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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- ---------
Commission File Number: 000-50901
HOME FEDERAL BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
United States 20-0945587
- ------------------------------------------- ------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
500 12th Avenue South, Nampa, Idaho 83651
- ------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (208) 466-4634
--------------
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Common Stock, $.01 par
value per share, 15,208,750 shares outstanding as of January 31, 2005.
HOME FEDERAL BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements.
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 "Association") pursuant to the Association's mutual holding
company reorganization. In connection with the mutual holding company
reorganization, the Association changed its name to Home Federal Bank
("Bank") On December 6, 2004, the Company's minority stock offering
closed and 6,083,500 shares were sold at $10.00 per share, with an
additional 146,004 shares issued to the Home Federal Foundation, Inc.
For further discussion of the Company's formation and operations, see the
Company's Annual Report on Form 10-K for the year ended September 30,
2004. Based upon the foregoing, the Unaudited Interim Consolidated
Financial Statements filed as a part of this quarterly report for periods
prior to December 6, 2004, are those of the Association and its
wholly-owned subsidiary, Idaho Home Service Corporation, as follows:
Page
Consolidated Balance Sheets as of
December 31, 2004 and September 30, 2004 1
Consolidated Statements of Income for the Three months
ended December 31, 2004 and 2003 2
Consolidated Statements of Shareholders' Equity 3
Consolidated Statements of Cash Flows for the Three months
ended December 31, 2004 and 2003 4
Selected Notes to Unaudited Interim Consolidated Financial
Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
19
Item 4 - Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
20
Item 3 - Defaults upon Senior Securities 20
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 5 - Other Information 20
Item 6 - Exhibits 20
SIGNATURES 21
HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS December 31, September 30,
(In thousands, except share data) (Unaudited) 2004 2004
------------ ------------
ASSETS
Cash and amounts due from depository
institutions $ 10,795 $ 215,663
Mortgage-backed securities available
for sale, at fair value 18,922 871
Mortgage-backed securities held to
maturity, at cost 150,400 96,595
Federal Home Loan Bank stock, at
cost 7,797 7,317
Loans receivable, net of allowance
for loan losses of $2,675 and $2,637 401,752 392,634
Loans held for sale 1,586 3,577
Accrued interest receivable 2,180 2,019
Property and equipment, net 10,668 10,967
Mortgage servicing rights, net 3,056 3,152
Bank owned life insurance 10,126 10,052
Real estate and other property owned 49 113
Other assets 990 907
---------- ----------
TOTAL ASSETS $ 618,321 $ 743,867
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit accounts
Demand deposits $ 165,189 $ 153,409
Savings deposits 24,975 25,453
Certificates of deposit 168,659 164,225
---------- ----------
Total deposit accounts 358,823 343,087
========== ==========
Advances by borrowers for taxes
and insurance 1,829 3,716
Interest payable 1,475 1,420
Deferred compensation 2,666 2,463
Federal Home Loan Bank advances 148,324 122,797
Deferred income tax liability 2,185 2,264
Income taxes payable 16 -
Other liabilities 2,820 223,023
---------- ----------
Total liabilities 518,138 698,770
========== ==========
SHAREHOLDERS' EQUITY
Serial preferred stock, $.01 par
value; 5,000,000 authorized,
issued and outstanding, none - -
Common stock, $.01 par value;
50,000,000 authorized,
issued and outstanding: 152 -
Dec. 31, 2004 15,208,750
issued, 15,208,750 outstanding
Sept. 30, 2004 none issued and
outstanding
Additional paid-in capital 59,898 -
Retained earnings 45,173 45,099
Unearned shares issued to employee
stock ownership plan (4,934) -
Accumulated other comprehensive loss (106) (2)
---------- ----------
Total shareholders' equity 100,183 45,097
========== ==========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 618,321 $ 743,867
========== ==========
See accompanying notes.
1
HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME Three Months Ended
(In thousands, except share data) (Unaudited) December 31,
2004 2003
------------ ------------
Interest and dividend income:
Loan interest $ 6,069 $ 5,975
Investment interest 243 33
Mortgage-backed security interest 1,363 442
Federal Home Loan Bank dividends - 82
------------ ------------
Total interest and dividend income 7,675 6,532
============ ============
Interest expense:
Deposits 1,425 1,176
Federal Home Loan Bank advances 1,261 1,153
------------ ------------
Total interest expense 2,686 2,329
------------ ------------
Net interest income 4,989 4,203
Provision for loan losses 59 300
Net interest income after provision
for loan losses 4,930 3,903
Noninterest income:
Service charges and fees 1,959 1,705
Gain on sale of loans 68 219
Increase in cash surrender value of bank
owned life insurance 75 125
Loan servicing fees 172 166
Mortgage servicing rights, net (96) 69
Other 39 43
------------ ------------
Total noninterest income 2,217 2,327
------------ ------------
Noninterest expense:
Compensation and benefits 3,053 2,649
Occupancy and equipment 719 702
Data processing 443 366
Advertising 340 212
Postage and supplies 210 194
Professional services 219 113
Insurance and taxes 66 98
Charitable contribution to Foundation 1,825 -
Other 182 262
------------ ------------
Total noninterest expense 7,057 4,596
------------ ------------
Income before income taxes 90 1,634
Income tax expense 16 596
------------ ------------
NET INCOME $ 74 $ 1,038
============ ============
Earnings per common share:
Basic $0.00 nm (1)
Diluted $0.00 nm (1)
Weighted average number of shares outstanding:
Basic 14,710,589 nm (1)
Diluted 14,710,589 nm (1)
(1) Shares outstanding and earnings per share information is not meaningful.
The Company did not complete its initial public offering until December
6, 2004 and did not have any outstanding shares prior to that date.
See accompanying notes.
