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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 March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: O-18847
HOME FEDERAL BANCORP
(Exact name of registrant as specified in its charter)
Indiana 35-1807839
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Origination) Identification No.)
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 April 30, 2003.
Common Stock, no par value - 4,272,007 shares outstanding
HOME FEDERAL BANCORP
FORM 10-Q
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated 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 Analysis of Financial
Condition and Results of Operations ........................ 11
ITEM 4. Controls and Procedures.......................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 13
Item 2. Changes in Securities and Uses of Proceeds ..................... 13
Item 3. Defaults Upon Senior Securities ................................ 13
Item 4. Submission of Matters to a Vote of Security Holders ............ 13
Item 5. Other Information .............................................. 13
Item 6. Exhibits and Reports on Form 8-K ............................... 13
Signatures .............................................................. 14
Certifications........................................................... 15
- 2 -
HOME FEDERAL BANCORP
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
March 31, December 31,
2003 2002
ASSETS: -------- --------
Cash .................................................$ 31,839 $ 27,404
Interest-bearing deposits ............................ 40,248 26,288
-------- --------
Total cash and cash equivalents .................... 72,087 53,692
-------- --------
Securities available for sale at fair value
(amortized cost $117,566 and $113,000) .............. 118,497 114,440
Securities held to maturity (fair value $2,420
and $3,147) ......................................... 2,333 3,026
Loans held for sale (fair value $23,695 and $31,055) . 23,273 30,560
Loans receivable, net of allowance for loan losses
of $7,186 and $7,172 ................................ 617,324 628,883
Investments in joint ventures ........................ 6,454 6,710
Federal Home Loan Bank stock ......................... 9,965 9,965
Accrued interest receivable, net ..................... 4,141 4,289
Premises and equipment, net .......................... 12,878 12,973
Real estate owned .................................... 1,717 1,472
Prepaid expenses and other assets .................... 8,282 8,259
Cash surrender value of life insurance ............... 10,979 10,841
Goodwill ............................................. 1,395 1,395
-------- --------
TOTAL ASSETS ......................................$889,325 $886,505
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits .............................................$607,805 609,358
Advances from Federal Home Loan Bank ................. 166,007 171,635
Senior debt .......................................... 14,242 14,242
Other borrowings ..................................... 5,809 1,867
Advance payments by borrowers for taxes and insurance 552 229
Accrued expenses and other liabilities ............... 14,594 11,380
-------- --------
Total liabilities ................................. 809,009 808,711
-------- --------
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: ............................ 9,743 9,184
4,255,202 shares at March 31, 2003
4,228,859 shares at December 31, 2002
Retained earnings, restricted ....................... 70,420 68,156
Accumulated other comprehensive income, net of taxes . 153 454
-------- --------
Total shareholders' equity ....................... 80,316 77,794
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........$889,325 $886,505
======== ========
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
March 31,
--------------------------
Interest income: 2003 2002
----------- -----------
Loans receivable ................................... $ 10,824 $ 11,726
Securities available for sale and held to maturity . 1,107 1,409
Other interest income .............................. 127 155
----------- -----------
Total interest income ............................... 12,058 13,290
----------- -----------
Interest expense:
Deposits ........................................... 3,397 4,048
Advances from Federal Home Loan Bank ................ 2,397 2,697
Other borrowings .................................... 222 201
----------- -----------
Total interest expense .............................. 6,016 6,946
----------- -----------
Net interest income ................................. 6,042 6,344
Provision for loan losses ........................... 210 509
----------- -----------
Net interest income after provision for loan losses . 5,832 5,835
----------- -----------
Other income:
Gain on sale of loans .............................. 2,144 1,018
Gain(loss) on sale of securities ................... -- 2
Income (loss) from joint ventures .................. 481 509
Insurance, annuity income, other fees .............. 430 378
Service fees on NOW accounts ....................... 600 489
Net gain (loss) on real estate owned and
repossessed assets................................. 11 193
