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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 2004 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-50901
HOME FEDERAL BANCORP, INC.
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(Exact name of registrant as specified in its charter)
United States 20-0945587
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
500 12th Avenue South, Nampa, Idaho 83651
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (208) 466-4634
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) Common Stock,
of the Act: par value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2):
Yes [ ] NO [X]
The Registrant did not have any shares of common stock issued and
outstanding as of March 31, 2004. The Registrant completed its initial public
offering on December 6, 2004. The aggregate market value of the Common Stock
outstanding held by nonaffiliates of the Registrant based on the closing sales
price of the Registrant's Common Stock as quoted on the Nasdaq Stock Market on
December 7, 2004 was $77,806,505 (6,229,504 shares at $12.49 per share).
For purposes of this calculation, Common Stock held by officers and directors of
the Registrant and the Home Federal Employee Stock Ownership Plan and Trust are
considered nonaffiliates.
HOME FEDERAL BANCORP, INC.
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I. Page
------
Item 1. Business
General. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Market Area. . . . . . . . . . . . . . . . . . . . . . . . . 1
Lending Activities . . . . . . . . . . . . . . . . . . . . . 2
Asset Quality. . . . . . . . . . . . . . . . . . . . . . . . 15
Investment Activities. . . . . . . . . . . . . . . . . . . . 23
Deposit Activities and Other Sources of Funds. . . . . . . . 26
How We Are Regulated . . . . . . . . . . . . . . . . . . . . 30
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Competition. . . . . . . . . . . . . . . . . . . . . . . . . 39
Subsidiaries and Other Activities. . . . . . . . . . . . . . 39
Executive Officers . . . . . . . . . . . . . . . . . . . . . 39
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 43
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 43
PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities . . . . . . 43
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . 45
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . .
A Warning About Forward Looking Statements . . . . . . . . . 47
Recent Developments. . . . . . . . . . . . . . . . . . . . . 47
General. . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Business Strategy. . . . . . . . . . . . . . . . . . . . . . 48
Operating Strategy . . . . . . . . . . . . . . . . . . . . . 48
Critical Accounting Policies . . . . . . . . . . . . . . . . 50
Comparison of Financial Condition at September 30, 2004 and
2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Comparison of Operating Results for Years Ended September
30, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . 53
Comparison of Financial Condition at September 30, 2003
and 2002. . . . . . . . . . . . . . . . . . . . . . . . . . 57
Comparison of Operating Results for Years Ended September
30, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . 59
Average Balances, Interest and Average Yields/Cost . . . . . 63
Yields Earned and Rates Paid . . . . . . . . . . . . . . . . 64
Rate/Volume Analysis . . . . . . . . . . . . . . . . . . . . 65
Asset and Liability Management and Market Risk . . . . . . . 66
Liquidity and Commitments. . . . . . . . . . . . . . . . . . 68
Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Off-Balance Sheet Arrangements . . . . . . . . . . . . . . . 70
Impact of Inflation. . . . . . . . . . . . . . . . . . . . . 70
Recent Accounting Pronouncements . . . . . . . . . . . . . . 71
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . 71
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . 73
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . 107
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . 107
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . 107
PART III.
Item 10. Directors and Executive Officers of the Registrant. . . . . . 107
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . 110
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. . . . . . . . . 115
Item 13. Certain Relationships and Related Transactions. . . . . . . . 116
Item 14. Principal Accountant Fees and Services. . . . . . . . . . . . 117
PART IV.
Item 15. Exhibits and Financial Statement Schedules. . . . . . . . . . 117
PART I
Item 1. Business
General
Home Federal Bancorp, Inc. ("we," "us," the "Company" or "Home Federal
Bancorp") was organized as a federally chartered stock corporation at the
direction of Home Federal Savings and Loan Association of Nampa
("Association") in connection with its mutual holding company reorganization
("Reorganization"). The Reorganization was completed on December 6, 2004. In
connection with the Reorganization, the Association converted to a federally
chartered stock savings bank and changed its corporate title to "Home Federal
Bank" ("Home Federal" or the "Bank"). In the Reorganization, Home Federal
Bancorp sold 40.06% of its outstanding shares of common stock (6,083,500 shares)
to the public and issued 59.04% of its outstanding shares of common stock
(8,979,246 shares) to Home Federal MHC, the mutual holding company parent of
Home Federal. In connection with the Reorganization, the Company received
$53,722,527 in net proceeds after deducting expenses, and issued an additional
146,004 shares and $365,010 to the Home Federal Foundation, Inc., a charitable
foundation established as part of the Reorganization.
Regulations of the Office of Thrift Supervision ("OTS") provide that so
long as Home Federal MHC exists, it will own at least a majority of Home Federal
Bancorp's common stock. Home Federal Bancorp's business activity is the
ownership of the outstanding capital stock of Home Federal and management of the
investment of offering proceeds retained from the reorganization. Home Federal
Bancorp neither owns nor leases any property but instead uses the premises,
equipment and other property of Home Federal with the payment of appropriate
rental fees, as required by applicable law and regulations. In the future, Home
Federal Bancorp may acquire or organize other operating subsidiaries; however,
there are no current plans, arrangements, agreements or understandings, written
or oral, to do so. Home Federal Bancorp has no significant assets, other than
all of the outstanding shares of Home Federal, and no significant liabilities.
Accordingly, the information set forth in this report, including the
consolidated financial statements and related financial data, relates primarily
to Home Federal.
Home Federal was founded in 1920 as a building and loan association and
reorganized as a federal mutual savings and loan association in 1936. Home
Federal's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") up to applicable legal limits under the Savings Association Insurance
Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank
("FHLB") System since 1937. The Bank is regulated by the OTS and the FDIC.
We are a community-oriented financial institution dedicated to serving the
financial service needs of consumers and businesses within our market area. We
engage primarily in the business of attracting deposits from the general public
and using these funds to originate loans. We emphasize the origination of loans
secured by first mortgages on owner-occupied, residential real estate,
residential development and construction, and commercial real estate. To a
lesser extent, we originate other types of real estate loans, commercial
business loans and consumer loans. See " - Lending Activities."
Market Area
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. See "Item 2. Properties."
Nearly 40% of the state's population lives and works in the four counties
served by Home Federal. Ada County has the largest population and includes the
City of Boise, the state capitol. Home Federal maintains its largest branch
presence in Ada County with seven locations, followed by Canyon County with five
offices, including Home Federal's corporate headquarters in Nampa. As of June
30, 2004, we had a 5.52% market share of the FDIC-insured deposits in
these two counties, ranking us fifth among all insured depository institutions
in these counties. The two remaining branches are located in Elmore and Gem
Counties.
1
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 Cascade, LLC. 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 September 2004 in the State of Idaho was 5.0%, compared to the U.S.
unemployment rate of 5.4%, and the unemployment rates for Ada, Canyon, Elmore
and Gem Counties were 4.0%, 6.5%, 6.5% and 7.6%, respectively. The higher
unemployment rates in Canyon, Elmore 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 September 30,
2004, the net loan portfolio totaled $392.6 million and represented 52.8% of our
total assets. As of September 30, 2004, our total loan portfolio was comprised
of: 63.1% single-family home loans, 6.9% home equity loans, 26.4% commercial
real estate loans, 1.8% multi-family real estate loans, 0.3% commercial business
loans, and 1.2% secured consumer loans and 0.3% unsecured consumer loans.
At September 30, 2004, the maximum amount which we could have loaned to any
one borrower and the borrower's related entities under applicable regulations
was $7.1 million. Our internal policy limits loans to one borrower and the
borrower's related entities to the lesser of 80% of the regulatory limit or
1.25% of total loans outstanding, or $5.2 million. At September 30, 2004, we
had one aggregate borrowing relationship with outstanding balances in excess of
this amount.
Our largest single borrower relationship was six commercial real estate
loans for $5.8 million in the aggregate made to a family partnership and secured
by buildings housing a restaurant, office and retail space, a child care
facility and RV storage. The second largest lending 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. Our third largest lending relationship was a
commercial real estate loan totaling $3.2 million to a limited liability company
for a mobile home dealership. The fourth largest lending relationship was a
commercial real estate loan totaling $5.7 million secured by a professional
building. This loan was made to a family trust, and we have sold $2.8 million
of a participation interest to two other financial institutions. The fifth
largest lending relationship consists of three commercial real estate loans for
$2.7 million secured by office space and a residential subdivision development.
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 September 30, 2004.
2
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,
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2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(dollars in thousands)
Real estate:
One- to four-family
residential (1) $242,818 61.27% $247,309 65.81% $194,088 60.27% $173,835 59.35% $143,576 58.31%
Multi-family residential 6,265 1.58 7,750 2.06 7,512 2.34 8,700 2.97 5,475 2.22
Commercial 93,575 23.61 79,020 21.02 79,197 24.59 59,752 20.40 44,700 18.15
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate 342,658 86.46 334,079 88.89 280,797 87.20 242,287 82.72 193,751 78.68
Real estate construction:
One- to four-family
residential 7,207 1.82 5,225 1.39 6,505 2.02 13,927 4.75 21,171 8.60
Multi-family residential 834 0.21 352 0.09 1,486 0.46 904 0.31 1,857 0.75
Commercial and land
development 11,151 2.81 9,128 2.43 6,579 2.04 10,416 3.56 5,516 2.24
Total real estate ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
construction 19,192 4.84 14,705 3.91 14,570 4.52 25,247 8.62 28,544 11.59
Consumer:
Home equity lines of
credit 27,351 6.90 20,640 5.49 18,069 5.61 15,250 5.20 15,604 6.34
Automobile (including
recreational vehicles) 3,838 0.97 1,939 0.52 2,297 0.71 2,133 0.73 1,185 0.48
Other consumer 1,949 0.49 2,827 0.75 3,666 1.14 4,332 1.48 4,128 1.68
------ ------ ------- ------ ------- ------ ------ ------ ------ -----
Total consumer 33,138 8.36 25,406 6.76 24,032 7.46 21,715 7.41 20,917 8.50
Commercial/ Business 1,363 0.34 1,662 0.44 2,641 0.82 3,662 1.25 3,031 1.23
------ ------ ------- ------ ------- ------ ------ ------ ------ -----
Total loans 396,351 100.00% 375,852 100.00% 322,040 100.00% 292,911 100.00% 246,243 100.00%
====== ====== ====== ====== ======
Less:
Net deferred loan origination
(fees) costs (1,080) (1,370) (2,358) (2,095) (1,992)
Allowance for loan
losses (2,637) (1,853) (1,385) (1,431) (1,129)
------- ------- ------- ------- -------
Loans receivable, net $392,634 $372,629 $318,297 $289,385 $243,122
======= ======= ======= ======= =======
________
(1) Does not include loans held for sale of $3.6 million, $5.1 million, $12.7 million,
$9.4 million and $4.8 million at September 30, 2004, 2003, 2002, 2001 and 2000, respectively.
3
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,
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(dollars in thousands)
FIXED RATE LOANS
Real estate:
One- to four-family
residential $193,241 48.76% $198,882 52.91% $133,697 41.52% $102,463 34.98% $78,169 31.74%
Multi-family residential 2,136 0.54 2,137 0.57 2,061 0.64 2,050 0.70 266 0.11
Commercial 12,428 3.13 8,461 2.25 8,125 2.52 8,005 2.73 10,199 4.14
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total 207,805 52.43 209,480 55.73 143,883 44.68 112,518 38.41 88,634 35.99
Real estate construction:
One- to four-family
residential 2,778 0.70 4,909 1.31 2,107 0.66 2,863 0.98 2,768 1.12
Multi-family residential - - - - - - - - - --
Commercial and land
development 312 0.08 2,478 0.66 359 0.11 185 0.06 - --
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total 3,090 0.78 7,387 1.97 2,466 0.77 3,048 1.04 2,768 1.12
Consumer:
Home equity lines of
credit 4,393 1.11 2,906 0.77 129 0.04 144 0.05 155 0.06
Automobile 3,838 0.97 1,939 0.52 2,297 0.71 2,133 0.73 1,185 0.48
Other consumer 1,949 0.49 2,827 0.75 3,666 1.14 4,332 1.48 4,128 1.68
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total 10,180 2.57 7,672 2.04 6,092 1.89 6,609 2.26 5,468 2.22
Commercial/business 642 0.16 775 0.21 1,420 0.44 1,362 0.46 1,478 0.60
Total fixed rate loans 221,717 55.94 225,314 59.95 153,861 47.78 123,537 42.17 98,348 39.93
ADJUSTABLE RATE LOANS
Real estate:
One- to four-family
residential 49,577 12.51 48,427 12.89 60,391 18.75 71,372 24.36 65,407 26.56
Multi-family residential 4,129 1.04 5,613 1.49 5,451 1.69 6,650 2.27 5,209 2.12
Commercial 81,147 20.48 70,559 18.77 71,072 22.07 51,747 17.67 34,501 14.01
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total 134,853 34.03 124,599 33.15 136,914 42.51 129,769 44.30 105,117 42.69
(table continues on following page)
4
At September 30,
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(dollars in thousands)
Real estate construction:
One- to four-family
residential 4,429 1.12 316 0.08 4,398 1.37 11,064 3.78 18,403 7.47
Multi-family residential 834 0.21 352 0.09 1,486 0.46 904 0.31 1,857 0.76
Commercial and land
development 10,839 2.73 6,650 1.77 6,220 1.93 10,231 3.49 5,516 2.24
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total 16,102 4.06 7,318 1.94 12,104 3.76 22,199 7.58 25,776 10.47
Consumer:
Home equity lines of
credit 22,958 5.79 17,734 4.72 17,940 5.57 15,106 5.16 15,449 6.28
Automobile - - - - - - - - - -
Other consumer -- - -- - -- - -- - - --
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total consumer 22,958 5.79 17,734 4.72 17,940 5.57 15,106 5.16 15,449 6.28
Commercial/ business 721 0.18 887 0.24 1,221 0.38 2,300 0.79 1,553 0.63
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total adjustable rate
loans 174,634 44.06 150,538 40.05 168,179 52.22 169,374 57.83 147,895 60.07
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total loans 396,351 100.00% 375,852 100.00% 322,040 100.00% 292,911 100.00% 246,243 100.00%
====== ====== ====== ====== ======
Less:
Net deferred loan
origination(fees)costs (1,080) (1,370) (2,358) (2,095) (1,992)
Allowance for loan losses(2,637) (1,853) (1,385) (1,431) (1,129)
------- ------- ------- ------- -------
Loans receivable, net $392,634 $372,629 $318,297 $289,385 $243,122
======= ======= ======= ======= =======
5
One- to Four-Family Residential Real Estate Lending. As of September 30,
2004, $242.8 million, or 61.3%, 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 September 30, 2004, $193.2
million, or 79.6%, of our permanent one- to four-family loan portfolio consisted
of fixed rate loans.
We also offer adjustable rate mortgage loans at rates and terms competitive
with market conditions. All of the adjustable rate mortgage loans we originate
are retained in the loan portfolio and are not originated for the purpose of
selling them in the secondary market, although they do conform to secondary
market standards. We offer several adjustable rate mortgage products which
adjust annually after an initial period ranging from one to ten years.
Contractual annual adjustments are generally limited to increases or decreases
of no more than two percent, subject to a maximum increase of no more than six
percent from the rate offered at the time of origination. The adjustable rate
mortgage loans held in our portfolio do not permit negative amortization of
principal and generally carry no prepayment restrictions. Borrower demand for
adjustable rate mortgage loans versus fixed rate mortgage loans is a function of
the level of interest rates, the expectations of changes in the level of
interest rates and the difference between the initial interest rates and fees
charged for each type of loan. The relative amount of fixed rate mortgage loans
and adjustable rate mortgage loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. At September
30, 2004, we had $49.6 million, or 20.4%, of our permanent one- to four-family
mortgage loans in adjustable rate loans.
The retention of adjustable rate mortgage loans in our loan portfolio helps
us reduce our exposure to changes in interest rates. There are, however, credit
risks resulting from the potential of increased interest to be paid by the
customer as a result of increases in interest rates. It is possible that,
during periods of rising interest rates, the risk of default on adjustable rate
mortgage loans may increase as a result of repricing and the increased costs to
the borrower. Furthermore, because adjustable rate mortgage loans may be
offered at initial rates of interest below the rates that would apply were the
adjustment index used for pricing initially, these loans may be subject to
increased risks of default or delinquency. This issue is of particular concern
in the low interest rate environment we have experienced since 2001. Another
consideration is that although adjustable rate mortgage loans allow us to
increase the sensitivity of our asset base as a result of changes in the
interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limits. Because of these
considerations, there is no assurance that yields on adjustable rate mortgage
loans will be sufficient to offset increases in our cost of funds, particularly
in today's low interest rate environment.
We generally underwrite our one- to four-family loans based on the
applicant's employment and credit history and the appraised value of the subject
property. Presently, we lend up to 80% of the lesser of the appraised value or
purchase price for one- to four-family residential loans. In situations where
we grant a loan with a loan-to-value ratio in excess of 80%, we require private
mortgage insurance in order to reduce our exposure to 80% or less. Properties
securing our one- to four-family loans are generally appraised by independent
fee appraisers approved by the Board of Directors. We require our borrowers to
obtain title and hazard insurance, and flood insurance, if necessary, in an
amount not less than the value of the property improvements.
Our fixed rate, single family residential mortgage loans are normally
originated with 15 to 30 year terms, although these loans typically remain
outstanding for substantially shorter periods, particularly in the declining
interest rate environment since 2001. In addition, substantially all
residential mortgage loans in our loan portfolio contain due-on-sale clauses,
which allow us to declare the unpaid amount of the loan due and payable upon the
sale of the property securing the loan. Typically, we enforce these due-on-sale
clauses to the extent permitted by law and as a standard course of business.
The average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates
and the interest rates payable on outstanding loans.
At September 30, 2004, $25.6 million, or 10.6%, of our one-to-four family
residential mortgages consisted of loans for non-owner occupied properties.
This consisted of $9.7 million of loans on second homes and $15.9 million
6
of loans for investment. 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 $5.6 million to the Idaho
Housing and Finance Association in the year ended September 30, 2004.
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 $3,000. 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.
Real Estate Construction. We have been an active originator of real estate
construction loans in our market area for many years. At September 30, 2004,
our construction and land development loans amounted to $19.2 million,
or 4.8%, of the total loan portfolio.
The following table shows the composition of the construction loan
portfolio at the dates indicated:
At September 30,
2004 2003
------ ------
(in thousands)
One- to four-family residential:
Speculative $ 3,016 $ 1,185
Permanent 3,422 3,351
Custom 769 689
Multi-family residential: 834 352
Commercial real estate:
Construction 9,598 7,275
Land development loans 1,553 1,853
------ ------
Total construction and land development $ 19,192 $ 14,705
====== ======
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 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.
7
During the year ended September 30, 2004, we originated $15.6 million 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, 2004 with all loans
performing according to their terms.
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 September 30, 2004, our largest subdivision
development loan had an outstanding principal balance of $716,000 and was
secured by a first mortgage lien. This loan was performing according to its
original terms at September 30, 2004. At September 30, 2004, we estimate that
the average outstanding principal balance of subdivision loans to contractors
and developers was $423,000.
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.
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 September 30, 2004, $6.3 million, or 1.6%, and $93.6 million, or 23.6%, 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
8
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 $507,000 as of September 30, 2004. As of that date, $6.3 million,
or 1.6%, of our total loan portfolio was secured by multi-family
dwellings located primarily in our market area. We target individual
multi-family and commercial real estate loans to small- and mid-size owner
occupants and investors between $500,000 and $2.0 million; however, we can by
policy originate loans to one borrower up to 80% of our regulatory limit, or
1.25% of our total outstanding loans. As of September 30, 2004, the maximum we
could lend to any one borrower based on this limit was $5.2 million. The
largest multi-family loan as of September 30, 2004 was a 44-unit residential
apartment complex with an outstanding principal balance at September 30, 2004 of
$1.7 million located in Canyon County. This loan is performing according to its
terms as of September 30, 2004.
Multi-family and commercial real estate loans up to $500,000 can be
approved by the Vice President and Manager of the Commercial Lending Department,
the Chief Lending Officer or the President and Chief Executive
Officer. Loans up to $1.5 million can be approved by the combined authority of
these three individuals. Our Management Loan Committee, which presently
consists of the President and Chief Executive Officer, the Chief Lending
Officer, the Residential Lending Operations Manager and the Commercial Loan
Department Manager, is authorized to approve loans to one borrower or a group of
related borrowers of up to $1.5 million in the aggregate, with no single loan
over $1.5 million. Loans over these amounts or outside our general underwriting
guidelines must be approved by the Board of Directors.
We offer both fixed and adjustable rate loans on multi-family and
commercial real estate loans. Loans originated on a fixed rate basis generally
are originated at fixed terms up to ten years, with amortization terms up to 25
years. As of September 30, 2004, we had $2.1 million in fixed multi-family
residential loans and $12.4 million in fixed commercial real estate 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 September 30, 2004, we had $4.2
million in adjustable rate multi-family residential loans and $81.2 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 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 $93.6 million, or 23.6%, of
our total loan portfolio as of September 30, 2004.
Consumer Lending. We offer a variety of consumer loans to our customers,
including, home equity loans and lines of credit, savings account loans,
automobile loans, recreational vehicle loans and personal unsecured loans.
Generally, consumer loans have shorter terms to maturity and higher interest
rates than mortgage loans. The maximum term we offer on automobile loans is 72
months and is applicable to new and one year old cars and light trucks. In
9
addition, we offer loan terms of up to 120 months on motor homes, and qualifying
travel trailers and boats. All automobile loans are risk priced based on the
percentage of cost, or established value, being financed. Consumer loans are
made with both fixed and variable interest rates and with varying terms. At
September 30, 2004, consumer loans amounted to $33.1 million, or 8.4%, of the
total loan portfolio.
At September 30, 2004, the largest component of the consumer loan portfolio
consisted of real estate secured loans and home equity lines of credit, which
totaled $27.4 million, or 6.9%, of the total loan portfolio. Home equity lines
of credit are made for, among other purposes, the improvement of residential
properties, debt consolidation and education expenses. The majority of these
loans are secured by a first or second mortgage on residential property. The
maximum loan-to-value ratio is 89.9% or less, when taking into account both the
balance of the home equity line of credit and the first mortgage loan. Home
equity lines of credit allow for a ten-year draw period, plus an additional ten
year repayment period, and the interest rate is tied to the prime rate as
published in The Wall Street Journal, and may include a margin.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In these cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and are more likely
to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount that can
be recovered on these loans. These risks are not as prevalent with respect to
our consumer loan portfolio because a large percentage of the portfolio consists
of home equity lines of credit that are underwritten in a manner such that they
result in credit risk that is substantially similar to one- to four-family
residential mortgage loans. Nevertheless, home equity lines of credit have
greater credit risk than one- to four-family residential mortgage loans because
they are secured by mortgages subordinated to the existing first mortgage on the
property, which we may or may not hold and do not have private mortgage
insurance coverage. At September 30, 2004, there were $50,000 of consumer loans
delinquent in excess of 90 days or in nonaccrual status. During the years ended
September 30, 2004 and 2003, we charged off $76,000 and $147,000, respectively,
in consumer loans.
Commercial Business Lending. At September 30, 2004, commercial business
loans totaled $1.4 million, or 0.3%, 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.
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.
10
Loan Maturity and Repricing. The following table sets forth certain
information at September 30, 2004 regarding the dollar amount of loans maturing
and repricing in Home Federal's portfolio based on their contractual terms
to maturity or next repricing date, 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 $12,100 $15,583 $15,924 $22,621 $176,590 $242,818
Multi-family
residential 366 1,539 1,749 491 2,120 6,265
Commercial 5,631 35,602 33,077 17,768 1,497 93,575
------ ------- ------- -------- -------- -------
Total real estate 18,097 52,724 50,750 40,880 180,207 342,658
Real estate construction:
One- to four-family
residential 3,785 145 499 - 2,778 7,207
Multi-family
residential - - - 834 - 834
Commercial and land
development 1,553 312 1,395 4,218 3,673 11,151
Total real estate ------ ------- ------- -------- -------- -------
construction 5,338 457 1,894 5,052 6,451 19,192
Consumer:
Home equity lines of
credit 23,145 - 169 440 3,597 27,351
Automobile 56 662 987 2,133 - 3,838
Other consumer 1,043 706 127 25 48 1,949
------ ------- ------- -------- -------- -------
Total consumer 24,244 1,368 1,283 2,598 3,645 33,138
Commercial/ Business 743 200 74 346 - 1,363
------ ------- ------- -------- -------- -------
Total loans
receivable $48,422 $54,749 $54,001 $48,876 $190,303 $396,351
====== ====== ====== ====== ======= =======
11
The following table sets forth the dollar amount of all loans due one year
or more after September 30, 2004, which have fixed interest rates and have
floating or adjustable interest rates.
Floating or
Adjustable Fixed
Rate Rates Total
---------- -------- -------
(in thousands)
Real estate:
One- to four-family residential $37,472 $193,246 $230,718
Multi-family residential 3,763 2,136 5,899
Commercial 76,663 11,281 87,944
---------- -------- -------
Total real estate 117,898 206,663 324,561
Real estate construction:
One- to four-family residential 644 2,778 3,422
Multi-family residential 834 - 834
Commercial and land development 9,286 312 9,598
---------- -------- -------
Total real estate construction 10,764 3,090 13,854
Consumer:
Home equity lines of credit - 4,206 4,206
Automobile - 3,782 3,782
Other consumer - 906 906
---------- -------- -------
Total consumer - 8,894 8,894
Commercial business - 620 620
---------- -------- -------
Total $128,662 $219,267 $347,929
========== ======== ========
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.
12
Loan Originations, Servicing, Purchases and Sales. During the year ended
September 30, 2004, our total loan originations were $190.4 million.
One- to four-family home loans are generally originated in accordance with
the guidelines established by Freddie Mac and Fannie Mae, with the exception of
our special community development loans under the Community Reinvestment Act.
We originate residential first mortgages and service them using an in-house
mortgage system. We utilize the Freddie Mac Loan Prospector and Fannie Mae
Desktop Underwriter automated loan systems to underwrite approximately 95% of
our residential first mortgage loans (excluding community development loans).
The remaining loans are underwritten by designated real estate loan underwriters
internally in accordance with standards as provided by our Board-approved loan
policy.
We actively sell residential first mortgage loans to the secondary market.
Generally, all 30-year fixed rate residential mortgages are sold to the
secondary market at the time of origination. Fixed rate residential mortgage
loans with terms of 20 years or less and adjustable rate mortgage loans are
generally held in our portfolio. During the years ended September 30, 2004,
2003 and 2002 we sold $67.6 million, $164.3 million and $92.8 million to the
secondary market representing 68.6%, 56.8% and 57.2% of total one- to four-
family residential loan originations, respectively. Our primary secondary
market relationship has been with Freddie Mac and Fannie Mae, and more recently
with the FHLB 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 September 30, 2004, our residential loan servicing
portfolio was $253.0 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.
13
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended September 30,
2004 2003 2002
------ ------ ------
(in thousands)
Loans originated:
Real estate:
One- to four-family residential (1) $98,473 $289,175 $162,092
Multi-family residential 74 664 862
Commercial 28,055 20,539 19,899
------ ------ ------
Total real estate 126,602 310,378 182,853
Real estate construction:
One- to four-family residential 27,484 22,494 21,823
Multi-family residential 838 900 581
Commercial and land development 13,094 9,471 9,277
------ ------ ------
Total real estate construction 41,416 32,865 31,681
Consumer:
Home equity loans 17,017 14,903 14,715
Automobile loans 3,187 968 1,260
Other consumer 1,048 1,332 2,009
------ ------ ------
Total consumer 21,252 17,203 17,984
Commercial/ Business 1,106 1,220 2,030
------ ------ ------
Total loans originated 190,376 361,666 234,548
Loans sold:
Total whole loans sold (67,627) (164,322) (92,786)
Participation loans (2,800) - --
------ ------ ------
Total loans sold (70,427) (164,322) (92,786)
Principal repayments (100,453) (150,940) (106,984)
Loans securitized - - --
Transfer to real estate owned (485) (249) (2,435)
Increase (decrease) in other items (net) (495) 521 (77)
------ ------ ------
Net increase in loans receivable and loans
held for sale $ 18,516 $ 46,676 $ 32,266
====== ====== ======
________
(1) Includes loans held for sale of $57.0 million, $141.1 million and $85.0
million for the years ended September 30, 2004, 2003 and 2002, respectively.
Loan Origination and Other Fees. In some instances, we receive loan
origination fees on real estate related products. Loan fees generally represent
a percentage of the principal amount of the loan that is paid by the borrower.
Accounting standards require that certain fees received, net of certain
origination costs, be deferred and amortized over the contractual life of the
loan. Net deferred fees or costs associated with loans that are prepaid or sold
are recognized as income at the time of prepayment. We had $1.1 million of net
deferred loan fees and costs as of September 30, 2004.
14
Asset Quality
The objective of our loan review process is to determine risk levels and
exposure to loss. The depth of review varies by asset types, depending on the
nature of those assets. While certain assets may represent a substantial
investment and warrant individual reviews, other assets may have less risk
because the asset size is small, the risk is spread over a large number of
obligors or the obligations are well collateralized and further analysis of
individual assets would expand the review process without measurable advantage
to risk assessment. Asset types with these characteristics may be reviewed as a
total portfolio on the basis of risk indicators such as delinquency (consumer
and residential real estate loans) or credit rating. A formal review process is
conducted on individual assets that represent greater potential risk.
A formal review process is a total re-evaluation of the risks associated with
the asset and is documented by completing an asset review report. Certain real
estate-related assets must be evaluated in terms of their fair market value or
net realizable value in order to determine the likelihood of loss exposure and,
consequently, the adequacy of valuation allowances.
