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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: O-18847
HOME FEDERAL BANCORP
(Exact name of registrant as specified in its charter)
Indiana 35-1807839
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
501 Washington Street, Columbus, Indiana 47201
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (812) 522-1592
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO_____
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.)
YES X NO_____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of April 29, 2005.
Common Stock, no par value - 3,982,346 shares outstanding
HOME FEDERAL BANCORP
FORM 10-Q
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets .................................... 3
Consolidated Statements of Income .............................. 4
Consolidated Statements of Cash Flows .......................... 5
Notes to Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 9
Forward looking statements ..................................... 9
Critical accounting policies ................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 13
Item 4. Controls and Procedures ........................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....... 14
Item 3. Defaults Upon Senior Securities ................................... 14
Item 4. Submission of Matters to a Vote of Security Holders ............... 14
Item 5. Other Information ................................................. 14
Item 6. Exhibits .......................................................... 15
Signatures ................................................................ 16
- 2 -
HOME FEDERAL BANCORP
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited) March 31, December 31,
2005 2004
--------- ---------
Assets:
Cash ....................................................$ 23,184 $ 24,729
Interest-bearing deposits ............................... 28,093 27,591
--------- ---------
Total cash and cash equivalents ....................... 51,277 52,320
--------- ---------
Securities available for sale at fair value
(amortized cost $134,900 and $125,086).................. 132,994 124,790
Securities held to maturity at amortized cost
(fair value $1,546 and $1,801) ......................... 1,532 1,779
Loans held for sale (fair value $2,657 and $2,653) ...... 2,625 2,617
Loans receivable, net of allowance for loan losses
of $7,863 and $7,864 .................................. 619,484 629,490
Investments in joint ventures ........................... 3,669 3,550
Federal Home Loan Bank stock ............................ 9,965 9,965
Accrued interest receivable, net ........................ 3,746 3,700
Premises and equipment, net ............................. 15,853 15,855
Real estate owned ....................................... 1,987 2,019
Prepaid expenses and other assets ....................... 8,987 8,909
Cash surrender value of life insurance .................. 11,928 11,818
Goodwill, net ........................................... 1,395 1,395
--------- ---------
Total Assets .........................................$ 865,442 $ 868,207
========= =========
Liabilities and Shareholders' Equity:
Liabilities:
Deposits ............................................$ 646,493 $ 640,181
Federal Home Loan Bank Advances ..................... 116,796 125,446
Senior debt ......................................... 14,242 14,242
Other borrowings .................................... 172 211
Advance payments by borrowers for taxes and insurance 358 48
Accrued expenses and other liabilities .............. 11,869 10,715
--------- ---------
Total liabilities ................................. 789,930 790,843
--------- ---------
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: 3,982,346 and 4,027,991 ..... 14,090 13,514
Retained earnings, restricted ....................... 62,730 64,138
Accumulated other comprehensive income (loss), net .. (1,308) (288)
--------- ---------
Total shareholders' equity ........................ 75,512 77,364
--------- ---------
Total Liabilities and Shareholders' Equity ..............$ 865,442 $ 868,207
========= =========
See notes to consolidated financial statements
- 3 -
HOME FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except share and per share data)
(unaudited) Three Months Ended
March 31,
-----------------------
2005 2004
Interest income: -----------------------
Loans receivable ................................. $ 9,495 $ 9,670
Securities available for sale and held to maturity 1,106 996
Other interest income ............................ 172 56
---------- ----------
Total interest income ............................ 10,773 10,722
---------- ----------
Interest expense:
Deposits ......................................... 2,943 2,684
Advances from Federal Home Loan Bank ............. 1,578 2,055
Other borrowings ................................. 182 201
---------- ----------
Total interest expense ........................... 4,703 4,940
---------- ----------
Net interest income ................................. 6,070 5,782
Provision for loan losses ........................... 146 246
---------- ----------
Net interest income after provision for loan losses . 5,924 5,536
---------- ----------
Other income:
Gain on sale of loans ............................ 343 683
Income from joint ventures ....................... 1 61
Insurance, annuity income, other fees ............ 561 499
