PROSPECTUS SUPPLEMENT
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HOME FEDERAL BANCORP, INC.
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA
401(K) SAVINGS PLAN AND TRUST
This prospectus supplement relates to the election by participants in
the Home Federal Savings and Loan Association of Nampa 401(k) Savings Plan to
direct the plan trustee to invest all or a portion of their funds in the plan in
the common stock of Home Federal Bancorp, Inc. ("Home Federal Bancorp"). The
Home Federal Savings and Loan Association of Nampa 401(k) Savings Plan is
referred to in this prospectus supplement as the 401(k) Plan.
The common stock may be purchased through an additional investment
option called the Employer Stock Fund. The interests offered under this
prospectus supplement are conditioned on the completion of the mutual holding
company reorganization of Home Federal Savings and Loan Association of Nampa
("Home Federal"). Your investment in the Employer Stock Fund in connection with
the reorganization of Home Federal is also governed by the purchase priorities
contained in Home Federal's plan of reorganization. The 401(k) Plan permits you,
as a participant, to direct the trustee of the Employer Stock Fund to purchase
Home Federal Bancorp common stock with amounts in the 401(k) Plan attributable
to your accounts. This prospectus supplement relates solely to the initial
election of a participant to direct the purchase of Home Federal Bancorp common
stock in the mutual holding company reorganization and not to any future
purchases under the 401(k) Plan or otherwise.
The prospectus dated August 13, 2004 of Home Federal Bancorp, which is
being delivered with this prospectus supplement, includes detailed information
with respect to Home Federal Bancorp, the reorganization, Home Federal Bancorp
common stock and the financial condition, results of operations and business of
Home Federal Bancorp. This prospectus supplement, which provides detailed
information with respect to the 401(k) Plan, should be read only in conjunction
with the prospectus.
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For a discussion of certain factors that you should consider before investing,
see "Restrictions on Resale" at page 12 in this prospectus supplement
and "Risk Factors" beginning on page 14 in the prospectus.
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The securities offered hereby are not deposits or accounts and are not
federally insured or guaranteed.
The securities offered hereby have not been approved or disapproved by
the Securities and Exchange Commission, the Office of Thrift Supervision, or any
state securities commission or agency, nor have these agencies passed upon the
accuracy or adequacy of this prospectus supplement. Any representation to the
contrary is a criminal offense.
The date of this prospectus supplement is August 13, 2004.
This prospectus supplement contains information you should consider
when making your investment decision. You should rely only on the information
provided in this prospectus supplement. Home Federal Bancorp has not authorized
anyone else to provide you with different information. Home Federal Bancorp is
not making an offer of its common stock in any state where an offer is not
permitted. The information in this prospectus supplement is accurate only as of
the date of this prospectus supplement, regardless of the time of delivery of
this prospectus supplement or any sale of Home Federal Bancorp common stock.
TABLE OF CONTENTS
THE OFFERING............................................................................... 1
Election to Purchase Home Federal Bancorp Common Stock in the
Reorganization and Stock Offering................................................... 1
Securities Offered.................................................................... 1
Method of Directing Transfer.......................................................... 2
Time for Directing Transfer........................................................... 2
Irrevocability of Transfer Direction.................................................. 2
Subsequent Elections.................................................................. 2
Purchase of Home Federal Bancorp Common Stock - The Employer Stock Fund............... 2
Nature of a Participant's Interest in Home Federal Bancorp Common Stock............... 2
Voting and Tender Rights of Home Federal Bancorp Common Stock......................... 3
DESCRIPTION OF THE 401(k) PLAN............................................................. 3
Introduction.......................................................................... 3
Eligibility and Participation......................................................... 3
Contributions Under the 401(k) Plan................................................... 3
Limitations on Contributions.......................................................... 4
Investment of Contributions........................................................... 5
Financial Data........................................................................ 7
Administration of the 401(k) Plan..................................................... 9
Benefits Under the 401(k) Plan........................................................ 9
Withdrawals and Distributions from the 401(k) Plan.................................... 9
Reports to 401(k) Plan Participants................................................... 10
Amendment and Termination............................................................. 10
Federal Income Tax Consequences ...................................................... 10
ERISA and Other Qualification......................................................... 11
Restrictions on Resale................................................................ 11
Securities and Exchange Commission Reporting and Short-Swing Profit Liability......... 12
LEGAL OPINIONS............................................................................. 12
INVESTMENT ELECTION FORM................................................................... A-1
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THE OFFERING
Election to Purchase Home Federal Bancorp Common Stock in the Reorganization and
Stock Offering
In connection with the Home Federal mutual holding company
reorganization, the 401(k) Plan will permit each participant to direct that all
or part of the funds in his or her accounts under the 401(k) Plan be transferred
to the Employer Stock Fund and used to purchase Home Federal Bancorp common
stock in the stock offering. The trustee of the Employer Stock Fund will follow
the participants' directions and exercise subscription rights to purchase the
common stock in the stock offering to the extent provided in our plan of
reorganization. Funds in the 401(k) Plan that you do not want to be used to
purchase Home Federal Bancorp common stock will remain invested in accordance
with your investment instructions in effect at the time.
Respective purchases by the 401(k) Plan in the stock offering will be
counted as purchases by the individual participants at whose election they are
made, and will be subject to the purchase limitations applicable to the
individual, rather than being counted in determining the maximum amount that the
Home Federal Bancorp tax-qualified employee plans (as defined in the prospectus)
may purchase in the aggregate. See "Home Federal's Reorganization and Stock
Offering - Subscription Offering and Subscription Rights" in the prospectus.
All participants are eligible to direct a transfer of funds to the
Employer Stock Fund. However, these directions are subject to the purchase
priorities in the plan of reorganization of Home Federal. Your order will be
filled based on your status as an eligible account holder, supplemental eligible
account holder or other member in the stock offering. An eligible account holder
is a depositor whose deposit account(s) totaled $50.00 or more on December 31,
2002. A supplemental eligible account holder is a depositor whose deposit
account(s) totaled $50.00 or more on June 30, 2004. An other member is a
depositor with Home Federal as of July 31, 2004 or a borrower as of March 16,
2004 whose loans continued to be outstanding as of July 31, 2004. If you fall
into one of the above subscription offering categories, you have subscription
rights to purchase shares of Home Federal Bancorp common stock in the
subscription offering and you may use funds in your 401(k) Plan account to pay
for the shares of Home Federal Bancorp common stock that you are eligible to
purchase.
If we receive subscriptions for more shares than are to be sold in the
offering, shares will be allocated to subscribers in the order of the priorities
established in the Home Federal plan of reorganization under a formula outlined
within the plan of reorganization. In that case, as a result of the allocation,
the trustee for the 401(k) Plan may not be able to purchase all of the common
stock you requested in the stock offering. The trustee would purchase in the
stock offering as many shares as it is able and would pro-rate those shares to
each participant's account based on the purchase priorities contained in the
Home Federal plan of reorganization and outlined above.
Securities Offered
The securities offered in connection with this prospectus supplement
are participation interests in the Employer Stock Fund. In connection with the
mutual holding company reorganization of Home Federal, and subject to any limits
set out in the plan of reorganization, up to 100% of the assets of the 401(k)
Plan may be used by the 401(k) Plan trustee to acquire our common stock for the
accounts of employees participating in the 401(k) Plan. Based on the asset value
of the 401(k) Plan as of December 31, 2003 and the offering price, up to 251,778
shares of our common stock could be acquired by the 401(k) Plan. Home Federal
Bancorp is the issuer of the common stock and only the employees of Home Federal
Bancorp and Home Federal may participate in the 401(k) Plan. Information
relating to the 401(k) Plan is contained in this prospectus supplement and
information relating to Home Federal Bancorp, the reorganization and stock
offering, and the financial condition, results of operations and business of
Home Federal Bancorp is contained in the prospectus delivered with this
prospectus supplement. The address of our principal executive office is 500 12th
Avenue South, Nampa, Idaho 83651, and our telephone number is (208) 466-4634. As
of December 31, 2003, the market value of the assets of the 401(k) Plan equaled
approximately $2.7 million. The plan administrator has informed each participant
of the value of his or her beneficial interest in the 401(k) Plan. The value of
401(k) Plan assets represents past contributions to the 401(k) Plan on your
behalf, plus or minus earnings or losses on the contributions, less previous
withdrawals.
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Method of Directing Transfer
Included with this prospectus supplement is an Investment Election
Form. If you wish to direct some or all of your beneficial interest in the
assets of the 401(k) Plan into the Employer Stock Fund to purchase Home Federal
Bancorp common stock in the stock offering, you should indicate that decision by
completing and submitting the election form. If you do not wish to make an
election at this time, you do not need to take any action.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the
Employer Stock Fund in order to purchase Home Federal Bancorp common stock in
the stock offering is September 14, 2004, unless extended. Your completed
election form must be returned to the stock information center, 500 12th Avenue
South, Nampa, Idaho 83651, by 12:00 Noon, Mountain time on that date.
Irrevocability of Transfer Direction
Once received in proper form, your executed Investment Election Form
may not be modified, amended or revoked without our consent unless the stock
offering has not been completed by November 10, 2004. See also "Investment of
Contributions - Home Federal Bancorp Common Stock Investment Election
Procedures" below.
Subsequent Elections
After the offering, you will continue to be able to direct the
investment of past balances and current contributions in the investment options
available under the 401(k) Plan, including the Employer Stock Fund (the
percentage invested in any option must be a whole percent). The allocation of
your interest in the various investment options offered under the 401(k) Plan
may be changed daily. Special restrictions may apply to transfers directed to or
from the Employer Stock Fund by those participants who are our executive
officers and principal stockholders and are subject to the provisions of Section
16(b) of the Securities Exchange Act of 1934, as amended. In addition, executive
officers of Home Federal Bancorp and Home Federal will not be able to transfer
their initial investment out of the Employer Stock Fund for a period of one year
following consummation of the reorganization and stock offering.
Purchase of Home Federal Bancorp Common Stock - The Employer Stock Fund
Shares of Home Federal Bancorp common stock purchased through the
401(k) Plan will be held as part of the Employer Stock Fund. The trustee
requires that Employer Stock Fund units consist of both shares of Home Federal
Bancorp common stock and cash. Accordingly, funds transferred to the Employer
Stock Fund for the purchase of Home Federal Bancorp common stock in the stock
offering will be used by the trustee to purchase both shares of the common stock
and cash. Units of the Employer Stock Fund will be valued in the offering at
$10.00 per unit. Of this amount, $9.30 will be used to acquire 0.93 of one share
of Home Federal Bancorp common stock, and $.70 will be used to acquire cash,
through an interest in a money market account. All other persons who purchase
our common stock in the stock offering outside of the 401(k) Plan may acquire
the common stock without having to acquire the related cash interest and will
pay $10.00 per share for Home Federal Bancorp common stock.
Nature of a Participant's Interest in Home Federal Bancorp Common Stock
Home Federal Bancorp common stock will be held in the name of the
trustee as part of the Employer Stock Fund, in its capacity as trustee. Because
the 401(k) Plan actually purchases the Employer Stock Fund units, you will
acquire a "participation interest" in the Employer Stock Fund units (and the
underlying shares of Home Federal Bancorp common stock and cash) and not own the
units (and shares and cash) directly. The trustee will maintain individual
accounts reflecting each participant's individual interest in the Employer Stock
Fund.
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Voting and Tender Rights of Home Federal Bancorp Common Stock
The plan administrator generally will exercise voting rights
attributable to all of the common stock held by the Employer Stock Fund. With
respect to matters involving tender offers for Home Federal Bancorp, the plan
administrator will vote shares allocated to participants in the 401(k) Plan as
directed by participants with interests in the Employer Stock Fund. The trustee
will provide to you voting instruction rights reflecting your proportional
interest in the Employer Stock Fund. The number of shares of common stock held
in the Employer Stock Fund that the trustee votes in the affirmative and
negative on each matter will be proportionate to the voting instructions given
by the participants. Where no voting or tender offer instructions are given by
the participant, the shares shall be voted or tendered in the manner directed by
the plan administrator.
DESCRIPTION OF THE 401(k) PLAN
Introduction
The 401(k) Plan was adopted by Home Federal and is formally named the
"Home Federal Savings and Loan Association of Nampa 401(k) Savings Plan." This
profit sharing plan contains a cash-or-deferred feature described at Section
401(k) of the Internal Revenue Code of 1986, as amended, to encourage employee
savings and to allow eligible employees to supplement their income upon
retirement.
Reference to Full Text of 401(k) Plan. The following statements are
summaries of certain provisions of the 401(k) Plan. They are not meant to be a
complete description of these provisions and are qualified in their entirety by
the full text of the 401(k) Plan. Copies of the 401(k) Plan are available to all
employees. You should submit your request to the plan administrator, Home
Federal Savings and Loan Association of Nampa, 500 12th Avenue South, Nampa,
Idaho 83651. We encourage you to read carefully the full text of the 401(k) Plan
to understand your rights and obligations under the 401(k) Plan.
Tax and Securities Laws. Participants should consult with legal counsel
regarding the tax and securities laws implications of participation in the
401(k) Plan. Any officers or beneficial owners of more than 10% of the
outstanding shares of common stock should consider the applicability of Sections
16(a) and 16(b) of the Securities Exchange Act of 1934, as amended, to his or
her participation in the 401(k) Plan. See "Securities and Exchange Commission
Reporting and Short Swing Profit Liability" on page 12 of this prospectus
supplement.
Eligibility and Participation
All employees of Home Federal Bancorp or a subsidiary are eligible to
participate in the cash or deferred portion (i.e., that portion of the 401(k)
Plan under which 401(k) deferrals are made) as of the first day of the month
following the commencement of employment. All employees of Home Federal Bancorp
or a subsidiary who have completed at one year of service are eligible to
participate in the profit sharing and matching contribution portions of the
401(k) Plan, as of the next following January 1 or July 1. As of December 31,
2003, there were approximately 232 employees eligible to participate in the cash
or deferred portion of the 401(k) Plan, and 109 employees had elected to
participate.
Contributions Under the 401(k) Plan
401(k) Contributions. The 401(k) Plan permits each participant to defer
receipt of up to 100% of their annual compensation, not to exceed $13,000 (for
2004), and to have that compensation contributed to the 401(k) Plan. Generally,
the 401(k) Plan describes a participant's annual compensation as total
compensation while the employee is a participant, taking into account pre-tax
deferrals and excluding fringe benefits. However, no more than $205,000 of
compensation may be taken into account for purposes of determining 401(k)
contributions (and matching contributions) for 2004. You may modify the rate of
your future 401(k) contributions by filing a new deferral agreement with the
plan administrator. Modifications to your rate of 401(k) contributions may take
effect as soon as practicable following when you make your revised deferral
election.
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Catch-Up 401(k) Contributions. The 401(k) Plan permits each participant
who has attained age 50 to defer up to an additional $3,000 (for 2004) into the
401(k) Plan. Catch-up 401(k) contributions are not subject to any limitations
other than the $3,000 dollar limitation.
Matching Contributions. The 401(k) Plan currently provides for matching
contributions to the 401(k) Plan. The annual matching contribution amount is
determined by Home Federal (and may be zero).
Profit Sharing Contributions. The 401(k) Plan currently permits Home
Federal to make discretionary profit sharing contributions to the 401(k) Plan.
To be eligible for a profit sharing contribution in any year, you must be
actively employed with Home Federal Bancorp or Home Federal on the last day of
the plan year, or have terminated employment during the year having completed at
least 501 hours of service during the plan year. Profit sharing contributions
are allocated proportionally among eligible participants based on compensation.
Rollover Contributions. You may also rollover or directly transfer
accounts from another qualified plan or an individual retirement account
("IRA"), provided the rollover or direct transfer complies with applicable law.
If you want to make a rollover contribution or direct transfer, you should
contact the plan administrator.
Limitations on Contributions
Limitations on 401(k) Contributions. Although the 401(k) Plan allows
you to defer receipt of up to 100% of your compensation each year as a 401(k)
contribution, federal law limits your total 401(k) contributions under the
401(k) Plan, and any similar plans, to $13,000 for 2004. This annual limitation
will increase by $1,000 for each subsequent year until 2006, when the annual
deferral limit will be $15,000. 401(k) contributions in excess of this
limitation are considered excess deferrals, and will be included in an affected
participant's gross income for federal income tax purposes in the year the
401(k) contribution is made. In addition, any excess deferral will again be
subject to federal income tax when distributed by the 401(k) Plan to the
participant, unless the excess deferral, together with any income earned on the
excess deferral, is distributed to the participant not later than the first
April 15th following the close of the taxable year in which the excess deferral
is made. Any income on the excess deferral that is distributed not later than
such date shall be treated, for federal income tax purposes, as earned and
received by the participant in the taxable year in which the distribution is
made.
Limitations on Annual Additions and Benefits. Pursuant to the
requirements of the Internal Revenue Code, the 401(k) Plan provides that the
total amount of all contributions and forfeitures (annual additions) allocated
to participants during any plan year may not exceed the lesser of 100% of the
participant's compensation for the plan year, or $41,000. The $41,000 limit will
be increased from time to time to reflect increases in the cost of living.
Annual additions for this purpose generally include 401(k) deferrals, matching
contributions and employer contributions to this or any other qualified plan
sponsored by Home Federal Bancorp. Annual additions do not include rollover
contributions.
Limitation on 401(k) and Matching Contributions for Highly Compensated
Employees. Sections 401(k) and 401(m) of the Internal Revenue Code limit the
amount of 401(k) contributions and matching contributions that may be made to
the 401(k) Plan in any plan year on behalf of highly compensated employees
(defined below) in relation to the amount of 401(k) contributions and matching
contributions made by or on behalf of all other employees eligible to
participate in the 401(k) Plan. Specifically, the percentage of 401(k)
contributions made on behalf of a participant who is a highly compensated
employee shall be limited so that the average actual deferral percentage for the
group of highly compensated employees for the current plan year does not exceed
the greater of (i) the average actual deferral percentage for the group of
eligible employees who are non-highly compensated employees for the prior plan
year multiplied by 1.25 or (ii) the average actual deferral percentage for the
group of eligible employees who are non-highly compensated employees for the
prior plan year, multiplied by two (2); provided that the difference in the
average actual deferral percentage for eligible non-highly compensated employees
does not exceed 2%. Similar discrimination rules apply to matching
contributions. The discrimination rules do not apply to 401(k) catch-up
contributions.
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In general, a highly compensated employee includes any employee who was
a 5% owner of the employer at any time during the year or preceding year or had
compensation for the preceding year in excess of $90,000. The dollar amount in
the foregoing sentence is for the plan year ending December 31, 2004. This
amount may be adjusted to reflect increases in the cost of living.
Contributions allocated to highly compensated employees that exceed the
average deferral limitation in any plan year are referred to as excess
contributions. In order to prevent the disqualification of the 401(k) Plan, any
excess 401(k) contributions, together with any income earned on these excess
contributions, must be distributed to the highly compensated employees before
the close of the following plan year. However, the employer will be subject to a
10% excise tax on any excess contributions unless the excess contributions,
together with any income earned on these excess contributions, are distributed
before the close of the first 2 1/2 months following the plan year to which the
excess contributions relate. Matching contributions that relate to the returned
deferral contributions will be forfeited (if not vested) or distributed (if
vested) at the same time as the excess deferral contributions are returned.
Regarding matching contributions that do not satisfy the limitation tests
described above, in order to prevent the disqualification of the 401(k) Plan,
any excess matching contributions, together with any income earned on these
excess contributions, must be distributed to the highly compensated employees
before the close of the following plan year. Excess matching contributions, plus
income allocable thereto, will be forfeited (if not vested) or distributed (if
vested). There are specific rules for determining which highly compensated
employees will be affected by the excess contribution return rules, and the
amount of excess 401(k) contributions and matching contributions that must be
returned to the affected employees.
Deduction Limits. Matching and profit sharing contributions are subject
to and limited by Internal Revenue Code deduction rules. Contributions will not
be made to the extent they would be considered nondeductible. 401(k)
contributions are neither subject to nor limited by the Internal Revenue Code
deduction rules.
Top-Heavy Plan Requirements. If for any plan year the 401(k) Plan is a
top-heavy plan, then minimum contributions may be required to be made to the
401(k) Plan on behalf of non-key employees. Contributions otherwise being made
under the Plan may apply to satisfy these requirements.
In general, the 401(k) Plan will be regarded as a "top-heavy plan" for
any plan year if, as of the last day of the preceding plan year, the aggregate
balance of the accounts of participants who are key employees exceeds 60% of the
aggregate balance of the accounts of all participants. Key employees generally
include any employee who, at any time during the plan year, is (1) an officer of
Home Federal Bancorp or its subsidiaries having annual compensation in excess of
$130,000 who is in an officer in an administrative or policy-making capacity,
(2) a 5% owner of Home Federal Bancorp (i.e., owns directly or indirectly more
than 5% of the stock of Home Federal Bancorp, or stock possessing more than 5%
of the total combined voting power of all stock of Home Federal Bancorp) or (3)
a 1% owner of Home Federal Bancorp having annual compensation in excess of
$150,000. The $130,000 amount (but not the $150,000 amount) in the foregoing
sentence are for 2004, and may be adjusted in the future for cost of living
increases.
Investment of Contributions
Investment Options. All amounts credited to participants' accounts
under the 401(k) Plan are held in trust. The trust is administered by a trustee
appointed by Home Federal's Board of Directors.
You must instruct the trustee as to how funds held in your account are
to be invested. In addition to the Employer Stock Fund, which will consist of
shares of Home Federal Bancorp common stock and cash, participants may elect to
instruct the trustee to invest such funds in any or all of the following
investment options:
. ING VP Money Market Portfolio, Class I - seeks to provide high
current return, consistent with preservation of capital and
liquidity by investing in high-quality money market
instruments.
. ING VP Bond Portfolio, Class I Fund - seeks to provide as high
a level of total return as is consistent with reasonable risk,
primarily through investment in a diversified portfolio of
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investment-grade corporate bonds and debt securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities.
. ING Governmental Fund, Class A - seeks to provide income
consistent with the preservation of capital through investment
in securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
. ING Fixed Account - seeks to provide stability; guarantees a
minimum rate of interest for the life of the contract, and may
credit a higher interest rate from time to time.
. Templeton Global Bond Fund, Class A - seeks to provide capital
appreciation and growth of income.
. ING VP Index Plus LargeCap Portfolio - seeks to outperform the
total return performance of the Standard & Poor's 500
Composite Index (S&P 500), while maintaining a market level of
risk.
. Oppenheimer Main Street Fund, Class A - seeks a high total
return.
. Pioneer Fund, Class A - seeks reasonable income and capital
growth.
. Fidelity VIP Contrafund Portfolio, Initial Class - seeks
long-term capital appreciation.
. MFS Capital Opportunities Fund, Class A - seeks capital
appreciation.
. Fidelity Advisor Mid Cap Fund, Class T - seeks long-term
capital growth.
. Franklin Small-Mid Cap Growth Fund, Class A - seeks long-term
capital growth.
. ING VP Index Plus SmallCap Portfolio - seeks to outperform the
total return performance of the Standard and Poor's Small-Cap
600 Index (S&P 600), while maintaining a market level of risk.
. Lord Abbett Series Fund, Mid-Cap Value Portfolio, Class VC -
seeks capital appreciation through investments, primarily in
equity securities, which are believed to be undervalued in the
marketplace.
. ING VP International Value Portfolio, Class I - seeks
long-term capital appreciation.
. Janus Aspen Series Worldwide Growth Portfolio, Institutional
Shares - seeks long-term growth of capital in a manner
consistent with the preservation of capital.
. ING American Century Small Cap Value Portfolio, Initial Class
- seeks long-term growth of capital; income is a secondary
objective.
. ING Baron Small Cap Growth Portfolio, Initial Class - seeks
capital appreciation.
. ING VP Index Plus MidCap Portfolio, Class I - seeks to
outperform the total return performance of the Standard &
Poor's MidCap 400 Index (S&P 400), while maintaining a market
level of risk.
. Washington Mutual Investors Fund, Class R3 - seeks to produce
income and to provide an opportunity through growth of
principal consistent with sound common stock investing.
. American Balanced Fund, Class R3 - seeks conservation of
capital, current income and long-term growth of capital and
income.
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For further descriptions of these investment options, you may request
a prospectus for each of the investment options from the plan administrator. If
no investment direction is given, all contributions to a participant's account
will be invested in the Money Market Fund.
The investment in Home Federal Bancorp common stock involves certain
risks. No assurance can be given that units in the Employer Stock Fund (that are
comprised primarily of Home Federal Bancorp common stock) purchased pursuant to
the 401(k) Plan will thereafter be able to be sold at a price equal to or in
excess of the purchase price. See also "Risk Factors" in the prospectus.
Home Federal Bancorp Common Stock Investment Election Procedures. You
may instruct the trustee to purchase Home Federal Bancorp common stock by
redirecting funds from your existing accounts into the Employer Stock Fund by
filing a completed Investment Election Form with the plan administrator on or
prior to the election deadline. The amount of funds redirected into the Employer
Stock Fund must be allocated in whole dollar increments from investment options
containing your 401(k) Plan funds. When you instruct the trustee to redirect the
funds in your existing accounts into the Employer Stock Fund in order to
purchase units in the Employer Stock Fund, the trustee will liquidate funds from
the appropriate investment option(s) and apply such redirected funds as
requested, in order to effect the new allocation. Approximately 93% of the
elected funds used to acquire units in the Employer Stock Fund will be invested
in Home Federal Bancorp common stock and the remaining 7% will be invested in a
money market account.
For example, you may fund an election to purchase $1,000 worth of the
Employee Stock Fund by redirecting the aggregate purchase price of $1,000 for
the shares from the following investment options (provided the necessary funds
are available in such Investment Options): (i) $100 from the ING VP Money Market
Fund; (ii) $300 from the ING Bond Fund; and (iii) $600 from the Lord Abbett
Mid-Cap Value Fund. In such case, the trustee would liquidate the amount
instructed and the $1,000 will be used to acquire 93 shares of Home Federal
Bancorp common stock and $70 of a money market account. If your instructions
cannot be fulfilled because you do not have the required funds in one or more of
the investment options to purchase the units in the Employer Stock Fund
subscribed for, you will be required to file a revised Investment Election Form
with the plan administrator by the election deadline. Once received in proper
form, an executed election form may not be modified, amended or rescinded
without our consent unless the stock offering has not been completed by November
10, 2004.
Adjusting Your Investment Strategy. Until changed in accordance with
the terms of the 401(k) Plan, future allocations of your contributions would
remain unaffected by the election to purchase units in the Employer Stock Fund
through the 401(k) Plan in the stock offering. You may modify a prior investment
allocation election or request the transfer of funds to another investment
vehicle by telephone at (800) 584-6001 or on the Internet at
www.ingretirementplans.com. After the reorganization and stock offering,
modifications and fund transfers relating to the Employer Stock Fund will be
permitted on a daily basis.
Valuation of Accounts. The 401(k) Plan uses a unit system for valuing
each investment fund. Under this system, your share in any investment fund is
represented by units. The unit value is determined as of the close of business
each regular business day. The total dollar value of your share in any
investment fund as of any valuation date is determined by multiplying the number
of units held by you by the unit value of the fund on that date. The sum of the
values of the funds you select represents the total value of your 401(k) Plan
account.
Financial Data
Employer Contributions. For the plan year ended December 31, 2003, we
made matching contributions totaling approximately $129,000 into the 401(k)
Plan. No profit sharing contribution was made to the 401(k) Plan for the plan
year ended December 31, 2003.
If we adopt other stock-based benefit plans, such as an employee stock
ownership plan or a restricted stock plan, then we may decide to reduce our
matching contribution and/or our discretionary contribution under the 401(k)
Plan in order to reduce overall expenses. We are currently planning to adopt an
employee stock ownership plan. If
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we adopt a restricted stock plan, the plan would not be submitted for
stockholder approval for at least six months following completion of the
reorganization.
Performance of Home Federal Bancorp Common Stock. As of the date of
this prospectus supplement, no shares of Home Federal Bancorp common stock have
been issued or are outstanding and there is no established market for our common
stock. Accordingly, there is no record of the historical performance of Home
Federal Bancorp common stock.
Performance of Investment Options. The following table provides
performance data with respect to the investment options available under the
401(k) Plan, based on information provided to Home Federal Bancorp by ING.
The information set forth below with respect to the investment options
has been reproduced from materials supplied by ING, which administers the 401(k)
Plan and is responsible for providing investment alternatives under the 401(k)
Plan other than the Employer Stock Fund. Home Federal Bancorp and Home Federal
take no responsibility for the accuracy of such information.
Additional information regarding the investment options may be
available from ING or Home Federal Bancorp. Participants should review any
available additional information regarding these investments before making an
investment decision under the 401(k) Plan.
The total percentage return for the prior three years is provided for
each of the following funds.
NET INVESTMENT PERFORMANCE
For the Year Ended December 31,
------------------------------------------------
2003 2002 2001
-------------- -------------- -------------
ING VP Money Market Portfolio, Class I 0.10% 0.81% 3.11%
ING VP Bond Portfolio, Class I 5.88 7.90 8.31
ING Governmental Fund, Class A 1.61 8.33 6.63
ING Fixed Account 4.92 5.65 6.03
Templeton Global Bond Fund, Class A 20.62 19.37 3.60
ING VP Index Plus Large Cap Portfolio, Class I 25.64 -21.84 -13.97
Oppenheimer Main Street Fund, Class A 26.25 -19.86 -10.96
Pioneer Fund, Class A 23.89 -20.78 -11.53
Fidelity VIP Contrafund Portfolio, Initial Class 27.57 -9.98 -12.86
MFS Capital Opportunities Fund, Class A 26.90 -30.73 -25.23
Fidelity Advisor Mid Cap Fund, Class T 43.17 -19.04 -20.97
Franklin Small-Mid Cap Growth Fund, Class A 36.92 -29.97 -20.97
ING VP Index Plus Small Cap Portfolio, Class I 31.92 -12.44 2.00
Lord Abbett Series Fund, Mid-Cap Value Portfolio, Class VC 23.89 -10.41 7.30
ING VP International Value Portfolio, Class I 29.40 -15.71 -12.02
Janus Aspen Series Worldwide Growth Portfolio, Institutional Shares 23.13 -26.02 -22.98
ING American Century Small Cap Value Portfolio, Initial Class 35.03 N/A N/A
ING Baron Small Cap Growth, Initial Class 33.07 N/A N/A
ING VP Index Plus MidCap Portfolio, Class I 35.03 -12.44 -1.72
Washington Mutual Investors Fund, Class R3 24.79 -16.04 0.75
American Balanced Fund, Class R3 21.08 -6.96 7.41
Each participant should note that past performance is not necessarily
an indicator of future results.
8
Administration of the 401(k) Plan
Trustees. The trustee is appointed by the Board of Directors of Home
Federal to serve at its pleasure. Currently, ING is the trustee for all funds
and upon the conclusion of the common stock offering by Home Federal Bancorp,
ING will also serve as the trustee of the Employer Stock Fund.
The trustee receives and holds the contributions to the 401(k) Plan in
trust and distributes them to participants and beneficiaries in accordance with
the provisions of the 401(k) Plan. The trustee is responsible for following
participant direction, effectuating the investment of the assets of the trust in
the Employer Stock Fund and the other investment options.
Benefits Under the 401(k) Plan
Plan Benefits. Your 401(k) Plan benefit is based on the value of the
vested portion of your 401(k) Plan accounts as of the valuation date next
preceding the date of distribution to you.
Vesting. You will always have a fully vested (nonforfeitable) interest
in your 401(k) contribution account and rollover account. Your matching
contribution account and profit sharing contribution account will vest at a rate
of 20% for each year of service after you complete two years of service (that
is, 100% vested after six years of service). Generally, a year of service is a
plan year (January 1 to December 31) during which you perform at least 1,000
hours of service for Home Federal Bancorp, Home Federal or an affiliated
employer. You also will become 100% vested in your matching contribution account
and profit sharing contribution account if you are actively employed on your
retirement date, death or disability.
Withdrawals and Distributions from the 401(k) Plan
Withdrawals Prior to Termination of Employment. You may elect to
receive an in-service distribution from your rollover account at any time. You
may also receive an in-service distribution if you have a hardship. Whether a
hardship has occurred in determined in accordance with Internal Revenue Service
rules.
Distribution Upon Retirement or Disability. Upon your retirement or
disability, you will receive a lump sum payment from the 401(k) Plan.
Distribution Upon Death. If you die prior to your benefits being paid
from the 401(k) Plan, your benefits will be paid to your surviving spouse or
beneficiary in a lump sum payment.
Distribution Upon Termination for any Other Reason. If you terminate
your employment for any reason other than retirement, disability or death and
your vested 401(k) Plan account balances exceed $5,000, the trustee will make
your distribution on your normal retirement date, unless you request an earlier
or later distribution date. Your vested 401(k) Plan accounts will be distributed
in a lump sum payment. If your vested account balances do not exceed $5,000, the
trustee will generally distribute your benefits to you as soon as
administratively practicable in a lump sum following your termination of
employment.
Form of Distribution. Distributions from the 401(k) Plan will generally
be in the form of cash. However, you have the right to request that your
distribution from the Employer Stock Fund be in the form of Home Federal Bancorp
common stock.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order, benefits payable under the 401(k) Plan shall not be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution, or levy of any kind, either voluntary or
involuntary, and any attempt to anticipate, alienate, sell, transfer, assign,
pledge, encumber, charge or otherwise dispose of any rights to benefits payable
under the 401(k) Plan shall be void.
9
Reports to 401(k) Plan Participants
As soon as practicable after the end of each calendar quarter, the plan
administrator will furnish to each participant a statement showing (i) balances
in the participant's accounts as of the end of that period, (ii) the amount of
contributions allocated to his or her accounts for that period, and (iii) the
number of units in each of the funds. Participants may also access information
regarding their 401(k) Plan Accounts by using internet access made available by
ING, the plan investment manager.
Amendment and Termination
We intend to continue to participate in the 401(k) Plan. Nevertheless,
we may amend or terminate the 401(k) Plan at any time. If the 401(k) Plan is
terminated in whole or in part, then, regardless of other provisions in the
401(k) Plan, each participant affected by the termination shall become fully
vested in all of his or her accounts.
Federal Income Tax Consequences
The following is a brief summary of the material federal income tax
aspects of the 401(k) Plan. You should not rely on this summary as a complete or
definitive description of the material federal income tax consequences relating
to the 401(k) Plan. Statutory provisions change, as do their interpretations,
and their application may vary in individual circumstances. Finally, the
consequences under applicable state and local income tax laws may not be the
same as under the federal income tax laws. Please consult your tax advisor with
respect to any distribution from the 401(k) Plan and transactions involving the
401(k) Plan.
As a "tax-qualified retirement plan," the Internal Revenue Code affords
the 401(k) Plan special tax treatment, including:
. the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the 401(k) Plan each year;
. participants pay no current income tax on amounts contributed
by the employer on their behalf; and
. earnings of the 401(k) Plan are tax-deferred, thereby
permitting the tax-free accumulation of income and gains on
investments.
We will administer the 401(k) Plan to comply with the requirements of the
Internal Revenue Code as of the applicable effective date of any change in the
law.
Taxation of Distributions. Generally, 401(k) Plan distributions are
taxable as ordinary income for federal income tax purposes.
Common Stock Included in a Lump Sum Distribution. If a lump sum
distribution includes common stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be reduced
by the amount of any net unrealized appreciation with respect to the common
stock. Net unrealized appreciation is the excess of the value of the common
stock at the time of the distribution over its cost or other basis to the trust.
The tax basis of the common stock for purposes of computing gain or loss on its
subsequent sale equals the value of the common stock at the time of distribution
less the amount of net unrealized appreciation. Any gain on a subsequent sale or
other taxable disposition of the common stock up to the amount of net unrealized
appreciation at the time of distribution will be considered long-term capital
gain regardless of the holding period of the common stock. Any gain on a
subsequent sale or other taxable disposition of the common stock in excess of
the amount of net unrealized appreciation at the time of distribution will be
considered either short-term or long-term capital gain depending upon the length
of the holding period of the common stock. The recipient of a distribution may
elect to include the amount of any net unrealized appreciation in the total
taxable amount of the distribution to the extent allowed by the regulations
issued by the Internal Revenue Service.
10
Rollovers and Direct Transfers to Another Qualified Plan or to an IRA;
Mandatory Tax Withholding. Except as discussed below, you may roll over
virtually all distributions from the 401(k) Plan to another tax-favored plan or
to a standard IRA without regard to whether the distribution is a lump sum
distribution or a partial distribution. You have the right to elect to have the
trustee transfer all or any portion of an "eligible rollover distribution"
directly to another qualified retirement plan (subject to the provisions of the
recipient qualified plan) or to an IRA. If you do not elect to have an "eligible
rollover distribution" transferred directly to another qualified plan or to an
IRA, the distribution will be subject to a mandatory federal withholding tax
equal to 20% of the taxable distribution. Your state may also impose tax
withholding on your taxable distribution. An "eligible rollover distribution"
means any amount distributed from the 401(k) Plan except: (1) a distribution
that is (a) one of a series of substantially equal periodic payments (not less
frequently than annually) made for your life (or life expectancy) or the joint
lives of you and your designated beneficiary or (b) for a specified period of
ten years or more; (2) any amount required to be distributed under the minimum
distribution rules; and (3) any other distributions excepted under applicable
federal law. If you elect to rollover or directly transfer common stock, you may
not take advantage of the favorable net unrealized appreciation that applies to
common stock, discussed above.
Ten-Year Averaging Rules. Under a special grandfather rule, if you have
completed at least five years of participation in the 401(k) Plan before the
taxable year in which the distribution is made, and you turned age 50 by 1986,
you may elect to have your lump sum distribution taxed using a "ten-year
averaging" rule. The election of the special averaging rule applies only to one
lump sum distribution you or your beneficiary receive, provided such amount is
received on or after you attain age 59 1/2 and you elect to have any other lump
sum distribution from a qualified plan received in the same taxable year taxed
under the ten-year averaging rule or receive a lump sum distribution on account
of your death.
Additional Tax on Early Distributions. A participant who receives a
distribution from the 401(k) Plan prior to attaining age 59 1/2 will be subject
to an additional income tax equal to 10% of the amount of the distribution. The
10% additional income tax will not apply, however, in certain cases, including
(but not limited) to distributions rolled over or directly transferred into an
IRA or another qualified plan, or the distribution is (i) made to a beneficiary
(or to the estate of a participant) on or after the death of the participant,
(ii) attributable to the participant's being disabled within the meaning of
Section 72(m)(7) of the Internal Revenue Code, (iii) part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the participant or the joint lives (or
joint life expectancies) of the participant and his beneficiary, (iv) made to
the participant after separation from service under the 401(k) Plan after
attainment of age 55, (v) made to pay medical expenses to the extent deductible
for federal income tax purposes, (vi) pursuant to a qualified domestic relations
order or (vii) made to effect the distribution of excess contributions or excess
deferrals.
This is a brief description of federal income tax aspects of the 401(k)
Plan which are of general application under the Internal Revenue Code. It is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the 401(k)
Plan. Accordingly, you are urged to consult a tax advisor concerning the
federal, state and local tax consequences that may be particular to you of
participating in and receiving distributions from the 401(k) Plan.
ERISA and Other Qualification
The 401(k) Plan is subject to certain provisions of the Employee
Retirement Income Security Act of 1974, the primary federal law governing
retirement plans, and is intended to be a qualified retirement plan under the
Internal Revenue Code.
Restrictions on Resale
Any person receiving shares of Home Federal Bancorp common stock under
the 401(k) Plan who is an "affiliate" of Home Federal Bancorp or Home Federal as
the term "affiliate" is used in Rules 144 and 405 under the Securities Act of
1933 (e.g., directors, officers and significant stockholders of Home Federal
Bancorp and Home Federal) may re-offer or resell such shares only pursuant to a
registration statement or, assuming the availability thereof, pursuant to Rule
144 or some other exemption from the registration requirements of the Securities
Act of
11
1933. Any person who may be an "affiliate" of Home Federal Bancorp may wish to
consult with counsel before transferring any Home Federal Bancorp common stock
owned by him or her. In addition, participants are advised to consult with
counsel as to the applicability of Section 16 of the Securities Exchange Act of
1934 which may restrict the sale of Home Federal Bancorp common stock acquired
under the 401(k) Plan, or other sales of Home Federal Bancorp common stock.
Securities and Exchange Commission Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934 imposes reporting and
liability requirements on officers, directors and persons beneficially owning
more than 10% of public companies such as Home Federal Bancorp. Section 16(a) of
the Securities Exchange Act of 1934 requires the filing of reports of beneficial
ownership. Within ten days of becoming a person subject to the reporting
requirements of Section 16(a), a Form 3 reporting initial beneficial ownership
must be filed with the Securities and Exchange Commission. Certain changes in
beneficial ownership, such as purchases, sales and participation in savings and
retirement plans must be reported on a Form 4 within two business days of when a
change occurs. Certain other changes in beneficial ownership, such as gifts and
inheritances, may be reported on a Form 4 or annually on a Form 5 within 45 days
after the close of our fiscal year. Participation in the Employer Stock Fund of
the 401(k) Plan by our officers, directors and persons beneficially owning more
than 10% of the outstanding Home Federal Bancorp common stock must be reported
to the Securities and Exchange Commission at least annually on a Form 4 or Form
5 by such individuals.
Section 16(b) of the Securities Exchange Act of 1934 provides for the
recovery by us of any profits realized by an officer, director or any person
beneficially owning more than 10% of the Home Federal Bancorp common stock
resulting from the purchase and sale or sale and purchase of Home Federal
Bancorp common stock within any six-month period. The Securities and Exchange
Commission rules provide an exemption from the profit recovery provisions of
Section 16(b) for certain transactions within an employee benefit plan, such as
the 401(k) Plan, provided certain requirements are met. If you are subject to
Section 16, you should consult with counsel regarding the applicability of
Section 16 to specific transactions involving the 401(k) Plan.
LEGAL OPINIONS
The validity of the issuance of Home Federal Bancorp common stock will
be passed upon by Breyer & Associates PC, McLean, Virginia, which firm acted as
special counsel for Home Federal Bancorp and Home Federal in connection with
Home Federal Bancorp's reorganization and stock offering.
12
INVESTMENT ELECTION FORM
------------------------
PARTICIPANT ELECTION TO INVEST IN
HOME FEDERAL BANCORP, INC. COMMON STOCK
("EMPLOYER STOCK FUND")
Home Federal Savings and Loan Association of Nampa
401(k) Savings Plan and Trust
If you would like to participate in the stock offering using amounts currently
in your account in the Home Federal Savings and Loan Association of Nampa 401(k)
Savings Plan and Trust, please complete this form and return it to Denis Trom,
500 12th Avenue South, Nampa, Idaho 83651, by no later than 12:00 Noon, Mountain
time, on September 14, 2004.
Participant's Name (Please Print):
----------------------------------------------
Address:
------------------------------------------------------------------------
Street City State Zip Code
Social Security Number:
-----------------------------
1. Background Information
Home Federal Bancorp, Inc. ("Home Federal Bancorp") will be issuing
shares of common stock, par value $0.01 per share, to certain members of Home
Federal Savings and Loan Association of Nampa ("Home Federal") and the public in
connection with the reorganization of Home Federal.
Participants in the Home Federal Savings and Loan Association of Nampa
401(k) Savings Plan and Trust (the "401(k) Plan") are being given an opportunity
to direct the trustee of the 401(k) Plan to purchase Home Federal Bancorp common
stock in the offering with amounts currently in their 401(k) Plan account by
acquiring units of the Employer Stock Fund, an investment fund under the 401(k)
Plan comprised of Home Federal Bancorp common stock and cash. (Employees who
would like to directly purchase shares of Home Federal Bancorp common stock in
the offering with funds other than amounts currently in their 401(k) Plan
account may do so by completing the order form that accompanies the prospectus.)
Units of the Employer Stock Fund will be valued in the stock offering at $10.00
per unit. Of this amount, $9.30 will be used to acquire 0.93 of one share of
Home Federal Bancorp common stock, and $.70 will be used to acquire cash,
through an interest in a money market account. Participants are also being given
the opportunity, after the stock offering, to direct future contributions under
the 401(k) Plan to the Employer Stock Fund. Approximately 93% of the amounts
used to acquire units in the Employer Stock Fund will be invested in Home
Federal Bancorp common stock and the remaining 7% will be invested in cash.
Because it is actually the 401(k) Plan that purchases the Home Federal
Bancorp common stock, participants would acquire a "participation interest"
(expressed as units of the Employer Stock Fund) in the shares and cash and would
not own the shares and cash directly.
Prior to making a decision to direct the trustee to purchase units in
the Employer Stock Fund, we strongly urge you to carefully review the prospectus
and the prospectus supplement that accompany this Investment Election Form. Your
decision to direct the transfer of amounts credited to your account balances to
the Employer Stock Fund in order to purchase shares of Home Federal Bancorp
common stock in connection with the stock offering is irrevocable.
Notwithstanding this irrevocability, participants may transfer out some or all
of their units in the Employer Stock Fund, if any, and into one or more of the
401(k) Plan's other investment funds at such times as are provided for under the
401(k) Plan's rules for such transfers.
Investing in any stock entails some risks and we encourage you to
discuss your investment decision with your investment advisor before completing
this form. Neither the trustee, the plan administrator, nor any employee of Home
Federal Bancorp or Home Federal is authorized to make any representations about
this investment. You
A-1
should not rely on any information other than information contained in the
prospectus and the prospectus supplement in making your investment decision.
Any shares purchased by the 401(k) Plan based on your election will be
subject to the conditions and restrictions otherwise applicable to Home Federal
Bancorp common stock purchased directly by you in the stock offering. These
restrictions are described in the prospectus and the prospectus supplement.
2. Investment Elections
If you would like to participate in the stock offering with amounts
currently in your 401(k) Plan account, please complete the table below,
indicating what amount of each of your current funds you would like to transfer
into the Employer Stock Fund. If the trustee is unable to use the total amount
that you elect in the box below to have transferred into the Employer Stock Fund
to purchase Home Federal Bancorp common stock and cash due to an
oversubscription in the stock offering, the amount that is not invested in the
Employer Stock Fund will be reallocated on a pro-rata basis among your other
401(k) Plan fund investments. If you elect in the box below to have 100% of your
current 401(k) Plan funds transferred into the Employer Stock Fund and the
offering is oversubscribed, the amount that is not invested in the Employer
Stock Fund will be invested in the money market account.
Indicate the amount to be transferred from one or more of the following
funds into the Employer Stock Fund:
Amount From Fund
------ ---------
$____________.00 ING VP Money Market Portfolio
$____________.00 ING VP Bond Fund
$____________.00 ING Governmental Fund
$____________.00 ING Fixed Account
$____________.00 Templeton Global Bond Fund
$____________.00 ING VP Index Plus Large Cap Portfolio
$____________.00 Oppenheimer Main Street Fund
$____________.00 Pioneer Fund
$____________.00 Fidelity VIP Contrafund Portfolio
$____________.00 MFS Capital Opportunities Fund
$____________.00 Fidelity Advisor Mid Cap Fund
$____________.00 Franklin Small-Mid Cap Growth Fund
$____________.00 ING VP Index Plus Small Cap Portfolio
$____________.00 Lord Abbett Series Fund, Mid-Cap Value Portfolio
$____________.00 ING VP International Value Portfolio
$____________.00 Janus Aspen Series Worldwide Growth Portfolio
$____________.00 ING American Century Small Cap Value Portfolio
$____________.00 ING Baron Small Cap Growth
$____________.00 ING VP Index Plus MidCap Portfolio
$____________.00 Washington Mutual Investors Fund
$____________.00 American Balanced Fund
Note: If you do not complete this election, you will not participate in the
offering by using your 401(k) Plan funds.
A-2
3. Purchaser Information. The ability of participants in the Plan to
purchase common stock in the stock offering and to direct their current account
balances into the Employer Stock Fund is based upon the participant's status as
an eligible account holder, supplemental eligible account holder or other
member. Please indicate your status.
A. [ ] Eligible Account Holder - Check here if you were
a depositor with $50.00 or more on deposit with Home
Federal Savings and Loan Association of Nampa as of
December 31, 2002.
B. [ ] Supplemental Eligible Account Holder - Check here
if you were a depositor with $50.00 or more on
deposit with Home Federal Savings and Loan
Association of Nampa as of June 30, 2004, but are not
an eligible account holder.
C. [ ] Other Member - Check here if you were a depositor
with Home Federal Savings and Loan Association of
Nampa as of July 31, 2004 or a borrower as of March
16, 2004 whose loans continued to be outstanding as
of July 31, 2004, but are not an eligible account
holder or supplemental eligible account holder.
Account Title (Names on Accounts) Account Number
--------------------------------------- ------------------------
--------------------------------------- ------------------------
--------------------------------------- ------------------------
--------------------------------------- ------------------------
4. Participant Signature and Acknowledgment - Required
By signing this investment election form, I authorize and direct the
plan administrator and trustee to carry out my instructions. I acknowledge that
I have been provided with and have received a copy of the prospectus and
prospectus supplement relating to the issuance of Home Federal Bancorp common
stock that accompany this investment election form. I am aware of the risks
involved in investing in Home Federal Bancorp common stock and understand that
the trustee, plan administrator and any employee of Home Federal Bancorp or Home
Federal are not responsible for my choice of investment. I understand that my
failure to sign this acknowledgment will make this investment election form null
and void.
I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF HOME
FEDERAL BANCORP, INC. ARE NOT DEPOSITS OR AN ACCOUNT AND ARE NOT FEDERALLY
INSURED OR GUARANTEED BY HOME FEDERAL BANCORP, INC. OR BY THE FEDERAL
GOVERNMENT.
If anyone asserts that the shares of Home Federal Bancorp common stock
are federally insured or guarantee, or are as safe as an insured deposit, I
should call the Office of Thrift Supervision Regional Director, Charles A.
Deardorff, at (650) 746-7000.
Participant's Signature: Date Signed:
--------------------------- --------------
This form must be completed and returned to Denis Trom,
500 12th Avenue South, Nampa, Idaho 83651,
by no later than
12:00 Noon, Mountain time, on September 14, 2004.
A-3
PROSPECTUS
Home Federal Bancorp, Inc.
(Proposed Holding Company for Home Federal Savings and Loan Association of Nampa)
Up to 5,290,000 Shares of Common Stock
Home Federal Bancorp, Inc. is offering its common stock for sale in
connection with the reorganization of Home Federal Savings and Loan Association
of Nampa into the mutual holding company structure. The shares being offered for
sale will represent 40.00% of the outstanding common stock of Home Federal
Bancorp, Inc. after the completion of this stock offering. Home Federal Bancorp,
Inc. will be formed to be the holding company for Home Federal Savings and Loan
Association of Nampa. Home Federal MHC will be formed to be the holding company
for Home Federal Bancorp, Inc. and will own 59.04% of the outstanding common
stock of Home Federal Bancorp, Inc. The remaining 0.96% will be held by a
charitable foundation that will be established by Home Federal Bancorp, Inc.
Home Federal Bancorp, Inc. expects its common stock to be listed for trading on
the Nasdaq National Market under the symbol "HOME."
================================================================================
TERMS OF THE OFFERING
Price Per Share: $10.00; Minimum Subscription: 25 shares or $250
Maximum,
Minimum Maximum as adjusted (1)
------------ ------------ --------------
Number of Shares 3,400,000 4,600,000 5,290,000
Underwriting Commission $ 376,511 $ 525,240 $ 610,759
Other Expenses $ 1,017,400 $ 1,017,400 $ 1,017,400
Net Proceeds to Home Federal Bancorp, Inc. $ 32,606,089 $ 44,457,360 $ 51,271,841
Net Proceeds Per Share $ 9.59 $ 9.66 $ 9.69
================================================================================
(1) Represents an amount that is 15% more than the maximum of the offering
range as a result of changes in financial or market conditions. The sale of
stock at this amount does not require the resolicitation of subscribers.
For a discussion of material risks you should consider, please refer to "Risk
Factors" beginning on page 14 of this prospectus.
Keefe, Bruyette & Woods, Inc. will use its best efforts to assist Home
Federal Bancorp, Inc. in selling at least the minimum number of shares shown
above, but does not guarantee that this number will be sold. Keefe, Bruyette &
Woods, Inc. is not obligated to purchase any shares of common stock in the
offering. Keefe, Bruyette & Woods, Inc. intends to make a market in the common
stock.
Home Federal Bancorp, Inc. will establish a charitable foundation,
which it will fund with cash and stock equal to 3% of the gross proceeds of
shares sold in the offering. Of the contribution, 80% will be made in stock and
20% will be made in cash. At the maximum of the offering range, 110,400 shares
will be contributed to the foundation. These shares will be issued in addition
to the shares being sold in the offering. In addition, the employee stock
ownership plan of Home Federal Bancorp, Inc. will purchase in the offering a
number of shares equal to 3.28% of the number of shares issued in the
reorganization, including those issued to Home Federal MHC, or if shares are not
available, in the open market after the stock offering.
Directors and executive officers of Home Federal Bancorp, Inc.,
together with the employee stock ownership plan, intend to purchase $7.5 million
and $9.0 million in the offering, or 22.0% and 19.5%, respectively, of the
offering based on the minimum and the maximum of the total shares to be sold to
the public. These purchases will count towards the minimum purchases needed to
complete the offering, and will be made for investment purposes only and not for
resale.
The offering will end at 12:00 Noon, Mountain time, on September 14,
2004. We may also commence a direct community offering and a syndicated
community offering concurrently with, during or promptly after the subscription
offering. We may extend the offerings, without notice to you, but they must be
completed or terminated by November 10, 2004, unless the Office of Thrift
Supervision approves a later date, which may not be beyond September 20, 2006.
Home Federal Bancorp, Inc. will hold all subscribers' funds in an
interest-bearing savings account at Home Federal Savings and Loan Association of
Nampa until the stock offering is completed or terminated. Funds will be
returned promptly with interest if the offering is terminated.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation nor any other federal
agency or state securities regulator has approved or disapproved these
securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
For information on how to subscribe, call the stock information center
at (208) 468-5025.
-----------------------
KEEFE, BRUYETTE & WOODS
-----------------------
August 13, 2004
[GRAPHIC OMITTED]
--------------------------------------------------------------------------------
SUMMARY
This summary highlights selected information from this prospectus and
may not contain all the information that is important to you. To completely
understand the stock offering, you should read this entire prospectus carefully,
including the consolidated financial statements and the notes to the
consolidated financial statements.
The Companies:
Home Federal Bancorp, Inc.
500 12th Avenue South
Nampa, Idaho 83651
(208) 466-4634
Home Federal Bancorp, Inc. ("Home Federal Bancorp") will be formed as a
federally-chartered stock corporation for the purpose of acquiring all of the
capital stock that Home Federal Savings and Loan Association of Nampa ("Home
Federal") will issue upon its reorganization into a mutual holding company
structure. Following the reorganization, a majority of the outstanding common
stock of Home Federal Bancorp will be held by Home Federal MHC, a
federally-chartered mutual holding company.
As part of the reorganization, Home Federal Bancorp is offering for
sale up to 5,290,000 shares of common stock, subject to adjustment. These shares
will represent 40.00% of the outstanding common stock of Home Federal Bancorp
after the completion of the reorganization and stock offering. Home Federal
Bancorp will form a charitable foundation, to which it will contribute cash and
stock equal to 3% of the gross proceeds of shares sold in the offering. Of the
contribution, 80% will be made in stock and 20% will be made in cash. Home
Federal MHC will own the remainder of the outstanding common stock of Home
Federal Bancorp. The following chart shows the corporate structure after
completion of the reorganization and stock offering.
Home Federal MHC Public Stockholders of Home Federal
Home Federal Bancorp Foundation, Inc.
59.04% 40.00% 0.96%
Home Federal Bancorp
100.00%
Home Federal
Home Federal MHC
500 12th Avenue South
Nampa, Idaho 83651
(208) 466-4634
Home Federal MHC will be formed as a federally-chartered mutual holding
company in connection with the mutual holding company reorganization of Home
Federal. Following completion of the reorganization, Home Federal MHC will own
59.04% of the outstanding common stock of Home Federal Bancorp. So long as Home
Federal MHC is in existence, it will at all times own at least a majority of the
outstanding common stock of Home Federal Bancorp.
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA
500 12th Avenue South
Nampa, Idaho 83651
(208) 466-4634
Home Federal was founded in 1920 as a building and loan association and
reorganized as a federal mutual savings and loan association in 1936. We are a
community-oriented financial institution dedicated to serving the financial
service needs of consumers and businesses within our market area. We engage
primarily in the business of attracting deposits from the general public and
using these funds to originate loans. We emphasize the origination of loans
secured by first mortgages on owner-occupied, residential real estate,
residential development and construction, and commercial real estate. To a
lesser extent, we originate other types of real estate loans, commercial
business loans and consumer loans. See "Business of Home Federal - Lending
Activities."
We serve the Treasure Valley region of southwestern Idaho, which
includes Ada, Canyon, Elmore and Gem Counties, through our 14 full-service
banking offices, two loan centers, 15 automated teller machines and Internet
banking services. Included in our 14 full-service banking offices are five
Wal-Mart in-store branch locations and an office located in the Hispanic
Cultural Center of Idaho.
At March 31, 2004, we had total assets of $496.8 million, deposit
accounts of $329.5 million and equity of $42.4 million. Through the
reorganization, we are changing our corporate structure by becoming a
federally-chartered stock savings bank and also are changing our name to "Home
Federal Bank."
Our Operating Strategy
Our mission is to operate and grow a profitable community-oriented
financial institution serving individuals and commercial real estate customers
in our market area. We plan to achieve this by executing our strategy of:
. maintaining favorable asset quality reflected primarily by a
low level of nonperforming assets, low charge-offs and
adequacy of loan loss reserves;
. seeking to improve net interest margin through a combination
of reduced funding costs and improved pricing relative to
asset risk;
. analyzing profitability of products and business lines and
allocating resources to those areas offering the greatest
potential for future profits;
. expanding the number of households we serve through internal
expansion of the branch network and possible selective
acquisitions of financial service providers in existing or
surrounding markets;
. pursuing further loan portfolio diversification, with an
emphasis on credit risk management;
. continuing an internal management culture which is driven by a
focus on profitability, productivity and accountability for
results and which responds proactively to the challenge of
change;
. providing our staff members with the knowledge and skills
necessary to perform their job functions and develop their
career potential;
. enhancing the perception of Home Federal with both the retail
and commercial banking public as the bank of choice;
. maintaining a sales and service culture based on an
understanding of the customer's needs and reflecting our
commitment to excellence;
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. reducing future reliance on net interest income by creating
additional sources of fee income from products and services we
offer; and
. utilizing technology to gain efficiencies in processing
customer information, to provide a competitive tool to assist
the sales process and to allow the efficient integration of
acquired businesses.
The Reorganization and Stock Offering
In connection with Home Federal's reorganization into the mutual
holding company form of organization, it is offering the common stock of Home
Federal Bancorp to the public primarily to allow it to grow through expanded
operations, particularly in the area of commercial real estate lending, as well
as through increased branching within our current market area. The stock form of
organization will also give us more flexibility to increase our capital position
and to offer stock-based employee compensation which will provide greater
incentive to improve corporate performance. Home Federal also considered
reorganizing as the wholly-owned subsidiary of a stock holding company, known as
a standard conversion, rather than as a second-tier subsidiary of a mutual
holding company. The amount of equity capital that would be raised in a standard
conversion, however, would be substantially more than the amount raised in a
minority stock offering by a subsidiary of a mutual holding company. As a
result, the capital raised in a standard conversion would be significantly in
excess of the amount needed for business operations, thereby making it more
difficult for Home Federal Bancorp to achieve acceptable returns on equity. See
"Home Federal's Reorganization and Stock Offering - Our Reasons for the
Reorganization."
We are offering between 3,400,000 and 4,600,000 shares of Home Federal
Bancorp common stock at $10.00 per share, which corresponds to the offering
range based on our independent appraisal after the contribution of shares to the
charitable foundation formed by Home Federal Bancorp and shares that will be
held by Home Federal MHC. Home Federal Bancorp will contribute cash and stock
equal to 3% of the gross proceeds of shares sold in the offering to the Home
Federal Foundation, Inc. ("Home Federal Foundation"). Of this contribution, 80%
will be made in stock and 20% will be made in cash. Home Federal MHC will own
59.04% of the outstanding common stock of Home Federal Bancorp. In the event of
subsequent developments in the financial condition of Home Federal Bancorp or
Home Federal or general financial market conditions before we complete the stock
offering, the number of shares we offer may increase up to 5,290,000 shares with
the approval of the Office of Thrift Supervision and without any notice to you.
If so, you will not have the chance to change or cancel your stock order.
Keefe, Bruyette & Woods will assist us in selling the stock. For
further information about the role of Keefe, Bruyette & Woods in the offering,
see "Home Federal's Reorganization and Stock Offering - Marketing Arrangements."
Terms of the Stock Offering
We are offering the shares of common stock to those with subscription
rights in the following order of priority:
(1) Depositors who held at least $50 with us on December 31, 2002.
(2) The Home Federal Bancorp employee stock ownership plan.
(3) Depositors who held at least $50 with us on June 30, 2004.
(4) Depositors with us as of July 31, 2004 and borrowers as of
March 16, 2004 whose loans continue to be outstanding as of
July 31, 2004.
Shares of common stock not subscribed for in the subscription offering
will be offered to the general public in a direct community offering with a
preference to natural persons residing in Ada, Canyon, Elmore and Gem Counties,
Idaho and, if necessary, a syndicated community offering. The direct community
offering and syndicated
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community offering, if any, shall begin at the same time as, during or promptly
after the subscription offering. See "Home Federal's Reorganization and Stock
Offering - Subscription Offering and Subscription Rights," "- Direct Community
Offering" and "- Syndicated Community Offering."
If we receive subscriptions for more shares than are to be sold in this
offering, shares will be allocated in order of the priorities described above
under a formula outlined in the plan of reorganization and stock issuance. If we
increase the number of shares to be sold above 4,600,000, the employee stock
ownership plan will have the first priority right to purchase any shares
exceeding that amount to the extent that its subscription has not previously
been filled. Any shares remaining will be allocated in the order of priorities
described above. See "Home Federal's Reorganization and Stock Offering -
Subscription Offering and Subscription Rights" for a description of the
allocation procedure.
How We Determined the Offering Range and the $10.00 Price Per Share
The independent appraisal by RP Financial, LC. ("RP Financial"), dated
as of May 21, 2004, established the offering range. This appraisal was based on
our financial condition and operations and the effect of the additional capital
raised in the stock offering. The $10.00 price per share was determined by our
Board of Directors and is the price most commonly used in stock offerings
involving reorganizations of mutual savings institutions.
The appraisal incorporated an analysis of a peer group of publicly
traded mid-tier thrift holding companies and mutual holding companies that RP
Financial deemed comparable to Home Federal. This analysis included an
evaluation of the average and median price-to-earnings and price-to-tangible
book value ratios indicated by the market prices of the peer group companies. RP
Financial applied the peer group's pricing ratios, as adjusted for certain
qualitative valuation factors to account for differences between Home Federal
and the peer group, to Home Federal's pro forma earnings and book value to
derive the estimated pro forma market value of Home Federal.
RP Financial has estimated that as of May 21, 2004, the pro forma
market value of Home Federal Bancorp on a fully converted basis, including the
effect of the contribution of cash and stock to the Home Federal Foundation,
ranged from a minimum of $85.0 million to a maximum of $115.0 million. Based on
this valuation and the $10.00 per share price, the number of shares of common
stock to be issued by Home Federal Bancorp will range from a minimum of
8,500,000 shares to a maximum of 11,500,000 shares. Home Federal Bancorp is
offering 40.00% of these shares, or between 3,400,000 and 4,600,000 shares or
$34.0 million to $46.0 million, for sale to eligible members of Home Federal,
the Home Federal Bancorp employee stock ownership plan and possibly to the
general public in a community offering. In addition, the charitable foundation
established by Home Federal Bancorp will be funded with cash and stock equal in
value to 3% of the shares sold in the offering. It is intended that 80% of the
foundation funding will be made by means of a stock contribution and 20% of the
foundation funding will be made by means of a cash contribution. Accordingly,
based on the minimum and maximum of the offering range, respectively, a minimum
of 81,600 shares to a maximum of 110,400 shares will be contributed in stock and
a minimum of $204,000 to a maximum of $276,000 will be contributed in cash. Home
Federal MHC will own between 5,018,400 and 6,789,600 shares, or 59.04%, of Home
Federal Bancorp at the completion of the stock offering. The establishment of
the charitable foundation has the effect of reducing the valuation of Home
Federal Bancorp. See "Comparison of Valuation and Pro Forma Information With and
Without Charitable Foundation."
The following tables present a summary of selected pricing ratios for
the peer group companies and the resulting pricing ratios for Home Federal
Bancorp. The estimated appraised value and the resulting premium/discount took
into consideration the potential financial impact of the stock offering of Home
Federal Bancorp.
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Recent and projected stock trading multiples. The following table
presents the pricing ratios for the peer group companies in their current
structure, as publicly traded mutual holding companies, and the pro forma
pricing ratios for Home Federal Bancorp.
Price-to-earnings Price-to-tangible
multiple book value ratio
------------------------ -----------------
Home Federal Bancorp (pro forma)
Maximum............................ 24.2x 141.8%
Minimum............................ 17.7 120.3
Valuation of peer group
companies as of May 21, 2004 (1)
Averages........................... 23.1x 200.5%
Medians............................ 23.1 203.2
----------
(1) Reflects earnings of the most recent 12 month period for which data
is publicly available.
Stock trading multiples of mutual holding companies on a
fully-converted basis. The following table presents pro forma pricing ratios for
the peer group companies, assuming they had completed a second-step conversion,
and for Home Federal Bancorp, assuming it had also fully converted. RP
Financial's calculations of the fully-converted pricing multiples for the peer
group companies assume the pro forma impact of selling the mutual holding
company shares of each of the peer group companies at their respective trading
prices as of May 21, 2004. RP Financial's calculation of the fully-converted
pricing multiples for Home Federal Bancorp assumes the pro forma impact of
selling 100% of the shares to be issued to the public at $10.00 per share.
Pro forma Pro forma
price-to-earnings price-to-tangible
multiple book value ratio
------------------------ -----------------
Home Federal Bancorp
Maximum............................ 25.2x 82.6%
Minimum............................ 18.2 74.6
Valuation of peer group
companies as of May 21, 2004 (1)
Averages........................... 25.4x 99.0%
Medians............................ 20.7 95.5
----------
(1) Reflects earnings of the most recent 12 month period for which data
is publicly available.
The pro forma fully-converted calculations for Home Federal Bancorp and
the peer group companies include the following assumptions:
. 8.0% of the shares sold would be purchased by an employee
stock ownership plan, with the expense to be amortized over
ten years;
. 4.0% of the shares sold would be purchased by a restricted
stock plan, with the expense to be amortized over five years;
and
. offering expenses would equal 2.0% of the gross proceeds of
the offering.
With respect to Home Federal Bancorp, the pro forma fully-converted calculations
also assume the impact of the establishment of a charitable foundation, funded
at the rate of 3.0% of the gross proceeds of the offering. Based on the results
of the appraisal, compared to the average pricing of the peer group on a
fully-converted basis, Home
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Federal Bancorp's fully-converted pro forma pricing ratios at the maximum of the
offering range indicated a discount of 0.8% on a price-to-earnings basis and a
discount of 16.6% on a price-to-book basis.
The independent appraisal is not necessarily indicative of the post-stock
offering trading value. Do not assume or expect that the valuation of Home
Federal Bancorp as indicated above means that the common stock will trade at or
above the $10.00 purchase price after the stock offering is completed.
The independent valuation must be updated before we complete the stock
offering. The amount of common stock being offered may be increased by up to 15%
without notice to persons who have subscribed for stock, so that a total of
5,290,000 shares would be sold in the offering. We received authorization from
the Office of Thrift Supervision to conduct the stock offering on August 13,
2004. The updated independent valuation will be subject to the further approval
of the Office of Thrift Supervision before we can complete the stock offering.
If the updated independent valuation would result in more than 5,290,000 shares
being sold, we would notify persons who have subscribed for stock and they would
have the opportunity to confirm, change or cancel their subscription orders. See
"Pro Forma Data."
After-Market Performance Information Provided by Independent Appraiser
The following information was provided to the Board of Directors by RP
Financial as part of its appraisal review. The table presents for all mutual
holding company reorganizations with a minority stock issuance from October 1,
2003 to May 21, 2004, and from January 1, 2002 to May 21, 2004, the average and
median percentage stock appreciation from the initial trading date of the
offering to the dates presented in the table. The Board did not consider this
data particularly relevant to Home Federal's appraisal given that the
information relates to stock appreciation experienced by other companies that
reorganized in different markets and that may have issued more or less than
40.00% of their outstanding common stock. In addition, the companies may have no
similarities to Home Federal with regard to the market in which Home Federal
competes, earnings quality and growth potential, among other factors. Finally,
the amount of proceeds raised as a percentage of pro forma stockholders' equity
for Home Federal Bancorp is substantially higher than the amount of proceeds
raised as a percentage of pro forma stockholders' equity for the institutions
represented in the table.
The substantial proceeds raised as a percentage of pro forma
stockholders' equity may have a negative effect on our stock price performance.
See "Risk Factors - After this offering, our return on equity will be low
compared to other companies and our compensation expenses will increase. This
could negatively impact the price of our stock."
This table is not intended to indicate how our stock may perform. Stock
appreciation is affected by many factors, including, but not limited to, the
factors set forth below. Before you make an investment decision, we urge you to
carefully read this prospectus, including, but not limited to, the section
entitled "Risk Factors" beginning on page 14.
Average Percentage Stock Price Median Percentage Stock Price
Appreciation from Initial Public Appreciation from Initial Public
Offering Price Offering Price
-------------------------------------- --------------------------------------
Number of After One After One Through After One After One Through
Transactions Day Month May 21, 2004 Day Month May 21, 2004
------------ --------- --------- ------------ --------- --------- ------------
October 1, 2003 -
May 21, 2004 .......... 8 36.2% 31.8% 21.6% 31.4% 25.5% 18.8%
January 1, 2002 -
May 21, 2004 .......... 12 33.7% 31.1% 42.8% 29.4% 25.3% 21.8%
Data presented in the table were calculated on a small sample. The
data, therefore, may not be meaningful for investors. While stock prices of
reorganizing institutions have, on average, increased for the period presented,
there can be no assurance that our stock price will appreciate the same amount,
if at all. There can also be no assurance that our stock price will not trade
below $10.00 per share, as has been the case for some thrift institutions that
have formed mutual holding companies. In addition, the transactions from
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which the data are derived occurred primarily during a falling interest rate
environment, during which the market for financial institutions typically
increases. If interest rates rise, our net interest income and the value of our
assets likely would be reduced, negatively affecting our stock price. See "Risk
Factors - A significant decline or rise in interest rates may hurt our profits
and net portfolio value."
The increase in any particular company's stock price is subject to
various factors, including the amount of proceeds a company raises (see "Risk
Factors - After this offering, our return on equity will be low compared to
other companies and our compensation expenses will increase. This could
negatively impact the price of our stock."), the quality of management and
management's ability to deploy proceeds (such as through investments, the
acquisition of other financial institutions or other businesses, the payment of
dividends and common stock repurchases). In addition, stock prices may be
affected by general market conditions, the interest rate environment, the market
for financial institutions and merger or takeover transactions, the presence of
professional and other investors who purchase stock on speculation, as well as
other unforeseeable events not necessarily in the control of management.
The Board of Directors carefully reviewed the information provided to
it by RP Financial through the appraisal process, but did not make any
determinations regarding whether or not prior mutual to stock conversions have
been undervalued on a price-to-tangible-book value basis, nor did the Board draw
any conclusions regarding how the historical data reflected above may impact
Home Federal's appraisal. Instead, the Board hired RP Financial to help it
understand the regulatory process and to advise the Board as to how much capital
Home Federal Bancorp would likely be required to raise under the Office of
Thrift Supervision's appraisal guidelines. The Board's ability to control the
amount of capital Home Federal will raise in the stock offering is limited by
the regulatory framework established by the Office of Thrift Supervision, which
requires that Home Federal hire an independent appraiser and permit the
independent appraiser to arrive at a value without undue influence from outside
parties, including Home Federal. The Board fully complied with the Office of
Thrift Supervision's guidelines and permitted RP Financial to arrive at the
appraised value of Home Federal independently, which the Board also understood
would be subject to Office of Thrift Supervision review and approval. RP
Financial, an independent appraisal firm expert in the appraisal guidelines of
the Office of Thrift Supervision, considered all factors that may appropriately
be considered under the Office of Thrift Supervision's appraisal guidelines when
arriving at the appraised value of Home Federal.
The Board of Directors recognized the duty of care it owes to Home
Federal and its members to proceed with the reorganization transaction in an
informed manner with the best interests of Home Federal and its members in the
forefront of its deliberations and decision making. The Board worked closely
with RP Financial to understand RP Financial's methodology and to consider the
appropriateness of RP Financial's assumptions in determining the appraised
value. The Board understood that if RP Financial's assumptions were appropriate
and the methodology employed was consistent with the Office of Thrift
Supervision's appraisal guidelines, the appraisal, once approved by the Office
of Thrift Supervision, would fairly estimate the pro forma market value of Home
Federal.
