home-financials.htm
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
[X] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the Fiscal Year Ended September 30, 2008
or
|
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number: 000-52995
HOME FEDERAL BANCORP,
INC.
(Exact
name of registrant as specified in its charter)
Maryland
|
68-0666697 |
(State or
other jurisdiction of incorporation |
(I.R.S.
Employer |
or
organization) |
Identification
No.) |
|
|
500
12th
Avenue South, Nampa,
Idaho
|
83651
|
(Address of
principal executive offices) |
(Zip
Code) |
|
|
Registrant’s
telephone number, including area code: |
(208)
466-4634 |
|
|
Securities
registered pursuant to Section 12(b) of the Act: |
|
|
|
Common Stock, par value $.01 per
share
|
Nasdaq Global
Market
|
(Title of Each Class) |
(Name
of Each Exchange on Which Registered)
|
|
|
Securities
registered pursuant to Section 12(g) of the Act: |
None
|
|
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
[ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer [ ] |
Accelerated filer
[X] |
Non-accelerated
filer [ ] |
Smaller
reporting company [ ] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
As of
December 3, 2008, there were 17,359,427 shares of the registrant’s common stock
outstanding. The aggregate market value of the voting stock held by
nonaffiliates of the registrant based on the closing sales price of the
registrant's common stock as quoted on The Nasdaq Global Market on March 31,
2008, was approximately $202,565,269 (16,880,439 shares at $12.00 per
share).
DOCUMENTS
INCORPORATED BY REFERENCE
Part II
and Part III - Portions of the Registrant’s definitive Proxy Statement for its
2009 Annual Meeting of Stockholders.
HOME
FEDERAL BANCORP, INC.
2008
ANNUAL REPORT ON FORM 10-K
TABLE
OF CONTENTS
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Page
# |
PART
I.
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Item 1 -
Business |
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2 |
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|
|
Item 1A - Risk
Factors |
|
41 |
|
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Item 1B -
Unresolved Staff Comments |
|
49
|
|
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|
Item 2 -
Properties |
|
49 |
|
|
|
Item 3 - Legal
Proceedings |
|
51 |
|
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|
Item 4 - Submission
of Matters to a Vote of Security Holders |
|
51 |
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PART
II.
|
|
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Item
5 - Market for Registrant’s Common Equity, Related Stockholder Matters
and
Issuer
Purchases of Equity Securities
|
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51 |
|
|
|
Item 6 - Selected
Financial Data |
|
54 |
|
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|
Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations |
|
56 |
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Item 7A -
Quantitative and Qualitative Disclosures About Market Risk |
|
81 |
|
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|
Item 8 - Financial
Statements and Supplementary Data |
|
82 |
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|
Item 9 - Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosure |
|
117 |
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Item 9A- Controls
and Procedures |
|
117 |
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Item 9B - Other
Information |
|
118 |
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PART
III.
|
|
|
|
Item 10 - Directors,
Executive Officers and Corporate Governance |
|
118 |
|
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Item 11 - Executive
Compensation |
|
118 |
|
|
|
Item
12 - Security Ownership of Certain Beneficial Owners and Management
and
Related
Stockholder
Matters
|
|
119 |
|
|
|
Item 13 -
Certain Relationships and Related Transactions, and Director
Independence |
|
119 |
|
|
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Item 14 - Principal
Accounting Fees and Services |
|
119 |
|
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PART
IV.
|
|
|
|
Item 15 – Exhibits,
Financial Statement Schedules |
|
119 |
Forward-Looking
Statements
“Safe
Harbor” statement under the Private Securities Litigation Reform Act of 1995:
This Form 10-K contains forward-looking statements, which can be identified by
the use of words such as “believes,” “expects,” “anticipates,” “estimates” or
similar expressions. Forward-looking statements include:
|
•
|
statements
of our goals, intentions and
expectations;
|
|
•
|
statements
regarding our business plans, prospects, growth and operating
strategies;
|
|
•
|
statements
regarding the quality of our loan and investment portfolios;
and
|
|
•
|
estimates
of our risks and future costs and
benefits.
|
These
forward-looking statements are subject to significant risks and uncertainties.
Actual results may differ materially from those contemplated by the
forward-looking statements due to, among others, the following
factors:
|
•
|
general
economic conditions, including real estate values, either nationally or in
our market area, that are worse than
expected;
|
|
•
|
changes
in the interest rate environment that reduce our interest margins or
reduce the fair value of financial
instruments;
|
|
•
|
the
credit risk of lending activities, including risks related to construction
and development lending and commercial and small business
banking;
|
|
•
|
changes
in the level and trend of loan delinquencies and
write-offs;
|
|
•
|
results
of examinations by banking
regulators;
|
|
•
|
increased
competitive pressures among financial services
companies;
|
|
•
|
changes
in consumer spending, borrowing and savings
habits;
|
|
•
|
our
ability to successfully manage our
growth;
|
|
•
|
changes
in the value of mortgage servicing
rights;
|
|
•
|
legislative
or regulatory changes that adversely affect our
business;
|
|
•
|
adverse
changes in the securities markets;
and
|
|
•
|
changes
in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Public Company Accounting Oversight Board or the
Financial Accounting Standards
Board.
|
Any of
the forward-looking statements that we make in this annual report and in other
public statements we make may turn out to be wrong because of inaccurate
assumptions we might make, because of the factors illustrated above or because
of other factors that we cannot foresee. Because of these and other
uncertainties, our actual future results may be materially different from the
results indicated by these forward-looking statements and you should not rely on
such statements.
PART
I
Item 1.
Business
Organization.
Home
Federal Bancorp, Inc. (“old Home Federal Bancorp”) was organized as a federally
chartered stock corporation at the direction of Home Federal Savings and Loan
Association of Nampa (“Association”) in connection with its mutual holding
company reorganization (“Reorganization”). On December 6, 2004, the Association
completed the Reorganization and minority stock offering. In connection with the
Reorganization, the Association converted to a federally chartered stock savings
bank and changed its name to Home Federal Bank (the “Bank”). Old Home Federal
Bancorp sold 40.06% of its outstanding shares of common stock (6,083,500 shares)
to the public and issued 59.04% of its outstanding shares of common stock
(8,979,246 shares) to Home Federal MHC, the mutual holding company parent of old
Home Federal Bancorp. In connection with the Reorganization, the old Home
Federal Bancorp received $53.6 million in net proceeds after deducting expenses,
and issued an additional 146,004 shares and $365,010 in cash to the Home Federal
Foundation, Inc. (the “Foundation”), a charitable foundation established as part
of the Reorganization.
On May
11, 2007, the Boards of Directors of Home Federal MHC, old Home Federal Bancorp,
Inc., and Home Federal Bank adopted a Plan of Conversion and Reorganization (the
“Conversion”) pursuant to which Home Federal Bank reorganized from the mutual
holding company structure to the stock holding company structure. Pursuant to
the terms of the Plan, Home Federal MHC converted to a federal interim stock
savings bank and simultaneously merged with and into Home Federal Bank, with
Home Federal Bank as the survivor. Additionally, Home Federal Bancorp, Inc.
converted to a federal interim stock savings bank and simultaneously merged with
and into Home Federal Bank, with Home Federal Bank as the survivor. Home Federal
Bank then formed a new stock holding company, Home Federal Bancorp, Inc. (“we”,
“us”, the “Company” or “Home Federal Bancorp”), that serves as the holding
company for Home Federal Bank. Home Federal Bancorp, Inc., is a Maryland
corporation. The conversion was completed on December 19, 2007.
As part
of the Conversion, a total of 9,384,000 new shares of the Company were sold at
$10 per share in subscription, community and syndicated community offerings
through which the Company received proceeds of approximately $87.8 million, net
of offering costs of approximately $5.9 million. The Company contributed $48.0
million or approximately 50% of the net proceeds to the Bank in the form of a
capital contribution. The Company loaned $8.2 million to the Bank’s Employee
Stock Ownership Plan (the “ESOP”) and the ESOP used those funds to acquire
816,000 shares of the Company’s common stock at $10 per share. As part of the
Conversion, shares of outstanding common stock of the old Home Federal Bancorp
were exchanged for 1.136 shares of the Company’s common stock. No fractional
shares were issued. Instead, cash was paid to stockholders at $10 per share for
any fractional shares that would otherwise be issued. The exchange resulted in
an additional 853,133 outstanding shares of the Company for a total of
17,326,169 outstanding shares as of the closing of the Conversion on December
19, 2007.
The
Conversion was accounted for as reorganization in corporate form with no change
in the historical basis of the Company’s assets, liabilities or stockholders’
equity. All references to the number of shares outstanding, including references
for purposes of calculating per share amounts, are restated to give retroactive
recognition to the exchange ratio applied in the Conversion.
Business.
Home
Federal Bancorp’s business activity is the ownership of the outstanding capital
stock of Home Federal Bank and management of the investment of offering proceeds
retained from the Reorganization and the Conversion. Home Federal Bancorp
neither owns nor leases any property but instead uses the premises, equipment
and other property of Home Federal Bank with the payment of appropriate
management fees, as required by applicable law and regulations. In the future,
Home Federal Bancorp may acquire or organize other operating subsidiaries;
however, there are no current plans to do so. Home Federal Bancorp has no
significant assets, other than cash and cash equivalents, mortgage-backed
securities and all of the outstanding shares of Home Federal, and no significant
liabilities.
Home
Federal Bank was founded in 1920 as a building and loan association and
reorganized as a federal mutual savings and loan association in 1936. Home
Federal Bank’s deposits are insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to applicable legal limits under the Deposit Insurance Fund. The
Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1937.
Home Federal Bank is regulated by the Office of Thrift Supervision (“OTS”) and
the Federal Deposit Insurance Corporation (“FDIC”).
We are in
the business of attracting deposits from consumers and businesses in our market
areas and utilizing those deposits to originate loans. We offer a wide range of
loan products to meet the credit needs of our customers. Historically, lending
activities have been primarily directed toward the origination of residential
and commercial real estate loans. Residential real estate lending activities
have been primarily focused on first mortgages on owner occupied, one- to
four-family residential properties. The Bank now originates nearly all of its
one- to four- family residential loans for sale in the secondary
market.
The Board
of Directors and the management team have recently undertaken efforts to change
the Company’s strategy from that of a traditional thrift to a full-service
community bank. This transition includes a reduced reliance on one- to four-
family loans originated for the Bank’s portfolio. As a result, the Bank’s
lending activities have expanded to include commercial business lending,
including commercial real estate and builder finance. While continuing our
commitment to residential lending through our secondary market program,
management expects commercial lending to become increasingly important for the
Company.
At
September 30, 2008, the Company had total assets of $725.1 million, net loans of
$459.8 million, deposit accounts of $372.9 million and stockholders’ equity of
$205.2 million.