2
HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
(In thousands, except share data) (Unaudited)
Unearned
Shares
Issued to
Employee Accumulated
Common Stock Additional Stock Other
------------------ Paid-In Retained Ownership Comprehensive
Shares Amount Capital Earnings Plan Income (loss) Total
-----------------------------------------------------------------------------------
Balance at Sept.
30, 2003
- $ - $ - $ 40,415 $ - $ (16) $ 40,399
Comprehensive
income: Net
income 4,684 4,684
Other comprehensive
income:
Change in
unrealized
holding loss
on securities
available for
sale, net of
deferred
income taxes 14 14
---------
Comprehensive
income: 4,698
-----------------------------------------------------------------------------------
Balance at Sept.
30, 2004 - - - 45,099 - (2) 45,097
Common stock
issued 15,062,746 151 58,476 (4,984) 53,643
Common stock
issued to
Foundation 146,004 1 1,459 1,460
Distribution
to capitalize
MHC (50) (50)
ESOP shares committed to be
released 13 50 63
Comprehensive income:
Net income 74 74
Other comprehensive
income:
Change in
unrealized
holding loss
on securities
available for
sale, net of
deferred
income taxes (104) (104)
---------
Comprehensive
loss: (30)
--------------------------------------------------------------------------------------
Balance at
Dec. 31,
2004 15,208,750 $152 $59,898 $45,173 $(4,934) $(106) $100,183
=====================================================================================
See accompanying notes.
3
HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited) Three Months Ended
December 31,
-----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$ 74 $ 1,038
Adjustments to reconcile net income to
cash provided (used) by operating
activities:
Depreciation and amortization 434 391
Net amortization (accretion) of
premiums and discounts on investments (22) (3)
Gain on sale of fixed assets and
repossessed assets (10) -
ESOP shares committed to be released 63 -
Contribution to Foundation 1,825 -
Provision for losses 59 300
Federal Home Loan Bank stock dividend - (82)
Deferred compensation expense 203 94
Net deferred loan fees (90) (28)
Net gain on sale of loans (68) (219)
Proceeds from sale of loans held for
sale 14,591 17,989
Originations of loans held for sale (12,533) (14,220)
Impairment of mortgage servicing asset 100 -
Net increase in value of bank owned life
insurance (74) (111)
Change in assets and liabilities:
Interest receivable (161) (88)
Other assets (100) 23
Interest payable 55 132
Other liabilities 203 1,053
------------ ------------
Net cash provided by
operating activities 4,549 6,269
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of mortgage-
backed securities held to maturity 3,416 3,473
Purchase of mortgage-backed securities
held to maturity (57,200) (20,891)
Proceeds from sale and maturity of
mortgage-backed securities
available for sale 40 -
Purchase of mortgage-backed securities
available for sale (18,263) (991)
Purchases of property and equipment (146) (916)
Purchase of Federal Home Loan Bank
stock (480) -
Loan originations and principal
collections, net (9,136) (7,704)
Proceeds from disposition of property
and equipment 21 -
Proceeds from sale of repossessed
assets 125 -
------------ ------------
Net cash used in investing
activities (81,623) (27,029)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 15,736 3,477
Net decrease in advances by borrowers
for taxes and insurance (1,887) (1,903)
Proceeds from Federal Home Loan Bank
advances 91,825 27,942
Repayment of Federal Home Loan Bank
advances (66,298) (7,733)
Stock subscription orders refunded (220,813) -
Net proceeds from stock issuance 53,643 -
------------ ------------
Net cash (used in) provided by
financing activities (127,794) 21,783
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (204,868) 1,023
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 215,663 11,118
------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 10,795 $ 12,141
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 2,631 $ 2,197
Income taxes - 125
4
HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited) Three Months Ended
December 31,
-----------------------------
2004 2003
------------ ------------
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of real estate and
other assets in settlement of
loans $ 49 $ -
Fair value adjustment to securities
available for sale (173) 11
Income tax effect related to fair
value adjustment 69 (5)
See accompanying notes.
5
HOME FEDERAL BANCORP, INC. & SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated financial statements presented in this quarterly report
include the accounts of the Company and its wholly-owned subsidiary, Home
Federal Bank (the "Bank"). The financial statements of the Company have been
prepared in conformity with accounting principles generally accepted in the
United States of America for interim financial information and are unaudited.
All significant intercompany transactions and balances have been eliminated.
In the opinion of the Company's management, all adjustments consisting of
normal recurring accruals necessary for a fair presentation of the financial
condition and results of operations for the interim periods included herein
have been made. The consolidated statement of financial condition as of
September 30, 2004 has been derived from the audited consolidated statement of
financial condition of the Association as of that date.
Certain information and note disclosures normally included in the Company's
annual financial statements have been condensed or omitted. Therefore, these
consolidated financial statements and notes thereto should be read in
conjunction with the Company's September 30, 2004 audited financial statements
and notes included in the Form 10-K filed with the Securities and Exchange
Commission on December 29, 2004.
Note 2 - Summary of Significant Accounting Policies
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements. Changes in these estimates
and assumptions are considered reasonably possible and may have a material
impact on the consolidated financial statements, and thus actual results could
differ from the amounts reported and disclosed herein. The Company considers
the allowance for loan losses, mortgage servicing rights, and deferred income
taxes to be critical accounting estimates.
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.
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.
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
Company performs a quarterly review of mortgage servicing rights for potential
declines in value. This review may include an independent appraisal by an
outside party of the fair value of the mortgage servicing rights.
Deferred income taxes are computed using the asset and liability approach as
prescribed in the 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 currently enacted tax rates applicable to
the period in which the differences between the financial statement carrying
amounts and tax basis of the existing assets and liabilities are expected to
be reported in the Company's income tax returns.
At December 31, 2004, there were no material changes in the Company's
significant accounting policies or critical accounting estimates from those
disclosed in the Company's Form 10-K for the fiscal year ended September 30,
2004.
6
Note 3 Mutual Holding Company Reorganization
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 the Association 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 of Reorganization and Stock Issuance, 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 for as 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 40.0% of its common stock in a public stock
offering that was complete on December 6, 2004.