Service fees on checking accounts ................ 726 656
Net gain on real estate owned .................... 17 72
Loan servicing income, net of impairments ........ 488 124
Miscellaneous .................................... 296 297
---------- ----------
Total other income ................................ 2,432 2,392
---------- ----------
Other expenses:
Compensation and employee benefits ............... 3,663 3,123
Occupancy and equipment .......................... 872 811
Service bureau expense ........................... 275 257
Federal insurance premium ........................ 23 23
Marketing ........................................ 252 177
Miscellaneous .................................... 1,260 1,406
---------- ----------
Total other expenses .............................. 6,345 5,797
---------- ----------
Income before income taxes .......................... 2,011 2,131
Income tax provision ................................ 662 744
---------- ----------
Net Income .......................................... $ 1,349 $ 1,387
========== ==========
Basic earnings per common share ..................... $ 0.34 $ 0.32
Diluted earnings per common share ................... $ 0.33 $ 0.31
Basic weighted average number of shares ............. 4,009,379 4,298,748
Dilutive weighted average number of shares .......... 4,130,164 4,488,434
Dividends per share ................................. $ 0.188 $ 0.188
See notes to consolidated financial statements
- 4 -
HOME FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three Months Ended
(unaudited) March 31
-----------------------
2005 2004
-----------------------
Cash Flows From Operating Activities:
Net income .............................................. $ 1,349 $ 1,387
Adjustments to reconcile net income to net cash
from operating activities:
Accretion of discounts, amortization and depreciation 492 581
Provision for loan losses ........................... 146 246
Net gain from sale of loans ......................... (343) (683)
Income from joint ventures and net gain from real
estate owned....................................... (18) (133)
Net loan fees deferred (recognized) ................. 72 (40)
Proceeds from sale of loans held for sale ........... 18,534 37,868
Origination of loans held for sale .................. (18,199) (43,768)
Net (increase) decrease in accrued interest and other
assets............................................. (62) 664
Increase in other liabilities ....................... 1,518 21
-------- --------
Net Cash From Operating Activities ...................... 3,489 (3,857)
-------- --------
Cash Flows From Investing Activities:
Net principal received on loans ......................... 10,340 12,566
Proceeds from:
Maturities/Repayments of:
Securities held to maturity ...................... 247 232
Securities available for sale .................... 4,145 11,111
Sales of:
Securities available for sale .................... 648 10,029
Real estate owned and other asset sales .......... 432 327
Purchases of:
Loans ............................................... (552) (3,473)
Securities available for sale ....................... (14,705) (21,134)
Investment in joint ventures,net ........................ (118) (16)
Acquisition of property and equipment ................... (392) (682)
-------- --------
Net Cash From Investing Activities ...................... 45 8,960
-------- --------
Cash Flows From Financing Activities:
Net increase in deposits ................................ 6,312 19,338
Proceeds from advances from Federal Home Loan Bank ...... 4,500 1,000
Repayment of advances from Federal Home Loan Bank ....... (13,150) (9,839)
Net increase/(decrease) from overnight borrowings ....... (39) 5,740
Common stock options exercised .......................... 682 155
Repurchase of common stock .............................. (2,131) (1,961)
Payment of dividends on common stock .................... (751) (797)
-------- --------
Net Cash From Financing Activities ...................... (4,577) 13,636
-------- --------
Net increase (decrease) in cash and cash equivalents .... (1,043) 18,739
Cash and cash equivalents, beginning of period .......... 52,320 34,178
-------- --------
Cash and Cash Equivalents, End of Period ................ $ 51,277 $ 52,917
======== ========
Supplemental information:
Cash paid for interest .................................. $ 4,647 $ 4,830
Cash paid for income taxes .............................. $ -- $ --
Assets acquired through foreclosure ..................... $ 484 $ 116
See notes to consolidated financial statements
- 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 March 31, 2005, and for the
three month period ended March 31, 2005, have not been audited by the
independent registered public accounting firm, 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, 2004.
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
March 31,
-------------------------
2005 2004
---- ----
Basic EPS:
Weighted average common shares ............... 4,009,379 4,298,748
========= =========
Diluted EPS:
Weighted average common shares ............... 4,009,379 4,298,748
Dilutive effect of stock options ............. 120,785 189,686
--------- ---------
Weighted average common and incremental shares 4,130,164 4,488,434
========= =========
Anti-dilutive options as of March 31, 2005 and 2004, were 90,099 and 5,724,
respectively.
