PROSPECTUS SUPPLEMENT
HOME FEDERAL BANCORP, INC.
(Proposed Holding Company for Home Federal Savings
and Loan Association of Nampa)
Up to 6,083,500 Shares of Common Stock
$10.00 per Share
On October 1, 2004, RP Financial, LC. updated its appraisal of the
estimated pro forma market value of the common stock of Home Federal Bancorp,
Inc., which has increased our offering range. The amended offering range has
increased to a range of $39.1 million at the minimum to $52.9 million at the
maximum, and $60.8 million at the adjusted maximum, as compared to the offering
range of $34.0 million to $46.0 million, and $52.9 million at the adjusted
maximum, established by the appraisal of RP Financial, LC. dated May 21, 2004.
This constitutes an approximate 15% increase in the range at all three levels.
As a result of the increase in the offering range, we are offering more
shares than indicated in our prospectus dated August 13, 2004. We are now
offering up to 6,083,500 shares of common stock for sale at $10.00 per share on
a best efforts basis, subject to certain conditions. We must sell a minimum of
3,910,000 shares in order to complete the offering. The maximum and minimum
purchase limitations for subscribers have not changed the percentage of the
outstanding shares we are selling to the public and the percentage to be held by
the charitable foundation has not changed. The offering is expected to terminate
at 12:00 Noon, Mountain time, on November 24, 2004. We may extend this date
without notice to you until December 16, 2004, unless the Office of Thrift
Supervision approves a later date. Once submitted, orders are irrevocable unless
the offering is terminated or extended beyond December 16, 2004. If the offering
is extended beyond December 16, 2004, subscribers will be resolicited. Funds
received prior to completion of the offering will be held in an escrow account
at Home Federal Bancorp, Inc. and will earn interest at our regular statement
savings rate.
=================================================================================================================
REVISED TERMS OF THE OFFERING
Minimum(1) Maximum(1) Maximum, as adjusted(2)
----------- ----------- -----------------------
Per Share Price................................ $ 10.00 $ 10.00 $ 10.00
Number of Shares............................... 3,910,000 5,290,000 6,083,500
Underwriting Commission........................ $ 443,096 $ 614,134 $ 712,481
Other Expenses................................. $ 1,143,000 $ 1,143,000 $ 1,143,000
Net Proceeds to Home Federal Bancorp, Inc...... $37,513,904 $51,142,866 $58,979,519
Net Proceeds Per Share......................... $ 9.59 $ 9.67 $ 9.70
(1) Determined in accordance with the amended offering range established by RP Financial, LC. and the purchase
price, which have been approved by the Board of Directors of Home Federal Bancorp, Inc. and Home Federal
Savings and Loan Association of Nampa.
(2) Represents an amount that is 15% more than the maximum of the offering range as a result of changes in
financial or market conditions.
=================================================================================================================
Please refer to "Risk Factors" beginning on page 14 of the prospectus and
"Additional Risk Factors" on page 1 of this document.
In view of the October 1, 2004 appraisal update and in accordance with
regulatory requirements, we returned all funds received, with interest, and
canceled all withdrawal authorizations for all persons who submitted accepted
subscriptions for shares of common stock in the subscription offering. At the
same time, each of these persons, AND ONLY THESE PERSONS, are again being given
the opportunity to subscribe for shares of common stock of Home Federal Bancorp,
Inc.
In order to place a new order for shares of common stock, you must
complete and return the enclosed Supplemental Order Form to Home Federal Savings
and Loan Association of Nampa, accompanied by payment or a withdrawal
authorization, so that it is received no later than 12:00 Noon, Mountain time,
on November 24, 2004. Failure to return a Supplemental Order Form will result in
your not receiving any shares of common stock in this offering.
This document supplements and amends the prospectus of Home Federal
Bancorp, Inc., dated August 13, 2004, and should be read together with the
prospectus. Any information presented in this document supersedes that contained
in the prospectus. Unless otherwise specifically set forth in this document,
capitalized terms used, but not defined, in this prospectus supplement shall
have the same meaning as they do in the prospectus. See "Extension of Time
Period to Complete the Stock Offering" in this prospectus supplement for
information on how a subscriber may obtain an additional copy of the prospectus.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any other federal agency or state securities regulator has
approved or disapproved these securities or determined if this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
For information, call the stock information center at (208) 468-5025.
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KEEFE, BRUYETTE & WOODS, INC.
-----------------------
The date of this prospectus supplement is November 4, 2004
TABLE OF CONTENTS
Additional Risk Factors.................................................... 1
Results of the Special Meeting of Members and the Subscription Offering.... 1
Amended Offering Range and Resolicitation.................................. 2
Market for the Common Stock................................................ 4
How We Intend to Use the Proceeds from this Offering....................... 5
Pro Forma Data............................................................. 7
Comparison of Valuation and Pro Forma Information With and Without
Charitable Foundation..................................................... 14
Capitalization............................................................. 15
Home Federal Exceeds All Regulatory Capital Requirements................... 16
Proposed Purchases By Management........................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................. 19
Where You Can Find More Information........................................ 30
Stock Information Center................................................... 31
Index to Interim Consolidated Financial Statements......................... F-1
ADDITIONAL RISK FACTORS
You should consider the risk factors presented below and in the "Risk
Factors" section of the prospectus in addition to the other information
contained in this prospectus supplement and in the prospectus before deciding
whether to make an investment in this stock.
After-Market Price Performance of Our Common Stock May Be Reduced
The increased valuation reflected in the amended offering range may
result in less favorable after-market price performance of the common stock than
might have occurred if the offering range of the common stock had not been
increased.
The Updated Appraisal is Based on Market Demand, Which May Not Continue in the
Future
The updated appraisal of RP Financial, LC. ("RP Financial") is based
upon the current demand for initial public offerings of financial services
companies and market demand for the common stock, as reflected by the level of
subscriptions received. No assurance can be given that this demand will
continue.
RESULTS OF THE SPECIAL MEETING OF MEMBERS AND
THE SUBSCRIPTION OFFERING
At the special meeting of members of Home Federal Savings and Loan
Association of Nampa ("Home Federal") held on September 20, 2004, members voted
on the approval of an amended plan of reorganization and stock issuance to
reorganize Home Federal into the mutual holding company structure and the other
transactions provided for in the plan, and the contribution to the Home Federal
Foundation, Inc. ("Home Federal Foundation") of cash and stock. At the special
meeting, 1,546,356 votes, or 53.31% of the 2,900,217 total votes eligible to be
cast, were voted in favor of Home Federal's amended plan of reorganization and
stock issuance, and 1,529,857 votes, or 52.74% of the 2,900,217 total votes
eligible to be cast, were voted in favor of the contribution to the Home Federal
Foundation of cash and stock. Accordingly, the amended plan of reorganization
and stock issuance and the contribution to the Home Federal Foundation were
approved by more than the required majority of the total votes entitled to be
cast at the special meeting.
Home Federal Bancorp, Inc. ("Home Federal Bancorp") originally offered
up to 5,290,000 shares of common stock in the offering. Home Federal received
orders to purchase 23,044,032 shares of common stock, or 4.3 times the shares
initially offered, from eligible depositors of Home Federal, the Home Federal
Bancorp employee stock ownership plan and directors, officers and employees of
Home Federal. Eligible Account Holders subscribed for approximately 20,938,933
shares. The following table provides a breakdown of the orders received in the
subscription offering:
Dollar Average Percent
Shares Number Amount Shares of Total
Ordered of Orders of Orders Ordered Orders
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Eligible Account Holders (Category 1) 20,938,933 2,400 $ 209,389 8,725 90.87%
Employee Stock Ownership Plan (1)
(Category 2) ...................... 433,357 1 4,334 433,357 1.88
Supplemental Eligible Account Holders
(Category 3) ...................... 1,616,004 322 16,160 5,019 7.01
Other Members (Category 4)
55,738 80 557 697 0.24
------------ ------------ ------------ ------------ ------------
Total ........... 23,044,032 2,803 $ 230,440 8,221 100.00%
============ ============ ============ ============ ============
---------------------
(1) Reflects employee stock ownership plan orders for shares based on the
maximum, as adjusted, of the initial offering range.
1
In connection with the updated appraisal and increase in our offering
range, we returned all subscription funds received, with interest, to
subscribers on Tuesday, October 12, 2004, and canceled all withdrawal
authorizations for all persons who submitted accepted subscriptions for shares
of common stock in the subscription offering. At the same time, each of these
persons, AND ONLY THESE PERSONS, are again being given the opportunity to
subscribe for shares of common stock of Home Federal Bancorp. See "Amended
Offering Range and Resolicitation - Resolicitation Procedure."
Based upon the initial subscription levels, if all subscribers again
subscribed for the same dollar amounts originally ordered:
o Orders from Eligible Account Holders would be allocated shares
based upon the method set forth under "Home Federal's
Reorganization and Stock Offering - Subscription Offering and
Subscription Rights - Preference Category No. 1" of the
prospectus. Depending upon a person's qualifying deposits
relative to the person's order size, this could result in a
subscriber receiving all shares requested or a significant
cutback of the order.
o Orders from the employee stock ownership plan would be filled
completely.
o Orders from Supplemental Eligible Account Holders and Other
Members would NOT be filled and Other Members would receive NO
shares.
However, because we do not know what the new level of orders will be, the level
of oversubscription, if any, and what the qualifying deposits of subscribers
will be relative to order sizes, there is no way to predict how shares will be
allocated, if necessary, to subscribing Supplemental Eligible Account Holders.
AMENDED OFFERING RANGE AND RESOLICITATION
Amended Offering Range
As required by applicable regulations, upon conclusion of the
subscription offering, RP Financial submitted an updated appraisal of the pro
forma market value of the common stock to Home Federal and the Office of Thrift
Supervision. The updated appraisal dated October 1, 2004 sets forth an estimated
amended offering range of the common stock to be sold of $39.1 million at the
minimum and $52.9 million at the maximum, with a midpoint of $46.0 million. This
is a 15% increase from the midpoint valuation established by the appraisal
report dated May 21, 2004, which was set forth in the prospectus. The increased
valuation was based on the current demand for initial public offerings of
financial services companies and market demand for the common stock, as
reflected by the level of subscriptions received. In determining the
reasonableness and adequacy of RP Financial's updated appraisal, the Board of
Directors of Home Federal reviewed the methodology and the appropriateness of
the assumptions used by RP Financial. Copies of RP Financial's appraisal report
and updated appraisals are available for inspection at the main office of Home
Federal and are otherwise publicly available. See "Where You Can Find More
Information."
As a result of the increase in the pro forma market value of the common
stock as reflected in the updated appraisal, the Office of Thrift Supervision
has approved an increase in the offering range to a minimum of 3,910,000 shares
and a maximum of 5,290,000 shares. If we receive orders for common stock in
excess of 5,290,000 shares, the maximum of the amended offering range, the final
valuation of Home Federal may be increased by RP Financial up to $60.8 million,
in which case the maximum of the amended offering range may be adjusted by 15%,
and we may accept orders for up to 6,083,500 shares of common stock without an
additional resolicitation of subscribers or any right of order cancellation by
subscribers.
Subscribers should note that the change in the estimated pro forma
market value has an impact on the pro forma data presented in this prospectus
supplement when compared to the values presented in the prospectus. See
"Capitalization" and "Pro Forma Data" in this prospectus supplement for the
effect on the pro forma stockholders' equity, stockholders' equity per share,
net income per share, price to book value ratios and price to earnings ratios
resulting from the amended offering range. The following table also shows the
effect on certain of those relationships
2
when they are adjusted to reflect both for the increased number of shares
offered at the maximum of the offering range and the use of June 30, 2004
financial information as compared to the March 31, 2004 information in the
prospectus.
At or for the At or for the
six months nine months
ended ended Percentage
March 31, 2004 June 30, 2004 Change
--------------- --------------- ---------------
Pro forma price to earnings per share ......... 35.71x 30.00x (16.0)%
Offering price as a percent of pro forma equity
per share ................................... 151.98% 149.93% (1.4)%
The number of shares ultimately sold in the offering within the amended
offering range will depend upon market demand for the common stock as well as
market and financial conditions as of the conclusion of the resolicitation
period, and will affect the price to book value ratio, price to earnings ratio,
stockholders' equity per share and net income per share of the common stock.
Prospective investors should be aware that the increased valuation reflected in
the amended offering range may result in less favorable after-market price
performance of the common stock than might have occurred if the offering range
had not been increased.
RP Financial's updated appraisal is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
these shares. RP Financial did not independently verify the consolidated
financial statements and other information provided by Home Federal, nor did RP
Financial value independently the assets or liabilities of Home Federal. The
updated appraisal considers Home Federal as a going concern and should not be
considered as an indication of the liquidation value of Home Federal. Moreover,
because this updated appraisal is necessarily based upon estimates and
projections of a number of matters, all of which are subject to change from time
to time, no assurance can be given that persons purchasing common stock in the
offerings will thereafter be able to sell the shares at prices at or above the
purchase price or in the range of the updated appraisal described above.
Resolicitation Procedure
In view of the appraisal update and in accordance with regulatory
requirements, we have returned all funds received, with interest, on October 12,
2004 and canceled all withdrawal authorizations for all persons who submitted
accepted subscriptions for shares of common stock in the subscription offering.
