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SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 1998
or
Transition report pursuant to Section 13 or 15(d) or the Securities Exchange
Act of 1934
For the transition period from ___________ to _____________
Commission file number: 0-18847
HOME FEDERAL BANCORP
(Exact name of registrant as specified in its charter)
United States 35-1807839
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
222 West Second Street, Seymour, Indiana 47274
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (812) 522-1592
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
and
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (l) 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K ___ or any amendment to this Form
10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of September 10, 1998, was $113,310,393
The number of shares of the Registrants Common Stock, no par value, outstanding
as of September 10, 1998, was 5,142,288 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1998,
are incorporated into Part II. Portions of the Proxy Statement for the 1998
annual meeting of shareholders are incorporated into Part I and Part III.
Exhibit Index on Page 38
Page 2 of 41 Pages
2
HOME FEDERAL BANCORP
FORM 10-K
INDEX
Forward Looking Statement ......................................................... 4
Item 1. Business ................................................................. 4
Item 2. Properties ............................................................... 31
Item 3. Legal Proceedings ........................................................ 32
Item 4. Submission of Matters to a Vote of Security Holders ...................... 32
Item 4.5 Executive Officers of Home Federal Bancorp ............................... 32
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .... 32
Item 6. Selected Financial Data .................................................. 34
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................... 34
Item 7. A Quantitative and Qualitative Disclosure About Market Risk .............. 34
Item 8. Financial Statements and Supplementary Data .............................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................... 35
Item 10. Directors and Executive Officers of the Registrant ....................... 35
Item 11. Executive Compensation ................................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management ........... 35
Item 13. Certain Relationships and Related Transactions ........................... 35
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......... 36
SIGNATURES ........................................................................ 37
3
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
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-K 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-K 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-K
identifies important factors that could cause such differences. These factors
include changes in interest rates, loss of deposits and loan demand to other
savings and financial institutions, substantial changes in financial markets;
changes in real estate values and the real estate market; regulatory changes, or
unanticipated results in pending legal proceedings.
PART I
Item 1. Business
General
Home Federal Bancorp (the "Company" or "HFB") is an Indiana corporation
organized in August, 1990 to become a unitary savings and loan holding company.
The principal asset of the Company consists of 100% of the issued and
outstanding capital stock of Home Federal Savings Bank ("Home Federal" or the
"Bank"). The Company was a shell corporation until Home Federal reorganized in
March, 1993.
Home Federal began operations in Seymour, Indiana under the name New
Building and Loan Association in 1908, and received its federal charter and
changed its name to Home Federal Savings and Loan Association in 1950. On
November 9, 1983, Home Federal Savings and Loan Association became a federal
savings bank and its name was changed to Home Federal Savings Bank. On January
14, 1988, Home Federal converted to stock form and on March 1, 1993, Home
Federal reorganized by converting each outstanding share of its common stock
into one share of common stock of the Company, thereby causing the Company to be
the holding company of Home Federal. Home Federal currently provides services
through its main office at 222 West Second Street in Seymour, Indiana, fifteen
full service branches located in south central Indiana, and the Magic Line
network of automated teller machines at nine locations in Seymour, Columbus,
North Vernon and Batesville. As a result, Home Federal serves primarily
Bartholomew, Jackson, Jefferson, Jennings, Scott, Ripley, Decatur and Washington
Counties in Indiana. Home Federal also participates in the nationwide electronic
funds transfer networks known as Plus System, Inc. and Cirrus System.
Home Federal directly and, through its service corporation subsidiary,
indirectly offers a wide range of consumer and commercial financial services.
These services include: (i) residential and commercial real estate loans; (ii)
NOW accounts; (iii) regular and term savings accounts and savings certificates;
(iv) Linsco Private Ledger Financial Services, Inc. ("Private Ledger")
full-service securities brokerage services; (v) consumer loans; (vi) debit
cards; (vii) credit cards; (viii) annuity and life insurance products; (ix)
Individual Retirement Accounts and Keogh plans; (x) commercial loans; (xi) real
estate development; (xii) trust services: and (xiii) commercial demand deposit
accounts.
Home Federal's primary source of revenue is interest from lending
activities. Its principal lending activity is the origination of conventional
mortgage loans to enable borrowers to purchase or refinance one- to four-family
residential real property. These loans are generally secured by first mortgages
on the property. Virtually all of the real estate loans originated by Home
Federal are secured by properties located in Indiana, although Home Federal has
authority to make or purchase real estate loans throughout the United States. In
addition, Home Federal makes secured and unsecured consumer related loans
(including consumer auto loans, second mortgage, home equity, credit cards,
mobile home, and savings account loans) and commercial loans secured by
mortgages on the underlying property. At June 30, 1998, approximately 19.1% of
its loans were consumer-related loans and 15.8% of its loans were commercial
mortgage loans. Home Federal also makes construction loans, which constituted
12.5% of Home Federal's loans at June 30, 1998. Finally, Home Federal makes
commercial loans, which constituted 8.3% of its loans at June 30, 1998.
4
Lending Activities
Loan Portfolio Data
The following two tables set forth the composition of Home Federal's loan
portfolio by loan type and security type as of the dates indicated. The
third table represents a reconciliation of gross loans receivable after
consideration of undisbursed portions of loans in process, deferred loans,
the allowance for loan losses, unearned discounts on loans and purchase
discounts. (Dollars in Thousands)
At June 30,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------
TYPE OF LOAN
First mortgage loans:
One-to-four family residential loans.. $268,133 43.5% $300,531 50.1% $278,118 51.3% $268,509 55.3% $278,383 60.1%
Commercial and multi-family .......... 97,469 15.8% 79,696 13.3% 73,853 13.6% 63,215 13.0% 59,830 12.9%
Loans on property under construction . 77,227 12.5% 54,504 9.1% 40,407 7.4% 23,982 4.9% 25,547 5.5%
Loans on unimproved acreage .......... 4,664 0.8% 4,192 0.7% 3,252 0.6% 2,554 0.5% 2,053 0.4%
Second mortgage, home equity .............. 65,321 10.6% 63,658 10.6% 50,372 9.3% 40,536 8.4% 29,376 6.3%
Commercial loans .......................... 50,890 8.3% 43,112 7.2% 40,609 7.5% 28,881 6.0% 21,660 4.7%
Consumer loans ............................ 10,347 1.7% 11,017 1.8% 11,952 2.2% 11,392 2.3% 4,381 0.9%
Auto loans ................................ 23,194 3.8% 23,086 3.8% 20,883 3.8% 21,506 4.4% 19,164 4.1%
Mobile home loans ......................... 14,349 2.3% 16,613 2.8% 18,833 3.5% 20,258 4.2% 19,287 4.2%
Savings accounts loans .................... 4,071 0.7% 3,989 0.7% 4,199 0.8% 4,407 0.9% 3,684 0.8%
- - ------------------------------------------------------------------------------------------------------------------------------------
Gross loans receivable ............... $615,665 100.0% $600,398 100.0% $542,478 100.0% $485,240 100.0% $463,365 100.0%
====================================================================================================================================
TYPE OF SECURITY
Residential:
One to four family ................... $366,319 59.3% $397,962 66.3% $358,003 66.0% $326,296 67.2% $326,055 70.4%
Multi-dwelling units ................. 19,003 3.1% 22,166 3.7% 23,807 4.4% 20,488 4.2% 22,004 4.7%
Commercial real estate .................... 122,828 20.0% 78,261 13.0% 60,940 11.2% 49,458 10.2% 45,077 9.7%
Commercial ................................ 50,890 8.3% 43,112 7.2% 40,609 7.5% 28,881 6.0% 21,660 4.7%
Mobile home ............................... 14,349 2.3% 16,613 2.8% 18,833 3.5% 20,258 4.2% 19,287 4.2%
Savings account ........................... 4,071 0.7% 3,989 0.7% 4,199 0.8% 4,407 0.9% 3,684 0.8%
Auto ...................................... 23,194 3.8% 23,086 3.8% 20,883 3.8% 21,506 4.4% 19,164 4.1%
Other consumer ............................ 10,347 1.7% 11,017 1.8% 11,952 2.2% 11,392 2.3% 4,381 0.9%
Land acquisition .......................... 4,664 0.8% 4,192 0.7% 3,252 0.6% 2,554 0.5% 2,053 0.4%
- - ------------------------------------------------------------------------------------------------------------------------------------
Gross loans receivable ............... $615,665 100.0% $600,398 100.0% $542,478 100.0% $485,240 100.0% $463,365 100.0%
====================================================================================================================================
LOANS RECEIVABLE-NET
Gross loans receivable .................... $615,665 105.7% $600,398 104.3% $542,478 104.3% $485,240 103.3% $463,365 103.9%
Deduct:
Undisbursed portion of loans in process ... (28,691) -4.9% (20,519) -3.6% (18,249 -3.5% (11,291) -2.4% (13,377) -3.0%
Deferred net loan fees .................... (690) -0.1% (560) -0.1% (963) -0.2% (1,069) -0.2% (1,204) -0.3%
Allowance for loan losses ................. (4,243) -0.7% (3,649) -0.6% (3,061) -0.6% (2,806) -0.6% (2,580) -0.6%
Unearned discounts ........................ (1) 0.0% (5) 0.0% (19) 0.0% (53) 0.0% (114) 0.0%
Purchase discount ......................... -- 0.0% (41) 0.0% (89) 0.0% (138) 0.0% (187) 0.0%
- - ------------------------------------------------------------------------------------------------------------------------------------
Net loans receivable ................. $582,040 100.0% $575,624 100.0% $520,097 100.0% $469,883 100.0% $445,903 100.0%
====================================================================================================================================
5
The following tables summarize the contractual maturities for
Home Federal's loan portfolio (including participations and mortgage-backed
certificates) for the fiscal periods indicated and the interest rate
sensitivity of loans due after one year: (In Thousands)
Maturities in Fiscal
Balance ----------------------------------------------------------------------------
Outstanding 2002 2004 2009 2013
At June 30, to to to and
1998 1999 2000 2001 2003 2008 2013 thereafter
---- ---- ---- ---- ---- ---- ---- ----------
Real estate ............. $435,587 $ 6,229 $ 1,790 $ 5,734 $ 23,019 $ 88,892 $ 90,768 $219,155
Mortgage-backed
certificates,
collateralized
mortgage obligations 15,760 549 2,784 2,142 3,173 5,322 -- 1,790
Construction Loans ...... 77,227 9,830 2,305 5,717 4,000 5,202 6,006 44,167
Commercial loans ........ 50,890 18,679 7,225 2,864 6,341 10,352 4,318 1,111
Other loans ............. 51,961 15,498 5,061 6,632 14,407 7,019 3,161 183
- - ----------------------------------------------------------------------------------------------------------------
Total .............. $631,425 $ 50,785 $ 19,165 $ 23,089 $ 50,940 $116,787 $104,253 $266,406
================================================================================================================
Interest Rate Sensitivity: (In Thousands)
Due After June 30, 1999
-----------------------
Fixed Variable Rate
Rate and Balloon
------------------------
Real estate ............................. $142,164 $287,193
Mortgage-backed certificates,
collateralized mortgage obligations 11,836 3,375
Construction Loans ...................... 528 66,869
Commercial loans ........................ 10,753 21,458
Other loans ............................. 36,464 --
- - ----------------------------------------------------------------
Total ............................. $201,745 $378,895
=================================================================
6
Residential Mortgage Loans
Approximately 95.7% of Home Federal's residential mortgage lending
activity, exclusive of refinances, involve the origination of loans secured by
one-to four-family residential properties. Home Federal is authorized to make
one-to four-family residential loans without any limitation as to interest rate,
amount, or number of interest rate adjustments. Pursuant to federal regulations,
if the interest rate is adjustable, the interest rate must be correlated with
changes in a readily verifiable index. Home Federal also makes residential
mortgage loans secured by mid-size multi-family dwelling units and apartment
complexes. The residential mortgage loans included in Home Federal's portfolio
are primarily conventional loans. As of June 30, 1998, $301.0 million, or 48.9%,
of Home Federal's total loan portfolio consisted of residential first mortgage
loans, $268.1 million, or 43.6%, of which were secured by one- to four-family
homes.
