Back to GetFilings.com
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, 1999
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.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of September 13, 1999, was $109,331,667.
The number of shares of the Registrant's Common Stock, no par value, outstanding
as of September 13, 1999, was 4,870,601 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1999,
are incorporated into Part II. Portions of the Proxy Statement for the 1999
annual meeting of shareholders are incorporated into Part I and Part III.
Exhibit Index on Page 40
Page 2 of 43 Pages
- 2 -
HOME FEDERAL BANCORP
FORM 10-K
INDEX
Forward Looking Statements......................................................... 4
Item 1. Business ................................................................. 4
Item 2. Properties ............................................................... 33
Item 3. Legal Proceedings ........................................................ 34
Item 4. Submission of Matters to a Vote of Security Holders ...................... 34
Item 4.5 Executive Officers of Home Federal Bancorp ............................... 34
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .... 34
Item 6. Selected Financial Data .................................................. 36
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................... 36
Item 7. A Quantitative and Qualitative Disclosures About Market Risk ............. 36
Item 8. Financial Statements and Supplementary Data .............................. 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................... 37
Item 10. Directors and Executive Officers of the Registrant ....................... 37
Item 11. Executive Compensation ................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management ........... 37
Item 13. Certain Relationships and Related Transactions ........................... 37
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......... 38
SIGNATURES ........................................................................ 39
- 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"or "HFSB").
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 MAC network of
automated teller machines at nine locations in Seymour, Columbus, North Vernon
and Batesville. On line banking and telephone banking are also available to Home
Federal Savings Bank customers. 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.
Management analyzes the operation of Home Federal Bancorp assuming one
operating segment, community banking services. Home Federal directly and,
through its service corporation subsidiary, indirectly offers a wide range of
consumer and commercial community banking services. These services include: (i)
residential and commercial real estate loans; (ii) NOW accounts; (iii) regular
and term savings accounts and savings certificates; (iv) 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
- 4 -
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, 1999, approximately 19.0% of
its loans were consumer-related loans and 17.8% of its loans were commercial
mortgage and multi-family loans. Home Federal also makes construction loans,
which constituted 10.9% of Home Federal's loans at June 30, 1999. Finally, Home
Federal makes commercial loans, which constituted 9.4% of its loans at June 30,
1999.
- 5 -
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.
At June 30,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
TYPE OF LOAN (Dollars in Thousands)
First mortgage loans:
One-to-four family residential loans $248,846 41.0% $268,133 43.6% $300,531 50.1% $278,118 51.3% $268,509 55.3%
Commercial and multi-family ........ 107,908 17.8% 97,469 15.8% 79,696 13.3% 73,853 13.6% 63,215 13.0%
Loans on property under construction 65,997 10.9% 77,227 12.5% 54,504 9.1% 40,407 7.4% 23,982 4.9%
Loans on unimproved acreage ........ 11,611 1.9% 4,664 0.8% 4,192 0.7% 3,252 0.6% 2,554 0.5%
Second mortgage, home equity ............ 68,873 11.3% 65,321 10.6% 63,658 10.6% 50,372 9.3% 40,536 8.4%
Commercial loans ........................ 56,956 9.4% 50,890 8.3% 43,112 7.2% 40,609 7.5% 28,881 6.0%
Consumer loans .......................... 9,250 1.5% 10,347 1.7% 11,017 1.8% 11,952 2.2% 11,392 2.3%
Auto loans .............................. 21,764 3.6% 23,194 3.8% 23,086 3.8% 20,883 3.8% 21,506 4.4%
Mobile home loans ....................... 12,048 2.0% 14,349 2.3% 16,613 2.8% 18,833 3.5% 20,258 4.2%
Savings accounts loans .................. 3,826 0.6% 4,071 0.7% 3,989 0.7% 4,199 0.8% 4,407 0.9%
--------------------------------------------------------------------------------------
Gross loans receivable ............. $607,079 100.0% $615,665 100.0% $600,398 100.0% $542,478 100.0% $485,240 100.0%
======================================================================================
TYPE OF SECURITY
Residential:
One to four family ................. $347,049 57.2% $366,319 59.5% $397,962 66.3% $358,003 66.0% $326,296 67.2%
Multi-dwelling units ............... 30,358 5.0% 19,003 3.1% 22,166 3.7% 23,807 4.4% 20,488 4.2%
Commercial real estate .................. 114,217 18.8% 122,828 20.0% 78,261 13.0% 60,940 11.2% 49,458 10.2%
Commercial .............................. 56,956 9.4% 50,890 8.3% 43,112 7.2% 40,609 7.5% 28,881 6.0%