3. Comprehensive Income
The following is a summary of the Company's total comprehensive income for the
interim three months period ended March 31, 2005 and 2004. (In thousands)
Three months ended
March 31,
------------------
2005 2004
---- ----
Net Income ......................................... $ 1,349 $ 1,387
Other comprehensive income:
Unrealized holding gains (losses)
from securities available for sale ........... (1,610) 965
Unrealized gains from cash flow hedge .......... 58 56
------- -------
Net unrealized gains (losses) ...................... (1,552) 1,021
Tax effect ......................................... 532 (355)
------- -------
Other comprehensive income (loss), net of tax ...... (1,020) 666
------- -------
Comprehensive Income ............................... $ 329 $ 2,053
==================
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.
- 6 -
For the Three Months Ended
March 31,
------------------------------------
(dollars in thousands, except share data) 2005 2004
- --------------------------------------------------------------------------------
Net income, as reported ........................ $ 1,349 $ 1,387
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects .... (152) (16)
--------- ---------
Pro forma net income ........................... $ 1,197 $ 1,371
========= =========
Earnings per share:
Basic---as reported ....................... $ .34 $ .32
Basic---pro forma ......................... $ .30 $ .32
Diluted---as reported ..................... $ .33 $ .31
Diluted---pro forma ....................... $ .29 $ .31
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
The Securities and Exchange Commission staff published Staff Accounting
Bulletin, ("SAB"), No. 105, "Loan Commitments Accounted for as Derivative
Instruments" effective for financial statements issued after March 31, 2004,
providing guidance regarding the application of generally accepted accounting
principles to loan commitments accounted for as derivative instruments.
Management has determined the adoption of SAB No. 105 did not have a material
effect on its consolidated financial statements.
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 equal to (or more than) the
cost of the investment; and (b) evidence indicating that the cost of the
investment is recoverable within a reasonable period of time outweighs evidence
to the contrary. The Financial Accounting Standards Board, ("FASB"), delayed the
effective date for the measurement and recognition guidance contained in
paragraphs 10 - 20 of EITF Issue 03-1 by FSP EITF Issue 03-1-1, "Effective Date
of Paragraphs 10-20 of EITF Issue No. 03-1, 'The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments," posted September 30,
2004. The delay of the effective date for paragraphs 10-20 will be superseded
concurrent with the final issuance of proposed FSP EITF Issue 03-1-a,
"Implication Guidance for the Application of Paragraph 16 of EITF Issue No.
03-1, 'The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments." Gross unrealized losses on available for sale securities
and held to maturity securities were $2,040,000 and $9,000, respectively, at
March 31, 2005. The Company is currently evaluating the impact of EITF 03-1 and
FSP EITF Issue 03-1-1 and is unable to estimate what the impact of adoption, if
any, will be.
SFAS No. 123 - R (Revised 2004) is effective as of the beginning of the first
annual reporting period that begins after June 15, 2005. This Statement is a
revision of SFAS No. 123, "Accounting for Stock-Based Compensation." This
Statement focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. The Company is
currently evaluating the impact of SFAS No. 123 - R and is unable to estimate
what the impact of adoption, if any, will be.
AcSec issued Statement of Position, ("SOP"), 03-3, "Accounting for Certain Loans
or Debt Securities Acquired in a Transfer." SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 15, 2004. The SOP addresses
accounting for differences between contractual cash flows and cash flows
- 7 -
expected to be collected from an investor's initial investment in loans or debt
securities (loans) acquired in a transfer if those differences are attributable,
at least in part, to credit quality. The SOP does not apply to loans originated
by the entity. Management does not believe the adoption of SOP 03-3 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 19 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 26 through 30 of
the annual report for the twelve-month period ended December 31, 2004. 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
historical portfolio 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
- 9 -
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 credit review function.