Loan servicing income, net of impairments .......... (10) 412
Miscellaneous ...................................... 481 511
----------- -----------
Total other income .................................. 4,137 3,512
----------- -----------
Other expenses:
Compensation and employee benefits ................. 2,937 2,858
Occupancy and equipment ............................ 777 704
Service bureau expense ............................. 240 205
Federal insurance premium .......................... 25 26
Marketing .......................................... 202 137
Miscellaneous ...................................... 1,101 1,228
----------- -----------
Total other expenses ................................ 5,282 5,158
----------- -----------
Income before income taxes .......................... 4,687 4,189
Income tax provision ................................ 1,733 1,596
----------- -----------
Net Income .......................................... $ 2,954 $ 2,593
=========== ===========
Basic earnings per common share ..................... $ 0.70 $ 0.59
Diluted earnings per common share ................... $ 0.66 $ 0.56
Basic weighted average number of shares ............. 4,236,669 4,431,575
Dilutive weighted average number of shares .......... 4,458,610 4,624,157
Dividends per share ................................. $ 0.163 $ 0.150
See notes to consolidated financial statements (unaudited)
- 4 -
HOME FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three Months Ended
(unaudited) March 31,
---------------------
2003 2002
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 2,954 $ 2,593
Adjustments to reconcile net income to net cash
from operating activities:
Accretion of discounts, amortization and depreciation . 473 159
Provision for loan losses ............................. 210 509
Net gain from sale of loans ........................... (2,144) (1,018)
Net (gain)/loss from sale of investment securities .... -- (2)
(Income)/loss from joint ventures and net (gain)/loss
from real estate owned............................... (492) (701)
Loan fees deferred (recognized), net .................. (6) (1)
Proceeds from sale of loans held for sale ............. 114,548 58,447
Origination of loans held for sale .................... (105,117) (46,898)
Increase (decrease) in accrued interest and
other assets ........................................ (521) (2,039)
Increase (decrease) in other liabilities .............. 3,570 (105)
--------- --------
Net cash from operating activities ...................... 13,475 10,944
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net principal received (disbursed) on loans ............. 12,639 23,263
Proceeds from:
Maturities/Repayments of:
Securities held to maturity ........................ 695 816
Securities available for sale ...................... 46,858 8,106
Sales of:
Securities available for sale ...................... 6,750 2,537
Real estate owned and other asset sales ............ 449 2,847
Purchases of:
Loans ................................................. (1,284) (1,784)
Securities available for sale ......................... (58,278) (46,287)
Investment in joint ventures ............................ 737 337
Investment in cash surrender value of life insurance .... -- 257
Acquisition of property and equipment ................... (276) (94)
--------- --------
Net cash from investing activities ...................... 8,290 (10,002)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ..................... (1,553) (6,423)
Proceeds from advances from FHLB ........................ -- 5,100
Repayment of advances from FHLB ......................... (5,628) (6,019)
Net proceeds from (net repayment of) overnight borrowings 3,942 (85)
Common stock options exercised .......................... 559 368
Repurchase of common stock .............................. -- (2,639)
Payment of dividends on common stock .................... (690) (656)
--------- --------
Net cash from financing activities ...................... (3,370) (10,354)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............... 18,395 (9,412)
Cash and cash equivalents, beginning of period .......... 53,692 64,676
--------- --------
Cash and cash equivalents, end of period ................ $ 72,087 $ 55,264
========= ========
Supplemental information:
Cash paid for interest .................................. $ 7,051 $ 6,919
Cash paid for income taxes .............................. $ -- $ 1,826
Assets acquired through foreclosure ..................... $ 891 $ 1,532
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 it's wholly owned subsidiaries. These
consolidated interim financial statements at March 31, 2003, and for the three
month period ended March 31, 2003, have not been audited by independent
auditors, but reflect, in the opinion of the Company's management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position and results of operations for such
periods, including elimination of all significant intercompany balances and
transactions.
These statements should be read in conjunction with the consolidated financial
statements and related notes, which are incorporated by reference in the
Company's Transition Report on Form 10-K for the six month period ended December
31, 2002.
