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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, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: O-18847
HOME FEDERAL BANCORP
(Exact name of registrant as specified in its charter)
Indiana 35-1807839
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or 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 - 4,002,573 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 ........................ 13
ITEM 4. Controls and Procedures.......................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 14
Item 2. Changes in Securities and Uses of Proceeds ..................... 14
Item 3. Defaults Upon Senior Securities ................................ 14
Item 4. Submission of Matters to a Vote of Security Holders ............ 14
Item 5. Other Information .............................................. 14
Item 6. Exhibits 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,
2004 2003
--------- ------------
ASSETS:
Cash ................................................. $ 23,870 $ 22,734
Interest-bearing deposits ............................ 11,311 11,444
--------- ---------
Total cash and cash equivalents .................... 35,181 34,178
--------- ---------
Securities available for sale at fair value
(amortized cost $125,108 and $123,243) .............. 123,413 123,638
Securities held to maturity (fair value
$1,543 and $1,883) .................................. 1,507 1,828
Loans held for sale (fair value $3,877 and $6,357) ... 3,823 6,272
Loans receivable, net of allowance for loan losses
of $7,583 and $7,506 ................................ 635,536 630,672
Investments in joint ventures ........................ 5,370 5,501
Federal Home Loan Bank stock ......................... 9,965 9,965
Accrued interest receivable, net ..................... 3,719 3,733
Premises and equipment, net .......................... 14,454 14,168
Real estate owned .................................... 901 1,739
Prepaid expenses and other assets .................... 9,952 8,880
Cash surrender value of life insurance ............... 11,599 11,359
Goodwill ............................................. 1,395 1,395
--------- ---------
TOTAL ASSETS ...................................... $ 856,815 $ 853,328
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits ............................................. $ 614,292 $ 588,915
Advances from Federal Home Loan Bank ................. 140,151 154,296
Senior debt .......................................... 14,242 14,242
Other borrowings ..................................... 1,213 624
Advance payments by borrowers for taxes and insurance 341 76
Accrued expenses and other liabilities ............... 11,084 11,153
--------- ---------
Total liabilities ................................. 781,323 769,306
--------- ---------
Shareholders' equity:
No par preferred stock; Authorized: 2,000,000 shares
Issued and outstanding: None
No par common stock; Authorized: 15,000,000 shares
Issued and outstanding: ............................ 12,964 12,616
4,002,573 shares at June 30, 2004
4,312,805 shares at December 31, 2003
Retained earnings, restricted ....................... 63,785 71,436
Accumulated other comprehensive income (loss),
net of taxes ....................................... (1,257) (30)
--------- ---------
Total shareholders' equity ........................ 75,492 84,022
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........ $ 856,815 $ 853,328
========= =========
See notes to consolidated financial statements (unaudited)
- 3 -
HOME FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
(unaudited) Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
Interest income: 2004 2003 2004 2003
----------- ----------- ----------- -----------
Loans receivable ................................. $ 9,553 $ 10,499 $ 19,223 $ 21,323
Securities available for sale and held to maturity 1,026 941 2,024 2,054
Other interest income ............................ 55 102 109 223
----------- ----------- ----------- -----------
Total interest income ............................. 10,634 11,542 21,356 23,600
----------- ----------- ----------- -----------
Interest expense:
Deposits .......................................... 2,608 3,104 5,292 6,501
Advances from Federal Home Loan Bank .............. 2,009 2,360 4,064 4,757
Other borrowings .................................. 167 210 368 432
----------- ----------- ----------- -----------
Total interest expense ............................ 4,784 5,674 9,724 11,690
----------- ----------- ----------- -----------
Net interest income ............................... 5,850 5,868 11,632 11,910
Provision for loan losses ......................... 35 450 281 660
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 5,815 5,418 11,351 11,250
----------- ----------- ----------- -----------
Other income:
Gain on sale of loans ............................ 939 2,155 1,622 4,299
Gain(loss) on sale of securities ................. -- 4 0 4
Income (loss) from joint ventures ................ 54 93 115 574
Insurance, annuity income, other fees ............ 493 403 992 833
Service fees on deposit accounts ................. 731 705 1,387 1,305
