-----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, NtnPW4Lee+FM/n7pXWNpwF5rFzNYd9UZLOxXlS1gAz63AXEziwGsPJWf+p9SfdOB Zx1Hc7oGG9o2Y46WOBt2dw== 0000908834-04-000717.txt : 20041104 0000908834-04-000717.hdr.sgml : 20041104 20041104140947 ACCESSION NUMBER: 0000908834-04-000717 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041104 DATE AS OF CHANGE: 20041104 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18847 FILM NUMBER: 041119111 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-Q 1 hfb10q_1029.txt FORM 10-Q 10/29/04 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: O-18847 HOME FEDERAL BANCORP (Exact name of registrant as specified in its charter) Indiana 35-1807839 (State or other Jurisdiction (I.R.S. Employer of Incorporation or 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO_____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) YES X NO_____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 25, 2004. Common Stock, no par value - 4,027,991 shares outstanding HOME FEDERAL BANCORP FORM 10-Q INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Forward looking statements 8 Critical accounting policies 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Item 4. Controls and Procedures 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits 15 Signatures 16 2
HOME FEDERAL BANCORP CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (unaudited) September 30, December 31, 2004 2003 ------------ ---------------- ASSETS: Cash $ 25,777 $ 22,734 Interest-bearing deposits 17,389 11,444 ------------ ---------------- Total cash and cash equivalents 43,166 34,178 ------------ ---------------- Securities available for sale at fair value (amortized cost $125,024 and $123,243) 125,290 123,638 Securities held to maturity (fair value $1,810 and $1,883) 1,781 1,828 Loans held for sale (fair value $7,454 and $6,357) 7,349 6,272 Loans receivable, net of allowance for loan losses of $8,626 and $7,506 641,165 630,672 Investments in joint ventures 4,328 5,501 Federal Home Loan Bank stock 9,965 9,965 Accrued interest receivable, net 3,716 3,733 Premises and equipment, net 15,193 14,168 Real estate owned 717 1,739 Prepaid expenses and other assets 9,133 8,880 Cash surrender value of life insurance 11,707 11,359 Goodwill 1,395 1,395 ------------ ---------------- TOTAL ASSETS $ 874,905 $ 853,328 ============ ================ LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits $ 638,705 $ 588,915 Advances from Federal Home Loan Bank 132,146 154,296 Senior debt 14,242 14,242 Other borrowings 1,459 624 Advance payments by borrowers for taxes and insurance 234 76 Accrued expenses and other liabilities 11,243 11,153 ------------ ---------------- Total liabilities 798,029 769,306 ------------ ---------------- Shareholders' equity: No par preferred stock; Authorized: 2,000,000 shares Issued and outstanding: None No par common stock; Authorized: 15,000,000 shares Issued and outstanding: 13,469 12,616 4,026,560 shares at September 30, 2004 4,312,805 shares at December 31, 2003 Retained earnings, restricted 63,367 71,436 Accumulated other comprehensive income, net of taxes 40 (30) ------------ ---------------- Total shareholders' equity 76,876 84,022 ------------ ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 874,905 $ 853,328 ============ ================
See notes to consolidated financial statements (unaudited) 3
HOME FEDERAL BANCORP CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share data) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- ---------------------------------- Interest income: 2004 2003 2004 2003 --------------- --------------- -------------- --------------- Loans receivable $ 9,459 $ 10,175 $ 28,682 $ 31,498 Securities available for sale and held to maturity 1,034 916 3,056 2,958 Other interest income 41 69 152 304 --------------- --------------- -------------- --------------- Total interest income 10,534 11,160 31,890 34,760 --------------- --------------- -------------- --------------- Interest expense: Deposits 2,701 2,910 7,993 9,411 Advances from Federal Home Loan Bank 1,880 2,316 5,944 7,073 Other borrowings 160 203 528 635 --------------- --------------- -------------- --------------- Total interest expense 4,741 5,429 14,465 17,119 --------------- --------------- -------------- --------------- Net interest income 5,793 5,731 17,425 17,641 Provision for loan losses 1,887 286 2,168 946 --------------- --------------- -------------- --------------- Net interest income after provision for loan losses 3,906 5,445 15,257 16,695 --------------- --------------- -------------- --------------- Other income: Gain on sale of loans 435 2,538 2,057 6,889 Gain on sale of securities - - - 4 Income (loss) from joint ventures 13 (54) 128 520 Insurance, annuity income, other fees 403 447 1,395 1,280 Service fees on deposit accounts 773 691 2,160 1,996 Net gain on real estate owned and repossessed assets 88 91 223 179 Loan servicing income, net of impairments 95 437 491 304 Miscellaneous 309 304 911 989 --------------- --------------- -------------- --------------- Total other income 2,116 4,454 7,365 