All depositors who had membership or liquidation rights with respect to the
Association as of December 6, 2004 (the effective date of the reorganization)
continue to have such rights solely with respect to the Mutual Holding Company
for as long as they continue to hold deposit accounts with Home Federal Bank
(the "Bank"). In addition, all persons who become depositors of the Bank
subsequent to the reorganization have membership and liquidation rights with
respect to the Mutual Holding Company. 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 for as long as their existing borrowings remain outstanding.
On December 6, 2004, the Association completed the mutual holding company
reorganization and minority stock offering. The Company sold 6,083,500 shares
of its common stock, $0.01 par value, at a price of $10.00 per share. The
Company also established and capitalized the Home Federal Foundation (the
"Foundation") by issuing an additional 146,004 shares of its common stock. In
addition, the Company issued 8,979,246 additional shares to Home Federal MHC,
a federally-chartered mutual holding company.
Note 4 Employee Stock Ownership Plan
In connection with the minority stock offering, the Company established an
Employee Stock Ownership Plan ("ESOP") for the benefit of its employees. The
Company issued 498,360 shares of common stock to the ESOP in exchange for a
ten-year note of approximately $5.0 million, which has been recorded as
"Unearned shares issued to employee stock ownership plan" within shareholders'
equity. As shares are released from collateral, the Company will report
compensation expense equal to the current market price of the shares.
Dividends on allocated ESOP shares reduce retained earnings; dividends on
unearned ESOP shares reduce accrued interest on the ESOP loan.
Note 5 Earnings Per Share
Earnings per share ("EPS") is computed using the basic and diluted weighted
average number of common shares outstanding during the period. Basic EPS is
computed by dividing the Company's net income or loss by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed
by dividing net income or loss by diluted weighted average shares outstanding,
which include common stock equivalent shares outstanding using the treasury
stock method, unless such shares are anti-dilutive. There were no outstanding
securities or contracts that could be exercised or converted into common stock
as of December 31, 2004. Therefore, basic and diluted earnings per share are
the same. ESOP shares are not considered outstanding for earnings per share
purposes until they are committed to be released.
7
The following table presents the computation of basic and diluted earnings
per share for the periods indicated (in thousands, except share data):
Three Months Ended
December 31,
-----------------------------
2004 2003
------------ ------------
Net income $ 74 $ 1,038
Weighted average shares
outstanding 14,710,589 nm (1)
------------ ------------
Basic and diluted earnings
per share $ 0.00 nm (1)
============ ============
(1) Shares outstanding and earnings per share information is not
meaningful. The Company did not complete its initial public offering
until December 6, 2004.
Note 6 Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), Accounting for Stock-Based Compensation. This Statement is a
revision of SFAS No. 123 and supercedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation. SFAS 123(R)
requires that the compensation cost relating to stock options, stock
appreciation rights, restricted stock or units, employee stock purchase plans
and other share-based payment transactions, measured based on the fair value,
be recognized in financial statements. For the Company, the provisions of
SFAS No. 123(R) will be effective for the quarter ending September 30, 2005.
The Company is currently assessing the impact that this pronouncement will
have on its consolidated financial statements.
Note 7 Mortgage-Backed Securities
Mortgage-backed securities available for sale consisted of the following (in
thousands):
December 31, 2004
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Losses Losses Value
------------------------------------------------------
FNMA mortgage-
backed
securities
$ 19,099 $ - $ (177) $ 18,922
========== ========== ========== ==========
September 30, 2004
------------------------------------------------------
FNMA mortgage-
backed
securities $ 874 $ - $ (3) $ 871
========== ========== ========== ==========
The contractual maturities of mortgage-backed securities available for sale
are shown below. Expected maturities may differ from contractual maturities
because borrowers have the right to prepay obligations without prepayment
penalties. (in thousands)
December 31, 2004
-----------------------------
Amortized Fair
Cost Value
----------- ----------
Due after five years
through ten years $ 835 $ 829
Due after ten years 18,264 18,0
----------- -----------
Total $ 19,099 $ 18,922
=========== ===========
The Company realized no gains or losses on sales of mortgage-backed securities
available for sale for the three months ended December 31, 2004 and 2003.
8
Mortgage-backed securities held to maturity consisted of the following (in
thousands):
December 31, 2004
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Losses Losses Value
----------- ----------- ----------- -----------
Agency mortgage-
backed securities
$ 146,650 $ 1,093 $ (500) $ 147,243
Non-Agency
mortgage-backed
securities 3,750 - (48) 3,702
----------- ----------- ----------- -----------
Total $ 150,400 $ 1,093 $ (548) $ 150,945
=========== =========== =========== ===========
September 30, 2004
------------------------------------------------------
Agency mortgage-
backed securities $ 96,595 $ 1,215 $ (284) $ 97,526
========== ========== ========== ==========
The contractual maturities of mortgage-backed securities held to maturity are
shown below. Expected maturities may differ from contractual maturities
because borrowers have the right to prepay obligations without prepayment
penalties (in thousands).
December 31, 2004
-----------------------------
Amortized Fair
Cost Value
----------- -----------
Due within one year $ 7 $ 8
Due after one year through
five years 2,573 2,692
Due after five years through
ten years 8,552 8,573
Due after ten years 139,268 139,672
----------- -----------
Total $ 150,400 $ 150,945
=========== ===========
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of December
31, 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 View Losses
---------- ----------- --------- ----------- ------ ----------
Mortgage-
backed
securities,
available for
sale
$ 18,922 $ (177) $ - $ - $ 18,922 $ (177)
Mortgage-
backed
securities,
held to
maturity 80,744 (548) - - 80,744 (548)
--------- --------- --------- --------- --------- ---------
Total $ 99,666 $ (725) $ - $ - $ 99,666 $ (725)
========= ========= ========= ========= ========= =========
Management has evaluated these securities and has determined that the decline
in the value is temporary and not related to any company or industry specific
event. The Company has the ability and intent to hold the securities for a
reasonable period of time for a forecasted recovery of the fair value in the
event of a more favorable interest rate environment.