We define a loan as being impaired when, based on current information and
events, it is probable that we will be unable to collect all amounts due under
the contractual terms of the loan agreement. We consider one- to four-family
mortgage loans and consumer installment loans to be homogeneous and, therefore,
do not separately evaluate them for impairment. All other loans are evaluated
for impairment on an individual basis.
We generally assess late fees or penalty charges on delinquent loans of
five percent of the monthly principal and interest amount. Substantially all
fixed rate and adjustable rate mortgage loan payments are due on the first day
of the month, however, the borrower is given a 15-day grace period to make the
loan payment. When a mortgage loan borrower fails to make a required payment
when it is due, we institute collection procedures. The first notice is mailed
to the borrower on the 16th day requesting payment and assessing a late charge.
Attempts to contact the borrower by telephone generally begin upon the 30th day
of delinquency. If a satisfactory response is not obtained, continual follow-
up contacts are attempted until the loan has been brought current. Before the
90th day of delinquency, attempts to interview the borrower are made to
establish the cause of the delinquency, whether the cause is temporary, the
attitude of the borrower toward the debt and a mutually satisfactory arrangement
for curing the default.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, we institute the same collection
procedures as for our mortgage loan borrowers.
The Board of Directors is informed monthly as to the status of all mortgage
and consumer loans that are delinquent by more than 30 days, and is given
information regarding classified assets.
If a borrower is chronically delinquent and all reasonable means of
obtaining payments have been exercised, we will seek to recover any collateral
securing the loan according to the terms of the security instrument and
applicable law. In the event of an unsecured loan, we will either seek legal
action against the borrower or refer the loan to an outside collection agency.
15
The following table shows our delinquent loans by the type of loan and
number of days delinquent as of September 30, 2004:
Loans Delinquent For: Total
----------------------------------- -----------------
60-89 Days Over 90 Days Delinquent Loans
---------------- ----------------- -----------------
Principal Principal Principal
Number Balance Number Balance Number Balance
of Loans Loans of Loans Loans of Loans Loans
-------- ------- -------- ------- -------- -------
(dollars in thousands)
Real estate:
One- to four-family
residential 1 $ 120 - $ - 1 $ 120
Multi-family residential -- - - - - --
Commercial - - 2 560 2 560
-------- ------- -------- ------- -------- -------
Total real estate 1 120 2 560 3 680
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 4 142 1 30 5 172
Automotive 5 35 1 7 6 42
Other consumer 4 11 9 13 13 24
-------- ------- -------- ------- -------- -------
Total consumer 13 188 11 50 24 238
Commercial business - - - - - -
Total 14 $308 13 $610 27 $918
======== ======= ======== ====== ======== =======
When a loan becomes 90 days delinquent, we place the loan on nonaccrual
status. As of September 30, 2004, 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 0.08%. Nonperforming assets as a percentage of total assets
was 0.10% as of September 30, 2004.
16
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 September 30,
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(dollars in thousands)
Loans accounted for on a
non-accrual basis:
Real estate:
One- to four-family residential $ - $ 69 $ 70 $ 1,314 $ 733
Multi-family residential - - - - --
Commercial 560 - - 39 --
------ ------ ------ ------ ------
Total real estate 560 69 70 1,353 733
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 7 9 5 5 6
Other consumer 13 14 15 29 13
------ ------ ------ ------ ------
Total consumer 50 64 72 74 155
Commercial business - - - 8 --
------ ------ ------ ------ ------
Total loans 610 133 468 3,658 888
Accruing loans which are
contractually past due 90 days
or more. - -- - - --
------ ------ ------ ------ ------
Total of nonaccrual and 90 days past
due loans 610 133 468 3,658 888
Repossessed assets - - 6 3 11
Real estate owned 113 - 248 55 --
------ ------ ------ ------ ------
Total nonperforming assets $ 723 $ 133 $ 722 $3,716 $ 899
====== ====== ====== ====== ======
Restructured loans $ - $ - $ - $ - $ -
Allowance for loan loss on
nonperforming loans 92 9 42 353 48
Classified assets included in
nonperforming assets 704 133 722 3,716 899
Allowance for loan losses on
classified assets 225 9 42 353 48
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable 0.16% 0.04% 0.14% 1.22% 0.36%
Nonaccrual and 90 days or more past
due loans as a percentage of total
assets 0.08% 0.03% 0.11% 0.96% 0.27%
Nonperforming assets as a percentage
of total assets 0.10% 0.03% 0.17% 0.97% 0.28%
Loans receivable, net $392,634 $372,629 $318,297 $289,385 $243,122
Nonaccrued interest (1) 12 $ 1 $ 3 $ 27 $ 7
Total assets 743,867 $450,196 $416,543 $382,504 $325,922
________
(1) If interest on the loans classified as nonaccrual had been accrued,
interest income in these amounts would have been recorded on nonaccrual loans.
17
Real Estate Owned and Other Repossessed Assets. Real estate we acquire as
a result of foreclosure or by deed-in-lieu of foreclosure is classified as real
estate owned until it is sold. When the property is acquired, it is recorded
at the lower of its cost, which is the unpaid principal balance of the related
loan plus foreclosure costs, or the fair market value of the property less
selling costs. Other repossessed collateral, including autos, are also recorded
at the lower of cost (i.e., the unpaid principal balance plus repossession
costs) or fair market value. As of September 30, 2004, we had one residential
real estate owned property with a cost of $113,000.
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 September 30, 2004.
Classified Assets. Federal regulations provide for the classification of
lower quality loans and other assets, such as debt and equity securities, as
substandard, doubtful or loss. An asset is considered substandard if it is
inadequately protected by the current net worth and pay capacity of the borrower
or of any collateral pledged. Substandard assets include those characterized by
the distinct possibility that we will sustain some loss if the deficiencies are
not corrected. Assets classified as doubtful have all the weaknesses inherent
in those classified substandard with the added characteristic that the
weaknesses present make collection or liquidation in full highly questionable
and improbable on the basis of currently existing facts, conditions and values.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted.
When we classify problem assets as either substandard or doubtful, we may
establish a specific allowance in an amount we deem prudent and approved by the
Classified Asset Committee to address the risk specifically or we may allow the
loss to be addressed in the general allowance. General allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been specifically allocated to particular problem assets. When an insured
institution classifies problem assets as a loss, it is required to charge off
such assets in the period in which they are deemed uncollectible. Assets which
do not currently expose us to sufficient risk to warrant classification in one
of the aforementioned categories but possess weaknesses are required to be
designated as special mention. Our determination as to the classification of
our assets and the amount of our valuation allowances is subject to review by
the OTS or the FDIC, which can order the establishment of additional loss
allowances.
In connection with the filing of periodic reports with the OTS 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 September 30, 2004, we had classified $1.6 million
of our assets as substandard. The total amount classified represented 3.6% of
equity capital and 0.2% of total assets as of September 30, 2004.
The aggregate amounts of our classified assets at the dates indicated were
as follows:
At September 30,
------------------
2004 2003
------ ------
(in thousands)
Classified assets:
Loss $ - $ --
Doubtful - 7
------ ------
Substandard 1,617 946
------ ------
Total $ 1,617 $ 953
====== ======
Classified assets included in nonperforming loans 704 133
Allowance for loan loss on classified assets 225 9
18
During the year ended September 30, 2004, we classified three commercial
real estate loans totaling $973,000 and four one- to four-family residential
loans of $451,000. During that same period, our classified consumer loans
totaled $79,000. Commercial real estate loans that were classified consisted of
a fitness center, a retail lumberyard and a restaurant with outstanding balances
of $413,000, $342,000 and $218,000, respectively, at September 30, 2004. We do
not currently expect any losses to arise from any of the commercial real estate
loans.
19
The following table summarizes the distribution of the allowance for loan
losses by loan category.
At September 30,
--------------------------------------------------------------------------------------------------
2004 2003 2002 2001
----------------------- ----------------------- ----------------------- -----------------------
Percent of Percent of Percent of Percent of
Loans Loans Loans Loans
in Loan in Loan in Loan in Loan
Category Category Category Category
Amount to Amount to Amount to Amount to
Loan by Loan Total Loan by Loan Total Loan by Loan Total Loan by Loan Total
Balance Category Loans Balance Category Loans Balance Category Loans Balance Category Loans
------- -------- ------ ------- -------- ------ ------- -------- ------ ------- -------- ------
(dollars in thousands)
Real estate:
One- to four-family
residential $242,818 $ 704 61.27% $247,309 $ 635 65.81% $194,088 $ 348 60.27% $173,835 $ 182 59.35%
Multi-family residential 6,265 75 1.58 7,750 20 2.06 7,512 14 2.33 8,700 17 2.97
Commercial 93,575 1,281 23.61 79,020 697 21.02 79,197 714 24.59 59,752 551 20.40
------- ------ ------ ------- ------ ----- ------- ------ ------ ------- ------- ------
Total real estate 342,658 2,060 86.46 334,079 1,352 88.89 280,797 1,076 87.19 242,287 750 82.72
Real estate construction:
One- to four-family
residential 7,207 69 1.82 5,225 13 1.39 6,505 12 2.02 13,927 20 4.75
Multi-family residential 834 11 0.21 352 1 0.09 1,486 3 0.46 904 10 0.31
Commercial and land
development 11,151 148 2.81 9,128 70 2.43 6,579 58 2.04 10,416 256 3.56
------- ------- ------ ------- ------ ----- ------- ------- ------ ------- ------- ------
Total real estate 19,192 228 4.84 14,705 84 3.91 14,570 73 4.52 25,247 286 8.62
Consumer:
Home equity lines of
credit 27,351 204 6.90 20,640 99 5.49 18,069 86 5.61 15,250 72 5.20
Automotive 3,838 79 0.97 1,939 40 0.52 2,297 30 0.71 2,133 28 0.73
Other consumer 1,949 45 0.49 2,827 244 0.75 3,666 79 1.14 4,332 238 1.48
------- ------- ------ ------- -------- ------ ------- -------- ------ ------- ------- ------
Total consumer 33,138 328 8.36 25,406 383 6.76 24,032 195 7.46 21,715 338 7.41
Commercial/business 1,363 21 0.34 1,662 34 0.44 2,641 41 0.82 3,662 57 1.25
------- ------- ------ ------- -------- ------ ------- -------- ------ ------- ------- ------
Total loans $396,351 $2,637 100.00% $375,852 $1,853 100.00% $322,040 $1,385 100.00% $292,911 $1,431 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======= ======= ====== =======
At September 30,
----------------------
2000
----------------------
Percent of
Loans
in Loan
Category
Amount to
Loan by Loan Total
Balance Category Loans
------- -------- ------
(dollars in thousands)
Real estate:
One- to four-family residential $143,576 $ 153 58.31%
Multi-family residential 5,475 10 2.22
Commercial 44,700 412 18.15
------- ------- ------
Total real estate 193,751 575 78.68
Real estate construction:
One- to four-family residential 21,171 30 8.60
Multi-family residential 1,857 24 0.75
Commercial and land development 5,516 136 2.24
------- ------ ------
Total real estate 28,544 190 11.59
Consumer:
Home equity lines of credit 15,604 74 6.34
Automotive 1,185 16 0.48
Other consumer 4,128 227 1.68
------- ------ ------
Total consumer 20,917 317 8.50
Commercial/business 3,031 47 1.23
------- ------ ------
Total loans $246,243 $1,129 100.00%
======= ====== ======
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.
20
The following table sets forth an analysis of our allowance for loan
losses at the dates and for the periods indicated.
Year Ended September 30,
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(in thousands)
Allowance at beginning of period $1,853 $1,385 $1,431 $1,129 $620
Provisions for loan losses 900 615 277 748 600
Recoveries:
Real estate:
One- to four-family residential 1 - - 1 -
Multi-family residential - - - - --
Commercial - - - - -
------ ------ ------ ------ ------
Total real estate loans 1 - - 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 12 - 1 1 2
Other consumer 7 7 3 20 107
------ ------ ------ ------ ------
Total consumer 19 7 4 21 109
Commercial/ business - - 2 - --
------ ------ ------ ------ ------
Total recoveries 20 7 8 22 109
Charge-offs:
Real estate:
One- to four-family residential 60 7 145 42 44
Multi-family residential - - - - --
Commercial and land development - - - - 23
------ ------ ------ ------ ------
Total real estate 60 7 145 42 67
Real estate construction:
One- to four-family residential - - 72 145 --
Multi-family residential - - - - --
Commercial and land development - - - - --
------ ------ ------ ------ ------
Total real estate construction - - 72 145 --
Consumer:
Home equity lines of credit - 37 39 89 46
Automobile 23 40 6 20 3
Other consumer 53 70 69 108 72
------ ------ ------ ------ ------
Total consumer 76 147 114 217 121
Commercial/ business - - - 64 12
------ ------ ------ ------ ------
(table continues on the following page)
21
Year Ended September 30,
--------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(in thousands)
Total charge-offs 136 154 331 468 200
Net charge-offs 116 147 323 446 91
------ ------ ------ ------ ------
Balance at end of period $2,637 $1,853 $1,385 $1,431 $1,129
====== ====== ====== ====== ======
Allowance for loan losses as
a percentage of total loans
outstanding at the end of the period 0.67% 0.49% 0.41% 0.47% 0.45%
Net charge-offs as a percentage
of average loans outstanding
during the period 0.03% 0.04% 0.10% 0.16% 0.04%
Allowance for loan losses as a
percentage of nonaccrual and
90 days or more past due loans
loans at end of period 432.30% 1393.23% 295.94% 48.21% 127.14%
Our Asset Liability Management Committee determines the appropriate level
of the allowance for loan losses on a quarterly basis and establishes the
provision for loan losses based on the risk composition of our loan portfolio,
delinquency levels, loss experience, economic conditions, bank regulatory
examination results, seasoning of the loan portfolios and other factors related
to the collectibility of the loan portfolio. The allowance is increased by the
provision for loan losses, which is charged against current period operating
results and decreased by the amount of actual loan charge-offs, net of
recoveries. Some of the factors that management applied in determining the
level of the amount of additions to our provision for loan losses for the years
ended September 30, 2004, 2003, 2002, 2001 and 2000 include the items listed in
the following table.
Year Ended September 30,
--------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(dollars in thousands)
Provisions for loan losses $ 900 $ 615 $ 277 $ 748 $ 600
Allowance for loan losses 2,637 1,853 1,385 1,431 1,129
Allowance for loan losses as a
percentage of total loans outstanding
at the end of the period 0.67% 0.49% 0.41% 0.47% 0.45%
Net charge-offs 116 147 323 446 91
Total of nonaccrual and 90 days
past due loans 610 133 468 3,658 888
Nonaccrual and 90 days or more past
due loans as a percentage of
loans receivable 0.16% 0.04% 0.14% 1.22% 0.36%
Loans receivable, net 392,634 372,629 318,297 289,385 243,122
For the year ended September 30, 2001, our provision for loan losses was
$748,000, an increase of $148,000 over the year ended September 30, 2000.
Management based the level of the provision on the increase in our nonaccrual
and 90 days past due loans and overall growth in our loan portfolio. Total
nonaccrual and 90 days past due loans increased $2.8 million from September 30,
2000 to $3.7 million. Loans receivable, net increased $46.3 million or 19.0%
from September 30, 2000. Our portfolio mix was similar to that of the year
ended September 30, 2002 with 67.8% homogeneous loans and 32.2% non-homogeneous.
Homogeneous loans consist of one- to four-family residential loans
22
and consumer loans. Non-homogeneous loans consist of multi-family residential
and commercial real estate loans, real estate construction loans and commercial
business loans. Non-homogeneous loans typically have an increased risk of loss
compared to homogeneous loans.
For the year ended September 30, 2002, our provision for loan losses was
$277,000, a decrease of $471,000 from September 30, 2001. Total nonaccrual and
90 days past due loans decreased $3.2 million from September 30, 2001 to
$468,000. In addition, our loan portfolio mix was 69.0% in homogeneous loans
and 31.0% non-homogeneous, an increase and decrease of 1.2%, respectively.
Loans receivable, net grew $28.9 million, or 10.0%, from September 30, 2001.
Our provision for loan losses for the year ended September 30, 2003
increased $338,000 from September 30, 2002 to $615,000. Management based the
increase in our provision for loan losses on the $54.3 million growth in loans
receivable, net. In addition, a significant percentage of that growth resulted
from residential mortgage loan refinances. These loans are unseasoned and may
have higher risks of loss than our historical experience may indicate.
For the year ended September 30, 2004, the provision for loan losses was
$900,000. Management based the level of the provision on the composition of the
loan portfolio, the level of nonaccrual and 90 days past due loans, the then
current level of the allowance for loan losses and overall growth in the loan
portfolio. At September 30, 2004, the mix of our loan portfolio consisted of
69.6% in homogeneous loans and 30.4% non-homogeneous; nonaccrual loans were
$610,000.
Investment Activities
General. OTS 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 September 30, 2004, our consolidated investment portfolio totaled $104.8
million and consisted principally of mortgage-backed securities and FHLB 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 $98.4 million and a $97.5 million amortized cost at September 30, 2004.
The mortgage-backed securities were comprised of Fannie Mae and Freddie Mac
mortgage-backed securities. At September 30, 2004, the portfolio had a
weighted-average coupon rate of 5.01% and an estimated weighted-average yield of
5.07%. These securities had an estimated average maturity of 19.2 years and an
estimated average life of 4.6 years at September 30, 2004.
Federal Home Loan Bank Stock. As a member of the FHLB of Seattle, we are
required to own its capital stock. The amount of stock we hold is based on
percentages specified by the FHLB of Seattle on our outstanding advances. The
redemption of any excess stock we hold is at the discretion of the Federal Home
Loan Bank of Seattle. The carrying value of FHLB stock totaled $7.3 million and
had a weighted-average-yield of 3.50% at September 30, 2004.
23
Bank-Owned Life Insurance. We purchase bank-owned life insurance policies
("BOLI") to offset future employee benefit costs. At September 30, 2004, we had
a $10.1 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.
On December 7, 2004, the agencies that regulate the banking industry issued
an interagency statement related to the use of BOLI by banks and other regulated
entities. The statement will require us to undertake a rigorous pre-purchase
analysis for any BOLI purchased after December 7, 2004, including, among other
things, an analysis of effective management and board oversight of the use of
BOLI, internal policies and procedures relating to BOLI holdings, the need for
BOLI and the appropriate type of BOLI, the amount of BOLI to be purchased, the
qualifications of any vendors, the characteristics of available insurance
products and the soundness of the insurance carrier. In addition, on at least
an annual basis, we will be required to evaluate and monitor the ongoing risks
of our BOLI portfolio. Specifically, we will be required to analyze, among
other things, the risks related to liquidity, operations, tax, reputation,
credit, interest rate, legal compliance and price.
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,
------------------------------------------------------
2004 2003 2002
---------------- ---------------- ----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- ----- -------- ----- -------- -----
(in thousands)
Available for sale:
Investment securities:
Adjustable rate mortgage
fund $ - $ - $5,468 $5,440 $2,504 $2,507
Mortgage-backed securities:
Fannie Mae 874 871 - - - --
Freddie Mac - - - - - --
-------- ----- -------- ----- -------- -----
Total available for sale $ 874 $ 871 $5,468 $5,440 $2,504 $2,507
====== ===== ====== ====== ====== ======
Held to maturity:
Mortgage-backed securities:
Fannie Mae $53,336 $53,708 $10,485 $10,832 $16,880 $17,631
Freddie Mac 43,259 43,818 13,940 14,591 27,445 28,648
-------- ------ -------- ------ -------- ------
Total held to maturity $96,595 $97,526 $24,425 $25,423 $44,325 $46,279
====== ====== ====== ====== ====== ======
24
The table below sets forth information regarding the amortized cost,
weighted average yields and maturities or periods to repricing of our
investment portfolio at September 30, 2004.
Amount Due or Repricing within:
--------------------------------------------------------------------------------------------------
1 Year or Less Over 1 to 5 Years Over 5 to 10 Years Over 10 Years Totals
------------------ ------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield(1) Cost Yield(1) Cost Yield(1) Cost Yield(1) Cost Yield(1)
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(dollars in thousands)
Available for sale:
Investment securities:
Mortgage-backed securities:
Freddie Mac - - - - --
Fannie Mae - - $874 3.99% - $874 3.99%
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Total available for sale $ - 0.00% $ - 0.00% $874 3.99% $ - 0.00% $874 3.99%
========= ======== ========= ======== ========= ======== ========= ======== ========= ========
Held to maturity:
Mortgage-backed securities:
Freddie Mac $ 16 5.42% $ 8,760 5.13% $325 7.76% $34,158 5.15% $43,259 5.17%
Fannie Mae - 2,056 4.44% - 51,280 5.03% 53,336 5.00%
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Total held to maturity $ 16 5.42% $10,816 5.00% $325 7.76% $85,438 5.08% $96,595 5.08%
========= ======== ========= ======== ========= ======== ========= ======== ========= ========
Total investment securities $ 16 5.42% $10,816 5.00% $1,199 5.01% $85,438 5.08% $97,469 5.07%
========= ======== ========= ======== ========= ======== ========= ======== ========= ========
________
(1) Interest and dividends are reported on a tax-equivalent basis. During
the time period presented, Home Federal did not own any tax exempt
investment securities.
25
The following table sets forth certain information with respect to each
category which had an aggregate book value in excess of 10% of our total equity
at the date indicated.
At September 30, 2004
---------------------
Amortized Market
Cost Value
--------- --------
(in thousands)
Available for sale:
Investment Securities:
Mortgage-backed securities:
Fannie Mae $ 874 $ 871
Freddie Mac - --
--------- --------
Total available for sale $ 874 $ 871
========= ========
Held to maturity:
Mortgage-backed securities:
Fannie Mae $ 53,336 $ 53,708
Freddie Mac 43,259 43,818
--------- --------
Total held to maturity $ 96,595 $ 97,526
========= ========
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 FHLB of Seattle are used to supplement the
availability of funds from other sources and also as a source of term funds to
assist in the management of interest rate risk.
Our deposit composition reflects a mixture with certificates of deposit
accounting for approximately one-half of the total deposits while interest and
noninterest-bearing checking, savings and money market accounts comprise the
balance of total deposits. We rely on marketing activities, convenience,
customer service and the availability of a broad range of deposit products and
services to attract and retain customer deposits.
Deposits. Substantially all of our depositors are residents of the State
of Idaho. Deposits are attracted from within our market area through the
offering of a broad selection of deposit instruments, including checking
accounts, money market deposit accounts, savings accounts and certificates of
deposit with a variety of rates. Deposit account terms vary according to the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate, among other factors. We offer a number of different deposit
programs including our High Performance Checking; Wall Street Select Checking
and Money Market Account; Medical Savings and Health Savings Account; and
Escalator Certificate of Deposit. Our High Performance Checking program is
comprised of seven different transaction account products with varying minimum
balance requirements, number of checks permitted and interest rate options. Our
Wall Street Select Checking and Money Market Account products offer
significantly higher rates of interest on larger deposit balances while
maintaining the availability of the customer's funds. Our Medical Savings and
Health Savings Accounts are offered directly or through an unaffiliated third
party marketing company to qualified individuals and employers. The program is
offered on a nationwide basis and participants in the plan receive a debit card
to facilitate account access. Our Escalator Certificate of Deposit has a
guaranteed blended rate for its four-year term with fixed rate increases
occurring every six months from the date of the original deposit, and also
offers the customer the opportunity to withdrawal the entire balance at any
six-month anniversary without a pre-payment penalty. In determining the terms
of our deposit accounts, we consider the development of long term profitable
customer relationships, current market interest rates, current maturity
structure and deposit mix, our customer preferences and the profitability of
acquiring customer deposits compared to alternative sources.
26
At September 30, 2004, we had $34.5 million of jumbo ($100,000 or more)
certificates of deposit, which are primarily from local customers, representing
10.1% of total deposits at that date.
Deposit Activities. The following table sets forth the total deposit
activities of Home Federal for the periods indicated.
Year Ended September 30,
------------------------
2004 2003 2002
------ ------ ------
(in thousands)
Beginning balance $301,273 $279,772 $266,316
Net deposits before interest credited 37,731 17,516 7,654
Interest credited 4,083 3,985 5,802
------ ------ ------
Net increase in deposits 41,814 21,501 13,456
------ ------ ------
Ending balance $343,087 $301,273 $279,772
======= ======= =======
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,
2004 2003 2002
------ ------ ------
(in thousands)
0.00 - 0.99% $19,880 $11,742 $ --
1.00 - 1.99% 28,083 36,899 28,383
2.00 - 2.99% 47,906 40,884 36,647
3.00 - 3.99% 48,835 31,983 29,473
4.00 - 4.99% 17,247 18,726 22,896
5.00 - 5.99% 1,184 2,968 6,952
6.00 - 6.99% 1,090 1,870 5,876
7.00 - 7.99% - - --
------ ------ ------
Total $164,225 $145,072 $130,227
======= ======= =======
Time Deposits by Maturities. The following table sets forth the amount and
maturities of time deposits at September 30, 2004.
Amounts Due
------------------------------------------------------
Less Than 1-2 2-3 3-4 After
1 Year Years Years Years 4 Years Total
--------- ------- ------- ------- ------- ------
(in thousands)
0.00 - 0.99% $18,291 $1,589 $ - $ - $ - $19,880
1.00 - 1.99% 13,474 5,273 2,238 7,097 1 28,083
2.00 - 2.99% 11,303 25,429 10,312 684 178 47,906
3.00 - 3.99% 10,729 24,174 12,724 856 352 48,835
4.00 - 4.99% 13,860 1,465 1,368 183 371 17,247
5.00 - 5.99% 117 966 96 4 1 1,184
6.00 - 6.99% 835 242 12 1 1,090
--------- ------- ------- ------- ------- ------
Total $68,609 $59,138 $26,750 $8,824 $904 $164,225
========= ======= ======= ======= ======= =======
27
The following table sets forth information concerning Home Federal's time
deposits and other deposits at September 30, 2004.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- -------- ------ -------------------------------- ------ ------- --------
(dollars in
thousands)
0.20% N/A Savings deposits $25,453 50 7.42%
0.33 N/A Interest-bearing demand deposits 56,149 50 16.37
- N/A Noninterest-bearing demand
deposits 29,638 50 8.64
0.87 N/A Money market accounts 35,392 1,000 10.32
0.20 N/A Medical savings accounts 32,230 25 9.39
Certificates of Deposit
---------------------------------
1.06% 1-12 months Fixed term, fixed rate 23,771 500 6.93
2.16 13-24 months Fixed term, fixed rate 43,918 500 12.80
3.38 25-36 months Fixed term, fixed rate 36,074 500 10.51
3.38 37-60 months Fixed term, fixed rate 59,241 500 17.27
4.49 Over 60 months Fixed term, fixed rate 588 500 0.17
1.34 18 months Other 633 500 0.18
------- ---- ------
Total $343,087 100.00%
======= ======
The following table indicates the amount of Home Federal's jumbo
certificates of deposit by time remaining until maturity as of September 30,
2004. Jumbo certificates of deposit are certificates in amounts of $100,000 or
more.
Certificates of
Deposit of
Maturity Period $100,000 or More
------------------- ---------------
(in thousands)
Three months or less $3,565
Over three through six months 2,685
Over six through twelve months 5,955
Over twelve months 22,293
--------------
Total $34,498
==============
28
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,
-------------------------------------------------------------------------------------------
2004 2003 2002
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Increase/ of Increase/ of Increase/
Amount Total (Decrease) Amount Total (Decrease) Amount Total (Decrease)
------ ------- -------- ------ ------- -------- ------ ------- --------
(dollars in thousands)
Savings deposits $25,453 7.42% $1,030 $24,423 8.11% $1,216 $23,207 8.29% $390
Demand deposits 85,787 25.01 13,621 72,166 23.95 5,399 66,767 23.86 9,229
Money market accounts 35,392 10.32 3,264 32,128 10.66 (3,379) 35,507 12.69 2,798
Medical savings accounts 32,230 9.39 4,746 27,484 9.12 3,420 24,064 8.60 3,624
Fixed rate certificates that
mature in the year ending:
Within 1 year 68,196 19.88 10,622 57,574 19.11 (1,249) 58,823 21.03 (49,661)
After 1 year, but within
2 years 58,918 17.17 20,175 38,743 12.86 13,262 25,481 9.11 9,192
After 2 years, but within
5 years 36,415 10.61 (11,364) 47,779 15.86 2,942 44,837 16.03 38,374
After 5 years 63 0.02 (54) 117 0.04 102 15 0.01 (22)
Other Certificates of Deposit 633 0.18 (226) 859 0.29 (212) 1,071 0.38 (468)
------- ------- -------- ------- ------- -------- ------- ------- --------
Total $343,087 100.00% $41,814 $301,273 100.00% $21,501 $279,772 100.00% $13,456
======= ====== ======== ======= ====== ======== ======= ====== ========
Borrowings. Customer deposits are the primary source of funds for our
lending and investment activities. We do, however, use advances from the FHLB
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 FHLB of Seattle to fund the purchase of investment securities in order to
increase our net interest income when attractive opportunities exist. Depending
upon the retail banking activity and the availability of excess post-stock
offering capital that may be provided to us, we will consider and undertake
additional leverage strategies within applicable regulatory requirements or
restrictions. We expect these borrowings would primarily consist of FHLB of
Seattle advances.
As a member of the FHLB 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 FHLB of Seattle that provides for immediately available advances up to
an aggregate of 40% of total assets, or $297.5 million as of September 30, 2004.
At September 30, 2004, our outstanding advances from the FHLB of Seattle totaled
$122.8 million.
29
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.