Net gain (loss) on real estate owned and
repossessed assets............................... 63 77 135 88
Loan servicing income, net of impairments ........ 272 (123) 396 (133)
Miscellaneous .................................... 305 499 602 980
----------- ----------- ----------- -----------
Total other income ................................ 2,857 3,813 5,249 7,950
----------- ----------- ----------- -----------
Other expenses:
Compensation and employee benefits ............... 3,356 3,203 6,480 6,140
Occupancy and equipment .......................... 774 748 1,585 1,525
Service bureau expense ........................... 258 235 515 475
Federal insurance premium ........................ 23 24 45 49
Marketing ........................................ 192 137 369 339
Miscellaneous .................................... 1,180 1,292 2,586 2,393
----------- ----------- ----------- -----------
Total other expenses .............................. 5,783 5,639 11,580 10,921
----------- ----------- ----------- -----------
Income before income taxes ........................ 2,889 3,592 5,020 8,279
Income tax provision .............................. 975 1,318 1,719 3,051
----------- ----------- ----------- -----------
Net Income ........................................ $ 1,914 $ 2,274 $ 3,301 $ 5,228
=========== =========== =========== ===========
Basic earnings per common share ................... $ 0.46 $ 0.53 $ 0.78 $ 1.23
Diluted earnings per common share ................. $ 0.45 $ 0.50 $ 0.75 $ 1.17
Basic weighted average number of shares ........... 4,132,814 4,283,864 4,215,781 4,260,397
Dilutive weighted average number of shares ........ 4,294,852 4,505,471 4,390,948 4,483,411
Dividends per share ............................... $ 0.188 $ 0.163 $ 0.375 $ 0.325
See notes to consolidated financial statements (unaudited)
- 4 -
HOME FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Six Months Ended
(unaudited) June 30,
----------------------
2004 2003
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 3,301 $ 5,228
Adjustments to reconcile net income to net cash
from operating activities:
Accretion of discounts, amortization and depreciation 1,133 1,054
Provision for loan losses ........................... 281 660
Net gain from sale of loans ......................... (1,622) (4,299)
Net (gain)/loss from sale of investment securities .. -- (4)
(Income)/loss from joint ventures and net (gain)/loss
from real estate owned ............................ (250) (662)
Loan fees deferred (recognized), net ................ (46) (23)
Proceeds from sale of loans held for sale ........... 83,484 225,145
Origination of loans held for sale .................. (79,413) (230,068)
Increase (decrease) in accrued interest and
other assets ...................................... (338) (1,476)
Increase (decrease) in other liabilities ............ 334 1,750
-------- ---------
Net cash from operating activities ....................... 6,864 (2,695)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net principal received (disbursed) on loans .............. 78 17,901
Proceeds from:
Maturities/Repayments of:
Securities held to maturity ...................... 323 811
Securities available for sale .................... 15,774 104,360
Sales of:
Securities available for sale .................... 12,861 23,312
Real estate owned and other asset sales .......... 919 990
Purchases of:
Loans ............................................... (5,177) (3,514)
Securities available for sale ....................... (30,833) (131,095)
Repayment of (investment in) joint ventures .............. 246 1,248
Acquisition of property and equipment .................... (1,269) (747)
-------- ---------
Net cash from investing activities ....................... (7,078) 13,266
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ...................... 25,377 (11,230)
Proceeds from advances from FHLB ......................... 1,000 5,000
Repayment of advances from FHLB .......................... (15,145) (13,035)
Net proceeds from (net repayment of) overnight borrowings 589 1,981
Common stock options exercised ........................... 896 1,813
Repurchase of common stock ............................... (9,953) (3,447)
Payment of dividends on common stock ..................... (1,547) (1,386)
-------- --------- ---------
Net cash from financing activities ....................... 1,217 (20,304)
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 1,003 (9,733)
Cash and cash equivalents, beginning of period ........... 34,178 53,692
-------- ---------
Cash and cash equivalents, end of period ................. $ 35,181 $ 43,959
======== =========
Supplemental information:
Cash paid for interest ................................... $ 9,809 $ 11,806
Cash paid for income taxes ............................... $ 1,714 $ 3,540
Assets acquired through foreclosure ...................... $ 105 $ 1,925
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, 2004, and for the
three and six month periods ended June 30, 2004, 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 included in the Company's Annual Report
on Form 10-K for the twelve month period ended December 31, 2003.
