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both. FIN 46 applies immediately to VIEs created after January 31, 2003, and to VIEs in which the entity obtains an interest after that date. Management has determined the adoption of FIN 46 did not have a material effect on its consolidated financial statements.
2. SECURITIES Securities are summarized as follows: (in thousands) December 31, 2003 December 31, 2002 --------------------------------------------------------------------------------------- Gross Unrealized Gross Unrealized Amortized ---------------- Fair Amortized ---------------- Fair Cost Gains Losses Value Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------- Held to Maturity: Municipal bonds $ 1,250 $ 20 $ - $ 1,270 $ 1,985 $ 55 $ - $ 2,040 Certificate of deposit 100 - - 100 100 - - 100 Collateralized mortgage obligations - - - - 14 - - 14 Mortgage backed securities 478 35 - 513 927 66 - 993 --------------------------------------------------------------------------------------- Total Held to Maturity $ 1,828 $ 55 $ - $ 1,883 $ 3,026 $ 121 $ - $ 3,147 ======================================================================================= Available for Sale: Agency bonds $ 51,442 $ 300 $ (30) $ 51,712 $ 42,386 $ 313 $ (2) $ 42,697 Asset backed securities - - - - 5,970 86 - 6,056 Municipal bonds 14,636 142 (2) 14,776 - - - - Collateralized mortgage obligations 27,095 108 (131) 27,072 39,316 714 - 40,030 Mortgage backed securities 22,889 234 (171) 22,952 12,048 574 - 12,622 Corporate debt 3,428 34 (77) 3,385 8,448 82 (209) 8,321 Equity mutual funds 3,678 - (12) 3,666 4,757 13 (131) 4,639 Equity securities 75 - - 75 75 - - 75 --------------------------------------------------------------------------------------- Total Available for Sale $l23,243 $ 818 $(423) $123,638 $113,000 $1,782 $(342) $114,440 =======================================================================================
June 30, 2002 ------------------------------------------------- Gross Unrealized Amortized ---------------- Fair Cost Gains Losses Value - -------------------------------------------------------------------------------- Held to Maturity: Municipal bonds $ 2,210 $ 61 $ - $ 2,271 Certificate of deposit 100 - - 100 Collateralized mortgage obligations 128 2 - 130 Mortgage backed securities 1,055 63 - 1,118 ------------------------------------------------- Total Held to Maturity $ 3,493 $ 126 $ - $ 3,619 ================================================= Available for Sale: Agency bonds $ 14,358 $ 198 $ - $ 14,556 Asset backed securities 5,965 89 - 6,054 Municipal bonds - - - - Collateralized mortgage obligations 60,431 1,016 (5) 61,442 Mortgage backed securities 16,744 553 - 17,297 Corporate debt 10,876 230 (129) 10,977 Equity mutual funds 4,683 9 (104) 4,588 Equity securities 75 - - 75 ------------------------------------------------- Total Available for Sale $113,132 $2,095 $(238) $114,989 ================================================= Certain securities, with amortized cost and fair value of $2.5 million at December 31, 2003, amortized cost and fair value of $2.0 million at December 31, 2002 and amortized cost of $2.9 million and fair value of $3.0 million at June 30, 2002, 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 December 31, 2003, 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 in one year or less $ - $ - - $ 4,009 $ 4,016 1.21% Due after 1 year through 5 years - - - 47,183 47,445 2.89% Due after 10 years - - - 250 251 2.26% Municipal bonds: Due after 1 year through 5 years 475 487 6.05% 4,880 4,906 3.46% Due after 5 years through 10 years 535 541 7.45% 9,756 9,870 4.89% Due after 10 years 240 242 7.79% - - - Certificate of deposit: Due in one year or less 100 100 1.10% - - - Collateralized mortgage obligations - - - 27,095 27,072 3.57% Mortgage backed securities 478 513 7.47% 22,889 22,952 4.22% Corporate debt: Due in one year or less - - - 1,505 1,539 6.13% Due after 10 years - - - 1,923 1,846 2.29% Equity mutual funds - - - 3,678 3,666 2.15% Equity securities - - - 75 75 - ------------------------------------------------------- Total $ 1,828 $ 1,883 6.79% $ 123,243 $123,638 3.42% =======================================================
Activities related to the sales of securities available for sale and called securities are summarized as follows: (in thousands) Twelve Six Months Months Ended Ended Year Ended --------------------------------------- Dec 2003 Dec 2002 June 2002 June 2001 - --------------------------------------------------------------------- Proceeds from sales $40,078 $7,360 $20,237 $74,471 Gross gains on sales 37 5 92 205 Gross losses on sales 120 1 - 401 The majority of unrealized losses in the portfolio resulted from increases in market interest rates and not from deterioration in the creditworthiness of the issuer. The total number of security positions in the investment portfolio that were in an unrealized loss position at December 31, 2003 is 29. The Company defines securities in a continuous unrealized loss position as a security that has been so classified for a period greater than 31 consecutive days as of December 31, 2003. Investments that have been in a continuous unrealized loss position are summarized as follows: (in thousands)
Less than Twelve Months Twelve Months Or Longer Total ------------------------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses - -------------------------------------------------------------------------------------------------------------------------------- Agency bonds $ 5,830 (30) $ - - $ 5,830 (30) Collateralized mortgage obligations 12,454 (131) - - 12,454 (131) Mortgage backed securities 13,015 (171) - - 13,015 (171) Corporate debt - - 1,846 (77) 1,846 (77) Equity mutual funds 3,572 (12) - - 3,572 (12) ------------------------------------------------------------------------------------- Total Temporarily Impaired Securities $ 34,871 (344) $ 1,846 (77) $36,717 (421) =====================================================================================
3. LOANS RECEIVEBLE Loans receivable are summarized as follows: (in thousands) ----------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 ------------------------------------------------------------------------------- First mortgage loans: Residential single family $178,159 $195,255 $214,565 Commercial and multi-family 171,397 183,369 172,495 Property under construction 94,431 63,017 54,639 Unimproved land 3,201 2,795 4,712 Home equity 35,515 40,998 45,541 Second mortgage 44,529 39,276 40,278 Commerical 99,085 90,063 86,435 Mobile home 4,365 5,834 6,625 Automobile 23,244 25,149 25,355 Consumer 4,221 4,681 4,535 Savings account 2,736 3,018 3,092 ---------- --------- --------- Gross loans receivable 660,883 653,455 658,272 Allowance for loan losses (7,506) (7,172) (6,451) Deferred loan fees (555) (544) (508) Undisbursed loan proceeds (22,150) (16,856) (19,498) ---------- --------- --------- Loans Receivable, Net $630,672 $628,883 $631,815 ========== ========= ========= 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 $2.5 million at December 31, 2003, $3.3 million at December 31, 2002 and $2.3 million at June 30, 2002. The Bank would have recorded interest income of $461,000 for the year ended December 31, 2003, $168,000 for the six month period ended December 31, 2002 and $503,000 and $432,000 for the fiscal years ended June 30, 2002 and 2001, respectively, if loans on non-accrual status had been current in accordance with their original terms. Actual interest received was $253,000, $83,000, $431,000 and $220,000 for the fiscal year ended December 31, 2003, for the six months ended December 31, 2002, and the fiscal years ended June 30, 2002 and 2001, 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 December 31, 2003, December 31, 2002 and June 30, 2002, on these restructured loans were $298,000, $266,000 and $324,000, 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 $171.4 million, $183.4 million and $172.5 million at December 31, 2003 and 2002, and June 30, 2002, 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, $22.0, $22.8 million and $29.6 million were collateralized by multi-family residential property at December 31, 2003 and 2002, and June 30, 2002, respectively. Effective July 1, 1998 and January 2, 1999, the company entered into two interest rate swap agreements with KeyBank on two commercial loans. In the first agreement the company will receive variable rate payments at thirty-day London inter bank offering rate ("LIBOR") index and make fixed rate payments at 6.28%. The notional amount on the swap was $3.2 million as of December 31, 2003. The thirty-day LIBOR was 1.12% at December 31, 2003. The termination date of the first swap agreement is July 1, 2008. In the second agreement the company will receive variable rate payments at thirty day LIBOR and make fixed rate payments at 6.24%. The notional amount of the swap was $1.9 million as of December 31, 