UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended June 30, 2005
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OR
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission File Number 000-51117
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HOME FEDERAL BANCORP, INC. OF LOUISIANA
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(Name of Small Business Issuer in Its Charter)
Federal 86-1127166
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
624 Market Street, Shreveport, Louisiana 71101
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number (318) 222-1145
Securities registered under Section 12(b) of the Exchange Act: NOT APPLICABLE
Securities registered under Section 12(b) of the Exchange Act:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Issuer's revenues for its most recent fiscal year ended June 30, 2005: $5.5
million.
As of September 15, 2005, the aggregate value of the 3,310,246 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
248,712 shares held by all directors and executives officers of the Registrant
and the Registrant's Employee Stock Ownership Plan ("ESOP") and Recognition and
Retention Plan ("RRP") as a group, was approximately $32 million. This figure is
based on the closing sales price of $9.80 per share of the Registrant's Common
Stock on September 15, 2005. Although directors and executive officers and the
ESOP were assumed to be "affiliates" of the Registrant for purposes of this
calculation, the classification is not to be interpreted as an admission of such
status.
Number of shares of Common Stock outstanding as of September 15, 2005: 3,558,958
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part of
the Form 10-KSB into which the document is incorporated.
(1) Portions of the Annual Report to Shareholders are incorporated into
Part II, Items 5 through 7 and Part III, Item 13 of this Form 10-KSB.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I
ITEM 1. BUSINESS
GENERAL
On January 18, 2005, Home Federal Savings and Loan Association ("Home
Federal Savings and Loan" or the "Association"), completed its reorganization to
the mutual holding company form of organization and formed Home Federal Bancorp,
Inc. of Louisiana ("Home Federal Bancorp" or the "Company") to serve as the
stock holding company for the Association. In connection with the
reorganization, the Company sold 1,423,583 shares of its common stock in a
subscription and community offering at a price of $10.00 per share. The Company
also issued 60% of its outstanding common stock in the reorganization to Home
Federal Mutual Holding Company of Louisiana, or 2,135,375 shares. The
Association is a federally chartered, stock savings and loan association and is
subject to federal regulation by the Federal Deposit Insurance Corporation and
the Office of Thrift Supervision. Services are provided to its customers by
three offices, all of which are located in the City of Shreveport, Louisiana.
The area served by the Association is primarily the Shreveport-Bossier City
metropolitan area; however, loan and deposit customers are found dispersed in a
wider geographical area covering much of northwest Louisiana.
The Company's only business activities are to hold all of the
outstanding common stock of Home Federal Savings and Loan. The Company is
authorized to pursue other business activities permitted by applicable laws and
regulations for savings and loan holding companies, which may include the
issuance of additional shares of common stock to raise capital or to support
mergers or acquisitions and borrowing funds for reinvestment in Home Federal
Savings and Loan.
Home Federal Bancorp does not own or lease any property, but instead
uses the premises, equipment and furniture of Home Federal Savings and Loan. At
the present time, the Company employs only persons who are officers of Home
Federal Savings and Loan to serve as officers of Home Federal Bancorp and may
also use the support staff of Home Federal Savings and Loan from time to time.
These persons are not separately compensated by Home Federal Bancorp.
Home Federal Savings and Loan is a federally chartered savings and
loan association located in Shreveport, Louisiana, which is the parish seat of
Caddo Parish. Home Federal Savings and Loan's business consists primarily of
attracting deposits from the general public and using those funds to invest in
securities and originate single-family and consumer loans.
HOME FEDERAL SAVINGS AND LOAN'S LENDING ACTIVITIES
GENERAL. At June 30, 2005, the net loan portfolio of Home Federal
Savings and Loan amounted to $23.6 million, representing approximately 21.2% of
its total assets at that date. The principal lending activity of Home Federal
Savings and Loan is the origination of one- to four-family residential loans. At
June 30, 2005, one- to four-family residential loans amounted to $19.3 million,
or 80.8% of its total loan portfolio. As part of Home Federal Savings and Loan's
desire to diversify its loan portfolio, Home Federal Savings and Loan also
offers consumer loans, which amounted to 15.7% of the total loan portfolio at
June 30, 2005.
The types of loans that Home Federal Savings and Loan may originate
are subject to federal and state laws and regulations. Interest rates charged on
loans are affected principally by the demand for such loans and the supply of
money available for lending purposes and the rates offered by its competitors.
These factors are, in turn, affected by general and economic conditions, the
monetary policy of the federal government, including the Federal Reserve Board,
legislative and tax policies, and governmental budgetary matters.
A savings institution generally may not make loans to one borrower and
related entities in an amount which exceeds the greater of (i) 15% of its
unimpaired capital and surplus, although loans in an amount equal to an
additional 10% of unimpaired capital and surplus may be made to a borrower if
the loans are fully secured by readily marketable securities, and (ii) $500,000.
At June 30, 2005, Home Federal Savings and Loan's regulatory limit on
loans-to-one borrower was $4.0 million and its five largest loans or groups of
loans-to-one borrower, including related entities, aggregated $950,000,
$837,042, $195,605, $186,313 and $185,571. Each of Home Federal Savings and
Loan's five largest loans or groups of loans was performing in accordance with
its terms at June 30, 2005.
1
Loans to or guaranteed by general obligations of a state or political
subdivision are not subject to the foregoing lending limits. As of June 30,
2005, Home Federal Savings and Loan had a loan commitment of $2.4 million to a
limited partnership established by the Housing Authority of Bossier City,
Louisiana. The loan will be secured by a first mortgage lien on real estate and
low to moderate income rental units in Bossier City, Louisiana as well as a
conditional assignment of rents. The commitment letter includes a condition that
the Housing Authority of Bossier City, Louisiana execute takeout agreements with
respect to Home Federal's position in the event of default. In addition, among
other conditions, the $2.4 million commitment letter requires a written
appraisal establishing the value of the rental property at completion of not
less than $5.3 million.
LOAN PORTFOLIO COMPOSITION. The following table shows the composition
of our loan portfolio by type of loan at the dates indicated.
JUNE 30,
-----------------------------------
2005 2004
---------------- ----------------
AMOUNT % AMOUNT %
------- ------ ------- ------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential $19,301 80.79% $20,903 90.82%
Other mortgage 837 3.50 101 .44
------- ------ ------- ------
Total real estate loans 20,138 84.29 21,004 91.26
------- ------ ------- ------
Consumer loans:
Home equity loans and second
mortgage loans 2,776 11.62 1,077 4.69
Savings account 470 1.97 590 2.56
Equity lines of credit 500 2.09 343 1.49
Other 6 .03 1 --
------- ------ ------- ------
Total consumer loans 3,752 15.71 2,011 8.74
------- ------ ------- ------
Total loans 23,890 100.00% 23,015 100.00%
======= ====== ======= ======
Less:
Allowance for loan losses 235 235
Deferred loan fees 80 101
------- -------
Net loans(1) $23,575 $22,679
======= =======
----------
(1) Does not include loans held for sale amounting to $70,000 at June 30, 2005
and $108,000 at June 30, 2004.
ORIGINATION OF LOANS. The lending activities of Home Federal Savings
and Loan are subject to the written underwriting standards and loan origination
procedures established by the board of directors and management. Loan
originations are obtained through a variety of sources, primarily consisting of
referrals from real estate brokers and existing customers. Written loan
applications are taken by one of Home Federal Savings and Loan's loan officers.
The loan officer also supervises the procurement of credit reports, appraisals
and other documentation involved with a loan. As a matter of practice, Home
Federal Savings and Loan obtains independent outside appraisals on substantially
all of its loans. Under the lending policy of Home Federal Savings and Loan, a
title opinion must be obtained for each real estate loan. Home Federal Savings
and Loan also requires fire and extended coverage casualty insurance in order to
protect the properties securing its real estate loans. Borrowers must also
obtain flood insurance policies when the property is in a flood hazard area.
Home Federal Savings and Loan's loan approval process is intended to
assess the borrower's ability to repay the loan, the viability of the loan and
the value of the property that will secure the loan. Loans up to $333,700 must
2
be approved by Home Federal Savings and Loan's loan committee which currently
consists of the Chief Executive Officer, the Chief Financial Officer and the
Vice President of Lending. Loans in excess of $333,700 must be approved by Home
Federal Savings and Loan's board of directors. All loans are ratified by the
board of directors of Home Federal Savings and Loan.
Home Federal Savings and Loan also purchases loans from a builder of
pre-fabricated housing. The loans are generally secured by rural properties and
the seller continues to perform the servicing functions on the loan. Although
the loans are originated with fixed-rates, Home Federal Savings and Loan
receives an adjustable-rate of interest with a floor rate of 6% and a ceiling of
8.75%. Under the terms of the agreement, the seller repurchases any loan that
becomes more than 90 days delinquent. At June 30, 2005, Home Federal Savings and
Loan had approximately $8.1 million of such loans in its portfolio.
The following table shows total loans originated, sold and repaid
during the periods indicated.
YEAR ENDED JUNE 30,
-------------------
2005 2004
-------- --------
(In Thousands)
Loan originations:
One- to four-family residential $ 6,799 $ 5,759
Other mortgage 843 --
Consumer 3,583 993
-------- --------
Total loan originations 11,225 6,752
-------- --------
Loans purchased 2,086 1,044
Total loan originations
and loans purchased 13,311 7,796
-------- --------
Loans sold (2,146) (6,335)
Loan principal repayments (10,327) (11,977)
-------- --------
Total loans sold and principal
repayments (12,473) (18,312)
Decrease due to other items, net (1) 58 1,202
-------- --------
Net increase (decrease) in loan portfolio $ 896 $ (9,312)
======== ========
----------
(1) Other items consist of deferred loan fees, the allowance for loan losses
and loans held for sale at year end.
Although federal laws and regulations permit savings institutions to
originate and purchase loans secured by real estate located throughout the
United States, Home Federal Savings and Loan concentrates its lending activity
to its primary market area in Caddo Parish, Louisiana and the surrounding area.
Subject to its loans-to-one borrower limitation, Home Federal Savings and Loan
is permitted to invest without limitation in residential mortgage loans and up
to 400% of its capital in loans secured by non-residential or commercial real
estate. Home Federal Savings and Loan also may invest in secured and unsecured
consumer loans in an amount not exceeding 35% of total assets. This 35%
limitation may be exceeded for certain types of consumer loans, such as home
equity and property improvement loans secured by residential real property. In
addition, Home Federal Savings and Loan may invest up to 10% of its total assets
in secured and unsecured loans for commercial, corporate, business or
agricultural purposes. At June 30, 2005, Home Federal Savings and Loan was
within each of the above lending limits.
