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SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended June 30, 1996
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)
Registrants 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 ______ NO ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.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 20, 1996, was $56,981,839.
The number of shares of the Registrants Common Stock, no par value, outstanding
as of September 20, 1996, was 2,226,282 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1996,
are incorporated into Part II. Portions of the Proxy Statement for the 1996
annual meeting of shareholders are incorporated into Part I and Part III.
Exhibit Index on Page 37
Page l of 41 Pages
HOME FEDERAL BANCORP
FORM 10-K
INDEX
Item 1. Business.................................................. 1
Item 2. Properties................................................ 29
Item 3. Legal Proceedings......................................... 30
Item 4. Submission of Matters to a Vote
of Security Holders..................................... 30
Item 4.5 Executive Officers of Home Federal Bancorp................ 30
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................. 30
Item 6. Selected Financial Data................................... 32
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................ 32
Item 8. Financial Statements and Supplementary Data............... 32
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial
Disclosure................................................ 32
Item 10. Directors and Executive Officers of the Registrant........ 32
Item 11. Executive Compensation.................................... 32
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................... 32
Item 13. Certain Relationships and Related Transactions............ 32
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................. 33
SIGNATURES .......................................................... 34
PART I
Item 1. Business
General
Home Federal Bancorp (the "Company" or "HFB") is an Indiana corporation
organized in August, 1990 to become a unitary savings and loan holding company.
The principal asset of the Company consists of 100% of the issued and
outstanding capital stock of Home Federal Savings Bank ("Home Federal" or the
"Bank"). The Company was a shell corporation until Home Federal reorganized in
March, 1993.
Home Federal began operations in Seymour, Indiana under the name New
Building and Loan Association in 1908, and received its federal charter and
changed its name to Home Federal Savings and Loan Association in 1950. On
November 9, 1983, Home Federal Savings and Loan Association became a federal
savings bank and its name was changed to Home Federal Savings Bank. On January
14, 1988, Home Federal converted to stock form and on March 1, 1993, Home
Federal reorganized by converting each outstanding share of its common stock
into one share of common stock of the Company, thereby causing the Company to be
the holding company of Home Federal. Home Federal currently provides services
through its main office at 222 West Second Street in Seymour, Indiana, fifteen
full service branches located in south central Indiana, and the Magic Line(R)
network of automated teller machines at seven locations in Seymour, Columbus,
North Vernon and Batesville. In August, 1994, Home Federal opened a loan
production office in Greensburg, Indiana. 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.(R) and Cirrus(R)
System.
Home Federal directly and, through its service corporation subsidiary,
indirectly offers a wide range of consumer and commercial financial services.
These services include: (i) residential and commercial real estate loans; (ii)
NOW accounts; (iii) regular and term savings accounts and savings certificates;
(iv) Linsco Private Ledger Financial Services, Inc. ("Private Ledger")
full-service securities brokerage services; (v) consumer loans; (vi) annuity and
life insurance products; (vii) Individual Retirement Accounts and Keogh plans;
(viii) commercial loans; (ix) real estate development; and (x) commercial demand
deposit accounts.
Home Federal's primary source of revenue is interest from lending
activities. Its principal lending activity is the origination of conventional
mortgage loans to enable borrowers to purchase or refinance one- to four-family
residential real property. These loans are generally secured by first mortgages
on the property. Virtually all of the real estate loans originated by Home
Federal are secured by properties located in Indiana, although Home Federal has
authority to make or purchase real estate loans throughout the United States. In
addition, Home Federal makes secured and unsecured consumer related loans
(including consumer auto loans, second mortgage, home equity, mobile home, and
savings account loans) and commercial loans secured by mortgages on the
underlying property. At June 30, 1996, approximately 19.6% of its loans were
consumer-related loans and 13.6% of its loans were commercial mortgage loans.
Home Federal also makes construction loans, which constituted 7.4% of Home
Federal's loans at June 30, 1996. Finally, Home Federal makes commercial loans,
which constituted 7.5% of its loans at June 30, 1996.
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 loan fees,
the allowance for loan losses, unearned discounts on loans and purchase
discounts.
At June 30,
---------------------------------------------------------------
1996 1995 1994
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars In Thousands)
TYPE OF LOAN
First mortgage loans:
One-to four-family residential loans................... $275,975 50.9% $266,909 55.1% $276,648 59.7%
Commercial and multi-family............................ 73,853 13.6% 63,215 13.0% 59,830 12.9%
Loans on property under construction................... 40,407 7.4% 23,982 4.9% 25,547 5.5%
Loans on unimproved acreage............................ 3,252 0.6% 2,554 0.5% 2,053 0.4%
FHA and VA loans....................................... 2,143 0.4% 1,600 0.3% 1,735 0.4%
Second mortgage, home equity.............................. 50,372 9.3% 40,536 8.4% 29,376 6.3%
Commercial loans.......................................... 40,609 7.5% 28,881 6.0% 21,660 4.7%
Consumer loans............................................ 11,952 2.2% 11,392 2.3% 4,381 1.0%
Auto loans................................................ 20,883 3.8% 21,506 4.4% 19,164 4.1%
Mobile home loans......................................... 18,833 3.5% 20,258 4.2% 19,287 4.2%
Savings account loans..................................... 4,199 0.8% 4,407 0.9% 3,684 0.8%
-------- ----- -------- ----- -------- -----
Gross loans receivable................................. $542,478 100.0% $485,240 100.0% $463,365 100.0%
======== ===== ======== ===== ======== =====
TYPE OF SECURITY
Residential:
One- to four-family.................................... $358,003 66.0% $326,296 67.3% $326,055 70.4%
Multi-dwelling units................................... 23,807 4.4% 20,488 4.2% 22,004 4.7%
Commercial real estate.................................... 60,940 11.2% 49,458 10.2% 45,077 9.7%
Commercial................................................ 40,609 7.5% 28,881 6.0% 21,660 4.7%
Mobile home............................................... 18,833 3.5% 20,258 4.2% 19,287 4.2%
Savings account........................................... 4,199 0.8% 4,407 0.9% 3,684 0.8%
Auto ..................................................... 20,883 3.8% 21,506 4.4% 19,164 4.1%
Other consumer............................................ 11,952 2.2% 11,392 2.3% 4,381 1.0%
Land acquisition.......................................... 3,252 0.6% 2,554 0.5% 2,053 0.4%
-------- ----- -------- ----- -------- -----
Gross loans receivable............................... $542,478 100.0% $485,240 100.0% $463,365 100.0%
======== ===== ======== ===== ======== =====
LOANS RECEIVABLE-NET
Gross loans receivable.................................... $542,478 104.3% $485,240 103.2% $463,365 103.9%
Deduct:
Unidisbursed portion of loans in process.................. (18,249) (3.5) (11,291) (2.4) (13,377) (3.0)%
Deferred net loan fees.................................... (963) (0.2) (1,069) (0.2) (1,204) (0.3)%
Allowance for loan losses................................. (3,061) (0.6) (2,806) (0.6) (2,580) (0.6)%
Unearned discounts........................................ (19) 0.0 (53) --- (114) ---%
Purchase discount......................................... (89) 0.0 (138) --- (187) ---%
-------- ----- -------- ----- -------- -----
Net loans receivable................................... $520,097 100.0% $469,883 100.0% $445,903 100.0%
======== ===== ======== ===== ======== =====
At June 30,
-----------------------------------------
1993 1992
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
TYPE OF LOAN
First mortgage loans:
One-to four-family residential loans................... $255,074 61.4% $226,612 61.0%
Commercial and multi-family............................ 51,393 12.4% 46,466 12.5%