2. Earnings Per Share
The following is a reconciliation of the weighted average common shares for the
basic and diluted earnings per share, ("EPS") computations:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Basic EPS:
Weighted average common shares . 4,132,814 4,283,864 4,215,781 4,260,397
========= ========= ========= =========
Diluted EPS:
Weighted average common shares . 4,132,814 4,283,864 4,215,781 4,260,397
Dilutive effect of stock options 162,038 221,607 175,167 223,014
--------- --------- --------- ---------
Weighted average common and
incremental shares ............. 4,294,852 4,505,471 4,390,948 4,483,411
========= ========= ========= =========
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, 2004 and 2003. (In thousands)
For the For the
Three months ended Six months ended
June 30, June 30,
------------------ ---------------
2004 2003 2004 2003
---- ---- ---- ----
Net Income ..................................$ 1,914 $ 2,274 $ 3,301 $ 5,228
Other comprehensive income:
Unrealized holding gains (losses)
from securities available for sale ..... (3,055) 293 (2,090) (216)
Reclassification adjustment for (gains)
losses realized in income .............. -- (4) -- (4)
Unrealized gains (losses) from
cash flow hedge......................... 174 43 230 98
------- ------- ------- --------
Net unrealized gains (losses) ............... (2,881) 332 (1,860) (122)
Tax effect .................................. 988 (109) 633 44
------- -------- ------- -------
Other comprehensive income(loss), net of tax (1,893) 223 (1,227) (78)
------- ------- ------- -------
Comprehensive Income ........................$ 21 $ 2,497 $ 2,074 $ 5,150
======= ======= ======= =======
- 6 -
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.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
- ------------------------------------- ------- ------- ------- -------
Net income, as reported $ 1,914 $ 2,274 $ 3,301 $ 5,228
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (15) (10) (31) (101)
------- ------- ------- -------
Pro forma net income $ 1,899 $ 2,264 $ 3,270 $ 5,127
======= ======= ======= =======
Earnings per share:
Basic---as reported $ .46 $ .53 $ .78 $ 1.23
Basic---pro forma $ .46 $ .53 $ .78 $ 1.20
Diluted---as reported $ .45 $ .50 $ .75 $ 1.17
Diluted---pro forma $ .44 $ .50 $ .74 $ 1.14
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
EITF Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" provides guidance for determining when an
investment is considered impaired (when fair value is less than cost), for
evaluating whether impairment is other-than-temporary, and, if
other-than-temporary, requiring recognition of an impairment loss equal to the
difference between the investment's cost and its fair value. Generally, an
impairment is considered other-than-temporary unless: (a) the investor has the
ability and intent to hold an investment for a reasonable period of time
sufficient for a forecasted recovery of fair value up to (or beyond) the cost of
the investment; and (b) evidence indicating that the cost of the investment is
recoverable within a reasonable period of time outweighs evidence to the
contrary. The model used to determine other-than-temporary impairments shall be
applied prospectively to all current and future investments in interim or annual
reporting periods beginning after June 15, 2004. Gross unrealized losses on
available for sale securities and held to maturity securities was $1,933,000 and
$0, respectively, at June 30, 2004. The Company is currently evaluating the
impact of EITF 03-1 and is unable to estimate what the impact of adoption, if
any, will be in the third quarter of 2004.
- 7 -
Part I, Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements that
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-Q are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-Q
identifies important factors that could cause such differences. These factors
include changes in interest rates, loss of deposits and loan demand to other
financial institutions, substantial changes in financial markets, changes in
real estate values and the real estate market, regulatory changes, changes in
the financial condition of issuers of the Company's investments and borrowers,
changes in economic condition of the Company's market area, increases in
compensation and employee expenses, or unanticipated results in pending legal
proceedings.
Home Federal Bancorp (the "Company") is organized as a financial holding company
and owns all the outstanding capital stock of HomeFederal Bank (the "Bank"). The
business of the Bank and therefore, the Company, is to provide consumer and
business banking services to certain markets in the south-central portions of
the State of Indiana. The Bank does business through 18 full service banking
branches.
CRITICAL ACCOUNTING POLICIES
The notes to the consolidated financial statements contain a summary of the
Company's significant accounting policies presented on pages 24 through 28 of
the annual report for the twelve month period ended December 31, 2003. Certain
of these policies are important to the portrayal of the Company's financial
condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Management believes that its critical accounting policies include
determining the allowance for loan losses, and the valuation of mortgage
servicing rights, ("MSR's").