During fiscal 2005 and 2004, Home Federal sold $2.1 million and $6.3
million of loans, respectively. Home Federal recognized gain on sale of loans of
$17,882 during fiscal 2005 and $61,704 during fiscal 2004. Loans were sold
during this period primarily to another financial institution. Such loans were
sold against forward sales commitments with servicing released and without
recourse after a certain amount of time, typically 90 days. The loans sold
primarily consisted of long-term, fixed rate residential real estate loans.
These loans were originated during a period of historically low interest rates
and were sold to reduce Home Federal's interest rate risk. Management will
continue to sell loans in the future to the extent it believes the interest rate
environment is unfavorable and interest rate risk is unacceptable.
CONTRACTUAL TERMS TO FINAL MATURITIES. The following table shows the
scheduled contractual maturities of our loans as of June 30, 2005, before giving
effect to net items. Demand loans, loans having no stated schedule
3
of repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The amounts shown below do not take into account loan prepayments.
ONE- TO
FOUR-
FAMILY OTHER
RESIDENTIAL MORTGAGE CONSUMER TOTAL
----------- -------- -------- -------
(In Thousands)
Amounts due after June 30, 2005 in:
One year or less $ 1,047 $ -- $1,524 $ 2,571
After one year through two years 101 -- 16 117
After two years through three years 302 -- 351 653
After three years through five years 466 -- 303 769
After five years through ten years 2,891 -- 830 3,721
After ten years through fifteen years 3,206 -- 604 3,809
After fifteen years 11,289 837 123 12,249
------- ---- ------ -------
Total $19,302 $837 $3,751 $23,890
======= ==== ====== =======
The following table sets forth the dollar amount of all loans, before
net items, due after June 30, 2005 which have fixed interest rates or which have
floating or adjustable interest rates.
FLOATING OR
FIXED-RATE ADJUSTABLE-RATE TOTAL
---------- --------------- -------
(In Thousands)
One- to four-family residential $10,970 $8,332 $19,302
Other mortgage 837 -- 837
Consumer 3,722 29 3,751
------- ------ -------
Total $15,529 $8,361 $23,890
======= ====== =======
Scheduled contractual maturities of loans do not necessarily reflect
the actual expected term of the loan portfolio. The average life of mortgage
loans is substantially less than their average contractual terms because of
prepayments. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on current mortgage loans are lower than
existing mortgage loan rates (due to refinancing of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher yielding loans are repaid or
refinanced at lower rates.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of Home Federal Savings and Loan is the origination of loans secured by
single-family residences. At June 30, 2005, $19.3 million, or 80.8%, of its
total loan portfolio, before net items, consisted of one- to four-family
residential loans.
The loan-to-value ratio, maturity and other provisions of the loans
made by Home Federal Savings and Loan generally have reflected the policy of
making less than the maximum loan permissible under applicable regulations, in
accordance with sound lending practices, market conditions and underwriting
standards established by Home Federal Savings and Loan. Home Federal Savings and
Loan's current lending policy on one- to four-family residential loans generally
limits the maximum loan-to-value ratio to 80% or less of the appraised value of
the property although Home Federal Savings and Loan will lend up to a 95%
loan-to-value ratio with private mortgage insurance. These loans are amortized
on a monthly basis with principal and interest due each month and generally
include "due-on-sale" clauses.
At June 30, 2005, $11.0 million, or 56.8%, of Home Federal Savings and
Loan's one- to four-family residential mortgage loans were fixed-rate loans.
Fixed-rate loans generally have maturities ranging from 15 to 30 years and are
fully amortizing with monthly loan payments sufficient to repay the total amount
of the loan with interest by the end of the loan term. Home Federal Savings and
Loan's fixed-rate loans generally are originated under terms, conditions and
documentation which permit them to be sold to U.S. Government-sponsored
agencies, such as the Federal Home Loan Mortgage Corporation, and other
investors in the secondary mortgage market.
4
Consistent with its asset/liability management, Home Federal Savings and Loan
has sold a significant portion of its long-term, fixed rate loans over the past
two years.
Although Home Federal Savings and Loan offers adjustable rate loans,
substantially all of its single-family loan originations over the last few years
have consisted of fixed-rate loans due to the low interest rate environment. The
adjustable-rate loans held in portfolio typically have interest rates which
adjust on an annual basis. These loans generally have an annual cap of 2% on any
increase or decrease and a cap of 6% above or below the initial rate over the
life of the loan. Such loans are underwritten based on the initial rate plus 2%.
CONSUMER LOANS. Home Federal Savings and Loan is authorized to make
loans for a wide variety of personal or consumer purposes. Home Federal Savings
and Loan originates consumer loans in order to accommodate its customers and
because such loans generally have shorter terms and higher interest rates than
residential mortgage loans. The consumer loans offered by Home Federal Savings
and Loan consist of home equity and second mortgage loans, loans secured by
deposit accounts with Home Federal Savings and Loan, equity lines of credit and
automobile loans. As part of its lending strategy, Home Federal Savings and Loan
has begun to place a greater emphasis on the origination of consumer loans.
However, Home Federal Savings and Loan does not intend to materially expand its
product offerings and instead intends to focus on increasing the volume of its
current products, primarily home equity and second mortgage loans. At June 30,
2005, $3.8 million, or 15.7% of Home Federal Savings and Loan's total loan
portfolio consisted of consumer loans compared to $2.0 million, or 8.7% of its
loan portfolio at June 30, 2004.
Of the $3.8 million of consumer loans held by Home Federal Savings and
Loan at June 30, 2005, $2.8 million consisted of home equity and second mortgage
loans compared to $1.1 million of home equity and second mortgage loans at June
30, 2004. These loans are secured by the underlying equity in the borrower's
residence. Home Federal Savings and Loan does not require that it hold the first
mortgage on the properties that secure its second mortgage loans. The amount of
Home Federal Savings and Loan's second mortgage loans generally cannot exceed a
loan-to-value ratio of 80% after taking into consideration the first mortgage
loan. These loans are typically three-to-five year balloon loans with fixed
rates and contain an on-demand clause that allows Home Federal Savings and Loan
to call the loan in at any time.
Home Federal Savings and Loan offers loans secured by deposit accounts
in Home Federal Savings and Loan, which loans amounted to $469,952, or 1.9% of
Home Federal Savings and Loan's total loan portfolio at June 30, 2005. Such
loans are originated for up to 90% of the account balance, with a hold placed on
the account restricting the withdrawal of the account balance. The interest rate
on the loan is equal to the interest rate paid on the account plus 2%. These
loans typically are payable on demand with a maturity date of one year.
Home Federal Savings and Loan also offers lines of credit secured by a
borrower's equity in real estate.
Consumer loans generally have shorter terms and higher interest rates
than residential mortgage loans, but generally entail greater credit risk than
residential mortgage loans, particularly those loans secured by assets that
depreciate rapidly, such as automobiles, boats and recreational vehicles. In
such cases, repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment for the outstanding loan and the remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In particular, amounts realizable on the sale of repossessed
automobiles may be significantly reduced based upon the condition of the
automobiles and the fluctuating demand for used automobiles.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, Home Federal Savings and Loan generally receives loan origination fees or
"points" for originating loans. Loan points are a percentage of the principal
amount of the mortgage loan and are charged to the borrower in connection with
the origination of the loan.
ASSET QUALITY
GENERAL. Home Federal Savings and Loan's collection procedures provide
that when a loan is 15 days past due, a late charge notice is sent to the
borrower requesting payment. If the delinquency continues at 30 days, personal
contact efforts are attempted, either in person or by telephone. If a loan
becomes 60 days past due and no progress has been made in resolving the
delinquency, a collection letter from legal counsel is sent and personal contact
is attempted. When a loan continues in a delinquent status for 90 days or more,
and a repayment schedule has not been made or kept by the borrower, generally a
notice of intent to foreclose is sent to the borrower. If the delinquency is not
cured, foreclosure proceedings are initiated. In most cases, deficiencies are
cured promptly.
5
While Home Federal Savings and Loan generally prefers to work with borrowers to
resolve such problems, Home Federal Savings and Loan will institute foreclosure
or other collection proceedings when necessary to minimize any potential loss.
Loans are placed on non-accrual status when management believes the
probability of collection of interest is doubtful. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income. Home Federal Savings and Loan generally discontinues the
accrual of interest income when the loan becomes 90 days past due as to
principal or interest unless the credit is well secured and Home Federal Savings
and Loan believes it will fully collect.
Real estate and other assets acquired by Home Federal Savings and Loan
as a result of foreclosure or by deed-in-lieu of foreclosure are classified as
real estate owned until sold. Home Federal Savings and Loan did not have any
real estate owned at June 30, 2005 or 2004.
DELINQUENT LOANS. The following table shows the delinquencies in our
loan portfolio as of the dates indicated.
JUNE 30, 2005 JUNE 30, 2004
------------------------------------------- -------------------------------------------
30-89 90 OR MORE DAYS 30-89 90 OR MORE DAYS
DAYS OVERDUE OVERDUE DAYS OVERDUE OVERDUE
-------------------- -------------------- -------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
One- to four-family
residential loans 2 $158 -- $-- 3 $135 -- $--
Other mortgage loans -- -- -- -- -- -- -- --
Consumer loans -- -- -- -- -- -- 2 2
--- ---- --- --- --- ---- --- ---
2 $158 -- $-- 3 $135 2 $ 2
=== ==== === === === ==== === ===
Total delinquent loans
Delinquent loans to total
net loans .67% --% .60% --%
Delinquent loans to total
Loans .66% --% .59% --%
6
NON-PERFORMING ASSETS. The following table shows the amounts of our
non-performing assets (defined as non-accruing loans, accruing loans 90 days or
more past due and real estate owned) at the dates indicated. Home Federal
Savings and Loan did not have troubled debt restructurings at either of the
dates indicated.
