Part
I, Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD
LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q (“Form 10-Q”) contains statements that constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the
future
financial performance of the Company. Readers of this Form 10-Q are
cautioned that any such forward looking statements are not guarantees of
future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements
as a
result of various factors. The accompanying information contained in
this Form 10-Q identifies important factors that could cause such
differences. These factors include changes in interest rates,
charge-offs and loan loss provisions, loss of deposits and loan demand to
other
financial institutions, substantial changes in financial markets, changes
in
real estate values and the real estate market, regulatory changes, changes
in
the financial condition of issuers of the Company’s investments and borrowers,
changes in economic condition of the Company’s market area, increases in
compensation and employee expenses, or unanticipated results in pending legal
proceedings or regulatory proceedings.
Home
Federal Bancorp (the "Company") is organized as a financial holding company
and
owns all the outstanding capital stock of HomeFederal Bank (the
"Bank"). The business of the Bank and, therefore, the Company, is to
provide consumer and business banking services to certain markets in the
south-central portions of the State of Indiana. The Bank does
business through 19 full service banking branches.
CRITICAL
ACCOUNTING POLICIES
The
notes
to the consolidated financial statements contain a summary of the Company’s
significant accounting policies presented on pages 30 through 35 of the
Company’s annual report on Form 10K for the year ended December 31,
2006. Certain of these policies are important to the portrayal of the
Company’s financial condition, since they require management to make difficult,
complex or subjective judgments, some of which may relate to matters that
are
inherently uncertain. Management believes that its critical
accounting policies include determining the allowance for loan losses, and
the
valuation of securities.
Allowance
for Loan Losses
A
loan is
considered impaired when it is probable the Company will be unable to collect
all contractual principal and interest payments due in accordance with the
terms
of the loan agreement. Impaired loans are measured based on the loan’s
discounted cash flow or the estimated fair value of the collateral if the
loan
is collateral dependent. The amount of impairment, if any, and any
subsequent changes are included in the allowance for loan losses.
The
allowance for loan losses is established through a provision for loan losses.
Loan losses are charged against the allowance when management believes the
loans
are uncollectible. Subsequent recoveries, if any, are credited to the
allowance. The allowance for loan losses is maintained at a level
management considers to be adequate to absorb probable loan losses inherent
in
the portfolio, based on evaluations of the collectibility and historical
loss
experience of loans. The allowance is based on ongoing assessments of
the probable estimated losses inherent in the loan portfolio. The
Company’s methodology for assessing the appropriate allowance level consists of
several key elements, as described below.
All
delinquent loans that are 90 days past due are included on the Asset Watch
List. The Asset Watch List is reviewed quarterly by the Asset Watch
Committee for any classification beyond the regulatory rating based on a
loan’s
delinquency.
Commercial
and commercial real estate loans, greater than $50,000, are individually
risk
rated pursuant to the loan policy. Homogeneous loans such as consumer
and residential mortgage loans are not individually risk rated by
management. They are pooled based on historical portfolio data that
management believes will provide a good basis for the loans'
quality. For all loans not listed individually on the Asset Watch
List, historical loss rates based on the last four years are the basis for
developing expected charge-offs for each pool of loans.
Historical
loss rates for commercial and consumer loans may be adjusted for significant
factors that, in management’s judgment, reflect the impact of any current
conditions on loss recognition. Factors which management considers in
the analysis include the effects of the local economy, trends in the nature
and
volume of loans (delinquencies,
charge-offs,
nonaccrual and problem loans), changes in the internal lending policies and
credit standards, collection practices, and examination results from bank
regulatory agencies and the Company’s credit review function.
Finally,
a portion of the allowance is maintained to recognize the imprecision in
estimating and measuring loss when
evaluating
allowances for individual loans or pools of loans. This unallocated
allowance is based on factors such as
current
economic conditions, trends in the Company’s loan portfolio delinquency, losses
and recoveries, level of
under
performing and nonperforming loans, and concentrations of loans in any one
industry. The unallocated
allowance
is assigned to the various loan categories based on management’s perception of
probable risk in the different loan categories and the principal balance
of the
loan categories.