Operating
Lines
Home
Federal Bancorp’s sole subsidiary is Home Federal Bank. Management has
determined that the Bank as a whole is the sole reporting unit and that no
reportable operating segments exist other than Home Federal Bank.
Market
Area
Home
Federal Bank serves the Boise, Idaho, and surrounding metropolitan statistical
area (“MSA”) known as the Treasure Valley region of southwestern Idaho, which
includes Ada, Canyon, Elmore and Gem counties. We have 15 full-service banking
offices, one loan center, 16 automated teller machines and Internet banking
services. Included in our 15 full-service banking offices are five Wal-Mart
in-store branch locations. For more information, see "Item 2.
Properties."
Home
Federal Bank maintains its largest branch presence in Ada County with eight
locations, followed by Canyon County with five offices, including Home Federal
Bank’s corporate headquarters in Nampa. As of June 30, 2008, the Bank had a
5.12% market share of the FDIC-insured deposits in these two counties, ranking
it seventh among all insured depository institutions in these counties,
according to the FDIC. The two remaining branches are located in Elmore and Gem
counties.
The local
economy is primarily urban with Boise, the state capital of Idaho, being the
most populous of the markets that the Bank serves, followed by Nampa, the
state's second largest city. Nearly 40% of the state’s population lives and
works in the four counties of Ada, Canyon, Elmore and Gem that are served by
Home Federal Bank. Of the four counties, Ada County has the largest population
followed by Canyon County. The counties of Elmore and Gem are more rural and
less populated than Ada and Canyon counties.
The
following table summarizes key economic and demographic information about these
market areas:
|
Ada
|
Canyon
|
Elmore
|
Gem
|
US
|
Median
Household Income
|
$
64,149
|
$48,365
|
$
45,108
|
$
43,426
|
$
54,749
|
Change
2000 – 2008
|
38.9%
|
34.9%
|
27.9%
|
26.2%
|
29.8%
|
|
|
|
|
|
|
Population
|
384,329
|
186,223
|
29,849
|
17,475
|
|
Change
2000 – 2008
|
27.7%
|
41.7%
|
2.5%
|
15.1%
|
9.9%
|
|
|
|
|
|
|
Unemployment
Rate
|
|
|
|
|
|
September
2008
|
4.5%
|
5.6%
|
4.8%
|
5.5%
|
6.1%
|
September
2007
|
2.1
|
2.5
|
2.9
|
2.0
|
4.7
|
|
|
|
|
|
|
Total
Industry Deposits (millions)
|
|
|
|
|
|
June
2008
|
$
6,244
|
$
1,467
|
$ 355
|
$ 145
|
|
June
2007
|
6,549
|
1,525
|
349
|
156
|
|
|
|
|
|
|
|
Home
Federal Bank’s Deposit
|
|
|
|
|
|
Market
Share, June 2008
|
2.6%
|
15.0%
|
15.6%
|
21.7%
|
|
|
|
|
|
|
|
Source:
FDIC, SNL Financial, Bureau of Labor
Statistics
|
The
regional economy is well diversified with government, healthcare, manufacturing,
high technology, call centers and construction providing sources of employment.
In addition, agriculture and related industries continue to be key components of
the economy in southwestern Idaho. Generally, sources of employment are
concentrated in Ada and Canyon counties and include the headquarters of Micron
Technology, J.R. Simplot Company and Boise Cascade, LLC. Other major employers
include Hewlett-Packard, Supervalu, two regional medical centers and Idaho state
government agencies. Boise is also home to Boise State University, the state's
largest university.
The
Treasure Valley has enjoyed strong population growth over the last five years,
which led to an increase in residential community developments. The current
economic slowdown, which has been led by significant deterioration in
residential home sales, has caused acceleration in unemployment in the Treasure
Valley. This slowdown has created an over-supply of speculative construction and
land development projects. While the unemployment rate in the Treasure Valley is
still below the national average, the rate of increase has outpaced national
unemployment levels in the second half of fiscal 2008. Micron Technologies and
Hewlett Packard have each announced layoffs, which will continue to place strain
on the local economy and residential housing. Continued deterioration in the
local economy may result in additional losses in the Bank’s loan portfolio,
restrict management’s ability to execute the Company’s growth plans or impact
the Bank’s liquidity due to a shrinking deposit base.
Operating
Strategy
Management’s
operating strategy centers on the continued development into a full service,
community-oriented bank from a traditional savings and loan business model. Our
goal is to continue to enhance our franchise value and earnings through
controlled growth in our banking operations, especially small business lending,
while maintaining the community-oriented customer service and sales focus that
has characterized our success to date. In order to be successful in this
objective and increase stockholder value, we are committed to the following
strategies:
Continue
Growing in Our Existing Markets. We believe there is a large customer
base in our market that is dissatisfied with the service received from larger
regional banks. By offering quicker decision making in the delivery of banking
products and services, offering customized products where appropriate, and
providing customer access to our senior managers, we hope to distinguish
ourselves from larger, regional banks operating in our market
areas.
Expand
Our Product Offerings. We intend to continue our emphasis on originating
commercial lending products that diversify our loan portfolio by increasing the
percentage of assets consisting of higher-yielding commercial real estate and
commercial business loans with higher risk adjusted returns, shorter maturities
and more sensitivity to interest rate fluctuations, while still providing high
quality loan products for single-family residential borrowers. We
also
intend to selectively add products to provide diversification of revenue sources
and to capture our customer’s full relationship by cross selling our loan and
deposit products and services to our customers.
Focus
on our Branch Expansion. Branch expansion has played a significant role
in our ability to grow loans, deposits and customer relationships. We are
planning two new branches that we intend to open within the next 12 months.
We recently
completed construction of a branch in Boise, Idaho, that opened in October 2008.
Our long-term strategy is to build two or three branches per year if
appropriate sites can be identified and obtained. We will also actively search
for appropriate acquisitions to enhance our ability to deliver products and
services in our existing markets and to expand into surrounding
markets.
Increase
Our Core Transaction Deposits. A fundamental part of our overall strategy
is to improve both the level and the mix of deposits that serve as a funding
base for asset growth. By growing demand deposit accounts and other transaction
accounts, we intend to reduce our reliance on higher-cost certificates of
deposit and borrowings such as advances from the Federal Home Loan Bank of
Seattle. In order to expand our core deposit franchise, we are focusing on
introducing additional products and services to obtain money market and time
deposits by bundling them with other consumer services. Business deposits are
being pursued by the introduction of cash management products and by specific
targeting of small business customers.
Hire
Experienced Employees With a Customer Service Focus. Our ability to
continue to attract and retain banking professionals with strong business
banking and service skills, community relationships and significant knowledge of
our markets is key to our success. We believe that by focusing on hiring
experienced bankers who are established in their communities, we enhance our
market position and add profitable growth opportunities. We emphasize to our
employees the importance of delivering exemplary customer service and seeking
opportunities to build further relationships with our customers. Our goal is to
compete by relying on the strength of our customer service and relationship
banking approach.
Develop
and nurture an internal management culture which is driven by a focus on
profitability, productivity and accountability for results and which responds
proactively to the challenge of change. The primary method for
reinforcing our culture is the comprehensive application of our “Pay for
Performance” total compensation program. Every employee has clearly defined
accountabilities and performance standards that tie directly or indirectly to
our profitability. All incentive compensation is based on specific profitability
measures, sales volume goals or a combination of specific profitability measures
and individual performance goals. This approach encourages all employees to
focus on our profitability and has created an environment that embraces new
products, services and delivery systems.
Lending
Activities
General. Historically, our
principal lending activity has consisted of the origination of loans secured by
first mortgages on owner-occupied, one- to four-family residences and loans for
the construction of one- to four-family residences. We also originate consumer
loans, with an emphasis on home equity loans and lines of credit. Commensurate
with our transformation from a traditional thrift to a full-service community
bank, we have been offering commercial real estate loans and to a lesser extent,
multi-family loans, primarily in the Treasure Valley. While we intend to
increase our commercial and industrial loans, a substantial portion of our loan
portfolio is currently secured by real estate, either as primary or secondary
collateral, located in the Treasure Valley.
At
September 30, 2008, the maximum amount of credit that we could have extended to
any one borrower and the borrower's related entities under applicable
regulations was $22.7 million. Our internal policy limits loans to one borrower
and the borrower's related entities to 80% of the regulatory limit, or $18.2
million. At September 30, 2008, the Company had no borrowing relationship with
outstanding balances in excess of this amount. Our largest single borrower
relationship at September 30, 2008 included four loans totaling $5.1
million secured by commercial real estate. The second
largest lending relationship included five commercial real estate loans totaling
$5.0 million. Our third largest borrower relationship was five
commercial real estate secured loans and one single family construction loan
totaling $5.0 million. The fourth largest lending relationship was
two commercial acquisition and development loans and a letter of credit totaling
$4.6 million. The fifth largest lending relationship included four
commercial real estate secured loans and a home equity line of credit totaling
$4.1 million. All of these loans, including those made to
corporations, have personal guarantees in place as an additional source of
repayment and are secured by property or assets in our primary market
area. These loans were performing according to their terms at
September 30, 2008.
During
fiscal year 2008, our Senior Management Loan Committee, which consists of the
President and Chief Executive Officer, the Executive Vice President/Commercial
Banking and the Senior Vice President/Chief Credit Officer, was authorized to
approve loans to one borrower or a group of related borrowers of up to $7.0
million in the aggregate with no single loan exceeding $3.5
million. Loan requests in excess of $7.0 million in the aggregate
were presented to the Loan Committee of the Board of Directors for review and
approval. The entire board comprises that committee. In November 2008, we
changed these limits to reduce the aggregate lending limit for the Senior
Management Loan Committee to $5.0 million, with relationships over $5.0 million
requiring board approval. The single loan limit was increased to $5.0 million at
that time.