Year Ended
September 30,
--------------------------
2004 2003 2002
------ ------ ------
(dollars in thousands)
Maximum amount of borrowing outstanding
at any month end:
Federal Home Loan Bank advances $136,000 $112,000 $97,000
Approximate average borrowings outstanding:
Federal Home Loan Bank advances 115,000 102,000 87,000
Approximate weighted average rate paid on:
Federal Home Loan Bank advances 4.08% 4.53% 5.14%
At September 30,
--------------------------
2004 2003 2002
------ ------ ------
(dollars in thousands)
Balance outstanding at end of period:
Federal Home Loan Bank advances $122,797 $96,527 $91,008
Weighted average rate paid on:
Federal Home Loan Bank advances 3.96% 4.64% 4.85%
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
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 OTS. 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 OTS 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
OTS and are subject to periodic examinations by the OTS 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.
30
The OTS 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 SAIF. 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 OTS or Congress, could have a material adverse impact on us and our
operations.
Regulation and Supervision of Home Federal
General. The OTS has extensive authority over the operations of savings
institutions. As part of this authority, Home Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. When these examinations are conducted by the OTS 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 OTS. The OTS 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 OTS.
Except under certain circumstances, public disclosure of final enforcement
actions by the OTS 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 OTS. 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 September 30, 2004, Home Federal's lending limit under this restriction was
$7.1 million. Home Federal is in compliance with the loans-to-one-borrower
limitation.
The OTS, 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.
On December 7, 2004, the agencies that regulate the banking industry issued
an interagency statement related to the use of BOLI by banks and other regulated
entities. The statement will require us to undertake a rigorous pre-purchase
analysis for any BOLI purchased after December 7, 2004, including, among other
things, an analysis of effective management and board oversight of the use of
BOLI, internal policies and procedures relating to BOLI holdings, the need for
BOLI and the appropriate type of BOLI, the amount of BOLI to be purchased, the
qualifications of any vendors, the characteristics of available insurance
products and the soundness of the insurance carrier. In addition, on at least
an annual basis, we will be required to evaluate and monitor the ongoing risks
of our BOLI portfolio. Specifically, we will be required to analyze, among
other things, the risks related to liquidity, operations, tax, reputation,
credit, interest rate, legal compliance and price.
Deposit Insurance. Home Federal is a member of the SAIF, 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
31
in any activity the FDIC determines by regulation or order to pose a serious
risk to the SAIF. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OTS 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 SAIF will be less than the
designated reserve ratio of 1.25% of SAIF 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 SAIF 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 ("BIF")
and SAIF insured institutions has ranged from 0 to 27 basis points. However,
SAIF and BIF 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 BIF and SAIF 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
OTS 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 OTS 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 September 30, 2004, Home Federal had intangible assets in
the form of mortgage servicing rights.
At September 30, 2004, Home Federal had tangible capital of $44.8 million,
or 6.0% of tangible assets, which is approximately $33.6 million above the
minimum requirement of 1.5% of tangible assets as of that date.
The capital standards also require core capital equal to at least 4.0% of
adjusted total assets unless an institution's supervisory condition is such to
allow it to maintain a 3.0% ratio. Core capital generally consists of tangible
capital plus certain intangible assets, including a limited amount of purchased
credit card relationships. At September 30, 2004, Home Federal's mortgage
service rights were subject to these tests. At September 30, 2004, Home Federal
had core capital equal to $44.8 million, or 6.0% of adjusted total assets, which
is $15.0 million above the minimum requirement of 4.0% in effect on that date.
The OTS also requires savings institutions to have core capital equal to 4%
of risk-weighted assets ("Tier 1 risk-based"). At September 30, 2004, Home
Federal had Tier 1 risk-based capital of $44.8 or 12.1% of risk-weighted assets,
which is approximately $29.9 million above the minimum on that date. The OTS
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-
32
weighted assets. Supplementary capital may be used to satisfy the risk-based
requirement only to the extent of core capital. The OTS 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 OTS 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 September 30, 2004, Home Federal had total risk-based capital of $47.3
million and risk-weighted assets of $371.0 million; or total risk-based capital
of 12.8% of risk-weighted assets. This amount was $17.7 million above the 8.0%
requirement in effect on that date.
The OTS 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 OTS 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 OTS, 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 OTS 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 OTS 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 OTS and the FDIC, including the appointment of a conservator or
a receiver.
The OTS 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 OTS 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. OTS 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 OTS may
have its dividend authority restricted by the OTS. 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 OTS 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
33
a proposed capital distribution or propose to exceed these net income
limitations, must obtain OTS approval prior to making such distribution. The
OTS 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
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 September 30,
2004, Home Federal met the test with a 97.8%, 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 FHLB 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 OTS, 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 OTS. 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 OTS has the
discretion to treat subsidiaries of savings institutions as affiliates on a case
by case basis.
Pursuant to the regulations under Sections 23A and 23B of the Federal
Reserve Act, Home Federal and Home Federal Bancorp will enter into an expense
sharing agreement. Under this agreement, Home Federal Bancorp will
reimburse Home Federal for the time that employees of Home Federal devote to
activities of Home Federal Bancorp, the portion of the expense of the annual
independent audit attributable to Home Federal Bancorp and all expenses
attributable to Home Federal Bancorp's public filing obligations under the
Securities Exchange Act of 1934. If Home Federal Bancorp commences any
significant activities other than holding all of the outstanding common stock of
Home
34
Federal, Home Federal Bancorp and Home Federal will amend the expense sharing
agreement to provide for the equitable sharing of all expenses of such other
activities that may be attributable to Home Federal Bancorp.
On April 1, 2003, the Federal Reserve's Regulation W, which comprehensively
amends Sections 23A and 23B of the Federal Reserve Act, became effective. The
Federal Reserve Act and Regulation W are applicable to savings associations such
as Home Federal. The Regulation unifies and updates staff interpretations
issued over the years, incorporates several new interpretative proposals (such
as to clarify when transactions with an unrelated third party will be attributed
to an affiliate) and addresses new issues arising as a result of the expanded
scope of non-banking activities engaged in by banks and bank holding companies
in recent years and authorized for financial holding companies under the
Gramm-Leach-Bliley Act.
In addition, OTS regulations prohibit a savings institution from lending to
any of its affiliates that is engaged in activities that are not permissible for
bank holding companies and from purchasing the securities of any affiliate,
other than a subsidiary.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to these persons and their related interests. Among other things, these
loans must generally be made on terms substantially the same as for loans to
unaffiliated individuals.
Federal Reserve System. The Federal Reserve Board requires that all
depository institutions maintain reserves on transaction accounts or
non-personal time deposits. These reserves may be in the form of cash or
non-interest-bearing deposits with the regional Federal Reserve Bank.
Negotiable order of withdrawal (NOW) accounts and other types of accounts that
permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to the reserve requirements, as are any
non-personal time deposits at a savings bank. As of September 30, 2004, Home
Federal's deposit with the Federal Reserve Bank and vault cash exceeded its
reserve requirements.
Federal Home Loan Bank System. Home Federal is a member of the FHLB of
Seattle, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions. Each FHLB 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 FHLB
System. It makes loans or advances to members in accordance with policies and
procedures, established by the Board of Directors of the FHLB, which are subject
to the oversight of the Federal Housing Finance Board. All advances from the
FHLB are required to be fully secured by sufficient collateral as determined by
the FHLB. 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
FHLB of Seattle. At September 30, 2004, Home Federal had $7.3 million in FHLB
stock, which was in compliance with this requirement. In past years, Home
Federal has received substantial dividends on its FHLB stock. Over the past two
fiscal years such dividends have averaged 4.11% and 6.03% for the fiscal years
ended September 30, 2004 and 2003. For the year ended September 30, 2004, Home
Federal received $278,000 in dividends paid by the FHLB of Seattle.
Under federal law, the FHLBs 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 FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Home Federal's FHLB 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
35
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" 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 is a federal mutual holding company
subsidiary within the meaning of the Home Owners' Loan Act. It is required to
file reports with the OTS and is subject to regulation and examination by the
OTS. In addition, the OTS has enforcement authority over Home Federal Bancorp
and any non-savings institution subsidiaries. This permits the OTS 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 OTS 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 OTS would consider the financial and managerial
resources and future prospects of Home Federal Bancorp and the target
institution, the effect of the acquisition on the risk to the insurance funds,
the convenience and the needs of the community and competitive factors.
Waivers of Dividends by Home Federal Bancorp. OTS regulations require Home
Federal MHC to notify the OTS of any proposed waiver of its receipt of dividends
from Home Federal Bancorp. The OTS reviews dividend waiver notices on a
case-by-case basis, and, in general, does not object to any such waiver if: (1)
the mutual holding company's board of directors determines that the waiver is
consistent with the directors' fiduciary duties to the mutual holding company's
members; (2) for as long as the savings association subsidiary is controlled by
the mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction on the
36
retained earnings of the savings association, which restriction, if material, is
disclosed in the public financial statements of the savings association and its
stock holding company; (3) the amount of any dividend waived by the mutual
holding company is available for declaration as a dividend solely to the mutual
holding company, in accordance with Statement of Financial Accounting Standards
No. 5, where the savings association determines that the payment of the dividend
to the mutual holding company is probable, an appropriate dollar amount is
recorded as a liability; and (4) the amount of any waived dividend is considered
as having been paid by the savings association in evaluating any proposed
dividend
under OTS capital distribution regulations.
We anticipate that Home Federal MHC will waive dividends paid by Home
Federal Bancorp, if any. Under OTS regulations, our public stockholders would
not be diluted because of any dividends waived by Home Federal MHC (and waived
dividends would not be considered in determining an appropriate exchange ratio)
in the event Home Federal MHC converts to stock form.
Conversion of Home Federal MHC to Stock Form. OTS regulations permit Home
Federal MHC to convert from the mutual form of organization to the capital stock
form of organization (a "conversion transaction"). There can be no assurance
when, if ever, a conversion transaction will occur, and the Board of Directors
has no current intention or plan to undertake a conversion transaction. In a
conversion transaction, a new holding company would be formed as the successor
to Home Federal Bancorp (the "New Holding Company"), Home Federal MHC's
corporate existence would end and certain depositors of Home Federal would
receive the right to subscribe for additional shares of the New Holding
Company. In a conversion transaction, each share of common stock held by
stockholders other than Home Federal MHC ("minority stockholders") would be
automatically converted into a number of shares of common stock in the New
Holding Company determined pursuant to an exchange ratio that ensures that the
minority stockholders own the same percentage of common stock in the New Holding
Company as they owned in Home Federal Bancorp immediately prior to the
conversation transaction. Under OTS regulations, minority stockholders would
not be diluted because of any dividends waived by Home Federal MHC (and waived
dividends would not be considered in determining an appropriate
exchange ratio), if Home Federal MHC converts to stock form. The total number
of shares held by minority stockholders after a conversion transaction also
would be increased by any purchases by minority stockholders in the stock
offering conducted as part of the conversion transaction.
A conversion transaction requires the approval of the OTS as well as a
majority of the votes eligible to be cast by the stockholders of Home Federal
Bancorp and a majority of the votes eligible to be cast by the stockholders of
Home Federal Bancorp other than Home Federal MHC.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was signed into law by President Bush on
July 30, 2002 in response to public concerns regarding corporate accountability
in connection with recent accounting scandals. The stated goals of the
Sarbanes-Oxley Act are to increase corporate responsibility, to provide for
enhanced penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and 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.
37
TAXATION
Federal Taxation
General. We are 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.
Home Federal Bancorp will file a consolidated federal income tax return
with Home Federal, which will commence with the first taxable year after
completion of the Reorganization. Accordingly, it is anticipated that any cash
distributions made by Home Federal Bancorp to its stockholders would be
considered to be taxable dividends and not as a non-taxable return of capital to
stockholders for federal and state tax purposes.
In connection with the formation of Home Federal Bancorp, Home Federal and
Home Federal Bancorp entered into a tax allocation agreement. Because Home
Federal Bancorp owns 100% of the issued and outstanding capital stock of Home
Federal, Home Federal Bancorp and Home Federal are members of an affiliated
group within the meaning of Section 1504(a) of the Internal Revenue Code, of
which group Home Federal Bancorp is the common parent corporation. As a result
of this affiliation, Home Federal may be included in the filing of a
consolidated federal income tax return with Home Federal Bancorp and, if a
decision to file a consolidated tax return is made, the parties agree to
compensate each other for their individual share of the consolidated tax
liability and/or any tax benefits provided by them in the filing of the
consolidated federal income tax return.
Method of Accounting. For federal income tax purposes, Home Federal
currently reports its income and expenses on the accrual method of accounting
and uses a fiscal year ending on September 30 for filing its federal income
tax return.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax
at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum taxable income. The alternative
minimum tax is payable to the extent such alternative minimum taxable income is
in excess of an exemption amount. Net operating losses can offset no more than
90% of alternative minimum taxable income. Certain payments of alternative
minimum tax may be used as credits against regular tax liabilities in future
years. Home Federal has not been subject to the alternative minimum tax, nor
does it have any such amounts available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carryback net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. At September 30, 2004, Home
Federal had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. Home Federal Bancorp may eliminate
from its income dividends received from Home Federal as a wholly-owned
subsidiary of Home Federal Bancorp if it elects to file a consolidated return
with Home Federal. The corporate dividends-received deduction is 100% or 80%,
in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, 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.
Audits. The federal income tax returns of Home Federal Bancorp and Home
Federal have not been audited in the past five years.
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
38
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.
Audits. The state income tax returns of Home Federal Bancorp and Home
Federal have not been audited in the past five years.
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, Bank
of America, Key Bank, Washington Federal and Farmers & Merchants State Bank.
These competitors control approximately 77.26% of the deposit market with
deposits of $4.35 billion, of the $5.63 billion total deposits in Ada and
Canyon Counties as of June 30, 2004. 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.
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.
Executive Officers
The following table sets forth certain information with respect to the
executive officers who are not directors of the Company and the Bank. Each of
the executive officers holds the same position with the Company and the Bank.
Executive Officers of the Company and Bank
Age at Position
September -----------------------------------------------
Name 30, 2004 Company Bank
- ------------------ -------- ---------------------- -----------------------
Daniel L. Stevens 61 Chairman of the Board, Chairman of the Board,
President and Chief President and Chief
Executive Officer Executive Officer
Robert A. Schoelkoph 52 Chief Financial Officer Chief Financial Officer
39
Roger D. Eisenbarth 57 Senior Vice President, Senior Vice President,
and Secretary Secretary and Chief
Lending Officer
Lynn A. Sander 52 - Senior Vice President
of Retail Banking
Denis J. Trom 58 -- Senior Vice President of
Human Resources
Karen Wardwell 48 -- Senior Vice President/
Operations and
Technology
Biographical Information
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 FHLB 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 FHLB of Seattle for eight years. He serves on America's
Community Bankers FHLB 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.
Robert A. Schoelkoph is Senior Vice President, Treasurer and Chief
Financial Officer of Home Federal. 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. 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.
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.
40
Denis J. Trom is Senior Vice President/Human Resources of Home Federal.
Mr. Trom joined Home Federal in April 2002. Mr. Trom was previously employed by
U.S. Bancorp, Minneapolis, Minnesota from 1978 until 2002. He held various
human resource, training and organizational development positions with U.S.
Bancorp during his 23 years of employment, most recently serving as Vice
President/Senior Regional Human Resources Consulting Manager from 1999 until
2002. Mr. Trom is active in the Society for Human Resource Management, American
Society for Training & Development, the Professional Association for
Compensation, Benefits and Total Rewards, and church activities.
Karen Wardwell is Senior Vice President/Operations and Technology of Home
Federal. 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.
Employees
At September 30, 2004, we had 222 full-time employees and 27 part-time
employees. Our employees are not represented by any collective bargaining
group. We consider our employee relations to be good.
Item 2. Properties
- -------------------
At September 30, 2004, we had 14 full service banking offices and two loan
centers, nine of which are leased. During the year ended September 30, 2004, we
received approval from the OTS for the sale of a branch facility located in
Jerome, Idaho, which closed on April 2, 2004. At September 30, 2004, the net
book value of our investment in premises, equipment and leaseholds was
approximately $10.7 million. The net book value of the data processing and
computer equipment utilized by us at September 30, 2004 was approximately
$600,000.
The following table provides a list of our main and branch offices and
indicates whether the properties are owned or leased:
Lease
Leased or Expiration Square
Location Owned Date Footage
- ------------------------- --------- ---------- -------
ADMINISTRATIVE OFFICE
500 12th Avenue South
Nampa, Idaho 83651 (1)(2) Owned N/A 34,014
BRANCH OFFICES:
Downtown Boise (2)
800 West State Street
Boise, Idaho 83702 Leased August 2010 3,500
41
Lease
Leased or Expiration Square
Location Owned Date Footage
- ----------------------------- --------- ---------- -------
Parkcenter (2)
871 East Parkcenter Boulevard
Boise, Idaho 83706 Owned N/A 4,500
Fairview (2)
10443 Fairview Avenue Building owned
Boise, Idaho 83704 Land leased June 2070 2,500
Meridian (2)
55 East Franklin Road
Meridian, Idaho 83642 Owned N/A 4,000
Caldwell (2)
923 Dearborn
Caldwell, Idaho 83605 Owned N/A 4,500
Mountain Home (2)
400 North 3rd East
Mountain Home, Idaho 83647 Owned N/A 2,600
Emmett (2)
250 South Washington Avenue
Emmett, Idaho 83617 Owned N/A 2,600
Boise (3)
8300 West Overland Road
Boise, Idaho 83709 Leased May 2005 695
Meridian (3)
4051 East Fairview Avenue
Meridian, Idaho 83642 Leased May 2005 695
Nampa (3)
2100 12th Avenue Road
Nampa, Idaho 83651 Leased May 2005 695
Caldwell (3)
5108 East Cleveland Boulevard
Caldwell, Idaho 83605 Leased May 2005 695
Garden City (3)
7319 West State Street
Boise, Idaho 83714 Leased May 2005 695
Hispanic Cultural Center
315 Stampede Drive
Nampa, Idaho 83687 Leased October 2005 235
42
Lease
Leased or Expiration Square
Location Owned Date Footage
- ----------------------------- --------- ---------- -------
LOAN OFFICES:
Westgate
7978 Fairview Avenue
Boise, Idaho 83704 Leased May 2004 2,500
Meridian
111 East 1st Street
Meridian, Idaho 83642 Leased December 2009 2,600
________
(1) Includes home branch
(2) Drive-up ATM available.
(3) Wal-Mart locations.
We are currently in the process of constructing a branch in Eagle, Idaho
with an estimated completion date of October 2005.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2004.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
- ------------------------------------------------------------------------
The Company's common stock began trading on the Nasdaq National Market
under the symbol "HOME" on December 7, 2004. As of December 7, 2004, there were
6,229,504 shares of common stock issued to non-affiliates and approximately
1,854 shareholders of record, excluding persons or entities who hold stock in
nominee or "street name" accounts with brokers. The Company's common stock had
no trading history during the years ended September 30, 2004 and 2003.
Dividends
Dividend payments by the Company are dependent primarily on dividends
received by the Company from the Bank. Under federal regulations, the dollar
amount of dividends the Bank may pay is dependent upon its capital position
and recent net income. Generally, if the Bank satisfies its regulatory capital
requirements, it may make dividend payments up to the limits prescribed in the
OTS regulations. However, institutions that have converted to a stock form
of ownership may not declare or pay a dividend on, or repurchase any of, its
common stock if the effect thereof would
43
cause the regulatory capital of the institution to be reduced below the amount
required for the liquidation account which was established in connection with
the mutual holding company reorganization. See Item 1, "Business -- How We Are
Regulated -- Regulation and Supervision of Home Federal -- Limitations on
Dividends and Other Capital Distributions."
Issuer Purchases of Equity Securities
The Company had no purchases of equity securities during the year ended
September 30, 2004.
44
Item 6. Selected Financial Data
- ---------------------------------
The following table sets forth certain information concerning the
consolidated financial position and results of operations of the Company and
subsidiaries at and for the dates indicated. The consolidated data is derived
in part from, and should be read in conjunction with, the Consolidated Financial
Statements of the Company and its subsidiary presented herein.
At September 30,
------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
FINANCIAL CONDITION DATA: (in thousands)
Total assets $743,867 $450,196 $416,543 $382,504 $325,922
Investment securities, available
for sale, at fair value 871 5,440 2,507 8,266 1,395
Mortgage-backed securities, held
to maturity 96,595 24,425 44,325 36,630 46,129
Loans receivable, net 392,634 372,629 318,297 289,385 243,122
Loans held for sale 3,577 5,066 12,722 9,367 4,781
Total deposit accounts 343,087 301,273 279,772 266,316 232,747
Federal Home Loan
Bank Advances 122,797 96,527 91,008 73,394 54,498
Equity capital 45,097 40,399 34,961 32,866 31,058
Year Ended September 30,
------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
OPERATING DATA: (in thousands)
Interest and dividend income $27,512 $26,896 $26,904 $26,514 $22,438
Interest expense 9,650 9,705 11,465 14,480 11,023
------ ------ ------ ------ ------
Net interest income 17,862 17,191 15,439 12,034 11,415
Provision for loan losses 900 615 277 748 600
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 16,962 16,576 15,162 11,286 10,815
Noninterest income 8,982 11,188 5,767 6,319 6,243
Noninterest expense 18,576 18,885 17,178 14,594 10,641
------ ------ ------ ------ ------
Income before income taxes 7,368 8,879 3,751 3,011 6,417
Income tax expense 2,684 3,423 1,644 1,223 2,085
------ ------ ------ ------ ------
Net income $ 4,684 $ 5,456 $ 2,107 $ 1,788 $ 4,332
====== ====== ====== ====== ======
At September 30,
------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
OTHER DATA:
Number of:
Real estate loans outstanding 3,081 3,053 2,565 2,360 2,210
Deposit accounts 75,565 72,327 70,183 64,801 56,130
Full-service offices 14 14 14 15 13
45
At or For the Year Ended
September 30,
------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on assets (1) 0.93% 1.23% 0.53% 0.50% 1.45%
Return on equity (2) 10.47 13.39 6.03 5.44 14.99
Equity-to-assets ratio (3) 8.86 9.17 8.74 9.20 9.68
Interest rate spread (4) 3.55 3.93 3.98 3.29 3.70
Net interest margin (5) 3.84 4.19 4.23 3.69 4.15
Efficiency ratio (6) 69.20 66.55 81.01 79.52 60.26
Average interest-earning assets
to average interest-bearing
liabilities 113.62 110.96 107.83 108.84 111.13
Noninterest expense as a
percent of average total assets 3.68 4.25 4.29 4.09 3.56
Capital Ratios:
Tier 1 (core) capital
(to risk-weighted assets) 6.01 8.89 8.50 8.60 9.49
Total risk-based capital
(to risk-weighted assets) 12.76 14.18 13.79 14.46 16.35
Tier 1 risk-based capital
(to risk-weighted assets) 12.05 13.56 13.27 13.85 15.75
Asset Quality Ratios:
Nonaccrual and 90 days or
more past due loans as a
percent of total loans 0.16 0.04 0.14 1.22 0.36
Nonperforming assets as a
percent of total assets 0.10 0.03 0.17 0.97 0.28
Allowance for losses as a percent
of gross loans receivable 0.67 0.49 0.41 0.47 0.45
Allowance for losses as a percent
of nonperforming loans 432.30 1393.23 295.94 39.12 127.14
Net charge-offs to average
outstanding loans 0.03 0.04 0.10 0.16 0.04
________
(1) Net income divided by average total assets.
(2) Net income divided by average equity.
(3) Average equity divided by average total assets.
(4) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Noninterest expense divided by total noninterest income and net interest
income before provision for loan loss.
46
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A Warning about Forward-Looking Statements
This annual report contains forward-looking statements, which can be
identified by the use of words such as "believes," "expects," "anticipates,"
"estimates" or similar expressions. Forward-looking statements include:
* statements of our goals, intentions and expectations;
* statements regarding our business plans, prospects, growth and operating
strategies;
* statements regarding the quality of our loan and investment portfolios; and
* estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
* general economic conditions, either nationally or in our market area, that
are worse than expected;
* changes in the interest rate environment that reduce our interest margins
or reduce the fair value of financial instruments;
* increased competitive pressures among financial services companies;
* changes in consumer spending, borrowing and savings habits;
* legislative or regulatory changes that adversely affect our business;
* adverse changes in the securities markets; and
* changes in accounting policies and practices, as may be adopted by the
bank regulatory agencies, the Public Company Accounting Oversight Board
or the Financial Accounting Standards Board.
Any of the forward-looking statements that we make in this annual report 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.
Recent Developments
Home Federal Bancorp was organized as a federally chartered stock
corporation at the direction of the Association in connection with its
Reorganization. The Reorganization was completed on December 6, 2004. In
connection with the Reorganization, the Association converted to a federally
chartered stock savings bank and changed its corporate title to "Home Federal
Bank" ("Home Federal" or the "Bank"). As of September 30, 2004, the Association
had not completed its reorganization into holding company form, and accordingly,
the Company had not issued any stock, had no assets or liabilities, and had not
conducted any business other than that of an organizational nature for the year
ended September 30, 2004. Based upon the foregoing, Management's Discussion and
Analysis of Financial Condition as filed as a part of this annual report is
that of the Association and its wholly-owned subsidiary, Idaho Home Service
Corporation.
47
General
Our results of operations depend primarily on revenue generated as a result
of our net interest income and noninterest income. Net interest income is the
difference between the interest income we earn on our interest-earning assets
(consisting primarily of loans and investment securities) and the interest we
pay on our interest-bearing liabilities (consisting primarily of customer
savings and money market accounts, time deposits and borrowings).
Noninterest income consists primarily of service charges on deposit and
loan accounts, gains on the sale of loans and investments, loan servicing fees,
and investment and mortgage servicing income. Our results of operations are
also affected by our provisions for loan losses and other expenses.
Other expenses consist primarily of noninterest expense, including
compensation and benefits, occupancy, equipment, data processing, advertising,
postage and supplies, professional services and, when applicable, deposit
insurance premiums. Compensation and benefits consist primarily of the salaries
and wages paid to our employees, payroll taxes and expenses for retirement and
other employee benefits. Occupancy and equipment expenses, which are the fixed
and variable costs of building and equipment, consist primarily of lease
payments, real estate taxes, depreciation charges, maintenance and costs of
utilities.
Our results of operations may also be affected significantly by general and
local economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities.
Business Strategy
Our strategy is to operate as an independent community-based financial
institution dedicated to serving the needs of customers and the local community.
We focus on providing exceptional service and quality products and services, as
well as convenient access to generate a high level of customer satisfaction.
Our principal business consists of attracting retail deposits from the general
public which we invest primarily in loans secured by first mortgages on owner-
occupied, one- to four-family residences. We also originate multi-family loans,
commercial real estate loans and a variety of consumer loans. We intend to
continue implementing this strategy while pursuing further loan portfolio
diversification, with an emphasis on credit risk management. Our commitment is
to provide a reasonable range of products and services to meet the needs of our
customers. As part of this commitment, we will continue the course established
over the past few years of increasing commercial real estate lending and
consumer lending with a particular emphasis on home equity loans. Our goal is
to grow Home Federal while providing exceptional and effective services to
customers and the local community.
Operating Strategy
Our mission is to operate and grow a profitable community-oriented
financial institution serving individuals and commercial real estate customers
in our market area. We plan to achieve this by executing our strategy of:
* maintaining favorable asset quality reflected primarily by a low level of
non-performing assets, low charge-offs and adequacy of loan loss reserves;
* seeking to improve net interest margin through a combination of reduced
funding costs and improved pricing relative to asset risk;
* analyzing profitability of products and business lines and allocating
resources to those areas offering the greatest potential for future profits;
* expanding the number of households we serve through internal expansion of
the branch network and possibleselective acquisitions of financial service
providers in existing or surrounding markets;
* pursuing further loan portfolio diversification, with an emphasis on credit
risk management;
48
* continuing an internal management culture which is driven by a focus on
profitability, productivity and accountability for results and which
responds proactively to the challenge of change;
* providing our staff members with the knowledge and skills necessary to
perform their job functions and develop their career potential;
* enhancing the perception of Home Federal with both the retail and commercial
banking public as the bank of choice;
* maintaining a sales and service culture based on an understanding of the
customer's needs and reflecting our commitment to excellence;
* reducing future reliance on net interest income by creating additional
sources of fee income from products and services we offer; and
* utilizing technology to gain efficiencies in processing customer information,
to provide a competitive tool to assist the sales process and to allow the
efficient integration of acquired businesses.
Maintaining favorable asset quality reflected primarily by a low level of
non-performing assets, low charge-offs and adequacy of loan loss reserves. We
believe that high asset quality is a key to long-term financial success. We
have sought to maintain a high level of asset quality and moderate credit risk
by using underwriting standards we believe are conservative. At September 30,
2004, 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 stock offering, we intend to continue
our philosophy of managing large loan exposures through our conservative
approach to lending.
Seeking to improve net interest margin through a combination of reduced
funding costs and improved pricing relative to asset risk. We intend to manage
our net interest income and net interest margin in order to ensure that the
balance sheet reflects an optimum mix of assets and liabilities that result in
the maximization of the net interest income and net portfolio value within the
limits of acceptable credit risk. On the asset side of the balance sheet, we
intend to originate residential and commercial real estate and consumer loans in
our local area. In addition, we may purchase mortgage-backed securities when
loan origination levels are not adequate to fund necessary asset growth. We
will fund asset growth with deposits and borrowings that have pricing and cash
flow characteristics that are similar to the asset side of the balance sheet.
Analyzing profitability of products and business lines and allocating
resources to those areas offering the greatest potential for future profits. We
have implemented comprehensive cost accounting and customer information systems
to provide the data necessary to build effective product and customer
profitability reporting for all of our lines of business. We intend to use this
profitability data as we build business plans to support the expansion of
current lines of business and in the implementation of new products and
services.