12,161 --------------- --------------- -------------- --------------- Other expenses: Compensation and employee benefits 3,308 3,243 9,787 9,140 Occupancy and equipment 770 749 2,355 2,274 Service bureau expense 235 237 750 712 Federal insurance premium 21 24 67 73 Marketing 132 146 501 485 Miscellaneous 1,249 1,410 3,835 3,803 --------------- --------------- -------------- --------------- Total other expenses 5,715 5,809 17,295 16,487 --------------- --------------- -------------- --------------- Income before income taxes 307 4,090 5,327 12,369 Income tax provision (benefit) (29) 1,462 1,690 4,513 --------------- --------------- -------------- --------------- Net Income $ 336 $ 2,628 $ 3,637 $ 7,856 =============== =============== ============== =============== Basic earnings per common share $ 0.08 $ 0.62 $ 0.88 $ 1.85 Diluted earnings per common share $ 0.08 $ 0.59 $ 0.84 $ 1.76 Basic weighted average number of shares 4,011,229 4,242,653 4,147,099 4,254,417 Dilutive weighted average number of shares 4,138,442 4,441,024 4,305,589 4,470,121 Dividends per share $ 0.188 $ 0.188 $ 0.563 $ 0.513 See notes to consolidated financial statements (unaudited)
4
HOME FEDERAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Nine Months Ended (unaudited) September 30, ---------------------------------- 2004 2003 ---------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,637 $ 7,856 Adjustments to reconcile net income to net cash from operating activities: Accretion of discounts, amortization and depreciation 1,652 1,643 Provision for loan losses 2,168 946 Net gain from sale of loans (2,057) (6,778) Net gain from sale of investment securities - (4) Income from joint ventures and net gain from real estate owned (351) (699) Loan fees recognized, net (57) (4) Proceeds from sale of loans held for sale 105,064 346,787 Origination of loans held for sale (104,084) (320,990) Decrease in accrued interest and other assets (206) (3,222) Increase in other liabilities 165 1,303 ------------ ------------ Net cash from operating activities 5,931 26,838 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net principal received (disbursed) on loans (5,660) 6,887 Proceeds from: Maturities/Repayments of: Securities held to maturity 421 1,204 Securities available for sale 21,194 124,194 Sales of: Securities available for sale 17,089 27,312 Real estate owned and other asset sales 1,332 1,676 Purchases of: Loans (6,944) (5,951) Securities available for sale (40,553) (163,590) Securities held to maturity (371) - Repayment of joint ventures 1,301 1,090 Acquisition of property and equipment (2,374) (917) ------------ ------------ Net cash from investing activities (14,565) (8,095) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 49,790 (15,630) Proceeds from advances from FHLB 16,500 7,000 Repayment of advances from FHLB (38,650) (20,039) Net proceeds from overnight borrowings 835 1,434 Common stock options exercised 1,402 2,853 Repurchase of common stock (9,953) (3,574) Payment of dividends on common stock (2,302) (2,189) ------------ ------------ Net cash from financing activities 17,622 (30,145) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 8,988 (11,402) Cash and cash equivalents, beginning of period 34,178 53,692 ------------ ------------ Cash and cash equivalents, end of period $ 43,166 $ 42,290 ============ ============ Supplemental information: Cash paid for interest $ 14,440 $ 17,132 Cash paid for income taxes $ 1,714 $ 4,430 Assets acquired through foreclosure $ 503 $ 3,166 See notes to consolidated financial statements (unaudited)
5 Notes to Consolidated Financial Statements (unaudited) 1. Basis of Presentation The consolidated financial statements include the accounts of Home Federal Bancorp (the "Company") and its wholly-owned subsidiaries, HomeFed Financial, Inc. and HomeFederal Bank (the "Bank") and the Bank's wholly owned subsidiaries. These consolidated interim financial statements at September 30, 2004, and for the three and nine month periods ended September 30, 2004, have not been audited by independent registered public accountants, but reflect, in the opinion of the Company's management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations for such periods, including elimination of all significant intercompany balances and transactions. These statements should be read in conjunction with the consolidated financial statements and related notes, which are included in the Company's Annual Report on Form 10-K for the twelve month period ended December 31, 2003. 2. Earnings Per Share The following is a reconciliation of the weighted average common shares for the basic and diluted earnings per share, ("EPS") computations:
Three months ended Nine months ended September 30, September 30, ------------------------------ ------------------------------ 2004 2003 2004 2003 Basic EPS: Weighted average common shares 4,011,229 4,242,653 4,147,099 4,254,417 ============== ============= ============= ============= Diluted EPS: Weighted average common shares 4,011,229 4,242,653 4,147,099 4,254,417 Dilutive effect of stock options 127,213 198,371 158,490 215,704 -------------- ------------- ------------- ------------- Weighted average common and incremental shares 4,138,442 4,441,024 4,305,589 4,470,121 ============== ============= ============= =============