Mobile home ............................. 12,048 2.0% 14,349 2.3% 16,613 2.8% 18,833 3.5% 20,258 4.2%
Savings account ......................... 3,826 0.6% 4,071 0.7% 3,989 0.7% 4,199 0.8% 4,407 0.9%
Auto .................................... 21,764 3.6% 23,194 3.8% 23,086 3.8% 20,883 3.8% 21,506 4.4%
Other consumer .......................... 9,250 1.5% 10,347 1.7% 11,017 1.8% 11,952 2.2% 11,392 2.3%
Land acquisition ........................ 11,611 1.9% 4,664 0.8% 4,192 0.7% 3,252 0.6% 2,554 0.5%
--------------------------------------------------------------------------------------
Gross loans receivable ............. $607,079 100.0% $615,665 100.0% $600,398 100.0% $542,478 100.0% $485,240 100.0%
======================================================================================
LOANS RECEIVABLE-NET
Gross loans receivable .................. $607,079 103.4% $615,665 105.8% $600,398 104.3% $542,478 104.3% $485,240 103.3%
Deduct:
Undisbursed portion of loans in process . (15,285) -2.6% (28,691) -4.9% (20,519) -3.6% (18,249) -3.5% (11,291) -2.4%
Deferred net loan fees .................. (527) -0.1% (690) -0.1% (560) -0.1% (963) -0.2% (1,069) -0.2%
Allowance for loan losses ............... (4,349) -0.7% (4,243) -0.7% (3,649) -0.6% (3,061) -0.6% (2,806) -0.6%
Unearned discounts ...................... -- 0.0% (1) 0.0% (5) 0.0% (19) 0.0% (53) 0.0%
Purchase discount ....................... -- 0.0% -- 0.0% (41) 0.0% (89) 0.0% (138) 0.0%
---------------------------------------------------------------------------------------
Net loans receivable ............... $586,918 100.0% $582,040 100.0% $575,624 100.0% $520,097 100.0% $469,883 100.0%
=======================================================================================
- 6 -
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:
Balance Maturites in Fiscal
Outstanding 2003 2005 2010 2014
At June 30, to to to and
1999 2000 2001 2002 2004 2009 2014 thereafter
---- ---- ---- ---- ---- ---- ---- ----------
(In Thousands)
Real estate .............. $368,365 $ 2,121 $ 2,249 $ 1,206 $13,949 $ 86,236 $70,980 $191,624
Mortgage-backed
certificates,
collateralized
mortgage obligations 9,660 339 880 554 2,899 1,238 2,942 808
Construction Loans ....... 65,997 9,412 5,670 4,180 7,641 4,985 7,647 26,462
Commercial loans ......... 56,956 19,157 9,137 5,919 7,295 9,764 3,488 2,196
Other loans .............. 115,761 10,137 8,830 7,779 36,644 38,227 13,129 1,015
-----------------------------------------------------------------------------
Total .............. $616,739 $41,166 $26,766 $19,638 $68,428 $140,450 $98,186 $222,105
=============================================================================
Interest Rate Sensitivity:
Due After June 30, 2000
-----------------------
Fixed Variable Rate
Rate and Balloon
---- -----------
(In Thousands)
Real estate ............................ $ 73,156 $293,085
Mortgage-backed certificates,
collateralized mortgage obligations 8,768 554
Construction Loans ..................... 222 56,364
Commercial loans ....................... 12,700 25,099
Other loans ............................ 62,526 43,099
------- -------
Total ............................. $157,372 $418,201
======= =======
- 7 -
Residential Mortgage Loans
Approximately 97.5% 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, 1999, $281.4 million, or 46.4%,
of Home Federal's total loan portfolio consisted of residential first mortgage
loans, $248.8 million, or 41.0%, 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.
Commercial Mortgage Loans
At June 30, 1999, 25.2% 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
- 8 -
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, 1999, had a balance of $3.7 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, 1999, 10.9% 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, 1999, was $3.7 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 places some
restrictions on the ability of thrifts to make 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 $115.8 million on June 30, 1999, or approximately 19.0%
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,
1999, Home Federal had $29.2 million of second mortgage loans, which equaled
4.8% of its total loan portfolio. Home Federal aggressively markets home equity
credit lines, which are adjustable-rate loans. As of June 30, 1999, Home Federal
had $39.6 million drawn on its home equity loans, or 6.5% of its total loan
portfolio, with $54.5 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,
1999, $21.8 million, or 3.6%, of Home Federal's total loan portfolio consisted
of automobile loans.
- 9 -
As of June 30, 1999, $12.0 million, or 2.0%, 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, 1999, $3.8 million, or
0.6%, 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, 1999, $57.0 million, or
9.4%, 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. Additionally
HFSB utilizes Freddie Mac's Loan Prospector as an origination, processing, and
underwriting tool. 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, in conjunction with the land value. Home Federal also
evaluates the feasibility of the construction project and the experience and
track record of the builder or developer.