Expanding the number of households we serve through internal expansion of
the branch network and possible selective acquisitions of financial service
providers in existing or surrounding markets. We continually monitor the growth
in our four-county market area and work closely with commercial real estate
experts to target sites for future branch locations. We currently are planning
to open a branch in Eagle, Idaho, a suburb of Boise. The property has been
purchased and construction is planned for mid-2005. We placed a temporary
office on the site in October 2004. Our long-term strategy is to build one
branch per year if appropriate sites can be identified and obtained. As a
result of the reorganization and stock offering, we will also actively search
for appropriate acquisitions to enhance our ability to deliver products and
services in our existing markets and to expand into surrounding markets.
Pursuing further loan portfolio diversification, with an emphasis on credit
risk management. We have developed an excellent team of lenders across our
market area who focus on realtor and builder relationships as well as
49
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. We focus 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 continue to manage our technology resources internally in order to
remain more flexible and responsive than our competition to new opportunities in
the market.
Critical Accounting Policies
We use estimates and assumptions in our financial statements in accordance
with generally accepted accounting principles. Material or critical estimates
that are susceptible to significant change include the determination of the
allowance for loan losses and the associated provision for loan losses, 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
50
understanding of our effective tax rate and the tax code. These estimates are
reviewed by our independent auditors on an annual basis and by our regulators
when they examine Home Federal.
Allowance for Loan Losses. Management recognizes that loan losses may
occur over the life of a loan and that the allowance for loan losses must be
maintained at a level necessary to absorb specific losses on impaired loans and
probable losses inherent in the loan portfolio. Our Asset Liability Management
Committee assesses the allowance for loan losses on a quarterly basis. The
Committee analyzes several different factors including delinquency, charge-off
rates and the changing risk profile of our loan portfolio, as well as local
economic conditions such as unemployment rates, bankruptcies and vacancy rates
of business and residential properties.
We believe that the accounting estimate related to the allowance for loan
losses is a critical accounting estimate because it is highly susceptible to
change from period to period requiring management to make assumptions about
future losses on loans; and the impact of a sudden large loss could deplete the
allowance and potentially require increased provisions to replenish the
allowance, which would negatively affect earnings.
Our methodology for analyzing the allowance for loan losses consists of
three components: formula, specific and general allowances. The formula
allowance is determined by applying an estimated loss percentage to various
groups of loans. The loss percentages are generally based on various historical
measures such as the amount and type of classified loans, past due ratios and
loss experience, which could affect the collectibility of the respective loan
types.
The specific allowance component is created when management believes that
the collectibility of a specific large loan, such as a real estate, multi-family
or commercial real estate loan, has been impaired and a loss is probable.
The general allowance element relates to assets with no well-defined
deficiency or weakness (i.e., assets classified pass or watch) and takes into
consideration loss that is inherent within the portfolio but has not been
realized. Borrowers are impacted by events well in advance of a lender's
knowledge that may ultimately result in a loan default and eventual loss.
Examples of such loss-causing events in the case of consumer or one- to
four-family residential loans would be a borrower job loss, divorce or medical
crisis. Examples in commercial or construction loans may be the loss
of customers due to competition or changes in the economy. General allowances
for each major loan type are determined by applying to the associated loan
balance loss factors that take into consideration past loss experience, asset
duration, economic conditions and overall portfolio quality.
The allowance is increased by the provision for loan losses, which is
charged against current period operating results and decreased by the amount of
actual loan charge-offs, net of recoveries.
Mortgage Servicing Rights. Mortgage servicing rights represent the present
value of the future servicing fees from the right to service loans in the
portfolio. The most critical accounting policy associated with mortgage
servicing is the methodology used to determine the fair value of capitalized
mortgage servicing rights, which requires the development of a number of
estimates, the most critical of which is the mortgage loan prepayment speeds
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
51
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
FHLB. 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 September 30, 2004 and September 30, 2003
General. Our total assets increased $293.7 million, or 65.2%, to $743.9
million at September 30, 2004 compared to $450.2 million at September 30, 2003.
The asset growth resulted mainly from the receipt of $220.8 million of
refundable stock subscription orders related to the plan of reorganization and
stock offering. Excluding the receipt of subscription orders, assets increased
$72.9 million or 16.1% with the purchases of mortgage-backed securities of $72.2
million accounting for the majority of the growth in assets. This growth was
funded by $41.8 million in increased deposits, $26.3 million in borrowings from
the FHLB of Seattle and $4.7 million in net income.
We use asset and liability duration measures as a component of interest
rate risk measurement. As described above, duration measures cash flows that
are generated from investments, loans or deposits by weighting the present
value of the cash flows according to the periods of time when the cash flows are
received with the result being an average date when the cash flows are received
or paid. During the year ended September 30, 2004, total asset duration
decreased 16.6 months to 26.2 months, and liability duration decreased 8.4
months to 19.1 months for a net duration gap of 7.1 months, down 8.2 months from
September 30, 2003.
Assets. Total assets increased $293.7 million during the year ended
September 30, 2004. The increase was primarily concentrated in the following
interest-earning asset categories:
Increase/
Balance at (Decrease) from Percentage
September 30, 2004 September 30, 2003 Increase/(Decrease)
------------------ ------------------ ------------------
(dollars in thousands)
Cash and amounts due from
depository institutions $215,663 $204,545 1,839.8%
Securities available for
sale, at fair value 871 (4,569) (84.0)
Mortgage-backed securities,
held to maturity 96,595 72,170 295.5
Loans receivable, net 392,634 20,005 5.4
Loans held for sale (1) 3,577 (1,489) (29.4)
Properties and equipment,
net 10,967 1,209 12.4
________
(1) Loans held for sale includes one- to four-family residential loans that
have been sold into the secondary market awaiting delivery to the
purchaser.
Cash and amounts due from depository institutions increased $204.5 million
primarily as a result of the receipt of refundable stock subscriptions related
to the plan of reorganization and stock offering.
During the year ended September 30, 2004, we purchased Fannie Mae and
Freddie Mac mortgage-backed securities in order to leverage the balance sheet
and achieve the desired level of total interest-earning assets. Mortgage-
backed securities have payment characteristics that are similar to those of
residential loans. The net increase of $72.2 million represented 99.3% of total
asset growth excluding subscription orders. Loans receivable, net increased
$20.0 million from loans originated in our local area.
52
During the year ended September 30, 2004, properties and equipment, net
increased $1.2 million net of accumulated depreciation. This increase is
primarily due to the cost incurred for the construction of our new Caldwell
branch, a remodel of the Nampa branch and the initial construction cost of the
new Eagle branch of $494,000, $858,000 and $732,000, respectively. The
remaining change in properties and equipment was the result of $1.7 million
depreciation expense.
As part of our ongoing business activities, we remodel existing facilities,
build new branches, improve technology and improve our infrastructure in order
to provide the best possible customer service. As a result of these activities,
we will from time to time enter into contracts committing to asset purchases and
construction projects. At September 30, 2004, we entered into contracts related
to the construction of the new branch in Eagle, Idaho.
Deposits. During the year ended September 30, 2004, deposits increased
$41.8 million. The following table details the sources of that growth:
Increase/
Balance at (Decrease) from
September 30, 2004 September 30, 2003 Percentage Increase
------------------ ------------------ -------------------
(dollars in thousands)
Savings deposits $25,453 $1,030 4.2%
Demand deposits 153,409 21,631 16.4
Certificates of deposit 164,225 19,153 13.2
-------- ------- ------
Total deposit accounts $343,087 $41,814 13.9%
Demand deposits increased $21.6 million during the year ended September 30,
2004, and accounted for 51.7% of the $41.8 million in total deposit growth.
Noninterest-bearing demand deposits grew $2.9 million and interest-bearing
demand deposits grew $18.7 million. Certificates of deposit grew $19.2 million
during the year ended September 30, 2004.
Borrowings. We use borrowings from the FHLB of Seattle as an alternative
funding source to deposits to manage funding costs and reduce interest rate risk
and to leverage the balance sheet. The net effect was to fund increases in
total interest-earning assets, thereby incrementally increasing our net interest
income. The FHLB of Seattle provides term borrowings at competitive interest
rates and terms ranging from overnight to 30 years. Total borrowings at
September 30, 2004 were $122.8 million, an increase of $26.3 million, or 27.2%,
from September 30, 2003.
Equity. Total equity increased $4.7 million, or 11.6%, to $45.1 million at
September 30, 2004 from $40.4 million at September 30, 2003. The source of
increase in our equity was $4.7 million from net income for the year ended
September 30, 2004. Our Tier 1 capital ratio was 6.0% and our total risk-based
capital ratio was 12.8% at September 30, 2004.
Comparison of Operating Results for the Years Ended September 30, 2004 and
September 30, 2003
General. Net income for the year ended September 30, 2004 was $4.7
million, a $772,000, or 14.1% decrease from the prior year. The two primary
factors that contributed to the decrease in net income were:
* an increase of $671,000 in net interest income; and
* an decrease of $2.2 million in noninterest income.
Noninterest expense decreased $309,000 and income tax expense decreased
$739,000 during the year ended September 30, 2004 compared to the prior year,
partially offsetting the decrease in noninterest income.
53
Net Interest Income. Net interest income for the year ended September 30,
2004 was $17.9 million, a $671,000 increase from the prior year. Total interest
and dividend income increased $616,000 while total interest expense decreased
$55,000. Interest rates declined during the year ended September 30, 2004. As
a result of these historically low interest rates, increased loan prepayment
rates and decreased asset reinvestment rates limited opportunities for increased
yields on our assets.
Interest and Dividend Income. Total interest and dividend income
increased $616,000 for the year ended September 30, 2004. 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, 2004 and 2003:
Year Ended September 30,
------------------------------------------------
2004 2003 Increase/
---------------- ---------------- (Decrease) in
Interest and
Dividend
Average Average Income from
Balance Yield Balance Yield 2003
--------- ----- --------- ----- -----------
(dollars in thousands)
Loans receivable, net $382,947 6.21% $352,124 6.81% $(211)
Loans held for sale 2,910 5.79 3,721 5.99 (55)
Investment securities available for
sale, including interest-bearing
deposits in other banks 14,690 1.77 14,842 2.03 (42)
Mortgage-backed securities,
held to maturity 58,076 5.23 33,893 6.02 998
Federal Home Loan Bank stock 6,761 4.11 5,841 6.03 (74)
--------- ----- --------- ----- -----------
Total interest-earning assets $465,384 5.91% $410,421 6.55% $616
========= ===== ========= ===== ===========
Low interest rates and high loan volumes from refinanced mortgage loans
resulted in a 60 basis point decline in yield on our loans receivable portfolio
and a 20 basis point decline in yield on our loans held for sale for the year
ended September 30, 2004. However, as a result of a $30.0 million increase in
the total average outstanding balances of both our loan portfolio and loans held
for sale during the same time period, the combined interest income received
decreased only $266,000. Rapid prepayments received on higher coupon
mortgage-backed securities, and decreased reinvestment rates for purchased
mortgage-backed securities resulted in a 79 basis point reduction in the yield
on mortgage-backed securities. The reduction in yield combined with the $24.2
million increase in the average balance outstanding in mortgage-backed
securities portfolio resulted in a $998,000 increase in related interest income
for securities. During the year ended September 30, 2004, we decreased our
average investment securities available for sale portfolio by $152,000, which
resulted in a net decrease of $42,000 in related interest income.
54
Interest Expense. Total interest expense for the year ended September 30,
2004 was $9.7 million, a decrease of $55,000 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, 2004 and 2003:
Year Ended September 30,
------------------------------------------------
2004 2003 Increase/
---------------- ---------------- (Decrease) in
Interest
Expense
Average Average from
Balance Cost Balance Cost 2003
--------- ----- --------- ----- -----------
(dollars in thousands)
Savings deposits $ 24,431 0.25% $ 24,354 0.43% $(44)
Interest-bearing demand deposits 83,364 0.27 70,956 0.27 34
Money market accounts 33,319 0.70 33,159 0.73 (10)
Certificates of deposit 153,280 2.89 139,254 3.26 (105)
Federal Home Loan Bank advances 115,197 4.08 102,173 4.53 70
Total interest-bearing --------- ----- --------- ----- -----------
liabilities $409,591 2.36% $369,896 2.62% $(55)
========= ===== ========= ===== ===========
The total cost of funds for total interest-bearing liabilities at September
30, 2004 decreased 26 basis points from the year ended September 30, 2003.
Historically low interest rates allowed us to fund balance sheet growth with a
$39.7 million increase in the average balance of interest-bearing liabilities at
a $55,000 decrease in interest expense.
Provision for Loan Losses. The provision for loan losses increased
$285,000, or 46.3%, to $900,000 for the year ended September 30, 2004. The
allowance for loan losses as a percentage of total loans outstanding increased
18 basis points to 0.67% at September 30, 2004. The following table details
activity and information related to the allowance for loan losses for the years
ended September 30, 2004 and 2003:
At or For the Year
Ended September 30,
------------------
2004 2003
------ ------
(dollars in thousands)
Provisions for loan losses $900 $615
Net charge-offs 116 147
Allowance for loan losses 2,637 1,853
Allowance for loan losses as a percentage
of total loans outstanding at the end
of period 0.67% 0.49%
Allowance for loan losses as a percentage of
nonperforming loans at end of period 432.30% 1,393.23%
Total nonaccrual and 90 days or more past due loans 610 133
Nonaccrual and 90 days or more past due loans
as a percentage of loans receivable 0.16% 0.04%
Loans receivable, net $392,634 $372,629
Total loans originated 190,376 361,666
The decrease in net charge-offs and nonaccrual and 90 days past due loans
from September 30, 2003 to September 30, 2004 resulted from the completion of
our work out of loan quality issues which began in 2000. During fiscal 2001,
2002 and 2003, we worked through the collection process on several one- to four-
family residential construction loans and a large single-family residential loan
resulting in total charge-offs of approximately $900,000. We increased our
provision for loan losses for the year ended September 30, 2004 compared to the
prior year in connection with the unseasoned nature of our loan portfolio that
resulted from a record volume of refinanced mortgage
55
loans. Total loan originations were $190.4 million and $361.7 million during
the years ended September 30, 2004 and 2003, respectively. In management's
judgment, this resulted in an increase in the level of unseasoned loans within
the loan portfolio thereby increasing the inherent risk of loss to Home Federal.
In addition, during the fiscal year ended September 30, 2004, management revised
the estimated loss ratios of several loan categories to better reflect Home
Federal's loss history. Industry or peer loss rates were used if Home Federal
did not have a meaningful history of losses. As a result, management increased
the general allowance to allow for the additional inherent risk of the loan
portfolio.
Noninterest Income. Noninterest income decreased $2.2 million, or 19.7%,
during the year ended September 30, 2004 from the prior year. The following
table provides a detailed analysis of the changes in components of noninterest
income:
Increase/
Year Ended (Decrease) from
September 30, 2004 September 30, 2003 Percentage Increase
------------------ ------------------ -------------------
(dollars in thousands)
Service fees and charges $8,072 $(48) (0.6)%
Gain on sale of loans 375 (669) (64.1)
Increase in cash surrender
value of life insurance 493 (108) (18.0)
Mortgage servicing rights, net 22 (1,348) (98.4)
Other 20 (33) (62.3)
--------------- ------------------ -------------------
Total noninterest income $8,982 $(2,206) (19.7)%
=============== ================== ===================
Service fees and charges decreased by $48,000 during the year ended
September 30, 2004 compared to fiscal 2003.
Gain on sale of loans decreased $669,000 in fiscal 2004 as a result of a
$93.9 million decrease in loans sold on the secondary market. Residential loan
sales for fiscal 2004 amounted to $67.6 million, compared to $164.3 million for
fiscal 2003.
56
Noninterest Expense. Noninterest expense decreased $309,000 during the
year ended September 30, 2004 from the prior fiscal year. The following table
provides a detailed breakdown of the components of noninterest expense
for fiscal 2004 and the increases or decreases from the prior year:
Increase/
Year Ended (Decrease) from Percentage Increase/
September 30, 2004 September 30, 2003 (Decrease)
------------------ ------------------ -------------------
(dollars in thousands)
Compensation and benefits $10,553 $(427) (3.9)%
Occupancy and equipment 2,778 (131) (4.5)
Data processing 1,549 183 13.4
Advertising 1,060 (196) (15.6)
Other 2,636 262 11.0
------------- ------------------ -------------------
Total noninterest expense $18,576 $(309) (1.6)%
============= ================== ===================
Compensation and benefits decreased $427,000 for the year ended September
30, 2004 compared to the prior year. Sales commissions paid to our mortgage
loan officers and originators decreased $360,000 due to a decrease of $175.2
million in total real estate loan originations.
Data processing expense increased $183,000 primarily due to increased
expenses for computer software maintenance of $14,000 and internet banking of
$189,000.
Other expenses increased $262,000 for the year ended September 30, 2004
from the prior year. Insurance and Property taxes increased $64,000.
Professional services, also included in other expenses, increased $31,000
primarily as a result of increased audit fees of $13,000. Consulting fees
increased $44,000 primarily due to costs related to the marketing of our health
savings account program.
Income Tax Expense. Income tax expense decreased $739,000 during the year
ended September 30, 2004 compared to fiscal 2003. Income tax expense decreased
primarily as a result of a $1.5 million decrease in net income before tax.
Income recognized from the increase in the cash surrender value of bank owned
life insurance is not generally subject to income tax. This reduced income tax
expense by $168,000 for the year ended September 30, 2004 and $243,000 for the
year ended September 30, 2003. The effective income tax rate is 34.0% for
federal and 7.6% for the State of Idaho.
Comparison of Financial Condition at September 30, 2003 and September 30, 2002
General. Total assets increased $33.7 million, or 8.1%, during the year
ended September 30, 2003. Record mortgage loan originations, brought on by
record low interest rates, provided a $54.3 million increase in loans
receivable, net. Asset growth was funded by an increase of $21.5 million in
deposits and $5.5 million in borrowings from the FHLB 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.
57
Assets. Asset growth was primarily concentrated in the following
interest-earning asset categories:
Increase/
Balance at (Decrease) from Percentage
September 30, 2003 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 372,629 54,332 17.1
Loans held for sale 5,066 (7,656) (60.2)
Mortgage servicing rights, net 3,130 1,370 77.8
During the year ended September 30, 2003, we originated $289.2 million in
one- to four-family mortgage loans. We sold $164.3 million in the secondary
market and $143.3 million in principal was received from loan amortizations.
We also originated $21.2 million in commercial real estate and multi-family
mortgages, $32.9 million in real estate construction loans, $17.2 million in
consumer loans and $1.2 million in commercial/business loans. The mortgage-
backed securities portfolio decreased $19.9 million as we concentrated on
residential mortgage growth.
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 FHLB 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
FHLB of Seattle borrowings matured and we borrowed $35.6 million in additional
FHLB of Seattle advances which resulted in a net increase in borrowings
of $5.5 million, or 6.1%. We took advantage of the historically low interest
rate environment and borrowed funds with longer terms to maturity, increasing
the duration of total borrowings from 17.3 months at September 30, 2002 to 51.4
months at September 30, 2003. In addition to extending the duration, our cost
of funds decreased 21 basis points to 4.53% at the end of the fiscal year. The
borrowings were used to fund a portion of the $54.3 million growth in our loans
receivable, net with durations that more closely match the terms of the loans.
58
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 8.9% and 13.6%,
respectively, at September 30, 2003.
Comparison of Operating Results for the Years Ended September 30, 2003 and
September 30, 2002
General. Net income for the year ended September 30, 2003 was $5.5
million, a $3.3 million or 158.9% increase from the prior year. The two primary
factors that contributed to the increase in net income were:
* an increase of $1.8 million in net interest income; and
* an increase of $5.4 million in noninterest income.
Noninterest expense increased $1.7 million and income tax expense increased
$1.8 million during the year ended September 30, 2003 compared to the prior
year, partially offsetting the gains in net interest and noninterest income.
Net Interest Income. Net interest income for the year ended September 30,
2003 was $17.2 million, a $1.8 million increase from the prior year. Total
interest and dividend income remained level with the prior year while total
interest expense decreased $1.8 million. Interest rates declined during the
year ended September 30, 2003. During this period, our balance sheet was
liability sensitive so the decline in interest rates resulted in a more rapid
repricing of our liabilities as compared to the asset side of the balance sheet.
Therefore, in a declining rate environment as we experienced during the year
ended September 30, 2003, interest expense declined more rapidly than interest
income. As a result of these record low interest rates, increased loan
prepayment rates and decreased asset reinvestment rates limited opportunities
for increased yields on our assets. The same factors contributed to the
significant decline in total interest expense.
Interest and Dividend Income. Total interest and dividend income for the
year ended September 30, 2003 remained largely unchanged from the previous year.
The following table compares detailed average earning asset balances, associated
yields and resulting change in interest and dividend income for the years ended
September 30, 2003 and 2002:
Year Ended September 30,
------------------------------------------------
2003 2002 Increase/
---------------- ---------------- (Decrease) in
Interest and
Dividend
Average Average Income from
Balance Yield Balance Yield 2002
--------- ----- --------- ----- -----------
(dollars in thousands)
Loans receivable, net $352,124 6.81% $301,507 7.66% $869
Loans held for sale 3,721 5.99 11,045 6.32 (475)
Investment securities available
for sale, including interest-
bearing deposits in other banks 14,842 2.03 6,137 3.18 107
Mortgage-backed securities, held
to maturity 33,893 6.02 41,690 6.28 (577)
Federal Home Loan Bank stock 5,841 6.03 4,634 6.13 68
--------- ----- --------- ----- -----------
Total interest-earning assets $410,421 6.55% $365,013 7.37% $ (8)
========= ===== ========= ===== ===========
59
Record low interest rates and high loan volumes from refinanced mortgage
loans resulted in an 85 basis point decline in yield on our loans receivable
portfolio and a 33 basis point decline in yield on our loans held for sale for
the year ended September 30, 2003. However, as a result of a $43.3 million
increase in the total average outstanding balances of both our loan portfolio
and loans held for sale during the same time period, the combined interest
income received increased by $394,000. Rapid prepayments received on higher
coupon mortgage-backed securities, and decreased reinvestment rates for
purchased mortgage-backed securities resulted in a 26 basis point reduction in
the yield on mortgage-backed securities. The reduction in yield combined with
the $7.8 million decrease in the average balance outstanding in mortgage-backed
securities portfolio resulted in a $577,000 decrease in related interest income
for securities. During the year ended September 30, 2003, we increased our
average investment securities available for sale portfolio by $8.7 million,
which resulted in a net increase of $107,000 in related interest income.
Interest Expense. Total interest expense for the year ended September 30,
2003 was $9.7 million, a decrease of $1.8 million from the prior fiscal year.
The following table details average balances, cost of funds and resulting
change in interest expense for the years ended September 30, 2003 and 2002:
Year Ended September 30,
------------------------------------------------
2003 2002 Increase/
---------------- ---------------- (Decrease) in
Interest
Expense
Average Average from
Balance Cost Balance Cost 2002
--------- ----- --------- ----- -----------
(dollars in thousands)
Savings deposits $ 24,354 0.43% $ 22,633 0.87% $ (94)
Interest-bearing demand deposits 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.
60
Provision for Loan Losses. The provision for loan losses increased
$338,000, or 122.0%, to $615,000 for the year ended September 30, 2003. The
allowance for loan losses as a percentage of total loans outstanding increased
eight basis points to 0.49% at September 30, 2003. The following table details
activity and information related to the allowance for loan losses for the years
ended September 30, 2003 and 2002:
At or For the Year
Ended September 30,
------------------
2003 2002
------ ------
(dollars in thousands)
Provisions for loan losses $ 615 $ 277
Net charge-offs 147 323
Allowance for loan losses 1,853 1,385
Allowance for loan losses as a percentage of total
loans outstanding at the end of period 0.49% 0.41%
Allowance for loan losses as a percentage of
nonperforming loans at end of period 1,393.23% 295.94%
Total nonaccrual and 90 days or more past due loans 133 468
Nonaccrual and 90 days or more past due loans
as a percentage of loans receivable 0.04% 0.14%
Loans receivable, net 372,629 318,297
Total loans originated $361,666 $234,547
The decrease in net charge-offs and nonaccrual and 90 days past due loans
from September 30, 2002 to September 30, 2003 resulted from the completion of
our work out of loan quality issues which began in 2000. During fiscal 2001,
2002 and 2003, we worked through the collection process on several one- to
four-family residential construction loans and a large single-family residential
loan resulting in total charge-offs of approximately $900,000. We increased our
provision for loan losses for the year ended September 30, 2003 compared to the
prior year in connection with the unseasoned nature of our loan portfolio that
resulted from a record volume of refinanced mortgage loans. Total loan
originations were $361.7 million and $234.5 million during the years ended
September 30, 2003 and 2002, respectively. In management's judgment, this
resulted in an increase in the level of unseasoned loans within the loan
portfolio thereby increasing the inherent risk of loss to Home Federal. As a
result, management increased the general allowance to allow for the additional
inherent risk of the loan portfolio.
Noninterest Income. Noninterest income increased $5.4 million, or 94.0%,
during the year ended September 30, 2003 from the prior year. The following
table provides a detailed analysis of the changes in components of noninterest
income:
Year Ended Increase from
September 30, 2003 September 30, 2002 Percentage Increase
------------------ ------------------ -------------------
(dollars in thousands)
Service fees and charges $ 8,120 $ 2,155 36.1%
Gain on sale of loans 1,044 368 54.4
Increase in cash surrender
value of life insurance 601 185 44.5
Mortgage servicing rights, net 1,370 2,417 230.9
Other 53 296 121.8
------------- ------------------ -------------------
Total noninterest income $ 11,188 $ 5,421 94.0%
============= ================== ===================
Mortgage servicing rights, net increased $2.4 million as a result of a
77.1% increase in residential mortgage loan sales on the secondary market and a
$1.5 million impairment of the mortgage servicing rights for the year ended
61
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 increase of $127.5
million in total real estate loan originations. Retirement expense increased
$572,000 based on the cumulative increased vesting of non-qualified retirement
plan participants and a $120,000 adjustment to the director indexed retirement
plans.
Data processing expense increased $369,000 primarily due to increased
expenses for computer software maintenance of $97,000, internet banking of
$88,000 and debit cards of $129,000.
Other expenses increased $189,000 for the year ended September 30, 2003
from the prior year. Professional services, included in other expenses,
increased $167,000 primarily as a result of increased audit fees of $42,000,
commercial loan review fees of $34,000 and consulting fees of $32,000 related to
the implementation of our performance-based compensation system.
Income Tax Expense. Income tax expense increased $1.8 million during the
year ended September 30, 2003 compared to fiscal 2002. Income tax expense
increased primarily as a result of a $5.1 million increase in net income
before tax. Income recognized from the increase in the cash surrender value of
bank owned life insurance is not generally subject to income tax. This reduced
income tax expense by $243,000 for the year ended September 30, 2003 and
$162,000 for the year ended September 30, 2002. The effective income tax rate
is 34.0% for federal and 7.6% for the State of Idaho.
62
Average Balances, Interest and Average Yields/Cost
The following table sets forth for the periods indicated, information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resultant yields, interest rate
spread, net interest margin (otherwise known as net yield on interest-earning
assets), and the ratio of average interest-earning assets to average
interest-bearing liabilities. Average balances have been calculated using the
average of daily balances during the period. Interest and dividends are
reported on a tax-equivalent basis. During the time periods presented, we did
not own any tax-exempt investment securities.
Year Ended
September 30,
--------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------ ------------------------------ ------------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance(1) Dividends Cost Balance(1) Dividends Cost Balance(1) Dividends Cost
--------- --------- ----- --------- --------- ----- --------- --------- ------
(dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 382,947 $ 23,768 6.21% $ 352,124 $ 23,979 6.81% $ 301,507 $ 23,110 7.66%
Loans held for sale 2,910 168 5.79 3,721 223 5.99 11,045 698 6.32
Investment securities,
available for sale,
including interest-
bearing deposits in
other banks 14,690 260 1.77 14,842 302 2.03 6,137 195 3.18
Mortgage-backed securities,
held to maturity 58,076 3,038 5.23 33,893 2,040 6.02 41,690 2,617 6.28
Federal Home Loan Bank stock 6,761 278 4.11 5,841 352 6.03 4,634 284 6.13
--------- --------- ----- --------- --------- ----- --------- --------- ------
Total interest-earning assets 465,384 27,512 5.91 410,421 26,896 6.55 365,013 26,904 7.37
--------- ---------
Noninterest earning assets 39,418 33,985 35,237
--------- --------- ---------
Total average assets $ 504,802 $ 444,406 $ 400,250
========= ========= =========
Interest-bearing liabilities:
Savings deposits $ 24,431 $ 60 0.25% $ 24,354 $ 104 0.43% $ 22,633 $ 198 0.87%
Interest-bearing demand
deposits 83,364 228 0.27 70,956 194 0.27 62,773 547 0.87
Money market accounts 33,319 232 0.70 33,159 242 0.73 36,963 686 1.86
Certificates of deposit 153,280 4,435 2.89 139,254 4,540 3.26 129,556 5,586 4.31
--------- --------- ----- --------- --------- --------- ---------
Total deposits 294,394 4,955 1.68 267,723 5,080 1.9 251,925 7,017 2.79
Federal Home Loan Bank
advances 115,197 4,695 4.08 102,173 4,625 4.53 86,577 4,448 5.14
--------- --------- --------- --------- --------- ---------
Total average interest-
bearing liabilities 409,591 9,650 2.36 369,896 9,705 2.62 338,502 11,465 3.39
Noninterest-bearing
liabilities 50,476 33,769 26,781
--------- --------- ---------
Total average liabilities 460,067 403,665 365,283
Average equity 44,735 40,741 34,967
--------- --------- ---------
Total liabilities and equity $504,802 $ 444,406 $ 400,250
========= ========= =========
Net interest income $17,862 $17,191 $15,439
Interest rate spread 3.55% 3.93% 3.98%
Net interest margin (2) 3.84% 4.19% 4.23%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 113.62% 110.96% 107.83%
________
(1) The average loans receivable, net balances include non-accruing loans.