Termination of the Offering
The subscription offering will end at 12:00 Noon, Mountain time, on
September 14, 2004, unless extended. The direct community offering and
syndicated community offering, if any, will also end at 12:00 Noon, Mountain
time, on September 14, 2004, unless extended. If fewer than the minimum number
of shares are subscribed for in the subscription offering and we do not get
orders for at least the minimum number of shares by November 10, 2004, we will
either:
(1) promptly return any payment you made to us, with interest, or
cancel any withdrawal authorization you gave us; or
(2) extend the offering, if allowed, and give you notice of the
extension and of your rights to confirm, change or cancel your
order. If we extend the offering and you do not respond to the
notice, then we will cancel your order and return your
payment, with interest, or cancel any withdrawal authorization
you gave us. We must complete or terminate the offering by
September 20, 2006.
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How We Will Use the Proceeds Raised from the Sale of Common Stock
We intend to use the net proceeds received from the stock offering as
follows:
Maximum,
Minimum Maximum as adjusted
-------- -------------- -----------
(In Thousands)
Gross proceeds........................................ $ 34,000 $ 46,000 $ 52,900
Less:
Estimated underwriting commission................... 377 526 611
Estimated other offering expenses................... 1,017 1,017 1,017
-------- -------------- -----------
Net proceeds 32,606 44,457 51,272
-------- -------------- -----------
Less:
Net proceeds to Home Federal........................ 16,303 22,229 25,636
Loan to our employee stock ownership plan........... 2,785 3,768 4,334
Cash contribution to the Home Federal Foundation.... 204 276 317
Funding of the restricted stock plan................ 1,666 2,254 2,592
-------- -------------- -----------
Net cash proceeds retained by Home Federal Bancorp.... $ 11,648 $ 15,930 $ 18,393
======== ============== ===========
The net proceeds retained by Home Federal Bancorp and Home Federal may
ultimately be used to support lending and investment activities, and future
expansion of operations through the establishment or acquisition of additional
banking offices or other financial service providers, although no such
acquisitions are specifically being considered at this time. We intend to use
the proceeds for future lending and investment activities, repurchasing stock
and payment of dividends, in addition to general and other corporate purposes.
See "Risk Factors" and "How We Intend to Use the Proceeds from this Offering."
We May Pay a Cash Dividend in the Future
We may pay cash dividends in the future, however, the amount and timing
of any dividends has not yet been determined. Although future dividends are not
guaranteed, based on our pro forma net income and stockholders' equity, we
believe Home Federal Bancorp will be capable of paying a dividend after
completion of this offering. Based on the minimum and maximum of net proceeds
expected to be retained, Home Federal Bancorp will have between $11.6 million
and $15.9 million available for payment of dividends. Home Federal Bancorp can
also pay dividends from the dividends it receives from Home Federal. As of May
21, 2004, all of the companies that comprised the peer group for the independent
appraisal paid regular cash dividends with implied dividend yields ranging from
1.08% to 4.86%. As of May 21, 2004, the median dividend yield paid by the peer
group companies equaled 2.37%.
We currently have no intention to pay or take any steps to pay a
tax-free dividend which qualifies as a return of capital. Regulations of the
Office of Thrift Supervision prohibit a return of capital during the term of the
three-year business plan submitted by Home Federal to the Office of Thrift
Supervision in connection with the reorganization and stock offering.
Plans to List the Common Stock for Trading on the Nasdaq National Market
We plan to list our common stock for trading on the Nasdaq National
Market under the symbol "HOME." Our application to list our stock on the Nasdaq
National Market has been approved. However, because of the unpredictability of
the stock market and other factors, persons purchasing shares may not be able to
sell their shares when they want to, or at a price equal to or above $10.00.
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Limitations on the Purchase of Common Stock in the Stock Offering
The minimum purchase is 25 shares.
The maximum purchase in the subscription offering by any person or
group of persons through a single deposit account is $250,000 of common stock,
which equals 25,000 shares.
The maximum purchase by any person in the direct community offering is
$250,000 of common stock, which equals 25,000 shares.
The maximum purchase in the subscription offering, direct community
offering and syndicated community offering combined by any person, related
persons or persons acting together is one percent of the shares sold in the
offering. At the maximum of the offering range, as adjusted, this equals
$529,000 of common stock, or 52,900 shares.
If any of the following persons purchase common stock, their purchases
when combined with your purchases cannot exceed one percent of the shares sold
in the offering:
. your spouse or relatives of you or your spouse living in your
house;
. companies, trusts or other entities in which you have an
interest or hold a position; or
. other persons who may be acting in concert with you.
How to Purchase Common Stock
Note: Once we receive your order, you cannot cancel or change it
without our consent. If Home Federal Bancorp intends to sell fewer than
3,400,000 shares or more than 5,290,000 shares, all subscribers will be notified
and given the opportunity to confirm, change or cancel their orders. If you do
not respond to this notice, we will return your funds promptly with interest or
will cancel any withdrawal authorization you gave us.
If you want to subscribe for shares, you must complete an original
stock order form and drop it off at any Home Federal branch office or send it,
together with full payment or withdrawal authorization, to Home Federal in the
postage-paid envelope provided. You must sign the certification that is part of
the stock order form. We must receive your stock order form before the end of
the offering period.
You may pay for shares in any of the following ways:
. By check or money order made payable to Home Federal Bancorp,
Inc.
. By authorizing a withdrawal from an account at Home Federal,
including certificates of deposit, designated on the stock
order form. To use funds in an individual retirement account
("IRA") at Home Federal, you must transfer your account to an
unaffiliated institution or broker. Please contact the stock
information center at (208) 468-5025 as soon as possible for
assistance.
. In cash, if delivered in person to any Home Federal branch
office.
We will pay interest on your subscription funds at the rate Home
Federal pays on regular savings accounts from the date we receive your funds
until the stock offering is completed or terminated. Payments for shares
subscribed for, other than withdrawals from a deposit account at Home Federal,
will be deposited in a segregated deposit account at Home Federal. All funds
authorized for withdrawal from deposit accounts with Home Federal will earn
interest at the applicable account rate until the stock offering is completed.
There will be no early withdrawal penalty for withdrawals from certificates of
deposit at Home Federal used to pay for stock.
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You may subscribe for shares of common stock using funds in your IRA at
Home Federal or elsewhere. However, common stock must be held in a self-directed
retirement account. Home Federal's IRAs are not self-directed, so they cannot be
invested in common stock. If you wish to use some or all of the funds in your
Home Federal IRA to purchase common stock, the applicable funds must be
transferred to a self-directed account reinvested by an independent trustee,
such as a brokerage firm. If you do not have such an account, you will need to
establish one before placing your stock order. An annual administrative fee may
be payable to the independent trustee. Because individual circumstances differ
and processing of retirement fund orders takes additional time, we recommend
that you contact the stock information center promptly, preferably at least two
weeks before the end of the offering period, for assistance with purchases using
your IRA or other retirement account. Whether you may use these funds for the
purchase of shares in the stock offering may depend on timing constraints and
possible limitations imposed by the institution where the funds are held.
For further discussion regarding the stock ordering procedures, see
"Home Federal's Reorganization and Stock Offering - Procedure for Purchasing
Shares in the Subscription Offering."
Purchases of Common Stock by Home Federal Officers and Directors
Home Federal's directors and executive officers intend to subscribe for
332,500 shares regardless of the number of shares sold in the offering. This
number equals 7.2% of the 4,600,000 shares that would be sold at the maximum of
the offering range. If fewer shares are sold in the stock offering, then
officers and directors will own a greater percentage of Home Federal Bancorp.
Directors and executive officers will pay the same $10.00 per share price for
these shares as everyone else who purchases shares in the stock offering.
Tax Consequences of the Reorganization
As a general matter, the reorganization will not be a taxable
transaction for purposes of federal or state income taxes to Home Federal MHC,
Home Federal Bancorp or Home Federal or persons who receive or exercise
subscription rights. Our special counsel, Breyer & Associates PC, has issued an
opinion to us that, among other items, for federal income tax purposes:
. the reorganization will qualify as a tax free reorganization;
. it is more likely than not that the fair market value of the
subscription rights is zero and accordingly, no gain or loss
will be recognized by recipients of subscription rights; and
. no gain or loss will be recognized for federal income tax
purposes by Home Federal MHC, Home Federal Bancorp or Home
Federal as a result of the reorganization to mutual holding
company structure.
Home Federal has also received an opinion from Penland Munther Goodrum,
Chartered, stating that, assuming the reorganization does not result in any
federal income tax liability to Home Federal, its account holders, Home Federal
Bancorp or Home Federal MHC, the reorganization will not result in any Idaho
income tax liability to those entities or persons.
For a further discussion of the tax consequences of the reorganization
and stock offering, see "Home Federal's Reorganization and Stock Offering -
Effects of the Reorganization and Stock Offering - Tax Effects."
Benefits to Management from the Offering
We intend to establish an employee stock ownership plan, which will
purchase in the offering 3.28% of the aggregate shares issued in the
reorganization, including those issued to Home Federal MHC, or if shares are not
available, in the open market after the stock offering. A loan from Home Federal
Bancorp to the plan, funded by a portion of the proceeds from this offering,
will be used to purchase these shares. The loan will accrue interest at the
prime rate in effect at the time the employee stock ownership loan is entered
into. The employee stock ownership
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plan will provide a retirement benefit to all employees eligible to participate
in the plan. The establishment of the employee stock ownership plan will result
in additional compensation expense to Home Federal Bancorp. See "Pro Forma Data"
for an illustration of the effects of this plan.
We also intend to adopt a stock option plan and a restricted stock plan
for the benefit of our directors, officers and employees, subject to stockholder
approval. If we adopt the restricted stock plan, some of these individuals will
be awarded stock at no cost to them. As a result, both the employee stock
ownership plan and the restricted stock plan will increase the voting control of
management without a cash outlay by the recipient of shares.
The establishment of the restricted stock plan and the stock option
plan will result in additional compensation expense to Home Federal. At this
time, no determination has been made regarding whether any options that may be
granted will be expensed; however, if we were to expense options, it would
negatively affect net income.
The value of the stock options that would be issued under a stock
option plan will be affected by the price of the Home Federal Bancorp stock at
the time the stock option plan is implemented and the options are granted. If a
stock option plan were to award stock options for 4.90% of the maximum amount of
shares that could be issued in the reorganization based on RP Financial's
appraisal, the total shares subject to options would be 416,500 shares, 490,000
shares, 563,500 shares and 648,025 shares, respectively, at the minimum,
midpoint, maximum and maximum, as adjusted, of the valuation range.
The following table presents the total estimated value of the shares of
common stock, assuming 11,500,000 shares are issued in the reorganization at the
maximum of the offering range, which would be acquired by the employee stock
ownership plan and the total value of all shares to be available for award and
issuance under the restricted stock plan. The table assumes that the value of
the shares is $10.00 per share. The table does not include a value for the
options because the price paid for the option shares will be equal to the fair
market value of the common stock on the day that the options are granted. As a
result, financial gains can be realized under an option only if the market price
of the common stock increases.
Estimated Percentage of
Number of Shares Value of Shares Shares Issued
---------------- ---------------------- -------------
(Dollars in Thousands)
Employee stock ownership plan ...... 376,832 $ 3,768 3.28%
Restricted stock awards ............ 225,400 2,254 1.96
Stock options ...................... 563,500 -- 4.90
---------------- ---------------------- -------------
Total ............................ 1,165,732 $ 6,022 10.14%
================ ====================== =============
The value of the shares obtained for the restricted stock plan will be
based on the price of Home Federal Bancorp's common stock at the time those
shares are purchased or issued, which, subject to stockholder approval, cannot
be implemented until at least six months after the reorganization and offering.
The following table presents the total value of all shares to be available for
award and issuance under the restricted stock plan, assuming the shares for the
plan are purchased or issued in a range of market prices from $8.00 per share to
$14.00 per share.
11
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259,210 Shares
166,600 Shares 196,000 Shares 225,400 Shares Awarded at
Awarded at Awarded at Awarded at Maximum of
Share Price Minimum of Range Midpoint of Range Maximum of Range Range, As Adjusted
----------- ---------------- ----------------- ---------------- ------------------
(Dollars in Thousands)
$ 8.00 $ 1,333 $ 1,568 $ 1,803 $ 2,074
$ 10.00 1,666 1,960 2,254 2,592
$ 12.00 1,999 2,352 2,705 3,111
$ 14.00 2,332 2,744 3,156 3,629
In addition, upon completion of the stock offering, we intend to enter
into an employment agreement with Daniel L. Stevens, President and Chief
Executive Officer, and severance agreements with Robert A. Schoelkoph, Roger D.
Eisenbarth, Lynn A. Sander, Denis J. Trom and Karen Wardwell. The agreements are
designed to assist us in maintaining a stable and competent management team
after the stock offering. The agreements will have a term of three years and
provide for a severance payment in the event of a change in control of Home
Federal Bancorp or Home Federal. The employment and severance agreements to be
entered into provide no additional compensation to members of management as the
employment agreement maintains Mr. Stevens' current annual salary of $205,000
and the severance agreements do not provide for a benefit, except under certain
circumstances, such as a change in control.
For a further discussion of benefits to management, see "Management."
Stock Information Center
If you have any questions regarding the offering or our conversion to
stock form, please call the stock information center at (208) 468-5025.
Subscription Rights
Subscription rights are not allowed to be transferred, and we will act
to ensure that you do not do so. We will not accept any stock orders that we
believe involve the transfer of subscription rights.
Home Federal Bancorp Has Established a Charitable Foundation
In connection with the reorganization, Home Federal Bancorp has
established a charitable foundation, the Home Federal Foundation, in order to
further its commitment to the local community. The foundation is anticipated to
distribute at least 5% of its assets each year to support charitable
organizations and activities that enhance the quality of life for residents
within its market area. The Home Federal Foundation will allow the local
communities to share in the anticipated future success of Home Federal and Home
Federal Bancorp through cash dividends payable on the common stock and potential
appreciation of the value of the common stock, as well as enable Home Federal
Bancorp and its related entities to develop a unified charitable donation
strategy. Directors of the foundation will be charged with the specific
development of a donation strategy consistent with the regulations set forth in
Section 501(c)(3) of the Internal Revenue Code.
Home Federal Bancorp will fund the foundation with a contribution of
cash and stock equal in value to 3% of the shares sold in the offering. It is
intended that 80% of the foundation funding will be made by means of a stock
contribution and 20% of the foundation funding will be made by means of a cash
contribution. Accordingly, based on the minimum and maximum of the offering
range, respectively, a minimum of 81,600 shares to a maximum of 110,400 shares
will be contributed in stock and a minimum of $204,000 to a maximum of $276,000
will be contributed in cash. There are no plans by Home Federal Bancorp to
provide additional funding beyond this initial funding to the foundation over
the next three years.
12
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As a result of the foundation's establishment and funding, the
appraisal will be reduced and Home Federal Bancorp will sell fewer shares of
common stock than if the reorganization were completed without the foundation.
See "Comparison of Valuation and Pro Forma Information With and Without
Charitable Foundation" and "Home Federal Foundation."
Important Risks in Owning Home Federal Bancorp's Common Stock
Before you decide to purchase stock, you should read the "Risk Factors"
section on pages 14 to 17 of this prospectus.
Possible Conversion of Home Federal MHC to Stock Form
In the future, Home Federal MHC may convert from the mutual to capital
stock form, in a transaction commonly known as a "second-step conversion." This
second-step conversion may be undertaken in order to, among other things, raise
additional capital for Home Federal or facilitate an acquisition transaction.
Home Federal MHC is not fully converting to stock form at this time because the
expected net proceeds from the stock offering are sufficient in our opinion to
support the growth of Home Federal MHC and Home Federal anticipated at this
time.
In a second-step conversion, members of Home Federal MHC would have
subscription rights to purchase common stock in an offering of new shares to be
conducted by Home Federal Bancorp or its successor, the shares of Home Federal
Bancorp would be cancelled and the public stockholders of Home Federal Bancorp
would be entitled to exchange their shares of common stock for an equal
percentage of new shares of the converted Home Federal MHC. This percentage may
be adjusted to reflect any assets owned by Home Federal MHC. Home Federal
Bancorp's public stockholders, therefore, would own approximately the same
percentage of the resulting entity as they owned prior to the second-step
conversion. The Board of Directors has no current plans to undertake a
"second-step conversion" transaction.
Restrictions on Acquisition of Home Federal Bancorp and Home Federal
Federal law restricts the ability of any person, firm or entity to
acquire Home Federal Bancorp, Home Federal or their respective capital stock. No
person, firm or entity may acquire more than 25% of any class of voting stock of
Home Federal Bancorp or Home Federal without approval by the Office of Thrift
Supervision. In addition, for a period of three years following completion of
the stock offering, Office of Thrift Supervision regulations generally prohibit
any person from acquiring or making an offer to acquire beneficial ownership of
more than 10% of the stock of Home Federal Bancorp or Home Federal without
approval from the Office of Thrift Supervision. Certain provisions in the
charter and bylaws of Home Federal Bancorp and Home Federal affect the ability
of any person, firm or entity to acquire control of Home Federal Bancorp and
Home Federal. These provisions include limitations on voting rights of persons
owning more than 10% of any class of outstanding voting stock of Home Federal
Bancorp or Home Federal.
13
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RISK FACTORS
You should consider these risk factors, in addition to the other
information in this prospectus, before deciding whether to make an investment in
Home Federal Bancorp's stock.
A significant decline or rise in interest rates may hurt our profits and net
portfolio value.
Interest rates are at historically low levels with most deposit rates
well below 2%. If interest rates were to rapidly decline further, Home Federal
may not be able to reduce the rates it pays on its deposits and other
interest-bearing liabilities in the same proportion or as rapidly as the decline
it would experience on the rates it receives on its loans and other
interest-earning assets. The difference between the rates received on
interest-earning assets and the rates paid on interest-bearing liabilities is
referred to as our interest rate spread. When our interest rate spread
decreases, so does our profitability. When interest rates rise, our net interest
income and the value of our assets could be significantly reduced if interest
paid on interest-bearing liabilities, such as deposits and borrowings, increases
more quickly than interest received on interest-earning assets, such as loans,
investment securities and mortgage-backed securities. For example, if we
experienced an immediate 200 basis point increase in interest rates as of March
31, 2004, the market value of our portfolio equity could decrease by $10.0
million, or 19.1%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset and Liability Management and Market
Risk." In addition, rising interest rates may hurt our income because they may
reduce the demand for loans such as real estate loan refinancings and the
resulting interest income. Management also expects reduced income from secondary
marketing activities in a rising rate environment with corresponding reductions
in the gains on the sale of loans.
Our loan portfolio possesses increased risk due to our substantial outstanding
balances of construction and development, commercial real estate and consumer
loans, which could increase the level of our provision for loan losses.
Our outstanding construction and land development, commercial real
estate and consumer loans accounted for more than 34.5% of our total loan
portfolio as of March 31, 2004. We have had a significant increase in commercial
real estate loans since we began originating these loans in 1997. Generally, we
consider construction and development, commercial real estate and consumer loans
to involve a higher degree of risk compared to first mortgage loans on one- to
four-family, owner-occupied residential properties. These loans have higher
risks for the following reasons:
. Construction and Development Loans. Repayment depends on the
successful completion and if applicable, sale, of the
improvements to the land.
. Commercial Real Estate Loans. Repayment depends on income
being generated in amounts sufficient to cover operating
expenses and debt service.
. Consumer Loans. Consumer loans (such as automobile loans) are
collateralized, if at all, with assets that may not provide an
adequate source of repayment of the loan due to depreciation,
damage or loss.
Because we plan to increase our emphasis on construction and
development, commercial real estate and consumer loans, we may determine it
necessary to increase the level of our provision for loan losses. Increased
provisions for loan losses would reduce our profits. For further information
concerning the risks associated with construction and development, commercial
real estate and consumer lending, see "Business of Home Federal - Lending
Activities" and "- Asset Quality."
The value of our mortgage servicing rights declines during periods of falling
interest rates.
We have a loan servicing portfolio that consists of the right to
service (i.e., collect the principal and interest) on loans that we originated
and sold to investors. At March 31, 2004 and at September 30, 2003, we
14
serviced $258.3 million and $246.0 million, respectively, of loans for others
and these mortgage servicing rights had a value of $3.0 million and $3.1
million, respectively, at those dates. The value of the loans we service for
others is significantly affected by interest rates. In general, during periods
of falling interest rates such as we recently experienced, mortgage loans prepay
at faster rates and the value of the mortgage servicing declines. Conversely,
during periods of rising interest rates, the value of the mortgage servicing
rights generally increases as a result of slower rates of prepayment. We may be
required to recognize this decrease in value by taking a charge against our
earnings, which would cause our profits to decrease. We have experienced an
increase in prepayments of mortgages as interest rates have decreased
dramatically during the past two years, which has impacted the value of our
servicing asset. Accordingly, we recognized impairment charges on our servicing
portfolio of $249,000 and $1.5 million for the years ended September 30, 2003
and 2002, respectively. We believe, based on historical experience, that the
amount of prepayments and related impairment charges should decrease as interest
rates increase.
After this offering, our return on equity will be low compared to other
companies and our compensation expenses will increase. This could negatively
impact the price of our stock.
The proceeds we will receive from the sale of Home Federal Bancorp's
common stock will significantly increase our capital and it will take us time to
fully use this capital in our business operations. Therefore, we expect our
return on equity to be below our historical level and less than our regional and
national peers. For the six months ended March 31, 2004 and the year ended
September 30, 2003, our return on equity was 9.38% (on an annualized basis) and
13.39%, respectively. On a pro forma basis, at the maximum of the offering
range, our return on equity would have been 4.43% on an annualized basis for the
six months ended March 31, 2004, and 6.51% for the year ended September 30, 2003
as compared to industry (all fully converted publicly-traded thrifts) return on
equity of 8.07% and 9.67%, respectively. This low return on equity could hurt
our stock price. We cannot guarantee when or if we will achieve returns on
equity that are comparable to industry peers. For further information regarding
pro forma income and expenses, see "Pro Forma Data."
Strong competition within our market area may limit our growth and
profitability.
Competition in the banking and financial services industry is intense.
In our market area, we compete with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual fund
companies, insurance companies, and investment brokerage and financial planning
firms operating locally and elsewhere. Many of these competitors have
substantially greater resources and lending limits than we do and may offer
certain services that we do not or cannot provide. Our profitability depends
upon our continued ability to successfully compete in our market.
Persons who purchase stock in the offering will own a minority of Home Federal
Bancorp's common stock and will not be able to exercise voting control over most
matters put to a vote of stockholders.
Public stockholders will own a minority or 40.00% of the outstanding
shares of Home Federal Bancorp's common stock after the stock offering. The same
directors and executive officers who manage Home Federal Bancorp also manage
Home Federal MHC, which will own 59.04% of the outstanding common stock of Home
Federal Bancorp. The Board of Directors of Home Federal MHC will be able to
exercise voting control over most matters put to a vote of stockholders because
Home Federal MHC will own a majority of Home Federal Bancorp's common stock. For
example, Home Federal MHC may exercise its voting control to prevent a sale of
Home Federal Bancorp in which the public stockholders could receive a premium
for their shares.
In addition, Home Federal Bancorp's directors, executive officers and
their associates are expected to purchase approximately 332,500 shares sold in
the offering, which represents 2.89% of the shares issued in the reorganization
at the maximum of the offering range. These purchases, together with the
purchase of 3.28% of the shares issued by the Home Federal Bancorp employee
stock ownership plan will result in the inside ownership of Home Federal Bancorp
common stock of 6.17% of the shares issued at the maximum of the offering range.
Furthermore, if stockholders of Home Federal Bancorp approve the restricted
stock plan and the stock option plan, and provided that all shares under the
restricted stock plan are awarded and all options under the stock option plan
15
are awarded and exercised, directors and executive officers may own up to an
additional 6.54% of the shares of stock issued. See "Management - Benefits" and
"Proposed Purchases by Management."
The contribution to the Home Federal Foundation will reduce earnings and your
ownership interest.
In connection with the reorganization, Home Federal Bancorp has
established the Home Federal Foundation and will contribute, based on the
maximum of the offering range, a maximum of 110,400 of its shares sold in the
offering and $276,000 in cash. This contribution will be a significant one-time
expense to Home Federal Bancorp and will decrease operating results for the year
ending September 30, 2004. Home Federal Bancorp, based on the maximum of the
offering range, will recognize a one-time expense of $1.4 million before taxes
upon making its contribution to the foundation. The $1.4 million expense will
reduce net income on an after tax basis by $840,000. Net income after taxes for
the year ended September 30, 2003 was $5.5 million. Net income for the year
ended September 30, 2003 would have been $4.6 million if the foundation expense
of $840,000 after taxes had been recorded in the year ended September 30, 2003.
In addition, the contribution of stock to the foundation will reduce your
ownership percentage in Home Federal Bancorp. For additional information, see
"Comparison of Valuation and Pro Forma Information With and Without Charitable
Foundation."
Holders of Home Federal Bancorp common stock may not be able to sell their
shares when desired if a liquid trading market does not develop, or for $10.00
or more per share even if a liquid trading market develops.
We have never issued common stock to the public. Consequently, there is
no established market for the common stock. We expect Home Federal Bancorp's
common stock to be listed for trading on the Nasdaq National Market under the
symbol "HOME." We cannot predict whether a liquid trading market in shares of
Home Federal Bancorp's common stock will develop or how liquid that market might
become. Persons purchasing shares may not be able to sell their shares when they
desire if a liquid trading market does not develop and may not be able to sell
them at a price equal to or above $10.00 per share even if a liquid trading
market develops.
We intend to grant stock options and restricted stock to the Board of Directors
and certain employees following the stock offering, which will likely reduce
your ownership interest.
If approved by a vote of a majority of the total votes eligible to be
cast at a duly called meeting by stockholders (other than Home Federal MHC), we
intend to establish a stock option plan with a number of shares equal to 4.90%
of the shares issued in the reorganization and a restricted stock plan with a
number of shares equal to 1.96% of the shares issued in the reorganization.
These stock benefit plans are being established for the benefit of selected
directors, officers and employees of Home Federal Bancorp and Home Federal and
are worth a total of $7.9 million at the purchase price, based on the maximum of
the estimated offering range. Awards under these plans will likely reduce the
ownership interest of all stockholders by increasing the number of shares
outstanding. The issuance of authorized but unissued shares of common stock
pursuant to the exercise of options under the stock option plan and the
restricted stock plan would dilute the voting interests of existing
stockholders, by up to 4.7% and 1.9%, respectively. For further discussion
regarding these plans, see "Pro Forma Data" and "Management - Benefits - Other
Stock Benefit Plans."
Implementation of new benefit plans will increase our future compensation
expense, which will reduce our profitability and stockholders' equity.
We will recognize additional annual material employee compensation and
benefit expenses as a result of the shares purchased or granted to employees and
executives under new benefit plans. We cannot predict the actual amount of these
new expenses because applicable accounting practices require that they be based
on the fair market value of the shares of common stock at specific points in the
future. We would recognize expenses for our employee stock ownership plan when
shares are committed to be released to participants' accounts and would
recognize expenses for restricted stock awards over the vesting period of awards
made to recipients. These expenses have been estimated in the pro forma
financial information under "Pro Forma Data" assuming the $10.00 per share
purchase price as fair market value. Actual expenses, however, may be higher or
lower, depending on the price of Home Federal Bancorp's common stock. In
addition, changes in accounting guidelines may require us to recognize
16
expenses relating to stock option grants. For further discussion of these plans,
see "Management - Benefits - Other Stock Benefit Plans."
The economy in our local market area may adversely affect our operations.
Our financial results may be adversely affected by changes in
prevailing economic conditions, including: decreases in real estate values,
changes in interest rates and adverse employment conditions; the monetary and
fiscal policies of the federal government; and other significant external
events. Because we hold a significant amount of real estate loans, decreases in
real estate values could adversely affect the value of property used as
collateral for these loans. Adverse changes in the economy may also have a
negative effect on the ability of our borrowers to make timely repayments of
their loans, which would have an adverse impact on our earnings. In this regard,
approximately 88.5% of our loans are to individuals and businesses in our
primary market area.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of words such as "believes," "expects," "anticipates,"
"estimates" or similar expressions. Forward-looking statements include:
. statements of our goals, intentions and expectations;
. statements regarding our business plans, prospects, growth and
operating strategies;
. statements regarding the quality of our loan and investment
portfolios; and
. estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
. general economic conditions, either nationally or in our
market area, that are worse than expected;
. changes in the interest rate environment that reduce our
interest margins or reduce the fair value of financial
instruments;
. increased competitive pressures among financial services
companies;
. changes in consumer spending, borrowing and savings habits;
. legislative or regulatory changes that adversely affect our
business;
. adverse changes in the securities markets; and
. changes in accounting policies and practices, as may be
adopted by the bank regulatory agencies, the Public Company
Accounting Oversight Board or the Financial Accounting
Standards Board.
Any of the forward-looking statements that we make in this prospectus
and in other public statements we make may turn out to be wrong because of
inaccurate assumptions we might make, because of the factors illustrated above
or because of other factors that we cannot foresee. Consequently, no
forward-looking statement can be guaranteed.
17
SELECTED FINANCIAL AND OTHER DATA
The summary information presented below under "Financial Condition
Data" and "Operating Data" for, and as of the end of, each of the years ended
September 30 is derived from our audited consolidated financial statements.
Information as of March 31, 2004 and the six months ended March 31, 2004 and
2003 is unaudited but we believe it reflects all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of such
information. The results of operations for the six months ended March 31, 2004
are not necessarily indicative of the results to be achieved for the fiscal year
ending September 30, 2004. The following information is only a summary and you
should read it in conjunction with our consolidated financial statements and
related notes beginning on page F-1.
At September 30,
At March 31, --------------------------------------------------------------
2004 2003 2002 2001 2000 1999
------------ ---------- ---------- ---------- ---------- ----------
FINANCIAL CONDITION DATA: (In Thousands)
Total assets............................ $ 496,773 $ 450,196 $ 416,543 $ 382,504 $ 325,922 $ 271,143
Investment securities, available for
sale, at fair value ................... 6,404 5,440 2,507 8,266 1,395 1,661
Mortgage-backed securities, held
to maturity ........................... 55,033 24,425 44,325 36,630 46,129 54,671
Loans receivable, net .................. 383,950 372,629 318,297 289,385 243,122 189,128
Loans held for sale .................... 3,160 5,066 12,722 9,367 4,781 2,139
Total deposit accounts ................. 329,515 301,273 279,772 266,316 232,747 209,302
Advances from Federal
Home Loan Bank ........................ 113,074 96,527 91,008 73,394 54,498 28,785
Equity capital ......................... 42,356 40,399 34,961 32,866 31,058 26,731
Six Months Ended
March 31, Year Ended September 30,
----------------------- --------------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
OPERATING DATA: (In Thousands)
Interest and dividend income .... $ 13,217 $ 13,670 $ 26,896 $ 26,904 $ 26,514 $ 22,438 $ 17,964
Interest expense ................ 4,682 4,922 9,705 11,465 14,480 11,023 8,451
Net interest income ............. 8,535 8,748 17,191 15,439 12,034 11,415 9,513
Provision for loan losses ....... 600 287 615 277 748 600 575
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses ...... 7,935 8,461 16,576 15,162 11,286 10,815 8,938
Noninterest income .............. 4,341 5,319 11,188 5,767 6,319 6,243 4,879
Noninterest expense ............. 9,218 9,796 18,885 17,178 14,594 10,641 9,079
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes ...... 3,058 3,984 8,879 3,751 3,011 6,417 4,738
Income tax expense .............. 1,105 1,559 3,423 1,644 1,223 2,085 1,766
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 1,953 $ 2,425 $ 5,456 $ 2,107 $ 1,788 $ 4,332 $ 2,972
========== ========== ========== ========== ========== ========= ==========
At September 30,
At March 31, --------------------------------------------------
OTHER DATA: 2004 2003 2002 2001 2000 1999
------------ ------ ------ ------ ------ ------
Number of:
Real estate loans outstanding ... 3,006 3,053 2,565 2,360 2,210 1,901
Deposit accounts ................ 57,513 56,308 54,459 50,087 43,856 39,232
Full-service offices ............ 15 14 14 15 13 9
18
At or For the
Six Months Ended At or For the Year Ended
March 31, September 30,
------------------ ----------------------------------------------
KEY FINANCIAL RATIOS: 2004 (1) 2003 (1) 2003 2002 2001 2000 1999
-------- -------- -------- ------- ------ ------- -------
Performance Ratios:
Return on assets (2) ................. 0.83% 1.13% 1.23% 0.53% 0.50% 1.45% 1.20%
Return on equity (3) ................. 9.38 12.83 13.39 6.03 5.44 14.99 11.77
Equity-to-assets ratio (4) ........... 8.85 8.80 9.17 8.74 9.20 9.68 10.17
Interest rate spread (5) ............. 3.70 4.17 3.93 3.98 3.29 3.70 3.71
Net interest margin (6) .............. 3.94 4.42 4.19 4.23 3.69 4.15 4.16
Efficiency ratio (7) ................. 71.59 69.64 66.55 81.01 79.52 60.26 63.08
Average interest-earning assets to
average interest-bearing
liabilities ......................... 111.00 109.97 110.96 107.83 08.84 111.13 112.16
Noninterest expense as a
percent of average total assets .... 3.92 4.55 4.25 4.29 4.09 3.56 3.66
Capital Ratios:
Tier 1 (core) capital
(to risk-weighted assets) ........... 8.46 8.37 8.89 8.50 8.60 9.49 9.83
Total risk-based capital
(to risk-weighted assets) ........... 13.81 13.59 14.18 13.79 14.46 16.35 18.16
Tier 1 risk-based capital
(to risk-weighted assets) ........... 13.07 14.16 13.56 13.27 13.85 15.75 17.72
Asset Quality Ratios:
Nonaccrual and 90 days or
more past due loans as a
percent of total loans .............. 0.15 0.09 0.04 0.14 1.22 0.36 0.03
Nonperforming assets as a
percent of total assets ............. 0.11 0.12 0.03 0.17 0.97 0.28 0.02
Allowance for losses as a percent
of gross loans receivable ........... 0.62 0.45 0.49 0.41 0.47 0.45 0.32
Allowance for losses as a percent
of nonperforming loans .............. 425.97 517.63 1393.23 295.94 39.12 127.14 1192.31
Net charge-offs to average
outstanding loans ................... 0.01 0.03 0.04 0.10 0.16 0.04 0.08
----------
(1) Ratios for the six-month periods have been annualized, where applicable.
(2) Net income divided by average total assets.
(3) Net income divided by average equity.
(4) Average equity divided by average total assets.
(5) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(7) Noninterest expense divided by total noninterest income and net interest
income before provision for loan loss.
19
RECENT DEVELOPMENTS
The following tables set forth certain information concerning our
consolidated financial position and results of operations at the dates and for
the periods indicated. Information at June 30, 2004 and March 31, 2004 and the
three and nine months ended June 30, 2004 and 2003 are unaudited, but, in the
opinion of management, contain all adjustments (none of which were other than
normal recurring entries) necessary for a fair presentation of the results of
these periods. The results of operations for the three and nine month periods
ended June 30, 2004 are not necessarily indicative of the results of operations
which may be expected for the year ending September 30, 2004. This information
should be read in conjunction with our consolidated financial statements and
related notes beginning on page F-1 of this prospectus.
At June 30, At March 31, At September 30,
FINANCIAL CONDITION DATA: 2004 2004 2003
----------- ------------ ----------------
(In Thousands)
Total assets .................................... $ 519,251 $ 496,773 $ 450,196
Investment securities, available for sale,
at fair value ................................. 893 6,404 5,440
Mortgage-backed securities, held to maturity .... 82,653 55,033 24,425
Loans receivable, net ........................... 386,837 383,950 372,629
Loans held for sale ............................. 1,813 3,160 5,066
Total deposit accounts .......................... 333,522 329,515 301,273
Advances from Federal Home Loan Bank ............ 131,756 113,074 96,527
Equity capital .................................. 43,676 42,356 40,399
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -------------------
OPERATING DATA: 2004 2003 2004 2003
------- ------- -------- --------
(In Thousands)
Interest and dividend income............. $ 6,884 $ 6,753 $ 20,101 $ 20,424
Interest expense......................... 2,391 2,421 7,073 7,343
Net interest income...................... 4,493 4,332 13,028 13,081
Provision for loan losses................ 300 150 900 437
------- ------- -------- --------
Net interest income after
provision for loan losses.............. 4,193 4,182 12,128 12,644
Noninterest income....................... 2,616 2,976 6,957 8,295
Noninterest expense...................... 4,721 3,913 13,939 13,711
------- ------- -------- --------
Income before income taxes............... 2,088 3,245 5,146 7,228
Income tax expense....................... 770 1,397 1,875 2,955
------- ------- -------- --------
Net income............................... $ 1,318 $ 1,848 $ 3,271 $ 4,273
======= ======= ======== ========
20
At or For the At or For the
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- ------------------------
KEY FINANCIAL RATIOS: 2004 (1) 2003 (1) 2004 (1) 2003 (1)
--------- --------- ---------- ----------
Performance Ratios:
Return on assets (2) .................... 1.05% 1.62% 0.91% 1.30%
Return on equity (3) .................... 12.64 19.92 10.10 14.36
Equity-to-assets ratio (4) .............. 8.28 8.15 8.97 9.04
Interest rate spread (5) ................ 3.63 3.80 3.66 4.04
Net interest margin (6) ................. 3.87 4.07 3.90 4.30
Efficiency ratio (7) .................... 66.41 53.54 69.75 64.14
Average interest-earning assets to
average interest-bearing liabilities .. 111.21 111.77 111.33 110.59
Noninterest expense as a percent of
average total assets .................. 3.75 3.44 5.79 6.25
Capital Ratios:
Tier I (core) capital
(to risk-weighted assets) ............. 8.35 8.32 8.35 8.32
Total risk-based capital
(to risk-weighted assets) ............. 13.69 13.75 13.69 13.75
Tier 1 risk-based capital
(to risk-weighted assets) ............. 12.90 13.18 12.90 13.18
Asset Quality Ratios:
Nonaccrual and 90 days or more past
due loans as a percent of total loans.. 0.17 0.01 0.17 0.01
Nonperforming assets as a percent of
total assets .......................... 0.15 0.04 0.15 0.04
Allowance for losses as a percent of
gross loans receivable ................ 0.69 0.46 0.69 0.46
Allowance for losses as a percent of
nonperforming loans ................... 400.30 3,315.69 400.30 3,315.69
Net charge-offs to average outstanding
loans ................................. 0.01 0.04 0.02 0.05
----------
(1) Ratios for the three and nine month periods have been annualized, where
applicable
(2) Net earnings divided by average total assets.
(3) Net earnings divided by average equity.
(4) Average equity divided by average total assets.
(5) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(7) Noninterest expense divided by total noninterest income and net interest
income before provision for loan loss.
21
Regulatory Capital
The table below sets forth Home Federal's capital position relative to
its Office of Thrift Supervision capital requirements at June 30, 2004. The
definitions used in the table are those provided in the capital regulations
issued by the Office of Thrift Supervision. See "How We Are Regulated -
Regulation and Supervision of Home Federal - Capital Requirements."
At June 30, 2004
-----------------------
Percent of
Amount Assets (1)
-------- -----------
(Dollars in Thousands)
Equity capital under generally
accepted accounting principles
("GAAP")............................... $ 43,676 8.41%
======== ===========
Tier 1 risk-based capital................ $ 43,356 12.90%
Requirement.............................. 13,521 4.00
-------- -----------
Excess................................... $ 29,835 8.90%
======== ===========
Tier 1 (core) capital.................... $ 43,356 8.35%
Requirement.............................. 20,782 4.00
-------- -----------
Excess................................... $ 22,574 4.35%
======== ===========
Total risk-based capital................. $ 46,002 13.69%
Risk-based requirement................... 27,041 8.00
-------- -----------
Excess................................... $ 18,961 5.69%
======== ===========
----------
(1) Adjusted total or adjusted risk-weighted assets, as
appropriate.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Comparison of Financial Condition at June 30, 2004 and September 30, 2003
General. Our total assets increased $69.1 million, or 15.3%, to $519.3
million at June 30, 2004 compared to $450.2 million at September 30, 2003. Asset
growth was concentrated primarily in mortgage-backed securities, which increased
$58.2 million, and loans originated in our local market area, which increased
$14.2 million. The growth was funded by $32.2 million in increased deposits,
$35.2 million in additional borrowings from the Federal Home Loan Bank of
Seattle and $3.3 million in net income.
In connection with our asset and liability management practices, we use
asset and liability duration measures as a component of interest rate risk
measurement. Duration measures cash flows that are generated from investments,
loans or deposits by weighting the present value of the cash flows according to
the periods of time when the cash flows are received with the result being an
average date when the cash flows are received or paid. We use months as the
measure of time. Our goal is to manage the mismatch between the duration
maturities of cash inflows that comes from loans and investments, and cash
outflows that comes from deposits and borrowings. We accomplish this by reducing
our asset durations, or cash inflows, and lengthening our liability durations,
or cash outflows, so that the net duration mismatch between assets and
liabilities is within our policy guidelines. During the nine months ended June
30, 2004, total asset duration decreased 3.93 months to 38.87 months, and
liability duration decreased 5.23 months to 22.25 months for a net duration gap
of 16.62 months, up 1.3 months from September 30, 2003.
22
Assets. During the nine months ended June 30, 2004, total assets
increased $69.1 million. The changes were primarily concentrated in the
following asset categories:
Increase/(Decrease)
Balance at from Percentage
June 30, 2004 September 30, 2003 Increase/(Decrease)
------------- ------------------- -------------------
(Dollars in Thousands)
Cash and amounts due from
depository institutions ........ $ 13,694 $ 2,576 23.2%
Securities available for sale,
at fair value .................. 893 (4,547) (83.6)
Mortgage-backed securities,
held to maturity ............... 82,653 58,228 238.4
Loans held for sale (1) .......... 1,813 (3,253) (64.2)
Loans receivable, net ............ 386,837 14,208 3.8
----------
(1) Loans held for sale includes one- to four-family residential loans that
have been sold into the secondary market awaiting delivery to the
purchaser.
Cash and amounts due from depository institutions increased $2.6
million primarily as the result of an increase in customer checking account
deposit clearing items that were due from other banks. In addition, cash
balances held at the Federal Home Loan Bank of Seattle increased.
During the nine months ended June 30, 2004, we purchased Fannie Mae and
Freddie Mac mortgage-backed securities in order to leverage the balance sheet
and achieve the desired level of total interest-earning assets. Mortgage-backed
securities have payment characteristics that are similar to those of residential
loans. The net increase of $58.2 million represented 84.3% of our total asset
growth. Loans receivable, net increased $14.2 million from loans originated in
our local area.
Deposits. Deposits increased $32.2 million during the nine months ended
June 30, 2004. Deposit growth resulted from increases in demand deposits and
certificates of deposits. The following table details the source of that growth:
Increase/(Decrease)
Balance at from Percentage
June 30, 2004 September 30, 2003 Increase/(Decrease)
------------- ------------------- -------------------
(Dollars in Thousands)
Savings deposits.............. $ 25,104 $ 681 2.8%
Demand deposits............... 149,956 18,178 13.8
Certificates of deposit....... 158,462 13,390 9.2
------------- ------------------- -------------------
Total deposit accounts........ $ 333,522 $ 32,249 10.7%
============= =================== ===================
Demand deposits increased $18.2 million during the nine months ended
June 30, 2004, and accounted for 56.4% of the $32.2 million in total deposit
growth. Noninterest-bearing demand deposits grew $2.0 million and
interest-bearing demand deposits grew $16.2 million. Certificates of deposit
increased $13.4 million primarily as a result of local advertised specials for
certificate accounts with maturities ranging from 19 to 39 months.
Borrowings. Advances from the Federal Home Loan Bank of Seattle
increased $35.2 million, or 36.5%, to $131.8 million during the nine months
ended June 30, 2004. We use advances from the Federal Home Loan Bank of Seattle
as an alternative funding source to deposits in order to manage funding costs,
reduce interest rate risk and to
23
leverage the balance sheet. The net effect was to fund increases in total
interest-earning assets, thereby incrementally increasing our net interest
income.
Equity. Total equity increased $3.3 million, or 8.1%, to $43.7 million
at June 30, 2004 as compared to $40.4 million at September 30, 2003. The source
of the increase was $3.3 million in net income for the nine months ended June
30, 2004. Our total Tier 1 (core) capital ratio was 8.35% and our total Tier 1
risk-based capital ratio was 13.69% at June 30, 2004.
Comparison of Operating Results for the Three Months ended June 30, 2004 and
June 30, 2003
General. Our net income for the three months ended June 30, 2004 was
$1.3 million, a decrease of $530,000 from the three months ended June 30, 2003.
The reduction in net income was caused, in part, by an increase in the provision
for loan losses of $150,000, a decrease in total noninterest income of $360,000
and an increase in total noninterest expense of $808,000. This was partially
offset by an increase in net interest income of $161,000 and a decrease in
income tax expense of $627,000.
Net Interest Income. Our net interest income increased $161,000 for the
three months ended June 30, 2004 compared to the three months ended June 30,
2003. Average total interest-earning assets increased $39.6 million between the
two three month time periods. Loan refinancing driven by low interest rates
resulted in a 43 basis point decline in our average asset yields. During that
same period, our average cost of funds declined 26 basis points, resulting in a
17 basis point decrease in our net interest spread.
Interest and Dividend Income. Total interest and dividend income for
the three months ended June 30, 2004 increased $131,000 to $6.9 million compared
to the three months ended June 30, 2003. The following table compares detailed
average earning asset balances, associated yields and resulting changes in
interest and dividend income for the three months ended June 30, 2004 and 2003:
Three Months Ended June 30,
-----------------------------------------------------
2004 2003 Increase/
----------------- ----------------- (Decrease) in
Interest and
Dividend
Average Average Income from
Balance Yield Balance Yield 2003
--------- ----- --------- ----- -------------
(Dollars in Thousands)
Loans receivable, net ....................... $ 384,123 6.01% $ 357,192 6.61% $ (132)
Loans held for sale ......................... 3,246 5.57 2,879 5.56 21
Investment securities, available for sale,
including interest-bearing deposits in
other banks ................................ 4,346 1.84 27,825 2.14 (129)
Mortgage-backed securities, held
to maturity ................................ 66,380 5.12 31,263 5.95 384
Federal Home Loan Bank stock ................ 6,711 3.99 6,086 5.26 (13)
--------- ----- --------- ----- -------------
Total interest-earning assets $ 464,806 5.92% $ 425,245 6.35% $ 131
========= ===== ========= ===== =============
We had a 43 basis point decline in the average yield on total
interest-earning assets, however, the increase in average total interest-earning
assets of $39.6 million for the three months ended June 30, 2004 compared to the
three months ended June 30, 2003 resulted in an increase of $131,000 in total
interest income. Continuing low interest rates and customer loan refinancings
resulted in a 60 basis point reduction in the average yield on loans receivable,
net and a $132,000 reduction in related interest income. Rapid prepayments
received on higher coupon mortgage-backed securities and decreased reinvestment
rates for purchased securities resulted in an 83 basis point reduction in the
associated average yield. Mortgage-backed security interest income increased
$384,000 as a result
24
of the $35.1 million or 112.3% increase in the average balance between the three
months ended June 30, 2004 and 2003.
Interest Expense. Total interest expense for the three months ended
June 30, 2004 was $2.4 million, virtually unchanged from the three months ended
June 30, 2003. The following table details average balances, cost of funds and
the change in interest expense for the three months ended June 30, 2004 and
2003:
Three Months Ended June 30,
---------------------------------------------------------------------
2004 2003 Increase/
------------------------- -------------------------- (Decrease) in
Interest
Average Average Expense from
Balance Cost Balance Cost 2003
----------- --------- ----------- ----------- ------------
(Dollars in Thousands)
Savings accounts .................. $ 24,971 0.19% $ 24,988 0.40% $ (13)
Interest-bearing demand accounts .. 87,291 0.24 73,148 0.22 12
Money market accounts ............. 33,734 0.70 31,689 0.67 6
Certificates of deposit ........... 156,547 2.84 142,635 3.14 (10)
Federal Home Loan Bank advances ... 115,425 4.01 108,001 4.38 (25)
----------- --------- ----------- ------------ ------------
Total interest-bearing liabilities $ 417,968 2.29% $ 380,461 2.55% $ (30)
=========== ========= =========== ============ ============
The average balance of total interest-bearing liabilities increased
$37.5 million for the three months ended June 30, 2004 compared to that of the
three months ended June 30, 2003, however, our average cost of funds for total
interest-bearing liabilities decreased 26 basis points, and total interest
expense decreased $30,000. The average balance of certificates of deposit
increased $13.9 million during the same time period, however, the average cost
of funds decreased 30 basis points and interest expense decreased $10,000.
Similarly, the average balance of interest-bearing demand deposits increased
$14.1 million and the average cost of funds increased two basis points,
resulting in a $12,000 increase in related interest expense. The current low
interest rate environment is the primary cause of the reduction of the cost of
funds.
Provision for Loan Losses. Our Asset Liability Committee assesses the
adequacy of the allowance for loan losses on a quarterly basis. The Committee
analyzes several different factors, including delinquency, charge-off rates and
the changing risk profile of our loan portfolio, as well as local economic
conditions including unemployment rates, bankruptcies and vacancy rates of
business and residential properties. Our methodology for analyzing the allowance
for loan losses consists of three components: formula, specific and general
allowances. The formula allowance is determined by applying an estimated loss
percentage to various groups of loans. The loss percentages are generally based
on various historical measures such as the amount and type of classified loans,
past due ratios and loss experience, which could affect the collectibility of
the respective loan types. The specific allowance component is created when
management believes that the collectibility of a specific large loan, such as a
real estate or multi-family or commercial real estate loan, has been impaired
and a loss is probable. The general allowance component is established to ensure
the adequacy of the allowance for loan losses in situations where the Asset
Liability Management Committee believes that there are risk factors associated
with the collectibility of the portfolio that may not be adequately addressed in
the formula or specific allowance components. Information considered for the
general allowance element includes regional economic and employment data.
Our provision for loan losses increased $150,000 for the three months
ended June 30, 2004 compared to the same period in the prior year. The following
table details selected activity associated with the allowance for loan losses
for the three months ended June 30, 2004 and 2003:
25
At or For the Three Months
Ended June 30,
----------------------------
2004 2003
-------- ----------
(Dollars in Thousands)
Provisions for loan losses.................................. $ 300 $ 150
Net charge-offs............................................. 13 35
Allowance for loan losses................................... 2,706 1,691
Allowance for losses as a percentage of total loans
outstanding at a the end of the period..................... 0.69% 0.46%
Allowance for loan losses as a percentage of
nonperforming loans at end of period....................... 400.30% 3,315.69%
Nonperforming loans......................................... 676 51
Nonaccrual and 90 days or more past due loans as a
percentage of loans receivable............................. 0.17% 0.01%
Total loans, net............................................ 388,650 370,305
Total commercial real estate and construction loans......... 117,402 97,270
The increase in the provision was due to an $18.3 million increase in
net loans receivable at June 30, 2004 as compared to June 30, 2003, increased
risk associated with the continued growth of our commercial real estate and
construction loan portfolio as a percentage of total gross loans, and the
increase in nonperforming loans from $51,000 at June 30, 2003 to $676,000 at
June 30, 2004. Total commercial real estate and construction loans represented
30.3% of our total net loans receivable at June 30, 2004 compared to 26.3% at
June 30, 2003. Nonaccrual and 90 days or more past due loans as a percentage of
loans receivable at June 30, 2004 and 2003 were 0.17% and 0.01%, respectively.
Management expects the allowance for loan losses as a percentage of loans
receivable to continue to increase in the future as the concentration of
commercial real estate and construction loans increases in the portfolio.
Noninterest Income. Noninterest income for the three months ended June
30, 2004 was $2.6 million, a decrease of $360,000, or 12.1%, from the three
months ended June 30, 2003. The following table provides a detailed analysis of
the changes in components of noninterest income:
Three Months Ended Increase/(Decrease) from Percentage
June 30, 2004 June 30, 2003 Increase/(Decrease)
------------------ ------------------------ -------------------
(Dollars in Thousands)
Service fees and charges ............ $ 2,198 $ (265) (10.8)%
Increase in cash surrender
value of life insurance ............ 122 (177) (59.2)
Mortgage servicing rights, net ...... 287 (21) (6.8)
Other ............................... 9 103 N/A
------------------ ------------------------ -------------------
Total noninterest income ............ $ 2,616 $ (360) (12.1)%
================== ======================== ===================
Service fees and charges declined mainly due to lower debit card fee
income. Income from the increase in the cash surrender value of life insurance
decreased due to lower interest rates. Mortgage servicing rights, net was
$287,000 for the three months ended June 30, 2004, a decrease of $21,000
compared to the three months ended June 30, 2003. Mortgage servicing rights, net
is an accounting estimate that represents the present value of the future
servicing fees from the right to service mortgage loans for others. It is
impacted by prepayment speeds of the underlying mortgages and interest rates. In
general, during periods of falling interest rates such as we experienced during
the three months ended June 30, 2004, mortgage loans prepay faster and the value
of our mortgage-servicing asset declines. On a quarterly basis, we perform an
independent valuation review of mortgage servicing rights in order to determine
if there has been a decline in its fair market value.
26
Noninterest Expense. Total noninterest expense for the three months
ended June 30, 2004 was $4.7 million, an increase of $808,000 or 20.6% compared
to the three months ended June 30, 2003. The following table provides a detailed
analysis of the changes in components of noninterest expense:
Three Months Ended Increase/(Decrease) Percentage
June 30, 2004 from June 30, 2003 Increase/(Decrease)
------------------ ----------------------- -------------------
(Dollars in Thousands)
Compensation and benefits .......... $ 2,753 $ 727 35.9%
Occupancy and equipment ............ 686 (45) (6.2)
Data processing .................... 374 39 11.6
Advertising ........................ 309 41 15.3
Postage and supplies ............... 193 (11) (5.4)
Other .............................. 406 57 16.3
------------------ ----------------------- -------------------
Total noninterest expense .......... $ 4,721 $ 808 20.6%
================== ======================= ===================
Compensation and benefits accounted for $727,000 in increased
noninterest expense. Compensation increased due to salary increases and an
increase in the number of employees. Data processing expense increased
principally as a result of an increase in the expense to operate our Internet
banking system. Advertising expense increased primarily due to production costs
of television advertising.
Income Tax Expense. Income tax expense for the three months ended June
30, 2004 was $770,000, which represented a decrease of $627,000 from the three
months ended June 30, 2003. Income before income taxes was $2.1 million for the
three months ended June 30, 2004 compared to $3.2 million for the three months
ended June 30, 2003, a decrease of $1.2 million, or 35.7%. Income recognized
from the increase in the cash surrender value of life insurance is generally not
subject to income tax and this reduced income tax by $48,000 and $117,000 for
the three months ended June 30, 2004 and 2003, respectively. The effective
income tax rate for the three months ended June 30, 2004 was 34.0% for federal
and 7.6% for the State of Idaho.
Comparison of Operating Results for the Nine Months ended June 30, 2004 and
June 30, 2003.
General. Our net income for the nine months ended June 30, 2004 was
$3.3 million, a decrease of $1.0 million compared to the nine months ended June
30, 2003. Income and expense items that contributed to the reduction in net
income include decreases in net interest income and total noninterest income of
$53,000 and $1.3 million, respectively, and increases in the provision for loan
losses and total noninterest expense of $463,000 and $228,000, respectively.
This was partially offset by a decease in income tax expense of $1.1 million.
Net Interest Income. Our net interest income was $13.0 million for the
nine months ended June 30, 2004 compared to $13.1 million for the nine months
ended June 30, 2003, a decrease of $53,000. Average total interest-earning
assets increased $39.1 million between the two nine month time periods as a
result of a record number of customer loan refinancings driven by historically
low interest rate; however, lower interest rates resulted in a 69 basis point
decline in our average asset yields. During that same period, our average cost
of funds declined only 31 basis points, resulting in a 38 basis point reduction
in our net interest spread.
Interest and Dividend Income. Total interest and dividend income for
the nine months ended June 30, 2004 decreased $323,000 to $20.1 million compared
to the nine months ended June 30, 2003. The following table compares detailed
average earning asset balances, associated yields and resulting changes in
interest and dividend income for the nine months ended June 30, 2004 and 2003:
27
Nine Months Ended June 30,
-------------------------------------------------------------------
2004 2003 Increase/
------------------------ ----------------------- (Decrease) in
Interest and
Dividend
Average Average Income from
Balance Yield Balance Yield 2003
---------- ----------- ---------- ----------- -------------
(Dollars in Thousands)
Loans receivable, net ....................... $ 381,052 6.20% $ 344,608 6.99% $ (349)
Loans held for sale ......................... 3,036 5.78 3,171 5.73 (6)
Investment securities, available for sale,
including, interest-bearing deposits in
other banks ................................ 6,809 1.96 15,436 2.05 (137)
Mortgage-backed securities, held
to maturity ................................ 47,500 5.32 37,013 6.04 221
Federal Home Loan Bank stock ................ 6,620 4.33 5,648 6.30 (52)
---------- ----------- ---------- ----------- -------------
Total interest-earning assets ............... $ 445,017 6.02% $ 405,876 6.71% $ (323)
========== =========== ========== =========== =============
Average total interest-earning assets increased $39.1 million during
the nine months ended June 30, 2004 when compared to the nine months ended June
30, 2003; however, we had a 69 basis point decrease in the average yield on
total interest-earning assets and a decrease of $323,000 in total interest
income. Historically low interest rates and a record number of customer loan
refinancings resulted in a 79 basis point reduction in the average yield on
loans receivable, net and a $349,000 reduction in related interest income. Rapid
repayments received on higher coupon mortgage-backed securities and decreased
reinvestment rates for purchased securities resulted in a 72 basis points
reduction in the associated average yield.
Interest Expense. Total interest expense for the nine months ended June
30, 2004 was $7.1 million, a decrease of $270,000 from the nine months ended
June 30, 2003. The following table details average balances, cost of funds and
the resulting decrease in interest expense for the nine months ended June 30,
2004 and 2003:
Nine Months Ended June 30,
---------------------------------------------------------------
2004 2003 Increase/
------------------------ ------------------ (Decrease) in
Interest
Average Average Expense from
Balance Cost Balance Cost 2003
--------------- ----- --------- ----- -------------
(Dollars in Thousands)
Savings accounts .................... $ 24,262 0.26% $ 24,279 0.47% $ (38)
Interest-bearing demand accounts .... 81,277 0.24 70,052 0.31 (19)
Money market accounts ............... 32,636 0.64 33,231 0.80 (43)
Certificates of deposit ............. 150,678 2.89 137,578 3.32 (158)
Federal Home Loan Bank advances ..... 110,892 4.16 101,879 4.54 (12)
--------------- ----- --------- ----- -------------
Total interest-bearing liabilities .. $ 399,745 2.36% $ 367,019 2.67% $ (270)
=============== ===== ========= ===== =============
The average balance of total interest-bearing liabilities increased
$32.7 million for the nine months ended June 30, 2004 compared to June 30, 2003;
however, our average total cost of funds decreased 31 basis points and total
interest expense decreased $270,000. The average balance of certificates of
deposit increased $13.1 million during the same period, however, the average
cost of funds decreased 43 basis points and interest expense declined $158,000.
Similarly, the average balance of interest-bearing demand deposits increased
$11.2 million, however, the average cost of funds decreased seven basis points,
resulting in a $19,000 reduction in related interest expense. In
28
addition, the average balance of money market deposits decreased $595,000 and
the average cost of funds decreased 16 basis points. The current low interest
rate environment has resulted in a significant reduction in our average cost of
funds and total interest expense.
Provision for Loan Losses. Our provision for loan losses for the nine
months ended June 30, 2004 was $900,000, an increase of $463,000 from the nine
months ended June 30, 2003. The following table details selected activity
associated with the allowance for loan loss for the nine months ended June 30,
2004 and 2003:
At or For the Nine Months
Ended June 30,
----------------------
2004 2003
---------- ----------
(Dollars in Thousands)
Provisions for loan losses.................................. $ 900 $ 437
Net charge-offs............................................. 64 136
Allowance for loan losses................................... 2,706 1,691
Allowance for losses as a percentage of total loans
outstanding at a the end of the period..................... 0.69% 0.46%
Allowance for loan losses as a percentage of
nonperforming loans at end of period....................... 400.30% 3,315.69%
Nonperforming loans......................................... 676 51
Nonaccrual and 90 days or more past due loans as a
percentage of total loans.................................. 0.17% 0.01%
Total net loans receivable.................................. 388,650 370,305
Total commercial real estate and construction loans......... 117,402 97,270
The increase in the provision for loan losses was due to an $18.3
million increase in loans net at June 30, 2004 as compared to June 30, 2003,
increased risk associated with the growth of our commercial real estate and
construction loan portfolio as a percentage of total gross loans and the
increase in nonperforming loans from $51,000 at June 30, 2003 to $676,000 at
June 30, 2004. Total commercial real estate and construction loans represented
30.3% of our total net loans receivable at June 30, 2004, compared to 26.3% at
June 30, 2003.
Noninterest Income. Noninterest income for the nine months ended June
30, 2004 was $7.0 million, a decrease of $1.3 million, or 16.1%, from the nine
months ended June 30, 2003. The following table provides a detailed analysis of
the changes in components of noninterest income:
Nine Months Ended Increase/(Decrease) Percentage
June 30, 2004 from June 30, 2003 Increase/(Decrease)
----------------- ------------------- -------------------
(Dollars in Thousands)
Service fees and charges ........ $ 6,004 $ (109) (1.8)%
Gain on sale of loans ........... 421 (172) (29.0)
Mortgage servicing rights, net... 173 (863) (83.3)
Other ........................... 359 (194) (31.5)
----------------- ------------------- -------------------
Total noninterest income ........ $ 6,957 $ (1,338) (16.1)%
================= =================== ===================
Service fees and charges totaled $6.0 million for the nine months ended
June 30, 2004, a decrease of $109,000, or 1.8%, over the comparable nine months
ended June 30, 2003. Service fees and charges represented 86.3% of total
noninterest income for the nine months ended June 30, 2004 up from 73.7% for the
nine months ended June 30, 2003.
Gain on the sale of loans was $421,000 for the nine months ended June
30, 2004, a decrease of $172,000 from the nine months ended June 30, 2003. Gain
on the sale of loans is directly related to mortgage loan
29
originations sold in the secondary market. The reduction in the income was the
result of a $67.4 million, or 59.0%, reduction in the sale of mortgage loans
during the nine months ended June 30, 2004 as compared to the nine months ended
June 30, 2003. Mortgage servicing rights, net was $173,000 for the nine months
ended June 30, 2004, a decrease of $863,000 compared to the nine months ended
June 30, 2003. The volume of consumer mortgage loans sold declined $67.4
million, or 59.0%, to $46.8 million for the nine months ended June 30, 2004
compared to the same period in 2003.
Noninterest Expense. Total noninterest expense for the nine months
ended June 30, 2004 was $13.9 million compared to $13.7 million for the nine
months ended June 30, 2003, an increase of $228,000. The following table
provides a detailed analysis of the changes in components of noninterest
expense:
Nine Months Ended Increase/(Decrease) Percentage
June 30, 2004 from June 30, 2003 Increase/(Decrease)
----------------- ------------------- -------------------
(Dollars in Thousands)
Compensation and benefits.. $ 8,094 $ 238 3.0%
Occupancy and equipment.... 2,062 (144) (6.5)
Data processing ........... 1,098 98 9.8
Advertising ............... 824 (66) (7.4)
Postage and supplies ...... 601 34 6.0
Other ..................... 1,260 68 5.7
----------------- ------------------- -------------------
Total noninterest expense $ 13,939 $ (228) 1.7%
================= =================== ===================
Compensation and benefits accounted for $238,000 in increased
noninterest expense. The deferral of salary and benefit expense related to
mortgage originations was the primary cause of the increase in compensation and
benefits expense. This deferral decreased from $1.1 million for the nine months
ended June 30, 2003 to $571,000 for the same period in 2004. Commissions and
incentive compensation expense decreased $306,000 and $121,000, respectively,
for the nine months ended June 30, 2004 compared to the nine months ended June
30, 2003. Commissions are paid to our loan originators based on residential
mortgage dollar origination volumes; those volumes decreased $160.6 million, or
66.1%, for the nine months ended June 30, 2004 compared to the nine months ended
June 30, 2003.
Occupancy expense declined $144,000 principally as a result of
decreased rent expense as we closed three Wal-Mart in-store branch locations in
the nine months ending June 30, 2003. Data processing expense increased $98,000
due to increased expense to operate our Internet banking system. Advertising
expense was $824,000 for the nine months ended June 30, 2004, a $66,000 decrease
from the $890,000 in expense for the nine months ended June 30, 2003. The
primary reason for the decrease was a $53,000 reduction in market research
expense.
Income Tax Expense. Income tax expense for the nine months ended June
30, 2004 was $1.9 million, a decrease of $1.1 million from that of the nine
months ended June 30, 2003. Income before income taxes was $5.1 million for the
nine months ended June 30, 2004 compared to $7.2 million for the nine months
ended June 30, 2003, a decrease of $2.1 million, or 28.8%. Income recognized
from the increase in the cash surrender value of life insurance is generally not
subject to income tax and this reduced income tax by $145,000 and $195,000 for
the three months ended June 30, 2004 and 2003, respectively. The effective
income tax rate for the nine months ended June 30, 2004 was 34.0% for federal
and 7.6% for the State of Idaho.
30
HOME FEDERAL BANCORP
Home Federal Bancorp will be incorporated under federal law to hold all
of the stock of Home Federal. Initially, Home Federal Bancorp will not be an
operating company and will have no significant assets other than all of the
outstanding shares of common stock of Home Federal, the net proceeds it keeps
from the offering and its loan to the Home Federal Bancorp employee stock
ownership plan. Home Federal Bancorp will have no significant liabilities. See
"How We Intend to Use the Proceeds from this Offering." Initially, the
management of Home Federal Bancorp and Home Federal will be substantially the
same. Home Federal Bancorp intends to utilize the support staff and offices of
Home Federal and will pay Home Federal for these services. If Home Federal
Bancorp expands or changes its business in the future, it may hire its own
employees.
We believe the proposed holding company structure will give us more
flexibility to enhance our business activities by forming new companies that we
own, or by acquiring other companies, including other financial institutions and
financial services companies. We do not, however, have any current plans to do
these things. Home Federal Bancorp intends to pay for its business activities
with the proceeds it keeps from the offering and the money it earns from
investing these proceeds, as well as from dividends from Home Federal. See "Our
Policy Regarding Dividends."
The principal executive offices of Home Federal Bancorp are located at
500 12th Avenue South, Nampa, Idaho 83651 and its telephone number is (208)
466-4634.
HOME FEDERAL MHC
Home Federal MHC will be a federally-chartered mutual holding company
formed in connection with the mutual holding company reorganization of Home
Federal. Following completion of the reorganization, it will be a mutual holding
company registered with the Office of Thrift Supervision.
Following completion of the reorganization, Home Federal MHC's
principal assets will be a majority of the outstanding common stock of Home
Federal Bancorp and $50,000 in cash it received from Home Federal Bancorp as its
initial capitalization. At the present time, we expect that Home Federal MHC
will not engage in any business activity other than its investment in a majority
of the common stock of Home Federal Bancorp. Federal law and regulations require
that as long as Home Federal MHC is in existence, it must own a majority of Home
Federal Bancorp's common stock. Following completion of the reorganization and
stock offering, Home Federal MHC will own 59.04% of Home Federal Bancorp's
outstanding common stock. Federal law and regulation, and the plan of
reorganization and stock issuance permit Home Federal MHC to convert to the
stock form of organization. For additional information regarding a stock
conversion of Home Federal MHC, see "How We Are Regulated - Regulation and
Supervision of Home Federal Bancorp - Conversion of Home Federal MHC to Stock
Form."
The principal executive offices of Home Federal MHC are located at 500
12th Avenue South, Nampa, Idaho 83651 and its telephone number is (208)
466-4634.
HOME FEDERAL
Home Federal is a community-oriented financial institution dedicated to
serving the financial service needs of consumers and businesses within its
market area. We engage primarily in the business of attracting deposits from the
general public and using these funds to originate loans. We emphasize the
origination of loans secured by first mortgages on owner-occupied, residential
real estate, residential development and construction, and commercial real
estate. To a lesser extent, we originate other types of real estate loans,
commercial business loans and consumer loans. See "Business of Home Federal -
Lending Activities."
We serve the Treasure Valley region of southwestern Idaho, which
includes Ada, Canyon, Elmore and Gem Counties, through our 14 full-service
banking offices, two loan centers, 15 automated teller machines and Internet
banking services. Included in our 14 full-service banking offices are five
Wal-Mart in-store branch locations and an office located in the Hispanic
Cultural Center of Idaho.
31
Home Federal was founded in 1920 as a building and loan association and
reorganized as a federal mutual savings and loan association in 1936. At March
31, 2004, we had total assets of $496.8 million, deposit accounts of $329.5
million and equity of $42.4 million. Through the reorganization and stock
offering, we are changing our corporate structure by becoming a
federally-chartered stock savings bank and also are changing our name to "Home
Federal Bank."
Home Federal is examined and regulated by the Office of Thrift
Supervision, its primary regulator. Home Federal is also regulated by the
Federal Deposit Insurance Corporation ("FDIC"). Home Federal is required to have
certain reserves set by the Board of Governors of the Federal Reserve System and
is a member of the Federal Home Loan Bank of Seattle, which is one of the 12
regional banks in the Federal Home Loan Bank System.
The principal executive offices of Home Federal are located at 500 12th
Avenue South, Nampa, Idaho 83651 and its telephone number is (208) 466-4634.
HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING
Although the actual net proceeds from the sale of the shares of common
stock cannot be determined until the stock offering is completed, we presently
anticipate that the net proceeds will be between $32.6 million at the minimum of
the offering range and $44.5 million at the maximum of the offering range, and
may be up to $51.3 million assuming an increase in the estimated offering range
by 15%. See "Pro Forma Data" and "Home Federal's Reorganization and Stock
Offering - How We Determined Our Price and the Number of Shares to Be Issued in
the Stock Offering" as to the assumptions used to arrive at these amounts.
We intend to use the net proceeds received from the stock offering as
follows:
Maximum,
Minimum Maximum as adjusted
------------ ------------ ------------
(In Thousands)
Gross proceeds ..................................... $ 34,000 $ 46,000 $ 52,900
Less:
Estimated underwriting commission ................ 377 526 611
Estimated other offering expenses ................ 1,017 1,017 1,017
------------ ------------ ------------
Estimated net proceeds ............................. 32,606 44,457 51,272
------------ ------------ ------------
Less:
Net proceeds to Home Federal ..................... 16,303 22,229 25,636
Loan to our employee stock ownership plan ........ 2,785 3,768 4,334
Cash contribution to the Home Federal Foundation.. 204 276 317
Funding of the restricted stock plan ............. 1,666 2,254 2,592
------------ ------------ ------------
Net cash proceeds retained by Home Federal Bancorp.. $ 11,648 $ 15,930 $ 18,393
============ ============ ============
Home Federal Bancorp will retain 50% of the net stock offering proceeds
and will purchase all of the capital stock of Home Federal to be issued in the
reorganization in exchange for the remaining 50% of the net stock offering
proceeds. Home Federal Bancorp intends to use a portion of the net proceeds to
make a loan directly to the employee stock ownership plan to enable it to
purchase up to 3.28% of the aggregate shares of common stock issued in the
reorganization, or if shares are not available, in the open market after the
stock offering. Based upon the sale of 3,400,000 shares of common stock in the
offering at the minimum of the estimated offering range and the sale of
4,600,000 shares of common stock in the offering at the maximum of the estimated
offering range, the loan to the Home Federal Bancorp, Inc. employee stock
ownership plan would be $2.8 million and $3.8 million, respectively. See
"Management - Benefits - Employee Stock Ownership Plan."
32
Home Federal Bancorp will contribute to the Home Federal Foundation a
combination of cash and stock equal to 3% of the gross proceeds of the shares
sold in the offering. Eighty percent of the total contribution will be made in
stock and 20% will be made in cash. In addition, Home Federal Bancorp intends to
adopt a restricted stock plan, subject to stockholder approval, and will use a
portion of its proceeds to fund the purchase of shares in the open market for
the plan. The restricted stock plan intends to purchase 1.96% of the aggregate
shares issued in the reorganization, or $1.7 million and $2.3 million at the
minimum and maximum of the estimated offering range, respectively, assuming a
$10.00 per share purchase price.
The remaining net proceeds retained by Home Federal Bancorp initially
may be used to invest in mortgage-backed or other securities, U.S. Government
and federal agency securities of various maturities, deposits in either Home
Federal or other financial institutions, or a combination thereof. The net
proceeds may ultimately be used:
. to support the growth in Home Federal's core retail business
activities within its geographical market;
. to provide funding for Home Federal's lending activities;
. to support the future expansion of operations through the
establishment or acquisition of additional banking offices or
other customer facilities;
. to acquire other financial service providers, although no
acquisitions are specifically being considered at this time;
. to diversify Home Federal's activities as opportunities become
available;
. for other business and investment purposes, including the
payment of regular or special cash dividends, possible
repurchases of the common stock or returns of capital,
although we have no current plans to declare or pay any return
of capital on the common stock; or
. for general corporate purposes.