3. Reclassifications Some items in the financial statements of previous periods have been reclassified to conform to the current period presentation. 4. Comprehensive Income The following is a summary of the Company's total comprehensive income for the interim three and nine month periods ended September 30, 2004 and 2003. (In thousands)
Three months Nine months ended ended September 30, September 30, ---------------------------------------------------- 2004 2003 2004 2003 ------- ------- ------- ------- Net Income $ 336 $ 2,628 $ 3,637 $ 7,856 Other comprehensive income: Unrealized holding gains (losses) from securities available for sale 1,959 (1,046) (131) (1,262) Reclassification adjustment for (gains) losses realized in income - - - (4) Unrealized gains (losses) from cash flow hedge 24 115 254 213 ---------------------------------------------------- Net unrealized gains (losses) 1,983 (931) 123 (1,053) Tax effect (686) 317 (53) 361 ---------------------------------------------------- Other comprehensive income (loss), net of tax 1,297 (614) 70 (692) ---------------------------------------------------- Comprehensive Income $ 1,633 $ 2,014 $ 3,707 $ 7,164 ====================================================
6 5. Stock Based Compensation The Company has stock-based employee compensation plans, which are accounted for 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.
For the Three Months Ended For the Nine Months Ended September 30, September 30, ----------------------------------- ------------------------------------ (dollars in thousands, except share data) 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------------------------------------- Net income, as reported $ 336 $ 2,628 $ 3,637 $ 7,856 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (12) (148) (43) (185) -------- -------- -------- -------- Pro forma net income $ 324 $ 2,480 $ 3,594 $ 7,671 ======== ======== ========= ======== Earnings per share: Basic---as reported $ .08 $ .62 $ .88 $ 1.85 Basic---pro forma $ .08 $ .58 $ .87 $ 1.80 Diluted---as reported $ .08 $ .59 $ .84 $ 1.76 Diluted---pro forma $ .08 $ .56 $ .83 $ 1.72
6. Segment Reporting 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 reportable 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 customer from which it derives 10 percent or more of its revenue. 7. New Accounting Pronouncements EITF Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" provides guidance for determining when an investment is considered impaired (when fair value is less than cost), for evaluating whether impairment is other-than-temporary, and, if other-than-temporary, requiring recognition of an impairment loss equal to the difference between the investment's cost and its fair value. Generally, an impairment is considered other-than-temporary unless: (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the cost of the investment; and (b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. The Financial Accounting Standards Board, ("FASB"), delayed the effective date for the measurement and recognition guidance contained in paragraphs 10 - 20 of EITF Issue 03-1 by FSP EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, 'The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," posted September 30, 2004. The delay of the effective date for paragraphs 10-20 will be superseded concurrent with the final issuance of proposed FSP EITF Issue 03-1-a, "Implication Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, 'The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." Gross unrealized losses on available for sale securities and held to maturity securities were $436,000 and $0, respectively, at September 30, 2004. The Company is currently evaluating the impact of EITF 03-1 and FSP EITF Issue 03-1-1 and is unable to estimate what the impact of adoption, if any, will be. 8. Senior Debt On September 20, 2004, with the payment of its third quarter dividend, the Company violated a covenant in its revolving note agreement with LaSalle Bank that restricts the declaration and payment of dividends during any year in excess of 50% of the Company's net annual income. LaSalle Bank has waived this covenant breach and the applicability of the covenant for the quarter ended December 31, 2004. Management anticipates full compliance with this covenant during 2005. 