Loans on property under construction................... 21,760 5.2% 8,143 2.2%
Loans on unimproved acreage............................ 1,988 0.5% 1,502 0.4%
FHA and VA loans....................................... 2,531 0.6% 3,212 0.9%
Second mortgage, home equity.............................. 27,157 6.5% 27,694 7.4%
Commercial loans.......................................... 17,234 4.2% 17,697 4.8%
Consumer loans............................................ 5,796 1.4% 6,278 1.7%
Auto loans................................................ 11,719 2.8% 14,597 3.9%
Mobile home loans......................................... 16,416 4.0% 15,230 4.1%
Savings account loans..................................... 4,295 1.0% 4,225 1.1%
-------- ----- -------- -----
Gross loans receivable................................. $415,363 100.0% $371,656 100.0%
======== ===== ======== =====
TYPE OF SECURITY
Residential:
One- to four-family.................................... $298,478 71.8% $265,385 71.4%
Multi-dwelling units................................... 16,664 4.0% 8,678 2.3%
Commercial real estate.................................... 42,773 10.3% 38,064 10.3%
Commercial................................................ 17,234 4.2% 17,697 4.8%
Mobile home............................................... 16,416 4.0% 15,230 4.1%
Savings account........................................... 4,295 1.0% 4,225 1.1%
Auto ..................................................... 11,719 2.8% 14,597 3.9%
Other consumer............................................ 5,796 1.4% 6,278 1.7%
Land acquisition.......................................... 1,988 .5% 1,502 .4%
-------- ----- -------- -----
Gross loans receivable............................... $415,363 100.0% $371,656 100.0%
======== ===== ======== =====
LOANS RECEIVABLE-NET
Gross loans receivable.................................... $415,363 103.8% $371,656 102.1%
Deduct:
Unidisbursed portion of loans in process.................. (11,603) (2.9) (4,104) (1.1)%
Deferred net loan fees.................................... (1,082) (.3) (820) (.2)%
Allowance for loan losses................................. (2,257) (.5) (2,123) (.6)%
Unearned discounts........................................ (220) ---- (408) (.1)%
Purchase discount......................................... (221) (.1) (242) (.1)%
-------- ----- -------- -----
Net loans receivable................................... $399,980 100.0% $363,959 100.0%
======== ===== ======== =====
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:
Maturities in Fiscal
Balance ------------------------------------------------------------------------
Outstanding 2000 2002 2007 2012
At June 30, to to to and
1996 1997 1998 1999 2001 2006 2011 thereafter
---- ---- ---- ---- ---- ---- ---- ----------
(In Thousands)
Real estate............... $405,800 $7,174 $2,603 $5,027 $17,795 $90,628 $119,548 $163,025
Mortgage-backed
certificates,
collateralized mortgage
obligations............ 27,975 215 1,303 2,734 6,744 5,558 5,977 5,444
Construction loans........ 40,252 6,091 3,478 --- --- 2,582 1,115 26,986
Commercial loans.......... 40,618 12,098 7,675 4,110 5,427 8,048 2,972 288
Other loans.............. 55,808 11,591 4,124 6,952 15,827 5,893 11,311 110
-------- ------- ------- ------- ------- -------- -------- --------
Total.................. $570,453 $37,169 $19,183 $18,823 $45,793 $112,709 $140,923 $195,853
======== ======= ======= ======= ======= ======== ======== ========
Interest Rate Sensitivity:
Due After June 30, 1997
-------------------------------------------
Fixed Variable Rate
Rate and Balloon
--------- --------------
(In Thousands)
Real estate.............................................. $122,930 $275,696
Mortgage-backed certificates,
collateralized mortgage obligations................... 23,399 4,361
Construction loans....................................... 4,335 29,826
Commercial loans ........................................ 6,588 21,932
Other loans.............................................. 44,193 24
-------- --------
Total................................................. $201,445 $331,839
======== ========
Residential Mortgage Loans
Approximately 96% of Home Federal's residential mortgage lending
activity involves 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, such loans must
require at least semi-annual payments and be for a term of not more than 40
years, and, if the interest rate is adjustable, it 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, 1996, $392 million, or 72.3%,
of Home Federal's total loan portfolio consisted of residential first mortgage
loans, $278 million, or 51.3%, 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.
In some instances, Home Federal's limits are more stringent than those set by
the OTS.
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, 1996, 13.6% of Home Federal's total loan portfolio
consisted of mortgage loans secured by commercial real estate. These properties
consisted primarily of shopping centers, office buildings, nursing homes,
manufacturing plants, warehouses, motels, apartment buildings and churches
located in central or south central Indiana. The commercial mortgage loans are
generally adjustable-rate loans, are written for terms not exceeding 30 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, 1996, had a balance of $3.8 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." However, 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, 1996, 7.4% 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, 1996, was $3.3 million.
Consumer Loans
Federal laws and regulations permit federally chartered savings
institutions to make secured and unsecured consumer loans in an aggregate amount
of up to 35% of the institution's total assets. In addition, a federally
chartered savings institution has lending authority above the 35% limit for
certain consumer loans, such as property improvement loans and loans secured by
savings accounts. However, the Qualified Thrift Lender test restricts some
thrifts from making consumer loans. See "Regulation -- Qualified Thrift Lender."
Consumer-related loans, consisting of second mortgage and home equity
loans, mobile home loans, automobile loans, loans secured by savings accounts
and consumer loans were $106 million on June 30, 1996, or approximately 19.6% of
Home Federal's total loan portfolio.
Second mortgage loans are made for terms of 5 - 15 years, and are
fixed-rate 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, 1996, Home Federal had $22.3 million
of second mortgage loans, which equaled 4.1% of its total loan portfolio. Home
Federal aggressively markets home equity loans, which are adjustable-rate loans.
As of June 30, 1996, Home Federal had $28.0 million drawn on its home equity
loans, or 5.2% of its total loan portfolio, with $34.9 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,
1996, $20.9 million, or 3.8%, of Home Federal's total loan portfolio consisted
of automobile loans.
As of June 30, 1996, $18.8 million, or 3.5%, 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, 1996, $4.2 million, or
.8%, 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, 1996, $40.6 million, or
7.5%, of Home Federal's total loan portfolio consisted of commercial loans.
Origination, Purchase and Sale of Loans
Home Federal originates residential loans in conformity with standard
underwriting criteria of the Federal Home Loan Mortgage Corporation ("FHLMC")
and the Federal National Mortgage Association ("FNMA") to assure maximum
eligibility for possible resale in the secondary market. Although Home Federal
currently has authority to lend anywhere in the United States, it has confined
its loan origination activities primarily to the central and south central
Indiana area. Home Federal's loan originations are generated primarily from
referrals from real estate brokers, builders, developers and existing customers,
newspaper, radio and periodical advertising and walk-in customers. Home
Federal's loan approval process is intended to assess the borrower's ability to
repay the loan, the viability of the loan and the adequacy of the value of the
property that will secure the loan.
Home Federal studies the employment, credit history, and information on
the historical and projected income and expenses of its individual and corporate
mortgagors to assess their ability to repay its mortgage loans. It uses its
staff appraisers or independent appraisers to appraise the property securing its
loans. It requires title insurance or abstracts accompanied by an attorney's
opinion evidencing Home Federal's valid lien on its mortgaged real estate and a
mortgage survey or survey coverage on all first mortgage loans and on other
loans when appropriate. Home Federal requires fire and extended coverage
insurance in amounts at least equal to the principal amount of the loan. It may
also require flood insurance to protect the property securing its interest. When
private mortgage insurance is required, borrowers must make monthly payments to
an escrow account from which Home Federal makes disbursements for taxes and
insurance. Otherwise, such escrow arrangements are optional.