Following the completion of the stock offering, to the extent permitted
by the Office of Thrift Supervision and based upon then existing facts and
circumstances, Home Federal Bancorp's Board of Directors may determine to
repurchase shares of common stock, subject to any applicable statutory and
regulatory requirements. Facts and circumstances which may lead us to repurchase
shares include but are not limited to:
. market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of
the rate of return and risk involved in the investment, the
ability to increase the book value and/or earnings per share
of the remaining outstanding shares, and an improvement in
Home Federal Bancorp's return on equity;
. the avoidance of dilution to stockholders by not having to
issue additional shares to cover the exercise of stock options
or to fund employee stock benefit plans; and
. any other circumstances in which repurchases would be in the
best interests of Home Federal Bancorp and its stockholders.
Any stock repurchases will be subject to the determination of our Board
of Directors that Home Federal will be capitalized in excess of all applicable
regulatory requirements after any repurchases.
The portion of the net proceeds used by Home Federal Bancorp to
purchase the capital stock of Home Federal will be added to Home Federal's
general funds to be used for general corporate purposes, including increased
33
lending and investment activities. While the amount of net proceeds received by
Home Federal will further strengthen Home Federal's capital position, its
capital position already exceeds all regulatory requirements. After the stock
offering, based upon the maximum of the estimated offering range, Home Federal's
tangible capital ratio will be approximately 11.0%. As a result, Home Federal
will continue to be a well-capitalized institution.
The net proceeds may vary because total expenses of the stock offering
may be more or less than those estimated. The net proceeds will also vary if the
number of shares to be sold in the stock offering is adjusted to reflect a
change in the estimated pro forma market value of Home Federal. Payments for
shares made through withdrawals from existing deposit accounts at Home Federal
will not result in the receipt of new funds for investment by Home Federal but
will result in a reduction of Home Federal's interest expense and liabilities as
funds are transferred from interest-bearing certificates or other deposit
accounts.
OUR POLICY REGARDING DIVIDENDS
The Board of Directors of Home Federal Bancorp may pay cash dividends
on the common stock in the future. However, the amount and timing of any
dividends has not yet been determined. The payment of dividends will depend upon
a number of factors, including capital requirements, our financial condition and
results of operations, tax considerations, statutory and regulatory limitations,
and general economic conditions. No assurances can be given that any dividends
will be paid or that, if paid, dividends will not be reduced or eliminated in
future periods. Special cash dividends, stock dividends or returns of capital
may, to the extent permitted by the Office of Thrift Supervision policy and
regulations, be paid in addition to, or in lieu of, regular cash dividends. Home
Federal Bancorp may file consolidated tax returns with Home Federal.
Accordingly, it is anticipated that any cash distributions made by Home Federal
Bancorp to its stockholders would be treated as cash dividends and not as a
return of capital for federal and state tax purposes.
Dividends from Home Federal Bancorp will depend, in large part, upon
receipt of dividends from Home Federal, because Home Federal Bancorp initially
will have limited sources of income other than dividends from Home Federal,
earnings from the investment of proceeds retained by Home Federal Bancorp from
the sale of shares of common stock and interest payments with respect to Home
Federal Bancorp's loan to its employee stock ownership plan. A regulation of the
Office of Thrift Supervision imposes limitations on "capital distributions" by
savings institutions. See "How We Are Regulated - Regulation and Supervision of
Home Federal - Limitations on Dividends and Other Capital Distributions."
If we pay dividends to stockholders of Home Federal Bancorp, it is
anticipated that any dividends payable to Home Federal MHC would be waived by
Home Federal MHC, subject to Office of Thrift Supervision approval. Under Office
of Thrift Supervision regulations, such dividends would not result in dilution
to public stockholders if Home Federal MHC converts to stock form in the future.
See "How We Are Regulated - Regulation and Supervision of Home Federal -
Limitations on Dividends and Other Capital Distributions."
Home Federal Bancorp currently has no intention to initiate any action
which leads to a return of capital (as distinguished from a dividend) to its
stockholders. Regulations of the Office of Thrift Supervision prohibit a return
of capital during the three-year term of the business plan submitted by Home
Federal to the Office of Thrift Supervision in connection with the stock
offering.
MARKET FOR THE COMMON STOCK
Home Federal Bancorp and Home Federal have never issued capital stock,
and, consequently, there is no established market for the common stock at this
time. Home Federal Bancorp has received conditional approval to have its common
stock listed on the Nasdaq National Market under the symbol "HOME." The
development of a liquid public market depends on the existence of willing buyers
and sellers, the presence of which is not within the control of Home Federal
Bancorp, Home Federal or any market maker. Accordingly, the number of active
buyers and sellers of the common stock at any particular time may be limited.
There can be no assurance that purchasers will be able to sell their shares at
or above the initial purchase price of $10.00 per share. See "Risk Factors."
34
CAPITALIZATION
The following table presents the capitalization of Home Federal at
March 31, 2004, and the pro forma consolidated capitalization of Home Federal
Bancorp after giving effect to the reorganization and stock offering, including
the issuance of shares to the charitable foundation and excluding assumed
earnings on the net proceeds, based upon the sale of the number of shares shown
below and the other assumptions set forth under "Pro Forma Data."
Home Federal Bancorp - Pro Forma
Based Upon Sale at $10.00 Per Share
-------------------------------------------------------------------
Home Federal 5,290,000
Capitalization 3,400,000 4,000,000 4,600,000 Shares (1)
At Shares Shares Shares (Maximum of
March 31, (Minimum (Midpoint (Maximum Range, as
2004 of Range) of Range) of Range) Adjusted)
-------------- -------------- -------------- -------------- ------------
(In Thousands)
Deposits (2) ............................. $ 329,515 $ 329,515 $ 329,515 $ 329,515 $ 329,515
Borrowings ............................... 113,074 113,074 113,074 113,074 113,074
-------------- -------------- -------------- -------------- ------------
Total deposits and borrowings ............ $ 442,589 $ 442,589 $ 442,589 $ 442,589 $ 442,589
============== ============== ============== ============== ============
Stockholders' equity
Preferred stock, $.01 par value per
share, 5,000,000 shares authorized,
none issued ......................... $ -- $ -- $ -- $ -- $ --
Common stock, $.01 par value per
share, 50,000,000 shares authorized,
shares to be issued as reflected .... -- 85 100 115 132
Additional paid-in capital (3) ....... -- 33,337 39,392 45,446 52,409
Retained earnings (4) ................ 42,368 42,318 42,318 42,318 42,318
Net unrealized gain (loss) ........... (12) (12) (12) (12) (12)
Less:
Contribution to the Home Federal
Foundation .......................... -- (1,020) (1,200) (1,380) (1,587)
Common stock to be acquired by the
employee stock ownership plan (5) ... -- (2,785) (3,277) (3,768) (4,334)
Common stock to be acquired by the
restricted stock plan (6) ........... -- (1,666) (1,960) (2,254) (2,592)
Plus:
Tax benefit of contribution to the
Home Federal Foundation (7) ......... -- 399 469 540 621
-------------- -------------- -------------- -------------- ------------
Total stockholders' equity ............. $ 42,356 $ 70,656 $ 75,830 $ 81,004 $ 86,956
============== ============== ============== ============== ============
Equity-to-assets ratio (8) ............. 8.53% 13.46% 14.30% 15.13% 16.06%
----------
(1) As adjusted to give effect to an increase in the number of shares which
could be offered due to an increase in the estimated offering range of up
to 15% to reflect changes in market and financial conditions following the
commencement of the stock offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the stock offering. Any withdrawals would reduce pro forma
deposits by the amount of the withdrawals.
(footnotes continue on following page)
35
(3) Reflects the issuance of the shares of common stock to be sold in the
offering, less the offering expenses and commission. No effect has been
given to the issuance of additional shares of common stock pursuant to the
proposed stock option plan. Shares of Home Federal Bancorp's common stock
assumed sold in the offering at the minimum, midpoint, maximum and maximum,
as adjusted, of the offering range were 3,400,000, 4,000,000, 4,600,000 and
5,290,000, respectively. See "Pro Forma Data" and "Management - Benefits -
Other Stock Benefit Plans."
(4) Retained earnings are substantially restricted by applicable regulatory
capital requirements.
(5) Assumes that 3.28% of the common stock issued in the reorganization will be
purchased by the employee stock ownership plan, which is reflected as a
reduction of stockholders' equity. The employee stock ownership plan shares
will be purchased with funds loaned to the plan by Home Federal Bancorp.
See "Pro Forma Data" and "Management - Benefits - Employee Stock Ownership
Plan."
(6) Home Federal Bancorp intends to adopt a restricted stock plan and to submit
the plan to stockholders at an annual or special meeting of stockholders
held at least six months following the completion of the stock offering. If
the plan is approved by a majority of the total votes eligible to be cast
at a duly called meeting by stockholders (other than Home Federal MHC),
Home Federal Bancorp intends to contribute sufficient funds to the
restricted stock plan to enable the plan to purchase a number of shares of
common stock equal to 1.96% of the common stock issued in the
reorganization. This assumes that stockholder approval has been obtained
and that the shares have been purchased in the open market at a purchase
price of $10.00 per share. However, if Home Federal Bancorp issues
authorized but unissued shares of common stock to the restricted stock plan
in the amount of 1.96% of the common stock issued in the reorganization,
the voting interests of existing stockholders would be diluted
approximately 1.9%. The shares are reflected as a compensation expense
resulting in a reduction of stockholders' equity. See "Pro Forma Data" and
"Management - Benefits - Other Stock Benefit Plans."
(7) Assumes that the one-time expense for establishing the foundation will
create a tax benefit at a 39.1% tax rate. In order to fully realize this
net deferred tax asset, Home Federal Bancorp will need to generate
sufficient future taxable income. While management has projected future
income to utilize the credit, there can be no assurances that such levels
of taxable income will be generated. See "Home Federal Foundation."
(8) Total equity divided by total assets.
HOME FEDERAL
EXCEEDS ALL REGULATORY CAPITAL REQUIREMENTS
At March 31, 2004, Home Federal exceeded all of its applicable
regulatory capital requirements. The table on the following page sets forth the
regulatory capital of Home Federal at March 31, 2004 and the pro forma
regulatory capital of Home Federal after giving effect to the reorganization and
stock offering, based upon the sale of the number of shares shown in the table.
The pro forma regulatory capital amounts reflect the receipt by Home Federal of
50% of the net stock proceeds, after expenses. The pro forma risk-based capital
amounts assume the investment of the net proceeds received by Home Federal in
assets that have a risk-weight of 20% under applicable regulations, as if such
net proceeds had been received and so applied at March 31, 2004.
36
Pro Forma at March 31, 2004
----------------------------------------------------------
3,400,000 Shares 4,000,000 Shares
At Sold at Sold at
March 31, 2004 $10.00 per Share $10.00 per Share
--------------------------- --------------------------- ---------------------------
Percent of Percent of Percent of
Amount Assets (1) Amount Assets Amount Assets
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Equity capital under GAAP ......... $ 42,356 8.53% $ 54,208 10.57% $ 56,385 10.93%
============ ============ ============ ============ ============ ============
Tier 1 risk-based capital ......... $ 42,066 13.07% $ 53,918 16.59% $ 56,095 17.23%
Requirement ..................... 12,870 4.00 13,000 4.00 13,024 4.00
------------ ------------ ------------ ------------ ------------ ------------
Excess .......................... $ 29,196 9.07% $ 40,913 12.59% $ 43,071 13.23%
============ ============ ============ ============ ============ ============
Tier 1 (core) capital ............. $ 42,066 8.46% $ 53,918 10.50% $ 56,095 10.87%
Requirement ..................... 19,881 4.00 20,533 4.00 20,651 4.00
------------ ------------ ------------ ------------ ------------ ------------
Excess .......................... $ 22,185 4.46% $ 33,385 6.50% $ 35,444 6.87%
============ ============ ============ ============ ============ ============
Risk-based capital ................ $ 44,417 13.81% $ 56,269 17.31% $ 58,446 17.95%
Risk-based requirement .......... 25,740 8.00 26,000 8.00 26,048 8.00
------------ ------------ ------------ ------------ ------------ ------------
Excess .......................... $ 18,677 5.81% $ 30,269 9.31% $ 32,398 9.95%
============ ============ ============ ============ ============ ============
Reconciliation of capital
infused into Home Federal:
Net proceeds infused .............. $ 16,303 $ 19,266
Less:
Common stock acquired by
employee stock ownership plan .. 2,785 3,277
Common stock acquired by
restricted stock plan .......... 1,666 1,960
------------ ------------
Pro forma increase in GAAP and
regulatory capital ............... $ 11,852 $ 14,029
============ ============
Pro Forma at March 31, 2004
----------------------------------------------------------
4,600,000 Shares 5,290,000 Shares
Sold at Sold at
$10.00 per Share $10.00 per Share
--------------------------- ---------------------------
Percent of Percent of
Amount Assets Amount Assets
------------ ------------ ------------ ------------
(Dollars in Thousands)
Equity capital under GAAP ......... $ 58,562 11.28% $ 61,066 11.69%
============ ============ ============ ============
Tier 1 risk-based capital ......... $ 58,272 17.86% $ 60,776 18.59%
Requirement ..................... 13,048 4.00 13,075 4.00
------------ ------------ ------------ ------------
Excess .......................... $ 45,224 13.86% $ 47,701 14.59%
============ ============ ============ ============
Tier 1 (core) capital ............. $ 58,272 11.22% $ 60,776 11.63%
Requirement ..................... 20,770 4.00 20,906 4.00
------------ ------------ ------------ ------------
Excess .......................... $ 37,502 7.22% $ 39,870 7.63%
============ ============ ============ ============
Risk-based capital ................ $ 60,623 18.59% $ 63,127 19.31%
Risk-based requirement .......... 26,095 8.00 26,150 8.00
------------ ------------ ------------ ------------
Excess .......................... $ 34,528 10.59% $ 36,977 11.31%
============ ============ ============ ============
Reconciliation of capital
infused into Home Federal:
Net proceeds infused .............. $ 22,229 $ 25,636
Less:
Common stock acquired by
employee stock ownership plan .. 3,768 4,334
Common stock acquired by
restricted stock plan .......... 2,254 2,592
------------ ------------
Pro forma increase in GAAP and
regulatory capital ............... $ 16,206 $ 18,710
============ ===========
----------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
37
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of our common
stock until the stock offering is completed. However, we estimate that net
proceeds will be between $32.6 million and $44.5 million, or $51.3 million if
the estimated offering range is increased by 15%, based upon the following
assumptions:
. all shares of common stock will be sold through
non-transferable rights to subscribe for the common stock, in
order of priority, to:
. eligible account holders, who are depositors of Home
Federal with account balances of at least $50 as of
the close of business on December 31, 2002;
. the proposed employee stock ownership plan, which
will purchase 3.28% of the shares of common stock
issued in the reorganization;
. supplemental eligible account holders, who are
depositors of Home Federal with account balances of
at least $50 as of the close of business on June 30,
2004; and
. other members, who are depositors of Home Federal as
of the close of business on July 31, 2004 and
borrowers as of March 16, 2004 whose loans continue
to be outstanding as of July 31, 2004.
. Keefe, Bruyette & Woods will receive a success fee equal to
1.35% of the gross proceeds from the offering, excluding
shares of common stock sold to directors, officers, employees
and the employee stock ownership plan, and shares contributed
to the charitable foundation; and
. total expenses, excluding the success fee paid to Keefe,
Bruyette & Woods, are estimated to be approximately
$1,017,400, although actual expenses may vary from those
estimated.
Pro forma consolidated net income and stockholders' equity of Home
Federal Bancorp have been calculated for the year ended September 30, 2003 and
the six months ended March 31, 2004 as if the common stock to be sold in the
stock offering had been sold at the beginning of the period and the net proceeds
had been invested at 1.15% and 1.20%, respectively, which represents the yield
on one-year U.S. Government securities at September 30, 2003 and March 31, 2004,
respectively. This rate is used because we believe it reflects the yield that we
will receive on the net proceeds of the stock offering. The effect of
withdrawals from deposit accounts for the purchase of common stock has not been
reflected. A tax rate of 39.1% has been assumed for the periods resulting in
after-tax yields of 0.70% and 0.73% for the year ended September 30, 2003 and
the six months ended March 31, 2004, respectively. Historical and pro forma per
share amounts have been calculated by dividing historical and pro forma amounts
by the indicated number of shares of common stock, as adjusted to give effect to
the shares purchased by the employee stock ownership plan. See Note 2 to the
following tables. As discussed under "How We Intend to Use the Proceeds from
this Offering," Home Federal Bancorp intends to retain 50% of the net proceeds
from the stock offering from which it will make a loan to fund the purchase of
3.28% of the common stock issued in the reorganization by the employee stock
ownership plan.
No effect has been given in the tables to the issuance of additional
shares of common stock pursuant to the proposed stock option plan. See
"Management - Benefits - Other Stock Benefit Plans." The table below gives
effect to the restricted stock plan, which is expected to be adopted by Home
Federal Bancorp following the stock offering and presented along with the stock
option plan to stockholders for approval at an annual or special meeting of
stockholders to be held at least six months following the completion of the
stock offering. If the restricted stock plan is approved by stockholders, the
restricted stock plan intends to acquire an amount of common stock equal to
1.96% of the shares of common stock issued in the reorganization, either through
open market purchases or from authorized but unissued shares of common stock, if
permissible. The following tables assume that stockholder approval has been
obtained, as to which there can be no assurance, and that the shares acquired by
the restricted stock plan are purchased in the open market at $10.00 per share.
No effect has been given to Home Federal Bancorp's results of operations after
the stock offering, the market price of the common stock after the offering or a
less than 1.96% purchase by the restricted stock plan.
38
The pro forma stockholders' equity is not intended to represent the
fair market value of the common stock and may be different than amounts that
would be available for distribution to stockholders in the event of liquidation.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of Home Federal Bancorp
computed in accordance with GAAP.
At or For the Six Months Ended March 31, 2004
------------------------------------------------------------------------
3,400,000 4,000,000 4,600,000 5,290,000
Shares Sold Shares Sold Shares Sold Shares Sold at
at $10.00 at $10.00 at $10.00 $10.00 Per Share
Per Share Per Share Per Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted) (1)
--------------- --------------- --------------- ---------------
(Dollars in Thousands)
Gross proceeds ..................................... $ 34,000 $ 40,000 $ 46,000 $ 52,900
Plus shares issued to the Home
Federal Foundation ................................ 816 960 1,104 1,270
--------------- --------------- --------------- ---------------
Pro forma market capitalization .................... $ 34,816 $ 40,960 $ 47,104 $ 54,170
=============== =============== =============== ===============
Gross proceeds ..................................... $ 34,000 $ 40,000 $ 46,000 $ 52,900
Less: Offering expenses and commissions............. 1,394 1,468 1,543 1,628
--------------- --------------- --------------- ---------------
Estimated net stock offering proceeds .............. 32,606 38,532 44,457 51,272
Less: Cash contribution to the Home
Federal Foundation .......................... (204) (240) (276) (317)
Shares purchased by the employee
stock ownership plan (2) .................... (2,785) (3,277) (3,768) (4,334)
Shares purchased by the restricted
stock plan (3) .............................. (1,666) (1,960) (2,254) (2,592)
--------------- --------------- --------------- ---------------
Net investable proceeds (4) ...................... $ 27,951 $ 33,055 $ 38,159 $ 44,029
=============== =============== =============== ===============
Net income:
Historical ....................................... $ 1,953 $ 1,953 $ 1,953 $ 1,953
Pro forma income on net proceeds ................. 102 121 139 161
Pro forma employee stock
ownership plan adjustment (2) ................... (85) (100) (115) (132)
Pro forma restricted stock
plan adjustment (3) ............................. (101) (119) (137) (158)
--------------- --------------- --------------- ---------------
Pro forma net income ............................. $ 1,869 $ 1,855 $ 1,840 $ 1,824
=============== =============== =============== ===============
Net income per share:
Historical ....................................... $ 0.24 $ 0.20 $ 0.18 $ 0.15
Pro forma income on net
proceeds, as adjusted .......................... 0.01 0.01 0.01 0.01
Pro forma employee stock
ownership plan adjustment (3) .................. (0.01) (0.01) (0.01) (0.01)
Pro forma restricted stock plan adjustment (5).... (0.01) (0.01) (0.01) (0.01)
--------------- --------------- --------------- ---------------
Pro forma net income per share (3)(5)(6) ......... $ 0.23 $ 0.19 $ 0.17 $ 0.14
=============== =============== =============== ===============
Offering price as a multiple of pro forma
net annualized earnings per share ................. 21.74x 26.32x 29.41x 35.71x
(table continued on following page) (Footnotes on page 43)
39
At or For the Six Months Ended March 31, 2004
----------------------------------------------------------
3,400,000 4,000,000 4,600,000 5,290,000
Shares Sold Shares Sold Shares Sold Shares Sold at
at $10.00 at $10.00 at $10.00 $10.00 Per Share
Per Share Per Share Per Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted) (1)
----------- ----------- ----------- ----------------
(Dollars in Thousands)
Stockholders' equity:
Historical ................................ $ 42,356 $ 42,356 $ 42,356 $ 42,356
Estimated net proceeds .................... 32,606 38,532 44,457 51,272
Less: Capitalization of Home Federal MHC (50) (50) (50) (50)
Plus: Stock issued to the Home
Federal Foundation ................. 816 960 1,104 1,270
Less: Stock contribution to the Home
Federal Foundation ................. (816) (960) (1,104) (1,270)
Less: Cash contribution to the Home
Federal Foundation ................. (204) (240) (276) (317)
Plus: Tax benefit of the contribution to
the Home Federal Foundation ........ 399 469 540 621
Less: Common stock acquired by the
employee stock ownership plan (2) .. (2,785) (3,277) (3,768) (4,334)
Less: Common stock to be acquired
by the restricted stock plan (3) ... (1,666) (1,960) (2,254) (2,592)
----------- ----------- ----------- ----------------
Pro forma stockholders' equity (2)(3)(7) .. $ 70,656 $ 75,830 $ 81,004 $ 86,956
=========== =========== =========== ================
Stockholders' equity per share:
Historical ................................ $ 4.98 $ 4.24 $ 3.68 $ 3.20
Estimated net proceeds .................... 3.84 3.85 3.87 3.88
Less: Capitalization of Home Federal MHC (0.01) (0.01) -- --
Plus: Stock issued to the Home
Federal Foundation ................. 0.10 0.10 0.10 0.10
Less: Stock contribution to the Home
Federal Foundation ................. (0.10) (0.10) (0.10) (0.10)
Less: Cash contribution to the Home
Federal Foundation ................. (0.02) (0.02) (0.02) (0.02)
Plus: Tax benefit of the contribution to
the Home Federal Foundation ........ 0.05 0.05 0.05 0.05
Less: Common stock acquired by the
employee stock ownership plan (2)... (0.33) (0.33) (0.33) (0.33)
Less: Common stock to be acquired
by the restricted stock plan (3).... (0.20) (0.20) (0.20) (0.20)
----------- ----------- ----------- ----------------
Pro forma stockholders' equity per
share (3)(5)(6)(7) ....................... $ 8.31 $ 7.58 $ 7.05 $ 6.58
=========== =========== =========== ================
Offering price as a percentage of pro forma
stockholders' equity (5) ................... 120.34% 131.93% 141.84% 151.98%
(Footnotes on page 43)
40
At or For the Year Ended September 30, 2003
----------------------------------------------------------
3,400,000 4,000,000 4,600,000 5,290,000
Shares Sold Shares Sold Shares Sold Shares Sold at
at $10.00 at $10.00 at $10.00 $10.00 Per Share
Per Share Per Share Per Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted) (1)
----------- ----------- ----------- ----------------
(Dollars in Thousands)
Gross proceeds ..................................... $ 34,000 $ 40,000 $ 46,000 $ 52,900
Plus shares issued to the Home
Federal Foundation ................................ 816 960 1,104 1,270
----------- ----------- ----------- ----------------
Pro forma market capitalization .................... $ 34,816 $ 40,960 $ 47,104 $ 54,170
=========== =========== =========== ================
Gross proceeds ..................................... $ 34,000 $ 40,000 $ 46,000 $ 52,900
Less: Offering expenses and commissions............. 1,394 1,468 1,543 1,628
----------- ----------- ----------- ----------------
Estimated net stock offering proceeds .............. 32,606 38,532 44,457 51,272
Less: Cash contribution to the Home
Federal Foundation .......................... (204) (240) (276) (317)
Shares purchased by the employee
stock ownership plan (2) .................... (2,785) (3,277) (3,768) (4,334)
Shares purchased by the restricted
stock plan (3) .............................. (1,666) (1,960) (2,254) (2,592)
----------- ----------- ----------- ----------------
Net investable proceeds (4) .................... $ 27,951 $ 33,055 $ 38,159 $ 44,029
=========== =========== =========== ================
Net income:
Historical ................................... $ 5,456 $ 5,456 $ 5,456 $ 5,456
Pro forma income on net proceeds ............. 195 231 267 308
Pro forma employee stock
ownership plan adjustment (2) ............... (170) (200) (229) (264)
Pro forma restricted stock
plan adjustment (3) ......................... (203) (239) (275) (316)
----------- ----------- ----------- ----------------
Pro forma net income ......................... $ 5,278 $ 5,248 $ 5,219 $ 5,184
=========== =========== =========== ================
Net income per share:
Historical ................................... $ 0.66 $ 0.56 $ 0.49 $ 0.43
Pro forma income on net
proceeds, as adjusted ....................... 0.02 0.02 0.02 0.02
Pro forma employee stock
ownership plan adjustment (3) ............... (0.02) (0.02) (0.02) (0.02)
Pro forma restricted stock plan adjustment (5)
(0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- ----------------
Pro forma net income per share (3)(5)(6) ..... $ 0.64 $ 0.54 $ 0.47 $ 0.41
=========== =========== =========== ================
Offering price as a multiple of pro forma
net annualized earnings per share ................. 15.63x 18.52x 21.28x 24.39x
(table continued on following page)
(Footnotes on page 43)
41
At or For the Year Ended September 30, 2003
----------------------------------------------------------
3,400,000 4,000,000 4,600,000 5,290,000
Shares Sold Shares Sold Shares Sold Shares Sold at
at $10.00 at $10.00 at $10.00 $10.00 Per Share
Per Share Per Share Per Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted) (1)
----------- ----------- ----------- ----------------
(Dollars in Thousands)
Stockholders' equity:
Historical ............................. $ 40,399 $ 40,399 $ 40,399 $ 40,399
Estimated net proceeds ................. 32,606 38,532 44,457 51,272
Less: Capitalization of Home Federal MHC (50) (50) (50) (50)
Plus: Stock issued to the Home
Federal Foundation .............. 816 960 1,104 1,270
Less: Stock contribution to the Home
Federal Foundation .............. (816) (960) (1,104) (1,270)
Less: Cash contribution to the Home
Federal Foundation .............. (204) (240) (276) (317)
Plus: Tax benefit of the contribution to
the Home Federal Foundation ..... 399 469 540 621
Less: Common stock acquired by the
employee stock ownership plan (2) (2,785) (3,277) (3,768) (4,334)
Less: Common stock to be acquired
by the restricted stock plan (3) (1,666) (1,960) (2,254) (2,592)
----------- ----------- ----------- ----------------
Pro forma stockholders' equity (2)(3)(7) $ 68,699 $ 73,873 $ 79,047 $ 84,999
=========== =========== =========== ================
Stockholders' equity per share:
Historical ............................. $ 4.75 $ 4.04 $ 3.51 $ 3.05
Estimated net proceeds ................. 3.84 3.85 3.87 3.88
Less: Capitalization of Home Federal MHC (0.01) (0.01) -- --
Plus: Stock issued to the Home
Federal Foundation .............. 0.10 0.10 0.10 0.10
Less: Stock contribution to the Home
Federal Foundation .............. (0.10) (0.10) (0.10) (0.10)
Less: Cash contribution to the Home
Federal Foundation .............. (0.02) (0.02) (0.02) (0.02)
Plus: Tax benefit of the contribution to
the Home Federal Foundation ..... 0.05 0.05 0.05 0.05
Less: Common stock acquired by the
employee stock ownership plan (2) (0.33) (0.33) (0.33) (0.33)
Less: Common stock to be acquired
by the restricted stock plan (3) (0.20) (0.20) (0.20) (0.20)
----------- ----------- ----------- ----------------
Pro forma stockholders' equity per
share (3)(5)(6)(7) .................... $ 8.08 $ 7.38 $ 6.88 $ 6.43
=========== =========== =========== ================
Offering price as a percentage of pro
forma stockholders' equity (5) ............. 123.76% 135.50% 145.35% 155.52%
(Footnotes on page 43)
42
----------
(1) As adjusted to give effect to an increase in the number of shares which
could be offered due to an increase in the estimated offering range of up
to 15% to reflect changes in market and financial conditions following the
commencement of the stock offering.
(2) It is assumed that 3.28% of the shares of common stock issued in the
reorganization will be purchased by the employee stock ownership plan with
funds loaned by Home Federal Bancorp. Home Federal intends to make annual
contributions to the employee stock ownership plan in an amount at least
equal to the principal and interest requirement of the debt. The pro forma
net earnings assumes (1) that the loan to the employee stock ownership plan
is payable over ten years, with the employee stock ownership plan shares
having an average fair value of $10.00 per share in accordance with
Statement of Position 93-6 of the American Institute of Certified Public
Accounting, entitled "Employers' Accounting for Employee Stock Ownership
Plans," and (2) the effective tax rate was 39.1% for the period. See
"Management - Benefits - Employee Stock Ownership Plan."
(3) Gives effect to the restricted stock plan we expect to adopt following the
offering for the benefit of directors, officers and employees. This plan
intends to acquire, following stockholder approval of the plan, a number of
shares of common stock equal to 1.96% of the shares of common stock issued
in the reorganization or 166,600, 196,000, 225,400 and 259,210 shares of
common stock at the minimum, midpoint, maximum and adjusted maximum of the
estimated offering range, respectively. Funds used by the restricted stock
plan to purchase the shares initially will be contributed by Home Federal
Bancorp. It is further assumed that the shares were acquired by the
restricted stock plan at the beginning of the period presented in open
market purchases at 10% and 20% of the amount contributed, net of taxes,
was an amortized expense during the six months ended March 31, 2004 and the
year ended September 30, 2003, respectively. The issuance of authorized but
unissued shares of common stock pursuant to the restricted stock plan in
the amount of 1.96% of the common stock issued in the reorganization would
dilute the voting interests of existing stockholders by approximately 1.9%
and under such circumstances, pro forma net earnings per share would be
$0.22, $0.19, $0.16 and $0.14, and $0.63, $0.53, $0.46 and $0.40 at the
minimum, midpoint, maximum and 15% above the maximum of the estimated
offering range for the six months ended March 31, 2004 and for the year
ended September 30, 2003, respectively, and pro forma stockholders' equity
per share would be $8.35, $7.64, $7.11 and $6.65, and $8.12, $7.45, $6.95
and $6.51 at the minimum, midpoint, maximum and 15% above the maximum of
such range for the six months ended March 31, 2004 and the year ended
September 30, 2003, respectively. There can be no assurance that the actual
purchase price of shares purchased by or issued to the restricted stock
plan will be $10.00 per share. See "Management - Benefits - Other Stock
Benefit Plans."
(4) Estimated proceeds available for investment consists of the estimated net
proceeds from the stock offering less (1) the proceeds attributable to the
purchase by the employee stock ownership plan, (2) the contribution to the
charitable foundation and (3) the value of the shares to be purchased by
the restricted stock plan, subject to stockholder approval, after the
offering at an assumed purchase price of $10.00 per share.
(5) The per share calculations are determined by adding the number of shares
sold in the offering and for purposes of calculating net income per share,
in accordance with Statement of Position 93-6, subtracting 264,202 shares,
311,296 shares, 357,990 shares and 411,689 shares; and 250,675 shares,
294,912 shares, 339,149 shares and 390,021 shares at the minimum, midpoint,
maximum and 15% above the maximum of the offering range, representing the
employee stock ownership plan shares which have not been committed for
release during the six months ended March 31, 2004 and the year ended
September 30, 2003, respectively. See note 3 above. For purposes of
calculating pro forma stockholders' equity per share, it is assumed that
shares outstanding total 8,500,000 shares at the minimum of the estimated
pro forma market value of Home Federal on a fully converted basis, of the
estimated valuation range, 10,000,000 shares at the midpoint of the range,
11,500,000 shares at the maximum of the range and 13,225,000 shares at 15%
above the maximum of the range.
(6) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which will be adopted by Home
Federal Bancorp following the stock offering and presented for approval by
stockholders at an annual or special meeting of stockholders of Home
Federal Bancorp held at least six months following the completion of the
offering. If the stock option plan is approved by a majority of the total
votes eligible to be cast at a duly called meeting by stockholders (other
than Home Federal MHC), an amount equal to 4.90% the common stock issued in
the reorganization, or 416,500 shares at the minimum of the estimated
offering range, 490,000 shares at the midpoint of the range, 563,500 shares
at the maximum of the range and
(footnotes continue on following page)
43
648,025 shares at 15% above the maximum of the range will be reserved for
future issuance upon the exercise of options to be granted under the stock
option plan. The issuance of common stock pursuant to the exercise of
options under the stock option plan will result in the dilution of existing
stockholders' voting interests by approximately 4.7%. Assuming approval of
the stock option plan by a majority of the total votes eligible to be cast
at a duly called meeting by stockholders (other than Home Federal MHC),
that all these options were exercised at the beginning of the period at an
exercise price of $10.00 per share and that the shares to fund the
restricted stock plan are acquired through open market purchases at a
purchase price of $10.00 per share, pro forma net earnings per share would
be $0.21, $0.18, $0.15 and $0.13, and $0.61, $0.52, $0.45 and $0.39 at the
minimum, midpoint, maximum and 15% above the maximum of the estimated
offering range for the six months ended March 31, 2004 and the year ended
September 30, 2003, respectively, and pro forma stockholders' equity per
share would be $8.41, $7.74, $7.24 and $6.80, and $8.20, $7.56, $7.08 and
$6.66 at the minimum, midpoint, maximum and 15% above the maximum of the
range at March 31, 2004 and at September 30, 2003, respectively. See
"Management - Benefits - Other Stock Benefit Plans."
(7) Pro forma stockholders' equity and pro forma stockholders' equity per share
do not give effect to the bad debt reserves established by Home Federal for
federal income tax purposes in the event of liquidation.
44
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT CHARITABLE FOUNDATION
As reflected in the table below, if the charitable foundation was not
established and funded as part of the reorganization, RP Financial has estimated
that the pro forma valuation of Home Federal Bancorp would be greater, and as a
result, a greater number of shares of common stock would be sold in the
offering. At the minimum, midpoint and maximum of the valuation range, the pro
forma valuation of Home Federal Bancorp equaled $85.0 million, $100.0 million
and $115.0 million, as compared to $86.7 million, $102.0 million and $117.3
million, respectively, without the foundation. There is no assurance that if the
foundation were not formed, the appraisal prepared at that time would have
concluded that the pro forma market value of Home Federal Bancorp would be the
same as that estimated here. Any appraisal prepared at that time would be based
on the facts and circumstances existing at that time, including, among other
things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
adjusted maximum of the estimated valuation range, assuming the reorganization
was completed at May 21, 2004, with and without the foundation. The valuation
amounts referred to in the table below relate to the value of the shares sold to
members of Home Federal and the public, excluding shares issued to Home Federal
MHC.
At the Maximum,
At the Minimum At the Midpoint At the Maximum As Adjusted
---------------------- ---------------------- ---------------------- ----------------------
With No With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Estimated offering amount ........ $ 34,000 $ 35,512 $ 40,000 $ 41,779 $ 46,000 $ 48,046 $ 52,900 $ 55,253
Pro forma market capitalization .. 34,816 35,512 40,960 41,779 47,104 48,046 54,170 55,253
Estimated full value ............. 85,000 86,700 100,000 102,000 115,000 117,300 132,250 134,895
Total assets ..................... 525,073 526,281 530,247 531,670 535,421 537,057 541,372 543,253
Total liabilities ................ 454,417 454,417 454,417 454,417 454,417 454,417 454,417 454,417
Pro forma stockholders' equity ... 70,656 71,864 75,830 77,253 81,004 82,640 86,956 88,836
Pro forma consolidated
net income ...................... 1,869 1,871 1,855 1,857 1,840 1,843 1,824 1,827
Pro forma stockholders'
equity per share ................ 8.31 8.28 7.58 7.57 7.05 7.04 6.58 6.58
Pro forma consolidated net
income per share ................ 0.23 0.22 0.19 0.19 0.17 0.16 0.14 0.14
Pro forma pricing ratios:
Offering price as a percentage
of pro forma stockholders'
equity per share ................ 120.34% 120.77% 131.93% 132.10% 141.84% 142.05% 151.98% 151.98%
Offering price to pro forma
net income per share .......... 21.74 22.73 26.32 26.32 29.41 31.25 35.71 35.71
Pro forma financial ratios:
Return on assets ............. 0.71% 0.71% 0.70% 0.70% 0.69% 0.69% 0.67% 0.67%
Return on stockholders'
equity ........................... 5.29% 5.21% 4.89% 4.81% 4.54% 4.46% 4.20% 4.11%
Stockholders' equity to
assets ........................... 13.46% 13.66% 14.30% 14.53% 15.13% 15.39% 16.06% 16.35%
45
PROPOSED PURCHASES BY MANAGEMENT
The following table sets forth, for each of Home Federal's directors
and executive officers and for all of the directors and executive officers as a
group, the proposed purchases of common stock, assuming sufficient shares are
available to satisfy their subscriptions. The amounts include shares that may be
purchased through individual retirement accounts and by associates. These
purchases are intended for investment purposes only, and not for resale.
Directors, officers, their associates and employees will pay the same price as
all other subscribers for the shares for which they subscribe.
At the Minimum of the At the Maximum of
Estimated Offering Range Estimated Offering Range
------------------------ ------------------------
As a Percent As a Percent
Number of Shares Number of Shares
Name Amount of Shares Offered of Shares Offered
----------------------------------- ----------- --------- ------------ --------- ------------
Directors:
----------
Daniel L. Stevens (1) ............. $ 500,000 50,000 1.47% 50,000 1.09%
Fred H. Helpenstell, M.D .......... 300,000 30,000 0.88 30,000 0.65
Thomas W. Malson .................. 250,000 25,000 0.74 25,000 0.54
N. Charles Hedemark ............... 250,000 25,000 0.74 25,000 0.54
Richard J. Schrandt ............... 250,000 25,000 0.74 25,000 0.54
James R. Stamey ................... 100,000 10,000 0.29 10,000 0.22
Robert A. Tinstman ................ 500,000 50,000 1.47 50,000 1.09
Executive Officers:
-------------------
Robert A. Schoelkoph .............. 200,000 20,000 0.59 20,000 0.43
Roger D. Eisenbarth ............... 200,000 20,000 0.59 20,000 0.43
Lynn A. Sander .................... 250,000 25,000 0.74 25,000 0.54
Denis J. Trom ..................... 350,000 35,000 1.03 35,000 0.76
Karen Wardwell .................... 175,000 17,500 0.51 17,500 0.38
----------- --------- ------------ --------- ------------
All directors and executive
officers as a group (12 persons).. $ 3,325,000 332,500 9.78% 332,500 7.23%
=========== ========= ============ ========= ============
----------
(1) Mr. Stevens is also an executive officer of Home Federal.
46
HOME FEDERAL AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
The following condensed consolidated statements of income are based on
the consolidated statements of income of Home Federal and subsidiary for the
fiscal years ended September 30, 2003, 2002 and 2001 audited by Moss Adams LLP,
independent certified public accountants, whose report thereon appears elsewhere
herein. The condensed consolidated statements of income for the six months ended
March 31, 2004 and 2003, are unaudited but, in the opinion of management,
reflect all adjustments necessary for a fair presentation of the results of
operations for those periods. All such adjustments are of a normal recurring
nature. The results of operations for the six months ended March 31, 2004 are
not necessarily indicative of the results of which may be expected for the
entire year or any other subsequent period. These condensed consolidated
statements of income should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein.
Six Months Ended
March 31, Year Ended September 30,
------------------ ----------------------------
2004 2003 2003 2002 2001
-------- -------- -------- -------- --------
(unaudited) (In Thousands)
Interest and dividend income $ 13,217 $ 13,670 $ 26,896 $ 26,904 $ 26,514
Interest expense ............ 4,682 4,922 9,705 11,465 14,480
-------- -------- -------- -------- --------
Net interest income ......... 8,535 8,748 17,191 15,439 12,034
Provision for loan losses ... 600 287 615 277 748
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses .. 7,935 8,461 16,576 15,162 11,286
Noninterest income .......... 4,341 5,319 11,188 5,767 6,319
Noninterest expense ......... 9,218 9,796 18,885 17,178 14,594
-------- -------- -------- -------- --------
Income before income taxes .. 3,058 3,984 8,879 3,751 3,011
Income tax expense .......... 1,105 1,559 3,423 1,644 1,223
-------- -------- -------- -------- --------
Net Income .................. $ 1,953 $ 2,425 $ 5,456 $ 2,107 $ 1,788
======== ======== ======== ======== ========
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Our results of operations depend primarily on revenue generated as a
result of our net interest income and noninterest income. Net interest income is
the difference between the interest income we earn on our interest-earning
assets (consisting primarily of loans and investment securities) and the
interest we pay on our interest-bearing liabilities (consisting primarily of
customer savings and money market accounts, time deposits and borrowings).
Noninterest income consists primarily of service charges on deposit and
loan accounts, gains on the sale of loans and investments, loan servicing fees,
and investment and mortgage servicing income. Our results of operations are also
affected by our provisions for loan losses and other expenses.
Other expenses consist primarily of noninterest expense, including
compensation and benefits, occupancy, equipment, data processing, advertising,
postage and supplies, professional services and, when applicable, deposit
insurance premiums. Compensation and benefits consist primarily of the salaries
and wages paid to our employees, payroll taxes and expenses for retirement and
other employee benefits. Occupancy and equipment expenses, which are the fixed
and variable costs of building and equipment, consist primarily of lease
payments, real estate taxes, depreciation charges, maintenance and costs of
utilities.
Our results of operations may also be affected significantly by general
and local economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities.
Business Strategy
Our strategy is to operate as an independent community-based financial
institution dedicated to serving the needs of customers and the local community.
We focus on providing exceptional service and quality products and services, as
well as convenient access to generate a high level of customer satisfaction. Our
principal business consists of attracting retail deposits from the general
public which we invest primarily in loans secured by first mortgages on
owner-occupied, one- to four-family residences. We also originate multi-family
loans, commercial real estate loans and a variety of consumer loans. We intend
to continue implementing this strategy while pursuing further loan portfolio
diversification, with an emphasis on credit risk management. Our commitment is
to provide a reasonable range of products and services to meet the needs of our
customers. As part of this commitment, we will continue the course established
over the past few years of increasing commercial real estate lending and
consumer lending with a particular emphasis on home equity loans. Our goal is to
grow Home Federal while providing exceptional and effective services to
customers and the local community.
Operating Strategy
Our mission is to operate and grow a profitable community-oriented
financial institution serving individuals and commercial real estate customers
in our market area. We plan to achieve this by executing our strategy of:
. maintaining favorable asset quality reflected primarily by a
low level of non-performing assets, low charge-offs and
adequacy of loan loss reserves;
. seeking to improve net interest margin through a combination
of reduced funding costs and improved pricing relative to
asset risk;
. analyzing profitability of products and business lines and
allocating resources to those areas offering the greatest
potential for future profits;
48
. expanding the number of households we serve through internal
expansion of the branch network and possible selective
acquisitions of financial service providers in existing or
surrounding markets;
. pursuing further loan portfolio diversification, with an
emphasis on credit risk management;
. continuing an internal management culture which is driven by a
focus on profitability, productivity and accountability for
results and which responds proactively to the challenge of
change;
. providing our staff members with the knowledge and skills
necessary to perform their job functions and develop their
career potential;
. enhancing the perception of Home Federal with both the retail
and commercial banking public as the bank of choice;
. maintaining a sales and service culture based on an
understanding of the customer's needs and reflecting our
commitment to excellence;
. reducing future reliance on net interest income by creating
additional sources of fee income from products and services we
offer; and
. utilizing technology to gain efficiencies in processing
customer information, to provide a competitive tool to assist
the sales process and to allow the efficient integration of
acquired businesses.
Maintaining favorable asset quality reflected primarily by a low level
of non-performing assets, low charge-offs and adequacy of loan loss reserves. We
believe that high asset quality is a key to long-term financial success. We have
sought to maintain a high level of asset quality and moderate credit risk by
using underwriting standards we believe are conservative. At March 31, 2004, our
nonaccrual and 90 days or more past due loans as a percentage of loans
receivable was only 0.15%. Although we intend to increase our multi-family and
commercial real estate lending after the stock offering, we intend to continue
our philosophy of managing large loan exposures through our conservative
approach to lending.
Seeking to improve net interest margin through a combination of reduced
funding costs and improved pricing relative to asset risk. We intend to manage
our net interest income and net interest margin in order to ensure that the
balance sheet reflects an optimum mix of assets and liabilities that result in
the maximization of the net interest income and net portfolio value within the
limits of acceptable credit risk. On the asset side of the balance sheet, we
intend to originate residential and commercial real estate and consumer loans in
our local area. In addition, we may purchase mortgage-backed securities when
loan origination levels are not adequate to fund necessary asset growth. We will
fund asset growth with deposits and borrowings that have pricing and cash flow
characteristics that are similar to the asset side of the balance sheet.
Analyzing profitability of products and business lines and allocating
resources to those areas offering the greatest potential for future profits. We
have implemented comprehensive cost accounting and customer information systems
to provide the data necessary to build effective product and customer
profitability reporting for all of our lines of business. We intend to use this
profitability data as we build business plans to support the expansion of
current lines of business and in the implementation of new products and
services.
Expanding the number of households we serve through internal expansion
of the branch network and possible selective acquisitions of financial service
providers in existing or surrounding markets. We continually monitor the growth
in our four-county market area and work closely with commercial real estate
experts to target sites for future branch locations. We currently are planning
to open a branch in Eagle, Idaho, a suburb of Boise. The property has been
purchased and construction is planned for mid-2005. We plan to place a temporary
49
office on the site as early as October 2004. Our long-term strategy is to build
one branch per year if appropriate sites can be identified and obtained. As a
result of the reorganization and stock offering, we will also actively search
for appropriate acquisitions to enhance our ability to deliver products and
services in our existing markets and to expand into surrounding markets.
Pursuing further loan portfolio diversification, with an emphasis on
credit risk management. We have developed an excellent team of lenders across
our market area who focus on realtor and builder relationships as well as direct
marketing to individual buyers. We anticipate expanding the real estate markets
in Ada and Canyon Counties and we are well positioned to increase our market
share in these areas. We continue to increase our presence in the small- to
mid-size commercial real estate market as a result of the strength of our
products and the quality of our service.
Continuing an internal management culture which is driven by a focus on
profitability, productivity and accountability for results and which responds
proactively to the challenge of change. The primary method for reinforcing our
culture is the comprehensive application of our "Pay for Performance" total
compensation program. Every employee at Home Federal has clearly defined
accountabilities and performance standards that tie directly or indirectly to
the profitability of Home Federal. All incentive compensation is based on
specific profitability measures or sales volume goals. This approach encourages
all employees to focus on the profitability of Home Federal and has created an
environment that embraces new products, services and delivery systems.
Providing our staff members with the knowledge and skills necessary to
perform their job functions and develop their career potential. We understand
the relationship between effective training and employee satisfaction. Although
we have always provided appropriate technical training, we have expanded our
focus to include comprehensive supervisory and leadership training. Our goal is
to provide development opportunities for every employee who wants to grow with
Home Federal and to fill future leadership positions with qualified internal
candidates whenever possible.
Enhancing the perception of Home Federal with both the retail and
commercial banking public as the bank of choice. We have a long tradition of
focusing on the needs of consumers in the communities we serve and a strong
reputation as an active corporate citizen. We deliver personalized service and
respond with flexibility to customer needs. We believe our community orientation
is attractive to our customers and distinguishes us from the large national
banks that operate in our market area. We fully intend to maintain this
community focus as we grow.
Maintaining a sales and service culture based on an understanding of
the customer's needs and reflecting our commitment to excellence. We use a
sophisticated, professional approach to measuring and continually improving our
sales and service culture. Our primary tool is a well-developed sales and
service training curriculum focused on identifying and meeting customer needs
and supported by an intensive coaching program. We assess our employees' level
of sales and service skills on an annual basis using a trainer to approach the
employee as a customer. These annual assessments are used to identify specific
training opportunities and to set sales and service improvement goals for the
following year.
Reducing future reliance on net interest income by creating additional
sources of fee income from products and services we offer. We have created
cross-functional teams who continually monitor the market for new product and
service opportunities on both the asset and liability sides of the business. We
intend to broaden the scope of these teams to actively seek new sources of fee
income and non-interest revenue, build business plans to support these sources,
and implement the plans to generate increased income.
Utilizing technology to gain efficiencies in processing customer
information, to provide a competitive tool to assist the sales process and to
allow the efficient integration of acquired businesses. In preparation for the
reorganization and stock offering, we have focused on developing and acquiring
the appropriate in-house expertise to manage and leverage our technology
investments to meet the needs of a rapidly changing organization.
50
We intend to continue to manage our technology resources internally in order to
remain more flexible and responsive than our competition to new opportunities in
the market.
Critical Accounting Policies
We use estimates and assumptions in our financial statements in
accordance with generally accepted accounting principles. Material or critical
estimates that are susceptible to significant change include the determination
of the allowance for loan losses and the associated provision for loan losses,
and the fair market value of capitalized mortgage servicing rights, as well as
deferred income taxes and the associated income tax expense. Management reviews
the allowance for loan losses for adequacy on a quarterly basis and establishes
a provision for loan losses that is sufficient for the loan portfolio growth
expected and the loan quality of the existing portfolio. Income tax expense and
deferred income taxes are calculated using an estimated tax rate and are based
on management's and our tax advisor's understanding of our effective tax rate
and the tax code. These estimates are reviewed by our independent auditors on an
annual basis and by our regulators when they examine Home Federal.
Allowance for Loan Losses. Management recognizes that loan losses may
occur over the life of a loan and that the allowance for loan losses must be
maintained at a level necessary to absorb specific losses on impaired loans and
probable losses inherent in the loan portfolio. Our Asset Liability Management
Committee assesses the allowance for loan losses on a quarterly basis. The
Committee analyzes several different factors, including delinquency, charge-off
rates and the changing risk profile of our loan portfolio, as well as local
economic conditions such as unemployment rates, bankruptcies and vacancy rates
of business and residential properties.
We believe that the accounting estimate related to the allowance for
loan losses is a critical accounting estimate because it is highly susceptible
to change from period to period requiring management to make assumptions about
future losses on loans; and the impact of a sudden large loss could deplete the
allowance and potentially require increased provisions to replenish the
allowance, which would negatively affect earnings.
Our methodology for analyzing the allowance for loan losses consists of
three components: formula, specific and general allowances. The formula
allowance is determined by applying an estimated loss percentage to various
groups of loans. The loss percentages are generally based on various historical
measures such as the amount and type of classified loans, past due ratios and
loss experience, which could affect the collectibility of the respective loan
types.
The specific allowance component is created when management believes
that the collectibility of a specific large loan, such as a real estate,
multi-family or commercial real estate loan, has been impaired and a loss is
probable.
The general allowance element relates to assets with no well-defined
deficiency or weakness (i.e., assets classified pass or watch) and takes into
consideration loss that is inherent within the portfolio but has not been
realized. Borrowers are impacted by events well in advance of a lender's
knowledge that may ultimately result in a loan default and eventual loss.
Examples of such loss-causing events in the case of consumer or one- to
four-family residential loans would be a borrower job loss, divorce or medical
crisis. Examples in commercial or construction loans may be the loss of
customers due to competition or changes in the economy. General allowances for
each major loan type are determined by applying to the associated loan balance
loss factors that take into consideration past loss experience, asset duration,
economic conditions and overall portfolio quality.
The allowance is increased by the provision for loan losses, which is
charged against current period operating results and decreased by the amount of
actual loan charge-offs, net of recoveries.
Mortgage Servicing Rights. Mortgage servicing rights represent the
present value of the future servicing fees from the right to service loans in
the portfolio. The most critical accounting policy associated with mortgage
servicing is the methodology used to determine the fair value of capitalized
mortgage servicing rights, which requires the development of a number of
estimates, the most critical of which is the mortgage loan prepayment speeds
51
assumption. The mortgage loan prepayment speeds assumption is significantly
impacted by interest rates. In general, during periods of falling interest
rates, the mortgage loans prepay faster and the value of our mortgage servicing
asset declines. Conversely, during periods of rising rates, the value of
mortgage servicing rights generally increases due to slower rates of
prepayments. The amount and timing of mortgage servicing rights amortization is
adjusted quarterly based on actual results and updated projections. In addition,
on a quarterly basis, we perform an independent valuation review of mortgage
servicing rights for potential declines in value. Based on the significance of
any changes in assumptions since the preceding independent appraisal, this
valuation may include an independent appraisal of the fair value of our
servicing portfolio. This quarterly valuation review entails applying current
assumptions to the portfolio stratified by predominant risk characteristics such
as loan type, interest rate and loan term.
Deferred Income Taxes. Deferred income taxes are reported for temporary
differences between items of income or expense reported in the financial
statements and those reported for income tax purposes. Deferred taxes are
computed using the asset and liability approach as prescribed in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this method, a deferred tax asset or liability is determined based on the
enacted tax rates that will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in an institution's income tax returns.
The deferred tax provision for the year is equal to the net change in the net
deferred tax asset from the beginning to the end of the year, less amounts
applicable to the change in value related to investments available for sale. The
effect on deferred taxes of a change in tax rates is recognized as income in the
period that includes the enactment date. The primary differences between
financial statement income and taxable income result from depreciation expense,
mortgage servicing rights, loan loss reserves and dividends received from the
Federal Home Loan Bank. Deferred income taxes do not include a liability for
pre-1988 bad debt deductions allowed to thrift institutions which may be
recaptured if the institution fails to qualify as a bank for income tax purposes
in the future.
Comparison of Financial Condition at March 31, 2004 and September 30, 2003
General. Our total assets increased $46.6 million, or 10.4%, to $496.8
million at March 31, 2004 compared to $450.2 million at September 30, 2003. The
asset growth resulted mainly from an increase in purchases of mortgage-backed
securities of $30.6 million and an increase in loans originated in our local
market area of $9.4 million. This growth was funded by $28.2 million in
increased deposits, $16.5 million in borrowings from the Federal Home Loan Bank
of Seattle and $2.0 million in net income.
We use asset and liability duration measures as a component of interest
rate risk measurement. As described above, duration measures cash flows that are
generated from investments, loans or deposits by weighting the present value of
the cash flows according to the periods of time when the cash flows are received
with the result being an average date when the cash flows are received or paid.
During the six month period ended March 31, 2004, total asset duration decreased
4.1 months to 38.7 months, and liability duration decreased 2.1 months to 25.4
months for a net duration gap of 13.3 months, down 2.0 months from September 30,
2003.
Assets. Total assets increased $46.6 million during the six months
ended March 31, 2004. The increase was primarily concentrated in the following
interest-earning asset categories:
52
Balance at Increase from
March 31, 2004 September 30, 2003 Percentage Increase
-------------- ------------------ -------------------
(Dollars in Thousands)
Cash and amounts due from
depository institutions....... $ 15,992 $ 4,874 43.8%
Securities available for sale,
at fair value................. 6,404 964 17.7
Mortgage-backed securities,
held to maturity.............. 55,033 30,608 125.3
Loans receivable, net.......... 383,950 11,321 3.0
Loans held for sale (1)........ 3,160 (1,906) (37.6)
Properties and equipment, net.. 10,101 343 3.5
----------
(1) Loans held for sale includes one- to four-family residential loans that have
been sold into the secondary market awaiting delivery to the purchaser.
Cash and amounts due from depository institutions increased $4.9
million primarily as a result of an increase in customer checking account
deposit clearing items that were due from other banks. In addition, teller cash
on hand increased as a result of a regular weekly cash order received from the
Federal Reserve at March 31, 2004. Home Federal maintains cash balances at
branch and ATM locations in order to meet customer cash withdrawal needs.
During the six months ended March 31, 2004, we purchased Fannie Mae and
Freddie Mac mortgage-backed securities in order to leverage the balance sheet
and achieve the desired level of total interest-earning assets. Mortgage-backed
securities have payment characteristics that are similar to those of residential
loans. The net increase of $30.6 million represented 65.7% of total asset
growth. Loans receivable, net increased $11.3 million from loans originated in
our local area.
During the six months ended March 31, 2004, properties and equipment,
net increased $343,000 net of accumulated depreciation. This increase consisted
of $494,000 in costs incurred to complete the construction of our new Caldwell
branch which opened in January 2004. The remaining change in properties and
equipment was the result of $804,000 of depreciation expense.
As part of our ongoing business activities, we remodel our existing
facilities, build new branches, improve technology and improve our
infrastructure in order to provide the best possible customer service. As a
result of these activities, we will from time to time enter into contracts
committing to various asset purchases and construction projects. At March 31,
2004, we did not have any asset purchase or construction commitments
outstanding.
Deposits. During the six months ended March 31, 2004, deposits
increased $28.2 million. The following table details the sources of that growth:
Balance at Increase from
March 31, 2004 September 30, 2003 Percentage Increase
-------------- ------------------ -------------------
(Dollars in Thousands)
Savings deposits............... $ 24,620 $ 197 0.8%
Demand deposits................ 149,299 17,521 13.3
Certificates of deposit........ 155,596 10,524 7.3
-------------- ------------------ -------------------
Total deposit accounts......... $ 329,515 $ 28,242 9.4%
============== ================== ===================
53
Demand deposits increased $17.5 million during the six months ended
March 31, 2004, and accounted for 62.0% of the $28.2 million in total deposit
growth. Noninterest-bearing demand deposits grew $3.6 million and
interest-bearing demand deposits grew $13.9 million. Certificates of deposit
grew $10.5 million during the six months ended March 31, 2004. Of this growth,
$1.9 million in certificates were opened in connection with the announcement of
our reorganization, and the remaining $8.6 million in certificates resulted from
locally advertised specials.
Borrowings. We use borrowings from the Federal Home Loan Bank of
Seattle as an alternative funding source to deposits to manage funding costs and
reduce interest rate risk and to leverage the balance sheet. The net effect was
to fund increases in total interest-earning assets, thereby incrementally
increasing our net interest income. The Federal Home Loan Bank of Seattle
provides term borrowings at competitive interest rates and terms ranging from
overnight to 30 years. Total borrowings at March 31, 2004 were $113.1 million,
an increase of $16.5 million, or 17.1%, from September 30, 2003.
Equity. Total equity increased $2.0 million, or 4.8%, to $42.4 million
at March 31, 2004 from $40.4 million at September 30, 2003. The source of
increase in our equity was $2.0 million from net income for the six months ended
March 31, 2004. Our Tier 1 capital ratio was 8.46% and our total risk-based
capital ratio was 13.07% at March 31, 2004.
Comparison of Operating Results for the Six Months Ended March 31, 2004 and
March 31, 2003
General. Our net income for the six months ended March 31, 2004 was
$2.0 million, a decrease of $472,000 from the comparable period in the prior
year. The decrease in net income was the result of a $213,000 decrease in net
interest income, a $313,000 increase in the provision for loan losses and a
$978,000 decrease in total noninterest income, offset by a reduction of $578,000
in noninterest expense and $454,000 in income tax expense.
Net Interest Income. Our net interest income decreased $213,000 for the
six month period ended March 31, 2004 to $8.5 million, compared to $8.7 million
for the comparable period in the prior year. Average total interest-earning
assets increased $37.4 million between the two six month time periods, however,
a record number of loan refinances driven by historically low interest rates
resulted in an 80 basis point decline in our average asset yields. During that
same period, our average cost of funds declined only 33 basis points resulting
in a 47 basis point reduction in our interest rate spread.
Interest and Dividend Income. Total interest and dividend income for
the six months ended March 31, 2004 decreased $453,000 to $13.2 million from the
comparable period of the prior year. The following table compares detailed
average earning asset balances, associated yields and resulting changes in
interest and dividend income for the six months ended March 31, 2004 and 2003:
54
Six Months Ended March 31,
--------------------------------------------------------------
2004 2003 Increase/
--------------------- --------------------- (Decrease) in
Interest and
Dividend
Average Average Income from
Balance Yield Balance Yield 2003
---------- -------- ---------- -------- ------------
(Dollars in Thousands)
Loans receivable, net .................... $ 379,533 6.21% $ 338,350 7.08% $ (210)
Loans held for sale ...................... 2,927 5.65 3,316 5.95 (32)
Investment securities, available for sale,
including interest-bearing deposits in
other banks ............................. 6,499 2.46 9,240 1.90 (8)
Mortgage-backed securities, held
to maturity ............................. 38,112 5.50 39,889 6.08 (164)
Federal Home Loan Bank stock ............. 6,575 4.50 5,430 6.89 (39)
---------- -------- ---------- -------- ------------
Total interest-earning assets ............ $ 433,646 6.10% $ 396,225 6.90% $ (453)
========== ======== ========== ======== ============
Average total interest-earning assets increased $37.4 million during
the six months ended March 31, 2004 compared to the six months ended March 31,
2003, however, we had an 80 basis point drop in the average yield on total
interest-earning assets resulting in a decrease of $453,000 in total interest
income. Historically low interest rates and a record number of customer loan
refinances resulted in a 87 basis point reduction in the average yield on loans
receivable, net and a $210,000 reduction in related interest income. Rapid
repayments received on higher coupon mortgage-backed securities, and decreased
reinvestment rates for purchased securities resulted in a 58 basis point
reduction in the associated average yield.
Interest Expense. Total interest expense for the six month period ended
March 31, 2004 was $4.7 million, a decrease of $240,000 from the comparable
period in the prior year. The following table details average balances, cost of
funds and the resulting decrease in interest expense for the six months ended
March 31, 2004 and 2003:
Six Months Ended March 31,
--------------------------------------------------------------
2004 2003 Increase/
--------------------- --------------------- (Decrease) in
Interest
Average Average Expense from
Balance Cost Balance Cost 2003
---------- -------- ---------- -------- ------------
(Dollars in Thousands)
Savings accounts ......................... $ 23,910 0.29% $ 23,925 0.51% $ (26)
Interest-bearing demand accounts ......... 78,286 0.24 68,505 0.36 (30)
Money market accounts .................... 32,090 0.61 34,002 0.86 (49)
Certificates of deposit .................. 147,759 2.92 135,050 3.42 (149)
Federal Home Loan Bank advances .......... 108,637 4.23 98,818 4.62 14
---------- -------- ---------- -------- ------------
Total interest-bearing liabilities ....... $ 390,682 2.40% $ 360,300 2.73% $ (240)
========== ======== ========== ======== ============
The average balance of total interest-bearing liabilities increased
$30.4 million for the six months ended March 31, 2004 compared to March 31,
2003; however, our total interest expense decreased $240,000 as a result of a 33
basis point decrease in our average total cost of funds. The average balance of
certificates of deposit increased $12.7 million during the same period, however,
the average cost of funds decreased 50 basis points and interest expense
declined $149,000. Similarly, the average balance of interest-bearing demand
deposits increased $9.8
55
million, however, the average cost of funds decreased 12 basis points resulting
in a $30,000 reduction in related interest expense. Additionally, the average
balance of money market deposits declined $1.9 million and the average cost of
funds decreased 25 basis points. The current low interest rate environment has
resulted in a significant reduction in our average cost of funds and total
interest expense.
Provision for Loan Losses. Our Asset Liability Management Committee
assesses the allowance for loan losses on a quarterly basis. As described above,
the Committee analyzes several different factors, including delinquency,
charge-off rates and the changing risk profile of our loan portfolio, as well as
local economic conditions such as unemployment rates, bankruptcies and vacancy
rates of business and residential properties. The following table details
activity associated with the allowance for loan losses for the six month periods
ended March 31, 2004 and 2003:
At or For the Six Months
Ended March 31,
------------------------
2004 2003
----------- ----------
(Dollars in Thousands)
Provisions for loan losses............................ $ 600 $ 287
Net charge-offs....................................... 42 98
Allowance for loan losses............................. 2,411 1,574
Allowance for losses as a percentage of total loans
outstanding at a the end of the period............... 0.62% 0.45%
Allowance for loan losses as a percentage of
nonperforming loans at end of period................. 425.97% 517.63%
Total nonaccrual and 90 days or more past due loans... 566 304
Nonaccrual and 90 days or more past due loans as a
percentage of loans receivable....................... 0.15% 0.09%
Our provision for loan losses for the six months ended March 31, 2004
was $600,000, an increase of $313,000 compared to the six months ended March 31,
2003. This increase is a direct result of a $262,000 increase in total
nonaccrual and 90 days or more past due loans and is related to the addition a
delinquent one- to four-family residential loan to nonaccrual status. The ratio
of the allowance for loan losses as a percentage of nonperforming loans
decreased from 517.63% at March 31, 2003 to 425.97% at March 31, 2004. Although
management uses the best information available in determining the allowance for
loan losses, future adjustments to the allowance may be necessary due to
economic, operating, regulatory and other conditions that may be beyond our
control. Any increase or decrease in the provision for loan losses has a
corresponding negative or positive effect on net income.
Noninterest Income. Noninterest income decreased $978,000, or 18.4%, to
$4.3 million for the six month period ended March 31, 2004 from the comparable
period of the prior year. The following table provides a detailed analysis of
the changes in the components of noninterest income:
56
Six Months Ended Increase/(Decrease) Percentage
March 31, 2004 from March 31, 2003 Increase/(Decrease)
---------------- ------------------- -------------------
(Dollars in Thousands)
Service fees and charges........ $ 3,807 $ 157 4.3%
Gain on sale of loans........... 344 (243) (41.4)
Increase in cash surrender
value of life insurance........ 249 48 23.9
Mortgage servicing rights, net.. (114) (842) (115.7)
Other........................... 55 (98) (64.1)
---------------- ------------------- -------------------
Total noninterest income........ $ 4,341 $ (978) (18.4)%
================ =================== ===================
Service fees and charges totaled $3.8 million for the six months ended
March 31, 2004, an increase of $157,000, or 4.3%, over the six months ended
March 31, 2003. Service fees and charges represented 87.7% of total noninterest
income for the six months ended March 31, 2004, up from 68.6% for the six months
ended March 31, 2003.
Mortgage servicing rights, net was ($114,000) for the six months ended
March 31, 2004, a decrease of $842,000 compared to the six months ended March
31, 2003. Mortgage servicing rights, net is an accounting estimate that
represents the present value of the future servicing rights from the right to
service mortgage loans for others. It is affected by prepayment speeds of the
underlying mortgages and interest rates. In general, during periods of falling
interest rates like those experienced during the six months ended March 31,
2004, mortgage loans repay faster and the value of our mortgage-servicing asset
declines. On a quarterly basis, we perform an independent valuation of mortgage
servicing rights in order to determine if there has been a decline in its fair
market value. An independent appraisal was performed on March 31, 2004 and
required us to reduce the carrying value of the mortgage-servicing asset by
$230,000.
Gain on the sale of loans was $344,000 for the six months ended March
31, 2004, a decrease of $243,000 from the six months ended March 31, 2003. Gain
on the sale of loans is directly related to mortgage loan originations that are
sold in the secondary market. The reduction in the income was the result of a
$49.7 million or 56.8% reduction in the sale of mortgage loans during the six
months ended March 31, 2004 as compared to the six months ended March 31, 2003.
During the six months ended March 31, 2003, we experienced record loan volumes
associated with customer mortgage loan refinances that were directly related to
historically low interest rates. We do not expect the refinancing trend to
continue at those volumes during the remaining months of our current fiscal year
and our future origination activities will be more dependent on the sale of
homes in the local area.
Noninterest Expense. Noninterest expense decreased $578,000 during the
six months ended March 31, 2004 to $9.2 million, compared to $9.8 million for
the comparable period of the prior year. The following table provides an
analysis of the changes in the components of noninterest expense:
Six Months Ended Increase/(Decrease) Percentage
March 31, 2004 from March 31, 2003 Increase/(Decrease)
---------------- ------------------- -------------------
(Dollars in Thousands)
Compensation and benefits....... $ 5,340 $ (490) (8.4)%
Occupancy and equipment......... 1,375 (100) (6.8)
Data processing................. 724 59 8.9
Advertising..................... 515 (108) (17.3)
Postage and supplies............ 408 44 12.1
Other........................... 856 17 2.0
---------------- ------------------- -------------------
Total noninterest expense....... $ 9,218 $ (578) (5.9)%
================ =================== ===================
57
The $490,000 reduction in compensation and benefits accounted for the
majority of the decrease in noninterest expense for the six months ended March
31, 2004. Commissions expense decreased $229,000 for the six months ended March
31, 2004. Commissions are paid to our loan originators based on residential
mortgage dollar origination volumes; those volumes decreased $109.7 million, or
67.0%, for the six months ended March 31, 2004. Management intends to
concentrate on mortgage loan originations generated from the sale of homes in
our local market area and does not anticipate a continuation of the prior year
record refinancing mortgage loan volumes for the remainder of the fiscal year
ending September 30, 2004. In addition, we terminated deferred compensation
plans for vice presidents resulting in a $155,000 reduction in compensation
expense for the six months ended March 31, 2004.
Advertising expense was $515,000 for the six months ended March 31,
2004, a $108,000 decrease from the $623,000 in expense for the six months ended
March 31, 2003. The primary reason for the decrease was a $153,000 reduction in
premiums paid to attract new checking account customers.
Income Tax Expense. Income tax expense decreased $454,000 for the six
months ended March 31, 2004 to $1.1 million from $1.6 million for the six months
ended March 31, 2003. Income before income taxes was $3.1 million for the six
months ended March 31, 2004, compared to $4.0 million for the six months ended
March 31, 2003, a decrease of $926,000 or 23.2%. Income recognized from the
increase in the cash surrender value of bank owned life insurance is not
generally subject to income tax and this reduced income tax expense by $97,000
and $78,000 for the six months ended March 31, 2004 and 2003, respectively. The
effective income tax rate for the six months ended March 31, 2004 was 34.0% for
federal and 7.6% for the State of Idaho.
Comparison of Financial Condition at September 30, 2003 and September 30, 2002
General. Total assets increased $33.7 million, or 8.1%, during the year
ended September 30, 2003. Record mortgage loan originations, brought on by
record low interest rates, provided a $54.3 million increase in loans
receivable, net. Asset growth was funded by an increase of $21.5 million in
deposits and $5.5 million in borrowings from the Federal Home Loan Bank of
Seattle. From an asset and liability perspective, total asset duration increased
10.5 months to 42.8 months, and liability duration increased 11.5 months to 27.5
months for a net duration gap of 15.3 months, down 1.0 month from September 30,
2002.
Assets. Asset growth was primarily concentrated in the following
interest-earning asset categories:
Increase/(Decrease)
Balance at from September 30, Percentage
September 30, 2003 2002 Increase/(Decrease)
------------------ ------------------- -------------------
(Dollars in Thousands)
Securities available for sale,
at fair value.................. $ 5,440 $ 2,933 117.0%
Mortgage-backed securities,
held to maturity............... 24,425 (19,900) (44.9)
Loans receivable, net of
allowance for loan losses...... 372,629 54,332 17.1
Loans held for sale............. 5,066 (7,656) (60.2)
Mortgage servicing rights, net.. 3,130 1,370 77.8
During the year ended September 30, 2003, we originated $289.2 million
in one- to four-family mortgage loans of which $164.3 million were sold in the
secondary market and $143.3 million in principal was received from loan
amortizations. We also originated $21.2 million in commercial real estate and
multi-family mortgages, $32.9 million in real estate construction loans, $17.2
million in consumer loans and $1.2 million in commercial/business loans. The
mortgage-backed securities portfolio decreased $19.9 million as we concentrated
on residential mortgage growth.
58
The value of mortgage servicing rights increased $1.4 million as a
result of the record sales of residential mortgage loans in the secondary
market. We service residential mortgage loans for Freddie Mac, Fannie Mae and
the Federal Home Loan Bank of Seattle. The principal balance of the loans we
service for others increased $39.9 million, or 19.4%, to $246.0 million at
September 30, 2003.
Deposits. During the year ended September 30, 2003, deposits increased
$21.5 million, which is detailed in the following table:
Balance at Increase from
September 30, 2003 September 30, 2002 Percentage Increase
------------------ ------------------- -------------------
(Dollars in Thousands)
Savings deposits................ $ 24,423 $ 1,216 5.2%
Demand deposits................. 131,778 5,440 4.3
Certificates of deposit......... 145,072 14,845 11.4
------------------ ------------------- -------------------
Total deposit accounts.......... $ 301,273 $ 21,501 7.7%
================== =================== ===================
The majority of certificate account growth resulted from offering of
the "Escalator CD," a four-year step-rate certificate of deposit with
predetermined step-up rates and the customer option of a one-time penalty-free
withdrawal at each six month interval until maturity. These accounts contributed
$12.2 million to the $14.8 million increase in certificate accounts. Checking
account growth consisted of $3.7 million in interest-bearing checking and $3.4
million in medical savings accounts, offset by a decline of $3.4 million in
money market accounts.
Borrowings. During the year ended September 30, 2003, $30.1 million in
Federal Home Loan Bank of Seattle borrowings matured and we borrowed $35.6
million in additional Federal Home Loan Bank of Seattle advances which resulted
in a net increase in borrowings of $5.5 million, or 6.1%. We took advantage of
the historically low interest rate environment and borrowed funds with longer
terms to maturity, increasing the duration of total borrowings from 17.3 months
at September 30, 2002 to 51.4 months at September 30, 2003. In addition to
extending the duration, our cost of funds decreased 21 basis points to 4.53% at
the end of the fiscal year. The borrowings were used to fund a portion of the
$54.3 million growth in our loans receivable, net with durations that more
closely match the terms of the loans.