Valuation
of Securities
Securities
are classified as held-to-maturity or available-for-sale on the date of
purchase. Only those securities classified as held-to-maturity are reported
at
amortized cost. Available-for-sale securities are reported at fair value
with
unrealized gains and losses included in accumulated other comprehensive income,
net of related deferred income taxes, on the consolidated balance sheets.
The
fair value of a security is determined based on quoted market prices. If
quoted
market prices are not available, fair value is determined based on quoted
prices
of similar instruments. Realized securities gains or losses are reported
within
noninterest income in the consolidated statements of income. The cost of
securities sold is based on the specific identification method.
Available-for-sale and held-to-maturity securities are reviewed quarterly
for
possible other-than-temporary impairment. The review includes an analysis
of the
facts and circumstances of each individual investment such as the severity
of
loss, the length of time the fair value has been below cost, the expectation
for
that security’s performance, the creditworthiness of the issuer and the
Company’s intent and ability to hold the security to recovery, which may be
maturity. A decline in value that is considered to be
other-than-temporary is recorded as a loss within noninterest income in the
consolidated statements of income. At September 30, 2007, the unrealized
losses
in the available-for-sale security portfolio were primarily comprised
of corporate bonds, municipal bonds, agency mortgage-backed securities and
collateralized mortgage obligations and agency bonds. Management believes
the
price movements in these securities are a result of the movement in market
interest rates. Management also maintains the intent and ability to hold
securities in an unrealized loss position to the earlier of the recovery
of
losses or maturity.
RESULTS
OF OPERATIONS:
Quarter
Ended
September
30,
2007
Compared to
Quarter
Ended
September
30, 2006
General
The
Company reported net income of $1,701,000 for the quarter ended September
30,
2007, compared to $341,000 for the quarter ended September 30, 2006, an increase
of $1,360,000. Basic earnings per common share for the current
quarter were $0.49 compared to $0.09 for the quarter ended September 30,
2006. Diluted earnings per common share were $0.48 for the quarter
ended September 30, 2007, compared to $0.09 for the quarter ended September
30,
2006. The Company’s net income for the third quarter of 2006
included a pre-tax loss of $1,956,000 resulting from the sale of approximately
$65.5 million of investment securities. The after tax impact of the
loss on sale of investment securities on third quarter earnings was
approximately $1,330,000 or $0.35 diluted earnings per common
share.
Net Interest Income
Net
interest income before provision for loan losses increased $567,000 or 8.9%
for
the quarter ended September 30, 2007, compared to the quarter ended September
30, 2006. This increase was due to an increase in net interest margin
to average interest earning assets of 28 basis points to 3.51%, as the rates
earned on interest earning assets rose faster than rates paid on interest
bearing liabilities during the third quarter. Average interest
earning assets increased $1,388,000 in the third quarter of 2007 compared
to the
same quarter of the prior year. Average interest bearing liabilities
decreased $3,134,000 in the third quarter of 2007, compared to the same quarter
of the prior year.
Provision
for Loan Losses
The
provision for loan losses increased $90,000 for the quarter ended September
30,
2007 to $286,000 compared to $196,000 for the quarter ended September 30,
2006. Net charge offs were $53,000 for the third quarter representing
an annualized net charge off ratio of 0.03% compared to net charge offs of
$457,000 representing an annualized net charge off ratio of 0.27% for the
third
quarter of 2006. While net charge offs have remained at
relatively low levels, the provision for loan losses was increased during
the
quarter as non performing loans have increased during the year, as well as
an
increase in consumer delinquencies. The increase in nonperforming
loans is due to two large commercial relationships - one $3.1 million
relationship designated as non-accrual in the second quarter and another
$3
million relationship that was classified as non-accrual in the third
quarter. The $3.1 million commercial relationship is secured by
accounts receivable inventory and facilities. The other $3 million
commercial relationship is a residential land development loan which is secured
by the underlying collateral. At September 30, 2007, the loan
loss allowance covered 58% of nonperforming loans compared to 171% of non
performing loans at September 30, 2006
The
allowance for loan losses increased $233,000 during the third
quarter. The increase in the allowance for loan losses during the
quarter was a result of the increase in non performing loans and an increase
in
consumer loan
delinquencies. See
the Critical Accounting Policies, Allowance for Loan Losses section for
a
description of the systematic analysis the Bank uses to determine its allowance
for loan losses. The change to the
loan
loss
allowance for the three month period ended September 30, 2007 and 2006 is
as
follows:
|
Quarter
ended September 30: (in thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Allowance
beginning balance
|
|
$
|
6,524
|
|
|
$
|
6,718
|
|
|
Provision
for loan losses
|
|
|
286
|
|
|
|
196
|
|
|
Charge-offs
|
|
|
(169
|
)
|
|
|
(621
|
)
|
|
Recoveries
|
|
|
116
|
|
|
|
164
|
|
|
Allowance
ending balance
|
|
$
|
6,757
|
|
|
$
|
6,457
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
to Total Loans
|
|
|
.92
|
%
|
|
|
.93
|
%
|
|
Allowance
to Nonperforming Loans
|
|
|
.58
|
%
|
|
|
171
|
%
|
Net
interest income after provision for loan losses increased $477,000 or 7.7%
for
the three month period ended September 30, 2007 compared to the three month
period ended September 30, 2006.