JUNE 30,
----------------------
2005 2004
---- ----
(Dollars in Thousands)
Non-accruing loans:
One- to four-family residential $-- $--
Other mortgage -- --
Consumer -- --
--- ---
Total non-accruing loans $-- $--
--- ---
Accruing loans 90 days or more
past due:
One- to four-family residential $-- $--
Other mortgage -- 2
Consumer -- --
--- ---
Total accruing loans 90 days or
more past due -- 2
--- ---
Total non-performing loans(1) -- 2
--- ---
Real estate owned, net -- --
--- ---
Total non-performing assets $-- $ 2
=== ===
Total non-performing loans as a percent of
loans, net --% --%
Total non-performing assets as a percent
of total assets --% --%
----------
(1) Non-performing loans consist of non-accruing loans plus accruing loans 90
days or more past due.
CLASSIFIED ASSETS. Federal regulations require that each insured
savings institution classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a higher
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified as loss, the insured institution must
either establish specific allowances for loan losses in the amount of 100% of
the portion of the asset classified loss, or charge-off such amount. General
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. Federal examiners may disagree with
an insured institution's classifications and amounts reserved.
Home Federal Savings and Loan did not have any classified assets at
June 30, 2005.
7
ALLOWANCE FOR LOAN LOSSES. At June 30, 2005, Home Federal Savings and
Loan's allowance for loan losses amounted to $235,000. The allowance for loan
losses is maintained at a level believed, to the best of management's knowledge,
to cover all known and inherent losses in the portfolio both probable and
reasonable to estimate at each reporting date. The level of allowance for loan
losses is based on management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing conditions. Home
Federal Savings and Loan is primarily engaged in originating single-family
residential loans. The management of Home Federal Savings and Loan considers the
deficiencies of all classified loans in determining the amount of allowance for
loan losses required at each reporting date. Management analyzes the probability
of the correction of the substandard loans' weaknesses and the extent of any
known or inherent losses that Home Federal Savings and Loan might sustain on
them.
While management believes that it determines the size of the allowance
based on the best information available at the time, the allowance will need to
be adjusted as circumstances change and assumptions are updated. Future
adjustments to the allowance could significantly affect net income.
The following table shows changes in our allowance for loan losses
during the periods presented. Home Federal Savings and Loan did not have any
charge-offs or recoveries during fiscal 2005 or 2004.
AT OR FOR THE YEAR ENDED JUNE 30,
---------------------------------
2005 2004
------- -----------
(Dollars in Thousands)
Total loans outstanding at end of period $23,960 $ 23,122
Average loans outstanding 22,973 27,277
Allowance for loan losses, beginning of period 235 235
Provision for loan losses -- --
Allowance for loan losses, end of period 235 235
Allowance for loan losses as a percent
of non-performing loans --% 11,750.00%
Allowance for loan losses as a percent
of loans outstanding 0.98% 1.02%
The following table shows how our allowance for loan losses is
allocated by type of loan at each of the dates indicated.
JUNE 30,
--------------------------------------------
2005 2004
--------------------- --------------------
LOAN LOAN
CATEGORY CATEGORY
AMOUNT AS A % AMOUNT AS A %
OF OF TOTAL OF OF TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS
--------- --------- --------- --------
(Dollars in Thousands)
One- to four-family residential $235 80.79% $235 90.78%
Other mortgage -- 3.50 -- .44
Consumer -- 15.71 -- 8.78
---- ------ ---- ------
Total $235 100.00% $235 100.00%
==== ====== ==== ======
8
INVESTMENT SECURITIES
Home Federal Savings and Loan has authority to invest in various types
of securities, including mortgage-backed securities, U.S. Treasury obligations,
securities of various federal agencies and of state and municipal governments,
certificates of deposit at federally insured banks and savings institutions,
certain bankers' acceptances and federal funds. Home Federal Savings and Loan's
investment strategy is established by the board of directors.
The following table sets forth certain information relating to our
investment securities portfolio at the dates indicated.
JUNE 30,
-----------------------------------------
2005 2004
------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- --------- -------
(In Thousands)
Securities Held to Maturity:
Corporate securities $ -- $ -- $ 15 $ 15
FHLB stock 632 632 903 903
Municipal obligations -- -- 270 271
Mortgage-backed securities 981 1,024 1,327 1,394
------- ------- ------- -------
Total Securities Held to
Maturity 1,613 1,656 2,515 2,583
------- ------- ------- -------
Securities Available for Sale:
FHLB and FNMA Notes 1,976 1,980 -- --
Corporate securities 2,094 2,057 2,037 2,016
Mortgage-backed securities 71,222 71,723 64,745 62,238
------- ------- ------- -------
Total Securities Available
for Sale 75,292 75,760 66,782 64,254
------- ------- ------- -------
Total Investment Securities $76,905 $77,416 $69,297 $66,837
======= ======= ======= =======
The following table sets forth the amount of investment securities
which contractually mature during each of the periods indicated and the weighted
average yields for each range of maturities at June 30, 2005. No tax-exempt
yields have been adjusted to a tax-equivalent basis. The amounts reflect the
fair value of Home Federal Savings and Loan's securities at June 30, 2005.
AMOUNTS AT JUNE 30, 2005 WHICH MATURE IN
--------------------------------------------------------------------------------------
OVER ONE
ONE WEIGHTED YEAR WEIGHTED OVER FIVE WEIGHTED OVER WEIGHTED
YEAR AVERAGE THROUGH AVERAGE THROUGH AVERAGE TEN AVERAGE
OR LESS YIELD FIVE YEARS YIELD TEN YEARS YIELD YEARS YIELD
------- -------- ---------- -------- --------- -------- ------- --------
(Dollars in Thousands)
Bonds and other
debt securities:
FHLB and FNMA
Notes
$-- --% $1,980 3.79% $ -- --% $ -- --%
Mortgage-backed
Securities -- -- 25 7.17 225 6.12 72,497 4.85
Equity securities(1):
ARM Fund -- -- -- -- -- -- 2,057 3.42
FHLB stock -- -- -- -- -- -- 632 3.43
--- --- ------ ---- ---- ---- ------- ----
Total investment
securities and
FHLB stock $-- --% $2,005 3.83% $225 6.12% $75,186 4.80%
=== === ====== ==== ==== ==== ======= ====
----------
(1) None of the listed equity securities has a stated maturity.
9
Mortgage-backed securities represent a participation interest in a
pool of one- to four-family or multi-family mortgages. The mortgage originators
use intermediaries (generally U.S. Government agencies and government-sponsored
enterprises) to pool and repackage the participation interests in the form of
securities, with investors receiving the principal and interest payments on the
mortgages. Such U.S. Government agencies and government-sponsored enterprises
guarantee the payment of principal and interest to investors.
Mortgage-backed securities are typically issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security approximates the life of the underlying
mortgages.
The mortgage-backed securities of Home Federal Savings and Loan
consist of Ginnie Mae securities, Freddie Mac securities and Fannie Mae
securities. Ginnie Mae is a government agency within the Department of Housing
and Urban Development which is intended to help finance government-assisted
housing programs. Ginnie Mae securities are backed by loans insured by the
Federal Housing Administration, or guaranteed by the Veterans Administration.
The timely payment of principal and interest on Ginnie Mae securities is
guaranteed by Ginnie Mae and backed by the full faith and credit of the U.S.
Government. Freddie Mac is a private corporation chartered by the U.S.
Government. Freddie Mac issues participation certificates backed principally by
conventional mortgage loans. Freddie Mac guarantees the timely payment of
interest and the ultimate return of principal on participation certificates.
Fannie Mae is a private corporation chartered by the U.S. Congress with a
mandate to establish a secondary market for mortgage loans. Fannie Mae
guarantees the timely payment of principal and interest on Fannie Mae
securities. Freddie Mac and Fannie Mae securities are not backed by the full
faith and credit of the U.S. Government, but because Freddie Mac and Fannie Mae
are U.S. Government-sponsored enterprises, these securities are considered to be
among the highest quality investments with minimal credit risks.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of Home Federal Savings and Loan.
The following table sets forth the composition of our mortgage-backed
securities portfolio at each of the dates indicated. The amounts reflect the
fair value of the Home Federal Savings and Loan's mortgage-backed securities at
June 30, 2005 and 2004.
JUNE 30,
-----------------
2005 2004
------- -------
(In Thousands)
Fixed rate:
GNMA $ 671 $ 851
FHLMC 8,081 7,322
FNMA 60,037 50,376
------- -------
Total fixed rate 68,789 58,549
------- -------
Adjustable rate:
GNMA 833 1,246
FNMA 2,069 2,567
FHLMC 1,056 1,270
------- -------
Total adjustable-rate 3,958 5,083
------- -------
Total mortgage-backed securities $72,477 $63,632
======= =======
10
Information regarding the contractual maturities and weighted average
yield of our mortgage-backed securities portfolio at June 30, 2005 is presented
below. Due to repayments of the underlying loans, the actual maturities of
mortgage-backed securities generally are substantially less than the scheduled
maturities. The amounts reflect the fair value of Home Federal Savings and
Loan's mortgage-backed securities at June 30, 2005.
AMOUNTS AT JUNE 30, 2005 WHICH MATURE IN
------------------------------------------------------------------
WEIGHTED OVER ONE WEIGHTED WEIGHTED
ONE YEAR AVERAGE THROUGH AVERAGE OVER FIVE AVERAGE
OR LESS YIELD FIVE YEARS YIELD YEARS YIELD
-------- -------- ---------- -------- --------- --------
(In Thousands)
Fixed rate:
GNMA $-- --% $-- --% $ 671 5.17%
FHLMC -- -- 7 7.26 8,074 4.76
FNMA -- -- 18 7.14 60,019 4.54
--- --- --- ---- ------- ----
Total fixed-rate -- -- 25 7.17 68,764 4.57
--- --- --- ---- ------- ----
Adjustable rate:
GNMA -- -- -- -- 833 3.49
FNMA -- -- -- -- 2,069 3.30
FHLMC -- -- -- -- 1,056 3.61
--- --- --- ---- ------- ----
Total adjustable-rate -- -- -- -- 3,958 3.42
--- --- --- ---- ------- ----
Total $-- --% $25 7.17% $72,722 4.51%
=== === === ==== ======= ====
The following table sets forth the purchases, sales and principal
repayments of our mortgage-backed securities during the periods indicated.
