As filed with the Securities and Exchange Commission on March 19, 2004
Registration No. 333-____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HOME FEDERAL BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 6036 (Applied for)
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
500 12th Avenue South
Nampa, Idaho 83653
(208) 466-4634
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(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
John F. Breyer, Jr., Esquire
Breyer & Associates PC
8180 Greensboro Drive, Suite 785
McLean, Virginia 22102
(703) 883-1100
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Calculation of Registration Fee
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Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered (1) Offering Price Per Unit Aggregate Offering Price (1) Registration Fee
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Common Stock, $0.01 par value 11,902,500 $10.00 $119,025,000 (2) $15,081 (3)
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(1) Estimated solely for purposes of calculating the registration fee. As
described in the prospectus, the actual number of shares to be issued
and sold are subject to adjustment based upon the estimated pro forma
market value of the registrant and market and financial conditions.
(2) In addition, pursuant to Rule 416(c) under the Securities Act, this
registration statement also covers an indeterminate amount of interests
to be offered or sold pursuant to the Home Federal Savings and Loan
Association of Nampa 401(k) Savings Plan.
(3) The securities of Home Federal Bancorp, Inc. to be purchased by the
Home Federal Savings and Loan Association of Nampa 401(k) Savings Plan
are included in the amount shown for Common Stock. Accordingly,
pursuant to Rule 457(h) of the Securities Act, no separate fee is
required for the participation interests. Pursuant to such rule, the
amount being registered has been calculated on the basis of the number
of shares of Common Stock that may be purchased with the current assets
of such Plan.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
PART I - INFORMATION REQUIRED IN PROSPECTUS
Cross Reference Sheet showing the location in the Prospectus
of the Items of Form S-1
Item 1. Forepart of the Registration Statement and Forepart of the Registration Statement; Outside Front
Outside Front Cover of Prospectus Cover Page
Item 2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page; Outside Back Cover Page
Prospectus
Item 3. Summary Information, Risk Factors and Ratio Summary; Risk Factors
of Earnings to Fixed Charges
Item 4. Use of Proceeds How We Intend to Use the Proceeds From this Offering;
Capitalization
Item 5. Determination of Offering Price Home Federal's Conversion - How We Determined Our
Price and the Number of Shares to be Issued in the Stock
Offering
Item 6. Dilution *
Item 7. Selling Security Holders *
Item 8. Plan of Distribution Home Federal's Conversion
Item 9. Description of Securities to be Registered Description of Capital Stock of Home Federal Bancorp
Item 10. Interests of Named Experts and Counsel Legal and Tax Opinions; Experts
Item 11. Information with Respect to the Registrant
(a) Description of Business Business of Home Federal Bancorp, Inc.; Business of
Home Federal
(b) Description of Property Business of Home Federal - Properties
(c) Legal Proceedings Business of Home Federal - Legal Proceedings
(d) Market Price of and Dividends on the Outside Front Cover Page; Market for the Common
Registrant's Common Equity and Related Stock; Our Policy Regarding Dividends
Stockholder Matters
(e) Financial Statements Consolidated Financial Statements; Pro Forma Data
(f) Selected Financial Data Selected Financial and Other Data
(g) Supplementary Financial Information *
(h) Management's Discussion and Analysis of Management's Discussion and Analysis of Financial
Financial Condition and Results of Operations Condition and Results of Operations
I - 1
(i) Changes in and Disagreements with *
Accountants on Accounting and Financial
Disclosure
(j) Quantitative and Qualitative Disclosures Management's Discussion and Analysis of Financial
About Market Risk Condition and Results of Operations - Asset and
Liability Management and Market Risk
(k) Directors, Executive Officers, Promoters Management and Control Persons
(l) Executive Compensation Management - Executive Compensation; Management -
Benefits
(m) Security Ownership of Certain Beneficial *
Owners and Management
(n) Certain Relationships and Related Management - Loans and Other Transactions with
Transactions Officers and Directors
Item 12. Disclosure of Commission Position on Part II, Item 17
Indemnification for Securities Act
Liabilities
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*Item is omitted because answer is negative or item inapplicable.
I - 2
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. 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 conversion of
Home Federal Savings and Loan Association of Nampa (referred to in this
prospectus supplement as "Home Federal"). Your investment in the Employer Stock
Fund in connection with the conversion of Home Federal is also governed by the
purchase priorities contained in Home Federal's plan of conversion. The 401(k)
Plan permits you, as a participant, to direct the trustee of the Employer Stock
Fund to purchase Home Federal Bancorp, Inc. 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, Inc. common stock in the mutual to stock conversion and not to
any future purchases under the 401(k) Plan or otherwise.
The prospectus dated _______________, 2004 of Home Federal Bancorp,
Inc., which is being delivered with this prospectus supplement, includes
detailed information with respect to Home Federal Bancorp, Inc., the conversion,
Home Federal Bancorp, Inc. common stock and the financial condition, results of
operations and business of Home Federal Bancorp, Inc. 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 1 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 , 2004.
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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, Inc. has not
authorized anyone else to provide you with different information. Home Federal
Bancorp, Inc. 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, Inc. common stock.
TABLE OF CONTENTS
THE OFFERING.............................................................. 1
Election to Purchase Home Federal Bancorp, Inc. Common
Stock in the Conversion...................................... 1
Securities Offered............................................. 1
Method of Directing Transfer................................... 1
Time for Directing Transfer.................................... 2
Irrevocability of Transfer Direction........................... 2
Subsequent Elections........................................... 2
Purchase Price of Home Federal Bancorp, Inc. Common Stock...... 2
Nature of a Participant's Interest in Home Federal Bancorp,
Inc. Common Stock............................................ 2
Voting and Tender Rights of Home Federal Bancorp, Inc.
Common Stock................................................. 2
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.............................. 8
Benefits Under the 401(k) Plan................................. 8
Withdrawals and Distributions from the 401(k) Plan............. 9
Reports to 401(k) Plan Participants............................ 9
Amendment and Termination...................................... 9
Federal Income Tax Consequences ............................... 9
ERISA and Other Qualifications................................. 12
Restrictions on Resale......................................... 12
Securities and Exchange Commission Reporting and Short-Swing
Profit Liability............................................. 12
LEGAL OPINIONS............................................................ 12
ELECTION FORM A-1
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THE OFFERING
Election to Purchase Home Federal Bancorp, Inc. Common Stock in the Conversion
In connection with the Home Federal Bancorp, Inc. mutual to stock
conversion, 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, Inc. common
stock in the conversion. The trustee of the Employer Stock Fund will follow the
participants' directions and exercise subscription rights to purchase the common
stock in the conversion to the extent provided in our plan of conversion. Funds
in the 401(k) Plan that you do not want to be used to purchase Home Federal
Bancorp, Inc. 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 conversion 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, Inc. tax- qualified employee plans (as defined in the
prospectus) may purchase in the aggregate. See "The Conversion - Subscription
Offering" in the prospectus.
All plan 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 conversion of Home Federal. Your order will be filled
based on your status as an eligible account holder or supplemental eligible
account holder in the reorganization. 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 March 31, 2004. If you fall into one of the above
subscription offering categories, you have subscription rights to purchase
shares of Home Federal Bancorp, Inc. common stock in the subscription offering
and you may use funds in the 401(k) Plan account to pay for the shares of Home
Federal Bancorp, Inc. 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 Bancorp, Inc. plan of conversion 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 conversion. The trustee would purchase in
the conversion 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 Bancorp, Inc. plan of conversion and outlined above.
Securities Offered
The securities offered in connection with this prospectus supplement
are participation interests in the 401(k) Plan. In connection with the mutual to
stock conversion, and subject to any limits set out in the plan of conversion,
up to 100 percent 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 September 30, 2003 and the offering price, up to 236,020 shares of our common
stock could be acquired by the 401(k) Plan. Home Federal Bancorp, Inc. is the
issuer of the common stock and only the employees of Home Federal Bancorp, Inc.
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, Inc., the conversion and the financial condition,
results of operations and business of Home Federal Bancorp, Inc. is contained in
the prospectus delivered with this prospectus supplement. The address of our
principal executive office is 500 12th Avenue South, Nampa, Idaho 83653, and our
telephone number is (208) 466-4634. As of September 30, 2003, the market value
of the assets of the 401(k) Plan equaled approximately $2,360,203. 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.
Method of Directing Transfer
Included with this prospectus supplement is an election and investment
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
1
Federal Bancorp, Inc. common stock in the reorganization, you should indicate
that decision by checking the appropriate box of the election form and
completing this part of 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, Inc. common stock
in the conversion is , 2004, unless extended. Your completed election form must
be returned to the stock information center, 500 12th Avenue South, Nampa, Idaho
83653, by 12:00 Noon, Mountain time on that date.
Irrevocability of Transfer Direction
Once received in proper form, your executed election form may not be
modified, amended or revoked without our consent unless the conversion has not
been completed within 45 days after the end of the subscription and community
offering. See also "Investment of Contributions - Home Federal Bancorp, Inc.
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 shareholders 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, Inc. 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 conversion.
Purchase Price of Home Federal Bancorp, Inc. Common Stock
The funds transferred to the Employer Stock Fund for the purchase of
Home Federal Bancorp, Inc. common stock in the conversion will be used by the
trustee to purchase shares of the common stock. The price paid for the shares of
Home Federal Bancorp, Inc. common stock will be $10.00 per share, the same price
as is paid by all other persons who purchase our common stock in the conversion.
Nature of a Participant's Interest in Home Federal Bancorp, Inc. Common Stock
Home Federal Bancorp, Inc. common stock will be held in the name of the
trustee of the Employer Stock Fund, in its capacity as trustee. Because the
401(k) Plan actually purchases the shares, you will acquire a "participation
interest" in the shares and not own the shares directly. The trustee will
maintain individual accounts reflecting each participant's individual interest
in the Employer Stock Fund.
Voting and Tender Rights of Home Federal Bancorp, Inc. 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, Inc., 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.
2
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 83653. We encourage you to read carefully the full text of the 401(k) Plan
to understand your rights and obligations under the 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 14 of this prospectus
supplement.
Eligibility and Participation
All employees of Home Federal Bancorp, Inc. or a subsidiary are
eligible to participate in the cash or deferred portion (i.e., that portion of
the 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,
Inc. 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 September 30,
2003, there were approximately 222 employees eligible to participate in the cash
or deferred portion of the 401(k) Plan, and 111 employees had elected to
participate in the cash or deferred portion of the 401(k) Plan.
Contributions Under the 401(k) Plan
401(k) Contributions. The 401(k) Plan permits each participant to defer
receipt of up to 100 percent of their annual compensation, not to exceed $13,000
(for 2004), and to have that compensation contributed to the 401(k) Plan.
Generally, the 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.
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 Bancorp, Inc. (and may be zero).
Profit Sharing Contributions. The 401(k) Plan currently permits Home
Federal Bancorp, Inc. to make discretionary profit sharing contributions to the
Plan. To be eligible for a profit sharing contribution in any year, you must be
actively employed with Home Federal Bancorp, Inc. 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.
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Rollover Contributions. You may also rollover or directly transfer
accounts from another qualified plan or an 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, Inc. 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.
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 ended September 30, 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 to
you. 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
4
(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, Inc. 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, Inc., i.e., owns directly or
indirectly more than 5% of the stock of Home Federal Bancorp, Inc., or stock
possessing more than 5% of the total combined voting power of all stock of Home
Federal Bancorp, Inc., or (3) a 1% owner of Home Federal Bancorp, Inc. having
annual compensation in excess of $150,000. The $130,000 dollar amount (but not
the $150,000 amount) in the foregoing sentence are for 2004, and will 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 Bancorp, Inc.'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, participants may elect
to instruct the trustee to invest such funds in any or all of the following
investment options:
o ING VP Money Market Portfolio - seeks to provide high current
return, consistent with preservation of capital and liquidity
by investing in high-quality money market instruments.
o ING Bond 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
investment-grade corporate bonds and debt securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities.
o ING Governmental Fund - 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.
o Templeton Global Bond Fund - seeks to provide capital
appreciation and growth of income.
o ING VP Ascent Portfolio - seeks to provide capital
appreciation.
o ING VP Crossroads Portfolio - seeks to provide total return
(i.e., income and capital appreciation, both realized and
unrealized).
o ING VP Legacy Portfolio - seeks to provide total income
consistent with the preservation of capital.
o ING Index Plus Large Cap 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.
5
o Oppenheimer Main Street Growth & Income Fund - seeks a high
total return which includes growth in the value of its shares
as well as current income from equity and debt securities.
o Pioneer Fund - seeks reasonable income and capital growth.
o Fidelity VP Contrafund Portfolio - seeks long-term capital
appreciation.
o MFS Capital Opportunities Fund - seeks capital appreciation.
o Fidelity Advisor Mid Cap Fund - seeks long-term capital
growth.
o Franklin Small-Mid Cap Growth Fund - seeks long-term capital
growth.
o ING VP Index Plus Small Cap 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.
o Lord Abbott Mid-Cap Value Portfolio - seeks capital
appreciation through investment, primarily in equity
securities, which are believed to be undervalued in the
marketplace.
o ING VP International Value Portfolio - seeks long-term capital
appreciation.
o Janus Aspen Series Worldwide Growth Portfolio - seeks
long-term growth of capital in a manner consistent with the
preservation of capital.
o ING Fixed Account - seeks to provide high current return,
consistent with preservation of capital.
A brief description of the Employer Stock Fund is set forth below. For
descriptions of these other investment options available to 401(k) Plan
participants, 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, Inc. common stock involves
certain risks. No assurance can be given that shares of Home Federal Bancorp,
Inc. 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, Inc. Common Stock Investment Election Procedures.
You may instruct the trustee to purchase Home Federal Bancorp, Inc. common stock
by redirecting funds from your existing accounts into the Employer Stock Fund by
filing an election form with the plan administrator on or prior to the election
deadline. The total amount of funds redirected into the Employer Stock Fund must
represent whole share amounts (i.e., must be divisible by the $10.00 per share
purchase price) and must be allocated in 1% increments from investment options
containing the participant's 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 Home Federal Bancorp, Inc. common stock, 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.
6
For example, you may fund an election to purchase 100 shares of Home
Federal Bancorp, Inc. common stock 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) 10% from the ING
VP Money Market Fund, (ii) 30% from the ING Bond Fund, and (iii) 60% from the
Lord Abbett Mid-Cap Value Fund. In such case, the trustee would liquidate $100
of the participant's funds from the Money Market Fund, $300 from funds in the
Bond Fund and $600 from funds in the Mid-Cap Value Fund to raise the $1,000
aggregate purchase price. 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 shares of Home Federal Bancorp, Inc. common stock subscribed for,
you will be required to file a revised 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
conversion has not been completed within 45 days after the end of the
subscription and community offering.
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 Home Federal Bancorp, Inc. common
stock through the 401(k) Plan in the reorganization. You may modify a prior
investment allocation election or request the transfer of funds to another
investment vehicle by filing a written notice, with such modification or request
taking effect after the valuation of accounts, which occurs daily. After the
reorganization, 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 September 30, 2003, we
made matching contributions totaling approximately $ 124,000 into the 401(k)
Plan. No profit sharing contribution was made to the 401(k) Plan for the plan
year ended September 30, 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 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, Inc. Common Stock. As of the date
of this prospectus supplement, no shares of Home Federal Bancorp, Inc. 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, Inc. 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, Inc. 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 Plan
other the Employer Stock Fund. Home Federal Bancorp, Inc. 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, Inc. 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.
7
NET INVESTMENT PERFORMANCE
For the Twelve-Month Period
Ended September 30,
--------------------------------
2003 2002 2001
--------------------------------
ING VP Money Market Portfolio 0.06%
ING Bond Fund 6.58
ING Governmental Fund 2.09
ING Fixed Account 5.03
Templeton Global Bond Fund 22.78
ING Ascent Portfolio 17.03
ING VP Crossroads Portfolio 14.52
ING VP Legacy Portfolio 9.94
ING VP Index Plus Large Cap Portfolio 21.29
Oppenheimer Main Street Growth and Income Fund 17.86
Pioneer Fund 17.83
Fidelity VP Contrafund Portfolio 15.81
MFS Capital Opportunities Fund 22.69
Fidelity Advisor Mid Cap Fund 31.03
Franklin Small-Mid Cap Growth Fund 31.86
ING VP Index Plus Small Cap Portfolio 24.43
Lord Abbett Mid-Cap Value Portfolio 17.07
ING VP International Value Portfolio 21.72
Janus Aspen Series Worldwide Growth Portfolio 12.83
Each participant should note that past performance is not necessarily
an indicator of future results.
Administration of the 401(k) Plan
Trustees. The trustee is appointed by the board of directors of Home
Federal Bancorp, Inc. to serve at its pleasure. Currently, Home Federal Bancorp,
Inc. is the trustee for all funds except the Employer Stock Fund. Upon the
conclusion of the common stock offering by Home Federal Bancorp, Inc., Home
Federal 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
Home Federal Bancorp, Inc. common stock 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 percent for each year of service after you complete 2 years of service
(that is, 100 percent vested after six years of service). Generally, a year of
service is a plan year (October 1 to September 30) during which you perform at
least 1,000 hours of service for Home Federal Bancorp, Inc., Home Federal or an
affiliated employer. You also will become 100 percent vested in your matching
contribution account and profit sharing contribution account if you are actively
employed on your retirement date, death or disability.
8
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 IRS rules.
Distribution Upon Retirement or Disability. Upon your retirement or
disability, you will receive a lump sum payment from the 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
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, Inc. 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.
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
plan.
9
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 plan each year;
- participants pay no current income tax on amounts contributed
by the employer on their behalf; and
- earnings of the 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.
Rollovers and Direct Transfers to Another Qualified Plan or to an
Individual Retirement Account; 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 individual retirement account 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 Individual Retirement Account. If you do not elect to have an "eligible
rollover distribution" transferred directly to another qualified plan or to an
Individual Retirement Account, 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 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.
10
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.
11
ERISA and Other Qualification
As noted above, the 401(k) Plan is subject to certain provisions of
ERISA, 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, Inc. common stock
under the 401(k) Plan who is an "affiliate" of Home Federal Bancorp, Inc. 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 substantial shareholders
of Home Federal Bancorp, Inc. 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 1933. Any person who may be an "affiliate"
of Home Federal Bancorp, Inc. may wish to consult with counsel before
transferring any Home Federal Bancorp, Inc. 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, Inc. common stock acquired under the
401(k) Plan, or other sales of Home Federal Bancorp, Inc. common stock.
Securities and Exchange Commission Reporting and Short-Swing Profit Liability
Section 16 of the Exchange Act imposes reports and liability
requirements on officers, directors and persons beneficially owning more than
10% of public companies such as Home Federal Bancorp, Inc. Section 16(a) of the
Exchange Act 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, gifts and participation in savings and retirement
plans must be reported periodically, either on a Form 4 within ten days after
the end of the month in which a change occurs, 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, Inc. 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 Exchange Act 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, Inc. common stock ("Section 16(b)
Persons") resulting from the purchase and sale or sale and purchase of Home
Federal Bancorp, Inc. 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, Inc. common stock
will be passed upon by Breyer & Associates PC, McLean, Virginia, which firm
acted as special counsel for Home Federal Bancorp, Inc. and Home Federal in
connection with Home Federal Bancorp, Inc.'s conversion.
12
PROSPECTUS
Up to 11,902,500 Shares of Common Stock
Home Federal Bancorp, Inc.
(Proposed Holding Company for Home Federal Savings and Loan Association
of Nampa)
================================================================================
Home Federal Savings and Loan Association of Nampa is converting from
the mutual to the stock form of organization. As part of the conversion, Home
Federal Savings and Loan Association of Nampa will issue all of its common stock
to Home Federal Bancorp, Inc. Home Federal Bancorp, Inc. has been formed to be
the holding company for Home Federal Savings and Loan Association of Nampa. Home
Federal Bancorp, Inc. is offering shares of its common stock to the public and
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 ............................. 7,650,000 10,350,000 11,902,500
Underwriting Commission and Other Expenses ... $ 1,823,005 $ 2,158,345 $ 2,351,166
Net Proceeds to Home Federal Bancorp, Inc. ... $ 74,676,995 $ 101,341,655 $ 116,673,834
Net Proceeds Per Share ....................... $ 9.76 $ 9.79 $ 9.80
--------
(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 1 of this prospectus.
Keefe, Bruyette & Woods 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 is not obligated to purchase any shares of common stock in the offering.
Keefe, Bruyette & Woods intends to make a market in the common stock.
The employee stock ownership plan of Home Federal Bancorp, Inc. will
purchase in the offering a number of shares equal to 8% of the number of shares
sold in the offering, or if shares are not available, in the open market after
the conversion. In addition, directors and executive officers of Home Federal
Bancorp, Inc., together with the employee stock ownership plan, intend to
purchase $9.9 million and $12.0 million in the offering, or 12.9% and 11.6%,
respectively, of the offering based on the minimum and the maximum of the total
shares to be sold. 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 begin on _____ __, 2004 and will end at 12:00 Noon,
Mountain time, on _____ __, 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 _____ __, 2004,
unless the Office of Thrift Supervision approves a later date, which may not be
beyond _____ __, 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 or in an interest bearing trust account at _______________,
an institution insured by the Federal Deposit Insurance Corporation, until the
conversion is completed or terminated. Funds will be returned promptly with
interest if the conversion 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) ___-____.
----------------------------------------------------
KEEFE, BRUYETTE & WOODS
----------------------------------------------------
_____ __, 2004
[GRAPHIC OMITTED]
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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. In certain instances, where appropriate, the
terms "we," "us" and "our" collectively refer to Home Federal Bancorp, Inc. and
Home Federal Savings and Loan Association of Nampa.
The Companies:
Home Federal Bancorp, Inc.
500 12th Avenue South
Nampa, Idaho 83653
(208) 466-4634
Home Federal Bancorp, Inc. ("Home Federal Bancorp") will be the savings
and loan holding company for Home Federal Savings and Loan Association of Nampa
("Home Federal") when our conversion to stock form is complete. Home Federal
Bancorp was formed as a Delaware corporation in March 2004 and has not engaged
in any business.
Home Federal Savings and Loan Association of Nampa
500 12th Avenue South
Nampa, Idaho 83653
(208) 466-4634
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.
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
December 31, 2003, we had total assets of $474.3 million, deposit accounts of
$304.8 million and equity of $41.4 million. Through the conversion, 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:
o maintaining favorable asset quality reflected primarily by a
low level of nonperforming assets, low charge-offs and
adequacy of loan loss reserves;
o seeking to improve net interest margin through a combination
of reduced funding costs and improved pricing relative to
asset risk;
i
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o analyzing profitability of products and business lines and
allocating resources to those areas offering the greatest
potential for future profits;
o 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;
o pursuing further loan portfolio diversification, with an
emphasis on credit risk management;
o 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;
o providing our staff members with the knowledge and skills
necessary to perform their job functions and develop their
career potential;
o enhancing the perception of Home Federal with both the retail
and commercial banking public as the bank of choice;
o maintaining a sales and service culture based on an
understanding of the customer's needs and reflecting our
commitment to excellence;
o reducing future reliance on net interest income by creating
additional sources of fee income from products and services we
offer; and
o 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 Conversion and Stock Offering
Home Federal is converting to stock form and offering the common stock
of Home Federal Bancorp to the public primarily to allow us 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. See "Home Federal's
Conversion - Our Reasons for the Conversion."
We are offering between 7,650,000 and 10,350,000 shares of Home Federal
Bancorp common stock at $10.00 per share, which corresponds to the offering
range based on our independent appraisal. 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 conversion, the
number of shares we offer may increase up to 11,902,500 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 Conversion - Marketing Arrangements."
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 March 5, 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 conversion. The $10.00 price per share was determined by our Board
of Directors and is the price most commonly used in stock offerings involving
conversions of mutual savings institutions.
ii
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The appraisal incorporated an analysis of a peer group of publicly
traded thrift 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 March 5, 2004, the pro forma
market value of Home Federal Bancorp ranged from a minimum of $76,500,000 to a
maximum of $103,500,000. Based on this valuation and the $10.00 per share price,
after this offering we will have a minimum of 7,650,000 shares to a maximum of
10,350,000 shares outstanding.
The following table presents a summary of selected pricing ratios for
the peer group companies and the resulting pricing ratios for Home Federal
Bancorp. Compared to the average pricing of the peer group, Home Federal
Bancorp's pro forma pricing ratios at the maximum of the offering range
indicated a premium of 13.4% on a price-to-earnings basis and a discount of
44.4% on a price-to-book basis. The estimated appraised value and the resulting
premium/discount took into consideration the potential financial impact of the
conversion.
Pro forma Pro forma
price-to-earnings price-to-tangible
multiple book value ratio
----------------- -----------------
Home Federal Bancorp
Maximum........................... 21.2x 79.4%
Minimum........................... 15.4 71.5
Valuation of peer group
companies as of March 5, 2004 (1)
Averages.......................... 18.7x 142.8%
Medians........................... 17.7 136.7
--------
(1) Reflects earnings of the most recent 12 month period for which data
is publicly available.
The independent appraisal is not necessarily indicative of the post-conversion
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 conversion 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
11,902,500 shares would be sold in the offering. We received authorization from
the Office of Thrift Supervision to conduct the stock offering on _____ __,
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 11,902,500 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."
Terms of the 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.
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(3) Depositors who held at least $50 with us on March 31, 2004.
(4) Depositors with us as of _____ __, 2004 and borrowers as of
March 16, 2004 whose loans continue to be outstanding as of
_____ __, 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 community offering, if any, shall begin at the same time
as, during or promptly after the subscription offering. Shares of common stock
not subscribed for in the subscription offering, direct community offering and
syndicated community offering will be offered in a public offering. See "Home
Federal's Conversion - Subscription Offering and Subscription Rights," "- Direct
Community Offering," "- Syndicated Community Offering" and "- Public 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 conversion. If we increase the number of
shares to be sold above 10,350,000, 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 Conversion - Subscription Offering and Subscription Rights" for
a description of the allocation procedure.
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 standard
mutual to stock conversions from January 1, 2002 to March 5, 2004 the average
and median percentage stock appreciation from the initial trading date of the
conversion 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. 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 Risk Factors
beginning on page 1.
Average Percentage Stock Price Appreciation Median Percentage Stock Price Appreciation
from Initial Public Offering Price from Initial Public Offering Price
-------------------------------------------- ------------------------------------------
Through Through
Number of After One After One March 5, After One After One March 5,
Transactions Day Month 2004 Day Month 2004
------------ ----------- ----------- ---------- ----------- ----------- ----------
12 33.3% 32.1% 89.4% 22.8% 26.8% 86.5%
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
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for some converted thrift institutions. In addition, the transactions from which
the data are arrived 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 rising 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.
You should also be aware that historically thrift institutions could be
acquired within the three year period following a full conversion. Regulatory
restrictions now generally prohibit a holding company regulated by the Office of
Thrift Supervision, such as Home Federal Bancorp, from being acquired within
three years following its conversion from mutual to stock form, which may also
have a negative impact on our stock price performance.
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 conversion 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 conversion 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.
