SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: O-18847
HOME FEDERAL BANCORP
(Exact name of registrant as specified in its charter)
Indiana 35-1807839
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
501 Washington Street, Columbus, Indiana 47201
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (812) 522-1592
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 5, 2003.
Common Stock, no par value - 4,310,293 shares outstanding
HOME FEDERAL BANCORP
FORM 10-Q
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Forward looking statements 9
Critical accounting policies 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
HOME FEDERAL BANCORP
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited) September 30, December 31,
2003 2002
----------- --------------
ASSETS:
Cash $ 24,350 $ 27,404
Interest-bearing deposits 17,940 26,288
--------- ---------
Total cash and cash equivalents 42,290 53,692
--------- ---------
Securities available for sale at fair value (amortized cost $124,577
and $113,000) 124,755 114,440
Securities held to maturity (fair value $1,888 and $3,147) 1,829 3,026
Loans held for sale (fair value $11,738 and $31,055) 11,541 30,560
Loans receivable, net of allowance for loan losses of $7,361 and $7,172 627,005 628,883
Investments in joint ventures 6,140 6,710
Federal Home Loan Bank stock 9,965 9,965
Accrued interest receivable, net 3,753 4,289
Premises and equipment, net 12,750 12,973
Real estate owned 2,248 1,472
Prepaid expenses and other assets 9,778 8,259
Cash surrender value of life insurance 11,250 10,841
Goodwill 1,395 1,395
--------- ---------
TOTAL ASSETS $ 864,699 $ 886,505
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits $ 593,728 $ 609,358
Advances from Federal Home Loan Bank 158,596 171,635
Senior debt 14,242 14,242
Other borrowings 3,301 1,867
Advance payments by borrowers for taxes and insurance 575 229
Accrued expenses and other liabilities 12,208 11,380
--------- ---------
Total liabilities 782,650 808,711
--------- ---------
Shareholders' equity:
No par preferred stock; Authorized: 2,000,000 shares
Issued and outstanding: None
No par common stock; Authorized: 15,000,000 shares
Issued and outstanding: 11,828 9,184
4,289,543 shares at September 30, 2003
4,228,859 shares at December 31, 2002
Retained earnings, restricted 70,459 68,156
Accumulated other comprehensive (loss) income, net of taxes (238) 454
--------- ---------
Total shareholders' equity 82,049 77,794
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 864,699 $ 886,505
========= =========
See notes to consolidated financial statements (unaudited)
HOME FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
(unaudited) Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
Interest income: 2003 2002 2003 2002
------------- ------------- ------------- --------------
Loans receivable $ 10,175 $ 11,719 $ 31,498 $ 35,252
Securities available for sale and held to maturity 916 1,482 2,958 4,443
Other interest income 69 76 304 342
------------- ------------- ------------- --------------
Total interest income 11,160 13,277 34,760 40,037
------------- ------------- ------------- --------------
Interest expense:
Deposits 2,910 3,851 9,411 11,850
Advances from Federal Home Loan Bank 2,316 2,644 7,073 8,030
Other borrowings 203 208 635 610
------------- ------------- ------------- --------------
Total interest expense 5,429 6,703 17,119 20,490
------------- ------------- ------------- --------------
Net interest income 5,731 6,574 17,641 19,547
Provision for loan losses 286 460 946 1,162
------------- ------------- ------------- --------------
Net interest income after provision for loan losses 5,445 6,114 16,695 18,385
------------- ------------- ------------- --------------
Other income:
Gain on sale of loans 2,479 1,386 6,778 3,039
Gain(loss) on sale of securities - 4 4 6
Income (loss) from joint ventures (54) 110 520 884
Insurance, annuity income, other fees 447 342 1,280 1,126
Service fees on deposit accounts 691 635 1,996 1,718
Net gain (loss) on real estate owned and repossessed assets 91 11 179 259
Loan servicing income, net of impairments 437 (116) 304 534
Miscellaneous 491 471 1,471 1,468
------------- ------------- ------------- --------------
Total other income 4,582 2,843 12,532 9,034
------------- ------------- ------------- --------------
Other expenses:
Compensation and employee benefits 3,371 2,747 9,511 8,485