2. Earnings Per Share
The following is a reconciliation of the weighted average common shares for the
basic and diluted earnings per share computations:
For the three months ended
March 31,
---------------------
2003 2002
--------- ---------
Basic EPS:
Weighted average common shares . 4,236,669 4,431,575
========= =========
Diluted EPS:
Weighted average common shares . 4,236,669 4,431,575
Dilutive effect of stock options 221,941 192,582
--------- ---------
Weighted average common and
incremental shares ............. 4,458,610 4,624,157
========= =========
3. Comprehensive Income
The following is a summary of the Company's total comprehensive income for the
interim three month periods ended March 31, 2003 and 2002. (In thousands)
Three months ended
March 31,
---------------------
2003 2002
-------- ---------
Net Income .............................................. $ 2,954 $ 2,593
Other comprehensive income:
Unrealized holding gains (losses) from securities
available for sale.................................. (509) (497)
Reclassification adjustment for (gains) losses
realized in income ................................. -- (2)
Unrealized gains (losses) from cash flow hedge ....... 55 124
-------- ---------
Net unrealized gains (losses) ........................... (454) (375)
Tax effect .............................................. 153 150
-------- ---------
Other comprehensive income (loss), net of tax ........... (301) (225)
-------- ---------
Comprehensive Income .................................... $ 2,653 $ 2,368
======== =========
4. 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.
(dollars in thousands, except share data)
- 6 -
For the three months ended
March 31,
--------------------------
2003 2002
------- ------
Net income, as reported ......................... $ 2,954 $ 2,593
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects ..... (91) (104)
-------- -------
Pro forma net income ............................ $ 2,863 $ 2,489
======== ======
Earnings per share:
Basic---as reported ........................ $ .70 $ .59
Basic---pro forma .......................... $ .68 $ .56
Diluted---as reported ...................... $ .66 $ .56
Diluted---pro forma ........................ $ .64 $ .54
5. 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.
6. 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.
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.
- 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 17 full service banking
branches and one commercial loan origination office in Indianapolis.
CRITICAL ACCOUNTING POLICIES
The notes to the consolidated financial statements contain a summary of the
Company's significant accounting policies presented on pages 23 through 27 of
the transition report for the six month period ended December 31, 2002. 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, ("ALL"), 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 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.
- 8 -
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.
Other factors used by management in determining 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. If Management were to underestimate
the allowance for loan losses, earnings could be reduced in the future as
increased provisions not offset by recoveries are made. Overestimations of the
required allowance could result in future increases in income as recoveries
increase or provisions for loan losses decrease.
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 March 31, 2003, MSR's had a
carrying value of $2.6 million.
RESULTS OF OPERATIONS:
Quarter Ended March 31, 2003 Compared to Quarter Ended March 31, 2002
General
The Company reported net income of $2,954,000 for the quarter ended March 31,
2003, compared to $2,593,000 for the quarter ended March 31, 2002, an increase
of $361,000 or 13.9%. Basic earnings per common share for the current quarter
were $0.70 compared to $0.59 for the quarter ended March 31, 2002. Diluted
earnings per common share were $0.66 for the quarter ended March 31, 2003
compared to $0.56 for the quarter ended March 31, 2002.
Net Interest Income
Net interest income before provision for loan losses decreased by $302,000 or
4.8% for the quarter ended March 31, 2003, compared to the quarter ended March
31, 2002. This decrease was due primarily to a 28 basis point, (a basis point is
defined as 1/100th of a percent), decrease in the net interest margin to average
interest earning assets, as yields on interest earning assets declined more
rapidly than the decline in the cost of funds. Offsetting the decrease in net
interest margin was an increase of $32.1 million in average interest earning
assets versus an increase of $24.8 million in average interest bearing
liabilities for the three month period ended March 31, 2003.
The provision for loan losses decreased $299,000 for the quarter ended March 31,
2003, compared to the quarter ended March 31, 2002. At March 31, 2003, the loan
loss allowance covered 99.5% of non-performing loans, real estate owned and
other repossessed assets. The charge to the loan loss provision reflects two
primary factors, economic trends in the Bank's market area and the continuing
changes in the Bank's portfolio loan mix. Unfavorable economic trends include
increased bankruptcies and unemployment rates. Additionally, the Bank's mix of
portfolio loans continues to increase the commercial real estate and commercial
portfolio as a percentage of the total loan portfolio. Generally, commercial
loans involve greater risk of loss to the Bank than residential loans.