Finally, a portion of the allowance is maintained in recognition of the inherent
inability to precisely determine the loss potential based on factors such as
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 MSR's, based on the
relative fair values of each. MSR's are subsequently carried at the lower of the
initial carrying value, adjusted for amortization, or fair value. MSR's are
evaluated for impairment based on the fair value of those rights. The Company
uses a present value cash flow valuation model to establish the fair value of
the MSR's. Factors included in the calculation of fair value of the MSR's
include estimating the present value of future net cash flows, market loan
prepayment speeds for similar loans, discount rates, servicing costs, and other
economic factors. Servicing rights are amortized over the estimated period of
net servicing revenue. It is likely that these economic factors will change over
the life of the MSR's, resulting in different valuations of the MSR's. The
differing valuations will affect the carrying value of the MSR's on the balance
sheet as well as the income recorded from loan servicing in the income
statement. As of March 31, 2005, MSR's had a carrying value of $3,071,000.
RESULTS OF OPERATIONS:
Quarter Ended March 31, 2005 Compared to Quarter Ended March 31, 2004
General
The Company reported net income of $1,349,000 for the quarter ended March 31,
2005, compared to $1,387,000 for the quarter ended March 31, 2004, a decrease of
$38,000 or 2.7%. Basic earnings per common share for the current quarter were
$0.34 compared to $0.32 for the quarter ended March 31, 2004. Diluted earnings
per common share were $0.33 for the quarter ended March 31, 2005, compared to
$0.31 for the quarter ended March 31, 2004.
Net Interest Income
Net interest income before provision for loan losses increased $288,000 or 5.0%
for the quarter ended March 31, 2005, compared to the quarter ended March 31,
2004. This increase was due to a 15 basis point, (a basis point is defined as
1/100th of a percent), increase in the net interest margin to average interest
earning assets. The increase in net interest margin was primarily the result of
an 18 basis point decline in the costs of interest bearing liabilities. The
liability cost decrease was attributable to the shifting mix of interest bearing
liabilities as the Bank's average balance of deposits increased $44,017,000 in
the quarter ended March 31, 2005 as compared to the quarter ended March 31,
2004. This increase in deposit balances allowed the Bank to pay down higher
costing FHLB advances whose average balance decreased $28,916,000 over the same
two quarters. The yields on interest earning assets remained relatively stable,
increasing 3 basis points for the two comparative quarters, while the average
balance of interest earning assets decreased $479,000 over the same period.
The provision for loan losses was $146,000 for the quarter ended March 31, 2005,
a decrease of $100,000, compared to the quarter ended March 31, 2004. At March
31, 2005 and 2004, the loan loss allowance covered 66.2% and 94.2% of
non-performing loans, respectively. The improving economy and the lower than
expected charge offs experienced by the Bank resulted in the $146,000 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 March 31,
2005 and 2004 is as follows:
Quarter ended March 31: (in thousands) 2005 2004
- -------------------------------------- ---- ----
Allowance beginning balance ........................... $ 7,864 $ 7,506
Provision for loan losses ............................. 146 246
Charge-offs ........................................... (167) (157)
Recoveries ............................................ 20 14
- ------------------------------------------------------- ------- -------
Loan Loss Allowance ending balance .................... $ 7,863 $ 7,609
======================================================= ======= =======
Allowance to Total Loans .............................. 1.25% 1.18%
Allowance to Nonperforming Assets ..................... 57% 90%
- 10 -
The decrease in the allowance to nonperforming assets ratio and the allowance to
non-performing loans ratio is attributable to two specific substandard loans
that are discussed in the asset quality section. The total principal and real
estate owned, ("REO"), balance related to these two loans is $7,174,000 as of
March 31, 2005. These two loans were not classified as non-performing as of
March 31, 2004.
Net interest income after provision for loan loss increased $388,000 or 7.0% for
the three-month period ended March 31, 2005, compared to the three months ended
March 31, 2004.
Interest Income
Total interest income for the three-month period ended March 31, 2005, remained
fairly stable increasing $51,000, over the same period of the prior year. This
increase reflects the small 3 basis points increase in yield on interest earning
assets, as well as the relatively stable average balance of interest earning
assets which decreased $398,000 for the quarter ended March 31, 2005, as
compared to the quarter ended March 31, 2004.