The Board has consistently worked closely with RP Financial to develop
a business plan that reflects how Home Federal could deploy the net proceeds in
a prudent manner consistent with safety and soundness principles.
Termination of the Offering
The subscription offering will end at 12:00 Noon, Mountain time, on
_____ __, 2004, unless extended. The direct community offering and syndicated
community offering, if any, will also end at 12:00 Noon, Mountain time, on _____
__, 2004, unless extended. If fewer than the minimum number of shares are
subscribed for in the
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subscription offering and we do not get orders for at least the minimum number
of shares by _____ __, 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
_____ __, 2006.
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 ....................................................... $ 76,500 $ 103,500 $ 119,025
Less: estimated underwriting commission and other offering expenses .. 1,823 2,158 2,351
------------ ------------ ------------
Net proceeds ......................................................... $ 74,677 $ 101,342 $ 116,674
------------ ------------ ------------
Less:
Net proceeds to Home Federal ..................................... $ 37,339 $ 50,671 $ 58,337
Loan to our employee stock ownership plan ........................ 6,120 8,280 9,522
Funding of the restricted stock plan ............................. 3,060 4,140 4,761
------------ ------------ ------------
Net cash proceeds retained by Home Federal Bancorp ................... $ 28,158 $ 38,251 $ 44,054
============ ============ ============
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. 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 conversion.
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 is currently pending. 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 Conversion
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 $1.2 million of common stock, which equals
120,000 shares.
If any of the following persons purchase common stock, their purchases
when combined with your purchases cannot exceed $1.2 million or 120,000 shares:
o your spouse or relatives of you or your spouse living in your
house;
o companies, trusts or other entities in which you have an
interest or hold a position; or
o 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
7,650,000 shares or more than 11,902,500 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:
o By check or money order made payable to Home Federal Bancorp,
Inc.
o 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
at Home Federal, you must transfer your account to an
unaffiliated institution or broker. Please contact the stock
information center at (208) ___-____ as soon as possible for
assistance.
o 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 conversion 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 or in a trust account
at ______________, ____________, Idaho, a financial institution insured by the
Federal Deposit Insurance Corporation ("FDIC"). All funds authorized for
withdrawal from deposit accounts with Home Federal will earn interest at the
applicable account rate until the conversion 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
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 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 Conversion - 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
375,000 shares regardless of the number of shares sold in the offering. This
number equals 3.6% of the 10,350,000 shares that would be sold at the maximum of
the offering range. If fewer shares are sold in the conversion, 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 conversion.
Tax Consequences of the Conversion
As a general matter, the conversion will not be a taxable transaction
for purposes of federal or state income taxes to 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:
o the conversion will qualify as a tax free reorganization; and
o no gain or loss will be recognized for federal income tax
purposes by Home Federal Bancorp or Home Federal as a result
of the conversion to stock form.
Home Federal has also received an opinion from Penland Munther Goodrum,
Chartered, stating that, assuming the conversion does not result in any federal
income tax liability to Home Federal, its account holders or Home Federal
Bancorp, the conversion will not result in any Idaho income tax liability to
those entities or persons.
For a further discussion of the tax consequences of the conversion, see
"Home Federal's Conversion - Effects of the Conversion - Tax Effects."
Benefits to Management from the Offering
We intend to establish an employee stock ownership plan, which will
purchase in the offering 8% of the aggregate shares sold in the offering, or if
shares are not available, in the open market after the conversion. 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 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.
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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 10% of the maximum amount of
shares that could be sold by us to the public in this stock offering based on RP
Financial's appraisal, the total shares subject to options would be 765,000
shares, 900,000 shares, 1,035,000 shares and 1,190,250 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 10,350,000 shares are sold in the offering 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.
Percentage of
Number Estimated Shares Sold
of Shares Value of Shares in the Offering
--------------- --------------- ---------------
(Dollars in Thousands)
Employee stock ownership plan ... 828,000 $ 8,280 8.0%
Restricted stock awards ......... 414,000 4,140 4.0
Stock options ................... 1,035,000 -- 10.0
--------------- --------------- ---------------
Total ..................... 2,277,000 $ 12,420 22.0%
=============== =============== ===============
In addition, upon completion of the conversion, 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 conversion. 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.
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) ___-____.
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.
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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 1 to 3 of this prospectus.
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 conversion, 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 or 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.
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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 December 31, 2003, the market value
of our portfolio equity could decrease by $10.6 million. 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 development, commercial real estate
and consumer loans accounted for more than one-third of our total loan portfolio
as of December 31, 2003. 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:
o Construction and Development Loans. Repayment depends on the
successful completion and if applicable, sale, of the
improvements to the land.
o Commercial Real Estate Loans. Repayment depends on income
being generated in amounts sufficient to cover operating
expenses and debt service.
o 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 December 31, 2003 and at September 30, 2003, we
1
serviced $254.7 million and $246.0 million, respectively, of loans for others
and these mortgage servicing rights had a value of $3.2 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 are currently experiencing, 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 three months ended December 31, 2003 and the year ended
September 30, 2003, our returns on equity were 10.37% (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 2.91% on an annualized basis for the
three months ended December 31, 2003, and 3.92% percent for the year ended
September 30, 2003 as compared to industry (all fully converted publicly-traded
thrifts) and peer group averages of 8.95% and 8.17%, 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.
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 conversion which will likely reduce your
ownership interest.
If approved by a vote of the stockholders, we intend to establish a
stock option plan with a number of shares equal to 10% of the shares sold in the
conversion and a restricted stock plan with a number of shares equal to 4% of
the shares sold in the conversion. 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 $14.5 million at
the purchase price, based on the maximum of the estimated offering range. Awards
under these plans will likely
2
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 9.1% and 3.8%, 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 expenses
relating to stock option grants. For further discussion of these plans, see
"Management - Benefits - Other Stock Benefit Plans."
The amount of common stock we will control, our certificate of incorporation and
bylaws, and state and federal law could discourage hostile acquisitions of
control of Home Federal Bancorp.
Our Board of Directors and executive officers intend to purchase
approximately 4.9% and 3.6% of our common stock at the minimum and maximum of
the offering range, respectively. These purchases, together with the purchase by
the employee stock ownership plan of 8% of the aggregate shares sold in the
offering, as well as the potential acquisition of common stock through the
proposed stock option plan and restricted stock plan will result in ownership by
insiders of Home Federal Bancorp in excess of 26.9% of the total shares sold in
the offering at the maximum of the offering range. This inside ownership and
provisions in our certificate of incorporation and bylaws may discourage
attempts to acquire Home Federal Bancorp, pursue a proxy contest for control of
Home Federal Bancorp, assume control of Home Federal Bancorp by a holder of a
large block of common stock and remove Home Federal Bancorp's management, all of
which stockholders might think are in their best interests. These provisions
include a limitation against any holder of common stock voting more than 10% of
the outstanding common stock.
In addition, the business corporation law of Delaware, the state where
Home Federal Bancorp is incorporated, provides for certain restrictions on
acquisition of Home Federal Bancorp. Furthermore, federal law restricts
acquisitions of control of savings and loan holding companies such as Home
Federal Bancorp.
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.
3
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:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and
operating strategies;
o statements regarding the quality of our loan and investment
portfolios; and
o 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:
o general economic conditions, either nationally or in our
market area, that are worse than expected;
o changes in the interest rate environment that reduce our
interest margins or reduce the fair value of financial
instruments;
o increased competitive pressures among financial services
companies;
o changes in consumer spending, borrowing and savings habits;
o legislative or regulatory changes that adversely affect our
business;
o adverse changes in the securities markets; and
o 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.
4
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 December 31, 2003 and the three months ended December 31, 2003
and 2002 is unaudited but we believe it contains all information required for a
fair statement of such information. The results of operations for the three
months ended December 31, 2003 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 December 31, --------------------------------------------------------------
2003 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
FINANCIAL CONDITION DATA: (In Thousands)
Total assets ........................... $ 474,307 $ 450,196 $ 416,543 $ 382,504 $ 325,922 $ 271,143
Investment securities, available for
sale, at fair value .................. 6,442 5,440 2,507 8,266 1,395 1,661
Mortgage-backed securities, held
to maturity .......................... 41,846 24,425 44,325 36,630 46,129 54,671
Loans receivable, net .................. 381,574 377,695 331,019 298,752 247,903 191,267
Total deposit accounts ................. 304,755 301,273 279,772 266,316 232,747 209,302
Advances from Federal
Home Loan Bank ....................... 116,735 96,527 91,008 73,394 54,498 28,785
Equity capital ......................... 41,444 40,399 34,961 32,866 31,058 26,731
Three Months Ended
December 31, Year Ended September 30,
----------------------- --------------------------------------------------------------
2003 2002 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
OPERATING DATA: (In Thousands)
Interest and dividend income ........... $ 6,532 $ 6,922 $ 26,896 $ 26,904 $ 26,514 $ 22,438 $ 17,964
Interest expense ....................... 2,329 2,507 9,705 11,465 14,480 11,023 8,451
Net interest income .................... 4,203 4,415 17,191 15,439 12,034 11,415 9,513
Provision for loan losses .............. 300 150 615 277 748 600 575
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses ............ 3,903 4,265 16,576 15,162 11,286 10,815 8,938
Noninterest income ..................... 2,327 2,610 11,188 5,767 6,319 6,243 4,879
Noninterest expense .................... 4,596 4,852 18,885 17,178 14,594 10,641 9,079
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes ............. 1,634 2,023 8,879 3,751 3,011 6,417 4,738
Income tax expense ..................... 596 771 3,423 1,644 1,223 2,085 1,766
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income ............................. $ 1,038 $ 1,252 $ 5,456 $ 2,107 $ 1,788 $ 4,332 $ 2,972
========== ========== ========== ========== ========== ========== ==========
At September 30,
At December 31, --------------------------------------------------------------
OTHER DATA: 2003 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
Number of:
Real estate loans outstanding ...... 3,031 3,053 2,565 2,360 2,210 1,901
Deposit accounts ................... 56,283 56,308 54,459 50,087 43,856 39,232
Full-service offices ............... 15 14 14 15 13 9
5
At or For the
Three Months Ended At or For the Year Ended
December 31, September 30,
---------------------- -------------------------------------------------------------
KEY FINANCIAL RATIOS: 2003 (1) 2002 (1) 2003 2002 2001 2000 1999
--------- --------- --------- --------- --------- --------- ---------
Performance Ratios:
Return on assets (2) ................... 0.90% 1.18% 1.23% 0.53% 0.50% 1.45% 1.20%
Return on equity (3) ................... 10.37 13.46 13.39 6.03 5.44 14.99 11.77
Equity-to-assets ratio (4) ............. 8.71 8.79 9.17 8.74 9.20 9.68 10.17
Interest rate spread (5) ............... 3.71 4.29 3.93 3.98 3.29 3.70 3.71
Net interest margin (6) ................ 3.96 4.55 4.19 4.23 3.69 4.15 4.16
Efficiency ratio (7) ................... 70.38 69.07 66.55 81.01 79.52 60.26 63.08
Average interest-earning assets to
average interest-bearing liabilities . 111.83 110.03 110.96 107.83 108.84 111.13 112.16
Noninterest expense as a
percent of average total assets ...... 4.00 4.59 4.25 4.29 4.09 3.56 3.66
Capital Ratios:
Tier 1 (core) capital (to risk-
weighted assets)...................... 8.67 8.50 8.89 8.50 8.60 9.49 9.83
Total risk-based capital (to risk-
weighted assets)...................... 14.06 14.25 14.18 13.79 14.46 16.35 18.16
Tier 1 risk-based capital (to risk-
weighted assets) ..................... 13.37 13.70 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 ............... 0.16 0.06 0.04 0.14 1.22 0.36 0.03
Nonperforming assets as a
percent of total assets .............. 0.13 0.07 0.03 0.17 0.97 0.28 0.02
Allowance for losses as a percent
of gross loans receivable ............ 0.55 0.42 0.49 0.41 0.47 0.45 0.32
Allowance for losses as a percent
of nonperforming loans ............... 344.97 713.04 1393.23 295.94 48.21 127.14 1192.31
Net charge-offs to average
outstanding loans .................... 0.01 0.02 0.04 0.10 0.16 0.04 0.08
--------
(1) Ratios for the three-month periods have been annualized.
(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.
6
HOME FEDERAL BANCORP
Home Federal Bancorp was incorporated under Delaware law to hold all of
the stock of Home Federal. Home Federal Bancorp has submitted an application to
the Office of Thrift Supervision for approval to become a savings and loan
holding company. See "How We Are Regulated - Regulation and Supervision of Home
Federal Bancorp." 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 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 83653 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.
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
December 31, 2003, we had total assets of $474.3 million, deposit accounts of
$304.8 million and equity of $41.4 million. Through the conversion, 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 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 83653 and its telephone number is (208) 466-4634.
7
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 conversion is completed, we presently
anticipate that the net proceeds will be between $74.7 million at the minimum of
the offering range and $101.3 million at the maximum of the offering range, and
may be up to $116.7 million assuming an increase in the estimated offering range
by 15%. See "Pro Forma Data" and "Home Federal's Conversion - 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 ....................................................... $ 76,500 $ 103,500 $ 119,025
Less: estimated underwriting commission and other offering expenses .. 1,823 2,158 2,351
------------ ------------ ------------
Estimated net proceeds ............................................... $ 74,677 $ 101,342 $ 116,674
------------ ------------ ------------
Less:
Net proceeds to Home Federal ..................................... $ 37,339 $ 50,671 $ 58,337
Loan to our employee stock ownership plan ........................ 6,120 8,280 9,522
Funding of the restricted stock plan ............................. 3,060 4,140 4,761
------------ ------------ ------------
Net cash proceeds retained by Home Federal Bancorp ................... $ 28,158 $ 38,251 $ 44,054
============ ============ ============
Home Federal Bancorp will retain 50% of the net conversion proceeds and
will purchase all of the capital stock of Home Federal to be issued in the
conversion in exchange for the remaining 50% of the net conversion 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 8%
of the aggregate shares of common stock sold in the offering, or if shares are
not available, in the open market after the conversion. Based upon the sale of
7,650,000 shares of common stock in the offering at the minimum of the estimated
offering range and the sale of 10,350,000 shares of common stock in the offering
at the maximum of the estimated offering range, the loan to the Home Federal
Bancorp employee stock ownership plan would be $6.1 million and $8.3 million,
respectively. See "Management - Benefits - Employee Stock Ownership Plan."
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 4% of the aggregate shares sold in the offering, or $3.1
million and $4.1 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:
o to support the growth in Home Federal's core retail business
activities within its geographical market;
o to provide funding for Home Federal's lending activities;
o to support the future expansion of operations through the
establishment or acquisition of additional banking offices or
other customer facilities;
8
o to acquire other financial service providers, although no
acquisitions are specifically being considered at this time;
o to diversify Home Federal's activities as opportunities become
available;
o 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
o for general corporate purposes.
Following the completion of the conversion, 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:
o 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;
o 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
o 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
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
conversion, based upon the maximum of the estimated offering range, Home
Federal's tangible capital ratio will be approximately 23.2%. As a result, Home
Federal will continue to be a well-capitalized institution.
The net proceeds may vary because total expenses of the conversion may
be more or less than those estimated. The net proceeds will also vary if the
number of shares to be sold in the conversion 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
9
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. As a converted
institution, Home Federal will be subject to the regulatory restriction that it
will not be permitted to pay a dividend on or repurchase any of its capital
stock if the effect thereof would be to cause its regulatory capital to be
reduced below the amount required for the liquidation account established in
connection with the conversion. 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."
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 conversion.
In addition, under Delaware law, dividends by Home Federal Bancorp may be paid
either out of surplus or, if there is no surplus, out of net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
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 applied to have its common stock listed on the
Nasdaq National Market under the symbol "HOME." There can be no assurance,
however, that Home Federal Bancorp will meet Nasdaq's listing requirements. 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.
Home Federal Bancorp intends to meet the requirements for listing on the Nasdaq
National Market. 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."
10
CAPITALIZATION
The following table presents the capitalization of Home Federal at
December 31, 2003, and the pro forma consolidated capitalization of Home Federal
Bancorp after giving effect to the conversion, 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 11,902,500
Capitalization 7,650,000 9,000,000 10,350,000 Shares (1)
At Shares Shares Shares (Maximum of
December 31, (Minimum (Midpoint (Maximum Range, as
2003 of Range) of Range) of Range) Adjusted)
-------------- -------------- -------------- -------------- --------------
(In Thousands)
Deposits (2) .............................. $ 304,755 $ 304,755 $ 304,755 $ 304,755 $ 304,755
Borrowings ................................ 116,735 116,735 116,735 116,735 116,735
-------------- -------------- -------------- -------------- --------------
Total deposits and borrowings ............. $ 421,490 $ 421,490 $ 421,490 $ 421,490 $ 421,490
============== ============== ============== ============== ==============
Stockholders' equity
Preferred stock, $.01 par value per
share, 2,000,000 shares authorized,
none issued ......................... $ -- $ -- $ -- $ -- $ --
Common stock, $.01 par value per,
share 30,000,000 shares authorized;
shares to be issued as reflected .... -- 77 90 104 119
Additional paid-in capital (3) ........ -- 74,601 87,919 101,239 116,555
Retained earnings (4) ................. 41,453 41,453 41,453 41,453 41,453
Net unrealized gain (loss) ............ (9) (9) (9) (9) (9)
Less:
Common stock to be acquired by the
employee stock ownership plan (5) ... -- (6,120) (7,200) (8,280) (9,522)
Common stock to be acquired by the
restricted stock plan (6) ........... -- (3,060) (3,600) (4,140) (4,761)
-------------- -------------- -------------- -------------- --------------
Total stockholders' equity $ 41,444 $ 106,942 $ 118,653 $ 130,367 $ 143,835
============== ============== ============== ============== ==============
Equity-to-assets ratio (7) ................ 8.74% 19.81% 23.51% 23.15% 24.94%
--------
(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 conversion.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the conversion. Any withdrawals would reduce pro forma
deposits by the amount of the withdrawals.
(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 issued and outstanding at the minimum, midpoint, maximum and
maximum, as adjusted, of the offering range were 7,650,000, 9,000,000,
10,350,000 and 11,902,500, respectively. See "Pro Forma Data" and
"Management - Benefits - Other Stock Benefit Plans."
(footnotes continued on following page)
11
(4) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, Home Federal will be prohibited from
paying any dividend that would reduce its regulatory capital below the
amount required for the liquidation account that will be set up in
connection with the conversion. See "Home Federal' s Conversion - Effects
of the Conversion - Depositors' Rights if We Liquidate."
(5) Assumes that 8% of the common stock sold in the conversion 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 conversion. If the
plan is approved by stockholders, 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 4% of the common
stock sold in the conversion. 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, in the event Home Federal
Bancorp issues authorized but unissued shares of common stock to the
restricted stock plan in the amount of 4% of the common stock sold in the
conversion, the voting interests of existing stockholders would be diluted
approximately 3.8%. 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) Total equity divided by total assets.
HOME FEDERAL
EXCEEDS ALL REGULATORY CAPITAL REQUIREMENTS
At December 31, 2003, 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 December 31, 2003 and the pro forma
regulatory capital of Home Federal after giving effect to the conversion, 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 December 31, 2003.
12
Pro Forma at December 31, 2003
---------------------------------------------------------------------------------
7,650,000 Shares 9,000,000 Shares 10,350,000 Shares 11,902,500 Shares
At Sold at Sold at Sold at Sold at
December 31, 2003 $10.00 per Share $10.00 per Share $10.00 per Share $10.00 per Share
------------------ ------------------ ------------------ ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets (1) Amount Assets Amount Assets Amount Assets Amount Assets
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Equity capital
under generally
accepted accounting
principles ("GAAP") ..... $ 41,144 8.74% $ 69,603 13.60% $ 74,649 14.40% $ 79,695 15.18% $ 85,498 16.05%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Tier 1 risk-based capital . $ 41,134 13.37% $ 69,293 21.99% $ 74,339 23.49% $ 79,385 24.98% $ 85,188 26.68%
Requirement ........... 18,976 4.00 20,470 4.00 20,737 4.00 21,003 4.00 21,310 4.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Excess ................ $ 22,158 9.37% $ 48,823 17.99% $ 53,602 19.49% $ 58,382 20.98% $ 63,878 22.68%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Core capital .............. $ 41,134 8.67% $ 69,293 13.54% $ 74,339 14.34% $ 79,385 15.12% $ 85,188 15.99%
Requirement ........... 18,976 4.00 20,470 4.00 20,737 4.00 21,003 4.00 21,310 4.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Excess ................ $ 22,158 4.67% $ 48,822 9.54% $ 53,602 10.34% $ 58,382 11.12% $ 63,878 11.99%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total capital ............. $ 43,270 14.06% $ 71,429 22.66% $ 76,475 24.16% $ 81,521 25.65% $ 87,324 27.34%
Risk-based requirement. 24,615 8.00 25,212 8.00 25,319 8.00 25,425 8.00 25,548 8.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Excess ................ $ 18,655 6.06% $ 46,217 14.66% $ 51,156 16.16% $ 56,096 17.65% $ 61,776 19.34%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Reconciliation of
capital infused
into Home Federal:
Net proceeds infused ...... $ 37,339 $ 44,005 $ 50,671 $ 58,337
Less:
Common stock
acquired by
employee stock
ownership plan ...... 6,120 7,200 8,280 9,522
Common stock
acquired by
restricted
stock plan .......... 3,060 3,600 4,140 4,761
-------- -------- -------- --------
Pro forma increase in
GAAP and regulatory
capital ................. $ 28,159 $ 33,205 $ 38,251 $ 44,054
======== ======== ======== ========
--------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
13
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of our common
stock until the conversion is completed. However, we estimate that net proceeds
will be between $74.7 million and $101.3 million, or $116.7 million if the
estimated offering range is increased by 15%, based upon the following
assumptions:
o all shares of common stock will be sold through
non-transferable rights to subscribe for the common stock, in
order of priority, to:
o 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;
o the proposed employee stock ownership plan, which
will purchase 8% of the shares of common stock sold
in the conversion;
o supplemental eligible account holders, who are
depositors of Home Federal with account balances of
at least $50 as of the close of business on March 31,
2004, and
o other members, who are depositors of Home Federal as
of the close of business on ________ __, 2004 and
borrowers as of March 16, 2004 whose loans continue
to be outstanding as of _______ __, 2004, other than
eligible account holders or supplemental eligible
account holders.
o 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
o total expenses, excluding the success fee paid to Keefe,
Bruyette & Woods, are estimated to be approximately $937,000,
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 three months ended December 31, 2003 as if the common stock to be sold in
the conversion had been sold at the beginning of the period and the net proceeds
had been invested at 1.15% and 1.19%, respectively, which represents the yield
on one-year U.S. Government securities at September 30, 2003 and December 31,
2003, 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 0.72% for the year ended September 30, 2003 and
the three months ended December 31, 2003, 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 conversion from which it will make a loan to fund the purchase
of 8% of the common stock 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 conversion 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
conversion. If the restricted stock plan is approved by stockholders, the
restricted stock plan intends to acquire an amount of common stock equal to 4%
of the shares of common stock sold in the conversion, 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
14
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 conversion, the market
price of the common stock after the conversion or a less than 4% purchase by the
restricted stock plan.
