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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 June 30, 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 August 7, 2003.
Common Stock, no par value - 4,238,578 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 ................................... 9
Forward Looking Statements ...................................... 9
Critical Accounting Policies..................................... 9
Item 3. Quantitative and Qualitative Analysis of Financial
Condition and Results of Operations ........................ 14
ITEM 4. Controls and Procedures.......................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 15
Item 2. Changes in Securities and Uses of Proceeds ..................... 15
Item 3. Defaults Upon Senior Securities ................................ 15
Item 4. Submission of Matters to a Vote of Security Holders ............ 15
Item 5. Other Information .............................................. 15
Item 6. Exhibits and Reports on Form 8-K ............................... 15
Signatures .............................................................. 16
- 2 -
HOME FEDERAL BANCORP
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
June 30, December 31,
2003 2002
---------- ---------
ASSETS:
Cash .................................................. $ 34,805 $ 27,404
Interest-bearing deposits ............................. 9,154 26,288
--------- ---------
Total cash and cash equivalents ..................... 43,959 53,692
--------- ---------
Securities available for sale at fair value
(amortized cost $116,117 and $113,000) ............... 117,341 114,440
Securities held to maturity (fair value $2,318
and $3,147).......................................... 2,220 3,026
Loans held for sale (fair value $40,423 and $31,055) .. 39,782 30,560
Loans receivable, net of allowance for loan losses
of $7,284 and $7,172.................................. 613,859 628,883
Investments in joint ventures ......................... 6,036 6,710
Federal Home Loan Bank stock .......................... 9,965 9,965
Accrued interest receivable, net ...................... 3,999 4,289
Premises and equipment, net ........................... 12,970 12,973
Real estate owned ..................................... 1,904 1,472
Prepaid expenses and other assets ..................... 8,496 8,259
Cash surrender value of life insurance ................ 11,115 10,841
Goodwill .............................................. 1,395 1,395
--------- ---------
TOTAL ASSETS ....................................... $ 873,041 $ 886,505
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits .............................................. $ 598,128 $ 609,358
Advances from Federal Home Loan Bank .................. 163,600 171,635
Senior debt ........................................... 14,242 14,242
Other borrowings ...................................... 3,848 1,867
Advance payments by borrowers for taxes and insurance . 748 229
Accrued expenses and other liabilities ................ 12,551 11,380
--------- ---------
Total liabilities .................................. 793,117 808,711
--------- ---------
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: ............................. 10,795 9,184
4,224,007 shares at June 30, 2003
4,228,859 shares at December 31, 2002
Retained earnings, restricted ........................ 68,753 68,156
Accumulated other comprehensive income, net of taxes .. 376 454
--------- ---------
Total shareholders' equity ......................... 79,924 77,794
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $ 873,041 $ 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 Six Months Ended
June 30, June 30,
------------------- -------------------
Interest income: 2003 2002 2003 2002
-------- -------- -------- --------
Loans receivable .................................. $ 10,499 $ 11,807 $ 21,323 $ 23,533
Securities available for sale and held to maturity 935 1,552 2,042 2,961
Other interest income ............................. 108 111 235 266
-------- -------- -------- --------
Total interest income .............................. 11,542 13,470 23,600 26,760
-------- -------- -------- --------
Interest expense:
Deposits .......................................... 3,104 3,951 6,501 7,999
Advances from Federal Home Loan Bank ............... 2,360 2,688 4,757 5,385
Other borrowings ................................... 210 203 432 404
-------- -------- -------- --------
Total interest expense ............................. 5,674 6,842 11,690 13,788
-------- -------- -------- --------
Net interest income ................................ 5,868 6,628 11,910 12,972
Provision for loan losses .......................... 450 193 660 702
-------- -------- -------- --------
Net interest income after provision for loan losses 5,418 6,435 11,250 12,270
-------- -------- -------- --------
Other income:
Gain on sale of loans ............................. 2,155 635 4,299 1,653
Gain(loss) on sale of securities .................. 4 -- 4 2
Income (loss) from joint ventures ................. 93 266 574 775