Interest Expense
Total interest expense for the three-month period ended March 31, 2005,
decreased $237,000, or 4.8%, as compared to the same period a year ago. The
interest rate paid on average interest bearing liabilities declined 18 basis
points in the quarter ended March 31, 2005, as compared to the quarter ended
March 31, 2004, due to the changing mix of interest bearing liabilities
discussed above.
Other Income
Total other income for the three-month period ended March 31, 2005, increased
$40,000 or 1.7% over the same period the previous year. The two largest changes
in non-interest income were the $340,000 decrease in the gain on sale of loans
and the $364,000 increase in loan servicing income. For the three-month period
ended March 31, 2004 the Bank originated approximately $51,350,000 in
residential loans, compared to $24,626,000 for the three-month period ended
March 31, 2005. In the first quarter of 2004 the Bank sold approximately
$37,185,000 of the loans originated versus $18,192,000 in the first quarter of
2005. This decrease in loan originations and sales accounted for the decrease in
gain on sale of loans for the current period compared to a year ago. The
difference in loan activity for these two periods was the result of slightly
higher loan rates in 2005 compared to 2004 and the reduced refinance activity
this year compared to the prior year.
The loan servicing income increased because of a $321,000 recovery to the MSR
impairment provision compared to a $20,000 impairment charge the previous year.
This resulted in a net increase of $341,000 over the prior year quarter.
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. The amortization charge in the current period was $363,000 compared
to $393,000 for the same period a year ago, which increased loan servicing
income by $30,000. Future impairment charges will depend on future interest rate
changes. If rates decline there may be more impairment charges. If they rise,
previously recorded impairment charges may be recovered. Other items that
comprise non-interest income were not materially different in the three month
period ended March 31, 2005 compared to the same period ended March 31, 2004.
Other Expenses
Other operating expenses for the three-month period ended March 31, 2005
increased $548,000, over the three-month period ended March 31, 2004. Items
contributing to this increase were compensation expense and employee benefits,
which increased $540,000, occupancy and equipment expense, which increased
$61,000, and marketing expense that increased $75,000. Miscellaneous expenses
decreased $146,000.
The $540,000 increase in compensation expense and employee benefits was due in
part to a $194,000 increase in temporary employee expense associated with
outsourced projects in the technology area of the Company, as well as increases
in retirement and health insurance costs, and normal wage increases over the
prior year. It is anticipated that the outsourced projects will be completed by
the end of April 2005 so that these expenses will not continue at this level for
the remainder of the year. In addition, costs that are deferred as a result of
loan production in accordance with FASB 91 were approximately $114,000 less than
a year ago causing compensation expense to increase by that amount over the
prior period.
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Occupancy expense increased approximately $61,000 due primarily to new branches
being opened in new markets. Marketing expense increased $75,000 due to various
promotions and new business development costs.
Miscellaneous expense decreased $146,000 due primarily to a $189,000 reduction
in REO write downs compared to prior year for the comparable three month period.
Asset Quality
Non-performing assets to total assets increased from 0.97% at March 31, 2004 to
1.60% at March 31, 2005. Non-performing loans to total gross loans also
increased from 1.12% to 1.88%, respectively, for the same periods.
Non-performing assets increased $5,415,000 from $8,457,000 at March 31, 2004 to
$13,872,000 at March 31, 2005.
In the first quarter of 2005 non-performing assets decreased by approximately
$1,000,000 from December 31, 2004. Non-performing assets as a percent of total
assets decreased from 1.71% at December 31, 2004 to 1.60% at March 31, 2005, an
11 basis point improvement.
The increase in non-performing loans from March 31, 2004 to March 31, 2005 was
primarily the result of two specific substandard loans that the Bank has
previously discussed.
The first relates to a company that filed for Chapter 11 Bankruptcy protection
on June 15, 2004. Substantially all of the assets of the company have been
liquidated and the bankruptcy court is in the final stages of determining the
disposition of sale proceeds. Management has continued to negotiate with other
creditors and the stockholders of the company in an attempt to avoid prolonged
and costly litigation. Initially management felt that while a total recovery was
possible, a negotiated settlement could likely result in principal loss and
therefore set a specific reserve of $500,000 to accommodate this potential. As a
result of these settlement negotiations, a motion has been filed with the court,
which, if granted by the court, would result in the Bank incurring a loss. Based
on this motion and the anticipated payout, management has increased the specific
reserve to $878,000 during the quarter. The court heard this motion on
April 25, 2005. Settlement was received on May 6, 2005, resulting in a loss of
$874,000, which had been previously reserved for.