Many of the residential mortgage loans currently offered by Home
Federal have adjustable rates. These loans generally have interest rates which
adjust (up or down) semi-annually or annually, with maximum rates which vary
depending upon when the loans are written. The adjustment is currently based
upon the weekly average of the one-year Treasury constant maturity rate.
The rates offered on Home Federal's adjustable-rate and fixed-rate
residential mortgage loans are generally competitive with the rates offered by
other financial institutions in its south central Indiana market area.
Although Home Federal's residential mortgage loans are written for
amortization terms up to 30 years, due to prepayments and refinancings, its
residential mortgage loans in the past have generally remained outstanding for a
substantially shorter period of time than the maturity terms of the loan
contracts.
All of the residential mortgages Home Federal currently originates
include "due on sale" clauses, which give Home Federal the right to declare a
loan immediately due and payable in the event that, among other things, the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not repaid. Qualified borrowers are not permitted to
assume mortgages at rates below the current market rate, unless the instrument
does not include a due on sale provision. Home Federal utilizes the due on sale
clause as a means of increasing the rate of interest on existing loans by
negotiating with the buyer new interest rates at the time of sale.
The Office of Thrift Supervision (the "OTS") requires institutions it
regulates to establish loan- to-value ratios consistent with their supervisory
loan-to-value limits. The supervisory limits adopted by the OTS are 65% for raw
land loans, 75% for land development loans, 80% for construction loans
consisting of commercial, multi-family and other non-residential construction,
and 85% for improved property. Multi-family construction includes condominiums
and cooperatives. A loan-to-value limit has not been established for permanent
mortgage or home equity loans on owner-occupied one-to four-family residential
property. However, for any such loan with a loan-to-value ratio that equals or
exceeds 90 percent at origination, an institution should require appropriate
credit enhancement in the form of either mortgage insurance or readily
marketable collateral. The Board of Directors of Home Federal Savings Bank
approved a set of loan-to-value ratios consistent with these supervisory limits.
It may be appropriate in individual cases to originate loans with
loan-to-value ratios in excess of the OTS limits based on the support provided
by other credit factors. The aggregate amount of all loans in excess of these
limits should not exceed 100 percent of total capital. Moreover, loans for all
commercial, agricultural, multi-family or other non-one-to four-family
residential properties should not exceed 30 percent of total capital.
7
Commercial Mortgage Loans
At June 30, 1998, 23.8% of Home Federal's total loan portfolio
consisted of mortgage loans secured by commercial real estate. These properties
consisted primarily of shopping centers, office buildings, nursing homes,
manufacturing plants, warehouses, motels, apartment buildings and churches
located in central or south central Indiana. The commercial mortgage loans are
generally adjustable-rate loans, are written for terms not exceeding 20 years,
and require an 80% loan-to-value ratio. Commitments for these loans in excess of
$1 million must be approved in advance by Home Federal's Board of Directors. The
largest such loan as of June 30, 1998, had a balance of $4.5 million. At that
date, approximately 99% of Home Federal's commercial real estate loans consisted
of loans secured by real estate located in Indiana.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), a thrift's portfolio of commercial real estate loans is
limited to 400% of its capital. Also, FIRREA's Qualified Thrift Lender test
limits the amount of commercial real estate loans made by thrifts. See
"Regulation --Qualified Thrift Lender." Home Federal currently complies with the
commercial real estate loan limitation, and neither that limitation nor the
Qualified Thrift Lender test significantly limits the ability of Home Federal to
make commercial real estate loans in its market area.
Generally, commercial mortgage loans involve greater risk to Home
Federal than do residential loans. Commercial mortgage loans typically involve
large loan balances to single borrowers or groups of related borrowers. In
addition, the payment experience on loans secured by income-producing properties
is typically dependent on the successful operation of the related project and
thus may be subject to adverse conditions in the real estate market or in the
general economy.
Construction Loans
Home Federal offers conventional short-term construction loans. At June
30, 1998, 12.5% of Home Federal's total loan portfolio consisted of construction
loans. Normally, a 95% or less loan-to-value ratio is required from
owner-occupants of residential property, an 80% loan-to-value ratio is required
from persons building residential property for sale or investment purposes, and
an 80% loan-to-value ratio is required for commercial property. Construction
loans are also made to builders and developers for the construction of
residential or commercial properties on a to-be-occupied or speculative basis.
Construction normally must be completed in six months for residential loans. The
largest such loan on June 30, 1998, was $3.3 million.
Consumer Loans
Federal laws and regulations permit federally chartered savings
institutions to make secured and unsecured consumer loans in an aggregate amount
of up to 35% of the institution's total assets. In addition, a federally
chartered savings institution has lending authority above the 35% limit for
certain consumer loans, such as property improvement loans and loans secured by
savings accounts. However, the Qualified Thrift Lender test restricts some
thrift from making consumer loans. See "Regulation -- Qualified Thrift Lender."
Consumer-related loans, consisting of second mortgage and home equity
loans, mobile home loans, automobile loans, loans secured by savings accounts
and consumer loans were $117.3 million on June 30, 1998, or approximately 19.1%
of Home Federal's total loan portfolio.
Second mortgage loans are made for terms of 5 - 15 years, and are
fixed-rate and variable rate line of credit loans. Home Federal's minimum for
such loans is $5,000, and Home Federal will loan up to 90% of the appraised
value of the property, less the existing mortgage amount(s). As of June 30,
1998, Home Federal had $30.3 million of second mortgage loans, which equaled
4.9% of its total loan portfolio. Home Federal aggressively markets home equity
loans, which are adjustable-rate loans. As of June 30, 1998, Home Federal had
$35.1 million drawn on its home equity loans, or 5.7% of its total loan
portfolio, with $45.8 million of additional credit available to its borrowers
under existing home equity loans.
Automobile loans are generally made for terms of up to five years. The
vehicles are required to be for personal or family use only. As of June 30,
1998, $23.2 million, or 3.8%, of Home Federal's total loan portfolio consisted
of automobile loans.
8
As of June 30, 1998, $14.3 million, or 2.3%, of Home Federal's total
loan portfolio consisted of mobile home loans. Generally, these loans are made
for terms of one year for each $1,000 of the sales price, with a maximum term of
15 years. On new mobile home loans, Home Federal requires a loan-to- value ratio
of 125% of the manufacturer's invoice price plus sales tax or 90% of the actual
sales price, whichever is lower. Also, Home Federal makes loans for previously
occupied mobile homes up to a 90% loan-to-value ratio based upon the actual
sales price or value as appraised, whichever is lower.
Loans secured by savings account deposits may be made up to 95% of the
pledged savings collateral at a rate 2% above the rate of the pledged savings
account or a rate equal to Home Federal's highest seven-year certificate of
deposit rate, whichever is higher. The loan rate will be adjusted as the rate
for the pledged savings account changes. As of June 30, 1998, $4.1 million, or
0.7%, of Home Federal's total loan portfolio consisted of savings account loans.
Although consumer-related loans generally involve a higher level of
risk than one-to four-family residential mortgage loans, their relatively higher
yields and shorter terms to maturity are believed to be helpful in Home
Federal's asset/liability management.
Commercial Loans
Collateral for Home Federal's commercial loans includes manufacturing
equipment, securities, real estate, inventory and accounts receivable. Terms of
these loans are normally for up to ten years and have adjustable rates tied to
reported prime rates and treasury indexes. Generally, commercial loans are
considered to involve a higher degree of risk than residential real estate
loans. However, commercial loans generally carry a higher yield and are made for
a shorter term than real estate loans. As of June 30, 1998, $50.9 million, or
8.3%, of Home Federal's total loan portfolio consisted of commercial loans.
Origination, Purchase and Sale of Loans
Home Federal originates residential loans in conformity with standard
underwriting criteria of the Federal Home Loan Mortgage Corporation ("FHLMC")
and the Federal National Mortgage Association ("FNMA") to assure maximum
eligibility for possible resale in the secondary market. Although Home Federal
currently has authority to lend anywhere in the United States, it has confined
its loan origination activities primarily to the central and south central
Indiana area. Home Federal's loan originations are generated primarily from
referrals from real estate brokers, builders, developers and existing customers,
newspaper, radio and periodical advertising and walk-in customers. Home
Federal's loan approval process is intended to assess the borrower's ability to
repay the loan, the viability of the loan and the adequacy of the value of the
property that will secure the loan.
Home Federal studies the employment, credit history, and information on
the historical and projected income and expenses of its individual and corporate
mortgagors to assess their ability to repay its mortgage loans. It uses its
staff appraisers or independent appraisers to appraise the property securing its
loans. It requires title insurance or abstracts accompanied by an attorney's
opinion evidencing Home Federal's valid lien on its mortgaged real estate and a
mortgage survey or survey coverage on all first mortgage loans and on other
loans when appropriate. Home Federal requires fire and extended coverage
insurance in amounts at least equal to the principal amount of the loan. It may
also require flood insurance to protect the property securing its interest. When
private mortgage insurance is required, borrowers must make monthly payments to
an escrow account from which Home Federal makes disbursements for taxes and
insurance. Otherwise, such escrow arrangements are optional.
The procedure for approval of loans on property under construction is
the same as for residential mortgage loans, except that the appraisal obtained
evaluates the building plans, construction specifications and estimates of
construction costs. Home Federal also evaluates the feasibility of the
construction project and the experience and track record of the builder or
developer.
9
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
In order to generate loan fee and servicing income and recycle funds
for additional lending activities, Home Federal seeks to sell loans in the
secondary market. Loan sales can enable Home Federal to recognize significant
fee income and to reduce interest rate risk while meeting local market demand.
Home Federal sold $201.8 million of fixed-rate loans in the fiscal year ended
June 30, 1998. Home Federal's current lending policy is to sell fixed-rate
residential mortgage loans exceeding 15 year maturities. In addition, when in
the opinion of management cash flow demands and asset/liability concerns
warrant, Home Federal will consider keeping fixed-rate loans with 15 year
maturities as well as adjustable-rate loans. Home Federal may sell participating
interests in commercial real estate loans in order to share the risk with other
lenders. Mortgage loans held for sale are carried at lower of cost or market
value, determined on an aggregate basis. The servicing is retained on most loan
sales except Veteran's Administration ("VA"), Federal Housing Administration
("FHA") and Indiana Housing Finance Authority ("IHFA") loans.
When loans are sold, Home Federal typically retains the responsibility
for collecting and remitting loan payments, inspecting the properties securing
the loans, making certain that monthly principal and interest payments and real
estate tax payments are made on behalf of borrowers, and otherwise servicing the
loans. Home Federal receives a servicing fee for performing these services. The
amount of fees received by Home Federal varies, but is generally calculated as
an amount equal to 38 basis points per annum on the outstanding principal amount
of the loans serviced. The servicing fee is recognized as income over the life
of the loans. At June 30, 1998, Home Federal serviced $385.2 million of loans
sold to other parties. Gains and losses on sale of loans, loan participations
and mortgage-backed securities are recognized at the time of sale.
The Company adopted Statement of Financial Accounting Standards No. 122
("SFAS 122") on July 1, 1996. SFAS 122 specifies conditions under which mortgage
servicing rights should be accounted for separately from the underlying mortgage
loans. In fiscal 1998, $1.1 million of the total $3.4 million gain on sale of
loans was attributable to mortgage servicing rights.
Management believes that purchases of loans and loan participations may
be desirable and evaluates potential purchases as opportunities arise. Such
purchases can enable Home Federal to take advantage of favorable lending markets
in other parts of the state, diversify its portfolio and limit origination
expenses. Any participations it acquires in commercial real estate loans require
a review of financial information on the borrower, a review of the appraisal on
the property by a local designated appraiser, an inspection of the property by a
senior loan officer, and a complete financial analysis of the loan. Servicing of
loans purchased is generally done by the seller. At June 30, 1998, approximately
1.6%, or $9.6 million, of Home Federal's gross loan portfolio was serviced by
others.