Occupancy and equipment 749 699 2,274 2,108
Service bureau expense 237 225 712 682
Federal insurance premium 24 24 73 75
Marketing 146 87 485 371
Miscellaneous 1,410 1,025 3,803 3,263
------------- ------------- ------------- --------------
Total other expenses 5,937 4,807 16,858 14,984
------------- ------------- ------------- --------------
Income before income taxes 4,090 4,150 12,369 12,435
Income tax provision 1,462 1,559 4,513 4,640
------------- ------------- ------------- --------------
Net Income $ 2,628 $ 2,591 $ 7,856 $ 7,795
============= ============= ============= ==============
Basic earnings per common share $ 0.62 $ 0.60 $ 1.85 $ 1.79
Diluted earnings per common share $ 0.59 $ 0.57 $ 1.76 $ 1.70
Basic weighted average number of shares 4,242,653 4,326,078 4,254,417 4,354,749
Dilutive weighted average number of shares 4,441,024 4,542,569 4,470,121 4,585,294
Dividends per share $ 0.188 $ 0.150 $ 0.513 $ 0.450
See notes to consolidated financial statements (unaudited)
HOME FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Nine Months Ended
(unaudited) September 30,
----------------------------------
2003 2002
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,856 $ 7,795
Adjustments to reconcile net income to net cash
from operating activities:
Accretion of discounts, amortization and depreciation 1,643 1,373
Provision for loan losses 946 1,162
Net gain from sale of loans (6,778) (3,039)
Net gain from sale of investment securities (4) (6)
Income from joint ventures and net gain from real estate owned (699) (1,123)
Loan fees deferred (recognized), net (4) 29
Proceeds from sale of loans held for sale 346,787 173,967
Origination of loans held for sale (320,990) (181,160)
Decrease in accrued interest and other assets (3,222) (5,909)
Increase in other liabilities 1,303 4,818
------------ ------------
Net cash from operating activities 26,838 (2,093)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net principal received (disbursed) on loans 6,887 16,667
Proceeds from:
Maturities/Repayments of:
Securities held to maturity 1,204 1,493
Securities available for sale 124,194 24,323
Sales of:
Securities available for sale 27,312 5,897
Real estate owned and other asset sales 1,676 4,118
Purchases of:
Loans (5,951) (6,044)
Securities available for sale (163,590) (69,606)
Repayment of joint ventures 1,090 1,771
Investment in cash surrender value of life insurance - (528)
Acquisition of property and equipment (917) (885)
------------ ------------
Net cash from investing activities (8,095) (22,794)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (15,630) 18,777
Proceeds from advances from FHLB 7,000 15,900
Repayment of advances from FHLB (20,039) (24,829)
Proceeds from senior debt - 1,200
Net proceeds from (net repayment of) overnight borrowings 1,434 (782)
Common stock options exercised 2,853 1,165
Repurchase of common stock (3,574) (6,077)
Payment of dividends on common stock (2,189) (1,950)
------------ ------------
Net cash from financing activities (30,145) 3,404
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (11,402) (21,483)
Cash and cash equivalents, beginning of period 53,692 64,676
------------ ------------
Cash and cash equivalents, end of period $ 42,290 $ 43,193
============ ============
Supplemental information:
Cash paid for interest $ 17,132 $ 20,332
Cash paid for income taxes $ 4,430 $ 4,497
Assets acquired through foreclosure $ 3,166 $ 3,161
See notes to consolidated financial statements (unaudited)
Notes to Consolidated Financial Statements (unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Home Federal
Bancorp (the "Company") and its wholly-owned subsidiaries, HomeFed Financial,
Inc. and HomeFederal Bank (the "Bank") and the Bank's wholly owned subsidiaries.
These consolidated interim financial statements at September 30, 2003, and for
the three and nine month periods ended September 30, 2003, have not been audited
by independent auditors, but reflect, in the opinion of the Company's
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position and results of operations for
such periods, including elimination of all significant intercompany balances and
transactions.
These statements should be read in conjunction with the consolidated financial
statements and related notes, which are incorporated by reference in the
Company's Transition Report on Form 10-K for the six month period ended December
31, 2002.