Insurance, annuity income, other fees ............. 403 406 833 784
Service fees on deposit accounts .................. 705 595 1,305 1,084
Net gain (loss) on real estate owned
and repossessed assets........................... 77 56 88 249
Loan servicing income, net of impairments ......... (123) 238 (133) 650
Miscellaneous ..................................... 499 484 980 995
-------- -------- -------- --------
Total other income ................................. 3,813 2,680 7,950 6,192
-------- -------- -------- --------
Other expenses:
Compensation and employee benefits ................ 3,203 2,880 6,140 5,738
Occupancy and equipment ........................... 748 705 1,525 1,409
Service bureau expense ............................ 235 240 475 445
Federal insurance premium ......................... 24 25 49 51
Marketing ......................................... 137 148 339 285
Miscellaneous ..................................... 1,292 1,021 2,393 2,249
-------- -------- -------- --------
Total other expenses ............................... 5,639 5,019 10,921 10,177
-------- -------- -------- --------
Income before income taxes ......................... 3,592 4,096 8,279 8,285
Income tax provision ............................... 1,318 1,484 3,051 3,080
-------- -------- -------- --------
Net Income ......................................... $ 2,274 $ 2,612 $ 5,228 $ 5,205
======== ======== ======== ========
Basic earnings per common share $ 0.53 $ 0.60 $ 1.23 $ 1.19
Diluted earnings per common share $ 0.50 $ 0.57 $ 1.17 $ 1.14
Basic weighted average number of shares 4,283,864 4,346,629 4,260,397 4,389,677
Dilutive weighted average number of shares 4,505,471 4,593,603 4,483,411 4,577,913
Dividends per share $ 0.163 $ 0.150 $ 0.325 $ 0.300
See notes to consolidated financial statements (unaudited)
- 4 -
HOME FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Six Months Ended
(unaudited) June 30,
---------------------
2003 2002
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...............................................$ 5,228 $ 5,205
Adjustments to reconcile net income to net cash
from operating activities:
Accretion of discounts, amortization and depreciation 1,054 796
Provision for loan losses ............................ 660 702
Net gain from sale of loans .......................... (4,299) (1,653)
Net (gain)/loss from sale of investment securities ... (4) (2)
(Income)/loss from joint ventures and net
(gain)/loss from real estate owned .................. (662) (1,024)
Loan fees deferred (recognized), net ................. (23) 30
Proceeds from sale of loans held for sale ............ 225,145 94,468
Origination of loans held for sale ................... (230,068) (82,214)
Increase (decrease) in accrued interest
and other asset..................................... (1,476) (5,315)
Increase (decrease) in other liabilities ............. 1,750 4,518
--------- ---------
Net cash from operating activities ....................... (2,695) 15,511
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net principal received (disbursed) on loans .............. 17,901 15,339
Proceeds from:
Maturities/Repayments of:
Securities held to maturity .................... 811 1,154
Securities available for sale .................. 104,360 14,917
Sales of:
Securities available for sale .................. 23,312 2,537
Real estate owned and other asset sales ........ 990 3,589
Purchases of:
Loans ............................................. (3,514) (2,452)
Securities available for sale ..................... (131,095) (55,192)
Repayment of (investment in) joint ventures .............. 1,248 1,204
Investment in cash surrender value of life insurance ..... -- 257
Acquisition of property and equipment .................... (747) (396)
--------- ---------
Net cash from investing activities ....................... 13,266 (19,043)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ...................... (11,230) (1,685)
Proceeds from advances from FHLB ......................... 5,000 7,400
Repayment of advances from FHLB .......................... (13,035) (16,325)
Net proceeds from (net repayment of) overnight borrowings 1,981 (1,068)
Common stock options exercised ........................... 1,813 1,083
Repurchase of common stock ............................... (3,447) (4,764)
Payment of dividends on common stock ..................... (1,386) (1,307)
--------- ---------
Net cash from financing activities ....................... (20,304) (16,666)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................ (9,733) (20,198)
Cash and cash equivalents, beginning of period ........... 53,692 64,676
--------- ---------
Cash and cash equivalents, end of period .................$ 43,959 $ 44,478
========= =========
Supplemental information:
Cash paid for interest ...................................$ 11,806 $ 13,862
Cash paid for income taxes ...............................$ 3,540 $ 4,247
Assets acquired through foreclosure ......................$ 1,925 $ 2,366
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 June 30, 2003, and for the