10
The following table shows loan activity for Home Federal during the
periods indicated: (Dollars in Thousands)
Year Ended June 30,
-----------------------------------
1998 1997 1996
---- ---- ----
Gross loans receivable at beginning of periods ................. $ 600,398 $ 542,478 $ 469,883
- - ------------------------------------------------------------------------------------------------------
Loans Originated:
Mortgage loans and contracts:
Construction:
Residential ...................................... 45,857 39,116 45,336
Commercial ....................................... 38,310 22,784 12,058
Purchases:
Residential ...................................... 117,474 113,265 112,549
Commercial ....................................... 22,206 16,107 7,214
Refinancing .......................................... 169,202 56,911 88,861
Other ................................................ 3,188 6,462 1,302
- - ------------------------------------------------------------------------------------------------------
Total ............................................ 396,237 254,645 267,320
Commercial ............................................... 39,274 34,709 51,537
Consumer ................................................. 38,166 38,150 35,800
- - ------------------------------------------------------------------------------------------------------
Total loans originated ............................... 473,677 327,504 354,657
Loans purchased:
Residential .......................................... -- -- 2,140
Other ................................................ 6,815 947 1,477
- - ------------------------------------------------------------------------------------------------------
Total loans originated and purchased ............. 480,492 328,451 358,274
Real estate loans sold ................................... 211,365 81,309 107,500
Loan repayments and other deductions ..................... 253,860 189,222 178,179
- - ------------------------------------------------------------------------------------------------------
Total loans sold, loan repayments and other deductions 465,225 270,531 285,679
- - ------------------------------------------------------------------------------------------------------
Net loan activity ........................................ 15,267 57,920 72,595
- - ------------------------------------------------------------------------------------------------------
Gross loans receivable at end of period .................. 615,665 600,398 542,478
Adjustments .............................................. (33,625) (24,774) (22,381)
- - ------------------------------------------------------------------------------------------------------
Net loans receivable at end of period .................... $ 582,040 $ 575,624 $ 520,097
======================================================================================================
FIRREA contains a generally more stringent loans-to-one-borrower
limitation than that applicable to savings associations before FIRREA's
enactment. Under FIRREA, a savings association generally may not make any loan
to a borrower or its related entities if the total of all such loans by the
savings association exceeds 15% of its capital (plus up to an additional 10% of
capital in the case of loans fully collateralized by readily marketable
collateral); provided, however, that loans up to $500,000 irrespective of the
percentage limitations may be made and certain housing development loans of up
to $30 million or 30% of capital, whichever is less, are permitted. The maximum
amount which Home Federal could have loaned to one borrower and the borrower's
related entities at June 30, 1998 under the 15% of capital limitation was $9.4
million. At that date, the highest outstanding balance of loans by Home Federal
to one borrower and related entities was approximately $6.3 million, an amount
within such loans-to-one borrower limitations.
11
Origination and Other Fees
Home Federal realizes income from fees for originating loans, late
charges, NOW account fees and fees for other miscellaneous services. Home
Federal charges origination fees that range from 0% to 3.5% of the loan amount.
In addition Home Federal charges processing fees of $100 to $175 and
underwriting fees of from $0 to $100. Late charges are assessed fifteen days
after payment is due. Home Federal also receives commissions on Linsco Private
Ledger full-service securities brokerage transactions which its subsidiary, Home
Savings Corporation, offers to its customers.
Non-performing Assets
Home Federal assesses late charges on mortgage loans if a payment is
not received by the 16th day following its due date. Any borrower whose payment
was not received by this time is mailed a past due notice. At the same time the
notice is mailed, the delinquent account is downloaded to a PC- based collection
system and assigned to a specific loan service representative. The loan service
representative will attempt to make contact with the customer via a phone call
to efficiently and effectively resolve any problem that might exist. If contact
by phone is not possible, mail, in the form of preapproved form letters, will be
used during the 16th and the 30th days following a specific due date. After the
30th day following any due date, or at the time a second payment has come due,
if no contact has been made with the customer, a personal visit will be
conducted by a Loan Service Department employee to interview the customer and
inspect the property to determine the borrower's ability to repay the loan.
Prompt follow up is a goal of the Loan Service Department with any and all
delinquencies.
When an advanced stage of delinquency appears (generally around the
90th day of delinquency) and if repayment cannot be expected within a reasonable
amount of time, Home Federal will make a determination of how to proceed to
protect the interests of both the customer and Home Federal. It may be necessary
for the borrower to attempt to sell the property at Home Federal's request. If a
resolution cannot be arranged, Home Federal will consider avenues necessary to
obtain title to the property which include foreclosure and/or accepting a
deed-in-lieu of foreclosure, whichever may be most appropriate. However, Home
Federal attempts to avoid taking title to the property if at all possible.
Home Federal has acquired certain real estate in lieu of foreclosure by
acquiring title to the real estate and then reselling it. Home Federal performs
an updated title check of the property and, if needed an appraisal on the
property before accepting such deeds.
On June 30, 1998, Home Federal held $242,000 of real estate and other
repossessed collateral acquired as a result of foreclosure, voluntary deed, or
other means. Such assets are classified as "real estate owned" until sold. When
property is so acquired, it is recorded at the lower of cost or fair market
value less estimated cost to sell at the date of acquisition and any subsequent
write down resulting therefrom is charged to the allowance for losses on real
estate owned. Interest accrual ceases on the date of acquisition and all costs
incurred from that date in maintaining the property are expensed.
Consumer loan borrowers who fail to make payments are contacted
promptly by the Loan Service Department in an effort to effectively and
efficiently cure any delinquency. A notice of delinquency is sent 10 days after
any specific due date when no payment has been received. The delinquent account
is downloaded to a PC-based collection system and assigned to a specific loan
service representative. The loan service representative will then attempt to
contact the borrower via a phone call.
Continued follow-up in the form of phone calls, letters, and personal
visits (when necessary) will be conducted to resolve delinquency. If a consumer
loan delinquency continues and advances to the 60- 90 days past due status, a
determination will be made by Home Federal on how to proceed. When a consumer
loan reaches 90 days past due Home Federal determines the loan to value ratio by
performing an inspection of the collateral (if any). Home Federal may initiate
action to obtain collateral (if any) or collect the debt through the legal
remedies available.
Collateral obtained as a result of loan default is retained by Home
Federal as an asset until sold or otherwise disposed.
12
The table below sets forth the amounts and categories of Home Federal's
non-performing assets (non-accrual loans, loans past due 90 days or more, real
estate owned, and other repossessed assets) for the last five years. It is the
policy of Home Federal that all earned but uncollected interest on conventional
loans be reviewed monthly to determine if any portion thereof should be
classified as uncollectible for any portion that is due but uncollected for a
period in excess of 90 days. The determination is based upon factors such as the
amount outstanding of the loan as a percentage of the appraised value of the
property and the delinquency record of the borrower.
At June 30,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Non-performing Assets:
Loans:
Non-accrual ............................. $3,992 $2,930 $2,871 $2,431 $2,230
Past due 90 days or more ................ -- 40 89 81 115
Restructured loans .......................... -- 1 1 102 283
- - ----------------------------------------------------------------------------------------------
Total non-performing loans .................. 3,992 2,971 2,961 2,614 2,628
Real estate owned, net (1) .................. 117 51 -- -- --
Other repossessed assets, net ............... 125 88 48 41 98
Total non-performing assets (2) ......... $4,234 $3,110 $3,009 $2,655 $2,726
==============================================================================================
Total non-performing assets to total assets . 0.59% 0.46% 0.48% 0.45% 0.50%
==============================================================================================
Loans with allowance for uncollected interest $3,993 $2,930 $2,872 $2,531 $2,167
==============================================================================================
(1) Refers to real estate acquired by Home Federal through foreclosure,
voluntary deed, or in-substance foreclosure, net of reserve.
(2) At June 30, 1998, 57.4% of Home Federal's non-performing assets consisted
of residential mortgage loans, .1% consisted of commercial real estate
loans, 12.3% consisted of commercial loans, 24.7% consisted of
consumer-related loans, 5.5% consisted of real estate owned and other
repossessed assets, none of which were commercial real estate loans.
For the year ended June 30, 1998, the income that would have been
recorded under original terms on the above non-accrual and restructured loans
was $325,000 compared to actual income recorded of $250,000. At June 30, 1998,
Home Federal had approximately $6.7 million in loans that were 30-89 days past
due.
The allowance for loan losses represents amounts available to absorb
future loan losses. Loans or portions thereof are charged to the allowance when
losses are considered probable. Recoveries of amounts previously charged off are
added to the allowance and provisions for loan losses are charged or credited to
earnings to bring the allowance to a level considered necessary by management.
For the year ended June 30, 1998, Home Federal charged off loans
totaling $696,000 and realized recoveries of $97,000 on previously charged-off
loans. Based on management's continuing review of the loan portfolio, historical
charge-offs and current economic conditions, Home Federal recorded a charge to
earnings of $1.2 million to adjust the allowance to $4.2 million as of June 30,
1998.
Investments
Home Federal's investment portfolio consists primarily of
mortgage-backed securities, collateralized mortgage obligations, overnight funds
with the FHLB of Indianapolis, U.S. Treasury obligations, U.S. Government agency
obligations, corporate debt and municipal bonds. At June 30, 1998, 1997, and
1996, Home Federal had approximately $72.2 million, $56.7 million and $57.9
million in investments, respectively.
13
Home Federal's investment portfolio is managed by its officers in
accordance with an investment policy approved by the Board of Directors. The
Board reviews all transactions and activities in the investment portfolio on a
monthly basis. Home Federal does not purchase corporate debt securities which
are not rated in one of the top four investment grade categories by one of
several generally recognized independent rating agencies. Home Federal's
investment strategy has enabled it to (i) shorten the average term to maturity
of its assets, (ii) improve the yield on its investments, (iii) meet federal
liquidity requirements and (iv) maintain liquidity at a level that assures the
availability of adequate funds.
The OTS requires savings associations to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances, and
specified United States government, state or federal agency obligations,
corporate debt securities, commercial paper, certain mutual funds, certain
mortgage related securities, and certain first lien residential mortgage loans)
equal to a monthly average of not less than a specified percentage of its net
withdrawable savings deposits plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10%, and is currently 4%. Monetary penalties may be imposed for
failure to meet the liquidity requirement. At June 30, 1998, Home Federal had
liquid assets of $85.8 million, and a liquidity ratio of 14.9%, which exceeded
its liquidity requirement.
Source Of Funds
General
Deposits have traditionally been the primary source of funds of Home
Federal for use in lending and investment activities. In addition to deposits,
Home Federal derives funds from loan amortization, prepayments, borrowings from
the FHLB of Indianapolis and income on earning assets. While loan amortization
and income on earning assets are relatively stable sources of funds, deposit
inflows and outflows can vary widely and are influenced by prevailing interest
rates, money market conditions and levels of competition. Borrowings may be used
to compensate for reductions in deposits or deposit inflows at less than
projected levels and may be used on a longer-term basis to support expanded
activities. See "-- Borrowings."
Deposits
Consumer and commercial deposits are attracted principally from within
Home Federal's primary market area through the offering of a broad selection of
deposit instruments including checking accounts, fixed-rate certificates of
deposit, NOW accounts, individual retirement accounts, passbook accounts and
commercial demand deposit accounts. Home Federal does not actively solicit or
advertise for deposits outside of the counties in which its branches are
located. Deposit account terms vary, with the principal differences being the
minimum balance required, the amount of time the funds remain on deposit and the
interest rate. To attract funds, Home Federal pays higher rates on larger
balances within the same maturity class.
Under regulations adopted by the FDIC, well-capitalized insured
depository institutions (those with a ratio of total capital to risk-weighted
assets of not less than 10%, with a ratio of core capital to risk-weighted
assets of not less than 6%, with a ratio of core capital to total assets of not
less than 5% and which have not been notified that they are in troubled
condition) may accept brokered deposits without limitations. Undercapitalized
institutions (those that fail to meet minimum regulatory capital requirements)
are prohibited from accepting brokered deposits. Adequately capitalized
institutions (those that are neither well-capitalized nor undercapitalized) are
prohibited from accepting brokered deposits unless they first obtain a waiver
from the FDIC. Under these standards, Home Federal would be deemed a
well-capitalized institution.
14
An undercapitalized institution may not solicit deposits by offering
rates of interest that are significantly higher than the prevailing rates of
interest on insured deposits (i) in such institution's normal market areas or
(ii) in the market area in which such deposits would otherwise be accepted.