7 Part I, Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief, outlook, estimate or expectations of the Company (as defined below), its directors or its officers primarily with respect to future events and the future financial performance of the Company. Readers of this Form 10-Q are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-Q identifies important factors that could cause such differences. These factors include changes in interest rates, loss of deposits and loan demand to other 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 economic condition of the Company's market area, increases in compensation and employee expenses, or unanticipated results in pending legal proceedings. Home Federal Bancorp (the "Company") is organized as a financial holding company and owns all the outstanding capital stock of HomeFederal Bank (the "Bank"). The business of the Bank and therefore, the Company, is to provide consumer and business banking services to certain markets in the south-central portions of the State of Indiana. The Bank does business through 18 full service banking branches. CRITICAL ACCOUNTING POLICIES The notes to the consolidated financial statements contain a summary of the Company's significant accounting policies presented on pages 24 through 28 of the annual report for the twelve month period ended December 31, 2003. Certain of these policies are important 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 determining the allowance for loan losses, and the valuation of mortgage servicing rights, ("MSR's"). 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, 8 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. As of September 30, 2004, MSR's had a carrying value of $3.1 million. RESULTS OF OPERATIONS: Quarter Ended September 30, 2004 Compared to Quarter Ended September 30, 2003 General The Company reported net income of $336,000 for the quarter ended September 30, 2004, compared to $2,628,000 for the quarter ended September 30, 2003, a decrease of $2,292,000 or 87.2%. Basic earnings per common share for the current quarter were $0.08 compared to $0.62 for the quarter ended September 30, 2003. Diluted earnings per common share were $0.08 for the quarter ended September 30, 2004, compared to $0.59 for the quarter ended September 30, 2003. Net Interest Income Net interest income before provision for loan losses increased slightly by $62,000 or 1.1% for the quarter ended September 30, 2004, compared to the quarter ended September 30, 2003. This slight increase was due to the net effect of an 11 basis point, (a basis point is defined as 1/100th of a percent), increase in the net interest margin to average interest earning assets, as the cost of funds declined more rapidly than the decline in the yields on interest earning assets, being offset by a decrease of $21,344,000 in average interest earning assets versus a decrease of $6,188,000 in average interest bearing liabilities for the three month period ended September 30, 2004, compared to the same quarter last year. The provision for loan losses was $1,887,000 for the quarter ended September 30, 2004, an increase of $1,601,000, compared to the quarter ended September 30, 2003. At September 30, 2004, the loan loss allowance covered 57.6% of non-performing loans. The increase in the loan loss provision is primarily attributable to two large commercial loans that are discussed in the asset quality section. See the Critical Accounting Policies, Allowance for Loan Losses section for a description of the systematic analysis the Bank uses to determine its allowance for loan losses. The change to the loan loss allowance for the three month period ended September 30, 2004 and 2003 is as follows: Quarter ended September 30: (in thousands) 2004 2003 ------------------------------------------ ---- ---- Allowance beginning balance $ 7,583 $ 7,284 Provision for loan losses 1,887 286 Charge-offs (900) (229) Recoveries 56 20 -------- -------- Loan Loss Allowance ending balance $ 8,626 $ 7,361 ======== ========= Allowance to Total Loans 1.31% 1.14% Allowance to Nonperforming Assets 55% 116% 9 Net interest income after provision for loan loss decreased $1,539,000 or 28.3% for the three month period ended September 30, 2004, compared to the three months ended September 30, 2003. Interest Income Total interest income for the three month period ended September 30, 2004, decreased $626,000, or 5.6%, over the same period of the prior year. This decrease is primarily the result of a $21,344,000 decrease in average interest earning assets as well as a 17 basis point decrease in the weighted average interest rate earned on average interest earning assets for the quarter ended September 30, 2004, as compared to the quarter ended September 30, 2003. Interest Expense Total interest expense for the three month period ended September 30, 2004, decreased $688,000, or 12.7%, as compared to the same period a year ago. The factors that caused the decrease in interest expense mirrors the same two factors for the decrease in interest income. The interest rate paid on average interest bearing liabilities declined 32 basis points in the quarter ended September 30, 2004, as compared to the quarter ended September 30, 2003, and the balance of average interest bearing liabilities declined $6,188,000 over the same two periods. Other Income Total other income for the three-month period ended September 30, 2004, decreased $2,338,000 or 52.5% over the same period a year ago. This decrease was primarily the result of a decrease of $2,103,000 from the gain on sale of loans. For the three-month period ended September 30, 2003, the Bank originated approximately $392,034,000 in residential loans, compared to $166,719,000 for the three-month period ended September 30, 2004. In the third quarter of 2003 the Bank sold approximately $119,163,000 of the loans originated versus $21,580,000 in the third quarter of 2004. The difference in loan activity for these two periods was the result of the low interest rate environment in 2003 and the high volumes of mortgage loan refinance activity. Another factor that decreased other income is the $342,000 decrease in loan servicing income, net of impairments for the three months ended September 30, 2004, compared to September 30, 2003. The originated mortgage servicing rights asset is reviewed for impairment each quarter. This asset is created when mortgage loans are sold and the Bank retains the servicing rights. The servicing rights are recognized as income at the time the loan is sold and the servicing asset is also recorded. 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 result with changes in interest rates and loan prepayment speeds. 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 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, the average life of the mortgage servicing portfolio lengthens, increasing the amount of servicing income the Bank receives over time thus increasing the value of the servicing portfolio. In the three-month period ended September 30, 2004, the impairment charge was $38,000 compared to the same period ending September 30, 2003 where the impairment recovery was $260,000 for a decrease in pre-tax income of $298,000. The amortization charge in the current three-month period was $389,000 compared to $364,000 for the same period a year ago. Other Expenses Other expenses for the three month period ended September 30, 2004, decreased $94,000, or 1.6% over the three month period ended September 30, 2003. This decrease was the net result of two primary factors including a $65,000 increase in compensation expenses. The increase was primarily the result of increases totaling $315,000 from personnel increases, including the staffing of the Greenwood branch, which opened in December of 2003, salary increases, retirement costs, and a reduction in deferred salary costs in accordance with Financial Accounting Standard, ("FAS"), 91, offset by a $250,000 decrease in the bonus expense. The current period does not have any bonus expense compared to the three month period ended September 30, 2003, which had a $250,000 accrual for bonus expense. Offsetting this net increase in compensation and employee benefits was a decrease of $161,000 in miscellaneous expenses. Decreases of $84,000 in real estate owned expenses and $121,000 in loan related expenses were offset by increases of $78,000 in consulting expenses related primarily to compliance with the Sarbanes-Oxley Act of 2002. Other small changes in various categories resulted in the remaining difference in miscellaneous expenses. Taxes The Company recorded a $29,000 income tax benefit during the quarter ended September 30, 2004, which reflects the Company's revised estimate of its anticipated federal and state effective tax rate of 31% for 2004. 10 Nine months Ended September 30, 2004 Compared to Nine months Ended September 30, 2003: General The Company reported net income of $3,637,000, or $.84 diluted earnings per share, for the nine months ended September 30, 2004, compared to $7,856,000, or $1.76 diluted earnings per share, for the same period a year ago, a decrease of $4,219,000 or a 52.3% decrease in earnings per dilutive common share. Net Interest Income Net interest income before provision for loan losses decreased $216,000 or 1.2% for the nine month period ended September 30, 2004, compared to the same period ended September 30, 2003. This decrease was due to the net effect of an 4 basis point increase in the net interest margin to average interest earning assets, as the cost of funds declined more rapidly than the decline in the yields on interest earning assets, being offset by a decrease of $20,572,000 in average interest earning assets versus a decrease of $15,192,000 in average interest bearing liabilities for the nine month period ended September 30, 2004, compared to the same period last year. The provision for loan losses was $2,168,000 for the nine months ended September 30, 2004, an increase of $1,222,000, compared to the nine months ended September 30, 2003. As mentioned in the quarterly comparison the increase in the loan loss provision is primarily attributable to two large commercial loans that are discussed in the asset quality section. The change to the loan loss allowance for the nine month period ended September 30, 2004 is as follows: Nine months ended September 30: (in thousands) 2004 2003 - ---------------------------------------------- ---- ---- Allowance beginning balance $ 7,506 $ 7,172 Provision for loan losses 2,168 946 Charge-offs (1,145) (882) Recoveries 97 125 -------- -------- Loan Loss Allowance $ 8,626 $ 7,361 ======== ========= Allowance to Total Loans 1.31% 1.14% Allowance to Nonperforming Assets 55% 116% Interest Income Total interest income for