9
Note 8 Loans Receivable
Loans receivable are summarized as follows (dollars in thousands):
December 31, 2004 September 30, 2004
---------------------- ------------------------
Percent Percent
Balance Of Total Balance Of Total
--------- ------------ ----------- ------------
Real Estate Loans
One-to four family
residential $ 246,424 60.78% $ 242,818 61.27%
Multi-family
residential 5,883 1.45 6,265 1.58
Commercial 95,117 23.46 93,575 23.61
--------- --------- --------- ---------
Total real
estate loans 347,424 85.69 342,658 86.46
Real Estate Construction
Loans
One-to four family
residential 8,460 2.09 7,207 1.82
Multi-family
residential 1,378 0.34 834 0.21
Commercial and land
development 13,216 3.26 11,151 2.81
--------- --------- --------- ---------
Total real estate
construction loans 23,054 5.69 19,192 4.84
--------- --------- --------- ---------
Consumer Loans
Home equity lines
of credit 27,684 6.82 27,351 6.90
New and used
automotive and RV 4,157 1.03 3,838 0.97
Other consumer 1,613 0.40 1,949 0.49
--------- --------- --------- ---------
Total consumer
loans 33,454 8.25 33,138 8.36
--------- --------- --------- ---------
Commercial/business
loans 1,486 0.37 1,363 0.34
--------- --------- --------- ---------
405,418 100.0% 396,351 100.0%
========= =========
Less:
Deferred loan fees 991 1,080
Allowance for loan
losses 2,675 2,637
--------- ---------
Loans receivable,
net $401,752 $392,634
========= =========
Item 2 - Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Forward-Looking Statements
This 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, but are not limited
to:
* 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
10
* 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.
These factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements. The
Company undertakes no obligation to publish revised forward-looking statements
to reflect the occurrence of unanticipated events or circumstances after the
date hereof.
Overview
The Company was organized as a federally chartered stock corporation at the
direction of the Association in connection with its mutual holding company
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". In the reorganization, the Company sold 40.00% 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 the Company. In connection with the
reorganization, the Company issued an additional 146,004 shares and $365,010
to the Home Federal Foundation, Inc., a charitable foundation established as
part of the reorganization. The Company's common stock is traded on the
NASDAQ Stock Market under the symbol "HOME."
The Association was founded in 1920 as a building and loan association and
reorganized as a federal mutual savings and loan association in 1936. The
Bank is a community-oriented financial institution dedicated to serving the
financial service needs of consumers and businesses within our market area.
The Bank's primary business is 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.
The Bank serves the Treasure Valley region of southwestern Idaho, which
includes Ada, Canyon, Elmore and Gem Counties, through our 15 full-service
banking offices and two loan centers. 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 the
Company's corporate headquarters in Nampa. The two remaining branches are
located in Elmore and Gem Counties.
The local economy is primarily urban with the city of Boise being the most
populous of the markets that we serve, followed by Nampa, the state's second
largest city. The regional economy is well diversified with government,
healthcare, manufacturing, high technology, call centers and construction
providing sources of employment. In addition, agriculture and related
industries continue to be key components of the economy in southwestern Idaho.
Generally, sources of employment are concentrated in Ada and Canyon Counties
and include the headquarters of Micron Technology, Albertsons, Washington
Group International, J.R. Simplot Company and Boise 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.
Critical Accounting Policies
Allowance for Loan Losses. Management believes 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 it, 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 based on 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 has been impaired and a loss is probable. The general allowance
element relates to assets with no well-defined deficiency of weakness and
takes into consideration loss that is inherent within the portfolio but has
not been realized.
11
Mortgage Servicing Rights. Mortgage servicing rights represent the present
value of the future loan servicing fees from the right to service loans for
others. 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 amount and timing of mortgage servicing rights
amortization is adjusted quarterly based on actual results and updated
projections. The Company performs a quarterly review of mortgage
servicing rights for potential declines in value. This review may include an
independent appraisal by an outside party of the fair value of the mortgage
servicing rights.
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
currently enacted tax rates applicable to the period in which the differences
between the financial statement carrying amounts and tax basis of existing
assets and liabilities are expected to be reported in the Company's income tax
returns. The deferred tax provision for the year is equal to the net
change in the net deferred tax asset from the beginning to the end of the
year, less amounts applicable to the change in value related to investments
available for sale. The effect on deferred taxes of a change in tax rates
is recognized as income in the period that includes the enactment date. The
primary differences between financial statement income and taxable income
result from depreciation expense, mortgage servicing rights, loan loss
reserves and dividends received from the Federal Home Loan Bank of Seattle
("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 December 31, 2004 and September 30, 2004
General. Total assets decreased $125.6 million or 16.9% to $618.3 million at
December 31, 2004 compared to $743.9 million at September 30, 2004. Assets at
September 30, 2004 included $220.8 million that was received from subscribers
in the stock offering. These subscription funds were subsequently refunded
to subscribers in the quarter ended December 31, 2004 as a result of a change
in the appraisal of the Company, which increased the valuation range.
Following the refund to subscribers, the Company conducted a resolicitation
and received $153.1 million from subscribers. The Company's stock offering,
however, was oversubscribed and as a result, $97.2 million of the $153.1
million subscription funds were returned to investors.