Home Federal on a periodic basis establishes interest rates paid,
maturity terms, service fees and withdrawal penalties. Determination of rates
and terms are predicated on funds acquisition and liquidity requirements, rates
paid by competitors, growth goals, federal regulations, and market area of
solicitation.
Deposit accounts at Home Federal at June 30, 1998, were as follows:
(Dollars in Thousands)
Minimum Weighted
Opening Balance at % of Average
Type of Account Balance June 30, 1998 Deposits Rate
- - --------------- ------- ------------- -------- --------
Withdrawable:
Non-interest bearing ......... $ 1 $ 25,102 4.6%
Passbook ..................... 1 47,639 8.8% 2.75%
Money market savings ......... 1,000 77,133 14.2% 4.55%
NOW .......................... 1 50,185 9.2% 2.08%
- - ----------------------------------------------------------------------------
Total withdrawable ........ 200,059 36.8% 2.93%
- - ----------------------------------------------------------------------------
Certificates (original terms):
Less than 1 year ............. 500 103,920 19.1% 5.48%
12 to 23 months .............. 500 124,066 22.8% 5.64%
24 to 35 months .............. 500 52,296 9.6% 5.51%
36 to 59 months .............. 500 14,801 2.7% 5.59%
60 to 120 months ............. 500 48,847 9.0% 6.05%
- - ----------------------------------------------------------------------------
Total certificates ....... 343,930 63.2% 5.63%
- - ----------------------------------------------------------------------------
Total deposits ............... $543,989 100.0% 4.64%
============================================================================
The following table sets forth by nominal interest rate categories the
composition of deposits of Home Federal at the dates indicated: (Dollars in
Thousands)
At June 30,
-------------------------------
1998 1997 1996
---- ---- ----
Non-interest bearing and below 2.99% $123,348 $117,394 $130,424
3.00% - 4.99% ...................... 119,234 106,914 62,219
5.00% - 6.99% ...................... 298,774 298,811 289,019
7.00% - 9.00% ...................... 2,633 4,669 7,911
9.01% or greater ................... -- -- --
- - ---------------------------------------------------------------------
Total .............................. $543,989 $527,788 $489,573
=====================================================================
15
The following table sets forth the change in dollar amount of deposits in
the various accounts offered by Home Federal for the periods indicated.
DEPOSIT ACTIVITY
(Dollars in Thousands)
Balance Balance Balance
at at at
June 30, % of Increase June 30, % of Increase June 30, % of Increase
1998 Deposits (Decrease) 1997 Deposits (Decrease) 1996 Deposits (Decrease)
---- -------- ---------- ---- -------- ---------- ---- -------- ----------
Withdrawable:
Non-interest bearing ........... $ 25,102 4.6% $ 1,596 $ 23,506 4.5% $ 1,528 $ 21,978 4.5% $ 21,978
Passbook ....................... 47,639 8.8% (804) 48,443 9.2% (10,545) 58,988 12.1% 58,988
Money market savings ........... 77,133 14.2% 12,370 64,763 12.2% 39,575 25,188 5.1% 25,188
NOW ............................ 50,185 9.2% 4,952 45,233 8.6% (3,645) 48,878 10.0% 48,878
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Withdrawable ....... 200,059 36.8% 18,114 181,945 34.5% 25,385 155,032 31.7% 155,032
- - ----------------------------------------------------------------------------------------------------------------------------------
Certificates:
Less than one year ............. 103,920 19.1% 6,619 97,301 18.4% 13,471 83,830 17.1% 83,830
12 to 23 months ................ 124,066 22.8% 13,824 110,242 20.9% 15,760 94,482 19.3% 94,482
24 to 35 months ................ 52,296 9.6% (7,561) 59,857 11.3% (11,375) 71,232 14.5% 71,232
36 to 59 months ................ 14,801 2.7% (7,795) 22,596 4.3% (4,312) 26,908 5.5% 26,908
60 to 120 months ............... 48,847 9.0% (7,000) 55,847 10.6% (2,242) 58,089 11.9% 58,089
- - ----------------------------------------------------------------------------------------------------------------------------------
Total certificate accounts 343,930 63.2% (1,913) 345,843 65.5% 11,302 334,541 68.3% 334,541
- - ----------------------------------------------------------------------------------------------------------------------------------
Total deposits ....... $543,989 100.0% $ 16,201 $527,788 100.0% $ 36,687 $489,573 100.0% $489,573
==================================================================================================================================
16
The following table represents, by various interest rate categories, the amounts
of deposits maturing during each of the three years following June 30, 1998, and
the percentage of such maturities to total deposits. Matured certificates which
have not been renewed as of June 30, 1998 have been allocated based upon certain
rollover assumptions. (Dollars in Thousands)
DEPOSITS MATURITIES
-------------------
3.99% 4.00 5.00 6.00 7.00
or to to to to Percent of
less 4.99% 5.99% 6.99% 9.00% Total Total
---- ----- ----- ----- ----- ----- -----
Certificate accounts maturing in
the twelve-month period ending:
June 30, 1999................. $ 1,227 $ 29,457 $205,146 $ 12,927 $ 1,584 $250,341 72.7%
June 30, 2000................. -- 10,915 22,861 19,970 589 54,335 15.8%
June 30, 2001................. -- 869 8,016 4,711 10 13,606 4.0%
Thereafter ................... -- 55 12,034 13,109 450 25,648 7.5%
- - ------------------------------------------------------------------------------------------------------------
$ 1,227 $ 41,296 $248,057 $ 50,717 $ 2,633 $343,930 100.0%
============================================================================================================
Included in the deposit totals in the above table are savings certificates of
deposit with balances of over $100,000. The majority of these deposits are from
regular customers of Home Federal. None of these were brokered deposits. The
following table provides a breakdown at June 30, 1998 of certificates of greater
than $100,000 by maturity. (Dollars in Thousands)
ACCOUNTS GREATER THAN $100,000
------------------------------
2.00 4.00 5.00 6.00 7.00
to to to to to Percent of
3.99% 4.99% 5.99% 6.99% 7.99% Total Total
----- ----- ----- ----- ----- ----- -----
Certificate accounts maturing in
the twelve-month period ending:
June 30, 1999 .......................... $ 347 $ 1,748 $62,388 $10,235 $ 314 $75,032 85.1%
June 30, 2000 .......................... -- 468 2,604 2,992 516 6,580 7.5%
June 30, 2001 .......................... -- -- 775 1,088 -- 1,863 2.1%
Thereafter ............................. -- 809 3,484 335 4,628 5.3%
- - ------------------------------------------------------------------------------------------------------------
$ 347 $ 2,216 $66,576 $17,799 $ 1,165 $88,103 100.0%
============================================================================================================
17
Borrowings
Home Federal relies upon advances (borrowings) from the FHLB of
Indianapolis to supplement its supply of lendable funds, meet deposit withdrawal
requirements and to extend the term of its liabilities. This facility has
historically been Home Federal's major source of borrowings. Advances from the
FHLB of Indianapolis are typically secured by Home Federal's stock in the FHLB
of Indianapolis and a portion of Home Federal's first mortgage loans and
mortgage-backed securities.
Each FHLB credit program has its own interest rate, which may be fixed
or variable, and range of maturities. Subject to the express limits in FIRREA,
the FHLB of Indianapolis may prescribe the acceptable uses to which these
advances may be put, as well as limitations on the size of the advances and
repayment provisions. At June 30, 1998, Home Federal had advances totaling $98.1
million outstanding from the FHLB of Indianapolis.
On June 30, 1993, the Company borrowed $13.0 million from LaSalle
National Bank of Chicago, with the stock of Home Federal and its subsidiaries
pledged as collateral (the "Senior Debt"). The Senior Debt bears interest at a
variable rate of prime (8.50% at June 30, 1998) and was scheduled to mature on
November 1, 1999. The Company repaid the note in its entirety in June of 1998.
Of the net proceeds, the Company injected $10.0 million to Home Federal's Tier l
capital. Home Federal used the proceeds to prepay $9.0 million of subordinated
debt plus a prepayment penalty of $1.8 million.
Other than the FHLB advances and the Senior Debt, Home Federal's only
borrowings in recent years have been short-term borrowings. The following table
sets forth the maximum amount of each category of short-term borrowings
(borrowings with remaining maturities of one year or less) outstanding at any
month-end during the periods shown and the average aggregate balances of
short-term borrowings for such periods. (Dollars in Thousands)
For the year ended June 30,
1998 1997 1996
---- ---- ----
FHLB advances ............................... $38,800 $33,200 $16,000
Official check overnight remittance ......... $ 8,710 $ 4,621 $ 4,280
Money Order remittance ...................... $ 44 $ -- $ --
FHLB overnight remittance ................... $ 992 $ 49 $ 57
Average amount of total short-term borrowings
outstanding ................................. $32,934 $34,129 $ 6,822
The following table sets forth the amount of short term FHLB advances
outstanding at year end during the period shown and the weighted average rate of
such FHLB advances. (Dollars in Thousands)
At the year ended June 30,
1998 1997 1996
---- ---- ----
FHLB advances:
Amount .............. $ 36,000 $ 33,200 $ 26,000
Weighted average rate 6.1% 6.7% 6.2%
See Note 9 in the Notes to Consolidated Financial Statements included
in the 1998 Shareholder Annual Report incorporated into Item 8 hereof for a
description of the terms of these borrowings.
18
Service Corporation Subsidiaries
Federal savings banks generally may invest up to 2% of their assets in
service corporations and make loans to such subsidiaries and joint ventures in
which such subsidiaries are participants in an aggregate amount not exceeding 2%
of an association's assets, plus an additional 1% of assets if the amount over
2% is used for specified community or inner-city development purposes. In
addition, federal regulations permit associations to make specified types of
loans to such subsidiaries (other than special- purpose finance subsidiaries),
in which the association owns more than 10% of the stock, in an aggregate amount
not exceeding 50% of the association's regulatory capital if the association's
regulatory capital is in compliance with applicable regulations.
One of Home Federal's subsidiaries, Home Savings Corporation ("HSC"),
an Indiana corporation, is currently engaged in three types of activities: (i)
real estate development; (ii) sales of life insurance products and annuities;
and (iii) full-service securities brokerage services. With the exception of its
securities brokerage services, all of HSC's activities are conducted through
joint ventures in which it is an equity investor. HSC has undertaken these
activities as a part of Home Federal's business strategy of diversifying its
operations into areas which, although related to traditional activities in which
Home Federal has expertise and often involving a similar pool of potential
customers, provide opportunities to earn income that are not as sensitive to
changes in interest rates as is net interest income, and also to meet the needs
of its customers by becoming a full-service financial center. Although these
activities create a potential for a higher rate of return than mortgage lending,
either directly through operations or indirectly through appreciation in value
of the business or real property, these activities involve greater and different
risks than those associated with thrift lending and can affect adversely the
savings association's regulatory capital calculations. See "Regulation --
Regulatory Capital." At June 30, 1998, Home Federal's aggregate investment in
HSC was $2.6 million. For the year ended June 30, 1998, HSC reported income of
$293,000 from these operations. HSC's office is located at 222 West Second
Street, Seymour, Indiana. The consolidated statements of operations of Home
Federal and its subsidiaries included elsewhere herein include the operations of
HSC. Intercompany balances and transactions have been eliminated in the
consolidation.
The following table sets forth certain information regarding each of
the joint ventures in which HSC was involved at June 30, 1998.
Date HSC Loans from
Entered Home Federal
into the Equity Outstanding at
Name Type of Project Project Investment June 30, 1998
---- --------------- -------- ---------- -------------
Consortium Partners Owns Family Financial 11/31/83 $ 617,000 $ -
Life Insurance
Company of New
Orleans
Coventry Associates Real Estate development 8/31/89 $ 40,000 $ -
in Seymour, Indiana
Heritage Woods II Rental Apartment 11/15/89 $ 96,000 $ -
project of low income
housing (22 units)
Admirals Woods Real estate development 4/20/93 $ 19,000 $ -
In Indianapolis, Indiana
Home-Breeden Real estate development 7/1/94 $ 2,375,000 $ 1,939,000
in Columbus, Indiana
Crystal Lake at River Single family homes in 11/29/97 $ 930,000 $ 920,000
Ridge Indianapolis, Indiana
HSC has a 20% interest in Consortium Partners, a Louisiana partnership,
which owns 50% of the outstanding shares of the Family Financial Life Insurance
Company of New Orleans ("Family Financial"). The remaining 50% of the
outstanding shares of Family Financial is owned proportionately by the partners
of Consortium Partners. Family Financial sells life, accident, and health
insurance as well as annuity products to the customers of the partners'
parent-thrifts. HSC receives (1) dividends paid on Family Financial shares owned
directly by it, (2) a pro rata allocation of dividends received on shares held
by Consortium Partners, which are divided among the partners based on the
actuarially determined value of Family Financial's various lines of insurance
generated by customers of these partners, and (3) commissions on sales of
insurance products made to customers. For the year ended June 30,1998, Home
Federal had income of $397,000, on a consolidated basis, from commissions and
dividends paid on Family Financial activities.