three and six month periods ended June 30, 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:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
Basic EPS:
Weighted average
common shares ................. 4,283,864 4,346,629 4,260,397 4,389,677
========= ========= ========= =========
Diluted EPS:
Weighted average common shares . 4,283,864 4,346,629 4,260,397 4,389,677
Dilutive effect of stock options 221,607 246,974 223,014 188,236
--------- --------- --------- ---------
Weighted average common and
incremental shares ............. 4,505,471 4,593,603 4,483,411 4,577,913
========= ========= ========= =========
3. Comprehensive Income
The following is a summary of the Company's total comprehensive income for the
interim three and six month periods ended June 30, 2003 and 2002. (In thousands)
For the For the
Three months ended Six months ended
June 30, June 30,
------------------ ---------------
2003 2002 2003 2002
---- ---- ---- ----
Net Income ..................................$ 2,274 $ 2,612 $ 5,228 $ 5,205
Other comprehensive income:
Unrealized holding gains (losses)
from securities available for sale ..... 293 1,759 (216) 1,262
Reclassification adjustment for (gains)
losses realized in income .............. (4) -- (4) (2)
Unrealized gains (losses) from
cash flow hedge......................... 43 (288) 98 (164)
------- ------- ------- --------
Net unrealized gains (losses) ............... 332 1,471 (122) 1,096
Tax effect .................................. (109) (500) 44 (350)
------- -------- ------- -------
Other comprehensive income(loss), net of tax 223 971 (78) 746
------- ------- ------- -------
Comprehensive Income ........................$ 2,497 $ 3,583 $ 5,150 $ 5,951
======= ======= ======= =======
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
- 6 -
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)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2003 2002 2003 2002
- ------------------------------------- ------- ------- ------- -------
Net income, as reported $ 2,274 $ 2,612 $ 5,228 $ 5,205
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (10) (309) (101) (413)
------- ------- ------- -------
Pro forma net income $ 2,264 $ 2,303 $ 5,127 $ 4,792
======= ======= ======= =======
Earnings per share:
Basic---as reported $ .53 $ .60 $ 1.23 $ 1.19
Basic---pro forma $ .53 $ .53 $ 1.20 $ 1.09
Diluted---as reported $ .50 $ .57 $ 1.17 $ 1.14
Diluted---pro forma $ .50 $ .50 $ 1.14 $ 1.05
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. As of June 30,
2003, there have been no such exit or disposal activities.
Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting
for Stock-Based Compensation--Transition and Disclosure, an amendment of FASB
Statement No. 123," was issued in December 2002 and is effective for fiscal
years ending after December 15, 2002. SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method on reported
results. Management has included the new disclosure requirements in its
consolidated financial statements.
Statement of Financial Accounting Standards No. 149 ("SFAS 149"), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," was issued in
April 2003 and is effective for contracts entered into or modified after June
30, 2003, except as stated below and for hedging relationships designated after
June 30, 2003. In addition, except as stated below, all provisions of SFAS 149
are to be applied prospectively. The provisions of SFAS 149 that relate to
Statement 133 implementation issues that have been effective for fiscal quarters
that began prior to June 15, 2003, will continue to be applied in accordance
with their respective effective dates. SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Management does
not believe this statement will have a material effect on its consolidated
financial statements.
- 7 -
Statement of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity," was issued in May 2003 and is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The requirements of SFAS 150
apply to issuers' classification and measurement of freestanding financial
instruments, including those that comprise more than one option or forward
contract. SFAS 150 does not apply to features that are embedded in a financial
instrument that is not a derivative in its entirety. Management does not believe
this statement will have a material effect on its consolidated financial
statements.
- 8 -
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 on a loan's
delinquency.
Commercial and commercial real estate loans are individually risk rated per the
loan policy. Homogenous loans such as consumer and residential mortgage loans
are not individually risk rated by management. They are risk rated based on
computer file data that management believes will provide a good basis for the
loans' quality. For all loans not listed individually on the Asset Watch List,
historical loss rates based on the last four years are the basis for developing
expected charge-offs for each pool of loans.
Historical loss rates for commercial and consumer loans may be adjusted for
- 9 -
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 June 30, 2003, MSR's had a
carrying value of $2.6 million.