AT OR FOR THE
YEAR ENDED JUNE 30,
-------------------
2005 2004
------- --------
(Dollars in
Thousands)
Mortgage-backed securities at beginning of period $66,072 $ 52,970
Purchases 15,849 34,811
Repayments (9,765) (13,670)
Sales -- (8,123)
Amortizations of premiums and discounts, net 47 84
------- --------
Mortgage-backed securities at end of period $72,203 $ 66,072
======= ========
Weighted average yield at end of period 4.85% 4.75%
======= ========
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of Home Federal Savings and
Loan's funds for lending and other investment purposes. In addition to deposits,
principal and interest payments on loans and investment securities are a source
of funds. Loan repayments are a relatively stable source of funds, while deposit
inflows and outflows are significantly influenced by general interest rates and
money market conditions. Borrowings may also be used on a short-term basis to
compensate for reductions in the availability of funds from other sources and on
a longer-term basis for general business purposes.
DEPOSITS. Deposits are attracted by Home Federal Savings and Loan
principally from Caddo Parish and to a lesser extent from Bossier Parish.
Deposit account terms vary, with the principal differences being the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate.
Home Federal Savings and Loan obtains deposits primarily from
residents of Louisiana and particularly Caddo and Bossier Parishes. Home Federal
Savings and Loan has not solicited deposits from outside Louisiana or paid fees
to brokers to solicit funds for deposit.
11
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established on a periodic basis. Management determines the rates
and terms based on rates paid by competitors, the need for funds or liquidity,
growth goals and federal regulations. Home Federal Savings and Loan attempts to
control the flow of deposits by pricing its accounts to remain generally
competitive with other financial institutions in its market area.
The following table shows the distribution of, and certain other
information relating to, our deposits by type of deposit, as of the dates
indicated.
JUNE 30,
-----------------------------------
2005 2004
---------------- ----------------
AMOUNT % AMOUNT %
------- ------ ------- ------
(Dollars in Thousands)
Certificate accounts:
0.00% - 0.99% $ 250 .36% $ 1,846 2.71%
1.00% - 1.99% 6,543 9.35 16,642 24.42
2.00% - 2.99% 20,564 29.38 11,084 16.27
3.00% - 3.99% 12,922 18.46 7,190 10.55
4.00% - 4.99% 10,493 14.99 5,911 8.67
5.00% - 5.99% 1,941 2.77 4,700 6.90
6.00% - 6.99% 1,796 2.57 4,875 7.16
------- ------ ------- ------
Total certificate accounts 54,509 77.88 52,248 76.68
------- ------ ------- ------
Transaction accounts:
Savings 4,917 7.02 5,530 8.12
NOW 6,825 9.75 6,006 8.82
Money market 3,744 5.35 4,350 6.38
------- ------ ------- ------
Total transaction accounts 15,486 22.12 15,886 23.32
------- ------ ------- ------
Total deposits $69,995 100.00% $68,134 100.00%
======= ====== ======= ======
The following table shows the average balance of each type of deposit
and the average rate paid on each type of deposit for the periods indicated.
YEAR ENDED JUNE 30,
---------------------------------------------------------------
2005 2004
------------------------------ ------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE EXPENSE RATE PAID BALANCE EXPENSE RATE PAID
------- -------- --------- ------- -------- ---------
(Dollars in Thousands)
Savings $ 5,368 $ 27 .50% $ 5,387 $ 27 .49%
NOW 6,041 13 .22 5,557 12 .22
Money market 4,129 17 .41 4,531 18 .41
Certificates of deposit 53,335 1,710 3.21 53,899 1,811 3.36
------- ------ ---- ------- ------ ----
Total deposits $68,873 $1,767 2.57% $69,374 $1,868 2.69%
======= ====== ==== ======= ====== ====
The following table shows our savings flows during the periods
indicated.
YEAR ENDED JUNE 30,
-------------------
2005 2004
------- -------
(In Thousands)
Total deposits at beginning of period $68,134 $71,390
Net deposits (withdrawals) 805 (4,363)
Interest credited 1,056 1,107
------- -------
Total increase (decrease) in deposits $ 1,861 $(3,256)
======= =======
12
The following table presents, by various interest rate categories and
maturities, the amount of certificates of deposit at June 30, 2005.
BALANCE AT JUNE 30, 2005
MATURING IN THE 12 MONTHS ENDING JUNE 30,
-------------------------------------------------
CERTIFICATES OF DEPOSIT 2006 2007 2008 THEREAFTER TOTAL
----------------------- ------- ------- ------ ---------- -------
(In Thousands)
Less than 2.00% $ 6,559 $ 222 $ 1 $ 11 $ 6,793
2.00% - 2.99% 12,635 6,895 441 593 20,564
3.00% - 3.99% 4,779 1,635 3,069 3,439 12,922
4.00% - 4.99% 920 2,624 1,298 5,651 10,493
5.00% - 5.99% 378 1,563 -- -- 1,941
6.00% - 6.99% 1,796 -- -- -- 1,796
------- ------- ------ ------ -------
Total certificate accounts $27,067 $12,939 $4,809 $9,694 $54,509
======= ======= ====== ====== =======
The following table shows the maturities of our certificates of
deposit of $100,000 or more at June 30, 2005 by time remaining to maturity.
WEIGHTED
QUARTER ENDING: AMOUNT AVERAGE RATE
--------------- ------ ------------
(Dollars in
Thousands)
September 30, 2005 $1,048 3.89%
December 31, 2005 869 2.62
March 31, 2006 507 4.23
June 30, 2006 610 4.12
After June 30, 2006 2,112 3.71
------ ----
Total certificates of deposit with
balances of $100,000 or more $5,146 3.67%
====== ====
BORROWINGS. Home Federal Savings and Loan may obtain advances from the
Federal Home Loan Bank of Dallas upon the security of the common stock it owns
in that bank and certain of its residential mortgage loans and mortgage-backed
and other investment securities, provided certain standards related to
creditworthiness have been met. These advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Federal Home Loan Bank advances are generally available to meet
seasonal and other withdrawals of deposit accounts and to permit increased
lending.
As of June 30, 2005, Home Federal Savings and Loan was permitted to
borrow up to an aggregate total of $85 million from the Federal Home Loan Bank
of Dallas. Home Federal Savings and Loan had $8.2 million and $9.7 million of
Federal Home Loan Bank advances outstanding at June 30, 2005 and 2004,
respectively.
13
The following table shows certain information regarding our borrowings
at or for the dates indicated:
AT OR FOR THE YEAR
ENDED JUNE 30,
------------------
2005 2004
------ -------
(Dollars in
Thousands)
FHLB advances:
Average balance outstanding $8,471 $ 9,527
Maximum amount outstanding at any
month-end during the period $9,541 $10,193
Balance outstanding at end of period $8,224 $ 9,748
Average interest rate during the
period 3.10% 3.09%
Weighted average interest rate at end
of period 3.24% 3.12%
At June 30, 2005, $2.8 million of the Home Federal Savings and Loan's
borrowings were short-term (maturities of one year or less). Such short-term
borrowings had a weighted average interest rate of 3.2% at June 30, 2005.
SUBSIDIARIES
At June 30, 2005, Home Federal Savings and Loan had one subsidiary,
Metro Financial Services, Inc., an inactive, wholly-owned subsidiary.
TOTAL EMPLOYEES
Home Federal Savings and Loan had 19 full-time employees and no
part-time employee at June 30, 2005. None of these employees are represented by
a collective bargaining agent, and Home Federal Savings and Loan believes that
it enjoys good relations with its personnel.
MARKET AREA
Home Federal Savings and Loan's primary market area for loans and
deposits is in northwest Louisiana, particularly Caddo Parish. Shreveport is the
Parish Seat for Caddo Parrish. Home Federal Savings and Loan's operating
strategy is based on strong community service.
Home Federal Savings and Loan's primary market area is suburban in
nature, as indicated by the population density of Caddo and Bossier Parishes.
Shreveport is the largest population center in the regional market area served
by Home Federal Savings and Loan. Services, wholesale/retail trade,
manufacturing, casino gaming and government constitute the basis of a fairly
diversified local economy. Competition for financial services in our primary
market area is intense.
COMPETITION
Home Federal Savings and Loan faces significant competition both in
attracting deposits and in making loans. Its most direct competition for
deposits has come historically from commercial banks, credit unions and other
savings institutions located in its primary market area, including many large
financial institutions which have greater financial and marketing resources
available to them. In addition, Home Federal Savings and Loan faces significant
competition for investors' funds from short-term money market securities, mutual
funds and other corporate and government securities. Home Federal Savings and
Loan does not rely upon any individual group or entity for a material portion of
its deposits. The ability of Home Federal Savings and Loan to attract and retain
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment opportunities.
14
Home Federal Savings and Loan's competition for real estate loans
comes principally from mortgage banking companies, commercial banks, other
savings institutions and credit unions. Home Federal Savings and Loan competes
for loan originations primarily through the interest rates and loan fees it
charges, and the efficiency and quality of services it provides borrowers.
Factors which affect competition include general and local economic conditions,
current interest rate levels and volatility in the mortgage markets. Competition
may increase as a result of the continuing reduction of restrictions on the
interstate operations of financial institutions.
REGULATION
Set forth below is a brief description of certain laws relating to the
regulation of Home Federal Bancorp, Home Federal Mutual Holding Company and Home
Federal Savings and Loan. This description does not purport to be complete and
is qualified in its entirety by reference to applicable laws and regulations.
GENERAL
Home Federal Savings and Loan, as a federally chartered savings and
loan association, is subject to federal regulation and oversight by the Office
of Thrift Supervision extending to all aspects of its operations. Home Federal
Savings and Loan also is subject to regulation and examination by the Federal
Deposit Insurance Corporation, which insures the deposits of Home Federal
Savings and Loan to the maximum extent permitted by law, and requirements
established by the Federal Reserve Board. Federally chartered savings
institutions are required to file periodic reports with the Office of Thrift
Supervision and are subject to periodic examinations by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation. The investment and
lending authority of savings institutions are prescribed by federal laws and
regulations, and such institutions are prohibited from engaging in any
activities not permitted by such laws and regulations. Such regulation and
supervision primarily is intended for the protection of depositors and not for
the purpose of protecting shareholders.
Federal law provides the federal banking regulators, including the
Office of Thrift Supervision and Federal Deposit Insurance Corporation, with
substantial enforcement powers. The Office of Thrift Supervision's enforcement
authority over all savings institutions and their holding companies includes,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to initiate injunctive actions. In general,
these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the Office of Thrift Supervision. Any change in such
regulations, whether by the Federal Deposit Insurance Corporation, Office of
Thrift Supervision or Congress, could have a material adverse impact on Home
Federal Mutual Holding Company, Home Federal Bancorp and Home Federal Savings
and Loan and their operations.