19
HSC markets Linsco Private Ledger full-service securities brokerage
services. For the year ended June 30, 1998, HSC received $979,000 in commissions
from its LINSCO Private Ledger activities.
In August, 1989, HSC entered into a financing agreement with Greemann
Real Estate, Inc. to purchase and develop Coventry Place, a residential real
estate subdivision in Seymour, Indiana. HSC is to receive a development fee
equal to 4% of total development costs. In addition to the interest on the loan,
which was paid off in April, 1996, HSC will receive 65% of the net profit after
the payment of all interest, development and sales fees.
In November, 1989, HSC invested $184,000 as a limited partner in
Heritage Woods II, a low income housing project in Columbus, Indiana. Over the
next six years, HSC will receive tax credits equal to approximately 9% of its
investment in the project.
On April 20, 1993, HSC entered into a joint venture agreement with Gary
L. Sager and Emily Sager to develop a moderately-priced 27 lot subdivision in
Marion County, Indiana, called Admirals Woods. The joint venture subsequently
executed loan documents with HSC for an acquisition and development loan in the
amount of $980,000. In addition to interest on the loan, HSC will receive 50% of
the profits after all interest, development and sales costs. The loan was paid
off in December, 1995.
On July 1, 1994, HSC entered into a joint venture agreement with
Breeden Investment Group, Inc. to develop a 320 lot starter home subdivision
with additional multi-family and commercial land ("McCullough's Run").
McCullough's Run is located on the east side of Columbus, Indiana. Loan
documents were executed on July 1, 1994 for land acquisition and development of
phases I and II in an amount not to exceed $1,700,000. Subsequent closings have
encompassed the balance of the six phases. The outstanding loan balance of $2.3
million as of June 30, 1998, reflects the development costs to date of all six
phases, the condominium site and commercial acreage.
On November 29, 1997, HSC entered into an LLC agreement with Curtis
Enterprises, Inc., and Gary B. Warstler to build up to eighty-five single family
homes at Crystal Lake at River Ridge in northern Indianapolis, Indiana. The LLC
will purchase finished lots from RN Thompson Development Corporation. HSC has a
line of credit in the amount of $2,100,000 to build the homes, and will receive
1/3 of the profits from their sale.
Home Federal also organized another service corporation subsidiary
under Indiana law, HomeFed Financial Corp., as a financing subsidiary to issue
subordinated debt, collateralized mortgage obligations, and similar securities.
This corporation is currently a shell corporation and has never engaged in any
business operations.
Employees
As of June 30, 1998, Home Federal employed 253 persons on a full-time
basis and 16 persons on a part-time basis. None of Home Federal's employees are
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
Competition
Home Federal operates in south central Indiana and makes almost all of
its loans to, and accepts almost all of its deposits from, residents of
Bartholomew, Jackson, Jefferson, Jennings, Scott, Ripley, Washington, Decatur,
Monroe and Marion counties in Indiana.
20
Home Federal is subject to competition from various financial
institutions, including state and national banks, state and federal thrift
associations, and other companies or firms, including brokerage houses, that
provide similar services in the areas of Home Federal's home and branch offices.
Also, in Seymour, Columbus, North Vernon and Batesville, Home Federal must
compete with banks and savings institutions in Indianapolis. To a lesser extent,
Home Federal competes with financial and other institutions in the market areas
surrounding Cincinnati, Ohio and Louisville, Kentucky. Home Federal also
competes with money market funds which currently are not subject to reserve
requirements, and with insurance companies with respect to its Individual
Retirement and annuity accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of healthy savings associations
in Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by Home
Federal and the Company.
In addition, The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to
acquire banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion; provided that acquisition or de novo formations of
branches by out-of-state banks are not permitted unless the laws of their home
states permit Indiana banks to acquire or establish branches on a reciprocal
basis. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion and authorizes out-of-state banks meeting certain requirements to
branch into Indiana by merger or de novo expansion, provided that acquisitions
or de novo formations of branches by out-of-state banks are not permitted unless
the laws of their home states permit Indiana banks to acquire or establish
branches on a reciprocal basis. The Indiana Branching Law became effective March
15, 1996. This new legislation may also result in increased competition for Home
Federal and the Company.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors that
are not readily predictable.
Regulation
General
Home Federal, as a federally chartered stock savings bank, is a member
of the Federal Home Loan Bank System ("FHLB System") and its deposits are
insured by the Savings Association Insurance Fund ("SAIF") which is administered
by the FDIC. Home Federal is subject to extensive regulation by the OTS. Federal
associations may not enter into certain transactions unless certain regulatory
tests are met or they obtain prior governmental approval, and the associations
must file reports with the OTS about their activities and their financial
condition. Periodic compliance examinations of Home Federal are conducted by the
OTS that has, in conjunction with the FDIC in certain situations, examination
and enforcement powers. This supervision and regulation is intended primarily
for the protection of depositors and federal deposit insurance funds. Home
Federal is also subject to certain reserve requirements under regulations of the
Board of Governors of the Federal Reserve System ("FRB").
Congress is considering legislation that would require all federal
savings associations, such as Home Federal, either to convert to a national bank
or a state-chartered bank by a specified date to be determined. In addition,
under the legislation, the Company likely would no longer be regulated as a
savings and loan holding company but rather as a bank holding company. This
proposed legislation would abolish the OTS and transfer its functions among the
other federal banking regulators. It cannot be predicted with certainty whether,
or in what form, the legislation will be enacted, or what impact it might have
on the powers of the Company and Home Federal.
21
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS. The regulation
also establishes a schedule of fees for the various types of applications and
filings made by savings associations with the OTS. The general assessment, to be
paid on a semiannual basis, is based upon the savings association's total
assets, including consolidated subsidiaries, as reported in a recent quarterly
thrift financial report. Currently, the quarterly assessment rates range from
.01164% of assets for associations with assets of $67.0 million or less to
.00308% for associations with assets in excess of $35.0 billion. Home Federal's
current semiannual assessment, based upon total assets at March 31, 1998 of
$705.4 million, is $76,000. The OTS has recently proposed a change to its
assessment regulations that would require assessments to be determined generally
on the basis of an institution's size, condition, and complexity of operations.
Home Federal is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
its own securities, and limitations upon other aspects of banking operations. In
addition, the activities and operations of Home Federal are subject to a number
of additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
Federal Home Loan Bank System
Home Federal is a member of the FHLB System, which consists of 12
regional banks. The Federal Housing Finance Board ("FHFB"), an independent
agency, controls the FHLB System including the FHLB of Indianapolis. The FHLB
System provides a central credit facility primarily for member savings
associations and other member financial institutions. Home Federal is required
to hold shares of capital stock in the FHLB of Indianapolis in an amount at
least equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, .3% of its assets or 1/20 (or such greater
fraction established by the FHLB) of outstanding FHLB advances, commitments,
lines of credit and letters of credit. Home Federal is currently in compliance
with this requirement. At June 30, 1998, Home Federal's investment in stock of
the FHLB of Indianapolis was $5.5 million.
In past years, Home Federal has received dividends on its FHLB stock.
All 12 FHLBs are required by law to provide funds for the resolution of troubled
savings associations and to establish affordable housing programs through direct
loans or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low- and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. For
the year ending June 30, 1998, dividends paid to Home Federal by the FHLB of
Indianapolis totaled $409,000, for an annual rate of 8.0%. A reduction in value
of such stock may result in a corresponding reduction of Home Federal's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. FIRREA proscribes eligible collateral as first mortgage
loans less than 90 days delinquent or securities evidencing interests therein,
securities (including mortgage-backed securities) issued, insured or guaranteed
by the federal government or any agency thereof, FHLB deposits and, to a limited
extent, real estate with readily ascertainable value in which a perfected
security interest may be obtained. Other forms of collateral may be accepted as
over collateralization or, under certain circumstances, to renew outstanding
advances. All long-term advances are required to provide funds for residential
home financing and the FHLB has established standards of community service that
members must meet to maintain access to long-term advances.
22
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Under current law, savings associations which cease to be Qualified Thrift
Lenders are ineligible to receive advances from their FHLB.
Liquidity
For each calendar month, Home Federal is required to maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to an amount not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings
during the preceding calendar month. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 4%. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The monthly average liquidity of Home Federal for June,
1998 was 14.9% which exceeded the applicable 4% liquidity requirement. Home
Federal has never been subject to monetary penalties for failure to meet its
liquidity requirements.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, the BIF for commercial banks
and state savings banks and the SAIF for savings associations and banks that
have acquired deposits from savings associations. The FDIC is required to
maintain designated levels of reserves in each fund. As of September 30, 1996,
the reserves of the SAIF were below the level required by law, primarily because
a significant portion of the assessments paid into the SAIF have been used to
pay the cost of prior thrift failures, while the reserves of the BIF met the
levels required by law in May, 1995. However, on September 30, 1996, provisions
designed to recapitalize the SAIF and eliminate the premium disparity between
the BIF and the SAIF were signed into law. See "--Assessments" below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
Home Federal was charged a one-time special assessment equal to $.657 per $100
in assessable deposits at March 31, 1995. Home Federal recognized this one-time
assessment as a non-recurring operating expense of $3,001,000, ($1,726,000 after
tax), during the three-month period ending September 30, 1996, and Home Federal
paid the assessment on November 27, 1996. The assessment was fully deductible
for both federal and state income tax purposes. Beginning January 1, 1997, Home
Federal's annual deposit insurance premium was reduced from .23% to .0644% of
total assessable deposits. BIF institutions pay lower assessments than
comparable SAIF institutions because BIF institutions pay only 20% of the rate
paid by SAIF institutions on their deposits with respect to obligations issued
by the federally-chartered corporation which provided some of the financing to
resolve the thrift crisis in the 1980's, ("FICO"). The 1996 law also provides
for the merger of the SAIF and the BIF by 1999, but not until such time as bank
and thrift charters are combined. Until the charters are combined, savings
associations with SAIF deposits may not transfer deposits into the BIF system
without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
23
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
Under the tangible capital requirement, a savings association must maintain
tangible capital (core capital less all intangible assets except purchased
mortgage servicing rights which may be included after making the above-noted
adjustments in an amount up to 100% of tangible capital) of at least 1.5% of
total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings association to account for the relative
risks inherent in the type and amount of assets held by the savings association.
The risk- based capital requirement requires a savings association to maintain
capital (defined generally for these purposes as core capital plus general
valuation allowances and permanent or maturing capital instruments such as
preferred stock and subordinated debt less assets required to be deducted) equal
to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four
categories (0-100%) with a credit risk-free asset such as cash requiring no
risk-based capital and an asset with a significant credit risk such as a
non-accrual loan being assigned a factor of 100%. At June 30, 1998, based on the
capital standards then in effect, Home Federal was in compliance with all
capital requirements.
The OTS has delayed implementation of a rule which sets forth the
methodology for calculating an interest rate risk component to be incorporated
into the OTS regulatory capital rule. Under the rule, only savings associations
with "above normal" interest rate risk (institutions whose portfolio equity
would decline in value by more than 2% of assets in the event of a hypothetical
200-basis point move in interest rates) will be required to maintain additional
capital for interest rate risk under the risk-based capital framework. A savings
association with an "above normal" level of exposure will have to maintain
additional capital equal to one-half the difference between its measured
interest rate risk (the most adverse change in the market value of its portfolio
resulting from a 200-basis point move in interest rates divided by the estimated
market value of its assets) and 2%, multiplied by the market value of its
assets. That dollar amount of capital is in addition to a savings association's
existing risk-based capital requirement. Although the OTS has decided to delay
implementation of this rule, it will continue to closely monitor the level of
interest rate risk at individual savings associations and it retains the
authority, on a case-by-case basis, to impose additional capital requirements
for individual savings associations with significant interest rate risk. The OTS
recently updated its standards regarding the management of interest rate risk to
include summary guidelines to assist savings associations in determining their
exposures to interest rate risk.