RESULTS OF OPERATIONS:
Quarter Ended June 30, 2003 Compared to Quarter Ended June 30, 2002
General
The Company reported net income of $2,274,000 for the quarter ended June 30,
2003, compared to $2,612,000 for the quarter ended June 30, 2002, a decrease of
$338,000 or 12.9%. Basic earnings per common share for the current quarter were
$0.53 compared to $0.60 for the quarter ended June 30, 2002. Diluted earnings
per common share were $0.50 for the quarter ended June 30, 2003 compared to
$0.57 for the quarter ended June 30, 2002.
Net Interest Income
Net interest income before provision for loan losses decreased by $760,000 or
11.8% for the quarter ended June 30, 2003, compared to the quarter ended June
30, 2002. This decrease was due primarily to a 51 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. A factor that positively
influenced net interest margin was an increase of $32.9 million in average
interest earning assets versus an increase of $26.1 million in average interest
bearing liabilities for the three month period ended June 30, 2003 compared to
the same quarter last year.
The provision for loan losses increased $257,000 for the quarter ended June 30,
2003, compared to the quarter ended June 30, 2002. At June 30, 2003, the loan
loss allowance covered 148.7% of non-performing loans. 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.
- 10 -
The change to the loan loss allowance for the three month period ended June 30,
2003 is as follows:
Quarter ended June 30: (in thousands) 2003 2002
------------------------------------- ---- ----
Allowance beginning balance............ $7,186 $6,364
Provision for loan losses.............. 450 193
Charge-offs............................ (432) (121)
Recoveries............................. 80 15
------ ------
Loan Loss Allowance ending balance..... $7,284 $6,451
====== ======
Allowance to Total Loans............... 1.10% 1.01%
Allowance to Nonperforming Assets...... 107% 106%
Interest Income
Total interest income for the three month period ended June 30, 2003, decreased
$1,928,000, or 14.3%, over the same period of the prior year. This decrease is
primarily the result of a 123 basis point decrease in the weighted average
interest rate earned on interest earning assets for the quarter ended June 30,
2003 as compared to the quarter ended June 30, 2002. The weighted average
interest rate earned on interest earning assets declined because market rates in
general declined.
Interest Expense
Total interest expense for the three month period ended June 30, 2003 decreased
$1,168,000, or 17.1%, 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
72 basis points in the quarter ended June 30, 2003, as compared to the quarter
ended June 30, 2002.
Other Income
Total other income for the three-month period ended June 30, 2003, increased
$1,133,000 or 42.3% over the same period a year ago. This increase was primarily
the result of an increase of $1,520,000 from the gain on sale of loans. The
lower loan rates experienced in the quarter ended June 30, 2003 as compared to
the quarter ended June 30, 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. Another factor increasing other income is the increase of
$110,000 in service fees on deposit accounts for the quarter ended June 30, 2003
as compared to the same quarter last year. This increase in deposit fees
resulted primarily from a restructuring of the deposit fees charged on
commercial accounts.
A factor decreasing other income was a $361,000 reduction in servicing income
for the quarter ended June 30, 2003, as compared to the quarter ended June 30,
2002. This decrease was due primarily to two factors. The increasing balance of
mortgage servicing rights resulted in $120,000 of increased amortization of
those rights for the quarter ended June 30, 2003. In addition, the impairment
charge for mortgage servicing rights increased $301,000 in the current quarter
compared to the same quarter ended June 30, 2002. The originated mortgage
servicing rights asset is reviewed for impairment each quarter. This asset is
created when mortgage loans are sold and the lender retains the servicing
rights. The 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. Future impairment charges will depend on future interest rate
changes. If rates continue to drop there may be more impairment charges. If they
rise, previously recorded impairment charges may be recovered.
An additional factor reducing other income for the three months ended June 30,
2003, was a $173,000 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 quarter ended June 30, 2002, which produced $183,000 of income in
the prior year's second quarter. In the current quarter ended June 30, 2003, the
same joint venture produced $35,000 of income.
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Other Expenses
Other expense for the three month period ended June 30, 2003 increased $620,000,
or 12.4% over the three month period ended June 30, 2002. This increase resulted
from normal salary increases, as well as increases in retirement and health care
costs, and increases from adding additional support staff, that increased
compensation and employee benefits $323,000 over the same period last year.