At the same time, each of these persons, AND ONLY THESE PERSONS, are again being
given the opportunity to subscribe for shares of common stock of Home Federal
Bancorp.
In order to place a new order for shares of common stock, you must
complete and return the enclosed Supplemental Order Form to Home Federal,
accompanied by payment or a withdrawal authorization, so that it is received no
later than 12:00 Noon, Mountain time, on November 24, 2004. Failure to return a
Supplemental Order Form will result in your not receiving any shares of common
stock in this offering. As a result of this resolicitation offer, the number of
shares of common stock set forth under "Results of the Special Meeting of
Members and the Subscription Offering" which were subscribed for in the
subscription offering may change. If we do not receive orders for the minimum
number of shares in the updated offering range, we may extend the offering
period, accept additional orders in the community offering and/or conduct a
syndicated community offering as provided in the prospectus.
Any subscriber who requires an additional copy of the prospectus
previously provided by us may obtain one by contacting our stock information
center at (208) 468-5025. We will promptly process the request. Because the
resolicitation period ends on November 24, 2004, any subscriber who desires to
obtain a copy of the prospectus should request one promptly, and at least five
days before the resolicitation period ends.
3
Extension of Time Period to Complete the Stock Offering
Office of Thrift Supervision regulations provide that the sale of the
common stock must be completed within 45 days following the termination of the
subscription period, unless that period is extended by the Office of Thrift
Supervision. As a result of the need to return all subscription funds received,
and to resolicit all persons who previously subscribed for shares of common
stock in the subscription offering, the resolicitation will terminate at 12:00
Noon, Mountain time, on November 24, 2004 unless extended by Home Federal and
Home Federal Bancorp, with approval of the Office of Thrift Supervision, if
necessary. If the offering is not completed by December 16, 2004, either all
funds received will be returned with interest and withdrawal authorizations
canceled or, if the Office of Thrift Supervision has granted an extension of
this period, all subscribers will be given the right to continue their order for
the dollar amount of shares subscribed for, or to increase, decrease or rescind
their subscriptions. Any subscriber who requires an additional copy of the
prospectus previously provided by Home Federal Bancorp may obtain one by
contacting the stock information center at (208) 468-5025. Home Federal Bancorp
will promptly process the request. Because the resolicitation period ends on
November 24, 2004, any subscriber who desires to obtain a copy of the prospectus
should request one promptly, and at least five days before the resolicitation
period ends.
Subscription by the Employee Stock Ownership Plan
The amended plan of reorganization and stock issuance provides that the
employee stock ownership plan may subscribe for up to 3.28% of the common stock
to be issued in the reorganization. Based on the amended offering range, the
employee stock option plan intends to purchase 3.28% of the shares issued in the
reorganization, or $3.2 million, $4.3 million and $5.0 million of shares of
common stock at the minimum, maximum and maximum, as adjusted, of the amended
offering range, respectively.
Funding of Our Charitable Foundation
Home Federal Bancorp will fund the foundation with a contribution of
cash and stock equal in value to 3% of the shares sold in the offering. It is
intended that 80% of the foundation funding will be made by means of a stock
contribution and 20% of the foundation funding will be made by means of a cash
contribution. Accordingly, based on the minimum and maximum of the offering
range, respectively, a minimum of 93,800 shares to a maximum of 127,000 shares
will be contributed in stock and a minimum of $235,000 to a maximum of $317,000
will be contributed in cash. There are no plans by Home Federal Bancorp to
provide additional funding beyond this initial funding to the foundation over
the next three years.
Limitation on Common Stock Purchases
Even though the offering range has increased, each Eligible Account
Holder, Supplemental Eligible Account Holder and Other Member generally will
still be limited to subscribing for up to 25,000 shares or $250,000, and no
person together with his or her associates or groups of persons acting in
concert may purchase more than 1% of the offering, which is 60,835. See "Home
Federal's Reorganization and Stock Issuance - Limitations on Stock Purchases" in
the prospectus. In light of the level of subscriptions by Supplemental Eligible
Account Holders, no assurance can be given that shares of common stock will be
available for allocation to Other Member subscribers.
The minimum purchase is still 25 shares, or $250. Subscribers who pay
for shares of common stock by cash, check, bank draft or money order will again
earn interest at Home Federal's stated rate on regular statement savings
accounts from the date of receipt until the stock offering is completed or
terminated.
MARKET FOR THE COMMON STOCK
Home Federal Bancorp and Home Federal have never issued capital stock,
and, consequently, there is no established market for the common stock at this
time. Home Federal Bancorp has received conditional approval to have its common
stock listed on the Nasdaq National Market under the symbol "HOME." The
development of a
4
liquid public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of Home Federal Bancorp, Home
Federal or any market maker. Accordingly, the number of active buyers and
sellers of the common stock at any particular time may be limited. There can be
no assurance that purchasers will be able to sell their shares at or above the
purchase price of $10.00 per share.
HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING
Although the actual net proceeds from the sale of the shares of common
stock cannot be determined until the stock offering is completed, we presently
anticipate that the net proceeds from the sale of the shares of common stock
will be between $37.5 million at the minimum of the offering range and $51.1
million at the maximum of the offering range, and may be up to $59.0 million
assuming an increase in the estimated offering range by 15%. See "Pro Forma
Data" in this prospectus supplement as to the assumptions used to arrive at
these amounts.
We intend to use the net proceeds received from the stock offering as
follows:
Maximum,
Minimum Maximum as adjusted
------------ ------------ ------------
(In Thousands)
Gross proceeds ......................................... $ 39,100 $ 52,900 $ 60,835
Less:
Estimated underwriting commission .................. 443 614 712
Estimated other offering expenses .................. 1,143 1,143 1,143
------------ ------------ ------------
Estimated net proceeds ................................. 37,514 51,143 58,980
------------ ------------ ------------
Less:
Net proceeds to Home Federal ....................... 18,757 25,572 29,490
Loan to our employee stock ownership plan .......... 3,203 4,334 4,984
Cash contribution to the Home Federal Foundation 235 317 365
Funding of the restricted stock plan ............... 1,916 2,592 2,981
------------ ------------ ------------
Net cash proceeds retained by Home Federal Bancorp ..... $ 13,403 $ 18,329 $ 21,160
============ ============ ============
Home Federal Bancorp will retain 50% of the net stock offering proceeds
and will purchase all of the capital stock of Home Federal to be issued in the
reorganization in exchange for the remaining 50% of the net stock offering
proceeds. Home Federal Bancorp intends to use a portion of the net proceeds to
make a loan directly to the employee stock ownership plan to enable it to
purchase up to 3.28% of the aggregate shares of common stock issued in the
reorganization, or if shares are not available, in the open market after the
stock offering. Based upon the sale of 3,910,000 shares of common stock in the
offering at the minimum of the estimated offering range and the sale of
5,290,000 shares of common stock in the offering at the maximum of the estimated
offering range, the loan to the Home Federal Bancorp employee stock ownership
plan would be $3.2 million and $4.3 million, respectively. See "Management -
Benefits - Employee Stock Ownership Plan" in the prospectus.
Home Federal Bancorp will contribute to the Home Federal Foundation a
combination of cash and stock equal to 3% of the gross proceeds of the shares
sold in the offering. Eighty percent of the total contribution will be made in
stock and 20% will be made in cash. In addition, Home Federal Bancorp intends to
adopt a restricted stock plan, subject to stockholder approval, and will use a
portion of its proceeds to fund the purchase of shares in the open market for
the plan. The restricted stock plan intends to purchase 1.96% of the aggregate
shares issued in the reorganization, or $1.9 million and $2.6 million at the
minimum and maximum of the estimated offering range, respectively, assuming a
$10.00 per share purchase price.
The remaining net proceeds retained by Home Federal Bancorp initially
may be used to invest in mortgage-backed or other securities, U.S. Government
and federal agency securities of various maturities, deposits
5
in either Home Federal or other financial institutions, or a combination
thereof. The net proceeds may ultimately be used:
o to support the growth in Home Federal's core retail business
activities within its geographical market;
o to provide funding for Home Federal's lending activities;
o to support the future expansion of operations through the
establishment or acquisition of additional banking offices or
other customer facilities;
o to acquire other financial service providers, although no
acquisitions are specifically being considered at this time;
o to diversify Home Federal's activities as opportunities become
available;
o for other business and investment purposes, including the
payment of regular or special cash dividends, possible
repurchases of the common stock or returns of capital,
although we have no current plans to declare or pay any return
of capital on the common stock; or
o for general corporate purposes.
Following the completion of the stock offering, to the extent permitted
by the Office of Thrift Supervision and based upon then existing facts and
circumstances, Home Federal Bancorp's Board of Directors may determine to
repurchase shares of common stock, subject to any applicable statutory and
regulatory requirements. Facts and circumstances which may lead us to repurchase
shares include but are not limited to:
o market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of
the rate of return and risk involved in the investment, the
ability to increase the book value and/or earnings per share
of the remaining outstanding shares, and an improvement in
Home Federal Bancorp's return on equity;
o the avoidance of dilution to stockholders by not having to
issue additional shares to cover the exercise of stock options
or to fund employee stock benefit plans; and
o any other circumstances in which repurchases would be in the
best interests of Home Federal Bancorp and its stockholders.
Any stock repurchases will be subject to the determination of our Board
of Directors that Home Federal will be capitalized in excess of all applicable
regulatory requirements after any repurchases.
The portion of the net proceeds used by Home Federal Bancorp to
purchase the capital stock of Home Federal will be added to Home Federal's
general funds to be used for general corporate purposes, including increased
lending and investment activities. While the amount of net proceeds received by
Home Federal will further strengthen Home Federal's capital position, its
capital position already exceeds all regulatory requirements. After the stock
offering, based upon the maximum of the estimated offering range, Home Federal's
tangible capital ratio will be approximately 11.4%. As a result, Home Federal
will continue to be a well-capitalized institution.
The net proceeds may vary because total expenses of the stock offering
may be more or less than those estimated. The net proceeds will also vary if the
number of shares to be sold in the stock offering is adjusted to reflect a
change in the estimated pro forma market value of Home Federal. Payments for
shares made through withdrawals from existing deposit accounts at Home Federal
will not result in the receipt of new funds for investment by Home Federal but
will result in a reduction of Home Federal's interest expense and liabilities as
funds are transferred from interest-bearing certificates or other deposit
accounts.
6
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of our common
stock until the stock offering is completed. However, we estimate that net
proceeds will be between $37.5 million and $51.1 million, or $59.0 million if
the estimated offering range is increased by 15%, based upon the following
assumptions:
o all shares of common stock will be sold through
non-transferable rights to subscribe for the common stock, in
order of priority, to:
o eligible account holders, who are depositors of Home
Federal with account balances of at least $50 as of
the close of business on December 31, 2002;
o the proposed employee stock ownership plan, which
will purchase 3.28% of the shares of common stock
issued in the reorganization;
o supplemental eligible account holders, who are
depositors of Home Federal with account balances of
at least $50 as of the close of business on June 30,
2004; and
o other members, who are depositors of Home Federal as
of the close of business on July 31, 2004 and
borrowers as of March 16, 2004 whose loans continue
to be outstanding as of July 31, 2004.
o Keefe, Bruyette & Woods will receive a success fee equal to
1.35% of the gross proceeds from the offering, excluding
shares of common stock sold to directors, officers, employees
and the employee stock ownership plan, and shares contributed
to the charitable foundation; and
o total expenses, excluding the success fee paid to Keefe,
Bruyette & Woods, are estimated to be approximately
$1,143,000, although actual expenses may vary from those
estimated.
Pro forma consolidated net income and stockholders' equity of Home
Federal Bancorp have been calculated for the year ended September 30, 2003 and
the nine months ended June 30, 2004 as if the common stock to be sold in the
stock offering had been sold at the beginning of the period and the net proceeds
had been invested at 1.15% and 2.09%, respectively, which represents the yield
on one-year U.S. Government securities at September 30, 2003 and June 30, 2004,
respectively. This rate is used because we believe it reflects the yield that we
will receive on the net proceeds of the stock offering, which is an acceptable
alternative to the average method. The effect of withdrawals from deposit
accounts for the purchase of common stock has not been reflected. A tax rate of
39.1% has been assumed for the periods resulting in after-tax yields of 0.70%
and 1.27% for the year ended September 30, 2003 and the nine months ended June
30, 2004, respectively. Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares of common stock, as adjusted to give effect to the shares purchased by
the employee stock ownership plan. See Note 2 to the following tables. As
discussed under "How We Intend to Use the Proceeds from this Offering," Home
Federal Bancorp intends to retain 50% of the net proceeds from the stock
offering from which it will make a loan to fund the purchase of 3.28% of the
common stock issued in the reorganization by the employee stock ownership plan.
No effect has been given in the tables to the issuance of additional
shares of common stock pursuant to the proposed stock option plan. The table
below gives effect to the restricted stock plan, which is expected to be adopted
by Home Federal Bancorp following the stock offering and presented along with
the stock option plan to stockholders for approval at an annual or special
meeting of stockholders to be held at least six months following the completion
of the stock offering. If the restricted stock plan is approved by stockholders,
the restricted stock plan intends to acquire an amount of common stock equal to
1.96% of the shares of common stock issued in the reorganization, either through
open market purchases or from authorized but unissued shares of common stock, if
permissible. The following tables assume that stockholder approval has been
obtained, as to which there can be no assurance, and that the shares acquired by
the restricted stock plan are purchased in the open market at $10.00 per share.