The procedure for approval of loans on property under construction is
the same as for residential mortgage loans, except that the appraisal obtained
evaluates the building plans, construction specifications and estimates of
construction costs. Home Federal also evaluates the feasibility of the
construction project and the experience and track record of the builder or
developer.
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 $107 million of fixed-rate loans in the fiscal year ended June
30, 1996. 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 selling fixed-rate loans with 15 year
maturities as well as adjustable-rate loans. Home Federal sells 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, 1996, Home Federal serviced $267 million of loans sold
to other parties. Gains and losses on sales 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 complete financial analysis of the loan. Servicing of
loans purchased is generally done by the seller. At June 30, 1996, approximately
1.1%, or $6.1 million, of Home Federal's gross loan portfolio was serviced by
others.
The following table shows loan activity for Home Federal during the periods
indicated:
Year Ended June 30,
-------------------------------------------
1996 1995 1994
------- -------- --------
(Dollars in Thousands)
Gross loans receivable at beginning of periods.................... $469,883 $463,365 $415,363
Loans originated:
Mortgage loans and contracts:
Construction:
Residential................................................ 45,336 24,465 29,649
Commercial................................................. 12,058 6,361 9,814
Purchases:
Residential................................................ 112,549 88,692 57,937
Commercial................................................. 7,214 3,809 7,222
Refinancing.................................................. 88,861 26,723 111,938
Other........................................................ 1,302 1,054 867
------- -------- --------
Total...................................................... 267,320 151,104 217,427
Commercial..................................................... 51,537 28,556 14,909
Consumer....................................................... 35,800 42,037 52,211
------- -------- --------
Total loans originated....................................... 354,657 221,697 284,547
Loans purchased:
Residential.................................................... 2,140 --- ---
Other ......................................................... 1,477 --- 894
------- -------- --------
Total loans originated and purchased......................... 358,274 221,697 285,441
------- -------- --------
Real estate loans sold............................................ 107,500 52,686 109,584
Loan repayments and other deductions.............................. 178,179 147,136 127,855
------- -------- --------
Total loans sold, loan repayments and other deductions......... 285,679 199,822 237,439
------- -------- --------
Net loan activity................................................. 72,595 21,875 48,002
------- -------- --------
Gross loans receivable at end of period........................... 542,478 485,240 463,365
Adjustments....................................................... (22,381) (15,357) (17,462)
------- -------- --------
Net loans receivable at end of period............................. 520,097 $469,883 $445,903
======= ======== ========
FIRREA contains a generally more stringent loans-to-one-borrower
limitation than that applicable to savings associations before FIRREA's
enactment. Under FIRREA, a savings association generally may not make any loan
to a borrower or its related entities if the total of all such loans by the
savings association exceeds 15% of its capital (plus up to an additional 10% of
capital in the case of loans fully collateralized by readily marketable
collateral); provided, however, that loans up to $500,000 irrespective of the
percentage limitations may be made and certain housing development loans of up
to $30 million or 30% of capital, whichever is less, are permitted. Loans made
prior to FIRREA, however, are not subject to these limitations. The maximum
amount which Home Federal could have loaned to one borrower and the borrower's
related entities at June 30, 1996 under the 15% of capital limitation was $8.2
million. At that date, the highest outstanding balance of loans by Home Federal
to one borrower and related entities was approximately $7.0 million, an amount
within such loans-to-one borrower limitations.
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 which range from 0% to 3.5% of the loan amount.
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
Late charges on mortgage loans are assessed by Home Federal if a
payment is not received by the 16th day following its due date. Any borrower
whose payment was not received by this time is mailed a past due notice. At the
same time the notice is mailed, the delinquent account is downloaded to a
PC-based collection system and assigned to a specific loan service
representative. The loan service representative will attempt to make contact
with the customer via a phone call to efficiently and effectively resolve any
problem that might exist. If contact by phone is not possible, mail, in the form
of preapproved form letters, will be used during the 16th and the 30th days
following a specific due date. After the 30th day following any due date, or at
the time a second payment has come due, if no contact has been made with the
customer, a personal visit will be conducted by a Loan Service Department
employee to interview the customer and inspect the property to determine the
borrower's ability to repay the loan. Prompt follow up is a goal of the Loan
Service Department with any and all delinquencies.
When an advanced stage of delinquency appears (generally around the
90th day of delinquency) and if repayment cannot be expected within a reasonable
amount of time, Home Federal will make a determination of how to proceed to
protect the interests of both the customer and Home Federal. It may be necessary
for the borrower to attempt to sell the property at Home Federal's request. If a
resolution cannot be arranged, Home Federal will consider avenues necessary to
obtain title to the property which include foreclosure and/or accepting a
deed-in-lieu of foreclosure, whichever may be most appropriate. However, Home
Federal attempts to avoid taking title to the property if at all possible.
Home Federal has acquired certain real estate in lieu of foreclosure by
acquiring title to the real estate and then reselling it. Home Federal performs
an updated title check of the property and, if needed, an appraisal on the
property before accepting such deeds.
On June 30, 1996, Home Federal held $48,000 of real estate and other
repossessed collateral acquired as a result of foreclosure, voluntary deed, or
other means. Such assets are is 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
writedown 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. 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.
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,
------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-performing Assets:
Loans:
Non-Accrual............................... $2,871 $2,431 $1,887 $1,428 $2,637
Past due 90 days or more.................. 89 81 115 1,292 755
Restructured loans.......................... 1 102 283 597 1,006
====== ====== ====== ====== ======
Total non-performing loans.................. 2,961 2,614 2,285 3,317 4,398
Real estate owned, net (1).................. --- --- 370 1,025 1,598
Other repossessed assets, net............... 48 41 71 25 35
Total non-performing assets (2)............. 3,009 $2,655 $2,726 $4,367 $6,031
------ ------ ------ ------ ------
Non-performing assets to total assets....... .48% .45% .50% .82% 1.19%
====== ====== ====== ====== ======
Loans with allowance for
uncollected interest...................... $2,872 $2,531 $2,167 $2,018 $2,989
(1) Refers to real estate acquired by Home Federal through foreclosure,
voluntary deed, or in-substance foreclosure, net of reserve.
(2) At June 30, 1996, 54.2% of Home Federal's non-performing assets consisted
of residential mortgage loans, 20.3% consisted of commercial real estate
loans, 10.2% consisted of commercial loans, 13.7% consisted of
consumer-related loans, and 1.6% consisted of real estate owned and other
repossessed assets.
For the year ended June 30, 1996, the income that would have been
recorded under original terms on the above non-accrual and restructured loans
was $274,000 compared to actual income recorded of $155,000. At June 30, 1996,
Home Federal had approximately $5.5 million in loans that were 30-89 days past
due.
The allowance for loan losses represents amounts available to absorb
future loan losses. Loans or portions thereof are charged to the allowance when
losses are considered probable. Recoveries of amounts previously charged off are
added to the allowance and provisions for loan losses are charged or credited to
earnings to bring the allowance to a level considered necessary by management.
For the year ended June 30, 1996, Home Federal charged off loans
totaling $453,000 and realized recoveries of $70,000 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 $638,000 to adjust the allowance to $3.1 million as of June 30,
1996.