In periods of rapidly changing interest rates, the Bank's balance sheet
is subject to significant fluctuations in market value (interest rate risk
exposure). However, as the delayed interest rate risk rules proposed by the OTS
currently read, the Bank at June 30, 1998, would have no additional capital
requirement. The Bank's management continues to monitor its interest rate risk
position.
24
The following is a summary of Home Federal's regulatory capital and
capital requirements at June 30, 1998:
To Be Categorized
As "Well Capitalized"
Under Prompt
For Capital Corrective Action
(Dollars in thousands) Actual Adequacy Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
- - -------------------------------------------------------------------------------------------------------
As of June 30, 1998
Tangible capital (to total assets) $58,514 8.20% $10,708 1.50% N/A N/A
Core capital (to total assets) ... $58,514 8.20 $28,554 4.00% N/A N/A
Total risk-based capital
(to risk-weighted assets) ...... $62,305 11.81 $42,206 8.00% $52,757 10.00%
Tier 1 risk-based capital
(to risk-weighted assets) ...... $58,514 11.09% N/A N/A $31,654 6.00%
Tier 1 leverage capital
(to average assets) ............ $58,514 8.35% N/A N/A $35,057 5.00%
If an association is not in compliance with its capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition to the specific sanctions provided in FIRREA for
failing to meet the capital requirements, the OTS and the FDIC generally are
authorized to take enforcement actions against a savings association that fails
to meet its capital requirements, which actions may include restrictions on
operations and banking activities, the imposition of a capital directive, a
cease and desist order, civil money penalties or harsher measures such as the
appointment of a receiver or conservator or a forced merger into another
institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, federal bank regulatory authorities to
take "prompt corrective action" with respect to institutions that do not meet
minimum capital requirements. For these purposes, FedICIA establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
1998, Home Federal was categorized as "well capitalized," meaning that Home
Federal's total risk-based capital ratio exceeded 10%, Home Federal's Tier I
risk-based capital ratio exceeded 6%, Home Federal's leverage ratio exceeded 5%,
and Home Federal was not subject to a regulatory order, agreement or directive
to meet and maintain a specific capital level for any capital measure.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier l institution ("Tier 1
Institution"). An institution that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 institution may be designated
by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the
institution is "in need of more than normal supervision." Home Federal is
currently a Tier l Institution.
25
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of a) 100% of its net income to date during the calendar year plus an amount
that would reduce by one-half its "surplus capital ratio" (the excess over its
fully phased-in capital requirements) at the beginning of the calendar year, or
b) 75% of its net income over the most recent four quarter period. Any
additional amount of capital distributions would require prior regulatory
approval.
The OTS has proposed revisions to these regulations which would permit
a savings association, without filing a prior notice or application with the
OTS, to make a capital distribution to its shareholders in a maximum amount that
does not exceed the association's undistributed net income for the prior two
years plus the amount of its undistributed income from the current year. This
proposed rule would require a savings association, such as Home Federal, that is
a subsidiary of a savings and loans holding company to file a notice with the
OTS 30 days before making a capital distribution up the "maximum amount"
described above. The proposed rule would also require all savings associations,
whether under a holding company or not, to file an application with the OTS
prior to making any capital distribution where the association is not eligible
for "expedited processing" under the OTS "Expedited Processing Regulation" or
where the proposed distribution, together with any other distributions made in
the same year, would exceed the "maximum amount" described above.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earnings standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies.
The association's written real estate lending policies must be reviewed
and approved by the association's board of directors at least annually. Further,
each association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Federal Reserve System
Under FRB regulations, Home Federal is required to maintain reserves
against its transaction accounts (primarily checking and NOW accounts) and
non-personal money market deposit accounts. The effect of these reserve
requirements is to increase Home Federal's cost of funds. Home Federal is in
compliance with its reserve requirements. A federal savings association, like
other depository institutions maintaining reservable accounts, may borrow from
the FRB "discount window," to meet these requirements but the FRB's regulations
require the savings association to exhaust other reasonable alternative sources,
including borrowing from its regional FHLB, before borrowing from the FRB.
FedICIA imposes certain limitations on the ability of undercapitalized
depository institutions to borrow from FRBs.
26
Holding Company Regulation
Under current law the Company (the "Holding Company") is regulated as a
"non-diversified unitary savings and loan holding company" within the meaning of
the Home Owners' Loan Act, as amended ("HOLA"), and subject to regulatory
oversight of the Director of the OTS. As such, the Holding Company is registered
with the OTS and thereby subject to OTS regulations, examinations, supervision
and reporting requirements. As a subsidiary of a savings and loan holding
company, Home Federal is subject to certain restrictions in its dealings with
the Holding Company and with other companies affiliated with the Holding
Company.
The HOLA generally prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from (i) acquiring control of
any other savings association or savings and loan holding company or controlling
the assets thereof or (ii) acquiring or retaining more than 5% of the voting
shares of a savings association or holding company thereof which is not a
subsidiary. Additionally, under certain circumstances, a savings and loan
holding company is permitted to acquire, with the approval of the Director of
the OTS, up to 15% of previously unissued voting shares of an under-capitalized
savings association for cash without that savings association being deemed
controlled by the holding company. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock may also acquire control of any savings association, other
than a subsidiary association, or any other savings and loan holding company.
The Holding Company's Board of Directors presently intends to continue
to operate the Holding Company as a unitary savings and loan holding company to
the extent permitted by law. There are generally no restrictions on the
permissible business activities of a unitary savings and loan holding company
under current law. However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
the OTS may impose such restrictions as deemed necessary to address such risk
and limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply). See "--Qualified
Thrift Lender." At June 30, 1998, Home Federal's asset composition was in excess
of that required to qualify Home Federal as a QTL.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with Home
Federal, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than Home Federal or other subsidiary savings
associations) would thereafter be subject to further restrictions. HOLA provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings association shall commence or continue
for a limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies or (vii) those activities
authorized by the FRB as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of the OTS prior to being engaged in by a
multiple holding company.
27
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the savings association to be acquired as of March 5,
1987, or if the laws of the state in which the savings association to be
acquired is located specifically permit associations to be acquired by
state-chartered associations or savings and loan holding companies located in
the state where the acquiring entity is located (or by a holding company that
controls such state-chartered savings associations). Also, the Director of the
OTS may approve an acquisition resulting in a multiple savings and loan holding
company controlling savings associations in more than one state in the case of
certain emergency thrift acquisitions.
No subsidiary saving association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period, or without
the giving of such notice, shall be invalid.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with
the SEC under the Securities Exchange Act of 1934 (the "1934 Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the 1934 Act and the rules of the SEC
thereunder. If the Holding Company has fewer than 300 shareholders, it may
deregister its shares under the 1934 Act and cease to be subject to the
foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the
Holding Company may not be resold without registration unless sold in accordance
with the resale restrictions of Rule 144 under the Securities Act of 1933 (the
"1933 Act"). If the Holding Company meets the current public information
requirements under Rule 144, each affiliate of the Holding Company who complies
with the other conditions of Rule 144 (including a one-year holding period and
conditions that require the affiliate's sale to be aggregated with those of
certain other persons) will be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) l % of the outstanding shares of the Holding Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Qualified Thrift Lender
Savings associations must meet a QTL test which requires a savings
association to have at least 65% of its portfolio assets invested in "qualified
thrift investments" on a monthly average basis in 9 out of every 12 months.
Qualified thrift investments under the QTL test include primarily residential
mortgages and related investments including certain mortgage-related securities.
Portfolio assets under the QTL test include all of an association's assets less
(i) goodwill and other intangibles, (ii) the value of property used by the
association to conduct its business, and (iii) its liquid assets as required to
be maintained under law up to 20% of total assets.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to SAIF) or be subject to the following penalties: (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test, the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
28
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification,
it shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At June 30, 1998, 70.9% of Home Federal's portfolio assets (as defined
on that date) were invested in qualified thrift investments (as defined on that
date), and therefore Home Federal's asset composition was in excess of that
required to qualify Home Federal as a QTL. Home Federal does not expect to
significantly change its lending or investment activities in the near future,
and therefore expects to continue to qualify as a QTL, although there can be no
such assurance.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- using terms such as satisfactory and
unsatisfactory -- and a written evaluation of each institution's performance.
Each FHLB is required to establish standards of community investment or service
that its members must maintain for continued access to long-term advances from
the FHLBs. The standards take into account a member's performance under the CRA
and its record of lending to first-time homebuyers. The FHLBs have established
an "Affordable Housing Program" to subsidize the interest rate of advances to
member associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. Home Federal
is participating in this program. The examiners have determined that Home
Federal has an outstanding record of meeting community credit needs.
Taxation
Federal Taxation
The Holding Company and its subsidiary file a consolidated federal
income tax return on the accrual basis for each fiscal year ending June 30. The
consolidated federal income tax return has the effect of eliminating
intercompany distributions, including dividends, in the computation of
consolidated taxable income. Income of the Holding Company generally would not
be taken into account in determining the bad debt deduction allowed to Home
Federal, regardless of whether a consolidated tax return is filed. However,
certain "functionally related" losses of the Holding Company would be required
to be taken into account in determining the permitted bad debt deduction which,
depending upon the particular circumstances, could reduce the bad debt
deduction. Home Federal's federal income tax returns have not been audited in
the last five years.
Historically, savings associations, such as Home Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, Home Federal will no longer be able to use the percentage of
taxable income method of computing its allocable tax bad debt deduction. Home
Federal will be required to compute its allocable deduction using the experience
method. As a result of the repeal of the percentage of taxable income method,
reserves taken after 1987 using the percentage of taxable income method
generally must be included in future taxable income over a six-year period,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. Home Federal will recapture
approximately $2.5 million over a six-year period beginning in fiscal 1999. In
addition, the pre-1988 reserve, in which no deferred taxes have been recorded,
will not have to be recaptured into income unless (i) Home Federal no longer
qualifies as a bank under the Code, or (ii) excess dividends are paid out by
Home Federal.
29
Depending on the composition of its items of income and expense, a
savings institution may be subject to the alternative minimum tax. A savings
institution must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences (although not to post-August 7, 1986
tax-exempt interest) can be credited against regular tax due in later years.
State Taxation
Home Federal is subject to Indiana's Financial Institutions Tax
("FIT"), that is imposed at a flat rate of 8.5% on "adjusted gross income."
"Adjusted gross income," for purposes of FIT, begins with taxable income as
defined by Section 63 of the Code, and thus, incorporates federal tax law to the
extent that it affects the computation of taxable income. Federal taxable income
is then adjusted by several Indiana modifications. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes.
Home Federal's state income tax returns have not been audited in the
last five years.
Current Accounting Issues
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Comprehensive Income", was issued in June 1997 and becomes effective for fiscal
periods beginning after December 15, 1997. SFAS 130 requires reclassification of
earlier financial statements for comparative purposes. SFAS No. 130 requires
that changes in the amounts of certain items, including gain and losses on
certain securities be shown in the financial statements. SFAS No. 130 does not
require a specific format for the financial statement in which comprehensive
income is reported, but does require that an amount representing total
comprehensive income be reported in that statement. This statement will result
in additional financial statement disclosures upon adoption.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," was
issued in June 1997 and is effective for fiscal periods beginning after December
15, 1997. This statement will change the way public companies report information
about segments of their business in their annual financial statements and
requires them to report selected segment information in their quarterly reports
issued to shareholders. It also requires entity-wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. Management has not
yet quantified the effect of this new standard on the consolidated financial
statements.
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued in
June 1998 and is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
fair value hedge, a cash flow hedge, or a hedge of foreign currency exposure.
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. Management has not yet quantified the effect of this new standard
on the consolidated financial statements.
30
Item 2. Properties.