the nine month period ended September 30, 2004, decreased $2,870,000, compared to the nine month period ended September 30, 2003. The nine month period decrease was due to a decrease of $20,572,000 in average interest earning assets and a 34 basis point decrease in the weighted average yield earned on those assets. Interest Expense Total interest expense for the nine month period ended September 30, 2004, decreased $2,654,000, compared to the nine month period ended September 30, 2003. Similar to the decrease in interest income, the decrease in interest expense was due to a 41 basis point decrease in the weighted average cost of funds for the nine month period ended September 30, 2004, as compared to the same period ended September 30, 2003, as well as a $15,192,000 decrease in average interest bearing liabilities. Other Income Total other income for the nine month period ended September 30, 2004, decreased $4,796,000 or 39.4% as compared to the same period one year ago. This decrease was primarily the result of a decrease in gain on sale of loans of $4,832,000 as discussed in the third quarter results above. Another factor decreasing other income for the nine months ended September 30, 2004, was a $392,000 decrease in the income from joint ventures. The primary reason for the decrease was the result of a large real estate sale by a joint venture in the nine months ended September 30, 2003, which produced $480,000 of income in the prior year. In the current nine month period ended September 30, 2004, the same joint venture produced $37,000 of income. A factor that increased other income was a $187,000 increase in loan servicing income. For the nine month period ended September 30, 2004, the amortization charge on originated mortgage servicing rights increased $174,000 due to the increased size of the mortgage servicing rights asset. Offsetting this expense was a $80,000 recovery of impairment charges in the nine month period ended September 30, 2004, compared to a $240,000 impairment 11 charge for the period ended September 30, 2003, for an increase in pre-tax income of $320,000. Two other factors which increased other income include a $164,000 increase in service fees on deposit accounts due to increased deposits and a $115,000 increase in insurance, annuity income and other fees that is primarily the result of increased brokerage fees of $132,000 in the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003. Other Expenses Total other expenses for the nine month period ended September 30, 2004, increased $808,000 or 4.9%. This increase is primarily the result of a $647,000 increase in compensation and employee benefits and as well as a $81,000 increase in occupancy and equipment expenses. The increase in compensation and employee benefits for the nine month period ended September 30, 2004, was primarily the result of increases totaling $1,101,000 from personnel increases, including the staffing of the Greenwood branch, which opened in December of 2003, salary increases, retirement costs and a reduction in deferred salary costs in accordance with FAS 91, offset by a $455,000 decrease in the bonus expense. The current period does not have any bonus expense compared to the nine month period ended September 30, 2003, which had a $455,000 accrual for bonus expense. The increase in occupancy expense is the result of expenses associated with the new Greenwood branch, which opened in December of 2003, and additional software expenses related to compliance and security projects. Taxes The Company's estimated effective federal and state income tax rate is 31% for the nine months ended September 30, 2004, compared to 36% for the nine months ended September 30, 2003. The decline in the Company's effective income tax rate results from the reduction in net income for the comparable periods. Asset Quality Non-performing assets to total assets increased to 1.80% at September 30, 2004, compared to 0.73% at September 30, 2003. Non-performing loans to total gross loans increased to 2.28% from 0.63%, respectively, for the same periods. This increase in non-performing assets is primarily attributable to the two large commercial loans discussed below. In February of 1999 the Bank, through a loan participation with another commercial bank (the "Lead Bank"), agreed to purchase up to $2.5 million of a $4.0 million line of credit to floor plan new cars for a car dealership. The loan is secured by vehicles, a second mortgage on real estate, and two individual guarantors for up to 15% each on the loan balance. In addition, other items of collateral are cross-collateralized with other loans advanced by the Lead Bank and might provide some recovery. At the end of the current quarter the Lead Bank notified the Bank that the dealership was in material breach of the loan covenants and that there was not sufficient vehicle collateral to cover the outstanding balance of the loan. The Bank's share of the outstanding loan balance at September 30, 2004, was $2.5 million. After meeting with the Lead Bank and representatives of the dealership, and review of the collateral