Allowance for Loan Losses
A loan is considered impaired when it is probable the Company will be unable to
collect all contractual principal and interest payments due in accordance with
the terms of the loan agreement. Impaired loans are measured based on the loan's
observable market price or the estimated fair value of the collateral if the
loan is collateral dependent. The amount of impairment, if any, and any
subsequent changes are included in the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to operating expense. Loan losses are charged against the allowance when
management believes the loans are uncollectible. Subsequent recoveries, if any,
are credited to the allowance.
The Company maintains an allowance for loan losses to absorb probable loan
losses inherent in the portfolio. The allowance for loan losses is maintained at
a level management considers to be adequate to absorb probable loan losses
inherent in the portfolio, based on evaluations of the collectibility and
historical loss experience of loans. The allowance is based on ongoing
assessments of the probable estimated losses inherent in the loan portfolio. The
Company's methodology for assessing the appropriate allowance level consists of
several key elements, as described below.
All delinquent loans that meet regulatory requirements are included on the Asset
Watch List. The Asset Watch List is reviewed quarterly by the Asset Watch
Committee for any classification beyond the regulatory rating based on the
loans' delinquency.
Commercial and commercial real estate loans are individually risk rated per the
loan policy. Homogeneous loans such as consumer and residential mortgage loans
are not individually risk rated by management. They are risk rated based on
computer file data that management believes will provide a good basis for the
loans' quality. For all loans not listed individually on the Asset Watch List,
historical loss rates based on the last four years are the basis for developing
expected charge-offs for each pool of loans.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgment, reflect the impact of any
current conditions on loss recognition. Factors which management considers in
the analysis include the effects of the local economy, trends in the nature and
volume of loans (delinquencies, charge-offs, nonaccrual and problem loans),
- 8 -
changes in the internal lending policies and credit standards, collection
practices, and examination results from bank regulatory agencies and the
Company's internal credit review function.
A portion of the allowance is not allocated to any particular loan type and is
maintained in recognition of the inherent inability to precisely determine the
loss potential in any particular loan or pool of loans. Among the factors used
by management in determining the unallocated portion of the allowance are
current economic conditions; trends in the Company's loan portfolio delinquency,
losses and recoveries; level of under performing and nonperforming loans; and
concentrations of loans in any one industry.
Valuation of Mortgage Servicing Rights
The Company recognizes the rights to service mortgage loans as separate assets,
which are included in other assets in the consolidated balance sheet. The total
cost of loans when sold is allocated between loans and mortgage servicing
rights, ("MSR's"), based on the relative fair values of each. MSR's are
subsequently carried at the lower of the initial carrying value, adjusted for
amortization, or fair value. MSR's are evaluated for impairment based on the
fair value of those rights. The Company uses a present value cash flow valuation
model to establish the fair value of the MSR's. Factors included in the
calculation of fair value of the MSR's include estimating the present value of
future net cash flows, market loan prepayment speeds for similar loans, discount
rates, servicing costs, and other economic factors. Servicing rights are
amortized over the estimated period of net servicing revenue. It is likely that
these economic factors will change over the life of the MSR's, resulting in
different valuations of the MSR's. The differing valuations will affect the
carrying value of the MSR's on the balance sheet as well as the income recorded
from loan servicing in the income statement. As of June 30, 2004, MSR's had a
carrying value of $3.4 million.
RESULTS OF OPERATIONS:
Quarter Ended June 30, 2004 Compared to Quarter Ended June 30, 2003
General
The Company reported net income of $1,914,000 for the quarter ended June 30,
2004, compared to $2,274,000 for the quarter ended June 30, 2003, a decrease of
$360,000 or 15.8%. Basic earnings per common share for the current quarter were
$0.46 compared to $0.53 for the quarter ended June 30, 2003. Diluted earnings
per common share were $0.45 for the quarter ended June 30, 2004, compared to
$0.50 for the quarter ended June 30, 2003.
Net Interest Income
Net interest income before provision for loan losses remained relatively stable
decreasing by $18,000 or .3% for the quarter ended June 30, 2004, compared to
the quarter ended June 30, 2003. This slight decrease was due to the net effect
of a 7 basis point, (a basis point is defined as 1/100th of a percent), increase
in the net interest margin to average interest earning assets, as the cost of
funds declined more rapidly than the decline in the yields on interest earning
assets, being offset by a decrease of $20,458,000 in average interest earning
assets versus a decrease of $14,713,000 in average interest bearing liabilities
for the three month period ended June 30, 2004, compared to the same quarter
last year.