No effect has been given to Home Federal Bancorp's results of operations after
the stock offering, the market price of the common stock after the offering or a
less than 1.96% purchase by the restricted stock plan.
7
The pro forma stockholders' equity is not intended to represent the
fair market value of the common stock and may be different than amounts that
would be available for distribution to stockholders in the event of liquidation.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of Home Federal Bancorp
computed in accordance with generally accepted accounting principles ("GAAP").
At or For the Nine Months Ended June 30, 2004
---------------------------------------------------------
3,910,000 4,600,000 5,290,000 6,083,500
Shares Sold Shares Sold Shares Sold Shares Sold at
at $10.00 at $10.00 at $10.00 $10.00 Per Share
Per Share Per Share Per Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted)(1)
------------ ------------ ------------ ------------
(Dollars in Thousands)
Gross proceeds ..................................... $ 39,100 $ 46,000 $ 52,900 $ 60,835
Plus shares issued to the Home
Federal Foundation ............................... 938 1,104 1,270 1,460
------------ ------------ ------------ ------------
Pro forma market capitalization .................... $ 40,038 $ 47,104 $ 54,170 $ 62,295
============ ============ ============ ============
Gross proceeds ..................................... $ 39,100 $ 46,000 $ 52,900 $ 60,835
Less: Offering expenses and commissions ............ 1,586 1,672 1,757 1,855
------------ ------------ ------------ ------------
Estimated net stock offering proceeds .............. 37,514 44,328 51,143 58,980
Less: Cash contribution to the Home
Federal Foundation ......................... 235 276 317 365
Shares purchased by the employee
stock ownership plan (2) ................... (3,203) (3,768) (4,334) (4,984)
Shares purchased by the restricted
stock plan (3) ............................. (1,916) (2,254) (2,592) (2,981)
------------ ------------ ------------ ------------
Net investable proceeds (4) ...................... $ 32,160 $ 38,030 $ 43,900 $ 50,650
============ ============ ============ ============
Net income:
Historical ................................... $ 3,271 $ 3,271 $ 3,271 $ 3,271
Pro forma income on net proceeds ............. 307 363 419 483
Pro forma employee stock
ownership plan adjustment (2) .............. (146) (172) (198) (228)
Pro forma restricted stock
plan adjustment (3) ........................ (175) (206) (237) (272)
------------ ------------ ------------ ------------
Pro forma net income ......................... $ 3,257 $ 3,256 $ 3,255 $ 3,254
============ ============ ============ ============
Net income per share:
Historical ................................... $ 0.35 $ 0.29 $ 0.26 $ 0.22
Pro forma income on net
proceeds, as adjusted ...................... 0.03 0.03 0.03 0.03
Pro forma employee stock
ownership plan adjustment (3) .............. (0.02) (0.02) (0.02) (0.02)
Pro forma restricted stock plan adjustment (5) (0.02) (0.02) (0.02) (0.02)
------------ ------------ ------------ ------------
Pro forma net income per share (3)(5)(6) ..... $ 0.34 $ 0.28 $ 0.25 $ 0.21
============ ============ ============ ============
Offering price as a multiple of pro forma
net annualized earnings per share ................ 22.06x 26.79x 30.00x 35.71x
(table continued on following page)
(Footnotes on page 12)
8
At or For the Nine Months Ended June 30, 2004
---------------------------------------------------------
3,910,000 4,600,000 5,290,000 6,083,500
Shares Sold Shares Sold Shares Sold Shares Sold at
at $10.00 at $10.00 at $10.00 $10.00 Per Share
Per Share Per Share Per Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted)(1)
------------ ------------ ------------ ------------
(Dollars in Thousands)
Stockholders' equity:
Historical ................................... $ 43,676 $ 43,676 $ 43,676 $ 43,676
Estimated net proceeds ....................... 37,514 44,328 51,143 58,980
Less: Capitalization of Home Federal MHC ..... (50) (50) (50) (50)
Plus: Stock issued to the Home
Federal Foundation .................... 938 1,104 1,270 1,460
Less: Stock contribution to the Home
Federal Foundation .................... (938) (1,104) (1,270) (1,460)
Less: Cash contribution to the Home
Federal Foundation .................... (235) (276) (317) (365)
Plus: Tax benefit of the contribution to
the Home Federal Foundation ........... 459 540 621 714
Less: Common stock acquired by the
employee stock ownership plan (2) ..... (3,203) (3,768) (4,334) (4,984)
Less: Common stock to be acquired
by the restricted stock plan (3) ...... (1,916) (2,254) (2,592) (2,981)
------------ ------------ ------------ ------------
Pro forma stockholders' equity (2)(3)(7) ..... $ 76,245 $ 82,196 $ 88,147 $ 94,990
============ ============ ============ ============
Stockholders' equity per share:
Historical ................................... $ 4.47 $ 3.80 $ 3.30 $ 2.87
Estimated net proceeds ....................... 3.84 3.85 3.87 3.88
Less: Capitalization of Home Federal MHC (0.01) -- -- --
Plus: Stock issued to the Home
Federal Foundation .................... 0.10 0.10 0.10 0.10
Less: Stock contribution to the Home
Federal Foundation .................... (0.10) (0.10) (0.10) (0.10)
Less: Cash contribution to the Home
Federal Foundation .................... (0.02) (0.02) (0.02) (0.02)
Plus: Tax benefit of the contribution to
the Home Federal Foundation ........... 0.05 0.05 0.05 0.05
Less: Common stock acquired by the
employee stock ownership plan (2)...... (0.33) (0.33) (0.33) (0.33)
Less: Common stock to be acquired
by the restricted stock plan (3)....... (0.20) (0.20) (0.20) (0.20)
------------ ------------ ------------ ------------
Pro forma stockholders' equity per
share (3)(5)(6)(7) ......................... $ 7.80 $ 7.15 $ 6.67 $ 6.25
============ ============ ============ ============
Offering price as a percentage of pro
forma stockholders' equity (5).................... 128.21% 139.86% 149.93% 160.00%
(Footnotes on page 12)
9
At or For the Year Ended September 30, 2003
---------------------------------------------------------
3,910,000 4,600,000 5,290,000 6,083,500
Shares Sold Shares Sold Shares Sold Shares Sold at
at $10.00 at $10.00 at $10.00 $10.00 Per Share
Per Share Per Share Per Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted)(1)
------------ ------------ ------------ ------------
(Dollars in Thousands)
Gross proceeds ..................................... $ 39,100 $ 46,000 $ 52,900 $ 60,835
Plus shares issued to the Home
Federal Foundation ............................... 938 1,104 1,270 1,460
------------ ------------ ------------ ------------
Pro forma market capitalization .................... $ 40,038 $ 47,104 $ 54,170 $ 62,295
============ ============ ============ ============
Gross proceeds ..................................... $ 39,100 $ 46,000 $ 52,900 $ 60,835
Less: Offering expenses and commissions ............ 1,586 1,672 1,757 1,855
------------ ------------ ------------ ------------
Estimated net stock offering proceeds .............. 37,514 44,328 51,143 58,980
Less: Cash contribution to the Home
Federal Foundation ......................... (235) (276) (317) (365)
Shares purchased by the employee
stock ownership plan (2) ................... (3,203) (3,768) (4,334) (4,984)
Shares purchased by the restricted
stock plan (3) ............................. (1,916) (2,254) (2,592) (2,981)
------------ ------------ ------------ ------------
Net investable proceeds (4) ...................... $ 32,160 $ 38,030 $ 43,900 $ 50,650
============ ============ ============ ============
Net income:
Historical ................................... $ 5,456 $ 5,456 $ 5,456 $ 5,456
Pro forma income on net proceeds ............. 225 266 307 354
Pro forma employee stock
ownership plan adjustment (2) .............. (195) (229) (264) (304)
Pro forma restricted stock
plan adjustment (3) ........................ (233) (275) (316) (363)
------------ ------------ ------------ ------------
Pro forma net income ......................... $ 5,253 $ 5,218 $ 5,183 $ 5,143
============ ============ ============ ============
Net income per share:
Historical ................................... $ 0.56 $ 0.47 $ 0.41 $ 0.36
Pro forma income on net
proceeds, as adjusted ...................... 0.02 0.02 0.02 0.02
Pro forma employee stock
ownership plan adjustment (3) .............. (0.02) (0.02) (0.02) (0.02)
Pro forma restricted stock plan adjustment (5) (0.02) (0.02) (0.02) (0.02)
------------ ------------ ------------ ------------
Pro forma net income per share (3)(5)(6) ..... $ 0.54 $ 0.45 $ 0.39 $ 0.34
============ ============ ============ ============
Offering price as a multiple of pro forma
net annualized earnings per share ................ 18.52x 22.22x 25.64x 29.41x
(table continued on following page)
(Footnotes on page 12)
10
At or For the Year Ended September 30, 2003
---------------------------------------------------------
3,910,000 4,600,000 5,290,000 6,083,500
Shares Sold Shares Sold Shares Sold Shares Sold at
at $10.00 at $10.00 at $10.00 $10.00 Per Share
Per Share Per Share Per Share (Maximum of
(Minimum (Midpoint (Maximum Range, as
of Range) of Range) of Range) Adjusted)(1)
------------ ------------ ------------ ------------
(Dollars in Thousands)
Stockholders' equity:
Historical .................................... $ 40,399 $ 40,399 $ 40,399 $ 40,399
Estimated net proceeds ........................ 37,514 44,328 51,143 58,980
Less: Capitalization of Home Federal MHC ...... (50) (50) (50) (50)
Plus: Stock issued to the Home
Federal Foundation ..................... 938 1,104 1,270 1,460
Less: Stock contribution to the Home
Federal Foundation ..................... (938) (1,104) (1,270) (1,460)
Less: Cash contribution to the Home
Federal Foundation ..................... (235) (276) (317) (365)
Plus: Tax benefit of the contribution to
the Home Federal Foundation ............ 459 540 621 714
Less: Common stock acquired by the
employee stock ownership plan (2) ...... (3,203) (3,768) (4,334) (4,984)
Less: Common stock to be acquired
by the restricted stock plan (3) ....... (1,916) (2,254) (2,592) (2,981)
------------ ------------ ------------ ------------
Pro forma stockholders' equity (2)(3)(7) ...... $ 72,968 $ 78,919 $ 84,870 $ 91,713
============ ============ ============ ============
Stockholders' equity per share:
Historical .................................... $ 4.13 $ 3.51 $ 3.05 $ 2.66
Estimated net proceeds ........................ 3.84 3.85 3.87 3.88
Less: Capitalization of Home Federal MHC ...... (0.01) -- -- --
Plus: Stock issued to the Home
Federal Foundation ..................... 0.10 0.10 0.10 0.10
Less: Stock contribution to the Home
Federal Foundation ..................... (0.10) (0.10) (0.10) (0.10)
Less: Cash contribution to the Home
Federal Foundation ..................... (0.02) (0.02) (0.02) (0.02)
Plus: Tax benefit of the contribution to
the Home Federal Foundation ............ 0.05 0.05 0.05 0.05
Less: Common stock acquired by the
employee stock ownership plan (2) ...... (0.33) (0.33) (0.33) (0.33)
Less: Common stock to be acquired
by the restricted stock plan (3) ...... (0.20) (0.20) (0.20) (0.20)
------------ ------------ ------------ ------------
Pro forma stockholders' equity per
share (3)(5)(6)(7) .......................... $ 7.46 $ 6.86 $ 6.42 $ 6.04
============ ============ ============ ============
Offering price as a percentage of pro
forma stockholders' equity (5) .................... 134.05% 145.77% 155.76% 165.56%
(Footnotes on page 12)
11
--------------------
(1) As adjusted to give effect to an increase in the number of shares which
could be offered due to an increase in the estimated offering range of up
to 15% to reflect changes in market and financial conditions following the
commencement of the stock offering.
(2) It is assumed that 3.28% of the shares of common stock issued in the
reorganization will be purchased by the employee stock ownership plan with
funds loaned by Home Federal Bancorp. Home Federal intends to make annual
contributions to the employee stock ownership plan in an amount at least
equal to the principal and interest requirement of the debt. The pro forma
net earnings assumes (1) that the loan to the employee stock ownership plan
is payable over ten years, with the employee stock ownership plan shares
having an average fair value of $10.00 per share in accordance with
Statement of Position 93-6 of the American Institute of Certified Public
Accounting, entitled "Employers' Accounting for Employee Stock Ownership
Plans," and (2) the effective tax rate was 39.1% for the period. See
"Management - Benefits - Employee Stock Ownership Plan" in the prospectus.