At June 30, 1998, Home Federal conducted its business from its main
office at 222 West Second Street, Seymour, Indiana and 15 full-service branches.
Home Federal owns two buildings that it uses for certain administrative
operations located at 218 West Second Street, Seymour, and 211 Chestnut Street,
Seymour. The headquarters of its Private Ledger operations, conducted through
its service corporation subsidiary, are located at 501 Washington Street,
Columbus, Indiana. Information concerning these properties, as of June 30, 1998,
is presented in the following table: (Dollars in Thousands)
Net Book
Value of
Property, Approximate
Description and Owned or Furniture and Square Lease
Address Leased Fixtures Footage Expiration
- - ----------------------- -------- ----------- ----------- ----------
Principal Office Owned $ 2,835 9,200 N/A
222 West Second Street
Operations Center Owned $ 253 20,000 N/A
218 West Second Street
Loan Processing Center Owned $ 94 5,130 N/A
211 North Chestnut
Branch Offices:
Columbus Branches:
501 Washington Street Owned $ 585 14,800 N/A
3805 25th Street Owned $ 328 5,800 N/A
2751 Brentwood Drive Owned $ 483 3,200 N/A
4330 West Jonathon Moore Pike Owned $ 743 2,600 N/A
Hope Branch 1/2 Owned $ 36 2,000 4/99
332 Jackson Street 1/2 Leased
Austin Branch Owned $ 54 3,600 N/A
67 West Main Street
Brownstown Branch Leased $ 24 2,400 Month to
101 North Main Street Month
North Vernon Branches
111 North State Street Owned $ 379 1,900 N/A
1540 North State Street Leased $ 48 1,600 10/02
Osgood Branch Owned $ 115 1,280 N/A
South Buckeye Street
Salem Branch
1208 South Jackson Owned $ 912 1,860 N/A
Seymour Branch Owned $ 448 6,800 N/A
1117 East Tipton Street
Batesville Branch Owned $ 676 2,175 N/A
12 West Pearl Street
Madison Branch Owned $ 524 2,550 N/A
201 Clifty Drive
Greensburg Branch Leased $ 29 2,440 8/98
115 East North Street
31
Home Federal owns its computer and data processing equipment that is
used for accounting, financial forecasting, and general ledger work. Home
Federal also has contracted for the data processing and reporting services of
NCR headquartered in Dayton, Ohio.
The contract with NCR expires in October 2000.
Item 3. Legal Proceedings.
Neither the Company, Home Federal nor its subsidiaries is a party to
any pending legal proceedings, other than routine litigation incidental to its
business activities.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the Corporation's or Home Federal's
shareholders during the quarter ended June 30, 1998.
Item 4.5. Executive Officers of Home Federal Bancorp.
Presented below is certain information regarding the executive officers
of HFB who are not also directors.
Position with HFB
--------------------------
Gerald L. Armstrong Chief Operating Officer and
Executive Vice President
S. Elaine Pollert Senior Vice President
Retail Banking
Lawrence E. Welker Executive Vice President, Treasurer,
Chief Financial Officer and Secretary
Gerald L. Armstrong (age 58) has been employed by Home Federal since
February, 1992 as its Executive Vice President, and Chief Operating Officer.
Before being employed by Home Federal, he was President, Chief Executive Officer
and a Director of Seymour National Bank, a commercial bank located in Seymour,
Indiana.
S. Elaine Pollert (age 38) has been employed by Home Federal since
1986. She was elected Vice President Branch Administration in 1989 and Senior
Vice President Retail Banking in 1996.
Lawrence E. Welker (age 51) has been employed by Home Federal since
1979. He was Controller from 1979 to 1982. In 1982, he was elected as Chief
Financial Officer and Treasurer, and in 1994 he became an Executive Vice
President.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Home Federal converted from mutual to stock form effective January 14,
1988 (the "Conversion"). Home Federal then reorganized effective March 1, 1993
by converting each outstanding share of its common stock, par value $.01 per
share, into one share of common stock, without par value, of HFB, a unitary
savings and loan holding company organized in Indiana (the "Reorganization").
HFB's principal asset is 100% of the outstanding capital stock of Home Federal.
HFB's common stock ("Common Stock") is quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), National Market
System, under the symbol "HOMF." HFB's Common Stock was substituted on the
NASDAQ, National Market System for Home Federal's common stock on March 1, 1993,
subject to the Reorganization. Home Federal's common stock had been quoted on
the NASDAQ, National Market System since its initial issuance pursuant to the
Conversion on January 14, 1988. For certain information related to the stock
prices and dividends paid by HFB, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results of
Operations" on page 5 of HFB's 1998 Shareholder Annual Report (the "Shareholder
Annual Report"). As of June 30, 1998, there were 582 shareholders of record of
HFB's Common Stock.
32
It is currently the policy of HFB's Board of Directors to continue to
pay quarterly dividends, but any future dividends are subject to the Board's
discretion based on its consideration of HFB's operating results, financial
condition, capital, income tax considerations, regulatory restrictions and other
factors.
Since HFB has no independent operations or other subsidiaries to
generate income, its ability to accumulate earnings for the payment of cash
dividends to its shareholders is directly dependent upon the ability of Home
Federal to pay dividends to the Company.
Under OTS regulations, a converted savings association may not declare
or pay cash dividends if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings association may
make a "capital distribution," which includes, among other things, cash
dividends, will depend upon in which one of three categories, based upon levels
of capital, that savings association is classified. Home Federal is a "tier one
institution" and therefore would be able to pay cash dividends to HFB during any
calendar year up to 100% of its net income during that calendar year plus the
amount that would reduce by one half its "surplus capital ratio" (the excess
over its capital requirements) at the beginning of the calendar year. See
"Regulation--Capital Distributions Regulation" in Item 1 hereof. Prior notice of
any dividend to be paid by Home Federal to the Company will have to be given to
the OTS.
Income of Home Federal appropriated to bad debt reserves and deducted
for federal income tax purposes is not available for payment of cash dividends
or other distributions to HFB without the payment of federal income taxes by
Home Federal on the amount of such income deemed removed from the reserves at
the then-current income tax rate. At June 30, 1998, approximately $6 million of
Home Federal's retained income represented bad debt deductions for which no
federal income tax provision had been made. See "Taxation--Federal Taxation" in
Item 1 hereof.
Unlike Home Federal, generally there is no regulatory restriction on
the payment of dividends by HFB, subject to the determination of the Director of
the OTS that there is reasonable cause to believe that the payment of dividends
constitutes a serious risk to the financial safety, soundness or stability of
Home Federal. Indiana law, however, would prohibit HFB from paying a dividend
if, after giving effect to the payment of that dividend, HFB would not be able
to pay its debts as they become due in the usual course of business or HFB's
assets would be less than the sum of its total liabilities plus preferential
rights of holders of preferred stock, if any.
On November 22, 1994, the Board of Directors of HFB declared a dividend
of one common share purchase right (a "Right" or "Rights") for each outstanding
share of Common Stock. The dividend was paid on December 6, 1994 to the
shareholders of record as of November 22, 1994. If and when the Rights become
exercisable, each Right will entitle the registered holder to purchase from HFB
one Common Share at a purchase price of $27.67 (the "Purchase Price"), subject
to adjustment as described in the Rights Agreement between the Company and
LaSalle National Bank, Chicago, Illinois, (the "Rights Agreement") which
specifies the terms of the Rights. The Rights will be represented by the
outstanding Common Share certificates and the Rights cannot be bought, sold or
otherwise traded separately from the Common Shares until the "Distribution
Date," which is the earliest to occur of (i) 10 calendar days following a public
announcement that a person or group (an "Acquiring Person") has (a) acquired
beneficial ownership of 15% or more of the outstanding Common Shares or (b)
become the beneficial owner of an amount of the outstanding Common Shares (but
not less than 10%) which the Board of Directors determines to be substantial and
which ownership the Board of Directors determines is intended or may be
reasonably anticipated, in general, to cause HFB to take actions determined by
the Board of Directors to be not in HFB's best long-term interests (an "Adverse
Person"), or (ii) 10 business days following the commencement or announcement of
an intention to make a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of 30% or more of
such outstanding Common Shares.
33
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire HFB on terms
not approved by the Board of Directors of HFB, except pursuant to an offer
conditioned on a substantial number of Rights being acquired. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors since the Rights may be redeemed by HFB at $.01 per Right
prior to the time that a person or group has acquired beneficial ownership of
15% or more of the Common Shares.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to
the material under the heading "Summary of Selected Consolidated Financial Data"
on page 5 of the Shareholder Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
The information required by this item is incorporated by reference to
pages 7 to 16 of the Shareholder Annual Report.
Item 7. A Quantitative and Qualitative Analysis of Financial Condition
and Results of Operations
The OTS requires each thrift institution to calculate the estimated change in
the institution's net portfolio value ("NPV") assuming an instantaneous,
parallel shift in the Treasury yield curve of 100 to 400 basis points either up
or down in 100 basis point increments. NPV represents the sum of future cash
flows of assets discounted to present value less the sum of future cash flows of
liabilities discounted to present value. The OTS permits institutions to utilize
the OTS' model, which is based upon data submitted in the institution's
quarterly thrift financial reports.
In estimating the NPV of mortgage loans and mortgage-backed securities, the OTS
model utilizes various price indications and prepayment rates. At June 30, 1998,
these price indications varied from 73.91 to 118.85 for fixed rate mortgages and
mortgage-backed securities and varied from 87.87 to 107.65 for adjustable rate
mortgages and mortgage-backed securities. Prepayment rates for June 30, 1998,
ranged from a constant prepayment rate ("CPR") or 6% to a CPR of 41%.
The value of deposit accounts appears on both the asset and liability side of
the NPV calculation in the OTS model. In estimating the value of certificate of
deposit accounts, ("CDs"), retail price estimates represent the value of the
liability implied by the CD and reflect the difference between the CD coupon and
secondary-market CD rates. As of June 30, 1998, the retail CD price assumptions
varied from 76.03 to 125.61. The retail CD intangible prices represent the value
of the "customer relationship" due to the rollover of CD deposits and are an
intangible asset for the Bank. As of June 30, 1998, the retail CD intangible
price assumptions varied from .02 to .66.
Other deposit accounts such as transaction accounts, money market deposit
accounts, passbook accounts and non-interest-bearing accounts are valued at 100%
of their respective outstanding balances in all nine interest rate scenarios on
the liability side of the OTS model. On the asset side of the model, intangible
prices are used to reflect the value of the "customer relationship" of the
various types of deposit accounts. As of June 30, 1998, the intangible prices
for transaction accounts, money market deposit accounts and passbook accounts
varied from -2.23 to 19.11, -. 58 to 12.37 and -1.01 to 14.56, respectively.
34
The following table sets forth the Bank's interest rate sensitivity of NPV as of
June 30, 1998. (Dollars in thousands)
Net Portfolio Value NPV as % of PV of Assets
- - -------------------------------------------------------------------------
Change
In Rates $ Amount $ Change % Change NPV Ratio Change
- - -------------------------------------------------------------------------
+400 bp 65,996 -12,039 -15 9.44% (117) bp
+300 bp 70,552 -7,483 -10 9.95% (67) bp
+200 bp 74,375 -3,660 -5 10.34% (27) bp
+100 bp 77,029 -1,007 -1 10.58% (3) bp
0 bp 78,035 - - 10.61% -
- - -100 bp 78,602 567 1 10.59% (2) bp
- - -200 bp 79,256 1,221 2 10.58% (4) bp
- - -300 bp 81,531 3,496 4 10.76% 14 bp
- - -400 bp 84,425 6,390 8 11.00% 38 bp
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and Notes thereto
contained on pages 17 to 35 of the Shareholder Annual Report are incorporated
herein by reference. HFB's Quarterly Results of Operations contained on page 6
of the Shareholder Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
There are no such changes and disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 to 4 of the Company's Proxy Statement for
its 1998 annual shareholder meeting (the "1998 Proxy Statement"). Information
concerning the Company's executive officers who are not also directors is
included in Item 4.5 in Part I of this report.
The information required by this item with respect to the compliance
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to page 12 of the 1998 Proxy Statement.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 4 to 11 of the 1998 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information referred by this item is incorporated by reference to
pages 1 to 3 of the 1998 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 11 of the 1998 Proxy Statement.