Assets. For the three months ended December 31, 2004 total assets decreased
$125.6 million. The increases and decreases were primarily concentrated in
the following asset categories:
Increase/ Percentage
Balance at Decrease from Increase/
December 31, 2004 September 30,2004 Decrease
------------------------------------------------------
(dollars in thousands)
Cash and amounts
due from
depository
institutions $10,795 $(204,868) (95.0)%
Mortgage-backed
securities,
available for sale,
at fair value 18,922 18,051 2,072.5
Mortgage-backed
securities,
held to maturity 150,400 53,805 55.7
Loans receivable, net of
allowance for loan losses 401,752 9,118 2.3
Loans held for sale 1,586 (1,991) (55.7)
Cash and amounts due from depository institutions decreased $204.9 million as
a result of the completion of the Company's minority stock offering. Assets
at September 30, 2004 included $220.8 million that was received from
subscribers in the stock offering. These subscription funds were subsequently
refunded to subscribers in the quarter ended December 31, 2004 as described
above.
The Company invested the net proceeds from the offering and additional
borrowings in mortgage-backed securities to leverage the balance sheet and
achieve the desired level of interest-earning assets. During the
three months ended
12
December 31, 2004, mortgage-backed securities increased $71.9 million or
73.7%. The increase in mortgage-backed securities consisted of
intermediate-term securities, including hybrid adjustable and fixed rate
securities with terms of 20 years or less.
Loans receivable, net, increased $9.2 million to $401.8 million at December
31, 2004, compared to $392.6 million at September 30, 2004. Single-family
residential loans and commercial real estate loans increased $4.9 million and
$3.6 million, respectively. Over 90% of the Company's loan portfolio is
secured by real estate, either as primary or secondary collateral, located in
its primary market areas.
Loans held for sale decreased $2.0 million to $1.6 million at December 31,
2004, compared to $3.6 million at September 30, 2004. The Company originates
fixed-rate residential loans, the majority of which are sold in the secondary
market. Selling fixed-rate mortgage loans allows the Company to reduce
interest rate risks associated with long term, fixed-rate products. It also
frees up funds to make new loans and diversify the loan portfolio. The Company
retains the servicing rights on most loans sold in the secondary market,
thereby maintaining the customer relationship and generating ongoing
noninterest income.
Deposits. Deposits increased $15.7 million during the three months ended
December 31, 2004. Deposit growth resulted from increases in demand deposits
and certificates of deposits. The following table details the changes in
deposit accounts.
Percentage
Balance at Increase from Increase/
December 31,2004 September 30,2004 (Decrease)
---------------------------------------------------------
(dollars in thousands)
Savings deposits $ 24,975 $ (478) (1.9)%
Demand deposits 165,189 11,780 7.7
Certificates of
deposit 168,659 4,434 2.7
---------------------------------------------------------
Total deposit
accounts $ 358,823 $ 15,736 4.6%
=========================================================
Noninterest-bearing demand deposits increased $2.8 million to $32.4 million at
December 31, 2004, compared to $29.6 million at September 30, 2004.
Interest-bearing deposits grew $9.0 million to $132.8 million at December 31,
2004, compared to $123.8 million at September 30, 2004. Certificates of
deposit increased $4.4 million primarily as a result of local advertised
specials for certificate accounts with maturities ranging from 19 to 39
months.
Borrowings. Advances from the Federal Home Loan Bank of Seattle increased
$25.5 million or 20.8%, to $148.3 million during the three months ended
December 31, 2004. The Company uses advances from the Federal Home Loan Bank
of Seattle as an alternative funding source to deposits in order to manage
funding costs, reduce interest rate risk, and to leverage the balance sheet.
The net effect was to fund increases in total interest-earning assets, thereby
incrementally increasing net interest income.
Equity. Total shareholders' equity increased $55.1 million or 122.2%, to
$100.2 million at December 31, 2004 as compared to $45.1 million at September
30, 2004. The increase was primarily due to the $53.6 million net proceeds
from the stock offering and $1.5 million for the 146,004 shares issued to the
Foundation.
Comparison of Operating Results for the Three Months ended December 31, 2004
and December 31, 2003
General. Net income for the three months ended December 31, 2004 was $74,000,
or less than $0.01 per basic share, compared to net income of $1.0 million for
the three months ended December 31, 2003. The Association completed it mutual
holding company reorganization, at which time the Company was organized,
on December 6, 2004. As a result, comparisons to prior periods refer to the
results of the Association, and per share data is not applicable.
The quarter ended December 31, 2004 is the first quarter of results since the
completion of the Bank's mutual holding company reorganization and the
Company's minority stock offering. As part of the reorganization, the Company
formed the Foundation and contributed $1.8 million to the Foundation, which
consisted of 146,000 shares of its common stock and $365,000 in cash. The
Foundation was formed for the purpose of supporting charitable organizations
and activities that enhance the quality of life for residents within the
Company's market area. The
13
$1.8 million contribution made by the Company to the Foundation during the
first fiscal quarter was the primary factor in the net income decrease from
the same period a year ago.
Excluding the contribution to the Foundation, the Company had net income of
$1.2 million, or $0.08 per share for the quarter ended December 31, 2004,
compared to $1.0 million for the same period a year ago. The per share data
for the quarter ended December 31, 2004 is being reported on shares
outstanding from December 6, 2004 through December 31, 2004, since the Bank
completed its conversion on December 6, 2004. The following table reconciles
the Company's actual net income to pro forma net income, exclusive of the
charitable contribution (in thousands, except share data):
Three Months Ended
December 31,
-------------------------------
2004 2003
------------ ------------
Pro forma disclosure
Net income, as reported $ 74 $ 1,038
Contribution to Foundation 1,825 -
Federal and State income tax benefit (712) -
------------ ------------
Pro forma net income $ 1,187 $1,038
Earnings per share
Basic as reported $0.00 nm(1)
Pro forma basic $0.08 nm(1)
(1) Shares outstanding and earnings per share information is not meaningful.
The Company did not complete its initial public offering until December 6,
2004.
Net Interest Income. Net interest income increased $800,000, or 19.0%, to
$5.0 million for the three months ended December 31, 2004, compared to $4.2
million for the three months ended December 31, 2003. Average total
interest-earning assets increased $142.4 million primarily due to the receipt
of cash from stock subscription requests and the purchase of mortgage-backed
securities with the net proceeds of the stock offering. The additional cash
and mortgage-backed securities contributed to a 73 basis point decline in our
average asset yields. During that same period our average cost of funds
declined 28 basis points, resulting in a 45 basis point decrease in our net
interest spread.