2003. The termination date of the second swap agreement is January 2, 2009. The two interest rate swaps are settled on a net basis. The company is exposed to losses, in the event of nonperformance by KeyBank, for the net interest rate differential when floating rates exceed the fixed maximum rate. However, the company does not anticipate nonperformance by the counter party. Under the capital standards provisions of FIRREA, the loans-to-one-borrower limitation is generally 15% of unimpaired capital and surplus, which, for the Bank, was approximately $14.5 million, $14.1 million and $13.6 million at December 31, 2003 and 2002, and June 30, 2002, respectively. As of December 31, 2003 and 2002, and June 30, 2002, the Bank was in compliance with this limitation. Aggregate loans to officers and directors included above were $11.6 million, $13.2 million and $13.0 million as of December 31, 2003 and 2002, and June 30, 2002, 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 fiscal year ended December 31, 2003, loans of $2.7 million were disbursed to officers and directors and repayments of $4.3 million were received from officers and directors. An analysis of the allowance for loan losses is as follows: (in thousands) Twelve Six Months Months Ended Ended Year Ended -------------------------------------------- Dec 2003 Dec 2002 June 2002 June 2001 - -------------------------------------------------------------------------------- Beginning balance $ 7,172 $ 6,451 $ 5,690 $ 4,949 Provision for loan losses 1,268 1,221 1,423 1,680 Charge-offs (1,079) (544) (730) (1,019) Recoveries 145 44 68 80 -------- ---------- -------- -------- Ending Balance $ 7,506 $ 7,172 $ 6,451 $ 5,690 ======== ========== ======== ======== The following is a summary of information pertaining to impaired loans: (in thousands) - -------------------------------------------------------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 - -------------------------------------------------------------------------------- Impaired loans with a valuation reserve $ 57 $ 234 $ - Impaired loans with no valuation reserve 8,982 6,063 580 ------ ------ ------ Total Impaired Loans $9,039 $6,297 $ 580 ====== ====== ====== Valuation reserve on average impaired loans $ 27 $ 111 $ - Average impaired loans $6,866 $5,534 $2,602 4. MORTGAGE BANKING ACTIVITIES At December 31, 2003 and 2002, and June 30, 2002, the Bank was servicing loans for others amounting to $611.6 million, $564.9 million and $551.4 million, respectively. Net gain on sales of loans, exclusive of gain attributable to retained MSR's was $5.1 million for the fiscal year ended December 31, 2003, $2.6 million, $2.8 million and $1.4 million for the six month period ended December 31, 2002, and the fiscal years ended June 30, 2002 and 2001, respectively. 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 that become delinquent as defined by the various agreements. At December 31, 2003 and 2002, and June 30, 2002, these obligations were limited to approximately $0, $53,000 and $90,000, respectively. The following analysis reflects the changes in mortgage servicing rights retained: (in thousands) - --------------------------------------------------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 - --------------------------------------------------------------------------- Beginning carrying value $ 2,508 $ 2,511 $ 1,617 Additions 2,356 1,092 1,651 Amortization (1,398) (478) (729) Net change in valuation allowance (83) (617) (28) ------- ------- ------- Ending Carrying Value $ 3,383 $ 2,508 $ 2,511 ======= ======= ======= The carrying value approximates fair value at December 31, 2003 and 2002, and June 30, 2002. 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 December 31, 2003 and 2002, and June 30, 2002 was $1,069,000, $986,000 and $368,000, respectively. The estimated annual amortization expense for the next five years is $865,000, $800,000, $646,000, $456,000, and $272,000. 5. INVESTMENTS IN JOINT VENTURES The Company has invested in joint ventures through its subsidiaries, Home Savings Corporation ("HSC") and HomeFed Financial Corp. On December 31, 2001, the Bank changed its charter from a Federal savings bank charter to an Indiana commercial bank charter. Commercial banks are not permitted to participate in real estate development joint ventures at December 31, 2003. HSC is a partner in five real estate development joint ventures for which exit strategies are either developed, or are currently being developed. The Company, as mandated by the regulators, is in the process of divesting itself of these investments by December 31, 2004, with two one-year extensions available, subject to regulatory approval. The Company is not required to divest itself of its investment in Family Financial Life. The investments are accounted for by the equity method. The Company's interest in these investments is as follows: (in thousands) - ----------------------------------------------------------------------- Equity Period Ended As Of Interest Dec 2003 Dec 2002 June 2002 - ------------------------------------------------------------------------ Family Financial Life 14% $ 774 $ 774 $ 774 Heritage Woods 33% 46 53 53 Home-Breeden 50% 1,600 1,809 2,126 Coventry Associates 65% - - 20 Crystal Lake 50% - 300 307 Broadmoor North/Heathfield 35% 1,227 1,394 1,415 Sycamore Springs 33% 1,581 1,880 2,925 Bloomington Technology 50% 273 500 533 ------- ------- ------ Total Investment $ 5,501 $6,710 $8,153 ======= ====== ======
Summarized condensed unaudited financial statements for these joint ventures are as follows: (in thousands) - -------------------------------------------------------------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 - -------------------------------------------------------------------------------------- Balance Sheets: Cash $ 2,932 $ 2,634 $ 2,883 Investments 2,372 4,020 3,727 Property and equipment, net 619 673 671 Inventory of developed lots 6,359 7,828 8,866 Other assets 556 489 547 ------- ------- ------- Total Assets $12,838 $15,644 $16,694 ======= ======= ======= Notes payable $ 4,783 $ 5,656 $ 6,999 Insurance liabilities 791 1,296 1,407 Other liabilities 277 321 286 ------- ------- ------- Total liabilities 5,851 7,273 8,692 ------- ------- ------- Shareholders' equity 6,987 8,371 8,002 ------- ------- ------- Total Liabilities and Shareholders' Equity $12,838 $15,644 $16,694 ======= ======= =======
Twelve Six Months Months Ended Ended Year Ended ----------------------------------------------------- Dec 2003 Dec 2002 June 2002 June 2001 ------------------------------------------------------------------------------ Income Statements Income: Insurance premiums and commissions $1,353 $2,062 $2,153 $2,479 Investment income 201 283 445 416 Net lot sales 2,189 671 1,809 767 Other income 136 1 165 109 ------- ------- ------- ------- Total income 3,879 3,017 4,572 3,771 ------- ------- ------- ------- Expenses: Commissions 883 987 1,239 1,100 Insurance benefits 394 479 367 326 Interest expense 148 77 497 208 Other expense 920 1,110 1,337 1,315 ------- ------- ------- ------- Total expense 2,345 2,653 3,440 2,949 ------- ------- ------- ------- Net Income $1,534 $ 364 $1,132 $ 822 ======= ======= ======= ======= The notes payable included $4.2 million, $5.2 million and $6.6 million due to HSC and $335,000, $149,000 and $135,000 due to the Bank at December 31, 2003 and 2002, and June 30, 2002, respectively. At December 31, 2003 and 2002, and June 30, 2002, open commitments to these joint ventures included letters of credit totaling $191,000, $609,000 and $609,000, respectively. 6. ACCRUED INTEREST RECEIVABLE Accrued interest receivable consists of the following: (in thousands) - -------------------------------------------------------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 - -------------------------------------------------------------------------------- Loans, less allowance of $183, $185 and $165 $2,838 $3,488 $3,575 Securities 881 770 846 Interest-bearing deposits 14 31 10 ------ ------ ------ Total Accrued Interest Receivable $3,733 $4,289 $4,431 ====== ====== ====== 7. PREMISES AND EQUIPMENT Premises and equipment consists of the following: (in thousands) - -------------------------------------------------------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 - -------------------------------------------------------------------------------- Land $ 2,230 $ 2,230 $ 1,561 Buildings and improvements 15,342 13,893 13,805 Furniture and equipment 7,895 7,875 7,240 -------- ---------- ---------- Total 25,467 23,998 22,606 Accumulated depreciation (11,480) (11,025) (10,414) -------- ---------- ---------- Total Premises and Equipment $13,987 $12,973 $12,192 ======== ========== ========== Depreciation expense included in operations for the fiscal year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and June 30, 2001 totaled $1.5 million, $725,000, $1.5 million and $1.3 million, respectively.