Loan Portfolio Analysis. The
following table sets forth the composition of the Company’s loan portfolio by
type of loan at the dates indicated.
|
At
September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential (1)
|
$210,501
|
|
45.23%
|
|
$249,545
|
|
51.55%
|
|
$293,640
|
|
57.88%
|
|
$252,126
|
|
58.00%
|
|
$242,818
|
|
61.27%
|
Multi-family
residential
|
8,477
|
|
1.82
|
|
6,864
|
|
1.42
|
|
7,049
|
|
1.39
|
|
5,454
|
|
1.25
|
|
6,265
|
|
1.58
|
Commercial
|
151,733
|
|
32.61
|
|
133,823
|
|
27.64
|
|
125,401
|
|
24.72
|
|
116,432
|
|
26.78
|
|
93,575
|
|
23.61
|
Total
real estate
|
370,711
|
|
79.66
|
|
390,232
|
|
80.61
|
|
426,090
|
|
83.99
|
|
374,012
|
|
86.03
|
|
342,658
|
|
86.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
13,448
|
|
2.89
|
|
20,545
|
|
4.24
|
|
23,678
|
|
4.67
|
|
14,421
|
|
3.32
|
|
7,207
|
|
1.82
|
Multi-family
residential
|
920
|
|
0.20
|
|
1,770
|
|
0.37
|
|
--
|
|
--
|
|
1,427
|
|
0.33
|
|
834
|
|
0.21
|
Commercial
and land development
|
18,674
|
|
4.01
|
|
21,899
|
|
4.52
|
|
16,344
|
|
3.22
|
|
7,470
|
|
1.72
|
|
11,151
|
|
2.81
|
Total
real estate construction
|
33,042
|
|
7.10
|
|
44,214
|
|
9.13
|
|
40,022
|
|
7.89
|
|
23,318
|
|
5.37
|
|
19,192
|
|
4.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
52,954
|
|
11.38
|
|
42,990
|
|
8.88
|
|
34,143
|
|
6.73
|
|
28,558
|
|
6.57
|
|
27,351
|
|
6.90
|
Automobile
|
1,903
|
|
0.41
|
|
2,173
|
|
0.45
|
|
3,245
|
|
0.64
|
|
4,576
|
|
1.05
|
|
3,838
|
|
0.97
|
Other
consumer
|
1,370
|
|
0.29
|
|
1,405
|
|
0.29
|
|
1,300
|
|
0.26
|
|
1,530
|
|
0.35
|
|
1,949
|
|
0.49
|
Total
consumer
|
56,227
|
|
12.08
|
|
46,568
|
|
9.62
|
|
38,688
|
|
7.63
|
|
34,664
|
|
7.97
|
|
33,138
|
|
8.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
5,385
|
|
1.16
|
|
3,122
|
|
0.64
|
|
2,480
|
|
0.49
|
|
2,759
|
|
0.63
|
|
1,363
|
|
0.34
|
|
465,365
|
|
100.00%
|
|
484,136
|
|
100.00%
|
|
507,280
|
|
100.00%
|
|
434,753
|
|
100.00%
|
|
396,351
|
|
100.00%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan fees
|
973
|
|
|
|
1,030
|
|
|
|
1,241
|
|
|
|
927
|
|
|
|
1,080
|
|
|
Allowance
for loan losses
|
4,579
|
|
|
|
2,988
|
|
|
|
2,974
|
|
|
|
2,882
|
|
|
|
2,637
|
|
|
Loans
receivable, net
|
$459,813
|
|
|
|
$480,118
|
|
|
|
$503,065
|
|
|
|
$430,944
|
|
|
|
$392,634
|
|
|
(1)
|
Does
not include loans held for sale of $2.8 million, $4.9 million, $4.1
million, $5.5 million, and $3.6 million at September 30, 2008, 2007, 2006,
2005 and 2004, respectively.
|
The
following table shows the composition of the Company’s loan portfolio by fixed
and adjustable rate loans at the dates indicated.
|
At
September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
FIXED
RATE LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
$134,772
|
|
28.96%
|
|
$159,099
|
|
32.87%
|
|
$188,102
|
|
37.08%
|
|
$199,352
|
|
45.86%
|
|
$193,241
|
|
48.76%
|
Multi-family
residential
|
1,947
|
|
0.42
|
|
1,993
|
|
0.41
|
|
2,055
|
|
0.41
|
|
2,119
|
|
0.48
|
|
2,136
|
|
0.54
|
Commercial
|
20,125
|
|
4.32
|
|
21,345
|
|
4.41
|
|
19,236
|
|
3.79
|
|
16,303
|
|
3.74
|
|
12,428
|
|
3.13
|
Total
real estate
|
156,844
|
|
33.70
|
|
182,437
|
|
37.69
|
|
209,393
|
|
41.28
|
|
217,774
|
|
50.08
|
|
207,805
|
|
52.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
1,370
|
|
0.29
|
|
1,488
|
|
0.31
|
|
16,797
|
|
3.31
|
|
3,391
|
|
0.78
|
|
2,778
|
|
0.70
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Commercial
and land development
|
2,973
|
|
0.64
|
|
5,102
|
|
1.05
|
|
5,967
|
|
1.18
|
|
1,838
|
|
0.42
|
|
312
|
|
0.08
|
Total
real estate construction
|
4,343
|
|
0.93
|
|
6,590
|
|
1.36
|
|
22,764
|
|
4.49
|
|
5,229
|
|
1.20
|
|
3,090
|
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
17,239
|
|
3.71
|
|
14,860
|
|
3.07
|
|
9,723
|
|
1.92
|
|
4,903
|
|
1.13
|
|
4,393
|
|
1.11
|
Automobile
|
1,903
|
|
0.41
|
|
2,173
|
|
0.45
|
|
3,245
|
|
0.64
|
|
4,576
|
|
1.05
|
|
3,838
|
|
0.97
|
Other
consumer
|
1,370
|
|
0.29
|
|
1,405
|
|
0.29
|
|
1,300
|
|
0.26
|
|
1,530
|
|
0.35
|
|
1,949
|
|
0.49
|
Total
consumer
|
20,512
|
|
4.41
|
|
18,438
|
|
3.81
|
|
14,268
|
|
2.82
|
|
11,009
|
|
2.53
|
|
10,180
|
|
2.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
1,543
|
|
0.34
|
|
1,073
|
|
0.22
|
|
622
|
|
0.12
|
|
1,091
|
|
0.25
|
|
642
|
|
0.16
|
Total
fixed rate loans
|
$183,242
|
|
39.38%
|
|
$208,538
|
|
43.08%
|
|
$247,047
|
|
48.71%
|
|
$235,103
|
|
54.06%
|
|
$221,717
|
|
55.94%
|
(table continues on following page)
(table continued from previous page)
|
At
September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
ADJUSTABLE
RATE LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
$75,729
|
|
16.27%
|
|
$90,446
|
|
18.68%
|
|
$105,538
|
|
20.80%
|
|
$52,774
|
|
12.14%
|
|
$49,577
|
|
12.51%
|
Multi-family
residential
|
6,530
|
|
1.40
|
|
4,871
|
|
1.01
|
|
4,994
|
|
0.98
|
|
3,335
|
|
0.77
|
|
4,129
|
|
1.04
|
Commercial
|
131,608
|
|
28.29
|
|
112,478
|
|
23.23
|
|
106,165
|
|
20.93
|
|
100,129
|
|
23.04
|
|
81,147
|
|
20.48
|
Total
real estate
|
213,867
|
|
45.96
|
|
207,795
|
|
42.92
|
|
216,697
|
|
42.71
|
|
156,238
|
|
35.95
|
|
134,853
|
|
34.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
12,078
|
|
2.60
|
|
19,057
|
|
3.93
|
|
6,881
|
|
1.36
|
|
11,030
|
|
2.54
|
|
4,429
|
|
1.12
|
Multi-family
residential
|
920
|
|
0.20
|
|
1,770
|
|
0.37
|
|
--
|
|
--
|
|
1,427
|
|
0.33
|
|
834
|
|
0.21
|
Commercial
and land development
|
15,701
|
|
3.37
|
|
16,797
|
|
3.47
|
|
10,377
|
|
2.04
|
|
5,632
|
|
1.30
|
|
10,839
|
|
2.73
|
Total
real estate construction
|
28,699
|
|
6.17
|
|
37,624
|
|
7.77
|
|
17,258
|
|
3.40
|
|
18,089
|
|
4.17
|
|
16,102
|
|
4.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
35,715
|
|
7.67
|
|
28,130
|
|
5.81
|
|
24,420
|
|
4.81
|
|
23,655
|
|
5.44
|
|
22,958
|
|
5.79
|
Automobile
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Other
consumer
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Total
consumer
|
35,715
|
|
7.67
|
|
28,130
|
|
5.81
|
|
24,420
|
|
4.81
|
|
23,655
|
|
5.44
|
|
22,958
|
|
5.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
3,842
|
|
0.82
|
|
2,049
|
|
0.42
|
|
1,858
|
|
0.37
|
|
1,668
|
|
0.38
|
|
721
|
|
0.18
|
Total
adjustable rate loans
|
282,123
|
|
60.62
|
|
275,598
|
|
56.92
|
|
260,233
|
|
51.29
|
|
199,650
|
|
45.94
|
|
174,634
|
|
44.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
465,365
|
|
100.00%
|
|
484,136
|
|
100.00%
|
|
507,280
|
|
100.00%
|
|
434,753
|
|
100.00%
|
|
396,351
|
|
100.00%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan fees
|
973
|
|
|
|
1,030
|
|
|
|
1,241
|
|
|
|
927
|
|
|
|
1,080
|
|
|
Allowance
for loan losses
|
4,579
|
|
|
|
2,988
|
|
|
|
2,974
|
|
|
|
2,882
|
|
|
|
2,637
|
|
|
Loans
receivable, net
|
$459,813
|
|
|
|
$480,118
|
|
|
|
$503,065
|
|
|
|
$430,944
|
|
|
|
$392,634
|
|
|
One- to Four-Family Residential Real
Estate Lending. We originate both fixed-rate loans and adjustable-rate
loans in our residential lending program. Generally, these loans are originated
to meet the requirements of Fannie Mae and Freddie Mac for sale in the secondary
market. We do from time to time, however, retain some of these loans in our loan
portfolio to meet asset and liability management objectives.
We offer
adjustable-rate mortgage loans at rates and terms competitive with market
conditions. Presently, most of the adjustable-rate mortgage loans are originated
for the purpose of selling them in the secondary market. We offer several
adjustable-rate mortgage products that adjust annually after an initial period
ranging from one to ten years. Contractual annual adjustments are generally
limited to increases or decreases of no more than two percent, subject to a
maximum increase of no more than six percent from the rate offered at the time
of origination. The adjustable-rate mortgage loans held in our portfolio do not
permit negative amortization of principal and generally carry no prepayment
restrictions. Borrower demand for adjustable-rate mortgage loans versus fixed
rate mortgage loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan. The
relative amount of fixed rate mortgage loans and adjustable-rate mortgage loans
that can be originated at any time is largely determined by the demand for each
in a competitive environment.
Adjustable-rate
mortgage loans in our loan portfolio help us reduce our exposure to changes in
interest rates. There are, however, credit risks resulting from the potential of
increased interest to be paid by the borrower as a result of increases in
interest rates. It is possible that, during periods of rising interest rates,
the risk of default on adjustable-rate mortgage loans may increase as a result
of repricing and the increased costs to the borrower. Furthermore, because
adjustable-rate mortgage loans may be offered at initial rates of interest below
the rates that would apply were the adjustment index used for pricing initially,
these loans may be subject to increased risks of default or delinquency. Another
consideration is that although adjustable-rate mortgage loans allow us to
decrease the sensitivity of our asset base as a result of changes in the
interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limits. Because of these
considerations, there is no assurance that yields on adjustable-rate mortgage
loans will be sufficient to offset increases in our cost of funds, particularly
in today’s interest rate environment. The Bank does not hold one- to four-
family residential real estate loans that have “option payment” or negative
amortization features at September 30, 2008.