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 Three Months Ended December 31, 2003
--------------------------------------------------------------------
7,650,000 9,000,000 10,350,000 11,902,500
Shares Sold at Shares Sold at Shares Sold at Shares Sold at
$10.00 Per $10.00 Per $10.00 Per $10.00 Per Share
Share Share Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted) (1)
-------------- -------------- -------------- --------------
(Dollars in Thousands)
Gross proceeds ................................... $ 76,500 $ 90,000 $ 103,500 $ 119,025
Less: Offering expenses and commissions .......... 1,823 1,991 2,158 2,351
-------------- -------------- -------------- --------------
Estimated net conversion proceeds ................ 74,677 88,009 101,342 116,674
Less: Shares purchased by the employee
stock ownership plan (2) ................. (6,120) (7,200) (8,280) (9,522)
Shares purchased by the restricted
stock plan (3) ........................... (3,060) (3,600) (4,140) (4,761)
-------------- -------------- -------------- --------------
Net investable proceeds (4) ................... $ 65,497 $ 77,209 $ 88,922 $ 102,391
============== ============== ============== ==============
Net income:
Historical ................................. $ 1,038 $ 1,038 $ 1,038 $ 1,038
Pro forma income on net proceeds ........... 119 140 161 186
Pro forma employee stock
ownership plan adjustment (2) ............ (93) (110) (126) (145)
Pro forma restricted stock
plan adjustment (3) ...................... (93) (110) (126) (145)
-------------- -------------- -------------- --------------
Pro forma net income ....................... $ 971 $ 958 $ 947 $ 934
============== ============== ============== ==============
Net income per share:
Historical ................................. $ 0.15 $ 0.13 $ 0.11 $ 0.09
Pro forma income on net
proceeds, as adjusted .................... 0.02 0.02 0.02 0.02
Pro forma employee stock
ownership plan adjustment (3) ............ (0.01) (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) ... $ 0.15 $ 0.13 $ 0.11 $ 0.09
============== ============== ============== ==============
Offering price as a percentage of pro forma
net annualized earnings per share .............. 16.67% 19.23% 22.73% 27.78%
(table continued on following page)
(Footnotes on page 18)
15
At or For the Three Months Ended December 31, 2003
--------------------------------------------------------------------
7,650,000 9,000,000 10,350,000 11,902,500
Shares Sold at Shares Sold at Shares Sold at Shares Sold at
$10.00 Per $10.00 Per $10.00 Per $10.00 Per Share
Share Share Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted) (1)
-------------- -------------- -------------- --------------
(Dollars in Thousands)
Stockholders' equity:
Historical ................................. $ 41,444 $ 41,444 $ 41,444 $ 41,444
Estimated net proceeds ..................... 74,677 88,009 101,342 116,674
Less: Common stock acquired by the
employee stock ownership plan (2) .. (6,120) (7,200) (8,280) (9,522)
Common stock to be acquired
by the restricted stock plan (3) ... (3,060) (3,600) (4,140) (4,761)
-------------- -------------- -------------- --------------
Pro forma stockholders' equity (2)(3)(7) ... $ 106,941 $ 118,653 $ 130,366 $ 143,835
============== ============== ============== ==============
Stockholders' equity per share:
Historical ................................. $ 5.42 $ 4.60 $ 4.00 $ 3.48
Estimated net proceeds ..................... 9.76 9.78 9.79 9.80
Less: Common stock acquired by the
employee stock ownership plan (2) .. (0.80) (0.80) (0.80) (0.80)
Common stock to be acquired
by the restricted stock plan (3) ... (0.40) (0.40) (0.40) (0.40)
-------------- -------------- -------------- --------------
Pro forma stockholders' equity per
share (3)(5)(6)(7) ....................... $ 13.98 $ 13.18 $ 12.59 $ 12.08
============== ============== ============== ==============
Offering price as a percentage of pro
forma stockholders' equity (5) ................. 71.53% 75.87% 79.43% 82.78%
============== ============== ============== ==============
Number of shares outstanding for pro forma
stockholders' equity per share calculations (5). 7,650,000 9,000,000 10,350,000 11,902,500
============== ============== ============== ==============
(Footnotes on page 18)
16
At or For the Year Ended September 30, 2003
--------------------------------------------------------------------
7,650,000 9,000,000 10,350,000 11,902,500
Shares Sold at Shares Sold at Shares Sold at Shares Sold at
$10.00 Per $10.00 Per $10.00 Per $10.00 Per Share
Share Share Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted) (1)
-------------- -------------- -------------- --------------
(Dollars in Thousands)
Gross proceeds ................................... $ 76,500 $ 90,000 $ 103,500 $ 119,025
Less: Offering expenses and commissions .......... 1,823 1,991 2,158 2,351
-------------- -------------- -------------- --------------
Estimated net conversion proceeds ................ 74,677 88,009 101,342 116,674
Less: Shares purchased by the employee
stock ownership plan (2) ................. (6,120) (7,200) (8,280) (9,522)
Shares purchased by the restricted
stock plan (3) ........................... (3,060) (3,600) (4,140) (4,761)
-------------- -------------- -------------- --------------
Net investable proceeds (4) ................... $ 65,497 $ 77,209 $ 88,922 $ 102,391
============== ============== ============== ==============
Net income:
Historical ................................. $ 5,456 $ 5,456 $ 5,456 $ 5,456
Pro forma income on net proceeds ........... 459 541 623 717
Pro forma employee stock
ownership plan adjustment (2) ............ (373) (438) (504) (580)
Pro forma restricted stock
plan adjustment (3) ...................... (373) (438) (504) (580)
-------------- -------------- -------------- --------------
Pro forma net income ....................... $ 5,169 $ 5,121 $ 5,071 $ 5,013
============== ============== ============== ==============
Net income per share:
Historical ................................. $ 0.77 $ 0.65 $ 0.57 $ 0.49
Pro forma income on net
proceeds, as adjusted .................... 0.06 0.06 0.06 0.06
Pro forma employee stock
ownership plan adjustment (3) ............ (0.05) (0.05) (0.05) (0.05)
Pro forma restricted stock plan
adjustment (5) ........................... (0.05) (0.05) (0.05) (0.05)
-------------- -------------- -------------- --------------
Pro forma net income per share (3)(5)(6) ... $ 0.73 $ 0.61 $ 0.53 $ 0.45
============== ============== ============== ==============
Offering price as a percentage of pro forma
net annualized earnings per share .............. 13.70% 16.39% 18.87% 22.22%
Stockholders' equity:
Historical ................................. $ 40,339 $ 40,399 $ 40,399 $ 40,399
Estimated net proceeds ..................... 74,677 88,009 101,342 116,674
Less: Common stock acquired by the
employee stock ownership plan (2) .. (6,120) (7,200) (8,280) (9,522)
Common stock to be acquired
by the restricted stock plan (3) ... (3,060) (3,600) (4,140) (4,761)
-------------- -------------- -------------- --------------
Pro forma stockholders' equity (2)(3)(7) ... $ 105,836 $ 117,608 $ 129,321 $ 142,790
============== ============== ============== ==============
(table continued on following page)
(Footnotes on page 18)
17
At or For the Year Ended September 30, 2003
--------------------------------------------------------------------
7,650,000 9,000,000 10,350,000 11,902,500
Shares Sold at Shares Sold at Shares Sold at Shares Sold at
$10.00 Per $10.00 Per $10.00 Per $10.00 Per Share
Share Share Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted) (1)
-------------- -------------- -------------- --------------
(Dollars in Thousands)
Stockholders' equity per share:
Historical ................................. $ 5.28 $ 4.49 $ 3.90 $ 3.39
Estimated net proceeds ..................... 9.26 9.78 9.79 9.80
Less: Common stock acquired by the
employee stock ownership plan (2) .. (0.80) (0.80) (0.80) (0.80)
Common stock to be acquired
by the restricted stock plan (3) ... (0.40) (0.40) (0.40) (0.40)
-------------- -------------- -------------- --------------
Pro forma stockholders' equity per
share (3)(5)(6)(7) ....................... $ 13.34 $ 13.07 $ 12.49 $ 11.99
============== ============== ============== ==============
Offering price as a percentage of pro
forma stockholders' equity (5) ................. 72.25% 76.51% 80.06% 83.40%
============== ============== ============== ==============
Number of shares outstanding for pro forma
stockholders' equity per share calculations (5) 7,650,000 9,000,000 10,350,000 11,902,500
============== ============== ============== ==============
--------
(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 conversion.
(2) It is assumed that 8% of the shares of common stock sold in the offering
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 (i) 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
(ii) 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 4% of the shares of common stock sold in
the offering or 306,000, 360,000, 414,000 and 476,100 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 the $10.00 purchase price and that 5% and 20% of the
amount contributed, net of taxes, was an amortized expense during the three
months ended December 31, 2003 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 4% of the
common stock sold in the offering would dilute the voting interests of
existing stockholders by approximately 3.8% and under such circumstances,
pro forma net earnings per share would be $0.14, $0.12, $0.10 and $0.09,
and $0.70, $0.59 $0.51 and $0.44 at the minimum, midpoint, maximum and 15%
above the maximum of the estimated offering range for the three months
ended December 31, 2003 and for the year ended September 30, 2003,
respectively, and pro forma stockholders' equity per share would be $13.83,
$13.06, $12.49 and $12.01, and $13.70, $12.95, $12.39 and $11.92 at the
minimum, midpoint, maximum and 15% above the
(footnotes continued on following page)
18
maximum of such range for the three months ended December 31, 2003 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 conversion less (i) the proceeds attributable to the
purchase by the employee stock ownership plan and (ii) the value of the
shares to be purchased by the restricted stock plan, subject to stockholder
approval, after the conversion 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 conversion and for purposes of calculating net income per
share, in accordance with Statement of Position 93-6, subtracting 596,700
shares, 702,000 shares, 807,300 shares and 928,395 shares; and 550,800
shares, 648,000 shares, 745,200 shares and 856,980 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 three months ended December 31, 2003 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 7,650,000 shares at the minimum of
the estimated pro forma market value of Home Federal on a fully converted
basis, of the estimated valuation range, 9,000,000 shares at the midpoint
of the range, 10,350,000 shares at the maximum of the range and 11,902,500
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 conversion 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
conversion. If the stock option plan is approved by stockholders, an amount
equal to 10% of the common stock sold in the offering, or 765,000 shares at
the minimum of the estimated offering range, 900,000 shares at the midpoint
of the range, 1,035,000 shares at the maximum of the range and 1,190,250
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 9.1%. Assuming stockholder
approval of the stock option plan, 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 $0.13, $0.11, $0.09 and $0.08, and $0.64,
$0.54, $0.46 and $0.40 at the minimum, midpoint, maximum and 15% above the
maximum of the estimated offering range for the three months ended December
31, 2003 and the year ended September 30, 2003, respectively, and pro forma
stockholders' equity per share would be $13.37, $12.70, $12.19 and $11.76,
and $13.49, $12.80, $12.28 and $11.83 at the minimum, midpoint, maximum and
15% above the maximum of the range at December 31, 2003 and at September
30, 2003, respectively. See "Management - Benefits - Other Stock Benefit
Plans."
(7) The equity capital of Home Federal will be substantially restricted because
of the liquidation account set up in connection with the conversion and
certain distributions from Home Federal's equity capital may be treated as
being from its accumulated bad debt reserve for tax purposes, which would
cause Home Federal to have additional taxable income. See "Taxation -
Federal Taxation." 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
a liquidation.
19
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 0.65% 50,000 0.48%
Fred H. Helpenstell, M.D. ......... 500,000 50,000 0.65 50,000 0.48
Thomas W. Malson................... 250,000 25,000 0.33 25,000 0.24
N. Charles Hedemark................ 300,000 30,000 0.39 30,000 0.28
Richard J. Schrandt................ 250,000 25,000 0.33 25,000 0.24
James R. Stamey.................... 150,000 15,000 0.20 15,000 0.14
Robert A. Tinstman................. 500,000 50,000 0.65 50,000 0.48
Executive Officers:
------------------
Robert A. Schoelkoph............... 250,000 25,000 0.33 25,000 0.24
Roger D. Eisenbarth................ 250,000 25,000 0.33 25,000 0.24
Lynn A. Sander..................... 250,000 25,000 0.33 25,000 0.24
Denis J. Trom...................... 350,000 35,000 0.46 35,000 0.34
Karen Wardwell..................... 200,000 20,000 0.26 20,000 0.19
---------- ----------- ----------- ----------- -----------
All directors and executive
officers as a group (12 persons).. $3,750,000 375,000 4.90% 375,000 3.62%
========== =========== =========== =========== ===========
--------
(1) Mr. Stevens is also an executive officer of Home Federal.
HOME FEDERAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following consolidated statements of income of Home Federal and
subsidiary for the fiscal years ended September 30, 2003, 2002 and 2001 have
been audited by Moss Adams LLP, independent certified public accountants, whose
report thereon appears elsewhere herein. The consolidated statements of income
for the three months ended December 31, 2003 and 2002, 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 three months ended
December 31, 2003 are not necessarily indicative of the results of which may be
expected for the entire year or any other subsequent period. These consolidated
statements of income should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein.
20
Three Months Ended
December 31, Year Ended September 30,
----------------------- -------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ---------- ---------- ----------
(unaudited) (In Thousands)
Interest and dividend income:
Loan interest ............................ $ 5,975 $ 6,155 $ 24,202 $ 23,808 $ 23,140
Investment interest including interest-
bearing deposits in other banks ........ 33 19 302 195 302
Mortgage-backed security interest ........ 442 653 2,040 2,617 2,810
Federal Home Loan Bank dividends ......... 82 95 352 284 262
---------- ---------- ---------- ---------- ----------
Total interest and dividend income ... 6,532 6,922 26,896 26,904 26,514
---------- ---------- ---------- ---------- ----------
Interest expense:
Deposits ................................. 1,176 1,366 5,080 7,017 10,251
Federal Home Loan Bank advances .......... 1,153 1,141 4,625 4,448 4,229
---------- ---------- ---------- ---------- ----------
Total interest expense ............... 2,329 2,507 9,705 11,465 14,480
---------- ---------- ---------- ---------- ----------
Net interest income .................. 4,203 4,415 17,191 15,439 12,034
Provision for loan losses .................... 300 150 615 277 748
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses .......... 3,903 4,265 16,576 15,162 11,286
---------- ---------- ---------- ---------- ----------
Noninterest income:
Service fees and charges ................. 1,871 1,715 8,120 5,965 4,764
Gain on sale of loans .................... 219 289 1,044 676 286
Increase in cash surrender value of life
insurance .............................. 125 100 601 416 332
Mortgage servicing rights, net ........... 69 404 1,370 (1,047) 878
Other .................................... 43 102 53 (243) 59
---------- ---------- ---------- ---------- ----------
Total noninterest income ............. 2,327 2,610 11,188 5,767 6,319
---------- ---------- ---------- ---------- ----------
Noninterest expense:
Compensation and benefits ................ 2,649 2,894 10,980 10,042 8,255
Occupancy and equipment .................. 702 747 2,909 2,790 2,353
Data processing .......................... 366 295 1,366 997 806
Advertising .............................. 212 317 1,256 1,164 1,038
Postage and supplies ..................... 194 177 778 788 768
Professional services .................... 113 138 402 235 290
Insurance and taxes ...................... 98 95 370 345 257
Other .................................... 262 189 824 817 827
---------- ---------- ---------- ---------- ----------
Total noninterest expense ............ 4,596 4,852 18,885 17,178 14,594
---------- ---------- ---------- ---------- ----------
Income before income taxes ........... 1,634 2,023 8,879 3,751 3,011
Income tax expense ........................... 596 771 3,423 1,644 1,223
---------- ---------- ---------- ---------- ----------
Net Income ................................... $ 1,038 $ 1,252 $ 5,456 $ 2,107 $ 1,788
========== ========== ========== ========== ==========
21
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:
o maintaining favorable asset quality reflected primarily by a
low level of non-performing assets, low charge-offs and
adequacy of loan loss reserves;
o seeking to improve net interest margin through a combination
of reduced funding costs and improved pricing relative to
asset risk;
o analyzing profitability of products and business lines and
allocating resources to those areas offering the greatest
potential for future profits;
22
o 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;
o pursuing further loan portfolio diversification, with an
emphasis on credit risk management;
o 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;
o providing our staff members with the knowledge and skills
necessary to perform their job functions and develop their
career potential;
o enhancing the perception of Home Federal with both the retail
and commercial banking public as the bank of choice;
o maintaining a sales and service culture based on an
understanding of the customer's needs and reflecting our
commitment to excellence;
o reducing future reliance on net interest income by creating
additional sources of fee income from products and services we
offer; and
o 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 December 31, 2003,
our nonaccrual and 90 days or more past due loans as a percentage of loans
receivable was only 0.16%. Although we intend to increase our multi-family and
commercial real estate lending after the conversion, 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
23
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 conversion from mutual to stock form, 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
mutual to stock conversion, 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. We intend to
24
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 Estimates
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 sufficient to absorb 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 including
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 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. The conditions evaluated in connection
with the general allowance include loan volumes and concentrations, seasoning of
the loan portfolio, specific industry conditions within portfolio segments,
governmental regulatory actions, recent loss experience in a particular segment
of the portfolio and the duration of the current business cycle. The general
allowance addresses risks in the portfolio that are not specifically associated
with a pool or individual loan but exist due to changes in economic conditions,
rapid loan portfolio growth, changes in credit underwriting, weakness in
specific loan markets, unseasoned nature of loan portfolio and new loan
products.
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
25
the development of a number of estimates, the most critical of which is the
mortgage loan prepayment speeds 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 December 31, 2003 and September 30, 2003
General. Our total assets increased $24.1 million, or 5.4%, to $474.3
million during the three months ended December 31, 2003. The asset growth
resulted mainly from purchases of mortgage-backed securities and loans
originated in our local market area. This growth was funded by $3.5 million in
increased deposits and $20.2 million in borrowings from the Federal Home Loan
Bank of Seattle.
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. This is accomplished 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 three month period
ended December 31, 2003, total asset duration decreased 3.2 months to 39.6
months, and liability duration decreased 1.1 months to 26.4 months for a net
duration gap of 13.2 months, down 2.1 months from September 30, 2003.
26
Assets. Total assets increased $24.1 million during the three months
ended December 31, 2003. The increase was primarily concentrated in the
following interest-earning asset categories:
Balance at Increase from
December 31, 2003 September 30, 2003 Percentage Increase
----------------- ------------------ -------------------
(Dollars in Thousands)
Securities available for sale,
at fair value................. $ 6,442 $ 1,002 18.4%
Mortgage-backed securities,
held to maturity.............. 41,846 17,421 71.3
Loans receivable, net of 381,574 3,879 1.0
allowance for loan losses.....
During the three month period ended December 31, 2003, we originated
$43.7 million in loans of which $17.8 million were sold in the secondary market,
$2.8 million were sold as participating interests and $15.5 million in principal
was received from principal paydowns. We purchased mortgage-backed securities in
order to achieve the desired level of total interest-earning assets and because
mortgage-backed securities have payment characteristics similar to those of
residential loans.
Deposits. During the three months ended December 31, 2003, deposits
increased $3.5 million. The following table details the source of that growth.
Balance at Increase/(Decrease) Percentage
December 31, 2003 from September 30, 2003 Increase/(Decrease)
----------------- ----------------------- -------------------
(Dollars in Thousands)
Savings deposits.............. $ 22,876 $ (1,547) (6.3)%
Demand deposits............... 134,266 2,488 1.9
Certificates of deposit....... 147,613 2,541 1.8
--------- --------- ------
Total deposit accounts........ $ 304,755 $ 3,482 1.2%
========= ========= ======
Certificate account growth resulted from special offerings of
certificates of deposit with maturities of nine through 39 months and from a
step-rate certificate of deposit with a maturity of four years. The maturities
were selected in order to extend liability duration and maintain interest rate
risk at acceptable levels.
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 Federal Home
Loan Bank of Seattle provides term borrowings at competitive interest rates and
terms ranging from overnight to 30 years. Total borrowings at December 31, 2003
were $116.7 million, an increase of $20.2 million, or 20.9%, from September 30,
2003.
Equity. Total equity increased $1.0 million, or 2.6%, to $41.4 million
at December 31, 2003 from $40.4 million at September 30, 2003. The source of
increase in our equity has been from net income. Net income for the three month
period ended December 31, 2003 was $1.0 million. Our Tier 1 capital ratio was
8.67% and our total risk-based capital ratio was 13.37% at December 31, 2003.
Comparison of Operating Results for the Three Months Ended December 31, 2003 and
December 31, 2002
General. Our net income for the three months ended December 31, 2003
was $1.0 million, a decrease of $214,000 from the comparable period in the prior
year. The decrease in net income was the result of a $212,000
27
decrease in net interest income, a $150,000 increase in the provision for loan
losses and a $283,000 decrease in total noninterest income, offset by a
reduction of $256,000 in noninterest expenses and $175,000 in income tax
expense. The decrease in noninterest income primarily resulted from a $73.5
million decline in one- to four-family residential loan origination volumes
during the three months ended December 31, 2003, which when combined with the
$31.1 million reduction in loan sales to the secondary market, resulted in a
decrease of $335,000 in mortgage servicing rights.
Net Interest Income. Our net interest income decreased $212,000 for the
three month period ended December 31, 2003 when compared to the comparable
period in the prior year. As a result of historically low interest rates, our
residential and commercial mortgage loan customers refinanced their existing
loans, thereby reducing their monthly payments and our interest income.
Mortgage-backed securities have similar payment characteristics as mortgage
loans. As rates decline, borrowers prepay and refinance the underlying mortgages
resulting in a reduction to our interest income. Lower interest rates on loans
and investments decrease our net interest income.
Declining interest rates also reduced our interest expense as the rates
we pay to our customers on their deposit accounts decreased. In addition,
borrowing rates from the Federal Home Loan Bank of Seattle declined. Lower
deposit and borrowing rates contributed to increases in our net interest income.
Interest and Dividend Income. Total interest and dividend income for
the three months ended December 31, 2003 decreased $390,000 to $6.5 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 three months ended December 31, 2003 and
2002:
Three Months Ended December 31,
-----------------------------------------------------------------------------
2003 2002 Increase/(Decrease)
------------------------ ------------------------- in Interest
Average Average and Dividend
Balance Yield Balance Yield Income from 2002
--------- ------- --------- ------- ------------------
(Dollars in Thousands)
Loans receivable, net................... $ 380,620 6.28% $ 337,388 7.30% $ (180)
Investment securities, including
interest-bearing deposits in
other banks........................... 6,576 2.01 2,793 2.72 14
Mortgage-backed securities.............. 30,977 5.71 42,586 6.13 (211)
Federal Home Loan Bank stock............ 6,534 5.02 5,320 7.14 (13)
--------- ---- --------- ---- --------
Total interest-earning assets........... $ 424,707 6.16% $ 388,087 7.13% $ (390)
========= ==== ========= ==== ========
Record low interest rates and record high loan volumes stemming from
refinanced mortgage loans resulted in a 102 basis point reduction in our loan
yields and a $180,000 reduction in interest income on the loan portfolio for the
three months ended December 31, 2003 from the comparable period of the prior
year. Rapid prepayments received on higher coupon mortgage-backed securities,
and decreased reinvestment rates for purchased mortgage- backed securities
resulted in a 42 basis point yield reduction and a $212,000 reduction in net
interest income.
28
Interest Expense. Total interest expense for the three month period
ended December 31, 2003 was $2.3 million, a decrease of $178,000 from the
comparable period in the prior year. The following table details average
balances, cost of funds and resulting decrease in interest expense for the three
months ended December 31, 2003 and 2002:
Three Months Ended December 31,
-------------------------------------------------------------------------
Increase/
2003 2004 (Decrease) in
--------------------- --------------------- Interest
Average Average Expense from
Balance Cost Balance Cost 2002
------- ---- ------- ---- ------------
(Dollars in Thousands)
Savings accounts .................................. $ 24,305 0.30% $ 23,315 0.51% $ (12)
Interest-bearing demand accounts .................. 74,590 0.20 66,843 0.38 (26)
Money market accounts ............................. 31,519 0.51 34,849 0.99 (46)
Certificates of deposit ........................... 146,042 2.96 132,164 3.59 (106)
Federal Home Loan Bank advances ................... 103,332 4.46 95,543 4.78 12
-------- ---- -------- ---- --------
Total interest-bearing liabilities ................ $379,788 2.45% $352,714 2.84% $ (178)
======== ==== ======== ==== ========
The total cost of funds for total interest-bearing liabilities for the
quarter ended December 31, 2003 decreased 39 basis points from the comparable
period in 2002, and interest expense decreased $178,000 even though the average
balance of total interest-bearing liabilities increased $27.1 million. The
current low interest rate environment is primarily responsible for the reduction
in the cost of funds.
Provision for Loan Losses. 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 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.
29
The following table details activity associated with the allowance for
loan losses for the three month periods ended December 31, 2003 and 2002:
At or For the
Three Months
Ended December 31,
----------------------
2003 2002
------ ------
(Dollars in Thousands)
Provisions for loan losses ............................. $ 300 $ 150
Net charge-offs ........................................ 28 59
Allowance for loan losses .............................. 2,125 1,476
Allowance for losses as a percentage of total loans
outstanding at a the end of the period ............... 0.55% 0.42%
Allowance for loan losses as a percentage of
nonperforming loans at end of period ................. 344.98% 713.04%
Total nonaccrual and 90 days or more past due loans .... 616 207
Nonaccrual and 90 days or more past due loans as a
percentage of loans receivable ....................... 0.16% 0.06%
The provision for loan loss increased $150,000 for the three months
ended December 31, 2003 compared to the prior year. Net charge-offs decreased
$31,000 during the three month period ended December 31, 2003 from that of the
prior year, however, total nonaccrual and 90 days or more past due loans
increased $409,000 to $616,000 at December 31, 2003. The allowance for loan
losses as a percentage of nonperforming loans at December 31, 2003 decreased to
334.98% compared to 713.04% at December 31, 2002. The increase in the provision
addressed the risk to Home Federal of increased nonperforming assets and the
increase in loans receivable, net.
Noninterest Income. Noninterest income decreased $283,000, or 10.8%, to
$2.3 million for the three month period ended December 31, 2003 from the
comparable period of the prior year. The following table provides a detailed
analysis of the changes in the components of noninterest income:
Increase/(Decrease)
Three Months Ended from December 31, Percengage
December 31, 2003 2002 Increase/(Decrease)
------------------ ------------------- ------------------
(Dollars in Thousands)
Service fees and charges............ $ 1,871 $ 156 9.1%
Gain on sale of loans............... 219 (70) (24.2)
Increase in cash surrender
value of life insurance........... 125 25 25.0
Mortgage servicing rights, net...... 69 (335) (82.9)
Other............................... 43 (59) 8)
-------- -------- -------
Total noninterest income............ $ 2,327 $ (283) (10.8)%
======== ======== =======
Mortgage servicing rights, net and the gain on sale of loans decreased
$405,000 or 58.4%. The decrease resulted from a $31.1 million, or 63.6%,
reduction in one- to four-family mortgages sold in the secondary market. In
addition, the market value of mortgage servicing rights decreased as a result of
the rapid prepayments of existing loans serviced for others. Service charges and
fees increased as a result of increases in debit card fees.
30
Noninterest Expense. Noninterest expense decreased $256,000 during the
three months ended December 31, 2003 from the comparable period of the prior
year. The following table provides an analysis of the changes in the components
of noninterest expense:
Three Months Ended Increase/(Decrease) Percentage
December 31, 2003 from December 31, 2002 Increase/(Decrease)
--------------------- ----------------------------- -------------------------
(Dollars in Thousands)
Compensation and benefits.......... $ 2,649 $ (245) (8.5)%
Occupancy and equipment............ 702 (45) (6.0)
Data processing.................... 366 71 24.1
Advertising........................ 212 (105) (33.1)
Other.............................. 667 68 11.4%
------- ------- -------
Total noninterest expense $ 4,596 $ (256) (5.3)%
======= ======= =======
The $256,000 decrease in noninterest expense was primarily attributable
to a decrease in compensation and benefits. This was mainly a result of two
factors: (1) a $95,000 decrease in commissions for single family residential
loan originations, and (2) a $99,000 decrease in compensation and salary expense
for the three Wal-Mart in-store branches that closed prior to September 30,
2003.
Income Tax Expense. Income tax expense for the three months ended
December 31, 2003 decreased $175,000 from the comparable period of the prior
year as a result of a $389,000 decrease in net income before tax. The effective
income tax rate for the three months ended December 31, 2003 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 $46.7 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:
Balance at Increase/(Decrease) Percentage
September 30, 2003 from September 30, 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............. 377,695 46,676 14.1
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
31
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.
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 4.64% at
the end of the fiscal year.
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:
o an increase of $1.8 million in net interest income; and
o 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.
32
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. 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
Average Average Dividend Income
Balance Yield Balance Yield from 2002
------- ----- -------- ----- ------------------
(Dollars in Thousands)
Loans receivable, net................... $355,845 6.80% $312,552 7.62% $ 394
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 82 basis point decrease in yield on the loans
receivable portfolio for the year ended September 30, 2003. The average balances
in loans receivable increased $43.3 million, however, the decrease in yield
resulted in an increase of $394,000 in interest income from loans receivable.
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.
33
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:
Year Ended September 30,
---------------------------------------------------------------------------
Increase/
2003 2002 (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 ................................. 377,695 331,019
-------- --------
Total loans originated ................................ $361,666 $234,547
======== ========
Our loan portfolio increased $46.7 million, or 14.1%, to $377.7 million
at September 30, 2003. In addition, during the year ended September 30, 2002,
borrower principal prepayments on loans receivable, net, reached historical
highs. We received $143.3 million in total principal repayments representing
43.3% of our loans receivable, net, at September 30, 2002, which resulted in a
large percentage of unseasoned loans for the year ended
34
September 30, 2003. As a result of strong loan growth and the unseasoned nature
of growth, we increased the provision and allowance for the year ended September
30, 2003.
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
35
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.
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. 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
Average Average Dividend Income
Balance Yield Balance Yield from 2001
--------- ----- --------- ----- -------------------
(Dollars in Thousands)
Loans receivable, net..................... $ 312,552 7.62% $ 274,606 8.43% $ 668
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
========= ===== ========= ===== =======
Declining interest rates and strong loan volumes at lower rates
resulted in an 81 basis point decrease in the yield on the loans receivable
portfolio for the year ended September 30, 2002. Average balances in loans
receivable increased $37.9 million; this was offset by the decrease in yield,
resulting an increase of only $668,000 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.
36
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,
---------------------------------------------------------------
Increase/
2002 2001 (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:
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% 39.12%
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 .................................. 331,019 298,752
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
37
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 loans 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) from Percentage
September 30, 2002 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 $1.0 million as a result of a
$1.5 million impairment of the mortgage servicing rights for year ended
September 30, 2002. We contracted with an outside appraisal firm in order to
establish the market value for our mortgage servicing rights for fiscal year
2002.