8. DEPOSITS Deposits are summarized as follows: (in thousands) Dec 2003 Dec 2002 June 2002 ------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate - ---------------------------------------------------------------------------------------------------- Non-interest bearing $ 55,535 $ 51,720 $ 49,884 NOW accounts 67,533 0.37% 73,690 0.77% 67,362 0.93% Statement savings 50,269 0.30% 47,809 0.75% 48,382 1.05% Money market savings 112,797 0.74% 120,944 1.53% 121,978 1.57% -------- ----- -------- ----- -------- ----- Total transaction accounts 286,134 0.43% 294,163 0.94% 287,606 1.06% -------- ----- -------- ----- -------- ----- Certificates of deposit: Less than one year 51,516 1.42% 45,039 1.93% 27,175 2.25% 12-23 months 38,270 1.62% 48,920 2.46% 58,959 3.01% 24-35 months 96,665 2.85% 108,069 3.69% 107,408 5.05% 36-59 months 30,655 4.49% 43,765 4.85% 27,559 4.86% 60-120 months 85,675 4.96% 69,402 5.15% 68,773 5.32% -------- ----- -------- ----- -------- ----- Total certificate accounts 302,781 3.21% 315,195 3.73% 289,874 4.42% -------- ----- -------- ----- -------- ----- Total Deposits $588,915 1.86% $609,358 2.39% $577,480 2.74% ======== ===== ======== ===== ======== =====
At December 31, 2003 and 2002, and June 30, 2002, certificates of deposit in amounts of $100,000 or more totaled $102.4 million, $106.4 million and $76.9 million, respectively.
A summary of certificate accounts by scheduled maturities at December 31, 2003 is as follows: (in thousands) 2004 2005 2006 2007 2008 Thereafter Total - ------------------------------------------------------------------------------------------------- 1.99% or less $ 74,060 $14,502 $ 1,119 $ - $ - $ - $ 89,681 2.00% - 2.99% 24,596 21,096 1,607 313 300 - 47,912 3.00% - 3.99% 49,152 1,509 1,620 1,372 4,485 1,715 59,853 4.00% - 4.99% 9,710 9,511 9,913 11,236 3,798 10,979 55,147 5.00% - 5.99% 4,326 4,081 7,501 22,537 2,193 1,612 42,250 Over 6.00% 2,033 4,023 471 782 217 412 7,938 --------------------------------------------------------------------- Total Certificate Amounts $163,877 $54,722 $22,231 $36,240 $10,993 $ 14,718 $302,781 =====================================================================
A summary of interest expense on deposits is as follows: (in thousands) Twelve Six Months Months Ended Ended Year Ended ---------- ---------- ---------------------- Dec 2003 Dec 2002 June 2002 June 2001 ---------- ---------- --------- --------- NOW accounts $ 176 $ 120 $ 379 $ 533 Statement savings 243 222 589 848 Money market savings 1,277 1,138 3,282 5,907 Certificates of deposit 10,508 6,034 14,466 19,422 ------- ------ ------- ------- Total Interest Expense $12,204 $7,514 $18,716 $26,710 ======= ====== ======= ======= 9. FEDERAL HOME LOAN BANK ADVANCES The Bank was eligible to receive advances from the FHLB up to $162.4 million, $207.6 million and $198.6 million at December 31, 2003 and 2002, and June 30, 2002. 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) - -------------------------------------------------- Weighted Year Ending Maturity Average December Amount Rate - -------------------------------------------------- 2004 $ 37,200 5.35% 2005 39,650 5.50% 2006 32,603 5.49% 2007 9,250 5.04% 2008 11,850 4.26% Thereafter 23,743 5.23% -------- ----- Total FHLB Advances $154,296 5.30% ======== ===== 10. OTHER BORROWINGS Senior Debt The Company has a revolving note with LaSalle Bank N.A. whereby the Company may borrow $17.5 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. The ninety-day LIBOR index was 1.15% at December 31, 2003. Interest payments are due ninety days after the date of any principal draws made on the loan and every ninety days thereafter. Maturities of senior debt based on minimum scheduled payments as of December 31, 2003 are: 2004 - $4.6 million and 2006 - $7.6 million. The Company used the funds to buy back shares of the Company's common stock. The assets of the Company collateralize the note. 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 December 31, 2003, the Company was in compliance with the debt covenants. As of December 31, 2003, the company has two swap agreements with LaSalle Bank N.A. In the first agreement the Company will make fixed rate payments at 5.6% and receive variable rate payments at the three-month LIBOR on a notional amount of $4.6 million. The maturity date of the first swap agreement is May 1, 2004. In the second agreement the Company will make fixed rate payments at 5.77% and receive variable rate payments at the three-month LIBOR on a notional amount of $4.6 million. The maturity date of the second swap agreement is February 1, 2006. The two interest rate swaps are settled on a net basis. The Company is exposed to credit loss, in the event of nonperformance by LaSalle Bank N.A., for the net interest rate differential when floating rates exceed the fixed maximum rate. However, the Company does not anticipate nonperformance by the counter party. Other Borrowings In addition to the other borrowings scheduled below, the Bank also has a $5.0 million overdraft line of credit with the Federal Home Loan Bank, none of which was used, as of December 31, 2003 or 2002, or June 30, 2002. (in thousands) - -------------------------------------------------------------------------------- Period Ended Dec 2003 Dec 2002 June 2002 - -------------------------------------------------------------------------------- Official check overnight remittance $ 624 $ 1,867 $ 3,341 -------- -------- -------- Total Other Borrowings $ 624 $ 1,867 $ 3,341 ======== ======== ======== 11. INCOME TAXES An analysis of the income tax provision is as follows: (in thousands) Twelve Six Months Months Ended Ended Year Ended --------------------------------------------- Dec 2003 Dec 2002 June 2002 June 2001 - ----------------------------------------------------------------------------- Current: Federal $ 3,020 $ 3,621 $ 5,869 $ 4,929 State 549 702 1,200 1,022 Deferred 1,451 (1,252) (824) (432) ------- ------- -------- ------- Income Tax Provision $ 5,020 $ 3,071 $ 6,245 $ 5,519 ======= ======= ======== ======= The difference between the financial statement provision and amounts computed by using the statutory rate of 34% is reconciled as follows: (in thousands)
- -------------------------------------------------------------------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 June 2001 - -------------------------------------------------------------------------------------------- Income tax provision at federal statutory rate $ 4,986 $ 2,845 $ 5,639 $ 5,123 State tax, net of federal tax benefit 568 286 722 640 Tax exempt interest (180) (57) (112) (125) Increase in cash surrender value of life insurance (176) (90) (176) (125) Other (178) 87 172 6 ------- ------- ------- ------- Income Tax Provision $ 5,020 $ 3,071 $ 6,245 $ 5,519 ======= ======= ======= =======
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 December 31, 2003 and 2002, and June 30, 2002, respectively. Pursuant to Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," 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)
- ----------------------------------------------------------------------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 - ----------------------------------------------------------------------------------------------- Deferred tax assets: Bad debt reserves, net $2,265 $ 2,478 $ 2,394 Difference in basis of fixed assets - 131 - Other 190 323 195 Deferred compensation 1,377 1,153 1,032 ------- ------- ------ Total deferred tax assets 3,832 4,085 3,621 ------- ------- ------ Deferred tax liabilities: Difference in basis of fixed assets 101 - 205 FHLB dividend 177 185 194 Unrealized gain on securities available for sale 136 494 639 Deferred fees 308 365 361 Originated mortgage servicing rights 1,087 23 537 Other - - 146 ------- ------- ------ Total deferred tax liabilities 1,809 1,067 2,082 ------- ------- ------- Net Deferred Tax Asset $ 2,023 $ 3,018 $ 1,539 ======= ======= =======