- 10 -
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 $217.5 million of fixed-rate loans in the fiscal year ended
June 30, 1999. 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 25 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, 1999, Home Federal serviced $461.5 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.
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 financial analysis of the loan. Servicing of loans
purchased is generally done by the seller. At June 30, 1999, others serviced
approximately 1.8%, or $10.8 million, of Home Federal's gross loan portfolio.
- 11 -
The following table shows loan activity for Home Federal during the periods
indicated:
Year Ended June 30,
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Gross loans receivable at beginning of periods ................. $ 615,665 $ 600,398 $ 542,478
--------- --------- ---------
Loans Originated:
Mortgage loans and contracts:
Construction:
Residential ....................................... 39,624 45,857 39,116
Commercial ........................................ 14,547 38,310 22,784
Purchases:
Residential ....................................... 122,428 117,474 113,265
Commercial ........................................ 27,219 22,206 16,107
Refinancing ........................................... 169,425 169,202 56,911
Other ................................................. 1,527 3,188 6,462
--------- --------- ---------
Total ............................................. 374,770 396,237 254,645
Commercial ................................................ 73,439 39,274 34,709
Consumer .................................................. 34,501 38,166 38,150
--------- --------- ---------
Total loans originated ................................ 482,710 473,677 327,504
Loans purchased:
Commercial ............................................ 4,917 6,815 947
--------- --------- ---------
Total loans originated and purchased .............. 487,627 480,492 328,451
Real estate loans sold .................................... 217,530 211,365 81,309
Loan repayments and other deductions ...................... 278,683 253,860 189,222
--------- --------- ---------
Total loans sold, loan repayments and other deductions 496,213 465,225 270,531
--------- --------- ---------
Net loan activity ......................................... (8,586) 15,267 57,920
--------- --------- ---------
Gross loans receivable at end of period ................... 607,079 615,665 600,398
Adjustments ............................................... (20,161) (33,625) (24,774)
--------- --------- ---------
Net loans receivable at end of period ..................... $ 586,918 $ 582,040 $ 575,624
========= ========= =========
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, 1999 under the 15% of capital limitation was $10.9 million.
At that date, the highest outstanding balance of loans by Home Federal to one
borrower and related entities was approximately $7.9 million, an amount within
such loans-to-one borrower limitations.
- 12 -
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 commencing on the 16th day following a specific due date. Between the 30th
and 60th 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, 1999, Home Federal held $2.1 million 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.
- 13 -
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,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Non-performing Assets:
Loans:
Non-accrual .............................. $3,509 $3,992 $2,930 $2,871 $2,431
Past due 90 days or more ................. -- -- 40 89 81
Restructured loans ............................ 61 -- 1 1 102
Total non-performing loans .................... 3,570 3,992 2,971 2,961 2,614
Real estate owned, net (1) .................... 1,936 117 51 -- --
Other repossessed assets, net ................. 114 125 88 48 41
------ ------ ------ ------- ------
Total non-performing assets .............. $5,620 $4,234 $3,110 $3,009 $2,655
====== ====== ====== ====== ======
Total non-performing assets to total assets (2) .75% 0.59% 0.46% 0.48% 0.45%
Loans with allowance for uncollected interest . $3,509 $3,993 $2,930 $2,872 $2,531
(1) Refers to real estate acquired by Home Federal through foreclosure,
voluntary deed, or insubstance foreclosure, net of reserve.
(2) At June 30, 1999, 43.6% of Home Federal's non-performing assets consisted
of residential mortgage loans, 0.1% consisted of commercial real estate
loans, 12.8% consisted of commercial loans, 5.9% consisted of
consumer-related loans, 1.1% consisted of restructured residential loans,
36.5% consisted of real estate owned and other repossessed assets, 59.1% of
which consisted of commercial real estate loans. The increase in real
estate owned is due primarily to the repossession of a single commercial
property of $1.2 million, represented by an apartment complex.
For the year ended June 30, 1999, the income that would have been
recorded under original terms on the above non-accrual and restructured loans
was $453,000 compared to actual income recorded of $233,000. At June 30, 1999,
Home Federal had approximately $3.8 million in loans that were 30-89 days past
due.
The allowance for loan losses represents amounts available to absorb
losses inherent in the loan portfolio. 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
appropriate by management.
For the year ended June 30, 1999, Home Federal charged off loans
totaling $1.1 million and realized recoveries of $85,000 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 $1.1 million to adjust the allowance to $4.3
million as of June 30, 1999.
- 14 -
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, 1999, 1998, and
1997, Home Federal had approximately $90.0 million, $72.2 million and $56.7
million in investments, respectively.