Additionally, miscellaneous expenses increased $271,000 due to an increase of
$191,000 in consultant fees and a $91,000 charge down of a real estate owned
property in the June 30, 2003, quarter compared to the June 30, 2002 quarter.
Six months Ended June 30, 2003 Compared to Six months Ended June 30, 2002:
General
The Company reported net income of $5,228,000, or $1.17 diluted earnings per
share, for the six months ended June 30, 2003, compared to $5,205,000, or $1.14
diluted earnings per share, for the same period a year ago, an increase of
$23,000 or a 2.6% increase in earnings per dilutive common share.
Net Interest Income
Net interest income before provision for loan losses decreased $1,062,000 for
the six month period ended June 30, 2003, compared to the same period ended June
30, 2002.
The change to the loan loss allowance for the six month period ended June 30,
2003 is as follows:
Six months ended June 30: (in thousands) 2003 2002
- ---------------------------------------- ---- ----
Allowance beginning balance ................. $ 7,172 $ 6,144
Provision for loan losses ................... 660 702
Charge-offs ................................. (652) (431)
Recoveries .................................. 104 36
------- -------
Loan Loss Allowance ......................... $ 7,284 $ 6,451
======= =======
Allowance to Total Loans ................... 1.10% 1.01%
Allowance to Nonperforming Assets........... 107% 106%
Interest Income
Total interest income for the six month period ended June 30, 2003 decreased
$3,160,000, compared to the six month period ended June 30, 2002. The six month
period decrease was due to a decrease of 105 basis points on the weighted
average yield earned on interest earning assets.
Interest Expense
Total interest expense for the six month period ended June 30, 2003 decreased
$2,098,000, compared to the six month period ended June 30, 2002. Similar to the
decrease in interest income, the decrease in interest expense was due to a 65
basis point decrease in the weighted average cost of funds for the six month
period ended June 30, 2003 as compared to the same period ended June 30, 2002.
Other Income
Total other income for the six month period ended June 30, 2003 increased
$1,758,000 or 28.4% as compared to the same period one year ago. This increase
was primarily the result of an increase in gain on sale of loans of $2,646,000
as discussed in the second quarter results above. An additional increase in
other income for the six months ended June 30, 2003 was a $221,000 increase in
the service fees on deposit accounts resulting from the previously discussed
restructuring of commercial deposit fees, as well as income produced from retail
checking.
A factor which reduced other income was a $783,000 decrease in loan servicing
income. For the six month period ended June 30, 2003 the amortization charge on
originated mortgage servicing rights increased $200,000 due to the increased
size of the mortgage servicing rights asset. Additionally, a $500,000 impairment
charge for the period ended June 30, 2003 compared to a recovery of impairment
charges in the six month period ended June 30, 2002 of $148,000 resulted in
$648,000 of the decrease to loan servicing income. A factor that offset the
decrease in loan servicing income was the $68,000 increase in loan servicing
income earned by the Bank for servicing loans sold in the secondary market.
Two other factors reducing other income in the six month period ended June 30,
2003 as compared to the six month period ended June 30, 2002 were a $201,000
decrease in income from joint ventures as discussed in the quarterly information
and a $161,000 decrease in the net gain on real estate owned and repossessed
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assets. The decrease in the real estate owned category occurred due to the
larger number of real estate owned sales which occurred in the six month period
ended June 30, 2002 which resulted in a gain on sale of residential real estate
owned of $289,000 during this period as compared to a gain on sale of
residential real estate of $59,000 which occurred in the six month period ended
June 30, 2003.
Other Expenses
Total other expenses for the six month period ended June 30, 2003 increased
$744,000 or 7.3%. This increase is a result of three factors including a
$402,000 increase in compensation and employee benefits, a $144,000 increase in
miscellaneous expenses and a $116,000 increase in occupancy expenses. The
increases in compensation and employee benefits for the six month period ended
June 30, 2003 mirror the increases discussed in the quarterly discussion. The
increases in miscellaneous expense are primarily the net result of increases of
$192,000 in consulting fees, $91,000 in real estate owned charge downs, $97,000
in loan related expenses and a reduction in real estate owned expenses including
taxes, repairs and maintenance of $236,000.