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) from Percentage
September 30, 2002 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%
======== ======== ======
38
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 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 conversion, we will have an employee
stock ownership plan. We also intend to adopt, subject to stockholder approval,
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."
39
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.
Three Months Ended December 31,
------------------------------------------------------------------
2003 2002
------------------------------- -------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost (1) Balance Dividends Cost (1)
-------- --------- -------- -------- --------- --------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net ................. $380,620 $ 5,975 6.28% $337,388 $ 6,155 7.30%
Investment securities, available for
sale, including interest bearing
deposits in other banks ............. 6,576 33 2.01 2,793 19 2.72
Mortgage-backed securities, held
to maturity ......................... 30,977 442 5.71 42,586 653 6.13
Federal Home Loan Bank stock........... 6,534 82 5.02 5,320 95 7.14
-------- -------- -------- --------
Total interest-earning assets........ 424,707 6,532 6.16 388,087 6,922 7.13
-------- --------
Noninterest earning assets............... 34,938 35,153
-------- --------
Total average assets................... $459,645 $423,240
======== ========
Interest-bearing liabilities:
Savings deposits ...................... $ 24,305 18 0.30 $ 23,315 30 0.51
Interest-bearing demand deposits ...... 74,590 37 0.20 66,843 63 0.38
Money market accounts ................. 31,519 40 0.51 34,849 86 0.99
Certificates of deposit ............... 146,042 1,081 2.96 132,164 1,187 3.59
-------- -------- ---- -------- -------- ----
Total deposits ...................... 276,456 1,176 1.70 257,171 1,366 2.12
[Cont'd]
Year Ended September 30,
------------------------------------------------------------------
2003 2002
------------------------------- -------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost (1) Balance Dividends Cost (1)
-------- --------- -------- -------- --------- --------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net ................. $355,845 $ 24,202 6.80% $312,552 $ 23,808 7.62%
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
======== ========
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
[Cont'd]
Year Ended September 30,
-------------------------------
2001
-------------------------------
Interest
Average and Yield/
Balance Dividends Cost (1)
-------- --------- --------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net ................. $274,606 $ 23,140 8.43%
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
========
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
(table continues on following page)
40
Three Months Ended December 31,
------------------------------------------------------------------
2003 2002
------------------------------- -------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost (1) Balance Dividends Cost (1)
-------- --------- -------- -------- --------- --------
(Dollars in Thousands)
Federal Home Loan Bank advances.......... 103,332 1,153 4.46 95,543 1,141 4.78
-------- ----- ------ -------- -------- ------
Total interest-bearing liabilities... 379,788 2,329 2.45 352,714 2,507 2.84
Noninterest-bearing liabilities.......... 39,825 33,333
-------- --------
Total average liabilities.............. 419,613 386,047
Average equity........................... 40,032 37,193
-------- --------
Total liabilities and equity........... $459,645 $423,240
======== ========
Net interest income...................... 4,203 4,415
Interest rate spread..................... 3.71% 4.29%
Net interest margin (2).................. 3.96% 4.55%
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................ 111.83% 110.03%
[Cont'd]
Year Ended September 30,
------------------------------------------------------------------
2003 2002
------------------------------- -------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost (1) Balance Dividends Cost (1)
-------- --------- -------- -------- --------- --------
(Dollars in Thousands)
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 (2).................. 4.19% 4.23%
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................ 110.96% 107.83%
[Cont'd]
Year Ended September 30,
-------------------------------
2001
-------------------------------
Interest
Average and Yield/
Balance Dividends Cost (1)
-------- --------- --------
(Dollars in Thousands)
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 (2).................. 3.69%
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................ 108.84%
----------
(1) Rates for the three months have been annualized.
(2) Net interest margin, otherwise known as yield on interest earning assets,
is calculated as net interest income divided by average interest-earning
assets.
41
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.
Three Months
Ended
At December 31, Year Ended September 30,
December 31, --------------- ------------------------
2003 2003 2002 2003 2002 2001
------------ ------ ------ ------ ------ ------
Weighted average yield on:
Loans receivable, net................... 6.08% 6.28% 7.30% 6.80% 7.62% 8.43%
Investment securities, available for
for sale, including interest-bearing
deposits in other banks............... 2.14 2.01 2.72 2.03 3.18 5.08
Mortgage-backed securities, held 5.52 5.71 6.13 6.02 6.28 6.68
to maturity...........................
Federal Home Loan Bank stock............ 5.00 5.02 7.14 6.03 6.13 6.80
Total interest-earning assets......... 5.95 6.16 7.13 6.55 7.37 8.12
Weighted average rate paid on:
Savings deposits........................ 0.30 0.30 0.51 0.43 0.87 2.11
Interest-bearing demand deposits........ 0.20 0.20 0.38 0.27 0.87 1.89
Money market accounts................... 0.59 0.51 0.99 0.73 1.86 3.75
Certificates of deposit................. 2.64 2.96 3.59 3.26 4.31 5.97
Total average deposits................ 1.55 1.70 2.12 1.90 2.79 4.40
Federal Home Loan Bank advances......... 4.09 4.46 4.78 4.53 5.14 6.32
Total interest-bearing liabilities.... 2.30 2.45 2.84 2.62 3.39 4.83
Interest rate spread (spread between
weighted average rate on all
interest-earning assets and all
interest-bearing liabilities).......... 3.65 3.71 4.29 3.93 3.98 3.29
Net interest margin (net interest
income (expense) as a percentage
of average interest-earning assets).... -- 3.96 4.55 4.19 4.23 3.69
42
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: (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (change in rate multiplied by change in volume).
Three Months Ended December 31,
2003 Compared to Three Months
Ended December 31, 2002
Increase (Decrease)
Due to
-----------------------------------------
Rate/
Rate Volume Volume(2) Total
-------- ------- --------- --------
Interest-earning assets:
Loans receivable, net ........................... $ (859) $ 789 $ (110) $ (180)
Investment securities, available for
sale, including interest-bearing
deposits in other banks ........................ (5) 26 (7) 14
Mortgage-backed securities, held
to maturity ................................... (45) (178) 12 (211)
Federal Home Loan Bank stock .................... (28) 22 (7) (13)
------- ------- -------- -------
Total net change in income on
interest-earning assets ......................... $ (937) $ 659 $ (112) $ (390)
======= ======= ======== =======
Interest-bearing liabilities:
Savings deposits ................................ $ (13) $ 2 $ (1) $ (12)
Interest-bearing demand deposits ................ (30) 7 (3) (26)
Money market accounts ........................... (42) (8) 4 (46)
Certificates of deposit ......................... (209) 125 (22) (106)
------- ------- -------- -------
Total average deposits ........................ (294) 126 (22) (190)
Federal Home Loan Bank advances ................. (75) 93 (6) 12
------- ------- -------- -------
Total net change in expense on
interest-bearing liabilities .................... $ (369) $ 219 $ (28) $ (178)
======= ======= ======== =======
Net change in net interest income.................. $ (212)
=======
[Cont'd]
Year Ended September 30, 2003
Compared to September 30, 2002
Increase (Decrease)
Due to
----------------------------------------
Rate/
Rate Volume Volume Total
-------- ------- -------- -------
(In Thousands)
Interest-earning assets:
Loans receivable, net ........................... $(2,550) $ 3,298 $ (354) $ 394
Investment securities, available for
sale, including interest-bearing
deposits in other banks ........................ (70) 277 (100) 107
Mortgage-backed securities, held
to maturity ................................... (108) (489) 20 (577)
Federal Home Loan Bank stock .................... (5) 74 (1) 68
------- ------- ------- -------
Total net change in income on
interest-earning assets ......................... $(2,733) $ 3,160 $ (435) $ (8)
======= ======= ======= =======
Interest-bearing liabilities:
Savings deposits ................................ $ (101) $ 15 $ (8) $ (94)
Interest-bearing demand deposits ................ (375) 71 (49) (353)
Money market accounts ........................... (416) (71) 43 (444)
Certificates of deposit ......................... (1,362) 418 (102) (1,046)
------- ------- ------- -------
Total average deposits ........................ (2,254) 433 (116) (1,937)
Federal Home Loan Bank advances ................. (529) 801 (95) 177
------- ------- ------- -------
Total net change in expense on
interest-bearing liabilities .................... $(2,783) $ 1,234 $ (211) $(1,760)
======= ======= ======= =======
Net change in net interest income.................. $ 1,752
=======
[Cont'd]
Year Ended September 30, 2002
Compared to September 30, 2001
Increase (Decrease)
Due to
-----------------------------------------
Rate/
Rate Volume Volume(1) Total
-------- ------- --------- --------
(In Thousands)
Interest-earning assets:
Loans receivable, net ........................... $(2,222) $ 3,198 $ (308) $ 668
Investment securities, available for
sale, including interest-bearing
deposits in other banks ........................ (113) 10 (4) (107)
Mortgage-backed securities, held
to maturity ................................... (171) (23) 1 (193)
Federal Home Loan Bank stock .................... (26) 53 (5) 22
------- ------- ------- --------
Total net change in income on
interest-earning assets ......................... $(2,532) $ 3,238 $ (316) $ 390
======= ======= ======= ========
Interest-bearing liabilities:
Savings deposits ................................ $ (285) $ (9) $ 5 $ (289)
Interest-bearing demand deposits ................ (547) 171 (92) (468)
Money market accounts ........................... (489) 417 (211) (283)
Certificates of deposit ......................... (2,164) (48) 18 (2,194)
------- ------- ------- --------
Total average deposits ........................ (3,485) 531 (280) (3,234)
Federal Home Loan Bank advances ................. (791) 1,243 (233) 219
------- ------- ------- --------
Total net change in expense on
interest-bearing liabilities .................... $(4,276) $ 1,774 $ (513) $ (3,015)
======= ======= ======= ========
Net change in net interest income.................. $ 3,405
========
----------
(1) Changes attributable to the combined impact of volume and rate have not been
allocated to the specific changes due to volume and rate. If such changes
were to be allocated, they would be done so proportionately to the specific
changes due to volume and rate.
43
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:
o economic conditions;
o interest rate outlook;
o asset/liability mix;
o interest rate risk sensitivity;
o current market opportunities to promote specific products;
o historical financial results;
o projected financial results; and
o 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
44
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
December 31, 2003 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 $ 31,603 $ (16,832) (34.75)% 6.97% (2.99)% $ 453,495
200 37,825 (10,610) (21.91) 8.14 (1.82) 464,761
100 44,118 (4,317) (8.91) 9.26 (0.70) 476,469
0 48,435 -- -- 9.95 -- 486,555
(100) 52,419 3,984 8.22 10.54 0.59 497,172
(200) 59,144 10,708 22.11 11.58 1.63 510,541
(300) 63,012 14,577 30.10 12.10 2.14 520,800
Pre-Shock NPV Ratio 9.95%
Post-Shock NPV Ratio 8.14
------
Static Sensitivity Measure - decline in NPV Ratio 1.81
------
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.
45
The following table illustrates the change in net interest income at
December 31, 2003 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 $ 19,401 $(321) (1.63)%
200 19,507 (215) (1.09)
100 19,669 (53) (0.27)
0 19,722 -- --
(100) 19,397 (325) (1.65)
(200) 18,798 (924) (4.69)
(300) 17,874 (1,848) (9.37)
----------
(1) Represents the decrease of the estimated net interest income at the
indicated change in interest rates compared to net interest income assuming
no change 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 December 31, 2003, the total approved loan origination
46
commitments outstanding amounted to $7.2 million. At the same date, unused lines
of credit were $18.3 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 December 31, 2003 totaled $56.1
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 December 31, 2003
to borrow an additional $63.8 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 $41.4 million at
December 31, 2003, or 8.74%, of total assets on that date. As of December 31,
2003, we exceeded all regulatory capital requirements. Our regulatory capital
ratios at December 31, 2003 were as follows: Tier 1 capital 8.67%; Tier 1 (core)
risk-based capital 14.06%; and total risk-based capital 13.37%. The regulatory
capital requirements to be considered well capitalized are 5.0%, 10.0% and 6.0%,
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 rules, and have not had any such arrangements
during the three months ended December 31, 2003 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
47
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 Standard 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,
48
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 BANCORP
General
Home Federal Bancorp was organized as a Delaware business corporation
at the direction of Home Federal on March 17, 2004 for the purpose of becoming
the savings and loan holding company for Home Federal upon completion of the
conversion. Home Federal Bancorp has engaged in any significant business to
date. Upon completion of the conversion of Home Federal from the mutual to stock
form of organization, Home Federal will be a wholly-owned subsidiary of Home
Federal Bancorp.
Business
Prior to the conversion, Home Federal Bancorp did not engage in any
significant business operations. Upon completion of the conversion, our primary
business activity will be the ownership of all of the outstanding common stock
of Home Federal. We plan to retain up to 50% of the net proceeds from the
offering and invest 50% of the remaining net proceeds in Home Federal as
additional capital in exchange for 100% of the outstanding common stock of Home
Federal. We will use a portion of the net proceeds to make a loan to the
employee stock ownership plan and will invest our initial capital as discussed
in "How We Intend to Use the Proceeds from this Offering." At a later date, we
may use 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, we 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, we 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, we
intend to employ only persons who are officers of Home Federal to serve as
officers of Home Federal Bancorp. We also plan to use the support staff of Home
Federal from time to time, however, we 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."
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 conversion 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.
49
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. 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. 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 December 31, 2003, the net
loan portfolio totaled $381.6 million and represented 80.4% of our total assets.
As of December 31, 2003, our total loan portfolio was comprised of: 64.5%
single-family home loans, 5.5% home equity loans, 22.8% commercial real estate
loans, 1.8% multi-family real estate loans, 0.5% commercial business loans, and
0.5% secured consumer loans and 0.6% unsecured consumer loans.
At December 31, 2003, the maximum amount which we could have loaned to
any one borrower and the borrower's related entities under applicable
regulations was $6.5 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 $4.9 million. At December 31, 2003, 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
50
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 for $2.7 million
and secured by a mobile home dealership and made to a limited liability company.
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 December 31, 2003.
51
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 December 31, -----------------------------------------
2003 2003 2002
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Real estate:
One- to four-family residential $ 248,360 64.50% $ 252,375 66.25% $ 206,810 61.78%
Multi-family residential ........ 7,046 1.83 7,750 2.04 7,512 2.24
Commercial ...................... 87,770 22.79 79,020 20.74 79,197 23.66
--------- ------ --------- ------ --------- ------
Total real estate ............. 343,176 89.12 339,145 89.03 293,519 87.68
Real estate construction:
One- to four-family residential 4,810 1.25 5,225 1.37 6,505 1.94
Multi-family residential ........ -- -- 352 0.09 1,486 0.44
Commercial and land
development ................... 9,726 2.53 9,128 2.40 6,579 1.97
--------- ------ --------- ------ --------- ------
Total real estate construction. 14,536 3.78 14,705 3.86 14,570 4.35
Consumer:
Home equity lines of credit ...... 21,223 5.51 20,640 5.42 18,069 5.39
Automobile ....................... 1,944 0.50 1,939 0.51 2,297 0.69
Other consumer ................... 2,448 0.64 2,827 0.74 3,666 1.10
--------- ------ --------- ------ --------- ------
Total consumer ............... 25,615 6.65 25,406 6.67 24,032 7.18
------ ------ ------
Commercial business ............... 1,714 0.45 1,662 0.44 2,641 0.79
--------- ------ --------- ------ --------- ------
Total loans ....................... 385,041 100.00% 380,918 100.00% 334,762 100.00%
====== ====== ======
Less:
Net deferred loan origination
(fees) costs .................. (1,342) (1,370) (2,358)
Allowance for loan losses ...... (2,125) (1,853) (1,385)
--------- --------- ---------
Loans receivable, net ............. $ 381,574 $ 377,695 $ 331,019
========= ========= =========
[Cont'd]
At September 30,
---------------------------------------------------------------
2001 2000 1999
-------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
---------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Real estate:
One- to four-family residential $ 183,202 60.60% $ 148,357 59.10% $ 114,119 58.93%
Multi-family residential ........ 8,700 2.88 5,475 2.18 1,676 0.87
Commercial ...................... 59,752 19.77 44,700 17.81 28,990 14.97
---------- ------ --------- ------ --------- -----
Total real estate ............. 251,654 83.25 198,532 79.09 144,785 74.77
Real estate construction:
One- to four-family residential 13,927 4.61 21,171 8.43 18,170 9.38
Multi-family residential ........ 904 0.30 1,857 0.74 -- --
Commercial and land
development ................... 10,416 3.44 5,516 2.20 6,610 3.41
---------- ------ --------- ------ --------- -----
Total real estate construction. 25,247 8.35 28,544 11.37 24,780 12.79
Consumer:
Home equity lines of credit ...... 15,250 5.05 15,604 6.22 16,145 8.34
Automobile ....................... 2,133 0.71 1,185 0.47 1,285 0.66
Other consumer ................... 4,332 1.43 4,128 1.64 4,798 2.48
---------- ------ --------- ------ --------- ------
Total consumer ............... 21,715 7.19 20,917 8.33 22,228 11.48
------ ------ ------
Commercial business ............... 3,662 1.21 3,031 1.21 1,851 0.96
---------- ------ --------- ------ --------- ------
Total loans ....................... 302,278 100.00% 251,024 100.00% 193,644 100.00%
====== ====== ======
Less:
Net deferred loan origination
(fees) costs .................. (2,095) (1,992) (1,757)
Allowance for loan losses ...... (1,431) (1,129) (620)
---------- --------- ---------
Loans receivable, net ............. $ 298,752 $ 247,903 $ 191,267
========== ========= =========
52
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 December 31, -----------------------------------------
2003 2003 2002
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
FIXED RATE LOANS (Dollars in Thousands)
Real estate:
One- to four-family residential. $ 200,363 52.04% $ 203,948 53.54% $ 146,316 43.70%
Multi-family residential........ 2,136 0.56 2,137 0.56 2,061 0.62
Commercial...................... 11,729 3.05 8,461 2.22 8,651 2.43
--------- ----- --------- ----- --------- -----
Total........................ 214,228 55.65 214,546 56.32 156,502 46.75
Real estate construction:
One- to four-family residential. 3,560 0.92 4,909 1.29 2,107 0.63
Multi-family residential........ -- -- -- -- -- --
Commercial and land
development................... 1,456 0.38 2,478 0.65 359 0.11
--------- ----- --------- ----- --------- -----
Total........................ 5,016 1.30 7,387 1.94 2,466 0.74
Consumer:
Home equity..................... 3,204 0.83 2,906 0.76 129 0.04
Automobile...................... 1,944 0.50 1,939 0.51 2,297 0.69
Other consumer.................. 2,448 0.64 2,827 0.74 3,666 1.10
--------- ----- --------- ----- --------- -----
Total........................ 7,596 1.97 7,672 2.01 6,092 1.83
Commercial/business............... 1,030 0.27 775 0.20 1,420 0.42
--------- ----- --------- ----- --------- -----
Total fixed rate loans............ 227,870 59.19 230,380 60.47 166,480 49.74
ADJUSTABLE RATE LOANS
Real estate:
One- to four-family residential. 47,997 12.46 48,427 12.72 60,494 18.07
Multi-family residential........ 4,910 1.28 5,613 1.47 5,451 1.63
Commercial...................... 76,041 19.75 70,559 18.52 71,072 21.23
--------- ----- --------- ----- --------- -----
Total........................ 128,948 33.49 124,599 32.71 137,017 40.93
[Cont'd]
At September 30,
--------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
FIXED RATE LOANS (Dollars in Thousands)
Real estate:
One- to four-family residential. $ 111,830 37.00% $ 82,950 33.04% $ 76,557 39.53%
Multi-family residential........ 2,050 0.68 266 0.11 298 0.15
Commercial...................... 8,005 0.64 10,199 4.06 7,948 4.10
--------- ----- --------- ----- --------- -----
Total........................ 121,885 40.32 93,415 37.21 84,803 43.78
Real estate construction:
One- to four-family residential. 2,863 0.95 2,768 1.10 1,633 0.84
Multi-family residential........ -- -- -- -- -- --
Commercial and land
development................... 185 0.06 -- -- 90 05
--------- ----- --------- ----- --------- -----
Total........................ 3,048 1.01 2,768 1.10 1,723 0.89
Consumer:
Home equity..................... 144 0.05 155 0.06 109 0.06
Automobile...................... 2,133 0.71 1,185 0.47 1,285 0.66
Other consumer.................. 4,332 1.43 4,128 1.64 4,798 2.48
--------- ----- --------- ----- --------- -----
Total........................ 6,609 2.19 5,468 2.17 6,192 3.20
Commercial/business............... 1,362 0.45 1,478 0.59 1,102 0.57
--------- ----- --------- ----- --------- -----
Total fixed rate loans............ 132,904 43.97 103,129 41.07 93,820 48.44
ADJUSTABLE RATE LOANS
Real estate:
One- to four-family residential. 71,372 23.61 65,407 26.06 37,562 19.40
Multi-family residential........ 6,650 2.20 5,209 2.08 1,378 0.71
Commercial...................... 51,747 17.12 34,501 13.74 21,042 10.87
--------- ----- --------- ----- --------- -----
Total........................ 129,769 42.93 105,117 41.88 59,982 30.98
(table continues on following page)
53
At September 30,
At December 31, -----------------------------------------
2003 2003 2002
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Real estate construction:
One- to four-family residential. 1,250 0.32 316 0.08 4,398 1.31
Multi-family residential ....... -- -- 352 0.09 1,486 0.44
Commercial and land
development .................. 8,270 2.15 6,650 1.75 6,220 1.87
--------- ------ --------- ------ --------- ------
Total ....................... 9,520 2.47 7,318 1.92 12,104 3.62
Consumer:
Home equity lines .............. 18,019 4.67 17,734 4.67 17,940 5.35
Automobile ..................... -- -- -- -- -- --
Other consumer ................. -- -- -- -- -- --
--------- ------ --------- ------ --------- ------
Total consumer .............. 18,019 4.67 17,734 4.67 17,940 5.35
Commercial/business .............. 684 0.18 887 0.23 1,221 0.36
--------- ------ --------- ------ --------- ------
Total adjustable rate loans ...... 157,171 40.82 150,538 39.52 168,282 50.27
--------- ------ --------- ------ --------- ------
Total loans ...................... 385,041 100.00% 380,918 100.00% 334,762 100.00%
====== ====== ======
Less:
Net deferred loan origination
(fees) costs ................. (1,342) (1,370) (2,358)
Allowance for loan losses ...... (2,125) (1,853) (1,385)
--------- --------- ---------
Loans receivable, net ............ $ 381,574 $ 377,695 $ 331,019
========= ========= =========
[Cont'd]
At September 30,
--------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Real estate construction:
One- to four-family residential. 11,064 3.66 18,403 7.33 16,537 8.54
Multi-family residential ....... 904 0.30 1,857 0.74 -- --
Commercial and land
development .................. 10,231 3.38 5,516 2.20 6,520 3.37
--------- ------ --------- ------ --------- ------
Total ....................... 22,199 7.34 25,776 10.27 23,057 11.91
Consumer:
Home equity lines .............. 15,106 5.00 15,449 6.16 16,036 8.28
Automobile ..................... -- -- -- -- -- --
Other consumer ................. -- -- -- -- -- --
--------- ------ --------- ------ --------- ------
Total consumer .............. 15,106 5.00 15,449 6.16 16,036 8.28
Commercial/business .............. 2,300 0.76 1,553 0.62 749 0.39
--------- ------ --------- ------ --------- ------
Total adjustable rate loans ...... 169,374 56.03 147,895 58.92 99,824 51.56
--------- ------ --------- ------ --------- ------
Total loans ...................... 302,278 100.00% 251,024 100.00% 193,644 100.00%
====== ====== ======
Less:
Net deferred loan origination
(fees) costs ................. (2,095) (1,992) (1,757)
Allowance for loan losses ...... (1,431) (1,129) (620)
--------- --------- ---------
Loans receivable, net ............ $ 298,752 $ 247,903 $ 191,267
========= ========= =========
54
One- to Four-Family Residential Real Estate Lending. As of December 31,
2003, $248.4 million, or 64.5%, 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 December 31, 2003, $200.4
million, or 52.0%, of our one- to four-family loan portfolio consisted of fixed
rate loans, both held for sale and held for investment.
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 December 31,
2003, we had $48.0 million, or 19.3%, of our 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.
55
At December 31, 2003, $24.2 million, or 6.3%, of our total loans
consisted of loans for non-owner occupied properties. This consisted of $9.3
million of loans on second homes, $14.7 million of loans for investment and
$235,000 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 $1.4 million to the Idaho Housing and Finance Association in the
year ended September 30, 2003 and three months ended December 31, 2003,
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 December 31, 2003, our construction and land development loans
amounted to $14.5 million, or 3.8%, of the total loan portfolio. At December 31,
2003, our construction lending includes loans to individuals for the
construction of personal residences, which amounted to approximately $4.8
million, and loans to residential developers, which amounted to approximately
$9.7 million. At December 31, 2003, the unadvanced portion of construction loans
in process amounted to $2.2 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 December 31, -----------------------
2003 2003 2002
--------------- --------- --------
(In Thousands)
One- to four-family residential:
Construction speculative ....................... $ 1,657 $ 1,185 $ 2,039
Construction permanent ......................... 2,316 3,351 2,848
Custom construction ............................ 837 689 1,618
Multi-family residential:
Construction permanent ......................... -- 352 1,486
Commercial real estate:
Construction permanent ......................... 7,370 7,275 5,842
Land development loans ........................... 2,356 1,853 737
-------- -------- --------
Total construction and land development .......... $ 14,536 $ 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
56
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 three months ended
December 31, 2003, we originated $22.5 million and $6.5 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 three months
ended December 31, 2003, 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 December 31, 2003, 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 December 31, 2003. At December 31, 2003, we estimate that the
average outstanding principal balance of subdivision loans to contractors and
developers was approximately $200,000.
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.
57
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 December 31, 2003, $7.0 million, or 1.8%, and $87.8 million, or 22.8%, 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 $494,000 as of December 31, 2003. As of that date, $7.0
million, or 1.8%, 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 December 31, 2003, the maximum we
could lend to any one borrower based on this limit was $4.9 million. The largest
multi-family loan as of December 31, 2003 was a 44-unit residential apartment
complex with an outstanding principal balance at December 31, 2003 of $1.8
million located in Canyon County. This loan is performing according to its terms
as of December 31, 2003.
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 December 31, 2003, we had $87.8 million in commercial real estate
loans and $7.0 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 December 31, 2003, we had
$4.9 million in adjustable rate multi-family residential loans and $76.0 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
58
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 $87.8 million, or
22.8%, of our total loan portfolio as of December 31, 2003.
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. Consumer loans are made with both
fixed and variable interest rates and with varying terms. At December 31, 2003,
consumer loans amounted to $25.6 million, or 6.7%, of the total loan portfolio.