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, 1999, Home Federal had
liquid assets of $110.6 million, and a liquidity ratio of 20.4%, 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)
- 15 -
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.
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, 1999, were as follows:
Minimum Weighted
Opening Balance at % of Average
Type of Account Balance June 30, 1999 Deposits Rate
- --------------- ----------------------------------------
(Dollars in
Thousands)
Withdrawable:
Non-interest bearing ......... $ 1 $ 35,532 6.1%
Passbook ..................... 1 48,026 8.3% 2.08%
Money market savings ......... 1,000 106,586 18.4% 4.18%
NOW .......................... 1 53,040 9.1% 1.68%
-------- ------ ----
Total withdrawable ........ 243,184 41.9% 2.61%
-------- ------ ----
Certificates (original terms):
Less than 1 year ............. 500 87,499 15.1% 4.80%
12 to 23 months .............. 500 114,908 19.8% 5.02%
24 to 35 months .............. 500 75,914 13.1% 5.34%
36 to 59 months .............. 500 11,908 2.1% 5.29%
60 to 120 months ............. 500 46,469 8.0% 6.03%
-------- ------ ----
Total certificates ....... 336,698 58.1% 5.18%
-------- ------ ----
Total deposits ............... $579,882 100.0% 4.10%
======== ====== ====
The following table sets forth by nominal interest rate categories the
composition of deposits of Home Federal at the dates indicated:
At June 30,
-----------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Non-interest bearing and below 2.99% $136,598 $123,348 $117,394
3.00% - 4.99% ...................... 225,362 119,234 106,914
5.00% - 6.99% ...................... 216,808 298,774 298,811
7.00% - 9.00% ...................... 1,114 2,633 4,669
-------- -------- --------
Total .............................. $579,882 $543,989 $527,788
======== ======== ========
- 16 -
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
1999 Deposits(Decrease) 1998 Deposits Decrease) 1997 Deposits (Decrease)
---- -------- -------- ---- ------- -------- ---- ------- --------
Withdrawable:
Non-interest bearing ....... $ 35,532 6.1% $ 10,430 $ 25,102 4.6% $ 1,596 $ 23,506 4.5% $ 1,528
Passbook ................... 48,026 8.3% 387 47,639 8.8% (804) 48,443 9.3% (10,545)
Money market savings ....... 106,586 18.4% 29,453 77,133 14.2% 12,370 64,763 12.3% 39,575
NOW ........................ 53,040 9.1% 2,855 50,185 9.2% 4,952 45,233 8.6% (3,645)
------------------------------------------------------------------------------------
Total Withdrawable ....... 243,184 41.9% 43,125 200,059 36.8% 18,114 181,945 34.5% 26,913
------------------------------------------------------------------------------------
Certificates:
Less than one year ......... 87,499 15.1% (16,421) 103,920 19.1% 6,619 97,301 18.4% 13,471
12 to 23 months ............ 114,908 19.8% (9,158) 124,066 22.8% 13,824 110,242 20.9% 15,760
24 to 35 months ............ 75,914 13.1% 23,618 52,296 9.6% (7,561) 59,857 11.3% (11,375)
36 to 59 months ............ 11,908 2.1% (2,893) 14,801 2.7% (7,795) 22,596 4.3% (4,312)
60 to 120 months ........... 46,469 8.0% (2,378) 48,847 9.0% (7,000) 55,847 10.6% (2,242)
------------------------------------------------------------------------------------
Total certificate accounts 336,698 58.1% (7,232) 343,930 63.2% (1,913) 345,843 65.5% 11,302
------------------------------------------------------------------------------------
Total deposits ....... $579,882 100.0% $ 35,893 $543,989 100.0% $16,201 $527,788 100.0% $ 38,215
====================================================================================
- 17 -
The following table represents, by various interest rate categories, the amounts
of deposits maturing during each of the three years following June 30, 1999, and
the percentage of such maturities to total deposits. Matured certificates which
have not been renewed as of June 30, 1999 have been allocated based upon certain
rollover assumptions.
DEPOSITS MATURITIES
(Dollars in Thousands)
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, 2000................. $ 1,145 $101,421 $101,255 $ 24,691 $ 620 $229,132 68.1%
June 30, 2001................. 126 11,962 52,671 5,757 11 70,527 20.9%
June 30, 2002................. -- 1,693 9,118 8,754 241 19,806 5.9%
Thereafter ................... -- 2,429 9,326 5,236 242 17,233 5.1%
---------------------------------------------------------------------------
$ 1,271 $117,505 $172,370 $ 44,438 $ 1,114 $336,698 100.0%
===========================================================================
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, 1999 of certificates of greater
than $100,000 by maturity.