REGULATION OF HOME FEDERAL BANCORP, INC. AND HOME FEDERAL MUTUAL HOLDING COMPANY
HOLDING COMPANY ACQUISITIONS. Home Federal Bancorp and Home Federal
Mutual Holding Company are savings and loan holding companies under the Home
Owners' Loan Act, and are registered with the Office of Thrift Supervision.
Federal law generally prohibits a savings and loan holding company, without
prior Office of Thrift Supervision approval, from acquiring the ownership or
control of any other savings institution or savings and loan holding company, or
all, or substantially all, of the assets or more than 5% of the voting shares of
the savings institution or savings and loan holding company. These provisions
also prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
institution not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the Office of Thrift Supervision.
The Office of Thrift Supervision may not approve any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (1) the approval
of interstate supervisory acquisitions by savings and loan holding companies;
and (2) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
15
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
HOLDING COMPANY ACTIVITIES. Home Federal Bancorp and Home Federal
Mutual Holding Company operate as unitary savings and loan holding companies.
Although savings and loan holding companies are not subject to specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, federal regulations do prescribe such restrictions on
subsidiary savings institutions, as described below. Home Federal Savings and
Loan must notify the Office of Thrift Supervision 30 days before declaring any
dividend. In addition, the financial impact of a holding company on its
subsidiary institution is a matter that is evaluated by the Office of Thrift
Supervision and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
WAIVERS OF DIVIDENDS BY HOME FEDERAL MUTUAL HOLDING COMPANY. It is the
policy of a number of mutual holding companies to waive the receipt of dividends
declared by their subsidiary companies. Office of Thrift Supervision regulations
require Home Federal Mutual Holding Company to notify the Office of Thrift
Supervision of any proposed waiver of its receipt of any dividends. The Office
of Thrift Supervision reviews dividend waiver notices on a case-by-case basis,
and, in general, does not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction to the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with Statement of Financial Accounting Standards No. 5, where the
savings association determines that the payment of such dividend to the mutual
holding company is probable, an appropriate dollar amount is recorded as a
liability; and (iv) the amount of any waived dividend is considered as having
been paid by the savings association in evaluating any proposed dividend under
Office of Thrift Supervision capital distribution regulations. Home Federal
Mutual Holding Company notified the Office of Thrift Supervision of its intent
to waive dividends paid by Home Federal Bancorp during the fiscal year ended
June 30, 2006. Under Office of Thrift Supervision regulations, public
stockholders would not be diluted because of any dividends waived by Home
Federal Mutual Holding Company (and waived dividends would not be considered in
determining an appropriate exchange ratio) in the event Home Federal Mutual
Holding Company converts to stock form.
FEDERAL SECURITIES LAWS. Home Federal Bancorp registered its common
stock with the Securities and Exchange Commission under Section 12(g) of the
Securities Exchange Act of 1934. The Company is subject to the proxy and tender
offer rules, insider trading reporting requirements and restrictions, and
certain other requirements under the Securities Exchange Act of 1934. Pursuant
to Office of Thrift Supervision regulations and our plan of stock issuance, we
have agreed to maintain such registration for a minimum of three years following
the reorganization in January 2005.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the President signed
into law the Sarbanes-Oxley Act of 2002 implementing legislative reforms
intended to address corporate and accounting fraud. In addition to the
establishment of a new accounting oversight board which is empowered to enforce
auditing, quality control and independence standards, the Sarbanes-Oxley Act
restricts provision of both auditing and consulting services by accounting
firms. To ensure auditor independence, any non-audit services being provided to
an audit client require pre-approval by the company's audit committee members.
In addition, the audit partners must be rotated. The Sarbanes-Oxley Act requires
chief executive officers and chief financial officers, or their equivalent, to
certify to the accuracy of periodic reports filed with the Securities and
Exchange Commission, subject to civil and criminal penalties if they knowingly
or willfully violate this certification requirement. In addition, under the
Sarbanes-Oxley Act, attorneys are required to report evidence of a material
violation of the securities laws or a breach of fiduciary duty by a company to
its chief executive officer or its chief legal officer, and, if such officer
does not appropriately respond, to report such evidence to the audit committee
or other similar committee of the board of directors or the board itself.
Longer prison terms were legislated for corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if
16
such restatement was due to corporate misconduct. Executives are also prohibited
from insider trading during retirement plan "blackout" periods, and loans to
company executives are restricted. In addition, a provision directs that civil
penalties levied by the Securities and Exchange Commission as a result of any
judicial or administrative action under the Sarbanes-Oxley Act be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution (FAIR) provision also requires the Securities and Exchange
Commission to develop methods of improving collection rates. The legislation
accelerates the time frame for disclosures by public companies for any material
changes in their financial condition or operations and certain other events.
Directors and executive officers must also provide information for most changes
in ownership in a company's securities within two business days of the change.
The Sarbanes-Oxley Act also increases the oversight of, and codifies
certain requirements relating to audit committees of public companies and how
they interact with the company's "registered public accounting firm" (RPAF).
Audit Committee members must be independent and are barred from accepting
consulting, advisory or other compensatory fees from the issuer. In addition,
companies must disclose whether at least one member of the committee is a
"financial expert," as such term is defined by the Securities and Exchange
Commission, and if not, why not. Under the Sarbanes-Oxley Act, a RPAF is
prohibited from performing statutorily mandated audit services for a company if
such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions has been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. The Sarbanes-Oxley Act also
prohibits any officer or director of a company or any other person acting under
their direction from taking any action to fraudulently influence, coerce,
manipulate or mislead any independent public or certified accountant engaged in
the audit of the company's financial statements for the purpose of rendering the
financial statement's materially misleading. The Sarbanes-Oxley Act also will
require inclusion of an internal control report and assessment by management in
the annual report to shareholders. The Sarbanes-Oxley Act requires the RPAF that
issues the audit report to attest to and report on management's assessment of
the company's internal controls. In addition, the Sarbanes-Oxley Act requires
that each financial report required to be prepared in accordance with, or
reconciled to, generally accepted accounting principles and filed with the
Securities and Exchange Commission reflect all material correcting adjustments
that are identified by a RPAF in accordance with generally accepted accounting
principles and the rules and regulations of the Securities and Exchange
Commission.
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
GENERAL. As the primary federal regulator of Home Federal Savings and
Loan, the Office of Thrift Supervision has extensive authority over the
operations of federally-chartered savings institutions. As part of this
authority, Home Federal Savings and Loan is required to file periodic reports
with the Office of Thrift Supervision and is subject to periodic examinations by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
The investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Such regulation
and supervision is primarily intended for the protection of depositors and the
Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation.
The Office of Thrift Supervision's enforcement authority over all
savings institutions and their holding companies includes, among other things,
the ability to assess civil money penalties, to issue cease and desist or
removal orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
Office of Thrift Supervision.
INSURANCE OF ACCOUNTS. The deposits of Home Federal Savings and Loan
are insured to the maximum extent permitted by the SAIF and are backed by the
full faith and credit of the U.S. Government. As insurer, the Federal Deposit
Insurance Corporation is authorized to conduct examinations of, and to require
reporting by, insured institutions. It also may prohibit any insured institution
from engaging in any activity determined by regulation or order to pose a
serious threat to the Federal Deposit Insurance Corporation. The Federal Deposit
Insurance Corporation also has the authority to initiate enforcement actions
against savings institutions, after giving the Office of Thrift Supervision an
opportunity to take such action.
SAIF-insured institutions are assigned to one of three capital groups
which are based solely on the level of an institution's capital- "well
capitalized," "adequately capitalized," and "undercapitalized." These capital
levels are defined in the same manner as under the prompt corrective action
system discussed below. These three groups are
17
then divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. Assessment rates for
insured institutions are determined semi-annually by the Federal Deposit
Insurance Corporation and currently range from zero basis points for
well-capitalized healthy institutions, such as Home Federal Saving and Loan, to
27 basis points for undercapitalized institutions with substantial supervisory
concern.
In addition, all institutions with deposits insured by the Federal
Deposit Insurance Corporation are required to pay assessments to fund interest
payments on bonds issued by the Financing Corporation, a mixed-ownership
government corporation established to recapitalize the predecessor to the
Savings Association Insurance Fund. The assessment rate for the second quarter
of 2005 was .0142% of insured deposits and is adjusted quarterly. These
assessments will continue until the Financing Corporation bonds mature in 2019.
The Federal Deposit Insurance Corporation may terminate the deposit
insurance of any insured depository institution, including Home Federal Savings
and Loan, if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the Federal Deposit Insurance
Corporation. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the institution
has no tangible capital. If insurance of accounts is terminated, the accounts at
the institution at the time of the termination, less subsequent withdrawals,
shall continue to be insured for a period of six months to two years, as
determined by the Federal Deposit Insurance Corporation. Management is aware of
no existing circumstances which would result in termination of Home Federal
Savings and Loan's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings
institutions are required to maintain minimum levels of regulatory capital. The
Office of Thrift Supervision has established capital standards consisting of a
"tangible capital requirement," a "leverage capital requirement" and "a
risk-based capital requirement." The Office of Thrift Supervision also is
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
Current Office of Thrift Supervision capital standards require savings
institutions to satisfy the following capital requirements:
- tangible capital requirement - "tangible" capital equal to at
least 1.5% of adjusted total assets;
- leverage capital requirement - "core" capital equal to at least
3.0% of adjusted total assets; and
- risk-based capital requirement - "total" capital (a combination
of core and "supplementary" capital) equal to at least 8.0% of
"risk-weighted" assets.
Core capital generally consists of common stockholders' equity
(including retained earnings). Tangible capital generally equals core capital
minus intangible assets, with only a limited exception for purchased mortgage
servicing rights. Home Federal Savings and Loan had no intangible assets at June
30, 2005. Both core and tangible capital are further reduced by an amount equal
to a savings institution's debt and equity investments in subsidiaries engaged
in activities not permissible to national banks (other than subsidiaries engaged
in activities undertaken as agent for customers or in mortgage banking
activities and subsidiary depository institutions or their holding companies).
These adjustments do not affect Home Federal Savings and Loan's regulatory
capital.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital generally consists of general allowances for loan losses up to a maximum
of 1.25% of risk-weighted assets, together with certain other items. In
determining the required amount of risk-based capital, total assets, including
certain off-balance sheet items, are multiplied by a risk weight based on the
risks inherent in the type of assets. The risk weights range from 0% for cash
and securities issued by the U.S. Government or unconditionally backed by the
full faith and credit of the U.S. Government to 100% for loans (other than
qualifying residential loans weighted at 80%) and repossessed assets.