12. REGULATORY MATTERS The Company and the Bank are 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 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 Company and the Bank to maintain minimum amounts and ratios (set forth in the following table), of total and Tier 1 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 December 31, 2003, the Company and the Bank met all capital adequacy requirements to which they were subject. As of December 31, 2003 and 2002, and June 30, 2002, the most recent notifications from the Federal Reserve categorized the Company and the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" the Company 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 either entity's category.
Summary of capital amounts and ratios as of December 31, 2003 and 2002, and June 30, 2002: (dollars in thousands) To Be Categorized As "Well Capitalized" Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions ----------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------------------- As of December 31, 2003 Total risk-based capital (to risk-weighted assets) HomeFederal Bank $ 96,739 14.35% $ 53,927 8.0% $ 67,409 10.0% Home Federal Bancorp Consolidated $ 90,164 13.36% $ 54,003 8.0% $ 67,504 10.0% Tier 1 risk-based capital (to risk-weighted assets) HomeFederal Bank $ 89,233 13.24% $ 26,964 4.0% $ 40,446 6.0% Home Federal Bancorp Consolidated $ 82,658 12.24% $ 27,002 4.0% $ 40,503 6.0% Tier 1 leverage capital (to average assets) HomeFederal Bank $ 89,233 10.36% $ 34,437 4.0% $ 43,046 5.0% Home Federal Bancorp Consolidated $ 82,658 9.61% $ 34,418 4.0% $ 43,022 5.0% To Be Categorized As "Well Capitalized" Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions ----------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------------------- As of December 31, 2002 Total risk-based capital (to risk-weighted assets) HomeFederal Bank $ 93,862 13.96% $ 53,795 8.0% $ 67,243 10.0% Home Federal Bancorp Consolidated $ 83,118 12.34% $ 53,883 8.0% $ 67,354 10.0% Tier 1 risk-based capital (to risk-weighted assets) HomeFederal Bank $ 86,690 12.89% $ 26,897 4.0% $ 40,346 6.0% Home Federal Bancorp Consolidated $ 75,946 11.28% $ 26,941 4.0% $ 40,412 6.0% Tier 1 leverage capital (to average assets) HomeFederal Bank $ 86,690 9.80% $ 35,370 4.0% $ 44,213 5.0% Home Federal Bancorp Consolidated $ 75,946 8.56% $ 35,505 4.0% $ 44,382 5.0% To Be Categorized As "Well Capitalized" Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions ------------------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------ As of June 30, 2002 Total risk-based capital (to risk-weighted assets) HomeFederal Bank $ 90,347 13.62% $ 53,062 8.00% $ 66,327 10.00% Home Federal Bancorp Consolidated $ 81,293 12.23% $ 53,196 8.00% $ 66,494 10.00% Tier 1 risk-based capital (to risk-weighted assets) HomeFederal Bank $ 83,896 12.65% $ 26,531 4.00% $ 39,796 6.00% Home Federal Bancorp Consolidated $ 74,842 11.26% $ 26,598 4.00% $ 39,897 6.00% Tier 1 leverage capital (to average assets) HomeFederal Bank $ 83,896 9.91% $ 33,877 4.00% $ 42,346 5.00% Home Federal Bancorp Consolidated $ 74,842 8.81% $ 33,992 4.00% $ 42,490 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 December 31, 2003, approximately $21.9 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, 2003, the latest actuarial valuation, the total plan assets exceeded the actuarially determined value of accrued benefits. The Bank had contribution expenses of $815,000 for the twelve months ended December 2003, $237,000 for six months ended December 2002, and $404,000 and $206,000, for the fiscal years ended June 2002 and June 2001, respectively. Cash contributions to the multi-employer pension plan for these same periods were $471,000, $163,000, $435,000 and $209,000, respectively. Supplemental Retirement Program The Bank has entered into supplemental retirement agreements for certain officers. These agreements are unfunded. However, the Bank has entered into life insurance contracts to fund these agreements. Benefits under these arrangements are generally paid over a 15 year period. The following table sets forth the Plan's funded status and amount recognized in the Bank's consolidated statements of income for the twelve months ended December 31, 2003, six months ended December 31, 2002 and for the fiscal years ended June 30, 2002 and 2001:
------------------------------------------------------------------- Dec 2003 Dec 2002 June 2002 June 2001 - ---------------------------------------------------------------------------------------------------------------------------- Economic assumptions: Discount rate 6.5% 6.5% 8.5% 9.7% Salary rate 4.0% 4.0% 4.0% 4.0% Components of net periodic pension expense: Interest cost on projected benefit obligation $ 176,676 $ 137,121 $ 200,196 $ 124,181 Service cost 64,914 11,292 34,995 64,516 Prior service cost 129,705 96,489 234,860 39,475 --------------- --------------- --------------- -------------- Net periodic pension expense $ 371,295 $ 244,902 $ 470,051 $ 228,172 =============== =============== =============== ==============
A summary of the Plan's funded status at December 31, 2003 and 2002, and June 30, 2002, 2001 is as follows: -------------------------------------------------- Dec 2003 Dec 2002 June 2002 - ------------------------------------------------------------------------------------------------------------------ Projected benefit obligation at beginning of year $ 2,770,882 $ 2,552,969 $ 2,410,778 Interest cost 176,676 137,121 200,196 Service cost 64,914 11,292 34,995 Amendment to plan - - - Actuarial loss 110,988 116,000 - Benefits paid during year (121,060) (46,500) (93,000) --------------- --------------- --------------- Projected benefit obligation at end of year (unfunded status) 3,002,400 2,770,882 2,552,969 Unrecognized net loss (932,859) (951,576) (932,065) --------------- --------------- --------------- Accrued pension liability $ 2,069,541 $ 1,819,306 $ 1,620,904 =============== =============== ===============
Prior service cost is amortized over the estimated remaining service lives of the employees of approximately seven years. 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 $120,000 $54,000, $109,000 and $99,000 during the year ended December 31, 2003, six months ended December 31, 2002 and fiscal years ended June 30, 2002 and 2001, respectively. 14. STOCK OPTIONS The Company has stock option plans for the benefit of officers, other key employees and directors. As of December 31, 2003, the plans were authorized to grant additional options to purchase 310,631 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 the stock option activity for the twelve month period ended December 31, 2003 and the six month period ended December 31, 2002, and for each of the years in the two year period ended June 30, 2002, and the stock options outstanding at the end of the respective periods: ----------------------------- Weighted Average Exercise Options Shares Price - -------------------------------------------------------------------------------- Outstanding June 30, 2000 908,596 $17.52 Granted 105,655 15.87 Forfeited (3,001) 23.06 Exercised (17,848) 6.56 --------- Outstanding June 30, 2001 993,402 17.52 Granted 164,655 18.73 Forfeited (14,687) 20.30 Exercised (132,961) 9.86 --------- Outstanding June 30, 2002 1,010,409 18.68 Granted 22,224 22.65 Forfeited (3,987) 24.46 Exercised (22,344) 13.05 --------- Outstanding December 31, 2002 1,006,302 18.87 --------- Granted 8,724 27.23 Forfeited (19,412) 23.03 Exercised (224,346) 13.94 --------- Outstanding December 31, 2003 771,268 20.30 ========= The following table is an analysis of the remaining weighted average life as of December 31, 2003 of the outstanding options within various exercise price ranges: - ------------------------------------------------------------------------ Exercise Price Number of Options Average Life - ------------------------------------------------------------------------ $10.620 - $16.250 244,137 3.9 $17.575 - $23.000 240,959 6.9 $23.063 - $27.400 286,172 5.5 ------- Total 771,268 5.4 ======= The weighted average fair value of options granted was $5.91 for the fiscal year ended December 31, 2003, $5.18 for the six month period ended December 31, 2002, and $4.58 and $3.59 for the fiscal years ended June 30, 2002 and June 30, 2001, respectively. 