Equity. Equity increased $5.4 million from net income for the year
ended September 30, 2003 offset by a small decrease related to the change in the
market value of available-for-sale securities. Our Tier 1 (core) and total
risk-based capital (to risk-weighted assets) ratios were 8.89% and 13.56%,
respectively, at September 30, 2003.
Comparison of Operating Results for the Years Ended September 30, 2003 and
September 30, 2002
General. Net income for the year ended September 30, 2003 was $5.5
million, a $3.3 million or 158.9% increase from the prior year. The two primary
factors that contributed to the increase in net income were:
. an increase of $1.8 million in net interest income; and
. an increase of $5.4 million in noninterest income.
Noninterest expense increased $1.7 million and income tax expense
increased $1.8 million during the year ended September 30, 2003 compared to the
prior year, partially offsetting the gains in net interest and noninterest
income.
Net Interest Income. Net interest income for the year ended September
30, 2003 was $17.2 million, a $1.8 million increase from the prior year. Total
interest and dividend income remained level with the prior year while total
interest expense decreased $1.8 million. Interest rates declined during the year
ended September 30, 2003.
59
During this period, our balance sheet was liability sensitive so the decline in
interest rates resulted in a more rapid repricing of our liabilities as compared
to the asset side of the balance sheet. Therefore, in a declining rate
environment as we experienced during the year ended September 30, 2003, interest
expense declined more rapidly than interest income. As a result of these record
low interest rates, increased loan prepayment rates and decreased asset
reinvestment rates limited opportunities for increased yields on our assets. The
same factors contributed to the significant decline in total interest expense.
Interest and Dividend Income. Total interest and dividend income for
the year ended September 30, 2003 remained largely unchanged from the previous
year. The following table compares detailed average earning asset balances,
associated yields and resulting change in interest and dividend income for the
years ended September 30, 2003 and 2002:
Year Ended September 30,
--------------------------------------------------------------
2003 2002 Increase/
--------------------- --------------------- (Decrease) in
Interest and
Dividend
Average Average Income from
Balance Yield Balance Yield 2002
---------- -------- ---------- -------- ------------
(Dollars in Thousands)
Loans receivable, net..................... $ 352,124 6.81% $ 301,507 7.66% $ 869
Loans held for sale....................... 3,721 5.99 11,045 6.32 (475)
Investment securities available for
sale, including interest-bearing
deposits in other banks.................. 14,842 2.03 6,137 3.18 107
Mortgage-backed securities, held
to maturity.............................. 33,893 6.02 41,690 6.28 (577)
Federal Home Loan Bank stock.............. 5,841 6.03 4,634 6.13 68
---------- -------- ---------- -------- ------------
Total interest-earning assets $ 410,421 6.55% $ 365,013 7.37% $ (8)
========== ======== ========== ======== ============
Record low interest rates and high loan volumes from refinanced
mortgage loans resulted in an 85 basis point decline in yield on our loans
receivable portfolio and a 33 basis point decline in yield on our loans held for
sale for the year ended September 30, 2003. However, as a result of a $43.3
million increase in the total average outstanding balances of both our loan
portfolio and loans held for sale during the same time period, the combined
interest income received increased by $394,000. Rapid prepayments received on
higher coupon mortgage-backed securities, and decreased reinvestment rates for
purchased mortgage-backed securities resulted in a 26 basis point reduction in
the yield on mortgage-backed securities. The reduction in yield combined with
the $7.8 million decrease in the average balance outstanding in mortgage-backed
securities portfolio resulted in a $577,000 decrease in related interest income
for securities. During the year ended September 30, 2003, we increased our
average investment securities available for sale portfolio by $8.7 million,
which resulted in a net increase of $107,000 in related interest income.
Interest Expense. Total interest expense for the year ended September
30, 2003 was $9.7 million, a decrease of $1.8 million from the prior fiscal
year. The following table details average balances, cost of funds and resulting
change in interest expense for the years ended September 30, 2003 and 2002:
60
Year Ended September 30,
--------------------------------------------------------------
2003 2002 Increase/
--------------------- --------------------- (Decrease) in
Interest
Average Average Expense from
Balance Cost Balance Cost 2002
---------- -------- ---------- -------- ------------
(Dollars in Thousands)
Savings deposits.......................... $ 24,354 0.43% $ 22,633 0.87% $ (94)
Interest-bearing demand accounts.......... 70,956 0.27 62,773 0.87 (353)
Money market accounts..................... 33,159 0.73 36,963 1.86 (444)
Certificates of deposit................... 139,254 3.26 129,556 4.31 (1,046)
Federal Home Loan Bank advances........... 102,173 4.53 86,577 5.14 177
---------- -------- ---------- -------- ------------
Total interest-bearing liabilities........ $ 369,896 2.62% $ 338,502 3.39% $ (1,760)
========== ======== ========== ======== ============
The total cost of funds for total interest-bearing liabilities at
September 30, 2003 decreased 77 basis points from the year ended September 30,
2002. Historically low interest rates allowed us to fund balance sheet growth
with a $31.4 million increase in the average balance of interest-bearing
liabilities at a $1.8 million decrease in interest expense.
Provision for Loan Losses. The provision for loan losses increased
$338,000, or 122.0%, to $615,000 for the year ended September 30, 2003. The
allowance for loan losses as a percentage of total loans outstanding increased
eight basis points to 0.49% at September 30, 2003. The following table details
activity and information related to the allowance for loan losses for the years
ended September 30, 2003 and 2002:
At or For the Year
Ended September 30,
------------------------
2003 2002
----------- ----------
(Dollars in Thousands)
Provisions for loan losses............................ $ 615 $ 277
Net charge-offs....................................... 147 323
Allowance for loan losses............................. 1,853 1,385
Allowance for loan losses as a percentage of total
loans outstanding at the end of period............... 0.49% 0.41%
Allowance for loan losses as a percentage of
nonperforming loans at end of period................. 1,393.23% 295.94%
Total nonaccrual and 90 days or more past due loans... 133 468
Nonaccrual and 90 days or more past due loans
as a percentage of loans receivable.................. 0.04% 0.14%
Loans receivable, net................................. 372,629 318,297
Total loans originated................................ $ 361,666 $ 234,547
The decrease in net charge-offs and nonaccrual and 90 days past due
loans from September 30, 2002 to September 30, 2003 resulted from the completion
of our work out of loan quality issues which began in 2000. During fiscal 2001,
2002 and 2003, we worked through the collection process on several one- to
four-family residential construction loans and a large single-family residential
loan resulting in total charge-offs of approximately $900,000. We increased our
provision for loan losses for the year ended September 30, 2003 compared to the
prior year in connection with the unseasoned nature of our loan portfolio that
resulted from a record volume of refinanced mortgage loans. Total loan
originations were $234.5 million and $361.7 million during the years ended
September 30, 2002 and 2003, respectively. In management's judgment, this
resulted in an increase in the level of unseasoned
61
loans within the loan portfolio thereby increasing the inherent risk of loss to
Home Federal. As a result, management increased the general allowance to allow
for the additional inherent risk of the loan portfolio.
Noninterest Income. Noninterest income increased $5.4 million, or
94.0%, during the year ended September 30, 2003 from the prior year. The
following table provides a detailed analysis of the changes in components of
noninterest income:
Year Ended Increase from
September 30, 2003 September 30, 2002 Percentage Increase
------------------ ------------------- -------------------
(Dollars in Thousands)
Service fees and charges........ $ 8,120 $ 2,155 36.1%
Gain on sale of loans........... 1,044 368 54.4
Increase in cash surrender value
of life insurance.............. 601 185 44.5
Mortgage servicing rights, net.. 1,370 2,417 230.9
Other........................... 53 296 121.8
------------------ ------------------- -------------------
Total noninterest income........ $ 11,188 $ 5,421 94.0%
================== =================== ===================
Mortgage servicing rights, net increased $2.4 million as a result of a
77.1% increase in residential mortgage loan sales on the secondary market and a
$1.5 million impairment of the mortgage servicing rights for the year ended
September 30, 2002. An impairment is recorded when the market value of the
mortgage servicing asset is reduced as a result of market conditions. In
general, during periods of falling interest rates, mortgage loans prepay rapidly
and the value of mortgage servicing assets declines. We contracted with an
outside appraisal firm in order to establish the market value for our mortgage
servicing rights for fiscal years 2002 and 2003.
Service fees and charges increased by $2.2 million during the year
ended September 30, 2003 compared to fiscal 2002. The increase resulted mainly
from $915,000 in increased debit card fees and $814,000 in increased checking
account fees.
Gain on sale of loans increased $368,000 in fiscal 2003 as a result of
a $71.5 million increase in loans sold on the secondary market. Residential loan
sales for fiscal 2003 amounted to $164.3 million, compared to $92.8 million for
fiscal 2002.
Noninterest Expense. Noninterest expense increased $1.7 million during
the year ended September 30, 2003 from the prior fiscal year. The following
table provides a detailed breakdown of the components of noninterest expense for
fiscal 2003 and the increases or decreases from the prior year:
Year Ended Increase from
September 30, 2003 September 30, 2002 Percentage Increase
------------------ ------------------- -------------------
(Dollars in Thousands)
Compensation and benefits....... $ 10,980 $ 938 9.3%
Occupancy and equipment......... 2,909 119 4.3
Data processing................. 1,366 369 37.0
Advertising..................... 1,256 92 7.9
Other........................... 2,374 189 8.6
------------------ ------------------- -------------------
Total noninterest expense....... $ 18,885 $ 1,707 9.9%
================== =================== ===================
Compensation and benefits increased $938,000 for the year ended
September 30, 2003 compared to the prior year. Sales commissions paid to our
mortgage loan officers and originators increased $279,000 due to an
62
increase of $127.5 million in total real estate loan originations. Retirement
expense increased $572,000 based on the cumulative increased vesting of
non-qualified retirement plan participants and a $120,000 adjustment to the
director indexed retirement plans.
Data processing expense increased $369,000 primarily due to increased
expenses for computer software maintenance of $97,000, internet banking of
$88,000 and debit cards of $129,000.
Other expenses increased $189,000 for the year ended September 30, 2003
from the prior year. Professional services, included in other expenses,
increased $167,000 primarily as a result of increased audit fees of $42,000,
fees for commercial loan reviews of $34,000 and consulting fees of $32,000
related to the implementation of our performance-based compensation system.
Income Tax Expense. Income tax expense increased $1.8 million during
the year ended September 30, 2003 compared to fiscal 2002. Income tax expense
increased primarily as a result of a $5.1 million increase in net income before
tax. Income recognized from the increase in the cash surrender value of bank
owned life insurance is not generally subject to income tax. This reduced income
tax expense by $243,000 for the year ended September 30, 2003 and $162,000 for
the year ended September 30, 2002. The effective income tax rate is 34.0% for
federal and 7.6% for the State of Idaho.
Comparison of Operating Results for the Years Ended September 30, 2002 and
September 30, 2001
General. Net income for the year ended September 30, 2002 was $2.1
million, a $319,000 or 17.8% increase over the prior year.
Net Interest Income. Net interest income increased $3.4 million during
the year ended September 30, 2002 from the prior year. Interest and dividend
income increased $390,000 as a result of the increase in interest-earning assets
offset by the decline in interest rates. In addition, interest expense decreased
$3.0 million as a result of the decline in interest rates.
Interest and Dividend Income. Total interest and dividend income for
the year ended September 30, 2002 increased $390,000 from the prior year. The
following table compares detailed average earning asset balances and associated
yields for the years ended September 30, 2002 and 2001:
Year Ended September 30,
--------------------------------------------------------------
2002 2001 Increase/
--------------------- --------------------- (Decrease) in
Interest and
Dividend
Average Average Income from
Balance Yield Balance Yield 2001
---------- -------- ---------- -------- ------------
(Dollars in Thousands)
Loans receivable, net .................... $ 301,507 7.66% $ 267,532 8.46% $ 480
Loans held for sale ...................... 11,045 6.32 7,074 7.21 188
Investment securities, available for
sale, including interest-bearing
deposits in other banks ................. 6,137 3.18 5,945 5.08 (107)
Mortgage-backed securities, held
to maturity ............................. 41,690 6.28 42,041 6.68 (193)
Federal Home Loan Bank stock ............. 4,634 6.13 3,852 6.80 22
---------- -------- ---------- -------- ------------
Total interest-earning assets ............ $ 365,013 7.37% $ 326,444 8.12% $ 390
========== ======== ========== ======== ============
63
Declining interest rates and strong loan volumes at lower rates
resulted in an 80 basis point decrease in the yield on the loans receivable
portfolio and an 89 basis point decrease on the loans held for sale for the year
ended September 30, 2002. Average balances in loans receivable and loans held
for sale increased $34.0 million and $4.0 million, respectively, offset by
decreases in yields, resulting in increases of only $480,000 and $188,000,
respectively, in interest income from loans receivable. Increasing prepayment
rates on higher coupon mortgage-backed securities resulted in a 40 basis point
reduction in the yield on mortgage-backed securities. The reduction in yield in
addition to the $351,000 decrease in the average outstanding balances resulted
in a $193,000 decrease in interest income for the securities. We increased the
average portfolio of available-for-sale investment securities and
interest-bearing deposits in other banks $192,000, however, the 190 basis point
decrease in yield resulted in a $107,000 decrease in income from the investment
securities.
Interest Expense. Total interest expense for the year ended September
30, 2002 was $11.5 million, a decrease of $3.0 million from the prior fiscal
year. The following table details average balances, cost of funds and resulting
change in interest expense for the years ended September 30, 2002 and 2001:
Year Ended September 30,
--------------------------------------------------------------
2002 2001 Increase/
--------------------- --------------------- (Decrease) in
Interest
Average Average Expense from
Balance Cost Balance Cost 2002
---------- -------- ---------- -------- ------------
(Dollars in Thousands)
Savings deposits ......................... $ 22,633 0.87% $ 23,078 2.11% $ (289)
Interest-bearing demand deposits ......... 62,773 0.87 53,735 1.89 (468)
Money market demand deposits ............. 36,963 1.86 25,839 3.75 (283)
Certificates of deposit .................. 129,556 4.31 130,362 5.97 (2,194)
Federal Home Loan Bank advances .......... 86,577 5.14 66,910 6.32 219
---------- -------- ---------- -------- ------------
Total interest-bearing liabilities ....... $ 338,502 3.39% $ 299,924 4.83% $ (3,015)
========== ======== ========== ======== ============
The total cost of funds of total interest-bearing liabilities for the
year ended September 30, 2002 decreased 144 basis points from the year ended
September 30, 2001. A rapidly declining interest rate environment allowed us to
increase average liability funding balance $38.6 million, while reducing
interest expense $3.0 million. The average balance in certificates of deposit
decreased $806,000 and the associated cost of funds declined 166 basis points
for a $2.2 million decrease in interest expense. The average balance in
interest-bearing demand deposits increased $9.0 million in 2002 while the
average cost of funds fell 102 basis points for a decrease of $468,000 in
interest expense.
Provision for Loan Losses. The following table details activity and
information related to the provision for loan losses for the years ended
September 30, 2002 and 2001:
64
At or For the Year
Ended September 30,
------------------------
2002 2001
----------- ----------
(Dollars in Thousands)
Provisions for loan losses............................ $ 277 $ 748
Net charge-offs....................................... 323 446
Allowance for loan losses............................. 1,385 1,431
Allowance for loan losses as a percentage of total
loans outstanding at the end of period............... 0.41% 0.47%
Allowance for loan losses as a percentage of
nonperforming loans at end of period................. 295.94% 48.21%
Total nonaccrual and 90 days or more past due loans... 468 3,658
Nonaccrual and 90 days or more past due loans
as a percentage of loans receivable.................. 0.14% 1.22%
Loans receivable, net................................. 318,297 289,385
Total real estate construction loans.................. $ 14,570 $ 25,247
The provision for loan losses decreased from $748,000 for the year
ended September 30, 2001 to $277,000 for the year ended September 30, 2002. This
decrease was the result of improved loan quality in our loan portfolio. At
September 30, 2001, we were in the process of working out several one- to
four-family residential construction loans with aggregate loan balances of over
$2.0 million. During the year ended September 30, 2002, we completed the work
out of these loan problems as evidenced by the significant reduction in the
total of nonaccrual loans and loans 90 days past due from $3.7 million at
September 30, 2001 to $468,000 at September 30, 2002.
The decrease in the provision is also the result of a 42.3%, or $10.7
million, reduction in total real estate construction loans outstanding at
September 30, 2002 as compared to September 30, 2001. Real estate construction
loans have greater credit risk than permanent one- to four-family residential
loans and therefore are given a greater weight in determining the allowance for
loan loss analysis. This analysis is performed by management on a quarterly
basis.
Noninterest Income. Noninterest income decreased $552,000 during the
year ended September 30, 2002 from the prior year. The following table provides
a detailed analysis of the changes in components of noninterest income:
Year Ended Increase/(Decrease) Percentage
September 30, 2002 from September 30, 2001 Increase/(Decrease)
------------------ ----------------------- -------------------
(Dollars in Thousands)
Service fees and charges........ $ 5,965 $ 1,201 25.2%
Gain on sale of loans........... 676 390 136.4
Increase in cash surrender
value of life insurance........ 416 84 25.3
Mortgage servicing rights, net.. (1,047) (1,925) (219.2)
Other........................... (243) (302) (511.9)
------------------ ----------------------- -------------------
Total noninterest income $ 5,767 $ (552) (8.7)%
================== ======================= ===================
Mortgage servicing rights, net decreased $1.9 million due in part to a
$1.5 million impairment of the mortgage servicing rights for the year ended
September 30, 2002 and a decline in the valuation of mortgage servicing rights
for mortgage loan production for the same year. We contracted with an outside
appraisal firm in order to establish the market value for our mortgage servicing
rights for fiscal year 2002.
65
Service fees and charges increased by $1.2 million during the year
ended September 30, 2002 compared to fiscal 2001. The increase resulted
primarily from increased checking account fees.
Gain on sale of loans increased $390,000 in fiscal 2002 as the result
of a $22.9 million increase in loans sold on the secondary market. Residential
loan sales for fiscal 2002 were $92.8 million.
Noninterest Expense. Noninterest expense increased $2.6 million during
year ended September 30, 2002 from the prior fiscal year. The following table
provides a detailed breakdown of the components of noninterest expense for
fiscal 2002 and the increases or decreases from the prior year:
Year Ended Increase/(Decrease) Percentage
September 30, 2002 from September 30, 2001 Increase/(Decrease)
------------------ ----------------------- -------------------
(Dollars in Thousands)
Compensation and benefits $ 10,042 $ 1,787 21.6%
Occupancy and equipment 2,790 437 18.6
Data processing 997 191 23.7
Advertising 1,164 126 12.1
Other 2,185 43 2.0
------------------ ----------------------- -------------------
Total noninterest expense $ 17,178 $ 2,584 17.7%
================== ======================= ===================
Compensation and benefits expense increased $1.8 million as a result of
increased salary expense of $963,000, incentive and commissions of $386,000,
payroll taxes of $115,000, medical and dental insurance of $116,000, training of
$59,000, and other items, net of $112,000. The increase in salary expense is
attributable to the opening of eight new Wal-Mart in-store branch locations
starting in August 2001 through September 30, 2002. Data processing expense
increased during the year ended September 30, 2002 as a result of higher
internet banking expense and debit card fees.
Income Tax Expense. Income tax expense for the year ended September 30,
2002 increased $421,000 from the prior fiscal year. Income tax expense increased
primarily as a result of higher net income before tax (up $740,000). The
effective income tax rate was 34.0% for federal and 7.6% for the State of Idaho
in 2002 and 8.0% in 2001.
Impact of Benefit Plans
Following the completion of the stock offering, we will have an
employee stock ownership plan. We also intend to adopt, subject to approval by a
majority of the total votes eligible to be cast at a duly called meeting by
stockholders (other than Home Federal MHC), a restricted stock plan and a stock
option plan. The implementation of the employee stock ownership plan and the
restricted stock plan will affect our results of operations as a component of
employee compensation expense. The employee stock ownership plan will result in
employee compensation expense equal to the current market price of the shares
being released and allocated to the participants in the plan for that year. The
effect the restricted stock plan will have on employee compensation expense will
be equal to the current market price of the shares being awarded to the
employees receiving the shares recognized as compensation expense over the
vesting period of the shares. Home Federal may currently elect to account for
stock option awards issued to employees under Accounting Principles Board
Opinion No. 25, which requires recognition of compensation expense based on the
intrinsic value of the award at the measurement date, which is generally the
date of grant. The intrinsic value is equal to the difference between the
current market price of the stock and the exercise prices of the stock option
award. Because the options to be issued are intended to have an exercise price
equal to the current market price of the stock, there will be no compensation
expense recognized on these awards. See "Pro Forma Data."
66
Average Balances, Interest and Average Yields/Cost
The following table sets forth for the periods indicated, information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resultant yields, interest rate
spread, net interest margin (otherwise known as net yield on interest-earning
assets), and the ratio of average interest-earning assets to average
interest-bearing liabilities. Average balances have been calculated using the
average of daily balances during the period. Interest and dividends are reported
on a tax-equivalent basis. During the time periods presented, we did not own any
tax-exempt investment securities.
Six Months Ended
March 31,
---------------------------------------------------------------------------
2004 2003
------------------------------------ ------------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance (1) Dividends Cost (2) Balance (1) Dividends Cost (2)
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net ................ $ 379,533 $ 11,776 6.21% $ 338,350 $ 11,986 7.08%
Loans held for sale .................. 2,927 165 5.65 3,316 197 5.95
Investment securities, available
for sale, including interest-
bearing deposits in other banks ..... 6,499 80 2.46 9,240 88 1.90
Mortgage-backed securities,
held to maturity .................... 38,112 1,048 5.50 39,889 1,212 6.08
Federal Home Loan Bank stock ......... 6,575 148 4.50 5,430 187 6.89
---------- ---------- ---------- ----------
Total interest-earning assets ...... 433,646 13,217 6.10 396,225 13,670 6.90
---------- ----------
Noninterest earning assets ............. 36,902 34,176
---------- ----------
Total average assets ................. $ 470,548 $ 430,401
========== ==========
Year Ended
September 30,
---------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance (1) Dividends Cost Balance (1) Dividends Cost
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net ................ $ 352,124 $ 23,979 6.81% $ 301,507 $ 23,110 7.66%
Loans held for sale .................. 3,721 223 5.99 11,045 698 6.32
Investment securities, available
for sale, including interest-
bearing deposits in other banks ..... 14,842 302 2.03 6,137 195 3.18
Mortgage-backed securities,
held to maturity .................... 33,893 2,040 6.02 41,690 2,617 6.28
Federal Home Loan Bank stock ......... 5,841 352 6.03 4,634 284 6.13
---------- ---------- ---------- ----------
Total interest-earning assets ...... 410,421 26,896 6.55 365,013 26,904 7.37
---------- ----------
Noninterest earning assets ............. 33,985 35,237
---------- ----------
Total average assets ................. $ 444,406 $ 400,250
========== ==========
Year Ended
September 30,
------------------------------------
2001
------------------------------------
Interest
Average and Yield/
Balance (1) Dividends Cost
---------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net ................ $ 267,532 $ 22,630 8.46%
Loans held for sale .................. 7,074 510 7.21
Investment securities, available
for sale, including interest-
bearing deposits in other banks ..... 5,945 302 5.08
Mortgage-backed securities,
held to maturity .................... 42,041 2,810 6.68
Federal Home Loan Bank stock ......... 3,852 262 6.80
---------- ----------
Total interest-earning assets ...... 326,444 26,514 8.12
----------
Noninterest earning assets ............. 30,498
----------
Total average assets ................. $ 356,942
==========
(table continues on following page)
67
Six Months Ended
March 31,
---------------------------------------------------------------------------
2004 2003
------------------------------------ ------------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance (1) Dividends Cost (2) Balance (1) Dividends Cost (2)
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Interest-bearing liabilities:
Savings deposits ..................... $ 23,910 $ 35 0.29% $ 23,925 $ 61 0.51%
Interest-bearing demand deposits ..... 78,286 93 0.24 68,505 123 0.36
Money market accounts ................ 32,090 98 0.61 34,002 147 0.86
Certificates of deposit .............. 147,759 2,157 2.92 135,050 2,306 3.42
---------- ---------- ---------- ----------
Total deposits ..................... $ 282,045 $ 2,383 1.69 261,482 2,637 2.02
Federal Home Loan Bank advances ........ 108,637 2,299 4.23 98,818 2,285 4.62
---------- ---------- ---------- ----------
Total interest-bearing liabilities ... 390,682 4,682 2.40 360,300 4,922 2.73
Noninterest-bearing liabilities ........ 38,218 32,209
---------- ----------
Total average liabilities ............ 428,900 392,509
Average equity ......................... 41,648 37,892
---------- ----------
Total liabilities and equity ......... $ 470,548 $ 430,401
========== ==========
Net interest income .................... $ 8,535 $ 8,748
Interest rate spread ................... 3.70% 4.17%
Net interest margin (3) ................ 3.94% 4.42%
Ratio of average interest-
earning assets to average
interest-bearing liabilities .......... 111.00% 109.97%
Year Ended
September 30,
---------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance (1) Dividends Cost Balance (1) Dividends Cost
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Interest-bearing liabilities:
Savings deposits ..................... $ 24,354 $ 104 0.43% $ 22,633 $ 198 0.87%
Interest-bearing demand deposits ..... 70,956 194 0.27 62,773 547 0.87
Money market accounts ................ 33,159 242 0.73 36,963 686 1.86
Certificates of deposit .............. 139,254 4,540 3.26 129,556 5,586 4.31
---------- ---------- ---------- ----------
Total deposits ..................... 267,723 5,080 1.90 251,925 7,017 2.79
Federal Home Loan Bank advances ........ 102,173 4,625 4.53 86,577 4,448 5.14
---------- ---------- ---------- ----------
Total interest-bearing liabilities ... 369,896 9,705 2.62 338,502 11,465 3.39
Noninterest-bearing liabilities ........ 33,769 26,781
---------- ----------
Total average liabilities ............ 403,665 365,283
Average equity ......................... 40,741 34,967
---------- ----------
Total liabilities and equity ......... $ 444,406 $ 400,250
========== ==========
Net interest income .................... $ 17,191 $ 15,439
Interest rate spread ................... 3.93% 3.98%
Net interest margin (3) ................ 4.19% 4.23%
Ratio of average interest-
earning assets to average
interest-bearing liabilities .......... 110.96% 107.83%
Year Ended
September 30,
------------------------------------
2001
------------------------------------
Interest
Average and Yield/
Balance (1) Dividends Cost
---------- ---------- ----------
(Dollars in Thousands)
Interest-bearing liabilities:
Savings deposits ..................... $ 23,078 $ 487 2.11%
Interest-bearing demand deposits ..... 53,735 1,015 1.89
Money market accounts ................ 25,839 969 3.75
Certificates of deposit .............. 130,362 7,780 5.97
---------- ----------
Total deposits ..................... 233,014 10,251 4.40
Federal Home Loan Bank advances ........ 66,910 4,229 6.32
---------- ----------
Total interest-bearing liabilities ... 299,924 14,480 4.83
Noninterest-bearing liabilities ........ 24,163
----------
Total average liabilities ............ 324,087
Average equity ......................... 32,855
----------
Total liabilities and equity ......... $ 356,942
==========
Net interest income .................... $ 12,034
Interest rate spread ................... 3.29%
Net interest margin (3) ................ 3.69%
Ratio of average interest-
earning assets to average
interest-bearing liabilities .......... 108.84%
----------
(1) The average loans receivable, net balances include non-accruing loans.
(2) Rates for the three months have been annualized.
(3) Net interest margin, otherwise known as yield on interest earning assets, is
calculated as net interest income divided by average interest-earning
assets.
68
Yields Earned and Rates Paid
The following table sets forth (on a consolidated basis) for the
periods and at the dates indicated, the weighted average yields earned on our
assets, the weighted average interest rates paid on our liabilities, together
with the net yield on interest-earning assets.
Six Months Ended
At March 31, Year Ended September 30,
March 31, ----------------------- ------------------------------------
2004 2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ---------- ----------
Weighted average yield on:
Loans receivable, net ..................... 6.02% 6.21% 7.08% 6.81% 7.66% 8.46%
Loans held for sale ....................... 5.44 5.65 5.95 5.99 6.32 7.21
Investment securities, available for
sale, including interest-bearing
deposits in other banks .................. 2.33 2.46 1.90 2.03 3.18 5.08
Mortgage-backed securities, held
to maturity .............................. 5.23 5.50 6.08 6.02 6.28 6.68
Federal Home Loan Bank stock .............. 4.00 4.50 6.89 6.03 6.13 6.80
Total interest-earning assets ........... 5.84 6.10 6.90 6.55 7.37 8.12
Weighted average rate paid on:
Savings deposits .......................... 0.20 0.29 0.51 0.43 0.87 2.11
Interest-bearing demand deposits .......... 0.26 0.24 0.36 0.27 0.87 1.89
Money market accounts ..................... 0.64 0.61 0.86 0.73 1.86 3.75
Certificates of deposit ................... 2.60 2.92 3.42 3.26 4.31 5.97
Total average deposits .................. 1.52 1.69 2.02 1.90 2.79 4.40
Federal Home Loan Bank advances ........... 4.08 4.23 4.62 4.53 5.14 6.32
Total interest-bearing liabilities ...... 2.22 2.40 2.73 2.62 3.39 4.83
Interest rate spread (spread between
weighted average rate on all
interest-earning assets and all
interest-bearing liabilities) .............. 3.62 3.70 4.17 3.93 3.98 3.29
Net interest margin (net interest
income (expense) as a percentage
of average interest-earning assets) ........ N/A 3.94 4.42 4.19 4.23 3.69
69
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on our net interest income. Information is provided with respect to: (1)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); and (2) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume). Changes in
rate/volume are allocated proportionately to the changes in rate and volume.
Six Months Ended March 31,
2004 Compared to Six Months Year Ended September 30, 2003
Ended March 31, 2003 Compared to September 30, 2002
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------ ------------------------------------
Rate Volume Total Rate Volume Total
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
Interest-earning assets:
Loans receivable, net ..................... $ (10,777) $ 10,567 $ (210) $ (1,721) $ 2,590 $ 869
Loans held for sale ....................... (9) (23) (32) (36) (439) (475)
Investment securities, available for
sale, including interest-bearing
deposits in other banks .................. -- (8) (8) (36) 143 107
Mortgage-backed securities, held
to maturity .............................. (112) (52) (164) (104) (473) (577)
Federal Home Loan Bank stock .............. (98) 59 (39) (5) 73 68
---------- ---------- ---------- ---------- ---------- ----------
Total net change in income on
interest-earning assets $ (10,996) $ 10,543 $ (453) $ (1,902) $ 1,894 $ (8)
========== ========== ========== ========== ========== ==========
Interest-bearing liabilities:
Savings deposits .......................... $ (26) $ -- $ (26) $ (110) $ 16 $ (94)
Interest-bearing demand deposits .......... (53) 23 (30) (436) 83 (353)
Money market accounts ..................... (41) (8) (49) (380) (64) (444)
Certificates of deposit ................... (423) 274 (149) (1,510) 464 (1,046)
---------- ---------- ---------- ---------- ---------- ----------
Total average deposits .................. (543) 289 (254) (2,436) 499 (1,937)
Federal Home Loan Bank advances ........... (82) 96 14 (344) 521 177
---------- ---------- ---------- ---------- ---------- ----------
Total net change in expense on
interest-bearing liabilities $ (625) $ 385 $ (240) $ (2,780) $ 1,020 $ (1,760)
========== ========== ========== ========== ========== ==========
Net change in net interest income ........... $ (213) $ 1,752
========== ==========
Year Ended September 30, 2002
Compared to September 30, 2001
Increase (Decrease) Due to
------------------------------------
Rate Volume Total
---------- ---------- ----------
(In Thousands)
Interest-earning assets:
Loans receivable, net ..................... $ (1,360) $ 1,840 $ 480
Loans held for sale ....................... (53) 241 188
Investment securities, available for
sale, including interest-bearing
deposits in other banks .................. (117) 10 (107)
Mortgage-backed securities, held
to maturity .............................. (170) (23) (193)
Federal Home Loan Bank stock .............. (21) 43 22
---------- ---------- ----------
Total net change in income on
interest-earning assets $ 1,721 $ 2,111 $ 390
========== ========== ==========
Interest-bearing liabilities:
Savings deposits .......................... $ (280) $ (9) $ (289)
Interest-bearing demand deposits .......... (680) 212 (468)
Money market accounts ..................... (1,916) 1,633 (283)
Certificates of deposit ................... (2,146) (48) (2,194)
---------- ---------- ----------
Total average deposits .................. (5,023) 1,789 (3,234)
Federal Home Loan Bank advances ........... (384) 603 219
---------- ---------- ----------
Total net change in expense on
interest-bearing liabilities $ (5,407) $ 2,392 $ (3,015)
========== ========== ==========
Net change in net interest income ........... $ 3,405
==========
70
Asset and Liability Management and Market Risk
General. Our Board of Directors has established an asset and liability
management policy to guide management in maximizing net interest rate spread by
managing the differences in terms between interest-earning assets and
interest-bearing liabilities while maintaining acceptable levels of liquidity,
capital adequacy, interest rate sensitivity, credit risk and profitability. The
policy includes the use of an Asset Liability Management Committee whose members
include certain members of senior management. The Committee's purpose is to
communicate, coordinate and manage our asset/liability positions consistent with
our business plan and Board-approved policies, as well as to price savings and
lending products, and to develop new products. The Asset Liability Management
Committee meets weekly to review various areas including:
. economic conditions;
. interest rate outlook;
. asset/liability mix;
. interest rate risk sensitivity;
. current market opportunities to promote specific products;
. historical financial results;
. projected financial results; and
. capital position.
The Committee also reviews current and projected liquidity needs, although not
necessarily on a weekly basis. As part of its procedures, the Asset Liability
Management Committee regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest income and
market value of portfolio equity, which is defined as the net present value of
an institution's existing assets, liabilities and off-balance sheet instruments,
and evaluating such impacts against the maximum potential change in market value
of portfolio equity that is authorized by the Board of Directors.
Our Risk When Interest Rates Change. The rates of interest we earn on
assets and pay on liabilities generally are established contractually for a
period of time. Market interest rates change over time. Our loans generally have
longer maturities than our deposits. Accordingly, our results of operations,
like those of other financial institutions, are impacted by changes in interest
rates and the interest rate sensitivity of our assets and liabilities. The risk
associated with changes in interest rates and our ability to adapt to these
changes is known as interest rate risk and is our most significant market risk.
How We Measure the Risk of Interest Rate Changes. We measure our
interest rate sensitivity on a monthly basis utilizing an internal model.
Management uses various assumptions to evaluate the sensitivity of our
operations to changes in interest rates. Although management believes these
assumptions are reasonable, the interest rate sensitivity of our assets and
liabilities on net interest income and the market value of portfolio equity
could vary substantially if different assumptions were used or actual experience
differs from such assumptions. Although certain assets and liabilities may have
similar maturities or periods of repricing, they may react differently to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities lag behind changes
in market interest rates. Non-uniform changes and fluctuations in market
interest rates across various maturities will also affect the results presented.
In addition, certain assets, such as adjustable rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. In the event of a significant change in interest rates,
prepayment and early withdrawal levels would likely deviate from those assumed.
The assumptions we use are based upon proprietary and market data and reflect
historical results and current market
71
conditions. These assumptions relate to interest rates, prepayments, deposit
decay rates and the market value of certain assets under the various interest
rate scenarios. An independent service was used to provide market rates of
interest and certain interest rate assumptions to determine prepayments and
maturities of loans, investments and borrowings, and used its own assumptions on
deposit decay rates except for time deposits. Time deposits are modeled to
reprice to market rates upon their stated maturities. We assumed that
non-maturity deposits can be maintained with rate adjustments not directly
proportionate to the change in market interest rates. Our historical deposit
decay rates were used, which are substantially lower than market decay rates. In
the past, we have demonstrated that the tiering structure of our deposit
accounts during changing rate environments results in relatively low volatility
and less than market rate changes in our interest expense for deposits. Our
deposit accounts are tiered by balance and rate, whereby higher balances within
an account earn higher rates of interest. Therefore, deposits that are not very
rate sensitive (generally, lower balance tiers) are separated from deposits that
are rate sensitive (generally, higher balance tiers).
When interest rates rise, we do not have to raise interest rates
proportionately on less rate sensitive accounts to retain these deposits. These
assumptions are based upon an analysis of our customer base, competitive factors
and historical experience. The Office of Thrift Supervision provides us with the
information presented in the following table, which is based on information we
have provided to the Office of Thrift Supervision in determining our interest
rate sensitivity. The table shows the change in our net portfolio value at March
31, 2004 that would occur upon an immediate change in interest rates based on
the Office of Thrift Supervision assumptions, but without giving effect to any
steps that we might take to counteract that change. The net portfolio value is
calculated based upon the present value of the discounted cash flows from assets
and liabilities. The difference between the present value of assets and
liabilities is the net portfolio value and represents the market value of equity
for the given interest rate scenario. Net portfolio value is useful for
determining, on a market value basis, how much equity changes in response to
various interest rate scenarios. Large changes in net portfolio value reflect
increased interest rate sensitivity and generally more volatile earnings
streams.
Net Portfolio as % of
Net Portfolio Value ("NPV") Portfolio Value of Assets
--------------------------------------- -------------------------------
Basis Point Asset Market
Change in Rates Amount $ Change (1) % Change NPV Ratio (2) % Change (3) Value
----------------- --------- -------------- ---------- --------------- -------------- --------------
(Dollars in Thousands)
300 $ 35,396 $ (16,939) (32.37)% 7.38% (2.80)% $ 479,524
200 42,344 (9,991) (19.09) 8.61 (1.56) 491,722
100 48,386 (3,949) (7.55) 9.61 (0.57) 503,477
0 52,335 -- -- 10.18 Base 514,088
(100) 53,071 736 1.41 10.18 521,085
(200) 57,707 5,372 10.26 10.84 0.66 532,551
(300) 57,330 4,995 9.54 10.65 0.47 538,214
Pre-Shock NPV Ratio 10.18
Post-Shock NPV Ratio 8.61
Static Sensitivity Measure - decline in NPV Ratio 1.56
Policy Maximum 3.00%
----------
(1) Represents the increase (decrease) of the estimated net portfolio value at
the indicated change in interest rates compared to the net portfolio value
assuming no change in interest rates.
(2) Calculated as the estimated net portfolio value divided by the portfolio
value of total assets.
(3) Calculated as the increase (decrease) of the net portfolio value ratio
assuming the indicated change in interest rates over the estimated net
portfolio value ratio assuming no change in interest rates.
72
The following table illustrates the change in net interest income at
March 31, 2004 that would occur in the event of an immediate change in interest
rates, with no effect given to any steps that might be taken to counter the
effect of that change in interest rates.
Net Interest Income
------------------------------------------
Basis Point
Change in Rates Amount $ Change (1) % Change
----------------- --------- -------------- ----------
(Dollars in Thousands)
300 $ 18,802 $ (167) (0.88)%
200 18,923 (46) (0.24)
100 19,033 64 (0.34)
0 18,969 Base Base
(100) 18,454 (515) (2.71)
(200) 17,782 (1,187) (6.26)
(300) 16,842 (2,127) (11.21)
----------
(1) Represents the decrease of the estimated net interest income at the
indicated change in interest rates compared to net interest income assuming
no in interest rates.
We use certain assumptions in assessing our interest rate risk. These
assumptions relate to interest rates, loan prepayment rates, deposit decay rates
and the market values of certain assets under differing interest rate scenarios,
among others.
As with any method of measuring interest rate risk, shortcomings are
inherent in the method of analysis presented in the foregoing tables. For
example, although assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in the market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage loans, have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, if interest rates change, expected rates of
prepayments on loans and early withdrawals from certificates of deposit could
deviate significantly from those assumed in calculating the table.
Liquidity and Commitments
We are required to have enough cash flow in order to maintain
sufficient liquidity to ensure a safe and sound operation. Historically, we have
maintained cash flow above the minimum level believed to be adequate to meet the
requirements of normal operations, including potential deposit outflows. On a
quarterly basis, we review and update cash flow projections to ensure that
adequate liquidity is maintained.
Our primary sources of funds are from customer deposits, loan
repayments, loan sales, maturing investment securities and advances from the
Federal Home Loan Bank of Seattle. These funds, together with retained earnings
and equity, are used to make loans, acquire investment securities and other
assets, and fund continuing operations. While maturities and the scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by the level of interest rates,
economic conditions and competition. We believe that our current liquidity
position, and our forecasted operating results are sufficient to fund all of our
existing commitments.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or mortgage-backed securities. On a longer term
basis, we maintain a strategy of investing in various lending products as
described in greater detail under "Business of Home Federal - Lending
Activities." At March 31, 2004, the total approved loan origination
73
commitments outstanding amounted to $12.0 million. At the same date, unused
lines of credit were $19.0 million. We use our sources of funds primarily to
meet ongoing commitments, to pay maturing certificates of deposit and savings
withdrawals, to fund loan commitments and to maintain our portfolio of
mortgage-backed securities and investment securities. Certificates of deposit
scheduled to mature in one year or less at March 31, 2004 totaled $57.3 million.
Although the average cost of deposits has decreased throughout fiscal 2003,
management's policy is to maintain deposit rates at levels that are competitive
with other local financial institutions. Based on historical experience, we
believe that a significant portion of maturing deposits will remain with Home
Federal. In addition, we had the ability at March 31, 2004 to borrow an
additional $85.6 million from the Federal Home Loan Bank of Seattle as a funding
source to meet commitments and for liquidity purposes.
We measure our liquidity based on our ability to fund our assets and to
meet liability obligations when they come due. Liquidity (and funding) risk
occurs when funds cannot be raised at reasonable prices, or in a reasonable time
frame, to meet our normal or unanticipated obligations. We regularly monitor the
mix between our assets and our liabilities to manage effectively our liquidity
and funding requirements.
Our primary source of funds is our deposits. When deposits are not
available to provide the funds for our assets, we use alternative funding
sources. These sources include, but are not limited to: cash management from the
Federal Home Loan Bank of Seattle, wholesale funding, brokered deposits, federal
funds purchased and dealer repurchase agreements, as well as other short-term
alternatives. Alternatively, we may also liquidate assets to meet our funding
needs.
On a quarterly basis, we estimate our liquidity sources and needs for
the coming three-month, six-month, and one-year time periods. Also, we determine
funding concentrations and our need for sources of funds other than deposits.
This information is used by our Asset Liability Management Committee in
forecasting funding needs and investing opportunities.
Capital
Consistent with our goal to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance with regulatory standards. Total equity capital was $42.4 million at
March 31, 2004, or 8.5%, of total assets on that date. As of March 31, 2004, we
exceeded all regulatory capital requirements. Our regulatory capital ratios at
March 31, 2004 were as follows: Tier 1 capital 8.5%; Tier 1 (core) risk-based
capital 13.1%; and total risk-based capital 13.8%. The regulatory capital
requirements to be considered well capitalized are 5%, 6% and 10%, respectively.
See "How We Are Regulated - Regulation and Supervision of Home Federal - Capital
Requirements."
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by
Securities and Exchange Commission ("SEC") rules, and have not had any such
arrangements during the six months ended March 31, 2004 or the three years ended
September 30, 2003.
Impact of Inflation
The Consolidated Financial Statements and related financial data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America. These principles generally
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. The primary
impact of inflation is reflected in the increased cost of our operations. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods
74
and services. In a period of rapidly rising interest rates, the liquidity and
maturity structures of our assets and liabilities are critical to the
maintenance of acceptable performance levels.
The principal effect of inflation on earnings, as distinct from levels
of interest rates, is in the area of noninterest expense. Expense items such as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in dollar value of the collateral securing
loans that we have made. Our management is unable to determine the extent, if
any, to which properties securing loans have appreciated in dollar value due to
inflation.
Recent Accounting Pronouncements
During 2003, the Financial Accounting Standards Board issued the
following accounting standards related to the financial services industry:
Statement of Financial Accounting Standards No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under Statement of Financial Accounting
Standard Board Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement is effective for certain contracts entered
into or modified after June 30, 2003, and for certain hedging relationships
designated after June 30, 2003. Implementation of this Statement is not expected
to have a material impact on our financial position or results of operations.
Statement of Financial Accounting Standard No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. Implementation of this Statement is
not expected to have a material impact on our financial position or results of
operations.
Financial Accounting Standards Board Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This Interpretation requires the
guarantor to recognize as a liability the fair value of the obligation at the
inception of the guarantee. The disclosure requirements in this Interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The recognition provisions are to be applied on a prospective
basis to guarantees issued after December 31, 2002. The adoption of the
recognition provisions of this Interpretation has not had a material impact on
our financial statements or results of operations.
Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities." This Interpretation defined a
variable interest entity as a corporation, partnership, trust or any other legal
structure used for the business purpose that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. This
Interpretation will require a variable interest entity to be consolidated by a
bank if that bank is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual return. The provisions of this Interpretation are required to be
applied immediately to variable interest entities created after January 31,
2003. We do not have any variable interest entities and accordingly the
implementation of this Interpretation did not result in any impact on our
financial position or results of operations.
The Emerging Issues Task Force researched a consensus in Emerging
Issues Task Force 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." The consensus was that certain quantitative
and qualitative disclosures should be required for debt and marketable equity
securities classified as available for sale or held to maturity under Financial
Accounting Standards Board Statement Nos. 115 and 124,
75
that are impaired at the balance sheet date but for which an other-than
temporary impairment has not been recognized. This Emerging Issues Task Force
consensus is effective for fiscal years ending after December 15, 2003. It is
not anticipated that the adoption of the Emerging Issues Task Force consensus
will result in an impact on our statement of financial position or results of
operations.
BUSINESS OF HOME FEDERAL MHC
Home Federal MHC will be a federally-chartered mutual holding company
formed in connection with the mutual holding company reorganization of Home
Federal. Following completion of the reorganization, it will be a mutual holding
company registered with the Office of Thrift Supervision.
Following completion of the reorganization, Home Federal MHC's
principal assets will be a majority of the outstanding common stock of Home
Federal Bancorp and $50,000 in cash it received from Home Federal Bancorp as its
initial capitalization. At the present time, we expect that Home Federal MHC
will not engage in any business activity other than its investment in a majority
of the common stock of Home Federal Bancorp. Federal law and regulations require
that as long as Home Federal MHC is in existence, it must own a majority of Home
Federal Bancorp's common stock. Following completion of the reorganization and
stock offering, Home Federal MHC will own 59.04% of Home Federal Bancorp's
outstanding common stock. Federal law and regulation, and the plan of
reorganization and stock issuance permit Home Federal MHC to convert to the
stock form of organization. For additional information regarding a stock
conversion of Home Federal MHC, see "How We Are Regulated - Regulation and
Supervision of Home Federal Bancorp - Conversion of Home Federal MHC to Stock
Form."
BUSINESS OF HOME FEDERAL BANCORP
Home Federal Bancorp will be a federally-chartered stock corporation
formed as part of the mutual holding company reorganization of Home Federal.
Following completion of the reorganization, it will be a savings and loan
holding company registered with the Office of Thrift Supervision.
Initially following the completion of the stock offering, Home Federal
Bancorp will not be an operating company and will have no significant assets
other than 100% of the outstanding common stock of Home Federal and 50% of the
net proceeds from the stock offering. Home Federal Bancorp will use a portion of
the net proceeds to make a loan to the employee stock ownership plan and will
invest its initial capital as discussed in "How We Intend to Use the Proceeds
from this Offering." At a later date, it may use a portion of the net proceeds
to pay dividends to stockholders and to repurchase shares of common stock,
subject to regulatory limitations.
In the future, as the holding company of Home Federal, Home Federal
Bancorp will be authorized to pursue other business activities permitted by
applicable laws and regulations for savings and loan holding companies, which
may include the acquisition of banking and financial services companies. See
"How We Are Regulated - Regulation and Supervision of Home Federal Bancorp" for
a discussion of the activities that are permitted for savings and loan holding
companies. We currently have no plans regarding any specific acquisition
transaction.
Initially, Home Federal Bancorp will neither own nor lease any property
but will instead use the premises, equipment and furniture of Home Federal with
the payment of appropriate rental fees, as required by applicable law. At the
present time, Home Federal Bancorp intends to employ only persons who are
officers of Home Federal to serve as officers of Home Federal Bancorp. It also
plans to use the support staff of Home Federal from time to time, however, it
will not separately compensate these individuals.
As the savings and loan holding company for Home Federal, the
competitive conditions applicable to Home Federal Bancorp will be the same as
those confronting Home Federal. See "Business of Home Federal - Competition."
76
BUSINESS OF HOME FEDERAL
General
Home Federal was founded in 1920 as a building and loan association and
reorganized as a federal mutual savings and loan association in 1936. Through
the reorganization to mutual holding structure, we are changing our corporate
structure by becoming a federally-chartered stock savings bank and also are
changing our name to "Home Federal Bank."
Our principal business consists of attracting retail deposits from the
general public which we invest primarily in loans secured by first mortgages on
owner-occupied, one- to four-family residences. We also originate multi-family
loans, commercial real estate loans and consumer loans, with an emphasis on home
equity loans.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings accounts, money market deposit
and term certificate accounts and checking accounts. We solicit deposits in our
market areas and, to a lesser extent from other programs nationwide, and we have
accepted brokered deposits on a limited basis.
Market Areas
We intend to continue to operate as an independent community-based
financial institution dedicated to serving the needs of customers primarily in
Ada, Canyon, Elmore and Gem Counties, known as the Treasure Valley region of
southwestern Idaho. Nearly 40% of the state's population lives and works in the
four counties served by Home Federal. Ada County has the largest population and
includes the City of Boise, the state capitol. Home Federal maintains its
largest branch presence in Ada County with seven locations, followed by Canyon
County with five offices, including Home Federal's corporate headquarters in
Nampa. As of June 30, 2003, we had a 5.5% market share of the FDIC-insured
deposits in these two counties, ranking us sixth among all insured depository
institutions in these counties. The two remaining branches are located in Elmore
and Gem Counties.
The local economy is primarily urban with the City of Boise being the
most populous of the markets that we serve, followed by Nampa, the state's
second largest city. The regional economy is well diversified with government,
healthcare, manufacturing, high technology, call centers and construction
providing sources of employment. In addition, agriculture and related industries
continue to be key components of the economy in southwestern Idaho. Generally,
sources of employment are concentrated in Ada and Canyon Counties and include
the headquarters of Micron Technology, Albertsons, Washington Group
International, J.R. Simplot Company and Boise Corporation. Other major employers
include Hewlett-Packard, two regional medical centers and Idaho state government
agencies. The City of Boise is also home to Boise State University, the state's
largest and fastest growing university. The unemployment rate at October 2003 in
the State of Idaho was 4.4%, compared to the U.S. unemployment rate of 5.6%, and
the unemployment rates for Ada, Canyon, Elmore and Gem Counties were 4.1%, 5.9%,
5.2% and 5.9%, respectively. The higher unemployment rates in Canyon and Gem
Counties generally reflect areas that have a small employment base and
experience only modest rates of job growth. Elmore County employment continues
to be positively influenced by Mountain Home Air Force Base and the services
needed to support it.
Lending Activities
General. Historically, our principal lending activity has consisted of
the origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences and loans for the construction of one- to four-family
residences. We also originate consumer loans, with an emphasis on home equity
lines of credit. In 1997, we hired an experienced commercial loan department
manager and began aggressively offering commercial loans and to a lesser extent,
multi-family loans, primarily in the Treasure Valley. A substantial portion of
our loan portfolio is secured by real estate, either as primary or secondary
collateral, located in our primary market area. As of March 31, 2004, the net
loan portfolio totaled $384.0 million and represented 77.3% of our total assets.
As of March 31, 2004, our total loan portfolio was comprised of: 63.4%
single-family home loans, 5.9% home equity loans, 27.3%
77
commercial real estate loans, 1.6% multi-family real estate loans, 0.4%
commercial business loans, and 1.1% secured consumer loans and 0.3% unsecured
consumer loans.
At March 31, 2004, the maximum amount which we could have loaned to any
one borrower and the borrower's related entities under applicable regulations
was $5.3 million. Our internal policy limits loans to one borrower and the
borrower's related entities to the lesser of 80% of the regulatory limit or
1.25% of total loans outstanding, or $5.0 million. At March 31, 2004, we had no
loans or group of loans to related borrowers with outstanding balances in excess
of this amount.
Our largest single borrower relationship was a commercial real estate
loan for $4.0 million made to an individual and secured by a franchise hotel
property that was made in conjunction with a Small Business Administration
lending program. The second largest lending relationship was three commercial
real estate loans with an aggregate balance of $3.6 million secured by
office/professional space, an office warehouse building and an industrial
building. This loan was made to a family trust. The third largest lending
relationship was a commercial real estate loan totaling $5.8 million secured by
a professional building. This loan was made to a family trust and we have sold
$2.8 million of a participation interest to two other financial institutions.
The fourth largest lending relationship was a commercial real estate loan for
$2.9 million secured by a professional office building and made to a
partnership. The fifth largest lending relationship was with a limited liability
company for $2.7 million secured by a mobile home dealership. All of these
loans, including those made to corporations, have personal guarantees in place
as an additional source of repayment. All of the properties securing these loans
are in our primary market area. These loans were performing according to their
terms at March 31, 2004.
78
Loan Portfolio Analysis. The following table sets forth the composition
of Home Federal's loan portfolio by type of loan at the dates indicated.
At September 30,
At March 31, ------------------------------------------------------------
2004 2003 2002 2001
------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Real estate:
One- to four-family
residential (1) .................. $ 241,089 62.21% $ 247,309 65.81% $ 194,088 60.27% $ 173,835 59.35%
Multi-family residential .......... 6,315 1.63 7,750 2.06 7,512 2.33 8,700 2.97
Commercial ........................ 94,519 24.39 79,020 21.02 79,197 24.59 59,752 20.40
--------- ------- --------- ------- --------- ------- --------- -------
Total real estate ............... 341,923 88.23 334,079 88.89 280,797 87.19 242,287 82.72
Real estate construction:
One- to four-family residential ... 4,428 1.14 5,225 1.39 6,505 2.02 13,927 4.75
Multi-family residential .......... -- -- 352 0.09 1,486 0.46 904 0.31
Commercial and land development ... 11,277 2.91 9,128 2.43 6,579 2.04 10,416 3.56
--------- ------- --------- ------- --------- ------- --------- -------
Total real estate construction .. 15,705 4.05 14,705 3.91 14,570 4.52 25,247 8.62
Consumer:
Home equity lines of credit ....... 22,929 5.91 20,640 5.49 18,069 5.61 15,250 5.20
Automobile ........................ 3,095 0.80 1,939 0.52 2,297 0.71 2,133 0.73
Other consumer .................... 2,161 0.56 2,827 0.75 3,666 1.14 4,332 1.48
--------- ------- --------- ------- --------- ------- --------- -------
Total consumer .................. 28,185 7.27 25,406 6.76 24,032 7.46 21,715 7.41
------- ------- ------- -------
Commercial business ................. 1,734 0.45 1,662 0.44 2,641 0.82 3,662 1.25
--------- ------- --------- ------- --------- ------- --------- -------
Total loans ......................... 387,547 100.00% 375,852 100.00% 322,040 100.00% 292,911 100.00%
======= ======= ======= =======
Less:
Net deferred loan origination
(fees) costs ..................... (1,186) (1,370) (2,358) (2,095)
Allowance for loan losses ......... (2,411) (1,853) (1,385) (1,431)
--------- --------- --------- ---------
Loans receivable, net ............... $ 383,950 $ 372,629 $ 318,297 $ 289,385
========= ========= ========= =========
At September 30,
---------------------------------------
2000 1999
------------------ ------------------
Amount Percent Amount Percent
--------- ------- --------- -------
(Dollars in Thousands)
Real estate:
One- to four-family
residential (1) .................. $ 143,576 58.31% $ 111,980 58.47%
Multi-family residential .......... 5,475 2.22 1,676 0.88
Commercial ........................ 44,700 18.15 28,990 15.14
--------- ------- --------- -------
Total real estate ............... 193,751 78.68 142,646 74.49
Real estate construction:
One- to four-family residential ... 21,171 8.60 18,170 9.49
Multi-family residential .......... 1,857 0.75 -- --
Commercial and land development ... 5,516 2.24 6,610 3.45
--------- ------- --------- -------
Total real estate construction .. 28,544 11.59 24,780 12.94
Consumer:
Home equity lines of credit ....... 15,604 6.34 16,145 8.43
Automobile ........................ 1,185 0.48 1,285 0.67
Other consumer .................... 4,128 1.68 4,798 2.51
--------- ------- --------- -------
Total consumer .................. 20,917 8.50 22,228 11.61
------- -------
Commercial business ................. 3,031 1.23 1,851 0.97
Total loans ......................... 246,243 100.00% 191,505 100.00%
======= =======
Less:
Net deferred loan origination
(fees) costs ..................... (1,992) (1,757)
Allowance for loan losses ......... (1,129) (620)
--------- ---------
Loans receivable, net ............... $ 243,122 $ 189,128
========= =========
----------
(1) Does not include loans held for sale of $3.2 million, $5.1 million, $12.7
million, $9.4 million, $4.8 million and $2.1 million at March 31, 2004 and
September 30, 2003, 2002, 2001, 2000 and 1999, respectively.
79
The following table shows the composition of Home Federal's loan
portfolio by fixed and adjustable rate loans at the dates indicated.
At September 30,
At March 31, ------------------------------------------------------------
2004 2003 2002 2001
------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- ------- --------- -------
(Dollars in Thousands)
FIXED RATE LOANS
Real estate:
One- to four-family residential ... $ 194,560 50.21% $ 198,882 52.91% $ 133,697 41.52% $ 102,463 34.98%
Multi-family residential .......... 2,144 0.55 2,137 0.57 2,061 0.64 2,050 0.70
Commercial ........................ 12,947 3.34 8,461 2.25 8,125 2.52 8,005 2.73
--------- ------- --------- ------- --------- ------- --------- -------
Total ............................ 209,651 54.10 209,480 55.73 143,883 44.68 112,518 38.41
Real estate construction:
One- to four-family residential ... 2,790 0.72 4,909 1.31 2,107 0.66 2,863 0.98
Multi-family residential .......... -- -- -- -- -- -- -- --
Commercial and land development ... 817 0.21 2,478 0.66 359 0.11 185 0.06
--------- ------- --------- ------- --------- ------- --------- -------
Total ........................... 3,607 0.93 7,387 1.97 2,466 0.77 3,048 1.04
Consumer:
Home equity ....................... 3,461 0.89 2,906 0.77 129 0.04 144 0.05
Automobile ........................ 3,095 0.80 1,939 0.52 2,297 0.71 2,133 0.73
Other consumer .................... 2,161 0.56 2,827 0.75 3,666 1.14 4,332 1.48
--------- ------- --------- ------- --------- ------- --------- -------
Total ........................... 8,717 2.25 7,672 2.04 6,092 1.89 6,609 2.26
Commercial/business ................. 907 0.23 775 0.21 1,420 0.44 1,362 0.46
--------- ------- --------- ------- --------- ------- --------- -------
Total fixed rate loans .............. 222,882 57.51 225,314 59.95 153,861 47.78 123,537 42.17
ADJUSTABLE RATE LOANS
Real estate:
One- to four-family residential ... 46,529 12.01 48,427 12.89 60,391 18.75 71,372 24.36
Multi-family residential .......... 4,171 1.08 5,613 1.49 5,451 1.69 6,650 2.27
Commercial ........................ 81,572 21.05 70,559 18.77 71,072 22.07 51,747 17.67
--------- ------- --------- ------- --------- ------- --------- -------
Total ........................... 132,272 34.14 124,599 33.15 136,914 42.51 129,769 44.30
At September 30,
---------------------------------------
2000 1999
------------------ ------------------
Amount Percent Amount Percent
--------- ------- --------- -------
(Dollars in Thousands)
FIXED RATE LOANS
Real estate:
One- to four-family residential ... $ 78,169 31.74% $ 74,532 38.92%
Multi-family residential .......... 266 0.11 298 0.16
Commercial ........................ 10,199 4.14 7,948 4.15
--------- ------- --------- -------
Total ............................ 88,634 35.99 82,778 43.23
Real estate construction:
One- to four-family residential ... 2,768 1.12 1,633 0.85
Multi-family residential .......... -- -- -- --
Commercial and land development ... -- -- 90 0.05
--------- ------- --------- -------
Total ........................... 2,768 1.12 1,723 0.90
Consumer:
Home equity ....................... 155 0.06 109 0.06
Automobile ........................ 1,185 0.48 1,285 0.67
Other consumer .................... 4,128 1.68 4,798 2.50
--------- ------- --------- -------
Total ........................... 5,468 2.22 6,192 3.23
Commercial/business ................. 1,478 0.60 1,102 0.58
--------- ------- --------- -------
Total fixed rate loans .............. 98,348 39.93 91,795 47.94
ADJUSTABLE RATE LOANS
Real estate:
One- to four-family residential ... 65,407 26.56 37,448 19.55
Multi-family residential .......... 5,209 2.12 1,378 0.72
Commercial ........................ 34,501 14.01 21,042 10.99
--------- ------- --------- -------
Total ........................... 105,117 42.69 59,868 31.26
(table continues on following page)
80
At September 30,
At March 31, ------------------------------------------------------------
2004 2003 2002 2001
------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Real estate construction:
One- to four-family residential ... 1,638 0.42 316 0.08 4,398 1.37 11,064 3.78
Multi-family residential .......... -- -- 352 0.09 1,486 0.46 904 0.31
Commercial and land
development ...................... 10,460 2.70 6,650 1.77 6,220 1.93 10,231 3.49
--------- ------- --------- ------- --------- ------- --------- -------
Total .......................... 12,098 3.12 7,318 1.94 12,104 3.76 22,199 7.58
Consumer:
Home equity lines ................. 19,468 5.02 17,734 4.72 17,940 5.57 15,106 5.16
Automobile ........................ -- -- -- -- -- -- -- --
Other consumer .................... -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
Total consumer ................. 19,468 5.02 17,734 4.72 17,940 5.57 15,106 5.16
Commercial/business ................. 827 0.21 887 0.24 1,221 0.38 2,300 0.79
--------- ------- --------- ------- --------- ------- --------- -------
Total adjustable rate loans ......... 164,665 42.49 150,538 40.05 168,179 52.22 169,374 57.83
--------- ------- --------- ------- --------- ------- --------- -------
Total loans ......................... 387,547 100.00% 375,852 100.00% 322,040 100.00% 292,911 100.00%
======= ======= ======= =======
Less:
Net deferred loan origination
(fees) costs ..................... (1,186) (1,370) (2,358) (2,095)
Allowance for loan losses ......... (2,411) (1,853) (1,385) (1,431)
--------- --------- --------- ---------
Loans receivable, net ............... $ 383,950 $ 372,629 $ 318,297 $ 289,385
========= ========= ========= =========
At September 30,
---------------------------------------
2000 1999
------------------ ------------------
Amount Percent Amount Percent
--------- ------- --------- -------
(Dollars in Thousands)
Real estate construction:
One- to four-family residential ... 18,403 7.47 16,537 8.64
Multi-family residential .......... 1,857 0.76 -- --
Commercial and land
development ...................... 5,516 2.24 6,520 3.40
--------- ------- --------- -------
Total .......................... 25,776 10.47 23,057 12.04
Consumer:
Home equity lines ................. 15,449 6.28 16,036 8.37
Automobile ........................ -- -- -- --
Other consumer .................... -- -- -- --
--------- ------- --------- -------
Total consumer ................. 15,449 6.28 16,036 8.37
Commercial/business ................. 1,553 0.63 749 0.39
--------- ------- --------- -------
Total adjustable rate loans ......... 147,895 60.07 99,710 52.06
--------- ------- --------- -------
Total loans ......................... 246,243 100.00% 191,505 100.00%
======= =======
Less:
Net deferred loan origination
(fees) costs ..................... (1,992) (1,757)
Allowance for loan losses ......... (1,129) (620)
--------- ---------
Loans receivable, net ............... $ 243,122 $ 189,128
========= =========
81
One- to Four-Family Residential Real Estate Lending. As of March 31,
2004, $241.1 million, or 62.2%, of our total loan portfolio consisted of
permanent loans secured by one- to four-family residences. We originate both
fixed rate loans and adjustable rate loans in our residential lending program.
Generally, 30 year fixed rate loans are originated to meet the requirements for
sale in the secondary market to Fannie Mae and Freddie Mac. We do from time to
time, however, retain a portion of the fixed rate loans that we originate,
particularly loans with maturities of 20 years or less, in our loan portfolio to
meet management's asset and liability objectives. At March 31, 2004, $194.6
million, or 80.7%, of our permanent one- to four-family loan portfolio consisted
of fixed rate loans.
We also offer adjustable rate mortgage loans at rates and terms
competitive with market conditions. All of the adjustable rate mortgage loans we
originate are retained in the loan portfolio and are not originated for the
purpose of selling them in the secondary market, although they do conform to
secondary market standards. We offer several adjustable rate mortgage products
which adjust annually after an initial period ranging from one to ten years.
Contractual annual adjustments are generally limited to increases or decreases
of no more than two percent, subject to a maximum increase of no more than six
percent from the rate offered at the time of origination. The adjustable rate
mortgage loans held in our portfolio do not permit negative amortization of
principal and generally carry no prepayment restrictions. Borrower demand for
adjustable rate mortgage loans versus fixed rate mortgage loans is a function of
the level of interest rates, the expectations of changes in the level of
interest rates and the difference between the initial interest rates and fees
charged for each type of loan. The relative amount of fixed rate mortgage loans
and adjustable rate mortgage loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. At March 31,
2004, we had $46.5 million, or 19.1%, of our permanent one- to four-family
mortgage loans in adjustable rate loans.
The retention of adjustable rate mortgage loans in our loan portfolio
helps us reduce our exposure to changes in interest rates. There are, however,
credit risks resulting from the potential of increased interest to be paid by
the customer as a result of increases in interest rates. It is possible that,
during periods of rising interest rates, the risk of default on adjustable rate
mortgage loans may increase as a result of repricing and the increased costs to
the borrower. Furthermore, because adjustable rate mortgage loans may be offered
at initial rates of interest below the rates that would apply were the
adjustment index used for pricing initially, these loans may be subject to
increased risks of default or delinquency. This issue is of particular concern
in the low interest rate environment we have experienced since 2001. Another
consideration is that although adjustable rate mortgage loans allow us to
increase the sensitivity of our asset base as a result of changes in the
interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limits. Because of these
considerations, there is no assurance that yields on adjustable rate mortgage
loans will be sufficient to offset increases in our cost of funds, particularly
in today's low interest rate environment.
We generally underwrite our one- to four-family loans based on the
applicant's employment and credit history and the appraised value of the subject
property. Presently, we lend up to 80% of the lesser of the appraised value or
purchase price for one- to four-family residential loans. In situations where we
grant a loan with a loan-to-value ratio in excess of 80%, we require private
mortgage insurance in order to reduce our exposure to 80% or less. Properties
securing our one- to four-family loans are generally appraised by independent
fee appraisers approved by the Board of Directors. We require our borrowers to
obtain title and hazard insurance, and flood insurance, if necessary, in an
amount not less than the value of the property improvements.
Our fixed rate, single family residential mortgage loans are normally
originated with 15 to 30 year terms, although these loans typically remain
outstanding for substantially shorter periods, particularly in the declining
interest rate environment since 2001. In addition, substantially all residential
mortgage loans in our loan portfolio contain due-on-sale clauses, which allow us
to declare the unpaid amount of the loan due and payable upon the sale of the
property securing the loan. Typically, we enforce these due-on-sale clauses to
the extent permitted by law and as a standard course of business. The average
loan maturity is a function of, among other factors, the level of purchase and
sale activity in the real estate market, prevailing interest rates and the
interest rates payable on outstanding loans.
82
At March 31, 2004, $24.7 million, or 6.4%, of our total loans consisted
of loans for non-owner occupied properties. This consisted of $9.2 million of
loans on second homes, $14.3 million of loans for investment and $1.2 million of
short term construction loans on investment properties. Loans secured by one to
two units are generally made with loan-to-value ratios of up to 90% and loans
secured by three units or more are made with loan-to-value ratios of up to 75%.
In an effort to provide financing for moderate income and first-time
buyers, we participate in the Idaho Housing and Finance Association's Single
Family Mortgage Program. The Idaho Housing and Finance Association is a
non-profit organization that provides housing resources to low-to
moderate-income families through various below market housing programs. The
program is designed to meet the needs of qualified borrowers in the low-to
moderate-income brackets. The program has established income limits based on
family size and sales price limits for both existing and new construction. We
offer residential mortgage loans through this program to qualified individuals
and originate the loans using modified underwriting guidelines. All of these
loans have private mortgage insurance on the portion of the principal amount
that exceeds 80% of the appraised value of the property. We sold loans of $4.3
million and $1.9 million to the Idaho Housing and Finance Association in the
year ended September 30, 2003 and six months ended March 31, 2004, respectively.
The Idaho Housing and Finance Association also has available a Down
Payment and Closing Cost Assistance Program that provides funds to qualified
borrowers for the purchase of a home. The maximum grant for households with
income of 80% or less of the median county income is $2,000. Households with
income greater than 80% but not exceeding 100% of the median county income are
eligible for a grant of up to $1,000.
Construction and Land Development Loans. We have been an active
originator of construction and land development loans in our market area for
many years. At March 31, 2004, our construction and land development loans
amounted to $15.7 million, or 4.1%, of the total loan portfolio. At March 31,
2004, our construction lending includes loans to individuals for the
construction of personal residences, which amounted to approximately $2.0
million, and loans to residential developers, which amounted to approximately
$2.4 million. At March 31, 2004, the unadvanced portion of residential
construction loans in process amounted to $4.1 million.
The following table shows the composition of the construction permanent
loans portfolio. At the dates indicated, the composition of our construction
loan portfolio was as follows:
At September 30,
At March 31, ---------------------
2004 2003 2002
------------ --------- ---------
(In Thousands)
One- to four-family residential:
Construction speculative ....................... $ 2,011 $ 1,185 $ 2,039
Construction permanent ......................... 2,008 3,351 2,848
Custom construction ............................ 409 689 1,618
Multi-family residential:
Construction permanent ......................... -- 352 1,486
Commercial real estate:
Construction permanent ......................... 7,618 7,275 5,842
Land development loans ........................... 3,659 1,853 737
------------ --------- ---------
Total construction and land development .......... $ 15,705 $ 14,705 $ 14,570
============ ========= =========
Our construction loans to individuals to build their personal
residences typically are structured as construction/permanent loans whereby
there is one closing for both the construction loan and the permanent
83
financing. During the construction phase, which typically lasts for six months,
our staff appraiser or an approved fee inspector makes periodic inspections of
the construction site and loan proceeds are disbursed directly to the
contractors or borrowers as construction progresses. Typically, disbursements
are made in five draws during the construction period. Construction loans
require payment of interest only during the construction phase and are
structured to be converted to fixed rate permanent loans at the end of the
construction phase. Prior to making a commitment to fund a construction loan, we
require an appraisal of the property by an independent fee appraiser or our
in-house appraiser. Our staff appraiser or an approved fee inspector also
reviews and inspects each project prior to every disbursement of funds during
the term of the construction loan. Loan proceeds are disbursed based on a
percentage of completion.
During the year ended September 30, 2003 and six months ended March 31,
2004, we originated $22.5 million and $10.6 million, respectively, of short-term
builder construction loans to fund the construction of one- to four-family
residential properties. Most loans are written with maturities of one year, have
interest rates that are tied to the prime rate plus a margin, and are subject to
monthly rate adjustment with the movement of the prime rate. All
builder/borrowers are underwritten to the same standards as other commercial
loan credits, requiring minimum debt service coverage ratios and established
cash reserves to carry projects through construction completion and on to
project sale. The maximum loan-to-value ratio on both pre-sold and speculative
projects is 80%. There were no default or foreclosure actions involving builder
construction loans during the year ended September 30, 2003 or six months ended
March 31, 2004, with all loans performing according to their terms. We plan to
expand the residential builder construction lending operation during the year
ending September 30, 2004, which may create additional loan portfolio credit
risk.
We originate construction and site development loans to contractors and
developers primarily to finance the construction of single-family homes and
subdivisions. Loans to finance the construction of single-family homes and
subdivisions are generally offered to experienced builders and developers in our
primary market area. Residential subdivision development loans are typically
offered with terms of up to 36 months. The maximum loan-to-value limit
applicable to these loans is 75% of the appraised prospective discounted value
upon completion of the project. Construction loan proceeds are disbursed
periodically in increments as construction progresses and as inspection by our
approved inspectors warrant. At March 31, 2004, our largest subdivision
development loan had an outstanding principal balance of $1.4 million and was
secured by a first mortgage lien. This loan was performing according to its
original terms at March 31, 2004. At March 31, 2004, we estimate that the
average outstanding principal balance of subdivision loans to contractors and
developers was approximately $915,000.
We also make construction loans for commercial development projects.
The projects include multi-family, apartment, retail, office/warehouse and
office buildings. These loans generally have an interest-only phase during
construction, and generally convert to permanent financing when construction is
completed. Disbursement of funds is at our sole discretion and is based on the
progress of construction. The maximum loan-to-value limit applicable to these
loans is 80% of the appraised post-construction value.