At December 31, 2003, the largest component of the consumer loan
portfolio consisted of real estate secured loans and home equity lines of
credit, which totaled $21.2 million, or 5.5%, 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 December 31, 2003, there were $15,000 of consumer loans
delinquent in excess of 90 days or in nonaccrual status. During the three months
ended December 31, 2003 and the years ended September 30, 2003 and 2002, we
charged off $37,000, $147,000 and $114,000, respectively, in consumer loans.
Commercial Business Lending. At December 31, 2003, 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 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.
59
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 December 31, 2003 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 .............. $ 14,451 $ 16,977 $ 13,590 $ 22,151 $181,191 $248,360
Multi-family residential ..................... 875 -- 3,206 498 2,467 7,046
Commercial ................................... 6,191 29,140 34,639 15,938 1,862 87,770
-------- -------- -------- -------- -------- --------
Total real estate .......................... 21,517 46,117 51,435 38,587 185,520 343,176
Real estate construction:
One- to four-family residential .............. 2,234 260 -- -- 2,316 4,810
Multi-family residential ..................... -- -- -- -- -- --
Commercial and land development............... 2,426 2,221 191 1,818 3,070 9,726
-------- -------- -------- -------- -------- --------
Total real estate construction ............. 4,660 2,481 191 1,818 5,386 14,536
Consumer:
Home equity .................................. 18,062 49 29 534 2,549 21,223
Automobile ................................... 43 679 830 392 -- 1,944
Other consumer ............................... 849 1,278 141 130 50 2,448
-------- -------- -------- -------- -------- --------
Total consumer ............................. 18,954 2,006 1,000 1,056 2,599 25,615
Commercial business ............................ 928 243 166 377 -- 1,714
-------- -------- -------- -------- -------- --------
Total .......................................... $ 46,059 $ 50,847 $ 52,792 $ 41,838 $193,505 $385,041
======== ======== ======== ======== ======== ========
60
The following table sets forth the dollar amount of all loans due one
year or more after December 31, 2003, 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..................... $ 35,062 $ 198,847 $ 233,909
Multi-family residential............................ 3,682 2,489 6,171
Commercial.......................................... 70,409 11,170 81,579
--------- --------- ---------
Total real estate................................. 109,153 212,506 321,659
Real estate construction:
One- to four-family residential..................... 90 2,486 2,576
Multi-family residential............................ -- -- --
Commercial.......................................... 7,300 -- 7,300
--------- --------- ---------
Total real estate construction.................... 7,390 2,486 9,876
Consumer:
Home equity......................................... -- 3,161 3,161
Automobile.......................................... -- 1,901 1,901
Other consumer...................................... -- 1,599 1,599
--------- --------- ---------
Total consumer................................... -- 6,661 6,661
Commercial business................................... -- 786 786
--------- --------- ---------
Total................................................. $ 116,543 $ 222,439 $ 338,982
========= ========= =========
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.
61
Loan Originations, Servicing, Purchases and Sales. During the three
months ended December 31, 2003 and the year ended September 30, 2003, our total
loan originations were $43.7 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. 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 December 31,
2003, our loan servicing portfolio was $254.7 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.
62
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Three Months Ended
December 31, Year Ended September 30,
------------------------- -----------------------------------------
2003 2002 2003 2002 2001
--------- --------- --------- --------- ---------
(In Thousands)
Loans originated:
Real Estate:
One- to four-family residential .................. $ 17,996 $ 91,476 $ 289,175 $ 162,092 $ 114,163
Multi-family residential ......................... 22 -- 664 862 4,028
Commercial ....................................... 11,999 2,554 20,539 19,899 17,680
--------- --------- --------- --------- ---------
Total real estate .............................. 30,017 94,030 310,378 182,853 135,871
Real Estate Construction:
One- to four-family residential .................. 6,501 6,055 22,494 21,823 42,132
Multi-family residential ......................... -- 498 900 581 747
Commercial and land development .................. 3,415 1,300 9,471 9,277 13,455
--------- --------- --------- --------- ---------
Total real estate construction ................. 9,916 7,853 32,865 31,681 56,334
Consumer:
Automobile loans ................................. 200 218 968 1,260 1,634
Home equity loans ................................ 3,283 3,039 14,903 14,715 7,540
Other consumer ................................... 159 222 1,332 2,009 3,625
--------- --------- --------- --------- ---------
Total consumer ................................. 3,642 3,479 17,203 17,984 12,799
Commercial business ................................ 127 314 1,220 2,030 2,729
--------- --------- --------- --------- ---------
Total loans originated ......................... 43,702 105,676 361,666 234,547 207,733
Loans sold:
Total whole loans sold ........................... (17,770) (48,843) (164,322) (92,786) (69,872)
Participation loans .............................. (2,800) -- -- -- --
--------- --------- --------- --------- ---------
Total loans sold ............................... (20,570) (48,843) (164,322) (92,786) (69,872)
Principal repayments ............................... (15,459) (39,430) (143,283) (110,338) (90,706)
Loans securitized .................................. -- -- -- -- --
Transfer to real estate owned ...................... -- (52) (249) (2,435) (334)
Increase (decrease) in other items (net) ........... (244) 2 521 (77) (557)
Loans held for sale ................................ (3,550) (2,088) (7,656) 3,355 4,586
--------- --------- --------- --------- ---------
Net increase in loans receivable, net .............. $ 3,879 $ 15,266 $ 46,677 $ 32,266 $ 50,850
========= ========= ========= ========= =========
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 $1.3 million of net
deferred loan fees and costs as of December 31, 2003.
63
Asset Quality
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.
64
The following table shows our delinquent loans by the type of loan and
number of days delinquent as of December 31, 2003:
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...... 3 $ 354 2 $ 601 5 $ 955
Multi-family residential............. -- -- -- -- -- --
Commercial........................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total real estate.................. 3 354 2 601 5 955
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.......... 2 54 -- -- 2 54
Automotive........................... -- -- -- -- -- --
Personal loans....................... 2 3 3 7 5 10
Other consumer....................... 8 7 10 8 18 15
-------- -------- -------- -------- -------- --------
Total consumer..................... 12 64 13 15 25 79
Commercial business.................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total.................................. 15 $ 418 15 $ 616 30 $1,034
======== ======== ======== ======== ======== ========
When a loan becomes 90 days delinquent, we place the loan on nonaccrual
status. As of December 31, 2003, nonaccrual loans and loans 90 days or more past
due as a percentage of total loans was 0.16%, and as a percentage of total
assets it was 0.13%. Nonperforming assets as a percentage of total assets were
0.13% as of December 31, 2003.
65
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 December 31, At September 30,
-------------------- --------------------------------------------------------
2003 2002 2003 2002 2001 2000 1999
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Real estate:
One- to four-family residential .............. $ 601 $ 155 $ 69 $ 70 $ 1,314 $ 733 $ 41
Multi-family residential ..................... -- -- -- -- -- -- --
Commercial ................................... -- -- -- -- 39 -- --
-------- -------- -------- -------- -------- -------- --------
Total real estate .......................... 601 155 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 .................. -- 30 41 52 40 136 --
Automotive ................................... -- -- 9 5 5 6 --
Personal loans ............................... 7 13 7 13 6 13 7
Other consumer ............................... 8 9 7 2 23 -- 4
-------- -------- -------- -------- -------- -------- --------
Total consumer ............................. 15 52 64 72 74 155 11
Commercial business ............................ -- -- -- -- 8 -- --
-------- -------- -------- -------- -------- -------- --------
Total .......................................... $ 616 $ 207 $ 133 $ 468 $ 3,658 $ 888 $ 52
======== ======== ======== ======== ======== ======== ========
Total of nonaccrual and 90 days past due loans . $ 616 $ 207 $ 133 $ 468 $ 3,658 $ 888 $ 52
Repossessed assets ............................. -- 40 -- 6 3 11 --
Real estate owned .............................. -- 52 -- 248 55 -- --
-------- -------- -------- -------- -------- -------- --------
Total nonperforming assets ................. $ 616 $ 299 $ 133 $ 722 $ 3,716 $ 899 $ 52
======== ======== ======== ======== ======== ======== ========
Restructured loans ............................. -- -- -- -- -- -- --
Nonaccrual and 90 days or more past due
loans as a percentage of loans receivable .... 0.16% 0.06% 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 ........ 0.13% 0.05% 0.03% 0.11% 0.96% 0.27% 0.02%
Nonperforming assets as a percentage
of total assets .............................. 0.13% 0.07% 0.03% 0.17% 0.97% 0.28% 0.02%
Loans receivable, net .......................... $ 381,574 $ 346,284 $ 377,695 $ 331,019 $ 298,752 $ 247,903 $ 191,267
Nonaccrued interest (1) ........................ $ 3 $ 1 $ 1 $ 3 $ 27 $ 7 $ --
Total assets ................................... $ 474,307 $ 431,774 $ 450,196 $ 416,643 $ 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.
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
66
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
December 31, 2003, 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 December 31, 2003.
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 December 31, 2003, we had classified
$2.2 million of our assets as substandard, none as doubtful and none as a loss.
The total amount classified of $2.2 million represented 5.20% of equity capital
and 0.6% of total assets as of December 31, 2003. Our allowance for loan losses
of $2.1 million at December 31, 2003 adequately covers the potential losses from
these classified loans.
The aggregate amounts of our classified assets at the dates indicated
were as follows:
At September 30,
December 31, ---------------------
2003 2003 2002
------------ ------ ------
(In Thousands)
Classified Assets:
Loss ............................ $ -- $ -- $ --
Doubtful ........................ -- 7 715
Substandard ..................... 2,154 946 1,031
------ ------ ------
Total ........................ $2,154 $ 953 $1,746
====== ====== ======
In December 2003, we classified two loans that resulted in a
significant portion of the $1.3 million increase in substandard assets compared
to September 30, 2003. The first loan is a loan to a fitness center in our
primary
67
market area. The outstanding balance of the loans was $241,000 at December 31,
2003 and the loan was 20 days delinquent on that date. We do not expect a loss
to arise from this loan.
The second loan is to a borrower in Park City, Utah. The outstanding
loan amount was $573,000 at December 31, 2003. We have private mortgage
insurance on the loan that covers our interest up to the 25% of the appraised
value. The borrower is complying with an agreement to bring the loan current by
April 30, 2004.
68
The following table summarizes the distribution of the allowance for
loan losses by loan category.
At September 30,
At December 31, -------------------------------------------------------------
2003 2003 2002
----------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Loan in Loan in Loan
Amount Category Amount Category Amount Category
Loan by Loan to total Loan by Loan to total Loan by Loan to total
Balance Category Loans Balance Category Loans Balance Category Loans
------- -------- -------- ------- -------- -------- ------- -------- --------
Real estate: (Dollars in Thousands)
One- to four-family
residential .......... $248,360 $ 717 64.50% $252,375 $ 636 66.25% $206,810 $ 353 61.78%
Multi-family residential 7,046 20 1.83 7,750 20 2.04 7,512 13 2.24
Commercial ............. 87,770 830 22.79 79,020 697 20.74 79,197 714 23.66
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total real estate .... 343,176 1,567 89.12 339,145 1,353 89.03 293,519 1,080 87.68
Real estate construction:
One- to four-family
residential .......... 4,810 15 1.25 5,225 13 1.37 6,505 11 1.94
Multi-family residential -- -- -- 352 -- 0.09 1,486 -- 0.44
Commercial and land
development .......... 9,726 84 2.53 9,128 70 2.40 6,579 58 1.97
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total real estate .... 14,536 99 3.78 14,705 83 3.86 14,570 69 4.35
Consumer:
Home equity lines of
credit ............... 21,223 111 5.51 20,640 99 5.42 18,069 86 5.40
Automotive ............. 1,944 43 0.50 1,939 40 0.51 2,297 30 0.69
Other consumer ......... 2,448 166 0.64 2,827 244 0.74 3,666 79 1.10
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total consumer ....... 25,615 419 6.65 25,406 383 6.67 24,032 195 7.18
Commercial/business ...... 1,714 39 0.45 1,662 34 0.44 2,641 41 0.79
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total loans .............. $385,041 $ 2,125 100.00% $380,918 $ 1,853 100.00% $334,762 $ 1,385 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
[Cont'd]
At September 30,
---------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Loan in Loan in Loan
Amount Category Amount Category Amount Category
Loan by Loan to total Loan by Loan to total Loan by Loan to total
Balance Category Loans Balance Category Loans Balance Category Loans
------- -------- -------- ------- -------- -------- ------- -------- --------
Real estate: (Dollars in Thousands)
One- to four-family
residential .......... $183,202 $ 183 60.61% $148,357 $ 153 59.10% $114,119 $ 50 58.93%
Multi-family residential 8,700 16 2.88 5,475 10 2.18 1,676 5 0.87
Commercial ............. 59,752 551 19.77 44,700 412 17.81 28,990 140 14.97
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total real estate .... 251,654 750 83.25 198,532 575 79.09 144,785 195 74.77
Real estate construction:
One- to four-family
residential .......... 13,927 20 4.61 21,171 30 8.43 18,170 26 9.38
Multi-family residential 904 10 0.30 1,857 24 0.74 -- -- --
Commercial and land
development .......... 10,416 256 3.45 5,516 136 2.20 6,610 85 3.41
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total real estate .... 25,247 286 8.35 28,544 190 11.37 24,780 111 12.80
Consumer:
Home equity lines of
credit ............... 15,250 72 5.05 15,604 74 6.22 16,145 40 8.34
Automotive ............. 2,133 28 0.71 1,185 16 0.47 1,285 20 0.66
Other consumer ......... 4,332 238 1.43 4,128 227 1.64 4,798 225 2.48
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total consumer ....... 21,715 338 7.18 20,917 317 8.33 22,228 285 11.48
Commercial/business ...... 3,662 57 1.21 3,031 47 1.21 1,851 29 0.96
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total loans .............. $302,278 $ 1,431 100.00% $251,024 $ 1,129 100.00% $193,644 $ 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.
69
The following table sets forth an analysis of our allowance for loan
losses at the dates and for the periods indicated.
Three Months Ended
December 31, Year Ended September 30,
------------------- ------------------------------------------------------
2003(1) 2002(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 ..................... 300 150 615 277 748 600 575
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 2 --
Other consumer ............................... 3 2 7 3 20 107 27
------ ------ ------ ------ ------ ------ ------
Total consumer ............................. 9 2 7 4 21 109 27
Commercial business ............................ -- -- -- 2 -- -- --
------ ------ ------ ------ ------ ------ ------
Total recoveries ............................... 9 2 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 .................. -- 25 37 39 89 46 21
Automobile ................................... 18 11 40 6 20 3 6
Other consumer ............................... 19 18 20 69 108 72 110
------ ------ ------ ------ ------ ------ ------
Total consumer ............................. 37 54 147 114 217 121 137
Commercial business ............................ -- -- -- -- 64 12 --
------ ------ ------ ------ ------ ------ ------
(table continues on the following page)
70
Three Months Ended
December 31, Year Ended September 30,
---------------------- ---------------------------------------------------------
2003(1) 2002(1) 2003 2002 2001 2000 1999
--------- --------- ------- -------- --------- --------- -------
(Dollars in Thousands)
Total charge-offs ............................. 37 61 154 331 468 200 151
Net charge-offs ............................... 28 59 147 323 446 91 124
--------- --------- ------- ------- --------- --------- ------
Balance at end of period ...................... $ 2,125 $ 1,476 $ 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 ........ 0.55% 0.42% 0.49% 0.41% 0.47% 0.45% 0.32%
Net charge-offs as a percentage
of average loans outstanding
during the period (1) ....................... 0.01% 0.02% 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 ...................... 344.97% 713.04% 1393.23% 295.94% 39.12% 127.14% 1192.31%
----------
(1) Ratios for the three month periods have been annualized.
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 December 31, 2003, our consolidated investment portfolio totaled
$54.9 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.
Mortgage-Backed Securities. Our mortgage-backed securities had a fair
value of $42.8 million and a $42.9 million amortized cost at December 31, 2003.
The mortgage-backed securities were comprised of Fannie Mae and Freddie Mac
mortgage-backed securities. At December 31, 2003, the portfolio had a
weighted-average coupon rate of 5.53% and an estimated weighted-average yield of
5.52%. These securities had an estimated average maturity of 16.7 years and an
estimated average life of 4.1 years at December 31, 2003.
Federal Home Loan Bank Stock. As a member of the Federal Home Loan Bank
of Seattle, we are required to its own 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
71
discretion of the Federal Home Loan Bank of Seattle. The carrying value of
Federal Home Loan Bank stock totaled $6.6 million and had a
weighted-average-yield of 5.0% at December 31, 2003.
Bank-Owned Life Insurance. We purchase bank-owned life insurance
policies ("BOLI") to offset future employee benefit costs. At December 31, 2003,
we had a $9.7 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.
72
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 December 31, --------------------------------------------------------------
2003 2003 2002 2001
------------------ ------------------ ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- -------- --------- ------- --------- ------- --------- -------
(Dollars 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 ............................... 991 1,002 -- -- -- -- -- --
Freddie Mac .............................. -- -- -- -- -- -- 743 758
------- ------- ------- ------- ------- ------- ------- -------
Total available for sale ............... $ 6,459 $ 6,442 $ 5,468 $ 5,440 $ 2,504 $ 2,507 $ 8,243 $ 8,266
======= ======= ======= ======= ======= ======= ======= =======
Held to maturity:
Investment securities:
Mortgage-backed securities:
Fannie Mae ............................... $24,771 $25,109 $10,485 $10,826 $16,880 $17,631 $10,616 $10,918
Freddie Mac .............................. 17,075 17,693 13,940 14,597 27,445 28,648 26,014 26,860
------- ------- ------- ------- ------- ------- ------- -------
Total held to maturity ................. $41,846 $42,802 $24,425 $25,423 $44,325 $46,279 $36,630 $37,778
======= ======= ======= ======= ======= ======= ======= =======
73
The table below sets forth information regarding the amortized cost,
weighted average yields and maturities or periods to repricing of our investment
portfolio at December 31, 2003.
Amount Due or Repricing within:
-----------------------------------------------------------
One Year or Less Over One to Five Years
------------------------ ------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
--------- -------- --------- --------
(Dollars in Thousands)
Available for sale:
Investment securities:
Adjustable rate mortgage funds ................. $ 3,757 2.29% $ 1,711 2.29%
Mortgage-backed securities:
Freddie Mac .................................. -- -- -- --
Fannie Mae ................................... -- -- -- --
------- ------ ------- ------
Total available for sale ................... 3,757 2.29 1,711 2.29
Held to maturity:
Investment securities:
Mortgage-backed securities:
Freddie Mac .................................. 34 6.38 3,405 6.60
Fannie Mae ................................... -- -- 138 6.68
------- ------ ------- ------
Total held to maturity ..................... 34 6.38 3,543 6.60
------- ------ ------- ------
Total investment securities .................... $ 3,791 2.33% $ 5,254 5.20%
======= ====== ======= ======
[Cont'd]
Amount Due or Repricing within:
------------------------------------------------------------------------------
Over Five to Ten Years Over Ten Years Totals
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- --------
(Dollars in Thousands)
Available for sale:
Investment securities:
Adjustable rate mortgage funds ................. $ -- --% $ -- --% $ 5,468 2.29%
Mortgage-backed securities:
Freddie Mac .................................. -- -- -- -- -- --
Fannie Mae ................................... 991 4.01 -- -- 991 4.01
------- ------ ------- ------ ------- ------
Total available for sale ................... 991 4.01 -- -- 6,459 2.55
Held to maturity:
Investment securities:
Mortgage-backed securities:
Freddie Mac .................................. 1,359 6.81 12,277 5.70 17,075 5.97
Fannie Mae ................................... -- -- 24,633 5.26 24,771 5.27
------- ------ ------- ------ ------- ------
Total held to maturity ..................... 1,359 6.81 36,910 5.41 41,846 5.56
------- ------ ------- ------ ------- ------
Total investment securities .................... $ 2,350 5.63% $36,910 5.41% $48,305 5.15%
======= ====== ======= ====== ======= ======
74
The following table sets forth certain information with respect to each
security which had an aggregate book value in excess of 10% of Home Federal's
total equity at the date indicated.
At December 31, At September 30,
2003 2003
------------------------ -------------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------- -------- --------- --------
(In Thousands)
Available for sale:
Investment Securities:
Short-term adjustable rate mortgage fund........ $ 5,468 $ 5,440 $ 5,468 $ 5,440
Mortgage-backed securities:
Fannie Mae...................................... 991 1,002 -- --
Freddie Mac..................................... -- -- -- --
-------- -------- -------- --------
Total investment securities................... $ 6,459 $ 6,442 $ 5,468 $ 5,440
======== ======== ======== ========
Held to maturity:
Mortgage-backed securities:
Fannie Mae...................................... 24,771 25,109 10,485 10,826
Freddie Mac..................................... 17,075 17,693 13,940 14,597
-------- ------- -------- --------
Total held to maturity........................ $ 41,846 $42,802 $ 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. The Escalator
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.
75
At December 31, 2003, we had $29.1 million of jumbo ($100,000 or more)
certificates of deposit, which are primarily from local customers, representing
9.5% of total deposits at that date.
In the unlikely event we are liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to Home Federal Bancorp, as the sole stockholder of Home
Federal.
Deposit Activities. The following table sets forth the total deposit
activities of Home Federal for the periods indicated.
Three Months
Ended December 31, Year Ended September 30,
-------------------------- -------------------------------------------
2003 2002 2003 2002 2001
--------- --------- --------- --------- ---------
(In Thousands)
Beginning balance ............................ $ 301,273 $ 279,772 $ 279,772 $ 266,316 $ 232,747
Net deposits (withdrawals) before
interest credited ........................ 2,540 (1,059) 17,516 7,654 24,705
Interest credited ............................ 942 1,039 3,985 5,802 8,864
--------- --------- --------- --------- ---------
Net increase (decrease) in deposits .......... 3,482 (20) 21,501 13,456 33,569
--------- --------- --------- --------- ---------
Ending balance ............................... $ 304,755 $ 279,752 $ 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 September 30,
At December 31, --------------------------------------
2003 2003 2002 2001
--------------- --------- --------- ---------
(In Thousands)
0.00 - 0.99%............... $ 15,729 $ 11,742 $ -- $ --
1.00 - 1.99%............... 35,198 36,899 28,383 --
2.00 - 2.99%............... 44,471 40,884 36,647 1,931
3.00 - 3.99%............... 29,497 31,983 29,473 27,524
4.00 - 4.99%............... 18,547 18,726 22,896 16,927
5.00 - 5.99%............... 2,536 2,968 6,952 27,928
6.00 - 6.99%............... 1,635 1,870 5,877 47,253
7.00 - 7.99%............... -- -- -- 11,249
--------- --------- --------- ---------
Total................. $ 147,613 $ 145,072 $ 130,226 $ 132,812
========= ========= ========= =========
76
Time Deposits by Maturities. The following table sets forth the amount
and maturities of time deposits at December 31, 2003.
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%......... $ 13,051 $ 2,641 $ 37 $ -- $ -- $ 15,729
1.00 - 1.99%......... 19,307 7,013 1,040 7,770 68 35,198
2.00 - 2.99%......... 5,381 12,660 25,478 304 648 44,471
3.00 - 3.99%......... 9,901 11,343 5,278 2,703 272 29,497
4.00 - 4.99%......... 6,105 10,720 936 786 -- 18,547
5.00 - 5.99%......... 1,394 15 972 150 5 2,536
6.00 - 6.99%......... 592 1,000 30 12 1 1,635
7.00 - 7.99%......... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total........... $ 55,731 $ 45,392 $ 33,771 $ 11,725 $ 994 $ 147,613
========= ========= ========= ========= ========= =========
The following table sets forth information concerning Home Federal's
time deposits and other deposits at December 31, 2003.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
-------- -------------- -------------------------------- ---------- ------- ----------
(In
Thousands)
0.30% N/A Regular savings $ 22,876 $ 50 7.51%
0.25 N/A Interest-bearing demand deposits 48,672 50 15.97
Noninterest-bearing demand
-- N/A deposits 26,870 50 8.82
0.59 N/A Money market accounts 31,622 1,000 10.38
0.30 N/A Medical savings accounts 27,101 25 8.89
Certificates of Deposit
-----------------------
1.09 1-12 months Fixed term, fixed rate 27,187 500 8.92
2.22 13-24 months Fixed term, fixed rate 35,394 500 11.61
3.63 25-36 months Fixed term, fixed rate 30,319 500 9.95
3.09 37-60 months Fixed term, fixed rate 53,582 500 17.58
4.61 Over 60 months Fixed term, fixed rate 336 500 0.11
0.70 18 months Other 796 500 0.26
--------- ------
TOTAL $ 304,755 100.00%
========= ======
77
The following table indicates the amount of Home Federal's jumbo
certificates of deposit by time remaining until maturity as of December 31,
2003. Jumbo certificates of deposit are certificates in amounts of $100,000 or
more.
Certificates of
Deposit
Maturity Period $100,000 and More
--------------------------------------------- ---------------------
(In Thousands)
Three months or less........................ $ 3,876
Over three through six months............... 3,453
Over six through twelve months.............. 4,080
Over twelve months.......................... 17,648
-----------
Total................................... $ 29,057
===========
78
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 December 31, ---------------------------------
2003 2003
--------------------------------- ---------------------------------
Percent Percent
of Increase/ of Increase/
Amount Total (Decrease) Amount Total (Decrease)
--------- ------- ---------- --------- ------- ----------
(Dollars in Thousands)
Savings deposits ..................... $ 22,876 7.51% $ (1,547) $ 24,423 8.11% $ 1,216
Demand accounts ...................... 75,542 24.79 3,376 72,166 23.95 5,399
Money market accounts ................ 31,623 10.38 (505) 32,128 10.66 (3,379)
Medical savings accounts ............. 27,101 8.89 (383) 27,484 9.12 3,420
Fixed rate certificates that mature
in the year ending:
Within 1 year ...................... 55,457 18.19 (2,117) 57,574 19.11 (1,249)
After 1 year, but within 2 years ... 44,982 14.76 6,239 38,743 12.86 13,262
After 2 years, but within 5 years .. 46,261 15.18 (1,518) 47,779 15.86 2,942
After 5 years ....................... 117 0.04 -- 117 0.04 102
Other ................................ 796 0.26 (63) 859 0.29 (213)
--------- ------ --------- --------- ------ ---------
$ 304,755 100.00% $ 3,482 $ 301,273 100.00% $ 21,500
========= ====== ========= ========= ====== =========
[Cont'd]
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%
========= ====== ========= ========= ======
79
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 conversion 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 conversion 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 $189.7 million as of December 31, 2003. At December 31, 2003, our
outstanding advances from the Federal Home Loan Bank of Seattle totaled $116.7
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
Three Months Ended Year Ended
December 31, September 30,
---------------------- -----------------------------------
2003 2002 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 ....... 103,333 95,543 102,173 86,577 66,910
Approximate weighted average rate paid on:
Federal Home Loan Bank advances ....... 4.46% 4.78% 4.53% 5.14% 6.32%
At September 30,
At December 31, -----------------------------------
2003 2003 2002 2001
--------------- --------- --------- ---------
(Dollars in Thousands)
Balance outstanding at end of period:
Federal Home Loan Bank advances........ $ 116,735 $ 96,527 $ 91,008 $ 73,394
Weighted average rate paid on:
Federal Home Loan Bank advances........ 4.09% 4.64% 4.85% 5.78%
80
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 December 31, 2003, we had 214 full-time employees and 25 part-time
employees. Our employees are not represented by any collective bargaining group.