The provision for loan losses was $35,000 for the quarter ended June 30, 2004, a
decrease of $415,000, compared to the quarter ended June 30, 2003. At June 30,
2004, the loan loss allowance covered 124.3% of non-performing loans. The
improving economy and the lower than expected charge offs experienced by the
Bank resulted in the $35,000 charge to the loan loss provision. See the Critical
Accounting Policies, Allowance for Loan Losses section for a description of the
systematic analysis the Bank uses to determine its allowance for loan losses.
The change to the loan loss allowance for the three month period ended June 30,
2004 and 2003 is as follows:
Quarter ended June 30: (in thousands) 2004 2003
- ------------------------------------- ---- ----
Allowance beginning balance ........................... $ 7,609 $ 7,186
Provision for loan losses ............................. 35 450
Charge-offs ........................................... (87) (432)
Recoveries ............................................ 26 80
- ------------------------------------------------------- ------- -------
Loan Loss Allowance ending balance .................... $ 7,583 $ 7,284
======================================================= ======= =======
Allowance to Total Loans .............................. 1.17% 1.10%
Allowance to Nonperforming Assets ..................... 108% 107%
Net interest income after provision for loan loss increased $397,000 or 7.3% for
- 9 -
the three month period ended June 30, 2004 compared to the three months ended
June 30, 2003.
Interest Income
Total interest income for the three month period ended June 30, 2004, decreased
$908,000, or 7.9%, over the same period of the prior year. This decrease is
primarily the result of a $20,458,000 decrease in average interest earning
assets as well as a 31 basis point decrease in the weighted average interest
rate earned on average interest earning assets for the quarter ended June 30,
2004, as compared to the quarter ended June 30, 2003.
Interest Expense
Total interest expense for the three month period ended June 30, 2004 decreased
$890,000, or 15.7%, as compared to the same period a year ago. The factors that
caused the decrease in interest expense mirrors the same two factors for the
decrease in interest income. The interest rate paid on average interest bearing
liabilities declined 40 basis points in the quarter ended June 30, 2004, as
compared to the quarter ended June 30, 2003, and the balance of average interest
bearing liabilities declined $14,713,000 over the same two periods.
Other Income
Total other income for the three-month period ended June 30, 2004, decreased
$956,000 or 25.1% over the same period a year ago. This decrease was primarily
the result of a decrease of $1,216,000 from the gain on sale of loans. For the
three-month period ended June 30, 2003, the Bank originated approximately
$144,664,000 in residential loans, compared to $54,981,000 for the three-month
period ended June 30, 2004. In the second quarter of 2003 the Bank sold
approximately $109,978,000 of the loans originated versus $44,676,000 in the
first quarter of 2004. The difference in loan activity for these two periods was
the result of the low interest rate environment in 2003 and the high volumes of
mortgage loan refinance activity.
A factor that increased other income is the $395,000 increase in loan servicing
income, net of impairments for the three months ended June 30, 2004, compared to
June 30, 2003. The originated mortgage servicing rights asset is reviewed for
impairment each quarter. This asset is created when mortgage loans are sold and
the Bank retains the servicing rights. The servicing rights are recognized as
income at the time the loan is sold and the servicing asset is also recorded.
The asset is then amortized as an expense to mortgage servicing income over the
life of the loan. The impairment charge is the recognition of the change in
value of mortgage servicing rights that result with changes in interest rates
and loan prepayment speeds. Mortgage servicing portfolios typically decline in
value as interest rates drop and increase in value as rates rise. The reason for
this decline in value is as rates drop, prepayment speeds increase causing the
average life of the servicing portfolio to shorten. This reduces the amount of
servicing income the Bank receives over time and thus reduces the value of the
servicing portfolio. If rates rise the opposite occurs, prepayments slow, the
average life of the mortgage servicing portfolio lengthens, increasing the
amount of servicing income the Bank receives over time thus increasing the value
of the servicing portfolio. In the three-month period ended June 30, 2004 the
impairment recovery was $138,000 compared to the same period ending June 30,
2003 where the impairment charge was $309,000 for an increase in pre-tax income
of $447,000. The amortization charge in the current three-month period was
$385,000 compared to $339,000 for the same period a year ago.