Interest Income
Total
interest income for the three month period ended September 30, 2007, increased
$1,066,000, or 8.2%, over the same period of the prior year. This
increase is due to the weighted average interest rate earned on average interest
earning assets increasing 53 basis points in the quarter ended September
30,
2007, as compared to the quarter ended September 30, 2006. The
increase in interest rates was primarily due to the changing mix of the balance
sheet as the average balance of higher yielding commercial and commercial
mortgage loans increased $57,124,000 and $24,564,000 respectively, for the
three
month period ended September 30, 2007 as compared to the three month period
ended September 30, 2006, average balances of while lower yielding available
for
sale securities and residential mortgage loans decreased $52,533,000 and
$18,918,000, respectively, over the same two comparative periods.
Interest Expense
Total
interest expense for the three month period ended September 30, 2007 increased
$499,000, or 7.6%, as compared to the same period a year ago. The
weighted average interest rates paid on average interest bearing liabilities
increased 27 basis points, from the September 2006 quarter to the September
2007
quarter. The increase in rates paid on interest bearing liabilities
relates to the shifting mix of interest bearing
liabilities. Certificates of deposits increased $26.1 million
in average balances for the two comparative quarters, while average balance
of
higher costing brokered deposits, public fund certificate of deposits and
FHLB
advances decreased $12.3 million, $6.8 million and $4.6 million,
respectively. The average rate paid for retail certificates of
deposits increased 54 basis points over the same period as the Bank has run
promotional specials to attract retail deposit funds which are priced 12
to 24
basis points lower than wholesale funding alternatives.
Non
Interest Income
Total
non
interest income increased $2,172,000 to $3,344,000 for the
quarter. The Company’s non interest income for the 2006 third quarter
included a nonrecurring pre-tax loss of $1,956,000 resulting from the sale
of
approximately $65.5 million of investment securities. Investment
advisory services fees increased $181,000 or 57.1% for the three month period
ended September 30, 2007 over the prior years comparable period as the Company
continues to expand its brokerage business. In June 2007, the Company
purchased a book of business in Greenwood from an independent
broker. Loan servicing income for the three months ended September
30, 2007 decreased $106,000 or 44.9% compared to the same period a year ago
due
to the sale of the Company’s servicing portfolio in December 2006.
Non
Interest Expenses
Non
interest expenses increased $469,000 or 6.8% to $7,357,000 for the
quarter. The primary reason for this increase was a
$373,000 increase in compensation and employee benefits. In the
third quarter of 2006 the Company reduced its vacation accrual $260,000 pursuant
to a change in vacation policy. Other items which
affected
the increase in compensation and employee benefits relate primarily to increased
incentive plan expenses as a result of commercial loan growth and increased
investment advisory service fees.