We
generally underwrite our one- to four-family loans based on the applicant's
employment, debt to income levels, credit history and the appraised value of the
subject property. Generally, we lend up to 80% of the lesser of the appraised
value or purchase price for one- to four-family residential loans. In situations
where we grant a loan with a loan-to-value ratio in excess of 80%, we generally
require private mortgage insurance in order to reduce our exposure to 80% or
less. Properties securing our one- to four-family loans are generally appraised
by independent fee appraisers that have been approved by us. We require our
borrowers to obtain title and hazard insurance, and flood insurance, if
necessary, in an amount not less than the value of the property
improvements.
Our
fixed-rate, single family residential mortgage loans are normally originated
with 15 to 30 year terms, although these loans typically remain outstanding for
substantially shorter periods. In addition, substantially all residential
mortgage loans in our loan portfolio contain due-on-sale clauses, which allow us
to declare the unpaid amount of the loan due and payable upon the sale of the
property securing the loan. Typically, we enforce these due-on-sale clauses to
the extent permitted by law and as a standard course of business. The average
loan maturity is a function of, among other factors, the level of purchase and
sale activity in the real estate market, prevailing interest rates and the
interest rates payable on outstanding loans.
At
September 30, 2008, $31.7 million, or 15.0%, of our one- to four-family
residential mortgages consisted of loans for non-owner occupied properties. This
consisted of $6.1 million of loans on second homes and $25.6 million of loans
for investment. Non-owner occupied loans secured by one to two units are
generally made with loan-to-value ratios of up to 90% and non-owner occupied
loans secured by three units or more are generally made with loan-to-value
ratios of up to 75%. In situations where we grant a loan with a loan-to-value
ratio in excess of 80%, we generally require private mortgage insurance in order
to reduce our exposure to 80% or less. As of September 30, 2008, delinquent
non-owner occupied loans made up 3.5% of total non-owner occupied residential
mortgages. Delinquent owner-occupied properties were 0.7% of total
owner-occupied residential mortgages.
In an
effort to provide financing for moderate income and first-time buyers, we
participate in the Idaho Housing and Finance Association's Single Family
Mortgage Program. The Idaho Housing and Finance Association is a non-profit
organization
that provides housing resources to low to moderate-income families through
various below market housing programs. The program is designed to meet the needs
of qualified borrowers in the low-to moderate-income brackets. The program has
established income limits based on family size and sales price limits for both
existing and new construction. We offer residential mortgage loans through this
program to qualified individuals and originate the loans using modified
underwriting guidelines. All of these loans have private mortgage insurance on
the portion of the principal amount that exceeds 80% of the appraised value of
the property. Approximately $8.7 million of loans were sold to the Idaho Housing
and Finance Association in the year ended September 30, 2008.
The Idaho
Housing and Finance Association has designed two programs to provide down
payment and/or closing cost assistance to qualified low-to-moderate income
borrowers in Idaho. The assistance consists of grant programs and a second
mortgage for a maximum combined loan-to-value of 102%. The grant program is open
to first time homebuyers whose total household income is equal to or less than
80% of the Area Median Income based on the property location and the total
number of household members. The subsidy assistance can range up to a maximum of
$20,000, based on need.
Real Estate Construction. We
have been an active originator of real estate construction loans in our market
area for many years. At September 30, 2008, our construction and land
development loans amounted to $33.0 million, or 7.1%, of the total loan
portfolio.
The
following table shows the composition of the construction loan portfolio at the
dates indicated:
|
At
September 30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
One-
to four-family residential:
|
|
|
|
Speculative
|
$11,324
|
|
$15,672
|
Permanent
|
--
|
|
347
|
Custom
|
2,124
|
|
4,526
|
|
|
|
|
Multi-family
residential
|
920
|
|
1,770
|
|
|
|
|
Commercial
real estate:
|
|
|
|
Construction
|
6,181
|
|
13,691
|
Land
development loans
|
12,493
|
|
8,208
|
Total
construction and land development
|
$33,042
|
|
$44,214
|
We
reduced our exposure to speculative construction loans in response to the
general slowdown in residential construction projects in the Treasure Valley
during fiscal 2008. Total originations of construction loans declined by 48% and
59% during fiscal 2008 compared to fiscal 2007 and 2006,
respectively.
Our
construction loans to individuals to build their personal residences typically
are structured as construction/permanent loans whereby there is one closing for
both the construction loan and the permanent financing. During the construction
phase, which typically lasts for six months, our staff appraiser or an approved
fee inspector makes periodic inspections of the construction site and loan
proceeds are disbursed directly to the contractors or borrowers as construction
progresses. Typically, disbursements are made in five draws during the
construction period. Construction loans require payment of interest only during
the construction phase and are structured to be converted to fixed or adjustable
rate permanent loans at the end of the construction phase. Prior to making a
commitment to fund a construction loan, we require an appraisal of the property
by an independent fee appraiser. Our staff appraiser or an approved fee
inspector also reviews and inspects each project prior to each disbursement of
funds during the term of the construction loan. Loan proceeds are disbursed
based on a percentage of completion.
During
the year ended September 30, 2008, we originated $12.8 million of short-term
builder construction loans to fund the construction of one- to four-family
residential properties. Most loans are written with maturities of one year, have
interest rates that are tied to The Wall Street Journal Prime
rate plus a margin, and are subject to monthly rate adjustments tied to the
movement of the prime rate. All builder/borrowers are underwritten to the same
standards
as other commercial loan credits, requiring minimum debt service coverage ratios
and established cash reserves to carry projects through construction completion
and sale of the project. The maximum loan-to-value ratio on both pre-sold and
speculative projects is 80%.
We
originate construction and site development loans to contractors and builders
primarily to finance the construction of single-family homes and subdivisions,
which homes typically have an average price ranging from $150,000 to $400,000.
Loans to finance the construction of single-family homes and subdivisions are
generally offered to experienced builders in our primary market areas. The
maximum loan-to-value limit applicable to these loans is generally up to 80% of
the appraised market value upon completion of the project. We generally do not
require any cash equity from the borrower if there is sufficient equity in the
land being used as collateral. Development plans are required from builders
prior to making the loan. Our Chief Appraiser is required to personally visit
the proposed site of the development and the sites of competing developments. We
require that builders maintain adequate insurance coverage. Maturity dates for
residential construction loans are largely a function of the estimated
construction period of the project, and generally do not exceed 36 months for
residential subdivision development loans. Substantially all of our residential
construction loans have adjustable rates of interest based on the Wall Street Journal prime
rate and during the term of construction, the accumulated interest is added to
the principal of the loan through an interest reserve. Construction loan
proceeds are disbursed periodically in increments as construction progresses and
as inspection by our approved inspectors warrant. At September 30, 2008, our
largest subdivision development loan had a commitment for $3.5 million and an
outstanding principal balance of $351,000. This loan was secured by a first
mortgage lien and was performing according to its original terms at September
30, 2008. At September 30, 2008, the average outstanding principal balance of
subdivision loans to contractors and developers was $1.0 million.
We also
make construction loans for commercial development projects. These projects
include multi-family, apartment, retail, office/warehouse and office buildings.
These loans generally have an interest-only phase during construction, and
generally convert to permanent financing when construction is completed.
Disbursement of funds is at our sole discretion and is based on the progress of
construction. The maximum loan-to-value limit applicable to these loans is 80%
of the appraised post-construction value.
We
originate land loans to local contractors and developers for the purpose of
holding the land for future development. These loans are secured by a first lien
on the property, are limited to 50% of the lower of the acquisition price or the
appraised value of the land, and generally have a term of up to two years with
an interest rate based on the
Wall Street Journal prime rate. Our land loans are generally
secured by property in our primary market area. We require title insurance and,
if applicable, a hazardous waste survey reporting that the land is free of
hazardous or toxic waste.
Our
construction and land development loans are based upon estimates of costs and
value associated with the completed project. These estimates may be inaccurate.
Construction and land development lending involves additional risks when
compared with permanent residential lending because funds are advanced upon the
security of the project, which is of uncertain value prior to its completion.
Because of the uncertainties inherent in estimating construction costs, as well
as the market value of the completed project and the effects of governmental
regulation of real property, it is relatively difficult to evaluate accurately
the total funds required to complete a project and the related loan-to-value
ratio.
This type
of lending also typically involves higher loan principal amounts and is often
concentrated with a small number of builders. These loans often involve the
disbursement of substantial funds with repayment substantially dependent on the
success of the ultimate project and the ability of the borrower to sell or lease
the property or obtain permanent take-out financing, rather than the ability of
the borrower or guarantor to repay principal and interest. If our appraisal of
the value of a completed project proves to be overstated, we generally require
cash curtailments or additional collateral to support the
shortfall.
Commercial and Multi-Family Real
Estate Lending. Multi-family and commercial real estate loans generally
are priced at a higher rate of interest than one- to four-family residential
loans. Typically, these loans have higher loan balances, are more difficult to
evaluate and monitor, and involve a greater degree of risk than one- to
four-family residential loans. Often payments on loans secured by multi-family
or commercial properties are dependent on the successful operation and
management of the property; therefore, repayment of these loans may be affected
by adverse conditions in the real estate market or the economy. We generally
require and obtain loan guarantees from
financially
capable parties based upon the review of personal financial statements. If the
borrower is a corporation, we generally require and obtain personal guarantees
from the corporate principals based upon a review of their personal financial
statements and individual credit reports.
We target
individual multi-family and commercial real estate loans to small- and mid-size
owner occupants and investors between $500,000 and $2.0 million; however, we can
by policy originate loans to one borrower up to 80% of our regulatory limit. As
of September 30, 2008, the maximum we could lend to any one borrower based on
this limit was $18.2 million. Commercial real estate loans are primarily secured
by office and warehouse space, professional buildings, retail sites, industrial
facilities and churches located in the Treasure Valley market area.
We offer
both fixed and adjustable rate loans on multi-family and commercial real estate
loans. Loans originated on a fixed rate basis generally are originated at fixed
terms up to ten years, with amortization terms up to 25 years. Commercial and
multi-family real estate loans are originated with rates that generally adjust
after an initial period ranging from three to ten years. Adjustable rate
multi-family residential and commercial real estate loans are generally priced
utilizing the applicable FHLB Term Borrowing Rate plus an acceptable margin.