2. Earnings Per Share
The following is a reconciliation of the weighted average common shares for the
basic and diluted earnings per share computations:
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
Basic EPS:
Weighted average common shares 4,242,653 4,326,078 4,254,417 4,354,749
============== ============= ============= =============
Diluted EPS:
Weighted average common shares 4,242,653 4,326,078 4,254,417 4,354,749
Dilutive effect of stock options 198,371 216,491 215,704 230,545
-------------- ------------- ------------- -------------
Weighted average common and
incremental shares 4,441,024 4,542,569 4,470,121 4,585,294
============== ============= ============= =============
3. Comprehensive Income
The following is a summary of the Company's total comprehensive income for the
interim three and nine month periods ended September 30, 2003 and 2002. (In
thousands)
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2003 2002 2003 2002
Net Income $ 2,628 $ 2,591 $ 7,856 $ 7,795
Unrealized holding gains (losses) from securities available for sale (1,046) (125) (1,262) 1,137
Reclassification adjustment for (gains) losses realized in income
- (4) (4) (6)
Unrealized gains (losses) from cash flow hedge 115 (245) 213 (409)
-----------------------------------------------------
Net unrealized gains (losses) (931) (374) (1,053) 722
Tax effect 317 143 361 (207)
-----------------------------------------------------
Other comprehensive income(loss), net of tax (614) (231) (692) 515
-----------------------------------------------------
Comprehensive Income $ 2,014 $ 2,360 $ 7,164 $ 8,310
=====================================================
4. Stock Based Compensation
The Company has stock-based employee compensation plans, which are accounted for
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the company had
applied the fair value recognition provisions of SFAS Statement No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation.
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------------------------------------------
(dollars in thousands, except share data) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------
Net income, as reported $2,628 $2,591 $7,856 $7,795
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (148) (25) (185) (348)
---------- ---------- ---------- ----------
Pro forma net income $2,480 $2,566 $7,671 $7,447
========== ========== ========== ==========
Earnings per share:
Basic---as reported $ .62 $ .60 $ 1.85 $ 1.79
Basic---pro forma $ .58 $ .59 $ 1.80 $ 1.71
Diluted---as reported $ .59 $ .57 $ 1.76 $ 1.70
Diluted---pro forma $ .56 $ .56 $ 1.72 $ 1.62
5. Segment Reporting
Management has concluded that the Company is comprised of a single operating
segment, community banking activities, and has disclosed all required
information relating to its one reportable segment. Management considers parent
company activity to represent an overhead function rather than an operating
segment. The Company operates in one geographical area and does not have a
single customer from which it derives 10 percent or more of its revenue.
6. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities," was issued in June 2002.
SFAS 146 addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002. As of September
30, 2003, there have been no such exit or disposal activities.
Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting
for Stock-Based Compensation--Transition and Disclosure, an amendment of SFAS
Statement No. 123," was issued in December 2002 and is effective for fiscal
years ending after December 15, 2002. SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method on reported
results. Management has included the new disclosure requirements in its
consolidated financial statements.
Statement of Financial Accounting Standards No. 149 ("SFAS 149"), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," was issued in
April 2003 and is effective for contracts entered into or modified after June
30, 2003, except as stated below and for hedging relationships designated after
June 30, 2003. In addition, except as stated below, all provisions of SFAS 149
are to be applied prospectively. The provisions of SFAS 149 that relate to
Statement 133 implementation issues that have been effective for fiscal quarters
that began prior to June 15, 2003, will continue to be applied in accordance
with their respective effective dates. SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Management has
determined the adoption of SFAS 149 did not have a material effect on its
consolidated financial statements.
Statement of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity," was issued in May 2003 and is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The requirements of SFAS 150
apply to issuers' classification and measurement of freestanding financial
instruments, including those that comprise more than one option or forward
contract. SFAS 150 does not apply to features that are embedded in a financial
instrument that is not a derivative in its entirety. Management has determined
the adoption of SFAS 150 did not have a material effect on its consolidated
financial statements
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that certain
guarantees must be recognized at fair value. FIN 45 also requires disclosure of
detailed information about each guarantee or group of guarantees. The disclosure
requirements are effective for financial statements ending after December 15,
2002. The recognition and measurement provisions of FIN 45 are applicable to
guarantees issued or modified after December 31, 2002. Management has determined
the adoption of FIN 45 did not have a material effect on its consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities - an Interpretation of Accounting
Research Bulletin (ARB) No. 51." FIN 46 requires the primary beneficiary to
consolidate a variable interest entity ("VIE") if it has a variable interest
that will absorb a majority of the entity's expected losses if they occur,
receive a majority of the entity's expected residual returns if they occur, or
both. FIN 46 applies immediately to VIEs created after January 31, 2003, and to
VIEs in which the entity obtains an interest after that date. Management has
determined the adoption of FIN 46 did not have a material effect on its
consolidated financial statements.