We consider our employee relations to be good.
Properties
At December 31, 2003, 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 these
closure of these branch offices. We also have received approval from the Office
of Thrift Supervision for the sale of a branch facility located in Jerome,
Idaho, which is scheduled to close on April 2, 2004. At December 31, 2003, the
net book value of our investment in premises, equipment, and leaseholds,
excluding computer equipment and construction in process, was approximately $7.9
million. The net book value of the data processing and computer equipment
utilized by us at December 31, 2003 was approximately $1.6 million.
81
The following table provides a list of our main and branch offices and
indicates whether the properties are owned or leased:
Lease Net Book Value at
Leased or Expiration December 31, Square
Location Owned Date 2003 Footage
------------------------ -------------- ------------ ----------------- -------
(Dollars in
Thousands)
ADMINISTRATIVE OFFICE
500 12th Ave. South Owned N/A $ 3,656 34,014
Nampa, ID 83651(1)(2)
BRANCH OFFICES:
Downtown Boise (2) Leased August 2010 70 3,500
800 W. State St.
Boise, ID 83702
Parkcenter (2) Owned N/A 1,493 4,500
871 E. Parkcenter Blvd.
Boise, ID 83706
Fairview (2) Building owned June 2070 304 2,500
10443 Fairview Ave. Land leased
Boise, ID 83704
Meridian (2) Owned N/A 1,068 4,000
55 E. Franklin Rd.
Meridian, ID 83642
Caldwell (2) Owned N/A 1,243 4,500
923 Dearborn
Caldwell, ID 83605
Mountain Home (2) Owned N/A 124 2,600
400 N. 3rd E.
Mountain Home, ID 83647
Emmett (2) Owned N/A 246 2,600
250 S. Washington Ave.
Emmett, ID 83617
Boise (3) Leased May 2005 145 695
8300 W. Overland Rd.
Boise, ID 83709
Meridian (3) Leased May 2005 148 695
4051 E. Fairview Ave.
Meridian, ID 83642
82
Lease Net Book Value at
Leased or Expiration December 31, Square
Location Owned Date 2003 Footage
------------------------ -------------- ------------ ----------------- -------
(Dollars in
Thousands)
Nampa (3) Leased May 2005 144 695
2100 12th Ave. Rd.
Nampa, ID 83651
Caldwell (3) Leased May 2005 136 695
5108 E. Cleveland Blvd.
Caldwell, ID 83605
Garden City (3) Leased May 2005 217 695
7319 W. State Street
Boise, ID 83703
Jerome (4) Leased May 2005 138 535
2680 S. Linclon
Jerome, Idaho
Hispanic Cultural Center Leased October 2005 28 235
315 Stampede Drive
Nampa, ID 83687
LOAN OFFICES:
Fairview Leased May 2004 10 2,500
7978 Fairview Ave.
Boise 83704
Meridian Leased December 2009 80 2,600
111 E. 1st St.
Meridian 83642
----------
(1) Includes home branch
(2) Drive-up ATM available.
(3) Wal-Mart locations.
(4) We have signed an agreement to sell the Jerome branch and its deposits.
The projected closing date is 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.
83
MANAGEMENT
Management of Home Federal Bancorp, Inc.
The Board of Directors of Home Federal Bancorp consists of the same
individuals who serve as directors of Home Federal. The Board of Directors of
Home Federal Bancorp is divided into three classes, each of which contains
approximately one-third of the directors. The directors shall be elected by the
stockholders of Home Federal Bancorp 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 conversion. 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 conversion. 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 conversion.
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 conversion, the directors of Home Federal immediately prior to the
conversion 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 conversion,
the Board of Directors of Home Federal Bancorp will elect the directors of Home
Federal.
84
The following table sets forth certain information regarding the Board
of Directors of Home Federal.
Director Current Term of
Name Age (1) 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
--------
(1) As of December 31, 2003.
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.
85
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.
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.
Executive Officers Who Are Not Directors
Each of the executive officers of Home Federal will retain his or her
office following the conversion. 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.
86
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 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. Members of Home Federal's Board of Directors receive a
monthly retainer of $1,000. Each director, except for Chairman Stevens, receives
$250 for each committee meeting attended and the committee
87
chair receives an additional $50 per committee meeting attended. Total fees paid
to directors during the year ended September 30, 2003 were $90,100.
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
director's 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 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 United
States 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). Upon 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 Home Federal converts to a stock owned company, followed within 12
months by replacement of 50% or more of the members of Home Federal's Board of
Directors. 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.
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."
88
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.
(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 Agreement for Chief Executive Officer. In connection with
the conversion, Home Federal Bancorp and Home Federal intend to enter into a
three-year employment agreement with Daniel L. Stevens. Under the employment
agreement, the initial base salary level for Mr. Stevens will be $205,000, which
amount will be paid by Home Federal and 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 agreement, the term of the
agreement 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 agreement may be terminated by Home Federal at any time, by Mr.
Stevens if he is assigned duties inconsistent with his initial position, duties
and responsibilities, or 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 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 agreement also provides for a severance payment and
other benefits if Mr. Stevens is involuntarily terminated because of a change in
control of Home Federal Bancorp and Home Federal. The agreement authorizes
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 agreement defines the term "change in control" as
having occurred
89
when, among other things: (1) a person other than Home Federal Bancorp purchases
shares of Home Federal Bancorp's common stock under a tender or exchange offer
for the shares; (2) any person, as that term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, is or becomes the beneficial
owner of securities of Home Federal Bancorp representing 25% or more of the
combined voting power of Home Federal Bancorp's then outstanding securities; (3)
the membership of the Board of Directors changes as the result of a contested
election; or (4) stockholders of Home Federal Bancorp approve a merger,
consolidation, sale or disposition of all or substantially all of Home Federal
Bancorp's assets, or a plan of partial or complete liquidation.
The maximum value of the severance benefits under the 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 agreement provides 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
December 31, 2003 and that Mr. Stevens elected to receive a lump sum cash
payment, he would be entitled to a payment of approximately $667,000. Section
280G of the Internal Revenue Code provides that severance payments that equal or
exceed three times the individual's base amount are deemed to be "excess
parachute payments" if they 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. 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 agreement provides 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
conversion, 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 agreements may be terminated by Home Federal at any
time, by the executive if he or she is assigned duties inconsistent with his or
her initial position, duties, responsibilities and status, or upon the
occurrence of certain events specified by federal regulations in connection with
a change in control of Home Federal Bancorp or Home Federal.
The severance agreements also provide for a severance payment and other
benefits if the executive is involuntarily terminated because of a change in
control of Home Federal Bancorp and Home Federal. The agreement authorizes
severance payments on a similar basis where an 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" as having occurred when, among other things: (1) a person
other than Home Federal Bancorp purchases shares of Home Federal Bancorp's
common stock under a tender or exchange offer for the shares; (2) any person, as
that term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, is or becomes the beneficial owner of securities of Home Federal
Bancorp representing 25% or more of the combined voting power of Home Federal
Bancorp's then outstanding securities; (3) the membership of the Board of
Directors changes as the result of a contested election; or (4) stockholders of
Home Federal Bancorp approve a merger, consolidation, sale or disposition of all
or substantially all of Home Federal Bancorp's assets, or a plan of partial or
complete liquidation.
The maximum value of the severance benefits under the severance
agreements is 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). The severance 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 the executive'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 the executive's base amount. Assuming that a
90
change in control had occurred at December 31, 2003 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 $376,000, $367,000 and $294,000, respectively. Section 280G of the
Internal Revenue Code provides that severance payments that equal or exceed
three times the individual's base amount are deemed to be "excess parachute
payments" if they are conditioned upon a change in control. Individuals
receiving parachute payments in excess of 2.99 times 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. 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 severance
agreements provide that severance and other payments that are conditioned on 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.
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 and return on equity for the year.
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, disability or a change in control of Home
Federal, the value of the participant's deferred account will begin to be paid.
The plan defines the term "change in control" as having occurred when Home
Federal converts to a stock owned company, followed within 12 months by
replacement of 50% or more of the members of Home Federal's Board of Directors.
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 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). 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 will be paid in monthly
payments over 180 months with interest credited on unpaid amounts at 7.5% per
year. Final salary
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benefits begin upon the participant's termination of service after the
participant's normal 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 September 30, 2003, Home Federal incurred
contribution-related expenses of $124,000 in connection with the 401(k) plan.
For the plan's fiscal year ended September 30, 2003, employees contributed
$343,000 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 conversion, 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 or
Home Federal Bancorp following the conversion. 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 have credit for 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 or 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 conversion. 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 8%
of the shares sold in the offering. This would range between 612,000 shares,
assuming 7,650,000 shares are sold in the offering, and 828,000 shares, assuming
10,350,000 shares are sold in the conversion. It is anticipated that the
employee stock ownership plan will borrow funds from Home Federal Bancorp to
purchase the shares. This loan will equal 8% 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 conversion. 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, or in the event of death or disability 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 conversion and offering, subject
to stockholder approval. Federal regulations prohibit us from implementing this
plan until six months after the conversion 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 10% of the shares issued in the conversion. 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
conversion, current regulations will require that:
o the total number of options available for grant to
non-employee directors be limited to 30% of the options
authorized under the plan;
o 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;
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o the number of options that may be granted to any officer or
employee be limited to 25% of the options authorized for the
plan;
o the options may not vest more rapidly than 20% per year,
beginning on the first anniversary of stockholder approval of
the plan; and
o 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 conversion and offering. Federal regulations
prohibit us from implementing this plan until six months after the conversion
and offering. If the recognition plan is implemented within the first 12 months
after the conversion and offering, federal regulations require that the plan be
approved by a majority of the outstanding shares of common stock of Home Federal
Bancorp.
If the restricted stock plan is implemented within 12 months after the
conversion 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 4% of the shares issued in the
offering. 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 conversion and offering, current regulations will require
that:
o the total number of shares that are awarded to non-employee
directors be limited to 30% of the shares authorized under the
plan;
o the number of shares that are awarded to any one non-employee
director be limited to 5% of the shares authorized under the
plan;
o the number of shares that are awarded to any officer or
employee be limited to 25% of the shares authorized under the
plan;
o the awards may not vest more rapidly than 20% per year,
beginning on the first anniversary of stockholder approval of
the plan; and
o 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 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
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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 $960,000 at
December 31, 2003, which was 2.3% of our equity at that date. All loans to
directors and executive officers were performing in accordance with their terms
at December 31, 2003. Total deposits of directors and executive officers were
approximately $2.4 million at December 31, 2003.
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 conversion.
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 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.
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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 December 31, 2003, Home Federal's lending
limit under this restriction was $6.5 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.
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
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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 December 31, 2003, Home Federal had intangible assets in the
form of mortgage servicing rights.
At December 31, 2003, Home Federal had tangible capital of $41.1
million, or 8.67% of adjusted total assets, which is approximately $34.0 million
above the minimum requirement of 1.5% of adjusted total assets in effect on 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 December 31, 2003, Home Federal's
mortgage service rights were subject to these tests. At December 31, 2003, Home
Federal had core capital equal to $41.1 million, or 8.67% 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
December 31, 2003, Home Federal had Tier 1 risk-based capital of $41.1 or 13.37%
of risk-weighted assets, which is approximately $28.8 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 December 31, 2003, Home Federal had total risk-based capital of
$43.3 million and risk-weighted assets of $307.7 million; or risk-based total
capital of 14.06% 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 December 31, 2003, Home
Federal met the test with a 98.65%, 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.
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 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.
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.
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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 December 31, 2003, 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 December 31, 2003, Home Federal had
$6.6 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 three months ended December 31, 2003, Home Federal received $82,300 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.
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"
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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 savings and loan holding
company 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.
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
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and auditing improprieties at publicly traded companies and to protect investors
by improving the accuracy and 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 conversion, 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 conversion. 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.
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 December 31, 2003, 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, 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.
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Delaware. As a Delaware holding company not earning income in Delaware,
Home Federal Bancorp is exempt from Delaware corporate income tax, but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
HOME FEDERAL'S CONVERSION
The Board of Directors of Home Federal has adopted the plan of
conversion and an application for approval of the plan of conversion has been
filed with the Office of Thrift Supervision. The plan of conversion 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 of conversion.
General
On March 16, 2004, we adopted a plan of conversion pursuant to which we
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 at
the same time, will become a wholly owned subsidiary of Home Federal Bancorp.
The conversion will include adoption of proposed federal stock charter and
bylaws, which will authorize us to issue capital stock. Under the plan, Home
Federal common stock is being sold to Home Federal Bancorp and Home Federal
Bancorp common stock is being offered to our eligible depositors, the employee
stock ownership plan, other depositors and borrowers, and then to the public.
The conversion will be accounted for at historical cost in accordance with
Statement of Financial Accounting Standards No. 141, "Business Combinations."
Home Federal Bancorp has filed an application with the Office of Thrift
Supervision to become a savings and loan holding company and to acquire all of
Home Federal's common stock to be issued in the conversion.
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. Shares not subscribed for in the
subscription offering, direct community offering and syndicated community
offering may be offered for sale in a firm commitment underwritten public
offering. See "- Direct Community Offering," "- Syndicated Community Offering"
and "- Public Offering."
Subscriptions for shares will be subject to the maximum and minimum
purchase limitations set forth in the plan of conversion. 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 conversion 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 conversion is terminated, we will charge all conversion
expenses against current income and any funds collected by us in the offering
will be promptly returned, with interest, to each subscriber.
Our Reasons for the Conversion
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 conversion is another step
in our strategic plan to increase our capital and expand our operations.
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As a stock corporation upon completion of the conversion, 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 conversion, 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 description of
the stock compensation plans which will be adopted by us in connection with the
conversion, see "Management - Benefits."
After considering the advantages and disadvantages of the conversion,
as well as applicable fiduciary duties and alternative transactions, the Board
of Directors of Home Federal approved the conversion as being in the best
interests of Home Federal and equitable to its depositors and borrowers.
Effects of the Conversion
General. The conversion 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 conversion, 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 conversion, 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 conversion will continue as an account holder in Home Federal
after the conversion, and the conversion 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 conversion. Depositors in Home Federal
will continue to hold their existing certificates, passbooks and other evidence
of their accounts. The conversion 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 conversion.
See "- Voting Rights" and "- Depositors' Rights if We Liquidate" below for a
discussion of the effects of the conversion on the voting and liquidation rights
of the depositors of Home Federal.
Continuity. The Board of Directors presently serving Home Federal will
serve as the Board of Directors of Home Federal after the conversion. 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 conversion, the voting stockholders of Home Federal Bancorp will elect
approximately one-third of Home Federal Bancorp's directors annually. All
current officers of Home Federal will retain their positions with Home Federal
after the conversion.
Voting Rights. After completion of the conversion, 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 conversion, voting
rights in Home Federal Bancorp will be vested exclusively in the stockholders of
Home Federal Bancorp. Each holder of common stock will be entitled to vote on
any matter to be considered by the stockholders of Home Federal Bancorp. After
completion of the conversion, voting rights in Home Federal will be vested
exclusively in its sole stockholder, Home Federal Bancorp.
Depositors' Rights if We Liquidate. We have no plans to liquidate.
However, if there should ever be a complete liquidation of Home Federal, either
before or after conversion, deposit account holders would receive the
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protection of insurance by the FDIC up to applicable limits. In addition,
liquidation rights before and after the conversion would be as follows:
Liquidation Rights in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of
the complete liquidation of Home Federal, each deposit account holder
would receive his or her pro rata share of any assets of Home Federal
remaining after payment of claims of all creditors (including the
claims of all depositors in the amount of the withdrawal value of their
accounts). Each holder's pro rata share of the remaining assets, if
any, would be in the same proportion of the assets as the balance in
his or her deposit account was to the aggregate balance in all our
deposit accounts at the time of liquidation.
Liquidation Rights in Proposed Converted Institution. After conversion,
each deposit account holder, in the event of the complete liquidation
of Home Federal, would have a claim of the same general priority as the
claims of all our other general creditors in addition to the protection
of FDIC insurance up to applicable limits. Therefore, except as
described below, the deposit account holder's claim would be solely in
the amount of the balance in his or her deposit account plus accrued
interest. A deposit account holder would have no interest in the assets
of Home Federal above that amount, if any.
Home Federal will, at the time of the conversion, establish a
liquidation account in an amount equal to its total equity as of the date of the
latest statement of financial condition contained in this prospectus. The
liquidation account will be a memorandum account on the records of Home Federal
and there will be no segregation of assets of Home Federal related to it.
The liquidation account will be maintained by Home Federal subsequent
to the conversion for the benefit of eligible account holders and supplemental
eligible account holders who retain their deposit accounts in Home Federal. Each
eligible account holder and supplemental eligible account holder will, with
respect to each deposit account held, have a related inchoate interest in a
portion of the liquidation account balance called a subaccount.
The initial subaccount balance for a deposit account held by an
eligible account holder or a supplemental eligible account holder will be
determined by multiplying the opening balance in the liquidation account by a
fraction of which the numerator is the amount of the holder's "qualifying
deposit" in the deposit account and the denominator is the total amount of the
"qualifying deposits" of all such holders. The initial subaccount balance will
not be increased, and it will be subject to downward adjustment as provided
below.
If the balance in any deposit account of an eligible account holder or
supplemental eligible account holder at the close of business on any annual
closing day of Home Federal subsequent to December 31, 2002 is less than the
lesser of (i) the deposit balance in the deposit account at the close of
business on any other annual closing date subsequent to December 31, 2002 or
March 31, 2004 or (ii) the amount of the "qualifying deposit" in the deposit
account on December 31, 2002 or March 31, 2004, then the subaccount balance for
the deposit account will be adjusted by reducing the subaccount balance in an
amount proportionate to the reduction in the deposit balance. In the event of a
downward adjustment, the subaccount balance will not be subsequently increased,
notwithstanding any increase in the deposit balance of the related deposit
account. If any such deposit account is closed, the related subaccount balance
will be reduced to zero.
In the event of a complete liquidation of Home Federal (and only in
that event), each eligible account holder and supplemental eligible account
holder will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance(s) for deposit account(s) then held by the holder before any liquidation
distribution may be made to stockholders. No merger, consolidation, bulk
purchase of assets with assumptions of deposit accounts and other liabilities or
similar transactions with another federally-insured institution in which Home
Federal is not the surviving institution will be considered to be a complete
liquidation. In any such transaction, the liquidation account will be assumed by
the surviving institution.
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Any assets remaining after the above liquidation rights of eligible
account holders and supplemental eligible account holders were satisfied would
be distributed to Home Federal Bancorp as the sole stockholder of Home Federal.
Tax Effects. Home Federal has received an opinion from its special
counsel, Breyer & Associates PC, McLean, Virginia, that the conversion 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 conversion.
However, this opinion is not binding on the Internal Revenue Service or the
Idaho State Tax Commission.
If the liquidation rights in Home Federal or subscription rights to
purchase Home Federal Bancorp common stock have a market value when received, or
in the case of subscription rights, when exercised, then depositors receiving or
exercising these rights may have a taxable gain. Any gain will be limited to the
fair market value of these rights.
Liquidation rights are the proportionate interest of certain depositors
of Home Federal in the special liquidation account to be established by Home
Federal under the plan of conversion. See "- Depositors' Rights if We
Liquidate." Special counsel has concluded that the liquidation rights will have
nominal, if any, fair market value.
The subscription rights are the preferential rights of eligible
subscribers to purchase shares of Home Federal Bancorp common stock in the
conversion. 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 stock in
the conversion 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 conversion 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 conversion.
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 conversion.
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 conversion under
Idaho tax laws will be substantially the same as the federal income tax
consequences described above.
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How We Determined Our Price and the Number of Shares to Be Issued in the Stock
Offering
The plan of conversion 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 to stock conversions, 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 $60,000. 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:
o 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 the net proceeds of this offering and the economic and
demographic conditions in Home Federal's existing marketing
area as prepared by RP Financial;
o certain historical, financial and other information relating
to Home Federal prepared by Home Federal;
o the impact of the conversion on Home Federal's net worth and
earnings potential as calculated by RP Financial; and
o the proposed dividend policy of Home Federal Bancorp and Home
Federal.
The appraisal also incorporated an analysis of a peer group of
publicly-traded thrift holding companies that RP Financial considered to be
comparable to Home Federal. The peer group analysis conducted by RP Financial
included a total of six publicly-traded thrift holding companies based in the
Pacific Northwest with total assets of less than $1 billion as well as seven
Midwest-based thrift holding companies with total assets of less than $1
billion. RP Financial excluded one thrift holding company 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 March 5, 2004, that the estimated
pro forma market value of the common stock, ranged from a minimum of $76.5
million to a maximum of $103.5 million with a midpoint of $90.0 million. The
Board of Directors of Home Federal determined that the common stock should be
sold at $10.00 per share. Based on this valuation and the $10.00 per share
price, after this offering we will have a minimum of 7,650,000 shares to a
maximum of 10,350,000 shares outstanding, with a midpoint of 9,000,000 shares.
The estimated offering range may
108
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 offering range is updated to amend the value of the common stock
below $76.5 million, which is the minimum of the estimated offering range, or
above $119.0 million, which is the maximum of the estimated offering range, as
adjusted by 15%, a new appraisal will be filed with the Securities and Exchange
Commission.
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 $103.5 million (the maximum of the
estimated offering range) and up to $119.0 million (the maximum of the estimated
offering range, 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 receive orders for common stock in excess of the
maximum of the estimated offering range 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 above 10,350,000 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 conversion.
The following table presents a summary of selected pricing ratios for
the peer group companies and the resulting pricing ratios for Home Federal
Bancorp reflecting the pro forma impact of the conversion 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 3.3%
on a price-to-earnings basis, a discount of 44.5% on a price-to-book basis and a
discount of 48.4% 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 conversion.
Pro Forma Price
-----------------------------------------------
Reported Tangible
Earnings Book Value Book Value
Multiple Ratio Ratio
---------- ------------ ------------
(x) (%) (%)
Home Federal Bancorp
15% above maximum 24.7 82.8 82.8
Maximum 21.2 79.4 79.4
Midpoint 18.3 75.9 75.9
Minimum 15.4 71.5 71.5
All fully-converted publicly-traded thrifts as of March 5, 2004:
Average 18.7 167.7 180.3
Median 17.1 156.5 167.0
Valuation of peer group as of March 5, 2004:
Average 18.7 142.8 156.8
Median 17.7 136.7 147.0
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.
109
Prior to completion of the conversion, the maximum of the estimated
offering range may be increased up to 15% and the number of shares of common
stock may be increased to 11,902,500 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 offering range
to fill unfilled orders in the subscription offering.
No sale of shares of common stock in the conversion 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 common stock to
be issued is materially incompatible with the estimate of our aggregate
consolidated pro forma market value. If this confirmation is not received, we
may cancel the conversion, extend the offering period and establish a new
estimated 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 may be
increased or decreased without a resolicitation of subscribers, provided that
the product of the total number of shares times the purchase price is not below
the minimum or more than 15% above the maximum of the estimated offering range.
If market or financial conditions change so as to cause the aggregate purchase
price of the shares to be below the minimum of the estimated offering range or
more than 15% above the maximum of such 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 offering range must be
approved by the Office of Thrift Supervision.
An increase in the number of shares of common stock 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 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
conversion which will likely reduce your ownership interest" and "Pro Forma
Data."
Copies of the appraisal report of RP Financial, including any
amendments, and the detailed report of the appraiser setting forth 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 conversion, rights to subscribe for the purchase of
common stock have been granted to the following persons in the following order
of descending priority:
o 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");
o the proposed employee stock ownership plan ("Tax-Qualified
Employee Stock Benefit Plans");
o depositors of Home Federal with account balances of at least
$50.00 as of the close of business on March 31, 2004
("Supplemental Eligible Account Holders"); and
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o depositors of Home Federal, as of the close of business on
________ __, 2004, and borrowers as of March 16, 2004, whose
loans continue to be outstanding on ________ __, 2004, other
than Eligible Account Holders or Supplemental Eligible Account
Holders ("Other Members").
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 conversion 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 issued 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 conversion provides that each Tax-Qualified Employee Plan, including
the employee stock ownership plan, shall receive nontransferable subscription
rights to purchase up to 10% of the shares of common stock sold in the offering.
The proposed employee stock ownership plan intends to purchase 8% of the shares
of common stock sold in the stock offering, or 612,000 shares and 828,000 shares
based on the minimum and maximum of the estimated offering range, respectively.
Subscriptions by the Tax-Qualified Employee Plan will not be aggregated with
shares of common stock purchased directly by or which are otherwise attributable
to any other participants in the subscription and direct
111
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
conversion to the contrary, the Tax-Qualified Employee 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 offering range, each Tax-Qualified Employee Plan will
have a priority right to purchase any such 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 issued 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 March 31, 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."
In the event the 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 conversion, available shares will be allocated among the subscribing Other
Members pro rata on the basis of the amounts of their respective subscriptions.
112
Expiration Date for the Subscription Offering. The subscription
offering will expire at 12:00 Noon, Mountain time, on ________ __, 2004, unless
extended for the full 45 day period permitted by regulation and may be extended
an additional 45 days to ________ __, 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 ________ __, 2006. Subscription rights which have not been
exercised prior to ________ __, 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, 7,650,000 shares, have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold by ________ __, 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 ________ __, 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 conversion 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 conversion 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. Persons, together with an associate or group of
persons acting in concert with them, may not subscribe for or purchase more than
$1.2 million of common stock in the direct community offering, if any. 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 ________ __, 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 conversion 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 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
113
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. No person, by himself or
herself, or with an associate or group of persons acting in concert, may
purchase more than $1.2 million of common stock in the syndicated community
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
conversion, 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 conversion. Funds will be promptly
returned, with interest, in the event the conversion 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 ________ __, 2004. The syndicated community offering may not be
extended past ________ __, 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.
Public Offering
As a final step in the conversion, the plan of conversion provides
that, if feasible, all shares of common stock not purchased in the subscription
offering, direct community offering and syndicated community offering may be
offered for sale to members of the general public in a firm commitment
underwritten public offering through Keefe, Bruyette & Woods. It is expected
that the public offering would commence as soon as practicable after termination
of the subscription offering, direct community offering and syndicated community
offering.
The price at which common stock is sold in the public offering will be
the same price at which shares are offered and sold in the subscription
offering, direct community offering and syndicated community offering. No
person, by himself or herself, or with an associate or group of persons acting
in concert, may purchase more than $1.2 million of common stock in the public
offering, subject to the maximum purchase limitations. See "- Limitations on
Stock Purchases."