Interest and Dividend Income. Total interest and dividend income for the
three months ended December 31, 2004 increased $1.2 million, or 18.5% to $7.7
million, compared to $6.5 million for the three months ended December 31,
2003. The increase was the result of the $142.4 million increase in the
average balance of interest-earning assets. The increase in average balance
of interest-earning assets was partially offset by lower interest rates,
prepayment of higher rate loans and mortgage backed securities in our
portfolio, and the FHLB election to delay their next dividend declaration and
payment until the first quarter of 2005. The FHLB is also changing the manner
for paying dividends while it seeks approval of its and capital management
plan. Until final adoption of this plan, the Company expects quarterly
dividend income from the FHLB to decrease as compared to prior quarters. We
do not expect the impact of the change to have a significant effect on our
results of operations or financial condition.
14
The following table compares detailed average earning asset balances,
associated yields, and resulting changes in interest and dividend income for
the three months ended December 31, 2004 and 2003 (dollars in thousands):
Three Months Ended December 31,
-------------------------------------------------------
2004 2003
-------------------------------------------------------
Increase/
Decrease in
Interest and
Dividend
Average Average Income from
Balance Yield Balance Yield 2003
------------------------------------------------------
Loans receivable,
net $399,619 5.94% $379,431 6.10% $ 148
Loans held for
sale 2,424 5.41 3,131 5.91 (54)
Investment
securities,
available for sale,
including
interest-bearing
deposits in
other banks 49,937 1.95 6,015 2.19 210
Mortgage-backed
securities 109,185 4.99 31,128 5.68 921
Federal Home Loan
Bank stock 7,432 0.00 6,534 5.02 (82)
------------------------------------------------------
Total interest-
earning assets $568,597 5.40% $426,239 6.13% $1,143
======================================================
Interest Expense. Interest expense increased $400,000, or 17.4%, to $2.7
million for the three months ended December 31, 2004 compared to $2.3 million
for the three months ended December 31, 2003. The average balance of total
interest-bearing liabilities increased $115.4 million for the three months
ended December 31,2004 compared to the three months ended December 31, 2003.
The increase was primarily due to cash received from stock subscription
requests prior to the completion of the minority stock offering. The average
cost of funds for total interest-bearing liabilities decreased 28 basis points
as a result of the lower interest rate environment.
The following table details average balances, cost of funds and the change in
interest expense for the three months ended December 31, 2004 and 2003:
Three Months Ended December 31,
-------------------------------------------------------
2004 2003
-------------------------------------------------------
Increase/
(Decrease) in
Interest
Average Average Expense from
Balance Cost Balance Cost 2003
------------------------------------------------------
(dollars in thousands)
Savings deposits $25,531 0.20% $24,305 0.30% $ (5)
Interest-bearing
demand deposits 131,868 0.25 74,591 0.19 47
Money market
deposits 40,554 0.96 31, 519 0.51 57
Certificates of
deposit 168,084 2.93 146,042 2.96 150
Federal Home Loan
Bank advances 129,128 3.91 103,333 4.46 108
------------------------------------------------------
Total Interest-
bearing
liabilities $ 495,165 2.17% $379,790 2.45% $357
======================================================
Provision for Loan Losses. The Company's Asset Liability Committee (the
"Committee") assesses the adequacy of the allowance for loan losses on a
quarterly basis. The Committee analyzes several different factors, including
delinquency, charge-off rates, and the changing risk profile of the loan
portfolio, as well as local economic conditions including unemployment rates,
bankruptcies and vacancy rates of business and residential properties. The
Committee's 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 based on various historical
measures such as the amount and type
15
of classified loans, past due ratios and loss experience, which could affect
the collectibility of the respective loan types. The specific allowance
component is determined when management believes that the collectibility of a
specific large loan has been impaired and a loss is probable. The general
allowance component is established to ensure the adequacy of the allowance for
loan losses in situations where the Committee believes there are risk factors
associated with the collectibility of the portfolio that may not be adequately
addressed in the formula or specific allowance components. Information
considered for the general allowance element includes regional economic and
employment data.
The provision for loan losses decreased $241,000 to $59,000 for the three
months ended December 31,2004 compared to $300,000 for the three months ended
December 31, 2004. The following table details selected activity associated
with the allowance for loan losses for the three months ended December 31,
2004 and 2003:
At or For the Three Months
Ended December 31,
-----------------------------
2004 2003
-----------------------------
(dollars in thousands)
Provision for loan losses $ 59 $ 300
Net charge-offs 21 28
Allowance for loan losses 2,675 2,125
Allowance for loan losses as
a percentage of total
loans receivable and loans
held for sale at the end
of the period 0.66% 0.55%
Allowance for loan losses as
a percentage of
nonperforming loans at the
end of the period 420.60% 344.97%
Nonperforming loans 636 616
Nonaccrual and 90 days or
more past due loans as a
percentage of loans receivable 0.16% 0.16%
Total loans, net 401,752 380,059
The Company increased its provision for loan losses for the prior fiscal year
in connection with the unseasoned nature of its loan portfolio that resulted
from a record volume of refinanced mortgage loans. In management's judgment,
the increase in the amount of refinanced mortgage loans resulted in an
increase in the level of unseasoned loans within the loan portfolio thereby
increasing the inherent risk of loss to the Company. In addition, management
revised the estimated loss ratios of several loan categories to better reflect
the Company's loss history. Industry or peer loss rates were used if the
Company did not have a meaningful history of losses. As a result, the
allowance for loan losses increased to $2.6 million as of September 30, 2004.
Management considers the allowance for loan losses at December 31, 2004 to be
adequate to cover probable losses inherent in the loan portfolio based on the
assessment of the above-mentioned factors affecting the loan portfolio.