(2) Net interest margin, otherwise known as yield on interest earning assets,
is calculated as net interest income divided by average interest-earning
assets.
63
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.
At
September 30, Year Ended September 30,
2004 2004 2003 2002
--------- ------ ------ ------
Weighted average yield on:
Loans receivable, net 5.96% 6.21% 6.81% 7.66%
Loans held for sale 5.74 5.79 5.99 6.32
Investment securities, available for
for sale, including interest-bearing
deposits in other banks 1.78 1.77 2.03 3.18
Mortgage-backed securities, held
to maturity 5.07 5.23 6.02 6.28
Federal Home Loan Bank stock 3.50 4.11 6.03 6.13
Total interest-earning assets 4.59 5.91 6.55 7.37
Weighted average rate paid on:
Savings deposits 0.20 0.25 0.43 0.87
Interest-bearing demand deposits 0.28 0.27 0.27 0.87
Money market accounts 0.88 0.70 0.73 1.86
Certificates of deposit 2.75 2.89 3.26 4.31
Total average deposits 1.64 1.68 1.9 2.79
Federal Home Loan Bank advances 3.96 4.08 4.53 5.14
Total interest-bearing liabilities 2.29 2.36 2.62 3.39
Interest rate spread (spread between
weighted average rate on all
interest-earning assets and all
interest-bearing liabilities) 2.30 3.55 3.93 3.98
Net interest margin (net interest
income (expense) as a percentage
of average interest-earning assets) N/A 3.84 4.19 4.23
64
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
our net interest income. Information is provided with respect to: (1) effects
on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); and (2) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume). Changes in
rate/volume are allocated proportionately to the changes in rate and volume.
Year Ended September 30, 2004 Year Ended September 30, 2003
Compared to September 30, 2003 Compared to September 30, 2002
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------ ------------------------------
Rate Volume Total Rate Volume Total
------ ------ ----- ------ ------ -----
(in thousands)
Interest-earning assets:
Loans receivable, net $(31,919) $31,708 $(211) $(1,721) $2,590 $ 869
Loans held for sale (7) (48) (55) (36) (439) (475)
Investment securities, available for
sale, including interest-bearing
deposits in other banks (39) (3) (42) (36) 143 107
Mortgage-backed securities, held
to maturity (225) 1,223 998 (104) (473) (577)
Federal Home Loan Bank stock (145) 71 (74) (5) 73 68
------ ------ ----- ------ ------ -----
Total net change in income on
interest-earning assets $(32,335) $32,951 $ 616 $(1,902) $1,894 $ (8)
====== ====== ===== ====== ====== =====
Interest-bearing liabilities:
Savings deposits $(44) $ - $ (44) $ (110) $ 16 $ (94)
Interest-bearing demand deposits - 34 34 (436) 83 (353)
Money market accounts (11) 1 (10) (380) (64) (444)
Certificates of deposit (932) 827 (105) (1,510) 464 (1,046)
------ ------ ----- ------ ------ -----
Total average deposits (987) 862 (125) (2,436) 499 (1,937)
Federal Home Loan Bank advances (248) 318 70 (344) 521 177
------ ------ ----- ------ ------ -----
Total net change in expense on
interest-bearing liabilities $ (1,235) $1,180 $ (55) $(2,780) $1,020 $(1,760)
====== ====== ===== ====== ====== ======
Net change in net interest income $ 671 $ 1,752
===== ======
65
Asset and Liability Management and Market Risk
General. Our Board of Directors has established an asset and liability
management policy to guide management in maximizing net interest rate spread by
managing the differences in terms between interest-earning assets and interest-
bearing liabilities while maintaining acceptable levels of liquidity, capital
adequacy, interest rate sensitivity, credit risk and profitability. The policy
includes the use of an Asset Liability Management Committee whose members
include certain members of senior management. The Committee's purpose is to
communicate, coordinate and manage our asset/liability positions consistent with
our business plan and Board-approved policies, as well as to price savings and
lending products, and to develop new products. The Asset Liability Management
Committee meets weekly to review various areas including:
* economic conditions;
* interest rate outlook;
* asset/liability mix;
* interest rate risk sensitivity;
* current market opportunities to promote specific products;
* historical financial results;
* projected financial results; and
* capital position.
The Committee also reviews current and projected liquidity needs, although not
necessarily on a weekly basis. As part of its procedures, the Asset Liability
Management Committee regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest income and
market value of portfolio equity, which is defined as the net present value of
an institution's existing assets, liabilities and off-balance sheet instruments,
and evaluating such impacts against the maximum potential change in market value
of portfolio equity that is authorized by the Board of Directors.
Our Risk When Interest Rates Change. The rates of interest we earn on
assets and pay on liabilities generally are established contractually for a
period of time. Market interest rates change over time. Our loans generally
have longer maturities than our deposits. Accordingly, our results of
operations, like those of other financial institutions, are impacted by changes
in interest rates and the interest rate sensitivity of our assets and
liabilities. The risk associated with changes in interest rates and our ability
to adapt to these changes is known as interest rate risk and is our most
significant market risk.
How We Measure the Risk of Interest Rate Changes. We measure our interest
rate sensitivity on a monthly basis utilizing an internal model. Management
uses various assumptions to evaluate the sensitivity of our operations to
changes in interest rates. Although management believes these assumptions are
reasonable, the interest rate sensitivity of our assets and liabilities on net
interest income and the market value of portfolio equity could vary
substantially if different assumptions were used or actual experience differs
from such assumptions. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react differently to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets and liabilities lag behind changes in
market interest rates. Non-uniform changes and fluctuations in market interest
rates across various maturities will also affect the results presented. In
addition, certain assets, such as adjustable rate mortgage loans, have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. In the event of a significant change in interest rates,
prepayment and early withdrawal levels would likely deviate from those assumed.
The assumptions we use are based upon proprietary and market data and reflect
historical results and current market conditions. These assumptions relate to
interest rates,
66
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 OTS provides us with the information presented
in the following table, which is based on information we have provided to the
OTS in determining our interest rate sensitivity. The table shows the change in
our net portfolio value at September 30, 2004 that would occur upon an immediate
change in interest rates based on the OTS 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 $39,834 $18,773 32.03% 5.50% (2.22)% $724,450
200 46,408 12,199 20.81 6.30 (1.41) 736,315
100 53,024 5,583 9.53 7.08 (0.63) 748,445
Base 58,607 - - 7.71 Base 759,780
-100 61,344 (2,737) (4.67) 7.98 0.27 768,512
-200 65,451 (6,844) (11.68) 8.40 0.69 778,882
-300 61,334 (2,727) (4.65) 7.85 0.14 781,110
Pre-Shock NPV Ratio 7.71
Post-Shock NPV Ratio 6.30
Static Sensitivity Measure - decline in NPV Ratio 1.41
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.
67
The following table illustrates the change in net interest income at
September 30, 2004 that would occur in the event of an immediate change in
interest rates, with no effect given to any steps that might be taken to counter
the effect of that change in interest rates.
Net Interest Income
--------------------------------------
Basis Point
Change in Rates Amount $ Change (1) % Change
--------------- -------- ----------- ----------
(dollars in thousands)
300 $ 28,764 $ 6,714 30.45%
200 26,885 4,835 21.93
100 25,016 2,966 13.45
Base 22,050 - Base
-100 20,600 (1,450) (6.58)
-200 18,366 (3,684) (16.71)
-300 17,072 (4,978) (22.58)
________
(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 FHLB 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 "Item I. Business - Lending Activities." At
September 30, 2004, the total approved loan origination commitments outstanding
amounted to $14.2 million. At the same date, unused lines of credit were $20.4
million. We use our sources of funds
68
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 September 30, 2004 totaled
$68.6 million. Although the average cost of deposits has decreased throughout
fiscal 2004, 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 September 30, 2004
to borrow an additional $174.7 million from the FHLB 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 FHLB 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.
Contractual Obligations
Through the normal course of operations, we have entered into certain
contractual obligations. Our obligations generally relate to funding of
operations through deposits and borrowings as well as leases for premises.
Lease terms generally cover a five year period, with options to extend, and are
non-cancelable.
At September 30, 2004, scheduled maturities of contractual obligations were
as follows:
Total
Within 1 Year 1-3 Years 4-5 Years Over 5 Years Balance
------------- --------- --------- ------------ -------
(in thousands)
Certificates of Deposit $68,609 $85,888 $9,665 $63 $164,225
FHLB Advances 18,007 55,485 17,905 31,400 122,797
Operating Leases 287 341 315 730 1,673
Total contractual ------- -------- ------- ------- --------
obligations $86,903 $141,714 $27,885 $32,193 $288,695
======= ======== ======= ======= ========
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 $45.1 million at
September 30, 2004, or 6.1%, of total assets on that date. As of September 30,
2004, we exceeded all regulatory capital requirements. Our regulatory capital
ratios at September 30, 2004 were as follows: Tier 1 capital 6.0%; Tier 1 (core)
risk-based capital 12.1%; and total risk-based capital 12.8%. The regulatory
capital requirements to be considered well
69
capitalized are 5%, 6% and 10%, respectively. See "Item I. Business - How We
Are Regulated - Regulation and Supervision of Home Federal - Capital
Requirements."
Off-Balance Sheet Arrangements
We are party to financial instruments with off-balance sheet risk in the
normal course of business in order to meet the financing needs of our customers.
These financial instruments generally include commitments to originate mortgage,
commercial and consumer loans, and involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. Our maximum exposure to credit loss in the event of nonperformance by
the borrower is represented by the contractual amount of those instruments.
Since some commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. We use the same
credit policies in making commitments as we do for on-balance sheet instruments.
Collateral is not required to support commitments.
Undisbursed balances of loans closed include funds not disbursed but
committed for construction projects. Unused lines of credit include funds not
disbursed, but committed to, home equity, commercial and consumer lines of
credit.
Commercial letters of credit are conditional commitments issued by us to
guarantee the performance of a customer to a third party. Those guarantees are
primarily used to support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held varies as
specified above and is required in instances where we deem it necessary.
The following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of September 30, 2004:
Contract or
Notional Amount
---------------
(dollars in thousands)
Commitments to originate loans:
Fixed rate $10,810
Adjustable rate 3,373
Undisbursed balance of loans closed 15,288
Unused lines of credit 20,264
Commercial letters of credit 168
---------------
Total $49,903
===============
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.
70
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 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 the fiscal year, the Financial Accounting Standards Board ("FASB")
issued the following accounting standards related to the financial services
industry:
In March 2004, the EITF reached consensus on Issue 03-01 ("EITF 03-01"),
The meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. EITF 03-01 includes new guidance for evaluating and recording
impairment losses on debt and equity investments, as well as new disclosure
requirements for investments that are deemed to be temporarily impaired. It
specifically addresses whether an investor has the ability and intent to
hold an investment until recovery. In addition EITF 03-01 contains disclosure
requirements that provide useful information about impairments that have not
been recognized as other-then-temporary for investments within the scope
of EITF 03-01. On September 30, 2004, the FASB deferred the effective date of
EITF 03-01's guidance pending the issuance of a final FASB Staff Position
("FSP") relating to the draft FSP EITF Issue 03-01-a, "Implementation Guidance
for the Application of Paragraph 16 of EITF Issue No. 03-01" which has not been
issued yet. This deferral did not change the disclosure guidance which remains
effective for fiscal years ending after December 15, 2003. Matters being
considered by the FASB which may impact our financial reporting include the
accounting as a component in determining net income for declines in market value
of debt securities which are due solely to changes in market interest rates and
the effect of sales of available-for-sale securities which have market values
below cost at the time of sale and whether such sale indicates an absence of
intent and ability of the investor to hold a forecasted recovery of the
investment's value to its original cost.
In December 2003, the FASB issued FIN No. 46R, Consolidation of Variable
Interest Entities, an interpretation of Accounting Research Bulletin No. 51.
FIN 46R is a revision to the original FIN No. 46, which was issued in January
2003 that addresses the consolidation of certain variable interest entities
(e.g., nonqualified special purpose entities). FIN 46R provides guidance on how
to identify a variable interest entity and determine when the assets,
liabilities, noncontrolling interests and results of operations of a variable
interest entity should be consolidated by the primary beneficiary. The primary
beneficiary is the enterprise that will absorb a majority of the variable
interest entity's expected losses or receive a majority of the expected residual
returns as a result of holding variable interests. The revision clarifies
how variable interest entities should be identified and evaluated for
consolidation purposes. FIN No. 46R must be applied no later than March 31,
2004. We adopted FIN No. 46R as of July 1, 2003. We are still in the process
of studying and evaluating the impact of FIN No. 46R. However, at this time we
do not expect the impact of FIN No. 46R to have a significant effect on our
results of operations or financial condition.
In March 2004, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 105 ("SAB 105"), Application of Accounting
Principles to Loan Commitments. SAB 105 requires registrants to account for
mortgage loan interest rate lock commitments related to loans held for sale as
written options. SAB 105 did not have an material effect on our financial
statements.
71
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained under "Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Market Risk and
Asset and Liability Management" of this Form 10-K is incorporated herein by
reference.
71
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
Home Federal Bancorp, Inc. (the "Company") was formed to serve as the stock
holding company for Home Federal Savings and Loan Association of Nampa (the
"Bank") pursuant to the Bank's mutual holding company formation.
As of September 30, 2004, the Bank had not completed its mutual holding company
formation, and accordingly, the Company had not issued any stock, had no assets
or liabilities, and had not conducted any business other than that of an
organizational nature for the year ended September 30, 2004. For a further
discussion of the Company's formation and operations, see the Company's
Registration Statement on Form S-1, as amended, initially filed on July 19,
2004, and declared effective on August 12, 2004. Based upon the foregoing, the
Audited Consolidated Financial Statements (File Number 333-113731) filed as a
part of this annual report are those of Home Federal Savings and Loan
Association of Nampa and its wholly-owned subsidiary, Idaho Home Service
Corporation, as follows:
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report 74
Consolidated Statement of Financial Condition as of
September 30, 2004 and 2003 75
Consolidated Statement of Income For the Years Ended
September 30, 2004, 2003, and 2002 76
Consolidated Statement of Equity For the
Years Ended September 30, 2004, 2003 and 2002 77
Consolidated Statement of Cash Flows For the Years Ended
September 30, 2004, 2003 and 2002 78
Notes to Consolidated Financial Statements 80
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related consolidated statements of income,
equity, and cash flows for each of the three years in the period ended September
30, 2004. 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 of the Public
Company Accounting Oversight Board (United States). 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,
2004 and 2003, and the results of their operations and cash flows for each of
three years in the period ended September 30, 2004, in conformity with
accounting principles generally accepted in the United States of America.
/s/Moss Adams LLP
Spokane, Washington
October 29, 2004, except for Note 14 as to which the date is December 7, 2004.
74
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
STATEMENT OF FINANCIAL CONDITION (in thousands)
- --------------------------------------------------------------------------------
ASSETS
September 30,
----------------------
2004 2003
----------------------
Cash and amounts due from depository institutions $215,663 $ 11,118
Securities available for sale, at fair value 871 5,440
Mortgage-backed securities held to maturity, at cost 96,595 24,425
Federal Home Loan Bank capital stock, at cost 7,317 6,533
Loans receivable, net of allowance for loan losses of
$2,637 and $1,853 at September 30, 2004 and 2003 392,634 372,629
Loans held for sale 3,577 5,066
Accrued interest receivable 2,019 1,585
Properties and equipment, net 10,967 9,758
Mortgage servicing rights, net 3,152 3,130
Investment in life insurance contracts 10,052 9,621
Real estate owned 113 -
Other assets 907 891
-------- ---------
TOTAL ASSETS $743,867 $450,196
-------- ---------
LIABILITIES AND EQUITY
DEPOSIT ACCOUNTS
Savings deposits $25,453 $ 24,423
Demand deposits 153,409 131,778
Certificates of deposit 164,225 145,072
-------- ---------
Total deposit accounts 343,087 301,273
-------- ---------
Advances by borrowers for taxes and insurance 3,716 3,553
Interest payable 1,420 939
Deferred compensation 2,463 1,803
Federal Home Loan Bank Advances 122,797 96,527
Deferred income tax liability 2,264 2,475
Income taxes payable - 365
Other liabilities 223,023 2,862
-------- ---------
Total Liabilities 698,770 409,797
-------- ---------
EQUITY CAPITAL
Retained earnings, substantially restricted 45,099 40,415
Unrealized gain (loss) on securities available
for sale, net of deferred income taxes (2) (16)
-------- ---------
Total equity capital 45,097 40,399
-------- ---------
TOTAL LIABILITIES AND EQUITY $743,867 $450,196
-------- ---------
75 See accompanying notes.
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (in thousands)
- --------------------------------------------------------------------------------
Year Ended September 30
-------------------------------
2004 2003 2002
-------------------------------
Interest and dividend income:
Loan interest $23,936 $24,202 $23,808
Investment interest 260 301 163
Mortgage-backed security interest 3,038 2,040 2,617
Federal Home Loan Bank dividends 278 352 284
Interest-bearing deposits in other banks - 1 32
------- ------- -------
Total interest and dividend income 27,512 26,896 26,904
------- ------- -------
Interest expense:
Deposits 4,955 5,080 7,017
Federal Home Loan Bank advances 4,695 4,625 4,448
------- ------- -------
Total interest expense 9,650 9,705 11,465
------- ------- -------
Net interest income 17,862 17,191 15,439
Provision for loan losses 900 615 277
------- ------- -------
Net interest income after provision
for loan losses 16,962 16,576 15,162
------- ------- -------
Noninterest income:
Service fees and charges 8,072 8,120 5,965
Gain on sale of loans 375 1,044 676
Increase in cash surrender value of
life insurance 493 601 416
Mortgage servicing rights
Loan servicing fees capitalized 741 2,762 1,155
(Amortization) accretion of mortgage
servicing rights (563) (1,143) (721)
Mortgage servicing rights impairment (156) (249) (1,481)
Other 20 53 (243)
------- ------- -------
Total noninterest income 8,982 11,188 5,767
------- ------- -------
Noninterest expense:
Compensation and benefits 10,553 10,980 10,042
Occupancy and equipment 2,778 2,909 2,790
Data processing 1,549 1,366 997
Advertising 1,060 1,256 1,164
Postage and supplies 805 778 788
Professional services 433 402 235
Insurance and taxes 434 370 345
Other 964 824 817
------- ------- -------
Total noninterest expense 18,576 18,885 17,178
------- ------- -------
Income before income taxes 7,368 8,879 3,751
Income tax expense 2,684 3,423 1,644
------- ------- -------
NET INCOME $4,684 $5,456 $2,107
------- ------- -------
76 See accompanying notes.
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF EQUITY (in thousands)
- --------------------------------------------------------------------------------
Accumulated
Total Other
Equity Retained Comprehensive Comprehensive
Capital Earnings Income(Loss) Income(Loss)
------- -------- ------------ ------------
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 defer-
red income taxes (12) - (12) (12)
------- ------- ------- ------
Comprehensive income $2,095
======
Balance, September 30, 2002 34,961 34,959 2
Net income 5,456 5,456 - $5,456
Change in unrealized gain
on securities available
for sale, net of defer-
red income taxes (18) - (18) (18)
------- ------- ------- ------
Comprehensive income $5,438
======
Balance, September 30, 2003 40,399 40,415 (16)
Net income 4,684 4,684 $4,684
Change in unrealized gain
on securities available
for sale, net of defer-
red income taxes 14 14 14
------- ------- ------- ------
Comprehensive income $4,698
======
Balance, September 30, 2004 $45,097 $45,099 $(2)
======= ======= =======
77 See accompanying notes.
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
- --------------------------------------------------------------------------------
Year Ended September 30
-------------------------------
2004 2003 2002
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $4,684 $5,456 $2,107
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Depreciation and amortization 1,658 1,625 1,675
Net accretion (amortization) of premiums
and discounts on investments (23) 51 105
(Gain) loss on sale of fixed assets and
repossessed assets 40 (47) 321
(Gain) loss on sale of securities
available for sale 39 37 (5)
Provision for losses 900 615 277
Federal Home Loan Bank stock dividend (278) (352) (284)
Deferred compensation expense 661 885 -
Net deferred loan fees (289) (989) 267
Provision (benefit) for deferred income taxes (225) 665 (93)
Net gain on sale of loans (376) (1,044) (1,120)
Proceeds from sale of loans held for sale 70,803 164,390 92,786
Originations of loans held for sale (68,938) (155,690) (124,879)
Impairment of mortgage servicing asset 156 249 1,481
Net increase in value of life
insurance contracts (430) (808) (361)
Change in assets and liabilities:
Interest receivable (435) 94 94
Other assets (265) (1,307) 769
Interest payable 481 554 (17)
Other liabilities (1,015) (2,097) 2,953
-------- -------- --------
Net cash provided (used) by operating
activities 7,148 12,287 (23,924)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturity of mortgage-
backed securities held to maturity 12,246 23,969 14,145
Purchase of mortgage-backed securities
held to maturity (84,394) (4,120) (21,221)
Proceeds from sale and maturity of mortgage-
backed securities available for sale 117 - -
Purchase of mortgage-backed securities
available for sale (991) - -
Purchase of securities available for sale - (60,000) -
Proceeds from sale of securities available
for sale 5,429 57,000 5,000
Purchases of property and equipment (2,953) (1,400) (1,882)
Purchase of Federal Home Loan Bank stock (506) (915) (964)
Loan originations and principal collections,
net (21,127) (53,665) -
Proceeds from disposition of property
and equipment 79 495 -
Proceeds from sale of repossessed assets 436 584 1,747
Investment in life insurance - - (369)
-------- -------- --------
Net cash used by investing activities (91,664) (38,052) (3,544)
-------- -------- --------
78 See accompanying notes.
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
- --------------------------------------------------------------------------------
Year Ended September 30
2004 2003 2002
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $41,814 $21,486 $12,047
Net increase in advances by borrowers for
taxes and insurance 163 592 157
Federal Home Loan Bank Advances 178,299 35,650 174,675
Payments on advances from Federal Home
Loan Bank (152,028) (30,131) (157,061)
Refundable stock subscription orders 220,813 - -
Net change in lines of credit - - (2,848)
-------- -------- --------
Net cash provided by financing activities 289,061 27,597 26,970
-------- -------- --------
CHANGE IN CASH AND CASH
EQUIVALENTS 204,545 1,832 (498)
Cash and cash equivalents, beginning of year 11,118 9,286 9,784
-------- -------- --------
Cash and cash equivalents, end of year $215,663 $11,118 $9,286
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE
INFORMATION
Cash paid during the year for:
Interest on deposits and other borrowings $9,170 $9,151 $11,483
======== ======== ========
Income taxes $3,416 $1,654 $1,638
======== ======== ========
SUPPLEMENTAL CASH FLOWS DISCLOSURE ON
NONCASH INVESTING TRANSACTIONS
Fair value adjustment to securities
available for sale 24 (30) (20)
Income tax effect related to fair value
adjustment (10) 12 8
Acquisition of real estate and other
assets in settlement of loans $512 $294 $2,376
======== ======== ========
79 See accompanying notes.
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 14 branches and two loan origination centers throughout
southwest Idaho. The Office of Thrift Supervision is the Association's primary
regulator.
Idaho Home Service Corporation is a wholly owned subsidiary of the Association.
This subsidiary 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 is 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.
80
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.
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, including interest-bearing deposits 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 September 30, 2004 and 2003 was $1.2 million
and $3.0 million, 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.
81
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. As of September 30,
2004, the bank held only 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.
82
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
83
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
The components of other comprehensive income and related tax effects are as
follows (in thousands):
Year Ended September 30,
---------------------------
2004 2003 2002
------ ------ ------
Unrealized holding gain (loss) on available
for sale securities $ 63 $ 7 $(25)
Reclassification adjustment for gain (loss)
realized in income (39) (37) 5
------ ------ ------
Net unrealized gain (loss) 24 (30) (20)
Tax effect 10 12 8
------ ------ ------
UNREALIZED GAIN (LOSS) AFTER TAX $ 14 $ (18) $(12)
====== ====== ======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies (Continued)
Advertising costs:
Advertising costs are charged to operations when incurred. Advertising expense
for the years ended September 30, 2004, 2003, and 2002, was $1.1 million,
$1.3 million and $1.2 million respectively.
Recent accounting pronouncements:
In December 2003, the FASB issued FIN No. 46R, Consolidation of Variable
Interest Entities, an interpretation of Accounting Research Bulletin No. 51.
FIN 46R is a revision to the original FIN No. 46, which was issued in January
2003, that addresses the consolidation of certain variable interest entities
(e.g., nonqualified special purpose entities). The FIN provides guidance on how
to identify a variable interest entity and determine when the assets,
liabilities, noncontrolling interests, and results of operations of a variable
interest entity should be consolidated by the primary beneficiary. The primary
beneficiary is the enterprise that will absorb a majority of the variable
interest entity's expected losses or receive a majority of the expected residual
returns as a result of holding variable interests. The revision clarifies how
variable interest entities should be identified and evaluated for consolidation
purposes. FIN No. 46R must be applied no later than March 31, 2004. The
Company adopted FIN No. 46 as of July 1, 2003. The Company is still in the
process of studying and evaluating the impact of FIN No. 46R. However, at this
time the Company does not expect the impact of FIN No. 46R to have a significant
effect on the results of operations or financial condition.
In March 2004, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 105 (SAB 105), "Application of Accounting Principles to
Loan Commitments". SAB 105 requires registrants to account for mortgage loan
interest rate lock commitments related to loans held for sale as written
options. SAB 105 did not have a material effect on the Company's financial
statements.
In March 2004, the EITF reached consensus on Issue 03-01 (EITF 03-01), "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF 03-01 includes new guidance for evaluating and recording
impairment losses on debt and equity investments, as well as new disclosure
requirements for investments that are deemed to be temporarily impaired. This
Issue specifically addresses whether an investor has the ability and intent to
hold an investment until recovery. In addition, Issue 03-01 contains disclosure
requirements that provide useful information about impairments that have not
been recognized as other-than-temporary for investments with in the scope of
this Issue. On September 30, 2004, the Financial Accounting Standards Board
deferred the effective date of the Issue's guidance on how to evaluate and
recognize an impairment loss that is other-than-temporary. This Issue's guidance
is pending the issuance of a final FASB Staff Position ("FSP") relating to the
draft FSP EITF Issue 03-01-a, Implementation Guidance for the Application of
Paragraph 16 of EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments," which the Board may
issue as early as November. This deferral did not change the disclosure guidance
which remains effective for fiscal years ending after December 15, 2003. Matters
being considered by the FASB which may impact the Company's financial reporting
include the accounting as a component in determining net income for declines in
market value of debt securities which are due solely to changes in market
interest rates and the effect of sales of available-for-sale securities which
have market values below cost at the time of sale and whether such sale
indicates an absence of intent and ability of the investor to hold to a
forecasted recovery of the investment's value to its original cost.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 September 30,
2004 and 2003 were as follows (in thousands):
September 30, 2004
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities available for sale: Cost Gains Losses Value
FNMA Mortgage-backed
securities $874 $ - $ (3) $871
==== ==== ===== ====
September 30, 2003
---------------------------------------
Adjustable Rate Mortgage $5,468 $ - $ (28) $5,440
Fund ====== ==== ===== ======
The contractual maturities of investment securities available for sale are shown
below (dollars in thousands). Expected maturities may differ from contractual
maturities because borrowers have the right to repay obligations without
prepayment penalties.
September 30, 2004
--------------------
Amortized Fair
Cost Value
--------- ---------
Due after five years through ten years $874 $871
==== ====
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 2 - Securities (Continued)
For the years ended September 30, 2004, 2003, and 2002, proceeds from sales of
securities available for sale amounted to $5.4 million, $57.0 million and
$5.0 million respectively. Gross realized gains during the years ended
September 30, 2004, 2003, and 2002, were none, $5,000 and $5,000 respectively,
and gross realized losses during the years ended September 30, 2004 and 2003,
were $39,000 and $42,000 respectively, which was included in other noninterest
income on the consolidated statement of income. There were no gross realized
losses recognized during the year ended September 30, 2002.
Mortgage-backed securities held to maturity consisted of the following (in
thousands):
September 30, 2004
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities held to maturity: --------- --------- -------- -------
Mortgage-backed securities $96,595 $1,215 $(284) $97,526
======= ==== ===== =======
September 30, 2003
---------------------------------------
Mortgage-backed securities $24,425 $998 $ - $25,423
======= ==== ===== =======
The contractual maturities of mortgage-back securities held to maturity are
shown below (dollars in thousands). Expected maturities may differ from
contractual maturities because borrowers have the right to repay obligations
without prepayment penalties.
September 30, 2004
-------------------
Amortized Fair
Cost Value
-------- --------
Due within one year $16 $16
Due after one year through five years 2,974 3,122
Due after five years through ten years 325 346
Due after ten years 93,280 94,042
------- -------
Total $96,595 $97,526
======= =======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 2 - Securities (Continued)
At September 30, 2004, the weighted-average yield on the mortgage-backed
securities was 5.07%. 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. Securities held to maturity are pledged as collateral for
Federal Home Loan Bank borrowings (Note 7).
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of September
30, 2004 are as follows (in thousands):
Less than 12 months 12 months or longer Total
---------------------- ---------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------- ------ ------- ------ ------- ------
Mortgage-backed
securities, available
for sale $ 871 $ (3) $ - $ - $ 871 $ (3)
Mortgage-backed
securities, held to
maturity 34,962 (284) - - 34,962 (284)
------- ----- ---- ---- ------- -----
$35,833 $(287) $ - $ - $35,833 $(287)
======= ===== ==== ==== ======= =====
We have evaluated these securities and have determined that the decline in the
value is temporary and not related to any company or industry specific event.