35
PART IV
Item 14. Exhibits. Financial Statement Schedules and Reports on Form 8-K.
(a) List the following documents filed as a part of the report:
Page in 1998
Shareholder
Financial Statements Annual Report
-------------------- -------------
Consolidated Balance Sheets as of
June 30, 1998 and 1997 17
Consolidated Statements of Income for each of
the years in the three-year period ended
June 30, 1998 18
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended June 30, 1998 19
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
June 30, 1998 20
Notes to Consolidated Financial Statements 21
Report of Deloitte & Touche LLP
Independent Auditors 36
(b) Reports on Form 8-K
Registrant has filed no reports on Form 8-K for the quarter ending June
30, 1998.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page 39.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
notes.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, this 22nd day
of September, 1998.
HOME FEDERAL BANCORP
DATE: September 22, 1998 /s/ John K. Keach. Jr.
------------------ ----------------------
John K. Keach, Jr., President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 22nd day of September,
1998.
/s/ Lawrence E. Welker /s/ John K. Keach, Jr.
- - ----------------------- ----------------------
Lawrence E. Welker, Executive John K. Keach, Jr.,
Vice President, Treasurer, President and Chief
Chief Financial Officer and Secretary Executive Officer
(Principal Financial Officer) (Principal Executive
Officer)
/s/ Melissa M. Arnold /s/John K. Keach, Jr.
- - --------------------- ---------------------
Melissa M. Arnold, Vice John K. Keach, Jr,Director
President and Controller
(Principal Accounting Officer)
/s/ John K. Keach. Sr. /s/ John T. Beatty
- - ---------------------- ------------------
John K. Keach, Sr., Director John T. Beatty, Director
/s/Lewis Essex /s/ Harold Force
- - -------------- ----------------
Lewis Essex, Director Harold Force, Director
/s/ David W. Laitinenen /s/ Harvard W. Nolting, Jr.
- - ----------------------- ---------------------------
David W. Laitinen, Director Harvard W. Nolting, Jr., Director
37
EXHIBIT INDEX
Reference to
Regulation S-K Sequential
Exhibit Number Document Page Number
- - -------------- -------- -----------
3(a) Articles of Incorporation (incorporated by
reference from Exhibit B to Registrant's
Registration Statement on Form S-4
(Registration
No. 33-55234)).
3(b) Code of By-Laws (incorporated by reference
from Exhibit C to Registrant's Registration
Statement on From S-4 (Registration No.
33-55234)).
4(a) Article 6 of the Articles of Incorporation
(incorporated by reference from Exhibit B to
Registrant's Registration Statement on Form
S-4 (Registration No. 33-55234)).
4(b) Article III of the Code of By-Laws
(incorporated by reference from Exhibit C to
Registrant's Registration Statement on From
S-4 (Registration No. 33-55234)).
10(a) Stock Option Plan (incorporated by reference
from Exhibit 10(a) to Registrant's Registra-
tion Statement on Form S-4 (Registration No.
33-55234)).
10(b) 1993 Stock Option Plan (incorporated by
reference from Exhibit 10(b) to
Registrant's Form 10-K for the year ended
June 30, 1994).
10(c) Employment Agreement with Lawrence E. Welker
(incorporated by reference from Exhibit 10(c) to
Registrants Registration Statement on Form S-4
(Registration No. 33-55234));first amendment
thereto dated March 1, 1993; second amendment
thereto dated November 22, 1994; third amendment
thereto dated April 30,1996.
10(d) Employment Agreement with John K. Keach, Jr.
(incorporated by reference from Exhibit 10(d) to
Registrant's Registration Statement on Form S-4
(Registration No. 33-55234));first amendment
thereto dated March 1, 1993; second amendment
thereto dated November 22, 1994; third amendment
thereto dated April 30,1996.
10(f) Employment Agreement with Gerald L. Armstrong
(incorporated by reference from Exhibit 10(f) to
Registrant's Registration Statement on Form S-4
(Registration No. 33-55234)); first amendment
thereto dated November 22, 1994; second amendment
thereto dated April 30,1996..
10(g) April 1, 1989 Promissory Note and related
documents pertaining to the Illinois Building
(incorporated by reference from Exhibit 10(f) to
Home Federal Savings Bank's Form 10-K for the year
ended June 30, 1989).
10(i) Stock Option Agreement with Harvard W. Nolting, Jr.
(incorporated by reference from Exhibit 10(i) to Home
Federal Savings Bank's Form 10-K for the fiscal year
ended June 30, 1991).
38
10(j) Stock Option Agreement with David W. Laitinen
(incorporated by reference from Exhibit 10(j) to Home
Federal Savings Bank's Form 10-K for the
fiscal year ended June 30, 1991).
10(k) Stock Option Agreement with John T. Beatty
(incorporated by reference from Exhibit 10(k) to Home
Federal Savings Bank's Form 10-K for the fiscal year
ended June 30, 1991).
10 (l) Stock Option Agreement with Harold Force
(incorporated by reference from Exhibit 10(l) to
Home Federal Savings Bank's Form 10-K for the fiscal
year ended June 30, 1991).
10 (n) Executive Supplemental Retirement Income Agreement
with John K. Keach, Jr. (incorporated by reference from
Exhibit 10(n) to Home Federal Savings Bank's
Form 10-K for the fiscal year ended June 30,
1991) and First Amendment to Executive
Supplemental Retirement Income Agreement
(incorporated by reference from Exhibit
10(n) to Registrant's Form 10-K for the
fiscal year ended June 30, 1992); second amendment
thereto dated February 18, 1993; third amendment
thereto dated July 1, 1996.
10 (o) Executive Supplemental Retirement Income
Agreement with Lawrence E. Welker
(incorporate by reference from Exhibit 10(o)
to Home Federal Saving Bank's Form 10-K for
the fiscal year ended June 30, 1991) and
First Amendment to Executive Supplemental
Retirement Income Agreement (incorporated by
reference from Exhibit 10(o) to Registrant's
Form 10-K for the fiscal year ended June 30,
1992); second amendment thereto dated February
18, 1993; third amendment thereto dated
July 1, 1996.
10 (p) Executive Supplemental Retirement Income
Agreement with S. Elaine Pollert dated
May 22, 1991;first amendment thereto dated July 17,
1992; second amendment thereto dated February
18, 1993; third amendment thereto dated
July 1, 1996.
10 (v) Deferred Compensation Agreement with John K.
Keach, Sr. (incorporated by reference from
Exhibit 10(v) to Home Federal Savings Bank
Form 10-K for the fiscal year ended June 30,
1992) and First Amendment to Deferred
Compensation Agreement (incorporated by
reference from Exhibit 10(v) to Registrant's
Form 10-K for the year ended June 30, 1994);
second amendment thereto dated March 19, 1996.
10 (w) Employment Agreement with S. Elaine Pollert
dated December 17, 1996; first amendment
thereto dated December 17, 1996.
10 (x) Executive Supplemental Retirement Income
Agreement with Gerald L. Armstrong
(incorporated by reference from Exhibit
10(x) to Home Federal Savings Bank Form 10-K
for the fiscal year ended June 30, 1992) and
First Amendment to Executive Supplemental
Retirement Income Agreement (incorporated by
reference from Exhibit 10(x) to Registrant's
Form 10-K for the year ended June 30, 1994);
second amendment thereto dated February 18,
1993; third amendment thereto dated July 1, 1996.
39
10 (y) Employment Agreement with Gerald L. Armstrong
(incorporated by reference from Exhibit l0(aa) to
Home Federal Savings Bank Form 10-K for the
fiscal year ended June 30, 1992).
10 (ab) Stock Option Agreement with Gerald L. Armstrong
(incorporated by reference from Exhibit 10(ab) to
Home Federal Savings Bank Form 10-K for the fiscal
year ended June 30, 1992).
10 (ac) Director Deferred Compensation Agreement with
John Beatty (incorporated by reference from Exhibit
l0(ac) to Home Federal Savings Bank Form 10-K
for the fiscal year ended June 30, 1992);first
amendment thereto dated February 18, 1993; second admendment
thereto dated March 19, 1998.
10 (ad) Director Deferred Compensation Agreement
with Lewis Essex (incorporated by reference
from Exhibit 10(ad) to Home Federal Savings
Bank Form 1 0-K for the fiscal year ended
June 30, 1992);first amendment thereto dated
February 18, 1993; second amendment
thereto dated March 19, 1998.
10 (ae) Director Deferred Compensation Agreement
with Harold Force (incorporated by reference
from Exhibit 10(ae) to Home Federal Savings
Bank Form l0-K for the fiscal year ended
June 30, 1992);first amendment thereto dated
February 18, 1993; second amendment thereto
dated December 21, 1993; third amendment
thereto dated March 19, 1998.
10 (af) Director Deferred Compensation Agreement
with David W. Laitinen (incorporated by
reference from Exhibit 10(af) to Home
Federal Savings Bank Form 10-K for the
fiscal year ended June 30, 1992);first
amendment thereto dated February 18, 1993;
second amendment thereto dated December 21, 1993;
third amendment thereto dated March 19, 1998.
10 (ag) Director Deferred Compensation Agreement with
William Nolting (incorporated by reference from
Exhibit 10(ag) to Home Federal Savings Bank Form
10-K for the fiscal year ended June 30, 1992);
first amendment thereto dated February 18, 1993;
second amendment thereto dated March 19, 1998.
10 (ah) Non-Qualified Stock Option Agreement, dated
December22, 1992, with John T. Beatty
(incorporated by referencefrom Exhibit
10(ah) to Registrant's Form 10-K for theyear
ended June 30, 1994)
10 (ai) Non-Qualified Stock Option Agreement,
dated December 22, 1992, with Lewis W. Essex
(incorporated by reference from Exhibit
10(ai) to Registrant's Form 10-K for the
year ended June 30, 1994).
40
10 (aj) Non-Qualified Stock Option Agreement,
dated December 22, 1992, with Harold Force
(incorporated by reference from Exhibit
10(aj) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (ak) Non-Qualified Stock Option Agreement, dated
December 22, 1992, with David W. Laitinen
(incorporated by reference from Exhibit 10(ak)
to Registrant's Form 10-K for the year ended
June 30, 1994).
10 (al) Non-Qualified Stock Option Agreement, dated
December 22, 1992, with Harvard W. Nolting, Jr
(incorporated by reference from Exhibit 10(al)
to Registrant's Form 10-K for the year ended
June 30, 1994).
10(am) Non-Qualified Stock Option Agreement, dated
August 24,1993, with John T. Beatty
(incorporated by reference from Exhibit
10(am) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (an) Non-Qualified Stock Option Agreement, dated
August 24,1993, with Lewis W. Essex (incorporated by
reference from Exhibit 10(an) to Registrant's
Form 10-K for the year ended June 30, 1994).
10 (ao) Non-Qualified Stock Option Agreement,
dated August 24, 1993, with Harold Force
(incorporated by reference from Exhibit
10(ao) to Registrant's Form 10-K for the
year ended June 30, 1994).
10 (ap) Non-Qualified Stock Option Agreement,
dated August 24, 1993, with David W.
Laitinen (incorporated by reference from
Exhibit 10(ap) to Registrant's Form 10-K for
the year ended June 30, 1994).
10 (aq) Non-Qualified Stock Option Agreement, dated
August 24, 1993, with Harvard W. Nolting, Jr.
(incorporated by reference from Exhibit 10(aq)
to Registrant's Form 10-K for the year ended
June 30, 1994).
10 (ar) Rights Agreement, dated as of November 22,
1994, between Registrant and LaSalle National
Bank, Chicago, Illinois, as Rights Agent
(incorporated by reference from Exhibit 1 to
Registrant's Registration Statement on Form
8-A filed with the SEC on December 5, 1994).
10 (as) 1995 Stock Option Plan (incorporated by reference
from Exhibit A to Registrant's Proxy Statement
for its 1995 annual shareholder meeting).
13 1998 Shareholder Annual Report
21 Subsidiaries of the Registrant (incorporated
by reference from Exhibit 21 to Registrant's
Form 10-K for the year ended June 30, 1993).
23.1 Independent Auditors' Consent.
27 Financial Data Schedule (to be filed electronically)