Taxes
The
effective tax rate for the quarters ended September 30, 2007 and September
30,
2006, was 36.1% and 29.4%, respectively. The applicable income tax
expense for both periods includes the benefit of tax-exempt income partially
offset by the effect of nondeductible expenses. Prior to September 1,
2006, state income tax expense for the Company did not include the Company’s
Nevada subsidiary, Home Investment Inc., as the subsidiary did not
have
nexus
with the state of Indiana before that date. The current three month
period ended September 30, 2007, includes $1,678,000 of pretax income from
the
Nevada subsidiary. In the third quarter of 2006, July and
August income of
$504,000
was excluded from Indiana income tax, while the loss on securities sale which
created nexus with the state of Indiana was included in calculating income
tax.
RESULTS
OF OPERATIONS:
Nine
months Ended
September 30,
2007
Compared to
Nine
months
Ended September 30, 2006
General
The
Company reported net income of $4,481,000 for the nine months ended September
30, 2007, compared to $3,405,000 for the nine months ended September, 2006,
an
increase of $1,076,000. Basic earnings per common share for the nine
months ended September 30, 2007 were $1.28 compared to $.91 for the nine
months
ended September 30, 2006. Diluted earnings per common share were
$1.25 for the nine months ended September 30, 2007, compared to $0.89 for
the
nine months ended September 30, 2006. The Company had various nonrecurring
items
occurring in both nine month periods ended September 30, 2007 and
2006. For the nine months ended September 30, 2007 these include a
pre-tax charge of $788,000 resulting from expenses associated with the February
16, 2007, separation agreement with an executive vice president of the Bank
and
the Company, as well as a $200,000 write down taken in the second quarter
of
2007, to reduce to zero, the book value of a building the Company donated
to a
local non profit organization. Nonrecurring items which occurred in
the nine month period ended September 2006 include the previously mentioned
pretax loss on securities sale of $1,956,000 and $260,000 increase to income
related to the vacation accrual policy change.
Net Interest Income
Net
interest income before provision for loan losses increased $1,649,000 or
8.7%
for the nine months ended September 30, 2007, compared to the nine months
ended
September 30, 2006. This increase was due to an increase in net
interest margin to average interest earning assets of 19 basis points to
3.47%,
as both the balances and rates earned on interest earning assets rose faster
than the balances and rates paid on interest bearing liabilities during the
nine
month period. Average interest earning assets and interest
bearing liabilities increased in the nine months ended September 30, 2007,
compared to the nine months ended September 30, 2006 of the prior year by
$20,146,000 and $14,312,000, respectively.
Provision
for Loan Losses
The
provision for loan losses was $789,000 for the nine months ended September
30,
2007, an increase of $256,000, compared to the nine months ended September
30,
2006. Net charge offs were $630,000 for the nine months ended
September 30, 2007 representing an annualized net charge off ratio of 0.12%
compared to net charge offs of $829,000 representing an annualized net charge
off ratio of 0.17% for the nine months ended September 30, 2006. The
increase in the provision for loan losses for the year was due to an increase
in
nonperforming loans, an increase in consumer delinquencies and portfolio
loan
growth during the period.
The
increase in the provision for loan losses for the year resulted in an increase
of $159,000 in the allowance for loan losses. At September 30, 2007,
the loan loss allowance covered .58% of nonperforming loans. See the
Critical Accounting Policies, Allowance for Loan Losses section for a
description of the systematic analysis the Bank uses to determine its allowance
for loan losses. The change to the loan loss allowance for the nine
months ended September 30, 2007 and 2006 is as follows:
|
Nine
months ended September 30: (in thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Allowance
beginning balance
|
|
$
|
6,598
|
|
|
$
|
6,753
|
|
|
Provision
for loan losses
|
|
|
789
|
|
|
|
533
|
|
|
Charge-offs
|
|
|
(1,012
|
)
|
|
|
(1,039
|
)
|
|
Recoveries
|
|
|
382
|
|
|
|
210
|
|
|
Allowance
ending balance
|
|
$
|
6,757
|
|
|
$
|
6,457
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
to Total Loans
|
|
|
.92
|
%
|
|
|
.93
|
%
|
|
Allowance
to Nonperforming Loans
|
|
|
.58
|
%
|
|
|
170.7
|
%
|
Net
interest income after provision for loan losses increased $1,393,000 or 7.6%
for
the nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006.