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 3.58%, risk-free interest rates ranging from 2.66% to 8.04%, expected volatility ranging from 24.13% to 34.86% and expected life of 5.04 to 5.80 years. Shareholder Rights Plan The Company has adopted a Shareholder Rights Plan and declared a dividend distribution at the rate of one Right for each share of common stock held of record as of the close of business on November 22, 1994, and for each share of common stock issued thereafter up to the Distribution Date (defined below). Each Right entitles holders of common stock to buy one share of common stock of the Company at an exercise price of $80. The Rights would be exercisable, and would detach from the common stock (the "Distribution Date") only if a person or group (i) were to acquire 15 percent or more of the outstanding shares of common stock of the Company; (ii) were to announce a tender or exchange offer that, if consummated, would result in a person or group beneficially owning 30 percent or more of the outstanding shares of common stock of the Company; or (iii) were declared by the Board to be an Adverse Person (as defined in the Plan) if such person or group beneficially owns 10 percent or more of the outstanding shares of common stock in the Company. In the event of any occurrence triggering the Distribution Date, each Right may be exercised by the holder (other than such an acquiring person or group) to purchase shares of common stock of the Company (or, in certain circumstances, common stock of the acquiring person) at a 50% discount to market price. The Company is entitled to redeem the Rights at $.01 per Right at any time. The Rights will expire at the close of business on November 22, 2004. 15. COMMITMENTS Financial Instruments with Off-Balance Sheet Risk In the normal course of business, the Bank makes various commitments to extend credit that are not reflected in the accompanying consolidated financial statements. At December 31, 2003 and 2002, and June 30, 2002, the Bank had loan commitments approximating $23.2, $35.5 million and $29.9 million, respectively, excluding undisbursed portions of loans in process. Loan commitments at December 31, 2003, included commitments to originate fixed rate loans with interest rates ranging from 4.5% to 7.5% totaling $7.3 million and adjustable rate loan commitments with interest rates ranging from 3.3% to 9.5% totaling $15.9 million. Commitments, which are disbursed subject to certain limitations, extend over various periods of time. Generally, unused commitments are cancelled upon expiration of the commitment term as outlined in each individual contract. Outstanding letters of credit were $1.9 million, $2.5 million and $2.4 million at December 31, 2003 and 2002, and June 30, 2002, respectively. Additionally, the Bank had approximately $11.7 million in commitments to sell fixed rate residential loans and $6.8 million in commitments to sell adjustable rate commercial loans at December 31, 2003. 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) December 2003 December 2002 June 2002 -------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Carrying Fair Value Value Value Value Value Value ----------------------------------------------------------------------------------------------------------------------------------- Assets: Cash $ 22,734 $ 22,734 $ 27,404 $ 27,404 $ 25,006 $ 25,006 Interest-bearing deposits 11,444 11,444 26,288 26,288 19,472 19,472 Securities available for sale 123,638 123,638 114,440 114,440 114,989 114,989 Securities held to maturity 1,828 1,883 3,026 3,147 3,493 3,619 Loans held for sale 6,272 6,357 30,560 31,055 6,302 6,383 Loans, net 630,672 648,987 628,883 653,007 631,815 649,880 Accrued interest receivable 3,733 3,733 4,289 4,289 4,431 4,431 Federal Home Loan Bank stock 9,965 9,965 9,965 9,965 9,965 9,965 Cash surrender value of life insurance 11,359 11,359 10,841 10,841 9,792 9,792 Liabilities: Deposits 588,915 597,911 609,358 621,187 577,480 583,881 Federal Home Loan Bank advances 154,296 161,387 171,635 180,429 174,139 182,626 Senior debt 14,242 14,792 14,242 15,161 11,200 11,200 Other borrowings 624 624 1,867 1,867 3,341 3,341 Advance payments by borrowers for taxes and insurance 76 76 229 229 442 442 Accrued interest payable 900 900 1,035 1,035 924 924 Commitments - - - - - - Financial Instruments: Interest rate swaps (1,099) (1,099) (1,592) (1,592) (1,038) (1,038)
The Company, using available market information and appropriate valuation methodologies, has determined the estimated fair values of financial instruments. 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 Swaps The fair value is derived from proprietary models based upon well-recognized financial principles which management believes provide a reasonable approximation of the fair 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 December 31, 2003 and 2002, and June 30, 2002. 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) -------------------------------------- Dec 2003 Dec 2002 June 2002 - -------------------------------------------------------------------------------------------------------------- Condensed Balance Sheets (Parent Company only) Assets: Cash $ 6,857 $ 2,930 $ 1,421 Investment in subsidiary 91,667 89,835 87,280 Other 285 447 361 ----------- ------------ ----------- Total Assets $ 98,809 $ 93,212 $ 89,062 =========== ============ =========== Liabilities: Senior debt $ 14,242 $ 14,242 $ 11,200 Other 545 1,176 776 ----------- ------------ ----------- Total liabilities 14,787 15,418 11,976 ----------- ------------ ----------- Shareholders' equity 84,022 77,794 77,086 ----------- ------------ ----------- Total Liabilities and Shareholders' Equity $ 98,809 $ 93,212 $ 89,062 =========== ============ ===========
--------------------------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 June 2001 - --------------------------------------------------------------------------------------------------------------------------- Condensed Statements of Income (Parent Company only) Dividends from subsidiary $ 7,750 $ 2,914 $ 6,379 $ 5,574 Other 560 271 629 556 ----------- ------------ ----------- ----------- Total income 8,310 3,185 7,008 6,130 ----------- ------------ ----------- ----------- Interest on senior debt 838 425 812 807 Other expenses 751 574 895 925 ----------- ------------ ----------- ----------- Total expenses 1,589 999 1,707 1,732 ----------- ------------ ----------- ----------- Income before taxes and change in undistributed earnings of subisidiary 6,721 2,186 5,301 4,398 Applicable income tax credit (403) (284) (419) (433) ----------- ------------ ----------- ----------- Income before change in undistributed earnings of subsidiary 7,124 2,470 5,720 4,831 Increase in undistributed earnings of subsidiary 2,519 2,827 4,619 4,718 ----------- ------------ ----------- ----------- Net Income $ 9,643 $ 5,297 $ 10,339 $ 9,549 =========== ============ =========== =========== --------------------------------------------------- Period Ended As Of Dec 2003 Dec 2002 June 2002 June 2001 - --------------------------------------------------------------------------------------------------------------------------- Condensed Statements of Cash Flows (Parent Company only) Operating Activities: Net income $ 9,643 $ 5,297 $ 10,339 $ 9,549 Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in other assets 162 (86) (29) (87) Increase (decrease) in accrued expenses and other liabilities (428) 276 44 245 Increase in undistributed earnings of subsidiary (2,519) (2,827) (4,619) (4,718) ----------- ------------ ----------- ----------- Net cash provided by operating activities 6,858 2,660 5,735 4,989 ----------- ------------ ----------- ----------- Investing Activities: Net cash used in investment in HomeFed Financial Corp. - - (768) - ----------- ------------ ----------- ----------- Financing Activities: Repayment of senior debt - - - (505) Funds provided by senior debt - 3,042 - 5,500 Payment of dividends (2,997) (1,331) (2,528) (2,438) Repurchase shares of common stock (3,575) (3,154) (4,764) (6,076) Exercise of stock options, net of fractional shares paid 3,641 292 1,369 199 ----------- ------------ ----------- ----------- Net cash used in financing activities (2,931) (1,151) (5,923) (3,320) ----------- ------------ ----------- ----------- Net (decrease)/increase in cash 3,927 1,509 (956) 1,669 Cash at beginning of period 2,930 1,421 2,377 708 ----------- ------------ ----------- ----------- Cash at End of Period $ 6,857 $ 2,930 $ 1,421 $ 2,377 =========== ============ =========== ===========