The second loan relates to the Bank's purchase of a $2,500,000 loan
participation interest in a $4,000,000 line of credit to floor plan new cars
originated by another commercial bank. The dealership is closed and the lead
bank has disposed of most of the assets of the dealership to the anticipated
buyer of the dealership. This sale is expected to conclude by early May. As of
March 31, 2005, the Bank had a net balance of $561,000 with a specific reserve
of $368,000. There were no changes to this loan in the current quarter that
materially affected the loan loss provision.
Management currently believes the reserve for these two loans to be adequate. It
is possible, however, that additional losses may be realized as the businesses
are liquidated. The ultimate amount of the impairment, for both of these loans,
and the actual losses to the Bank, may be higher or lower depending on the value
of the collateral ultimately realized. The Bank may be required to make
additional provisions with respect to these loans if the actual value of the
collateral is less than presently estimated. The Bank may recognize a recovery
of the provision if the actual value is higher than anticipated.
Excluding the two loans described above, and the REO associated with them, the
Bank's nonperforming assets would be $6,698,000 at 3/31/05, or .77% of total
assets. This ratio is more in line with the Bank's performance in this area
prior to the third and fourth quarters of the previous year when these loans
were classified as nonperforming.
FINANCIAL CONDITION:
Total assets as of March 31, 2005, were $865,442,000, a decrease of $2,765,000
from December 31, 2004, total assets of $868,207,000. Changes within the various
balance sheet categories included a $6,312,000 increase in deposits and a
decrease of $10,006,000 in loans receivable. The funds from deposits and loan
repayments were used to pay off $8,650,000 of FHLB advances, fund an $8,204,000
increase in securities available for sale and the repurchase $2,131,000 of
company stock.
Shareholders' equity decreased $1,852,000 during the same period. Retained
earnings increased $1,349,000 from net income and decreased $751,000 for
dividends paid and $2,006,000 million from stock buy backs. Common stock
increased $682,000 from the exercise of common stock options and $19,000 from
the related tax benefit of disqualifying dispositions of such options. Common
stock decreased $125,000 from stock buy backs. The Company had a decrease from
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$296,000 in unrealized losses in its securities available for sale portfolio,
net of tax, to $1,906,000 unrealized losses over the three month period ended
March 31, 2005. This decrease in unrealized losses resulted in $1,055,000 of
other comprehensive losses, net of tax, for the three month ended March 31,
2005. Additionally, the Company had other comprehensive gain, net of tax, from
the change in fair value of a cash flow hedge of $35,000 for the same
three-month period.
At March 31, 2005, the Company and the Bank exceeded all current applicable
regulatory capital requirements as follows:
As of March 31, 2005
(Dollars in Thousands)
To be "Well-
Capitalized" under
Minimum Prompt Corrective
Actual Requirements Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Consolidated
Tier I Capital to Risk-
Weighted Assets $75,426 11.26% $26,787 4.00% $40,181 6.00%
Total Risk-Based Capital to
Risk-Weighted Assets $83,289 12.44% $53,574 8.00% $66,968 10.00%
Tier I Leverage Ratio $75,426 8.70% $34,674 4.00% $43,342 5.00%
HomeFederal Bank
Tier I Capital to Risk-
Weighted Assets $84,127 12.58% $26,758 4.00% $40,137 6.00%
Total Risk-Based capital to
Risk-Weighted Assets $91,990 13.75% $53,517 8.00% $66,896 10.00%
Tier I Leverage Ratio $84,127 9.72% $34,637 4.00% $43,296 5.00%
Liquidity and Capital Resources
Historically, the Bank has maintained its liquid assets at a level believed
adequate to meet requirements of normal daily activities, repayment of maturing
debt and potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is maintained. Cash for
these purposes is generated through the sale or maturity of investment
securities and loan sales and repayments, and may be generated through increases
in deposits. Loan payments are a relatively stable source of funds, while
deposit flows are influenced significantly by the level of interest rates and
general money market conditions. Borrowings may be used to compensate for
reductions in other sources of funds such as deposits. As a member of the
Federal Home Loan Bank ("FHLB") system, the Bank may borrow from the FHLB of
Indianapolis. At March 31, 2005, the Bank had $116,796,000 in such borrowings.