Interest Income
Total
interest income for the nine months ended September30, 2007, increased
$4,517,000, or 12.3%, over the
same
period of the prior year. This increase is primarily the result of
two factors: 1) the weighted average interest rate
earned
on
average interest earning assets increased 60 basis points for the nine months
ended September30, 2007,
as
compared to the nine months ended September30, 2006 and 2) the average balance
of interest earning assets increased $20,146,000 over the same
period. The increase in interest rates was primarily due to the
changing mix of the balance sheet as the average balance of higher yielding
commercial, commercial mortgage and second and home equity loans increased
$58,174,000, $24,852,000 and $7,264,000 respectively, for the nine months
ended
September 30, 2007 as compared to the nine months ended September 30, 2006,
while average balances of lower yielding available for sale securities and
residential mortgage loans decreased $58,924,000 and $13,130,000 respectively,
over the same two comparative periods.
Interest Expense
Total
interest expense for the nine months ended September 30, 2007 increased
$2,868,000, or 16.2%, as compared to the same period a year ago. The
weighted average interest rates paid on average interest bearing liabilities
increased 44 basis points, from the September 2006nine month period to the
September 2007nine month period. The increase in weighted average
interest rates paid on retail certificates of deposits increased approximately
75 basis points, while average balances increased
$31,153,000. Average balances of brokered deposits, public funds
certificates of deposit and FHLB advances decreased $7,313,000, $7,128,000
and
$11,914,000, respectively.
Non
Interest Income
Total
non
interest income increased $2,255,000 or 31.3% to $9,467,000 for the nine
months
ended September 30, 2007. The pre-tax loss of $1,956,000
resulting from the sale of approximately $65.5 million of investment securities
in 2006 was the primary reason for the increase in non interest
income. Other increases included deposit fee income which
increased $401,000 or 9.0% for the nine months ended September 30, 2007,
due to
an overdraft privilege program introduced by the Company in March 2006, as
well
as an increasing number of demand and commercial checking
accounts. The Company’s average number of demand accounts and
commercial checking accounts increased approximately 212 and 234, respectively,
in the nine month period ended September 30, 2007 compared to the nine month
period ended September 30, 2006. Investment advisory services fees increased
$350,000 or 33.9% over the prior year due to the Company adding an additional
broker in both June and July of 2006, as well as the purchase of a brokerage
book of business in June 2007. The Company sold its loan servicing
portfolio in December of 2006. In the first nine months of 2006, the
Company recorded $298,000 in loan servicing income from the recovery of an
impairment charge related to mortgage servicing rights. Both of these
factors resulted in loan servicing income decreasing $586,000 in the nine
months
ended September 30, 2007 as compared to the nine months ended September 30,
2006.
Non
Interest Expenses
Non
interest expenses increased $1,816,000 or 8.8% to $22,458,000 for the nine
months ended September 30, 2007.
Compensation
and employee benefits expense increased $567,000 or 4.8% for the
nine months ended September 30, 2007. The Company reduced its
vacation accrual $260,000 pursuant to a change in vacation policy in the
third
quarter of 2006. Compensation and employee benefits expense also
increased due to additional salary and incentive expense for the new commercial
lenders in Indianapolis and related support staff and normal annual salary
increases. These increases were mitigated by the reduction in
compensation expense attained through a reorganization of the Company, which
occurred in the second half of the first quarter, allowing the Company to
operate effectively with fewer personnel in other areas.
Occupancy
expenses increased $109,000 or 3.8% due primarily to the rent associated
with
the new Indianapolis office. Marketing expense decreased $217,000
over the nine months ended September 30, 2007. The Company
anticipates marketing expenses for 2007 to be approximately equal to 2006;
however, the timing of when these amounts will be incurred as compared to
the
prior year will fluctuate. Miscellaneous expense increased $1,265,000
for the nine months ended September 30, 2007 due to a first quarter charge
associated with a separation agreement with a former executive vice president
of
the Bank and the Company of $788,000, as well as the $200,000 write
down associated with the building donation. Other non interest
expense increases included $100,000 in professional fees primarily due to
additional legal and accounting expenses incurred to address new proxy
disclosure requirements and new accounting pronouncements.