Part I, Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements that
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-Q are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-Q
identifies important factors that could cause such differences. These factors
include changes in interest rates, loss of deposits and loan demand to other
financial institutions, substantial changes in financial markets, changes in
real estate values and the real estate market, regulatory changes, changes in
the financial condition of issuers of the Company's investments and borrowers,
changes in economic condition of the Company's market area, increases in
compensation and employee expenses, or unanticipated results in pending legal
proceedings.
Home Federal Bancorp (the "Company") is organized as a financial holding company
and owns all the outstanding capital stock of HomeFederal Bank (the "Bank"). The
business of the Bank and therefore, the Company, is to provide consumer and
business banking services to certain markets in the south-central portions of
the State of Indiana. The Bank does business through 17 full service banking
branches.
CRITICAL ACCOUNTING POLICIES
The notes to the consolidated financial statements contain a summary of the
Company's significant accounting policies presented on pages 23 through 27 of
the transition report for the six month period ended December 31, 2002. Certain
of these policies are important to the portrayal of the Company's financial
condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Management believes that its critical accounting policies include
determining the allowance for loan losses, ("ALL"), and the valuation of
mortgage servicing rights, ("MSR's").
Allowance for loan losses
A loan is considered impaired when it is probable the Company will be unable to
collect all contractual principal and interest payments due in accordance with
the terms of the loan agreement. Impaired loans are measured based on the loan's
observable market price or the estimated fair value of the collateral if the
loan is collateral dependent. The amount of impairment, if any, and any
subsequent changes are included in the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to operating expense. Loan losses are charged against the allowance when
management believes the loans are uncollectible. Subsequent recoveries, if any,
are credited to the allowance.
The Company maintains an allowance for loan losses to absorb probable loan
losses inherent in the portfolio. The allowance for loan losses is maintained at
a level management considers to be adequate to absorb probable loan losses
inherent in the portfolio, based on evaluations of the collectibility and
historical loss experience of loans. The allowance is based on ongoing
assessments of the probable estimated losses inherent in the loan portfolio. The
Company's methodology for assessing the appropriate allowance level consists of
several key elements, as described below.
All delinquent loans that meet regulatory requirements are included on the Asset
Watch List. The Asset Watch List is reviewed quarterly by the Asset Watch
Committee for any classification beyond the regulatory rating based on a loan's
delinquency.
Commercial and commercial real estate loans are individually risk rated per the
loan policy. Homogenous loans such as consumer and residential mortgage loans
are not individually risk rated by management. They are risk rated based on
computer file data that management believes will provide a good basis for the
loans' quality. For all loans not listed individually on the Asset Watch List,
historical loss rates based on the last four years are the basis for developing
expected charge-offs for each pool of loans.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgment, reflect the impact of any
current conditions on loss recognition. Factors which management considers in
the analysis include the effects of the local economy, trends in the nature and
volume of loans (delinquencies, charge-offs, nonaccrual and problem loans),
changes in the internal lending policies and credit standards, collection
practices, and examination results from bank regulatory agencies and the
Company's internal credit review function.
Other factors used by management in determining the allowance are current
economic conditions, trends in the Company's loan portfolio delinquency, losses
and recoveries, level of under performing and nonperforming loans, and
concentrations of loans in any one industry. If Management were to underestimate
the allowance for loan losses, earnings could be reduced in the future as
increased provisions not offset by recoveries are made. Overestimations of the
required allowance could result in future increases in income as recoveries
increase or provisions for loan losses decrease.
Valuation of Mortgage Servicing Rights
The Company recognizes the rights to service mortgage loans as separate assets,
which are included in other assets in the consolidated balance sheet. The total
cost of loans when sold is allocated between loans and mortgage servicing
rights, ("MSR's"), based on the relative fair values of each. MSR's are
subsequently carried at the lower of the initial carrying value, adjusted for
amortization, or fair value. MSR's are evaluated for impairment based on the
fair value of those rights. The Company uses a present value cash flow valuation
model to establish the fair value of the MSR's. Factors included in the
calculation of fair value of the MSR's include, estimating the present value of
future net cash flows, market loan prepayment speeds for similar loans, discount
rates, servicing costs, and other economic factors. Servicing rights are
amortized over the estimated period of net servicing revenue. It is likely that
these economic factors will change over the life of the MSR's, resulting in
different valuations of the MSR's. The differing valuations will affect the
carrying value of the MSR's on the balance sheet as well as the income recorded
from loan servicing in the income statement. As of September 30, 2003, MSR's had
a carrying value of $3.4 million.