Savings institutions must value securities available for sale at
amortized cost for regulatory capital purposes. This means that in computing
regulatory capital, savings institutions should add back any unrealized
18
losses and deduct any unrealized gains, net of income taxes, on debt securities
reported as a separate component of GAAP capital.
At June 30, 2005, Home Federal Savings and Loan exceeded all of its
regulatory capital requirements, with tangible, core and risk-based capital
ratios of 24.2%, 24.2% and 91.6%, respectively.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the Office of Thrift Supervision or
the Federal Deposit Insurance Corporation. Such actions could include a capital
directive, a cease and desist order, civil money penalties, the establishment of
restrictions on the institution's operations, termination of federal deposit
insurance and the appointment of a conservator or receiver. The Office of Thrift
Supervision's capital regulation provides that such actions, through enforcement
proceedings or otherwise, could require one or more of a variety of corrective
actions.
PROMPT CORRECTIVE ACTION. The following table shows the amount of
capital associated with the different capital categories set forth in the prompt
corrective action regulations.
TOTAL TIER 1 TIER 1
CAPITAL CATEGORY RISK-BASED CAPITAL RISK-BASED CAPITAL LEVERAGE CAPITAL
---------------- ------------------ ------------------ ----------------
Well capitalized ................. 10% or more 6% or more 5% or more
Adequately capitalized ........... 8% or more 4% or more 4% or more
Undercapitalized ................. Less than 8% Less than 4% Less than 4%
Significantly undercapitalized ... Less than 6% Less than 3% Less than 3%
In addition, an institution is "critically undercapitalized" if it has
a ratio of tangible equity to total assets that is equal to or less than 2.0%.
Under specified circumstances, a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
Federal Deposit Insurance Corporation may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements within 45 days of the date that the
institution receives notice or is deemed to have notice that it is
undercapitalized, significantly undercapitalized or critically undercapitalized.
A federal banking agency must provide the institution with written notice of
approval or disapproval within 60 days after receiving a capital restoration
plan, subject to extensions by the agency. An institution which is required to
submit a capital restoration plan must concurrently submit a performance
guaranty by each company that controls the institution. In addition,
undercapitalized institutions are subject to various regulatory restrictions,
and the appropriate federal banking agency also may take any number of
discretionary supervisory actions.
At June 30, 2005, Home Federal Savings and Loan was deemed a well
capitalized institution for purposes of the above regulations and as such is not
subject to the above mentioned restrictions.
The table below sets forth Home Federal Savings and Loan's capital
position relative to its regulatory capital requirements at June 30, 2005.
TO BE WELL
REQUIRED FOR CAPITALIZED UNDER EXCESS OVER
CAPITAL ADEQUACY PROMPT CORRECTIVE WELL-CAPITALIZED
ACTUAL PURPOSES ACTION PROVISIONS PROVISIONS
--------------- ---------------- ----------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- ------ ----- ------- -----
(Dollars in Thousands)
Total risk-based capital $26,588 91.56% $2,323 8.00% $2,904 10.00% $23,684 89.08%
Tier 1 risk-based capital 26,353 90.76 1,161 4.00 1,742 6.00 24,611 93.39
Tier 1 leverage Capital 26,353 24.20 4,356 4.00 5,445 5.00 20,908 79.34
CAPITAL DISTRIBUTIONS. Office of Thrift Supervision regulations govern
capital distributions by savings institutions, which include cash dividends,
stock repurchases and other transactions charged to the capital account of a
savings institution to make capital distributions. A savings institution must
file an application for Office of Thrift
19
Supervision approval of the capital distribution if either (1) the total capital
distributions for the applicable calendar year exceed the sum of the
institution's net income for that year to date plus the institution's retained
net income for the preceding two years, (2) the institution would not be at
least adequately capitalized following the distribution, (3) the distribution
would violate any applicable statute, regulation, agreement or Office of Thrift
Supervision-imposed condition, or (4) the institution is not eligible for
expedited treatment of its filings. If an application is not required to be
filed, savings institutions which are a subsidiary of a savings and loan holding
company (as well as certain other institutions) must still file a notice with
the Office of Thrift Supervision at least 30 days before the board of directors
declares a dividend or approves a capital distribution.
QUALIFIED THRIFT LENDER TEST. All savings institutions are required to
meet a qualified thrift lender, or QTL, test to avoid certain restrictions on
their operations. A savings institution can comply with the QTL test by either
qualifying as a domestic building and loan association as defined in the
Internal Revenue Code or meeting the Office of Thrift Supervision QTL test.
Currently, the Office of Thrift Supervision QTL test requires that 65%
of an institution's "portfolio assets" (as defined) consist of certain housing
and consumer-related assets on a monthly average basis in nine out of every 12
months. To be a qualified thrift lender under the IRS test, the savings
institution must meet a "business operations test" and a "60 percent assets
test," each defined in the Internal Revenue Code.
If the savings institution fails to maintain its QTL status, the
holding company's activities are restricted. In addition, it must discontinue
any non-permissible business, although the Office of Thrift Supervision may
grant a grace period up to two years for good cause. Nonetheless, any company
that controls a savings institution that is not a qualified thrift lender must
register as a bank holding company within one year of the savings institution's
failure to meet the QTL test.
Statutory penalty provisions require an institution that fails to
remain a QTL to either become a national bank or be prohibited from the
following:
- Making any new investments or engaging in any new activity not allowed
for both a national bank and a savings association;
- Establishing any new branch office unless allowable for a national
bank; and
- Paying dividends unless allowable for a national bank.
Three years from the date a savings association should have become or
ceases to be a QTL, by failing to meet either QTL test, the institution must
comply with the following restriction:
- Dispose of any investment or not engage in any activity unless the
investment or activity is allowed for both a national bank and a
savings association.
At June 30, 2005, the qualified thrift investments of Home Federal
Savings and Loan were approximately 100.0% of its portfolio assets.
AFFILIATE TRANSACTION RESTRICTIONS. Federal laws strictly limit the
ability of savings institutions to engage in transactions with their affiliates,
including their savings and loan holding companies. Except for certain
exceptions set forth in the Office of Thrift Supervision regulations, a savings
association must comply with sections 23A and 23B of the Federal Reserve Act and
Regulation W which implements those statutory provisions. Those statutory and
regulatory provisions apply to transactions between a subsidiary institution and
its parent company or the non-savings institution subsidiaries of the savings
and loan holding company and are limited to 10% of a savings institution's
capital and surplus and, with respect to such parent company and all such
non-savings institution subsidiaries, to an aggregate of 20% of the savings
institution's capital and surplus. Further, loans and extensions of credit
generally are required to be secured by eligible collateral in specified
amounts. Federal law also requires that all transactions between a savings
institution and its affiliates be on terms as favorable to the savings
institution as transactions with non-affiliates. Home Federal Savings and Loan
believes that all transactions between it and its affiliates at June 30, 2005
were on terms as favorable to it as its transactions with non-affiliates.
20
PRIVACY REQUIREMENTS OF THE GRAMM-LEACH-BLILEY ACT. The
Gramm-Leach-Bliley Act of 1999 provided for sweeping financial modernization for
commercial banks, savings banks, securities firms, insurance companies, and
other financial institutions operating in the United States. Among other
provisions, the Gramm-Leach-Bliley Act places limitations on the sharing of
consumer financial information with unaffiliated third parties. Specifically,
the Gramm-Leach-Bliley Act requires all financial institutions offering
financial products or services to retail customers to provide such customers
with the financial institution's privacy policy and provide such customers the
opportunity to "opt out" of the sharing of personal financial information with
unaffiliated third parties.
ANTI-MONEY LAUNDERING. On October 26, 2001, in response to the events
of September 11, 2001, the President of the United States signed into law the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (referred to as the USA PATRIOT
Act). The USA PATRIOT Act significantly expands the responsibilities of
financial institutions, including savings and loan associations, in preventing
the use of the U.S. financial system to fund terrorist activities. Title III of
the USA PATRIOT Act provides for a significant overhaul of the U.S. anti-money
laundering regime. Among other provisions, it requires financial institutions
operating in the United States to develop new anti-money laundering compliance
programs, due diligence policies and controls to ensure the detection and
reporting of money laundering. Such compliance programs are intended to
supplement existing compliance requirements, also applicable to financial
institutions, under the Bank Secrecy Act and the Office of Foreign Assets
Control Regulations. We have established policies and procedures to ensure
compliance with the USA PATRIOT Act's provisions, and the impact of the USA
PATRIOT Act on our operations has not been material.
FEDERAL HOME LOAN BANK SYSTEM. Home Federal Savings and Loan is a
member of the Federal Home Loan Bank of Dallas, which is one of 12 regional
Federal Home Loan Banks that administers the home financing credit function of
savings institutions. Each Federal Home Loan Bank serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the Federal Home
Loan Bank System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the Federal
Home Loan Bank. At June 30, 2005, Home Federal Savings and Loan had $8.2 million
of Federal Home Loan Bank advances.
As a member, Home Federal Savings and Loan is required to purchase and
maintain stock in the Federal Home Loan Bank of Dallas in an amount equal to at
least 1% of its aggregate unpaid residential mortgage loans or similar
obligations at the beginning of each year. At June 30, 2005, Home Federal
Savings and Loan had $631,800 in Federal Home Loan Bank stock, which was in
compliance with this requirement.
The Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of Federal Home Loan Bank
dividends paid in the past and could do so in the future. These contributions
also could have an adverse effect on the value of Federal Home Loan Bank stock
in the future.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets. At June 30,
2004 Home Federal Savings and Loan had met its reserve requirement.
TAXATION
FEDERAL TAXATION
GENERAL. Home Federal Bancorp, Home Federal Mutual Holding Company and
Home Federal Savings and Loan are subject to federal income taxation in the same
general manner as other corporations with some exceptions listed below. The
following discussion of federal, state and local income taxation is only
intended to summarize certain pertinent income tax matters and is not a
comprehensive description of the applicable tax rules. Home Federal Savings and
Loan's federal and state income tax returns for taxable years through December
31, 2001 have been closed for purposes of examination by the Internal Revenue
Service or the Louisiana Department of Revenue. As a result, all tax returns
through that date may no longer be audited by either tax authority.