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Home Federal Bancorp Columbus, Indiana We have audited the accompanying consolidated balance sheets of Home Federal Bancorp and its subsidiaries (the "Company") as of December 31, 2003 December 31, 2002, and June 30, 2002, and the related consolidated statements of income, shareholders' equity and cash flows for the year ended December 31, 2003, the six month period ended December 31, 2002 and for each of the two years in the period ended June 30, 2002. 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 financial consolidated statements present fairly, in all material respects, the financial position of the Company at December 31, 2003 and 2002, and June 30, 2002, and the results of its operations and its cash flows for the year ended December 31, 2003, the six month period ended December 31, 2002 and for each of the two years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Indianapolis, Indiana January 23, 2004 Board of Directors & Officers of Home Federal Bancorp Board of Directors Officers John K. Keach, Jr. John K. Keach, Jr. Chairman of the Board, President and Chairman of the Board, President and Chief Executive Officer, Chief Executive Officer Home Federal Bancorp Charles R. Farber John T. Beatty Executive Vice President President, Beatty Insurance, Inc. Lawrence E. Welker Executive Vice President, Harold Force Chief Financial Officer, President, Treasurer and Secretary Force Construction Company, Inc. S. Elaine Pollert David W. Laitinen, MD Executive Vice President Orthopedic Surgeon John M. Miller President, Best Beers, Inc. Executive Officers of HomeFederal Bank Harvard W. Nolting, Jr. John K. Keach, Jr. Retired from Nolting Chairman of the Board, Foods, Inc. President and Chief Executive Officer Gregory J. Pence President, Charles R. Faber Kiel Bros. Oil Company, Inc. and Executive Vice President KP Oil Company, Inc. Lawrence E. Welker John K. Keach, Sr. Executive Vice President, Chairman Emeritus Chief Financial Officer, Retired Treasurer and Secretary The Directors of Home S. Elaine Pollert Federal Bancorp also Executive Vice President serve as Directors of HomeFederal Bank. Melissa A. McGill Senior Vice President Controller Shareholder Information Stock Listing The common stock of Home Federal Bancorp is traded on the National Association of Securities Dealers Automated Quotation System, National Market System, under the symbol HOMF. Home Federal Bancorp stock appears in The Wall Street Journal under the abbreviation HomFedBcpIN, and in other publications under the abbreviation HFdBcp. Transfer Agent & Registrar To change name, address or ownership of stock, to report lost certificates, or to consolidate accounts, contact: LaSalle Bank N.A. c/o Corporate Trust Operations 135 South LaSalle Street, Room 1960 Chicago, Illinois 60603 (800) 246-5761 General Counsel Barnes & Thornburg 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 December 31, 2003, 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 (877) 626-7000 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 (877) 626-7000 For an online annual report or shareholder inquiries on the Web, visit us at: www.homf.com Office Locations Seymour 22 W. Second Street 1117 E. Tipton Street Picture omitted Columbus 501 Washington Street A map of the state of Indiana, showing 1020 Washington Street HomeFederal's office locations is on 3805 25th Street the left side of the page. 2751 Brentwood Drive 4330 W. Jonathan Moore Pike Hope 8475 N. State Road 9 Austin 67 W. Main Street North Vernon 111 N. State Street 1540 N. State Street Osgood 820 S. Buckeye Street Batesville 114 State Road 46 East Madison 201 Clifty Drive Brownstown 101 N. Main Steet Salem 1208 S. Jackson Street Greensburg 115 E. North Street Greenwood 8740 W. Emerson Avenue Southport Road Coming Fall 2004 Visit our Web site at www.homf.com or call us toll-free at (877) 626-7000. EX-14 4 hfb_10kex14.txt CODE OF ETHICS Exhibit 14 HOME FEDERAL BANCORP CODE OF ETHICS GENERAL The Corporation is committed to conducting its business in accordance with the highest ethical standards and has adopted the principles set forth below as corporate policy. It is the Corporation's policy that no officer or employee should place him or herself in a position where his/her actions, personal interests or the activities or interests of those for whom he/she acts is, or is likely to become, in conflict with the interests of the Corporation or its subsidiaries. All employees of the Corporation are to review this policy and agree to comply with the principles set forth herein. RELATIONSHIPS WITH OUTSIDE BUSINESS INTERESTS Employees owe loyalty to the Corporation. There can be no self-dealing or self-interest in any transaction involving the Corporation. Officers should be particularly cautious to avoid compromising their responsibilities to the Corporation by becoming an employee of, investing in, or accepting interests in the Corporation's customers, suppliers, or their various business interests. As a general rule, a prohibited conflict exists whenever such activity entails an account relationship in which the officer is responsible or influential in exercising control. Officers shall not engage in the conduct of any business outside the Corporation or have any outside employment or consulting arrangement unless such business or arrangement does not interfere with the satisfactory work performance for the Corporation and does not have any actual potential conflict with Corporation business. Officers must give prior notice to the President of the Corporation before accepting a second position of employment or a consulting arrangement. At no time shall an employee of the Corporation hold a position of employment with a thrift, bank, brokerage house, other financial institution that is not controlled by the Corporation, or a public utility, while in the employ of the Corporation. Each officer shall disclose to the President of the Corporation all existing employment and consulting arrangements with entities other than the Corporation and shall obtain prior approval before any such future involvements. Further disclosure must be made regarding any interest an employee or his/ her immediate family has in a non-public enterprise, or a material interest in a public enterprise if: (1) the enterprise is a substantial competitor of the Corporation; (2) the enterprise borrows from the Corporation; (3) the enterprise is a supplier of the Corporation; or (4) the employee deals directly with the enterprise in its purchase, receipt of goods, services, or securities. Whenever an employee finds that he or she is inadvertently placed in a potentially compromising position due to relationships with business associates, customers, suppliers, or competitors, the officer shall report the matter immediately to the President of the Corporation and discontinue any activities associated with the entity until the matter has been resolved. Under no circumstances shall an employee perform any role in supervising, evaluating or influencing the job evaluation, pay or benefits of any close relative or fiance. Any