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 and U.S. Government
agency obligations. At June 30, 1996, 1995, and 1994, Home Federal had
approximately $57.9 million, $59.3 million and $60.4 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 5%. Monetary penalties may be imposed for
failure to meet the liquidity requirement. At June 30, 1996, Home Federal had
liquid assets of $48.7 million, and a liquidity ratio of 10.1%, which exceeded
its liquidity requirement.
Source Of Funds
General
Deposits have traditionally been the primary source of funds of Home
Federal for use in lending and investment activities. In addition to deposits,
Home Federal derives funds from loan amortization, prepayments, borrowings from
the FHLB of Indianapolis and income on earning assets. While loan amortization
and income on earning assets are relatively stable sources of funds, deposit
inflows and outflows can vary widely and are influenced by prevailing interest
rates, money market conditions and levels of competition. Borrowings may be used
to compensate for reductions in deposits or deposit inflows at less than
projected levels and may be used on a longer-term basis to support expanded
activities. See "-- Borrowings."
Deposits
Consumer and commercial deposits are attracted principally from within
Home Federal's primary market area through the offering of a broad selection of
deposit instruments including checking accounts, fixed-rate certificates of
deposit, NOW accounts, individual retirement accounts, passbook accounts and
commercial demand deposit accounts. Home Federal does not actively solicit or
advertise for deposits outside of the counties in which its branches are
located. Deposit account terms vary, with the principal differences being the
minimum balance required, the amount of time the funds remain on deposit and the
interest rate. To attract funds, Home Federal pays higher rates on larger
balances within the same maturity class.
Under regulations adopted by the FDIC, well-capitalized insured
depository institutions (those with a ratio of total capital to risk-weighted
assets of not less than 10%, with a ratio of core capital to risk-weighted
assets of not less than 6%, with a ratio of core capital to total assets of not
less than 5% and which have not been notified that they are in troubled
condition) may accept brokered deposits without limitations. Undercapitalized
institutions (those that fail to meet minimum regulatory capital requirements)
are prohibited from accepting brokered deposits. Adequately capitalized
institutions (those that are neither well-capitalized nor undercapitalized) are
prohibited from accepting brokered deposits unless they first obtain a waiver
from the FDIC. Under these standards, Home Federal would be deemed a
well-capitalized institution.
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
(2) in the market area in which such deposits would otherwise be accepted.
Adequately capitalized institutions, whether or not they accept
brokered deposits pursuant to a waiver from the FDIC, are prohibited from paying
a rate of interest on such funds which, at the time such funds are accepted,
significantly exceeds (1) the rate paid on deposits of similar maturity in such
institution's normal market area for deposits accepted in the institution's
normal market area or (2) the "national rate" paid on deposits of comparable
maturity for deposits accepted outside the institution's normal market area. The
national rate is (1) 120 percent of the current yield on similar maturity U.S.
Treasury obligations or (2) in the
case of any deposit at least half of which is uninsured (institutional or
wholesale deposits), 130 percent of such applicable yield. A rate is deemed to
be "significantly" higher or excessive if it exceeds by more than 75 basis
points the applicable benchmark (i.e., the local rate or national rate).
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by Home Federal on a periodic basis. 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, 1996, were as follows:
Minimum Weighted
Opening Balance at % of Average
Type of Account Balance June 30, 1996 Deposits Rate
- - --------------- ------- ------------- -------- --------
(Dollars in Thousands)
Withdrawable:
Passbook......................................... $ 1 $58,988 12.05% 3.00%
Money market savings............................. 1,000 25,188 5.14% 3.05%
NOW.............................................. 1 70,856 14.48% 1.44%
Total withdrawable............................ 155,032 31.67% 2.30%
-------- -----
Certificates (original terms):
Less than 1 year................................. 500 83,830 17.12% 5.32%
12 to 23 months.................................. 500 94,482 19.30% 5.81%
24 to 35 months.................................. 500 71,232 14.55% 5.99%
36 to 59 months.................................. 500 26,908 5.50% 5.54%
60 to 120 months................................. 500 58,089 11.86% 6.24%
Total certificates............................ 334,541 68.33% 5.78%
-------- -----
Total deposits................................... $489,573 100.0% 4.68%
======== =====
The following table sets forth by nominal interest rate categories the
composition of deposits of Home Federal at the dates indicated:
At June 30,
-------------------------------------------
1996 1995 1994
--------- -------- --------
(Dollars in Thousands)
Non-interest bearing and below 3%....................... $130,424 $124,334 $152,556
3.01% - 5.00%........................................... 62,219 78,023 191,395
5.01% - 7.00%........................................... 289,019 242,125 66,129
7.01% - 9.00%........................................... 7,911 22,238 34,891
9.01% or greater....................................... --- 366 1,016
----------- -------- --------
Total..................................................$ 489,573 $467,086 $445,987
=========== ======== ========
The following table represents, by various interest rate categories,
the amounts of deposits maturing during each of the three years following June
30, 1996, and the percentage of such maturities to total deposits. Matured
certificates which have not been renewed as of June 30, 1996, have been
allocated based upon certain rollover assumptions.
DEPOSIT MATURITIES
(Dollars in Thousands)
2.00 3.01 4.01 5.01 6.01 7.01 8.01
to to to to to to to Percent of
3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% Total Total
---- ------ ------- -------- ------- ------ ------ -------- ----------
Certificate accounts maturing in
the twelve-month period ending:
June 30, 1997..................... $580 $1,165 $35,612 $119,897 $61,600 $3,316 $477 $222,647 66.6%
June 30, 1998..................... --- 5 247 48,821 7,584 605 1,676 58,938 17.6
June 30, 1999..................... --- --- 2 11,911 2,976 1,199 86 16,174 4.8
Thereafter........................ --- --- --- 12,534 23,696 493 59 36,782 11.0
---- ------ ------- -------- ------- ------ ------ -------- -----
$580 $1,170 $35,861 $193,163 $95,856 $5,613 $2,298 $334,541 100.0%
==== ====== ======= ======== ======= ====== ====== ======== =====
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, 1996 of
certificates of greater than $100,000 by maturity.
ACCOUNTS GREATER THAN $100,000
(Dollars in Thousands)
2.00 3.01 4.01 5.01 6.01 7.01
to to to to to to Percent of
3.00% 4.00% 5.00% 6.00% 7.00% 8.00% Total Total
---- ---- ------ ------- ------- ------ ------- ----------
Certificate accounts maturing
in the twelve-month period ending:
June 30, 1997....................... $301 $317 $4,534 $32,773 $10,822 $1,655 50,402 87.2%
June 30, 1998....................... --- --- --- 1,746 861 133 2,740 4.7
June 30, 1999....................... --- --- --- 380 132 272 784 1.4
Thereafter.......................... --- --- --- 586 2,798 463 3,847 6.7
---- ---- ------ ------- ------- ------ ------- -----
.................................... $301 $317 $4,534 $35,485 $14,613 $2,523 $57,773 100.0%
==== ==== ====== ======= ======= ====== ======= =====
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
1996 Deposits (Decrease) 1995 Deposits (Decrease) 1994 Deposits (Decrease)
---------- -------- ---------- ---- -------- ---------- ---- -------- ----------
Withdrawable:
Passbook ........................ $58,988 12.1% $2,991 $55,997 12.0% $(2,323) $58,320 13.1% $ 3,595
Money Market Savings............. 25,188 5.1 2,322 22,866 4.9 (3,517) 26,383 5.9 (1,080)
NOW ...................... 70,856 14.5 3,646 67,210 14.4 2,707 64,503 14.5 8,648
Total withdrawable............ 155,032 31.7 8,959 146,073 31.3 (3,133) 149,206 33.5 11,163
-------- ----- ------- -------- ----- ------- -------- ----- ---------
Certificates:
Less than one year............... 83,830 17.1 24,290 59,540 12.7 (23,486) 83,026 18.6 11,377
12 to 23 months.................. 94,482 19.3 (13,303) 107,785 23.1 50,164 57,621 12.9 (26,003)
24 to 35 months.................. 71,232 14.5 6,602 64,630 13.8 9,509 55,121 12.3 (7,223)
36 to 59 months.................. 26,908 5.5 (712) 27,620 5.9 (5,667) 33,287 7.5 7,662
60 to 120 months................. 58,089 11.9 (3,349) 61,438 13.2 (6,288) 67,726 15.2 3,533
-------- ----- ------- -------- ----- ------- -------- ----- ---------
Total certificate accounts.... 334,541 68.3 13,528 321,013 68.7 24,232 296,781 66.5 (10,654)
-------- ----- ------- -------- ----- ------- -------- ----- ---------
Total deposits.......... $489,573 100.0% $22,487 $467,086 100.0% $21,099 $445,987 100.0% $ 509
======== ===== ======= ======== ===== ======= ======== ===== =========
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, 1996, Home Federal had advances totaling $70.7
million outstanding from the FHLB of Indianapolis.