21
METHOD OF ACCOUNTING. For federal income tax purposes, Home Federal
Savings and Loan reports income and expenses on the accrual method of accounting
and used a December 31 tax year in 2004 for filing its federal income tax return
and has transitioned to a June 30 tax year in 2005.
BAD DEBT RESERVES. The Small Business Job Protection Act of 1996
eliminated the use of the reserve method of accounting for bad debt reserves by
savings associations, effective for taxable years beginning after 1995. Prior to
that time, Home Federal Savings and Loan was permitted to establish a reserve
for bad debts and to make additions to the reserve. These additions could,
within specified formula limits, be deducted in arriving at taxable income. As a
result of the Small Business Job Protection Act of 1996, savings associations
must use the experience method in computing their bad debt deduction beginning
with their 1996 federal tax return. In addition, federal legislation required
the recapture over a six year period of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the Small Business Job
Protection Act of 1996, bad debt reserves created prior to January 1, 1988 were
subject to recapture into taxable income if Home Federal Savings and Loan failed
to meet certain thrift asset and definitional tests. New federal legislation
eliminated these savings association related recapture rules. However, under
current law, pre-1988 reserves remain subject to recapture should Home Federal
Savings and Loan make certain non-dividend distributions or cease to maintain a
bank charter.
At June 30, 2005, the total federal pre-1988 reserve was approximately
$3.3 million. The reserve reflects the cumulative effects of federal tax
deductions by Home Federal Savings and Loan for which no federal income tax
provisions have been made.
ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes an
alternative minimum tax at a rate of 20% on a base of regular taxable income
plus certain tax preferences. The alternative minimum tax is payable to the
extent such alternative minimum tax income is in excess of the regular income
tax. Net operating losses, of which Home Federal Savings and Loan has none, can
offset no more than 90% of alternative minimum taxable income. Certain payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. Home Federal Savings and Loan has not been subject
to the alternative minimum tax or any such amounts available as credits for
carryover.
NET OPERATING LOSS CARRYOVERS. For net operating losses in tax years
beginning before August 6, 1997, Home Federal Savings and Loan may carry back
net operating losses to the three years preceding the loss year and then forward
to fifteen years following the loss years. For net operating losses in years
beginning after August 5, 1997, net operating losses can be carried back to the
two years preceding the loss year and forward to the 20 years following the loss
year. At June 30, 2005, Home Federal Savings and Loan had no net operating loss
carry forwards for federal income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Home Federal Bancorp may
exclude from its income 100% of dividends received from Home Federal Savings and
Loan as a member of the same affiliated group of corporations. The corporate
dividends received deduction is 80% in the case of dividends received from
corporations which a corporate recipient owns less than 80%, but at least 20% of
the distribution corporation. Corporations which own less than 20% of the stock
of a corporation distributing a dividend may deduct only 70% of dividends
received.
STATE TAXATION
Home Federal Bancorp is subject to the Louisiana Corporation Income
Tax based on our Louisiana taxable income. The Corporation Income Tax applies at
graduated rates from 4% upon the first $25,000 of Louisiana taxable income to 8%
on all Louisiana taxable income in excess of $200,000. For these purposes,
"Louisiana taxable income" means net income which is earned by us within or
derived from sources within the State of Louisiana, after adjustments permitted
under Louisiana law, including a federal income tax deduction. In addition, Home
Federal Savings and Loan will be subject to the Louisiana Shares Tax which is
imposed on the assessed value of a company's stock. The formula for deriving the
assessed value is to calculate 15% of the sum of:
(a) 20% of our capitalized earnings, plus
22
(b) 80% of our taxable stockholders' equity, minus
(c) 50% of our real and personal property assessment
Various items may also be subtracted in calculating a company's
capitalized earnings.
ITEM 2. DESCRIPTION OF PROPERTY
PROPERTIES
At June 30, 2005, Home Federal Savings and Loan conducted its business
from its headquarters office located in Shreveport, Louisiana and two full
service branch offices.
The following table sets forth certain information relating to Home
Federal Savings and Loan's offices at June 30, 2005.
NET BOOK
VALUE AMOUNT OF
DESCRIPTION/ADDRESS LEASED/OWNED OF PROPERTY DEPOSITS
------------------- ------------ ----------- ---------
(In Thousands)
Building Owned $166 $31,501
624 Market Street
Shreveport, LA
Building/ATM Owned(1) 3 28,396
6363 Youree Dr.
Shreveport, LA
Building/ATM Owned 169 13,869
8990 Mansfield Rd.
Shreveport, LA
----------
(1) The building is owned by Home Federal Savings and Loan but the land is
subject to an operating lease which expires November 30, 2008.
ITEM 3. LEGAL PROCEEDINGS
Home Federal Bancorp and Home Federal Savings and Loan are not
involved in any pending legal proceedings other than nonmaterial legal
proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
(a) The information required herein, to the extent applicable, is incorporated
by reference from page [2] of Home Federal's 2005 Annual Report to Shareholders
filed as Exhibit 13 hereto ("2005 Annual Report").
The Registrant did not have any equity compensation plans or
individual compensation arrangements (whether with employees or non-employees,
such as directors), in effect as of June 30, 2005.
23
(b) Not applicable.
(c) Not applicable.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information required herein is incorporated by reference from
pages 4 TO 13 of the 2005 Annual Report.
ITEM 7. FINANCIAL STATEMENTS
The information required herein is incorporated by reference from
pages 14 TO 48 of the 2005 Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
ITEM 8A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer
evaluated the disclosure controls and procedures (as defined under Rule
13a-15(c) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended)
as of the end of the period covered by this annual report. Based upon the
evaluation and the corrective actions discussed above, the Chief Executive
officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective.
ITEM 8B. OTHER INFORMATION
Not applicable
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following tables present information concerning the nominees for
director, and our continuing directors, all of whom also serve as directors of
Home Federal Savings and Loan Association. The indicated period of service as a
director includes service as a director of Home Federal Savings and Loan
Association prior to the organization of Home Federal Bancorp in 2005. No
director, executive officer or nominee for director is related to any other
director or executive officer by blood, marriage or adoption, except Daniel
Herndon and David Herndon III who are brothers and Sidney York and Amos
Wedgeworth Jr., who are brothers-in-law. Ages are reflected as of June 30, 2005.
NOMINEES FOR DIRECTOR FOR THREE-YEAR TERMS EXPIRING IN 2008
Position with Home Federal Bancorp and Director
Name Age Principal Occupation During the Past Five Years Since
---- --- ----------------------------------------------- --------
David A. Herndon III 68 Director. Retired geologist. 1998
Woodus K. Humphrey 65 Director. Insurance executive, Woodus Humphrey 2001
Insurance, Inc., Shreveport, Louisiana.
Sidney D. York 77 Director. Retired as Chairman of Home Federal 1977
Savings and Loan in January 1998 and as
President in September 1993.
24
MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE
DIRECTORS WHOSE TERMS EXPIRE IN 2006
Position with Home Federal Bancorp and Director
Name Age Principal Occupation During the Past Five Years Since
---- --- ----------------------------------------------- --------
Henry M. Hearne 65 Director. Self employed in the fields of 2000
investments and farming.
Clyde D. Patterson 63 Director. Executive Vice President of Home 1990
Federal Savings and Loan and Home Federal
Bancorp since September 1993 and January 2005,
respectively.
Amos L. Wedgeworth, Jr. 79 Director. Retired physician. 1980
DIRECTORS WHOSE TERMS EXPIRE IN 2007
Position with Home Federal Bancorp and Director
Name Age Principal Occupation During the Past Five Years Since
---- --- ----------------------------------------------- --------
Walter T. Colquitt III 60 Director. Dentist, Shreveport, Louisiana. 1993
Daniel R. Herndon 65 Chairman of the Board of Directors of Home 1980
Federal Savings and Loan since January 1998.
President and Chief Executive Officer of Home
Federal Savings and Loan since September 1993.
Chairman, President and Chief Executive Officer
of Home Federal Bancorp since 2005.
Scott D. Lawrence 59 Director. President of Southwestern Wholesale, 1994
Shreveport, Louisiana since 1980.
EXECUTIVE OFFICER WHO IS NOT ALSO A DIRECTOR
DeNell W. Mitchell, age 49 years, has served as the Vice President and
Senior Lending Officer of Home Federal Savings and Loan since 1993 and
Secretary-Treasurer since 2004. Ms. Mitchell has served as Vice President and
Corporate Secretary of Home Federal Bancorp since 2005.
AUDIT COMMITTEE
The Board of Directors of Home Federal Bancorp has established an
Audit Committee consisting of Messrs. Hearne, Lawrence and David Herndon. The
Audit Committee reviews with management and the independent registered public
accounting firm the systems of internal control, reviews the annual financial
statements, including the Form 10-KSB and monitors Home Federal Bancorp's
adherence in accounting and financial reporting to generally accepted accounting
principles. The Audit Committee is comprised of three directors who are
independent directors as defined in the Nasdaq listing standards and the rules
and regulations of the Securities and Exchange Commission, except for David
Herndon, who is the brother of Daniel Herndon. The Board of Directors has
determined that no members of the Audit Committee meet the qualifications
established for an audit committee financial expert in the regulations of the
Securities and Exchange Commission. The Audit Committee met one time in fiscal
2005.
25
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the officers and directors, and persons who own more than 10% of Home
Federal Bancorp's common stock to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% shareholders are required by regulation to furnish Home Federal
Bancorp with copies of all Section 16(a) forms they file. We know of no person
who owns 10% or more of our common stock other than Home Federal Mutual Holding
Company.
Based solely on our review of the copies of such forms furnished to
us, or written representations from our officers and directors, we believe that
during, and with respect to, the fiscal year ended June 30, 2005, our officers
and directors complied in all respects with the reporting requirements
promulgated under Section 16(a) of the Securities Exchange Act of 1934.
CODE OF ETHICS
Home Federal Bancorp had adopted a Code of Ethics that applies to its
principal executive officer and principal financial officer, as well as
directors, other officers and employees of Home Federal Bancorp and Home Federal
Savings and Loan. A copy of the Code of Ethics may be obtained without charge
upon request made to Clyde D. Patterson, Home Federal Bancorp, Inc., 624 Market
Street, Shreveport, Louisiana 71101.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth a summary of certain information
concerning the compensation paid by Home Federal Savings and Loan (including
amounts deferred to future periods by the officers) for services rendered in all
capacities during the fiscal years ended June 30, 2005 and 2004 to the President
and Chief Executive Officer and the other executive officer of Home Federal
Savings and Loan during fiscal 2005 whose salary plus bonus exceeded $100,000.