We originate land loans to local contractors and developers for the
purpose of holding the land for future development. These loans are secured by a
first lien on the property, are limited to 65% of the lower of the acquisition
price or the appraised value of the land, and generally have a term of up to two
years with a floating interest rate based on our internal base rate. Our land
loans are generally secured by property in our primary market area. We require
title insurance and, if applicable, a hazardous waste survey reporting that the
land is free of hazardous or toxic waste.
Construction financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan depends largely upon the accuracy of
the initial estimate of the property's value at completion of construction
compared to the estimated cost, including interest, of construction and other
assumptions. Additionally, if the estimate of value proves to be inaccurate, we
may be confronted with a project, when completed, having a value less than the
loan amount. We have attempted to minimize these risks by generally
concentrating on residential construction loans in our market area to
contractors with whom we have established relationships.
84
Multi-Family and Commercial Real Estate Lending. We have originated
commercial real estate loans, and to a lesser extent multi-family loans, since
1997 when we hired an experienced commercial lender. Loans are underwritten by
designated lending staff or loan committee depending on the size of the loan. As
of March 31, 2004, $6.3 million, or 1.6%, and $105.8 million, or 27.3%, of our
total loan portfolio was secured by multi-family and commercial real estate
property, respectively.
We actively pursue multi-family and commercial real estate loans. These
loans generally are priced at a higher rate of interest than one- to four-family
residential loans. Typically, these loans have higher loan balances, are more
difficult to evaluate and monitor, and involve a greater degree of risk than
one- to four-family residential loans. Often payments on loans secured by
multi-family or commercial properties are dependent on the successful operation
and management of the property; therefore, repayment of these loans may be
affected by adverse conditions in the real estate market or the economy. We
generally require and obtain loan guarantees from financially capable parties
based upon the review of personal financial statements. If the borrower is a
corporation, we generally require and obtain personal guarantees from the
corporate principals based upon a review of their personal financial statements
and individual credit reports. The multi-family and commercial real estate loan
portfolio is relatively unseasoned and contains a higher risk of default and
loss than the single-family residential loan portfolio.
The average size loan in our multi-family and commercial real estate
loan portfolio was $526,000 as of March 31, 2004. As of that date, $6.3 million,
or 1.6%, of our total loan portfolio was secured by multi-family dwellings
located primarily in our market area. We target individual multi-family and
commercial real estate loans to small- and mid-size owner occupants and
investors between $500,000 and $2.0 million; however, we can by policy originate
loans to one borrower up to 80% of our regulatory limit, or 1.25% of our total
outstanding loans. As of March 31, 2004, the maximum we could lend to any one
borrower based on this limit was $5.0 million. The largest multi-family loan as
of March 31, 2004 was a 44-unit residential apartment complex with an
outstanding principal balance at March 31, 2004 of $1.8 million located in
Canyon County. This loan is performing according to its terms as of March 31,
2004.
Multi-family and commercial real estate loans up to $500,000 can be
approved by the Vice President and Manager of the Commercial Lending Department,
the Chief Lending Officer or the President and Chief Executive Officer. Loans up
to $1.5 million can be approved by the combined authority of these three
individuals. Our Management Loan Committee, which presently consists of the
President and Chief Executive Officer, the Chief Lending Officer, the
Residential Lending Operations Manager and the Commercial Loan Department
Manager, is authorized to approve loans to one borrower or a group of related
borrowers of up to $1.5 million in the aggregate, with no single loan over $1.5
million. Loans over these amounts or outside our general underwriting guidelines
must be approved by the Board of Directors.
We offer both fixed and adjustable rate loans on multi-family and
commercial real estate loans. Loans originated on a fixed rate basis generally
are originated at fixed terms up to ten years, with amortization terms up to 25
years. As of March 31, 2004, we had $105.8 million in commercial real estate
loans and $6.3 million in multi-family residential loans.
Multi-family residential and commercial real estate adjustable rate
loans are originated with variable rates that generally adjust after an initial
period ranging from five to ten years. Adjustable rate multi-family residential
and commercial real estate loans are generally priced utilizing the Five Year
U.S. Treasury Constant Maturity Index plus a margin of 2.75% to 3.75%, with
principal and interest payments fully amortizing over terms up to 25 years.
These loans generally have a prepayment penalty. As of March 31, 2004, we had
$4.2 million in adjustable rate multi-family residential loans and $92.0 million
in adjustable rate commercial real estate loans. Both adjustable rate mortgages
and fixed rate mortgages generally allow provisions for assumption of a loan by
another borrower subject to lender approval and a 1% assumption fee. The maximum
loan-to-value ratio for multi-family residential loans is generally 80% on
purchases and refinances. The maximum loan-to-value ratio for commercial real
estate loans is generally 80% for both purchases and refinances. We require
appraisals of all properties securing multi-family residential and commercial
real estate loans. Appraisals are performed by independent appraisers designated
by us
85
or by our staff appraiser. We require our multi-family residential and
commercial real estate loan borrowers with outstanding balances in excess of
$250,000 to submit annual financial statements and rent rolls on the subject
property. We also inspect the subject property at least every three to five
years if the loan balance exceeds $500,000. We generally require a minimum pro
forma debt coverage ratio of 1.2 times for loans secured by multi-family
residential and commercial properties except for a few loans to religious
organizations which have a debt coverage ratio of 1.0 times.
We originate commercial real estate loans, including hotels, office
space, office/warehouse, retail strip centers, mobile home dealership,
mini-storage facilities, medical and professional, retail and churches located
in our Idaho market area. Commercial real estate loans totaled $105.8 million,
or 27.3%, of our total loan portfolio as of March 31, 2004.
Consumer Lending. We offer a variety of consumer loans to our
customers, including, primarily, home equity loans and lines of credit, savings
account loans, automobile loans, recreational vehicle loans and personal
unsecured loans. Generally, consumer loans have shorter terms to maturity and
higher interest rates than mortgage loans. The maximum term we offer on
automobile loans is 72 months and is applicable to new and one year old cars and
light trucks. In addition, we offer loan terms of up to 120 months on motor
homes, and qualifying travel trailers and boats. All automobile loans are risk
priced based on the percentage of cost, or established value, being financed.
Consumer loans are made with both fixed and variable interest rates and with
varying terms. At March 31, 2004, consumer loans amounted to $28.2 million, or
7.3%, of the total loan portfolio.
At March 31, 2004, the largest component of the consumer loan portfolio
consisted of real estate secured loans and home equity lines of credit, which
totaled $22.9 million, or 5.9%, of the total loan portfolio. Home equity lines
of credit are made for, among other purposes, the improvement of residential
properties, debt consolidation and education expenses. The majority of these
loans are secured by a first or second mortgage on residential property. The
maximum loan-to-value ratio is 89.9% or less, when taking into account both the
balance of the home equity line of credit and the first mortgage loan. Home
equity lines of credit allow for a ten-year draw period, plus an additional ten
year repayment period, and the interest rate is tied to the prime rate as
published in The Wall Street Journal, and may include a margin.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In these cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount that can be recovered on
these loans. These risks are not as prevalent with respect to our consumer loan
portfolio because a large percentage of the portfolio consists of home equity
lines of credit that are underwritten in a manner such that they result in
credit risk that is substantially similar to one- to four-family residential
mortgage loans. Nevertheless, home equity lines of credit have greater credit
risk than one- to four-family residential mortgage loans because they are
secured by mortgages subordinated to the existing first mortgage on the
property, which we may or may not hold and do not have private mortgage
insurance coverage. At March 31, 2004, there were $53,000 of consumer loans
delinquent in excess of 90 days or in nonaccrual status. During the six months
ended March 31, 2004 and the years ended September 30, 2003 and 2002, we charged
off $51,000, $147,000 and $114,000, respectively, in consumer loans.
Commercial Business Lending. At March 31, 2004, commercial business
loans totaled $1.7 million, or 0.5%, of our loan portfolio. Our commercial
business lending policy includes credit file documentation and analysis of the
borrower's background, capacity to repay the loan, the adequacy of the
borrower's capital and collateral, as well as an evaluation of other conditions
affecting the borrower. Analysis of the borrower's past, present and future
86
cash flows is also an important aspect of our credit analysis. We generally
obtain personal guarantees on our commercial business loans. Nonetheless, these
loans are believed to carry higher credit risk than single family loans.
Unlike residential mortgage loans, commercial business loans are
typically made on the basis of the borrower's ability to make repayment from the
cash flow of the borrower's business. As a result, the availability of funds for
the repayment of commercial business loans may be substantially dependent on the
success of the business itself, which is often dependent in part upon general
economic conditions. Our commercial business loans are usually, but not always,
secured by business assets. However, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
Loan Maturity and Repricing. The following table sets forth certain
information at March 31, 2004 regarding the dollar amount of loans maturing in
Home Federal's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity are reported as
due in one year or less. Loan balances do not include undisbursed loan proceeds,
unearned discounts, unearned income and allowance for loan losses.
After After After
1 Year 3 Years 5 Years
Within Through Through Through Beyond
1 Year 3 Years 5 Years 10 Years 10 Years Total
--------- --------- --------- --------- --------- ---------
(In Thousands)
Real estate:
One- to four-family residential ...... $ 13,292 $ 15,983 $ 12,896 $ 22,329 $ 176,589 $ 241,089
Multi-family residential ............. 366 1,558 1,772 495 2,124 6,315
Commercial ........................... 8,340 31,485 33,156 19,041 2,497 94,519
--------- --------- --------- --------- --------- ---------
Total real estate .................. 21,998 49,026 47,824 41,865 181,210 341,923
Real estate construction:
One- to four-family residential ...... 2,255 165 36 174 1,798 4,428
Multi-family residential ............. -- -- -- -- -- --
Commercial and land development ...... 952 3,524 1,424 1,436 3,941 11,277
--------- --------- --------- --------- --------- ---------
Total real estate construction ..... 3,207 3,689 1,460 1,610 5,739 15,705
Consumer:
Home equity .......................... 19,519 50 38 506 2,816 22,929
Automobile ........................... 40 675 928 1,452 -- 3,095
Other consumer ....................... 830 1,077 138 67 49 2,161
--------- --------- --------- --------- --------- ---------
Total consumer ..................... 20,389 1,802 1,104 2,025 2,865 28,185
Commercial business .................... 1,012 205 150 367 -- 1,734
--------- --------- --------- --------- --------- ---------
Total .................................. $ 46,606 $ 54,722 $ 50,538 $ 45,867 $ 189,814 $ 387,547
========= ========= ========= ========= ========= =========
87
The following table sets forth the dollar amount of all loans due one
year or more after March 31, 2004, which have fixed interest rates and have
floating or adjustable interest rates.
Floating or
Adjustable Fixed
Rate Rates Total
----------- --------- ---------
(In Thousands)
Real estate:
One- to four-family residential ................ $ 33,237 $ 194,560 $ 227,797
Multi-family residential ....................... 3,805 2,144 5,949
Commercial ..................................... 73,312 12,867 86,179
--------- --------- ---------
Total real estate ............................ 110,354 209,571 319,925
Real estate construction:
One- to four-family residential ................ 375 1,798 2,173
Multi-family residential ....................... -- -- --
Commercial ..................................... 10,325 -- 10,325
--------- --------- ---------
Total real estate construction ............... 10,700 1,798 12,498
Consumer:
Home equity .................................... -- 3,410 3,410
Automobile ..................................... -- 3,055 3,055
Other consumer ................................. -- 1,331 1,331
--------- --------- ---------
Total consumer ............................... -- 7,796 7,796
Commercial business .............................. -- 722 722
--------- --------- ---------
Total ............................................ $ 121,054 $ 219,887 $ 340,941
========= ========= =========
Loan Solicitation and Processing. Loan originations are obtained from a
variety of sources, including walk-in customers, loan brokers for primarily
multi-family and commercial loans, and referrals from builders and realtors.
Residential real estate loans are solicited through media advertising, direct
mail to existing customers and by realtor referrals. We are also in the process
of developing a program to accept broker-originated one- to four-family loans.
Loan originations are further supported by lending services offered through our
Internet web site, advertising, cross-selling and through our employees'
community service.
Upon receipt of a loan application from a prospective borrower, we
obtain a credit report and other data to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of the
real estate offered as collateral generally is undertaken by an appraiser we
have retained and who is licensed in the State of Idaho and has been approved by
the Board of Directors.
Mortgage loan applications are initiated by loan officers and are
required to be approved by our underwriting staff that have Board-approved
lending authority. Loans that exceed the lending authority must be approved by
one or more members of the Management Loan Committee. All loans up to and
including $1.5 million may be approved by the Management Loan Committee without
Board approval; loans in excess of $1.5 million and up to $4.9 million must be
approved by the Board Loan Committee and loans over $4.9 million by the entire
Board of Directors.
We require title insurance on all real estate loans, fire and casualty
insurance on all secured loans and on home equity lines of credit where the
property serves as collateral.
88
Loan Originations, Servicing, Purchases and Sales. During the six
months ended March 31, 2004 and the year ended September 30, 2003, our total
loan originations were $91.0 million and $361.7 million, respectively.
One- to four-family home loans are generally originated in accordance
with the guidelines established by Freddie Mac and Fannie Mae, with the
exception of our special community development loans under the Community
Reinvestment Act. We originate residential first mortgages and service them
using an in-house mortgage system. We utilize the Freddie Mac Loan Prospector
and Fannie Mae Desktop Underwriter automated loan systems to underwrite
approximately 95% of our residential first mortgage loans (excluding community
development loans). The remaining loans are underwritten by designated real
estate loan underwriters internally in accordance with standards as provided by
our Board-approved loan policy.
We actively sell residential first mortgage loans to the secondary
market. Generally, all 30-year fixed rate residential mortgages are sold to the
secondary market at the time of origination. Fixed rate residential mortgage
loans with terms of 20 years or less and adjustable rate mortgage loans are
generally held in our portfolio. During the years ended September 30, 2003, 2002
and 2001 we sold $164.0 million, $93.0 million and $70.0 million to the
secondary market representing 56.8%, 57.2% and 61.2% of total one- to
four-family residential loans, respectively. Our primary secondary market
relationship has been with Freddie Mac and Fannie Mae, and more recently with
the Federal Home Loan Bank of Seattle. We generally retain the servicing on the
majority of loans sold into the secondary market. Loans are generally sold on a
non-recourse basis. As of March 31, 2004, our loan servicing portfolio was
$258.3 million.
Multi-family and commercial real estate loans are underwritten by
designated lending staff or our Management Loan Committee depending on the size
of the loan and are serviced by the commercial loan department.
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The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Six Months Ended
March 31, Year Ended September 30,
---------------------- -----------------------------------
2004 2003 2003 2002 2001
--------- --------- --------- --------- ---------
(In Thousands)
Loans originated:
Real Estate:
One- to four-family residential (1) .. $ 43,389 $ 154,499 $ 289,175 $ 162,092 $ 114,163
Multi-family residential ............. 51 -- 664 862 4,028
Commercial ........................... 21,730 9,855 20,539 19,899 17,680
--------- --------- --------- --------- ---------
Total real estate .................. 65,170 164,354 310,378 182,853 135,871
Real Estate Construction:
One- to four-family residential ...... 10,628 9,177 22,494 21,823 42,132
Multi-family residential ............. -- 618 900 581 747
Commercial and land development ...... 5,715 3,128 9,471 9,277 13,455
--------- --------- --------- --------- ---------
Total real estate construction ..... 16,343 12,923 32,865 31,681 56,334
Consumer:
Automobile loans ..................... 1,620 562 968 1,260 1,634
Home equity loans .................... 6,880 5,167 14,903 14,715 7,540
Other consumer ....................... 358 484 1,332 2,009 3,625
--------- --------- --------- --------- ---------
Total consumer ..................... 8,858 6,213 17,203 17,984 12,799
Commercial business .................... 669 951 1,220 2,030 2,729
--------- --------- --------- --------- ---------
Total loans originated ............. 91,040 184,441 361,666 234,548 207,733
Loans sold:
Total whole loans sold ............... (34,902) (87,404) (164,322) (92,786) (69,872)
Participation loans .................. (2,800) -- -- -- --
--------- --------- --------- --------- ---------
Total loans sold ................... (37,702) (87,404) (164,322) (92,786) (69,872)
Principal repayments ................... (41,644) (79,025) (143,283) (110,339) (90,706)
Loans securitized ...................... -- -- -- -- --
Transfer to real estate owned .......... -- (249) (249) (2,435) (334)
Increase (decrease) in other items (net) (375) (60) 521 (77) (557)
Loans held for sale .................... (1,905) (9,240) (7,656) 3,355 4,586
--------- --------- --------- --------- ---------
Net increase in loans receivable, net .. $ 9,414 $ 8,463 $ 46,677 $ 32,266 $ 50,850
========= ========= ========= ========= =========
--------
(1) Includes loans held for sale of $24.3 million and $75.7 million for the six
months ended March 31, 2004 and 2003, respectively, and $141.1 million,
$85.0 million and $65.5 million for the years ended September 30, 2003,
2002 and 2001, respectively.
Loan Origination and Other Fees. In some instances, we receive loan
origination fees on real estate related products. Loan fees generally represent
a percentage of the principal amount of the loan that is paid by the borrower.
Accounting standards require that certain fees received, net of certain
origination costs, be deferred and amortized over the contractual life of the
loan. Net deferred fees or costs associated with loans that are prepaid or sold
are recognized as income at the time of prepayment. We had $1.2 million of net
deferred loan fees and costs as of March 31, 2004.
90
Asset Quality
The objective of our loan review process is to determine risk levels
and exposure to loss. The depth of review varies by asset types, depending on
the nature of those assets. While certain assets may represent a substantial
investment and warrant individual reviews, other assets may have less risk
because the asset size is small, the risk is spread over a large number of
obligors or the obligations are well collateralized and further analysis of
individual assets would expand the review process without measurable advantage
to risk assessment. Asset types with these characteristics may be reviewed as a
total portfolio on the basis of risk indicators such as delinquency (consumer
and residential real estate loans) or credit rating. A formal review process is
conducted on individual assets that represent greater potential risk. A formal
review process is a total re-evaluation of the risks associated with the asset
and is documented by completing an asset review report. Certain real
estate-related assets must be evaluated in terms of their fair market value or
net realizable value in order to determine the likelihood of loss exposure and,
consequently, the adequacy of valuation allowances.
We define a loan as being impaired when, based on current information
and events, it is probable that we will be unable to collect all amounts due
under the contractual terms of the loan agreement. We consider one- to
four-family mortgage loans and consumer installment loans to be homogeneous and,
therefore, do not separately evaluate them for impairment. All other loans are
evaluated for impairment on an individual basis.
We generally assess late fees or penalty charges on delinquent loans of
five percent of the monthly principal and interest amount. Substantially all
fixed rate and adjustable rate mortgage loan payments are due on the first day
of the month, however, the borrower is given a 15-day grace period to make the
loan payment. When a mortgage loan borrower fails to make a required payment
when it is due, we institute collection procedures. The first notice is mailed
to the borrower on the 16th day requesting payment and assessing a late charge.
Attempts to contact the borrower by telephone generally begin upon the 30th day
of delinquency. If a satisfactory response is not obtained, continual follow-up
contacts are attempted until the loan has been brought current. Before the 90th
day of delinquency, attempts to interview the borrower are made to establish the
cause of the delinquency, whether the cause is temporary, the attitude of the
borrower toward the debt and a mutually satisfactory arrangement for curing the
default.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, we institute the same collection
procedures as for our mortgage loan borrowers.
The Board of Directors is informed monthly as to the status of all
mortgage and consumer loans that are delinquent by more than 30 days, and is
given information regarding classified assets.
If a borrower is chronically delinquent and all reasonable means of
obtaining payments have been exercised, we will seek to recover any collateral
securing the loan according to the terms of the security instrument and
applicable law. In the event of an unsecured loan, we will either seek legal
action against the borrower or refer the loan to an outside collection agency.
91
The following table shows our delinquent loans by the type of loan and
number of days delinquent as of March 31, 2004:
Loans Delinquent For:
---------------------------------------------- Total
60-89 Days Over 90 Days Delinquent Loans
-------------------- ---------------------- ---------------------
Principal Principal Principal
Number Balance Number Balance Number Balance
of Loans Loans of Loans Loans of Loans Loans
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
Real estate:
One- to four-family residential ................ 5 $ 426 4 $ 285 9 $ 711
Multi-family residential ....................... -- -- -- -- -- --
Commercial ..................................... -- -- -- -- -- --
------ --------- ------ --------- ------ ---------
Total real estate ............................ 5 426 4 285 9 711
Real estate construction:
One- to four-family residential ................ -- -- -- -- -- --
Multi-family residential ....................... -- -- -- -- -- --
Commercial and land
development .................................. -- -- -- -- -- --
------ --------- ------ --------- ------ ---------
Total real estate construction ............... -- -- -- -- -- --
Consumer:
Home equity lines of credit .................... 6 175 -- -- 6 175
Automotive ..................................... 1 7 -- -- 1 7
Personal loans ................................. 4 9 4 6 8 15
Other consumer ................................. 6 7 13 13 19 20
------ --------- ------ --------- ------ ---------
Total consumer ............................... 17 198 17 19 34 217
Commercial business .............................. -- -- -- -- -- --
------ --------- ------ --------- ------ ---------
Total ............................................ 22 $ 624 21 $ 304 43 $ 928
====== ========= ====== ========= ====== =========
When a loan becomes 90 days delinquent, we place the loan on nonaccrual
status. As of March 31, 2004, nonaccrual loans and loans 90 days or more past
due as a percentage of total loans was 0.15%, and as a percentage of total
assets it was 0.11%. Nonperforming assets as a percentage of total assets were
0.11% as of March 31, 2004.
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Nonperforming Assets. The following table sets forth information with
respect to our nonperforming assets and restructured loans within the meaning of
Statement of Financial Accounting Standards No. 15 for the periods indicated.
During the periods presented, there were no accruing loans which were
contractually past due 90 days or more.
At March 31, At September 30,
---------------------- -------------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
--------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Real estate:
One- to four-family residential ...... $ 513 $ 285 $ 69 $ 70 $ 1,314 $ 733 $ 41
Multi-family residential ............. -- -- -- -- -- -- --
Commercial ........................... -- -- -- -- 39 -- --
--------- --------- --------- --------- --------- --------- ---------
Total real estate .................. 513 285 69 70 1,353 733 41
Real estate construction:
One- to four-family residential ...... -- -- -- 326 2,223 -- --
Multi-family residential ............. -- -- -- -- -- -- --
Commercial and land development ...... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total real estate construction ..... -- -- -- 326 2,223 -- --
Consumer:
Home equity lines of credit .......... 39 -- 41 52 40 136 --
Automotive ........................... -- -- 9 5 5 6 --
Personal loans ....................... 9 6 7 13 6 13 7
Other consumer ....................... 5 13 7 2 23 -- 4
--------- --------- --------- --------- --------- --------- ---------
Total consumer ..................... 53 19 64 72 74 155 11
Commercial business .................... -- -- -- -- 8 -- --
--------- --------- --------- --------- --------- --------- ---------
Total .................................. $ 566 $ 304 $ 133 $ 468 $ 3,658 $ 888 $ 52
========= ========= ========= ========= ========= ========= =========
Total of nonaccrual and 90 days past
due loans ............................. $ 566 $ 304 $ 133 $ 468 $ 3,658 $ 888 $ 52
Repossessed assets ..................... -- -- -- 6 3 11 --
Real estate owned ...................... -- 239 -- 248 55 -- --
--------- --------- --------- --------- --------- --------- ---------
Total nonperforming assets ......... $ 566 $ 543 $ 133 $ 722 $ 3,716 $ 899 $ 52
========= ========= ========= ========= ========= ========= =========
Restructured loans ..................... -- -- -- -- -- -- --
Allowance for loan loss on
nonperforming loans ................... 28 15 9 42 353 48 3
Classified assets included in
nonperforming assets .................. 566 534 133 722 3,716 899 52
Allowance for loan losses on
classified assets ..................... 28 15 9 42 353 48 3
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable ............................ 0.15% 0.09% 0.04% 0.14% 1.22% 0.36% 0.03%
Nonaccrual and 90 days or more past
due loans as a percentage of total
assets ................................ 0.11% 0.07% 0.03% 0.11% 0.96% 0.27% 0.02%
Nonperforming assets as a percentage
of total assets ....................... 0.11% 0.12% 0.03% 0.17% 0.97% 0.28% 0.02%
Loans receivable, net .................. $ 383,950 $ 348,657 $ 372,629 $ 318,297 $ 289,385 $ 243,122 $ 189,128
Nonaccrued interest (1) ................ $ 13 $ 8 $ 1 $ 3 $ 27 $ 7 $ --
Total assets ........................... $ 496,773 $ 447,184 $ 450,196 $ 416,543 $ 382,504 $ 325,922 $ 271,143
----------
(1) If interest on the loans classified as nonaccrual had been accrued,
interest income in these amounts would have been recorded on nonaccrual
loans.
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Real Estate Owned and Other Repossessed Assets. Real estate we acquire
as a result of foreclosure or by deed-in-lieu of foreclosure is classified as
real estate owned until it is sold. When the property is acquired, it is
recorded at the lower of its cost, which is the unpaid principal balance of the
related loan plus foreclosure costs, or the fair market value of the property
less selling costs. Other repossessed collateral, including autos, are also
recorded at the lower of cost (i.e., the unpaid principal balance plus
repossession costs) or fair market value. As of March 31, 2004, we had no
residential real estate owned properties or repossessed assets from other
secured loans.
Restructured Loans. According to generally accepted accounting
principles, we are required to account for certain loan modifications or
restructuring as a "troubled debt restructuring." In general, the modification
or restructuring of a debt is considered a troubled debt restructuring if we,
for economic or legal reasons related to a borrower's financial difficulties,
grant a concession to the borrower that we would not otherwise consider. We had
no restructured loans as of March 31, 2004.
Classified Assets. Federal regulations provide for the classification
of lower quality loans and other assets, such as debt and equity securities, as
substandard, doubtful or loss. An asset is considered substandard if it is
inadequately protected by the current net worth and pay capacity of the borrower
or of any collateral pledged. Substandard assets include those characterized by
the distinct possibility that we will sustain some loss if the deficiencies are
not corrected. Assets classified as doubtful have all the weaknesses inherent in
those classified substandard with the added characteristic that the weaknesses
present make collection or liquidation in full highly questionable and
improbable on the basis of currently existing facts, conditions and values.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted.
When we classify problem assets as either substandard or doubtful, we
may establish a specific allowance in an amount we deem prudent and approved by
the Classified Asset Committee to address the risk specifically or we may allow
the loss to be addressed in the general allowance. General allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been specifically allocated to particular problem assets. When an insured
institution classifies problem assets as a loss, it is required to charge off
such assets in the period in which they are deemed uncollectible. Assets which
do not currently expose us to sufficient risk to warrant classification in one
of the aforementioned categories but possess weaknesses are required to be
designated as special mention. Our determination as to the classification of our
assets and the amount of our valuation allowances is subject to review by the
Office of Thrift Supervision or the FDIC, which can order the establishment of
additional loss allowances.
In connection with the filing of periodic reports with the Office of
Thrift Supervision and in accordance with our classification of assets policy,
we regularly review the problem assets in our portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of our review of our assets, as of March 31, 2004, we had classified $2.5
million of our assets as substandard. The total amount classified of $2.5
million represented 5.9% of equity capital and 0.5% of total assets as of March
31, 2004.
The aggregate amounts of our classified assets at the dates indicated
were as follows:
94
At September 30,
At March 31, --------------------
2004 2003 2002
------------ -------- ---------
(In Thousands)
Classified Assets:
Loss ........................................... $ -- $ -- $ --
Doubtful ....................................... -- 7 715
Substandard .................................... 2,487 946 1,031
--------- -------- ---------
Total ....................................... $ 2,487 $ 953 $ 1,746
========= ======== =========
Classified assets including in nonperforming
loans ........................................... 566 133 722
Allowance for loan loss on classified assets ..... 28 9 42
During the six months ended March 31, 2004, we classified four
commercial real estate loans totaling $1.1 million and a one- to four-family
residential loan of $570,000. During that same period, our classified consumer
loans decreased $92,000. Commercial real estate loans that were classified
consisted of a fitness center, a retail lumberyard, a subdivision development
and a restaurant with outstanding balances of $418,000, $344,000, $135,000 and
$211,000, respectively, at March 31, 2004. None of the classified commercial
real estate loans were delinquent more than 30 days. Subsequent to March 31,
2004, the subdivision development loan of $203,000 was paid off. We do not
expect any losses to arise from any of the commercial real estate loans.
The one- to four-family residential loan was to a borrower in Park
City, Utah. The outstanding loan amount was $570,000 at March 31, 2004. We have
private mortgage insurance on the loan that covers our interest up to the 25% of
the appraised value. The loan has been brought current and was no longer
classified as of June 30, 2004.
95
The following table summarizes the distribution of the allowance for
loan losses by loan category.
At September 30,
At March 31, ----------------------------------
2004 2003
---------------------------------- ----------------------------------
Percent of Percent of
Loans Loans
in Loan in Loan
Category Category
Amount to Amount to
Loan by Loan Total Loan Loan by Total
Balance Category Loans Balance Category Loans
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Real estate: .................
One- to four-family
residential ............... $ 241,089 $ 836 62.21% $ 247,309 $ 635 65.81%
Multi-family residential ... 6,315 22 1.63 7,750 20 2.06
Commercial ................. 94,519 1,033 24.39 79,020 697 21.02
--------- --------- --------- --------- --------- ---------
Total real estate .......... 341,923 1,891 88.23 334,079 1,352 88.89
Real estate construction:
One- to four-family
residential ............... 4,428 15 1.14 5,225 13 1.39
Multi-family residential ... -- -- -- 352 1 0.09
Commercial and land
development ............... 11,277 98 2.91 9,128 70 2.43
--------- --------- --------- --------- --------- ---------
Total real estate .......... 15,705 113 4.05 14,705 84 3.91
Consumer:
Home equity lines of
credit .................... 22,929 153 5.91 20,640 99 5.49
Automotive ................. 3,095 83 0.80 1,939 40 0.52
Other consumer ............. 2,161 125 0.56 2,827 244 0.75
--------- --------- --------- --------- --------- ---------
Total consumer ............. 28,185 361 7.27 25,406 383 6.76
Commercial/business .......... 1,734 46 0.45 1,662 34 0.44
--------- --------- --------- --------- --------- ---------
Total loans .................. $ 387,547 $ 2,411 100.00% $ 375,852 $ 1,853 100.00%
========= ========= ========= ========= ========= =========
At September 30,
------------------------------------------------------------------------
2002 2001
---------------------------------- ----------------------------------
Percent of Percent of
Loans Loans
in Loan in Loan
Category Category
Amount to Amount to
Loan by Loan Total Loan Loan by Total
Balance Category Loans Balance Category Loans
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Real estate: .................
One- to four-family
residential ............... $ 194,088 $ 348 60.27% $ 173,835 $ 182 59.35%
Multi-family residential ... 7,512 14 2.34 8,700 17 2.97
Commercial ................. 79,197 714 24.59 59,752 551 20.40
--------- --------- --------- --------- --------- ---------
Total real estate .......... 280,797 1,076 87.19 242,287 750 82.72
Real estate construction:
One- to four-family
residential ............... 6,505 12 2.02 13,927 20 4.75
Multi-family residential ... 1,486 3 0.46 904 10 0.31
Commercial and land
development ............... 6,579 58 2.04 10,416 256 3.56
--------- --------- --------- --------- --------- ---------
Total real estate .......... 14,570 73 4.52 25,247 286 8.62
Consumer:
Home equity lines of
credit .................... 18,069 86 5.61 15,250 72 5.20
Automotive ................. 2,297 30 0.71 2,133 28 0.73
Other consumer ............. 3,666 79 1.14 4,332 238 1.48
--------- --------- --------- --------- --------- ---------
Total consumer ............ 24,032 195 7.46 21,715 338 7.41
Commercial/business .......... 2,641 41 0.82 3,662 57 1.25
--------- --------- --------- --------- --------- ---------
Total loans .................. $ 322,040 $ 1,385 100.00% $ 292,911 $ 1,431 100.00%
========= ========= ========= ========= ========= =========
At September 30,
------------------------------------------------------------------------
2000 1999
---------------------------------- ----------------------------------
Percent of Percent of
Loans Loans
in Loan in Loan
Category Category
Amount to Amount to
Loan by Loan Total Loan Loan by Total
Balance Category Loans Balance Category Loans
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Real estate: .................
One- to four-family
residential ............... $ 143,576 $ 153 58.31% $ 111,980 $ 50 58.47%
Multi-family residential ... 5,475 10 2.22 1,676 5 0.87
Commercial ................. 44,700 412 18.15 28,990 140 15.14
--------- --------- --------- --------- --------- ---------
Total real estate .......... 193,751 575 78.68 142,646 195 74.48
Real estate construction:
One- to four-family
residential ............... 21,171 30 8.60 18,170 26 9.49
Multi-family
residential .................. 1,857 24 0.75 -- -- --
Commercial and land
development ............... 5,516 136 2.24 6,610 85 3.45
--------- --------- --------- --------- --------- ---------
Total real estate .......... 28,544 190 11.59 24,780 111 12.94
Consumer:
Home equity lines of
credit ................... 15,604 74 6.34 16,145 40 8.43
Automotive ................. 1,185 16 0.48 1,285 20 0.67
Other consumer ............. 4,128 227 1.68 4,798 225 2.51
--------- --------- --------- --------- --------- ---------
Total consumer ............. 20,917 317 8.50 22,228 285 11.61
Commercial/business .......... 3,031 47 1.23 1,851 29 0.97
--------- --------- --------- --------- --------- ---------
Total loans .................. $ 246,243 $ 1,129 100.00% $ 191,505 $ 620 100.00%
========= ========= ========= ========= ========= =========
Management believes that it uses the best information
available to determine the allowance for loan losses. However,
unforeseen market conditions could result in adjustments to the
allowance for loan losses and net income could be significantly
affected, if circumstances differ substantially from the assumptions
used in determining the allowance.
96
The following table sets forth an analysis of our allowance for loan
losses at the dates and for the periods indicated.
Six Months Ended
March 31, Year Ended September 30,
-------------------- ----------------------------------------------------
2004(1) 2003(1) 2003 2002 2001 2000 1999
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Allowance at beginning of period ............ $ 1,853 $ 1,385 $ 1,385 $ 1,431 $ 1,129 $ 620 $ 169
Provisions for loan losses .................. 600 287 615 277 748 600 575
Recoveries:
Real estate:
One- to four-family residential ........... -- -- -- -- 1 -- --
Multi-family residential .................. -- -- -- -- -- -- --
Commercial ................................ -- -- - -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total real estate loans ................. -- -- -- -- 1 -- --
Real estate construction:
One- to four-family residential ........... -- -- -- 2 -- -- --
Multi-family residential .................. -- -- -- -- -- -- --
Commercial and land development ........... -- -- -- -- -- -- -
-------- -------- -------- -------- -------- -------- --------
Total real estate construction .......... -- -- -- 2 -- -- --
Consumer
Home equity lines of credit ............... -- -- -- -- -- -- --
Automobile ................................ 6 -- -- 1 1 -- --
Other consumer ............................ 3 4 7 3 20 107 27
-------- -------- -------- -------- -------- -------- --------
Total consumer .......................... 9 4 7 4 21 109 27
Commercial business ......................... -- -- -- 2 -- -- --
-------- -------- -------- -------- -------- -------- --------
Total recoveries ............................ 9 4 7 8 22 109 27
Charge-offs:
Real estate:
One- to four-family residential ........... -- 7 7 145 42 44 14
Multi-family residential .................. -- -- -- -- -- -- --
Commercial and land development ........... -- -- -- -- -- 23 --
-------- -------- -------- -------- -------- -------- --------
Total real estate ....................... -- 7 7 145 42 67 14
Real estate construction:
One- to four-family residential ........... -- -- -- 72 145 -- --
Multi-family residential .................. -- -- -- -- -- -- --
Commercial ................................ -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total real estate construction .......... -- -- -- 72 145 -- --
Consumer:
Home equity lines of credit ............... -- 26 37 39 89 46 21
Automobile ................................ 17 38 40 6 20 3 6
Other consumer ............................ 34 31 20 69 108 72 110
-------- -------- -------- -------- -------- -------- --------
Total consumer .......................... 51 95 147 114 217 121 137
Commercial business ......................... -- -- -- -- 64 12 --
-------- -------- -------- -------- -------- -------- --------
(table continues on the following page)
97
Six Months Ended
March 31, Year Ended September 30,
-------------------- ----------------------------------------------------
2004(1) 2003(1) 2003 2002 2001 2000 1999
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Total charge-offs ........................... 51 102 154 331 468 200 151
Net charge-offs ............................. 42 98 147 323 446 91 124
-------- -------- -------- -------- -------- -------- --------
Balance at end of period .................... $ 2,411 $ 1,574 $ 1,853 $ 1,385 $ 1,431 $ 1,129 $ 620
======== ======== ======== ======== ======== ======== ========
Allowance for loan losses as
a percentage of total loans
outstanding at the end of the period ...... 0.62% 0.45% 0.49% 0.41% 0.47% 0.45% 0.32%
Net charge-offs as a percentage
of average loans outstanding
during the period ......................... 0.01% 0.03% 0.04% 0.10% 0.16% 0.04% 0.08%
Allowance for loan losses as a
percentage of nonaccrual and
90 days or more past due loans
loans at end of period .................... 425.97% 517.63% 1393.23% 295.94% 48.21% 127.14% 1192.31%
--------
(1) Ratios for the six month periods have been annualized.
Our Asset Liability Management Committee determines the appropriate
level of the allowance for loan losses on a quarterly basis and establishes the
provision for loan losses based on the risk composition of our loan portfolio,
delinquency levels, loss experience, economic conditions, bank regulatory
examination results, seasoning of the loan portfolios and other factors related
to the collectibility of the loan portfolio. The allowance is increased by the
provision for loan losses, which is charged against current period operating
results and decreased by the amount of actual loan charge-offs, net of
recoveries. Some of the factors that management applied in determining the level
of the amount of additions to our provision for loan losses for the six months
ended March 31, 2004 and 2003 and for the years ended September 30, 2003, 2002,
2001, 2000 and 1999 include the items listed in the following table.
Six Months Ended
March 31, Year Ended September 30,
--------------------- ---------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
--------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Provisions for loan losses .................. $ 600 $ 287 $ 615 $ 277 $ 748 $ 600 $ 575
Allowance for loan losses ................... 2,411 1,574 1,853 1,385 1,431 1,129 620
Allowance for loan losses as a
percentage of total loans outstanding
at the end of the period ................... 0.62% 0.45% 0.49% 0.41% 0.47% 0.45% 0.32%
Net charge-offs ............................. 42 98 147 323 446 91 124
Total of nonaccrual and 90 days
past due loans ............................. 566 304 133 468 3,658 888 52
Nonaccrual and 90 days or more past
due loans as a percentage of
loans receivable ........................... 0.15% 0.09% 0.04% 0.14% 1.22% 0.36% 0.03%
Loans receivable, net ....................... 383,950 348,657 372,629 318,297 289,385 243,122 189,128
For the year ended September 30, 1999, the provision for loan losses
was $575,000. Management based the level of the provision on the composition of
the loan portfolio, the level of nonaccrual and 90 days past due
98
loans, the then current level of the allowance for loan losses and overall
growth in the loan portfolio. At September 30, 1999, the mix of our loan
portfolio consisted of 70.4% in homogeneous loans and 29.6% non-homogeneous;
nonaccrual loans were only $52,000. Homogeneous loans consist of one- to
four-family residential loans and consumer loans. Non-homogeneous loans consist
of multi-family residential and commercial real estate loans, real estate
construction loans and commercial business loans. Non-homogeneous loans
typically have an increased risk of loss compared to homogeneous loans.
Our provision for loan losses for the year ended September 30, 2000
increased by $25,000 to $600,000 from the year ended September 30, 1999. The mix
of our loan portfolio shifted to 67.4% in homogenous loans and 32.6% in
non-homogeneous loans, a decrease and increase of three basis points,
respectively, from the year ended September 30, 1999. In addition, the level of
our total nonaccrual and 90 days past due loans increased to $888,000 at
September 30, 2000.
For the year ended September 30, 2001, our provision for loan losses
was $748,000, an increase of $148,000 over the year ended September 30, 2000.
Management based the level of the provision on the increase in our nonaccrual
and 90 days past due loans and overall growth in our loan portfolio. Total
nonaccrual and 90 days past due loans increased $2.8 million from September 30,
2000 to $3.7 million. Loans receivable, net increased $46.3 million or 19.0%
from September 30, 2000. Our portfolio mix was similar to that of the year ended
September 30, 2002 with 67.8% homogeneous loans and 32.2% non-homogeneous.
For the year ended September 30, 2002, our provision for loan losses
was $277,000, a decrease of $471,000 from September 30, 2001. Total nonaccrual
and 90 days past due loans decreased $3.2 million from September 30, 2001 to
$468,000. In addition, our loan portfolio mix was 69.0% in homogeneous loans and
31.0% non-homogeneous, an increase and decrease of 1.2 basis points,
respectively. Loans receivable, net grew $28.9 million, or 10.0%, from September
30, 2001.
Our provision for loan losses for the year ended September 30, 2003
increased $338,000 from September 30, 2002 to $615,000. Management based the
increase in our provision for loan losses on the $54.3 million growth in loans
receivable, net. In addition, a significant percentage of that growth resulted
from residential mortgage loan refinances. These loans are unseasoned and may
have higher risks of loss than our historical experience may indicate.
Investment Activities
General. Office of Thrift Supervision regulations permit us to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
federally insured banks and savings institutions, banker's acceptances,
repurchase agreements and federal funds. Subject to various restrictions, we
also may invest a portion of our assets in commercial paper and corporate debt
securities.
Our investment policy is designed to provide and maintain adequate
liquidity and to generate favorable rates of return without incurring undue
interest rate or credit risk. Our investment policy generally limits investments
to mortgage-backed securities, U.S. Government and agency securities, municipal
bonds, certificates of deposit and marketable corporate debt obligations.
Investment in mortgage-backed securities includes those issued or guaranteed by
Fannie Mae, Freddie Mac and Ginnie Mae. We purchase mortgage-backed securities
to supplement the loan originations for our portfolio during periods when we
have not been able to originate our desired level of portfolio loan product.
At March 31, 2004, our consolidated investment portfolio totaled $61.5
million and consisted principally of an adjustable rate mortgage fund,
mortgage-backed securities and Federal Home Loan Bank stock. From time to time,
investment levels may be increased or decreased depending upon yields available
on investment alternatives and management's projections as to the demand for
funds to be used in loan originations, deposits and other activities.
99
Mortgage-Backed Securities. Our mortgage-backed securities had a fair
value of $57.7 million and a $56.0 million amortized cost at March 31, 2004. The
mortgage-backed securities were comprised of Fannie Mae and Freddie Mac
mortgage-backed securities. At March 31, 2004, the portfolio had a
weighted-average coupon rate of 5.23% and an estimated weighted-average yield of
4.95%. These securities had an estimated average maturity of 14.42 years and an
estimated average life of 4.60 years at March 31, 2004.
Federal Home Loan Bank Stock. As a member of the Federal Home Loan Bank
of Seattle, we are required to own its capital stock. The amount of stock we
hold is based on percentages specified by the Federal Home Loan Bank of Seattle
on our outstanding advances. The redemption of any excess stock we hold is at
the discretion of the Federal Home Loan Bank of Seattle. The carrying value of
Federal Home Loan Bank stock totaled $6.7 million and had a
weighted-average-yield of 4.00% at March 31, 2004.
Bank-Owned Life Insurance. We purchase bank-owned life insurance
policies ("BOLI") to offset future employee benefit costs. At March 31, 2004, we
had a $9.8 million investment in life insurance contracts. The purchase of BOLI
policies, and its increase in cash surrender value, is classified as "Investment
in life insurance contracts" in our consolidated statements of financial
condition. The income related to the BOLI, which is generated by the increase in
the cash surrender value of the policy, is classified in "increase in cash
surrender value of life insurance" in our consolidated statements of income.
100
The following table sets forth the composition of our investment
securities portfolios at the dates indicated. The amortized cost of the
available for sale investments and mortgage backed-securities is their net book
value before the mark-to-market fair value adjustment.
At September 30,
At March 31, ---------------------------------------------------------------------
2004 2003 2002 2001
--------------------- --------------------- --------------------- ---------------------
Amortized Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value Cost Fair Value
--------- --------- --------- --------- --------- --------- --------- ---------
(In Thousands)
Available for sale:
Investment securities:
Adjustable rate mortgage fund ... $ 5,468 $ 5,440 $ 5,468 $ 5,440 $ 2,504 $ 2,507 $ 7,500 $ 7,508
Mortgage-backed securities:
Fannie Mae ...................... 958 964 -- -- -- -- -- --
Freddie Mac ..................... -- -- -- -- -- -- 7437 758
--------- --------- --------- --------- --------- --------- --------- ---------
Total available for sale ...... $ 6,426 $ 6,404 $ 5,468 $ 5,440 $ 2,504 $ 2,507 $ 8,243 $ 8,266
========= ========= ========= ========= ========= ========= ========= =========
Held to maturity:
Mortgage-backed securities:
Fannie Mae ...................... $ 33,381 $ 34,300 $ 10,485 $ 10,832 $ 16,880 $ 17,631 $ 10,616 $ 10,918
Freddie Mac ..................... 21,652 22,432 13,940 14,591 27,445 28,648 26,014 26,860
--------- --------- --------- --------- --------- --------- --------- ---------
Total held to maturity ........ $ 55,033 $ 56,732 $ 24,425 $ 25,423 $ 44,325 $ 46,279 $ 36,630 $ 37,778
========= ========= ========= ========= ========= ========= ========= =========
101
The table below sets forth information regarding the amortized cost,
weighted average yields and maturities or periods to repricing of our investment
portfolio at March 31, 2004.
Amount Due or Repricing within:
---------------------------------------------------------------------
One Year or Less Over One to Five Years Over Five to Ten Years
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield (1) Cost Yield (1) Cost Yield (1)
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Available for sale:
Investment securities:
Adjustable rate mortgage funds ....... $ 4,538 2.35% $ 930 2.35% $ -- --%
Mortgage-backed securities:
Freddie Mac .......................... -- -- -- -- -- --
Fannie Mae ........................... -- -- -- -- 958 4.01
--------- --------- --------- --------- --------- ---------
Total available for sale ........... 4,538 2.35 930 2.35 958 4.01
--------- --------- --------- --------- --------- ---------
Held to maturity:
Mortgage-backed securities:
Freddie Mac .......................... 27 6.56 3,504 6.55 722 7.25
Fannie Mae ........................... -- -- 120 6.69 -- --
--------- --------- --------- --------- --------- ---------
Total held to maturity ............. 27 6.56 3,624 6.55 722 7.25
--------- --------- --------- --------- --------- ---------
Total investment securities ............ $ 4,565 2.37% $ 4,554 5.70% $ 1,680 5.40%
========= ========= ========= ========= ========= =========
Amount Due or Repricing within:
---------------------------------------------
Over Ten Years Totals
--------------------- ---------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield (1) Cost Yield (1)
--------- --------- --------- ---------
(Dollars in Thousands)
Available for sale:
Investment securities:
Adjustable rate mortgage funds ....... $ -- --% $ 5,468 2.35%
Mortgage-backed securities:
Freddie Mac .......................... -- -- -- --
Fannie Mae ........................... -- -- 958 4.01
--------- --------- --------- ---------
Total available for sale ........... -- -- 6,426 2.60
--------- --------- --------- ---------
Held to maturity:
Mortgage-backed securities:
Freddie Mac .......................... 17,399 5.24 21,652 5.52
Fannie Mae ........................... 33,261 5.03 33,381 5.03
--------- --------- --------- ---------
Total held to maturity ............. 50,660 5.10 55,033 5.22
--------- --------- --------- ---------
Total investment securities ............ $ 50,660 5.10% $ 61,459 4.95%
========= ========= ========= =========
----------
(1) Interest and dividends are reported on a tax-equivalent basis. During the
time periods presented, Home Federal did not own any tax exempt investment
securities.
102
The following table sets forth certain information with respect to each
category which had an aggregate book value in excess of 10% of Home Federal's
total equity at the date indicated.
At March 31, 2004 At September 30, 2003
----------------------- -----------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
(In Thousands)
Available for sale:
Investment Securities:
Adjustable rate mortgage fund ........ $ 5,468 $ 5,440 $ 5,468 $ 5,440
Mortgage-backed securities:
Fannie Mae ........................... 958 964 -- --
Freddie Mac .......................... -- -- -- --
---------- ---------- ---------- ----------
Total investment securities ........ $ 6,426 $ 6,404 $ 5,468 $ 5,440
========== ========== ========== ==========
Held to maturity:
Mortgage-backed securities:
Fannie Mae ........................... $ 33,381 $ 34,300 $ 10,485 $ 10,832
Freddie Mac .......................... 21,652 22,432 13,940 14,591
---------- ---------- ---------- ----------
Total held to maturity ............. $ 55,033 $ 56,732 $ 24,425 $ 25,423
========== ========== ========== ==========
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of our
funds for lending and other investment purposes. Scheduled loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are influenced significantly by general interest rates and market
conditions. Borrowings from the Federal Home Loan Bank of Seattle are used to
supplement the availability of funds from other sources and also as a source of
term funds to assist in the management of interest rate risk.
Our deposit composition reflects a mixture with certificates of deposit
accounting for approximately one-half of the total deposits while interest and
noninterest-bearing checking, savings and money market accounts comprise the
balance of total deposits. We rely on marketing activities, convenience,
customer service and the availability of a broad range of deposit products and
services to attract and retain customer deposits.
Deposits. Substantially all of our depositors are residents of the
State of Idaho. Deposits are attracted from within our market area through the
offering of a broad selection of deposit instruments, including checking
accounts, money market deposit accounts, savings accounts and certificates of
deposit with a variety of rates. Deposit account terms vary according to the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate, among other factors. We offer a number of different deposit
programs including our High Performance Checking; Wall Street Select Checking
and Money Market Account; Medical Savings and Health Savings Account; and
Escalator Certificate of Deposit. Our High Performance Checking program is
comprised of seven different transaction account products with varying minimum
balance requirements, number of checks permitted and interest rate options. Our
Wall Street Select Checking and Money Market Account products offer
significantly higher rates of interest on larger deposit balances while
maintaining the availability of the customer's funds. Our Medical Savings and
Health Savings Accounts are offered directly or through an unaffiliated third
party marketing company to qualified individuals and employers. The program is
offered on a nationwide basis and participants in the plan receive a debit card
to facilitate account access. Our Escalator Certificate of Deposit has a
guaranteed blended rate for its four-year term with fixed rate increases
occurring every six months from the date of the original deposit, and also
offers the customer the opportunity to withdrawal the entire balance at any
six-month anniversary without a pre-payment penalty. In determining the terms of
our deposit accounts, we consider the development of long term profitable
customer relationships, current market interest rates, current maturity
structure and deposit mix, our customer preferences and the profitability of
acquiring customer deposits compared to alternative sources.
103
At March 31, 2004, we had $31.5 million of jumbo ($100,000 or more)
certificates of deposit, which are primarily from local customers, representing
9.6% of total deposits at that date.
Deposit Activities. The following table sets forth the total deposit
activities of Home Federal for the periods indicated.
Six Months
Ended March 31, Year Ended September 30,
--------------------------- ------------------------------------------
2004 2003 2003 2002 2001
------------ ------------ ------------ ------------ ------------
(In Thousands)
Beginning balance ...................... $ 301,273 $ 279,772 $ 279,772 $ 266,316 $ 232,747
Net deposits before interest credited .. 26,303 17,295 17,516 7,654 24,705
Interest credited ...................... 1,939 2,032 3,985 5,802 8,864
------------ ------------ ------------ ------------ ------------
Net increase in deposits ............... 28,242 19,327 21,501 13,456 33,569
------------ ------------ ------------ ------------ ------------
Ending balance ......................... $ 329,515 $ 299,099 $ 301,273 $ 279,772 $ 266,316
============ ============ ============ ============ ============
Time Deposits by Rates. The following table sets forth the time
deposits in Home Federal classified by rates as of the dates indicated.
At March 31, At September 30,
---------- ------------------------------------
2004 2003 2002 2001
---------- ---------- ---------- ----------
(In Thousands)
0.00 - 0.99% ............ $ 20,499 $ 11,742 $ -- $ --
1.00 - 1.99% ............ 29,959 36,899 28,383 --
2.00 - 2.99% ............ 42,465 40,884 36,647 1,931
3.00 - 3.99% ............ 41,087 31,983 29,473 27,524
4.00 - 4.99% ............ 18,451 18,726 22,896 16,927
5.00 - 5.99% ............ 1,902 2,968 6,952 27,928
6.00 - 6.99% ............ 1,233 1,870 5,876 47,253
7.00 - 7.99% ............ -- -- -- 11,249
---------- ---------- ---------- ----------
Total .............. $ 155,596 $ 145,072 $ 130,227 $ 132,812
========== ========== ========== ==========
Time Deposits by Maturities. The following table sets forth the amount
and maturities of time deposits at March 31, 2004.
Amounts Due
---------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
0.00 - 0.99% ............ $ 18,631 $ 1,834 $ 34 $ -- $ -- $ 20,499
1.00 - 1.99% ............ 15,258 6,063 914 7,685 39 29,959
2.00 - 2.99% ............ 5,519 20,486 15,543 372 545 42,465
3.00 - 3.99% ............ 6,022 9,245 23,962 1,479 379 41,087
4.00 - 4.99% ............ 10,659 6,129 1,303 360 -- 18,451
5.00 - 5.99% ............ 751 317 828 5 1 1,902
6.00 - 6.99% ............ 416 804 -- 12 1 1,233
7.00 - 7.99% ............ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total $ 57,256 $ 44,878 $ 42,584 $ 9,913 $ 965 $ 155,596
========== ========== ========== ========== ========== ==========
104
The following table sets forth information concerning Home Federal's
time deposits and other deposits at March 31, 2004.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
---------- --------------- -------------------------------- --------- --------- ----------
(In Thousands)
0.20% N/A Regular savings $ 24,620 $ 50 7.47%
0.29 N/A Interest-bearing demand deposits 53,419 50 16.21
-- N/A Noninterest-bearing demand
deposits 30,325 50 9.20
0.64 N/A Money market accounts 33,928 1,000 10.30
0.20 N/A Medical savings accounts 31,627 25 9.60
Certificates of Deposit
--------------------------------
1.00 1-12 months Fixed term, fixed rate 27,020 500 8.20
2.10 13-24 months Fixed term, fixed rate 36,492 500 11.07
3.49 25-36 months Fixed term, fixed rate 34,051 500 10.33
3.16 37-60 months Fixed term, fixed rate 56,964 500 17.29
4.62 Over 60 months Fixed term, fixed rate 337 500 0.10
0.90 18 months Other 732 500 0.23
--------- ----------
Total $ 329,515 100.00%
========= ==========
The following table indicates the amount of Home Federal's jumbo
certificates of deposit by time remaining until maturity as of March 31, 2004.
Jumbo certificates of deposit are certificates in amounts of $100,000 or more.
Certificates of
Deposit of
Maturity Period $100,000 or More
-------------------------------------------------- ----------------
(In Thousands)
Three months or less ............................. $ 3,450
Over three through six months .................... 2,321
Over six through twelve months ................... 4,750
Over twelve months ............................... 20,954
----------------
Total ........................................ $ 31,475
================
105
Deposit Flow. The following table sets forth the balances of deposits
in the various types of accounts offered by Home Federal at the dates indicated.
At September 30,
At March 31, -----------------------------------
2004 2003
----------------------------------- -----------------------------------
Percent Percent
of Increase/ of Increase/
Amount Total (Decrease) Amount Total (Decrease)
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Savings deposits ....................... $ 24,620 7.47% $ 197 $ 24,423 8.11% $ 1,216
Demand accounts ........................ 83,744 25.41 11,578 72,166 23.95 5,399
Money market accounts .................. 33,928 10.30 1,800 32,128 10.66 (3,379)
Medical savings accounts ............... 31,627 9.60 4,143 27,484 9.12 3,420
Fixed rate certificates that mature
in the year ending:
Within 1 year ...................... 56,793 17.24 (781) 57,574 19.11 (1,249)
After 1 year, but within 2
years ............................. 44,608 13.54 5,865 38,743 12.86 13,262
After 2 years, but within 5
years ............................. 53,456 16.22 5,677 47,779 15.86 2,942
After 5 years ...................... 8 -- (109) 117 0.04 102
Other .................................. 731 0.22 (128) 859 0.29 (213)
--------- --------- --------- --------- --------- ---------
$ 329,515 100.00% $ 28,242 $ 301,273 100.00% $ 21,500
========= ========= ========= ========= ========= =========
At September 30,
-------------------------------------------------------------
2002 2001
----------------------------------- ----------------------
Percent Percent
of Increase/ of
Amount Total (Decrease) Amount Total
--------- --------- --------- --------- ---------
(Dollars in Thousands)
Savings deposits ....................... $ 23,207 8.29% $ 390 $ 22,817 8.57%
Demand accounts ........................ 66,767 23.86 9,229 57,538 21.61
Money market accounts .................. 35,507 12.69 2,798 32,709 12.28
Medical savings accounts ............... 24,064 8.60 3,624 20,440 7.68
Fixed rate certificates that mature
in the year ending:
Within 1 year ...................... 58,823 21.03 (49,661) 108,483 40.72
After 1 year, but within 2
years ............................. 25,481 9.11 9,192 16,289 6.12
After 2 years, but within 5
years ............................. 44,837 16.03 38,374 6,463 2.43
After 5 years ...................... 15 0.01 (22) 37 0.01
Other .................................. 1,071 0.38 (468) 1,540 0.58
--------- --------- --------- --------- ---------
$ 279,772 100.00% $ 13,456 $ 266,316 100.00%
========= ========= ========= ========= =========
106
Borrowings. Customer deposits are the primary source of funds for our
lending and investment activities. We do, however, use advances from the Federal
Home Loan Bank of Seattle to supplement our supply of lendable funds to meet
short-term deposit withdrawal requirements and also to provide longer term
funding to better match the duration of selected loan and investment maturities.
As one of our capital management strategies, we have used borrowings
from the Federal Home Loan Bank of Seattle to fund the purchase of investment
securities in order to increase our net interest income when attractive
opportunities exist. Depending upon the retail banking activity and the
availability of excess post-stock offering capital that may be provided to us,
we will consider and undertake additional leverage strategies within applicable
regulatory requirements or restrictions. We expect these borrowings would
primarily consist of Federal Home Loan Bank of Seattle advances. We may also
consider increasing our use of borrowed funds prior to the offering of Home
Federal Bancorp capital stock in order to reduce the exposure of investing the
sizable amount of the net proceeds from the stock offering at single point in
the interest rate cycle.
As a member of the Federal Home Loan Bank of Seattle, we are required
to own its capital stock and are authorized to apply for advances on the
security of the stock and certain of our mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met. Advances
are made individually under various terms pursuant to several different credit
programs, each with its own interest rate and range of maturities. We maintain a
committed credit facility with the Federal Home Loan Bank of Seattle that
provides for immediately available advances up to an aggregate of 40% of total
assets, or $198.7 million as of March 31, 2004. At March 31, 2004, our
outstanding advances from the Federal Home Loan Bank of Seattle totaled $113.1
million.
The following table sets forth information regarding our borrowings at
the end of and during the periods indicated. The table includes both long- and
short-term borrowings.
At or For the
Six Months Ended Year Ended
March 31, September 30,
------------------------ --------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Maximum amount of borrowing outstanding
at any month end:
Federal Home Loan Bank advances .............. $ 116,735 $ 104,478 $ 112,285 $ 97,409 $ 74,759
Approximate average borrowings outstanding:
Federal Home Loan Bank advances .............. 108,637 98,818 102,173 86,577 66,910
Approximate weighted average rate paid on:
Federal Home Loan Bank advances .............. 4.23% 4.62% 4.53% 5.14% 6.32%
At September 30,
At March 31, ---------------------------------------
2004 2003 2002 2001
----------- ----------- ----------- -----------
(Dollars in Thousands)
Balance outstanding at end of period:
Federal Home Loan Bank advances .............. $ 113,074 $ 96,527 $ 91,008 $ 73,394
Weighted average rate paid on:
Federal Home Loan Bank advances .............. 4.08% 4.64% 4.85% 5.78%
107
Subsidiaries and Other Activities
Home Federal has one wholly-owned subsidiary, Idaho Home Service
Corporation, which was established in 1981 as Home Service Corporation for the
purpose of facilitating various business activities. Most recently, its
activities included the sale of investment and insurance products through an
affiliation with Lincoln Financial Advisor from 1998 to 2000. Since 2000, Idaho
Home Service Corporation has been inactive.
Competition
We face intense competition in originating loans and in attracting
deposits within our targeted geographic market. We compete by leveraging our
full service delivery capability comprised of convenient branch locations,
including five branches located inside Wal-Mart Superstores offering extended
banking hours, call center and Internet banking, and consistently delivering
high-quality, individualized service to our customers that result in a high
level of customer satisfaction.
We currently rank fifth in terms of deposits, among the 20
federally-insured depository institutions in Ada and Canyon Counties, our
primary market area. Our key competitors are U.S. Bank, Wells Fargo, Washington
Mutual, Key Bank, Washington Federal and Farmers & Merchants State Bank. These
competitors control approximately 75.25% of the deposit market with deposits of
$3.57 billion, of the $4.75 billion total deposits in Ada and Canyon Counties as
of June 30, 2003. Aside from these traditional competitors, credit unions,
insurance companies and brokerage firms are an increasingly competing challenge
for consumer deposit relationships. We also compete for loans and deposits with
single branch offices in Gem and Elmore Counties.
Our competition for loans comes principally from mortgage bankers,
commercial banks, thrift institutions, credit unions and finance companies.
Several other financial institutions, including those previously mentioned, have
greater resources than we do and compete with us for lending business in our
targeted market area. Among the advantages of some of these institutions are
their ability to make larger loans, finance extensive advertising campaigns,
access lower cost funding sources and allocate their investment assets to
regions of highest yield and demand. This competition for the origination of
loans may limit our future growth and earnings prospects.
Employees
At March 31, 2004, we had 210 full-time employees and 26 part-time
employees. Our employees are not represented by any collective bargaining group.
We consider our employee relations to be good.
Properties
At March 31, 2004, we had 15 full service banking offices and two loan
centers, ten of which are leased. During the year ended September 30, 2003, we
closed three branch offices, which resulted in the disposition of $530,000 in
assets. We retained all of the deposit and loan accounts associated with the
closure of these branch offices. We also received approval from the Office of
Thrift Supervision for the sale of a branch facility located in Jerome, Idaho,
which closed on April 2, 2004. At March 31, 2004, the net book value of our
investment in premises, equipment and leaseholds was approximately $9.2 million.
The net book value of the data processing and computer equipment utilized by us
at March 31, 2004 was approximately $654,000.
108
The following table provides a list of our main and branch offices and
indicates whether the properties are owned or leased:
Lease
Location Leased or Expiration Net Book Value at Square
Owned Date March 31, 2004 Footage
-------------------------------- -------------- ------------- ----------------- -------
(In Thousands)
ADMINISTRATIVE OFFICE
500 12th Avenue South Owned N/A $ 3,952 34,014
Nampa, Idaho 83651 (1)(2)
BRANCH OFFICES:
Downtown Boise (2)
800 West State Street Leased August 2010 65 3,500
Boise, Idaho 83702
Parkcenter (2)
871 East Parkcenter Boulevard Owned N/A 1,470 4,500
Boise, Idaho 83706
Fairview (2) Building owned
10443 Fairview Avenue Land leased June 2070 298 2,500
Boise, Idaho 83704
Meridian (2)
55 East Franklin Road Owned N/A 1,055 4,000
Meridian, Idaho 83642
Caldwell (2)
923 Dearborn Owned N/A 1,507 4,500
Caldwell, Idaho 83605
Mountain Home (2)
400 North 3rd East
Mountain Home, Idaho 83647 Owned N/A 2,600 121
Emmett (2)
250 South Washington Avenue Owned N/A 242 2,600
Emmett, Idaho 83617
Boise (3)
8300 West Overland Road Leased May 2005 135 695
Boise, Idaho 83709
Meridian (3)
4051 East Fairview Avenue Leased May 2005 138 695
Meridian, Idaho 83642
109
Lease
Leased or Expiration Net Book Value at Square
Location Owned Date March 31, 2004 Footage
-------------------------------- -------------- ------------- ----------------- -------
(In Thousands)
Jerome (3) (4)
2680 S. Lincoln
Jerome, Idaho 83338 Leased April 2004 $ 127 535
Nampa (3)
2100 12th Avenue Road
Nampa, Idaho 83651 Leased May 2005 132 695
Caldwell (3)
5108 East Cleveland Boulevard
Caldwell, Idaho 83605 Leased May 2005 124 695
Garden City (3)
7319 West State Street
Boise, Idaho 83714 Leased May 2005 205 695
Hispanic Cultural Center
315 Stampede Drive
Nampa, Idaho 83687 Leased October 2005 26 235
LOAN OFFICES:
Westgate
7978 Fairview Avenue
Boise, Idaho 83704 Leased May 2004 7 2,500
Meridian
111 East 1st Street
Meridian, Idaho 83642 Leased December 2009 76 2,600
----------
(1) Includes home branch
(2) Drive-up ATM available.
(3) Wal-Mart locations.
(4) Branch and deposits of $1.1 million were sold April 2, 2004.
We are currently in the process of designing and obtaining permits for
a branch in Eagle, Idaho.
Legal Proceedings
From time to time we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. We do not anticipate
incurring any material liability as a result of such litigation, nor do we
expect any material impact on our financial position, results of operations or
cash flows.
110
MANAGEMENT
Management of Home Federal Bancorp
The Board of Directors of Home Federal Bancorp will consist of the same
individuals who serve as directors of Home Federal. The Board of Directors of
Home Federal Bancorp will be divided into three classes, each containing
approximately one-third of the directors. The directors will be elected by the
stockholders of Home Federal Bancorp, including Home Federal MHC, for three-year
terms, or until their successors are elected. One class of directors, consisting
of N. Charles Hedemark and Thomas W. Malson, has a term of office expiring at
the first annual meeting of stockholders after the completion of the offering. A
second class of directors, consisting of Fred H. Helpenstell, Richard J.
Schrandt and Daniel L. Stevens, has a term of office expiring at the second
annual meeting of stockholders after the completion of the offering. The third
class of directors, consisting of Robert A. Tinstman and James R. Stamey, has a
term of office expiring at the third annual meeting of stockholders after the
completion of the offering.
The following individuals are the executive officers of Home Federal
Bancorp and hold the offices set forth opposite their names.
Name Position Held With Home Federal Bancorp
-------------------- --------------------------------------------
Daniel L. Stevens Chairman of the Board, President and Chief
Executive Officer
Robert A. Schoelkoph Senior Vice President, Treasurer and Chief
Financial Officer
Roger D. Eisenbarth Senior Vice President and Secretary
The executive officers of Home Federal Bancorp are elected annually and
hold office until their respective successors have been elected or until death,
resignation or removal by the Board of Directors.
Information concerning the principal occupations, employment and
compensation of the directors and executive officers of Home Federal Bancorp is
set forth under "- Management of Home Federal" and "- Executive Officers Who Are
Not Directors." Directors of Home Federal Bancorp initially will not be
compensated by Home Federal Bancorp but will serve and be compensated by Home
Federal. It is not anticipated that separate directors' fees will be paid to
directors of Home Federal Bancorp until such time as these persons devote
significant time to the separate management of Home Federal Bancorp's affairs,
which is not expected to occur until Home Federal Bancorp becomes actively
engaged in additional businesses other than holding the stock of Home Federal.
Home Federal Bancorp may determine that such compensation is appropriate in the
future.
Management of Home Federal
Because Home Federal is a federally-chartered mutual savings and loan
association, its members have elected its Board of Directors. Upon completion of
the stock offering, the directors of Home Federal immediately prior to the
offering will continue to serve as directors of Home Federal in stock form. The
Board of Directors of Home Federal in stock form will consist of seven directors
divided into three classes, with approximately one-third of the directors
elected at each annual meeting of stockholders. Because Home Federal Bancorp
will be the only stockholder of Home Federal following the reorganization, the
Board of Directors of Home Federal Bancorp will elect the directors of Home
Federal.
111
The following table sets forth certain information regarding the Board
of Directors of Home Federal.
Age as of Director Current Term of
Name March 31, 2004 Position Held With Home Federal Since Office Expires
----------------------------------------------------------------------------------------------------------------------
Daniel L. Stevens 60 Chairman of the Board, President 1996 2006
and Chief Executive Officer
Fred H. Helpenstell, M.D. 73 Director 1991 2006
Thomas W. Malson 74 Director 1986 2005
N. Charles Hedemark 61 Director 1983 2005
Richard J. Schrandt 53 Director 1995 2006
James R. Stamey 60 Director 2001 2007
Robert A. Tinstman 57 Director 1999 2007
The business experience of each director for at least the past five
years is set forth below.
Daniel L. Stevens is President and Chief Executive Officer of Home
Federal, a position he has held since joining Home Federal in 1995. Mr. Stevens
became a director in 1996 and has served as Chairman of the Board since 2001. He
has been in the financial services industry for over 30 years and has served as
a senior officer or chief executive officer for four other mutual and stock
thrifts during his career. He is Vice Chairman of the Board of Directors of the
Federal Home Loan Bank of Seattle, as well as serving as the Chairman of the
Audit Committee and a member of the Financial Operations Committee. Mr. Stevens
has been a director of the Federal Home Loan Bank of Seattle for eight years. He
serves on America's Community Bankers Federal Home Loan Bank System Committee
and the America's Community Bankers Credit Union Working Group, and co-chairs
the Idaho Bankers Association Credit Union Task Force. He is Chairman of the
Board of Directors and Executive Committee of the Boise Metro Chamber of
Commerce and serves as a director for the Idaho Community Bankers Association,
Idaho Community Reinvestment Corporation and the Midwest Conference of Community
Bankers. He is a director of the Boise State University Foundation, past member
of the Boise Philharmonic Association Board of Directors, past member of the
Idaho Supreme Court Advisory Council and past Chairman of the United Way of
Treasure Valley and the Nampa Neighborhood Housing Services Board of Directors.
Fred H. Helpenstell, M.D. is a retired physician. Dr. Helpenstell
earned his Bachelors Degree in chemistry and zoology from Grinnell College, Iowa
and his medical degree from the University of Illinois Medical School. After
becoming an orthopedic surgeon, he opened a practice in Idaho. He served on the
Idaho State Board of Medical Examiners from 1968 until 1975 and was President of
the Board of Directors of Mercy Medical Center in Nampa. After volunteering his
orthopedic skills in Nepal, he spent seven years as chair of the Nepal Program
for Health Volunteers Overseas. Dr. Helpenstell is a director of Terry Reilly
Health Services, the Boise Philharmonic Association and the Boise Philharmonic
Foundation.
Thomas W. Malson has been the owner and Chief Executive Officer of
Robertson Supply, Inc., a wholesale pipe distributor located in Nampa, Idaho
since 1959.
N. Charles Hedemark is Executive Vice President and Chief Operating
Officer of Intermountain Gas Company, a natural gas utility company, where he
has been an employee since 1965. Mr. Hedemark is a graduate of Albertson College
of Idaho and the Executive Program at Stanford University. He is the immediate
past president of the Northwest Gas Association in Portland, Oregon and the
Commission of the Capital City Development Corporation. He is past Chairman of
Blue Cross of Idaho's Board of Directors, the Boise Metro Chamber of Commerce
and the United Way of Ada County, and past President of the Boise School
Foundation.
Richard J. Schrandt is retired after owning D&B Supply Co., Inc., a
home and farm supply business, from 1985 until 2002. Mr. Schrandt is a member of
the Caldwell Rotary Club.
112
James R. Stamey is a retired banker, having been employed by U.S. Bank
from 1985 until 2001, where he last served as President of U.S. Bank, Idaho and
Executive Vice President and Manager of Corporate Banking of the Intermountain
Region. Mr. Stamey is President of the Library Foundation. He also served as
President of the Idaho Association of Commerce and Industry and served on the
Board of Directors for the Boise Philharmonic, the Idaho Bankers Association and
the Boise Rotary Club.
Robert A. Tinstman has been Executive Chairman of the James
Construction Group, LLC, a construction company, since May 2002. Prior to that,
Mr. Tinstman was the sole owner of Tinstman & Associates, a construction
consulting company, from May 1999 until May 2002. He served as President and
Chief Executive Officer of the Morrison-Knudsen Company from 1995 until February
1999, where he had been employed since May 1974. Mr. Tinstman is also a director
of IDACORP, Inc. and CNA Surety.
Executive Officers Who Are Not Directors
Each of the executive officers of Home Federal will retain his or her
office following the reorganization. Officers are elected annually by the Board
of Directors of Home Federal. The business experience for at least the past five
years for each of the five executive officers of Home Federal who do not serve
as directors is set forth below.
Robert A. Schoelkoph is Senior Vice President, Treasurer and Chief
Financial Officer of Home Federal and is 51 years of age. Mr. Schoelkoph joined
Home Federal in 1980. Mr. Schoelkoph was controller of Home Federal from 1980
until 1983 and has served as Chief Financial Officer and Treasurer since 1983.
He is a member of the Board of Directors and past Chairman of the Idaho
Employers Council and a member of the Board of Directors of the Nampa Shelter
Foundation. Mr. Schoelkoph is a certified public accountant.