On June 30, 1993, the Company borrowed $13.0 million from LaSalle
National Bank of Chicago, with the stock of Home Federal and its subsidiaries
pledged as collateral (the "Senior Debt"). The Senior Debt bears interest at a
variable rate of prime plus .75%, which was 9.00% at June 30, 1996. Of the net
proceeds, the Company injected $10.0 million to Home Federal's Tier l capital.
Home Federal used the proceeds to prepay $9.0 million of subordinated debt plus
a prepayment penalty of $1.8 million. See Note 10 to the Consolidated Financial
Statements included in the 1996 Shareholder Annual Report incorporated into Item
8 hereof for a description of the terms of the Senior Debt.
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,
---------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
FHLB advances.................................... $16,000 $29,000 $22,000
Official check overnight remittance.............. $ 4,280 $ 3,086 $ 3,416
FHLB overnight remittance........................ $ 57 $ 38 $ 60
Average amount of total
short-term borrowings outstanding............. $ 6,822 $ 24,225 $13,570
The following table sets forth the maximum amount of short term FHLB
advances outstanding at any month end durig the period shown and the weighted
average rate of such FHLB advances.
For the year ended June 30,
------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
FHLB advances:
Amount 26,000 $15,500 $22,000
Weighted average rate 6.2% 6.8% 6.4%
See Note 9 in the Notes to Consolidated Financial Statements included in the
1996 Shareholder Annual Report incorporated into Item 8 hereof for a description
of the terms of these borrowings.
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, 1996, Home Federal's aggregate investment in
HSC was $2.9 million. For the year ended June 30, 1996, HSC reported income of
$455,000 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, 1996.
Loans from
Home Federal
Outstanding
Date HSC Entered Equity at June 30,
Name Type of Project into the Project Investment 1996
- - -------------------- --------------------- ---------------- ------------- --------------
Consortium Partners Owns Family Financial 11/31/83 $ 605,000 $ ---
Life Insurance
Company of New
Orleans
Coventry Associates Real estate development 8/31/89 $ 156,000 $ ---
in Seymour, Indiana
Heritage Woods II Rental Apartment 11/15/89 $ 132,000 $ 145,000
project of low income
housing (22 units)
Admirals Woods Real estate development 4/20/93 $ 301,000 $ ---
in Indianapolis, Indiana
Home-Breeden Real estate development 7/1/94 $1,224,000 $ ---
in Columbus, Indiana
HSC has a 19% 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 30,1996, Home
Federal had income of $366,000, on a consolidated basis, from commissions and
dividends paid on Family Financial activities.
HSC markets LINSCO Private Ledger full-service securities brokerage
services. For fiscal 1996, HSC received $935,000 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. For the year ended June 30, 1996,
development fees of $3,000 were accrued. In addition to the interest on the loan
which was paid off in April, 1996, HSC will receive 65% of the net profit after
the payment of all interest, development and sales fees.
In November, 1989, HSC invested $184,000 as a limited partner in
Heritage Woods II, a low income housing project in Columbus, Indiana. Over the
next six years, HSC will receive tax credits equal to approximately 9% of its
investment in the project.
On April 20, 1993, HSC entered into a joint venture agreement with Gary
L. Sager and Emily Sager to develop a moderately-priced 27 lot subdivision in
Marion County, Indiana, called Admirals Woods. The joint venture subsequently
executed loan documents with HSC for an acquisition and development loan in the
amount of $980,000. In addition to interest on the loan, HSC will receive 50% of
the profits after all interest, development and sales costs. The loan was paid
off in December, 1995.
On July 1, 1994, HSC entered into a joint venture agreement with
Breeden Investment Group, Inc. to develop a 221 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. As additional phases are
developed for sale, additional financing will be required. In addition to
interest on the loan, HSC will receive 50% of all profits.
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, 1996, Home Federal employed 240 persons on a full-time
basis and 13 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
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 and Columbus, Home Federal must compete with banks and savings
institutions in Indianapolis. To a lesser extent, Home Federal competes with
financial and other institutions in the market areas surrounding Cincinnati,
Ohio and Louisville, Kentucky. Home Federal also competes with money market
funds which currently are not subject to reserve requirements, and with
insurance companies with respect to its Individual Retirement and annuity
accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of healthy savings associations
in Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by Home
Federal and the Company.
In addition, The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to
acquire banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana recently passed a law 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. The Indiana Branching Law
became effective March 15, 1996, provided that prior to June 1, 1997, interstate
mergers and de novo branches are not permitted to out-of-state banks unless the
laws of their home states permit Indiana banks to merge or establish de novo
branches on a reciprocal basis. This new legislation may also result in
increased competition for Home Federal and the Company.
Because of recent changes in Federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings associations
have certain powers to acquire savings associations based in other states, and
Indiana law expressly permits reciprocal acquisition of Indiana savings
associations. In addition, Federal savings associations are permitted to branch
on an interstate basis.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors that
are not readily predictable.
Regulation
General
Home Federal, as a federally chartered stock savings bank, is a member
of the Federal Home Loan Bank System ("FHLB System") and its deposits are
insured by the Savings Association Insurance Fund ("SAIF") which is administered
by the FDIC. Home Federal is subject to extensive regulation by the OTS. Federal
associations may not enter into certain transactions unless certain regulatory
tests are met or they obtain prior governmental approval, and the associations
must file reports with the OTS about their activities and their financial
condition. Periodic compliance examinations of Home Federal are conducted by the
OTS which has, in conjunction with the FDIC in certain situations, examination
and enforcement powers. This supervision and regulation are intended primarily
for the protection of depositors and federal deposit insurance funds. Home
Federal is also subject to certain reserve requirements under regulations of the
Board of Governors of the Federal Reserve System ("FRB").
Congress is considering legislation that would consolidate the
supervision and regulation of all U.S. financial institutions in one
administrative body (the "Legislation"). It cannot be predicted with certainty
whether or when the Legislation will be enacted or the extent to which Home
Federal would be affected thereby.
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS. The regulation
also establishes a schedule of fees for the various types of applications and
filings made by savings associations with the OTS. The general assessment, to be
paid on a semiannual basis, is based upon the savings association's total
assets, including consolidated subsidiaries, as reported in a recent quarterly
thrift financial report. Currently, the assessment rates range from .0172761% of
assets for associations with assets of $67.0 million or less to .0045864% for
associations with assets in excess of $35.0 billion. Home Federal's current
semiannual assessment, based upon total assets at March 31, 1996, is $67,000.