Other Expenses
Other expenses for the three month period ended June 30, 2004 increased
$144,000, or 2.6% over the three month period ended June 30, 2003. This increase
resulted from various factors including a $153,000 increase in compensation
expenses for the three months ended June 30, 2004, compared to the three months
ended June 30, 2003. The increase was due to increases in retirement costs, as
well as salary increases. Another factor increasing other expenses was a $55,000
increase in marketing expenses for the quarter ended June 2004, compared to the
same period a year ago. This increase in marketing was used primarily to support
advertising in the new Greenwood market where the Bank opened a branch in
December of 2003. A factor reducing other expenses is the decrease of $112,000
in miscellaneous expenses. Factors that resulted in the decrease in
miscellaneous expenses include a $91,000 write down of a commercial real estate
owned property in the quarter ended June 30, 2003 compared to no write downs in
the quarter ended June 2004. Consulting fees for compliance, technology and
human resources projects decreased $104,000 over the same period, which was
another factor reducing miscellaneous expenses.
Six months Ended June 30, 2004 Compared to Six months Ended June 30, 2003:
General
The Company reported net income of $3,301,000, or $.75 diluted earnings per
share, for the six months ended June 30, 2004, compared to $5,228,000, or $1.17
diluted earnings per share, for the same period a year ago, a decrease of
$1,927,000 or a 35.5% decrease in earnings per dilutive common share.
Net Interest Income
Net interest income before provision for loan losses decreased $278,000 for the
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six month period ended June 30, 2004, compared to the same period ended June 30,
2003.
The change to the loan loss allowance for the six month period ended June 30,
2004 is as follows:
Six months ended June 30: (in thousands) 2004 2003
- ---------------------------------------- ---- ----
Allowance beginning balance ............ $ 7,506 $ 7,172
Provision for loan losses .............. 281 660
Charge-offs ............................ (245) (652)
Recoveries ............................. 41 104
------- -------
Loan Loss Allowance .................... $ 7,583 $ 7,284
======= =======
Allowance to Total Loans ............... 1.17% 1.10%
Allowance to Nonperforming Assets....... 108% 107%
Interest Income
Total interest income for the six month period ended June 30, 2004 decreased
$2,244,000, compared to the six month period ended June 30, 2003. The six month
period decrease was due to a decrease of $20,192,000 in average interest earning
assets and a 42 basis point decrease in the weighted average yield earned on
those assets.
Interest Expense
Total interest expense for the six month period ended June 30, 2004 decreased
$1,966,000, compared to the six month period ended June 30, 2003. Similar to the
decrease in interest income, the decrease in interest expense was due to a 45
basis point decrease in the weighted average cost of funds for the six month
period ended June 30, 2004 as compared to the same period ended June 30, 2003,
as well as a $19,754,000 decrease in average interest bearing liabilities.
Other Income
Total other income for the six month period ended June 30, 2004 decreased
$2,701,000 or 34.0% as compared to the same period one year ago. This decrease
was primarily the result of a decrease in gain on sale of loans of $2,677,000 as
discussed in the second quarter results above. An additional decrease in other
income for the six months ended June 30, 2004 was a $459,000 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 six months ended June 30,
2003, which produced $480,000 of income in the prior year. In the current six
month period ended June 30, 2003, the same joint venture produced $37,000 of
income.
A factor that increased other income was a $529,000 increase in loan servicing
income. For the six month period ended June 30, 2004 the amortization charge on
originated mortgage servicing rights increased $150,000 due to the increased
size of the mortgage servicing rights asset. Offsetting this expense was a
$118,000 recovery of impairment charges in the six month period ended June 30,
2004, compared to a $500,000 impairment charge for the period ended June 30,
2003, for an increase in pre-tax income of $618,000.
Other Expenses
Total other expenses for the six month period ended June 30, 2004 increased
$659,000 or 6.0%. This increase is primarily the result of two factors including
a $340,000 increase in compensation and employee benefits and a $193,000
increase in miscellaneous expenses. The increase in compensation and employee
benefits for the six month period ended June 30, 2004, mirrors the increase
discussed in the quarterly discussion. The increase in miscellaneous expense is
primarily the result of an increase of $110,000 in the write down of real estate
owned expense as well as small increases in various other expense categories.