These loans are generally amortized for up to 25 years with prepayment penalty
structures applied for each rate lock period.
The
maximum loan-to-value ratio for commercial and multi-family real estate loans is
generally 75% on purchases and refinances. We require appraisals of all
properties securing commercial and multi-family real estate loans. Appraisals
are performed by independent appraisers designated by us or by our staff
appraiser. We require our commercial and multi-family real estate loan borrowers
with outstanding balances in excess of $500,000 to submit annual financial
statements and rent rolls on the subject property. We also inspect the subject
property at least every three to five years if the loan balance exceeds
$250,000. We generally require a minimum pro forma debt coverage ratio of 1.25
times for loans secured by commercial and multi-family properties.
Consumer Lending. We offer a
variety of consumer loans to our customers, including home equity loans and
lines of credit, savings account loans, automobile loans, recreational vehicle
loans and personal unsecured loans. Generally, consumer loans have shorter terms
to maturity and higher interest rates than mortgage loans. The maximum term we
offer on automobile loans is 72 months and is applicable to new and one year old
cars and light trucks. In addition, we offer loan terms of up to 120 months on
motor homes, and qualifying travel trailers and boats. All automobile loans are
risk priced based on the percentage of cost, or established value, being
financed. Consumer loans are made with both fixed and variable interest rates
and with varying terms.
At
September 30, 2008, the largest component of the consumer loan portfolio
consisted of home equity loans and lines of credit. Home equity loans are made
for, among other purposes, the improvement of residential properties, debt
consolidation and education expenses. The majority of these loans are secured by
a first or second mortgage on residential property. The maximum loan-to-value
ratio is 80%, when taking into account both the balance of the home equity loan
and the first mortgage loan. Home equity lines of credit allow for a ten-year
draw period, plus an additional ten year repayment period, and the interest rate
is tied to the Prime rate as published in The Wall Street Journal, and
may include a margin.
Consumer
loans entail greater risk than do residential mortgage loans, particularly in
the case of consumer loans that are unsecured or secured by rapidly depreciating
assets such as automobiles. In these cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount that can be recovered on these loans.
These risks are not as prevalent with respect to our consumer loan portfolio
because a large percentage of the portfolio consists of home equity loans and
lines of credit that are underwritten in a manner such that they result in
credit risk that is substantially similar to one- to four-family residential
mortgage loans. Nevertheless, home equity loans and lines of credit have greater
credit risk than one- to four-family residential mortgage loans because they are
secured by mortgages subordinated to the existing first mortgage on the
property, which we may or may not hold. In addition, we do not have private
mortgage insurance coverage for these loans. We do not actively participate in
wholesale or brokered home equity loan origination.
Commercial Business Lending.
As part of our strategic plan, we are focusing on increasing the
commercial business loans that we originate, including lines of credit, term
loans and letters of credit. These loans are typically secured by collateral and
are used for general business purposes, including working capital financing,
equipment financing, capital investment and general investment. Loan terms vary
from one to seven years. The interest rates on such loans are generally floating
rates indexed to the Wall
Street Journal Prime rate plus a margin.
Commercial
business loans typically have shorter maturity terms and higher interest spreads
than real estate loans, but generally involve more credit risk because of the
type and nature of the collateral. We are focusing our efforts on small- to
medium-sized, privately-held companies with local or regional businesses that
operate in our market area. Our commercial business lending policy includes
credit file documentation and analysis of the borrower’s background, capacity to
repay the loan, the adequacy of the borrower’s capital and collateral, as well
as an evaluation of other conditions affecting the borrower. Analysis of the
borrower’s past, present and future cash flows is also an important aspect of
our credit analysis. We generally obtain personal guarantees on our commercial
business loans.
Repayment
of our commercial business loans is often dependent on the cash flows of the
borrower, which may be unpredictable, and the collateral securing these loans
may fluctuate in value. Our commercial business loans are originated primarily
based on the identified cash flow of the borrower and secondarily on the general
liquidity and secondary cash flow support of the borrower. Advance ratios
against collateral provide additional support to repay the loan. Most often,
this collateral consists of accounts receivable, inventory or equipment. Credit
support provided by the borrower for most of these loans and the probability of
repayment is based on the liquidation of the pledged collateral and enforcement
of a personal guarantee, if any. As a result, in the case of loans secured by
accounts receivable, the availability of funds for the repayment of these loans
may be substantially dependent on the ability of the borrower to collect amounts
due from its customers. The collateral securing other loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
Loan Maturity and Repricing.
The following table sets forth certain information at September 30, 2008,
regarding the dollar amount of loans maturing or repricing in our portfolio
based on their contractual terms to maturity or next repricing date, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity are reported as
due in one year or less. Loan balances do not include undisbursed loan proceeds,
unearned discounts, unearned income and allowance for loan losses.
|
Within
1
Year
|
|
After
1
Year
Through
3
Years
|
|
After
3
Years
Through
5
Years
|
|
After
5
Years
Through
10
Years
|
|
Beyond
10
Years
|
|
Total
|
|
(in
thousands)
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
$
14,000
|
|
$
48,056
|
|
$15,016
|
|
$53,980
|
|
$79,449
|
|
$210,501
|
Multi-family
residential
|
398
|
|
3,473
|
|
1,530
|
|
1,129
|
|
1,947
|
|
8,477
|
Commercial
|
13,049
|
|
48,926
|
|
59,653
|
|
29,457
|
|
648
|
|
151,733
|
Total
real estate
|
27,447
|
|
100,455
|
|
76,199
|
|
84,566
|
|
82,044
|
|
370,711
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
13,448
|
|
--
|
|
--
|
|
--
|
|
--
|
|
13,448
|
Multi-family
residential
|
920
|
|
--
|
|
--
|
|
--
|
|
--
|
|
920
|
Commercial
and land development
|
18,674
|
|
--
|
|
--
|
|
--
|
|
--
|
|
18,674
|
Total
real estate construction
|
33,042
|
|
--
|
|
--
|
|
--
|
|
--
|
|
33,042
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
35,893
|
|
58
|
|
278
|
|
1,129
|
|
15,596
|
|
52,954
|
Automobile
|
39
|
|
802
|
|
683
|
|
366
|
|
13
|
|
1,903
|
Other
consumer
|
265
|
|
424
|
|
659
|
|
12
|
|
10
|
|
1,370
|
Total
consumer
|
36,197
|
|
1,284
|
|
1,620
|
|
1,507
|
|
15,619
|
|
56,227
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
3,595
|
|
766
|
|
951
|
|
59
|
|
14
|
|
5,385
|
Total
loans receivable
|
$100,281
|
|
$102,505
|
|
$78,770
|
|
$86,132
|
|
$97,677
|
|
$465,365
|
The
following table sets forth the dollar amount of all loans maturing or repricing
more than one year after September 30, 2008, which have fixed interest rates and
have floating or adjustable interest rates.
|
Floating
or
Adjustable
Rate
|
|
Fixed
Rates
|
|
Total
|
|
(in
thousands)
|
Real
estate:
|
|
|
|
|
|
One-
to four-family residential
|
$
61,758
|
|
$134,743
|
|
$196,501
|
Multi-family
residential
|
6,132
|
|
1,947
|
|
8,079
|
Commercial
|
119,672
|
|
19,012
|
|
138,684
|
Total
real estate
|
187,562
|
|
155,702
|
|
343,264
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
One-
to four-family residential
|
--
|
|
--
|
|
--
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
Commercial
and land development
|
--
|
|
--
|
|
--
|
Total
real estate construction
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
Home
equity
|
--
|
|
17,061
|
|
17,061
|
Automobile
|
--
|
|
1,864
|
|
1,864
|
Other
consumer
|
--
|
|
1,105
|
|
1,105
|
Total
consumer
|
--
|
|
20,030
|
|
20,030
|
|
|
|
|
|
|
Commercial
business
|
320
|
|
1,470
|
|
1,790
|
|
|
|
|
|
|
Total
loans receivable
|
$187,882
|
|
$177,202
|
|
$365,084
|
Loan Solicitation and Processing.
Loan originations are obtained primarily from walk-in customers and
referrals from builders and realtors. As part of our commercial banking
strategy, we are focusing our efforts in increasing the amount of our direct
originations of commercial and multi-family real estate loans, construction
loans to builders and commercial business loans. Residential real estate loans
are solicited through media advertising, direct mail to existing customers and
by realtor referrals. Loan originations are further supported by lending
services offered through our internet website, advertising, cross-selling and
through our employees' community service.
Upon
receipt of a loan application from a prospective borrower, we obtain a credit
report and other data to verify specific information relating to the applicant's
employment, income and credit standing. An appraisal of the real estate offered
as collateral generally is undertaken by an appraiser we have retained and
approved, and who is licensed in the State of Idaho.
Mortgage
loan applications are initiated by loan officers and are required to be approved
by our underwriting staff who have appropriately delegated lending authority.
Loans that exceed the underwriter’s lending authority must be approved by one or
more members of the Management Loan Committee. We require title insurance on
real estate loans as well as fire and casualty insurance on all secured loans
and on home equity loans and lines of credit where the property serves as
collateral.
Loan Originations, Servicing,
Purchases and Sales. During the year ended September 30, 2008, our total
loan originations were $190.3 million. The majority of all first lien
residential mortgages are sold to the secondary market at the time of
origination. During the year ended September 30, 2008, we sold $48.0 million to
the secondary market. This number included $4.9 million in loans originated in
prior years. The remaining $43.1 million of loans represents 89.9% of total
current year one- to four-family residential loan originations. Our primary
secondary market relationships have been with Freddie Mac, Fannie Mae and major
correspondent banks. The decline in loans sold during 2008 was a
result of the slowdown in new and existing home sales during the year combined
with higher mortgage rates.
One- to
four-family home loans are generally originated in accordance with the
guidelines established by Freddie Mac and Fannie Mae, with the exception of our
special community development loans under the Community Reinvestment Act. We
utilize the Freddie Mac Loan Prospector and Fannie Mae Desktop Underwriter
automated loan systems to underwrite the majority of our residential first
mortgage loans (excluding community development loans). The remaining loans are
underwritten by designated real estate loan underwriters internally in
accordance with standards as provided by our Board-approved loan policy. The
underwriting criteria we use on loans that are not sold to investors and
retained in our portfolio are at least as stringent as those we use for the
loans we sell.
Since
2006, the majority of our one- to four-family home loans have been sold into the
secondary market with servicing released. Loans are generally sold on a
non-recourse basis. In the past, we generally retained the servicing on the
majority of loans sold into the secondary market. On August 28, 2008, Home
Federal Bank entered into a binding agreement with another bank whereby Home
Federal Bank would sell its remaining servicing rights. The purchase price was
1.02% of the unpaid principal balance of all loans in the servicing portfolio,
except for those loans that are 60 days or more past due, in litigation, in
bankruptcy or in foreclosure as of October 31, 2008. The transfer is to be
completed by December 16, 2008. At September 30, 2008, our residential loan
servicing portfolio was $167.0 million.