Noninterest Income. Noninterest income decreased $110,000 to $2.2 million for
the three months ended December 31, 2004 compared to $2.3 million for the
three months ended December 31, 2003. As management expected, the slowdown in
mortgage refinance activity affected the gains on the sale of single-family
residential loans.
Mortgage servicing rights is an accounting estimate of the present value of
the future servicing fees from the right to service mortgage loans for others.
This estimate is affected by prepayment speeds of the underlying mortgages and
interest rates. In general, during periods of falling interest rates,
mortgage loans prepay faster and the value of the mortgage-servicing asset
declines. The Company performs a quarterly review of mortgage servicing
rights for potential declines in value. As part of this review, the Company
determined the value of the mortgage servicing right had declined $100,000 at
December 31, 2004 as compared to the prior quarter.
16
The following table provides a detail analysis of the changes in components of
noninterest income:
Three Months Increase/ Percentage
Ended (Decrease) Increase/
Dec. 31, 2004 from Dec. 31, 2003 (Decrease)
--------------------------------------------------------
(dollars in thousands)
Service fees and
charges $1,959 $254 14.9%
Gain on sale of
loans 68 (151) (68.9)
Increase in cash surrender
value of bank owned life
insurance 75 (50) (40.0)
Loan servicing fees 172 6 3.6
Mortgage servicing rights,
net (96) (165) (239.1)
Other 39 (4) (9.3)
--------------------------------------------------------
Total noninterest
income $2,217 (110) (4.7)%
========================================================
Noninterest Expense. Noninterest expense increased $2.5 million, or 53.5%, to
$7.1 million for the three months ended December 31, 2004 compared to $4.6
million for the three months ended December 31, 2004. Excluding the $1.8
million one-time contribution to the Foundation, noninterest expense increased
$636,000 or 13.8%.
The following table provides a detail analysis of the changes in components of
noninterest expense:
Three Months Increase/ Percentage
Ended (Decrease) Increase/
Dec. 31, 2004 from Dec. 31, 2003 (Decrease)
--------------------------------------------------------
(dollars in thousands)
Compensation and
benefits $3,053 $ 404 15.2%
Occupancy and
equipment 719 17 2.4
Data processing 443 77 21.0
Advertising 340 128 60.4
Contribution to
Foundation 1,825 1,825 100.0
Other 677 10 1.5
--------------------------------------------------------
Total noninterest
expense $7,057 $2,461 53.5%
========================================================
Compensation expense increased due to annual merit pay increases, the
establishment of the ESOP, and an increase in the number of employees. As of
December 31, 2004, the Company employed 234 full-time equivalent employees,
compared to 228 at December 31, 2003. Advertising expense increased due to
additional marketing campaigns in the current quarter. The efficiency ratio
(excluding the charitable contribution to the Foundation), which is defined as
the percentage of noninterest expense to net interest income plus noninterest
income, increased to 72.61% compared to 70.38% for the three months ended
December 31, 2003.
Income Tax Expense. Income tax expense decreased $580,000 to $16,000 for the
three months ended December 31, 2004 compared to $596,000 for the same period
a year ago. Income before income taxes was $90,000 for the three months ended
December 31, 2004 compared to $1.6 million for the three months ended December
31, 2003. The Company's combined Federal and State effective income tax
rate for the first quarter of 2004 was 17.8% compared to 36.5% for the same
quarter in 2003. The decrease in the effective tax rate was due to the
increase in the cash surrender value of the bank-owned life insurance which is
not subject to income taxes and the decrease in net income before income taxes
due to the $1.8 million contribution to the Foundation.
Liquidity, Commitments and Capital Resources
Liquidity. The Company actively analyzes and manages the Bank's liquidity
with the objectives of maintaining an adequate level of liquidity and to
ensure the availability of sufficient cash flows to support loan growth, fund
deposit withdrawals, fund operations and satisfy other financial commitments.
See "Consolidated Statements of Cash Flows" contained in the Consolidated
Financial Statements included in this document.
17
The primary sources of funds are customer deposits, loan repayments, loan
sales, maturing investment securities, and advances from the Federal Home Loan
Bank of Seattle. These sources of 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. Management believes that our current
liquidity position and our forecasted operating results are sufficient to fund
all of our existing commitments.
At December 31, 2004, the Company maintained a line of credit with the Federal
Home Loan Bank of Seattle equal to 40% of total assets to the extent the
Company provides qualifying collateral and holds sufficient FHLB stock. At
December 31, 2004, we were in compliance with our collateral requirements and
$54.5 million of the line of credit was available. In addition, we held
readily saleable loans and mortgage-backed securities available for sale for
liquidity purposes.
At December 31, 2004, certificates of deposits amounted to $168.7 million, or
47.0% of total deposits, including $75.2 million which are scheduled to mature
by December 31, 2005. Historically, we have been able to retain a significant
amount of our deposits as they mature. Management believes the Company has
adequate resources to fund all loan commitments through deposits, advances
from the Federal Home Loan Bank of Seattle, loan repayments, maturing
investment securities, and the sale of mortgage loans in the secondary
markets.
Off-Balance Sheet Arrangements. The Company is a party to financial
instruments with off-balance sheet risk in the normal course of business to
meet the financing needs of its 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. The Company uses the
same credit policies in making commitments as it does 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
the Company to guarantee the performance of a customer to a third party.
The following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of December
31, 2004:
Contract or
Notional Amount
----------------------
(in thousands)
Commitments to
originate loans:
Fixed rate $15,487
Adjustable rate 5,151
Undisbursed balance
of loans closed 15,298
Unused lines of credit 22,037
Commercial letters of
credit 168
-----------------
Total $58,141
=================
Capital. Consistent with our objective to operate a sound and profitable
financial institution, the Company has maintained and will continue to focus
on maintaining a "well capitalized" rating from regulatory authorities. In
addition, the Company is subject to certain capital requirements set by our
regulatory agencies. At December 31, 2004, the Company exceeded all
regulatory capital requirements. Total equity of the Company was $100.2
million at December 31, 2004, or 16.2% of total assets on that date.