Commercial loans typically involve larger loan balances to single borrowers or
groups of related borrowers and in the case of commercial real estate loans,
repayment is normally dependent on the successful operation of the related
project and may be subject to adverse conditions in the real estate market or in
the general economy. 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.
- 9 -
Quarter ending March 31 (in thousands): 2003 2002
- ---------------------------------------- ---- ----
Allowance beginning balance ............... $ 7,172 $ 6,144
Provision for loan losses ................. 210 509
Charge-offs ............................... (220) (310)
Recoveries ................................ 24 21
------- -------
Loan Loss Allowance ending balance......... $ 7,186 $ 6,364
======= =======
Allowance to Total Loans .................. 1.11% .94%
Allowance to Nonperforming Assets.......... 100% 79%
Interest Income
Total interest income for the three-month period ended March 31, 2003, decreased
$1,232,000, or 9.3%, over the same period of the prior year. This decrease is
primarily the result of a 88 basis point decrease in the weighted average
interest rate earned on interest earning assets for the quarter ended March 31,
2003 as compared to the quarter ended March 31, 2002. The weighted average
interest rate earned on interest earning assets declined because market rates in
general declined. This decline is reflected in the quarterly average of the
one-year constant maturity treasury rate, which fell 41.7% from 2.3%, for the
quarter ended March 31, 2002, to 1.3%, for the quarter ended March 31, 2003.
This decrease in rates caused adjustable rate assets to automatically reprice to
lower rates. Additionally, fixed rate loans refinanced into lower rate loans.
Interest Expense
Total interest expense for the three-month period ended March 31, 2003 decreased
$930,000, or 13.4%, as compared to the same period a year ago. The factor that
caused the decrease in interest expense mirrors the factor for the decrease in
interest income. The interest rate paid on interest bearing liabilities declined
60 basis points in the quarter ended March 31, 2003, as compared to the quarter
ended March 31, 2002.
Other Income
Total other income for the three-month period ended March 31, 2003, increased
$625,000 or 17.8% over the same period a year ago. This increase was primarily
the result of an increase of $1,126,000 from the gain on sale of loans. The
lower loan rates experienced in the quarter ended March 31, 2003 as compared to
the quarter ended March 31, 2002 resulted in increased refinancing activity,
causing the Bank's fifteen and thirty year fixed rate loan originations to
increase. The Bank typically sells most of its fifteen year and thirty year
fixed rate mortgages in the secondary market, resulting in the increased gain on
sale of loans.
A factor decreasing other income was a $422,000 reduction in servicing income
for the quarter ended March 31, 2003, as compared to the quarter ended March 31,
2002. This decrease was due primarily to two factors. The increasing balance of
mortgage servicing rights resulted in $80,000 of increased amortization of those
rights for the quarter ended March 31, 2003. In addition, the impairment charge
for mortgage servicing rights increased $347,000 in the current quarter compared
to the same quarter ended March 31, 2002. The declining rate scenario
experienced in the quarter ended March 31, 2003, led to increased mortgage
prepayment speeds, resulting in a $191,000 impairment charge to the Bank's
mortgage servicing rights portfolio in the quarter ended March 31, 2003. The
rate scenario was reversed in the quarter ended March 31, 2002. In the quarter
ended March 31, 2002, the average rate on sold loans increased to 6.8% from an
average rate on sold loans of 6.6% for the quarter ended December 31, 2001. The
increasing rate scenario experienced during the three months ended March 31,
2002, as well as other factors, resulted in a reduction of the required
impairment allowance, increasing the Bank's loan servicing income by $156,000
for the quarter ended March 31, 2002.
An additional factor reducing other income for the three months ended March 31,
2003, was a $182,000 decrease in the net gain on real estate owned and
repossessed assets. This decrease resulted from sales of real estate owned and
repossessed assets decreasing from $2,847,000 for the quarter ended March 31,
2002, as compared to sales of $449,000 for the quarter ended March 31, 2003.