transaction between the Corporation and any entity in which an employee or director has a material financial interest must be described in detail, with full disclosure of the conflict, to the Corporation's Board of Directors. Any employee involved with, or having knowledge of, such transaction involving a conflict of interest shall fully disclose his or her involvement or the transaction (if not previously disclosed) to the Corporation's President or any member of the Corporation's Board of Directors. FIDUCIARY RELATIONSHIPS Officers may not accept appointment as an administrator, trustee, executor, guardian or any similar fiduciary capacity without prior approval of the President, except when acting at the request of the Corporation or as a fiduciary on a family account. PURCHASE OF CORPORATION AND FIDUCIARY ASSETS No employee of the Corporation shall purchase any assets owned by the Corporation or in which the Corporation has a security interest or other lien, unless prior approval has been obtained, full value is paid for the asset, and the transaction is completely and properly documented on the books of the Corporation. No employee of the Corporation and no member of the immediate family of the employee, whether acting individually or in fiduciary capacity shall purchase or borrow any assets from or sell any assets to any estate, trust or other fiduciary account being administered by the Corporation except in accordance with laws and regulations governing such transactions. OUTSIDE DIRECTORSHIPS, PARTNERSHIPS, SOLE PROPRIETORSHIPS Prior notice to the President is required before an officer accepts a position as officer or director of a corporation, becomes a member of a business partnership, or becomes sole proprietor of a corporation or business. Prior notice is not necessary for acceptance of a position as an officer or director of any corporation that is for social, fraternal, professional, educational, charitable, civic or religious purposes. Participation as an individual investor in limited partnerships does not require Corporation prior notice unless the Corporation is a lender to or has another business relationship with the partnership and/or the officer holds a dominant position in the partnership. All such relationships, however, shall be reported on an annual basis to the Corporation. An officer of the Corporation should not serve as a director or officer of a non-affiliated financial institution without specific written approval of the President. When an officer is serving on a board of directors at the request of the Corporation, fees and other remuneration shall be turned over to the Corporation. When serving not at the request of the Corporation, remuneration may be kept. OUTSIDE NON-BUSINESS ACTIVITIES Officers are encouraged and urged to participate in civic or charitable organizations in the communities they serve, provided such participation is not in conflict with the Corporation's objectives and does not unduly interfere with regular duties. Employees who participate in such activities for civic or charitable organizations may not make or participate in decisions of the Corporation to make contributions to any such organizations. The Corporation also encourages participation in business and professional organizations. If such activities involve inordinate amounts of time away from responsibilities, prior approval of the employee's supervisor must be obtained. Supplies, material and other property belonging to the Corporation may not be used in more than an incidental way in the performance of such activities. ILLEGAL AND UNETHICAL ACTS The following unethical or illegal acts by employees are prohibited: Employee theft, fraud, embezzlement, misappropriation, or any form of wrongful conversion of property belonging to the Corporation or another employee. Any act of fraud or deception involving the Corporation, a customer, a supplier or any other party. Any act of bribery, including a premise, offer or gift of money or anything of value made or offered by an employee to: A government official or someone acting for the government. A person employed by, or acting on behalf of, a customer, supplier or other organization with which the Corporation does business or has prospective business. Any dishonest or unethical act by an employee against the Corporation. The destruction or alteration of Corporation records in order to falsify, conceal or misrepresent information to: Avoid criticism for errors of judgment or to conceal failure to follow a supervisor's instructions. Show a performance record better than, or different from, performance actually achieved. Misrepresent the employee's performance, activities, or other transactions, or those of another employee. Political contributions of money, services, or other property of the Corporation that are in violation of the law when the contributions are made. Violations of securities laws rules or regulations, including failure to disclose material information that should be described in filings the Corporation makes with the Securities and Exchange Commission and banking regulators. GIFTS AND FEES Officers and their families may not solicit or accept gifts, fees, bequests, services or entertainment from customers, suppliers or prospective customers. A gift is regarded as any type of gratuity, favor, loan, legacy, fee, compensation, or anything of monetary value. All such gifts are prohibited except: o Business entertainment and other courtesies such as meals, sporting events, and the like, which involve no more than ordinary amenities, and can be properly reciprocated by the employee and charged as a business expense. Lavish or extravagant entertainment, such as weekend trips, etc., should not be accepted unless reimbursement is made to the donor. o Gifts received because of kinship, marriage, or social relationships and not because of any business relationship. o Unsolicited advertising or promotional materials that are generally available. o Customer or supplier paid travel or lodging where the trip has a legitimate business purpose. Any such trips must be approved in advance in writing by the President of the Corporation. o Fees or other compensation received from an organization in which membership or an official position is held, subject to prior written approval and possible requirement to pay such compensation to the Corporation. Officers who believe that acceptance of a permitted gift might make them feel obligated and therefore improperly influenced in the performance of their duties should not accept it, or turn it over to the Corporation. Officers who are unsure whether a gift is violative of the law and these standards, should seek guidance from the Corporation's President. Likewise, no individual representing the Corporation or members of his or her family may extend a gift to any existing or prospective customer or supplier that will not meet these same criteria. All gifts received or extended which are in the categories above and are valued in excess of $200 should be reported to your manager or the President. All gifts which do not fit the above guidelines, no matter what the value, should be reported to your manager or the President. From time to time officers are asked to speak, testify, or consult with outside organizations and regulators. An honorarium or gift in excess of $25.00 for such outside activity shall be reported to your manager or the President for determination of the disposition of the honorarium. Officers may not accept from customers or suppliers any fee or other form of remuneration which violates the law or the spirit of this statement. Officers and members of their immediate families should not, except under very exceptional circumstances, accept directly or indirectly any bequest or legacy from a customer of the Corporation. If the officer learns of such a legacy in a customer's will, the employee must report all pertinent facts as soon as he or she learns of the legacy. In