In addition, at March 31, 2005, the Bank had commitments to purchase loans of
$659,000, fund loan originations of $22,056,000, unused home equity lines of
credit of $64,154,000 and unused commercial lines of credit of $34,246,000, as
well as commitments to sell loans of $19,460,000. Generally, a significant
portion of amounts available in lines of credit will not be drawn. In the
opinion of management, the Bank has sufficient cash flow and borrowing capacity
to meet current and anticipated funding commitments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the opinion of management the interest rate sensitivity results for the
quarter ended March 31, 2005, is not materially different from the results
presented on page 13 of the annual report for the twelve month period ended
December 31, 2004, 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
N/A
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information on the Company's repurchases of shares
of its common stock during the quarter ended March 31, 2005.
(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)
- -------------- ---------------- ---------- --------------------- ---------------------
January 2005 - $ 0.00 - 201,400
February 2005 62,500 $ 25.32 62,500 138,900
March 2005 21,700 $ 25.29 21,700 117,200
---------------- --------- ---------------------
First Quarter 84,200 $ 25.31 84,200 117,200
================ =====================
(1) The Company's current stock repurchase program, announced November 24,
2004, authorized the repurchase of 5% of the Company's outstanding
shares of common stock, or 201,400 such shares, on the open market, in
block transactions or in private transactions. The program has no
expiration date.
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Submission of Matters to a Vote of Security Holders
N/A
Item 5. Other information
Effective as of May 5, 2005, HomeFederal Bank (the “Bank”, a wholly owned
subsidiary of Home Federal Bancorp, entered into a Settlement Agreement (the
“Settlement Agreement”) with Kiel Bros. Oil Company, Inc. and KP Oil, Inc.
(collectively, the “Debtors”) to settle certain claims and actions among them
relating to Debtor’s debt to the Bank and the Bank’s assertion of a valid,
perfected, first priority mortgage lien and security interest in property of the
Debtors.
The Debtors were obligated to the Bank under notes in the aggregate original
principal amount of $15,912,000, secured primarily by mortgage liens on property
of the Debtors. On June 15, 2004, each of the Debtors filed a voluntary petition
for relief under chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Southern District of Indiana, Indianapolis
Division (the “Court”). Thereafter, the Bank filed motions with the Court to,
among other things, compel immediate payment of the secured debt and determine
the validity, priority and extent of the Bank’s liens.
Pursuant to the terms of the Settlement Agreement, the Debtors and the Bank
agreed that the Bank had a secured, pre-bankruptcy petition claim in the total
amount of $12,500,000, which amount was paid in full to the Bank on May 6, 2005.
The parties also agreed that the Bank had an unsecured, pre-bankruptcy petition
claim in the total amount of $2,167,252, and agreed that any right to receive a
distribution on or with respect to this claim would be assigned to the Debtors,
along with certain remaining mortgage liens on Debtors’ property.
In addition, the Bank agreed to dismiss its claims against the Debtors (other
than claims related to the Settlement Agreement), and both the Bank and the
Debtors mutually released, discharged and acquitted each other from any further
claims relating to the bankruptcy cases.
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The description of the material features of the Settlement Agreement provided
above are qualified in their entirety by reference to the full text of the
Settlement Agreement, a copy of which is attached as an exhibit to this
Quarterly Report and incorporated herein by reference.
Item 6. Exhibits
(a) Exhibits
10(1) Material Contract - Settlement Agreement
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on behalf of
the undersigned thereto duly authorized.
Home Federal Bancorp
DATE: May 9, 2005 /S/ Lawrence E. Welker
Lawrence E. Welker, Executive Vice President,
Treasurer, and Chief Financial Officer
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