(3) Gives effect to the restricted stock plan we expect to adopt following the
offering for the benefit of directors, officers and employees. This plan
intends to acquire, following stockholder approval of the plan, a number of
shares of common stock equal to 1.96% of the shares of common stock issued
in the reorganization or 191,590, 225,400, 259,210 and 298,092 shares of
common stock at the minimum, midpoint, maximum and adjusted maximum of the
estimated offering range, respectively. Funds used by the restricted stock
plan to purchase the shares initially will be contributed by Home Federal
Bancorp. It is further assumed that the shares were acquired by the
restricted stock plan at the beginning of the period presented in open
market purchases at 10% and 20% of the amount contributed, net of taxes,
was an amortized expense during the nine months ended June 30, 2004 and the
year ended September 30, 2003, respectively. The issuance of authorized but
unissued shares of common stock pursuant to the restricted stock plan in
the amount of 1.96% of the common stock issued in the reorganization would
dilute the voting interests of existing stockholders by approximately 1.9%
and under such circumstances, pro forma net earnings per share would be
$0.33, $0.28, $0.24 and $0.21, and $0.54, $0.46, $0.40 and $0.34 at the
minimum, midpoint, maximum and 15% above the maximum of the estimated
offering range for the nine months ended June 30, 2004 and for the year
ended September 30, 2003, respectively, and pro forma stockholders' equity
per share would be $7.85, $7.21, $6.75 and $6.34, and $7.52, $6.94, $6.51
and $6.13 at the minimum, midpoint, maximum and 15% above the maximum of
such range for the nine months ended June 30, 2004 and the year ended
September 30, 2003, respectively. There can be no assurance that the actual
purchase price of shares purchased by or issued to the restricted stock
plan will be $10.00 per share. See "Management - Benefits - Other Stock
Benefit Plans" in the prospectus.
(4) Estimated proceeds available for investment consists of the estimated net
proceeds from the stock offering less (1) the proceeds attributable to the
purchase by the employee stock ownership plan, (2) the contribution to the
charitable foundation and (3) the value of the shares to be purchased by
the restricted stock plan, subject to stockholder approval, after the
offering at an assumed purchase price of $10.00 per share.
(5) The per share calculations are determined by adding the number of shares
issued in the reorganization and for purposes of calculating net income per
share, in accordance with Statement of Position 93-6, subtracting 296,284
shares, 348,570 shares, 400,855 shares and 460,983 shares; and 288,276
shares, 339,149 shares, 390,021 shares and 448,524 shares at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
representing the employee stock ownership plan shares which have not been
committed for release during the nine months ended June 30, 2004 and the
year ended September 30, 2003, respectively. For purposes of calculating
pro forma stockholders' equity per share, it is assumed that shares
outstanding total 9,775,000 shares at the minimum of the estimated pro
forma market value of Home Federal on a fully converted basis, of the
estimated valuation range, 11,500,000 shares at the midpoint of the range,
13,225,000 shares at the maximum of the range and 15,208,750 shares at 15%
above the maximum of the range.
(6) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which will be adopted by Home
Federal Bancorp following the stock offering and presented for approval by
stockholders at an annual or special meeting of stockholders of Home
Federal Bancorp held at
(footnotes continue on following page)
12
least six months following the completion of the offering. If the stock
option plan is approved by a majority of the total votes eligible to be
cast at a duly called meeting by stockholders (other than Home Federal
MHC), an amount equal to 4.90% the common stock issued in the
reorganization, or 478,975 shares at the minimum of the estimated offering
range, 563,500 shares at the midpoint of the range, 648,025 shares at the
maximum of the range and 745,229 shares at 15% above the maximum of the
range will be reserved for future issuance upon the exercise of options to
be granted under the stock option plan. The issuance of common stock
pursuant to the exercise of options under the stock option plan will result
in the dilution of existing stockholders' voting interests by approximately
4.7%. Assuming approval of the stock option plan by a majority of the total
votes eligible to be cast at a duly called meeting by stockholders (other
than Home Federal MHC), that all these options were exercised at the
beginning of the period at an exercise price of $10.00 per share and that
the shares to fund the restricted stock plan are acquired through open
market purchases at a purchase price of $10.00 per share, pro forma net
earnings per share would be $0.33, $0.28, $0.25 and $0.22, and $0.53,
$0.45, $0.39 and $0.34 at the minimum, midpoint, maximum and 15% above the
maximum of the estimated offering range for the nine months ended June 30,
2004 and the year ended September 30, 2003, respectively, and pro forma
stockholders' equity per share would be $7.94, $7.33, $6.88 and $6.49, and
$7.63, $7.07, $6.65 and $6.29 at the minimum, midpoint, maximum and 15%
above the maximum of the range at June 30, 2004 and at September 30, 2003,
respectively. See "Management - Benefits - Other Stock Benefit Plans" in
the prospectus. (7) Pro forma stockholders' equity and pro forma
stockholders' equity per share do not give effect to the bad debt reserves
established by Home Federal for federal income tax purposes in the event of
liquidation.
13
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT CHARITABLE FOUNDATION
As reflected in the table below, if the charitable foundation was not
established and funded as part of the reorganization, RP Financial has estimated
that the pro forma valuation of Home Federal Bancorp would be greater, and as a
result, a greater number of shares of common stock would be sold in the
offering. At the minimum, midpoint and maximum of the valuation range, the pro
forma valuation of Home Federal Bancorp equaled $97.8 million, $115.0 million
and $132.3 million, as compared to $99.5 million, $117.0 million and $134.6
million, respectively, without the foundation. There is no assurance that if the
foundation were not formed, the appraisal prepared at that time would have
concluded that the pro forma market value of Home Federal Bancorp would be the
same as that estimated here. Any appraisal prepared at that time would be based
on the facts and circumstances existing at that time, including, among other
things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
adjusted maximum of the estimated valuation range, assuming the reorganization
was completed at June 30, 2004, with and without the foundation. The valuation
amounts referred to in the table below relate to the value of the shares sold to
members of Home Federal and the public, excluding shares issued to Home Federal
MHC.
At the Maximum,
At the Minimum At the Midpoint At the Maximum As-Adjusted-
---------------------- ---------------------- ---------------------- -----------------------
With No With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
(Dollars in Thousands)
Estimated offering amount ........ $ 39,100 $ 40,735 $ 46,000 $ 47,923 $ 52,900 $ 55,112 $ 60,835 $ 63,378
Pro forma market capitalization .. 40,038 40,735 47,104 47,923 54,170 55,112 62,295 63,378
Estimated full value ............. 97,750 99,450 115,000 117,000 132,250 134,550 152,088 154,733
Total assets ..................... 551,820 553,121 557,770 559,300 563,721 565,481 570,565 572,587
Total liabilities ................ 475,575 475,575 475,575 475,575 475,575 475,575 475,575 475,575
Pro forma stockholders' equity ... 76,245 77,546 82,195 83,725 88,146 89,906 94,990 97,012
Pro forma consolidated
net income ..................... 3,257 3,267 3,256 3,269 3,255 3,270 3,254 3,271
Pro forma stockholders'
equity per share ............... 7.80 7.78 7.15 7.15 6.67 6.68 6.25 6.26
Pro forma consolidated net
income per share ............... 0.34 0.33 0.28 0.28 0.25 0.24 0.21 0.21
Pro forma pricing ratios:
Offering price as a percentage
of pro forma stockholders'
equity per share .............. 128.21% 128.53% 139.86% 139.86% 149.93% 149.70% 160.00% 159.74%
Offering price to pro forma
net income per share .......... 22.06 22.73 26.79 26.79 30.00 31.25 35.71 35.71
Pro forma financial ratios:
Return on assets (annualized) ... 0.79% 0.79% 0.78% 0.78% 0.77% 0.77% 0.76% 0.76%
Return on stockholders' equity
(annualized) .................. 5.70% 5.62% 5.28% 5.21% 4.92% 4.85% 4.57% 4.50%
Stockholders' equity to assets .. 13.82% 14.02% 14.74% 14.97% 15.64% 15.90% 16.65% 16.94%
14
CAPITALIZATION
The following table presents the capitalization of Home Federal at June
30, 2004, and the pro forma consolidated capitalization of Home Federal Bancorp
after giving effect to the reorganization and stock offering, including the
issuance of shares to the charitable foundation and excluding assumed earnings
on the net proceeds, based upon the sale of the number of shares shown below and
the other assumptions set forth under "Pro Forma Data."
Home Federal Bancorp - Pro Forma
Based Upon Sale at $10.00 Per Share
---------------------------------------------------------
Home Federal 6,083,500
Capitalization 3,910,000 4,600,000 5,290,000 Shares (1)
At Shares Shares Shares (Maximum of
June 30, (Minimum (Midpoint (Maximum Range, as
2004 of Range) of Range) of Range) Adjusted)
------------ ------------ ------------ ------------ ------------
(In Thousands)
Deposits (2) .......................... $ 333,522 $ 333,522 $ 333,522 $ 333,522 $ 333,522
Borrowings ............................ 131,756 131,756 131,756 131,756 131,756
------------ ------------ ------------ ------------ ------------
Total deposits and borrowings ......... $ 465,278 $ 465,278 $ 465,278 $ 465,278 $ 465,278
============ ============ ============ ============ ============
Stockholders' equity
Preferred stock, $.01 par value per
share, 5,000,000 shares authorized,
none issued ........................ $ -- $ -- $ -- $ -- $ --
Common stock, $.01 par value per
share, 50,000,000 shares authorized,
shares to be issued as reflected ... -- 98 115 132 152
Additional paid-in capital (3) ....... -- 38,355 45,317 52,280 60,288
Retained earnings (4) ................ 43,686 43,636 43,636 43,636 43,636
Net unrealized gain (loss) ........... (10) (10) (10) (10) (10)
Less:
Contribution to the Home Federal
Foundation ......................... -- (1,173) (1,380) (1,587) (1,825)
Common stock to be acquired by the
employee stock ownership plan (5) .. -- (3,203) (3,768) (4,334) (4,984)
Common stock to be acquired by the
restricted stock plan (6) .......... -- (1,916) (2,254) (2,592) (2,981)
Plus:
Tax benefit of contribution to the
Home Federal Foundation (7) ........ -- 459 540 621 714
------------ ------------ ------------ ------------ ------------
Total stockholders' equity ............ $ 43,676 $ 76,246 $ 82,196 $ 88,146 $ 94,990
============ ============ ============ ============ ============
Equity-to-assets ratio (8) ............ 8.41% 13.82% 14.74% 15.64% 16.65%
--------------------
(1) As adjusted to give effect to an increase in the number of shares which
could be offered due to an increase in the estimated offering range of up
to 15% to reflect changes in market and financial conditions following the
commencement of the stock offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the stock offering. Any withdrawals would reduce pro forma
deposits by the amount of the withdrawals.
(footnotes continue on following page)
15
(3) Reflects the issuance of the shares of common stock to be sold in the
offering, less the offering expenses and commission. No effect has been
given to the issuance of additional shares of common stock pursuant to the
proposed stock option plan. Shares of Home Federal Bancorp's common stock
assumed sold in the offering at the minimum, midpoint, maximum and maximum,
as adjusted, of the offering range were 3,910,000, 4,600,000, 5,290,000 and
6,083,500, respectively. See "Pro Forma Data" contained in this prospectus
supplement.
(4) Retained earnings are substantially restricted by applicable regulatory
capital requirements.
(5) Assumes that 3.28% of the common stock issued in the reorganization will be
purchased by the employee stock ownership plan, which is reflected as a
reduction of stockholders' equity. The employee stock ownership plan shares
will be purchased with funds loaned to the plan by Home Federal Bancorp.
See "Pro Forma Data" contained in this prospectus supplement.
(6) Home Federal Bancorp intends to adopt a restricted stock plan and to submit
the plan to stockholders at an annual or special meeting of stockholders
held at least six months following the completion of the stock offering. If
the plan is approved by a majority of the total votes eligible to be cast
at a duly called meeting by stockholders (other than Home Federal MHC),
Home Federal Bancorp intends to contribute sufficient funds to the
restricted stock plan to enable the plan to purchase a number of shares of
common stock equal to 1.96% of the common stock issued in the
reorganization. This assumes that stockholder approval has been obtained
and that the shares have been purchased in the open market at a purchase
price of $10.00 per share. However, if Home Federal Bancorp issues
authorized but unissued shares of common stock to the restricted stock plan
in the amount of 1.96% of the common stock issued in the reorganization,
the voting interests of existing stockholders would be diluted
approximately 1.9%. The shares are reflected as a compensation expense
resulting in a reduction of stockholders' equity. See "Pro Forma Data"
contained in this prospectus supplement.
(7) Assumes that the one-time expense for establishing the foundation will
create a tax benefit at a 39.1% tax rate. In order to fully realize this
net deferred tax asset, Home Federal Bancorp will need to generate
sufficient future taxable income. While management has projected future
income to utilize the credit, there can be no assurances that such levels
of taxable income will be generated. See "Home Federal Foundation"
contained in the prospectus.
(8) Total equity divided by total assets.
HOME FEDERAL
EXCEEDS ALL REGULATORY CAPITAL REQUIREMENTS
At June 30, 2004, Home Federal exceeded all of its applicable
regulatory capital requirements. The table on the following page sets forth the
regulatory capital of Home Federal at June 30, 2004 and the pro forma regulatory
capital of Home Federal after giving effect to the reorganization and stock
offering, based upon the sale of the number of shares shown in the table. The
pro forma regulatory capital amounts reflect the receipt by Home Federal of 50%
of the net stock proceeds, after expenses. The pro forma risk-based capital
amounts assume the investment of the net proceeds received by Home Federal in
assets that have a risk-weight of 20% under applicable regulations, as if such
net proceeds had been received and so applied at June 30, 2004.