The
following table shows total loans originated, purchased, sold and repaid during
the periods indicated.
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands)
|
Loans
originated:
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
One-
to four-family residential (1)
|
$ 48,114
|
|
$ 96,254
|
|
$124,670
|
Multi-family
residential
|
1,819
|
|
2,000
|
|
345
|
Commercial
|
47,662
|
|
23,598
|
|
26,152
|
Total
real estate
|
97,595
|
|
121,852
|
|
151,167
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
One-
to four-family residential
|
17,853
|
|
41,529
|
|
58,233
|
Multi-family
residential
|
--
|
|
1,770
|
|
9
|
Commercial
and land development
|
14,152
|
|
18,266
|
|
19,623
|
Total
real estate construction
|
32,005
|
|
61,565
|
|
77,865
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
Home
equity
|
35,339
|
|
32,136
|
|
33,454
|
Automobile
|
894
|
|
654
|
|
667
|
Other
consumer
|
3,104
|
|
3,264
|
|
2,876
|
Total
consumer
|
39,337
|
|
36,054
|
|
36,997
|
|
|
|
|
|
|
Commercial
business
|
21,352
|
|
5,159
|
|
5,164
|
|
|
|
|
|
|
Total
loans originated
|
190,289
|
|
224,630
|
|
271,193
|
|
|
|
|
|
|
Loans
purchased:
|
|
|
|
|
|
One-
to four-family residential
|
--
|
|
--
|
|
38,782
|
|
|
|
|
|
|
Loans
sold:
|
|
|
|
|
|
One-
to four-family residential
|
(47,968)
|
|
(96,370)
|
|
(81,575)
|
Participation
loans
|
--
|
|
--
|
|
--
|
Total
loans sold
|
(47,968)
|
|
(96,370)
|
|
(81,575)
|
|
|
|
|
|
|
Principal
repayments
|
(161,575)
|
|
(149,714)
|
|
(157,581)
|
Transfer
to real estate owned
|
(1,394)
|
|
(857)
|
|
--
|
Increase
(decrease) in other items (net)
|
(1,730)
|
|
149
|
|
(128)
|
|
|
|
|
|
|
Net
increase (decrease) in loans receivable and loans held for
sale
|
$(22,378)
|
|
$(22,162)
|
|
$ 70,691
|
________
(1)
|
Includes
originations of loans held for sale of $45.9 million, $97.2 million, and
$80.1 million for the years ended September 30, 2008, 2007 and 2006,
respectively.
|
Loan Origination and Other Fees.
In some instances, we receive loan origination fees on real estate
related products. Loan fees generally represent a percentage of the principal
amount of the loan, and are paid by the borrower. Accounting standards require
that certain fees received, net of certain origination costs, be deferred and
amortized over the contractual life of the loan. Net deferred fees or costs
associated with loans that are prepaid or sold are recognized as income at the
time of prepayment. We had $973,000 of net deferred loan fees and costs as of
September 30, 2008.
Asset
Quality
The
objective of our loan review process is to determine risk levels and exposure to
loss. The depth of review varies by asset types, depending on the nature of
those assets. While certain assets may represent a substantial investment and
warrant individual reviews, other assets may have less risk because the asset
size is small, the risk is spread over a large number of obligors or the
obligations are well collateralized and further analysis of individual assets
would expand the review process without measurable advantage to risk assessment.
Asset types with these characteristics may be reviewed as a total portfolio on
the basis of risk indicators such as delinquency (consumer and residential real
estate loans) or credit rating. A formal review process is conducted on
individual assets that represent greater potential risk. A formal review process
is a total reevaluation of the risks associated with the asset and is documented
by completing an asset review report. Certain real estate-related assets must be
evaluated in terms of their fair market value or net realizable value in order
to determine the likelihood of loss exposure and, consequently, the adequacy of
valuation allowances.
We define
a loan as being impaired when, based on current information and events, it is
probable that we will be unable to collect all amounts due under the contractual
terms of the loan agreement. Large groups of smaller balance homogenous loans
such as consumer secured loans, residential mortgage loans and consumer
unsecured loans are collectively evaluated for potential loss. All other loans
are evaluated for impairment on an individual basis.
We
generally assess late fees or penalty charges on delinquent loans of five
percent of the monthly principal and interest amount. The borrower is given a 10
to 15-day grace period to make the loan payment depending on loan type. When a
borrower fails to make a required payment when it is due, we institute
collection procedures. The first notice is mailed to the borrower on the day
following the expiration of the grace period requesting payment and assessing a
late charge. Attempts to contact the borrower by telephone generally begin upon
the 30th day of delinquency. If a satisfactory response is not obtained,
continual follow-up contacts are attempted until the loan has been brought
current. Before the 90th day of delinquency, attempts to interview the borrower
are made to establish the cause of the delinquency, whether the cause is
temporary, the attitude of the borrower toward the debt and a mutually
satisfactory arrangement for curing the default.
The Board
of Directors is informed monthly as to the number and dollar amount of
commercial, mortgage and consumer loans that are delinquent by more than 30
days, and is given information regarding classified assets.
If a
borrower is chronically delinquent and all reasonable means of obtaining
payments have been exercised, we will seek to recover any collateral securing
the loan according to the terms of the security instrument and applicable law.
In the event of an unsecured loan, we will either seek legal action against the
borrower or refer the loan to an outside collection agency.
The
following table shows our delinquent loans by the type of loan and number of
days delinquent as of September 30, 2008:
|
Loans
Delinquent For:
|
|
Total
|
|
60-89
Days
|
|
Over
90 Days
|
|
Delinquent
Loans
|
|
Number
of
Loans
|
|
Principal
Balance
Loans
|
|
Number
of
Loans
|
|
Principal
Balance
Loans
|
|
Number
of
Loans
|
|
Principal
Balance
Loans
|
|
(in
thousands)
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
7
|
|
$ 878
|
|
9
|
|
$ 1,518
|
|
16
|
|
$ 2,396
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Commercial
|
1
|
|
1,150
|
|
1
|
|
100
|
|
2
|
|
1,250
|
Total
real estate
|
8
|
|
2,028
|
|
10
|
|
1,618
|
|
18
|
|
3,646
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
2
|
|
242
|
|
8
|
|
2,724
|
|
10
|
|
2,966
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Commercial
and land development
|
--
|
|
--
|
|
1
|
|
353
|
|
1
|
|
353
|
Total
real estate construction
|
2
|
|
242
|
|
9
|
|
3,077
|
|
11
|
|
3,319
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
4
|
|
306
|
|
4
|
|
195
|
|
8
|
|
501
|
Automobile
|
1
|
|
1
|
|
--
|
|
--
|
|
1
|
|
1
|
Other
consumer
|
1
|
|
4
|
|
--
|
|
--
|
|
1
|
|
4
|
Total
consumer
|
6
|
|
311
|
|
4
|
|
195
|
|
10
|
|
506
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
1
|
|
8
|
|
--
|
|
--
|
|
1
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
17
|
|
$2,589
|
|
23
|
|
$ 4,890
|
|
40
|
|
$ 7,479
|
When a
loan becomes 90 days delinquent, we place the loan on nonaccrual status;
accordingly, we have no accruing loans that are contractually past due 90 days
or more. As of September 30, 2008, nonaccrual loans as a percentage of total
loans was 2.16%, and as a percentage of total assets it was 1.37%.
Nonperforming Assets. The
following table sets forth information with respect to our nonperforming assets
and troubled debt restructurings within the meaning of Statement of Financial
Accounting Standards (“FAS”) No. 15 for the periods indicated. During the
periods presented, there were no accruing loans that were contractually past due
90 days or more. Nonperforming assets include real estate acquired through
foreclosure and loans that are not delinquent but exhibit weaknesses that have
evidenced doubt as to our ability to collect all contractual principal and
interest and have been classified as impaired under FAS No. 114. As a result,
nonperforming loans and nonperforming assets were higher in balance than total
delinquent loans at September 30, 2008. There were $31,000 of troubled debt
restructurings at September 30, 2008 that were not delinquent or in
nonperforming status.
|
At
September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
(in
thousands)
|
Loans
accounted for on a non-accrual basis:
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
$1,518
|
|
$ 588
|
|
$ 358
|
|
$ 388
|
|
$ --
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Commercial
|
100
|
|
407
|
|
--
|
|
--
|
|
560
|
Total
real estate
|
1,618
|
|
995
|
|
358
|
|
388
|
|
560
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
3,787
|
|
436
|
|
--
|
|
--
|
|
--
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Commercial
and land development
|
4,204
|
|
--
|
|
--
|
|
--
|
|
--
|
Total
real estate construction
|
7,991
|
|
436
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
Home
equity
|
306
|
|
100
|
|
30
|
|
79
|
|
30
|
Automobile
|
--
|
|
--
|
|
--
|
|
5
|
|
7
|
Other
consumer
|
10
|
|
--
|
|
--
|
|
6
|
|
13
|
Total
consumer
|
316
|
|
100
|
|
30
|
|
90
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
20
|
|
--
|
|
--
|
|
--
|
|
--
|
Total
loans
|
9,945
|
|
1,531
|
|
388
|
|
478
|
|
610
|
Accruing
loans which are contractually past due 90 days or more
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Total
of nonaccrual and 90 days past due loans
|
9,945
|
|
1,531
|
|
388
|
|
478
|
|
610
|
Repossessed
assets
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Real
estate owned
|
650
|
|
549
|
|
--
|
|
534
|
|
113
|
Total
nonperforming assets
|
$10,595
|
|
$2,080
|
|
$ 388
|
|
$1,012
|
|
$ 723
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans
|
$ 812
|
|
$ 35
|
|
$ 11
|
|
$ 322
|
|
$ --
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan loss on nonperforming loans
|
1,733
|
|
66
|
|
--
|
|
7
|
|
92
|
|
|
|
|
|
|
|
|
|
|
Classified
assets included in nonperforming assets
|
10,152
|
|
1,666
|
|
388
|
|
1,000
|
|
704
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan loss on classified assets
|
1,767
|
|
191
|
|
46
|
|
64
|
|
225
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
and accruing loans 90 days or more past due as a percentage of loans
receivable
|
2.16%
|
|
0.32%
|
|
0.08%
|
|
0.11%
|
|
0.16%
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
and accruing loans 90 days or more past due as a percentage of total
assets
|
1.37%
|
|
0.22%
|
|
0.05%
|
|
0.07%
|
|
0.08%
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets as a percentage of total assets
|
1.46%
|
|
0.29%
|
|
0.05%
|
|
0.15%
|
|
0.10%
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
$459,813
|
|
$480,118
|
|
$503,065
|
|
$430,944
|
|
$392,634
|
|
|
|
|
|
|
|
|
|
|
Nonaccrued
interest (1)
|
182
|
|
36
|
|
11
|
|
5
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
725,070
|
|
709,954
|
|
761,292
|
|
689,577
|
|
743,867
|
(1)
|
If
interest on the loans classified as nonaccrual had been accrued, interest
income in these amounts would have been recorded on nonaccrual
loans.
|
Real Estate Owned and Other
Repossessed Assets. Real estate we acquire as a result of foreclosure or
by deed-in-lieu of foreclosure is classified as real estate owned until it is
sold. When the property is acquired, it is recorded at the lower of its cost,
which is the unpaid principal balance of the related loan plus foreclosure
costs, or the fair market value of the property less selling costs. Other
repossessed collateral, including autos, are also recorded at the lower of cost
(i.e., the unpaid principal balance plus repossession costs) or fair market
value. As of September 30, 2008, we had $650,000 in real estate
owned.