We have the ability and intent to hold the securities for a reasonable period of
time for a forecasted recovery of the amortized cost in the event of a more
favorable interest rate environment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 3 - Loans Receivable
Loans receivable are summarized as follows (in thousands):
September 30,
----------------------
2004 2003
-------- --------
Real Estate Loans
One-to four family residential $242,818 $247,309
Multi-family residential 6,265 7,750
Commercial 93,575 79,020
-------- --------
Total real estate loans 342,658 334,079
-------- --------
Real Estate Construction Loans
One-to four family residential 7,207 5,225
Multi-family residential 834 352
Commercial and land development 11,151 9,128
-------- --------
Total real estate construction loans 19,192 14,705
-------- --------
Consumer Loans
Home equity lines of credit 27,351 20,640
New and used automotive and RV 3,838 1,939
Other consumer 1,949 2,827
-------- --------
Total consumer loans 33,138 25,406
-------- --------
Commercial/business loans 1,363 1,662
-------- --------
396,351 375,852
Less net deferred loan fees 1,080 1,370
-------- --------
Total loans 395,271 374,482
Less allowance for loan losses 2,637 1,853
-------- --------
LOANS, net $392,634 $372,629
======== ========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Loans Receivable (Continued)
The contractual maturity of loans receivable at September 30, 2004, are shown
below (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 Year After 5
1 Year to 5 Years Years Total
------ ---------- ----- -----
Real Estate
One-to four family residential $24 $2,185 $240,609 $242,818
Multi-family residential 366 16 5,883 6,265
Commercial 1,149 8,217 84,209 93,575
------ ------- -------- --------
Total real estate 1,539 10,418 330,701 342,658
------ ------- -------- --------
Real Estate Construction
One-to four family residential 3,517 268 3,422 7,207
Multi-family residential - - 834 834
Commercial and land development 862 1,226 9,063 11,151
------ ------- -------- --------
Total real estate construction 4,379 1,494 13,319 19,192
------ ------- -------- --------
Consumer
Home equity lines of credit 187 169 26,995 27,351
Automotive 56 1,649 2,133 3,838
Other consumer 1,044 832 73 1,949
------ ------- -------- --------
Total consumer 1,287 2,650 29,201 33,138
------ ------- -------- --------
Commercial/business 523 408 432 1,363
------ ------- -------- --------
Total loans $7,728 $14,970 $373,653 $396,351
------ ------- -------- --------
The interest rates on loans at September 30, 2004, fall into the following fixed
and variable components (in thousands):
Fixed rates $221,717
Variable rates 174,634
--------
Total loans $396,351
--------
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Loans Receivable (Continued)
An analysis of the changes in the allowance for loan losses is as follows
(dollars in thousands):
Year Ended September 30,
---------------------------
2004 2003 2002
------ ------ ------
Beginning balance, $1,853 $1,385 $1,431
Provision for loan losses 900 615 277
Charge offs (136) (154) (331)
Recoveries 20 7 8
------ ------ ------
Ending balance $2,637 $1,853 $1,385
====== ====== ======
At September 30, 2004, 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. There
was no allowance for loan losses related to impaired loans in 2004, 2003, or
2002. The average recorded investment in impaired loans during the years ended
September 30, 2004, 2003 and 2002, was $93,000, $25,000 and $989,000
respectively. No interest income was recognized on impaired loans as of
September 30, 2004, 2003, or 2002. As of September 30, 2004, 2003, and 2002,
the Association had no accruing loans which are contractually past due 90 days
or more. 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 September 30, 2004 and 2003 were $257.0 million and $246.0 million,
respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 4 - Loan Servicing (Continued)
The following summarizes capitalized mortgage servicing rights activity (in
thousands):
Year Ended September 30,
---------------------------
2004 2003 2002
------ ------ ------
Mortgage servicing asset, beginning balance $3,130 $1,760 $2,807
Capitalized 741 2,762 1,155
(Amortization) accretion (563) (1,143) (721)
Impairment (156) (249) (1,481)
------ ------ ------
Mortgage servicing asset, ending balance $3,152 $3,130 $1,760
====== ====== ======
Fair value of these servicing rights approximated carrying value at September
30, 2004, 2003, and 2002. At September 30, 2004, 2003, and 2002, the fair value
of servicing rights was determined by an independent valuation.
Note 5 - Properties and Equipment
Properties and equipment at September 30, 2004 and 2003 are summarized as
follows (in thousands):
September 30,
-------------------
2004 2003
------- ------
Land $1,627 $1,627
Buildings and leasehold improvement 7,975 7,055
Construction in progress 1,733 759
Furniture and equipment 8,855 8,651
Automobiles 203 203
------- ------
Total cost 20,393 18,295
Less accumulated depreciation and
amortization (9,426) (8,537)
------- ------
NET BOOK VALUE $10,967 $9,758
======= ======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 5 - Properties and Equipment (Continued)
During the year ended September 30, 2004, the Association closed one branch.
Assets disposed of relating to the closing of the branches totaled approximately
$121,000 and resulted in total losses of $47,000.
Repairs and maintenance are charged against income as incurred; major renewals
and improvements are capitalized. Depreciation and amortization charged against
operations for the years ended September 30, 2004, 2003, and 2002, was $1.7
million, $1.6 million and $1.7 million respectively.
Note 6 - Deposit Accounts
Deposit information at September 30 is as follows (dollars in thousands):
Weighted Weighted
Average Average
Interest September 30, Interest September 30,
Rate 2004 Rate 2003
---- ---- ---- ----
Savings deposits 0.20% $25,453 0.43% $24,423
Demand deposits 0.36% 153,409 0.42% 131,778
-------- --------
178,862 156,201
Certificates of deposit 0.00 - 0.99% 19,880 0.00 - 0.99% 11,742
1.00 - 1.99% 28,083 1.00 - 1.99% 36,899
2.00 - 2.99% 47,906 2.00 - 2.99% 40,884
3.00 - 3.99% 48,835 3.00 - 3.99% 31,983
4.00 - 4.99% 17,247 4.00 - 4.99% 18,726
5.00 - 5.99% 1,184 5.00 - 5.99% 2,968
6.00 - 6.99% 1,090 6.00 - 6.99% 1,870
-------- --------
Total Certificates of deposit 164,225 145,072
-------- --------
Total deposits $343,087 $301,273
-------- --------
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6 - Deposit Accounts (Continued)
Scheduled maturities of time deposits are as follows (in thousands):
September 30,
---------------------
2004 2003
-------- --------
2003 $ - $ -
2004 - 58,278
2005 68,609 38,918
2006 59,138 30,027
2007 26,750 16,748
2008 8,824 985
2009 841 -
Thereafter 63 116
-------- --------
$164,225 $145,072
======== ========
Deposit accounts are insured by the FDIC up to $100,000. At September 30, 2004
and 2003, time deposits of $100,000 or greater approximated $34.5 million and
$28.0 million, respectively.
Interest expense by type of deposit account for the years ended September 30 is
summarized as follows (in thousands):
Year Ended September 30,
----------------------------
2004 2003 2002
------ ------ ------
Savings deposits $60 $104 $198
Demand deposits 460 436 1,233
Certificates of deposit 4,435 4,540 5,586
------ ------ ------
$4,955 $5,080 $7,017
====== ====== ======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 7 - Advances from the Federal Home Loan Bank
The Association has the ability to borrow up to 40% 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 September 30, 2004 and 2003 was $122.8 million and $96.5
million, respectively, with interest rates ranging from 1.43% to 6.77%.
The Association's borrowings consisted of the following (dollars in thousands):
Year Ended September 30,
------------------------
2004 2003
---- ----
FHLB advances
Maximum outstanding at any month end $ 136,000 $ 112,000
Average outstanding $ 115,000 $ 102,000
Weighted average interest rates
For the period 4.08% 4.62%
At end of period 3.96% 4.64%
Scheduled maturities of the fixed rate FHLB borrowings were (dollars in
thousands):
September 30,
------------------------------------------
2004 2003
------------------ ------------------
Average Average
Interest Interest
Rates Amount Rates Amount
----- ------ ----- ------
2005 3.80% $18,007 4.89% $20,431
2006 3.87% 24,935 4.49% 13,723
2007 3.51% 30,550 4.51% 18,202
2008 3.86% 14,832 4.71% 6,671
2009 3.71% 3,073 4.42% 6,100
Thereafter 4.64% 31,400 4.64% 31,400
-------- -------
$122,797 $96,527
======== =======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 in this account at September 30, 2004 and 2003 was
$-0- and $-0-, respectively. At September 30, 2004, 2003, and 2002, the current
interest rates for this account were 0%, 0%, 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 years ended September 30, 2004, 2003,
and 2002, total Association contributions were $141,000, $124,000 and $105,000
respectively.
Salary Continuation Plan:
As a supplement to the Retirement Plan, the Association has adopted a Salary
Continuation Plan pursuant to agreements with certain officers of the
Association and its subsidiaries. Under the Salary Continuation Plan, an
officer will be entitled to a stated annual benefit for a period of 15 years (i)
upon retirement from the Association after attaining age 65, or (ii) upon
attaining age 65 if his or her employment had been previously terminated due to
disability. In the event the executive dies after age 65, but before receiving
the full 15 years of annual benefits, the remaining payments shall be paid to
his or her beneficiaries. Upon termination of employment, the annual benefit
amount is 50% of the officer's average final 36 months base salary.
Upon early retirement, the Association shall pay the officer the vested accrual
balance as of the end of the month prior to the early retirement date. The
Association shall pay the early retirement benefit in 180 equal installments.
The accrued liability for the salary continuation plan was $831,000 and $639,000
at September 30, 2004 and 2003, respectively. The amounts recognized in
compensation expense were $192,000, $298,000 and $154,000 for the years ended
September 30, 2004, 2003, and 2002, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 8 - Employee Retirement Plans (Continued)
Deferred compensation:
The Association has deferred compensation agreements with several key members of
management and Board of Directors. Under the agreements, the Association is
obligated to provide for each such officer and board member or his beneficiaries
during a period of fifteen or ten years after the death, disability, or
retirement of the officer or board member. 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 accrued liability for the deferred compensation agreements was $1.2 million
and $954,000 at September 30, 2004 and 2003, respectively. The amounts
recognized in compensation expense were $230,000, $340,000 and $141,000 for the
years ended September 30, 2004, 2003, and 2002, 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 accrued liability for the indexed retirement plan was $336,000 and $209,000
at September 30, 2004 and 2003, respectively. The amounts recognized in
compensation expense were $127,000, $154,000 and $41,000 for the years ended
September 30, 2004, 2003, and 2002, respectively.
Bank owned life insurance:
The Association has funded it employee benefit plan with BOLI. The cash
surrender value of the BOLI was $10.1 million and $9.6 million at September 30,
2004 and 2003, 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 $62,000, $55,000 and
$55,000 for the years ended September 30, 2004, 2003, and 2002, respectively.
The potential death benefits as of September 30, 2004 and 2003 were $22.5
million and $22.1 million respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9 - Commitments
Lease commitments:
The Association has entered into noncancelable operating leases for land and
buildings that require future minimum rental payments in excess of one year as
of September 30, 2004. Certain lease payments may be adjusted periodically in
accordance with changes in the Consumer Price Index. The estimated future
minimum annual rental payments, exclusive of taxes and other charges, are
summarized as follows (in thousands):
Year ending
September 30,
-------------
2005 $287
2006 176
2007 165
2008 157
2009 158
Thereafter 730
------
Total $1,673
======
Total rent expense for the years ended September 30, 2004, 2003, and 2002, was
$373,000, $506,000 and $427,000 respectively.
The Association leases office space to others on a month-to-month basis as well
as two noncancelable operating leases. Total rental income was $36,000, $29,000
and $23,000 for the years ended September 30, 2004, 2003, and 2002,
respectively. Minimum future rental income on the two noncancelable operating
leases with terms in excess of one year is as follows (in thousands):
Year Ending
September 30,
-------------
2005 $62
2006 62
----
Total $124
====
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
At September 30, 2004 and 2003, commitments to extend credit were as follows (in
thousands):
September 30,
-------------------
2004 2003
---- ----
Unfunded commitments under lines of credit and
letters of credit $20,432 $16,701
Undisbursed balance of loans closed 15,288 10,548
Commitments to originate loans
Fixed rate 10,810 8,177
Adjustable rate 3,373 5,439
------- -------
Total commitments $49,903 $40,865
------- -------
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 (in thousands):
Year Ended September 30,
------------------------
2004 2003
---- ----
Beginning balance $973 $622
Principal advances 537 860
Principal repayments (579) (509)
---- ----
Balance, end of year $931 $973
---- ----
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 $1.5 million and $1.4
million at September 2004 and 2003, respectively.
100
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 of September 2004, the
Association meets all of the capital adequacy requirements to which it is
subject.
The actual and required minimum capital amounts and ratios are presented in the
following table (dollars in thousands):
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
Year Ended ---------------- -------------------- ----------------------
September 30, 2004 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total risk-based capital
(to risk-weighted assets) $47,334 12.76% $29,677 8.0% $37,097 10.0%
Tier 1 (core) capital 44,784 6.01% 29,817 4.0% 37,271 5.0%
Tangible capital
(to tangible assets) 44,784 6.01% 14,908 2.0% N/A N/A
Tier 1 risk-based capital
(to risk-weighted assets) 44,784 12.05% 14,839 4.0% 22,258 6.0%
Year Ended
September 30, 2003
Total risk-based capital
(to risk-weighted assets) $41,956 14.18% $23,666 8.0% $29,582 10.0%
Tier 1 (core) capital 40,103 8.89% 18,046 4.0% 22,558 5.0%
Tangible capital
(to tangible assets) 40,103 8.89% 9,023 2.0% - N/A
Tier 1 risk-based capital
(to risk-weighted assets) 40,103 13.56% 11,833 4.0% 17,749 6.0%
101
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11 - Capital Requirement (Continued)
The following table is a reconciliation of the Association's capital, calculated
according to generally accepted accounting principles, to total Tier I capital
(in thousands):
September 30,
-------------------
2004 2003
---- ----
Equity $45,097 $40,399
Other comprehensive income -
unrealized gain (loss) on securities 2 16
Mortgage servicing rights, net (315) (312)
------- -------
TOTAL TIER I CAPITAL $44,784 $40,103
======= =======
Note 12 - Income Taxes
The components of income tax (benefit) expense consisted of the following (in
thousands):
Year Ended September 30,
---------------------------------
2004 2003 2002
---- ---- ----
Current $2,909 $2,758 $1,737
Deferred (225) 665 (93)
------ ------ ------
INCOME TAX EXPENSE $2,684 $3,423 $1,644
------ ------ ------
102
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 (in
thousands).
Year Ended September 30,
---------------------------------
2004 2003 2002
---- ---- ----
Federal income tax at statutory rates $2,505 $3,019 $1,275
State income taxes, net of federal benefit 370 409 262
Effect of permanent differences (177) (186) (122)
Other (14) 181 229
------ ------ ------
INCOME TAX EXPENSE $2,684 $3,423 $1,644
------ ------ ------
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities consist of the following (in thousands):
September 30,
-------------------
2004 2003
---- ----
Deferred tax asset:
Deferred compensation $1,025 $583
Unrealized loss on securities
available for sale 2 16
Allowance for loan losses 1,097 627
Accrued expense 121 107
Other 138 2
------- -------
Total deferred tax asset 2,383 1,335
------- -------
Deferred tax liability:
Fixed asset basis (634) (582)
Unrealized gain on securities
available for sale - -
Deferred loan fees (458) (317)
Prepaid expenses (135) -
Mortgage servicing rights (1,311) (1,322)
Federal Home Loan Bank stock dividends (1,947) (1,589)
Other (162) -
------- -------
Total deferred tax liability (4,647) (3,810)
------- -------
NET DEFERRED TAX LIABILITY $(2,264) $(2,475)
------- -------
103
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12 - Income Taxes (Continued)
Included in retained earnings at September 2004 and 2003 is approximately $2.1
million 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 $900,000 at September 2004 and 2003.
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,
---------------------------------------------
2004 2003
-------------------- ---------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial Assets:
Cash and cash equivalents $ 215,663 $ 215,663 $ 11,118 $ 11,118
Securities available for sale 871 871 5,440 5,440
Mortgage-backed securities
held to maturity 96,595 97,526 24,425 25,423
Loans receivable, net 392,634 396,601 372,629 373,937
Federal Home Loan Bank stock 7,317 7,317 6,533 6,533
Financial Liabilities:
Demand and savings deposits 178,862 178,862 156,201 156,201
Certificates of deposit 164,225 164,718 145,072 147,283
Federal Home Loan Bank
advances 122,797 124,965 96,527 102,425
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.
104
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 September 30, 2004 and 2003 were insignificant.
Note 14 - Subsequent Event
On May 18, 2004, the Board of Directors of the Association unanimously adopted a
Plan of Reorganization and Stock Issuance. At the special meeting of members of
Home Federal held on September 20, 2004, members approved the plan of
reorganization and stock issuance and the contribution to the Home Federal
Foundation by more than the required majority of the total votes entitled to be
cast at the special meeting.
Pursuant to the Plan, the Association: (i) converted to a federal stock savings
bank (Stock Savings Bank) as the successor to the Association in its current
mutual form; (ii) organized a Stock Holding Company as a federally-chartered
corporation that owns 100% of the common stock of the Stock Savings Bank; and
(iii) organized a Mutual Holding Company as a federally-chartered mutual holding
company that owns at least 51% of the common stock of the Stock Holding Company
so long as the Mutual Holding Company remains in existence. The Stock Savings
Bank succeeded to the business and operations of the Association in its mutual
form and the Stock Holding Company sold a minority interest in its common stock
in a public stock offering.
Following the completion of the reorganization, all depositors who had
membership or liquidation rights with respect to the Association as of the
effective date of the reorganization continue to have such rights solely with
respect to the Mutual Holding Company so long as they continue to hold deposit
accounts with the Association. In addition, all persons who became depositors of
the Association subsequent to the reorganization have such membership and
liquidation rights with respect to the Mutual Holding Company.
105
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14-Subsequent Event (Continued)
Borrower members of the Association at the time of the reorganization have the
same membership rights in the Mutual Holding Company that they had in the
Association immediately prior to the reorganization so long as their existing
borrowings remain outstanding.
As of September 30, 2004, pursuant to the plan of reorganization and stock
issuance, other liabilities and deposits included refundable stock subscriptions
received in the amount of $220.8 million and $10.1 million, respectively.
As of December 6, 2004, the plan of reorganization was completed. The Company's
common stock began trading on the Nasdaq National Market under the symbol "HOME"
on December 7, 2004. As of December 7, 2004, there were 6,229,504 shares of
common stock issued and approximately 1,854 shareholders of record, excluding
persons or entities who hold stock in nominee or "street name" accounts with
brokers. Costs incurred in connection with the offering were recorded as a
reduction of the proceeds from the offering. At September 30, 2004,
approximately $1.3 million in conversion costs were included in other assets.
106
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
Not applicable.
Item 9A. Controls and Procedures
- ---------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Section 13(a)-15(e)
or Rule 15(d)-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"))
was carried out under the supervision and with the participation of the
Company's Chief Executive Officer, Chief Financial Officer and several other
members of the Company's senior management as of the end of the period covered
by this annual report. The Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures as currently in effect are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is (i) accumulated and communicated to the Company's management
(including the Chief Executive Officer and Chief Financial Officer) in
a timely manner, and (ii) recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the year ended September 30, 2004,
the Company did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls. A number of internal control procedures
were, however, modified during the year in conjunction with the Bank's
conversion to a new core processing system. The Company also continued to
implement suggestions from its internal auditor and independent auditors on ways
to strengthen existing controls.
Item 9B. Other Information
- ---------------------------
There was no information to be disclosed by the Company in a report on Form
8-K during the fourth quarter of fiscal 2004 that was not so disclosed.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The following table sets forth certain information regarding the Board of
Directors of the Company.
Name Age at September 30, 2004 Position Held with the Company
- ------------------ ------------------------- ------------------------------
Daniel L. Stevens 61 Chairman of the Board, President
and Chief Executive Officer
Fred H. Helpenstell, M.D. 73 Director
Thomas W. Malson 74 Director
N. Charles Hedemark 62 Director
Richard J. Schrandt 54 Director
James R. Stamey 61 Director
Robert A. Tinstman 58 Director
The business experience of each director for at least the past five years is
set forth below.
107
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
FHLB 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 FHLB of Seattle for eight years. He serves on America's Community
Bankers FHLB 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 to 1975 and was President of the
Board of Directors of Mercy Medical Center in Nampa. After volunteering his
orthopedic skills in Nepal, he spent seven years as chair of the Nepal Program
for Health Volunteers Overseas. Dr. Helpenstell is a director of Terry Reilly
Health Services, the Boise Philharmonic Association and the Boise Philharmonic
Foundation.
Thomas W. Malson has been the owner and Chief Executive Officer of Robertson
Supply, Inc., a wholesale pipe distributor, located in Nampa, Idaho since 1959.
N. Charles Hedemark is Executive Vice President and Chief Operating Officer of
Intermountain Gas Company, a natural gas utility company, where he has been an
employee since 1965. Mr. Hedemark is a graduate of Albertson College of Idaho
and the Executive Program at Stanford University. He is the immediate past
president of the Northwest Gas Association in Portland, Oregon and the
Commission of the Capital City Development Corporation. He is past Chairman of
Blue Cross of Idaho's Board of Directors, the Boise Metro Chamber of Commerce
and the United Way of Ada County, and past President of the Boise School
Foundation.
Richard J. Schrandt is retired after owning D&B Supply Co., Inc., a home and
farm supply business, from 1985 until 2002. Mr. Schrandt is a member of the
Caldwell Rotary Club.
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 is the Executive Chairman of the James Construction Group,
LLC, a construction consulting company. From May 1999 until May 2002, he was a
consultant for Tinstman and Associates. 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
For information regarding the executive officers of the Company, see "Item 1.
Business - Executive Officers."
108
Meetings and Committees of the Board of Directors
Our Board of Directors meets monthly. During the year ended September 30,
2004, 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, 2004.
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 two times in addition to regular Board of Directors' meetings
during the year ended September 30, 2004. 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, 2004.
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,
2004. 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.
Audit Committee Financial Expert
The Audit Committee of the Company is composed of Directors Tinstman
(Chairman), Hedemark, Schrandt and Stamey. Each member of the Audit Committee
is "independent" as defined in the Nasdaq Stock Market listing standards. The
Company's Board of Directors has designated Director Schrandt as the Audit
Committee financial expert, as defined in the SEC's Regulation S-K. Director
Schrandt is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A
promulgated under the Exchange Act. Director Schrandt is a retired Certified
Public Accountant and was the owner of D&B Supply from 1985 to 2002. Prior to
that, he was a financial analyst and controller with Peavey Company/ConAgra for
11 years and an auditor for Arthur Andersen & Co. for three years.
Code of Ethics
The Board of Directors adopted a Code of Ethics for the Company's officers
(including its senior financial officers), directors and employees during the
year ended September 30, 2004. The Code of Ethics requires the
109
Company's officers, directors and employees to maintain the highest standards of
professional conduct. The Company's Code of Ethics is filed as an exhibit to
this Annual Report on Form 10-K.
Shareholder Nominations
During the year ended September 30, 2004, there were no material changes to
the procedures pursuant to which a shareholder may recommend a nominee for the
Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, the
Company's directors and executive officers, and any persons holding 10% or more
of its common stock, are required to report their beneficial ownership and any
changes therein to the SEC and the Company. Specific due dates for those reports
have been established, and the Company is required to report any failure to file
such reports by those due dates. Based solely on the Company's review of Forms
3, 4, and 5 filed by such persons, the Company believes that during the year
ended September 30, 2004 all Section 16(a) filing requirements applicable to
such persons were met in a timely manner.
Item 11. 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, 2004 to the President and Chief Executive Officer of Home Federal
and the three other most highly compensated executive officers of Home Federal
who received total annual salary and bonus in excess of $100,000, also known as
"named executive officers."
Annual Compensation (1) Compensation Awards (2)
---------------------- ---------------------
Name and
Principal Fiscal Restricted All Other
Position Year Salary Incentive(3) Stock Award Options Compensation
- ----------------- ------ ------ ----------- ----------- ------- ------------
Daniel L. Stevens
President and
Chief Executive
Officer 2004 $205,008 $51,252 - - $180,714(4)
2003 184,008 118,780 - -- 172,160
2002 162,000 84,175 - -- 100,252
Robert A. Schoelkoph
Chief Financial
Officer 2004 108,080 21,600 -- - 52,374(5)
2003 100,011 64,559 -- -- 55,061
2002 90,095 47,878 -- -- 32,756
Roger D. Eisenbarth
Chief Credit Officer
2004 104,004 20,801 -- -- 70,475(6)
2003 96,000 61,970 -- -- 71,464
2002 88,511 47,036 -- -- 43,000
Lynn A. Sander
Senior Vice Pres.
Retail Banking 2004 99,604 20,801 -- -- 29,615(7)
2003 88,082 56,858 -- -- 22,884
2002 78,225 41,814 -- -- 7,429
-------------------------------------------------------------------------
(1) Does not include other personal benefits, the value of which did not exceed
the lesser of $50,000 or 10% of the total.
(2) As a mutual institution, Home Federal did not have any stock option or
restricted stock plans during the year ended September 30, 2004. Home
Federal does, however, intend to adopt such plans in the future.
110
(3) Incentive accrued for the fiscal year ended September 30 and paid November
2, 2004, November 5, 2003 and November 8, 2002.
(4) Includes the following amounts: for the year ended September 30, 2004,
$64,243 of compensation credited under deferred incentive agreement,
accrual of $108,721 under salary continuation agreement and $7,750 of
employer matching contributions to 401(k); for the year September 30, 2003,
$84,660 of compensation credited under a deferred incentive agreement,
accrual of $81,750 under a salary continuation agreement and $5,750
of employer matching contributions to 401(k); for the fiscal year ended
September 30, 2002, $37,518 of compensation credited under a deferred
incentive agreement, accrual of $57,234 under a salary continuation
agreement and $5,500 of employer matching contributions to 401(k).
(5) Includes the following amounts: for the year ended September 30, 2004,
$20,626 of compensation credited under deferred incentive agreement,
accrual of $26,379 under salary continuation agreement and $5,369 of
employer matching contributions to 401(k); for the year September 30, 2003,
$27,471 of compensation credited under a deferred incentive agreement,
accrual of $22,610 under a salary continuation agreement and $4,980
of employer matching contributions to 401(k); for the fiscal year ended
September 30, 2002, $12,381 of compensation credited under a deferred
incentive agreement, accrual of $15,924 under a salary continuation
agreement and $4,451 of employer matching contributions to 401(k).
(6) Includes the following amounts: for the year ended September 30, 2004,
$27,041 of compensation credited under deferred incentive agreement,
accrual of $38,250 under salary continuation agreement and $5,184 of
employer matching contributions to 401(k); for the year September 30, 2003,
$35,159 of compensation credited under a deferred incentive agreement,
accrual of $31,505 under a salary continuation agreement and $4,800
of employer matching contributions to 401(k); for the fiscal year ended
September 30, 2002, $15,308 of compensation credited under a deferred
incentive agreement, accrual of $23,266 under a salary continuation
agreement and $4,426 of employer matching contributions to 401(k).
(7) Includes the following amounts: for the year ended September 30, 2004,
$7,879 of compensation credited under deferred incentive agreement, accrual
of $16,559 under salary continuation agreement and $5,177 of employer
matching contributions to 401(k); for the year September 30, 2003, $9,501
of compensation credited under a deferred incentive agreement, accrual of
$8,782 under a salary continuation agreement and $4,601 of employer
matching contributions to 401(k); for the fiscal year ended September 30,
2002, $1,577 of compensation credited under a deferred incentive agreement,
accrual of $2,153 under a salary continuation agreement and $3,699 of
employer matching contributions to 401(k).
Option Grants in Last Fiscal Year
During the fiscal year ended September 30, 2004, the Company did not maintain
a stock option plan. Therefore, no options were granted to the Chief Executive
Officer and the named executive officers during the fiscal year ended September
30, 2004.
Employment Agreements for Chief Executive Officer
In connection with the reorganization, Home Federal Bancorp and Home Federal
have entered into separate three-year employment agreements with Daniel L.
Stevens. Under the employment agreements, the aggregate initial base salary
level for Mr. Stevens is $205,000, which amount may be increased at the
discretion of the Board of Directors or an authorized committee of the Board. On
each anniversary of the initial date of the employment agreements, the term
of the agreements will be extended for an additional year unless notice is given
by the Board of Directors to Mr. Stevens at least 90 days prior to the
anniversary date. The agreements may be terminated by Home Federal or Home
Federal Bancorp, as appropriate, at any time, by Mr. Stevens if he is assigned
duties inconsistent with his initial position, duties and responsibilities, or
upon the occurrence of certain events. If Mr. Stevens's employment is terminated
without cause or upon his voluntary termination following the occurrence of an
event described in the preceding sentence, Home Federal or Home Federal Bancorp,
as appropriate, would be required to honor the terms of the agreement through
the expiration of the then current term, including payment of cash compensation
and continuation of employee benefits.