16
Pro Forma at June 30, 2004
-----------------------------------------------------------------------------
3,910,000 Shares 4,600,000 Shares 5,290,000 Shares 6,083,500 Shares
At Sold at Sold at Sold at Sold at
June 30, 2004 $10.00 per Share $10.00 per Share $10.00 per Share $10.00 per Share
---------------- ----------------- ----------------- ---------------- ---------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(1) Amount Assets Amount Assets Amount Assets Amount Assets
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Equity capital under GAAP...... $43,676 8.41% $57,314 10.65% $59,818 11.05% $62,322 11.44% $65,201 11.88%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Tier 1 risk-based capital...... $43,356 13.59% $56,994 17.65% $59,498 18.39% $62,002 19.12% $64,881 19.96%
Requirement................ 12,763 4.00 12,916 4.00 12,941 4.00 12,971 4.00 13,002 4.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Excess..................... $30,593 9.59% $44,078 13.65% $46,557 14.39% $49,031 15.12% $51,879 15.96%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Tier 1 (core) capital.......... $43,356 8.35% $56,994 10.59% $59,498 10.98% $62,002 11.37% $64,881 11.82%
Requirement................ 20,782 4.00 21,527 4.00 21,675 4.00 21,812 4.00 21,956 4.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Excess..................... $22,574 4.35% $35,467 6.59% $37,823 6.98% $40,190 7.37% $42,925 7.82%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Risk-based capital............. $45,860 14.37% $59,498 18.43% $62,002 19.17% $64,506 19.90% $67,385 20.74%
Risk-based requirement..... 25,526 8.00 25,833 8.00 25,883 8.00 25,942 8.00 26,004 8.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Excess..................... $20,334 6.37% $33,665 10.43% $36,119 11.17% $38,564 11.90% $41,381 12.74%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Reconciliation of capital
infused into Home Federal:
Net proceeds infused........... $18,757 $22,164 $25,572 $29,490
Less:
Common stock acquired by
employee stock ownership plan (3,203) (3,768) (4,334) (4,984)
Common stock acquired by
restricted stock plan....... (1,916) (2,254) (2,592) (2,981)
------- ------- ------- -------
Pro forma increase in GAAP and
regulatory capital........... $13,638 $16,142 $18,646 $21,525
======= ======= ======= =======
--------------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
17
PROPOSED PURCHASES BY MANAGEMENT
The following table sets forth, for each of Home Federal's directors
and executive officers and for all of the directors and executive officers as a
group, the proposed purchases of common stock, assuming sufficient shares are
available to satisfy their subscriptions. The amounts include shares that may be
purchased through individual retirement accounts and by associates. These
purchases are intended for investment purposes only, and not for resale.
Directors, officers, their associates and employees will pay the same price as
all other subscribers for the shares for which they subscribe.
At the Minimum of the At the Maximum of
Estimated Offering Range Estimated Offering Range
------------------------ ------------------------
As a Percent As a Percent
Number of Shares Number of Shares
Name Amount of Shares Offered of-Shares Offered
-------------------------------------- ---------- ---------- ---------- ---------- ----------
Directors:
----------
Daniel L. Stevens (1)................. $ 500,000 50,000 1.28% 50,000 0.95%
Fred H. Helpenstell, M.D. ............ 300,000 30,000 0.77 30,000 0.57
Thomas W. Malson...................... 250,000 25,000 0.64 25,000 0.47
N. Charles Hedemark................... 250,000 25,000 0.64 25,000 0.47
Richard J. Schrandt................... 250,000 25,000 0.64 25,000 0.47
James R. Stamey....................... 100,000 10,000 0.26 10,000 0.19
Robert A. Tinstman.................... 250,000 25,000 0.64 25,000 0.47
Executive Officers:
-------------------
Robert A. Schoelkoph.................. 200,000 20,000 0.51 20,000 0.38
Roger D. Eisenbarth................... 200,000 20,000 0.51 20,000 0.38
Lynn A. Sander........................ 250,000 25,000 0.64 25,000 0.47
Denis J. Trom......................... 250,000 25,000 0.64 25,000 0.47
Karen Wardwell........................ 175,000 17,500 0.45 17,500 0.33
---------- ---------- ---------- ---------- ----------
All directors and executive
officers as a group (12 persons).... $2,975,000 297,500 7.61% 297,500 5.62%
========== ========== ========== ========== ==========
--------------------
(1) Mr. Stevens is also an executive officer of Home Federal.
18
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:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and
operating strategies;
o statements regarding the quality of our loan and investment
portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
o general economic conditions, either nationally or in our
market area, that are worse than expected;
o changes in the interest rate environment that reduce our
interest margins or reduce the fair value of financial
instruments;
o increased competitive pressures among financial services
companies;
o changes in consumer spending, borrowing and savings habits;
o legislative or regulatory changes that adversely affect our
business;
o adverse changes in the securities markets; and
o changes in accounting policies and practices, as may be
adopted by the bank regulatory agencies, the Public Company
Accounting Oversight Board or the Financial Accounting
Standards Board.
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 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 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 or weakness and takes into
consideration loss that is inherent within the portfolio but has not been
realized.
19
Mortgage Servicing Rights. Mortgage servicing rights represent the
present value of the future 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. In addition, on a
quarterly basis, we perform an independent valuation review of mortgage
servicing rights for potential declines in value.
Deferred Income Taxes. Deferred income taxes are reported for temporary
differences between items of income or expense reported in the financial
statements and those reported for income tax purposes. Deferred taxes are
computed using the asset and liability approach as prescribed in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this method, a deferred tax asset or liability is determined based on the
enacted tax rates that will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in an institution's income tax returns.
The deferred tax provision for the year is equal to the net change in the net
deferred tax asset from the beginning to the end of the year, less amounts
applicable to the change in value related to investments available for sale. The
effect on deferred taxes of a change in tax rates is recognized as income in the
period that includes the enactment date. The primary differences between
financial statement income and taxable income result from depreciation expense,
mortgage servicing rights, loan loss reserves and dividends received from the
Federal Home Loan Bank. Deferred income taxes do not include a liability for
pre-1988 bad debt deductions allowed to thrift institutions which may be
recaptured if the institution fails to qualify as a bank for income tax purposes
in the future.
Recent Developments
Home Federal has completed its September 30, 2004 fiscal year and is
currently in the process of preparing its audited financial statements, which
are not available at this time. Other than an increase in assets and liabilities
from the receipt of funds in the offering that expired September 14, 2004, no
material changes in Home Federal's results from the current fiscal year are
anticipated. On October 12, 2004, we returned all subscription funds received,
with interest, to subscribers and canceled all withdrawal authorizations for all
persons who submitted acceptable subscriptions for shares of common stock in the
subscription offering. Home Federal does not anticipate that there will be any
material changes in its results for the current fiscal year from those presented
for recent previous periods, and as presented in its prospectus and prospectus
supplement.
Comparison of Financial Condition at June 30, 2004 and September 30, 2003
General. Our total assets increased $69.1 million or 15.3% to $519.3
million at June 30, 2004 compared to $450.2 million at September 30, 2003. Asset
growth was concentrated primarily in mortgage-backed securities, which increased
$58.2 million, and loans originated in our local market area, which increased
$14.2 million. The growth was funded by $32.2 million in increased deposits,
$35.2 million in additional borrowings from the Federal Home Loan Bank of
Seattle, and $3.3 million in net income.
In connection with our asset and liability management practices, we use
asset and liability duration measures as a component of interest rate risk
measurement. Duration measures cash flows that are generated from investments,
loans or deposits by weighting the present value of the cash flows according to
the periods of time when the cash flows are received with the result being an
average date when the cash flows are received or paid. We use months as the
measure of time. Our goal is to manage the mismatch between the duration
maturities of cash inflows that comes from loans and investments, and cash
outflows that come from deposits and borrowings. We accomplish this by reducing
our asset durations, or cash inflows, and lengthening our liability durations,
or cash outflows, so that the net duration mismatch between assets and
liabilities is within our policy guidelines. During the nine months ended June
30, 2004, total asset duration decreased 3.93 months to 38.87 months, and
liability duration decreased 5.23 months to 22.25 months for a net duration gap
of 16.62 months, up 1.3 months from September 30, 2003.
20
Assets. During the nine months ended June 30, 2004 total assets grew
$69.1 million. The growth was primarily concentrated in the following asset
categories:
Balance Increase /(Decrease) Percentage
at June 30, from September 30, Increase /
2004 2003 (Decrease)
--------------- --------------- ---------------
(Dollars in Thousands)
Cash and amounts due from depository .......
institutions ............................. $ 13,694 $ 2,576 23.2%
Securities available for sale, at fair value 893 (4,547) (83.6)
Mortgage-backed securities, held to maturity 82,653 58,228 238.4
Loans held for sale (1) .................... 1,813 (3,253) (64.2)
Loans receivable, net of allowance for loan
losses ................................... 386,837 14,208 3.8%
--------------
(1) Loans held for sale includes one- to four-family residential loans that
have been sold into the secondary market awaiting delivery to the
purchaser.
Cash and amounts due from depository institutions increased $2.6 million
primarily as the result of an increase in customer checking account deposit
clearing items that were due from other banks. In addition, cash balances held
at the Federal Home Loan Bank of Seattle increased.
During the nine months ended June 30, 2004, we purchased Fannie Mae and Freddie
Mac mortgage-backed securities in order to leverage the balance sheet and
achieve the desired level of total interest-earning assets. Mortgage-backed
securities have payment characteristics that are similar to those of residential
loans. The net increase of $58.2 million represented 84.3% of total asset
growth. Net loans receivable, increased $14.2 million from loans originated in
our local area.
Deposits. Deposits increased $32.2 million during the nine months ended
June 30, 2004. Deposit growth resulted from increases in demand deposits and
certificates of deposit. The following table details the sources of that growth.
Increase from
Balance at September 30, Percentage
June 30, 2004 2003 Increase
--------------- --------------- ---------------
(Dollars in Thousands)
Savings deposits ........................... $ 25,104 $ 681 2.8%
Demand deposits ............................ 149,956 18,178 13.8
Certificates of deposit .................... 158,462 13,390 9.2
--------------- --------------- ---------------
Total deposit accounts ..................... $ 333,522 $ 32,249 10.7%
=============== =============== ===============
Demand deposits increased $18.2 million during the nine months ended June 30,
2004, and accounted for 56.4% of the $32.2 million in total deposit growth.
Noninterest-bearing demand deposits grew $2.0 million and interest- bearing
demand deposits grew $16.2 million. Certificates of deposit increased $13.4
million primarily as a result of local advertised specials for certificate
accounts with maturities ranging from 19 to 39 months.
Borrowings. Advances from Federal Home Loan Bank of Seattle increased
$35.2 million or 36.5% to $131.8 million during the nine months ended June 30,
2004. We use advances from the Federal Home Loan Bank of Seattle as an
alternative funding source to deposits in order to manage funding costs, reduce
interest rate risk, and to leverage the balance sheet. The net effect was to
fund increases in total interest-earning assets, thereby incrementally
increasing our net interest income.
21
Equity. Total equity increased $3.3 million or 8.1%, to $43.7 million
at June 30, 2004 as compared to $40.4 million at September 30, 2003. The source
of increase was $3.3 million in net income for the nine months ended June 30,
2004. Our total tier 1 (core) capital ratio was 8.35% and our total tier 1
risk-based capital ratio was 13.69% at June 30, 2004.
Comparison of Operating Results for the Three Months Ended June 30, 2004 and
June 30, 2003.
General. Net income for the three months ended June 30, 2004 was $1.3
million, a decrease of $530,000 from the comparable three months ended June 30,
2003. The reduction in net income was caused, in part, by an increase in the
provision for loan losses of $150,000, a decrease in total noninterest income of
$360,000 and an increase in total noninterest expense of $808,000. This was
partially offset by an increase in net interest income of $161,000 and a
decrease in income tax expense of $627,000.
Net Interest Income. Net interest income increased $161,000 for the
three months ended June 30, 2004 compared to the three months ended June 30,
2003. Average total interest-earning assets increased $39.6 million between the
two three month time periods. Loan refinancing driven by low interest rates
resulted in a 43 basis point decline in our average asset yields. During that
same period our average cost of funds declined 26 basis points, resulting in a
17 basis point increase in our net interest spread.
Interest and Dividend Income. Total interest and dividend income for
the three months ended June 30, 2004 increased $131,000 to $6.9 million from the
three months ended June 30, 2003. The following table compares detailed average
earning asset balances, associated yields, and resulting changes in interest and
dividend income for the three months ended June 30, 2004 and 2003:
Three Months Ended June 30,
------------------------------------------------------------------
2004 2003
---------------------- ----------------------
Increase /
(Decrease) in
Interest and
Dividend
Average Average Income from
Balance Yield Balance Yield 2003
-------- -------- -------- -------- ---------
(Dollars in Thousands)
Loans receivable, net..................... $384,123 6.01% $357,192 6.61% $ (132)
Loans held for sale....................... 3,246 5.57 2,879 5.56 21
Investment securities, available for sale,
including interest-bearing deposits in
other banks............................. 4,346 1.84 27,825 2.14 (129)
Mortgage-backed securities, held to
maturity................................ 66,380 5.12 31,263 5.95 384
Federal Home Loan Bank stock..............