Roger D. Eisenbarth is Senior Vice President, Secretary and Chief
Lending Officer of Home Federal and is 57 years of age. Mr. Eisenbarth joined
Home Federal as Vice President, Caldwell Branch Manager in 1978, and has served
in his current capacity since November 1993. Prior to joining Home Federal, Mr.
Eisenbarth served in various branch and regional management positions with Bank
of Idaho and Idaho First National Bank. He is currently active in Leadership
Nampa of the Nampa Chamber of Commerce, is on the Board of Directors of the
economic development organizations, Caldwell Unlimited, Inc. and the Idaho
Community Reinvestment Corp., and is an honorary Board member and past President
of Caldwell Night Rodeo.
Lynn A. Sander is Senior Vice President/Retail Banking of Home Federal
and is 51 years of age. Ms. Sander joined Home Federal in May 2000. Ms. Sander
served as Vice President/Sales Management from May 2000 until she was appointed
to her current position in July 2001. Prior to that, she was Senior Vice
President, Account Manager for Fairmont/Aspen Performance Group, a sales and
service consulting company, from June 1999 to May 2000. From 1987 until December
1998, Ms. Sander was employed by KeyBank of Idaho and its affiliate KeyCorp
Management Company, where her last position was Vice President/Core Banking
Territory Manager. She was Fundraising Chairman of the Idaho Anne Frank Human
Rights Memorial, and currently serves as a member of the Board of Directors of
the United Way of Treasure Valley and a member of the Leukemia Cup Committee of
the Leukemia Society. Ms. Sander will chair the Treasure Valley United Way
Campaign for 2004-2005.
Denis J. Trom is Senior Vice President/Human Resources of Home Federal
and is 58 years of age. Mr. Trom joined Home Federal in April 2002. Mr. Trom was
previously employed by U.S. Bancorp, Minneapolis, Minnesota from 1978 until
2002. He held various human resource, training and organizational development
positions with U.S. Bancorp during his 23 years of employment, most recently
serving as Vice President/Senior Regional Human Resources Consulting Manager
from 1999 until 2002. Mr. Trom is active in the Society for Human Resource
Management, American Society for Training & Development, the Professional
Association for Compensation, Benefits and Total Rewards, and church activities.
Karen Wardwell is Senior Vice President/Operations and Technology of
Home Federal and is 47 years of age. Ms. Wardwell joined Home Federal in August
2001 as Vice President and Director of Internal Audit, a position
113
she held until she was promoted to Director of Retail Operations in 2002 and
then to her current position in May 2003. Ms. Wardwell was previously employed
by Wells Fargo, formerly First Security Bank, Boise, Idaho, from 1998 until
August 2001. She served as Assistant Vice President and Manager of various
production groups within the Consumer Loan Service Center. Prior to that, she
was employed at West One Bank from 1981 until August 1996. In her 15-year career
with West One, she held various positions in operations and information
technology. Her last position was Assistant Vice President and Manager in the
Consumer Loan Service Center. Ms. Wardwell is in her final year of the BAI
Graduate School of Operations and Technology at Vanderbilt University. She is a
member of the Leadership Boise program of the Boise Area Chamber of Commerce,
and a member of the Scholarship Committee and former Board Treasurer of the
Boise Capital Soccer Club.
Meetings and Committees of the Board of Directors
Our Board of Directors meets monthly. During the year ended September
30, 2003, the Board of Directors held 12 regular meetings and one strategic
planning session. No director missed more than one meeting of the total meetings
of the Board of Directors and committees on which such director served during
this period. We currently have standing Audit, Loan, Compensation, Nominating
and Asset-Liability Committees.
The Audit Committee is comprised of Directors Tinstman (Chairman),
Hedemark, Schrandt and Stamey. The Audit Committee meets quarterly and on an as
needed basis. The Audit Committee evaluates the effectiveness of Home Federal's
internal controls for safeguarding its assets and ensuring the integrity of the
financial reporting. The Committee hires the independent auditors and reviews
the audit report prepared by the independent auditors. This committee met four
times during the year ended September 30, 2003.
The Loan Committee is comprised of the members of the Board of
Directors, the Chief Lending Officer, the Residential Lending Operations Manager
and a staff underwriter. Mr. Stevens is the Chairman of this Committee. The Loan
Committee meets as needed to monitor loan, investment and funding activities;
and to establish, review and revise loan and investment policies and practices.
This Committee met three times in addition to regular Board of Directors'
meetings during the year ended September 30, 2003. Loan Committee members
receive no additional fees for serving on the Committee.
The Compensation Committee is comprised of Directors Hedemark
(Chairman), Helpenstell, Malson and Stevens (ex-officio). The Compensation
Committee meets annually and on an as needed basis. The Committee provides
general oversight to the personnel, compensation and benefits related matters of
Home Federal. This Committee met three times during the year ended September 30,
2003.
The Nominating Committee is comprised of two Board members, one of whom
serves as Chairman. The Nominating Committee is appointed annually by the
Chairman of the Board. Members of the Committee are selected from the pool of
directors who are not up for election during the appointment year. The
Nominating Committee meets annually and on an as needed basis and is responsible
for selecting qualified individuals to fill expiring director's terms and
openings on the Board of Directors. This Committee met once during the year
ended September 30, 2003. Nominating Committee members receive no additional
fees for serving on the Committee.
The Asset-Liability Committee is comprised of the entire Board of
Directors. The Committee reviews and gives general direction to the activities
of the management Asset-Liability Committee. The Asset-Liability Committee meets
as a part of the regular monthly Board meetings, and its members receive no
additional fees for serving on the Committee.
Directors' Compensation
Directors' Fees. In the past, members of Home Federal's Board of
Directors have received a monthly retainer of $1,000. Each director, except for
Chairman Stevens, also received $250 for each committee meeting attended and the
committee chair received an additional $50 per committee meeting attended. Total
fees paid to directors during the year ended September 30, 2003 were $90,100. In
June 2004, the Board of Directors voted to
114
increase the fees, and Board members now receive an annual retainer of $15,000
and also receive $750 for each committee meeting attended.
Deferred Incentive Plan. Home Federal maintains a nonqualified deferred
incentive plan for directors. All members of the Board of Directors participate
in the plan. The plan provides an incentive award percentage determined by
reference to Home Federal's return on assets and return on equity for the year.
Each year, the percentage is determined and multiplied by the participant's
directors' fees for the year. The resulting amount is set aside in an unfunded
deferral account for that participant. Participants may also elect to defer all
or a part of their directors' fees into the deferral account under the plan. The
deferral accounts are credited annually with an earnings percentage equal to
Home Federal's return on equity percentage for the year. Upon the participant's
termination of service, the value of the participant's combined deferral
accounts will begin to be paid. Hardship distributions are permitted. The plan
also provides a death benefit equal to the greater of the value of the
participant's deferral accounts, or a fixed death benefit ranging from $38,000
to $231,000, as set forth in the particular participant's agreement. All
benefits are paid over 120 months, and during that period, the deferral account
is adjusted for interest. For the year ended September 30, 2003, $119,000 was
credited to the deferral accounts of all of the participants, with each
participant being allocated the amount required under the plan.
Indexed Retirement Plan. Home Federal also maintains an unfunded
nonqualified retirement plan for directors. All members of the Board of
Directors participate in the plan. Each year under the plan, each director will
be credited an amount equal to the difference between the actual cash surrender
value of a life insurance policy and the value of a hypothetical account which
is credited with an after-tax return based on an investment in one-year U.S.
Treasury bonds, adjusted to reflect a pre-tax return. This is the primary
benefit under the plan. Directors retiring on their normal retirement date or
with more than ten years of service also receive a secondary benefit. The
secondary benefit is an annual benefit, beginning upon the director's normal
retirement age, which is generally equal to the difference between the earnings
on the life insurance policy and the after-tax return on a hypothetical
investment account, adjusted to reflect a pre-tax return. The primary benefit
begins upon the director's normal retirement date (except in the case of early
termination or disability, in which case the distribution begins upon the
director's termination of service), and will be paid over 120 months without an
interest adjustment. The secondary benefit, if payable, will be paid over the
director's life (or 10 years, if the director terminates service for reasons
other than normal retirement). If the director's services are terminated within
24 months following a change in control, the primary and secondary benefit will
be paid over 120 months beginning upon the director's termination of service.
The plan defines the term "change in control" as having occurred when (1) any
person, as that term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934 (with the exception of Home Federal Bancorp or certain
persons acting on behalf of Home Federal Bancorp), is or becomes the beneficial
owner of 25% or more of the combined voting power of Home Federal Bancorp's then
outstanding securities; (2) individuals who are members of the Board cease for
any reason to constitute at least a majority thereof (with certain exceptions);
(3) the stockholders of Home Federal Bancorp approve a merger of consolidation
of Home Federal Bancorp with any other corporation (other than certain mergers
or consolidations where either there is continued ownership of at least 50% of
the combined voting power of Home Federal Bancorp stockholders, or no person (as
defined above) acquires more than 25% of the combined voting power of Home
Federal Bancorp's then outstanding securities); or (4) the stockholders of Home
Federal Bancorp approve a plan of complete liquidation or the sale or
disposition by Home Federal Bancorp of all or substantially all of the assets of
Home Federal Bancorp (or any transaction having a similar effect). The plan also
provides a lump sum death benefit. All plan benefits are fully vested. For the
year ended September 30, 2003, $210,000 was credited to the accounts of all of
the participants, with each participant being allocated the amount required
under the plan.
Split Dollar Death Benefits. Home Federal has also entered into life
insurance split dollar agreements with each of the members of the Board of
Directors, except for Thomas W. Malson, whereby their beneficiaries will receive
certain death benefits if the director should die while a member of the Board.
Home Federal has purchased life insurance policies for each participant in order
to provide the benefit, and Home Federal pays all premiums due on the policies.
Home Federal is entitled to an amount equal to the greater of the cash value of
the insurance policies or the aggregate premiums paid by Home Federal less any
outstanding indebtedness to the insurer.
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Executive Compensation
Summary Compensation Table. The following table sets forth a summary of
certain information concerning the compensation paid by Home Federal, including
amounts deferred to future periods by the officers, for services rendered in all
capacities during the year ended September 30, 2003 to the President and Chief
Executive Officer of Home Federal and the three other most highly compensated
executive officers of Home Federal who received total annual salary and bonus in
excess of $100,000, also known as "named executive officers."
Annual Compensation (1) Compensation Awards (2)
----------------------------- --------------------------
Restricted
Fiscal Stock All Other
Name and Principal Position Year Salary Incentive (3) Award Options Compensation (4)
------------------------------ ---------- ------------ --------------- ------------ ----------- -------------------
Daniel L. Stevens 2003 $184,008 $117,635 -- -- $174,399
President and
Chief Executive Officer
Robert A. Schoelkoph 2003 100,011 63,936 -- -- 53,995
Chief Financial Officer
Roger D. Eisenbarth 2003 96,000 61,372 -- -- 68,419
Chief Credit Officer
Lynn A. Sander 2003 88,082 56,310 -- -- 56,874
Senior Vice President
of Retail Banking
--------
(1) Home Federal provides the executive officers with certain other personal
benefits, the aggregate value of which did not exceed the lesser of $50,000
or 10% of the total annual salary and bonus reported for each officer. The
value of these benefits is not included in this table.
(2) As a mutual institution, Home Federal does not have any stock option or
restricted stock plans. Home Federal does, however, intend to adopt such
plans following the reorganization. See "- Benefits - Other Stock Benefit
Plans."
(3) Incentive amounts were accrued for fiscal 2003 and paid on November 5,
2003. The incentive compensation was based on a combination of both
individual and Home Federal income performance. Individual performance
standards were established at the beginning of the fiscal year.
(4) Includes the following amounts: for Mr. Stevens, employer matching
contributions to 401(k) of $5,750, accrual made under salary continuation
agreement of $80,325 and compensation credited under deferred incentive
agreement of $88,324; for Mr. Schoelkoph, employer matching contributions
to 401(k) of $4,980, accrual made under salary continuation agreement of
$20,213 and compensation credited under deferred incentive agreement of
$28,802; for Mr. Eisenbarth, employer matching contributions to 401(k) of
$4,800, accrual made under salary continuation agreement of $28,598 and
compensation credited under deferred incentive agreement of $35,021; and
for Ms. Sander, employer matching contributions to 401(k) of $4,601,
accrual made under salary continuation agreement of $25,489 and
compensation credited under deferred incentive agreement of $26,784.
Employment Agreements for Chief Executive Officer. In connection with
the reorganization, Home Federal Bancorp and Home Federal intend to enter into
separate three-year employment agreements with Daniel L. Stevens. Under the
employment agreements, the aggregate initial base salary level for Mr. Stevens
will be $205,000, which amount may be increased at the discretion of the Board
of Directors or an authorized committee of the Board. On each anniversary of the
initial date of the employment agreements, the term of the agreements will be
extended for an additional year unless notice is given by the Board of Directors
to Mr. Stevens at least 90 days prior to the anniversary date. The agreements
may be terminated by Home Federal or Home Federal Bancorp, as appropriate, at
any time, by Mr. Stevens if he is assigned duties inconsistent with his initial
position, duties and responsibilities, or
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upon the occurrence of certain events. If Mr. Stevens's employment is terminated
without cause or upon his voluntary termination following the occurrence of an
event described in the preceding sentence, Home Federal or Home Federal Bancorp,
as appropriate, would be required to honor the terms of the agreement through
the expiration of the then current term, including payment of cash compensation
and continuation of employee benefits.
The employment agreements also provide for a severance payment and
other benefits if Mr. Stevens is involuntarily terminated within 12 months
following a change in control of Home Federal Bancorp. The agreements authorize
severance payments on a similar basis if Mr. Stevens voluntarily terminates his
employment following a change in control because he is assigned duties
inconsistent with his position, duties and responsibilities immediately prior to
the change in control. The agreements define the term "change in control" as
having occurred when (1) any person, as that term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (with the exception of Home Federal
Bancorp or certain persons acting on behalf of Home Federal Bancorp), is or
becomes the beneficial owner of 25% or more of the combined voting power of Home
Federal Bancorp's then outstanding securities; (2) individuals who are members
of the Board cease for any reason to constitute at least a majority thereof
(with certain exceptions); (3) the stockholders of Home Federal Bancorp approve
a merger of consolidation of Home Federal Bancorp with any other corporation
(other than certain mergers or consolidations where either there is continued
ownership of at least 50% of the combined voting power of Home Federal Bancorp
stockholders, or no person (as defined above) acquires more than 25% of the
combined voting power of Home Federal Bancorp's then outstanding securities); or
(4) the stockholders of Home Federal Bancorp approve a plan of complete
liquidation or the sale or disposition by Home Federal Bancorp of all or
substantially all of the assets of Home Federal Bancorp (or any transaction
having a similar effect).
The maximum value of the severance benefits under each employment
agreement is 2.99 times Mr. Stevens's average annual compensation during the
five-year period prior to the effective date of the change in control (known as
the base amount). The employment agreements provide that the value of the
maximum benefit be distributed in the form of a lump sum cash payment equal to
2.99 times Mr. Stevens's base amount, and continued coverage under Home Federal
Bancorp's and Home Federal's health, life and disability programs for a 36-month
period following the change in control, the total value of which does not exceed
2.99 times his base amount. Assuming that a change in control had occurred at
March 31, 2004 and that Mr. Stevens elected to receive a lump sum cash payment,
he would be entitled to a payment of approximately $692,000. Section 280G of the
Internal Revenue Code provides that severance payments (either separately or in
conjunction with other payments made on account of a change in control) that
equal or exceed three times the individual's base amount will result in Mr.
Stevens receiving "excess parachute payments" if the payments are conditioned
upon a change in control. Individuals receiving parachute payments in excess of
2.99 times of their base amount are subject to a 20% excise tax on the amount by
which the value of the individual's change in control benefits exceed one times
the individual's base amount (the excess parachute payment). If excess parachute
payments are made, Home Federal Bancorp and Home Federal would not be entitled
to deduct the amount of these excess payments. The employment agreements provide
that severance and other payments that are subject to a change in control will
be reduced as much as necessary to ensure that no amounts payable to the
executive will be considered excess parachute payments.
Severance Agreements for Executive Officers. In connection with the
reorganization, Home Federal intends to enter into three-year change in control
severance agreements with each of Robert A. Schoelkoph, Roger D. Eisenbarth,
Lynn A. Sander, Denis J. Trom and Karen Wardwell. On each anniversary of the
initial date of the severance agreements, the term of each agreement may be
extended for an additional year at the discretion of the Board or an authorized
committee of the Board. The severance agreements also provide for a severance
payment and other benefits if the executive is involuntarily terminated after a
change in control of Home Federal Bancorp. The agreement also authorizes
severance payments where the executive voluntarily terminates employment
following a change in control because of being assigned duties inconsistent with
the executive's position, duties, responsibilities and status immediately prior
to such change in control. The agreement defines the term "change in control" in
the same manner as defined under Mr. Stevens's employment agreement, described
above. The severance benefit is equal to 2.99 times the executive's average
annual compensation during the five-year period prior to the effective date of
the change in control (known as the base amount). This amount will be paid to
the executive in a cash lump sum within 25 days after the later of the date of
the change in control or the date of the executive's termination.
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Home Federal also will continue to pay, for the remaining term of the
executive's agreement, the life, health and disability coverage of the executive
and the executive's eligible dependents. Assuming that a change in control had
occurred at March 31, 2004 and that each executive elected to receive a lump sum
cash payment, Messrs. Schoelkoph and Eisenbarth and Ms. Sander, the named
executive officers, would be entitled to payments of approximately $384,000,
$377,000 and $303,000, respectively. Plan benefits are reduced to the extent
necessary to avoid the payment of an excise tax under Section 280G of the
Internal Revenue Code (relating to excess parachute payments upon a change in
control).
Deferred Incentive Plan for Executive Officers. Home Federal maintains
an unfunded nonqualified deferred incentive plan for designated executive
employees. Participation in the plan is at the discretion of the Board of
Directors. The plan provides an incentive award percentage determined by
reference to Home Federal's return on assets for the year. The incentive award
is conditioned on Home Federal maintaining a stable-to-improving trend on return
on assets. Each year, the percentage is determined and multiplied by the
participant's base salary for the year. The resulting amount is set aside in an
unfunded deferral account for that participant. The deferral account is credited
annually with an earnings percentage equal to the percentage increase in Home
Federal's net worth over the year. Upon the participant's termination of
employment after the participant's normal retirement date or disability, or an
involuntary termination within 24 months following a change in control of Home
Federal Bancorp, the value of the participant's deferred account will begin to
be paid. The agreement defines the term "change in control" in the same manner
as defined under Mr. Stevens's employment agreement, described above. Upon the
participant's termination of employment after the participant's early retirement
date, the value of the participant's deferral account, reduced to reflect the
early commencement of benefits, and further reduced by ten percent for each year
of service less than ten, will begin to be paid. Upon the participant's
termination of employment prior to the participant's early retirement date, the
value of the participant's deferral account, reduced by ten percent for each
year of service less than ten, will be paid beginning on the participant's
normal retirement date. Hardship distributions are permitted. A death benefit
also is provided under the plan equal to the greater of the value of the
participant's deferral account, or $683,000, $613,000, $490,000 and $707,000 for
Messrs. Stevens, Schoelkoph and Eisenbarth and Ms. Sander, respectively. All
benefits are paid over 180 months, and during that period, the deferral account
is adjusted for interest. Benefits are reduced to the extent necessary to avoid
the payment of an excise tax under Section 280G of the Internal Revenue Code
(relating to excess parachute payments upon a change in control).
Salary Continuation Plan for Executive Officers. Home Federal maintains
an unfunded nonqualified deferred compensation plan for designated executive
employees. Participation in the plan is at the discretion of the Board of
Directors. Under the plan, if the participant makes the required contributions,
then upon the participant's normal retirement date (age 65), the plan will pay a
monthly benefit equal to 50% of the average of the participant's final 36 months
of base salary (the final salary benefit), plus the participant's deferral
account balance. The participant's deferral account balance is the sum of the
participant's elective deferrals plus interest credited at prime minus one
percent. The plan provides a reduced monthly benefit if the participant
terminates employment as a result of early retirement (termination before age
65). The early retirement benefit is the participant's vested accrual balance
plus the deferral account balance as defined above. Vesting occurs at a rate of
ten percent per plan year. The plan also provides a disability benefit, which is
the same as the early retirement benefit except that the benefit is fully
vested. There is also a change in control benefit (if the participant is
involuntarily terminated within 24 months following the change in control) equal
to (1) the participant's accrual balance determined as of the end of the month
preceding the change in control, (2) the participant's deferral account balance
as defined above, and (3) 2.99 times the participant's base annual salary as of
the change in control. Plan benefits are reduced to the extent necessary to
avoid the payment of an excise tax under Section 280G of the Internal Revenue
Code (relating to excess parachute payments upon a change in control). The
agreement defines the term "change in control" in the same manner as defined
under Mr. Stevens's employment agreement, described above. In the event of the
participant's death, the participant's beneficiary would receive the sum of the
participant's projected benefit and his deferral account balance as defined
above. The participant's projected account is the final salary benefit the
participant would have received had he attained age 65, assuming a 4% annual
increase in the participant's base salary. The final salary benefit paid in
connection with a participant's normal retirement will be paid in monthly
payments over 180 months and other payments based on accrual balances will be
paid over 180 months, with interest credited on unpaid amounts at 7.5% per year.
Final salary benefits begin upon the participant's termination of service after
the participant's normal
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retirement date, death or disability. Final salary benefits paid on account of
early retirement begin upon the participant's attainment of age 65. The
participant's deferral account balance will be paid in a lump sum within 90 days
of the participant's termination of employment. Under the agreements, Messrs.
Stevens, Schoelkoph and Eisenbarth and Ms. Sander would receive monthly benefits
of approximately $9,000, $6,900, $5,200 and $6,500, respectively, upon
retirement or after attaining the normal retirement age.
Benefits
General. Home Federal currently provides health and welfare benefits to
its employees, including hospitalization, comprehensive medical insurance,
dental, life, short-term and long-term disability insurance, subject to certain
deductibles and copayments by employees. Home Federal also provides certain
retirements benefits. See Note 8 of the Notes to Consolidated Financial
Statements.
401(k) Plan. Home Federal maintains the Home Federal 401(k) Plan and
Trust for the benefit of its eligible employees. The plan is intended to be a
tax-qualified retirement plan under Sections 401(a) and 401(k) of the Internal
Revenue Code of 1986, as amended. Eligible employees of Home Federal are
eligible to participate in the 401(k) part of the plan. Eligible employees of
Home Federal who have completed one year of service are eligible to participate
in the matching contribution and profit-sharing parts of the plan (except for
employees employed on December 31, 1995, who are immediately eligible to
participate in the plan.) Generally, participants direct the investment of the
plan assets.
During 2004, participants may contribute the lesser of $13,000 or 100%
of their annual compensation through a pre-tax salary reduction election. The
dollar limit increases to $14,000 in 2005 and $15,000 in 2006 and beyond. During
2004, participants 50 years of age or more, may elect to make an additional
$3,000 pre-tax salary reduction election. The dollar limit increases to $4,000
in 2005 and $5,000 in 2006 and beyond. Home Federal matches 401(k) salary
deferrals in such years and in such amounts as it determines in its discretion.
Home Federal may also make profit-sharing contributions in such years and in
such amounts as it determines in its discretion. Profit-sharing contributions,
if made, are allocated proportionately based on compensation among participants
who are actively employed on the last day of the plan year, or who have
terminated employment during the year and have completed at least 501 hours of
service during that plan year. Participants are at all times 100% vested in
their salary reduction contributions and the earnings thereon. Participants vest
in matching contributions and profit-sharing contributions and the earnings
thereon at the rate of 20% per year, beginning with the completion of their
second year of service with full vesting occurring after six years of service.
For the plan's fiscal year ended December 31, 2003, Home Federal incurred
contribution-related expenses of $129,000 in connection with the 401(k) plan.
For the plan's fiscal year ended December 31, 2003, employees contributed
$363,000 to the plan.
Incentive Compensation Plan for Employees. Home Federal maintains an
incentive compensation plan for employees. Participation in the plan is at the
discretion of the Board of Directors. The plan provides a table that sets out an
incentive award percentage. The incentive award percentage is determined by
reference to Home Federal's return on assets and return on equity for the year.
Each year, the percentage is determined and multiplied by the participant's base
salary for the year. Awards are paid soon as practicable following the end of
the performance period.
Incentive Compensation Plan for Retail Employees. All customer service,
sales and supervisory employees working in Home Federal's branches are eligible
to participate in the Sales Excellence incentive plan. The plan is designed to
recognize and reward outstanding sales and referral performance, increase sales
and improve Home Federal's profitability, improve morale and teamwork, attract
and retain the best employees, and improve overall customer retention. The plan
pays a quarterly incentive based on each team's performance compared to stated
goals. The amount of incentive paid varies by position, with district sales
managers and stores sales managers receiving the largest incentives followed by
sales associates and customer service associates. A year-end incentive bonus is
paid if the branch meets or exceeds its total annual goals.
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Sales Commission Plans for Residential Real Estate Lending Employees.
All residential real estate district managers, loan officers and loan
originators are paid a monthly sales commission in addition to a base salary.
Commissions are paid on closed and funded loans only. For loan originators,
commissions are paid on each dollar of production over $250,000 per month and
increase when production exceeds $1 million in any month. For loan officers and
district managers, commissions vary based on the type of loan closed, with
higher commissions paid for new purchase transactions. Commissions increase as
volume targets are exceeded during the year. District managers also earn an
additional commission based on the production of the loan officers and
originators reporting directly to them. The Vice President, Sales Manager for
residential real estate lending earns a monthly commission based on the overall
production of all lenders and originators.
Employee Severance Compensation Plan. Home Federal's Board of Directors
intends to, in connection with the reorganization and stock offering, establish
the Home Federal Employee Severance Compensation Plan which will provide
eligible employees with severance pay benefits in the event of a change in
control of Home Federal Bancorp following the stock offering. Management
personnel with employment agreements or severance agreements are not eligible to
participate in the severance plan. Generally, employees will be eligible to
participate in the severance plan if they have completed at least one year of
service with Home Federal. Employees will be credited with service prior to
adoption of the plan. The severance plan vests in each participant a contractual
right to the benefits the participant is entitled to thereunder. Under the
severance plan, in the event of a change in control of Home Federal Bancorp,
eligible employees who are terminated or terminate their employment within one
year, for reasons specified under the severance plan, will be entitled to
receive a severance payment. If a participant whose employment has terminated
has completed at least one year of service, the participant will be entitled to
a cash severance payment equal to three months for service of one to two years,
six months for service of two to three years, and six months plus one month for
each year of continuous employment over three years up to a maximum of one and
one-half times the participant's annual compensation. A participant who is a
middle manager of Home Federal prior to the change in control will receive a
minimum payment equal to one-half of the participant's annual compensation.
Individuals who are officers of Home Federal prior to the change in control will
receive a minimum payment equal to the participant's annual compensation. These
payments may tend to discourage takeover attempts by increasing costs to be
incurred by Home Federal in the event of a takeover. If the provisions of the
severance plan are triggered, the total amount of payments that would be due
thereunder, based solely upon current salary levels, would be approximately $4.2
million. It is management's belief, however, that substantially all of Home
Federal's employees would be retained in their current positions in the event of
a change in control, and that any amount payable under the severance plan would
be considerably less than the total amount that could possibly be paid under the
severance plan.
Employee Stock Ownership Plan. The Board of Directors of Home Federal
Bancorp has authorized the adoption of an employee stock ownership plan for our
eligible employees, subject to the completion of the reorganization and stock
offering. The employee stock ownership plan will be known as the Home Federal
Employee Stock Ownership Plan. The employee stock ownership plan will satisfy
the requirements for an employee stock ownership plan under the Internal Revenue
Code of 1986, as amended, and the Employee Retirement Income Security Act of
1974, as amended. Employees of Home Federal who have been credited with at least
1,000 hours of service during a designated 12-month period will be eligible to
participate in the employee stock ownership plan.
It is intended that the employee stock ownership plan will purchase
3.28% of the shares issued in the reorganization, including those issued to Home
Federal MHC. This would range between 278,528 shares, assuming 8,500,000 shares
are issued in the reorganization, and 376,832 shares, assuming 11,500,000 shares
are issued in the reorganization. It is anticipated that the employee stock
ownership plan will borrow funds from Home Federal Bancorp to purchase the
shares. This loan will equal 100% of the aggregate purchase price of the common
stock purchased by the employee stock ownership plan. The employee stock
ownership plan will repay the loan principally from the cash contributions from
Home Federal and from dividends payable on the common stock held by the employee
stock ownership plan over the anticipated ten-year term of the loan. The
interest rate for the employee stock ownership plan loan is expected to be the
prime rate as published in The Wall Street Journal on the closing date of the
stock offering. See "Pro Forma Data."
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In any plan year, we may make additional discretionary contributions to
the employee stock ownership plan for the benefit of participants. These
contributions may be used to acquire shares of common stock through the purchase
of outstanding shares in the market, from individual stockholders, or from
shares which constitute authorized but unissued shares or shares held in trust
by Home Federal Bancorp. Several factors will affect the timing, amount, and
manner of such discretionary contributions, including applicable regulatory
policies, the requirements of applicable laws and regulations, and market
conditions.
Home Federal Bancorp will hold shares purchased by the employee stock
ownership plan with the proceeds of the loan in a suspense account and release
them for allocation among eligible participants as the loan is repaid.
Discretionary contributions to the employee stock ownership plan and shares
released from the suspense account will be allocated among participants on the
basis of each eligible participant's proportional share of total compensation.
Forfeitures will be reallocated among the remaining plan participants.
Participants will fully vest in their employee stock ownership plan
account after the completion of five years of service. Employees will be
credited with service earned prior to adoption of the employee stock ownership
plan. A participant also is fully vested at normal retirement, which is the
attainment of age 65 and the completion of five years of participation in the
plan, in the event of death or disability while actively employed or upon
termination of the employee stock ownership plan. Benefits are distributable
upon a participants' normal retirement, death, disability or termination of
employment, subject to the conditions of the plan. Contributions to the employee
stock ownership plan are not fixed, so benefits payable under the employee stock
ownership plan cannot be estimated.
The Board of Directors of Home Federal Bancorp will select a trustee
for the employee stock ownership plan. The trustee must vote all allocated
shares held in the employee stock ownership plan in accordance with the
instructions of plan participants and unallocated shares must be voted in the
same ratio on any matter as those shares for which instructions are given. The
trustee will vote the allocated shares for which no instructions are received as
directed by the plan administrator.
Under applicable accounting requirements, compensation expense for a
leveraged employee stock ownership plan is recorded at the fair market value of
the employee stock ownership plan shares when committed to be released to
participants' accounts. See "Pro Forma Data."
Other Stock Benefit Plans. We intend to adopt a stock option plan for
our directors, officers and employees after the reorganization and stock
offering, subject to stockholder approval. The plan must be approved by a
majority of the total votes eligible to be cast at a duly called meeting by
stockholders (other than Home Federal MHC). Federal regulations prohibit us from
implementing this plan until six months after the reorganization and offering.
Home Federal Bancorp expects that the stock option plan will authorize
a committee of non-employee directors or the full Board of Directors, to grant
options to purchase up to 4.90% of the shares issued in the reorganization,
including the shares issued to Home Federal MHC. The stock option plan will have
a term of ten years. The committee will decide which directors, officers and
employees will receive options and the terms of those options. Generally, no
stock option will permit its recipient to purchase shares at a price that is
less than the fair market value of a share on the date the option is granted,
and no option will have a term that is longer than ten years. In addition,
executive officers and directors would be required to exercise or forfeit their
options if Home Federal becomes critically undercapitalized, is subject to
enforcement action or receives a capital directive.
If we implement a stock option plan before the first anniversary of the
stock offering, current regulations will require that:
. the total number of options available for grant to
non-employee directors be limited to 30% of the options
authorized under the plan;
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. the number of options that may be granted to any one
non-employee director be limited to 5% of the options
authorized under the plan;
. the number of options that may be granted to any officer or
employee be limited to 25% of the options authorized for the
plan;
. the options may not vest more rapidly than 20% per year,
beginning on the first anniversary of stockholder approval of
the plan; and
. accelerated vesting not be permitted except for death,
disability or upon a change in control of Home Federal or Home
Federal Bancorp.
We may obtain the shares needed for this plan by issuing additional
shares or through stock repurchases.
We also expect to implement a restricted stock plan for our directors,
officers and employees after the reorganization and stock offering. Federal
regulations prohibit us from implementing this plan until six months after the
reorganization and offering. If the recognition plan is implemented within the
first 12 months after the reorganization and offering, federal regulations
require that the plan be approved by a majority of the total votes eligible to
be cast at a duly called meeting by stockholders (other than Home Federal MHC).
If the restricted stock plan is implemented within 12 months after the
reorganization and offering, Home Federal Bancorp expects that the plan will
authorize a committee of non-employee directors or the full Board of Directors
to make restricted stock awards of up to 1.96% of the shares issued in the
reorganization, including the shares issued to Home Federal MHC. The committee
will decide which directors, officers and employees will receive restricted
stock and the terms of those awards. Home Federal Bancorp may obtain the shares
needed for this plan by issuing additional shares or through stock repurchases.
If we implement a restricted stock plan before the first anniversary of the
reorganization and stock offering, current regulations will require that:
. the total number of shares that are awarded to non-employee
directors be limited to 30% of the shares authorized under the
plan;
. the number of shares that are awarded to any one non-employee
director be limited to 5% of the shares authorized under the
plan;
. the number of shares that are awarded to any officer or
employee be limited to 25% of the shares authorized under the
plan;
. the awards may not vest more rapidly than 20% per year,
beginning on the first anniversary of stockholder approval of
the plan; and
. accelerated vesting not be permitted except for death,
disability or upon a change in control of Home Federal or Home
Federal Bancorp.
Restricted stock awards under this plan may feature employment
restrictions that require continued employment for a period of time for the
award to be vested. Awards would not be vested unless the specified employment
restrictions are met. However, pending vesting, the award recipient may have
voting and dividend rights. Executive officers and directors would be required
to forfeit the unvested portion of their restricted stock if Home Federal
becomes critically undercapitalized, is subject to enforcement action or
receives a capital directive.
Loans and Other Transactions with Officers and Directors
Home Federal has followed a policy of granting loans to officers and
directors, which fully complies with all applicable federal regulations. Loans
to directors and executive officers are made in the ordinary course of
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business and on the same terms and conditions as those of comparable
transactions with non-insider employees prevailing at the time, in accordance
with our underwriting guidelines, and do not involve more than the normal risk
of collectibility or present other unfavorable features. However, employees,
directors and officers receive a preferred rate on six-month and one-year
adjustable rate mortgages, and on certain types of consumer loans.
All loans we make to our directors and executive officers are subject
to federal regulations restricting loans and other transactions with affiliated
persons of Home Federal. Loans and available lines of credit to all directors
and executive officers and their associates totaled approximately $1.1 million
at March 31, 2004, which was 2.7% of our equity at that date. All loans to
directors and executive officers were performing in accordance with their terms
at March 31, 2004. Total deposits of directors and executive officers were
approximately $2.1 million at March 31, 2004.
HOW WE ARE REGULATED
The following is a brief description of certain laws and regulations
which are applicable to Home Federal Bancorp and Home Federal. The description
of these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations. We believe,
however, that we have included all descriptions of laws and regulations
applicable to Home Federal Bancorp and Home Federal that an investor needs to
consider in making an investment decision.
Legislation is introduced from time to time in the United States
Congress that may affect our operations. In addition, the regulations governing
us may be amended from time to time by the Office of Thrift Supervision. Any
such legislation or regulatory changes in the future could adversely affect us.
We cannot predict whether any such changes may occur.
General
Home Federal, as a federally-chartered savings institution, is subject
to federal regulation and oversight by the Office of Thrift Supervision
extending to all aspects of its operations. Home Federal also is subject to
regulation and examination by the FDIC, which insures the deposits of Home
Federal to the maximum extent permitted by law, and requirements established by
the Federal Reserve Board. Federally chartered savings institutions are required
to file periodic reports with the Office of Thrift Supervision and are subject
to periodic examinations by the Office of Thrift Supervision and the FDIC. The
investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and these institutions are prohibited from
engaging in any activities not permitted by the laws and regulations. This
regulation and supervision primarily is intended for the protection of
depositors and not for the purpose of protecting stockholders. This regulatory
oversight will continue to apply to Home Federal following the reorganization.
The Office of Thrift Supervision regularly examines Home Federal and
prepares reports for the consideration of Home Federal's Board of Directors on
any deficiencies that it may find in Home Federal's operations. The FDIC also
has the authority to examine Home Federal in its roles as the administrator of
the Savings Association Insurance Fund. Home Federal's relationship with its
depositors and borrowers also is regulated to a great extent by both federal and
state laws, especially in matters such as the ownership of savings accounts and
the form and content of Home Federal's mortgage requirements. Any change in
these regulations, whether by the FDIC, the Office of Thrift Supervision or
Congress, could have a material adverse impact on us and our operations.
Regulation and Supervision of Home Federal
General. The Office of Thrift Supervision has extensive authority over
the operations of savings institutions. As part of this authority, Home Federal
is required to file periodic reports with the Office of Thrift Supervision and
is subject to periodic examinations by the Office of Thrift Supervision and the
FDIC. When these examinations are conducted by the Office of Thrift Supervision
and the FDIC, the examiners may require Home
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Federal to provide for higher general or specific loan loss reserves. All
savings institutions are subject to a semi-annual assessment, based upon the
institution's total assets, to fund the operations of the Office of Thrift
Supervision. The Office of Thrift Supervision also has extensive enforcement
authority over all savings institutions and their holding companies, including
Home Federal and Home Federal Bancorp. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the Office of Thrift Supervision. Except under certain
circumstances, public disclosure of final enforcement actions by the Office of
Thrift Supervision is required.
In addition, the investment, lending and branching authority of Home
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by these laws. For example, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal institutions in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the Office of Thrift Supervision. Federal savings institutions are
also generally authorized to branch nationwide. Home Federal is in compliance
with the noted restrictions.
Home Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At March 31, 2004, Home Federal's lending limit
under this restriction was $5.0 million. Home Federal is in compliance with the
loans-to-one- borrower limitation.
The Office of Thrift Supervision, as well as the other federal banking
agencies, has adopted guidelines establishing safety and soundness standards on
such matters as loan underwriting and documentation, asset quality, earnings
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution that fails to comply
with these standards must submit a compliance plan.
Deposit Insurance. Home Federal is a member of the Savings Association
Insurance Fund, which is administered by the FDIC. Deposits are insured up to
the applicable limits by the FDIC and this insurance is backed by the full faith
and credit of the United States government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the Savings Association Insurance Fund. The FDIC
also has the authority to initiate enforcement actions against savings
institutions, after giving the Office of Thrift Supervision an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition. The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Under the system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based
capital") of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification of
all insured institutions is made by the FDIC for each semi-annual assessment
period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the Savings Association
Insurance Fund will be less than the designated reserve ratio of 1.25% of
Savings Association Insurance Fund insured deposits. In setting these increased
assessments, the FDIC must seek to restore the reserve ratio to that designated
reserve level, or such higher reserve ratio as established by the FDIC. The FDIC
may also impose special assessments on Savings Association Insurance Fund
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC.
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Since January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings Association Insurance Fund insured institutions has ranged from 0 to 27
basis points. However, Savings Association Insurance Fund and Bank Insurance
Fund insured institutions are required to pay a Financing Corporation
assessment, in order to fund the interest on bonds issued to resolve thrift
failures in the 1980s, equal to approximately 1.5 basis points for each $100 in
domestic deposits annually. These assessments, which may be revised based upon
the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits, will continue until the bonds mature in the year 2017.
Capital Requirements. Federally insured savings institutions, such as
Home Federal, are required to maintain a minimum level of regulatory capital.
The Office of Thrift Supervision has established capital standards, including a
tangible capital requirement, a leverage ratio or core capital requirement and a
risk-based capital requirement applicable to such savings institutions. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The Office of Thrift Supervision is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At March 31, 2004, Home Federal had intangible assets in the
form of mortgage servicing rights.
At March 31, 2004, Home Federal had tangible capital of $42.0 million,
or 8.5% of tangible assets, which is approximately $34.6 million above the
minimum requirement of 1.5% of tangible assets as of that date.
The capital standards also require core capital equal to at least 4.0%
of adjusted total assets unless an institution's supervisory condition is such
to allow it to maintain a 3.0% ratio. Core capital generally consists of
tangible capital plus certain intangible assets, including a limited amount of
purchased credit card relationships. At March 31, 2004, Home Federal's mortgage
service rights were subject to these tests. At March 31, 2004, Home Federal had
core capital equal to $42.0 million, or 8.5% of adjusted total assets, which is
$22.2 million above the minimum requirement of 4.0% in effect on that date.
The Office of Thrift Supervision also requires savings institutions to
have core capital equal to 4% of risk- weighted assets ("Tier 1 risk-based"). At
March 31, 2004, Home Federal had Tier 1 risk-based capital of $42.0 or 13.1% of
risk-weighted assets, which is approximately $29.2 million above the minimum on
that date. The Office of Thrift Supervision also requires savings institutions
to have total capital of at least 8.0% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The Office of Thrift Supervision is also authorized
to require a savings institution to maintain an additional amount of total
capital to account for concentration of credit risk and the risk of
non-traditional activities.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the Office of Thrift Supervision has assigned a risk weight of 50% for
prudently underwritten permanent one- to four-family first lien mortgage loans
not more than 90 days delinquent and having a loan-to-value ratio of not more
than 80% at origination unless insured to such ratio by an insurer approved by
Fannie Mae or Freddie Mac.
On March 31, 2004, Home Federal had total risk-based capital of $44.4
million and risk-weighted assets of $321.7 million; or total risk-based capital
of 113.8% of risk-weighted assets. This amount was $18.7 million above the 8.0%
requirement in effect on that date.
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The Office of Thrift Supervision and the FDIC are authorized and, under
certain circumstances, required to take certain actions against savings
institutions that fail to meet their capital requirements. The Office of Thrift
Supervision is generally required to take action to restrict the activities of
an "undercapitalized institution," which is an institution with less than either
a 4.0% core capital ratio, a 4.0% Tier 1 risked-based capital ratio or an 8.0%
risk- based capital ratio. Any such institution must submit a capital
restoration plan and until the plan is approved by the Office of Thrift
Supervision, may not increase its assets, acquire another institution, establish
a branch or engage in any new activities, and generally may not make capital
distributions. The Office of Thrift Supervision is authorized to impose the
additional restrictions that are applicable to significantly undercapitalized
institutions. As a condition to the approval of the capital restoration plan,
any company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or
has Tier 1 risk-based or core capital ratios of less than 3.0% or a risk-based
capital ratio of less than 6.0% and is considered "significantly
undercapitalized" will be made subject to one or more additional specified
actions and operating restrictions which may cover all aspects of its operations
and may include a forced merger or acquisition of the institution. An
institution that becomes "critically undercapitalized" because it has a tangible
capital ratio of 2.0% or less is subject to further mandatory restrictions on
its activities in addition to those applicable to significantly undercapitalized
institutions. In addition, the Office of Thrift Supervision must appoint a
receiver, or conservator with the concurrence of the FDIC, for a savings
institution, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized institution is also subject to
the general enforcement authority of the Office of Thrift Supervision and the
FDIC, including the appointment of a conservator or a receiver.
The Office of Thrift Supervision is also generally authorized to
reclassify an institution into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition. The imposition by
the Office of Thrift Supervision or the FDIC of any of these measures on Home
Federal may have a substantial adverse effect on its operations and
profitability.
Limitations on Dividends and Other Capital Distributions. Office of
Thrift Supervision regulations impose various restrictions on savings
institutions with respect to their ability to make distributions of capital,
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account.
Generally, savings institutions, such as Home Federal, that before and
after the proposed distribution are well-capitalized, may make capital
distributions during any calendar year equal to up to 100% of net income for the
year-to-date plus retained net income for the two preceding years. However, an
institution deemed to be in need of more than normal supervision by the Office
of Thrift Supervision may have its dividend authority restricted by the Office
of Thrift Supervision. Home Federal may pay dividends to Home Federal Bancorp in
accordance with this general authority.
Savings institutions proposing to make any capital distribution need
not submit written notice to the Office of Thrift Supervision prior to such
distribution unless they are a subsidiary of a holding company or would not
remain well-capitalized following the distribution. Savings institutions that do
not, or would not meet their current minimum capital requirements following a
proposed capital distribution or propose to exceed these net income limitations,
must obtain Office of Thrift Supervision approval prior to making such
distribution. The Office of Thrift Supervision may object to the distribution
during that 30-day period based on safety and soundness concerns. See "-
Regulatory Capital Requirements."
Liquidity. All savings institutions, including Home Federal, are
required to maintain sufficient liquidity to ensure a safe and sound operation.
Qualified Thrift Lender Test. All savings institutions, including Home
Federal, are required to meet a qualified thrift lender test to avoid certain
restrictions on their operations. This test requires a savings institution to
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have at least 65% of its portfolio assets, as defined by regulation, in
qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. As an alternative, the savings institution may
maintain 60% of its assets in those assets specified in Section 7701(a)(19) of
the Internal Revenue Code. Under either test, these assets primarily consist of
residential housing related loans and investments. At March 31, 2004, Home
Federal met the test with a 98.7%, ratio and has always met the test since its
effectiveness.
Any savings institution that fails to meet the qualified thrift lender
test must convert to a national bank charter, unless it requalifies as a
qualified thrift lender within one year of failure and thereafter remains a
qualified thrift lender. If such an institution has not yet requalified or
converted to a national bank, its new investments and activities are limited to
those permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new Federal Home Loan Bank
borrowings and is subject to national bank limits for payment of dividends. If
such an institution has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. If any institution that fails
the qualified thrift lender test is controlled by a holding company, then within
one year after the failure, the holding company must register as a bank holding
company and become subject to all restrictions on bank holding companies.
Community Reinvestment Act. Under the Community Reinvestment Act, every
FDIC-insured institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to help meet the credit needs of its
entire community, including low and moderate income neighborhoods. The Community
Reinvestment Act does not establish specific lending requirements or programs
for financial institutions nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
its particular community, consistent with the Community Reinvestment Act. The
Community Reinvestment Act requires the Office of Thrift Supervision, in
connection with the examination of Home Federal, to assess the institution's
record of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications, such as a merger or the
establishment of a branch, by Home Federal. An unsatisfactory rating may be used
as the basis for the denial of an application by the Office of Thrift
Supervision. Due to the heightened attention being given to the Community
Reinvestment Act in the past few years, Home Federal may be required to devote
additional funds for investment and lending in its local community. Home Federal
was examined for Community Reinvestment Act compliance and received a rating of
satisfactory in its latest examination.
Transactions with Affiliates. Generally, transactions between a savings
institution or its subsidiaries and its affiliates are required to be on terms
as favorable to the institution as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the institution's capital. Affiliates of Home
Federal include Home Federal Bancorp and any company which is under common
control with Home Federal. In addition, a savings institution may not lend to
any affiliate engaged in activities not permissible for a bank holding company
or acquire the securities of most affiliates. The Office of Thrift Supervision
has the discretion to treat subsidiaries of savings institutions as affiliates
on a case by case basis.
Pursuant to the regulations under Sections 23A and 23B of the Federal
Reserve Act, Home Federal and Home Federal Bancorp will enter into an expense
sharing agreement. Under this agreement, Home Federal Bancorp will reimburse
Home Federal for the time that employees of Home Federal devote to activities of
Home Federal Bancorp, the portion of the expense of the annual independent audit
attributable to Home Federal Bancorp and all expenses attributable to Home
Federal Bancorp's public filing obligations under the Securities Exchange Act of
1934. If Home Federal Bancorp commences any significant activities other than
holding all of the outstanding common stock of Home Federal, Home Federal
Bancorp and Home Federal will amend the expense sharing agreement to provide for
the equitable sharing of all expenses of such other activities that may be
attributable to Home Federal Bancorp.
On April 1, 2003, the Federal Reserve's Regulation W, which
comprehensively amends Sections 23A and 23B of the Federal Reserve Act, became
effective. The Federal Reserve Act and Regulation W are applicable to savings
associations such as Home Federal. The Regulation unifies and updates staff
interpretations issued over the years, incorporates several new interpretative
proposals (such as to clarify when transactions with an unrelated third
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party will be attributed to an affiliate) and addresses new issues arising as a
result of the expanded scope of non-banking activities engaged in by banks and
bank holding companies in recent years and authorized for financial holding
companies under the Gramm-Leach-Bliley Act.
In addition, Office of Thrift Supervision regulations prohibit a
savings institution from lending to any of its affiliates that is engaged in
activities that are not permissible for bank holding companies and from
purchasing the securities of any affiliate, other than a subsidiary.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the Office of
Thrift Supervision. These conflict of interest regulations and other statutes
also impose restrictions on loans to these persons and their related interests.
Among other things, these loans must generally be made on terms substantially
the same as for loans to unaffiliated individuals.
Federal Reserve System. The Federal Reserve Board requires that all
depository institutions maintain reserves on transaction accounts or
non-personal time deposits. These reserves may be in the form of cash or non-
interest-bearing deposits with the regional Federal Reserve Bank. Negotiable
order of withdrawal (NOW) accounts and other types of accounts that permit
payments or transfers to third parties fall within the definition of transaction
accounts and are subject to the reserve requirements, as are any non-personal
time deposits at a savings bank. As of March 31, 2004, Home Federal's deposit
with the Federal Reserve Bank and vault cash exceeded its reserve requirements.
Federal Home Loan Bank System. Home Federal is a member of the Federal
Home Loan Bank of Seattle, which is one of 12 regional Federal Home Loan Banks
that administers the home financing credit function of savings institutions.
Each Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the Federal Home Loan Bank System. It
makes loans or advances to members in accordance with policies and procedures,
established by the Board of Directors of the Federal Home Loan Bank, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the Federal Home Loan Bank are required to be fully secured by sufficient
collateral as determined by the Federal Home Loan Bank. In addition, all
long-term advances are required to provide funds for residential home financing.
As a member, Home Federal is required to purchase and maintain stock in
the Federal Home Loan Bank of Seattle. At March 31, 2004, Home Federal had $6.7
million in Federal Home Loan Bank stock, which was in compliance with this
requirement. In past years, Home Federal has received substantial dividends on
its Federal Home Loan Bank stock. Over the past two fiscal years such dividends
have averaged 6.08% and were 6.03% for the fiscal year ended September 30, 2003.
For the six months ended March 31, 2004, Home Federal received $148,000 in
dividends paid by the Federal Home Loan Bank of Seattle and $352,000 for the
fiscal year ended September 30, 2003.
Under federal law, the Federal Home Loan Banks are required to provide
funds for the resolution of troubled savings institutions and to contribute to
low- and moderately-priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected adversely
the level of Federal Home Loan Bank dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on the
value of Federal Home Loan Bank stock in the future. A reduction in value of
Home Federal's Federal Home Loan Bank stock may result in a corresponding
reduction in Home Federal's capital.
Affiliate Transactions. Home Federal Bancorp and Home Federal are
separate and distinct legal entities. Various legal limitations restrict Home
Federal from lending or otherwise supplying funds to Home Federal Bancorp,
generally limiting any single transaction to 10% of Home Federal's capital and
surplus and limiting all such transactions to 20% of Home Federal's capital and
surplus. These transactions also must be on terms and conditions consistent with
safe and sound banking practices that are substantially the same as those
prevailing at the time for transactions with unaffiliated companies.
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Federally insured savings institutions are subject, with certain
exceptions, to certain restrictions on extensions of credit to their parent
holding companies or other affiliates, on investments in the stock or other
securities of affiliates and on the taking of such stock or securities as
collateral from any borrower. In addition, these institutions are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit or the providing of any property or service.
Environmental Issues Associated With Real Estate Lending. The
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
a federal statute, generally imposes strict liability on all prior and present
"owners and operators" of sites containing hazardous waste. However, Congress
asked to protect secured creditors by providing that the term "owner and
operator" excludes a person whose ownership is limited to protecting its
security interest in the site. Since the enactment of the CERCLA, this "secured
creditor exemption" has been the subject of judicial interpretations which have
left open the possibility that lenders could be liable for cleanup costs on
contaminated property that they hold as collateral for a loan.
To the extent that legal uncertainty exists in this area, all
creditors, including Home Federal, that have made loans secured by properties
with potential hazardous waste contamination (such as petroleum contamination)
could be subject to liability for cleanup costs, which costs often substantially
exceed the value of the collateral property.
Regulation and Supervision of Home Federal Bancorp
General. Home Federal Bancorp will become a federal mutual holding
company subsidiary within the meaning of the Home Owners' Loan Act. It will be
required to file reports with the Office of Thrift Supervision and will be
subject to regulation and examination by the Office of Thrift Supervision. In
addition, the Office of Thrift Supervision has enforcement authority over Home
Federal Bancorp and any non-savings institution subsidiaries. This permits the
Office of Thrift Supervision to restrict or prohibit activities that it
determines to be a serious risk to Home Federal. This regulation is intended
primarily for the protection of the depositors and not for the benefit of
stockholders of Home Federal Bancorp.
Activities Restrictions. Home Federal Bancorp and its non-savings
institution subsidiaries are subject to statutory and regulatory restrictions on
their business activities specified by federal regulations, which include
performing services and holding properties used by a savings institution
subsidiary, activities authorized for savings and loan holding companies as of
March 5, 1987, and non-banking activities permissible for bank holding companies
pursuant to the Bank Holding Company Act of 1956 or authorized for financial
holding companies pursuant to the Gramm-Leach-Bliley Act.
If Home Federal fails the qualified thrift lender test, Home Federal
Bancorp must, within one year of that failure, register as, and will become
subject to, the restrictions applicable to bank holding companies. See "-
Regulation and Supervision of Home Federal - Qualified Thrift Lender Test."
Mergers and Acquisitions. Home Federal Bancorp must obtain approval
from the Office of Thrift Supervision before acquiring more than 5% of the
voting stock of another savings institution or savings and loan holding company
or acquiring such an institution or holding company by merger, consolidation or
purchase of its assets. In evaluating an application for Home Federal Bancorp to
acquire control of a savings institution, the Office of Thrift Supervision would
consider the financial and managerial resources and future prospects of Home
Federal Bancorp and the target institution, the effect of the acquisition on the
risk to the insurance funds, the convenience and the needs of the community and
competitive factors.
Waivers of Dividends by Home Federal Bancorp. Office of Thrift
Supervision regulations require Home Federal MHC to notify the Office of Thrift
Supervision of any proposed waiver of its receipt of dividends from Home Federal
Bancorp. The Office of Thrift Supervision reviews dividend waiver notices on a
case-by-case basis, and, in general, does not object to any such waiver if: (1)
the mutual holding company's board of directors determines that the waiver is
consistent with the directors' fiduciary duties to the mutual holding company's
members; (2) for as long as the savings association subsidiary is controlled by
the mutual holding company, the
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dollar amount of dividends waived by the mutual holding company are considered
as a restriction on the retained earnings of the savings association, which
restriction, if material, is disclosed in the public financial statements of the
savings association and its stock holding company; (3) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, in accordance with Statement of
Financial Accounting Standards No. 5, where the savings association determines
that the payment of the dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (4) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under Office of Thrift Supervision capital
distribution regulations.
We anticipate that Home Federal MHC will waive dividends paid by Home
Federal Bancorp, if any. Under Office of Thrift Supervision regulations, our
public stockholders would not be diluted because of any dividends waived by Home
Federal MHC (and waived dividends would not be considered in determining an
appropriate exchange ratio) in the event Home Federal MHC converts to stock
form.
Conversion of Home Federal MHC to Stock Form. Office of Thrift
Supervision regulations permit Home Federal MHC to convert from the mutual form
of organization to the capital stock form of organization (a "conversion
transaction"). There can be no assurance when, if ever, a conversion transaction
will occur, and the Board of Directors has no current intention or plan to
undertake a conversion transaction. In a conversion transaction, a new holding
company would be formed as the successor to Home Federal Bancorp (the "New
Holding Company"), Home Federal MHC's corporate existence would end and certain
depositors of Home Federal would receive the right to subscribe for additional
shares of the New Holding Company. In a conversion transaction, each share of
common stock held by stockholders other than Home Federal MHC ("minority
stockholders") would be automatically converted into a number of shares of
common stock in the New Holding Company determined pursuant to an exchange ratio
that ensures that the minority stockholders own the same percentage of common
stock in the New Holding Company as they owned in Home Federal Bancorp
immediately prior to the conversation transaction. Under Office of Thrift
Supervision regulations, minority stockholders would not be diluted because of
any dividends waived by Home Federal MHC (and waived dividends would not be
considered in determining an appropriate exchange ratio), if Home Federal MHC
converts to stock form. The total number of shares held by minority stockholders
after a conversion transaction also would be increased by any purchases by
minority stockholders in the stock offering conducted as part of the conversion
transaction.
A conversion transaction requires the approval of the Office of Thrift
Supervision as well as a majority of the votes eligible to be cast by the
stockholders of Home Federal Bancorp and a majority of the votes eligible to be
cast by the stockholders of Home Federal Bancorp other than Home Federal MHC.
Federal Securities Law
The stock of Home Federal Bancorp is registered with the SEC under the
Securities Exchange Act of 1934, as amended. Home Federal Bancorp will be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Securities Exchange Act of 1934.
Home Federal Bancorp stock held by persons who are affiliates of Home
Federal Bancorp may not be resold without registration unless sold in accordance
with certain resale restrictions. Affiliates are generally considered to be
officers, directors and principal stockholders. If Home Federal Bancorp meets
specified current public information requirements, each affiliate of Home
Federal Bancorp will be able to sell in the public market, without registration,
a limited number of shares in any three-month period.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was signed into law by President Bush on
July 30, 2002 in response to public concerns regarding corporate accountability
in connection with recent accounting scandals. The stated goals of the
Sarbanes-Oxley Act are to increase corporate responsibility, to provide for
enhanced penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and
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reliability of corporate disclosures pursuant to the securities laws. The
Sarbanes-Oxley Act generally applies to all companies that file or are required
to file periodic reports with the SEC, under the Securities Exchange Act of
1934, including Home Federal Bancorp. The Sarbanes-Oxley Act includes very
specific additional disclosure requirements and new corporate governance rules.
The Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
TAXATION
Federal Taxation
General. We will be subject to federal income taxation in the same
general manner as other corporations, with some exceptions discussed below. The
following discussion of federal taxation is intended only to summarize certain
pertinent federal income tax matters and is not a comprehensive description of
the tax rules applicable to us. Home Federal's federal income tax returns have
not been audited in the past five years.
Following the reorganization, Home Federal Bancorp anticipates that it
will file a consolidated federal income tax return with Home Federal commencing
with the first taxable year after completion of the reorganization. Accordingly,
it is anticipated that any cash distributions made by Home Federal Bancorp to
its stockholders would be considered to be taxable dividends and not as a
non-taxable return of capital to stockholders for federal and state tax
purposes.
In connection with the formation of Home Federal MHC, Home Federal
Bancorp, Home Federal and Home Federal MHC will enter into a tax allocation
agreement. Because Home Federal Bancorp will own 100% of the issued and
outstanding capital stock of Home Federal, Home Federal Bancorp and Home Federal
are members of an affiliated group within the meaning of Section 1504(a) of the
Internal Revenue Code, of which group Home Federal Bancorp is the common parent
corporation. As a result of this affiliation, Home Federal may be included in
the filing of a consolidated federal income tax return with Home Federal Bancorp
and, if a decision to file a consolidated tax return is made, the parties agree
to compensate each other for their individual share of the consolidated tax
liability and/or any tax benefits provided by them in the filing of the
consolidated federal income tax return.
Method of Accounting. For federal income tax purposes, Home Federal
currently reports its income and expenses on the accrual method of accounting
and uses a fiscal year ending on September 30 for filing its federal income tax
return.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum
tax at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum taxable income. The alternative minimum
tax is payable to the extent such alternative minimum taxable income is in
excess of an exemption amount. Net operating losses can offset no more than 90%
of alternative minimum taxable income. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years. Home
Federal has not been subject to the alternative minimum tax, nor does it have
any such amounts available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carryback
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. At March 31, 2004, Home Federal
had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. Home Federal Bancorp may
eliminate from its income dividends received from Home Federal as a wholly-owned
subsidiary of Home Federal Bancorp if it elects to file a consolidated return
with Home Federal. The corporate dividends-received deduction is 100% or 80%, in
the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return,
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depending on the level of stock ownership of the payor of the dividend.
Corporations which own less than 20% of the stock of a corporation distributing
a dividend may deduct 70% of dividends received or accrued on their behalf.
State Taxation
Idaho. Home Federal Bancorp and Home Federal are subject to the general
corporate tax provisions of the State of Idaho. Idaho's state corporate income
taxes are generally determined under federal tax law with some modifications.
Idaho taxable income is taxed at a rate of 7.6%. These taxes are reduced by
certain credits, primarily the Idaho investment tax credit in the case of the
Bank.
HOME FEDERAL'S REORGANIZATION AND STOCK OFFERING
The Board of Directors of Home Federal has adopted and the Office of
Thrift Supervision has approved our plan of reorganization and stock issuance.
The plan of reorganization and stock issuance is also subject to the approval of
our members and the satisfaction of certain other conditions imposed by the
Office of Thrift Supervision. The Office of Thrift Supervision approval does not
constitute a recommendation or endorsement of the plan.
General
On May 18, 2004, the Board of Directors of Home Federal adopted, and on
June 8, 2004 amended, a plan of reorganization and stock issuance pursuant to
which Home Federal will convert from a federally-chartered mutual savings and
loan association to a federally-chartered stock savings bank to be known as
"Home Federal Bank" and Home Federal Bancorp will offer will offer shares of its
common stock to the eligible depositors of Home Federal, the employee stock
ownership plan, other depositors and borrowers, and then to the public. Under
the plan, Home Federal will reorganize into the federal mutual holding company
structure as a wholly-owned subsidiary of Home Federal Bancorp, which in turn
will be a majority-owned subsidiary of Home Federal MHC.
Pursuant to the plan, we will accomplish our corporate change as
follows or in any other manner that is consistent with applicable federal law
and regulations and the intent of the plan of reorganization and stock issuance:
(1) Home Federal will organize an interim stock savings bank as a
wholly-owned subsidiary ("Interim One");
(2) Interim One will organize an interim stock savings bank as a
wholly-owned subsidiary ("Interim Two");
(3) Interim One will organize Home Federal Bancorp as a
wholly-owned subsidiary;
(4) Home Federal will exchange its charter for a federal stock
savings bank charter to become Home Federal and Interim One
will exchange its charter for a federal mutual holding company
charter to become Home Federal MHC;
(5) simultaneously with step (4), Interim Two will merge with and
into Home Federal with Home Federal as the resulting
institution;
(6) all of the initially issued stock of Home Federal will be
transferred to Home Federal MHC in exchange for membership
interests in Home Federal MHC;
(7) Home Federal MHC will contribute the capital stock of Home
Federal to Home Federal Bancorp and Home Federal will become a
wholly-owned subsidiary of Home Federal Bancorp; and
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(8) contemporaneously with the reorganization, Home Federal
Bancorp will offer for sale in the stock offering shares of
common stock based on the pro forma market value of Home
Federal Bancorp and Home Federal.
Home Federal Bancorp expects to receive the approval of the Office of
Thrift Supervision to become a savings and loan holding company and to own all
of the common stock of Home Federal. The reorganization will be effected only
upon completion of the sale of the minimum number of the shares of common stock
to be issued pursuant to the plan of reorganization and stock issuance.
The shares of Home Federal Bancorp common stock are first being offered
in a subscription offering to holders of subscription rights. To the extent
shares of common stock remain available after the subscription offering, shares
may be offered in a direct community offering on a best efforts basis through
Keefe, Bruyette & Woods in such a manner as to promote a wide distribution of
the shares. Shares not subscribed for in the subscription offering and direct
community offering may be offered for sale on a best efforts basis in a
syndicated community offering conducted by Keefe, Bruyette & Woods. We have the
right, in our sole discretion, to accept or reject, in whole or in part, any
orders to purchase shares of common stock received in the direct community
offering and the syndicated community offering. See "- Direct Community
Offering" and "- Syndicated Community Offering."
Subscriptions for shares will be subject to the maximum and minimum
purchase limitations set forth in the plan of reorganization and stock offering.
See "- Limitations on Stock Purchases."
The completion of the offering is subject to market conditions and
other factors beyond our control. No assurance can be given as to the length of
time following approval of the plan of reorganization by our members that will
be required to complete the sale of shares. If we experience delays, significant
changes may occur in the estimated offering range with corresponding changes in
the offering price and the net proceeds to be realized by us from the sale of
the shares. If the reorganization is terminated, we will charge all
reorganization expenses against current income and any funds collected by us in
the offering will be promptly returned, with interest, to each subscriber.
The following is a summary of material aspects of the reorganization
and stock offering. You should refer to the provisions of the plan of
reorganization and stock issuance. Copies of the plan are available for
inspection at the office of Home Federal and at the Office of Thrift
Supervision. The plan is also filed as an exhibit to the registration statement
of which this prospectus is a part, copies of which may be obtained from the
SEC. See "Where You Can Find More Information."
Our Reasons for the Reorganization
As a mutual institution, Home Federal has no authority to issue shares
of capital stock and consequently has no access to market sources of equity
capital. Only by generating and retaining earnings from year to year is Home
Federal able to increase its capital position. This reorganization is another
step in our strategic plan to increase our capital and expand our operations.
As a stock corporation upon completion of the reorganization, Home
Federal will be organized in the form used by commercial banks, most major
corporations and a majority of savings institutions. The ability to raise new
equity capital through the issuance and sale of capital stock will allow Home
Federal the flexibility to increase its capital position more rapidly than by
accumulating earnings and at times deemed advantageous by the Board of
Directors. It will also support future growth and expanded operations, including
increased lending and investment activities, as business needs require and
regulations permit. The ability to attract new capital also will help better
address the needs of the communities we serve and enhance our ability to make
acquisitions or expand into new businesses. The acquisition alternatives
available to Home Federal are quite limited as a mutual institution. However,
after the reorganization, we will have increased ability to merge with other
institutions. Finally, the ability to issue capital stock will enable us to
establish stock compensation plans for directors, officers and employees, giving
them equity interests in Home Federal Bancorp and greater incentive to improve
its performance. For a
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description of the stock compensation plans which will be adopted by us in
connection with the reorganization, see "Management - Benefits." Although Home
Federal's ability to raise capital and general business flexibility will be
improved by this reorganization and stock offering, these advantages will be
limited by the requirement in applicable laws and regulations that a mutual
holding company maintain a majority ownership interest in its savings bank
holding company subsidiary.
The advantages of the reorganization also could be achieved if Home
Federal were to reorganize into a wholly-owned subsidiary of a stock holding
company, known as a standard conversion, rather than as a second-tier subsidiary
of a mutual holding company. A standard conversion also would free Home Federal
from the restrictions on its ability to raise capital which result from the
requirement that its mutual holding company maintain a majority ownership
interest in Home Federal Bancorp. Office of Thrift Supervision regulations
require that savings institutions converting to stock form in a standard
conversion sell all of their to-be-outstanding capital stock rather than a
minority interest. The amount of equity capital that would be raised in a
standard conversion would therefore be substantially more than the amount raised
in a minority stock offering by a subsidiary of a mutual holding company. As a
result, the capital raised in a standard conversion would be significantly in
excess of the amount needed for business operations, thereby making it more
difficult for Home Federal Bancorp to achieve acceptable returns on equity. In
March 2004, Home Federal filed an application for a standard conversion with the
Office of Thrift Supervision, but withdrew it in May 2004 based on comments
received from the Office of Thrift Supervision and increased appraisal
valuations. In addition, a standard conversion would eliminate all aspects of
the mutual form or organization, whereas some are retained with the mutual
holding company structure. Completion of the reorganization does not eliminate
the possibility of Home Federal MHC converting from mutual to stock form in the
future; however, a full conversion is not contemplated at this time. See "How We
Are Regulated - Regulation and Supervision of Home Federal Bancorp - Conversion
of Home Federal MHC to Stock Form."
After considering the advantages and disadvantages of the
reorganization, as well as applicable fiduciary duties and alternative
transactions, including a reorganization into a wholly-owned subsidiary of a
stock holding company rather than as a second-tier subsidiary of a mutual
holding company, the Board of Directors of Home Federal approved the
reorganization as being in the best interests of Home Federal and equitable to
its depositors and borrowers.
Effects of the Reorganization and Stock Offering
General. The reorganization and stock offering will have no effect on
Home Federal's present business of accepting deposits and investing its funds in
loans and other investments permitted by law. Following completion of the
reorganization and stock offering, Home Federal will continue to be subject to
regulation by the Office of Thrift Supervision, and its accounts will continue
to be insured by the FDIC, up to applicable limits, without interruption. After
the reorganization, Home Federal will continue to provide services for
depositors and borrowers under current policies and by its present management
and staff.
Deposits and Loans. Each holder of a deposit account in Home Federal at
the time of the reorganization will continue as an account holder in Home
Federal after the reorganization and stock offering, and it will not affect the
deposit balance, interest rate or other terms of such accounts. Each account
will be insured by the FDIC to the same extent as before the reorganization and
stock offering. Depositors in Home Federal will continue to hold their existing
certificates, passbooks and other evidence of their accounts. The reorganization
and stock offering will not affect the loan terms of any borrower from Home
Federal. The amount, interest rate, maturity, security for and obligations under
each loan will remain as they existed prior to the reorganization and stock
offering. See "- Voting Rights" and "- Depositors' Rights if We Liquidate" below
for a discussion of the effects of the reorganization on the voting and
liquidation rights of the depositors and borrowers of Home Federal.
Continuity. The Board of Directors presently serving Home Federal will
serve as the Board of Directors of Home Federal after the reorganization and
stock offering. The initial members of the Board of Directors of Home Federal
Bancorp will consist of the individuals currently serving on the Board of
Directors of Home Federal. After the reorganization and stock offering, the
stockholders of Home Federal Bancorp will elect approximately one-third
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of Home Federal Bancorp's directors annually. All current officers of Home
Federal will retain their positions with Home Federal after the reorganization
and stock offering.
Voting Rights. After completion of the reorganization and stock
offering, depositor and borrower members will have no voting rights in Home
Federal or Home Federal Bancorp and, therefore, will not be able to elect
directors of Home Federal or Home Federal Bancorp or to control their affairs.
Currently these rights are held by depositors and borrowers of Home Federal.
After the reorganization and stock offering, voting rights in Home Federal
Bancorp will be vested exclusively in the stockholders of Home Federal Bancorp,
which will own all of the stock of Home Federal. Each holder of common stock
will be entitled to vote on any matter to be considered by the stockholders of
Home Federal Bancorp, subject to the provisions of Home Federal Bancorp's
charter. As a federally-chartered mutual holding company, Home Federal MHC will
have no authorized capital stock and no stockholders. Home Federal MHC will be
controlled by members of Home Federal, which consists of its depositors and
certain borrowers. These members have generally signed proxies giving their
voting rights to Home Federal's management. The revocable proxies that members
of Home Federal give the Board of Directors of Home Federal general authority to
cast a member's vote on any and all matters presented to the members. These
proxies are deemed to cover the member's votes as members of Home Federal MHC,
and this authority is given to the Board of Directors of Home Federal MHC.
The plan of reorganization and stock issuance also provides for the
transfer of proxy rights to the Board of Directors of Home Federal MHC. As a
result, the Board of Directors of Home Federal will be able to govern the
operations of Home Federal MHC, and Home Federal Bancorp, notwithstanding
objections raised by members of Home Federal MHC or stockholders of Home Federal
Bancorp, respectively, so long as the Board of Directors has been appointed
proxy for a majority of the outstanding votes of members of Home Federal MHC and
these proxies have not been revoked. In addition, all persons who become
depositors of Home Federal following the reorganization will have membership
rights with respect to Home Federal MHC.
Depositors' Rights if We Liquidate. In the event of a voluntary
liquidation of Home Federal prior to the reorganization, holders of deposit
accounts in Home Federal would be entitled to distribution of any assets of Home
Federal remaining after all claims of depositors and creditors are satisfied.
Following the reorganization, the holder of Home Federal's common stock, which
will be Home Federal Bancorp, would be entitled to any assets remaining upon a
liquidation, dissolution or winding up of Home Federal and, except through their
liquidation interests in Home Federal, as discussed below, holders of deposit
accounts in Home Federal would not have any interest in these assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of Home Federal MHC following completion of the reorganization,
holders of deposit accounts in Home Federal would be entitled, pro rata to the
value of their accounts and to distribution of any assets of Home Federal MHC
remaining after the claims of all creditors of Home Federal MHC are satisfied.
Stockholders of Home Federal Bancorp will have no liquidation or other rights
with respect to Home Federal solely as stockholders. In the event of a
liquidation, dissolution or winding up of Home Federal Bancorp, each holder of
shares of the common stock would be entitled to receive, after payment of all
debts and liabilities of Home Federal Bancorp, a pro rata portion of all assets
of Home Federal Bancorp available for distribution to holders of the common
stock. There currently are no plans to liquidate Home Federal, Home Federal
Bancorp or Home Federal MHC.