ACCOUNTS GREATER THAN $100,000
(Dollars in Thousands)
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, 2000............................ $ 101 $21,744 $49,563 $ 4,882 $ 540 $76,830 85.9%
June 30, 2001............................ 126 -- 5,542 1,645 -- 7,313 8.2%
June 30, 2002............................ -- 110 534 1,934 136 2,714 3.0%
Thereafter .............................. -- -- 850 1,538 215 2,603 2.9%
------------------------------------------------------------------
$ 227 $21,854 $56,489 $ 9,999 $ 891 $89,460 100.0%
==================================================================
- 18 -
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, 1999, Home Federal had advances totaling $87.9
million outstanding from the FHLB of Indianapolis.
On October 8, 1998, the Company entered into a revolving note with
LaSalle Bank N.A. whereby the Company may borrow up to $7 million. The note
accrues interest at a variable rate based on the ninety-day LIBOR index, on the
date of the draw, plus 150 basis points. Interest payments are due ninety days
after the date of any principal draws made on the loan and every ninety days
thereafter. The principal balance is due in full as of October 1, 1999. As of
June 30, 1999 the Company had a $1 million balance, consisting of two $500,000
draws accruing interest as of June 30, 1999 at 6.50% and 6.53%, respectively.
The Company used the funds attained to buy back shares of the Company's common
stock. The note is collateralized by the assets of the Company. Under terms of
the agreement, the Company is bound by certain restrictive debt convenants
relating to earnings, net worth and various financial ratios.
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.
For the year ended June 30,
1999 1998 1997
----- ---- ----
(Dollars in Thousands)
FHLB advances ............................... $34,500 $38,800 $33,200
Official check overnight remittance ......... $ 6,273 $ 8,710 $ 4,621
Money Order remittance ...................... $ 57 $ 44 $ --
FHLB overnight remittance ................... $ 420 $ 992 $ 49
---------------------------
Average amount of total short-term borrowings
outstanding ................................. $26,309 $32,934 $34,129
===========================
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.
At the year ended June 30,
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
FHLB advances:
Amount................. $ 11,300 $ 36,000 $ 33,200
Weighted average rate.. 6.1% 6.1% 6.7%
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.
- 19 -
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, 1999, Home Federal's aggregate investment in
HSC, including loans, was $7.1 million. For the year ended June 30, 1999, HSC
reported income of $412,000 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, 1999.
Date
HSC Loans from
Entered Home Federal
into the Equity Outstanding
Name Type of Project Project Investment June 30, 1999
- ---- --------------- ------- ---------- -------------
Consortium Partners Owns Family Financial Life Insurance 11/31/83 $ 617,000 $ -
Company of New Orleans
Coventry Associates Real Estate development 8/31/89 $ - $ -
in Seymour, Indiana
Heritage Woods II Rental Apartment project of low income 11/15/89 $ 85,000 $ -
housing (22 units)
Admirals Woods Real estate development 4/20/93 $ - $ -
in Indianapolis, Indiana
Home-Breeden Real estate development 7/1/94 $2,189,000 $ 1,714,557
in Columbus, Indiana
Crystal Lake at River Ridge Single family homes in Indianapolis, 11/29/97 $2,010,000 $ 2,031,217
Indiana
Bloomington Technology Industrial park in Bloomington, Indiana 11/10/97 $ 709,000 $ -
Park, LLC
Courtyard Homes at Single family homes in Indianapolis, 6/14/99 $1,480,000 $ 1,475,000
Sycamore Springs, LLC Indiana
- 20 -
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 30,1999, Home
Federal had income of $346,000, on a consolidated basis, from commissions and
dividends paid on Family Financial activities.
HSC markets Linsco Private Ledger full-service securities brokerage
services. For the year ended June 30, 1999, HSC received $605,000 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 is entitled to 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. The joint venture sold its final lot in fiscal 1999.
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 $1.7
million as of June 30, 1999, reflects the development costs to date of all six
phases, the condominium site and commercial acreage. HSC is entitled to 50% of
the profit from sale of lots within McCullough's Run.
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 is entitled
to 1/3 of the profits from their sale.
On November 10, 1997 HSC entered into an LLC agreement with
Wininger-Stolberg HC, II, Inc. to develop the Bloomington Technology Park in
Bloomington, IN. The City of Bloomington and Monroe County are providing an
$800,000 grant to build infrastructure. HSC will provide a matching amount. The
eighty-two acre site was purchased from Otis Elevator Company, Inc. and work
started late spring, 1998. HSC is entitled to a fee of $150,000 and 50% of all
profit from the sale of lots in Bloomington Technology Park.