6,711 3.99 6,086 5.26 (13)
-------- -------- -------- -------- ---------
Total interest-earning assets............. $464,806 5.92% $425,245 6.35% $ 131
======== ======== ======== ======== =========
We had a 43 basis point decline in the average yield on total interest-earning
assets; however, the increase in average total interest-earning assets of $39.6
million for the three months ended June 30, 2004 when compared to the three
months ended June 30, 2003 resulted in an increase of $131,000 in total interest
income. Continuing low interest rates and customer loan refinances resulted in a
60 basis point reduction in the average yield on net loans receivable and a
$132,000 reduction in related interest income. Rapid prepayments received on
higher coupon mortgage- backed securities and decreased reinvestment rates for
purchased securities resulted in an 83 basis point reduction in the associated
average yield. Mortgage-backed security interest income increased $384,000 as
the result of a $35.1 million or 112.3% increase in the average balance between
the three months ended June 30, 2004 and 2003.
22
Interest Expense. Total interest expense for the three months ended
June 30, 2004 was $2.4 million, virtually unchanged from the three months ended
June 30, 2003. The following table details average balances, cost of funds and
the change in interest expense for the three months ended June 30, 2004 and
2003:
Three Months Ended June 30,
--------------------------------------------------------------
2004 2003
-------------------- --------------------
Increase/
(Decrease) in
Average Average Interest Expense
Balance Cost Balance Cost from 2003
--------- -------- --------- -------- ----------------
Savings deposits..................... $ 24,971 0.19% $ 24,988 0.40% $ (13)
Interest-bearing demand deposits..... 87,291 0.24 73,148 0.22 12
Money market deposits................ 33,734 0.70 31,689 0.67 6
Certificates of deposit.............. 156,547 2.84 142,635 3.14 (10)
Federal Home Loan Bank advances...... 115,425 4.01 108,001 4.38 (25)
--------- -------- --------- -------- ----------------
Total interest-bearing liabilities... $ 417,968 2.29% $ 380,461 2.55% $ (30)
========= ======== ========= ======== ================
The average balance of total interest-bearing liabilities increased $37.5
million for the three months ended June 30, 2004 compared to the three months
ended June 30, 2003; however, our average cost of funds for total interest-
bearing liabilities decreased 26 basis points, and total interest expense
decreased $30,000. The average balance of certificates of deposit increased
$13.9 million during the same time period; however, the average cost of funds
decreased 30 basis points and interest expense decreased $10,000. Similarly, the
average balance of interest-bearing demand deposits increased $14.1 million and
the average cost of funds increased 2 basis points, resulting in a $12,000
increase in related interest expense. The current low interest rate environment
is the primary cause for the reduction of the cost of funds.
Provision for Loan Losses. Our Asset Liability Committee assesses the
adequacy of the allowance for loan losses on a quarterly basis. The Committee
analyzes several different factors, including delinquency, charge-off rates, and
the changing risk profile of our loan portfolio, as well as local economic
conditions including unemployment rates, bankruptcies and vacancy rates of
business and residential properties. Our methodology for analyzing the allowance
for loan losses consists of three components: formula, specific and general
allowances. The formula allowance is determined by applying an estimated loss
percentage to various groups of loans. The loss percentages are generally based
on various historical measures such as the amount and type of classified loans,
past due ratios and loss experience, which could affect the collectibility of
the respective loan types. The specific allowance component is created when
management believes that the collectibility of a specific large loan, such as a
real estate or multi-family or commercial real estate loan, has been impaired
and a loss is probable. The general allowance component is established to ensure
the adequacy of the allowance for loan losses in situations where the Asset
Liability Management Committee believes that there are risk factors associated
with the collectibility of the portfolio that may not be adequately addressed in
the formula or specific allowance components. Information considered for the
general allowance element includes regional economic and employment data.
Our provision for loan loss increased $150,000 for the three months
ended June 30, 2004 compared to the same period in the prior year. The following
table details selected activity associated with the allowance for loan losses
for the three months ended June 30, 2004 and 2003:
23
At or For the Three Months Ended June 30,
-----------------------------------------
2004 2003
--------------- ---------------
(Dollars in Thousands)
Provision for loan losses....................................... $ 300 $ 150
Net charge-offs................................................. 13 35
Allowance for loan losses....................................... 2,706 1,691
Allowance for loan losses as a percentage of total loans
outstanding at the end of the period........................... 0.69% 0.46%
Allowance for loan losses as a percentage of nonperforming loans
at the end of the period....................................... 400.30% 3315.69%
Nonperforming loans............................................. 676 51
Nonaccrual and 90 days or more past due loans as a percentage of
loans receivable............................................... 0.17% 0.01%
Total loans, net................................................ 388,650 370,305
Total commercial real estate and construction loans, net........ 117,402 97,270
The increase in the provision was due to an $16.5 million increase in net loans
receivable at June 30, 2004 as compared to June 30, 2003, increased risk
associated with the continued growth of our net commercial real estate and
construction loan portfolio as a percentage of total gross loans, and the
increase in nonperforming loans from $51,000 at June 30, 2003 to $676,000 at
June 30, 2004. Typically commercial real estate loans have higher loan balances,
are more difficult to evaluate and monitor, and involve a greater degree of
credit risk than one- to four- family residential loans. The risk of loss on
construction loans depends largely on the accuracy of the initial estimate of
the property's value at completion of construction compared to the estimated
cost of construction and other assumptions. Total net commercial real estate and
construction loans represented 30.3% of our total net loans receivable at June
30, 2004 compared to 26.3% at June 30, 2003. Nonaccrual and 90 days or more past
due loans as a percentage of loans receivable at June 30, 2004 and 2003 were
0.17% and 0.01%, respectively. Management expects the allowance for loan losses
as a percentage of loans receivable to continue to increase in the future as the
concentration of commercial real estate and construction loans increases in the
portfolio.
Noninterest Income. Noninterest income for the three months ended June
30, 2004 was $2.6 million, a decrease of $360,000 or 12.1% from the three months
ended June 30, 2003. The following table provides a detailed analysis of the
changes in components of noninterest income:
Increase /(Decrease)
Three Months Ended from Percentage Increase/
June 30, 2004 June 30, 2003 (Decrease)
------------------ ---------------------- --------------------
(Dollars in Thousands)
Service fees and charges.................... $ 2,198 $ (265) (10.8)%
Increase in cash surrender value of life
insurance.................................. 122 (177) (59.2)
Mortgage servicing rights, net.............. 287 (21) (6.8)
Other....................................... 9 103 N/A
------------------ ---------------------- --------------------
Total noninterest income.................... $ 2,616 $ (360) (12.1)%
================== ====================== ====================
Service fees and charges declined mainly due to lower debit card fee income.
Income from the change in the cash surrender value of life insurance decreased
due to lower interest rates. Mortgage servicing rights, net was $287,000 for the
three months ended June 30, 2004, a decrease of $21,000 from the three months
ended June 30, 2003. Mortgage servicing rights, net is an accounting estimate
that represents the present value of the future servicing fees from the right to
service mortgage loans for others. It is impacted by prepayment speeds of the
underlying mortgages and interest rates. In general, during periods of falling
interest rates, such as we experienced during the three months ended June 30,
2004, mortgage loans prepay faster and the value of our mortgage-servicing asset
declines. On a
24
quarterly basis we perform an independent valuation review of mortgage servicing
rights in order to determine if there has been a decline in the fair market
value.
Noninterest Expense. Total noninterest expense for the three months
ended June 30, 2004 was $4.7 million, an increase of $808,000 or 20.6% compared
to the three months ended June 30, 2003. The following table provides a detailed
analysis of the changes in components of noninterest expense:
Increase/(Decrease)
Three Months Ended from Percentage Increase/
June 30, 2004 June 30, 2003 (Decrease)
------------------ ------------------- --------------------
(Dollars in Thousands)
Compensation and benefits................ $ 2,753 $ 727 35.9%
Occupancy and equipment.................. 686 (45) (6.2)
Data processing.......................... 374 39 11.6
Advertising.............................. 309 41 15.3
Postage and supplies..................... 193 (11) (5.4)
Other.................................... 406 57 16.3
------------------ ------------------- --------------------
Total noninterest expense................ $ 4,721 $ 808 20.6%
================== =================== ====================
Compensation and benefits accounted for $727,000 in increased noninterest
expense. Compensation increased due to salary increases and an increase in the
number of employees. Data processing expense increased principally as a result
of an increase in the expense to operate our Internet banking system.
Advertising expense increased primarily due to production costs of television
advertising.
Income Tax Expense. Income tax expense for the three months ended June
30, 2004 was $770,000, which represented a decrease of $627,000 from the three
months ended June 30, 2003. Income before income taxes was $2.1 million for the
three months ended June 30, 2004 compared to $3.2 million for the three months
ended June 30, 2003, a decrease of $1.2 million or 35.7%. Income recognized from
the increase in the cash surrender value of life insurance is generally not
subject to income tax and this reduced income tax by $48,000 and $117,000 for
the three months ended June 30, 2004 and 2003 respectively. The effective income
tax rate for the three months ended June 30, 2004 was 34.0% for federal and 7.6%
for the State of Idaho.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2004 AND
JUNE 30, 2003.
General. Our net income for the nine months ended June 30, 2004 was
$3.3 million, a decrease of $1.0 million from the nine months ended June 30,
2003. Income and expense items that contributed to the reduction in net income
include decreases in net interest income and total noninterest income of $53,000
and $1.3 million respectively, and increases in the provision for loan losses
and total noninterest expense of $463,000 and $228,000, respectively. This was
partially offset by a decrease in income tax expense of $1.1 million.
Net Interest Income. Our net interest income was $13.0 million for the
nine months ended June 30, 2004 compared to $13.1 million for the nine months
ended June 30, 2003, a decrease of $53,000. Average total interest- earning
assets increased $39.1 million between the two nine month time periods as a
result of a record number of customer loan refinancings driven by historically
low interest rates; however, lower interest rates resulted in a 69 basis point
decline in our average asset yields. During that same period, our average cost
of funds declined only 31 basis points, resulting in a 38 basis point reduction
in our net interest spread.
Interest and Dividend Income. Total interest and dividend income for
the nine months ended June 30, 2004 decreased $323,000 to $20.1 million from the
nine months ended June 30, 2003. The following table compares detailed average
earning asset balances, associated yields, and resulting changes in interest and
dividend income for the nine months ended June 30, 2004 and 2003:
25
Nine Months Ended June 30,
-------------------------------------------------------------
2004 2003
-------------------- --------------------
Increase/
(Decrease) in
Interest and
Average Average Dividend Income
Balance Yield Balance Yield from 2003
--------- -------- --------- -------- ---------------
(Dollars in Thousands)
Loans receivable, net.................... $ 381,052 6.20% $ 344,608 6.99% $ (349)
Loans held for sale...................... 3,036 5.78 3,171 5.73 (6)
Investment securities, available for
sale, including interest bearing
deposits in other banks................. 6,809 1.96 15,436 2.05 (137)
Mortgage-backed securities, held to
maturity................................ 47,500 5.32 37,013 6.04 221
Federal Home Loan Bank stock............. 6,620 4.33 5,648 6.30 (52)
--------- -------- --------- -------- ---------------
Total interest-earning assets............ $ 445,017 6.02% $ 405,876 6.71% $ (323)
========= ======== ========= ======== ===============
Average total interest-earning assets increased $39.1 million during the nine
months ended June 30, 2004 when compared to the nine months ended June 30, 2003;
however, we had a 69 basis point decrease in the average yield on total
interest-earning assets and a decrease of $323,000 in total interest income.
Historically low interest rates and a record number of customer loan
refinancings resulted in a 79 basis point reduction in the average yield on net
loans receivable and a $349,000 reduction in related interest income. Rapid
repayments received on higher coupon mortgage-backed securities and decreased
reinvestment rates for purchased securities resulted in a 72 basis point
reduction in the associated average yield.