Taxes
The
effective tax rate for the nine month periods ended September 30, 2007 and
September 30, 2006, is 34.5% and 32.0%, respectively. The applicable
income tax expense for both periods includes the benefit of tax-exempt income
partially offset by the effect of nondeductible expenses. Prior to
September 1, 2006, state income tax expense for the Company did not include
the
Company’s Nevada subsidiary, Home Investment Inc., as the subsidiary did not
have nexus with the state of Indiana before that date. Home Investment Inc.’s
pretax income for the eight month period
ended
August 31, 2006, before nexus was established, was approximately $2,685,000.
The
month of September 2006 pretax loss was approximately $1,462,762 due to the
securities sale. The current nine month period ended
September
30, 2007, includes $1,643,000 of pretax income from the Nevada
subsidiary. Additionally, in the current nine month period the
Company received a federal tax benefit for the donation of a building held
for
investment to a local non profit organization.
Asset
Quality
Nonperforming
assets to total assets increased to 1.35% at September 30, 2007 from 0.46%
at
December 31, 2006. Nonperforming loans to total gross loans increased
to 1.59% at September 30, 2007 from 0.54% at December 31, 2006. The increase
in
nonperforming assets and non performing loans was due primarily to two
commercial relationships that moved to non-accrual status totaling approximately
$6.1 million. One commercial loan of $3.1 million is secured by
accounts receivable inventory and facilities. The other $3 million
commercial relationship is a residential land development loan which is secured
by the underlying collateral. The allowance for loan losses increased
to $6,757,000 as of September 30, 2007 compared to $6,598,000 at December
31,
2006. The ratio of the allowance for loan losses to total loans was
0.92% at September 30, 2007. During the nine month period ended
September 30, 2007 the Company’s loan portfolio increased $42,398,000 primarily
through $65,566,000 of growth in the commercial and commercial mortgage loans
being offset by decreases of $17,940,000 in residential mortgages and $5,440,000
in other consumer loans. The growth in commercial loans was the
primary contributor to the decrease in the ratio of allowance to total
loans. Although commercial lending generally carries more risk the
allowance for loan losses that corresponds to the recent commercial loan
growth
is consistent with the current risk grades on the individual
relationships. Management’s analysis of the unallocated portion of
the allowance remains consistent with the prior quarter as no major changes
were
noted in the Indianapolis commercial market or the Company’s other major
markets.
FINANCIAL
CONDITION:
Total
assets as of September 30, 2007, were $876,602,000, which was a decrease
of
$27,865,000 from December 31, 2006, total assets of
$904,467,000. Changes within the various balance sheet categories
included a $69,916,000 decrease in cash and due from banks. Cash and
due from banks was unusually high at the end of the prior year due to large
deposits made by public fund customers at year end, which were subsequently
withdrawn as public fund
checking
deposit balances decreased $47,579,000. Certificates of deposits
increased $14,601,000 as the Company ran promotions to attract this
funding. Another use of cash was the funding of commercial
loans. Total loans increased $42,398,000 with the increase in
commercial loans being offset by a decrease in residential mortgage loans
of
$17,940,000. The decrease in residential mortgage loans reflects the
Company’s current practice of selling the majority of its residential loan
originations. Additional decreases occurred in consumer loans of
$5,440,000. The majority of the decrease in consumer loans relates to
the Company’s decision in 2006 to no longer originate indirect auto
loans. Brokered deposits declined $13,158,000 due to
maturities. FHLB borrowings increased $15,032,000. The
Company from time to time takes advantage of attractive pricing on FHLB
borrowings to replace other funding sources or provide for anticipated funding
needs.
Bank
premises and equipment decreased $1,919,000 to $15,313,000 as of September
30,
2007. This decrease is the result of a sale leaseback transaction
completed by the Company in the third quarter of 2007. The Company
sold four retail branch buildings and entered into operating leases with
the
buyer. The gain on sale of these buildings, which totaled
approximately $2.0 million, was deferred and will be amortized over the life
of
the leases. The proceeds from the sale will be used to fund
commercial loan growth.