Tax Effects. Home Federal has received an opinion from its special
counsel, Breyer & Associates PC, McLean, Virginia, that the reorganization and
stock offering will constitute a tax free reorganization under the Internal
Revenue Code and that no gain or loss will be recognized for federal income tax
purposes by Home Federal or Home Federal Bancorp as a result of the completion
of the reorganization and stock offering. However, this opinion is not binding
on the Internal Revenue Service or the Idaho State Tax Commission. Special
counsel's opinion provides as follows:
1. The conversion of Home Federal's charter from a mutual savings
and loan association charter to a stock bank charter will
qualify as a reorganization under section 368(a)(1)(F) of the
Internal
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Revenue Code of 1986, and no gain or loss will be recognized
by Home Federal in either its mutual form ("Mutual
Association") or stock form (as the "Stock Bank") as a result.
2. No gain or loss will be recognized by Home Federal upon the
transfer of its assets to Stock Bank solely in exchange for
shares of Stock Bank common stock and the assumption by Stock
Bank of the liabilities of Mutual Association.
3. No gain or loss will be recognized by Stock Bank upon the
receipt of Home Federal's assets in exchange for shares of
Stock Bank common stock.
4. Stock Bank's holding period in the assets received from Home
Federal will include the period during which such assets were
held by Mutual Association.
5. The Stock Bank's basis in the assets of Home Federal will be
the same as the basis of such assets in the hands of Home
Federal immediately prior to the reorganization.
6. Mutual Association members will recognize no gain or loss upon
the constructive receipt of solely Stock Bank common stock in
exchange for their membership interests.
7. The Stock Bank will succeed to and take into account Home
Federal's earnings and profits or deficit in earnings and
profits, as of the date of the reorganization.
8. For purposes of Section 381 of the Internal Revenue Code of
1986, Stock Bank will be treated the same as Mutual
Association, and therefore, Mutual Association's tax year will
not end merely as a result of the conversion of Home Federal
Bank to stock form and Stock Bank will not be required to
obtain a new employee identification number.
9. No gain or loss will be recognized by eligible account holders
and supplemental eligible account holders of Mutual
Association on the issuance to them of withdrawable deposit
accounts in Stock Bank plus liquidation rights with respect to
Home Federal MHC, in exchange for their deposit accounts in
Mutual Association or to the other depositors on the issuance
to them of withdrawable deposit accounts.
10. It is more likely than not that the fair market value of the
subscription rights to purchase common stock is zero.
Accordingly, no gain or loss will be recognized by eligible
account holders and supplemental eligible account holders upon
the distribution to them of the nontransferable subscription
rights to purchase shares of stock in Home Federal Bancorp.
Gain realized, if any, by the eligible account holders and
supplemental eligible account holders on the distribution to
them of the nontransferable subscription rights to purchase
shares of common stock will be recognized but only in an
amount not in excess of the fair market value of such
subscription rights. Eligible account holders and supplemental
eligible account holders will not realize any taxable income
as a result of the exercise by them of the nontransferable
subscription rights.
11. The basis of the deposit accounts in Stock Bank to be received
by the eligible account holders, supplemental eligible account
holders and other members of Mutual Association will be the
same as the basis of their deposit accounts in Mutual
Association surrendered in exchange therefor. The basis of the
interests in the liquidation rights in the Home Federal MHC to
be received by the eligible account holders and supplemental
eligible account holders of Mutual Association will be zero.
12. The exchange of Stock Bank common stock constructively
received by eligible account holders, supplemental eligible
account holders and other members in exchange for membership
interests in Home Federal MHC will constitute a tax-free
exchange of property solely for "stock."
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13. Eligible account holders, supplemental eligible account
holders and other members will recognize no gain or loss upon
the transfer of Stock Bank common stock they constructively
received in the conversion of Home Federal to stock form to
Home Federal MHC solely in exchange for membership interests
in Home Federal MHC.
14. Eligible account holders, supplemental eligible account
holders and other members' basis in the Home Federal MHC
membership interests received in the transaction (which basis
is zero) will be the same as the basis of the property
transferred in exchange for such interests.
15. Home Federal MHC will recognize no gain or loss upon receipt
of property from eligible account holders, supplemental
eligible account holders and other members in exchange for
membership interests in Home Federal MHC.
16. Home Federal MHC's basis in the property received from
eligible account holders, supplemental eligible account
holders and other members (which basis is zero) will be the
same as the basis of such property in the hands of eligible
account holders, supplemental eligible account holders and
other members.
17. Home Federal MHC's holding period for the property received
from eligible account holders, supplemental account holders
and other members will include the period during which such
property was held by such persons.
18. Home Federal MHC and the persons who purchased common stock of
Home Federal Bancorp in the subscription and community
offering ("minority stockholders") will recognize no gain or
loss upon the transfer of Stock Bank common stock and cash,
respectively, to Home Federal Bancorp in exchange for common
stock in Home Federal Bancorp
19. Home Federal Bancorp will recognize no gain or loss on its
receipt of Stock Bank common stock and cash in exchange for
Home Federal Bancorp common stock.
20. Home Federal MHC's basis in the Home Federal Bancorp common
stock will be the same as its basis in the Home Federal stock
exchanged for such stock.
21. Home Federal MHC's holding period in the Home Federal Bancorp
common stock received will include the period during which it
held the Stock Bank common stock, provided that such property
was a capital asset on the date of the exchange.
22. Home Federal Bancorp's basis in the Stock Bank stock received
from Home Federal MHC will be the same as the basis of such
property in the hands of Home Federal MHC.
23. Home Federal Bancorp's holding period for the Stock Bank stock
received from Home Federal MHC will include the period during
which such property was held by Home Federal MHC.
24. It is more likely than not that the basis of the Home Federal
Bancorp common stock to its minority stockholders will be the
purchase price thereof. The holding period of the Home Federal
Bancorp common stock purchased pursuant to the exercise of
subscription rights will commence on the date on which the
right to acquire such stock was exercised.
The tax opinion as to items 10 and 24 above is based on the position
that subscription rights do not have any economic value at the time of
distribution or the time the subscription rights are exercised. The subscription
rights are the preferential rights of eligible subscribers to purchase shares of
Home Federal Bancorp common stock in the stock offering. See "- Subscription
Offering and Subscription Rights." Because the subscription rights are acquired
without cost, are not transferable, last for only a short time period and give
the recipients a right to purchase
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stock in the stock offering only at fair market value, special counsel believes
these rights do not have any taxable value when they are granted or exercised.
Special counsel's opinion states that it is not aware of the Internal Revenue
Service claiming in any similar transaction that liquidation rights or
subscription rights have any market value. Because there are no judicial
opinions or official Internal Revenue Service positions on this issue, however,
special counsel's opinion relating to liquidation rights and subscription rights
comes to a reasoned conclusion instead of an absolute conclusion on these
issues. Special counsel's conclusion is supported by a letter from RP Financial
which states that the subscription rights do not have any value when they are
distributed or exercised.
If the Internal Revenue Service disagrees and says the subscription
rights have value, income may be recognized by recipients of these rights, in
certain cases whether or not the rights are exercised. This income may be
capital gain or ordinary income, and Home Federal Bancorp and Home Federal could
recognize gain on the distribution of these rights. Eligible subscribers are
encouraged to consult with their own tax advisor regarding their own
circumstances and any tax consequences if subscription rights are deemed to have
value.
Special counsel has also concluded that there are no other material
federal income tax consequences in connection with the reorganization.
The opinion of special counsel makes certain assumptions consisting
solely of factual matters that would be contained in a representation letter of
Home Federal to the Internal Revenue Service if it were seeking a private letter
ruling relating to the federal income tax consequences of the reorganization.
Special counsel's opinion is based on the Internal Revenue Code, regulations now
in effect or proposed, current administrative rulings and practice and judicial
authority, all of which are subject to change. Any change may be made with
retroactive effect. Unlike private letter rulings received from the Internal
Revenue Service, special counsel's opinion is not binding on the Internal
Revenue Service and there can be no assurance that the Internal Revenue Service
will not take a position contrary to the positions reflected in special
counsel's opinion, or that special counsel's opinion will be upheld by the
courts if challenged by the Internal Revenue Service.
Home Federal has also obtained an opinion from Penland Munther Goodrum,
Chartered, Boise, Idaho, that the income tax effects of the reorganization and
stock offering under Idaho tax laws will be substantially the same as the
federal income tax consequences described above.
How We Determined Our Price and the Number of Shares to Be Issued in the Stock
Offering
The plan of reorganization and stock issuance requires that the
purchase price of the common stock must be based on the appraised pro forma
market value of Home Federal Bancorp and Home Federal, as determined on the
basis of an independent valuation. RP Financial, a financial services industry
consulting firm whose members collectively have over 100 years of experience in
valuing financial institutions for mutual holding company reorganizations and
stock offerings, has been retained to make this valuation. Home Federal selected
RP Financial based upon its experience and reputation in valuing stock offerings
by issuers such as Home Federal Bancorp. Home Federal has no prior relationship
with RP Financial. For its services in making this appraisal, RP Financial's
fees and out-of-pocket expenses are estimated to be $75,000. Home Federal has
agreed to indemnify RP Financial and any employees of RP Financial who act for
or on behalf of RP Financial in connection with the appraisal against any and
all loss, cost, damage, claim, liability or expense of any kind, including
claims under federal and state securities laws, arising out of any misstatement,
untrue statement of a material fact or omission to state a material fact in the
information supplied by Home Federal to RP Financial, unless RP Financial is
determined to be negligent or otherwise at fault.
RP Financial made its appraisal in reliance upon the information
contained in this prospectus, including the financial statements. RP Financial
also considered the following factors, among others:
. the present and projected operating results and financial
condition of Home Federal Bancorp and Home Federal, which were
prepared by Home Federal and then adjusted by RP Financial to
reflect
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the net proceeds of this offering and the economic and
demographic conditions in Home Federal's existing marketing
area as prepared by RP Financial;
. certain historical, financial and other information relating
to Home Federal prepared by Home Federal;
. the impact of the reorganization and stock offering on Home
Federal's net worth and earnings potential as calculated by RP
Financial; and
. the proposed dividend policy of Home Federal Bancorp and Home
Federal.
The appraisal also incorporated an analysis of a peer group of
publicly-traded mutual holding companies that RP Financial considered to be
comparable to Home Federal. The peer group analysis conducted by RP Financial
included a total of ten publicly-traded mutual holding companies with total
assets of less than $1 billion. RP Financial excluded three mutual holding
companies which otherwise met the foregoing criteria due to the lack of seasoned
trading history and reported financial statements as a publicly-traded company.
The analysis of comparable publicly-traded institutions included an evaluation
of the average and median price-to-earnings and price-to-book value ratios
indicated by the market prices of the peer companies. RP Financial applied the
peer group's pricing ratios as adjusted for certain qualitative valuation
factors to account for differences between Home Federal and the peer group, to
Home Federal's pro forma earnings and book value to derive the estimated pro
forma market value of Home Federal.
In its review of the appraisal provided by RP Financial, the Board of
Directors reviewed the methodologies and the appropriateness of the assumptions
used by RP Financial in addition to the factors listed above, and the Board of
Directors believes that these assumptions were reasonable. On the basis of the
foregoing, RP Financial has advised Home Federal Bancorp and Home Federal in its
opinion, dated May 21, 2004, that the estimated pro forma market value of Home
Federal Bancorp on a fully-converted basis ranged from a minimum of $85.0
million to a maximum of $115.0 million with a midpoint of $100.0 million. The
Board of Directors of Home Federal determined that the common stock should be
sold at $10.00 per share. Based on the estimated valuation and the $10.00 per
share price, the number of shares of common stock that Home Federal Bancorp will
issue will range from a minimum of 8,500,000 shares to a maximum of 11,500,000
shares, with a midpoint of 100,000,000 shares. The Board determined to offer for
sale 40.00% of these shares, or between 3,400,000 shares and 4,600,000 shares,
with a midpoint of 4,000,000 shares, to certain members of Home Federal and the
public pursuant to this prospectus. In addition, the charitable foundation
established by Home Federal Bancorp will be funded with cash and stock equal in
value to 3% of the shares sold in the offering. It is intended that 80% of the
foundation funding will be made by means of a stock contribution and 20% of the
foundation funding will be made by means of a cash contribution. Accordingly,
based on the minimum and maximum of the offering range, respectively, a minimum
of 81,600 shares to a maximum of 110,400 shares will be contributed in stock and
a minimum of $204,000 to a maximum of $276,000 will be contributed in cash. The
59.04% of the shares of Home Federal Bancorp stock that are not offered for sale
in the offering or contributed to the foundation will be issued to Home Federal
MHC.
The estimated valuation range may be amended with the approval of the
Office of Thrift Supervision or if necessitated by subsequent developments in
the financial condition of Home Federal Bancorp and Home Federal or market
conditions generally. In the event the estimated valuation range is updated to
amend the value of Home Federal Bancorp on a fully-converted basis below $85.0
million, which is the minimum of the estimated valuation range, or above $132.3
million, which is the maximum of the estimated valuation range, as adjusted by
15%, a new appraisal will be filed with the Office of Thrift Supervision.
Based upon current market and financial conditions and recent practices
and policies of the Office of Thrift Supervision, if Home Federal Bancorp
receives orders for common stock in excess of $46.0 million (the maximum of the
estimated valuation range of shares to be sold to the public) and up to $52.9
million (the maximum of the estimated valuation range of shares to be sold to
the public, as adjusted by 15%), the Office of Thrift Supervision may require it
to accept all such orders. No assurances, however, can be made that Home Federal
Bancorp will
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receive orders for common stock in excess of the maximum of the estimated
valuation range of shares to be sold to the public or that, if such orders are
received, that all such orders will be accepted because Home Federal Bancorp's
final valuation and number of shares to be issued are subject to the receipt of
an updated appraisal from RP Financial which reflects such an increase in the
valuation and the approval of an increase by the Office of Thrift Supervision.
In addition, an increase in the number of shares to be sold to the public above
4,600,000 shares will first be used, if necessary, to fill the order of the
employee stock ownership plan. There is no obligation or understanding on the
part of management to take and/or pay for any shares in order to complete the
stock offering.
The following table presents a summary of selected pricing ratios for
the peer group companies on a fully- converted basis and the resulting
fully-converted pricing ratios for Home Federal Bancorp reflecting the pro forma
impact of the stock offering. Compared to the median pricing ratios of the peer
group, Home Federal Bancorp's pro forma pricing ratios at the midpoint of the
offering range indicated a premium of 4.8% on a price-to-earnings basis, a
discount of 14.8% on a price-to-book basis and a discount of 17.3% on a
price-to-tangible book value basis. The estimated appraised value and the
resulting premiums or discounts took into consideration the potential financial
impact of the stock offering.
Pro Forma Price
----------------------------------------------------
Reported Tangible
Earnings Book Value Book Value
Multiple Ratio Ratio
----------------------------------------------------
(x) (%) (%)
Home Federal Bancorp
15% above maximum 29.4 86.0 86.0
Maximum 25.2 82.6 82.6
Midpoint 21.7 79.0 79.0
Minimum 18.2 74.6 74.6
All fully-converted publicly-traded thrifts as of May 21, 2004:
Average 17.3 152.2 163.6
Median 16.0 145.3 154.2
Valuation of peer group as of May 21, 2004:
Average 25.4 95.4 99.0
Median 20.7 92.8 95.5
RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing Home Federal
Bancorp's shares. RP Financial did not independently verify the consolidated
financial statements and other information provided by Home Federal, nor did RP
Financial value independently the assets or liabilities of Home Federal. The
valuation considers Home Federal as a going concern and should not be considered
as an indication of the liquidation value of Home Federal. Moreover, because
this valuation is necessarily based upon estimates and projections of a number
of matters, all of which are subject to change from time to time, no assurance
can be given that persons purchasing common stock in the offerings will
thereafter be able to sell such shares at prices at or above the purchase price
or in the range of the valuation described above.
Prior to completion of the stock offering, the maximum of the estimated
valuation range may be increased up to 15% and the number of shares of common
stock offered for sale may be increased to 5,290,000 shares to reflect changes
in market and financial conditions or to fill the order of the employee stock
ownership plan, without the resolicitation of subscribers. See "- Limitations on
Stock Purchases" as to the method of distribution and allocation of additional
shares that may be issued in the event of an increase in the estimated valuation
range to fill unfilled orders in the subscription offering.
No sale of shares of common stock in the stock offering may be
completed unless RP Financial confirms that nothing of a material nature has
occurred which would cause it to conclude that the aggregate value of the
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common stock to be issued is materially incompatible with the estimate of the
aggregate consolidated pro forma market value of Home Federal Bancorp and Home
Federal. If this confirmation is not received, we may cancel the stock offering,
extend the offering period and establish a new estimated valuation and offering
range and/or estimated price range, extend, reopen or hold a new offering or
take any other action the Office of Thrift Supervision may permit.
Depending upon market or financial conditions following the start of
the subscription offering, the total number of shares of common stock to be
issued may be increased or decreased without a resolicitation of subscribers,
provided that the product of the total number of shares issued times the
purchase price is not below the minimum or more than 15% above the maximum of
the estimated valuation range. If market or financial conditions change so as to
cause the aggregate value of the common stock to be issued to be below the
minimum of the estimated valuation range or more than 15% above the maximum of
this range, purchasers will be resolicited and be permitted to continue their
orders, in which case they will need to reconfirm their subscriptions prior to
the expiration of the resolicitation offering or their subscription funds will
be promptly refunded with interest at Home Federal's passbook account rate of
interest, or be permitted to modify or rescind their subscriptions. Any change
in the estimated valuation range must be approved by the Office of Thrift
Supervision.
An increase in the number of shares of common stock to be issued as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and Home Federal Bancorp's pro forma net
income and stockholders' equity on a per share basis while increasing pro forma
net income and stockholders' equity on an aggregate basis. A decrease in the
number of shares of common stock to be issued would increase both a subscriber's
ownership interest and Home Federal Bancorp's pro forma net income and
stockholders' equity on a per share basis while decreasing pro forma net income
and stockholders' equity on an aggregate basis. See "Risk Factors - We intend to
grant stock options and restricted stock to the Board of Directors and certain
employees following the stock offering, which will likely reduce your ownership
interest" and "Pro Forma Data."
Copies of the appraisal report of RP Financial, including any
amendments, which contains the method and assumptions for the appraisal are
available for inspection at the main office of Home Federal and the other
locations specified under "Where You Can Find More Information." In addition,
the appraisal report is an exhibit to the registration statement of which this
prospectus is a part. The registration statement is available on the SEC's
website (http://www.sec.gov).
Subscription Offering and Subscription Rights
Under the plan of reorganization and stock issuance, rights to
subscribe for the purchase of common stock have been granted to the following
persons in the following order of descending priority:
. depositors of Home Federal with account balances of at least
$50.00 as of the close of business on December 31, 2002
("Eligible Account Holders");
. the proposed employee stock ownership plan ("Tax-Qualified
Employee Stock Benefit Plans");
. depositors of Home Federal with account balances of at least
$50.00 as of the close of business on June 30, 2004
("Supplemental Eligible Account Holders"); and
. depositors of Home Federal, as of the close of business on
July 31, 2004, and borrowers as of March 16, 2004 whose loans
continued to be outstanding on July 31, 2004 ("Other
Members").
Home Federal amended its charter, effective as of March 16, 2004, in order to
make it consistent with the provisions of the current model forms promulgated by
the Office of Thrift Supervision. As a result of the amendment, the rights of
Home Federal's borrowers as members were fixed as of the effective date of the
adoption of the amended charter and only borrowers as of that date whose loans
continue to be outstanding have voting rights in Home Federal, and consequently,
subscription rights in the stock offering.
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All subscriptions received will be subject to the availability of
common stock after satisfaction of all subscriptions of all persons having prior
rights in the subscription offering and to the maximum and minimum purchase
limitations set forth in the plan of reorganization and as described below under
"- Limitations on Stock Purchases."
Preference Category No. 1: Eligible Account Holders. Each Eligible
Account Holder shall receive, without payment, first priority, nontransferable
subscription rights to subscribe for shares of common stock in an amount equal
to the greater of:
(1) $250,000 or 25,000 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of
common stock; or
(3) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common
stock to be sold by a fraction, of which the numerator is the
amount of the qualifying deposit of the Eligible Account
Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders in Home Federal in
each case on the close of business on December 31, 2002 (the
"Eligibility Record Date"), subject to the overall purchase
limitations.
See "- Limitations on Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated among subscribing Eligible Account
Holders so as to permit each such Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining will be allocated among the subscribing
Eligible Account Holders whose subscriptions remain unfilled pro rata in the
proportion that the amounts of their respective qualifying deposits bear to the
total amount of qualifying deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled. For example, if an Eligible Account Holder
with an unfilled subscription has qualifying deposits totaling $100, and the
total amount of qualifying deposits for Eligible Account Holders with unfilled
subscriptions was $1,000, then the number of shares that may be allocated to
fill this Eligible Account Holder's subscription would be 10% of the shares
remaining available, up to the amount subscribed for. Subscription rights of
Eligible Account Holders will be subordinated to the priority rights of
Tax-Qualified Employee Plans to purchase shares in excess of the maximum of the
estimated offering range.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his or her subscription order form all accounts in which he or she has
an ownership interest. Failure to list an account could result in fewer shares
being allocated than if all accounts had been disclosed. The subscription rights
of Eligible Account Holders who are also directors or officers of Home Federal
or their associates will be subordinated to the subscription rights of other
Eligible Account Holders to the extent attributable to increased deposits in the
year preceding December 31, 2002.
Preference Category No. 2: Tax-Qualified Employee Stock Benefit Plans.
The plan of reorganization provides that each Tax-Qualified Employee Stock
Benefit Plan, including the employee stock ownership plan, shall receive
nontransferable subscription rights to purchase up to 10% of the common stock
sold in the offering, provided that individually or in the aggregate these plans
(other than that portion of these plans which is self-directed) shall not
purchase more than 10% of the shares of common stock, including any increase in
the number of shares of common stock after the date hereof as a result of an
increase of up to 15% in the maximum of the estimated valuation range. The
proposed employee stock ownership plan intends to purchase 3.28% of the shares
of common stock issued in the reorganization (or 8.19% of the shares sold in the
offering), or 278,528 shares and 376,832 shares based on the minimum and maximum
of the estimated valuation range of shares to be issued in the reorganization,
respectively. Subscriptions by the Tax-Qualified Employee Stock Benefit Plans
will not be aggregated with shares of common stock purchased directly by or
which are otherwise attributable to any other participants in the
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subscription and direct community offerings, including subscriptions of any of
Home Federal's directors, officers, employees or associates thereof.
Subscription rights received pursuant to this category shall be subordinated to
all rights received by Eligible Account Holders to purchase shares pursuant to
Preference Category No. 1; provided, however, that notwithstanding any other
provisions of the plan of reorganization and stock issuance to the contrary, the
Tax-Qualified Employee Stock Benefit Plan shall have a first priority
subscription right to the extent that the total number of shares of common stock
sold in the stock offering exceeds the maximum of the estimated offering. If the
total number of shares offered in the stock offering is increased to an amount
greater than then number of shares representing the maximum of the estimated
valuation range to be sold to the public, each Tax-Qualified Employee Stock
Benefit Plan will have a priority right to purchase up to 8% of the shares
exceeding the maximum of the estimated offering range, up to an aggregate of 10%
of the common stock sold in the stock offering. See "Management - Benefits -
Employee Stock Ownership Plan."
Preference Category No. 3: Supplemental Eligible Account Holders. To
the extent that there are sufficient shares remaining after satisfaction of
subscriptions by Eligible Account Holders and the Tax-Qualified Employee Stock
Benefit Plans, each Supplemental Eligible Account Holder shall be entitled to
receive, without payment therefore, third priority, nontransferable subscription
rights to subscribe for shares of common stock in an amount equal to the greater
of:
(1) $250,000 or 25,000 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of
common stock; or
(3) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common
stock to be sold by a fraction, of which the numerator is the
amount of the qualifying deposit of the Supplemental Eligible
Account Holder and the denominator of which is the total
amount of qualifying deposits of all Supplemental Eligible
Account Holders in Home Federal in each case on the close of
business on June 30, 2004 (the "Supplemental Eligibility
Record Date"), subject to the overall purchase limitations.
See "- Limitations on Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions of all Supplemental Eligible Account Holders, available shares
first will be allocated among subscribing Supplemental Eligible Account Holders
so as to permit each such Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
(including the number of shares, if any, allocated in accordance with Category
No. 1) equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining available will be allocated among the
Supplemental Eligible Account Holders whose subscriptions remain unfilled pro
rata in the proportion that the amounts of their respective qualifying deposits
bear to the total amount of qualifying deposits of all subscribing Supplemental
Eligible Account Holders whose subscriptions remain unfilled.
Preference Category No. 4: Other Members. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the Tax-Qualified Employee Stock Benefit Plans and Supplemental
Eligible Account Holders, each Other Member shall receive, without payment
therefore, fourth priority, nontransferable subscription rights to subscribe for
shares of Home Federal Bancorp common stock, up to the greater of $250,000 or
25,000 shares of common stock, or one-tenth of one percent of the total offering
of shares of common stock in the offerings, subject to the overall purchase
limitations. See "- Limitations on Stock Purchases."
If Other Members subscribe for a number of shares which, when added to
the shares subscribed for by Eligible Account Holders, the Tax-Qualified
Employee Stock Benefit Plans and Supplemental Eligible Account Holders, is in
excess of the total number of shares of common stock offered in the stock
offering, available shares will be allocated among the subscribing Other Members
pro rata on the basis of the amounts of their respective subscriptions.
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Expiration Date for the Subscription Offering. The subscription
offering will expire at 12:00 Noon, Mountain time, on September 14, 2004, unless
extended for the full 45 day period permitted by regulation and may be extended
an additional 45 days to November 10, 2004 without the approval of the Office of
Thrift Supervision. Any further extensions of the subscription offering must be
approved by the Office of Thrift Supervision. The subscription offering may not
be extended beyond September 20, 2006. Subscription rights which have not been
exercised prior to September 14, 2004 (unless extended) will become void.
Home Federal Bancorp and Home Federal will not execute orders until at
least the minimum number of shares of common stock, 3,400,000 shares, have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold by November 10, 2004, unless this period is extended with the consent of
the Office of Thrift Supervision, all funds delivered to Home Federal pursuant
to the subscription offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be canceled. If an extension
beyond November 10, 2004 is granted, Home Federal Bancorp and Home Federal will
notify subscribers of the extension of time and of any rights of subscribers to
confirm, modify or rescind their subscriptions. This is commonly referred to as
a "resolicitation offering."
In a resolicitation offering, Home Federal Bancorp would mail you a
supplement to this prospectus if you subscribed for stock to let you confirm,
modify or cancel your subscription. If you fail to respond to the resolicitation
offering, it would be as if you had canceled your order and all subscription
funds, together with accrued interest, would be returned to you. If you
authorized payment by withdrawal of funds on deposit at Home Federal, that
authorization would terminate. If you affirmatively confirm your subscription
order during the resolicitation offering, Home Federal Bancorp and Home Federal
would continue to hold your subscription funds until the end of the
resolicitation offering. Your resolicitation order would be irrevocable without
the consent of Home Federal Bancorp and Home Federal until the stock offering is
completed or terminated.
Direct Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscription rights discussed above, we anticipate offering
shares pursuant to the plan of reorganization and stock issuance to members of
the general public who receive a prospectus, with a preference given to natural
persons residing in Ada, Canyon, Elmore and Gem Counties, Idaho. These natural
persons are referred to as preferred subscribers. If there is a direct community
offering, persons, together with an associate or group of persons acting in
concert with them, may not subscribe for or purchase more than one percent of
the total shares of common stock sold in the stock offering. We may limit total
subscriptions in the direct community offering to ensure that the number of
shares available for the syndicated community offering may be up to a specified
percentage of the number of shares of common stock. Finally, we may reserve
shares offered in the direct community offering for sales to institutional
investors. The opportunity to subscribe for shares of common stock in any direct
community offering will be subject to our right, in our sole discretion, to
accept or reject any such orders either at the time of receipt of an order or as
soon as practicable following September 14, 2004. The direct community offering,
if any, shall begin at the same time as, during or promptly after the
subscription offering and shall not be for more than 45 days after the end of
the subscription offering.
In the event of an oversubscription for shares in the direct community
offering, shares may be allocated, to the extent shares remain available, on a
pro rata basis to such person based on the amount of their respective
subscriptions.
Syndicated Community Offering
The plan of reorganization and stock issuance provides that, if
feasible, all shares of common stock not purchased in the subscription offering
and direct community offering may be offered for sale to selected members of the
general public in a syndicated community offering through a syndicate of
registered broker-dealers managed by Keefe, Bruyette & Woods as agent of Home
Federal Bancorp. We call this the syndicated community offering. We
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expect that the syndicated community offering will begin as soon as practicable
after termination of the subscription offering and the direct community
offering, if any. We, in our sole discretion, have the right to reject orders in
whole or in part received in the syndicated community offering. Neither Keefe,
Bruyette & Woods nor any registered broker-dealer shall have any obligation to
take or purchase any shares of common stock in the syndicated community
offering; however, Keefe, Bruyette & Woods has agreed to use its best efforts in
the sale of shares in the syndicated community offering.
The price at which common stock is sold in the syndicated community
offering will be the same price at which shares are offered and sold in the
subscription offering and direct community offering. If there is a syndicated
community offering, no person, by himself or herself, or with an associate or
group of persons acting in concert, may purchase more than one percent of the
total shares of common stock sold in the stock offering, subject to the maximum
purchase limitations. See "- Limitations on Stock Purchases."
Keefe, Bruyette & Woods may enter into agreements with broker-dealers
to assist in the sale of the shares in the syndicated community offering,
although no such agreements currently exist. No orders may be placed or filled
by or for a selected dealer during the subscription offering. After the close of
the subscription offering, Keefe, Bruyette & Woods will instruct selected
dealers as to the number of shares to be allocated to each dealer. Only after
the close of the subscription offering and upon allocation of shares to selected
dealers may selected dealers take orders from their customers. During the
subscription offering and direct community offering, selected dealers may only
solicit indications of interest from their customers to place orders as of a
certain order date for the purchase of shares of Home Federal Bancorp common
stock. When, and if, Keefe, Bruyette & Woods and Home Federal believe that
enough indications of interest and orders have not been received in the
subscription offering and direct community offering to consummate the
reorganization, Keefe, Bruyette & Woods will request, as of the order date,
selected dealers to submit orders to purchase shares for which they have
previously received indications of interest from their customers. The dealers
will send confirmations of the orders to their customers on the next business
day after the order date. The dealers will debit the accounts of their customers
on the settlement date, which date will be three business days from the order
date. Customers who authorize selected dealers to debit their brokerage accounts
are required to have the funds for payment in their account on but not before
the settlement date. On the settlement date, the dealers will deposit funds to
the account established by Home Federal for each dealer. Each customer's funds
forwarded to Home Federal, along with all other accounts held in the same title,
will be insured by the FDIC up to $100,000 in accordance with applicable FDIC
regulations. After payment has been received by Home Federal from the dealers,
funds will earn interest at Home Federal's regular savings account rate until
the completion or termination of the stock offering. Funds will be promptly
returned, with interest, in the event the stock offering is not consummated as
described above.
The syndicated community offering will be completed within 45 days
after the termination of the subscription offering, unless extended by Home
Federal with the approval of the Office of Thrift Supervision, but in no event
later than December 24, 2004. The syndicated community offering may not be
extended past September 20, 2006. See "- How We Determined Our Price and the
Number of Shares to Be Issued in the Stock Offering" above for a discussion of
rights of subscribers, if any, in the event an extension is granted.
Persons Who are Not Permitted to Participate in the Stock Offering
Home Federal will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for stock pursuant to the plan of reorganization reside. However, Home Federal
is not required to offer stock in the subscription offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which:
. the number of persons otherwise eligible to subscribe for
shares under the plan of reorganization and stock issuance who
reside in such jurisdiction is small;
. the granting of subscription rights or the offer or sale of
shares of common stock to such persons would require any of
Home Federal Bancorp and Home Federal or their officers,
directors or
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employees, under the laws of such jurisdiction, to register as
a broker, dealer, salesman or selling agent or to register or
otherwise qualify its securities for sale in such jurisdiction
or to qualify as a foreign corporation or file a consent to
service of process in such jurisdiction; or
. such registration, qualification or filing in the judgment of
Home Federal would be impracticable or unduly burdensome for
reasons of cost or otherwise.
Where the number of persons eligible to subscribe for shares in one state is
small, Home Federal will base its decision as to whether or not to offer the
common stock in that state on a number of factors, including but not limited to
the size of accounts held by account holders in the state, the cost of
registering or qualifying the shares or the need to register Home Federal, its
officers, directors or employees as brokers, dealers or salesmen.
Limitations on Stock Purchases
The plan of reorganization and stock issuance includes the following
limitations on the number of shares of Home Federal Bancorp common stock which
may be purchased in the stock offering:
(1) No fewer than 25 shares of common stock may be purchased, to
the extent shares are available;
(2) Each Eligible Account Holder may subscribe for and purchase in
the subscription offering up to the greater of:
(a) $250,000 or 25,000 shares of common stock;
(b) one-tenth of one percent of the total offering of
shares of common stock; or
(c) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of
shares of common stock to be sold by a fraction, of
which the numerator is the amount of the qualifying
deposit of the Eligible Account Holder and the
denominator is the total amount of qualifying
deposits of all Eligible Account Holders in Home
Federal in each case as of the close of business on
the Eligibility Record Date, subject to the overall
limitation in clause (7) below;
(3) The Tax-Qualified Employee Stock Benefit Plans, including the
proposed employee stock ownership plan, may purchase in the
aggregate up to 10% of the shares of common stock sold in the
stock offering, and including any additional shares issued in
the event of an increase in the estimated offering range; at
this time, the employee stock ownership plan intends to
purchase only 3.28% of the shares of common stock issued in
the reorganization (or 8.19% of the shares sold in the
offering);
(4) Each Supplemental Eligible Account Holder may subscribe for
and purchase in the subscription offering up to the greater
of:
(a) $250,000 or 25,000 shares of common stock;
(b) one-tenth of one percent of the total offering of
shares of common stock; or
(c) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of
shares of common stock to be sold by a fraction, of
which the numerator is the amount of the qualifying
deposit of the Supplemental Eligible Account Holder
and the denominator is the total amount of qualifying
deposits of all Supplemental Eligible Account Holders
in Home Federal in each case as of the close of
business on the
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Supplemental Eligibility Record Date, subject to the
overall limitation in clause (7) below;
(5) Each Other Member may subscribe for and purchase in the
subscription offering up to the greater of $250,000 or 25,000
shares of common stock or one-tenth of one percent of the
total offering of shares of common stock, subject to the
overall limitation in clause (7) below;
(6) Persons purchasing shares of common stock in the direct
community offering or syndicated community offering may
purchase in the direct community offering or syndicated
community offering up to the greater of $250,000 or 25,000
shares of common stock, subject to the overall limitation in
clause (7) below;
(7) Except for the Tax-Qualified Employee Stock Benefit Plans, and
irrespective of the purchase limitations set forth in clauses
(2)(c) and (4)(c) above, the maximum number of shares of Home
Federal Bancorp common stock subscribed for or purchased in
all categories of the offerings by any person, together with
associates of and groups of persons acting in concert with
these persons, shall not exceed one percent of the total
shares of common stock sold in the stock offering ($529,000 or
52,900 shares of common stock at the maximum of the offering
range, as adjusted); and
(8) No more than 26% of the total number of shares offered for
sale may be purchased by directors and officers of Home
Federal and their associates, in the aggregate, excluding
purchases by Tax- Qualified Employee Stock Benefit Plans.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
Home Federal, the Boards of Directors of Home Federal Bancorp and Home Federal
may, in their sole discretion, increase the individual amount permitted to be
subscribed for to a maximum of 9.99% of the number of shares sold in the stock
offering, provided that orders for shares exceeding 5% of the shares being
offered in the stock offering shall not exceed, in the aggregate, 10% of the
shares being offered in the stock offering. Requests to purchase additional
shares of common stock will be allocated by the Boards of Directors on a pro
rata basis giving priority in accordance with the preference categories set
forth in this prospectus.
The term "associate" when used to indicate a relationship with any
person means:
. any corporation or organization (other than Home Federal, Home
Federal Bancorp or a majority-owned subsidiary of either of
them) of which such person is a director, officer or partner
or is directly or indirectly the beneficial owner of 10% or
more of any class of equity securities;
. any trust or other estate in which such person has a
substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity;
. any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a
director or officer of Home Federal, Home Federal Bancorp or
any subsidiary of Home Federal or Home Federal Bancorp or any
affiliate thereof; and
. any person acting in concert with any of the persons or
entities specified above;
provided, however, that Tax-Qualified or Non-Tax Qualified Employee Plans shall
not be deemed to be an associate of any director or officer of Home Federal or
Home Federal Bancorp to the extent provided in the plan of reorganization and
stock issuance. When used to refer to a person other than an officer or director
of Home Federal, the Board of Directors of Home Federal or officers delegated by
the Board of Directors in their sole discretion may determine the persons that
are associates of other persons.
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The term "acting in concert" means knowing participation in a joint
activity or parallel action towards a common goal whether or not pursuant to an
express agreement, or a combination or pooling of voting or other interests in
the securities of an issuer for a common purpose pursuant to any arrangement. A
person or company which acts in concert with another person or company shall
also be deemed to be acting in concert with any person or company who is also
acting in concert with that other party, except that the Tax-Qualified Employee
Stock Benefit Plans will not be deemed to be acting in concert with their
trustees or a person who serves in a similar capacity solely for the purpose of
determining whether stock held by the trustee and stock held by each plan will
be aggregated. The determination of whether a group is acting in concert shall
be made solely by the Board of Directors of Home Federal or officers delegated
by the Board of Directors and may be based on any evidence upon which the board
or delegatee chooses to rely.
Marketing Arrangements
We have retained Keefe, Bruyette & Woods to consult with and to advise
Home Federal, and to assist Home Federal Bancorp, on a best efforts basis, in
the distribution of the shares of common stock in the subscription offering and
direct community offering. The services that Keefe, Bruyette & Woods will
provide include:
. training the employees of Home Federal who will perform
certain ministerial functions in the offering regarding the
mechanics and regulatory requirements of the stock offering
process;
. managing the stock information center by assisting interested
stock subscribers and by keeping records of all stock orders;
. preparing marketing materials; and
. assisting in the solicitation of proxies from Home Federal's
members for use at the special meeting.
For its services, Keefe, Bruyette & Woods will receive a management fee
of $50,000 and a success fee of 1.35% of the aggregate purchase price, less any
shares of common stock sold to our directors, officers and employees and the
Tax-Qualified Employee Stock Benefit Plans. The management fee will be applied
against the success fee. If selected dealers are used to assist in the sale of
shares of Home Federal Bancorp common stock in the direct community offering,
these dealers will be paid a fee of up to 5.5% of the total purchase price of
the shares sold by the dealers. Keefe, Bruyette & Woods will also be reimbursed
for its out of pocket expenses and expenses of its legal counsel which are
estimated to be $50,000 and the fees of its legal counsel which are estimated to
be $35,000. Home Federal has agreed to indemnify Keefe, Bruyette & Woods against
certain claims or liabilities, including certain liabilities under the
Securities Act of 1933, as amended, and will contribute to payments Keefe,
Bruyette & Woods may be required to make in connection with any such claims or
liabilities.
Sales of shares of Home Federal Bancorp common stock will be made by
registered representatives affiliated with Keefe, Bruyette & Woods or by the
broker-dealers managed by Keefe, Bruyette & Woods. Keefe, Bruyette & Woods has
undertaken that the shares of Home Federal Bancorp common stock will be sold in
a manner which will ensure that the distribution standards of the Nasdaq Stock
Market will be met. A stock information center will be established at Home
Federal's corporate office located at 500 12th Avenue South in Nampa, Idaho.
Home Federal Bancorp will rely on Rule 3a4-1 of the Securities Exchange Act of
1934 and sales of Home Federal Bancorp common stock will be conducted within the
requirements of this rule, so as to permit officers, directors and employees to
participate in the sale of Home Federal Bancorp common stock in those states
where the law permits. No officer, director or employee of Home Federal Bancorp
or Home Federal will be compensated directly or indirectly by the payment of
commissions or other remuneration in connection with his or her participation in
the sale of common stock.
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Procedure for Purchasing Shares in the Subscription Offering
To ensure that each purchaser receives a prospectus at least 48 hours
before September 14, 2004, the subscription expiration date, unless extended, in
accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, no
prospectus will be mailed any later than five days prior to that date or hand
delivered any later than two days prior to that date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a prospectus.
To purchase shares in the subscription offering, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at Home Federal must be
received by Home Federal by 12:00 Noon, Mountain time, on September 14, 2004,
unless extended. In addition, Home Federal Bancorp and Home Federal will require
a prospective purchaser to execute a certification in the form required by the
Office of Thrift Supervision. Order forms which are not received by this time or
are executed defectively or are received without full payment, or appropriate
withdrawal instructions, are not required to be accepted. In addition, Home
Federal will not accept orders submitted on photocopied or facsimiled order
forms nor order forms without an executed certification. We are not required to
notify subscribers of incomplete or improperly executed order forms and we have
the right to waive or permit the correction of incomplete or improperly executed
order forms as long as it is performed before the expiration of the offering. We
do not represent, however, that we will do so and we have no affirmative duty to
notify any prospective subscriber of any such defects. Home Federal has the
right to waive or permit the correction of incomplete or improperly executed
forms, but does not represent that it will do so. Once received, an executed
order form may not be modified, amended or rescinded without the consent of Home
Federal, unless the stock offering has not been completed within 45 days after
the end of the subscription offering, or this period has been extended.
In order to ensure that Eligible Account Holders, Tax-Qualified
Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other
Members are properly identified as to their stock purchase priority, depositors
as of the close of business on the Eligibility Record Date, December 31, 2002,
or the Supplemental Eligibility Record Date, June 30, 2004, and depositors and
borrowers as of the close of business on July 31, 2004, must list all accounts
on the stock order form giving all names in each account and the account
numbers. Failure to list ALL of your account relationships, which will ALL be
reviewed when taking into consideration relevant account relationships in the
event of an allocation of stock, could result in a loss of all or part of your
share allocation in the event of an oversubscription.
Payment for subscriptions may be made:
. by check or money order, however, third party checks may not
be remitted as payment for your order;
. by authorization of withdrawal from deposit accounts
maintained with Home Federal (including a certificate of
deposit); or
. in cash, if delivered in person at any branch office of Home
Federal, although we request that you exchange cash for a
check with any of our tellers.
No wire transfers will be accepted. Interest will be paid on payments made by
cash, check or money order at our then-current passbook account rate from the
date payment is received until completion of the stock offering. If payment is
made by authorization of withdrawal from deposit accounts, the funds authorized
to be withdrawn from a deposit account will continue to accrue interest at the
contractual rate, but may not be used by the subscriber until all of Home
Federal Bancorp common stock has been sold or the plan of reorganization and
stock issuance is terminated, whichever is earlier. If a subscriber authorizes
Home Federal to withdraw the amount of the purchase price from his or her
deposit account, Home Federal will do so as of the effective date of the
reorganization. Home Federal will waive any applicable penalties for early
withdrawal from certificate accounts.
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If any amount of a subscription order is unfilled, Home Federal will
make an appropriate refund or cancel an appropriate portion of the related
withdrawal authorization, after completion of the stock offering. If the stock
offering is not consummated, purchasers will have refunded to them all payments
made, with interest, and all withdrawal authorizations will be canceled in the
case of subscription payments authorized from accounts at Home Federal.
If any Tax-Qualified or Non-Tax-Qualified Employee Stock Benefit Plans
subscribe for shares during the subscription offering, these plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
rather, may pay for shares of common stock subscribed for at the purchase price
upon completion of the subscription offering, direct community offering and
syndicated community offering, if all shares are sold. If, after the completion
of the subscription offering, the amount of shares to be issued is increased
above the maximum of the estimated valuation range included in this prospectus,
the Tax-Qualified and Non-Tax-Qualified Employee Stock Benefit Plans will be
entitled to increase their subscriptions by a percentage equal to the percentage
increase in the amount of shares to be issued above the maximum of the estimated
valuation range, provided that such subscription will continue to be subject to
applicable purchase limits and stock allocation procedures.
You may subscribe for shares of common stock using funds in your
individual retirement account ("IRA") at Home Federal or elsewhere. However,
common stock must be held in a self-directed retirement account. Home Federal's
IRAs are not self-directed, so they cannot be invested in common stock. If you
wish to use some or all of the funds in your Home Federal IRA, the applicable
funds must be transferred to a self-directed account reinvested by an
independent trustee, such as a brokerage firm. If you do not have such an
account, you will need to establish one before placing your stock order. An
annual administrative fee may be payable to the independent trustee. Because
individual circumstances differ and processing of retirement fund orders takes
additional time, we recommend that you contact the stock information center
promptly, preferably at least two weeks before the end of the offering period,
for assistance with purchases using your IRA or other retirement account that
you may have. Whether you may use such funds for the purchase of shares in the
stock offering may depend on timing constraints and possible limitations imposed
by the institution where the funds are held.
The records of Home Federal will control all matters related to the
existence of subscription rights and/or one's ability to purchase shares of
common stock in the subscription offering.
Should an oversubscription result in an allocation of shares, the
allocation of shares will be completed in accordance with the plan of
reorganization. Our interpretation of the terms and conditions of the plan of
reorganization and of the acceptability of the order form will be final. If a
partial payment for your shares is required, we will first take the funds from
the cash or check you paid with and secondly from any account you wanted funds
withdrawn from.
Restrictions on Transfer of Subscription Rights and Shares
No person with subscription rights may transfer or enter into any
agreement or understanding to transfer the legal or beneficial ownership of the
subscription rights issued under the plan of reorganization and stock issuance
or the shares of common stock to be issued upon their exercise. These rights may
be exercised only by the person to whom they are granted and only for that
person's account. Each person exercising such subscription rights will be
required to certify that the person is purchasing shares solely for the person's
own account and that the person has no agreement or understanding regarding the
sale or transfer of the shares. Regulations also prohibit any person from
offering or making an announcement of an offer or intent to make an offer to
purchase subscription rights or shares of common stock prior to the completion
of the stock offering.
Home Federal will refer to the Office of Thrift Supervision any
situations that it believes may involve a transfer of subscription rights and
will not honor orders believed by it to involve the transfer of such rights.
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Issuance of Home Federal Bancorp's Common Stock
Certificates representing shares of common stock issued in the stock
offering will be mailed to the persons entitled thereto at the registration
address noted on the order form, as soon as practicable following consummation
of the stock offering. Any certificates returned as undeliverable will be held
by us until claimed by persons legally entitled thereto or otherwise disposed of
in accordance with applicable law. Until certificates for the shares of common
stock are available and delivered to purchasers, purchasers may not be able to
sell the shares of common stock which they ordered.
Required Approvals
In order to complete the reorganization, our members must approve the
plan of reorganization and stock issuance at a special meeting of members, which
will be called for that purpose. In addition, the Office of Thrift Supervision
must approve Home Federal Bancorp's application to become a savings and loan
holding company and to acquire all of Home Federal's common stock. Home Federal
Bancorp may be required to make certain filings with state securities regulatory
authorities in connection with the issuance of Home Federal Bancorp common stock
in the offerings.
Restrictions on Purchase or Transfer of Shares After the Stock Offering
All shares of common stock purchased in connection with the stock
offering by a director or an executive officer of Home Federal Bancorp and Home
Federal will be subject to a restriction that the shares not be sold for a
period of one year following the stock offering except in the event of the death
of the director or officer or pursuant to a merger or similar transaction
approved by the Office of Thrift Supervision. Each certificate for restricted
shares will bear a legend giving notice of this restriction, and instructions
will be issued to the effect that any transfer within that time period of any
certificate or record ownership of the shares other than as provided above is a
violation of the restriction. Any shares of common stock issued at a later date
within this one year period as a stock dividend, stock split or otherwise with
respect to the restricted stock will be subject to the same restrictions.
Purchases of common stock of Home Federal Bancorp by directors,
executive officers and their associates during the three-year period following
completion of the stock offering may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the Office of
Thrift Supervision. This restriction does not apply, however, to negotiated
transactions involving more than one percent of Home Federal Bancorp's
outstanding common stock or to certain purchases of stock pursuant to an
employee stock benefit plan.
For information regarding the proposed purchases of common stock by
officers and directors of Home Federal, see "Proposed Purchases by Management."
Any purchases made by the officers and directors of Home Federal are intended
for investment purposes only, and not for resale, including any purchases made
for the purpose of meeting the minimum of the offering range.
Pursuant to regulations of the Office of Thrift Supervision, Home
Federal Bancorp may not, for a period of one year following completion of this
offering, repurchase shares of the common stock except on a pro rata basis,
pursuant to an offer approved by the Office of Thrift Supervision and made to
all stockholders, or through open market purchases of up to five percent of the
outstanding stock where extraordinary circumstances exist.
RESTRICTIONS ON ACQUISITION
OF HOME FEDERAL BANCORP AND HOME FEDERAL
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire Home Federal Bancorp, Home Federal or
their respective capital stock are summarized below. Also discussed are certain
provisions in Home Federal Bancorp's charter and bylaws which may be deemed to
affect the ability of a person, firm or entity to acquire it.
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Change in Control Regulations
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institution unless the Office of Thrift Supervision
has been given 60 days prior written notice. The Home Owners' Loan Act provides
that no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock of a savings institution, where certain enumerated "control factors" are
also present in the acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control
if:
. it would result in a monopoly or substantially lessen
competition;
. the financial condition of the acquiring person might
jeopardize the financial stability of the institution; or
. the competence, experience or integrity of the acquiring
person indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control
by such person.
These restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax- qualified employee stock benefit
plans, provided that the plans do not have beneficial ownership of more than 25%
of any class of equity security of the savings institution.
For a period of three years following completion of the stock offering,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of
the stock of Home Federal Bancorp or Home Federal without the Office of Thrift
Supervision's prior written approval.
Mutual Holding Company Structure
Following the reorganization, all of the issued and outstanding common
stock of Home Federal will be owned by Home Federal Bancorp. A majority of the
issued and outstanding common stock of Home Federal Bancorp will be owned by
Home Federal MHC. As a result, management of Home Federal MHC will be able to
exert voting control over Home Federal Bancorp and Home Federal and will be able
to restrict the ability of the minority stockholders of Home Federal Bancorp to
effect a change of control of management. Home Federal MHC, as long as it
remains in the mutual form of organization, will control a majority of the
voting stock of Home Federal Bancorp.
Charter and Bylaws of Home Federal Bancorp
The charter and bylaws of Home Federal Bancorp contain certain
provisions that are intended to encourage a potential acquiror to negotiate any
proposed acquisition of Home Federal Bancorp directly with its Board of
Directors. An unsolicited, non-negotiated takeover proposal can seriously
disrupt the business and management of a corporation and cause it great expense.
Accordingly, the Board of Directors believes it is in the best interests of Home
Federal Bancorp and its stockholders to encourage potential acquirors to
negotiate directly with management. The Board also believes that these
provisions should not discourage persons from proposing a merger or transaction
at prices reflective of the true value of Home Federal Bancorp and that
otherwise is in the best interests of all stockholders. However, these
provisions may have the effect of discouraging offers to purchase Home Federal
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Bancorp or its securities that are not approved by the Board of Directors but
which certain of Home Federal Bancorp's stockholders may deem to be in their
best interests or pursuant to which stockholders would receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who might desire to participate in such a transaction may not have
an opportunity to do so. These provisions will also render the removal of the
current Board of Directors and management more difficult. The Boards of
Directors of Home Federal and Home Federal Bancorp believe these provisions are
in the best interests of the stockholders because they will assist Home Federal
Bancorp's Board of Directors in managing the affairs of Home Federal Bancorp in
the manner they believe to be in the best interests of stockholders generally
and because a company's board of directors is often best able in terms of
knowledge regarding the company's business and prospects, as well as resources,
to negotiate the best transaction for its stockholders as a whole.
The following description of certain of the provisions of the charter
and bylaws of Home Federal Bancorp is necessarily general and reference should
be made in each instance to the charter and bylaws. See "Where You Can Find More
Information" regarding how to obtain a copy of these documents.
Board of Directors. The charter provides that the number of directors
shall not be less than five nor more than 15. The initial number of directors is
seven, but this number may be changed by resolution of the Board of Directors.
The bylaws provide that the Board of Directors will be divided into three
classes, with directors in each class elected for three-year staggered terms.
These provisions enable the Board of Directors to elect directors friendly to
management in the event of a non-negotiated takeover attempt and may make it
more difficult for a person seeking to acquire control of Home Federal Bancorp
to gain majority representation on the Board of Directors in a relatively short
period of time. Home Federal Bancorp believes these provisions to be important
to continuity in the composition and policies of the Board of Directors.
Limitations on Voting. The charter specifically prohibits cumulative
voting for the election of directors. Cumulative voting in the election of
directors entitles a stockholder to cast a total number of votes equal to the
number of directors to be elected multiplied by the number of his or her shares
and to distribute that number of votes among such number of nominees as the
stockholder chooses. The absence of cumulative voting for directors limits the
ability of a minority stockholder to elect directors. Because the holder of less
than a majority of Home Federal Bancorp's shares cannot be assured
representation on the Board of Directors, the absence of cumulative voting may
discourage accumulations of Home Federal Bancorp's shares or proxy contests that
would result in changes in Home Federal Bancorp's management. The Board of
Directors believes that the elimination of cumulative voting will help to assure
continuity and stability of management and policies; directors should be elected
by a majority of the stockholders to represent the interests of the stockholders
as a whole rather than be the special representatives of particular minority
interests; and efforts to elect directors representing specific minority
interests are potentially divisive and could impair the operations of Home
Federal Bancorp.
In addition, the charter provides that for a period of five years from
the effective date of the charter, no person may offer to acquire or acquire
more than 10% of any class of equity security of Home Federal Bancorp. This
prohibition does not apply to purchases by any tax-qualified employee benefit
plan of Home Federal Bancorp or an underwriter involving the public offering of
securities of Home Federal Bancorp. In addition during this five- year period,
all shares owned over the 10% limit may not be voted in any matter submitted to
stockholders for a vote.
Special Meetings. The charter of Home Federal Bancorp provides that for
a period of five years from the effective date of the charter, a special meeting
of stockholders may be called only through a resolution of the Board of
Directors for matters relating to a change in control of Home Federal Bancorp or
amendments to its charter.
Authorized Capital Stock. The charter of Home Federal Bancorp
authorizes the issuance of 50,000,000 shares of common stock and 5,000,000
shares of preferred stock. The shares of common stock and preferred stock were
authorized in an amount greater than that to be issued in the reorganization and
stock offering to provide Home Federal Bancorp's Board of Directors with
flexibility to effect, among other transactions, financings, acquisitions, stock
dividends, stock splits and the issuance of employee stock options. However,
these additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain
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control of Home Federal Bancorp. The Board of Directors also has sole authority
to determine the terms of any one or more series of preferred stock, including
voting rights, conversion rates and liquidation preferences. As a result of the
ability to fix voting rights for a series of preferred stock, the Board of
Directors has the power, to the extent consistent with its fiduciary duty, to
issue a series of preferred stock to persons friendly to management in order to
attempt to block a post tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
Home Federal Bancorp's Board of Directors currently has no plan to issue
additional shares, other than the issuance of additional shares pursuant to
stock benefit plans.
Director Nominations. The charter of Home Federal Bancorp requires a
stockholder who intends to nominate a candidate for election to the Board of
Directors at a stockholders' meeting to give written notice to the secretary of
Home Federal Bancorp at least 60 days in advance of the date of the meeting at
which such nominations will be made. The Board of Directors of Home Federal
Bancorp believes that it is in the best interests of Home Federal Bancorp and
its stockholders to provide sufficient time for the Board of Directors to study
all nominations and to determine whether to recommend to the stockholders that
such nominees be considered.
Purpose and Takeover Defensive Effects of Home Federal Bancorp's
Charter and Bylaws. The Board of Directors believes that the provisions
described above are prudent and will reduce Home Federal Bancorp's vulnerability
to takeover attempts and certain other transactions that have not been
negotiated with and approved by its Board of Directors. These provisions will
also assist in the orderly deployment of the stock offering proceeds into
productive assets during the initial period after the offering. The Board of
Directors believes these provisions are in the best interest of Home Federal,
and Home Federal Bancorp and its stockholders. In the judgment of the Board of
Directors, Home Federal Bancorp's Board will be in the best position to
determine the true value of Home Federal Bancorp and to negotiate more
effectively for what may be in the best interests of its stockholders.
Accordingly, the Board of Directors believes that it is in the best interest of
Home Federal Bancorp and its stockholders to encourage potential acquirors to
negotiate directly with the Board of Directors of Home Federal Bancorp and that
these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also the view of the Board of Directors that these
provisions should not discourage persons from proposing a merger or other
transaction at a price reflective of the true value of Home Federal Bancorp and
that is in the best interest of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of Home Federal
Bancorp for its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of Home Federal Bancorp's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer or
other takeover attempt may be made at a price substantially above the current
market prices, these offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive Home
Federal Bancorp's remaining stockholders of benefits of certain protective
provisions of the Securities Exchange Act of 1934, if the number of beneficial
owners became less than 300, thereby allowing for deregistration.
Despite the belief of Home Federal and Home Federal Bancorp as to the
benefits to stockholders of these provisions of Home Federal Bancorp's charter
and bylaws, these provisions may also have the effect of discouraging a future
takeover attempt that would not be approved by Home Federal Bancorp's Board of
Directors, but pursuant to which stockholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have any opportunity
to do so. These provisions will also render the removal of Home Federal
Bancorp's Board of Directors and of management more
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difficult. The Board of Directors of Home Federal and Home Federal Bancorp,
however, have concluded that the potential benefits outweigh the possible
disadvantages.
The cumulative effect of the restriction on acquisition of Home Federal
Bancorp contained in the charter and bylaws of Home Federal Bancorp and in
federal law may be to discourage potential takeover attempts and perpetuate
incumbent management, even though certain stockholders of Home Federal Bancorp
may deem a potential acquisition to be in their best interests, or deem existing
management not to be acting in the stockholders' best interests.
Benefit Plans
In addition to the provisions of Home Federal Bancorp's charter and
bylaws described above, benefit plans of Home Federal Bancorp and Home Federal
intended to be adopted after completion of this offering contain provisions
which also may discourage hostile takeover attempts which the Board of Directors
of Home Federal might conclude are not in the best interests of Home Federal,
Home Federal Bancorp or its stockholders. For a description of the benefit plans
and the provisions of these plans relating to changes in control of Home Federal
Bancorp or Home Federal, see "Management - Benefits."
HOME FEDERAL FOUNDATION
General
In furtherance of our commitment to the communities we serve, we will
voluntarily establish a charitable foundation in connection with the
reorganization of Home Federal to a mutual holding company structure. The plan
of reorganization provides that the foundation will be established as a
non-stock corporation and will be funded with an initial contribution valued at
3% of the gross proceeds received in the offering. The form of funding will be
80% common stock and 20% cash, with the maximum amount of the cash contribution
being $276,000 based on the maximum of the offering range. The contribution of
common stock and cash to the foundation will be dilutive to the interests of
stockholders and will have an adverse impact on the reported earnings of Home
Federal Bancorp in 2004, the year in which the contribution will be made. Home
Federal Bancorp has no plans to provide additional funding beyond this initial
contribution over the next three years. The contribution of common stock to the
foundation will not be included in determining whether the minimum number of
shares of common stock, 3,400,000, has been sold in order to complete the
offering.
Purpose of the Foundation.
The purpose of the Home Federal Foundation is to provide funding to
support charitable causes and community development activities in the
communities we serve. The Home Federal Foundation is being formed as a
complement to our existing community activities, not as a replacement for these
activities. Home Federal currently contributes funds to support local community
activities. The foundation is completely dedicated to community activities and
the promotion of charitable causes, and may be able to support these activities
in ways that are not currently available to Home Federal.
We believe the establishment of a charitable foundation is consistent
with Home Federal's long-term commitment to community service. The Board of
Directors further believes that the funding of the foundation with common stock
of Home Federal Bancorp is a means of enabling the communities served by us to
share in the growth and success of Home Federal Bancorp long after completion of
the reorganization. The foundation will accomplish that goal by providing for
continued ties between the foundation and Home Federal, thereby forming a
partnership with our community. The establishment of the foundation will also
enable Home Federal Bancorp and Home Federal to develop a unified charitable
donation strategy and will centralize the responsibility for administration and
allocation of corporate charitable funds.
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Structure of the Home Federal Foundation
The foundation will be incorporated under Idaho law as a non-stock
corporation and its initial board of directors will consist of persons who are
directors or employees of Home Federal, as well as one independent director.
Directors of the foundation who are affiliated with Home Federal are not
expected to be paid additional compensation for their service on the
foundation's board. The articles of incorporation of the foundation provide that
the corporation is organized exclusively for charitable purposes, including
development in the local community, as set forth in Section 501(c)(3) of the
Internal Revenue Code. The foundation's articles of incorporation or bylaws
provide that no part of its earnings will inure to the benefit of, or be
distributable to, its trustees, officers or members.
As required by Office of Thrift Supervision regulations, for five years
after the reorganization, one seat on the foundation's board of directors will
be reserved for a person from our local community who is not one of our
officers, directors or employees, and one seat on the foundation's board of
directors will be reserved for one of our directors. We have selected two of our
current directors, Daniel L. Stevens and N. Charles Hedemark, to serve on the
initial board of directors of the foundation. Mr. Stevens is the President and
Chief Executive Office of each of Home Federal, Home Federal Bancorp and Home
Federal MHC. Mr. Hedemark is an independent director. Mr. Stevens and his
associates intend to subscribe for 50,000 shares of Home Federal Bancorp common
stock in the offering and assuming sufficient shares are available, they will
own .43% of the outstanding common stock of Home Federal Bancorp at the maximum
of the estimated offering range upon completion of the offering. Mr. Hedemark
and his associates intend to subscribe for 25,000 shares of Home Federal Bancorp
common stock in the offering and assuming sufficient shares are available, they
will own .22% of the outstanding common stock of Home Federal Bancorp at the
maximum of the estimated offering range upon completion of the offering. The
director from the local community has not yet been selected, but is expected to
be selected prior to the completion of the reorganization and stock offering. In
accordance with the regulations of the Office of Thrift Supervision, the
director from the local community will have experience with local charitable
organizations and grant making.
The authority for the affairs of the foundation is vested in its board
of directors. The directors of the foundation are responsible for establishing
the foundation's policies with respect to grants or donations by the foundation,
consistent with the purpose for which the foundation was established. Although
no formal policy governing the foundation grants exists at this time, the
foundation's board of directors will adopt such a policy prior to receiving the
contribution. As directors of a not-for-profit corporation, directors of the
foundation are at all times be bound by their fiduciary duty to advance the
foundation's charitable goals, to protect the assets of the foundation and to
act in a manner consistent with the charitable purpose for which the foundation
was established. The directors of the foundation are also responsible for
directing the foundation's activities, including the management of the common
stock of Home Federal Bancorp and the cash held by the foundation. The board of
directors of the foundation will appoint such officers as may be necessary to
manage its operation. Initially, the foundation intends to use employees of Home
Federal as its volunteer support staff. The Home Federal Foundation will have no
members. Its directors will elect directors at the annual meeting or a special
meeting called for that purpose.
Office of Thrift Supervision regulations require that all shares of
common stock held by the foundation must be voted in the same ratio as all other
shares of Home Federal Bancorp's common stock voted on each proposal considered
by stockholders of Home Federal Bancorp.
As a private foundation under Section 501(c)(3) of the Internal Revenue
Code, the foundation is required to distribute annually in grants or donations,
a minimum of 5% of the average fair market value of its net investment assets.
One of the conditions imposed on the gift of common stock by Home Federal
Bancorp is that the amount of common stock that may be sold by the foundation in
any one year shall not exceed 5% of the average market value of the assets held
by the foundation. This condition includes an exception where the board of
directors of the foundation determines that the failure to sell an amount of
common stock greater than such amount would result in a longer-term reduction of
the value of the foundation's assets and as such would jeopardize its capacity
to carry out its charitable purposes.
156
Upon completion of the reorganization and the contribution of shares to
the foundation, Home Federal Bancorp would have 8,500,000, 10,000,000 and
11,500,000 shares issued and outstanding at the minimum, midpoint and maximum of
the estimated valuation range. As the result of the shares issued to the
foundation, the voting and ownership interests of purchasers of common stock in
the offering will be diluted by 2.3%, as compared to their interests in Home
Federal Bancorp if the foundation were not established. For additional
discussion of the dilutive effect, see "Pro Forma Data." If the foundation had
not been established and funded as part of the reorganization, RP Financial
estimates that the pro forma valuation of Home Federal Bancorp would be greater;
and as a result, a greater number of shares of common stock would be issued in
the offering. At the minimum, midpoint and maximum of the valuation range, the
pro forma valuation of Home Federal Bancorp is $85.0 million, $100.0 million and
$115.0 million with the foundation, as compared to $86.7 million, $102.0 million
and $117.3 million, respectively, without the foundation. See "Comparison of
Valuation and Pro Forma Information With and Without Charitable Foundation."
If in the future, Home Federal Bancorp converts from the mutual to
capital stock form, in a transaction commonly known as a "second-step
conversion" and, as part of such second-step conversion, an additional
charitable contribution is to be made to the foundation, such additional
charitable contribution must be approved (1) by a majority of the vote eligible
to be cast of the Home Federal MHC's members and (2) separately by a majority of
the votes eligible to be cast by the minority stockholders (stockholders other
than Home Federal MHC) of Home Federal Bancorp.
Tax Considerations
Home Federal Bancorp has been advised by its outside tax advisors that
an organization created and operated for charitable purposes would generally
qualify as a Section 501(c)(3) exempt organization under the Internal Revenue
Code, and that this type of an organization would likely be classified as a
private foundation as determined in Section 501 of the Internal Revenue Code.
The foundation will submit a request to the Internal Revenue Service to be
recognized as an exempt organization. As long as the foundation files its
application for recognition of tax-exempt status within 15 months from the date
of its organization, and provided the Internal Revenue Service approves the
application, the effective date of the foundation's status as a Section
501(c)(3) organization will be the date of its organization. Home Federal
Bancorp's outside tax advisor, however, has not rendered any advice on the
regulatory condition to the contribution to require that all shares of common
stock of Home Federal Bancorp held by the foundation must be voted in the same
ratio as all other outstanding shares of common stock of Home Federal Bancorp,
on all proposals considered by shareholders of Home Federal Bancorp. If Home
Federal Bancorp or the foundation receives an opinion of its legal counsel that
compliance with this voting restriction would have the effect of causing the
foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the foundation, or subject the foundation to an
excise tax under Section 4941 of the Internal Revenue Code, it is expected that
the Office of Thrift Supervision would waive such voting restriction upon
submission of a legal opinion by Home Federal Bancorp or the foundation
satisfactory to it.
Under Idaho law, Home Federal Bancorp is authorized by statute to make
charitable contributions and by law has recognized the benefits of such
contributions to a Idaho corporation. In this regard, Idaho law provides that a
charitable gift must be within reasonable limits to be valid. Under the Internal
Revenue Code, Home Federal Bancorp is generally allowed a deduction for
charitable contributions made to qualifying donees within the taxable year of up
to 10% of its taxable income of the consolidated group of corporations (with
certain modifications) for that year. Charitable contributions made by Home
Federal Bancorp in excess of the annual deductible amount will be deductible
over each of the five succeeding taxable years, subject to certain limitations.
Home Federal believes that the reorganization presents a unique opportunity to
establish and fund a charitable foundation given the substantial amount of
additional capital being raised in the stock offering. In making this
determination, Home Federal considered the dilutive impact of the contribution
of common stock to the foundation on the amount of common stock available to be
offered for sale in the stock offering. Based on this consideration, Home
Federal believes that the contribution to the foundation in excess of the 10%
annual deduction limitation is justified given Home Federal Bancorp's capital
position and its earnings, the substantial additional capital being raised in
the stock offering and the potential benefits of the foundation to the
communities served by Home Federal. In this regard,
157
assuming the sale of shares at the maximum of the estimated offering range, Home
Federal Bancorp would have pro forma stockholders' equity of $79.9 million or
15.0% of pro forma consolidated assets. See "Capitalization," "Home Federal
Exceeds All Regulatory Capital Requirements," "Pro Forma Data" and "Comparison
of Valuation and Pro Forma Information With and Without Charitable Foundation."
Home Federal Bancorp has received the opinion of its outside tax
advisors, Silver, Freedman & Taff, L.L.P., that Home Federal Bancorp's
contribution of its own stock to the foundation does not constitute an act of
self- dealing. However, any opinion received from outside tax advisors is not
binding on the Internal Revenue Service or the Idaho State Tax Commission. Home
Federal Bancorp should also be entitled to a deduction in the amount of the fair
market value of the stock at the time of the contribution less the nominal par
value that the foundation is required to pay to Home Federal Bancorp for such
stock, subject to the annual deduction limitation described above. Home Federal
Bancorp, however, would be able to carry forward any unused portion of the
deduction for five years following the contribution, subject to certain
limitations. Home Federal Bancorp's outside tax advisors, however, have not
rendered advice as to fair market value for purposes of determining the amount
of the tax deduction. Assuming the close of the offering at the maximum of the
estimated price range, Home Federal Bancorp estimates that a substantial portion
of the contribution should be deductible over the six-year period. Home Federal
Bancorp may make further contributions to the foundation following the initial
contribution. In addition, Home Federal Bancorp and Home Federal may also
continue to make charitable contributions to other qualifying organizations. Any
of these future contributions would be based on an assessment of the financial
condition of Home Federal Bancorp at that time, the interests of stockholders
and depositors of Home Federal Bancorp and Home Federal, and the financial
condition and operations of the foundation.
Although Home Federal Bancorp has received an opinion of its outside
tax advisors that it will more likely than not be entitled to a deduction for
the charitable contribution, there can be no assurances that the Internal
Revenue Service will recognize the foundation as a Section 501(c)(3) exempt
organization or that a deduction for the charitable contribution will be
allowed. In either case, Home Federal Bancorp's contribution to the foundation
would be expensed without tax benefit, resulting in a reduction in earnings in
the year in which the Internal Revenue Service makes the determination.
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The foundation will be required to make an
annual filing with the Internal Revenue Service. The foundation also will be
required to publish a notice that the annual information return will be
available for public inspection for a period of 180 days after the date of the
public notice. The information return for a private foundation must include,
among other things, an itemized list of all grants made or approved, showing the
amount of each grant, the recipient, any relationship between a grant recipient
and the foundation's managers and a concise statement of the purpose of each
grant. Numerous other restrictions exist in the operation of the foundation
including transactions with related entities, level of investment and
distributions for charitable purposes.
Regulatory Requirements Applicable to the Home Federal Foundation
Establishment of the Foundation will be subject to the following
requirements pursuant to the regulations of the Office of Thrift Supervision as
set forth on 12 C.F.R. Sections 563b.565 and 563b.575:
. the primary purpose of the foundation must be to serve and
make grants in the local community;
. so long as the foundation controls shares of Home Federal
Bancorp, those shares must be voted in the same ratio of all
other shares are voted on each proposal considered by the
stockholders. The stock contributed to the foundation must
include a legend to this effect;
. for at least five years after its establishment, at least one
seat of the foundation's board of directors must be reserved
for an independent director from the local community who has
experience with
158
local community charitable organizations and grant making but
who is not an officer, director or an employee of Home Federal
or any affiliate of Home Federal;
. for at least five years after its establishment, at least one
seat on the foundation's board of directors must be reserved
for a director from Home Federal;
. the foundation will be subject to examination by the Office of
Thrift Supervision, at the foundation's expense, and must
comply with all supervisory directives imposed by the Office
of Thrift Supervision;
. the foundation must provide the Office of Thrift Supervision
with a copy of the annual report it submits to the IRS;
. the foundation must operate according to written policies
adopted by its board of directors, including a conflict of
interest policy; and
. the foundation may not engage in self-dealing and must comply
with all laws necessary to maintain its tax-exempt status
under the Internal Revenue Code.
In addition, within six months of completing the reorganization, the
foundation must submit to the Office of Thrift Supervision a three-year
operating plan. The Home Federal Foundation must also provide to the Office of
Thrift Supervision copies of its charter and bylaws, conflict of interest policy
and the gift instrument for the contribution to the foundation. Additionally,
the establishment and funding of the foundation must be separately approved by
at least a majority of the total number of votes eligible to be cast by members
of Home Federal at the special meeting of members. Consummation of the
reorganization and the stock offering is not conditioned upon member approval of
the foundation. Failure to approve the foundation may, however, materially
increase the pro forma market value of Home Federal Bancorp. See "Comparison of
Valuation and Pro Forma Information With and Without Charitable Foundation."
DESCRIPTION OF CAPITAL STOCK OF
HOME FEDERAL BANCORP
General
Home Federal Bancorp is authorized to issue 50,000,000 shares of common
stock having a par value of $.01 per share and 5,000,000 shares of preferred
stock having a par value of $.01 per share. Home Federal Bancorp currently
expects to issue up to 11,500,000 shares of common stock, subject to adjustment
up to 13,225,000 shares, and no shares of preferred stock in the reorganization
and stock offering. Each share of Home Federal Bancorp's common stock will have
the same relative rights as, and will be identical in all respects with, each
other share of common stock. Upon payment of the purchase price for the common
stock, in accordance with the plan of reorganization and stock issuance, all
such stock will be duly authorized, fully paid and nonassessable.