Asset Quality
Non-performing assets to total assets increased from 0.78% at June 30, 2003 to
0.82% at June 30, 2004. Non-performing loans to total gross loans increased from
0.74% to 0.94%, respectively, for the same periods. The increase in the
non-performing loan ratio is primarily due to the decrease in total gross loans
of $13,983,000 from June 30, 2003 to June 30, 2004. Additionally, over this
period non-performing residential loans have decreased by 1,200,000, home
equity/second mortgages by $325,000 and real estate owned and other repossessed
property by $1,000,000. Commercial real estate restructured debt increased by
$2,700,000. This increase was due primarily to one commercial real estate loan.
A liquidation plan has been executed with the borrower and management expects no
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additional losses to be incurred related to this credit.
In addition to the above, a commercial borrower ("the Borrower") filed for
Chapter 11 Bankruptcy protection on June 15, 2004. Total loans outstanding with
the Borrower at June 30, 2004 were $15,798,000, of which $9,178,000 is sold to
other loan participants leaving a net loan balance of $6,620,000 outstanding.
These loans are secured by first mortgages on multiple properties located in
Indiana, Kentucky and Ohio.
Discussions with the Borrower's management and review of the related property
appraisals indicate that the loans are well secured. The Borrower has informed
the Bank that they are pursuing multiple options for sale or restructuring of
their operations; all of which are expected to result in the loans being paid
off in full. The loans are further secured by personal guarantees of two of the
principals of the Borrower. Management does not anticipate a material loss on
this loan relationship; however, temporary interruptions in payments are likely
under the bankruptcy protections afforded by the Chapter 11 filing.
Clarification of the liquidation method and likely outcome are anticipated prior
to the end of the third quarter of this year.
At June 30, 2004, the loans' payment statuses were current and therefore still
considered "performing" and "accruing". However, the Borrower's July payment is
past due. Should the loans' payment status change to delinquent, management will
need to evaluate the appropriateness of continuing to record interest income.
Placing the loans on "non-accruing" status would result in a reduction of
interest income of approximately $40,000 per month.
FINANCIAL CONDITION:
Total assets as of June 30, 2004, were $856,815,000, which was an increase of
$3,487,000 from December 31, 2003, total assets of $853,328,000. Changes within
the various balance sheet categories included a $25,377,000 increase in
deposits. The funds from the increase in deposits were used to payoff
$14,145,000 of FHLB advances, which had an outstanding balance of $140,151,000
at June 30, 2004.
Shareholders' equity decreased $8,530,000 during the same period. Retained
earnings increased $3,301,000 from net income and decreased $1,547,000 for
dividends paid and $9,405,000 from stock buy backs. Common stock increased
$842,000 from the exercise of common stock options and $54,000 from the related
tax benefit of disqualifying dispositions of such options. Common stock
decreased $548,000 from stock buy backs. The Company had a decrease from
$260,000 in unrealized gains in its securities available for sale portfolio, net
of tax, to $1,106,000 unrealized losses over the six month period ended June 30,
2004. This decrease in unrealized gains resulted in $1,366,000 of other
comprehensive losses, net of tax, for the six months ended June 30, 2004.
Additionally, the Company had other comprehensive gain, net of tax, from the
change in fair value of a cash flow hedge of $139,000 for the same six month
period.
At June 30, 2004, the Company and the Bank exceeded all current applicable
regulatory capital requirements as follows:
As of June 30, 2004
(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 $75,355 11.07% $27,230 4.00% $40,846 6.00%
Total Risk-Based Capital to
Risk-Weighted Assets $82,937 12.18% $54,461 8.00% $68,076 10.00%
Tier I Leverage Ratio $75,355 8.75% $34,434 4.00% $43,043 5.00%
HomeFederal Bank
Tier I Capital to Risk-
Weighted Assets $84,480 12.43% $27,194 4.00% $40,790 6.00%
Total Risk-Based to Risk-
Weighted Assets $92,062 13.54% $54,387 8.00% $67,984 10.00%
Tier I Leverage Ratio $84,480 9.82% $34,424 4.00% $43,030 5.00%
EITF Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
- 12 -
Application to Certain Investments" provides guidance for determining when an
investment is considered impaired (when fair value is less than cost), for
evaluating whether impairment is other-than-temporary, and, if
other-than-temporary, requiring recognition of an impairment loss equal to the
difference between the investment's cost and its fair value. Generally, an
impairment is considered other-than-temporary unless: (a) the investor has the
ability and intent to hold an investment for a reasonable period of time
sufficient for a forecasted recovery of fair value up to (or beyond) the cost of
the investment; and (b) evidence indicating that the cost of the investment is
recoverable within a reasonable period of time outweighs evidence to the
contrary. The model used to determine other-than-temporary impairments shall be
applied prospectively to all current and future investments in interim or annual
reporting periods beginning after June 15, 2004. Gross unrealized losses on
available for sale securities and held to maturity securities was $1,933,000 and
$0, respectively, at June 30, 2004. The Company is currently evaluating the
impact of EITF 03-1 and is unable to estimate what the impact of adoption, if
any, will be in the third quarter of 2004.