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
their 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, 1996, Home Federal's investment in stock of
the FHLB of Indianapolis was $3.8 million.
In past years, Home Federal has received dividends on its FHLB stock.
All 12 FHLB's 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. These contributions and obligations could adversely affect
the FHLB's ability to pay dividends and the value of FHLB stock in the future.
For the year ending June 30, 1996, dividends paid to Home Federal by the FHLB of
Indianapolis totaled $271,000, for an annual rate of 7.9%. 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. Eligible collateral includes 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
For each calendar month, Home Federal is required to maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to an amount not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings
during the preceding calendar month. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5%. OTS regulations also require each member savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently l %) of the total of its net withdrawable
deposit accounts and short-term borrowings during the preceding calendar month.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The monthly average liquidity of Home Federal for June, 1996 was
10.1% which exceeded the applicable 5% liquidity requirement. Its average
short-term liquidity ratio for June, 1996 was 5.3%. Home Federal has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, the BIF for commercial banks
and state savings banks and the SAIF for savings associations and banks that
have acquired deposits from savings associations. The FDIC is required to
maintain designated levels of reserves in each fund. The reserves of the SAIF
are currently 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 level required by
law in May, 1995. Thrifts are generally prohibited from converting from one
insurance fund to the other until the SAIF meets its designated reserve level,
except with the prior approval of the FDIC in certain limited cases, and
provided certain fees are paid. The insurance fund conversion provisions to not
prohibit a SAIF member from converting to a bank charter or merging with a bank
during the moratorium as long as the resulting bank continues to pay the
applicable insurance assessments to the SAIF during such period and as long as
certain other conditions are met.
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 such rates if such 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. Such risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Because of the differing reserve levels of the SAIF and the BIF,
deposit insurance assessments paid by well-capitalized BIF-insured institutions
were recently reduced significantly below the level paid by well-capitalized
SAIF-insured institutions. Assessments paid by well-capitalized SAIF-insured
institutions exceeded those paid by well-capitalized BIF-insured institutions by
approximately $0.19 per $100 in deposits in late
1995 and exceeded them by $0.23 per $100 in deposits beginning in 1996. Such
premium disparity could have a negative competitive impact on Home Federal and
other institutions with SAIF deposits.
Congress has recently considered many proposals designed to
recapitalize the SAIF and eliminate the significant premium disparity between
the BIF and the SAIF. Among those considered is a recapitalization plan
providing for a special assessment, estimated at approximately $0.85 per $100 of
SAIF deposits held at some time in 1995, in order to increase SAIF reserves to
the level required by law. Certain BIF-insured banks holdings SAIF-insured
deposits would pay a lower special assessment. In addition, the cost of prior
thrift failures would be shared by both the SAIF and the BIF. Such cost sharing
might increase BIF assessments by $0.02 to $0.025 per $100 in deposits. SAIF
assessments for well-capitalized SAIF-insured institutions would be set at a
significantly lower level after the legislation is adopted and could never be
reduced below the level set for well-capitalized BIF-insured institutions. The
recapitalization plan also provides for the merger of the SAIF and the BIF on
January 1, 1998, subject to certain conditions. It has also been proposed that
the savings association charter be eliminated in connection with the proposed
merger of the BIF and SAIF.
Home Federal had $486.3 million in deposits subject to SAIF assessments
at June 30, 1996. If the one-time special assessment in the legislative proposal
is enacted into law, Home Federal will pay an additional after-tax assessment of
approximately $2.5 million (based upon deposits at June 30, 1996) which will
reduce capital and earnings for the quarter in which any such assessment is
recorded. However, it is expected that quarterly SAIF assessments would be
reduced significantly sometime after adoption of the legislation.
No assurances can be given that the SAIF recapitalization plan
discussed above or any other plan will be enacted into law or in which form it
may be enacted. In addition, the Company can give no assurances that the
disparity between BIF and SAIF assessments will be eliminated. If the proposed
legislation is not adopted, SAIF premiums may increase and the disparity between
BIF and SAIF premiums may become greater, with a resulting adverse effect on the
Company's operations.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill (on a declining basis until 1995), purchased mortgage
servicing rights (which may be included in an amount up to 50% of core capital,
but which are to be reported on an association's balance sheet at the lesser of
90% of their fair market value, 90% of their original pruchase price, or 100% of
their remaining unamortized book value), and purchased credit card relationships
(which may be included in an amount up to 25% of core capital) 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) 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, 1996, based on the capital
standards then in effect, Home Federal was in compliance with all capital
requirements.
The OTS has delayed implementation of a rule which sets forth the
methodology for calculating an interest rate risk component to be incorporated
into the OTS regulatory capital rule. Under the rule, only savings associations
with "above normal" interest rate risk (institutions whose portfolio equity
would decline in value by more than 2% of assets in the event of a hypothetical
200-basis point move in interest rates) will be required to maintain additional
capital for interest rate risk under the risk-based capital framework. An
institution 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 an institution's
existing risk-based capital requirement. The OTS has stated that it intends to
reduce or eliminate the leverage ratio capital requirements once the interest
rate risk component rule is implemented. 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 institutions and it retains the authority, on a
case-by-case basis, to impose additional capital requirements for individual
institutions with significant interest rate risk.
The following is a summary of Home Federal's regulatory capital and
capital requirements at June 30, 1996:
Tangible Core Risk-based
capital capital capital
------- ------- -------
(Dollars in Thousands)
Regulatory capital $51,859 $51,859 $54,513
Minimum capital requirement 9,396 18,791 35,320
------- ------- -------
Excess capital $42,463 $33,068 $19,193
======= ======= =======
Regulatory capital ratio 8.28% 8.28% 12.35%
Minimum capital ratio 1.50% 3.00% 8.00%
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,
1996, Home Federal was categorized as "well capitalized."
An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital of 4% or greater, and generally a leverage ratio of 4%
greater. An institution is deemed to be "undercapitalized" if it has a total
risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of
less than 4%, or generally a leverage ratio of less than 4%; and (d)
"significantly undercapitalized" if it has a total risk-based capital ratio of
less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" institutions are subject to growth limitations and
are required to submit a capital restoration plan. If an "undercapitalized"
institution fails to submit, or fails to implement in a material respect, an
acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" institutions are subject to one or more of a
number of requirements and restrictions, including an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks, and
restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically undercapitalized" institutions are subject to appointment of a
receiver or conservator.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier l institution ("Tier 1
Institution"). An institution that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 institution may be designated
by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the
institution is "in need of more than normal supervision." Home Federal is
currently a Tier l Institution.
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to 100% of its
net income to date during the calendar year plus an amount that would reduce by
one-half its "surplus capital ratio" (the excess over its fully phased-in
capital requirements) at the beginning of the calendar year. Any additional
amount of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a notice with the OTS
concerning such dividend declaration.
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. Additional standards on earnings and classified assets are expected
to be issued in the near future.
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 Federal Reserve Bank "discount window," 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 Federal
Reserve Bank. FedICIA imposes certain limitations on the ability of
undercapitalized depository institutions to borrow from Federal Reserve Banks.
Holding Company Regulation
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.
HOLA generally prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from (i) acquiring control of any
other savings association or savings and loan holding company or controlling the
assets thereof or (ii) acquiring or retaining more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary.