Restructured Loans. According
to generally accepted accounting principles, we are required to account for
certain loan modifications or restructuring as a "troubled debt
restructuring." In general, the modification or restructuring of a
debt is considered a troubled debt restructuring if we, for economic or legal
reasons related to a borrower's financial difficulties, grant a concession to
the borrower that we would not otherwise consider. As of September 30, 2008, we
had three restructured loans with an aggregate balance of $812,000.
Classified Assets. Federal
regulations provide for the classification of lower quality loans and other
assets, such as debt and equity securities, as substandard, doubtful or loss. An
asset is considered substandard if it is inadequately protected by the current
net worth, liquidity and paying capacity of the borrower or any collateral
pledged. Substandard assets include those characterized by the distinct
possibility that we will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all the weaknesses inherent in
those classified substandard with the added characteristic that the weaknesses
present make collection or liquidation in full highly questionable and
improbable on the basis of currently existing facts, conditions and values.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted.
When we
classify problem assets as either substandard or doubtful, we may establish a
specific allowance in an amount we deem prudent and approved by the Classified
Asset Committee to address the risk specifically or we may allow the loss to be
addressed in the general allowance. General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
specifically allocated to particular problem assets. When an insured institution
classifies problem assets as a loss, it is required to charge off such assets in
the period in which they are deemed uncollectible. Assets that do not currently
expose us to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are required to be designated
as special mention. Our determination as to the classification of our assets and
the amount of our valuation allowances is subject to review by the OTS, which
can order the establishment of additional loss allowances.
In
connection with the filing of periodic reports with the OTS and in accordance
with our classification of assets policy, we regularly review the problem assets
in our portfolio to determine whether any assets require classification in
accordance with applicable regulations. On the basis of our review of our
assets, as of September 30, 2008, we had classified assets of $10.6 million. The
total amount of classified assets represented 5.2% of equity capital and 1.5% of
total assets as of September 30, 2008. The increase in classified assets from
prior year detailed in the table above was due to an increase in troubled loans
primarily in our construction and land development portfolio. As of September
30, 2008, there were 18 impaired loans included in classified assets. The
aggregate amounts of classified assets at the dates indicated were as
follows:
|
At
September 30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
Classified
assets:
|
|
|
|
Doubtful
|
$
--
|
|
$ 10
|
Substandard
|
10,638
|
|
4,521
|
Total
|
$10,638
|
|
$4,531
|
|
|
|
|
Classified
assets included in nonperforming loans
|
$
9,945
|
|
$1,531
|
Specific
allowance for loan loss on classified assets
|
1,767
|
|
191
|
Potential Problem Loans.
Potential problem loans are loans that do not yet meet the criteria for
placement on non-accrual status, but known information about possible credit
problems of the borrowers causes management to have doubts as to the ability of
the borrowers to comply with present loan repayment terms. This may result in
the future inclusion of such loans in the non-accrual loan category. As of
September 30, 2008, the aggregate amount of potential problem loans was $8.6
million, which includes loans that were rated “Special Mention” or “Substandard
under the Bank’s risk grading process but were not impaired or on non-accrual
status as well as other delinquent loans that possessed inherent weaknesses
other than their delinquent status. The $8.6 million balance includes
$4.0 million in loans secured by commercial real estate loans, $2.3 million in
one- to four- family residential real loans and $2.3 million in real estate
construction and land development loans.
The
following table summarizes the distribution of the allowance for loan losses by
loan category.
|
At
September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
(in
thousands)
|
|
Loan
Balance
|
Amount
by
Loan Category
|
Percent
of
Loans
in
Loan Category
to
Total Loans
|
|
Loan
Balance
|
Amount
by
Loan Category
|
Percent
of
Loans
in
Loan Category
to
Total Loans
|
|
Loan
Balance
|
Amount
by
Loan Category
|
Percent
of
Loans
in
Loan Category
to
Total Loans
|
|
Loan
Balance
|
Amount
by
Loan Category
|
Percent
of
Loans
in
Loan Category
to
Total Loans
|
|
Loan
Balance
|
Amount
by
Loan Category
|
Percent
of
Loans
in
Loan Category
to
Total Loans
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
residential
|
$210,501
|
$849
|
45.23%
|
|
$249,545
|
$ 840
|
51.55%
|
|
$293,640
|
$ 873
|
57.88%
|
|
$252,126
|
$ 784
|
58.00%
|
|
$242,818
|
$ 704
|
61.27%
|
Multi-family
residential
|
8,477
|
70
|
1.82
|
|
6,864
|
60
|
1.42
|
|
7,049
|
61
|
1.39
|
|
5,454
|
61
|
1.25
|
|
6,265
|
75
|
1.58
|
Commercial
|
151,733
|
1,345
|
32.61
|
|
133,823
|
1,205
|
27.64
|
|
125,401
|
1,087
|
24.72
|
|
116,432
|
1,297
|
26.78
|
|
93,575
|
1,281
|
23.61
|
Total
real estate
|
370,711
|
2,264
|
79.66
|
|
390,232
|
2,105
|
80.61
|
|
426,090
|
2,021
|
83.99
|
|
374,012
|
2,142
|
86.03
|
|
342,658
|
2,060
|
86.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
residential
|
13,448
|
610
|
2.89
|
|
20,545
|
188
|
4.24
|
|
23,678
|
290
|
4.67
|
|
14,421
|
241
|
3.32
|
|
7,207
|
69
|
1.82
|
Multi-family
residential
|
920
|
11
|
0.20
|
|
1,770
|
23
|
0.37
|
|
--
|
--
|
--
|
|
1,427
|
18
|
0.33
|
|
834
|
11
|
0.21
|
Commercial
and land
development
|
18,674
|
1,029
|
4.01
|
|
21,899
|
245
|
4.52
|
|
16,344
|
294
|
3.22
|
|
7,470
|
132
|
1.72
|
|
11,151
|
148
|
2.81
|
Total
real estate
|
33,042
|
1,650
|
7.10
|
|
44,214
|
455
|
9.13
|
|
40,022
|
584
|
7.89
|
|
23,318
|
391
|
5.37
|
|
19,192
|
228
|
4.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
52,954
|
529
|
11.38
|
|
42,990
|
311
|
8.88
|
|
34,143
|
243
|
6.73
|
|
28,558
|
192
|
6.57
|
|
27,351
|
204
|
6.90
|
Automotive
|
1,903
|
29
|
0.41
|
|
2,173
|
35
|
0.45
|
|
3,245
|
58
|
0.64
|
|
4,576
|
79
|
1.05
|
|
3,838
|
79
|
0.97
|
Other
consumer
|
1,370
|
28
|
0.29
|
|
1,405
|
37
|
0.29
|
|
1,300
|
32
|
0.26
|
|
1,530
|
39
|
0.35
|
|
1,949
|
45
|
0.49
|
Total
consumer
|
56,227
|
586
|
12.08
|
|
46,568
|
383
|
9.62
|
|
38,688
|
333
|
7.63
|
|
34,664
|
310
|
7.97
|
|
33,138
|
328
|
8.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
5,385
|
79
|
1.16
|
|
3,122
|
45
|
0.64
|
|
2,480
|
36
|
0.49
|
|
2,759
|
39
|
0.63
|
|
1,363
|
21
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
$465,365
|
$4,579
|
100.00%
|
|
$484,136
|
$2,988
|
100.00%
|
|
$507,280
|
$2,974
|
100.00%
|
|
$434,753
|
$2,882
|
100.00%
|
|
$396,351
|
$2,637
|
100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth an analysis of our allowance for loan losses at the
dates and for the periods indicated.
|
Year
Ended September 30,
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
at beginning of period
|
$ 2,988
|
|
$2,974
|
|
$2,882
|
|
$2,637
|
|
$1,853
|
|
Provisions
for loan losses
|
2,431
|
|
409
|
|
138
|
|
456
|
|
900
|
|
Transfer
to unfunded commitments
|
--
|
|
(192)
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
--
|
|
--
|
|
--
|
|
--
|
|
1
|
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Commercial
|
--
|
|
--
|
|
--
|
|
2
|
|
--
|
|
Total
real estate
|
--
|
|
--
|
|
--
|
|
2
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Commercial
and land development
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Total
real estate construction
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
--
|
|
--
|
|
--
|
|
12
|
|
--
|
|
Automobile
|
9
|
|
4
|
|
12
|
|
--
|
|
12
|
|
Other
consumer
|
15
|
|
12
|
|
12
|
|
9
|
|
7
|
|
Total
consumer
|
24
|
|
16
|
|
24
|
|
21
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Total
recoveries
|
24
|
|
16
|
|
24
|
|
23
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
665
|
|
73
|
|
--
|
|
--
|
|
60
|
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Commercial
|
--
|
|
--
|
|
--
|
|
56
|
|
--
|
|
Total
real estate
|
665
|
|
73
|
|
--
|
|
56
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
--
|
|
91
|
|
--
|
|
--
|
|
--
|
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Commercial
and land development
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Total
real estate construction
|
--
|
|
91
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
137
|
|
--
|
|
3
|
|
19
|
|
--
|
|
Automobile
|
23
|
|
--
|
|
3
|
|
22
|
|
23
|
|
Other
consumer
|
39
|
|
36
|
|
33
|
|
51
|
|
53
|
|
Total
consumer
|
199
|
|
36
|
|
39
|
|
92
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business |
-- |
|
19 |
|
31 |
|
86 |
|
-- |
|
|
864 |
|
219 |
|
70 |
|
234 |
|
136 |
|
Total
charge-offs |
840 |
|
203 |
|
46 |
|
211 |
|
116 |
|
Net
charge-offs |
$
4,579 |
|
$
2,988 |
|
$2,974 |
|
$2,882 |
|
$2,637 |
|
Balance
at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percentage
of
total loans outstanding at the end of the period
|
0.98% |
|
0.62% |
|
0.59% |
|
0.67% |
|
0.67% |
|
Net
charge-offs as a percentage of average
loans outstanding during the
period
|
0.18% |
|
0.04% |
|
0.01% |
|
0.05% |
|
0.03% |
|
Allowance
for loan losses as a percentage of nonaccrual and
90 days or more past due loans at end of
period
|
46.04% |
|
195.17% |
|
766.49% |
|
602.97% |
|
432.30% |
|
Management
reviews the allowance for loan losses on at least a quarterly basis and
establishes the provision for loan losses based on the risk composition of the
loan portfolio, delinquency levels, loss experience, economic conditions, bank
regulatory examination results, seasoning of the loan portfolios and other
factors related to the collectibility of the loan portfolio The allowance is
increased by the provision for loan losses, which is charged against current
period operating results and decreased by the amount of actual loan charge-offs,
net of recoveries.