Liquidity and Capital Resources
Historically, the Bank has maintained its liquid assets at a level believed
adequate to meet requirements of normal daily activities, repayment of maturing
debt and potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is maintained. Cash for
these purposes is generated through the sale or maturity of investment
securities and loan sales and repayments, and may be generated through increases
in deposits. Loan payments are a relatively stable source of funds, while
deposit flows are influenced significantly by the level of interest rates and
general money market conditions. Borrowings may be used to compensate for
reductions in other sources of funds such as deposits. As a member of the
Federal Home Loan Bank ("FHLB") system, the Bank may borrow from the FHLB of
Indianapolis. At June 30, 2004, the Bank had $140,151,000 in such borrowings. In
addition, at June 30, 2004, the Bank had commitments to purchase loans of
$11,816,000, fund loan originations of $45,941,000, unused home equity lines of
credit of $66,130,000 and unused commercial lines of credit of $40,384,000, as
well as commitments to sell loans of $11,521,000. 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, 2004 is not materially different from the results
presented on page 14 of the annual report for the twelve month period ended
December 31, 2003, which is incorporated by reference herein.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as
defined in Sections 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended), as of the end of the most recent
fiscal quarter covered by this quarterly report (the "Evaluation
Date"), have concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures were adequate and are designed to
ensure that material information relating to the Company would be
made known to such officers by others within the Company on a timely
basis.
(b) Changes in internal controls. There were no significant changes in
the Company's internal control over financial reporting identified in
connection with the Company's evaluation of controls that occurred
during the Company's last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
- 13 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
N/A
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table provides information on the Company's repurchases of shares
of its common stock during the quarter ended June 30, 2004.
(a) (b) (c) (d)
Total number of Maximum number of
shares purchased shares that
Average as part of may yet be
Total number of price paid publicly announced purchased under the
Period shares purchased per share plans or programs (1) plans or programs (1)
- -------------- ---------------- ---------- --------------------- ---------------------
April 2004 - $ 0.00 - 297,000
May 2004 215,000 $ 26.97 215,000 82,000
June 2004 82,000 $ 26.75 82,000 -
---------------- ---------- ---------------------- ----------------------
Second Quarter 297,000 $ 26.91 297,000 0
================ ======================
(1) The Company's current stock repurchase program, announced April 27,
2004, authorized the repurchase of 7% of the Company's outstanding
shares of common stock, or 297,000 such shares, on the open market, in
block transactions or in private transactions. The program had no
expiration date. The Company completed the repurchase of these shares
on June 4, 2004.
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Submission of Matters to a Vote of Security Holders
On April 27, 2004, the Corporation held its Annual Meeting of Shareholders. A
total of 3,892,570 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
John T. Beatty 3,728,281 164,289
(three year term)
Harold Force 3,727,780 164,790
(three year term)
Gregory J. Pence 3,729,919 162,651
(three year term)
The terms of office of the following directors continued after the Annual
Meeting of Shareholders:
Term Expiring
John K. Keach, Jr. 2005
David W. Laitinen, M.D. 2005
John M. Miller 2006
Harvard W. Nolting, Jr. 2006
Item 5. Other information
N/A
- 14 -
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 26, 2004 Home Federal Bancorp filed an 8-K containing a press
release announcing its results of operations for the quarter ended March
31, 2004.
(c) On May 11, 2004, Home Federal Bancorp of Columbus, Indiana issued a press
release concerning the retirement of its Chief Financial Officer.
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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 6, 2004 /S/ Lawrence E. Welker
Lawrence E. Welker, Executive Vice President,
Treasurer, and Chief Financial Officer