On June 14, 1999, HSC entered into an LLC agreement with the Courtyard
Homes at Sycamore Springs, LLC to build 54 homes at the Sycamore Springs planned
community in Indianapolis, Indiana. The LLC purchased the land and will develop
lots and build the homes. HSC is entitled to one third of the profits from the
home sales.
- 21 -
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, 1999, Home Federal employed 255 persons on a full-time
basis and 12 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.
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 thrifts. Thrifts
may also acquire banks under federal law. To date, several bank holding company
acquisitions of healthy thrifts in Indiana have been completed. Affiliations
between banks and thrifts based in Indiana have increased 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 legislation also results 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.
- 22 -
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").
The U.S. Congress is currently considering broad financial reform
legislation, which could permit, subject to certain restrictions, bank holding
companies to acquire manufacturing and other nonfinancial companies, and permit
nonfinancial companies to acquire banks. Some versions of the proposed
legislation would also 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. Other versions of the proposed legislation
would require the Company to be regulated as a bank holding company rather than
as a savings and loan holding company, and 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.
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS and a schedule
of fees for the various types of applications and filings made by savings
associations with the OTS. The OTS recently amended how saving associations
calculate their semi-annual assessments under this regulation by establishing a
marginal assessment rate that decreases as the asset size of a savings
association increases, and includes a fixed-cost component that is assessed on
all savings associations. The assessment rate that applies to a savings
association depends upon the institution's size, condition, and the complexity
of its operations. Home Federal's semi-annual assessment under this revised
regulation is approximately $70,000.
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, 1999, Home Federal's investment in stock of
the FHLB of Indianapolis was $5.8 million.
- 23 -
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, 1999, dividends paid to Home Federal by the FHLB of
Indianapolis totaled $455,000, 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.
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
Federal law requires that savings associations maintain an average
daily balance of liquid assets in a minimum amount not less than 4% or more than
10% of their withdrawable accounts plus short-term borrowings. Liquid assets
include cash, certain time deposits, certain bankers' acceptances, specified
U.S. government, state or federal agency obligations, certain corporate debt
securities, commercial paper, certain mutual funds, certain mortgage-related
securities, and certain first-lien residential mortgage loans. The OTS recently
amended its regulation that implements this statutory liquidity requirement to
reduce the minimum amount of liquid assets a savings association must hold from
5% of net withdrawable accounts and short-term borrowings to 4%. The OTS also
eliminated the requirement that savings associations maintain short-term liquid
assets constituting at least 1% of their average daily balance of net
withdrawable deposit accounts and current borrowings. The revised OTS rule also
permits savings associations to calculate compliance with the liquidity
requirement based upon their average daily balance of liquid assets during each
quarter rather than during each month, as was required under the prior rule. The
OTS may impose monetary penalties on savings associations that fail to meet
these liquidity requirements. As of June 30, 1999, Home Federal had liquid
assets of $111.8 million, and a regulatory liquidity ratio of 20.4%.
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,
- 24 -
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.
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 with the highest supervisory rating for
safety and soundness maintain "core capital" of at least 3% of total assets. All
other savings associations must maintain core capital of at least 4% to 5%. 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, 1999, based on the capital
standards then in effect, Home Federal was in compliance with all capital
requirements.
- 25 -
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, 1999, would have no additional capital
requirement. The Bank's management continues to monitor its interest rate risk
position.
- 26 -
The following is a summary of Home Federal's regulatory capital and
capital requirements at June 30, 1999:
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, 1999
Tangible capital (to total assets).. $ 61,711 8.38% $11,043 1.50% N/A N/A
Core capital (to total assets)...... $ 61,711 8.38% $29,447 4.00% N/A N/A
Total risk-based capital
(to risk-weighted assets)........ $ 65,235 11.44% $45,617 8.00% $57,021 10.00%
Tier 1 risk-based capital
(to risk-weighted assets)........ $ 61,711 10.82% N/A N/A $34,213 6.00%
Tier 1 leverage capital
(to average assets).............. $ 61,711 8.42% N/A N/A $36,664 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,
1999, 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
The OTS recently adopted a regulation, which became effective on April
1, 1999, that revised the restrictions that apply to "capital distributions" by
savings associations. The amended regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
- 27 -
The amended regulation exempts certain savings associations from the
requirement under the previous regulation that all savings associations file
either a notice or an application with the OTS before making any capital
distribution. As revised, the regulation requires a savings association to file
an application for approval of a proposed capital distribution with the OTS if
the association is not eligible for expedited treatment under OTS's application
processing rules, or the total amount of all capital distributions, including
the proposed capital distribution, for the applicable calendar year would exceed
an amount equal to the savings association's net income for that year to date
plus the savings association's retained net income for the preceding two years
(the "retained net income standard"). At June 30, 1999, Home Federal's retained
net income standard was $8.2 million. A savings association must also file an
application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because Home
Federal is a subsidiary of a savings and loan holding company, this latter
provision will require, at a minimum, that Home Federal file a notice with the
OTS 30 days before making any capital distributions to the Company.