Interest Expense. Total interest expense for the nine months ended June
30, 2004 was $7.1 million, a decrease of $270,000 from the nine months ended
June 30, 2003. The following table details average balances, cost of funds and
the resulting decrease in interest expense for the nine months ended June 30,
2004 and 2003:
Nine Months Ended June 30,
----------------------------------------------------------------
2004 2003
-------------------- --------------------
Increase/
Decrease in
Average Average Interest Expense
Balance Cost Balance Cost from 2003
--------- -------- --------- -------- ----------------
(Dollars in Thousands)
Savings deposits...................... $ 24,262 0.26% $ 24,279 0.47% $ (38)
Interest-bearing demand
deposits............................. 81,277 0.24 70,052 0.31 (19)
Money market deposits................. 32,636 0.64 33,231 0.80 (43)
Certificates of deposit............... 150,678 2.89 137,578 3.32 (158)
Federal Home Loan Bank
advances............................. 110,892 4.16 101,879 4.54 (12)
--------- -------- --------- -------- ----------------
Total interest-bearing liabilities.... $ 399,745 2.36% $ 367,019 2.67% $ (270)
========= ======== ========= ======== ================
The average balance of total interest-bearing liabilities increased $32.7
million for the nine months ended June 30, 2004 compared to June 30, 2003;
however, our average total cost of funds decreased 31 basis points, and total
interest expense decreased $270,000. The average balance of certificates of
deposit increased $13.1 million during
26
the same period; however, the average cost of funds decreased 43 basis points
and interest expense declined $158,000. Similarly, the average balance of
interest-bearing demand deposits increased $11.2 million; however, the average
cost of funds decreased 7 basis points resulting in a $19,000 reduction in
related interest expense. In addition, the average balance of money market
deposits decreased $595,000 and the average cost of funds decreased 16 basis
points. The current low interest rate environment has resulted in a significant
reduction in our average cost of funds and total interest expense.
Provision for Loan Losses. Our provision for loan losses for the nine
months ended June 30, 2004 was $900,000, an increase of $463,000 from the nine
months ended June 30, 2003. The following table details selected activity
associated with the allowance for loan loss for the nine months ended June 30,
2004 and 2003:
At or For the Nine Months Ended June 30,
----------------------------------------
2004 2003
----------------- ------------------
(Dollars in Thousands)
Provision for loan losses........................................... $ 900 $ 437
Net charge-offs..................................................... 64 136
Allowance for loan losses........................................... 2,706 1,691
Allowance for loan losses as a percentage of total loans
outstanding at the end of the period............................... 0.69% 0.46%
Allowance for loan losses as a percentage of
nonperforming loans at the end of the period....................... 400.30% 3315.69%
Nonperforming loans................................................. 676 51
Nonaccrual and 90 days or more past due loans as a
percentage of total loans.......................................... 0.17% 0.01%
Total loans receivable, net......................................... 388,650 370,305
Total commercial real estate and construction loans, net............ 117,402 97,270
The increase in the provision for loan losses was due to an $16.5 million
increase in net loans at June 30, 2004 as compared to June 30, 2003, increased
risk associated with the growth of our net commercial real estate and
construction loan portfolio as a percentage of total gross loans from $51,000 at
June 30, 2003 to $676,000 at June 30, 2004. Typically commercial real estate
loans have higher loan balances, are more difficult to evaluate and monitor, and
involve a greater degree of credit risk than one- to four- family residential
loans. The risk of loss on construction loans depends largely on the accuracy of
the initial estimate of the property's value at completion of construction
compared to the estimated cost of construction and other assumptions. Total net
commercial real estate and construction loans represented 30.2% of our total net
loans receivable at June 30, 2004 compared to 26.3% at June 30, 2003.
Noninterest Income. Noninterest income for the nine months ended June
30, 2004 was $7.0 million, a decrease of $1.3 million, or 16.1% from the nine
months ended June 30, 2003. The following table provides a detailed analysis of
the changes in components of noninterest income:
Nine Months Ended Increase /(Decrease) Percentage Increase/
June 30, 2004 from June 30, 2003 (Decrease)
----------------- -------------------- ---------------------
(Dollars in Thousands)
Service fees and charges.................. $ 6,004 $ (109) (1.8)%
Gain on sale of loans..................... 421 (172) (29.0)
Mortgage servicing rights, net............ 173 (863) (83.3)
Other..................................... 359 (194) (31.5)
----------------- -------------------- ---------------------
Total noninterest income.................. $ 6,957 $ (1,338) (16.1)%
================= ==================== =====================
27
Service fees and charges totaled $6.0 million for the nine months ended June 30,
2004, a decrease of $109,000 or 1.8% over the nine months ended June 30, 2003.
Service fees and charges represented 86.3% of total noninterest income for the
nine months ended June 30, 2004, up from 73.7% for the nine months ended June
30, 2003.
Gain on the sale of loans was $421,000 for the nine months ended June
30, 2004, a decrease of $172,000 from the nine months ended June 30, 2003. Gain
on the sale of loans is directly related to mortgage loan originations that are
sold in the secondary market. The reduction in the income was the result of a
$67.4 million or 59.0% reduction in the sale of mortgage loans during the nine
months ended June 30, 2004 as compared to the nine months ended June 30, 2003.
Mortgage servicing rights, net was $173,000 for the nine months ended June 30,
2004, a decrease of $863,000 compared to the nine months ended June 30, 2003.
The volume of consumer mortgage loans sold declined $67.4 million or 59.0% to
$46.8 million for the nine months ended June 30, 2004 compared to the same
period in 2003.
Noninterest Expense. Total noninterest expense for the nine months
ended June 30, 2004 was $13.9 million compared to $13.7 million for the nine
months ended June 30, 2003, an increase of $228,000. The following table
provides a detailed analysis of the changes in components of noninterest
expense:
Nine months Ended Increase/(Decrease) Percentage Increase
June 30, 2004 from June 30, 2003 /(Decrease)
------------------ -------------------- -------------------
(Dollars in Thousands)
Compensation and benefits............. $ 8,094 $ 238 3.0%
Occupancy and equipment............... 2,062 (144) (6.5)
Data processing....................... 1,098 98 9.8
Advertising........................... 824 (66) (7.4)
Postage and supplies.................. 601 34 6.0
Other................................. 1,260 68 5.7
------------------ -------------------- -------------------
Total noninterest expense............. $ 13,939 $ 228 1.7%
================== ==================== ===================
Compensation and benefits accounted for $238,000 in increased noninterest
expense. The deferral of salary and benefit expense related to mortgage
originations was the primary cause of the increase in compensation and benefits
expense. This deferral decreased from $1.1 million for the nine months ended
June 30, 2003 to $571,000 for the same period in 2004; a decrease in the
deferral results in a net increase in salary and benefit expense. Commissions
and incentive compensation expense decreased $306,000 and $121,000,
respectively, for the nine months ended June 30, 2004 compared to the nine
months ended June 30, 2003. Commissions are paid to our loan originators based
on residential mortgage dollar origination volumes; those volumes decreased
$160.6 million or 66.1% for the nine months ended June 30, 2004 compared to the
nine months ended June 30, 2003.
Occupancy expense declined $144,000 principally as a result of
decreased rent expense, as we closed three Wal-Mart in-store branch locations in
the nine months ended June 30, 2003. Data processing expense increased $98,000
due to increased expense to operate our Internet banking operations. Advertising
expense was $824,000 for the nine months ended June 30, 2004, a $66,000 decrease
from the $890,000 in expense for the nine months ended June 30, 2003. The
primary reason for the decrease was a $53,000 reduction in market research
expense.
Income Tax Expense. Income tax expense for the nine months ended June
30, 2004 was $1.9 million, a decrease of $1.1 million from the nine months ended
June 30, 2003. Income before income taxes was $5.1 million for the nine months
ended June 30, 2004 compared to $7.2 million for the nine months ended June 30,
2003, a decrease of $2.1 million or 28.8%. Income realized from the increase in
the cash surrender value of life insurance is generally not subject to income
tax and this reduced income tax by $145,000 and $195,000 for the nine months
ended June 30, 2004 and 2003, respectively. The effective income tax rate for
the nine months ended June 30, 2004 was 34.0% for federal and 7.6% for the State
of Idaho.
28
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. We actively analyze and manage Home Federal's liquidity with
the objectives of maintaining an adequate level of liquidity and to ensuring 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.
Our primary sources of funds are from customer deposits, loan
repayments, loan sales, maturing investment securities, and advances from the
Federal Home Loan Bank of Seattle. These 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. We believe that our current
liquidity position and our forecasted operating results are sufficient to fund
all of our existing commitments.
At June 30, 2004, we maintained a line of credit with the Federal Home
Loan Bank of Seattle equal to 40% of total assets, with a used portion of the
line of credit amounting to 25.4% of total assets. This line of credit is
dependent on us having sufficient collateral to pledge to the Federal Home Loan
Bank of Seattle. At June 30, 2004, we were in compliance with our collateral
requirements, and 14.6% of our line of credit with the Federal Home Loan Bank of
Seattle was available. In addition, we held readily saleable loans available for
liquidity purposes.
At June 30, 2004, certificates of deposits amounted to $158.5 million,
or 47.5% of total deposits, including $57.9 million which are scheduled to
mature by June 30, 2005. Historically, we have been able to retain a significant
amount of our deposits as they mature. Management believes that we have 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.
Capital. Consistent with our objective to operate a sound and
profitable financial institution, we have maintained and will continue to focus
on maintaining a "well capitalized" rating from regulatory authorities. In
addition, we are subject to certain capital requirements set by our regulatory
agencies. At June 30, 2004, we exceeded all regulatory capital requirements.
Total equity was $43.7 million at June 30, 2004, or 8.41% of total assets on
that date. Our regulatory capital ratios at June 30, 2004, were as follows: Tier
1 capital of 8.35%; Tier 1 risk-based capital of 12.90%; and total risk-based
capital of 13.69%. The regulatory capital requirements to be considered well
capitalized are 5%, 6%, and 10% respectively.
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. Home Federal'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 impacted 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 utilizing an internal model.
29
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 and Freddie Mac; (2) borrowing intermediate- to
long-term funds at fixed rates from the Federal Home Loan Bank of Seattle; (3)
originating consumer loans with 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
June 30, 2004, there were no material changes in Home Federal's market risk from
the information provided in the prospectus.
At June 30, 2004, Home Federal had no off-balance sheet derivative
financial instruments, and Home Federal did not maintain a trading account for
any class of financial instruments nor engage in hedging activities or purchase
high risk derivative instruments. Furthermore, Home Federal is not subject to
foreign currency exchange rate risk or commodity price risk.
WHERE YOU CAN FIND MORE INFORMATION
Home Federal Bancorp has filed with the Securities and Exchange
Commission ("SEC") a registration statement under the Securities Act of 1933
with respect to the common stock offered hereby. As permitted by the rules and
regulations of the SEC, this prospectus supplement does not contain all the
information set forth in the registration statement. This information, including
the appraisal report which is an exhibit to the registration statement, can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of this material can
be obtained from the SEC at prescribed rates. For more information about the
public reference room, call the SEC at (800) SEC-0330. In addition, the SEC
maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC, including Home Federal Bancorp. The statements
contained in this prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are, of necessity,
brief descriptions thereof and are not necessarily complete; each statement is
qualified by reference to the contract or document. We believe, however, that we
have included the material information an investor needs to consider in making
an investment decision. Home Federal also maintains a website
(http://www.homefederalsavings.com), which contains various information about
Home Federal.
Home Federal Bancorp has filed with the Office of Thrift Supervision an
Application for Minority Stock Issuance, and Home Federal has filed with the
Office of Thrift Supervision a Notice of Mutual Holding Company Formation. This
prospectus supplement and the prospectus omit certain information contained in
the Application and Notice. The Application and Notice, including the proxy
materials, exhibits and certain other information, may be inspected, without
charge, at the office of the Office of Thrift Supervision, 1700 G Street, N.W.,
Washington, D.C. 20552 and the office of Regional Director of the Office of
Thrift Supervision at the West Regional office of the Office of Thrift
Supervision, Pacific Plaza, 2001 Junipero Serra Boulevard, Suite 650, Daly City,
California 94014.
In connection with the stock offering, Home Federal Bancorp has
registered its common stock with the SEC under Section 12 of the Securities
Exchange Act of 1934, and, upon such registration, Home Federal Bancorp and the
holders of its stock became subject to the proxy solicitation rules, reporting
requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Securities Exchange Act of 1934. Under the
amended plan of reorganization and stock issuance, Home Federal Bancorp has
undertaken that it will not terminate this registration for a period of at least
three years following the stock offering.
A copy of the amended plan of reorganization and stock issuance, the
charter and bylaws of Home Federal Bancorp and Home Federal are available
without charge from Home Federal. You may request this information from: Jerilyn
Warren, Home Federal Savings and Loan Association of Nampa, 500 12th Avenue
South, Nampa, Idaho 83651.
30
STOCK INFORMATION CENTER
If you have any questions regarding the offering, the stock offering or
the resolicitation, please call our stock information center at (208) 468-5025,
from 9:00 a.m. to 4:00 p.m., Mountain time, Monday through Thursday and Friday
from 9:00 a.m. to 12:00 p.m. The stock information center is closed on weekends
and bank holidays. The stock information center is located at Home Federal's
main office, 500 12th Avenue South, Nampa, Idaho 83651.