Other Expenses
Other expense for the three-month period ended March 31, 2003 increased
$124,000, or 2.4% over the three-month period ended March 31, 2002. This
increase primarily resulted from increases in retirement and health care costs
of $85,000 that increased compensation and employee benefits, as well as a
$73,000 increase in occupancy expenses due to miscellaneous repairs and
maintenance and increased utility bills experienced in the quarter ended March
31, 2003. Additionally, marketing expenses increased $65,000 due to new
advertising campaigns launched by the Bank in the quarter ended March 31, 2003.
Offsetting these increases were decreases in miscellaneous expenses associated
with real estate owned expenses, which decreased $127,000 in the March 31, 2003,
quarter compared to the March 31, 2002 quarter.
- 10 -
FINANCIAL CONDITION:
Total assets as of March 31, 2003, were $889,325,000, which showed a slight
increase of $2,820,000 from December 31, 2002, total assets of $886,505,000.
Changes within the various balance sheet categories included an $18,395,000 or
34.3% increase in cash and cash equivalents, while loans held for sale and loans
receivable, net of allowance for loan losses, decreased $7,287,000 and
$11,559,000, respectively, for the three month period ended March 31, 2003.
Shareholders' equity increased $2,522,000 during the same period. Retained
earnings increased $2,954,000 from net income and decreased $690,000 for
dividends paid. Common stock increased $559,000 from the exercise of common
stock options. The Company had other comprehensive loss from unrealized losses
in its securities available for sale portfolio, net of tax, of $334,000 for the
three months ended March 31, 2003. Additionally, the Company had other
comprehensive gain, net of tax, from the change in fair value of a cash flow
hedge of $33,000 for the same three month period.
At March 31, 2003, the Company and the Bank exceeded all current applicable
regulatory capital requirements as follows:
As of March 31, 2003
(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 $78,769 11.68% $26,972 4.00% $40,459 6.00%
Total Risk-Based Capital to
Risk-Weighted Assets $85,955 12.75% $53,945 8.00% $67,431 10.00%
Tier I Leverage Ratio $78,769 8.90% $35,393 4.00% $44,241 5.00%
HomeFederal Bank
Tier I Capital to Risk-
Weighted Assets $88,241 13.09% $26,972 4.00% $40,459 6.00%
Total Risk-Based to Risk-
Weighted Assets $95,427 14.15% $53,945 8.00% $67,431 10.00%
Tier I Leverage Ratio $88,241 9.99% $35,330 4.00% $44,162 5.00%
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 FHLB
system, the Bank may borrow from the FHLB of Indianapolis. At March 31, 2003,
the Bank had $166,007,000 in such borrowings. In addition, at March 31, 2003,
the Bank had commitments to fund loan originations of $52,784,000, unused home
equity lines of credit of $77,745,000 and unused commercial lines of credit of
$29,484,000, as well as commitments to sell loans of $59,759,000. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the opinion of management the interest rate sensitivity results for the
quarter ended March 31, 2003 is not materially different from the results
presented on page 14 of the transition report for the six month period ended
December 31, 2002, which is incorporated by reference herein.
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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-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934, as amended), as of May 9, 2003 (the "Evaluation
Date") within 90 days before the filing date of this quarterly
report, 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 controls or in other factors that could
significantly affect these controls subsequent to the Evaluation
Date.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
N/A
Item 2. Changes in 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
In February, 2003, the Board of Directors announced it had approved the sixth
repurchase, from time to time, on the open market of up to 5% of the Company's
outstanding shares of common stock, or 211,699 such shares. As of May 13, 2003
Home Federal Bancorp has repurchased 24,000 shares under this plan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbances-Oxley Act of 2002.
(b) On February 25, 2003 Home Federal Bancorp filed an 8-K containing a
press release announcing a first quarter dividend of $0.1625 per share
to be paid on the Company's common stock. Additionally, the press
release included the approval of the Board of Directors to repurchase up
to 5% of the Company's outstanding shares of common stock or 211,699
such shares.
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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: May 9, 2003 /S/ Lawrence E. Welker
Lawrence E. Welker, Executive Vice President,
Treasurer, and Chief Financial Officer
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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 quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date:May 9, 2003
/s/ John K. Keach, Jr.
Chief Executive Officer
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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 quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date ;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Lawrence E. Welker
Chief Financial Officer
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