114
The public offering will be completed within 90 days after the
termination of the subscription offering, unless extend by Home Federal with the
approval of the Office of Thrift Supervision. 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 conversion 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:
o the number of persons otherwise eligible to subscribe for
shares under the plan of conversion who reside in such
jurisdiction is small;
o 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 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
o 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 conversion includes the following limitations on the number
of shares of Home Federal Bancorp common stock which may be purchased in the
conversion:
(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 issued 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 an
employee stock ownership plan, may purchase in the aggregate
up to 8% of the shares of common stock issued in the
conversion,
115
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 8% of
these shares;
(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 issued 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 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, syndicated community offering or public
offering may purchase in the direct community offering,
syndicated community offering or public offering up to
$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 $1.2 million or 120,000 shares
of common stock; 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 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
conversion, provided that orders for shares exceeding 5% of the shares being
offered in the conversion shall not exceed, in the aggregate, 10% of the shares
being offered in the conversion. 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:
o 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;
o 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;
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o 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
o 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 conversion. 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.
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:
o 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;
o managing the stock information center by assisting interested
stock subscribers and by keeping records of all stock orders;
o preparing marketing materials; and
o 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. 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
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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.
Procedure for Purchasing Shares in the Subscription Offering
To ensure that each purchaser receives a prospectus at least 48 hours
before ________ __, 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 ________ __, 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 conversion 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, March 31, 2004, and depositors and
borrowers as of the close of business on the Voting Record Date, ________ __,
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:
o by check or money order, however, third party checks may not
be remitted as payment for your order;
o by authorization of withdrawal from deposit accounts
maintained with Home Federal (including a certificate of
deposit); or
o in cash, if delivered in person at any full-service banking
office of Home Federal, although we request that you exchange
cash for a check with any of our tellers.
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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 conversion. 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 conversion 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 conversion. Home Federal will
waive any applicable penalties for early withdrawal from certificate accounts.
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 conversion. If the conversion
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, or upon completion of the
public offering if shares remain to be sold in that offering. 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 you 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
conversion. Our interpretation of the terms and conditions of the plan of
conversion 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 conversion 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
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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
conversion.
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.
Issuance of Home Federal Bancorp's Common Stock
Certificates representing shares of common stock issued in the
conversion 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 conversion. 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 conversion, we will need to receive the
approval of the Office of Thrift Supervision. We also will need to have our
members approve the plan of conversion at a special meeting of members, which
will be called for that purpose. Finally, 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 Conversion
All shares of common stock purchased in connection with the conversion
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 conversion 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 conversion 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 1% 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.
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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 certificate of incorporation and bylaws
which may be deemed to affect the ability of a person, firm or entity to acquire
it. These provisions include a restriction on any holder of common stock voting
more than 10% of the outstanding common stock.
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:
o it would result in a monopoly or substantially lessen
competition;
o the financial condition of the acquiring person might
jeopardize the financial stability of the institution; or
o 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 conversion,
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, Inc. or Home Federal without the Office of
Thrift Supervision's prior written approval.
Anti-takeover Provisions in Home Federal Bancorp's Certificate of Incorporation
and Bylaws
The certificate of incorporation 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 of Directors believes
that these provisions will encourage negotiations and discourage hostile
takeover attempts. 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
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purchase Home Federal 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
certificate of incorporation and bylaws of Home Federal Bancorp is necessarily
general and reference should be made in each instance to the certificate of
incorporation and bylaws. See "Where You Can Find More Information" regarding
how to obtain a copy of these documents.
Board of Directors. The certificate of incorporation 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 certificate of incorporation provides 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 certificate of incorporation specifically
does not permit 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 certificate of incorporation provides that for a
period of five years from the completion of the conversion, 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 any tax-qualified employee
benefit plan of Home Federal Bancorp or an underwriter or member of a selling
group involving the public sale or resale of securities of Home Federal Bancorp
or any of its subsidiaries so long as after the sale or resale, no underwriter
or member of the selling group is a beneficial owner of more than 10% of any
class of equity 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. After the five-year period, any
holder of more than 10% of any class of equity securities is limited in voting
shares held in excess of the 10% limitation, without the permission of the Board
of Directors.
Special Meetings. The certificate of incorporation of Home Federal
Bancorp provides that special meetings of stockholders of Home Federal Bancorp
may be called by the chief executive officer or by the Board of Directors. If a
special meeting is not called, stockholder proposals cannot be presented to the
stockholders for action until the next annual meeting. Stockholders are not
permitted to call special meetings.
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Authorized Capital Stock. The certificate of incorporation of Home
Federal Bancorp authorizes the issuance of 30,000,000 shares of common stock and
2,000,000 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
conversion 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 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 certificate of incorporation 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 30 days (but not more than 60
days) in advance of the date of the meeting at which such nominations will be
made. The nomination notice is also required to include specified information
concerning the nominee and the proposing stockholder. 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.
Supermajority Voting Provisions. Home Federal Bancorp's certificate of
incorporation requires the affirmative vote of 80% of the outstanding shares
entitled to vote to approve a merger, consolidation or other business
combination, unless the transaction is approved, prior to consummation, by the
vote of at least two-thirds of the number of the Continuing Directors (as
defined in the certificate of incorporation) on Home Federal Bancorp's Board of
Directors. "Continuing Directors" generally includes all members of the Board of
Directors who are not affiliated with any individual, partnership, trust or
other person or entity (or the affiliates and associates of such person or
entity) which is a beneficial owner of 10% or more of the voting shares of Home
Federal Bancorp. This provision could tend to make the acquisition of Home
Federal Bancorp more difficult to accomplish without the cooperation or
favorable recommendation of Home Federal Bancorp's Board of Directors.
Amendment of Certificate of Incorporation and Bylaws. Home Federal
Bancorp's certificate of incorporation may be amended by the vote of the holders
of a majority of the outstanding shares of its common stock, except that the
provisions of the certificate of incorporation governing the duration of the
corporation, the purpose and powers of the corporation, authorized capital
stock, denial of preemptive rights, the number and staggered terms of directors,
removal of directors, stockholder nominations and proposals, approval of certain
business combinations, the evaluation of certain business combinations,
limitation of directors' liability, indemnification of officers and directors,
calling of special meetings of stockholders, the authority to repurchase shares
and the manner of amending the certificate of incorporation may not be repealed,
altered, amended or rescinded except by the vote of the holders of at least 80%
of the outstanding shares of Home Federal Bancorp. This provision is intended to
prevent the holders of a lesser percentage of the outstanding stock of Home
Federal Bancorp from circumventing any of the foregoing provisions by amending
the certificate of incorporation to delete or modify one of such provisions.
Home Federal Bancorp's bylaws may only be amended by a majority vote of
the Board of Directors of Home Federal Bancorp or by the holders of at least 80%
of the outstanding stock by Home Federal Bancorp.
Purpose and Takeover Defensive Effects of Home Federal Bancorp's
Certificate of Incorporation 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
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conversion proceeds into productive assets during the initial period after the
conversion. 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
certificate of incorporation 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 difficult. The Board of Directors of Home Federal and Home
Federal Bancorp, however, have concluded that the potential benefits outweigh
the possible disadvantages.
Following the conversion, pursuant to applicable law and, if required,
following the approval by stockholders, Home Federal Bancorp may adopt
additional anti-takeover charter provisions or other devices regarding the
acquisition of its equity securities that would be permitted for a Delaware
business corporation.
The cumulative effect of the restriction on acquisition of Home Federal
Bancorp contained in the certificate of incorporation and bylaws of Home Federal
Bancorp and in federal and Delaware 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 certificate of
incorporation 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
124
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."
DESCRIPTION OF CAPITAL STOCK OF
HOME FEDERAL BANCORP
General
Home Federal Bancorp is authorized to issue 30,000,000 shares of common
stock having a par value of $.01 per share and 2,000,000 shares of preferred
stock having a par value of $.01 per share. Home Federal Bancorp currently
expects to issue up to 10,350,000 shares of common stock, subject to adjustment
up to 11,902,500 shares, and no shares of preferred stock in the conversion.
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 conversion, 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.
Common Stock Dividends. Home Federal Bancorp can pay dividends out of
statutory surplus or, if there is no surplus, from certain net profits if, as
and when declared by its Board of Directors. The payment of dividends by Home
Federal Bancorp is 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 therefore. 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.
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. Upon conversion, the 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 Delaware 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. Certain matters require a vote of 80% of the outstanding shares
entitled to vote thereon. See "Restrictions on Acquisition of Home Federal
Bancorp and Home Federal."
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 conversion, 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 after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, 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,
125
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 conversion 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 certificate of incorporation 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 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 conversion 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 conversion 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 conversion have been
passed upon for Home Federal and Home Federal Bancorp by Penland Munther
Goodrum, Chartered, Boise, Idaho. Certain legal matters will be passed upon for
Keefe, Bruyette & Woods by Elias, Matz, Tiernan & Herrick, LLP, Washington, D.C.
126
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 has filed with the Office of Thrift Supervision an
Application for Approval of Conversion, which includes proxy materials for the
special meeting of members and certain other information. This prospectus omits
certain information contained in the Application for Approval of Conversion. The
Application, including the proxy materials, exhibits and certain other
information that are a part of the Application for Approval of Conversion, 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 conversion, Home Federal Bancorp will register
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 will become 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 conversion, Home Federal Bancorp has undertaken that it will not
terminate this registration for a period of at least three years following the
conversion.
A copy of the plan of conversion, the certificate of incorporation and
bylaws of Home Federal Bancorp and Home Federal are available without charge
from Home Federal. Requests for this information should be directed to: Jerilyn
Warren, Home Federal Savings and Loan Association of Nampa, 500 12th Avenue
South, Nampa, Idaho 83653.
127
HOME FEDERAL AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report.................................................F-2
Consolidated Statement of Financial Condition as of
December 31, 2003 and September 30, 2003 and 2002.........................F-3
Consolidated Statement of Income for the Three Months Ended
December 31, 2003 and 2002 and the Years Ended September 30, 2003,
2002 and 2001.............................................................F-4
Consolidated Statement of Equity for the Three Months Ended
December 31, 2003 and the Years Ended September 30, 2003, 2002 and 2001 ..F-5
Consolidated Statement of Cash Flows for the Three Months Ended
December 31, 2003 and 2002 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 [LOGO 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
financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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
STATEMENT OF FINANCIAL CONDITION
--------------------------------------------------------------------------------
(Unaudited) September 30,
December 31, ----------------------------
2003 2003 2002
------------ ------------ ------------
Cash and amounts due from depository institutions $ 12,141 $ 11,118 $ 9,286
Securities available for sale, at fair value 6,442 5,440 2,507
Mortgage-backed securities, held to maturity 41,846 24,425 44,325
Federal Home Loan Bank capital stock, at cost 6,615 6,533 5,267
Loans receivable, net of allowance for loan losses of
$2,125 at December 31, 2003; $1,853 at September 30,
2003, and $1,385 at September 30, 2002 381,574 377,695 331,019
Accrued interest receivable 1,673 1,585 1,679
Properties and equipment, net 10,283 9,758 10,531
Mortgage servicing rights, net 3,199 3,130 1,760
Investment in life insurance contracts 9,732 9,621 8,813
Other assets 802 891 1,356
------------ ------------ ------------
TOTAL ASSETS $ 474,307 $ 450,196 $ 416,543
============ ============ ============
LIABILITIES AND EQUITY
DEPOSIT ACCOUNTS
Savings deposits $ 22,876 $ 24,423 $ 23,207
Demand deposits 134,266 131,778 126,338
Certificates of deposit 147,613 145,072 130,227
------------ ------------ ------------
Total deposit accounts 304,755 301,273 279,772
Advances by borrowers for taxes and insurance 1,646 3,553 2,975
Interest payable 1,071 939 385
Deferred compensation 1,897 1,803 918
Advances from FHLB 116,735 96,527 91,008
Deferred income tax liability 2,353 2,475 1,827
Income taxes payable 962 365 140
Other liabilities 3,444 2,862 4,557
------------ ------------ ------------
432,863 409,797 381,582
------------ ------------ ------------
EQUITY CAPITAL
Retained earnings, substantially restricted 41,453 40,415 34,959
Unrealized gain (loss) on securities available for sale,
net of deferred income taxes (9) (16) 2
------------ ------------ ------------
41,444 40,399 34,961
------------ ------------ ------------
TOTAL LIABILITIES AND EQUITY $ 474,307 $ 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)
Three Months Ended
December 31, Year Ended September 30,
------------------------ --------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Interest and dividend income:
Loan interest $ 5,975 $ 6,155 $ 24,202 $ 23,808 $ 23,140
Investment interest 33 18 301 163 228
Mortgage-backed security interest 442 653 2,040 2,617 2,810
Federal Home Loan Bank dividends 82 95 352 284 262
Interest-bearing deposits in other banks -- 1 1 32 74
---------- ---------- ---------- ---------- ----------
Total interest and dividend income 6,532 6,922 26,896 26,904 26,514
---------- ---------- ---------- ---------- ----------
Interest expense:
Deposits 1,176 1,366 5,080 7,017 10,251
Federal Home Loan Bank advances 1,153 1,141 4,625 4,448 4,229
---------- ---------- ---------- ---------- ----------
Total interest expense 2,329 2,507 9,705 11,465 14,480
---------- ---------- ---------- ---------- ----------
Net interest income 4,203 4,415 17,191 15,439 12,034
Provision for loan losses 300 150 615 277 748
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 3,903 4,265 16,576 15,162 11,286
---------- ---------- ---------- ---------- ----------
Noninterest income:
Service fees and charges 1,871 1,715 8,120 5,965 4,764
Gain on sale of loans 219 289 1,044 676 286
Increase in cash surrender value of life insurance 125 100 601 416 332
Mortgage servicing rights
Loan servicing fees capitalized 286 796 2,762 1,155 720
(Amortization) accretion of mortgage servicing rights (217) (391) (1,143) (721) 158
Mortgage servicing rights impairment -- -- (249) (1,481) --
Other 43 101 53 (243) 59
---------- ---------- ---------- ---------- ----------
Total noninterest income 2,327 2,610 11,188 5,767 6,319
---------- ---------- ---------- ---------- ----------
Noninterest expense:
Compensation and benefits 2,649 2,894 10,980 10,042 8,255
Occupancy and equipment 702 747 2,909 2,790 2,353
Data processing 366 295 1,366 997 806
Advertising 212 317 1,256 1,164 1,038
Postage and supplies 194 177 778 788 768
Professional services 113 138 402 235 290
Insurance and taxes 98 95 370 345 257
Other 262 189 824 817 827
---------- ---------- ---------- ---------- ----------
Total noninterest expense 4,596 4,852 18,885 17,178 14,594
---------- ---------- ---------- ---------- ----------
Income before income taxes 1,634 2,023 8,879 3,751 3,011
Income tax expense 596 771 3,423 1,644 1,223
---------- ---------- ---------- ---------- ----------
NET INCOME $ 1,038 $ 1,252 $ 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
--------------------------------------------------------------------------------
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 loss 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) $ 1,038 $ 1,038 $ -- $ 1,038
Change in unrealized loss on
securities available for sale, net of
deferred income taxes 7 -- 7 7
------------ ------------ ------------ ------------
Comprehensive income $ 1,045
============
Balance, December 31, 2003 (unaudited) $ 41,444 $ 41,453 $ (9)
============ ============ ============
See accompanying notes. F-5
--------------------------------------------------------------------------------
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (dollars in thousands)
--------------------------------------------------------------------------------
(Unaudited)
Three Months Ended
December 31, Year Ended September 30,
------------------------ --------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,038 $ 1,252 $ 5,456 $ 2,107 $ 1,788
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation of properties and equipment 391 407 1,625 1,675 1,248
Net amortization of investments (3) 31 51 105 102
(Gain) loss on sale of fixed assets and repossessed
assets -- (71) (47) 321 21
(Gain) loss on sale of securities available for sale -- -- 37 (5) --
Provision for losses 272 91 615 277 748
Federal Home Loan Bank stock dividend (82) (90) (352) (284) (262)
Deferred compensation expense 94 154 885 -- --
Net deferred loan fees (28) (92) (989) 267 148
Deferred income tax (132) 251 665 (93) (179)
Net gain on sale of loans (219) (290) (1,044) (1,120) (705)
Proceeds from sale of loans held for sale 17,989 49,133 164,390 92,786 68,556
Originations of loans held for sale (14,220) (46,755) (155,690) (124,879) (120,731)
Impairment of mortgage servicing asset -- -- -- 1,481 --
Net increase in value of life insurance contracts (111) (349) (808) (361) (289)
Change in assets and liabilities:
Interest receivable (88) 81 94 94 (27)
Other assets 155 (537) (1,058) 769 (842)
Interest payable 132 181 554 (17) 50
Other liabilities 1,053 148 (2,097) 2,953 1,216
---------- ---------- ---------- ---------- ----------
Net cash provided (used) by operating activities 6,241 3,545 12,287 (23,924) (49,158)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturity of mortgage-
backed securities 3,473 5,067 23,969 14,145 9,948
Purchase of mortgage-backed securities (20,891) -- (4,120) (21,221) --
Purchase of securities available for sale (991) -- (60,000) -- (7,500)
Proceeds from sale of securities available for sale -- -- 57,000 5,000 --
Purchases of property and equipment (916) (475) (1,400) (1,882) (1,677)
Purchase of Federal Home Loan Bank stock -- (176) (915) (964) --
Loan originations and principal collections, net (7,676) (17,352) (53,665) -- --
Proceeds from disposition of property and equipment -- -- 495 -- 1,014
Proceeds from sale of repossessed assets -- 319 584 1,747 218
Investment in life insurance -- -- -- (369) (4,559)
---------- ---------- ---------- ---------- ----------
Net cash used by investing activities (27,001) (12,617) (38,052) (3,544) (2,556)
---------- ---------- ---------- ---------- ----------
See accompanying notes. F-6
--------------------------------------------------------------------------------
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (dollars in thousands)
--------------------------------------------------------------------------------
(Unaudited)
Three Months Ended
December 31, Year Ended September 30,
------------------------ --------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 3,477 $ (39) $ 21,486 $ 12,047 $ 32,768
Net increase in advances by borrowers for taxes
and insurance (1,903) (1,561) 592 157 166
Advances from Federal Home Loan Bank 27,942 19,620 35,650 174,675 191,618
Payments on advances from Federal Home Loan Bank (7,733) (6,150) (30,131) (157,061) (172,722)
Net change in lines of credit -- -- -- (2,848) 338
---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities 21,783 11,870 27,597 26,970 52,168
---------- ---------- ---------- ---------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS 1,023 2,798 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 $ 12,141 $ 12,084 $ 11,118 $ 9,286 $ 9,784
========== ========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE
INFORMATION
Cash paid during the year for:
Interest on deposits and other borrowings $ 2,197 $ 8,685 $ 9,151 $ 11,483 $ 14,409
========== ========== ========== ========== ==========
Income taxes $ 125 $ -- $ 2,775 $ 1,638 $ 1,629
========== ========== ========== ========== ==========
SUPPLEMENTAL CASH FLOWS DISCLOSURE ON
NONCASH INVESTING TRANSACTIONS
Acquisition of real estate and other assets in
settlement of loans $ -- $ -- $ 294 $ 2,376 $ 346
========== ========== ========== ========== ==========
See accompanying notes. F-7
--------------------------------------------------------------------------------
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 15 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 is currently not active.
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 financial statement presentation:
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. In preparing the
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 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 obtains an annual independent appraisal for the value of the
mortgage servicing assets.
Management believes that the allowance for loan losses is adequate and the
valuation of other real estate owned and mortgage servicing assets proper. 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.
F-8
--------------------------------------------------------------------------------
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies (Continued)
Basis of financial statement presentation (continued):
The Association's unaudited interim financial statements are subject to possible
adjustment in connection with the annual audit of the Association's financial
statements as of and for the year ending September 30, 2004. In the opinion of
management, the accompanying unaudited interim 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 three month period ended December 31, 2003, 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 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 December 31, 2003 (unaudited), September 30,
2003 and 2002, was $3,079, $3,003, and $2,096, 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 methods that approximate the interest method
over the period to maturity. Securities held to maturity consist of
mortgage-backed and related securities.
Securities available for sale:
Available for sale securities consist of investments in a mutual fund and
mortgage-backed securities, which are not classified as trading securities nor
as held to maturity securities.
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.
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Note 1 - Summary of Significant Accounting Policies (Continued)
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 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.
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.
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.
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.
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Note 1 - Summary of Significant Accounting Policies (Continued)
Loans receivable and allowance for loan losses (continued):
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.
An allowance for possible losses is maintained at a level deemed by management
to be adequate to provide for potential 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.
F-11
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Note 1 - Summary of Significant Accounting Policies (Continued)
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.
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 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
statement of financial condition, such items, along with net income are
components of comprehensive income.
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Note 1 - Summary of Significant Accounting Policies (Continued)
The components of other comprehensive income and related tax effects are as
follows (dollars in thousands):
(Unaudited)
Three Months
Ended Year Ended September 30,
December 31, ----------------------------
2003 2003 2002
------------ ------------ ------------
Unrealized holding gain (loss)
on available for sale securities $ 11 $ 7 $ (25)
Reclassification adjustment for (gain) loss
realized in income -- (37) 5
------------ ------------ ------------
Net unrealized gain (loss) 11 (30) (20)
Tax effect (4) 12 8
------------ ------------ ------------
UNREALIZED GAIN (LOSS) AFTER TAX $ 7 $ (18) $ (12)
============ ============ ============
Advertising costs:
Advertising costs are charged to operations when incurred. Advertising expense
for the three months ended December 31, 2003 (unaudited), and years ended
September 30, 2003, 2002, and 2001, was $149 and $1,257, $1,164, and $440,
respectively.
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.
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Note 1 - Summary of Significant Accounting Policies (Continued)
Recent accounting pronouncements (continued):
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 Company's
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 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
financial position or results of operations.
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 financial position or results of
operations.
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Note 1 - Summary of Significant Accounting Policies (Continued)
Recent accounting pronouncements (continued):
The EITF reached 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 statement of financial position or results of operations.
Reclassifications:
Certain reclassifications have been made to prior year's financial statements in
order to conform with the current year presentation. The reclassifications had
no effect on previously reported net income or equity.
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 December 31, 2003, and
September 30, 2003, and 2002, were as follows (dollars in thousands):
(Unaudited) December 31, 2003
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Securities available for sale: Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
Adjustable Rate Mortgage Fund $ 5,468 $ -- $ (28) $ 5,440
Mortgage-backed securities 991 11 -- 1,002
---------- ---------- ---------- ----------
$ 6,459 $ 11 $ (28) $ 6,442
========== ========== ========== ==========
September 30, 2003
---------------------------------------------------
Adjustable Rate Mortgage Fund $ 5,468 $ -- $ (28) $ 5,440
========== ========== ========== ==========
September 30, 2002
---------------------------------------------------
Adjustable Rate Mortgage Fund $ 2,504 $ 3 $ -- $ 2,507
========== ========== ========== ==========
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Note 2 - Securities (Continued)
For the three months ended December 31, 2003 (unaudited), and the years ended
September 30, 2003, 2002, and 2001, proceeds from sales of securities available
for sale amounted to $-0- and $57,000, $5,000, and $-0-, respectively. Gross
realized gains during the three months ended December 31, 2003 (unaudited), and
the years ended September 30, 2003, 2002, and 2001, were $-0- and $5, $5, and,
$-0-, respectively, and gross realized losses during the year ended September
30, 2003, were $42, which was included in other noninterest income on the
consolidated statement of income. There were no gross realized losses recognized
during the three months ended December 31, 2003 (unaudited), and the years ended
September 30, 2002 and 2001.
(Unaudited) December 31, 2003
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Securities held to maturity: Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
Mortgage-backed securities $ 41,846 $ 994 $ (38) $ 42,802
========== ========== ========== ==========
September 30, 2003
-------------------------------------------------
Mortgage-backed securities $ 24,425 $ 998 $ -- $ 25,423
========== ========== ========== ==========
September 30, 2002
-------------------------------------------------
Mortgage-backed securities $ 44,325 $ 1,954 $ -- $ 46,279
========== ========== ========== ==========
At December 31, 2003 (unaudited), the weighted average yield on the adjustable
rate mortgage fund, and mortgage-backed securities was 2.20% and 5.53%,
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.
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).
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Note 3 - Loans Receivable
Loans receivable are summarized as follows (dollars in thousands):
(Unaudited)
December 31, September 30,
---------- -----------------------
2003 2003 2002
---------- ---------- ----------
Real Estate Loans
One-to four family residential $ 248,360 $ 252,375 $ 206,810
Multi-family residential 7,046 7,750 7,512
Commercial 87,770 79,020 79,197
---------- ---------- ----------
Total real estate loans 343,176 339,145 293,519
---------- ---------- ----------
Real Estate Construction Loans
One-to four family residential 4,810 5,225 6,505
Multi-family residential -- 352 1,486
Commercial and land development 9,726 9,128 6,579
---------- ---------- ----------
Total real estate construction loans 14,536 14,705 14,570
---------- ---------- ----------
Consumer Loans
Home equity lines of credit 21,223 20,640 18,069
Automotive 1,944 1,939 2,297
Other consumer 2,448 2,827 3,666
---------- ---------- ----------
Total consumer loans 25,615 25,406 24,032
---------- ---------- ----------
Commercial/business loans 1,714 1,662 2,641
---------- ---------- ----------
385,041 380,918 334,762
Less net deferred loan fees 1,342 1,370 2,358
---------- ---------- ----------
Total loans 383,699 379,548 332,404
Less allowance for loan losses 2,125 1,853 1,385
---------- ---------- ----------
LOANS, net $ 381,574 $ 377,695 $ 331,019
========== ========== ==========
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Note 3 - Loans Receivable (Continued)
The contractual maturity of loans receivable at December 31, 2003 (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 $ 14,451 $ 30,567 $ 203,342 $ 248,360
Multi-family residential 875 3,206 2,965 7,046
Commercial 6,191 63,779 17,800 87,770
---------- ---------- ---------- ----------
Total real estate 21,517 97,552 224,107 343,176
---------- ---------- ---------- ----------
Real Estate Construction
One-to four family residential 2,234 260 2,316 4,810
Multi-family residential -- -- -- --
Commercial and land development 2,426 2,412 4,888 9,726
---------- ---------- ---------- ----------
Total real estate construction 4,660 2,672 7,204 14,536
---------- ---------- ---------- ----------
Consumer
Home equity lines of credit 18,062 78 3,083 21,223
Automotive 43 1,509 392 1,944
Other consumer 849 1,419 180 2,448
---------- ---------- ---------- ----------
18,954 3,006 3,655 25,615
---------- ---------- ---------- ----------
Commercial/business 928 409 377 1,714
---------- ---------- ---------- ----------
$ 46,059 $ 103,639 $ 235,343 $ 385,041
========== ========== ========== ==========
The interest rates on loans at December 31, 2003, fall into the following fixed
and variable components (dollars in thousands):
Fixed rates $ 227,870
Variable rates 157,171
-----------
$ 385,041
===========
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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)
Three Months Ended
December 31, Year Ended September 30,
------------------------ --------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Beginning balance, $ 1,853 $ 1,385 $ 1,385 $ 1,431 $ 1,129
Provision for loan losses 300 150 615 277 748
Charge offs (37) (61) (154) (331) (468)
Recoveries 9 2 7 8 22
---------- ---------- ---------- ---------- ----------
Ending balance $ 2,125 $ 1,476 $ 1,853 $ 1,385 $ 1,431
========== ========== ========== ========== ==========
At December 31, 2003 (unaudited), and September 30, 2003, and 2002, the
Association had no recorded investment in impaired loans recognized in
conformity with Statement of Financial Accounting Standards (SFAS) No. 114 as
amended by SFAS No. 118. Impaired loans at September 30, 2001 totaled $729 in
accordance with SFAS No. 114 as amended by SFAS No. 118. There was no allowance
for loan losses related to impaired loans in 2003, 2002, or 2001. The average
recorded investment in impaired loans during the three months ended December 31,
2003 (unaudited), and the years ended September 30, 2002 and 2001, was $-0- and,
$42, and $107, respectively. No interest income on impaired loans was recognized
for cash payments received in 2003, 2002, or 2001. The Association is not
committed to lend additional funds to debtors whose loans have been modified.