The Bank's regulatory capital ratios at December 31, 2004 were as follows:
Tier I capital of 12.65%; Tier I risk-based capital of 22.02%; and total
risk-based capital of 22.80%. The regulatory capital requirements to be
considered well capitalized are 5%, 6%, and 10% respectively.
18
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
Our Board of Directors has established an asset and liability management
policy to guide management in maximizing net interest 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 Asset
Liability Management Committee, consisting of certain members of senior
management, 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.
One of our primary financial objectives is to generate ongoing profitability.
The Company's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits and borrowings. The rates we earn on assets and pay on liabilities
generally is 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 affected by changes in interest rates and the
interest rate sensitivity of our assets and liabilities. We measure our
interest rate sensitivity on a monthly basis using an internal model.
Management employs various strategies to manage our interest rate sensitivity
including: (1) selling long-term fixed- rate mortgage loans in the secondary
market to Fannie Mae, Freddie Mac and the Federal Home Loan Bank of Seattle;
(2) borrowing intermediate- to long-term funds at fixed rates from the Federal
Home Loan Bank of Seattle; (3) originating consumer loans at shorter
maturities or at variable rates; (4) originating adjustable rate mortgage
loans; (5) appropriately modifying loan and deposit pricing to capitalize on
the then current market opportunities; and (6) increasing lower cost core
deposits, such as savings and checking accounts.
At December 31, 2004, the Company had no off-balance sheet derivative
financial instruments, and the Bank did not maintain a trading account for any
class of financial instruments or engage in hedging activities or purchase
high risk derivative instruments. Furthermore, the Company is not subject to
foreign currency exchange rate risk or commodity price risk.
There has not been any material change in the market risk disclosures
contained in the Company's Annual Report on Form 10-K for the year ended
September 30, 2004.
Item 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
An evaluation of the Company's disclosure controls and procedures (as defined
in Section 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the
"Act")) was carried out under the supervision and with the participation of
the Company's Chief Executive Officer, Chief Financial Officer, and other
members of the Company's management team as of the end of the period covered
by this quarterly 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 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 quarter ended December 31, 2004, the Company did not make any
significant changes in, nor take any corrective actions regarding its internal
controls or other factors, that could materially affect these controls.
19
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- ---------------------------
From time to time, the Company is engaged in legal proceedings in the ordinary
course of business, none of which are currently considered to have a material
impact on the Company's financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- ---------------------------------------------------------------------
On August 12, 2004, the Company's Registration Statement on Form S-1 (File No.
333-113731) was declared effective. On December 6, 2004, the Bank completed
the mutual holding company reorganization and minority stock offering. The
Company issued 6,083,500 shares of its common stock, $0.01 par value, that
were sold at a price of $10.00 per share in the subscription offering. The
Company established and capitalized the Foundation by issuing an additional
146,004 shares of its common stock. In addition, the Company issued 8,979,246
additional shares to Home Federal MHC, a federally-chartered mutual holding
company.
The Company incurred approximately $2.2 million in expenses as of December 31,
2004 in connection with the issuance and distribution of the securities
registered. Keefe, Bruyette & Woods, Inc. acted as Investment Advisor to the
Company and assisted in the sale of the Company's common stock on a "best
efforts" basis. A success fee of $698,000 was paid to Keefe, Bruyette and
Woods, Inc. while the remaining $1.5 million represented other expenses of the
offering. No payments were made directly or indirectly to any directors or
officers of the Company or their associates, persons owning ten percent or
more of any class of equity securities of the Company, or to affiliates of the
Company.
In connection with the minority stock offering, the Company received $53.6 in
net proceeds after deducting expenses of $2.2 million and net of unfunded ESOP
proceeds of $5.0 million. The Company invested $29.3 million of the net
proceeds into the Bank in exchange for 100% of the Bank's capital stock. The
remaining $24.3 million in net proceeds was retained by the Company as working
capital.
Stock Repurchases. The Company did not repurchase any shares of its
outstanding Common Stock during the three months ended December 31, 2004. In
addition, the Company has no publicly announced plans to repurchase its common
stock.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable.
Item 5. Other Information
- -------------------------
Not applicable.
Item 6. Exhibits
- -----------------
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 of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act.
20
SIGNATURES
Pursuant to the requirements 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: February 10, 2005 /s/ Daniel L. Stevens
- ------------------------ ---------------------
Daniel L. Stevens
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: February 10, 2005 /s/ Robert A. Schoelkoph
- ------------------------ ------------------------
Robert A. Schoelkoph
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
21
EXHIBIT 31.1
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Daniel L. Stevens, President and Chief Executive Officer of Home Federal
Bancorp, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q 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 we 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 quarterly 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 fiscal
fourth 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
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weakness 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 data 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: February 10, 2005 /s/ Daniel L. Stevens
- ------------------------ -----------------------
Daniel L. Stevens
Chairman, President and
Chief Executive Officer
22
EXHIBIT 31.2
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert A. Schoelkoph, Chief Financial Officer of Home Federal Bancorp,
Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q 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 we 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 quarterly 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 fiscal
fourth 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
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weakness 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 data 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: February 10, 2005 /s/ Robert A. Schoelkoph
- ------------------------ ------------------------
Robert A. Schoelkoph
Senior Vice President and
Chief Financial Officer
23
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 Quarterly Report on Form 10-Q, that:
1. the Report fully complies with the requirements of Section 13(a) or 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 financial condition and results of operations of the
Company.
/s/ Daniel L. Stevens /s/ Robert A. Schoelkoph
- ----------------------- -------------------------
Daniel L. Stevens Robert A. Schoelkoph
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
Dated: February 10, 2005
- ------------------------
24