- 28 -
In addition to these regulatory restrictions, Home Federal's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Company. The Plan of Conversion requires Home Federal to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders and prohibits Home Federal
from making capital distributions to the Company if its net worth would be
reduced below the amount required for the liquidation account.
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, earnings standards and interest rate sensitivity 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.
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
- 29 -
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, 1999, 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.
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.
- 30 -
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).
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, 1999, 66.5% 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
- 31 -
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.
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 is no longer able to use the percentage of
taxable income method of computing its allocable tax bad debt deduction. Home
Federal is 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 began recapturing
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.
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. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," was issued in June 1998 and
amended by Statement of Financial Accounting Standards No. 137 ("SFAS 137"),
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS 133". SFAS 133, as amended by SFAS 137, is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. This
statement establishes accounting and reporting standards for derivative
- 32 -
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.
Item 2. Properties.
At June 30, 1999, 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, 1999,
is presented in the following table:
Net Book Value of
Property, Approximate
Description and Owned or Furniture and Square Lease
Address Leased Fixtures Footage Expiration
------- ------ -------- ------- ----------
(Dollars in Thousands)
Principal Office
222 West Second Street Owned $ 2,212 9,200 N/A
Operations Center
218 West Second Street Owned $ 504 20,000 N/A
Loan Processing Center
211 North Chestnut Owned $ 304 5,130 N/A
Branch Offices:
Columbus Branches:
501 Washington Street Owned $ 1,277 14,800 N/A
3805 25th Street Owned $ 321 5,800 N/A
2751 Brentwood Drive Owned $ 495 3,200 N/A
4330 West Jonathon Moore Pike Owned $ 717 2,600 N/A
Hope Branch 1/2 Owned $ 49 2,000
332 Jackson Street 1/2 Leased 4/2002
Austin Branch
67 West Main Street Owned $ 61 3,600 N/A
Brownstown Branch Month to
101 North Main Street Leased $ 28 2,400 Month
North Vernon Branches
111 North State Street Owned $ 400 1,900 N/A
1540 North State Street Leased $ 54 1,600 10/2002
Osgood Branch
South Buckeye Street Owned $ 125 1,280 N/A
Salem Branch
1208 South Jackson Owned $ 871 1,860 N/A
- 33 -
Net Book Value of
Property, Approximate
Description and Owned or Furniture and Square Lease
Address Leased Fixtures Footage Expiration
------- ------ -------- ------- ----------
(Dollars in Thousands)
Seymour Branch
1117 East Tipton Street Owned $ 527 6,800 N/A
Batesville Branch
12 West Pearl Street Owned $ 657 2,175 N/A
Madison Branch
201 Clifty Drive Owned $ 496 2,550 N/A
Greensburg Branch
115 East North Street Leased $ 31 2,440 8/99
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.
The Bank has sued one of its depositors in the Jackson County Circuit
Court in Brownstown, Indiana, to recover amounts lost as a result of his
cashing of bad checks (in the aggregate amount of $298,000), plus treble
damages, costs, and fees. The depositor has counterclaimed for damages
resulting from certain actions the Bank has taken to protect its rights
with respect to this matter, including the freezing of the depositor's
savings account at the Bank.
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, 1999.
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 59) 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 39) 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 52) 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
- 34 -
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 1999 Shareholder Annual Report (the "Shareholder
Annual Report"). As of June 30, 1999, there were 526 shareholders of record of
HFB's Common Stock.
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, is limited. 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, 1999, 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.
- 35 -
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 Operations.
The information required by this item is incorporated by reference to
pages 6 to 15 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
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 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, 1999,
these price indications varied from 75.60 to 115.25 for fixed rate mortgages and
mortgage-backed securities and varied from 91.47 to 106.52 for adjustable rate
mortgages and mortgage-backed securities. Prepayment rates for June 30, 1999,
ranged from a constant prepayment rate ("CPR") of 6% to a CPR of 43%.
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, 1999, the retail CD price assumptions
varied from 77.35 to 118.2. 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, 1999, the retail CD intangible
price assumptions varied from .07 to 1.14.
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, 1999, the intangible prices
for transaction accounts, money market deposit accounts and passbook accounts
varied from -1.67 to 18.02 , -.43 to 11.45 and -.65 to 13.32, respectively.