any event, an employee may not accept such a bequest or legacy that arises from relationships solely based upon the Corporation's position unless approved by the President. No officer may accept a personal fee for arranging a loan from the Corporation or from any other person or lending institution. BORROWING Officers are not to borrow from customers or suppliers of the Corporation, except those who engage in lending in the usual course of their business and then only on terms offered to others in similar circumstances. This prohibition does not preclude borrowing from anyone related to the employee by blood or marriage. Borrowing from the Corporation must be in accordance with law and regulation and the policies established by the Corporation. Except as provided below, the Corporation may not directly or indirectly extend or maintain credit, arrange for the extension of credit, or renew an extension of credit, in the form of a personal loan to or for any of its directors or executive officers. Notwithstanding the foregoing, loans may be made by HomeFederal Bank that otherwise comply with Regulation O under the Federal Reserve Act. Reports of borrowings will be requested from time to time from all levels of Corporation officers to meet both regulatory requirements and Corporation policy. All officers shall submit such summary reports when requested, or reports of new borrowings in a timely fashion. MISAPPROPRIATION OF BUSINESS OPPORTUNITIES In some cases, the Corporation may be interested in business or investment opportunities made known to employees. In such cases, an employee is expected to advise the Corporation of such opportunities or investments before acting upon them personally. DISCLOSURES IN PUBLIC FILINGS The Corporation's filings made under the Securities Exchange Act of 1934, such as quarterly and annual reports and proxy statements, are to contain full, fair, accurate, timely, and understandable disclosures. All press releases and shareholder communications must also contain such disclosures. The Corporation has procedures in place to achieve these goals with respect to securities reports and shareholder communications. Any employee who has concerns about disclosures being made in these documents should feel free to contact any member of the Corporation's Audit Committee or of the Corporation's Board of Directors including the President of the Corporation. ACCOUNTING MATTERS The Corporation's financial statements and books and records on which they are based must accurately reflect all corporate transactions. All receipts and disbursements of corporate funds shall be promptly and properly recorded on the Corporation's books, and the Corporation's records must disclose the nature and purpose of the transactions. All financial officers shall cooperate fully with the independent auditors of the Corporation and under no circumstances withhold any information from them. The Corporation's investors, creditors and other decision makers rely on its records and have a right to information which is timely and accurate. A director, officer or employee may not maintain the Corporation's accounting or other records, or cause them to be maintained, in such a way that they do not reflect the true nature of transactions, account balances or other matters with clarity and completeness. A director, officer or employee may not establish for any purpose an unauthorized, undisclosed, or unrecorded fund or asset account involving Corporation assets. A director, officer or employee may not allow transactions with a supplier, agent, or customer to be structured or recorded in a way not consistent with normal business practice or generally accepted accounting principles. No false or artificial entries shall be made on the books or records of the Corporation or its subsidiaries for any reason. No payment on behalf of the Corporation shall be made or approved with the understanding that it will or might be used for something other than the stated purposes. The shifting of charges or costs to inappropriate accounts is prohibited by Corporation policy. No false, incomplete or misleading entries or records shall be created. No undisclosed or unrecorded corporate funds shall be established for any purpose, nor shall the Corporation funds be placed in any personal or noncorporate account. "Slush funds" or similar off-book accounts, where there is no accounting for receipts or expenditures on corporate books, are prohibited. A system of internal accounting controls shall be maintained which is sufficient to provide reasonable assurances that transactions: are executed in accordance with Management's authorization. are recorded in a manner that permits preparation of financial statements in conformity with generally accepted accounting principles and other applicable criteria; and are recorded so as to maintain accountability for the Corporation's assets. No officer or employee acting on behalf of the Corporation shall engage in any activity which circumvents the Corporation's systems of internal controls. CERTIFICATIONS Employees may be required periodically to certify their understanding of and intent to comply with this Policy Statement. Any employee who violates the Policy Statement is subject to possible suspension or discharge. Any employee who assists in, or knowingly fails to report, a violation of these policies is also subject to suspension, discharge or other appropriate action. Any employee who suspects a violation of these policies (including any material transaction or relationship that gives rise to a conflict of interest which to the knowledge of such employee has not been disclosed to the appropriate persons) should inform his or her superior, or the Corporation's President or any member of the Corporation's Board of Directors. Any supervisor informed of a suspected violation shall notify the Corporation's President or any member of the Corporation's Board of Directors. EX-21.3 5 hfb_10kex21.txt AUDITOR'S CONSENT Exhibit 21.3 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No.'s 33-58912, 33-76036, 33-99096, 333-35122 and 333-81916 of Home Federal Bancorp on Form S-8 of our report dated January 23, 2004 (which report expresses an unqualified opinion), appearing in this Annual Report on Form 10-K of Home Federal Bancorp for the twelve-month period ended December 31, 2003. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Indianapolis, Indiana March 12, 2004 EX-31 6 ex311_0312.txt KEACH CERTIFICATION Exhibit 31.1 CERTIFICATION I, John K. Keach, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Home Federal Bancorp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2004 /s/ John K. Keach, Jr. ------------------------------- John K. Keach, Jr., President and Chief Executive Officer EX-31 7 ex312_0312.txt WELKER CERTIFICATION Exhibit 31.2 CERTIFICATION I, Lawrence E. Welker, certify that: 1. I have reviewed this annual report on Form 10-K of Home Federal Bancorp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2004 /s/ Lawrence E. Welker ---------------------------------- Lawrence E. Welker, Chief Financial Officer EX-32 8 ex32_0312.txt SOX CERTIFICATION Exhibit 32 CERTIFICATION By signing below, each of the undersigned officers hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge, (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Home Federal Bancorp. Signed this 10th day of March 2004. /s/ Lawrence E. Welker /s/ John K. Keach, Jr. ---------------------------- --------------------------- (Signature of Authorized Officer) (Signature of Authorized Officer) Lawrence E. Welker John K. Keach, Jr. ---------------------------- --------------------------- (Typed Name) (Typed Name) Chief Financial Officer President and Chief Executive Officer (Title) (Title) A signed original of this written statement required by Section 906 has been provided to and is being retained by Home Federal Bancorp and will be forwarded to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----