The employment agreements also provide for a severance payment and other
benefits if Mr. Stevens is involuntarily terminated within 12 months following a
change in control of Home Federal Bancorp. The agreements
111
authorize severance payments on a similar basis if Mr. Stevens voluntarily
terminates his employment following a change in control because he is assigned
duties inconsistent with his position, duties and responsibilities immediately
prior to the change in control. The agreements define the term "change in
control" as having occurred when (1) any person, as that term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (with the
exception of Home Federal Bancorp or certain persons acting on behalf of Home
Federal Bancorp), is or becomes the beneficial owner of 25% or more of the
combined voting power of Home Federal Bancorp's then outstanding securities; (2)
individuals who are members of the Board cease for any reason to constitute at
least a majority thereof (with certain exceptions); (3) the stockholders of Home
Federal Bancorp approve a merger of consolidation of Home Federal Bancorp with
any other corporation (other than certain mergers or consolidations where either
there is continued ownership of at least 50% of the combined voting power of
Home Federal Bancorp stockholders, or no person (as defined above) acquires more
than 25% of the combined voting power of Home Federal Bancorp's then outstanding
securities); or (4) the stockholders of Home Federal Bancorp approve a plan of
complete liquidation or the sale or disposition by Home Federal Bancorp of all
or substantially all of the assets of Home Federal Bancorp (or any transaction
having a similar effect).
The maximum value of the severance benefits under each employment agreement is
2.99 times Mr. Stevens's average annual compensation during the five-year period
prior to the effective date of the change in control (known as the base amount).
The employment agreements provide that the value of the maximum benefit be
distributed in the form of a lump sum cash payment equal to 2.99 times Mr.
Stevens's base amount, and continued coverage under Home Federal Bancorp's and
Home Federal's health, life and disability programs for a 36-month period
following the change in control, the total value of which does not exceed 2.99
times his base amount. Assuming that a change in control had occurred at March
31, 2004 and that Mr. Stevens elected to receive a lump sum cash payment, he
would be entitled to a payment of approximately $692,000. Section 280G of the
Internal Revenue Code provides that severance payments (either separately or in
conjunction with other payments made on account of a change in control) that
equal or exceed three times the individual's base amount will result in Mr.
Stevens receiving "excess parachute payments" if the payments are conditioned
upon a change in control. Individuals receiving parachute payments in excess of
2.99 times of their base amount are subject to a 20% excise tax on the amount by
which the value of the individual's change in control benefits exceed one times
the individual's base amount (the excess parachute payment). If excess parachute
payments are made, Home Federal Bancorp and Home Federal would not be entitled
to deduct the amount of these excess payments. The employment agreements provide
that severance and other payments that are subject to a change in control will
be reduced as much as necessary to ensure that no amounts payable to the
executive will be considered excess parachute payments.
Severance Agreements for Executive Officers
In connection with the reorganization, Home Federal entered into three-year
change in control severance agreements with each of Robert A. Schoelkoph, Roger
D. Eisenbarth, Lynn A. Sander, Denis J. Trom and Karen Wardwell. On each
anniversary of the initial date of the severance agreements, the term of each
agreement may be extended for an additional year at the discretion of the Board
or an authorized committee of the Board. The severance agreements also provide
for a severance payment and other benefits if the executive is involuntarily
terminated after a change in control of Home Federal Bancorp. The agreement also
authorizes severance payments where the executive voluntarily terminates
employment following a change in control because of being assigned duties
inconsistent with the executive's position, duties, responsibilities and status
immediately prior to such change in control. The agreement defines the term
"change in control" in the same manner as defined under Mr. Stevens's employment
agreement, described above. The severance benefit is equal to 2.99 times the
executive's average annual compensation during the five-year period prior to the
effective date of the change in control (known as the base amount). This amount
will be paid to the executive in a cash lump sum within 25 days after the later
of the date of the change in control or the date of the executive's termination.
Home Federal also will continue to pay, for the remaining term of the
executive's agreement, the life, health and disability coverage of the executive
and his/her eligible dependents. Assuming that a change in control had occurred
at March 31, 2004 and that each executive elected to receive a lump sum cash
payment, Messrs. Schoelkoph and Eisenbarth and Ms. Sander, the named executive
officers, would be entitled to payments of approximately $384,000, $377,000 and
$303,000, respectively. Plan benefits are reduced to the extent necessary to
avoid the payment of an excise tax under Section 280G of the Internal Revenue
Code (relating to excess parachute payments upon a change in control).
112
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. The incentive award is conditioned on Home Federal maintaining a
stable-to-improving trend on return on assets and return on equity. Each year,
the percentage is determined and multiplied by the participant's base salary for
the year. The resulting amount is set aside in an unfunded deferral account for
that participant. The deferral account is credited annually with an earnings
percentage equal to the percentage increase in Home Federal's net worth over the
year. Upon the participant's termination of employment after the participant's
normal retirement date or disability, or an involuntary termination within 24
months following a change in control of Home Federal Bancorp, the value of the
participant's deferred account will begin to be paid. The agreement defines the
term "change in control" in the same manner as defined under Mr. Stevens's
employment agreement, described above. Upon the participant's termination of
employment after the participant's early retirement date, the value of the
participant's deferral account, reduced to reflect the early commencement of
benefits, and further reduced by ten percent for each year of service less than
ten, will begin to be paid. Upon the participant's termination of employment
prior to the participant's early retirement date, the value of the participant's
deferral account, reduced by ten percent for each year of service less than ten,
will be paid beginning on the participant's normal retirement date. Hardship
distributions are permitted. A death benefit also is provided under the plan
equal to the greater of the value of the participant's deferral account, or
$683,000, $613,000, $490,000 and $707,000 for Messrs. Stevens, Schoelkoph and
Eisenbarth and Ms. Sander, respectively. All benefits are paid over 180 months,
and during that period, the deferral account is adjusted for interest. Benefits
are reduced to the extent necessary to avoid the payment of an excise tax under
Section 280G of the
Internal Revenue Code (relating to excess parachute payments upon a change in
control).
Salary Continuation Plan for Executive Officers
Home Federal maintains an unfunded nonqualified deferred compensation plan for
designated executive employees. Participation in the plan is at the discretion
of the Board of Directors. Under the plan, if the participant makes the required
contributions, then upon the participant's normal retirement date (age 65), the
plan will pay a monthly benefit equal to 50% of the average of the participant's
final 36 months of base salary (the final salary benefit), plus the
participant's deferral account balance. The participant's deferral account
balance is the sum of the participant's elective deferrals plus interest
credited at prime minus one percent. The plan provides a reduced monthly benefit
if the participant terminates employment as a result of early retirement
(termination before age 65). The early retirement benefit is the participant's
vested accrual balance plus the deferral account balance as defined above.
Vesting occurs at a rate of ten percent per plan year. The plan also provides a
disability benefit, which is the same as the early retirement benefit except
that the benefit is fully vested. There is also a change in control benefit (if
the participant is involuntarily terminated within 24 months following the
change in control) equal to (1) the participant's accrual balance determined as
of the end of the month preceding the change in control, (2) the participant's
deferral account balance as defined above, and (3) 2.99 times the participant's
base annual salary as of the change in control. Plan benefits are reduced to the
extent necessary to avoid the payment of an excise tax under Section 280G of the
Internal Revenue Code (relating to excess parachute payments upon a change in
control). The agreement defines the term "change in control" in the same manner
as defined under Mr. Stevens's employment agreement, described above. In the
event of the participant's death, the participant's beneficiary would receive
the sum of the participant's projected benefit and his deferral account balance
as defined above. The participant's projected account is the final salary
benefit the participant would have received had he attained age 65, assuming a
4% annual increase in the participant's base salary. The final salary benefit
paid in connection with a participant's normal retirement will be paid in
monthly payments over 180 months and other payments based on accrual balances
will be paid over 180 months, with interest credited on unpaid amounts at 7.5%
per year. Final salary benefits begin upon the participant's termination of
service after the participant's normal 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.
113
Report of the Compensation Committee
The Compensation Committee of the Company administers all policies that govern
executive compensation for the Company. The Compensation Committee is
responsible for evaluating the performance of the Chief Executive Officer while
the Chief Executive Officer evaluates the performance of other senior officers
and makes recommendations to the Compensation Committee regarding their
compensation levels. The Company's executive compensation policies are intended
to retain and attract key executives who are vital to the success of the Company
by providing a compensation package that is competitive in the financial
industry and motivational to each individual executive.
In making its recommendations, the Compensation Committee considers numerous
factors, including the past service of such employee, the present and potential
contributions of such employee to the success of the Company, and such other
factors as the Committee shall deem relevant, including the employee's years of
service, position with the Company, and other factors. In addition the
Committee, in its discretion, may review compensation reports prepared by third
parties of companies and banks that are of a similar size and in a similar
location in order to make its recommendations. The Committee does not apply a
formula assigning specific weights to any of these factors when making their
determination.
Currently, the compensation for executive officers consists principally of a
base salary and bonus. In addition, the Company maintains a 401(k) profit
sharing pension plan for all qualifying employees and provides opportunities for
employee ownership of the Company's common stock through participation in an
employee stock ownership plan. The Company has also entered into Severance
Agreements with the Company's executive officers and maintains a Deferred
Incentive Plan and a Salary Continuation Plan on their behalf.
Base Salary. The Board of Directors approves an annual base salary for all
senior officers and executive officers, based upon recommendations from the
Compensation Committee. Annual base salaries are generally effective October
1st of each year. Factors considered in setting base salaries include the
executive's performance, the Company's overall performance and compensation
levels in the financial industry, among other factors.
Annual Incentive Bonus. The Company maintains a discretionary bonus plan for
employees. 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 as soon as practicable following the end of the
performance period. Under the plan and for the year ended September 30, 2004,
Chief Executive Officer Daniel L. Stevens received $51,252, and the remaining
employees received 9.8% of the Company's net income, distributed based upon each
employee's salary to total employees' salaries.
401(k) Profit Sharing Pension Plan. The Company maintains a tax-qualified
401(k) profit-sharing plan for the benefit of employees with one year of service
who have attained age 21. The Bank's annual discretionary contribution
historically has been 5% of the employee's first 10% contribution.
Executive Officer Compensation. During the fiscal year ended September 30,
2004, the base salary of the Company's Chief Executive Officer, Daniel L.
Stevens, was $205,008. In addition, he received an incentive bonus of
$51,252 and was credited with $180,714 in other compensation as set forth in the
preceding Summary Compensation Table. This resulted in total compensation of
$436,974, which represents an 8.0% decrease from the previous year. The
Board of Directors believes that Mr. Stevens' compensation is appropriate based
on the Company's compensation policy, consideration of salaries for similar
positions in the financial industry and the Company's performance during the
fiscal year.
Compensation Committee of the Company consisting of:
/s/ N. Charles Hedemark (Chair)
/s/ Fred H. Helpenstell, M.D.
/s/ Thomas W. Malson
/s/ Daniel L. Stevens (ex-officio)
114
Compensation Committee Interlocks and Insider Participation. With the
exception of Daniel L. Stevens, who serves as an ex-officio member of the
Compensation Committee, no members of the Compensation Committee were
officers or employees of the Company or any of its subsidiaries during the year
ended September 30, 2004, were formerly Company officers or had any
relationships otherwise requiring disclosure.
Compensation of Directors
Directors of the Company are not currently compensated but serve and are
compensated by Home Federal. It is not anticipated that separate directors' fees
will be paid to directors of the Company until such time as these persons
devote significant time to the separate management of the Company's affairs,
which is not expected to occur until the Company becomes actively engaged in
additional businesses other than holding the stock of Home Federal. We may
determine that such compensation is appropriate in the future.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------
(a) and (b) Security Ownership of Certain Beneficial Owners and Management.
Persons and groups who beneficially own in excess of 5% of the Company's
common stock are required to file with the SEC, and provide a copy to the
Company, certain reports disclosing such ownership pursuant to the Securities
Exchange Act of 1934, as amended ("Exchange Act"). Based on such reports, the
following table sets forth, as of the close of business on December 7, 2004,
certain information as to those persons who were beneficial owners of more than
5% of the outstanding shares of common stock. Management knows of no persons
other than those set forth below who beneficially owned more than 5% of the
outstanding shares of common stock as of the close of business on December
7, 2004.
The following table also sets forth, as of the close of business on December
7, 2004 information as to the shares of common stock beneficially owned by (a)
each current director of the Company, (b) each of the executive officers named
in the Summary Compensation Table ("named executive officers") and (c) all
executive officers and directors of the Company as a group.
Number of Shares Percent of Shares
Name Beneficially Owned(1) Outstanding
- ----------------------------------- -------------------- -----------------
Beneficial Owners of More than 5%
Home Federal MHC
500 12th Avenue South
Nampa, Idaho 83651 8,979,246 59.04%
Directors
Daniel L. Stevens ** 46,009 *
Fred H. Helpenstell, M.D. 30,000 *
Thomas W. Malson 25,000 *
N. Charles Hedemark 25,000 *
Richard J. Schrandt 25,000 *
James R. Stamey 10,000 *
115
Robert A. Tinstman 25,000 *
Executive Officers
Robert A. Schoelkoph 23,088 *
Roger D. Eisenbarth 20,100 *
Lynn A. Sander 9,501 *
Denis J. Trom 25,000 *
Karen Wardwell 2,993 *
---------- ----------
All executive officers and directors
as a group (12 persons) 266,691 1.77%
---------------------------------------------------------------------------
* Less than 1%.
** Mr. Stevens is also an executive officer of the Company.
(1) In accordance with Rule 13d-3 of the Exchange Act, a person is deemed to be
the beneficial owner, for purposes of this table, of any shares of common
stock if he or she has voting and/or investment power with respect to
such security. The table includes shares owned by spouses, other immediate
family members in trust, shares held in retirement accounts or funds for
the benefit of the named individuals, and other forms of ownership, over
which shares the persons named in the table may possess voting and/or
investment power.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a subsequent
date result in a change in control of the Company.
(d) Equity Compensation Plan Information. The Company did not have any
established equity compensation plans during the year ended September 30, 2004.
Item 13. Certain Relationships and Related Transactions
- ----------------------------------------------------------
The Company 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 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 the Company. Loans and available lines of credit to all directors and
executive officers and their associates totaled approximately $930,000 at
September 30, 2004, which was 2.1% of our equity at that date. All loans to
directors and executive officers were performing in accordance with their terms
at September 30, 2004. Total deposits of directors and executive officers were
approximately $1.5 million at September 30, 2004.
116
Item 14. Principal Accountant Fees and Services
- ------------------------------------------------
Audit Fees
During the fiscal year ended September 30, 2004, the aggregate fees billed to
the Company for professional services rendered for the audit of the Company's
annual financial statements and the reviews of the financial statements
included in the Company's Quarterly Reports on Form 10-Q filed during the fiscal
year ended September 30, 2004 was $68,121, which were paid to Moss Adams, LLP.
The aggregate fees billed to the Company for professional services
rendered for the audit of the Company's annual financial statements during the
fiscal year ended September 30, 2003 was $48,460, which was paid to Moss Adams,
LLP.
Audit Related Fees
The Company paid fees to Moss Adams, LLP for audit-related services for the
fiscal years ended September 30, 2004 and 2003, including the review of the
documents filed in connection with the our mutual to stock conversion. The fees
billed to the Company during the fiscal years ended September 30, 2004 and 2003
for these audit-related services were $160,381 and $0, respectively, which were
paid to Moss Adams, LLP.
Tax Fees
The aggregate fees billed to the Company for tax services by Moss Adams, LLP
for the fiscal years ended September 30, 2004 and 2003 were $3,500 and $5,765,
respectively, which were paid to Moss Adams, LLP. Such fees were for tax return
preparation.
All Other Fees
The Company paid no other fees to Moss Adams, LLP for the fiscal years ended
September 30, 2004 and 2003, respectively.
The Audit Committee will establish general guidelines for the permissible
scope and nature of any permitted non-audit services to be provided by the
independent auditors in connection with its annual review of its Charter. Pre-
approval may be granted by action of the full Audit Committee or by delegated
authority to one or more members of the Audit Committee. If this authority is
delegated, all approved non-audit services will be presented to the Audit
Committee at its next meeting. In considering non-audit services, the Audit
Committee or its delegate will consider various factors, including but not
limited to, whether it would be beneficial to have the service provided by the
independent auditors and whether the service could compromise the independence
of the independent auditors.
The Audit Committee of the Board of Directors determined that the services
performed by Moss Adams, LLP other than audit services are not incompatible with
Moss Adams, LLP maintaining its independence.
PART IV
Item 15. Exhibits and Financial Statement Schedules
- ----------------------------------------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (1)
10.1 Form of Employment Agreement for President and Chief Executive
Officer with Home Federal Bank (1)
10.2 Form of Employment Agreement for President and Chief Executive
Officer with Home Federal Bancorp, Inc. (1)
117
10.3 Form of Severance Agreement for Executive Officers (1)
10.4 Form of Home Federal Savings and Loan Association of Nampa
Employee Severance Compensation Plan (1)
10.5 Form of Director Indexed Retirement Agreement entered into by
Home Federal Savings and Loan Association of Nampa with Each of
its Directors (1)
10.6 Form of Director Deferred Incentive Agreement entered into by
Home Federal Savings and Loan Association of Nampa with Each of
its Directors (1)
10.7 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 (1)
10.8 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 (1)
10.9 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 (1)
14 Code of Ethics
21 Subsidiaries of the Registrant
23 Consent of Accountants
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
___________
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(333-35817).
118
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HOME FEDERAL BANCORP, INC.
Date: December 29, 2004 By: /s/ Daniel L Stevens
---------------------------
Daniel L. Stevens
President and Chief Executive
Officer
Pursuant to the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
SIGNATURES TITLE DATE
----- ----
/s/Daniel L. Stevens Chairman of the Board, December 29, 2004
- -------------------- President, Chief Executive
Daniel L. Stevens Officer and Director
(Principal Executive Officer)
/s/Robert A. Schoelkoph Chief Financial Officer December 29, 2004
- ----------------------- (Principal Financial and
Robert A. Schoelkoph Accounting Officer)
/s/Fred H. Helpenstell, M.D. Director December 29, 2004
- ----------------------------
Fred H. Helpenstell, M.D.
/s/Thomas W. Malson Director December 29, 2004
- -------------------
Thomas W. Malson
/s/N. Charles Hedemark Director December 29, 2004
- ----------------------
N. Charles Hedemark
/s/Richard J. Schrandt Director December 29, 2004
- ----------------------
Richard J. Schrandt
/s/James R. Stamey Director December 29, 2004
- ------------------
James R. Stamey
/s/Robert A. Tinstman Director December 29, 2004
- ---------------------
Robert A. Tinstman
119
Exhibit 14
Code of Ethics
CODE OF ETHICS
Revised September 20, 2004
Policy Statement
================================================================================
To the public, our customers, and others, each of us represents Home Federal.
Maintaining the highest standards of professional and ethical conduct is
essential in preserving the integrity of Home Federal. We must all be
continually sensitive to the fact that our actions, as viewed by disinterested
observers, are subjected to close scrutiny and critical interpretation.
These sections outline the Code of Ethics Policy reviewed and approved by the
Board of Directors of Home Federal Savings and Loan Association of Nampa. Home
Federal is committed to assisting all in determining what is appropriate
personal and professional ethics and reaffirming Home Federal's policy of
ethical conduct that is in compliance with all state and federal laws. This
policy applies to all employees and non-employee members of the Board of
Directors of Home Federal.
================================================================================
I. INTRODUCTION
All employees of Home Federal must comply with this Code of Ethics within the
first hour of employment. Managers, employees, and technical personnel must
modify system configurations and procedures, if necessary, to comply with the
terms of this policy.
The business of Home Federal Savings and Loan Association of Nampa ("Home
Federal") and its affiliates includes a full array of banking products and
related services. During the performance of our duties, it is necessary to
interact with many constituencies. These persons place their trust in us and
accordingly, we have the responsibility to keep this trust and be in strict
compliance with all applicable laws and regulations
Home Federal requires corporate and affiliate directors, officers, and employees
to observe a high standard of ethics in business and personal matters. The
following Code of Ethics specifies certain standards for the guidance of all
directors, officers, and employees. The Code should be considered as
illustrative, but not regarded as all-inclusive.
Failure to comply with all policies and procedures may result in termination of
employment or service on the Board of Directors. Any questions regarding proper
code of conduct should be referred to an immediate supervisor or to the Director
of Human Resources.
Home Federal Code of Ethics Page 2 of 15
================================================================================
II. GENERAL POLICIES
A. General
All Directors, officers, and employees (referenced throughout this policy as
"individuals" unless specifically identified) of Home Federal (referenced
throughout this policy as "Association" unless specifically identified) have
certain responsibilities that directly and indirectly reflect upon the
reputation and successful business operation of Home Federal. The most
important personal aspects of Home Federal are the trust and confidence of its
depositors, customers, and employees. With this same basic principle in mind,
all individuals of Home Federal must ensure that honesty and integrity are among
Home Federal's highest priorities.
The following sections in this policy are to assist all individuals of Home
Federal in determining what is appropriate personal and professional ethics and
reaffirms Home Federal's policies of ethical conduct. The foundation of Home
Federal's code of ethics consists of basic standards of business, as well as
personal conduct:
1. Honesty and candor in Home Federal activities, including compliance with
the spirit, as well as the letter of the law.
2. Avoidance of conflicts between personal interests and the interests of Home
Federal, or even the appearance of such conflicts.
3. Maintenance of Home Federal's reputation and avoidance of activities that
might reflect adversely on Home Federal.
4. Integrity in dealing with Home Federal's assets.
5. Total compliance with laws and regulations.
At Home Federal's discretion and judgment, Home Federal may revise, withdraw, or
add any rules, policies, or procedures at any time in order to maintain safe and
efficient operation. Officers and employees should be aware that a violation of
rules, policies, or procedures provides a basis for disciplinary action that may
lead up to and include termination.
In all situations, including those where there are no applicable legal
principles or the law is unclear or in conflict, all individuals of Home Federal
are expected to conduct themselves in such a manner that can be supported by
Home Federal, and to exercise good judgment in the discharge of their
responsibilities.
B. Employer Responsibility
Home Federal pledges all employees fair treatment, good career opportunities,
and attractive working conditions, including pay and benefits. In return, it
expects from all employees conscientious and professional work, high ethical
standards, and observance of such special restrictions as may be required
because of the fiduciary nature of an activity.
Specifically, Home Federal, as an employer:
1. Seeks to promote equality of employment opportunity, career advancement,
and to eliminate influences of bias based on race, religion, ethnic
background, sex, and age.
2. Maintains ongoing affirmative action programs and expects supervisors and
other employees to comply fully with the spirit as well as the text of
these programs.
3. Makes job performance and job qualifications the basis of selection and
promotion.
4. Recognizes that the dignity and individuality of each employee is entitled
to respect by other employees.
Home Federal Code of Ethics Page 3 of 15
================================================================================
5. Provides appropriate training, educational, and other opportunities for
employees and encourages them to develop their capacities and realize their
potential.
6. Attempts to make the best use of each employee's abilities when assigning
duties, giving consideration to employee satisfaction and morale, as well
as efficiency and cost.
7. Encourages timely, candid, and relevant exchange of information and an
open-minded attitude to provide a free and open channel of communication,
assure fair and equitable treatment of all employees, and create an
atmosphere of understanding, cooperation, and mutual trust.
8. Safeguards the privacy of its employees and confidentiality of employee
records as referenced in the Home Federal policy entitled "Privacy of
Employee Records and Records Retention Guidelines."
C. Managers' Responsibility
Managers must exemplify the highest standards of conduct and ethical behavior.
In addition, the manager's role is to help employees translate how our standards
of conduct and ethics apply to their positions and everyday behavior. It is also
the manager's role to enforce our standards. The Office of Human Resources is
also available to help you when you have questions or need assistance.
D. Purchase of Assets from Home Federal
Home Federal employees are eligible to bid on miscellaneous items (e.g.,
computer equipment, furniture, fixtures, etc.), repossessed and foreclosed
properties, or any other properties as described owned by Home Federal when such
items are available for sale. Bids will be based on the guidelines enforced by
Home Federal. Guidelines, including terms, are not to be overly favorable to an
insider purchase when fair market is possible through external sales.
E. Integrity of Accounting and Records
A fundamental precondition of proper governance of any corporation is the
reliability of all accounting information and records. To assure the absolute
integrity of such information:
1. All entries to Association books must be prepared with scrupulous accuracy
and shall be consistent with the highest standards of accounting practice.
2. No false or artificial entries shall be made in any books or records of
Home Federal, and no employee shall engage in any arrangement that results
in such entries.
3. No payment on behalf of Home Federal shall be approved or any transaction
made with the intention or understanding that part or all of such payment
will be used for any purpose other than that described by the documents
supporting it.
4. Any employee having information or knowledge of any unrecorded fund or
asset or any prohibited act shall promptly report such activity to the
President/CEO.
5. No fund, asset, or liability of Home Federal shall, under any circumstances
or for any purpose, be concealed or hidden.
6. Full cooperation with Home Federal's internal audit procedures is
imperative. False or misleading statements to auditors are considered to
constitute a falsification of records and are grounds for dismissal.
7. No member of the staff, management, or any other person acting under the
direction of an officer or director may fraudulently influence, coerce,
manipulate, or mislead any independent public or certified accountant
engaged in the performance of an audit of the financial statements of that
company for the purpose of making financial statements materially
misleading.
Home Federal Code of Ethics Page 4 of 15
================================================================================
F. Conflict of Interest
All directors, officers, and employees should avoid situations which could
result in, or give the appearance of, a conflict of interest concerning Home
Federal, its stockholders, any affiliate, or customers. Personal interest which
could affect the proper exercise of judgment must be avoided. In those cases
where personal interests do exist, or may appear to exist, an officer or
employee should disqualify himself or herself and permit other members of the
staff to handle the transaction, and a director should disqualify himself or
herself and abstain from discussion and voting on the matter.
In determining whether a conflict of interest could exist, directors, officers,
and employees should remember that the rules also apply to their spouses and
adult children, where appropriate. For example, a conflict of interest would
arise where the spouse of an employee was offered a business opportunity on
account of the employee's position at Home Federal.
Having a business or other employment outside Home Federal is permissible
provided that it does not conflict with the director, officer, or employee's
duties or the time and attention required of his or her position at Home
Federal. Also, the business or employment cannot be directly competitive with
Home Federal.
Acceptance of membership on outside boards involves possible conflicts of
interest. Directors, officers, and employees are encouraged to participate in
civic, charitable, and religious organizations; any other such organization, or
position therewith, should be authorized by appropriate management. Situations
which might be in conflict with this policy should be cleared with the
President.
All individuals of Home Federal are expected to take an objective look at their
actions from time to time and inquire whether or not a reasonable, disinterested
observer - a customer, a supplier, a shareholder, an acquaintance, or a
government official - would have any grounds to believe:
1. The confidential nature of account relationships has been breached.
2. Fiduciary responsibilities have been handled in a less than prudent manner.
3. Business has been completed with Home Federal only on the basis of
friendships, family ties, gift receiving or giving, or to curry favor with
special interest groups.
4. Individuals of Home Federal to enhance their own opportunities when dealing
with others in their political, investment, or retail purchasing activities
use Home Federal's name as leverage.
5. The needs of the shareholders and public are not considered in making
business decisions.
In the event a potential conflict of interest does arise involving an officer or
employee, its nature and extent should be fully disclosed immediately to the
President/CEO who, after making a thorough review of the circumstances, will
determine appropriate action to be taken.
In the event a potential conflict of interest does arise involving the President
/ CEO, its nature and extent should be fully disclosed immediately to one of the
members of the Board of Directors who, after conducting a thorough review of the
circumstances, will determine appropriate action to be taken.
In the event a potential conflict of interest does arise involving a member of
the Board of Directors, its nature and extent should be fully disclosed
immediately to the Chairman of the Board, who after investigating the
circumstances, will determine appropriate action to be taken.
Home Federal Code of Ethics Page 5 of 15
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G. Fiduciary Appointments
Officers and employees must not accept appointment as personal representative,
trustee, co-trustee or other fiduciary position of a Home Federal customer,
unless the will or trust agreement involves the individual's family
relationship. Nor shall such Officer or employee accept a legacy under the will
or trust agreement of a Home Federal customer with whom the individual has
dealt, unless a family relationship exists. There may be specific circumstances
that warrant exceptions to this. All exceptions are to be approved in writing
by the President/CEO.
Those Directors who serve in a fiduciary role in their professional capacity are
encouraged to avail themselves of Home Federal services, keeping in mind that
their responsibility lies in representing their client's best interest ahead of
Home Federal's in any such dealings.
H. Beneficiary or Legacy
Officers and employees must report any gift of a beneficial interest or legacy
under will or trusts of customers of Home Federal, other than relative, at such
time as the individual learns of the designation. The objective of such a
notification requirement is to allow for consideration of all of the facts in
each case to make certain there are no real conflicts of interest and that a
reasonable, disinterested third party could not allege a conflict of interest
upon the officer or employee in receipt of this benefit. If this reporting
requirement results in a decision that a real or apparent conflict exists or
could exist, the officer or employee will be expected to make every effort to be
relieved of the expectation of benefit and will probably be required to renounce
the gift should it come to the individual by operation of law.
If a beneficial interest or legacy becomes payable to an officer or employee by
reason of death of a customer or otherwise, and the early notification procedure
set forth above has not been followed, ordinarily the individual will be
required to renounce the gift unless there is a showing that the individual's
relationship with the settler or testator predated significantly either the
individual's hiring by Home Federal or the initiation of business with Home
Federal by the settler or testator.
I. Self-Dealing
Individuals of Home Federal are prohibited from:
1. Owning any interest in another company or business which might materially
benefit by an action or decision consummated by such officer or employee on
behalf of Home Federal; or
2. Representing Home Federal in any transaction with a person or organization
in which the individual has a direct interest or from which benefits may be
derived.