RESULTS OF OPERATIONS:
Quarter Ended September 30, 2003 Compared to Quarter Ended September 30, 2002
General
The Company reported net income of $2,628,000 for the quarter ended September
30, 2003, compared to $2,591,000 for the quarter ended September 30, 2002, an
increase of $37,000 or 1.4%. Basic earnings per common share for the current
quarter were $0.62 compared to $0.60 for the quarter ended September 30, 2002.
Diluted earnings per common share were $0.59 for the quarter ended September 30,
2003 compared to $0.57 for the quarter ended September 30, 2002.
Net Interest Income
Net interest income before provision for loan losses decreased by $843,000 or
12.8% for the quarter ended September 30, 2003, compared to the quarter ended
September 30, 2002. This decrease was due primarily to a 46 basis point, (a
basis point is defined as 1/100th of a percent), decrease in the net interest
margin to average interest earning assets, as yields on interest earning assets
declined more rapidly than the decline in the cost of funds. A factor that
positively influenced net interest margin was an increase of $11.3 million in
average interest earning assets versus an increase of $8.1 million in average
interest bearing liabilities for the three month period ended September 30,
2003, compared to the same quarter last year.
The provision for loan losses was $286,000 for the quarter ended September 30,
2003, a decrease of $174,000, compared to the quarter ended September 30, 2002.
At September 30, 2003, the loan loss allowance covered 180.5% of non-performing
loans. The $286,000 charge to the loan loss provision reflects the increase in
the commercial real estate and commercial portfolio as a percentage of the total
loan portfolio. Generally, commercial loans involve greater risk of loss to the
Bank than residential loans. Commercial loans typically involve larger loan
balances to single borrowers or groups of related borrowers and in the case of
commercial real estate loans, repayment is normally dependent on the successful
operation of the related project and may be subject to adverse conditions in the
real estate market or in the general economy. See the Critical Accounting
Policies, Allowance for Loan Losses section for a description of the systematic
analysis the Bank uses to determine its allowance for loan losses.
The change to the loan loss allowance for the three month period ended September
30, 2003 and 2002 is as follows:
Quarter ended September 30: (in thousands) 2003 2002
------------------------------------------- ------------ --------------
Allowance beginning balance $ 7,284 $ 6,451
Provision for loan losses 286 460
Charge-offs (229) (192)
Recoveries 20 14
------------ --------------
Loan Loss Allowance ending balance $ 7,361 $ 6,733
============ ==============
Allowance to Total Loans 1.14% 1.01%
Allowance to Nonperforming Assets 116% 105%
Net interest income after provision for loan loss decreased $669,000 or 10.9%
for the three month period ended September 30, 2003 compared to the three months
ended September 30, 2002.
Interest Income
Total interest income for the three month period ended September 30, 2003,
decreased $2,117,000, or 15.9%, over the same period of the prior year. This
decrease is primarily the result of a 114 basis point decrease in the weighted
average interest rate earned on interest earning assets for the quarter ended
September 30, 2003, as compared to the quarter ended September 30, 2002.
Interest Expense
Total interest expense for the three month period ended September 30, 2003
decreased $1,274,000, or 19.0%, as compared to the same period a year ago. The
factor that caused the decrease in interest expense mirrors the factor for the
decrease in interest income. The interest rate paid on interest bearing
liabilities declined 68 basis points in the quarter ended September 30, 2003, as
compared to the quarter ended September 30, 2002.
Other Income
Total other income for the three-month period ended September 30, 2003,
increased $1,739,000 or 61.2% over the same period a year ago. This increase was
primarily the result of an increase of $1,093,000 from the gain on sale of
loans. The Bank sold $118,617,000 loans in the secondary market in the quarter
ended September 30, 2003, as compared to $75,531,000 in the quarter ended
September 30, 2002, an increase of $43,086,000 in secondary market loan sales.