31
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA
INDEX TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Statements of Financial Condition as of June 30, 2004 and
September 30, 2003.............................................................................. F-2
Consolidated Statements of Income for the Three and Nine Month Periods Ended
June 30, 2004 and 2003.......................................................................... F-3
Consolidated Statements of Cash Flows for the Three and Nine Month Periods Ended
June 30, 2004 and 2003.......................................................................... F-4
Notes to Consolidated Financial Statements....................................................... F-6
The following financial statements are included in the prospectus:
Page
Number
in the
Prospectus
----------
Independent Auditor's Report..................................................................... F-2
Consolidated Statement of Financial Condition as of
March 31, 2004 and September 30, 2003 and 2002.................................................. F-3
Consolidated Statement of Income for the Six Months Ended
March 31, 2004 and 2003 and the Years Ended September 30, 2003, 2002and 2001.................... F-4
Consolidated Statement of Equity for the Six Months Ended
March 31, 2004 and the Years Ended September 30, 2003, 2002 and 2001............................ F-5
Consolidated Statement of Cash Flows for the Six Months Ended
March 31, 2004 and 2003 and the Years Ended September 30, 2003, 2002 and 2001................... F-6
Notes to Consolidated Financial Statements....................................................... F-8
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
The financial statements of Home Federal Bancorp, Inc. have been
omitted because Home Federal Bancorp, Inc. has not yet issued any stock, has no
assets or liabilities, and has not conducted any business other than that of an
organizational nature.
F-1
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
DOLLARS IN THOUSANDS
June 30, 2004 September 30, 2003
---------------- ------------------
ASSETS
Cash and amounts due from depository institutions $ 13,694 $ 11,118
Securities, available for sale, at fair value 893 5,440
Securities held to maturity, at cost (fair value at June 30, 2004:
$82,347; at September 30, 2003: $25,423) 82,653 24,425
Federal Home Loan Bank capital stock, at cost 7,117 6,533
Loans held for sale 1,813 5,066
Loans receivable, net of allowance for loan losses of $2,706 at
June 30, 2004 and $1,853 at September 30, 2003 386,837 372,629
Accrued interest receivable 1,797 1,585
Properties and equipment, net 10,346 9,758
Mortgage servicing rights, net 3,303 3,130
Investment in life insurance contracts 9,947 9,621
Other assets 851 891
---------------- ------------------
TOTAL ASSETS $ 519,251 $ 450,196
================ ==================
LIABILITIES AND EQUITY CAPITAL
DEPOSIT ACCOUNTS
Savings deposits $ 25,104 $ 24,423
Demand deposits 149,956 131,778
Certificates of deposit 158,462 145,072
Total deposit accounts 333,522 301,273
Advances by borrowers for taxes and insurance 1,840 3,553
Interest payable on FHLB advances and other borrowings 378 368
Interest payable on deposit accounts 905 571
Deferred compensation 1,976 1,803
Advances from Federal Home Loan Bank 131,756 96,527
Deferred income tax liability 2,120 2,475
Income taxes payable 83 365
Other liabilities 2,995 2,862
---------------- ------------------
Total liabilities 475,575 409,797
EQUITY CAPITAL
Retained earnings, substantially restricted 43,686 40,415
Accumulated comprehensive loss, net of deferred income taxes (10) (16)
---------------- ------------------
Total equity capital 43,676 40,399
---------------- ------------------
TOTAL LIABILITIES AND EQUITY $ 519,251 $ 450,196
================ ==================
The accompanying notes are an integral part of these financial statements.
F-2
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Interest and dividend income
Loan interest $ 5,948 $ 6,059 $ 17,889 $ 18,244
Investment interest 16 147 86 223
Mortgage-backed security interest 849 465 1,897 1,676
Federal Home Loan Bank stock dividends 67 80 215 267
Interest-bearing deposits in other banks 4 2 14 14
------------ ------------ ------------ ------------
Total interest and dividend income 6,884 6,753 20,101 20,424
------------ ------------ ------------ ------------
Interest expense
Deposits 1,233 1,238 3,617 3,875
Federal Home Loan Bank advances 1,158 1,183 3,456 3,468
------------ ------------ ------------ ------------
Total interest expense 2,391 2,421 7,073 7,343
------------ ------------ ------------ ------------
Net interest income 4,493 4,332 13,028 13,081
Provision for loan losses 300 150 900 437
------------ ------------ ------------ ------------
Net interest income after provision for
loan losses 4,193 4,182 12,128 12,644
------------ ------------ ------------ ------------
Noninterest income
Service fees and charges 2,198 2,463 6,004 6,113
Gain on sale of loans 77 6 421 593
122 299 371 500
Mortgage servicing rights
Loan servicing income 226 402 704 1,574
Amortization of mortgage servicing rights (39) (94) (401) (538)
Mortgage servicing rights impairment 100 - (130) -
Other (68) (100) (13) 53
------------ ------------ ------------ ------------
Total noninterest income 2,616 2,976 6,957 8,295
------------ ------------ ------------ ------------
NONINTEREST EXPENSE
Compensation and benefits 2,753 2,026 8,094 7,856
Occupancy and equipment 686 731 2,062 2,206
Data processing 374 335 1,098 1,000
Advertising 309 268 824 890
Postage and supplies 193 204 601 567
Professional services 73 60 253 316
Insurance and taxes 117 88 325 269
Other 216 201 682 607
------------ ------------ ------------ ------------
Total noninterest expense 4,721 3,913 13,939 13,711
------------ ------------ ------------ ------------
Income before income taxes 2,088 3,245 5,146 7,228
Income tax expense 770 1,397 1,875 2,955
------------ ------------ ------------ ------------
NET INCOME $ 1,318 $ 1,848 $ 3,271 $ 4,273
============ ============ ============ ============
EARNINGS PER SHARE
Basic n/a n/a n/a n/a
Diluted n/a n/a n/a n/a
The accompanying notes are an integral part of these financial statements.
F-3
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
(Unaudited)
Nine Months Ended June 30,
-----------------------------
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,271 $ 4,273
Adjustments to reconcile net income to net cash
Provided (used) by operating activities:
Depreciation of properties and equipment 1,187 1,226
Net amortization and accretion of premiums and discounts on investments (4) 45
(Gain) loss on sale of fixed assets and repossessed assets 55 30
(Gain) loss on sale of securities available for sale 39 (3)
Provision for loan losses 900 437
Federal Home Loan Bank stock dividend (215) (267)
Deferred compensation expense 504 556
Net deferred loan fees (220) (811)
Change in accrued income tax (637) 1,275
Net gain on sale of loans (421) (593)
Proceeds from sale of loans held for sale 55,861 113,458
Originations of loans held for sale (52,148) (109,560)
Amortization of mortgage servicing rights 401 538
Impairment of mortgage servicing asset 130 -
Net increase in value of life insurance contracts (326) (721)
Change in assets and liabilities:
Accrued interest receivable (212) 8
Other assets 40 130
Interest payable on deposits and FHLB advances 344 436
Other liabilities 133 2,570
Other (1169) (1951)
Net cash provided (used) by operating activities 7,513 11,076
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from principal repayments and maturities of securities
available for sale 81 -
Proceeds from sale of securities available for sale 5,468 35,000
Purchase of securities available for sale (991) (50,005)
Proceeds from principal repayments and maturities of mortgage-backed
securities held to maturity 9,136 17,407
Purchase of mortgage-backed securities held to maturity (67,360) -
Purchases of properties and equipment (1,978) (749)
Purchase of Federal Home Loan Bank stock (369) (752)
Loan originations and principal collections, net (14,770) (41,935)
Proceeds from disposition of property and equipment 80 7
Proceeds from sale of repossessed assets 505
Investment in life insurance contracts - -
------------- -------------
Net cash used by investing activities (70,703) (40,522)
------------- -------------
(table continued on following page)
F-4
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
DOLLARS IN THOUSANDS
(Unaudited)
Nine Months Ended June 30,
-----------------------------
2004 2003
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 32,249 23,783
Net increase (decrease) in advances by borrowers for taxes and insurance (1,713) (1,398)
Advances from Federal Home Loan Bank 35,229 21,277
------------- -------------
Net cash provided by financing activities 65,765 43,662
------------- -------------
CHANGE IN CASH AND CASH EQUIVALENTS 2,576 14,216
Cash and cash equivalents, beginning of year 11,118 9,286
------------- -------------
Cash and cash equivalents, end of year $ 13,694 $ 23,502
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURE INFORMATION
Cash paid during the year for:
Interest on deposit accounts and other borrowings $ 6,729 $ 6,907
------------- -------------
Income taxes $ 2,512 $ 1,680
------------- -------------
SUPPLEMENTAL CASH FLOWS DISCLOSURE ON NONCASH INVESTING TRANSACTIONS
Acquisition of real estate and other assets in settlement of loans $ 10 $ 409
------------- -------------
The accompanying notes are an integral part of these financial statements.
F-5
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF NAMPA
SELECTED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Home
Federal Savings and Loan Association of Nampa and its wholly owned subsidiary,
Idaho Home Services Corporation. The financial statements of Home Federal
Savings and Loan Association of Nampa and Idaho Home Services Corporation (the
"Bank") have been prepared in conformity with accounting principles generally
accepted in the United States of America for interim financial information and
predominant practice followed by the financial services industry, and are
unaudited. All significant intercompany transactions and balances have been
eliminated. In the opinion of the Bank'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 of the Bank as of
September 30, 2003, has been derived from the audited consolidated statement of
financial condition of the Bank as of that date.
Certain information and note disclosures normally included in the Bank's annual
financial statements have been condensed or omitted. Therefore, these
consolidated financial statements and notes thereto should be read in
conjunction with a reading of the financial statements and notes included in the
Registration Statement on Form S-1 filed by Home Federal Bancorp, Inc. (the
"Company") with the Securities and Exchange Commission (File Number 333-113731),
as amended, initially filed on June 10, 2004, and declared effective on August
12, 2004 ("Registration Statement") and the Minority Stock Issuance by a
Saving's Association Subsidiary of a Mutual Holding Company on Form MHC-2 filed
by Home Federal with the Office of Thrift Supervision ("OTS") initially filed on
June 10, 2004 and approved on August 13, 2004. Certain amounts in the 2003
financial statements have been reclassified to conform to the 2004 presentation.
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 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 Bank 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;
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.
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 Bank
performs an independent valuation review of mortgage servicing rights for
potential declines in value. This valuation may include an independent appraisal
of the fair value of the servicing portfolio.
Deferred income taxes are computed using the asset and liability approach as
proscribed 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 enacted tax rates that will be in effect
when the differences between the financial statement carrying amounts and tax
basis of the existing assets and liabilities are expected to be reported in an
institution's income tax returns.
F-6
At June 30, 2004, there were no material changes in the Company's significant
accounting policies or critical accounting estimates from those disclosed in the
Company's Registration Statement.
NOTE 3 - COMMITMENTS TO EXTEND CREDIT
In the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities that are not presented in the accompanying
consolidated financial statements. The commitments and contingent liabilities
include various guarantees and commitments to extend credit. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the agreement. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed necessary
by the Company 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 June 30, 2004 (unaudited), and September 30, 2003, commitments to extend
credit were as follows (dollars in thousands):
(unaudited)
June 30, 2004 September 30, 2003
------------- ------------------
Unfunded commitments under lines of credit $ 18,800 $ 16,701
Other loan commitments 14,698 13,396
------------- ------------------
Total commitments to extend credit $ 34,498 $ 30,097
------------- ------------------
At June 30, 2004 (unaudited) the interest rates and terms of fixed rate loan
commitments were as follows (dollars in thousands):
At June 30, 2004 (unaudited)
------------------------------
Average
Amount Term
---------- -----------
Fixed rate loan commitments:
Interest rate:
5.00 - 5.99% $ 1,906 24 Years
6.00 - 6.99% 7,360 30 Years
7.00 - 7.99% 302 30 Years
NOTE 4 - PLAN OF REORGANIZATION AND STOCK ISSUANCE
On May 18, 2004, the Board of Directors of the Bank unanimously adopted the Plan
of Reorganization and Stock Issuance (the Plan). Pursuant to the Plan, the Bank
will: (i) convert to a federal stock savings bank (Stock Savings Bank) as the
successor to the Bank in its current mutual form; (ii) organize a Stock Holding
Company as a federally- chartered corporation that will own 100% of the common
stock of the Stock Savings Bank; and (iii) organize a Mutual Holding Company as
a federally-chartered mutual holding company that will own at least 51% of the
common stock of the Stock Holding Company so long as the Mutual Holding Company
remains in existence. The Stock Savings Bank will succeed to the business and
operations of the Bank in its mutual form and the Stock Holding Company will
sell a minority interest in its common stock in a public stock offering. The
Plan must be approved by the OTS and Insurance and by the Bank's members.
Following the completion of the reorganization, all depositors who had
membership or liquidation rights with respect to the Bank as of the effective
date of the reorganization will continue to have such rights solely with respect
to the
F-7
Mutual Holding Company so long as they continue to hold deposit accounts with
the Bank. In addition, all persons who become depositors of the Bank subsequent
to the reorganization will have such membership and liquidation rights with
respect to the Mutual Holding Company. Borrower members of the Bank at the time
of the reorganization will have the same membership rights in the Mutual Holding
Company that they had in the Bank immediately prior to the reorganization so
long as their existing borrowings remain outstanding.
The Stock Holding Company plans to offer to the public shares of common stock
representing a minority ownership of the estimated pro forma market value of the
Bank as determined by an independent appraisal. The Mutual Holding Company will
maintain the majority ownership of the Stock Holding Company. Cost incurred in
connection with the offering will be recorded as a reduction of the proceeds
from the offering. If the transaction is not consummated, all costs incurred in
connection with the transaction will be expensed. At June 30, 2004 (unaudited),
we incurred $472,000 in total reorganization costs; the costs are included in
other assets.
F-8