Home Federal Bancorp has not paid separate cash compensation to its officers and
directors.
ANNUAL COMPENSATION(1)
FISCAL ---------------------- OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ------ -------- ------- ------------
Daniel R. Herndon 2005 $130,350 $13,035 $17,703(2)
President and Chief Executive Officer 2004 128,304 12,665 16,798
Clyde D. Patterson 2005 $103,700 $10,370 $15,944(2)
Executive Vice President 2004 102,085 10,070 14,625
----------
(1) Annual compensation does not include amounts attributable to other
miscellaneous benefits received by Mr. Herndon. The costs to Home Federal
Savings and Loan of providing such benefits during fiscal 2004 did not
exceed 10% of the total salary and bonus paid to or accrued for the benefit
of the individual executive officer.
(2) Includes contributions by Home Federal Savings and Loan of $8,603 and
$6,844 to the accounts of Messrs. Herndon and Patterson, respectively,
under the Home Federal Savings and Loan 401(k) Plan during fiscal 2005 and
$9,100 in directors' fees paid to each individual during fiscal 2005.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth as of October 12, 2005, certain
information as to the common stock beneficially owned by (i) each person or
entity, including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, who or which was known to us to be the
beneficial owner of more than 5% of the
26
issued and outstanding common stock, (ii) the directors of Home Federal Bancorp,
(iii) certain executive officers of Home Federal Bancorp; and (iv) all directors
and executive officers of Home Federal Bancorp as a group.
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER OR BENEFICIAL OWNERSHIP AS OF PERCENT OF
NUMBER OF PERSONS IN GROUP OCTOBER 12, 2005(1) COMMON STOCK
--------------------------------------------------- -------------------------- ------------
Home Federal Mutual Holding Company of Louisiana... 2,135,375 60.0%
624 Market Street
Shreveport, Louisiana 71101
Directors:
Walter T. Colquitt III.......................... 3,089(2) *
Henry M. Hearne................................. 17,989(2)(3) *
Daniel R. Herndon............................... 35,430(2)(4) 1.0
David A. Herndon III............................ 21,989(2)(5) *
Woodus K. Humphrey.............................. 12,989(2) *
Scott D. Lawrence............................... 12,989(2)(6) *
Clyde D. Patterson.............................. 14,300(2)(7) *
Amos L. Wedgeworth, Jr.......................... 3,989(2) *
Sidney D. York.................................. 4,489(2) *
All Directors and Executive Officers
as a Group (10 persons)......................... 116,640(2) 2.2%
----------
* Represents less than 1% of our outstanding common stock.
(1) Based upon filings made pursuant to the Securities Exchange Act of 1934 and
information furnished by the respective individuals. Under regulations
promulgated pursuant to the Securities Exchange Act of 1934, shares of
common stock are deemed to be beneficially owned by a person if he or she
directly or indirectly has or shares (i) voting power, which includes the
power to vote or to direct the voting of the shares, or (ii) investment
power, which includes the power to dispose or to direct the disposition of
the shares. Unless otherwise indicated, the named beneficial owner has sole
voting and dispositive power with respect to the shares.
(2) Includes a total of 49,815 shares over which the directors and executive
officers as a group (10 persons) have voting power which have been granted
pursuant to the 2005 Recognition and Retention Plan and are held in the
associated trust. Individually, each director has been allocated 2,989 of
such shares and Messrs. Daniel Herndon and Clyde Patterson have been
allocated 17,430 and 9,300 shares, respectively.
(3) Includes 5,000 shares held by Mr. Hearne's spouse and 10,000 shares held by
the Grand Bend Investments LLC, of which Mr. Hearne is a principal.
(4) Includes 5,000 shares held in Home Federal Savings and Loan Association's
401(k) Plan for the benefit of Mr. Herndon and 13,000 shares held by
Herndon Investment Company LLC over which Mr. Herndon disclaims beneficial
ownership except with respect to his 50% ownership interest therein.
(5) Includes 13,000 shares held by Herndon Investment Company LLC, of which Mr.
Herndon is a 50% owner, and over which he disclaims beneficial ownership
except with respect to his pecuniary interest therein.
(6) Includes 5,000 shares held in Mr. Lawrence's individual retirement account.
(7) The 5,000 shares are held in Home Federal Savings and Loan Association's
401(k) Plan for the benefit of Mr. Patterson.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with applicable federal laws and regulations, Home
Federal Savings and Loan offers mortgage loans to its directors, officers and
employees as well as members of their immediate families for the financing of
their primary residences and certain other loans. These loans are generally made
on substantially the same terms as those prevailing at the time for comparable
transactions with non-affiliated persons. It is the belief of management that
these loans neither involve more than the normal risk of collectibility nor
present other unfavorable features.
27
ITEM 13. EXHIBITS
(a) The following documents are filed as part of this report and are
incorporated herein by reference from the Registrant's 2005 Annual Report:
Report of Independent Registered Public Accountants.
Consolidated Balance Sheets as of June 30, 2005 and June 30,
2004.
Consolidated Statements of Income for the Years Ended June 30,
2005 and 2004.
Consolidated Statements of Comprehensive Income (Loss) for the
Years Ended June 30, 2005 and 2004.
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2005 and 2004.
Consolidated Statements of Cash Flows for the Years Ended June
30, 2005 and 2004.
Notes to Consolidated Financial Statements.
The following exhibits are filed as part of the Form 10-KSB, and this
list includes the Exhibit Index:
NO. EXHIBITS LOCATION
---- -------- --------
3.1 Federal Stock Charter of Home Federal Bancorp, Inc. of Louisiana (1)
3.2 Bylaws of Home Federal Bancorp, Inc. of Louisiana (1)
4.0 Stock Certificate of Home Federal Bancorp, Inc. of Louisiana (1)
10.1 Home Federal Bancorp, Inc. of Louisiana 2002 Stock Option Plan (2)
10.2 Home Federal Bancorp, Inc. of Louisiana 2002 Recognition and Retention (2)
Plan and Trust Agreement
13.0 Annual Report to Stockholders Filed
Herewith
31.1 Certification of Chief Executive Officer Pursuant to Rules 13a-14 and Filed
15d-14 of the Securities and Exchange Act of 1934 and Section 302 of Herewith
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Rules 13a-14 and Filed
15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Herewith
Sarbanes-Oxley Act of 2002
32.0 Certifications Pursuant Section 906 of the Sarbanes-Oxley Act of 2002 Filed
(18 U.S.C. 1350) Herewith
----------
(1) Incorporated herein by reference from Home Federal Bancorp's Registration
Statement on Form SB-2, as amended, filed with the SEC on September 15,
2004 (File No. 333-119026).
(2) Incorporated herein by reference from Home Federal Bancorp's Definitive
Schedule 14A filed with the SEC on June 29, 2005 (File No. 000-51117).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees paid by us to
LaPorte Sehrt Romig & Hand for professional services rendered by LaPorte Sehrt
Romig & Hand in connection with the audit of Home Federal Bancorp's consolidated
financial statements for fiscal 2005 and 2004, as well as the fees paid by us to
LaPorte Sehrt
28
Romig & Hand for audit-related services, tax services and all other services
rendered by LaPorte Sehrt Romig & Hand to us during fiscal 2005 and 2004.
YEAR ENDED JUNE 30,
-------------------
2005 2004
------- -------
Audit fees (1) ........................................... $53,070 $72,005
Audit-related fees ....................................... -- --
Tax fees ................................................. -- --
All other fees ........................................... -- --
------- -------
Total ................................................. $53,070 $72,005
======= =======
----------
(1) Audit fees consist of fees incurred in connection with the audit of our
annual financial statements and the review of the interim financial
statements included in our quarterly reports filed with the Securities and
Exchange Commission, as well as work generally only the independent auditor
can reasonably be expected to provide, such as statutory audits, consents
and assistance with and review of documents filed with the Securities and
Exchange Commission. Audit fees for fiscal 2005 include fees incurred in
connection with the provision of a comfort letter for our initial public
offering prospectus.
The Audit Committee selects our independent registered public
accounting firm and pre-approves all audit services to be provided by it to Home
Federal Bancorp. The Audit Committee also reviews and pre-approves all
audit-related and non-audit related services rendered by our independent
registered public accounting firm in accordance with the Audit Committee's
charter. In its review of these services and related fees and terms, the Audit
Committee considers, among other things, the possible effect of the performance
of such services on the independence of our independent registered public
accounting firm. The Audit Committee pre-approves certain audit-related services
and certain non-audit related tax services which are specifically described by
the Audit Committee on an annual basis and separately approves other individual
engagements as necessary.
Each new engagement of LaPorte Sehrt Romig & Hand was approved in
advance by the Audit Committee or its Chair, and none of those engagements made
use of the de minimis exception to pre-approval contained in the Securities and
Exchange Commission's rules.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOME FEDERAL BANCORP, INC. OF LOUISIANA
Date: October 12, 2005
BY: /s/ Daniel R. Herndon
------------------------------------
Daniel R. Herndon
Chairman, President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
-------------------------- ----------------------------- ----------------
/s/ Daniel R. Herndon
--------------------------
Daniel R. Herndon Chairman of the Board, October 12, 2005
President and Chief Executive
Officer
/s/ Walter T. Colquitt III
--------------------------
Walter T. Colquitt III Director October 12, 2005
/s/ David A. Herndon III
--------------------------
David A. Herndon III Director October 12, 2005
/s/ Scott D. Lawrence
--------------------------
Scott D. Lawrence Director October 12, 2005
/s/ Sidney D. York
--------------------------
Sidney D. York Director October 12, 2005
/s/ Clyde D. Patterson
--------------------------
Clyde D. Patterson Director and Executive Vice October 12, 2005
President (Principal
Financial and Accounting
Officer)
/s/ Henry M. Hearne
--------------------------
Henry M. Hearne Director October 12, 2005
30
NAME TITLE DATE
-------------------------- ----------------------------- ----------------
/s/ Woodus K. Humphrey
--------------------------
Woodus K. Humphrey Director October 12, 2005
/s/ Amos L. Wedgeworth Jr.
--------------------------
Amos L. Wedgeworth Jr. Director October 12, 2005
31