Shareholders'
equity decreased $2,401,000 during the first nine months of
2007. Retained earnings increased $4,481,000 from net income and
decreased $2,095,000 for shareholder dividends and $8,086,000 from stock
buy
backs. Common stock increased $3,259,000 from the exercise of common
stock options, $321,000 from the related tax benefit of disqualifying
dispositions of such options, and $98,000 from recognition of compensation
expense associated with vesting of stock options. Common stock
decreased $437,000 from stock buy backs. Additionally, the Company
had other comprehensive gain from unrealized gains in its securities available
for sale portfolio, net of tax, of $58,000 for the nine months ended September
30, 2007.
At
September 30, 2007, the Company and the Bank exceeded all current applicable
regulatory capital requirements as follows:
|
|
|
Actual
|
|
|
For
Capital
Adequacy
Purposes
|
|
|
To
Be Categorized As
“Well
Capitalized”
Under
Prompt
Corrective
Action
Provisions
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
As
of September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to
risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HomeFederal
Bank
|
|
$
|
86,560
|
|
|
|
11.07
|
%
|
|
$
|
62,580
|
|
|
|
8.0
|
%
|
|
$
|
78,225
|
|
|
|
10.0
|
%
|
|
Home
Federal Bancorp Consolidated
|
|
$
|
89,419
|
|
|
|
11.42
|
%
|
|
$
|
62,664
|
|
|
|
8.0
|
%
|
|
$
|
78,330
|
|
|
|
10.0
|
%
|
|
Tier
1 risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to
risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HomeFederal
Bank
|
|
$
|
79,803
|
|
|
|
10.20
|
%
|
|
$
|
31,290
|
|
|
|
4.0
|
%
|
|
$
|
46,935
|
|
|
|
6.0
|
%
|
|
Home
Federal Bancorp Consolidated
|
|
$
|
82,662
|
|
|
|
10.55
|
%
|
|
$
|
31,332
|
|
|
|
4.0
|
%
|
|
$
|
46,998
|
|
|
|
6.0
|
%
|
|
Tier
1 leverage capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to
average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HomeFederal
Bank
|
|
$
|
79,803
|
|
|
|
9.17
|
%
|
|
$
|
34,810
|
|
|
|
4.0
|
%
|
|
$
|
43,513
|
|
|
|
5.0
|
%
|
|
Home
Federal Bancorp Consolidated
|
|
$
|
82,662
|
|
|
|
9.48
|
%
|
|
$
|
34,860
|
|
|
|
4.0
|
%
|
|
$
|
43,576
|
|
|
|
5.0
|
%
|
Capital
Resources
Tier
I
capital consists principally of shareholders’ equity including Tier I qualifying
junior subordinated debt, but excluding unrealized gains and losses on
securities available-for-sale, less goodwill and certain other intangibles.
Tier
II capital consists of general allowances for loan losses, subject to
limitations. Assets are adjusted under the risk-based guidelines to take
into
account different risk characteristics. Average assets for this purpose does
not
include
goodwill
and any other intangible assets that the Federal Reserve Board determines
should
be deducted from Tier I capital.
Liquidity
Resources
Historically,
the Bank has maintained its liquid assets at a level believed adequate to
meet
requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is
maintained. Cash for these purposes is generated through the sale or
maturity of investment securities and loan sales and repayments, and may
be
generated through increases in deposits. Loan payments are a
relatively stable source of funds, while deposit flows are influenced
significantly
by the level of interest rates and general money market
conditions. Borrowings may be used to compensate for reductions in
other sources of funds such as deposits. As a member of the Federal
Home Loan Bank (“FHLB”) system, the Bank may borrow from the FHLB of
Indianapolis. At September 30, 2007, the Bank had $83,699,000 in such
borrowings. In addition, at September 30, 2007, the Bank had
commitments to purchase
loans
of
$12,909,000, as well as commitments to fund loan originations of $45,877,000,
unused home equity lines of credit of $46,626,000 and unused commercial lines
of
credit of $64,383,000, as well as commitments to sell loans of $42,710,000.
Generally, a significant portion of amounts available in lines of credit
will
not be drawn. In the opinion of management, the Bank has sufficient
cash flow and borrowing capacity to meet current and anticipated funding
commitments.