including guarantees discussed above, it is estimated by management that the loss could be approximately $1,225,000. Management charged off $500,000 of that amount and has set aside specific reserves of $725,000 for the remaining $2,000,000 balance outstanding at September 30, 2004. The total charge to the provision for loan losses in the current quarter for this loan is $1,225,000. The Bank intends to pursue several possible courses of action to mitigate the ultimate losses on this loan. However, it is currently too early to determine if any of these actions will be successful. As was previously announced, one of the Bank's commercial borrowers ("the Borrower") filed for Chapter 11 Bankruptcy protection on June 15, 2004. Total loans outstanding with the Borrower at June 30, 2004 were $15,798,000, of which $9,178,000 is sold to other loan participants leaving a net loan balance of $6,620,000 outstanding. These loans are secured by first mortgages on multiple properties located in Indiana, Illinois, Kentucky and Ohio. These loans have been classified as substandard and approximately $1,194,000 has been set aside as specific reserves for these loans. Of the $1,194,000 in specific reserves, $200,000 has been charged to the provision for loan losses in the current period. The Borrower is in the process of liquidating the business through an auction process of the properties under the supervision of the bankruptcy court. Preliminary bids indicate there will be a loss on this loan. However, management currently believes the remaining $1,194,000 specific reserve is adequate to cover potential losses. The ultimate amount of the impairment, for both of these loans, and the actual losses to the Bank, may be higher or lower depending on the value of the collateral ultimately realized. The Bank may be required to make additional provisions with respect to these loans if the actual value of the collateral is less than presently estimated. The Bank may recognize a recovery of the provision if the actual value is higher than anticipated. 12 FINANCIAL CONDITION: Total assets as of September 30, 2004, were $874,905,000, which was an increase of $21,577,000 from December 31, 2003, total assets of $853,328,000. Changes within the various balance sheet categories included a $49,790,000 increase in deposits and an $8,988,000 increase in cash and cash equivalents. The funds from deposits were used to pay off $22,150,000 of FHLB advances, fund $10,493,000 of loan growth and repurchase $9,953,000 of company stock. Shareholders' equity decreased $7,146,000 during the same period. Retained earnings increased $3,637,000 from net income and decreased $2,302,000 for dividends paid and $9,404,000 from stock buy backs. Common stock increased $1,277,000 from the exercise of common stock options and $125,000 from the related tax benefit of disqualifying dispositions of such options. Common stock decreased $549,000 from stock buy backs. The Company had a decrease from $260,000 in unrealized gains in its securities available for sale portfolio, net of tax, to $177,000 unrealized gains over the nine month period ended September 30, 2004. This decrease in unrealized gains resulted in $83,000 of other comprehensive losses, net of tax, for the nine months ended September 30, 2004. Additionally, the Company had other comprehensive gain, net of tax, from the change in fair value of a cash flow hedge of $153,000 for the same nine month period. At September 30, 2004, the Company and the Bank exceeded all current applicable regulatory capital requirements as follows:
As of September 30, 2004 (Dollars in Thousands) To be "Well- Capitalized" under Minimum Prompt Corrective Actual Requirements Action Provisions ------ ------------ ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Consolidated Tier I Capital to Risk- Weighted Assets $75,795 11.04% $27,473 4.00% $41,209 6.00% Total Risk-Based Capital to Risk-Weighted Assets $84,370 12.28% $54,945 8.00% $68,681 10.00% Tier I Leverage Ratio $75,795 8.76% $34,594 4.00% $43,242 5.00% HomeFederal Bank Tier I Capital to Risk- Weighted Assets $84,074 12.26% $27,438 4.00% $41,157 6.00% Total Risk-Based capital to Risk-Weighted Assets $92,649 13.51% $54,876 8.00% $68,596 10.00% Tier I Leverage Ratio $84,074 9.76% $34,460 4.00% $43,074 5.00%
EITF Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" provides guidance for determining when an investment is considered impaired (when fair value is less than cost), for evaluating whether impairment is other-than-temporary, and, if other-than-temporary, requiring recognition of an impairment loss equal to the difference between the investment's cost and its fair value. Generally, an impairment is considered other-than-temporary unless: (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the cost of the investment; and (b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. The Financial Accounting Standards Board, ("FASB"), delayed the effective date for the measurement and recognition guidance contained in paragraphs 10 - 20 of EITF Issue 03-1 by FSP EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, 