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 December 31, 2003 (unaudited), and September 30, 2003 and 2002, were
$254,683, $245,969, and $206,062, respectively.
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Note 4 - Loan Servicing (Continued)
The following summarizes capitalized mortgage servicing rights activity (dollars
in thousands):
(Unaudited)
Three Months Ended
December 31, Year Ended September 30,
------------------------ --------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Mortgage servicing asset,
beginning balance $ 3,130 $ 1,760 $ 1,760 $ 2,807 $ 1,929
Capitalized 286 796 2,762 1,155 720
(Amortization) accretion (217) (391) (1,143) (721) 158
Impairment -- -- (249) (1,481) --
---------- ---------- ---------- ---------- ----------
Mortgage servicing asset,
ending balance $ 3,199 $ 2,165 $ 3,130 $ 1,760 $ 2,807
========== ========== ========== ========== ==========
Fair value of these servicing rights approximated carrying value at December 31,
2003 and 2002, 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 December 31, 2003, management determined the fair
value of servicing rights was materially comparable to the independent valuation
at September 30, 2003.
Note 5 - Properties and Equipment
Properties and equipment at December 31, 2003, and September 30, 2003, and 2002,
are summarized as follows (dollars in thousands):
(Unaudited)
December 31, September 30,
---------- ------------------------
2003 2003 2002
---------- ---------- ----------
Land $ 1,684 $ 1,627 $ 1,439
Buildings and leasehold improvement 7,839 7,055 7,588
Construction in progress 413 759 76
Furniture and equipment 9,071 8,651 8,650
Automobiles 203 203 176
---------- ---------- ----------
Total cost 19,210 18,295 17,929
Less accumulated depreciation and amortization (8,927) (8,537) (7,398)
---------- ---------- ----------
NET BOOK VALUE $ 10,283 $ 9,758 $ 10,531
========== ========== ==========
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Note 5 - Properties and Equipment (Continued)
During the year ended September 30, 2003, the Association closed three branches.
Assets disposed of relating to the closing of the branches totaled approximately
$529,628 and resulted in total losses of $352,439. 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 three months ended December 31, 2003 (unaudited) and 2002 (unaudited), and
years ended September 30, 2003, 2002, and 2001, was $391 and $407, and $1,625,
$1,675, and $1,248, respectively.
Note 6 - Deposit Accounts
Deposit information at December 31 and September 30 is as follows (dollars in
thousands):
Weighted (Unaudited) Weighted Weighted
Average December 31, Average September 30, Average September 30,
Interest Rate 2003 Interest Rate 2003 Interest Rate 2003
------------- ------------ ------------- ------------ ------------- ------------
Savings deposits 0.30% $ 22,876 0.43% $ 24,423 0.88% $ 23,207
Demand deposits 0.29% 134,266 0.42% 131,778 1.24% 126,338
------------ ------------ ------------
157,142 156,201 149,545
------------ ------------ ------------
Certificates of 0.00 - 0.99% 15,729 0.00 - 0.99% 11,742 0.00 - 0.99% --
deposit 1.00 - 1.99% 35,198 1.00 - 1.99% 36,899 1.00 - 1.99% 28,383
2.00 - 2.99% 44,471 2.00 - 2.99% 40,884 2.00 - 2.99% 36,647
3.00 - 3.99% 29,497 3.00 - 3.99% 31,983 3.00 - 3.99% 29,473
4.00 - 4.99% 18,547 4.00 - 4.99% 18,726 4.00 - 4.99% 22,896
5.00 - 5.99% 2,536 5.00 - 5.99% 2,968 5.00 - 5.99% 6,952
6.00 - 6.99% 1,635 6.00 - 6.99% 1,870 6.00 - 6.99% 5,876
------------ ------------ ------------
147,613 145,072 130,227
------------ ------------ ------------
$ 304,755 $ 301,273 $ 279,772
============ ============ ============
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Note 6 - Deposit Accounts (Continued)
Scheduled maturities of time deposits are as follows (dollars in thousands):
(Unaudited) September 30,
December 31, -------------------------
2003 2003 2002
---------- ---------- ----------
2003 $ -- $ -- $ 59,902
2004 56,057 58,278 25,516
2005 45,178 38,918 19,730
2006 33,683 30,027 23,466
2007 11,735 16,748 1,598
2008 844 985 15
Thereafter 116 116 --
---------- ---------- ----------
$ 147,613 $ 145,072 $ 130,227
========== ========== ==========
Deposit accounts are insured by the FDIC up to $100,000. At December 31, 2003
(unaudited), and September 30, 2003, and 2002, time deposits of $100,000 or
greater approximated $29,057 and $28,025, and $22,778, respectively.
Interest expense by type of deposit account for the three months ended December
31 and years ended September 30 is summarized as follows (dollars in thousands):
(Unaudited)
Three Months Ended
December 31, Year Ended September 30,
----------------------- ------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Savings $ 18 $ 30 $ 104 $ 198 $ 487
Demand 77 149 436 1,233 1,984
Certificates of deposit 1,081 1,187 4,540 5,586 7,780
---------- ---------- ---------- ---------- ----------
$ 1,176 $ 1,366 $ 5,080 $ 7,017 $ 10,251
========== ========== ========== ========== ==========
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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 December 31, 2003 (unaudited), and September 30, 2003 and 2002, was
$116,736 and $96,527, and $91,008, respectively, with interest rates ranging
from 1.21% to 6.77%.
The Association's borrowings consisted of the following (dollars in thousands):
(Unaudited)
Three Months
Ended Year Ended
December 31, September 30,
2003 2003
------------ ------------
FHLB advances
Maximum outstanding at any month end $ 117,000 $ 112,000
Average outstanding $ 103,000 $ 102,000
Weighted average interest rates
For the period 4.46% 4.53%
At end of period 4.09% 4.64%
Scheduled maturities of the fixed rate FHLB borrowings were (dollars in
thousands):
(Unaudited)
December 31, 2003 September 30, 2003 September 30, 2002
--------------------------- --------------------------- ---------------------------
Average Average Average
Interest Interest Interest
Rates Amount Rates Amount Rates Amount
------------ ------------ ------------ ------------ ------------ ------------
2004 3.68% $ 30,052 4.89% $ 20,431 5.14% $ 27,598
2005 3.97% 21,590 4.49% 13,723 4.89% 20,431
2006 3.75% 15,952 4.51% 18,202 4.49% 14,157
2007 4.85% 10,438 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
------------ ------------ ------------
$ 116,735 $ 96,527 $ 91,008
============ ============ ============
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Note 7 - Advances From the Federal Home Loan Bank (Continued)
Included in the Association's borrowing capacity with FHLB is a cash management
advance account. The balance at December 31, 2003 (unaudited), was $6,642. There
was no balance in this account at September 30, 2003, and the balance at
September 30, 2002, was $1,200. At December 31, 2003, 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 three months ended December 31, 2003
(unaudited) and 2002 (unaudited), and years ended September 30, 2003, 2002, and
2001, total Association contributions were $34 and $28 and $124, $105, and $94,
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.
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 $22 and $82, and $298, $154,
and $49 for the three months ended December 31, 2003 (unaudited), and December
31, 2002 (unaudited), and the years ended September 30, 2003, 2002, and 2001,
respectively.
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Note 8 - Employee Retirement Plans (Continued)
Deferred compensation:
The Association has deferred compensation agreements with several key members of
management. Under the agreements, the Association is obligated to provide for
each such employee or his 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 $(36) and $28, and $340,
$141, and $146 for the three months ended December 31, 2003 (unaudited), and
December 31, 2002 (unaudited), and the years ended September 30, 2003, 2002, and
2001, respectively.
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 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 $102 and $42, and $154, $41,
and $20 for the three months ended December 31, 2003 (unaudited), and December
31, 2002 (unaudited), and the years ended September 30, 2003, 2002, and 2001,
respectively.
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Note 8 - Employee Retirement Plans (Continued)
Bank owned life insurance:
The Association has funded it employee benefit plan with BOLI. The cash
surrender value of the BOLI was $9,732, $9,621, and $8,813 at December 31, 2003
(unaudited), and December 31, 2002 (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 $14 and $14,
and $55, $55, and $40 for the three months ended December 31, 2003 (unaudited),
and December 31, 2002 (unaudited), and the years ended September 30, 2003, 2002,
and 2001, respectively.
The potential death benefits as of December 31, 2003 (unaudited), and September
30, 2003, were $4,309 and $5,081, respectively.
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
December 31, 2003. Certain lease payments may be adjusted periodically in
accordance with changes in the Consumer Price Index.
The Association also has noncancelable operating leases for six 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)
December 31,
2003
------------
2004 $ 363
2005 237
2006 157
2007 144
2008 315
Thereafter 704
------------
$ 1,920
============
Total rent expense for the three months ended December 31, 2003 (unaudited) and
2002 (unaudited), and the years ended September 30, 2003, 2002, and 2001, was
$94 and $154, and $506, $427, and $388, respectively.
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Note 9 - Commitments (Continued)
The Association leases office space to others on a month-to-month basis as well
as one noncancelable operating lease. Total rental income was $4 and $10, and
$29, $23, and $50 for the three months ended December 31, 2003 (unaudited) and
2002 (unaudited), and the years ended September 30, 2003, 2002, and 2001,
respectively. Minimum future rental income on the one noncancelable operating
lease with terms in excess of one year is as follows (dollars in thousands):
(Unaudited)
Three Months
Ended
December 31,
2003
------------
2004 $ 11
2005 12
2006 9
------------
$ 32
============
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
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.
F-27
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Note 9 - Commitments (Continued)
At December 31, 2003 (unaudited), and September 30, 2003, commitments to extend
credit were as follows (dollars in thousands):
(Unaudited)
December 31, September 30,
2003 2003
------------ ------------
Unfunded commitments under lines of credit $ 18,280 $ 16,701
Other loan commitments 7,234 13,396
------------ ------------
$ 25,514 $ 30,097
============ ============
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)
Three Months
Ended Year Ended September 30,
December 31, ----------------------------
2003 2003 2002
------------ ------------ ------------
Beginning balance $ 973 $ 622 $ 386
Principal advances 3 860 255
Principal repayments (16) (509) (19)
------------ ------------ ------------
Balance, end of year $ 960 $ 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 $3,158, $1,353, and $1,023
at December 31, 2003 (unaudited), and September 30, 2003 and 2002, respectively.
F-28
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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 December 31, 2003 (unaudited), and September
30, 2003 and 2002, the Association meets all of the capital adequacy
requirements to which it is subject.
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
(Unaudited) Three Months ------------------- ------------------- --------------------
Ended December 31, 2003 Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
Total risk-based capital (to risk-
weighted assets): $ 43,270 14.06% $ 24,615 => 8.0% $ 30,768 => 10.0%
Tier 1 (core) capital 41,134 8.67% 18,978 => 4.0% 23,722 => 5.0%
Tangible capital (to tangible
assets): 41,134 8.67% 9,489 => 2.0% -- N/A
Tier 1 risk-based capital (to risk-
weighted assets): 41,134 13.37% 18,978 => 4.0% 28,466 => 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% 18,046 => 4.0% 27,069 => 6.0%
F-29
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Note 11 - Capital Requirement (Continued)
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------------------- ------------------- --------------------
Year Ended September 30, 2002 Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
Total risk-based capital (to risk-
weighted assets): $ 35,865 13.79% $ 21,672 => 8.0% $ 27,092 => 10.0%
Tier 1 (core) capital 35,539 8.50% 16,700 => 4.0% 20,873 => 5.0%
Tangible capital (to tangible
assets): 35,539 8.50% 8,350 => 2.0% -- N/A
Tier 1 risk-based capital (to risk-
weighted assets): 35,539 13.27% 16,700 => 4.0% 16,255 => 6.0%
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 1 capital (dollars in thousands):
September 30,
December 31, ---------------------------
2003 2003 2002
------------ ------------ ------------
Equity $ 41,444 $ 40,399 $ 34,961
Other comprehensive income - unrealized
gain (loss) on securities 9 16 (2)
------------ ------------ ------------
TOTAL TIER I CAPITAL $ 41,453 $ 40,415 $ 34,959
============ ============ ============
Note 12 - Income Taxes
The components of income tax (benefit) expense consisted of the following
(dollars in thousands):
(Unaudited)
Three Months Ended
December 31, Year Ended September 30,
------------------------ -------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Current $ 728 $ 520 $ 2,758 $ 1,737 $ 1,402
Deferred (132) 251 665 (93) (179)
---------- ---------- ---------- ---------- ----------
INCOME TAX EXPENSE $ 596 $ 771 $ 3,423 $ 1,644 $ 1,223
========== ========== ========== ========== ==========
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Note 12 - Income Taxes (Continued)
Deferred income taxes result from timing differences in the recognition of
income and expense for income tax and financial reporting purposes (dollars in
thousands).
(Unaudited)
Three Months Ended
December 31, Year Ended September 30,
------------------------ --------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Federal income tax at statutory rates $ 556 $ 576 $ 3,019 $ 1,275 $ 1,024
State income taxes, net of federal benefit 80 80 409 262 159
Effect of permanent differences (12) (39) (184) (119) (85)
Other (28) 154 179 226 125
---------- ---------- ---------- ---------- ----------
INCOME TAX EXPENSE $ 596 $ 771 $ 3,423 $ 1,644 $ 1,223
========== ========== ========== ========== ==========
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)
December 31, September 30,
------------ ----------------------------
2003 2003 2002
------------ ------------ ------------
Deferred tax asset:
Deferred compensation $ 631 $ 583 $ 373
Unrealized loss on securities available for sale 6 16 --
Allowance for loan losses 733 627 540
Accrued expense 107 107 --
Other 22 2 25
Deferred tax liability:
Fixed asset basis (539) (582) (624)
Unrealized gain on securities available for sale (4) -- (1)
Deferred loan fees (338) (317) --
Mortgage servicing rights (1,350) (1,322) (687)
Federal Home Loan Bank stock dividends (1,621) (1,589) (1,453)
------------ ------------ ------------
NET DEFERRED TAX LIABILITY $ (2,353) $ (2,475) $ (1,827)
============ ============ ============
F-31
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Note 12 - Income Taxes (Continued)
Included in retained earnings at December 31, 2003, and September 30, 2003 and
2002, is approximately $3,200, in bad debt reserves for which no deferred income
tax liability has been recorded. This amount represents allocations of income to
bad debt deductions for tax purposes only. Reduction of these reserves for
purposes other than tax bad debt losses or adjustments arising from carryback of
net operating losses would create income for tax purposes, which would be
subject to the then-current corporate income tax rate. The unrecorded deferred
liability on this amount was approximately $1,250 at December 31, 2003, 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) ---------------------------------------------------------
December 31, 2003 2003 2002
--------------------------- --------------------------- ---------------------------
Carrying Estimated Fair Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value Amount Value
------------ ------------ ------------ ------------ ------------ ------------
Financial Assets:
Cash and cash equivalents $ 12,141 $ 12,141 $ 11,118 $ 11,118 $ 9,286 $ 9,286
Securities available for sale 6,442 6,442 5,440 5,440 2,507 2,507
Mortgage-backed securities held
to maturity 41,846 42,802 24,425 25,423 44,325 46,279
Loans receivable, net 381,574 384,106 377,695 373,937 331,019 355,116
Federal Home Loan Bank stock 6,615 6,615 6,533 6,533 5,267 5,267
Financial Liabilities:
Demand and savings deposits 157,142 157,142 156,201 156,201 149,545 149,545
Certificates of deposit 147,613 149,034 145,072 147,283 130,227 134,155
Federal Home Loan Bank
borrowings 116,735 120,564 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.
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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 December 31, 2003 and 2002, and September 30, 2003, 2002, and 2001,
were insignificant.
Note 14 - Subsequent Event
On March 16, 2004, the Board of Directors of the Association approved a Plan of
Conversion (the Plan) which provides for the conversion of the Association from
a federally chartered mutual savings and loan association to a federally
chartered stock savings bank (the Bank) pursuant to the rules and regulations of
the Office of Thrift Supervision. As part of the conversion, the Plan provides
for the concurrent formation of a holding company that will own 100% of the
common stock of the Association. Following receipt of all required regulatory
approvals, the approval of the depositors of the Association eligible to vote on
the Plan, and the satisfaction of all other conditions precedent to the
conversion, the Association will complete the conversion.
Upon the completion of the conversion, the legal existence of the Association
shall not terminate but the stock bank shall be a continuation of the mutual
association. The Bank shall have, hold, and enjoy the same in its own right as
fully and to the same extent as the same was possessed, held, and enjoyed by the
mutual association. The Bank at the time and the taking effect of the conversion
shall continue to have and succeed to all the rights, obligations, and relations
of the mutual association.
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Note 14 - Subsequent Event (Continued)
At the time of conversion, the Association will establish a liquidation account
in an amount equal to its total net worth as of the latest statement of
financial condition appearing in the final prospectus. The liquidation account
will be maintained for the benefit of eligible depositors who continue to
maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible depositors have
reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible depositor will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for the accounts then held. The liquidation
account balance is not available for the payment of dividends.
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the offering. If the conversion transaction is not completed, all costs
will be charged to expense. As of December 31, 2003, there were no conversion
costs that had been deferred.
F-34
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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, Home Federal or Keefe, Bruyette & Woods. 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 since any of the dates as of which information is furnished
herein or since the date hereof.
--------------------------------
TABLE OF CONTENTS
Page
----
Summary..................................................................... i
Risk Factors................................................................ 1
A Warning About Forward-Looking Statements.................................. 4
Selected Financial and Other Data........................................... 5
Home Federal Bancorp........................................................ 7
Home Federal ............................................................... 7
How We Intend to Use the Proceeds from this Offering........................ 8
Our Policy Regarding Dividends.............................................. 9
Market for the Common Stock................................................. 10
Capitalization.............................................................. 11
Home Federal Exceeds All Regulatory Capital Requirements.................... 12
Pro Forma Data.............................................................. 14
Proposed Purchases by Management............................................ 20
Home Federal and Subsidiary Consolidated Statements of Income............... 20
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 22
Business of Home Federal Bancorp............................................ 49
Business of Home Federal ................................................... 49
Management ................................................................. 84
How We Are Regulated........................................................ 96
Taxation.................................................................... 103
Home Federal's Conversion................................................... 104
Restrictions on Acquisition of Home Federal Bancorp and Home Federal ....... 121
Description of Capital Stock of Home Federal Bancorp........................ 125
Transfer Agent and Registrar................................................ 126
Experts..................................................................... 126
Legal and Tax Opinions...................................................... 126
Where You Can Find More Information......................................... 127
Index to Consolidated Financial Statements.................................. F-1
Dealer Prospectus Delivery Obligation
Until the later of _________ __, 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
11,902,500 SHARES
HOME FEDERAL
BANCORP, INC.
(Proposed Holding Company for
Home Federal Bank)
COMMON STOCK
--------------
PROSPECTUS
--------------
KEEFE, BRUYETTE & WOODS
____________ __, 2004
================================================================================
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Legal fees and expenses............................................................. $ 200,000
Securities marketing legal fees..................................................... 35,000
EDGAR, copying, printing, postage and mailing....................................... 285,000
Appraisal and business plan preparation fees and expenses........................... 75,000
Accounting fees and expenses........................................................ 85,000
Securities marketing fees and expenses.............................................. 1,414,000
Data processing fees and expenses................................................... 45,000
SEC registration fee................................................................ 15,000
Blue Sky filing fees and expenses................................................... 5,000
Office of Thrift Supervision filing fee............................................. 12,000
NASDAQ listing fee.................................................................. 100,000
Stock transfer agent and regular fees and expenses.................................. 20,000
Other expenses - NASD filing fee, certificate printing, telephone/stock center...... 60,000
----------
Total...................................................................... $2,351,000
==========
Item 14. Indemnification of Directors and Officers
Article XVII of the Certificate of Incorporation of Home
Federal Bancorp, Inc. requires indemnification of directors,
officers and employees to the fullest extent permitted by
Delaware law.
Section 145 of the Delaware General Corporation Law sets forth
circumstances under which directors, officers, employees and
agents may be insured or indemnified against liability which
they may incur in their capacities:
145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS;
INSURANCE.--(a) A corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly
II - 1
and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
incurred by him any such capacity, or arising out of his status as such, whether
or not the corporation would have the power to indemnify him against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agents, so that any
person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
II - 2
Item 15. Recent Sales of Unregistered Securities
Not Applicable.
Item 16. Exhibits and Financial Statement Schedules
The financial statements and exhibits filed as part of this
registration statement are as follows:
(a) Exhibits
1.1 Engagement Letter between Home Federal Savings and Loan
Association of Nampa and Keefe, Bruyette & Woods, Inc.
1.2 Form of proposed Agency Agreement among Home Federal Bancorp,
Inc., Home Federal Savings and Loan Association of Nampa and
Keefe, Bruyette & Woods, Inc. (a)
2 Plan of Conversion of Home Federal Savings and Loan
Association of Nampa
3.1 Certificate of Incorporation of Home Federal Bancorp, Inc.
3.2 Bylaws of Home Federal Bancorp, Inc.
4 Form of Certificate for Common Stock
5 Opinion of Breyer & Associates PC regarding legality of
securities registered
8.1 Federal Tax Opinion of Breyer & Associates PC
8.2 State Tax Opinion of Penland Munther Goodrum, Chartered
8.3 Opinion of RP Financial, LC. as to the value of subscription
rights
10.1 Form of Employment Agreement for President and Chief Executive
Officer
10.2 Form of Severance Agreement for Executive Officers
10.3 Form of Home Federal Savings and Loan Association of Nampa
Employee Severance Compensation Plan
10.4 Form of Director Indexed Retirement Agreement entered into by
Home Federal Savings and Loan Association of Nampa with Each
of its Directors
10.5 Form of Director Deferred Incentive Agreement entered into by
Home Federal Savings and Loan Association of Nampa with Each
of its Directors
10.6 Form of Split Dollar Agreement entered into by Home Federal
Savings and Loan Association of Nampa with Daniel L. Stevens,
N. Charles Hedemark, Fred H. Helpenstell, M.D., Richard J.
Schrandt, James R. Stamey and Robert A. Tinstman
10.7 Form of Executive Deferred Incentive Agreement, and amendment
thereto, entered into by Home Federal Savings and Loan
Association of Nampa with Daniel L. Stevens, Robert A.
Schoelkoph, Roger D. Eisenbarth, Lynn A. Sander and Karen
Wardwell
II - 3
10.8 Form of Amended and Restated Salary Continuation Agreement
entered into by Home Federal Savings and Loan Association of
Nampa with Daniel L. Stevens, Robert A. Schoelkoph, Roger D.
Eisenbarth, Lynn A. Sander and Karen Wardwell
21 Subsidiaries of the Registrant
23.1 Consent of Moss Adams LLP
23.2 Consent of Breyer & Associates PC (contained in opinion
included as Exhibit 5)
23.3 Consent of Breyer & Associates PC as to its Federal Tax
Opinion (contained in opinion included as Exhibit 8.1)
23.4 Consent of Penland Munther Goodrum, Chartered as to its State
Tax Opinion (contained in opinion included as Exhibit 8.2)
23.5 Consent of RP Financial, LC.
24 Power of Attorney (contained in signature page to the
registration statement)
99.1 Order and Certification Form
99.2 Solicitation and Marketing Materials
99.3 Appraisal Agreement between Home Federal Savings and Loan
Association of Nampa and RP Financial, LC.
99.4 Appraisal Report of RP Financial, LC.
--------------
(a) To be filed by amendment.
II - 4
(b) Financial Statement Schedules
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors........................................................ F-2
Consolidated Statements of Financial Condition as of
December 31, 2003 and September 30, 2003 and 2002..................................... F-4
Consolidated Statements of Income for the Three Months Ended
December 31, 2003 and 2002 and the Years Ended September 30, 2003, 2002 and 2001...... F-5
Consolidated Statements of Equity for the Three Months Ended
December 31, 2003 and the Years Ended September 30, 2003, 2002 and 2001............... F-6
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 2003 and 2002 and the Years Ended September 30, 2003, 2002 and 2001...... F-7
Notes to Consolidated Financial Statements............................................ F-9
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.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
II - 5
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post- effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of any
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is therefore unenforceable.
II - 6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Nampa,
State of Idaho on March 19, 2004.
HOME FEDERAL BANCORP, INC.
By: /s/ DANIEL L. STEVENS
--------------------------------------
Daniel L. Stevens
Chairman of the Board, President and
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Home Federal Bancorp,
Inc., do hereby severally constitute and appoint Daniel L. Stevens, our true and
lawful attorney and agent, to do any and all things and acts in our names in the
capacities indicated below and to execute all instruments for us and in our
names in the capacities indicated below which said Daniel L. Stevens may deem
necessary or advisable to enable Home Federal Bancorp, Inc., to comply with the
Securities Act of 1933 and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with the registration
statement on Form S-1 relating to the offering of Home Federal Bancorp, Inc.'s
Common Stock, including specifically but not limited to, power and authority to
sign, for us or any of us in our names in the capacities indicated below, the
registration statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that Daniel L. Stevens
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ DANIEL L. STEVENS Chairman of the Board, President and March 19, 2004
------------------------------ Chief Executive Officer
Daniel L. Stevens (Principal Executive Officer)
/s/ ROBERT A. SCHOELKOPH Senior Vice President, Treasurer March 19, 2004
------------------------------ and Chief Financial Officer
Robert A. Schoelkoph (Principal Financial and Accounting Officer)
/s/ N. CHARLES HEDEMARK Director March 19, 2004
------------------------------
N. Charles Hedemark
/s/ FRED H. HELPENSTELL, M.D. Director March 19, 2004
------------------------------
Fred H. Helpenstell, M.D.
/s/ THOMAS W. MALSON Director March 19, 2004
------------------------------
Thomas W. Malson
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/s/ RICHARD J. SCHRANDT Director March 19, 2004
------------------------------
Richard J. Schrandt
/s/ JAMES R. STAMEY Director March 19, 2004
------------------------------
James R. Stamey
/s/ ROBERT A. TINSTMAN Director March 19, 2004
------------------------------
Robert A. Tinstman
II - 8