Additionally, under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
previously unissued voting shares of an under-capitalized savings association
for cash without that savings association being deemed controlled by the holding
company. Except with the prior approval of the Director of the OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, 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.
There are generally no restrictions on the permissible business activities of a
unitary savings and loan holding company. 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, 1996, Home Federal's asset composition was in excess
of that required to qualify Home Federal as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
institution 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 institution,
(iv) holding or managing properties used or occupied by a subsidiary savings
institution, (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 association to be acquired as of March 5, 1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
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 institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
No subsidiary saving association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period, or without
the giving of such notice, shall be invalid.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with
the SEC under the Securities Exchange Act of 1934 (the "1934 Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the 1934 Act and the rules of the SEC
thereunder. If the Holding Company has fewer than 300 shareholders, it may
deregister its shares under the 1934 Act and cease to be subject to the
foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the
Holding Company may not be resold without registration unless sold in accordance
with the resale restrictions of Rule 144 under the Securities Act of 1933 (the
"1933 Act"). If the Holding Company meets the current public information
requirements under Rule 144, each affiliate of the Holding Company who complies
with the other conditions of Rule 144 (including a two-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
Under current OTS regulations, the QTL test requires that a savings
association 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: (i) loans made to
purchase, finance, construct, improve or repair domestic residential housing or
manufactured housing; (ii) home equity loans; (iii) mortgage-backed securities;
(iv) direct or indirect existing obligations of either the FDIC or the Fedeal
Savings and Loan Insurance Corporation ("FSLIC") for ten years from the date of
issuance, if issued prior to July 1, 1989; (v) obligations of the FDIC, FSLIC,
FSLIC Resolution Fund and the Resolution Trust Corporation for a five year
period from July 1, 1989, if issued after such date; (vi) FHLB stock; (vii) 50%
of the dollar amount of residential mortgage loans originated and sold within 90
days of origination; (viii) investments in service corporations that derive at
least 80% of their gross revenues from activities directly related to
purchasing, refinancing, constructing, improving or repairing domestic
residential real estate or manufactured housing; (ix) 200% of the dollar amount
of loans and investments made to acquire, develop and construct
one-to-four-family residences that are valued at no more than 60% of the median
value of homes constructed in the area; (x) 200% of the dollar amount of loans
for the acquisition or improvement of residential real property, churches,
schools, and nursing homes located within, and loans for any purpose to any
small business located within, an area where credit needs of its low and
moderate income residents are determined not to have been adequately met; (xi)
loans for the purchase, construction, improvement or upkeep of churches,
schools, nursing homes and hospitals not qualified under (x); (xii) up to 10% of
portfolio assets held in consumer loans or loans for educational purposes; and
(xiii) FHLMC and FNMA stock. However, the aggregate amount of investments in
categories (vii)-(xiii) which may be taken into account for the purpose of
whether an institution meets the QTL test cannot exceed 15% of portfolio assets.
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, 1996, 81.4% of Home Federal's portfolio assets (as defined
on that date) were invested in qualified thrift investments (as defined on that
date), and therefore Home Federal's asset composition was in excess of that
required to qualify Home Federal as a QTL. Home Federal does not expect to
significantly change its lending or investment activities in the near future,
and therefore expects to continue to qualify as a QTL, although there can be no
such assurance.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- using terms such as satisfactory and
unsatisfactory -- and a written evaluation of each institution's performance.
Each FHLB is required to establish standards of community investment or service
that its members must maintain for continued access to long-term advances from
the FHLBs. The standards take into account a member's performance under the CRA
and its record of lending to first-time home buyers. The FHLBs have established
an "Affordable Housing Program" to subsidize the interest rate of advances to
member associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. Home Federal
is participating in this program. The examiners have determined that Home
Federal has an outstanding record of meeting community credit needs.
Taxation
Federal Taxation
The Holding Company and its subsidiary file a consolidated federal
income tax return on the accrual basis for each fiscal year ending June 30. The
consolidated federal income tax return has the effect of eliminating
intercompany distributions, including dividends, in the computation of
consolidated taxable income. Income of the Holding Company generally would not
be taken into account in determining the bad debt deduction allowed to Home
Federal, regardless of whether a consolidated tax return is filed. However,
certain "functionally related" losses of the Holding Company would be required
to be taken into account in determining the permitted bad debt deduction which,
depending upon the particular circumstances, could reduce the bad debt
deduction. Home Federal's federal income tax returns have not been audited in
the last five years.
Historically, savings associations, such as Home Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, Home Federal will no longer be able to use the percentage of
taxable income method of computing its allocable tax bad debt deduction. Home
Federal will be required to compute its allocable deduction using the experience
method. As a result of the repeal of the percentage of taxable income method,
reserves taken after 1987 using the percentage of taxable income method
generally must be included in future taxable income over a six-year period,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. 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.
On August 20, 1996, the "Small Business Job Protection Act of 1996" was
passed into law. One provision of this act repeals the special bad debt reserve
method for thrift institutions currently provided for in Section 593 of the
Internal Revenue Code ("IRC"). The provision requires thrifts to recapture any
reserves accumulated after 1987 but forgives taxes owed on reserves accumulated
prior to 1988. Thrift institutions will be given six years to account for the
recaptured excess reserves, beginning with the first taxable year after 1995,
and will be permitted to delay the timing of this recapture for one or two years
subject to whether they meet certain residential loan test requirements.
Management does not believe that this legislation will have a material adverse
effect on the Home Federal's consolidated financial position.
State Taxation
Home Federal is subject to Indiana's Financial Institutions Tax
("FIT"), which 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. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," is effective for fiscal years beginning after December 15,
1995. This statement establishes accounting standards for the impairment of
long-lived assets, certain liabilities, certain intangibles and goodwill.
Management does not believe the adoption of this statement will have a material
effect on the financial position or results of operations of Home Federal.
Statement of Financial Accounting Standards No. 122 ("SFAS 122"),
"Accounting for Mortgage Servicing Rights - an Amendment of FASB Statement No.
65," is effective for fiscal years beginning after December 15, 1995. This
Statement specifies condition under which mortgage servicing rights should be
accounted for separately from the underlying mortgage loans. Management has not
yet quantified the effect of this new standard on the consolidated financial
statements.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," was issued in October 1995 and is
effective for fiscal years beginning after December 15, 1995. Companies can
either elect the new method of accounting or disclose in a note to the financial
statements the pro forma effect of adopting the standard. The Company has not
yet determined if it will elect to change to the fair value method, nor has it
determined the effect the new standard will have on net income and earnings per
share should it elect to make such a change. Adoption of the new standard will
have no effect on the Company's cash flows.
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," was issued in June 1996 and provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 125 applies to transactions occurring after December 31, 1996.
Management has not yet quantified the effect of this new standard on the
consolidated financial statements.
Item 2. Properties.
At June 30, 1996, Home Federal conducted its business from its main
office at 222 West Second Street, Seymour, Indiana and 15 full-service branches.