The officer or employee in writing to the President/CEO must report any
significant interest in a company or business having a banking relationship with
Home Federal, whether or not the officer or employee deals with that particular
company. No supplier of Home Federal shall hold or acquire any interest in such
business unless the securities representing such interest are widely held (i.e.,
traded on the national exchange or in the over-the-counter market). Home
Federal employees must disclose all potential conflicts of interest, including
those in which they have been inadvertently placed due to either business or
personal relationships with customers, suppliers, business associates, or
competitors of Home Federal.
Individuals of Home Federal must never use their position with Home Federal to
influence public officials or others for personal benefit or for the benefit of
another party. Likewise, employment with Home Federal should not be used as
leverage to gain favors from customers or suppliers.
J. Signing on Customers' Accounts
To avoid the appearance of a conflict, all individuals of Home Federal should
not sign on customers' accounts, have access to their safe deposit boxes, or
otherwise represent customers. This does not include situations where
individuals of Home Federal act in an ownership capacity or act because of a
close family relationship.
Home Federal Code of Ethics Page 6 of 15
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K. Confidential Information
The confidential nature of bank accounts and company resources in general is a
fundamental precept in financial services. It is important that our directors,
officers, and employees be constantly alert to the responsibility of maintaining
confidentiality.
All information obtained by virtue of employment with or service to Home Federal
should be held in strictest confidence. This includes financial and personal
information of customers, including fellow employees, as well as Home Federal's
financial information and information related to its internal affairs,
competitive position, strategic planning, and regulatory actions. Confidential
information must not be disclosed to anyone except as required for business
transactions or as required by law. When disclosing confidential information,
do so in a manner that does not risk violating confidentiality.
Confidential information pertaining to Home Federal or its customers, suppliers,
stockholders, and employees is to be used solely for corporate purposes and not
as a basis for personal gain by directors, officers, or employees.
In certain instances, confidential information could be considered "insider
information" within the meaning of federal and state securities laws.
Disclosure or use of such information for personal gain or for avoiding personal
loss could result in substantial civil and criminal penalties to individuals who
disclose or who use this information. Directors, officers, and employees must
be extremely cautious in discussing the corporate affairs of Home Federal with
customers or outsiders, including with stockholders of Home Federal who do not
have a right to such information before an announcement is made to all
stockholders of Home Federal.
1. Trading in Home Federal's Stock
Directors, officers, and employees are encouraged to participate and
maintain ownership in the stock of Home Federal. While there are occasions that
dictate the purchase or sale of any investment, active buying and selling of
Home Federal's common stock in order to make short term profits is discouraged.
The Securities and Exchange Commission has stringent rules and regulations
related to trading securities while in the possession of material, non-public
information.
There may be occasions when you become aware of certain facts related to
Home Federal such as earnings, expansion plans, a potential acquisition, or
other similar situations which may reasonably be expected to be important to the
investing public. Insider information is information that has not been publicly
released and which a reasonable person would consider important in determining
whether to buy, sell, or hold securities. Until such information is
disseminated to the general public through a press release or other public
announcement, directors, officer, and employees are prohibited from either
purchasing or selling Home Federal's stock. Violation of this policy could
subject directors, officers, or employees to possible action by the Securities
and Exchange Commission, the result of which may include fines and/or
imprisonment. Should any directors, officer, or employee desire to acquire or
sell Home Federal's stock while knowledgeable of information which has not been
released to the public, inquiries for advice should be made to the Chief
Financial Officer.
2. Protecting Home Federal Information
All Home Federal information must receive protection against unauthorized
access, modification, destruction or disclosure. Individuals of Home Federal
must follow applicable policies and procedures and safeguard information in
whatever forms it exists (i.e., electronic or hard copy). Deliberate or willful
violations of existing policies for protecting Home Federal information or
negligent failure to protect Home Federal information properly may result in
disciplinary actions.
Home Federal Code of Ethics Page 7 of 15
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3. Disclosure of Corporate News and Information
Financial information about Home Federal is not to be released to anyone
unless it is included in a published report or otherwise made generally
available to the public. Officers or employees with questions concerning the
disclosure of confidential information should be referred to the President/CEO.
All media inquiries regarding Home Federal should be referred to the
President/CEO. The following subjects are never to be discussed with the media
or in any public forum:
a) Confidential business matters, which could be of interest to
competitors.
b) Information about a customer and the customer's dealings with Home
Federal.
c) Information about an employee or former employee.
4. Information Regarding Past and Present Employees
The policy of Home Federal is to safeguard the confidential aspects of its
relationship with its officers and employees; to satisfy all requirements of
applicable labor laws; and to maintain uniformity in replies to inquiries
concerning past and present officers and employees. In order to assure that
this policy is consistently maintained, any request for information regarding
past or present officers and employees must be referred to the Office of Human
Resources. This includes salary verification and date of last employment.
The above procedures apply to all requests, whether written or oral,
regarding Home Federal, past or present, employment, including routine credit
inquiries from legitimate businesses regarding deposit or loan information.
L. Gifts and Entertainment
In the matter of gifts and gratuities to directors, officers, or employees,
circumstances must govern. Substantial gifts and excessive entertainment
offered because of your affiliation with Home Federal should be courteously and
tactfully declined. Commissions, fees, or propositions involving personal gain
to a director, officer, or employee in connection with a transaction are highly
improper and in some cases, illegal.
No director, officer, or employee or member of his or her immediate family
should give or accept cash, gifts, special accommodations, or other favors from
anyone with whom the person is negotiating, soliciting, or doing business with
on behalf of Home Federal. Similarly, officers and employees may not solicit or
accept personal fees, commissions, or other forms of remunerations because of
any transaction or business involving Home Federal.
The preceding prohibitions are not applicable to entertainment or hospitality of
a "reasonable" value, or gifts (but never cash), which under the circumstances,
are of limited or nominal value. Whenever possible, Home Federal should pay the
expenses of a director, officer, or employee. Frequent invitations from
customers or vendors for meals or entertainment should be declined or handled
with firm insistence that the director, officer, or employee pay for alternate
meals. The acceptance of gifts of more than a nominal value could be considered
as an attempt at bribery and could subject both the giver and the recipient to
felony charges as well as the penalties prescribed under the Bank Bribery Act,
18 U.S.C. '215. The Bank Bribery Act also covers agents or attorneys of a
financial institution.
Full and timely disclosure to the Director of Human Resources must be made with
respect to entertainment, hospitality, or gifts received. Any question or doubt
as to the appropriateness of their receipt should be referred to and resolved by
the Director of Human Resources on a timely basis. The tactful communication of
the limitations of this policy to the donors of gifts is also strongly
encouraged.
Home Federal Code of Ethics Page 8 of 15
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M. Anti-Trust Rules B Charges and Pricing
Interest rates on deposits and loans, terms of loans, service charges, and other
similar matters will be determined solely on the basis of what is in the best
interest of Home Federal and its customers. Under no circumstances should any
agreements or understandings be established with any other financial institution
concerning such charges. Home Federal is individually responsible for its
policies and operating procedures.
It is important that no comments be made or actions taken by directors,
officers, or employees that could be misinterpreted as an agreement to cooperate
with competitors in following a common course of action as to rates of interest
paid, the terms on which loans are made, hours, or the price of services offered
to customers. Situations where discussions with competitors are permissible are
strictly limited to circumstances where action by a banking group is warranted,
such as an extension of a term loan by a group of banks or a potential bad loan
situation where cooperation among lenders is necessary to assist the borrower in
working out financial problems.
N. Fidelity Coverage
Every officer and employee must be covered by Home Federal's fidelity bond.
Home Federal will not continue to employ anyone who ceases to be eligible for
coverage.
Coverage under the terms of Home Federal's fidelity bond ceases for anyone who
has been found to commit a dishonest or fraudulent act. Obviously, this
includes the misappropriation of money or other property. It also includes the
misposting of accounts to favor oneself or another, the kiting of checks, the
making of false entries, records or reports, and the deliberate misrouting of
checks to delay payment.
O. Undesirable Business
Directors, officers, and employees may not discriminate in the acceptance of
business brought to us by reputable persons. However, it should also be kept in
mind that accounts or loans requested from known controversial or unsavory
persons or firms should generally be declined. Such relationships could lead to
loss and embarrassment for Home Federal and should be very carefully considered.
P. Personal Reputation
Loyalty, fidelity, and good morals are assumed qualities of those who represent
Home Federal but, nevertheless, need to be emphasized. It is imperative that
each individual display conduct at all times so as to reflect credit on Home
Federal and its directors, officers, and employees. A reputation for good
morals, ethics, and integrity is within the reach of all, and officers and
employees must remain above reproach throughout their business career.
Home Federal and its officers and employees may be subject to penalties if they
violate any laws. It is, therefore, important that officers and employees be
familiar with the laws and regulations governing the line of business in which
they work and that officers and employees be careful to ensure that those laws
and regulations are in full compliance. Compliance with laws and regulations is
everyone's responsibility. Officers and employees who commit illegal acts could
be subjected to disciplinary action, which may include termination.
Additionally, it is the responsibility of all officers and employees to report
all instances of known or suspected illegal activity on the part of any officer,
employee, agent or customer of Home Federal. If it is uncertain as to the
propriety of an individual's actions, contact the Director of Human Resources to
obtain clarification. Officers and employees must promptly notify the Security
Officer if it is suspected that an officer, employee, agent, or customer has
committed an illegal act or the discovery of any circumstances that suggest that
a crime has been committed. Failure to report suspected illegal activities
properly as outlined in this policy might subject that officer or employee to
disciplinary action including, if appropriate, termination. Home Federal is
required by law to report violations of criminal laws to state and/or federal
law enforcement agencies.
Home Federal Code of Ethics Page 9 of 15
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Home Federal policy prohibits any form of retaliatory action toward an officer
or employee who notifies Home Federal of a suspected illegal act or participates
in the investigation of a complaint.
Dishonest and fraudulent acts by Home Federal officers and employees are crimes
under federal and state law, and may be punishable by fines and/or imprisonment.
Examples of activities prohibited by law include:
1. Accepting anything of value (except an individual's salary or other
compensation paid or sanctioned by Home Federal) in connection with the
business of Home Federal. (Refer to the section of this policy for
detailed description of Home Federal's policy regarding Gifts, Gratuities,
and Other Payments from Customers.)
2. Stealing, embezzling or misapplying corporate funds or assets.
3. Using threats, physical force, or other unauthorized means to collect
money.
4. Issuing unauthorized obligations (such as certificates of deposit, notes,
mortgages or commitments) or making false entries.
5. Unless specifically permitted by law, making a loan or giving a gift to a
regulator who has the authority to examine Home Federal.
6. Using a computer to gain unauthorized access to the records of a customer.
7. Concealing or misapplying any of Home Federal's assets.
8. Loaning funds to, or depositing funds with third parties with the
understanding, express or implied, that the party receiving such funds will
make a loan or pay any consideration to the officer or employee.
Q. Community and Political Activity
As an institution, Home Federal cannot and should not engage in politics.
Directors, officers, and employees, however, are encouraged to stay well
informed on local, state, and national affairs and to meet their responsibility
to vote in all elections.
Directors, officers, and employees should ensure that their participation in
political activities in no way reflects unfavorably on Home Federal. Community
and political activities by directors, officers, and employees are encouraged,
provided that participation:
1. Is accomplished in a legal manner.
2. Does not interfere with work performance for Home Federal.
3. Is not deemed to be divisive in the community.
4. Occurs in such a manner which clearly indicates that the director, officer,
or employee does not speak for Home Federal.
Before running for an elected political office or accepting an appointment to a
federal, state, or local government office, the director, officer, or employee
must discuss the position with Home Federal's Chief Executive Officer.
Federal law prohibits Home Federal from making political contributions to
parties or candidates. Loans to political parties or candidates are also
generally prohibited. The use of any corporate funds, supplies, special
services, equipment, or labor for political purposes must be avoided as such use
is illegal. Additionally, no reimbursement will be made to any individual for
political contributions or for the cost of attendance at any political function.
Fund-raising efforts for any purpose should be avoided if there is any
possibility of an adverse effect on the reputation of Home Federal.
Home Federal Code of Ethics Page 10 of 15
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R. Illegal Activity
Directors, officers, and employees are expected to abide by all local, state,
and federal laws, regulations, and guidelines. Officers or employees engaged in
activities found to be in conflict with and against these laws, regulations, or
guidelines will be subject to termination of employment. Examples of illegal
activity include, but are not limited to:
1. Embezzlement
2. Unauthorized sale of information
3. Frauds such as forgery, counterfeiting, and check kiting
4. Unauthorized use of funds, revenues, and fees
5. Abuse of expense, asset, and liability accounts
6. Sexual harassment or discrimination
In addition, any director, officer, or employee who is charged with, or is
entering into a pretrial diversion or similar program for any crime involving
breach of trust, dishonesty, money laundering, a drug-related offense, a crime
of violence, or a felony must immediately notify the Director of Human
Resources.
S. Competition
The competition between Home Federal and other financial institutions must
always be positive. The best possible service and personal interest in our
customers are much ore effective than the criticism of a competitor. Such
criticism is not in keeping with the character of Home Federal and should have
no place in the conversation of directors, officers, and employees.
Federal law prohibits any combination, conspiracy or agreement among competitors
to restrict or prevent competition. A violation of the law can occur through a
formal or informal agreement between Home Federal and a competitor to:
1. Fix prices.
2. Allocate markets or customers.
3. Refuse to deal with particular suppliers or customers.
All individuals of Home Federal in contact with Home Federal's competitors must
avoid any agreements with them (or even circumstances that might give the
appearance of such agreements) relating to how Home Federal conducts its
business. All individuals of Home Federal should especially be careful at
social or professional meetings. Discussions or exchanges of information
relating to competitive matters (i.e., cost, pricing, or strategy) must
carefully be avoided.
Officers and employees with questions concerning antitrust issues should be
directed to their immediate manager or any executive officer.
T. Money Laundering Activities/Bank Secrecy Act
Both federal and state law prohibits the laundering of money. Money is
laundered to hide criminal activity associated with it, including the crimes by
which it is generated (i.e., drug trafficking, tax avoidance, counterfeiting,
etc.). Officers and employees need to "know their customer" and be alert to the
dangers to Home Federal should it, even unwillingly, become involved in
receiving or laundering proceeds of crimes. Regulators require banks to report
any known or suspected criminal activity, such as the laundering of monetary
instruments or structuring of transactions to avoid Bank Secrecy Act
requirements (refer to Home Federal's Bank Secrecy Policy for specific reporting
requirements). Officers and employees should contact the Security Officer
immediately in the event any known or suspected criminal activity or transaction
comes to their attention.
Home Federal Code of Ethics Page 11 of 15
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U. Outside Employment
Home Federal does not prohibit outside employment; however, officers and
employees are expected to devote full-time attention and energy to their career
with Home Federal. Significant outside employment or employment in positions or
establishments which may result in adverse public reaction must be avoided.
Home Federal policy requires that officers and employees inform their immediate
supervisor prior to accepting any outside employment. The immediate supervisor
is to inform the Office of Human Resources. No outside employment of any kind
will be approved which might subject Home Federal to criticism or which would
encroach upon working time, interfere with regular duties, or necessitate such
long hours as to affect the individual's effectiveness.
Officers and employees must avoid outside employment that involves or may appear
to involve a conflict of interest. Examples include:
1. Employment by a company or personally engaging in any activity that is
competitive with Home Federal.
2. Employment that involves the use of Home Federal's equipment, supplies or
facilities.
3. Employment which involves the preparation, audit or certification of
statements, tax returns, or other documents upon which Home Federal may
place reliance for lending or other purposes. Officers and employees who
prepare income tax returns for individuals or entities other than the
themselves must obtain confirmation from their potential client that the
client does not intend to use the officer's or employee's work product as
part of any transaction with Home Federal.
4. Employment that involves the rendering of investment, legal or other
advice, or exercising judgment which is based upon information, reports or
analyses that are accessible primarily from or through the individual's
employment with Home Federal.
5. Employment which may reflect adversely on the officer, employee, or on Home
Federal.
6. Employment under circumstances that may suggest the sponsorship or support
of Home Federal on behalf of the outside employer or an outside
organization.
7. Employment as an insurance or securities broker, agent, or representative.
8. Employment as a real estate salesman, broker, agent or contractor (except
with the prior written approval of the officer's or employee's immediate
supervisor with concurrence of Executive Management). Prior written
approval is required since there are a number of potential conflict of
interest situations, as well as possible violations of banking laws, which
must scrupulously be avoided in this area).
V. Advice To Customers
1. Legal Advice
Officers and employees may on occasion be asked by customers to make
statements that relate to the legality of particular transactions. Home Federal
cannot practice law or provide legal advice. As such, officers and employees
must exercise care in discussions with customers. Nothing must be said which
might be interpreted as the giving of legal advice.
Officers or employees with questions as to whether legal advice is being
requested should consult with their supervisor or Executive Management.
2. Tax or Investment Advice
Officers and employees must avoid giving customers advice on tax matters,
the preparation of tax returns, or in investment decisions, except as may be
appropriate in the performance of a fiduciary responsibility, or as otherwise
required in the ordinary course of duties.
Home Federal Code of Ethics Page 12 of 15
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3. Recommending Other Firms
During the course of contact with customers and the general public,
officers and employees may be asked to recommend others who provide professional
services. Typically, such requests involve attorneys, accountants, securities
dealers, insurance agents, brokers, and real estate agents. Home Federal,
excluding only referral arrangements made by Home Federal, must give customers
who receive recommendations several qualified sources without indicating any
preference or warranty.
W. Lending Relationships And Prohibited Lending Practices
1. Borrowing
To avoid possible conflicts of interest, loan applications submitted to
officers and employees by relatives or close personal friends (or entities
controlled by relatives or close personal friends) are to be submitted to other
independent lending officers or employees of equal or higher position for
processing and approval. With the same respect, loan applications submitted to
Directors by relatives or close personal friends (or entities controlled by
relatives or close personal friends) are to be submitted through the normal
lending channels. This policy also applies to the processing and approval of
overdrafts, waiver of service charges, and other free services.
2. Lending Relationships
It is the position of Home Federal that lending services be available to
serve the legitimate and deserving credit needs of all customers on an equal
basis. Loan terms and conditions shall be based on the borrower's credit
worthiness and banking relationships.
Directors and Executive Officers are required to comply with the provisions
of Regulation O, "Loans to Executive Officers, Directors, and Principal
Shareholders of Member Banks", relative to all Home Federal borrowing.
3. Prohibited Lending Practices
Any transaction between an officer or employee of Home Federal and a
customer of Home Federal must be conducted on an "arm's length basis", meaning
the officer or employee may not receive any discount or other benefit not
normally granted to others. Additionally, no officer or employee shall borrow
directly from another employee.
Officers and employees may not borrow money from customers or suppliers
(including personal friends) of Home Federal, except from recognized lending
institutions. The term "borrow" does not include a purchase from a customer or
supplier resulting in an extension of credit in the normal course of business.
Lending officers are not permitted to process loan applications or to
extend credit to members of their immediate family. Immediate family is defined
as spouses, parents, children, and/or siblings, grandparents, in-laws, or
cousins. Any such loan application must be referred to another lending officer.
X. Gifts, Gratuities, And Other Payments From Customers
It is a federal crime for officers, employees or members of their immediate
family to solicit or accept for themselves or third parties (other than Home
Federal) any gift, offer of travel, unusual hospitality or other thing of value
from any person or entity which either appears to be, or is in connection with
any business or transaction of Home Federal.
Home Federal Code of Ethics Page 13 of 15
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Individuals may not accept cash gifts from customers that are not relatives. For
the purpose of this policy, a relative is any person who is related by blood or
marriage, or whose relationship with the employee is similar to that of persons
who are related by blood or marriage If a customer gives an employee cash, the
employee should thank the customer and explain that Home Federal policy
prohibits accepting cash from customers.
The above prohibits any officer, director, employee, agent, or attorney of a
financial institution, or bank holding company except as provided by law, from
corruptly soliciting or receiving anything of value for or in connection with
any transaction or business of the financial institution. The thing of value
may not be for the benefit of the official or of any other person or entity
(other than the financial institution itself). Salaries or fees paid by the
financial institution to its own officers, employees, and agents are not
encompassed within the provisions of the provisions of the subsection.
Officers or employees who are offered or who anticipate receiving a gift or
other things of value that is not permitted under the above guidelines must
report it promptly in writing to their immediate supervisor and Executive
Management.
Officers, employees or their immediate family shall not solicit for themselves
or a third party (other than Home Federal) anything of value from anyone in
return for any business, service, or confidential information of Home Federal.
Moreover, officers, employees or anyone in their immediate family may not accept
anything of value (other than the individual's salary or commissions from Home
Federal) from anyone in connection with the business of Home Federal, either
before or after a transaction is discussed or consummated. Criminal penalties
may be imposed for violating these prohibitions.
Possible exceptions to the general prohibition regarding the acceptance of
things of value may include:
1. Acceptance of gifts, gratuities, amenities or favors based on family
relationships (such as those between the parents, children or spouse of a
Home Federal officer or employee) where circumstances make it clear that it
is those relationships, rather than the business of Home Federal, which are
the motivating factors.
2. Acceptance of meals, refreshments, travel arrangements, accommodations, or
entertainment, all of reasonable value and in the regular course of a
meeting or other occasion, the purpose of which is to hold a bona fide
business discussion, provided the expenses would be paid for by Home
Federal as a reasonable business expense, if not paid for by another party.
3. Acceptance of loans from other banks or financial institutions on customary
terms to finance proper and usual activities of Home Federal officers or
employees, such as home mortgage loans, except where prohibited by law.
4. Acceptance of advertising or promotional material of nominal value, such as
pens, pencils, note pads, key chains, calendars and similar items.
5. Acceptance of discounts or rebates on merchandise or services that are
offered by a third party to all the officers and employees of Home Federal,
or through a program approved by Home Federal, or to the general public.
6. Acceptance of gifts of modest value related to commonly recognized events
or occasions, such as a promotion, new job, wedding, retirement, holiday or
bar mitzvah. If an officer or employee, or a member of his or her family,
receives a gift which exceeds in value that might be considered reasonable
in light of this policy, they should report the receipt of such gifts to
the Security Officer to see if the retention of such a gift is acceptable
under this policy.
7. Acceptance of civic, charitable, educational, or religious organizational
awards for recognition of service and accomplishment.
Officers and employees who are uncertain as to the propriety of a gift must seek
the written approval of their immediate supervisor before accepting it. The
request should be in writing and should state all relevant facts. It is then
the supervisor's responsibility to forward a copy of the request along with the
supervisor's recommendation to his / her manager.
Home Federal Code of Ethics Page 14 of 15
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Y. Solicitation Policy
1. General
This section is designed to protect Home Federal employees against the
unauthorized solicitation by other employees and non-employees with regard to
such issues as the purchase of goods or services, or rendering support to
political or non-political acts.
2. Solicitation of Employees by Other Home Federal Employees
It is the policy of Home Federal that on-duty employees are not allowed to
solicit other Home Federal employees or distribute unauthorized materials as
follows:
a) Oral/Written Solicitation. An employee may not solicit another
employee either orally or with written material while either employee
is on "working time." The term "working time" does not include an
employee's meal times or break periods when an employee is released
from the performance of his or her work, whether such periods are paid
for or not.
Solicitation includes such activities as requests for signatures,
contributions for charities, merchandise purchases and requests for
donations. An example of such material includes, but is not limited
to, the sale of food, selling raffle tickets for a charity, and / or
selling cosmetics, etc.
Home Federal employees are permitted to transmit brief personal e-mail
messages to co-workers as long as the messages do not interfere with
normal business activities, involve solicitation, are not associated
with any for-profit outside business activity, and do not contain
information that may potentially embarrass or damage Home Federal,
Home Federal's customers, or employees. Refer to Home Federal's
Technology Policy for additional information.
b) Distribution of Handouts/Literature. Distribution by employees of
advertising materials, handouts or literature on Home Federal property
is prohibited at all times. Exceptions may be made for Home Federal
sponsored activities. Bulletin boards are reserved for Home Federal
notices or required legislative notices or posters only. Examples of
such material include, but are not limited to the posting of notices
advertising a local church bazaar or handing out pamphlets for a
congressional candidate qualifies as distribution.
3. Solicitation of Employees by Outside Sources
Non-employees are prohibited from soliciting employees on Home Federal
property, either by personal contact or written communication. Non-employees
are not permitted access to the interior of Home Federal's facilities or outside
working areas except to avail themselves of customer services.
4. Solicitation of Home Federal Sponsored Events
Home Federal may authorize a limited number of fund drives by employees on
behalf of charitable organizations or for Home Federal sponsored activities.
Employees are encouraged to volunteer to assist in these drives, but their
participation is entirely voluntary.
Z. Speeches And Articles For Publication
Officers or employees may not speak on behalf of Home Federal nor discuss Home
Federal's policies or procedures in articles, speeches or presentations without
the prior consent of the individual's immediate supervisor and/or Senior
Management.
Officers and employees may not use official Home Federal stationery for personal
correspondence or other non-work related purposes.
Officers, employees or their immediate family may not solicit honoraria for
public speaking or writing services performed on behalf of Home Federal or by
reason of the fact that the individual is an employee of Home Federal. Officers
and employees, however, may accept reimbursement of related expenses for such
services.
Home Federal Code of Ethics Page 15 of 15
================================================================================
III. Special Ethical Obligations of the Chief Executive Officer
and Senior Financial Officers
This section of the Code sets forth certain standards for the guidance of the
Chief Executive Officer, the Chief Financial Officer, the Principal Accounting
Officer, Controller, or persons performing similar functions ("Senior Financial
Officers").
1. Honest and Ethical Conduct
Each Senior Financial Officer must act honestly and ethically. Senior
Financial Officers should also promote honest and ethical behavior within Home
Federal.
Acting honestly and ethically includes the duty to avoid actual or apparent
conflicts of interest, as well as situations which could result in an actual or
apparent conflict of interest. A conflict of interest may arise when personal
or financial interest is adverse to, or appears adverse to, the interests of
Home Federal. Each Senior Financial Officer should report to the Audit
Committee of the Board of Directors any material transaction or relationship
that reasonably could be expected to result in a conflict of interest.
In addition to the duty to avoid conflicts of interest, Senior Financial
Officers must treat confidential information properly. All information obtained
by virtue of employment with Home Federal should be held in strictest
confidence. Confidential information must not be disclosed to anyone except as
required for business transactions or as required by law. When confidential
information is disclosed, it must be done in a manner that does not risk
violating confidentiality.
2. Preparation of Public Documents
Each Senior Financial Officer must ensure that all public documents and
documents filed with the Securities and Exchange Commission which he or she is
involve din preparing or reviewing contain full, fair, accurate, timely, and
understandable disclosure. In order to ensure this, the Senior Financial
Officers must maintain the skills relevant to Home Federal's needs. The Senior
Financial Officers are also responsible for establishing and maintaining
appropriate disclosure controls and procedures and internal controls.
3. Compliance with Laws, Rules, and Regulations
Each Senior Financial Officer must comply with all local, state, and
federal laws, rules, and regulations. Any Senior Financial Officer engaged in
activities found to be in conflict with and against these laws, rules, and
regulations will be subject to termination of employment. The Senior Financial
Officers should also cause other officers and employees to comply with all
local, state, and federal laws, rules, and regulations.
IV. ADMINISTRATION OF THE CODE
Any violation or suspected violation of this Code of Ethics must be promptly
reported to the Audit Committee of the Board of Directors. Violators of the
code may be subject to disciplinary action, up to and including termination of
employment. Questions regarding the code and requests for a waiver from the
Code should be brought to the Audit Committee. The Audit Committee will
administer the Code and will make periodic reports to the Board of Directors, as
necessary.
This Code of Ethics shall be publicly available. Changes to, and waivers from,
the section of the Code specifically applicable to Senior Financial Officers
shall also be disclosed to the public as required by law or stock exchange
regulations. Waivers of the Code of directors or executive officers must be
approved by the Board of Directors, and disclosed in a Current Report on Form
8-K.
Exhibit 21
Subsidiaries of the Registrant
Parent
- -------------------------------
Home Federal Bancorp, Inc.
Percentage Jurisdiction or
Subsidiaries of Ownership State of Incorporation
- ------------------------------- ------------ ------------------------
Home Federal Bank 100% United States
Idaho Home Service Corporation (1) 100% Idaho
_____________
(1) This corporation is a wholly owned subsidiary of Home Federal Bank.
Exhibit 23
Consent of Accountants
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULES
To the Board of Directors and Stockholders
Home Federal Bancorp, Inc.
Nampa, Idaho
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration Statement Number 333-121085) of Home Federal
Bancorp, Inc. of our report dated December 29, 2004, relating to the
consolidated financial statements of Home Federal Savings and Loan Association
of Nampa, which appear in Home Federal Bancorp, Inc.'s Annual Report on Form
10-K as of and for the year ended September 30, 2004.
/s/ Moss Adams LLP
Spokane, Washington
December 29, 2004
Exhibit 31.1
Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Daniel L. Stevens, certify that:
1. I have reviewed this Annual Report on Form 10-K of Home Federal Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation;
and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 29, 2004 /s/Daniel L. Stevens
--------------------
Daniel L. Stevens
Chief Executive Officer
Exhibit 31.1
Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Robert A. Schoelkoph, certify that:
1. I have reviewed this Annual Report on Form 10-K of Home Federal Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation;
and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 29, 2004 /s/Robert A. Schoelkoph
-----------------------
Robert A. Schoelkoph
Chief Financial Officer
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF HOME FEDERAL BANCORP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form
10-K, that:
(1) the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
(2) the information contained in the report fairly presents, in all
material respects, the Company's financial condition and results of
operations.
/s/Daniel L. Stevens /s/Robert A. Schoelkoph
-------------------- -----------------------
Daniel L. Stevens Robert A. Schoelkoph
Chief Executive Officer Chief Financial Officer
Dated: December 29, 2004