The common stock of Home Federal Bancorp represents nonwithdrawable
capital. The common stock is not a savings or deposit account and is not insured
by the FDIC or any other government agency. The Board of Directors can, without
stockholder approval, issue additional shares of common stock although Home
Federal MHC so long as it is in existence, must own a majority of the
outstanding common stock of Home Federal Bancorp.
Common Stock Dividends. Home Federal Bancorp can pay dividends if, as
and when declared by its Board of Directors, subject to limitations which are
imposed by law and applicable regulation. See "Our Policy Regarding Dividends"
and "How We Are Regulated." The holders of common stock of Home Federal Bancorp
will be entitled to receive and share equally in the dividends declared by the
Board of Directors of Home Federal Bancorp out of funds legally available
therefor. If Home Federal Bancorp issues preferred stock, the holders thereof
may have a priority over the holders of the common stock with respect to
dividends.
159
Stock Repurchases. Office of Thrift Supervision regulations place
certain limitations on the repurchase of Home Federal Bancorp's capital stock.
See "How We Intend to Use the Proceeds from this Offering."
Voting Rights. Holders of common stock of Home Federal Bancorp will
possess exclusive voting rights in Home Federal Bancorp. They will elect Home
Federal Bancorp's Board of Directors and act on such other matters as are
required to be presented to them under federal law or as are otherwise presented
to them by the Board of Directors. Except as discussed in "Restrictions on
Acquisition of Home Federal Bancorp and Home Federal," each holder of common
stock will be entitled to one vote per share and will not have any right to
cumulate votes in the election of directors. If Home Federal Bancorp issues
preferred stock, holders of the preferred stock may also possess voting rights.
As a federally-chartered mutual savings and loan association, corporate
powers and control of Home Federal are vested in its members, who elect the
officers of Home Federal and who fill any vacancies on the Board of Directors as
it exists upon conversion. Subsequent to the reorganization, voting rights will
be vested exclusively in the owners of the shares of capital stock of Home
Federal, all of which will be owned by Home Federal Bancorp, and voted at the
direction of Home Federal Bancorp's Board of Directors. Consequently, the
holders of the common stock will not have direct control of Home Federal.
Liquidation. In the event of any liquidation, dissolution or winding up
of Home Federal, Home Federal Bancorp, as holder of Home Federal's capital stock
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of Home Federal, including all deposit accounts and
accrued interest thereon, and all assets of Home Federal available for
distribution. In the event of liquidation, dissolution or winding up of Home
Federal Bancorp, the holders of its common stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of Home Federal Bancorp available for distribution. If preferred
stock is issued, the holders thereof may have a priority over the holders of the
common stock in the event of liquidation or dissolution.
Preemptive Rights, Redemption. Holders of the common stock of Home
Federal Bancorp will not be entitled to preemptive rights with respect to any
shares that may be issued. The common stock is not subject to redemption.
Preferred Stock. None of the shares of Home Federal Bancorp's
authorized preferred stock will be issued in the reorganization and stock
offering and there are no current plans to issue the preferred stock. This stock
may be issued with such designations, powers, preferences and rights as the
Board of Directors may determine. The Board of Directors can, without
stockholder approval, issue preferred stock with voting, dividend, liquidation
and conversion rights that could dilute the voting strength of the holders of
the common stock and may assist management in impeding an unfriendly takeover or
attempted change in control.
Restrictions on Acquisition. Acquisitions of Home Federal Bancorp are
restricted by provisions in its charter and bylaws and by the rules and
regulations of various regulatory agencies. See "How We Are Regulated -
Regulation and Supervision of Home Federal Bancorp" and "Restrictions on
Acquisition of Home Federal Bancorp and Home Federal."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Home Federal Bancorp common stock
is Registrar and Transfer Company, Cranford, New Jersey.
EXPERTS
Our consolidated financial statements as of September 30, 2003 and
2002, and for each of the three years in the period ended September 30, 2003
included in this prospectus have been audited by Moss Adams LLP, independent
certified public accountants, as set forth in their report thereon appearing
elsewhere herein and in the
160
registration statement, and are included in reliance upon the report of this
firm given upon the authority as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of
its report to Home Federal setting forth its opinion as to the estimated pro
forma market value of the common stock upon issuance and its letter with respect
to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax
consequences of the reorganization and stock offering have been passed upon for
Home Federal by Breyer & Associates PC, McLean, Virginia, special counsel to
Home Federal and Home Federal Bancorp. The Idaho income tax consequences of the
reorganization and stock offering have been passed upon for Home Federal and
Home Federal Bancorp by Penland Munther Goodrum, Chartered, Boise, Idaho. The
contribution by Home Federal Bancorp of its own stock to the charitable
foundation will be passed upon by Silver, Freedman & Taff, L.L.P., Washington,
D.C. and Penland Munther Goodrum, Chartered. Certain legal matters will be
passed upon for Keefe, Bruyette & Woods by Elias, Matz, Tiernan & Herrick, LLP,
Washington, D.C.
WHERE YOU CAN FIND MORE INFORMATION
Home Federal Bancorp has filed with the SEC a registration statement
under the Securities Act of 1933 with respect to the common stock offered
hereby. As permitted by the rules and regulations of the SEC, this prospectus
does not contain all the information set forth in the registration statement.
This information, including the appraisal report which is an exhibit to the
registration statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of this material can be obtained from the SEC at prescribed rates.
For more information about the public reference room, call the SEC at (800)
SEC-0330. In addition, the SEC maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including Home
Federal Bancorp. The statements contained in this prospectus as to the contents
of any contract or other document filed as an exhibit to the registration
statement are, of necessity, brief descriptions thereof and are not necessarily
complete; each statement is qualified by reference to the contract or document.
We believe, however, that we have included the material information an investor
needs to consider in making an investment decision. Home Federal also maintains
a website (http://www.homefederalsavings.com), which contains various
information about Home Federal.
Home Federal Bancorp has filed with the Office of Thrift Supervision an
Application for Minority Stock Issuance, and Home Federal has filed with the
Office of Thrift Supervision a Notice of Mutual Holding Company Formation. This
prospectus omits certain information contained in the Application and Notice.
The Application and Notice, including the proxy materials, exhibits and certain
other information, may be inspected, without charge, at the office of the Office
of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552 and the
office of Regional Director of the Office of Thrift Supervision at the West
Regional office of the Office of Thrift Supervision, Pacific Plaza, 2001
Junipero Serra Boulevard, Suite 650, Daly City, California 94014.
In connection with the stock offering, Home Federal Bancorp has
registered its common stock with the SEC under Section 12 of the Securities
Exchange Act of 1934, and, upon such registration, Home Federal Bancorp and the
holders of its stock became subject to the proxy solicitation rules, reporting
requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Securities Exchange Act of 1934. Under the
plan of reorganization and stock issuance, Home Federal Bancorp has undertaken
that it will not terminate this registration for a period of at least three
years following the stock offering.
A copy of the plan of reorganization and stock issuance, the charter
and bylaws of Home Federal Bancorp and Home Federal are available without charge
from Home Federal. You may request this information from: Jerilyn Warren, Home
Federal Savings and Loan Association of Nampa, 500 12th Avenue South, Nampa,
Idaho 83651.
161
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report..............................................................F-2
Consolidated Statement of Financial Condition as of
March 31, 2004 and September 30, 2003 and 2002.........................................F-3
Consolidated Statement of Income for the Six Months Ended
March 31, 2004 and 2003 and the Years Ended September 30, 2003, 2002 and 2001..........F-4
Consolidated Statement of Equity for the Six Months Ended
March 31, 2004 and the Years Ended September 30, 2003, 2002 and 2001 ..................F-5
Consolidated Statement of Cash Flows for the Six Months Ended
March 31, 2004 and 2003 and the Years Ended September 30, 2003, 2002 and 2001..........F-6
Notes to Consolidated Financial Statements................................................F-8
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
The financial statements of Home Federal Bancorp, Inc. have been
omitted because Home Federal Bancorp, Inc. has not yet issued any stock, has no
assets or liabilities, and has not conducted any business other than that of an
organizational nature.
F-1
MOSS ADAMS LLP [GRAPHIC OMITTED]
--------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS 601 West Riverside, Suite 1800
Spokane, WA 99201-0663
Phone 509.747.2600
Toll Free 1.800.888.4065
FAX 509.624.5129
www.mossadams.com
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Home Federal Savings and Loan Association
of Nampa and Subsidiary
Nampa, Idaho
We have audited the accompanying consolidated statement of financial condition
of Home Federal Savings and Loan Association of Nampa and subsidiary as of
September 30, 2003 and 2002, and the related consolidated statements of income,
equity, and cash flows for each of the three years in the period ended September
30, 2003. These consolidated financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Home
Federal Savings and Loan Association of Nampa and subsidiary as of September 30,
2003 and 2002, and the results of their operations and cash flows for each of
the three years in the period ended September 30, 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ MOSS ADAMS LLP
Spokane, Washington
January 30, 2004
F-2
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION(dollars in thousands)
--------------------------------------------------------------------------------
ASSETS
(Unaudited) September 30,
March 31, ------------------------
2004 2003 2002
---------- ---------- ----------
Cash and amounts due from depository institutions $ 15,992 $ 11,118 $ 9,286
Securities available for sale, at fair value 6,404 5,440 2,507
Securities held to maturity, at cost 55,033 24,425 44,325
Federal Home Loan Bank capital stock, at cost 6,681 6,533 5,267
Loans receivable, net of allowance for loan losses of
$2,411 at March 31, 2004; $1,853 at September 30,
2003, and $1,385 at September 30, 2002 383,950 372,629 318,297
Loans held for sale 3,160 5,066 12,722
Accrued interest receivable 1,700 1,585 1,679
Properties and equipment, net 10,101 9,758 10,531
Mortgage servicing rights, net 3,016 3,130 1,760
Investment in life insurance contracts 9,842 9,621 8,813
Other assets 894 891 1,356
---------- ---------- ----------
TOTAL ASSETS $ 496,773 $ 450,196 $ 416,543
========== ========== ==========
LIABILITIES AND EQUITY
DEPOSIT ACCOUNTS
Savings deposits $ 24,620 $ 24,423 $ 23,207
Demand deposits 149,299 131,778 126,338
Certificates of deposit 155,596 145,072 130,227
---------- ---------- ----------
Total deposit accounts 329,515 301,273 279,772
Advances by borrowers for taxes and insurance 3,458 3,553 2,975
Interest payable on FHLB advances and other borrowings 391 368 367
Interest payable on deposits accounts 800 571 18
Deferred compensation 1,844 1,803 918
Advances from FHLB 113,074 96,527 91,008
Deferred income tax liability 2,116 2,475 1,827
Income taxes payable 553 365 140
Other liabilities 2,666 2,862 4,557
---------- ---------- ----------
Total Liabilities 454,417 409,797 381,582
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 9)
EQUITY CAPITAL
Retained earnings, substantially restricted 42,368 40,415 34,959
Accumulated comprehensive income (loss),
net of deferred income taxes (12) (16) 2
---------- ---------- ----------
Total equity capital 42,356 40,399 34,961
---------- ---------- ----------
TOTAL LIABILITIES AND EQUITY $ 496,773 $ 450,196 $ 416,543
========== ========== ==========
See accompanying notes. F-3
--------------------------------------------------------------------------------
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (dollars in thousands)
--------------------------------------------------------------------------------
(Unaudited) Six Months
Ended March 31, Year Ended September 30,
------------------------ --------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Interest and dividend income:
Loan interest $ 11,941 $ 12,183 $ 24,202 $ 23,808 $ 23,140
Investment interest 80 87 301 163 228
Mortgage-backed security interest 1,048 1,212 2,040 2,617 2,810
Federal Home Loan Bank stock dividends 148 187 352 284 262
Interest-bearing deposits in other banks -- 1 1 32 74
---------- ---------- ---------- ---------- ----------
Total interest and dividend income 13,217 13,670 26,896 26,904 26,514
---------- ---------- ---------- ---------- ----------
Interest expense:
Deposits 2,383 2,637 5,080 7,017 10,251
Federal Home Loan Bank advances 2,299 2,285 4,625 4,448 4,229
---------- ---------- ---------- ---------- ----------
Total interest expense 4,682 4,922 9,705 11,465 14,480
---------- ---------- ---------- ---------- ----------
Net interest income 8,535 8,748 17,191 15,439 12,034
Provision for loan losses 600 287 615 277 748
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 7,935 8,461 16,576 15,162 11,286
---------- ---------- ---------- ---------- ----------
Noninterest income:
Service fees and charges 3,807 3,650 8,120 5,965 4,764
Gain on sale of loans 344 587 1,044 676 286
Increase in cash surrender value of life insurance 249 201 601 416 332
Mortgage servicing rights
Loan servicing fees capitalized 479 1,110 2,762 1,155 720
(Amortization) accretion of mortgage servicing rights (363) (382) (1,143) (721) 158
Mortgage servicing rights impairment (230) -- (249) (1,481) --
Other 55 153 53 (243) 59
---------- ---------- ---------- ---------- ----------
Total noninterest income 4,341 5,319 11,188 5,767 6,319
---------- ---------- ---------- ---------- ----------
Noninterest expense:
Compensation and benefits 5,340 5,830 10,980 10,042 8,255
Occupancy and equipment 1,375 1,475 2,909 2,790 2,353
Data processing 724 665 1,366 997 806
Advertising 515 623 1,256 1,164 1,038
Postage and supplies 408 364 778 788 768
Professional services 180 256 402 235 290
Insurance and taxes 209 181 370 345 257
Other 467 402 824 817 827
---------- ---------- ---------- ---------- ----------
Total noninterest expense 9,218 9,796 18,885 17,178 14,594
---------- ---------- ---------- ---------- ----------
Income before income taxes 3,058 3,984 8,879 3,751 3,011
Income tax expense 1,105 1,559 3,423 1,644 1,223
---------- ---------- ---------- ---------- ----------
NET INCOME $ 1,953 $ 2,425 $ 5,456 $ 2,107 $ 1,788
========== ========== ========== ========== ==========
See accompanying notes. F-4
--------------------------------------------------------------------------------
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF EQUITY (dollars in thousands)
--------------------------------------------------------------------------------
Accumulated
Other
Total Equity Retained Comprehensive Comprehensive
Capital Earnings Income (Loss) Income (Loss)
-------------- -------------- -------------- --------------
Balance, September 30, 2000 $ 31,058 $ 31,064 $ (6)
Net income 1,788 1,788 -- $ 1,788
Change in unrealized loss on
securities available for sale, net of
deferred income taxes 20 -- 20 20
-------------- -------------- -------------- --------------
Comprehensive income $ 1,808
==============
Balance, September 30, 2001 32,866 32,852 14
Net income 2,107 2,107 -- $ 2,107
Change in unrealized gain on
securities available for sale, net of
deferred income taxes (12) -- (12) (12)
-------------- -------------- -------------- --------------
Comprehensive income $ 2,095
==============
Balance, September 30, 2002 34,961 34,959 2
Net income 5,456 5,456 -- $ 5,456
Change in unrealized gain on
securities available for sale, net of
deferred income taxes (18) -- (18) (18)
-------------- -------------- -------------- --------------
Comprehensive income $ 5,438
==============
Balance, September 30, 2003 $ 40,399 $ 40,415 $ (16)
============== ============== ==============
Net income (unaudited) $ 1,953 $ 1,953 $ -- $ 1,953
Change in unrealized loss on
securities available for sale, net of
deferred income taxes 4 -- 4 4
-------------- -------------- -------------- --------------
Comprehensive income $ 1,957
==============
Balance, March 31, 2004 (unaudited) $ 42,356 $ 42,368 $ (12)
============== ============== ==============
See accompanying notes. F-5
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (dollars in thousands)
--------------------------------------------------------------------------------
(Unaudited)
Six Months Ended March 31, Year Ended September 30,
------------------------ --------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,953 $ 2,425 $ 5,456 $ 2,107 $ 1,788
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation of properties and equipment 804 731 1,625 1,675 1,248
Net amortization of investments (5) 34 51 105 102
(Gain) loss on sale of fixed assets and repossessed
assets (12) (4) (47) 321 21
(Gain) loss on sale of securities available for sale -- (3) 37 (5) --
Provision for loan losses 600 287 615 277 748
Federal Home Loan Bank stock dividend (148) (182) (352) (284) (262)
Deferred compensation expense 41 350 885 -- --
Net deferred loan fees 667 845 (989) 267 148
Deferred income tax (361) 761 665 (93) (179)
Net gain on sale of loans (344) (587) (1,044) (1,120) (705)
Proceeds from sale of loans held for sale 37,702 87,404 164,390 92,786 68,556
Originations of loans held for sale (35,452) (77,577) (155,690) (124,879) (120,731)
Impairment of mortgage servicing asset 230 -- 249 1,481 --
Net increase in value of life insurance contracts (221) (436) (808) (361) (289)
Change in assets and liabilities:
Interest receivable (115) (4) 94 94 (27)
Other assets (119) (1,135) (1,307) 769 (842)
Interest payable on deposits and FHLB advances 252 319 554 (17) 50
Other liabilities (8) 1,090 (2,097) 2,953 1,216
---------- ---------- ---------- ---------- ----------
Net cash provided (used) by operating activities 5,464 14,318 12,287 (23,924) (49,158)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from principle repayments and maturities of
mortgage-backed securities available for sale 33 5,000 23,969 14,145 9,948
Proceeds from sale of mortgage-backed securities
available for sale -- -- 57,000 5,000 --
Purchase of mortgage-backed securities available for sale (991) (20,000) (4,120) (21,221) --
Proceeds from principle repayments and maturities of
mortgage-backed securities held to maturity 5,702 10,653 -- -- --
Purchase of mortgage-backed securities held to maturity (36,305) -- (60,000) -- (7,500)
Purchases of properties and equipment (1,135) (644) (1,400) (1,882) (1,677)
Purchase of Federal Home Loan Bank stock -- (207) (915) (964) --
Loan originations and principal collections, net (12,588) (31,730) (53,665) -- --
Proceeds from disposition of properties and equipment -- 505 495 -- 1,014
Proceeds from sale of repossessed assets -- 183 584 1,747 218
Investment in life insurance -- -- -- (369) (4,559)
---------- ---------- ---------- ---------- ----------
Net cash used by investing activities (45,284) (36,240) (38,052) (3,544) (2,556)
---------- ---------- ---------- ---------- ----------
See accompanying notes. F-6
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (dollars in thousands)
--------------------------------------------------------------------------------
(Unaudited)
Six Months Ended March 31, Year Ended September 30,
------------------------ --------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 28,242 $ 20,223 $ 21,486 $ 12,047 $ 32,768
Net increase (decrease) in advances by borrowers for
taxes and insurance (95) (711) 592 157 166
Advances from Federal Home Loan Bank 30,245 19,500 35,650 174,675 191,618
Payments on advances from Federal Home Loan Bank (13,698) (13,315) (30,131) (157,061) (172,722)
Net increase (decrease) in lines of credit -- -- -- (2,848) 338
---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities 44,694 25,697 27,597 26,970 52,168
---------- ---------- ---------- ---------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS 4,874 3,775 1,832 (498) 454
Cash and cash equivalents, beginning of year 11,118 9,286 9,286 9,784 9,330
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of year $ 15,992 $ 13,061 $ 11,118 $ 9,286 $ 9,784
========== ========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE
INFORMATION
Cash paid during the year for:
Interest on deposit accounts and other borrowings $ 4,195 $ 4,056 $ 9,151 $ 11,483 $ 14,409
========== ========== ========== ========== ==========
Income taxes $ 818 $ 1,654 $ 1,654 $ 1,638 $ 1,629
========== ========== ========== ========== ==========
SUPPLEMENTAL CASH FLOWS DISCLOSURE ON
NONCASH INVESTING TRANSACTIONS
Acquisition of real estate and other assets in
settlement of loans $ -- $ 239 $ 294 $ 2,376 $ 346
========== ========== ========== ========== ==========
See accompanying notes. F-7
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - Summary of Significant Accounting Policies
Nature of business:
Home Federal Savings and Loan Association of Nampa (the Association) was
organized in 1920 as a building and loan and reorganized in 1936 as a federal
mutual savings and loan association and adopted Chapter K Revised, in 1954, of
the Home Owners' Loan Act of 1933.
The Association operates 14 branches and two loan origination centers throughout
southwest Idaho. The Office of Thrift Supervision is the Association's primary
regulator.
Idaho Home Service Corporation is a wholly-owned subsidiary of the Association.
This subsidiary's primary business activity was the sale of nondeposit
investment products to Association members until April 2001 when operations were
discontinued. The subsidiary has been inactive since that time.
Principles of consolidation:
The consolidated financial statements include the accounts of Home Federal
Savings and Loan Association of Nampa and its wholly-owned subsidiary, Idaho
Home Service Corporation. All significant intercompany transactions have been
eliminated.
Basis of consolidated financial statement presentation:
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of certain assets and
liabilities as of the date of the consolidated statement of financial condition
and certain revenues and expenses for the period. Actual results could differ,
either positively or negatively, from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses, the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans, and valuation of mortgage servicing assets. In connection
with the determination of the allowance for loan losses and other real estate
owned, management generally obtains appraisals for significant properties.
Management also periodically obtains an independent appraisal for the value of
the mortgage servicing assets.
F-8
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - Summary of Significant Accounting Policies (Continued)
Basis of consolidated financial statement presentation (continued):
The allowance for loan losses is maintained at the level considered by
management to be sufficient to absorb estimated probable losses. While
management uses currently available information to recognize losses on loans,
other real estate (when owned), and impairment of mortgage servicing assets,
future additions to the allowance and future impairments may be necessary based
on changes in economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
Association's allowance for loan losses and their valuation of other real estate
owned, and the mortgage servicing assets. Such agencies may require the
Association to recognize additions to the allowance or an impairment on other
real estate owned or mortgage servicing assets based on their judgments of
information available to them at the time of their examination.
The Association's unaudited interim consolidated financial statements are
subject to possible adjustment in connection with the annual audit of the
Association's consolidated financial statements as of and for the year ending
September 30, 2004. In the opinion of management, the accompanying unaudited
interim consolidated financial statements reflect all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of financial
position and results of operations for the periods presented. Operations for the
six month period ended March 31, 2004, are not necessarily indicative of the
results to be expected for the full year.
Cash and cash equivalents:
For the purposes of reporting cash flows, the Association has defined cash and
cash equivalents as those amounts included in the consolidated statement of
financial condition caption cash and amounts due from depository institutions.
Cash and cash equivalents are on deposit with other banks and financial
institutions in amounts that periodically exceed the federal insurance limit.
The Association evaluates the credit quality of these banks and financial
institutions to mitigate its credit risk.
Cash on hand and in banks:
The Association is required to maintain an average reserve balance with the
Federal Reserve Bank, or maintain such reserve in cash on hand. The amount of
this required reserve balance at March 31, 2004 (unaudited), September 30, 2003
and 2002, was $1,706,000, $3,003,000, and $2,096,000, respectively.
Securities held to maturity:
Securities for which the Association has the positive intent and ability to hold
to maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity. Securities held to maturity consist of mortgage-backed and related
securities.
F-9
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - Summary of Significant Accounting Policies (Continued)
Securities available for sale:
Available for sale securities consist of investments in an adjustable rate
mortgage fund and mortgage-backed securities, which are not classified as
trading securities nor as held to maturity securities.
The adjustable rate mortgage fund invests primarily in securities backed by or
representing an interest in mortgages on domestic residential housing or
manufactured housing meeting the definition of such assets for purposes of the
qualified thrift lender test under the current Office of Thrift Supervision
Regulations.
Unrealized holding gains and losses, net of tax, on available for sale
securities are reported as a net amount in a separate component of equity until
realized. Gains and losses on the sale of available for sale securities are
determined using the specific-identification method and are included in
earnings.
Declines in the fair value of individual held to maturity and available for sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. Any such write-downs would be
included in earnings as realized losses.
Federal Home Loan Bank stock:
Federal Home Loan Bank (FHLB) stock is a required investment for institutions
that are members of the FHLB. The required investment in the common stock is
based on a predetermined formula and is carried at cost on the consolidated
statement of financial condition.
During 2002, the FHLB revised its capital structure from the issuance of one
class of stock to two, B(1) and B(2) stock. B(1) stock may be redeemed at cost,
but is restricted as to purchase and sale. Class B(2) is not a required
investment for institutions and is not restricted as to purchase and sale, but
has the same redemption restrictions as class B(1) stock.
Loans held for sale:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income. Realized gains or losses on sales of mortgage loans are
recognized based on the difference between the selling price and the carrying
value of the related mortgage loans sold and recognized in income at the time
the loan is sold. Loans sold in the secondary market are sold without recourse.
Loans receivable and allowance for loan losses:
The Association grants commercial, real estate, and consumer loans to customers.
A substantial portion of the loan portfolio is represented by commercial and
real estate loans made to borrowers in Idaho. The ability of the Association's
debtors to honor their contracts is dependent upon the real estate market and/or
general economic conditions in the Association's market area.
F-10
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - Summary of Significant Accounting Policies (Continued)
Loans receivable and allowance for loan losses (continued):
Loans are stated at the amount of unpaid principal, adjusted for deferred loan
fees and related costs and an allowance for loan losses. Interest on loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding. Interest income is accrued on the unpaid balance.
Loan origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using the interest method
over the contractual life of the loan.
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent, or in the opinion of management, the
collection of interest is questionable. Thereafter, no interest is taken into
income unless received in cash or until such time as the borrower demonstrates
the ability to resume payments of principal and interest.
Premiums and discounts on purchased loans are amortized over the life of the
loan as an adjustment to yield using the interest method.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, an amendment
of SFAS No. 114, a loan is considered impaired when, based on current
information and events, it is probable that the Association will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan basis for
nonhomogeneous loan types by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the loan is collateral
dependent. Large groups of smaller balance homogenous loans such as consumer
secured loans, residential mortgage loans and consumer unsecured loans are
collectively evaluated for probable loss.
When a loan has been identified as being impaired, the amount of the impairment
is measured by using a practical expedient, the current fair value of the
collateral, reduced by costs to sell, is used. When the measurement of the
impaired loan is less than the recorded investment in the loan (including
accrued interest, net deferred loan fees or costs, and unamortized premium or
discount), an impairment is recognized by creating or adjusting an allocation of
the allowance for loan losses. Uncollected accrued interest is reversed against
interest income. If ultimate collection of principal is in doubt, all cash
receipts on impaired loans are applied to reduce the principal balance.
F-11
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - Summary of Significant Accounting Policies (Continued)
Loans receivable and allowance for loan losses (continued):
The allowance for loan losses is maintained at a level deemed by management to
provide for probable loan losses through charges to operating expense. The
allowance is based upon a periodic review of loans which includes consideration
of actual net loan loss experience, changes in the size and character of the
loan portfolio, identification of individual problem situations which may affect
the borrower's ability to pay, and an evaluation of current economic conditions.
Loan losses are recognized through charges to the allowance.
Real estate acquired in settlement of loans:
Real estate acquired through foreclosure is stated at the lower of cost
(principal balance of the former mortgage loan plus costs of obtaining title and
possession) or fair value less costs to sell at the time of foreclosure. Costs
of development and improvement of the property are capitalized. In addition,
costs of holding such real estate are expensed.
Properties and equipment:
Office properties and equipment are recorded at cost. Depreciation and
amortization are computed using primarily the straight-line method for financial
statement purposes over the following estimated useful lives and lease periods:
Buildings and leasehold improvements 15-40 years
Furniture, equipment, and automobiles 3-12 years
The normal costs of maintenance and repairs are charged to expense as incurred.
Mortgage servicing rights:
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on current market
interest rates. For purposes of measuring impairment, the rights are stratified
based on loan type, size, note rate, date of origination, and term. The amount
of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value. Loans sold in the
secondary market, in which servicing is retained, are sold without recourse.
F-12
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - Summary of Significant Accounting Policies (Continued)
Income taxes:
Deferred income taxes are reported for temporary differences between items of
income or expense reported in the consolidated financial statements and those
reported for income tax purposes. Deferred taxes are computed using the asset
and liability approach as prescribed in Statement No. 109, Accounting for Income
Taxes. Under this method, a deferred tax asset or liability is determined based
on the enacted tax rates that will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in the Association's income tax returns.
The deferred tax provision for the year is equal to the net change in the net
deferred tax liability from the beginning to the end of the year, less amounts
applicable to the change in value related to investments available for sale. The
effect on deferred taxes of a change in tax rates is recognized as income in the
period that includes the enactment date.
Comprehensive income:
Accounting principles generally require that recognized revenue, expenses,
gains, and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as separate components of the equity section of the
consolidated statement of financial condition, such items, along with net income
are components of comprehensive income.
The components of other comprehensive income and related tax effects are as
follows (dollars in thousands):
(Unaudited) Six Months Ended
March 31, Year Ended September 30,
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Unrealized holding gain (loss)
on securities available for sale $ 7 $ (4) $ 7 $ (25) $ 33
Reclassification adjustment for (gain)
loss realized in income -- 3 (37) 5 --
---------- ---------- ---------- ---------- ----------
Net unrealized gain (loss) 7 (1) (30) (20) 33
Tax effect (3) -- 12 8 (13)
---------- ---------- ---------- ---------- ----------
UNREALIZED GAIN (LOSS)
NET OF TAX $ 4 $ (1) $ (18) $ (12) $ 20
========== ========== ========== ========== ==========
Advertising costs:
Advertising costs are charged to operations when incurred. Advertising expense
for the six months ended March 31, 2004 (unaudited) and March 31, 2003
(unaudited), were $515,000 and $623,000, and years ended September 30, 2003,
2002, and 2001, were $1,256,000, $1,164,000, and $1,038,000, respectively.
F-13
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - Summary of Significant Accounting Policies (Continued)
Recent accounting pronouncements:
Effective January 1, 2003, the Association adopted Statement of Financial
Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting
obligations associated with the retirement of long-lived assets. SFAS No. 143
requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred and
capitalize that amount as part of the book value of the long-lived asset. The
Association has entered into various operating leases, which are subject to the
provisions of this statement. The lease agreements contain provisions requiring
restoration and removal of assets from the leased sites at the end of the lease
term. The Association has reviewed its operating lease agreements and determined
there is no material legal asset retirement obligation.
In June 2002, Financial Accounting Standards Board (FASB) issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The Association's adoption of SFAS No. 146 had no impact on the Association's
consolidated statement of financial position or results of operations.
In October 2002, FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions - an amendment of FASB statement No. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 147 removes acquisitions of financial
institutions from the scope of both Statement No. 72 and Interpretation No. 9
and requires that those transactions be accounted for in accordance with FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. In addition, this Statement amends FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor and borrower relationship intangible assets and
credit card holder intangible assets. The provisions of this Statement were
effective on October 1, 2002. The Association's adoption of SFAS No. 147 had no
impact on the Association's consolidated statement of financial position or
results of operations.
The FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative
Instruments and Hedging Activities. This Statement, which was issued in April
2003, amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. This Statement is effective
for contracts entered into or modified after June 30, 2003. The Association's
adoption of SFAS No. 149 did not have material impact on the Association's
consolidated statement of financial position or results of operations.
F-14
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - Summary of Significant Accounting Policies (Continued)
Recent accounting pronouncements (continued):
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This Statement, which was issued
in May 2003, establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Association's adoption of SFAS No. 150 did
not have a material impact on the Association's consolidated statement of
financial position or results of operations.
The EITF researched a consensus in EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. The
consensus was that certain quantitative and qualitative disclosures should be
required for debt and marketable equity securities classified as available for
sale or held to maturity under FASB Statement Nos. 115 and 124, that are
impaired at the balance sheet date but for which an other-than-temporary
impairment has not been recognized. This EITF consensus is effective for fiscal
years ending after December 15, 2003. Adoption of the EITF consensus did not
result in an impact on the consolidated statement of financial position or
results of operations.
In December 2003, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position (SOP) No. 03-3, Accounting for Certain Loans or
Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for
differences between the contractual cash flows and the cash flows expected to be
collected from purchased loans or debt securities if those differences are
attributable, in part, to credit quality. SOP 03-3 requires purchased loans and
debt securities to be recorded initially at fair value based on the present
value of the cash flows expected to be collected with no carryover of any
valuation allowance previously recognized by the seller. Interest income should
be recognized based on the effective yield from the cash flows expected to be
collected. To the extent that the purchased loans experience subsequent
deterioration in credit quality, a valuation allowance would be established for
any additional cash flows that are not expected to be received. However, if more
cash flows are expected to be received than originally estimated, the effective
yield would be adjusted on a prospective basis. SOP 03-3 will be effective for
loans and debt securities acquired after December 31, 2004. Although the
Association anticipates that the implementation of SOP 03-3 will require
significant loan system and operational changes to track credit related losses
on loans purchased starting in 2005, it is not expected to have a significant
effect on the consolidated financial statements.
F-15
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - Summary of Significant Accounting Policies (Continued)
Recent accounting pronouncements (continued):
In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which expands on the accounting guidance
of Statement Nos. 5, 57, and 107, and incorporates without change the provisions
of FASB Interpretation No. 34, which is being superseded. This FIN requires a
guarantor to recognize, at the inception of the guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The
recognition requirements of FIN No. 45 apply prospectively to guarantees issued
or modified after December 31, 2002. As a result of the adoption of FIN No. 45,
there has been no effect on the consolidated financial statements.
In December 2003, the FASB issued FIN No. 46R, Consolidation of Variable
Interest Entities, an interpretation of Accounting Research Bulletin No. 51. FIN
46R is a revision to the original FIN No. 46, which was issued in January 2003,
that addresses the consolidation of certain variable interest entities (e.g.,
nonqualified special purpose entities). The FIN provides guidance on how to
identify a variable interest entity and determine when the assets, liabilities,
noncontrolling interests, and results of operations of a variable interest
entity should be consolidated by the primary beneficiary. The primary
beneficiary is the enterprise that will absorb a majority of the variable
interest entity's expected losses or receive a majority of the expected residual
returns as a result of holding variable interests.
The revision clarifies how variable interest entities should be identified and
evaluated for consolidation purposes. FIN No. 46R must be applied no later than
March 31, 2004. The Association adopted FIN No. 46 as of July 1, 2003. The
Association is still in the process of studying and evaluating the impact of FIN
No. 46R. However, at this time the Association does not expect the impact of FIN
No. 46R to have a significant effect on the results of operations or financial
condition.
Reclassifications:
Certain reclassifications have been made to prior year's consolidated financial
statements in order to conform with the current year presentation. The
reclassifications had no effect on previously reported net income or equity.
F-16
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 2 - Securities
Securities held by the Association have been classified in the consolidated
statement of financial condition according to management's intent. The amortized
cost of securities and their approximate fair values at March 31, 2004, and
September 30, 2003 and 2002, were as follows (dollars in thousands):
(Unaudited) March 31, 2004
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Securities available for sale: Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Adjustable Rate Mortgage Fund $ 5,468 $ -- $ (28) $ 5,440
FNMA mortgage-backed securities 958 6 -- 964
------------ ------------ ------------ ------------
$ 6,426 $ 6 $ (28) $ 6,404
============ ============ ============ ============
September 30, 2003
-----------------------------------------------------------
Adjustable Rate Mortgage Fund $ 5,468 $ -- $ (28) $ 5,440
============ ============ ============ ============
September 30, 2002
-----------------------------------------------------------
Adjustable Rate Mortgage Fund $ 2,504 $ 3 $ -- $ 2,507
============ ============ ============ ============
There were no sales of securities available for sale during the six months ended
March 31, 2004 (unaudited) and 2003 (unaudited), or the year ended September 30,
2001. For the years ended September 30, 2003 and 2002, proceeds from sales of
securities available for sale amounted to $57,000,000 and $5,000,000,
respectively. Gross realized gains on securities available for sale during the
six months ended March 31, 2003 (unaudited), and the years ended September 30,
2003 and 2002, were $3,000 and $5,000 and $5,000, respectively, which was
include in other noninterest income on the consolidated statement of income.
Gross realized losses on securities available for sale for the year ended
September 30, 2003, were $42,000, which was include in other noninterest income
on the consolidated statement of income. There were no gross realized gains on
securities available for sale recognized during the six months ended March 31,
2004 (unaudited), and the year ended September 30, 2001. There were no gross
realized losses on securities available for sale recognized during the six
months ended March 31, 2004 (unaudited) and 2003 (unaudited), and the years
ended September 30, 2002 and 2001.
F-17
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Note 2 - Securities (Continued)
The amortized cost of securities and their approximate fair values at March 31,
2004, and September 30, 2003 and 2002, were as follows (dollars in thousands):
(Unaudited) March 31, 2004
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Securities held to maturity: Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Mortgage-backed securities:
FHLMC $ 21,652 $ 780 $ -- $ 22,432
FNMA 33,381 919 -- 34,300
------------ ------------ ------------ ------------
$ 55,033 $ 1,699 $ -- $ 56,732
============ ============ ============ ============
September 30, 2003
-----------------------------------------------------------
Mortgage-backed securities:
FHLMC $ 10,485 $ 347 $ -- $ 10,832
FNMA 13,940 651 -- 14,591
------------ ------------ ------------ ------------
$ 24,425 $ 998 $ -- $ 25,423
============ ============ ============ ============
September 30, 2002
-----------------------------------------------------------
Mortgage-backed securities
FHLMC $ 16,880 $ 751 $ -- $ 17,631
FNMA 27,445 1,203 -- 28,648
------------ ------------ ------------ ------------
$ 44,325 $ 1,954 $ -- $ 46,279
============ ============ ============ ============
There were no sales of securities held to maturity for the six months ended
March 31, 2004 (unaudited), and the years ended September 30, 2003, 2002, and
2001.
At March 31, 2004 (unaudited), the weighted average yield on the adjustable rate
mortgage fund and mortgage-backed securities was 2.35% and 5.21%, respectively.
At September 30, 2003, the weighted average yield on the adjustable rate
mortgage fund and mortgage-backed securities was 2.24% and 6.19%, respectively.
At September 30, 2002, the weighted average yield on the adjustable rate
mortgage fund and mortgage-backed securities was 3.15% and 6.53%, respectively.
F-18
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Note 2 - Securities (Continued)
Expected maturities may differ from contractual maturities because borrowers
have the right to repay obligations without prepayment penalties. Securities
held to maturity are pledged as collateral for Federal Home Loan Bank borrowings
(Note 7).
At March 31, 2004, there was one, the adjustable rate mortgage fund, security
with an unrealized loss. The unrealized loss had existed for less than one year.
Management does not believe that the unrealized loss represents an
other-than-temporary impairment. The decline in fair market value of the
security is generally due to changes in interest rates. In the opinion of
management the unrealized loss does not reflect a deterioration of the credit
worthiness of the issuing entity, nor the probable payment of principal and
interest according to the contractual terms of the security.
F-19
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Note 3 - Loans Receivable
Loans receivable are summarized as follows (dollars in thousands):
(Unaudited)
March 31, September 30,
---------- -----------------------
2004 2003 2002
---------- ---------- ----------
Real Estate Loans
One-to four family residential $ 241,089 $ 247,309 $ 194,088
Multi-family residential 6,315 7,750 7,512
Commercial 94,519 79,020 79,197
---------- ---------- ----------
Total real estate loans 341,923 334,079 280,797
---------- ---------- ----------
Real Estate Construction Loans
One-to four family residential 4,428 5,225 6,505
Multi-family residential -- 352 1,486
Commercial and land development 11,277 9,128 6,579
---------- ---------- ----------
Total real estate construction loans 15,705 14,705 14,570
---------- ---------- ----------
Consumer Loans
Home equity lines of credit 22,929 20,640 18,069
New and used automotive and RV 3,095 1,939 2,297
Other consumer 2,161 2,827 3,666
---------- ---------- ----------
Total consumer loans 28,185 25,406 24,032
---------- ---------- ----------
Commercial/business loans 1,734 1,662 2,641
---------- ---------- ----------
Total loans 387,547 375,852 322,040
Less net deferred loan fees 1,186 1,370 2,358
---------- ---------- ----------
Total loans less deferred loan fees 386,361 374,482 319,682
Less allowance for loan losses 2,411 1,853 1,385
---------- ---------- ----------
TOTAL LOANS, net $ 383,950 $ 372,629 $ 318,297
========== ========== ==========
F-20
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Note 3 - Loans Receivable (Continued)
The contractual maturity of loans receivable at March 31, 2004 (unaudited), are
shown below (dollars in thousands). Expected maturities will differ from
contractual maturities because borrowers may have the right to prepay loans with
or without prepayment penalties.
Within One One Year to After Five
Year Five Years Years Total
---------- ---------- ---------- ----------
Real Estate
One-to four family residential $ 13,292 $ 28,879 $ 198,918 $ 241,089
Multi-family residential 366 3,330 2,619 6,315
Commercial 8,340 64,641 21,538 94,519
---------- ---------- ---------- ----------
Total real estate 21,998 96,850 223,075 341,923
---------- ---------- ---------- ----------
Real Estate Construction
One-to four family residential 2,255 201 1,972 4,428
Multi-family residential -- -- -- --
Commercial and land development 952 4,948 5,377 11,277
---------- ---------- ---------- ----------
Total real estate construction 3,207 5,149 7,349 15,705
---------- ---------- ---------- ----------
Consumer
Home equity lines of credit 19,519 88 3,322 22,929
New and used automotive and RV 40 1,603 1,452 3,095
Other consumer 830 1,215 116 2,161
---------- ---------- ---------- ----------
Total consumer 20,389 2,906 4,890 28,185
---------- ---------- ---------- ----------
Commercial/business 1,012 355 367 1,734
---------- ---------- ---------- ----------
Total loans $ 46,606 $ 105,260 $ 235,681 $ 387,547
========== ========== ========== ==========
The interest rates on loans at March 31, 2004, fall into the following fixed and
variable components (dollars in thousands):
Fixed rates $ 164,665
Variable rates 222,882
-------------
$ 387,547
=============
F-21
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Note 3 - Loans Receivable (Continued)
An analysis of the changes in the allowance for loan losses is as follows
(dollars in thousands):
(Unaudited)
Six Months Ended
March 31, Year Ended September 30,
------------------------ --------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Beginning balance, $ 1,853 $ 1,385 $ 1,385 $ 1,431 $ 1,129
Provision for loan losses 600 287 615 277 748
Charge offs (51) (102) (154) (331) (468)
Recoveries 9 4 7 8 22
---------- ---------- ---------- ---------- ----------
Ending balance $ 2,411 $ 1,574 $ 1,853 $ 1,385 $ 1,431
========== ========== ========== ========== ==========
The amount of impaired loans and the related allocated reserve for loan losses
were as follows (dollars in thousands):
(Unaudited)
Six Months Ended
March 31, Year Ended September 30,
----------------------- ------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Impaired Loans:
Nonaccrual $ 1,108 $ -- $ -- $ 326 $ 2,270
Accrual -- -- -- -- --
---------- ---------- ---------- ---------- ----------
$ 1,108 $ -- $ -- $ 326 $ 2,270
========== ========== ========== ========== ==========
Allocated reserves $ -- $ -- $ -- $ 33 $ 285
========== ========== ========== ========== ==========
The average balance of impaired loans and the related interest income recognized
were as follows (dollars in thousands):
(Unaudited)
Six Months Ended
March 31, Year Ended September 30,
----------------------- ------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Average balance of impaired loans $ 555 $ 47 $ 25 $ 989 $ 1,095
Interest income recognized from cash
payments on impaired loans -- -- -- -- --
F-22
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Note 3 - Loans Receivable (Continued)
The investments in residential mortgage loans are pledged as collateral for
Federal Home Loan Bank borrowings (Note 7).
Note 4 - Loan Servicing
Loans serviced for outside investors are not included in the consolidated
statements of financial condition. The unpaid principal balances of loans
serviced at March 31, 2004 (unaudited) and 2003 (unaudited), were $258,252,000
and $235,019,000, respectively, and at September 30, 2003, 2002, and 2001, the
balances were $245,969,000, $206,062,000, and $195,601,000, respectively.
The following summarizes capitalized mortgage servicing rights activity (dollars
in thousands):
(Unaudited)
Six Months Ended
March 31, Year Ended September 30,
------------------------ --------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Mortgage servicing asset,
beginning balance $ 3,130 $ 1,760 $ 1,760 $ 2,807 $ 1,929
Capitalized 479 1,110 2,762 1,155 720
(Amortization) accretion (363) (382) (1,143) (721) 158
Impairment (230) -- (249) (1,481) --
---------- ---------- ---------- ---------- ----------
Mortgage servicing asset,
ending balance $ 3,016 $ 2,488 $ 3,130 $ 1,760 $ 2,807
========== ========== ========== ========== ==========
Fair value of these servicing rights approximated carrying value at March 31,
2004, and at September 30, 2003, 2002, and 2001. At September 30, 2003, 2002,
and 2001, the fair value of servicing rights was determined by an independent
valuation. At March 31, 2004, management determined the fair value of servicing
rights was materially comparable to the independent valuation at September 30,
2003.
F-23
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 5 - Properties and Equipment
Properties and equipment at March 31, 2004, and September 30, 2003 and 2002, are
summarized as follows (dollars in thousands):
(Unaudited)
March 31, September 30,
---------- ------------------------
2004 2003 2002
---------- ---------- ----------
Land $ 1,627 $ 1,627 $ 1,439
Buildings and leasehold improvement 8,093 7,055 7,588
Construction in progress 222 759 76
Furniture and equipment 9,145 8,651 8,650
Automobiles 203 203 176
---------- ---------- ----------
Total cost 19,290 18,295 17,929
Less accumulated depreciation and amortization (9,189) (8,537) (7,398)
---------- ---------- ----------
NET BOOK VALUE $ 10,101 $ 9,758 $ 10,531
========== ========== ==========
During the year ended September 30, 2003, the Association closed three branches.
Assets disposed of relating to the closing of the branches totaled approximately
$530,000 and resulted in total losses of $352,000. The Association retained all
deposit and loan accounts associated with the disposed branches.
Repairs and maintenance are charged against income as incurred; major renewals
and improvements are capitalized. Depreciation charged against operations for
the six months ended March 31, 2004 (unaudited) and 2003 (unaudited), and years
ended September 30, 2003, 2002, and 2001, was $804,000, and $731,000 and
$1,625,000, $1,675,000, and $1,248,000, respectively.
F-24
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Note 6 - Deposit Accounts
Deposit information for the periods presented is as follows (dollars in
thousands):
Weighted (Unaudited) Weighted Weighted
Average March 31, Average September 30, Average September 30,
Interest Rate 2004 Interest Rate 2003 Interest Rate 2002
------------- ------------- ------------- ------------- ------------- -------------
Savings deposits 0.20% $ 24,620 0.43% $ 24,423 0.88% $ 23,207
Demand deposits 0.29% 149,299 0.42% 131,778 1.24% 126,338
------------- ------------- -------------
173,919 156,201 149,545
------------- ------------- -------------
Certificates of 0.00 - 0.99% 20,499 0.00 - 0.99% 11,742 0.00 - 0.99% -
deposit 1.00 - 1.99% 29,959 1.00 - 1.99% 36,899 1.00 - 1.99% 28,383
2.00 - 2.99% 42,465 2.00 - 2.99% 40,884 2.00 - 2.99% 36,647
3.00 - 3.99% 41,087 3.00 - 3.99% 31,983 3.00 - 3.99% 29,473
4.00 - 4.99% 18,451 4.00 - 4.99% 18,726 4.00 - 4.99% 22,896
5.00 - 5.99% 1,902 5.00 - 5.99% 2,968 5.00 - 5.99% 6,952
6.00 - 6.99% 1,233 6.00 - 6.99% 1,870 6.00 - 6.99% 5,876
------------- -------------
-------------
155,596 145,072 130,227
------------- ------------- -------------
$ 329,515 $ 301,273 $ 279,772
============= ============= =============
Scheduled maturities of certificates of deposit are as follows (dollars in
thousands):
(Unaudited) September 30,
March 31, -----------------------
2004 2003 2002
---------- ---------- ----------
2003 $ -- $ -- $ 59,902
2004 -- 58,278 25,516
2005 57,256 38,918 19,730
2006 44,878 30,027 23,466
2007 42,584 16,748 1,598
2008 9,913 985 15
Thereafter 965 116 --
---------- ---------- ----------
$ 155,596 $ 145,072 $ 130,227
========== ========== ==========
F-25
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Note 6 - Deposit Accounts (Continued)
Deposit accounts are insured by the FDIC up to $100,000. At March 31, 2004
(unaudited), and September 30, 2003 and 2002, certificates of deposit of
$100,000 or greater approximated $34,475,000, $28,025,000 and $22,778,000,
respectively.
Interest expense by type of deposit account for the three months ended March 31
and years ended September 30 is summarized as follows (dollars in thousands):
(Unaudited)
Six Months Ended
March 31, Year Ended September 30,
----------------------- ------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Savings $ 35 $ 61 $ 104 $ 198 $ 487
Demand 191 270 436 1,233 1,984
Certificates of deposit 2,157 2,306 4,540 5,586 7,780
---------- ---------- ---------- ---------- ----------
$ 2,383 $ 2,637 $ 5,080 $ 7,017 $ 10,251
========== ========== ========== ========== ==========
Note 7 - Advances From the Federal Home Loan Bank
The Association has the ability to borrow up to 35% of its total assets from the
Federal Home Loan Bank of Seattle. Advances are collateralized by all FHLB stock
owned by the bank, deposits with the FHLB of Seattle, and certain mortgages or
deeds of trust securing such properties. The outstanding balances on FHLB
advances at March 31, 2004 (unaudited), and September 30, 2003 and 2002, was
$113,074,000, $96,527,000, and $91,008,000, respectively, with interest rates
ranging from 1.23% to 6.77%.
The Association's borrowings consisted of the following (dollars in thousands):
(Unaudited) Six Year Ended
Months Ended September 30,
March 31, 2004 2003
-------------- -----------
FHLB advances
Maximum outstanding at any month end $ 117,000 $ 112,000
Average outstanding $ 109,000 $ 102,000
Weighted average interest rates
For the period 4.23% 4.62%
At end of period 4.08% 4.64%
F-26
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Note 7 - Advances From the Federal Home Loan Bank (Continued)
Scheduled maturities of the fixed rate FHLB borrowings were (dollars in
thousands):
(Unaudited)
March 31, 2004 September 30, 2003 September 30, 2002
----------------------------- ----------------------------- ----------------------------
Average Average Average
Interest Interest Interest
Rates Amount Rates Amount Rates Amount
------------- ------------- ------------- ------------- ------------- -------------
2004 3.96% $ 21,482 4.89% $ 20,431 5.14% $ 27,598
2005 4.09% 25,477 4.49% 13,723 4.89% 20,431
2006 3.06% 14,015 4.51% 18,202 4.49% 14,157
2007 4.33% 13,397 4.71% 6,671 4.51% 19,802
2008 3.54% 7,303 4.42% 6,100 4.69% 7,170
Thereafter 4.64% 31,400 4.64% 31,400 6.77% 1,850
------------- ------------- -------------
$ 113,074 $ 96,527 $ 91,008
============= ============= =============
Included in the Association's borrowing capacity with FHLB is a cash management
advance account. The balance at March 31, 2004 (unaudited), was $1,175,000.
There was no balance in this account at September 30, 2003, and the balance at
September 30, 2002, was $1,200,000. At March 31, 2004, and September 30, 2002,
the current interest rates for this account were 1.23% and 1.35%, respectively.
Note 8 - Employee Retirement Plans
The Association has a 401(k) retirement plan covering substantially all of its
full-time employees. The Association matches 50% of employee contributions up to
5% of eligible employee wages. For the six months ended March 31, 2004
(unaudited) and 2003 (unaudited), and years ended September 30, 2003, 2002, and
2001, total Association contributions were $68,000 and $60,000 and $124,000,
$105,000, and $94,000, respectively.
Salary Continuation Plan:
As a supplement to the Retirement Plan, the Association has adopted a Salary
Continuation Plan pursuant to agreements with certain officers of the
Association and its subsidiaries. Under the Salary Continuation Plan, an officer
will be entitled to a stated annual benefit for a period of 15 years (i) upon
retirement from the Association after attaining age 65, or (ii) upon attaining
age 65 if his or her employment had been previously terminated due to
disability. In the event the executive dies after age 65, but before receiving
the full 15 years of annual benefits, the remaining payments shall be paid to
his or her beneficiaries.
F-27
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Note 8 - Employee Retirement Plans (Continued)
Salary Continuation Plan (continued):
From time to time, the Association may (but is not required to) amend the stated
benefit amount for each executive to provide a benefit up to 50% of the current
salary. However, the annual salary continuation benefit paid to an executive,
plus the annual pension payable to the executive under the Retirement Plan, may
not exceed 80% of his or her final average salary as defined in the Retirement
Plan.
If an executive's employment is terminated voluntarily or involuntarily for
cause, prior to attaining age 65, no salary continuation benefits shall be owing
to the executive unless the executive is eligible for early retirement, because
he or she has attained age 55 and has been employed for at least ten years. In
this event the executive shall be paid a reduced annual benefit beginning at age
65, or an earlier benefit that is reduced further and payable upon termination.
In the event the executive's employment is terminated as a result of a change in
control of the Association as defined in the Plan, the executive will be
entitled to a reduced annual benefit pursuant to the early retirement terms of
the Plan, notwithstanding that the executive is under age 55 or has not been
employed by the Association for ten years.
The amounts recognized in compensation expense were $80,000 and $172,000, and
$298,000, $154,000, and $49,000 for the six months ended March 31, 2004
(unaudited) and 2003, and the years ended September 30, 2003, 2002, and 2001,
respectively.
Deferred compensation:
The Association has deferred compensation agreements with several key members of
management and the Board of Directors. Under the agreements, the Association is
obligated to provide for each such employee or Board members or their
beneficiaries during a period of ten years after the employee's death,
disability, or retirement. The estimated present value of future benefits to be
paid is being accrued over the period from the effective date of the agreement
until the expected retirement dates of the participants. The Association's
liability under the plan is determined annually by taking the participant's base
salary for the year times an incentive award percentage, which is based on the
Association's return on assets and equity for the year.
The amounts recognized in compensation expense were $106,000 and $181,000 , and
$439,000, $142,000 and $171,000 for the six months ended March 31, 2004
(unaudited) and 2003 (unaudited), and the years ended September 30, 2003, 2002,
and 2001, respectively.
F-28
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Note 8 - Employee Retirement Plans (Continued)
Split dollar life insurance plan:
The Association has entered into agreements with certain executives where the
Association provides life insurance coverage for the executives. Under each
agreement, the Association will pay for a life insurance policy on the life of
each executive. The Association owns the cash surrender value of each policy
and, by way of a split dollar agreement, has agreed to endorse the death
benefits over and above the cash surrender value to the beneficiary of the
executive. The payment of the benefit will come directly from the insurance
company to the beneficiary. As the Association has no benefit obligation to the
executive, no accruals are required on the Association's consolidated financial
statements. There are no accrued liabilities recorded associated with this plan.
Indexed retirement plan:
The Association has entered into agreements with its directors whereby the
Association has established an indexed retirement plan. Benefit amounts are
based on additional net earnings from bank owned life insurance (BOLI) policies
compared to the yield on treasury securities. Benefit payments are not
guaranteed because there may not be a positive spread between BOLI earnings and
the yield on selected treasury securities. However, life insurance assets have
historically generated more net earnings than treasury securities.
The amounts recognized in compensation expense were $110,000 and $11,000 and
$154,000, $41,000 and $20,000 for the six months ended March 31, 2004
(unaudited) and 2003 (unaudited), and the years ended September 30, 2003, 2002,
and 2001, respectively.
Bank owned life insurance:
The Association has funded it employee benefit plan with BOLI. The cash
surrender value of the BOLI was $9,842,000, and $9,621,000, $8,813,000, and
$8,083,000 at March 31, 2004 (unaudited), and the years ended September 30,
2003, 2002, and 2001, respectively. The Association has annual mortality
insurance premiums, which reduce the cash surrender values on the life insurance
policies. The mortality insurance expense related to the BOLI was $28,000 and
$27,000 and $55,000, $55,000, and $40,000 for the six months ended March 31,
2004 (unaudited) and 2003 (unaudited), and the years ended September 30, 2003,
2002, and 2001, respectively.
The potential death benefits as of March 31, 2004 (unaudited), and September 30,
2003, were $5,081,000.
Note 9 - Commitments
Lease commitments:
The Association has entered into noncancelable operating leases for four of its
branches that have initial or remaining lease terms in excess of one year as of
March 31, 2004. Certain lease payments may be adjusted periodically in
accordance with changes in the Consumer Price Index.
F-29
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Note 9 - Commitments (Continued)
The Association also has noncancelable operating leases for five retail branches
located inside Wal-Mart stores. The agreements are for five years with two
five-year renewal options. The estimated future minimum annual rental payments
under the branch operating leases, exclusive of taxes and other charges, are
summarized as follows (dollars in thousands):
(Unaudited)
March 31,
2004
------------
2004 $ 353
2005 190
2006 157
2007 157
2008 157
Thereafter 809
------------
$ 1,823
============
Total rent expense for the six months ended March 31, 2004 (unaudited) and 2003
(unaudited), and the years ended September 30, 2003, 2002, and 2001, was
$191,000 and $255,000, and $506,000, $427,000, and $388,000, respectively.
The Association leases office space to others on a month-to-month basis as well
as one noncancelable operating lease. Total rental income was $22,000 and
$15,000, and $29,000, $23,000, and $50,000 for the six months ended March 31,
2004 (unaudited) and 2003 (unaudited), and the years ended September 30, 2003,
2002, and 2001, respectively.
F-30
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Note 9 - Commitments (Continued)
Minimum future rental income on the one noncancelable operating lease with terms
in excess of one year is as follows (dollars in thousands):
(Unaudited)
Six Months
Ended
March 31,
2004
------------
2004 $ 11
2005 12
2006 6
------------
$ 29
============
Commitments to extend credit:
In the normal course of business, the Association makes various commitments and
incurs certain contingent liabilities that are not presented in the accompanying
consolidated financial statements. The commitments and contingent liabilities
include various guarantees and commitments to extend credit. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the agreement. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Association evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Association upon extension of the credit, is based on
management's credit evaluation of the borrower. Collateral held varies but may
include securities, accounts receivable, inventory, fixed assets, and/or real
estate properties. The distribution of commitments to extend credit approximates
the distribution of loans outstanding.
At March 31, 2004 (unaudited), and September 30, 2003, commitments to extend
credit were as follows (dollars in thousands):
(Unaudited)
March 31, September 30,
2004 2003
------------- -------------
Unfunded commitments under lines of credit $ 18,257 $ 16,701
Other loan commitments 11,973 13,396
------------- -------------
$ 30,230 $ 30,097
============= =============
F-31
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Note 9 - Commitments (Continued)
At March 31, 2004 (unaudited), and September 30, 2003, fixed rate loan
commitments by interest rate range were as follows (dollars in thousands):
(Unaudited)
March 31, September 30,
2004 2003
------------- -------------
Less than 5% $ 1,046 $ --
5% through 5.99% 8,860 2,491
6% through 6.99% 1,030 4,565
7% through 7.99% -- 179
8% through 8.99% -- 50
------------- -------------
$ 10,936 $ 7,285
============= =============
Note 10 - Related Party Transactions
In the normal course of business, the Association makes loans to its executive
officers, directors, and companies affiliated with these individuals. It is
management's opinion that loans to the Association's officers and directors have
been made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated parties and have not involved more than normal risk of collectibility.
An analysis of activity with respect to loans receivable from directors,
executive officers, and their affiliates is as follows (dollars in thousands):
(Unaudited) Six
Months Ended Year Ended September 30,
March 31, ----------------------------
2004 2003 2002
------------ ------------ ------------
Beginning balance $ 973 $ 622 $ 386
Principal advances 536 860 255
Principal repayments (555) (509) (19)
------------ ------------ ------------
Balance, end of year $ 954 $ 973 $ 622
============ ============ ============
The Association also accepts deposits from its executive officers, directors,
and affiliated companies on substantially the same terms as unrelated parties.
The aggregate dollar amounts of these deposits were $2,094,000, $1,353,000 and
$1,023,000 at March 31, 2004 (unaudited), and September 30, 2003 and 2002,
respectively.
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 11 - Capital Requirement
The Association is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift Supervision
(OTS). Failure to meet the minimum regulatory capital requirements can initiate
certain mandatory, and possible additional discretionary actions by regulators,
that if undertaken, could have a direct material effect on the Association and
the consolidated financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Association must meet specific capital guidelines involving quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classifications under the prompt corrective action
guidelines are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of total
risk-based capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined), and tangible
capital to adjusted total assets (as defined). As discussed in greater detail
below (dollars in thousands), as of March 31, 2004 (unaudited), and September
30, 2003 and 2002, the Association met all of the capital adequacy requirements
to which it is subject.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 11 - Capital Requirement (Continued)
The most recent notification from the Association's regulator categorized the
Association as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Association must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table below (dollars in thousands). There are no conditions
or events since the most recent notification that management believes have
changed the Association's category
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
(Unaudited) Six Months --------------------- ---------------------- ----------------------
Ended March 31, 2004 Amount Ratio Amount Ratio Amount Ratio
---------- --------- ---------- -------- ---------- --------
Total risk-based capital (to risk-
weighted assets): $ 44,417 13.81% $ 25,740 > 8.0% $ 32,174 > 10.0%
- -
Tier 1 (core) capital 42,066 8.46% 19,881 > 4.0% 24,851 > 5.0%
- -
Tangible capital (to tangible
assets): 42,066 8.46% 9,940 > 2.0% -- N/A
-
Tier 1 risk-based capital (to risk-
weighted assets): 42,066 13.07% 12,870 > 4.0% 19,305 > 6.0%
- -
Year Ended September 30, 2003
Total risk-based capital (to risk-
weighted assets): $ 41,956 14.18% $ 23,666 > 8.0% $ 29,582 > 10.0%
- -
Tier 1 (core) capital 40,103 8.89% 18,046 > 4.0% 22,558 > 5.0%
- -
Tangible capital (to tangible
assets): 40,103 8.89% 9,023 > 2.0% -- N/A
-
Tier 1 risk-based capital (to risk-
weighted assets): 40,103 13.56% 11,833 > 4.0% 17,749 > 6.0%
- -
Year Ended September 30, 2002
Total risk-based capital (to risk-
weighted assets): $ 36,169 13.51% $ 21,421 > 8.0% $ 26,776 > 10.0%
- -
Tier 1 (core) capital 34,783 8.35% 16,655 > 4.0% 20,818 > 5.0%
- -
Tangible capital (to tangible
assets): 34,783 8.35% 8,327 > 2.0% -- N/A
-
Tier 1 risk-based capital (to risk-
weighted assets): 34,783 12.99% 10,710 > 4.0% 16,065 > 6.0%
- -
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 11 - Capital Requirement (Continued)
The following table is a reconciliation of the Association's capital, calculated
according to accounting principles generally accepted in the United States of
America, to total Tier I capital (dollars in thousands):
September 30,
March 31, ------------------------
2004 2003 2002
---------- ---------- ----------
Equity $ 42,356 $ 40,399 $ 34,961
Other comprehensive income - unrealized
gain (loss) on securities available for sale 12 16 (2)
Mortgage servicing rights, net (302) (312) (175)
---------- ---------- ----------
Tier I capital 42,066 40,103 34,784
---------- ---------- ----------
Allowance for loan losses 2,411 1,853 1,385
Specific reserve for in-substance foreclosure (60) -- --
---------- ---------- ----------
2,351 1,853 1,385
---------- ---------- ----------
TOTAL RISK BASED CAPITAL $ 44,417 $ 41,956 $ 36,169
========== ========== ==========
Note 12 - Income Taxes
The components of income tax (benefit) expense consisted of the following
(dollars in thousands):
(Unaudited)
Six Months Ended
March 31, Year Ended September 30,
------------------------ -------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Current $ 1,461 $ 827 $ 2,758 $ 1,737 $ 1,402
Deferred (356) 732 665 (93) (179)
---------- ---------- ---------- ---------- ----------
INCOME TAX EXPENSE $ 1,105 $ 1,559 $ 3,423 $ 1,644 $ 1,223
========== ========== ========== ========== ==========
F-35
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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 12 - Income Taxes (Continued)
The effective tax rate differs from the statutory federal tax rate for the years
presented as follows:
(Unaudited)
Six Months Ended March 31, Year Ended September 30,
------------------------------------------- ------------------------------------------------------------------
2004 2003 2003 2002 2001
-------------------- -------------------- -------------------- -------------------- --------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Federal income
tax at
statutory
rates $ 1,040 34.00% $ 1,355 34.00% $ 3,019 34.00% $ 1,275 34.00% $ 1,024 34.00%
State income
taxes,
net of federal
benefit 147 4.81% 187 4.69% 409 4.61% 262 6.98% 159 5.28%
Effect of bank
owned life
insurance (85) (2.78%) (68) (1.71%) (186) (2.09%) (122) (3.25%) (98) (3.25%)
Effect of other
permanent
differences 3 0.10% 85 2.13% 181 2.04% 229 6.11% 138 4.58%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
INCOME TAX
EXPENSE $ 1,105 36.13% $ 1,559 39.11% $ 3,423 38.56% $ 1,644 43.84% $ 1,223 40.61%
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities consist of the following (dollars in
thousands):
(Unaudited)
March 31, September 30,
---------- ------------------------
2004 2003 2002
---------- ---------- ----------
Deferred tax asset:
Deferred compensation $ 710 $ 583 $ 373
Unrealized loss on securities available for sale 19 16 --
Allowance for loan losses 845 627 540
Accrued expense 107 107 --
Other -- 2 25
Deferred tax liability:
Fixed asset basis (431) (582) (624)
Unrealized gain on securities available for sale -- -- (1)
Deferred loan fees (363) (317) --
Mortgage servicing rights (1,278) (1,322) (687)
Federal Home Loan Bank stock dividends (1,647) (1,589) (1,453)
Other (78) -- --
---------- ---------- ----------
NET DEFERRED TAX LIABILITY $ (2,116) $ (2,475) $ (1,827)
========== ========== ==========
F-36
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Note 12 - Income Taxes (Continued)
In August 1996, the Small Business Job Protection Act of 1996 (the Act) was
signed into law. Under the Act, the percentage of taxable income method of
accounting for tax basis bad debts is no longer available effective for the
years ending after December 31, 1995. As a result, the Bank is required to use
the experience method of accounting for tax basis bad debts for 1996 and later
years. As a result of tax bad debt deductions allowed before January 1, 1988,
shareholders' equity as of March 31, 2004 (unaudited), and September 30, 2003
and 2002, includes accumulated earnings of approximately $3,200,000 for which
income taxes have not been provided. If, in the future, this portion of retained
earnings is used for any purpose other than to absorb losses on loans or on
property acquired through foreclosure, federal and state income taxes may be
imposed at then-applicable rates. The unrecorded deferred liability on this
amount was approximately $1,250,000 at March 31, 2004, and September 30, 2003
and 2002.
Note 13 - Fair Value of Financial Instruments
The estimated fair values of the Association's financial instruments are as
follows (dollars in thousands):
September 30,
(Unaudited) --------------------------------------------------------------
March 31, 2004 2003 2002
------------------------------ ------------------------------ ------------------------------
Estimated Fair Estimated Fair Estimated Fair
Carrying Amount Value Carrying Amount Value Carrying Amount Value
-------------- -------------- -------------- -------------- -------------- --------------
Financial Assets:
Cash and cash equivalents $ 15,992 $ 15,992 $ 11,118 $ 11,118 $ 9,286 $ 9,286
Securities available for sale 6,404 6,404 5,440 5,440 2,507 2,507
Mortgage-backed securities held
to maturity 55,033 56,732 24,425 25,423 44,325 46,279
Loans receivable, net 383,950 383,992 372,629 373,937 318,297 355,116
Federal Home Loan Bank stock 6,681 6,681 6,533 6,533 5,267 5,267
Financial Liabilities:
Demand and savings deposits 173,919 171,508 156,201 156,201 149,545 149,545
Certificates of deposit 155,596 157,784 145,072 147,283 130,227 134,155
Federal Home Loan Bank
borrowings 113,074 118,526 96,527 102,425 91,008 94,751
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents:
The carrying amount approximates fair value.
Securities available for sale and held to maturity:
The fair values of securities excluding restricted equity securities are based
on quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
F-37
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Note 13 - Fair Value of Financial Instruments (Continued)
Federal Home Loan Bank stock:
The carrying value of FHLB stock approximates fair value based on the respective
redemption provisions.
Loans receivable:
For variable-rate loans that re-price frequently and have no significant change
in credit risk, fair values are based on carrying values. Fair values for
commercial real estate and commercial loans with maturities beyond one year are
estimated using a discounted cash flow analysis, utilizing interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loans with maturities less than one year are estimated to have a
fair value equal to the carrying value. Fair values for impaired loans are
estimated using discounted cash flow analysis or underlying collateral values,
where applicable.
Deposits:
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit maturing beyond one year is estimated
using discounted cash flow analysis using the rates currently offered for
deposits of similar remaining maturities. Certificates with maturities less than
one year are valued at carrying values.
Off-balance-sheet instruments:
Fair values of off-balance-sheet lending commitments are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the borrower's credit standing. The fair value of
the fees at March 31, 2004 and 2003, and September 30, 2003, 2002, and 2001,
were insignificant.
Note 14 - Subsequent Event (Unaudited)
On May 18, 2004, the Board of Directors of the Association unanimously adopted
the Plan of Reorganization and Stock Issuance (the Plan). Pursuant to the Plan,
the Association will: (i) convert to a federal stock savings bank (Stock Savings
Bank) as the successor to the Association in its current mutual form; (ii)
organize a Stock Holding Company as a federally-chartered corporation that will
own 100% of the common stock of the Stock Savings Bank; and (iii) organize a
Mutual Holding Company as a federally-chartered mutual holding company that will
own at least 51% of the common stock of the Stock Holding Company so long as the
Mutual Holding Company remains in existence. The Stock Savings Bank will succeed
to the business and operations of the Association in its mutual form and the
Stock Holding Company will sell a minority interest in its common stock in a
public stock offering. The Plan must be approved by the OTS and Insurance and by
the Association's members.
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Note 14 - Subsequent Event (Unaudited)
Following the completion of the reorganization, all depositors who had
membership or liquidation rights with respect to the Association as of the
effective date of the reorganization will continue to have such rights solely
with respect to the Mutual Holding Company so long as they continue to hold
deposit accounts with the Association. In addition, all persons who become
depositors of the Association subsequent to the reorganization will have such
membership and liquidation rights with respect to the Mutual Holding Company.
Borrower members of the Association at the time of the reorganization will have
the same membership rights in the Mutual Holding Company that they had in the
Association immediately prior to the reorganization so long as their existing
borrowings remain outstanding.
The Stock Holding Company plans to offer to the public shares of common stock
representing a minority ownership of the estimated pro forma market value of the
Association as determined by an independent appraisal. The Mutual Holding
Company will maintain the majority ownership of the Stock Holding Company. Cost
incurred in connection with the offering will be recorded as a reduction of the
proceeds from the offering. If the transaction is not consummated, all costs
incurred in connection with the transaction will be expensed. At March 31, 2004
(unaudited), approximately $403,000 in conversion costs have been included in
other assets.
F-39
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No person has been authorized to give any information or to make any
representation other than as contained in this prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by Home Federal
Bancorp, Inc., Home Federal Savings and Loan Association of Nampa or Keefe,
Bruyette & Woods, Inc. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicitation
in such jurisdiction. Neither the delivery of this prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of Home Federal Bancorp or Home Federal Savings
and Loan Association of Nampa since any of the dates as of which information is
furnished herein or since the date hereof.
--------------
TABLE OF CONTENTS
Page
----
Summary................................................... 1
Risk Factors.............................................. 14
A Warning About Forward-Looking Statements................ 17
Selected Financial and Other Data......................... 18
Recent Developments....................................... 20
Management's Discussion and Analysis of Recent Developments 22
Home Federal Bancorp...................................... 31
Home Federal MHC.......................................... 31
Home Federal ............................................. 31
How We Intend to Use the Proceeds from this Offering...... 32
Our Policy Regarding Dividends............................ 34
Market for the Common Stock............................... 34
Capitalization............................................ 35
Home Federal Exceeds All Regulatory Capital Requirements.. 36
Pro Forma Data............................................ 38
Comparison of Valuation and Pro Forma Information
With and Without Charitable Foundation.................. 45
Proposed Purchases by Management.......................... 46
Home Federal and Subsidiary
Condensed Consolidated Statements of Income............. 47
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 48
Business of Home Federal MHC.............................. 76
Business of Home Federal Bancorp.......................... 76
Business of Home Federal ................................. 77
Management ............................................... 111
How We Are Regulated...................................... 123
Taxation.................................................. 131
Home Federal's Reorganization and Stock Offering.......... 132
Restrictions on Acquisition of Home Federal Bancorp
and Home Federal ....................................... 151
Home Federal Foundation................................... 155
Description of Capital Stock of Home Federal Bancorp...... 159
Transfer Agent and Registrar.............................. 160
Experts................................................... 160
Legal and Tax Opinions.................................... 161
Where You Can Find More Information....................... 161
Index to Consolidated Financial Statements................ F-1
Dealer Prospectus Delivery Obligation
Until the later of September 14, 2004 or 25 days after the commencement of
the syndicated community offering, if any, all dealers that effect transactions
in these securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers' obligation
of dealers to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
================================================================================
================================================================================
UP TO
5,290,000 SHARES
HOME FEDERAL
BANCORP, INC.
(Proposed Holding Company for
Home Federal Savings and Loan Association of Nampa)
COMMON STOCK
--------------
PROSPECTUS
--------------
KEEFE, BRUYETTE & WOODS
August 13, 2004
================================================================================