These increases in sales volume were the result of originations of residential
mortgages of $117,755,000 in the current quarter, as well as a reduction in the
loans held for sale portfolio of $19,019,000. Another factor increasing other
income is the $553,000 increase in loan servicing income, net of impairments,
for the current quarter compared to the same quarter of the prior year. Included
in loan servicing income is the amortization charge of mortgage servicing rights
and the impairment provision related to mortgage servicing rights. The
originated mortgage servicing rights asset is reviewed for impairment each
quarter. This asset is created when mortgage loans are sold and the lender
retains the servicing rights. The servicing rights are recognized as income at
the time the loan is sold and the servicing asset is also recorded. The asset is
then amortized as an expense to mortgage servicing income over the life of the
loan. The impairment charge is the recognition of the change in value of
mortgage servicing rights that result with changes in interest rates and loan
prepayment speeds. Mortgage servicing portfolios typically decline in value as
interest rates drop and increase in value as rates rise. The reason for this
decline in value is as rates drop, prepayment speeds increase causing the
average life of the servicing portfolio to shorten. This reduces the amount of
servicing income the Bank receives over time and thus reduces the value of the
servicing portfolio. If rates rise the opposite occurs, prepayments slow, the
average life of the mortgage servicing portfolio lengthens, increasing the
amount of servicing income the Bank receives over time thus increasing the value
of the servicing portfolio. In the three-month period ended September 30, 2003
the impairment charge was a recovery of a previously recorded impairment of
$260,000 as prepayment speeds slowed. This compared to an impairment charge of
$368,000 for the same period ending September 30, 2002. The difference was an
increase in income for the current period of $628,000 compared to the same
period a year ago. Additionally, other income increased $105,000 due to
increases in insurance, annuity income and other fees for the quarter ended
September 30, 2003, as compared to the same quarter last year. This increase in
insurance, annuity income and other fees included increased brokerage fees of
$28,000, as well as, one time pair off fees of $65,000 received from Freddie Mac
and Fannie Mae, related to non delivery of previously committed loans, which at
the time of scheduled contractual delivery to Freddie Mac or Fannie Mae, would
have been made at below market rates. Per the Bank's contract with Freddie Mac
and Fannie Mae, fees may be received by the Bank, or paid by the Bank, based on
market fluctuations.
A factor reducing other income for the three months ended September 30, 2003,
was a $164,000 decrease in the income from joint ventures. The primary reason
for the decrease was the result of an impairment charge against a joint venture
of $127,000. The impairment charge was the result of annual projected lot sales
being revised downward, which in turn reduced the cash flows expected from the
residential development joint venture.
Other Expenses
Other expense for the three month period ended September 30, 2003 increased
$1,130,000, or 23.5% over the three month period ended September 30, 2002. This
increase resulted from normal salary increases, a bonus accrual, increases in
retirement and health care costs, and increases from adding additional support
staff, that increased compensation and employee benefits $624,000 over the same
period last year. Additionally, miscellaneous expenses increased $385,000 in the
September 30, 2003 quarter, compared to the September 30, 2002 quarter, due to
various factors including consultant fees, personnel expenses related to hiring
new personnel, costs associated with a fall home equity advertising campaign and
one-time charges associated with upgrading flood insurance policies.
Nine months Ended September 30, 2003 Compared to Nine months Ended September 30,
2002:
General
The Company reported net income of $7,856,000, or $1.76 diluted earnings per
share, for the nine months ended September 30, 2003, compared to $7,795,000, or
$1.70 diluted earnings per share, for the same period a year ago, an increase of
$61,000 or a 3.4% increase in earnings per dilutive common share.
Net Interest Income
Net interest income before provision for loan losses decreased $1,906,000 or
9.8% for the nine month period ended September 30, 2003, compared to the same
period ended September 30, 2002.
The change to the loan loss allowance for the nine month period ended September
30, 2003 is as follows:
Nine months ended September 30: (in thousands) 2003 2002
---------------------------------------------- -------- -------
Allowance beginning balance $7,172 $6,144
Provision for loan losses 946 1,162
Charge-offs (882) (623)
Recoveries 125 50
-------- --------
Loan Loss Allowance $7,361 $6,733
======== ========
Allowance to Total Loans 1.14% 1.01%
Allowance to Nonperforming Assets 116% 105%
Net interest income after provision for loan losses decreased $1,690,000 or
9.2%.
Interest Income
Total interest income for the nine month period ended September 30, 2003
decreased $5,277,000, compared to the nine month period ended September 30,
2002. The nine month period decrease was due to a decrease of 108 basis points
on the weighted average yield earned on interest earning assets.