Home Federal owns one building located at 218 West Second Street, Seymour, which
it uses for certain administrative operations. 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, 1996, is presented in the following table:
Net Book
Value of
Property, Approximate
Description and Owned or Furniture & Square Lease
Address Leased Fixtures Footage Expiration
------- ------ -------- ------- ----------
(Dollars in Thousands)
Principal Office
222 West Second Street Owned $ 1,061 9,200 N/A
Operations Center
218 West Second Street Owned $ 1,668 20,000 N/A
Branch Offices:
Columbus Branches:
501 Washington Street Owned $ 647 14,800 N/A
3805 25th Street Owned $ 314 4,500 N/A
2751 Brentwood Drive Owned $ 574 3,200 N/A
4330 West Jonathon Moore Pike Owned $ 842 2,600 N/A
Hope Branch 1/2 Owned $ 43 2,000 4/99
332 Jackson Street 1/2 Leased
Austin Branch
67 West Main Street Owned $ 53 3,600 N/A
Brownstown Branch Month to
101 North Main Street Leased $ 11 2,400 Month
North Vernon Branches
111 North State Street Owned $ 426 1,900 N/A
1540 North State Street Leased $ 66 1,600 10/02
Osgood Branch
S. Buckeye Street Owned $ 117 1,280 N/A
Salem Branch
R.R. #1, Highway 60 W. Owned $ 63 2,000 N/A
Seymour Branch
1117 E. Tipton Street Owned $ 450 6,800 N/A
Batesville Branch
12 W. Pearl Street Owned $ 716 2,175 N/A
Madison Branch
201 Clifty Drive Owned $ 474 2,550 N/A
Loan Origination Office:
115 East North Street Leased $ 23 2,440 8/97
Greensburg, Indiana
Home Federal owns its computer and data processing equipment which is
used for accounting, financial forecasting, and general ledger work. Home
Federal also has contracted for the data processing and reporting services of
AT&T GIS headquartered in Dayton, Ohio. The contract with AT&T expires in
October 2000. The cost of these data processing services is currently $43,400
per month through October, 1998.
Item 3. Legal Proceedings.
Neither the Company, Home Federal nor its subsidiaries is a party to
any pending legal proceedings, other than routine litigation incidental to its
business activities.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the Corporation's or Home Federal's
shareholders during the quarter ended June 30, 1996.
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
Lawrence E. Welker Executive Vice President, Treasurer,
Chief Financial Officer and Secretary
Gerald L. Armstrong Chief Operating Officer and
Executive Vice President
Lawrence E. Welker (age 49) 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.
Gerald L. Armstrong (age 56) 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.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Home Federal converted from mutual to stock form effective January 14,
1988 (the "Conversion). Home Federal then reorganized effective March 1, 1993 by
converting each outstanding share of its common stock, par value $.01 per share,
into one share of common stock, without par value, of Home Federal Bancorp
("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 6 of HFB's 1996 Shareholder Annual
Report (the "Shareholder Annual Report"). As of August 30, 1996, there were 595
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, will depend upon in which one of three categories, based upon levels
of capital, that savings association is classified. Home Federal is a "tier one
institution" and therefore would be able to pay cash dividends to HFB during any
calendar year up to 100% of its net income during that calendar year plus the
amount that would reduce by one half its "surplus capital ratio" (the excess
over its capital requirements) at the beginning of the calendar year. See
"Regulation--Capital Distributions Regulation" in Item 1 hereof. Prior notice of
any dividend to be paid by Home Federal to the Company will have to be given to
the OTS.
Income of Home Federal appropriated to bad debt reserves and deducted
for federal income tax purposes is not available for payment of cash dividends
or other distributions to HFB without the payment of federal income taxes by
Home Federal on the amount of such income deemed removed from the reserves at
the then-current income tax rate. At June 30, 1996, approximately $6.0 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 $60.00 (the "Purchase Price"), subject
to adjustment as described in the Rights Agreement between the Company and Bank
One, Indianapolis, NA (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.
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire HFB on terms
not approved by the Board of Directors of HFB, except pursuant to an offer
conditioned on a substantial number of Rights being acquired. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors since the Rights may be redeemed by HFB at $.01 per Right
prior to the time that a person or group has acquired beneficial ownership of
15% or more of the Common Shares.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to
the material under the heading "Summary of Selected Consolidated Financial Data"
on page 5 of the Shareholder Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information required by this item is incorporated by reference to
pages 7 to 13 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Corporation's Consolidated Financial Statements and Notes thereto
contained on pages 14 to 32 of the Shareholder Annual Report are incorporated
herein by reference. HFB's Quarterly Results of Operations contained on page 6
of the Shareholder Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There are no such changes and disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 to 4 of the Corporation's Proxy Statement
for its 1996 annual shareholder meeting (the "1996 Proxy Statement").
Information concerning the Corporation'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 11 of the 1996 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 1996 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 1996 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 10 of the 1996 Proxy Statement.
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 1996
Shareholder
Annual Report
Consolidated Balance Sheets as of
June 30, 1996 and 1995...........................................14
Consolidated Statements of Income for each of
the years in the three-year period ended
June 30, 1996....................................................15
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended June 30, 1996..............................................16
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
June 30, 1996....................................................17
Notes to Consolidated Financial Statements............................18
Report of Deloitte & Touche LLP
Independent Auditors.............................................32
(b) Reports on Form 8-K
Registrant has filed no reports on Form 8-K for the quarter ending June
30, 1996.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page 35.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
notes.
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 26th day
of September, 1996.
HOME FEDERAL BANCORP
DATE: September 26, 1996 /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 26th day of September,
1996.
/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/ Mark A. Dennis /s/John K. Keach. Jr.
- - ------------------------------------- -----------------------------------
Mark A. Dennis, Vice John K. Keach, Jr., Director
President and Controller
(Principal Accounting Officer)
/s/ John K. Keach. Sr. /s/ John T. Beatty
- - ------------------------------------- -----------------------------------
John K. Keach, Sr., Director John T. Beatty, Director
/s/Lewis Essex /s/ Harold Force
- - ------------------------------------- -----------------------------------
Lewis Essex, Director Harold Force, Director
/s/ David W. Laitinenen /s/ Harvard W. Nolting. Jr.
- - ------------------------------------- -----------------------------------
David W. Laitinen, Director Harvard W. Nolting, Jr., Director
EXHIBIT INDEX
Reference to
Regulation S-K Sequential
Exhibit Number Document Page Number
2 Agreement and Plan of Reorganization
(incorporated by reference from Exhibit A to
Registrant's Registration Statement on Form S-4
(Registration No. 33-55234)).
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)).
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)).
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)).
10(g) April 1, 1989 Promissory Note and related
documents pertaining to the Illinois Building
(incorporated by reference from Exhibit 10(f) to
Home Federal Savings Bank's Form 10-K for the year
ended June 30, 1989).
10(i) Stock Option Agreement with Harvard W. Nolting, Jr.
(incorporated by reference from Exhibit 10(i) to Home
Federal Savings Bank's Form 10-K for the fiscal year
ended June 30, 1991).
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).
10(o) Executive Supplemental Retirement Income
Agreement with Lawrence E. Welker
(incorporated 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).
10(p) Executive Supplemental Retirement Income
Agreement with Buryl S. Line (incorporated by
reference from Exhibit 10(p) to
Home Federal Savings Bank's Form 10-K for
the fiscal year ended June 30, 1991).
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).
10(w) Deferred Compensation Agreement with Buryl S. Line
(incorporated by reference from Exhibit 10(w) to Home
Federal Savings Bank Form 10-K for the fiscal year ended
June 30, 1992).
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).
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).
10(ad) Director Deferred Compensation Agreement
with Lewis Essex (incorporated by reference
from Exhibit 10(ad) to Home Federal Savings
Bank Form 1 0-K for the fiscal year ended
June 30, 1992).
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).
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).
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).
10(ah) Non-Qualified Stock Option Agreement, dated December
22, 1992, with John T. Beatty (incorporated by reference
from Exhibit 10(ah) to Registrant's Form 10-K for the
year 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 Bank One, Indianapolis, NA,
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 1996 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)