- 36 -
The following table sets forth the Bank's interest rate sensitivity of NPV as of
June 30, 1999. (dollars in thousands)
Net Portfolio Value NPV as % of PV of Assets
Change
In Rates $ Amount $ Change % Change NPV Ratio Change
+300 bp 82,148 ( 6,483) (7) 11.15 % ( 50) bp
+200 bp 85,508 ( 3,123) (4) 11.46 % ( 18) bp
+100 bp 87,790 ( 842) (1) 11.64 % - bp
0 bp 88,631 - - 11.65 % -
-100 bp 88,040 ( 592) (1) 11.48 % ( 16) bp
-200 bp 87,932 ( 700) (1) 11.38 % ( 27) bp
-300 bp 88,809 177 - 11.38 % ( 27) bp
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and Notes thereto
contained on pages 16 to 33 of the Shareholder Annual Report are incorporated
herein by reference. HFB's Quarterly Results of Operations contained on page 5
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 1999 annual shareholder meeting (the "1999 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 16 of the 1999 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 1999 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 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 11 of the 1999 Proxy Statement.
- 37 -
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:
Financial Statements Page in
1999
Shareholder
Annual Report
Consolidated Balance Sheets as of
June 30, 1999 and 1998 16
Consolidated Statements of Income for each of
the years in the three-year period ended
June 30, 1999 17
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended June 30, 1999 18
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
June 30, 1999 19
Notes to Consolidated Financial Statements 20
Report of Deloitte & Touche LLP
Independent Auditors 34
(b) Reports on Form 8-K
Registrant has filed no reports on Form 8-K for the quarter ending June
30, 1999.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page 40.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
- 38 -
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 28th day
of September, 1999.
HOME FEDERAL BANCORP
DATE: September 28, 1999 /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 28th day of September,
1999.
/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. Laitinen /s/ Harvard W. Nolting. Jr.
- --------------------- ---------------------------
David W. Laitinen, Director Harvard W. Nolting, Jr., Director
- 39 -
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 Registration 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, second and third
amendments thereto incorporated by reference to
Exhibit 10(c) of Registrants Form 10-K for
the year ended June 30, 1998.
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, second and third
amendments thereto incorporated by reference to
Exhibit 10(d) of Registrants Form 10-K for
the year ended June 30, 1998.
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 and second
amendments thereto incorporated by reference to
Exhibit 10(f) of Registrants Form 10-K for
the year ended June 30, 1998.
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).
- 40 -
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).
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 and third
amendments thereto incorporated by reference to Exhibit
10(n) of Registrants Form 10-K for the year ended June 30,
1998.
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 and third amendments thereto
incorporated by reference to Exhibit 10(o)
of Registrants Form 10-K for the year ended
June 30, 1998.
10(p) Executive Supplemental Retirement Income
Agreement with Elaine Pollert (incorporate
by reference from Exhibit 10(p) to Home
Federal Saving Bank's Form 10-K for the
fiscal year ended June 30, 1998) and First,
Second and Third Amendments to Executive
Supplemental Retirement Income Agreement
(incorporated by reference from Exhibit
10(p) to Registrant's Form 10-K for the
fiscal year ended June 30, 1998).
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).
and Second Amendment to Deferred
Compensation Agreement (incorporated by
reference from Exhibit 10(v) to Registrant's
Form 10-K for the year ended June 30, 1998).
- 41 -
10(w) Employment Agreement with S. Elaine Pollert (incorporated by
reference from Exhibit l0(w) to Home Federal Savings Bank
Form 10-K for the fiscal year ended June 30, 1998); and
First Amendment to Employment Agreement (incorporated by
reference from Exhibit 10(w) to Registrant's Form 10-K for
the year ended June 30, 1998).
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);
and Second and Third Amendments 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, 1998).
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 and second amendments
thereto (incorporated by reference from
Exhibit 10(ac) to Registrant's Form 10-K for
the year ended June 30, 1998).
10(ad) Director Deferred Compensation Agreement
with Lewis Essex (incorporated by reference
from Exhibit 10(ad) to Home Federal Savings
Bank Form 10-K for the fiscal year ended
June 30, 1992); first and second amendments
thereto (incorporated by reference from
Exhibit 10(ad) to Registrant's Form 10-K for
the year ended June 30, 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, second and third
amendments thereto (incorporated by
reference from Exhibit 10(ae) to
Registrant's Form 10-K for the year ended
June 30, 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, second and third amendments
thereto (incorporated by reference from Exhibit 10(af) to
Registrant's Form 10-K for the year ended June 30, 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
and second amendments thereto (incorporated
by reference from Exhibit 10(ag) to
Registrant's Form 10-K for the year ended
June 30, 1998).
- 42 -
10(ah) Non-Qualified Stock Option Agreement, dated
December 22, 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).
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 1999 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).
- 43 -