Interest Expense
Total interest expense for the nine month period ended September 30, 2003
decreased $3,371,000, compared to the nine month period ended September 30,
2002. Similar to the decrease in interest income, the decrease in interest
expense was due to a 66 basis point decrease in the weighted average cost of
funds for the nine month period ended September 30, 2003, as compared to the
same period ended September 30, 2002.
Other Income
Total other income for the nine month period ended September 30, 2003 increased
$3,498,000 or 38.7% as compared to the same period one year ago. This increase
was primarily the result of an increase in gain on sale of loans of $3,739,000,
which was comprised of $1,070,000 MSR gain and $2,669,000 gain from sale of
loans in the secondary market. For the nine-months ended September 30, 2003 the
Bank originated $381.4 million residential loans in southeast Indiana, compared
to $222.4 million for the nine-months ended September 30, 2002. Eighty one
percent of these loans were refinances of existing loans. The vast majority of
these loans were made as fixed rate loans and sold in the secondary mortgage
market. Two other factors increasing other fee income for the nine months ended
September 30, 2003, as compared to the nine months ended September 30, 2002,
were increases in insurance, annuity income and other fees and increases in
service fees on deposit accounts of $154,000 and $278,000, respectively. The
increase in insurance, annuity income and other fees resulted primarily from the
net effect of the previously discussed pair off fees received from Freddie Mac
of $65,000 and increased brokerage fees of $140,000. These fee increases were
offset by a $50,000 decrease in insurance and debt cancellation income. Service
fees on deposit accounts increased primarily due to a restructuring of
commercial deposit fees, as well as income produced from retail checking.
Two factors that reduced other income was a $230,000 decrease in loan servicing
income and a $364,000 decrease in income from joint ventures. Loan servicing
income decreased primarily due to the increased amortization charge on
originated mortgage servicing rights of $337,000 resulting from the increased
size of the mortgage servicing rights asset. A factor that offset the decrease
in loan servicing income was the $88,000 increase in loan servicing income
earned by the Bank for servicing loans sold in the secondary market. The
decrease in income from joint ventures is due primarily to two factors; 1)
$157,000 of impairment charges on one real estate development project; and 2)
large real estate sales by a joint venture in the nine months ended September
30, 2002, which produced $630,000 of income compared to $480,000 of income from
the same joint venture in the current nine month period ended September 30,
2003.
Other Expenses
Total other expenses for the nine month period ended September 30, 2003
increased $1,874,000 or 12.5%. This increase is a result of four factors
including a $1,026,000 increase in compensation and employee benefits, a
$540,000 increase in miscellaneous expenses, a $166,000 increase in occupancy
expenses and a $114,000 increase in marketing expenses. The increases in
compensation and employee benefits for the nine month period ended September 30,
2003 mirror the increases discussed in the quarterly discussion. The increases
in miscellaneous expense are the net result of various expense categories
including, an increase of $285,000 in consulting fees, $91,000 in real estate
owned charge downs, $227,000 increased loan related expenses, $78,000 increased
office supplies and $72,000 increased insurance expense. These increases in
miscellaneous expenses were offset by reductions in real estate owned expenses
including taxes, repairs and maintenance of $179,000, as well as reduced audit
and accounting fees of $96,000. The increase in occupancy expenses included
increases in depreciation expenses and increases in repairs and maintenance
expenses. The increase in marketing expenses relates primarily to expenditures
related to the Greenwood market, where the Bank is scheduled to open a new
branch in the fourth quarter of this year.
FINANCIAL CONDITION:
Total assets as of September 30, 2003, were $864,699,000, which was a decrease
of $21,806,000 from December 31, 2002, total assets of $886,505,000. Changes
within the various balance sheet categories included a $19,019,000 decrease in
loans held for sale and an $11,402,000 or 21.2% decrease in cash and cash
equivalents for the nine month period ended September 30, 2003. The decreases in
cash and loans held for sale were used to pay down advances from the Federal
Home Loan Bank, which decreased $13,039,000, and to fund the decrease in higher
rate public funds and jumbo deposits, as deposits decreased $15,630,000 in the
nine month period ended September 30, 2003.
Shareholders' equity increased $4,255,000 during the same period. Retained
earnings increased $7,856,000 from net income and decreased $2,189,000 for
dividends paid and $3,364,000 from stock buy backs. Common stock increased
$2,621,000 from the exercise of common stock options and $232,000 from a tax
benefit associated with the disqualified dispositions of option exercises.