'The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," posted September 30, 2004. The delay of the effective date for paragraphs 10-20 will be superseded concurrent with the final issuance of proposed FSP EITF Issue 03-1-a, "Implication Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, 'The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." Gross unrealized losses on available for sale securities and held to maturity securities were $436,000 and $0, respectively, at September 30, 2004. The Company is currently evaluating the impact of EITF 03-1 and FSP EITF Issue 03-1-1 and is unable to estimate what the impact of adoption, if any, will be. 13 Liquidity and Capital Resources Historically, the Bank has maintained 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 investment securities and loan sales and repayments, and may be generated through increases in deposits. Loan payments are a relatively stable source of funds, while deposit flows are influenced significantly by the level of interest rates and general money market conditions. Borrowings may be used to compensate for reductions in other sources of funds such as deposits. As a member of the Federal Home Loan Bank ("FHLB") system, the Bank may borrow from the FHLB of Indianapolis. At September 30, 2004, the Bank had $132,146,000 in such borrowings. In addition, at September 30, 2004, the Bank had commitments to purchase loans of $4,537,000, fund loan originations of $24,800,000, unused home equity lines of credit of $63,878,000 and unused commercial lines of credit of $39,197,000, as well as commitments to sell loans of $11,250,000. Generally, a significant portion of amounts available in lines of credit will not be drawn. In the opinion of management, the Bank has sufficient cash flow and borrowing capacity to meet current and anticipated funding commitments. On September 20, 2004, with the payment of its third quarter dividend, the Company violated a covenant in its revolving note agreement with LaSalle Bank that restricts the declaration and payment of dividends during any year in excess of 50% of the Company's net annual income. LaSalle Bank has waived this covenant breach and the applicability of the covenant for the quarter ended December 31, 2004. Management anticipates full compliance with this covenant during 2005. Item 3. Quantitative and Qualitative Disclosures About Market Risk. In the opinion of management the interest rate sensitivity results for the quarter ended September 30, 2004, is not materially different from the results presented on page 14 of the annual report for the twelve month period ended December 31, 2003, which is incorporated by reference herein. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the most recent fiscal quarter covered by this quarterly report (the "Evaluation Date"), have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and are designed to ensure that material information relating to the Company would be made known to such officers by others within the Company on a timely basis. (b) Changes in internal controls. There were no significant changes in the Company's internal control over financial reporting identified in connection with the Company's evaluation of controls that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings N/A Item 2. Unregistered Sales of Equity Securities and Use of Proceeds N/A Item 3. Defaults Upon Senior Securities N/A Item 4. Submission of Matters to a Vote of Security Holders N/A Item 5. Other information N/A 14 Item 6. Exhibits (a) Exhibits 31(1) Certification required by 12 C.F.R. 240.13a-14(a). 31(2) Certification required by 12 C.F.R. 240.13a-14(a). 32 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbances-Oxley Act of 2002. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on behalf of the undersigned thereto duly authorized. Home Federal Bancorp DATE: November 3, 2004 /s/ Lawrence E. Welker --------------------------------------------- Lawrence E. Welker, Executive Vice President, Treasurer, and Chief Financial Officer 16 EX-31 2 ex311_1029.txt KEACH CERTIFICATION Exhibit 31(1) CERTIFICATION I, John K. Keach, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 quarterly 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: November 3, 2004 /s/ John K. Keach, Jr. --------------------------------------- Chief Executive Officer EX-31 3 ex312_1029.txt WELKER CERTIFICATION Exhibit 31(2) CERTIFICATION I, Lawrence E. Welker, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 quarterly 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: November 3, 2004 /s/ Lawrence E. Welker ------------------------------------- Chief Financial Officer EX-32 4 ex32_1029.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 third day of November 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 Chief Executive Officer - --------------------------------- ----------------------------------- (Title) (Title) A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Home Federal Bancorp and will be retained by Home Federal Bancorp and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----