FINANCIAL CONDITION:
Total assets as of June 30, 2003, were $873,041,000, which was a decrease of
$13,464,000 from December 31, 2002, total assets of $886,505,000. Changes within
the various balance sheet categories included $9,733,000 or 18.1% decrease in
cash and cash equivalents and a loans receivable, net of allowance for loan
losses, decrease of $15,024,000, for the six month period ended June 30, 2003.
The decrease in cash was used to temporarily fund the increase in loans held for
sale of $9,222,000, while the payments received on the loan portfolio were
partially used to pay down advances from the Federal Home Loan Bank which
decreased $8,035,000 and to fund the decrease in higher rate public funds and
jumbo deposits, as deposits decreased $11,230,000 in the six month period ended
June 30, 2003. Shareholders' equity increased $2,130,000 during the same period.
Retained earnings increased $5,228,000 from net income and decreased $1,386,000
for dividends paid and $3,245,000 from stock buy backs. Common stock increased
$1,581,000 from the exercise of common stock options and $232,000 from a tax
benefit associated with the disqualified dispositions of option exercises.
Common stock decreased $202,000 from stock buy backs. The Company had other
comprehensive loss from unrealized losses in its securities available for sale
portfolio, net of tax, of $138,000 for the six months ended June 30, 2003.
Additionally, the Company had other comprehensive gain, net of tax, from the
change in fair value of a cash flow hedge of $60,000 for the same six month
period.
At June 30, 2003, the Company and the Bank exceeded all current applicable
regulatory capital requirements as follows:
As of June 30, 2003
(Dollars in Thousands)
To be "Well-
Capiitalized" under
Minimum Prompt Corrective
Actual Requirements Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Consolidated
Tier I Capital to Risk-
Weighted Assets $78,155 11.76% $26,583 4.00% $39,874 6.00%
Total Risk-Based Capital to
Risk-Weighted Assets $85,439 12.86% $53,165 8.00% $66,457 10.00%
Tier I Leverage Ratio $78,155 8.87% $35,236 4.00% $44,046 5.00%
HomeFederal Bank
Tier I Capital to Risk-
Weighted Assets $87,899 13.25% $26,543 4.00% $39,815 6.00%
Total Risk-Based to Risk-
Weighted Assets $95,183 14.34% $53,086 8.00% $66,358 10.00%
Tier I Leverage Ratio $87,899 9.96% $35,289 4.00% $44,112 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
- 13 -
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 June 30, 2003, the
Bank had $163,600,000 in such borrowings. In addition, at June 30, 2003, the
Bank had commitments to fund loan originations of $71,817,000, unused home
equity lines of credit of $77,355,000 and unused commercial lines of credit of
$31,654,000, as well as commitments to sell loans of $87,797,000. 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 June 30, 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.
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") 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. During the prior quarter, the Company
outsourced the Bank's internal audit function to BKD. Additionally, the
Company established a compliance department. While the Company was not
experiencing any problems with the internal controls over financial
reporting, the Company believes these changes will enhance the internal
controls already established. There were no other 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.
- 14 -
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.
On April 22, 2003, the Corporation held its Annual Meeting of Shareholders. A
total of 3,838,368 shares were present in person or by proxy at the meeting. The
following director nominees received the following votes and votes withheld at
that meeting:
For Votes Withheld
Harvard W. Nolting, Jr. 3,749,275 89,093
(three year term)
John M. Miller 3,751,275 87,093
(three year term)
The terms of office of the following directors continued after the Annual
Meeting of Shareholders:
Term Expiring
John T. Beatty 2004
Harold Force 2004
John K. Keach, Jr. 2005
David W. Laitinen, M.D. 2005
Gregory J. Pence 2004
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 August 7, 2003
Home Federal Bancorp has repurchased 140,400 shares under this plan.
Item 6. Exhibits and Reports on Form 8-K
(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.
(b) On April 16, 2003 Home Federal Bancorp filed an 8-K containing a press
release announcing its results of operations for the quarter ended March
31, 2003.
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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: August 13, 2003 /S/ Lawrence E. Welker
Lawrence E. Welker, Executive Vice President,
Treasurer, and Chief Financial Officer
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