Common stock decreased $209,000 from stock buy backs. The Company had a decrease
from $946,000 in unrealized gains in its securities available for sale
portfolio, net of tax, to $125,000 over the nine month period ended September
30, 2003. This decrease in unrealized gains resulted in $821,000 of other
comprehensive losses, net of tax, for the nine months ended September 30, 2003.
Additionally, the Company had other comprehensive gain, net of tax, from the
change in fair value of a cash flow hedge of $129,000 for the same nine month
period.
At September 30, 2003, the Company and the Bank exceeded all current applicable
regulatory capital requirements as follows:
As of September 30, 2003
(Dollars in Thousands)
To be "Well-
Capitalized" under
Minimum Prompt Corrective
Actual Requirements Action Provisions
------ ------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Consolidated
Tier I Capital to Risk-
Weighted Assets $80,892 11.92% $27,138 4.00% $40,706 6.00%
Total Risk-Based Capital to
Risk-Weighted Assets $88,253 13.01% $54,275 8.00% $67,844 10.00%
Tier I Leverage Ratio $80,892 9.25% $34,970 4.00% $43,712 5.00%
HomeFederal Bank
Tier I Capital to Risk-
Weighted Assets $88,442 13.05% $27,100 4.00% $40,650 6.00%
Total Risk-Based to Risk-
Weighted Assets $95,803 14.14% $54,200 8.00% $67,750 10.00%
Tier I Leverage Ratio $88,442 10.08% $35,109 4.00% $43,886 5.00%
Liquidity and Capital Resources
Historically, the Bank has maintained its liquid assets at a level believed
adequate to meet requirements of normal daily activities, repayment of maturing
debt and potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is maintained. Cash for
these purposes is generated through the sale or maturity of investment
securities and loan sales and repayments, and may be generated through increases
in deposits. Loan payments are a relatively stable source of funds, while
deposit flows are influenced significantly by the level of interest rates and
general money market conditions. Borrowings may be used to compensate for
reductions in other sources of funds such as deposits. As a member of the
Federal Home Loan Bank ("FHLB") system, the Bank may borrow from the FHLB of
Indianapolis. At September 30, 2003, the Bank had $158,596,000 in such
borrowings. In addition, at September 30, 2003, the Bank had commitments to fund
loan originations of $34,316,000, unused home equity lines of credit of
$75,096,000 and unused commercial lines of credit of $27,659,000, as well as
commitments to sell loans of $34,499,000. Generally, a significant portion of
amounts available in lines of credit will not be drawn. In the opinion of
management, the Bank has sufficient cash flow and borrowing capacity to meet
current and anticipated funding commitments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the opinion of management the interest rate sensitivity results for the
quarter ended September 30, 2003 is not materially different from the results
presented on page 14 of the transition report for the six month period ended
December 31, 2002, which is incorporated by reference herein.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as
defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934, as amended), as of the end of the most recent fiscal
quarter covered by this quarterly report (the "Evaluation Date"), have
concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and are designed to ensure that
material information relating to the Company would be made known to
such officers by others within the Company on a timely basis.
(b) Changes in internal controls. There were no significant changes in the
Company's internal control over financial reporting identified in
connection with the Company's evaluation of controls that occurred
during the Company's last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
N/A
Item 2. Changes in Securities and Use of Proceeds
N/A
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Submission of Matters to a Vote of Security Holders
N/A
Item 5. Other information
In February, 2003, the Board of Directors announced it had approved the sixth
repurchase, from time to time, on the open market of up to 5% of the Company's
outstanding shares of common stock, or 211,699 such shares. As of October 28,
2003, Home Federal Bancorp has repurchased 140,400 shares under this plan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31(1) Certification required by 12 C.F.R. 240.13a-14(a).
31(2) Certification required by 12 C.F.R. 240.13a-14(a).
32 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbances-Oxley Act of 2002.
(b) On July 18, 2003 Home Federal Bancorp filed an 8-K containing a press
release announcing its results of operations for the quarter ended
June 30, 2003.
On August 21, 2003 Home Federal Bancorp file an 8-K regarding a
blackout period for the Home Federal Employees' Salary Savings Plan
("the plan") necessitated by a change in the record keepers for the
plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on behalf of
the undersigned thereto duly authorized.
Home Federal Bancorp
DATE: November 13, 2003 /s/ Lawrence E. Welker
---------------------------------------------
Lawrence E. Welker, Executive Vice President,
Treasurer, and Chief Financial Officer