In
estimating our allowance for loan losses, we consider our historical loss ratios
as a basis for our general loss reserve. We then adjust those historical loss
rates after consideration of current internal and external environmental
factors. We consider economic indicators that may correlate to higher, or lower,
loss ratios in the current environment compared to our historical loss
experience. These external factors include trends in unemployment, levels of
foreclosures and bankruptcy filings, vacancy rates and peer bank delinquency
levels, as well as several other economic factors in our market area. Internal
factors include changes in underwriting criteria or policies, management
turnover and the results of our internal loan review processes and audits.
Further, we estimate a range of losses in each loan portfolio. Management then
judgmentally selects a level of allowance for loan loss within those ranges that
best reflects our estimate of our loss exposure. Classified assets that are not
impaired are assigned an estimated loss percentage at a higher rate than
nonclassified assets as these loans, by their nature, represent a higher
likelihood of incurred loss. If management determines the repayment of an
impaired loan is dependent upon the liquidation of collateral, an updated
appraisal is requested. Management usually applies a discount to the appraised
value and in some situations may use the appraiser’s “quick sale” value, each
further reduced by estimated costs to sell.
Management
believes the allowance for loan losses as of September 30, 2008, represents our
best estimate of known and unknown but probable, incurred losses inherent in our
loan portfolio at that date. While we believe the estimates and assumptions used
in our determination of the allowance are reasonable, there can be no assurance
that such estimates and assumptions will not be proven incorrect in the future,
or that the actual amount of future provisions will not exceed the amount of
past provisions or that any increased provision that may be required will not
adversely impact our financial condition and results of operations. In addition,
the determination of the amount of Home Federal Bank’s allowance for loan losses
is subject to review by bank regulators, as part of the routine examination
process, which may result in the establishment of additional reserves based upon
their judgment of information available to them at the time of their
examination.
The
following table provides certain information with respect to our allowance for
loan losses, including charge-offs, recoveries and selected ratios for the
periods indicated.
|
At
September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Provisions
for loan losses
|
$2,431
|
|
$ 409
|
|
$ 138
|
|
$ 456
|
|
$ 900
|
Allowance
for loan losses
|
4,579
|
|
2,988
|
|
2,974
|
|
2,882
|
|
2,637
|
Allowance
for loan losses as a percentage of
total loans outstanding at the end of the period
|
0.98%
|
|
0.62%
|
|
0.59%
|
|
0.67%
|
|
0.67%
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs
|
$ 840
|
|
$ 203
|
|
$ 46
|
|
$ 211
|
|
$ 116
|
Total
of nonaccrual and 90 days past due loans
|
9,945
|
|
1,531
|
|
388
|
|
478
|
|
610
|
Nonaccrual
and 90 days or more past due loans
as a percentage of loans receivable
|
2.16%
|
|
0.32%
|
|
0.08%
|
|
0.11%
|
|
0.16%
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
$459,813
|
|
$480,118
|
|
$503,065
|
|
$430,944
|
|
$392,634
|
Investment
Activities
General. OTS regulations
permit the Bank and the Company to invest in various types of liquid assets,
including U.S. Treasury obligations, securities of U.S. Government-sponsored
enterprises, certain certificates of deposit of federally-insured banks and
savings institutions, banker's acceptances, repurchase agreements and federal
funds. Subject to various restrictions, we also may invest a portion of our
assets in commercial paper and corporate debt securities.
Our
investment policies are designed to provide and maintain adequate liquidity and
to generate favorable rates of return without incurring undue interest rate or
credit risk. The investment policies generally limit investments to Treasury
notes, mortgage-backed securities, obligations of U.S. government sponsored
enterprises, municipal bonds, certificates of deposit and marketable corporate
debt obligations. Investment in mortgage-backed securities includes those issued
or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. In 2008, Freddie Mac
and Fannie Mae were placed into conservatorship under the U.S. Treasury
Department. As a result, these securities are now backed by the full faith and
credit of the U.S. government. We do not own direct obligations of Freddie Mac
or Fannie Mae in the form of preferred or common stock or subordinated debt
obligations.
From time
to time, investment levels may be increased or decreased depending upon yields
available on investment alternatives and management's projections as to the
demand for funds to be used in loan originations, deposits and other
activities.
Mortgage-Backed Securities.
Our mortgage-backed securities had a fair value of $188.8 million and a
$191.1 million amortized cost at September 30, 2008. The mortgage-backed
securities were primarily comprised of Fannie Mae and Freddie Mac
mortgage-backed securities. At September 30, 2008, the portfolio had a
weighted-average coupon rate of 4.73% and an estimated weighted-average yield of
4.54%. These securities had an estimated average maturity of 17.2 years and an
estimated average life of 4.5 years at September 30, 2008.
During
the quarter ended June 30, 2007, the Company transferred its entire portfolio of
held to maturity mortgage- backed securities to available for sale to meet the
additional liquidity needs associated with increasing commercial banking
activities.
Non-agency
mortgage-backed securities are comprised of whole-loan pools securitized by
Countrywide, now Bank of America, and Lehman Brothers. While the fair value of
these securities was below amortized cost, management’s review of the
delinquency levels, loan to value ratios and credit support of these loan pools
did not indicate other than temporary impairment of these securities at
September 30, 2008. Management continues to monitor these mortgage-backed
securities as they do not enjoy the guarantee of the U.S. Treasury that
mortgage-backed securities issued by Freddie Mac, Fannie Mae and
GNMA.
The
following table sets forth the composition of our investment securities
portfolios at the dates indicated.
|
At
September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
(in
thousands)
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
Fannie
Mae
|
$
101,626
|
|
$
100,602
|
|
$
68,019
|
|
$
66,477
|
|
$ --
|
|
$
--
|
Freddie
Mac
|
86,104
|
|
85,128
|
|
94,484
|
|
92,394
|
|
--
|
|
--
|
Non-Agency
|
3,390
|
|
3,057
|
|
3,464
|
|
3,387
|
|
12,476
|
|
12,182
|
Total
available for sale
|
$191,120
|
|
$188,787
|
|
$165,967
|
|
$162,258
|
|
$12,476
|
|
$ 12,182
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
Fannie
Mae
|
$ --
|
|
$
--
|
|
$ --
|
|
$ --
|
|
$65,234
|
|
$ 63,452
|
Freddie
Mac
|
--
|
|
--
|
|
--
|
|
--
|
|
114,505
|
|
111,954
|
Non-Agency
|
--
|
|
--
|
|
--
|
|
--
|
|
3,540
|
|
3,436
|
Total
held to maturity
|
$ --
|
|
$ --
|
|
$ --
|
|
$ --
|
|
$183,279
|
|
$178,842
|
At
September 30, 2008, Management believes that the Company had the ability and
intent to hold these securities until their value has recovered to amortized
cost.
The table
below sets forth information regarding the amortized cost, weighted average
yields and maturities or periods to repricing of our investment portfolio at
September 30, 2008.
|
|
|
Amount
Due or Repricing within:
|
|
1
Year or Less
|
|
Over
1 to 5 Years
|
|
Over
5 to 10 Years
|
|
Over
10 Years
|
|
Totals
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
(1)
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
(1)
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
(1)
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
(1)
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
(1)
|
|
(in
thousands)
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie
Mae
|
$ 4,177
|
|
4.39%
|
|
$20,164
|
|
3.39%
|
|
$10,686
|
|
4.70%
|
|
$66,599
|
|
4.74%
|
|
$101,626
|
|
4.45%
|
Freddie
Mac
|
11,470
|
|
4.43
|
|
6,704
|
|
4.65
|
|
18,564
|
|
4.42
|
|
49,366
|
|
4.76
|
|
86,104
|
|
4.69
|
Non-Agency
|
3,390
|
|
4.69
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
3,390
|
|
4.63
|
Total
available for sale
|
$19,037
|
|
4.47%
|
|
$26,868
|
|
3.70%
|
|
$29,250
|
|
4.52%
|
|
$115,965
|
|
4.75%
|
|
$191,120
|
|
4.54%
|
________
(1)
|
Interest
and dividends are reported on a tax-equivalent basis. During the time
period presented, the Company did not own any tax exempt investment
securities. For available for sale securities carried at fair value, the
weighted average yield is computed using amortized
cost.
|
The
following table sets forth certain information with respect to each category
which had an aggregate book value in excess of 10% of our total equity at the
date indicated.
|
At
September 30, 2008
|
|
Amortized
Cost
|
|
Fair
Value
|
|
(in
thousands)
|
Available
for sale:
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
Fannie
Mae
|
$101,626
|
|
$100,602
|
Freddie
Mac
|
86,104
|
|
85,128
|
Total
available for sale
|
$187,730
|
|
$185,730
|
Federal Home Loan Bank Stock.
As a member of the FHLB of Seattle, the Bank is required to own its
capital stock. The amount of stock the Bank holds is based on percentages
specified by the FHLB of Seattle on outstanding advances. The redemption of any
excess stock the Bank holds is at the discretion of the FHLB of Seattle. At
September 30, 2008, the carrying value of FHLB stock totaled $9.6
million.
Bank-Owned Life Insurance. We
purchased bank-owned life insurance policies ("BOLI") to offset employee benefit
costs. At September 30, 2008, we had an $11.6 million investment in “general
account” life insurance contracts. The potential death benefits as of
September 30, 2008 were $23.0 million. All of the insurance companies that
issued the policies in the Bank’s BOLI portfolio had investment grade ratings by
Moody’s, Standard & Poor’s, Fitch and A.M Best at September 30,
2008.
Deposit
Activities and Other Sources of Funds
General. Deposits
are the major source of our funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. Borrowings from the FHLB of
Seattle are used to supplement the availability of funds from other sources and
also as a source of term funds to assist in the management of interest rate
risk.
Our
deposit composition reflects a mixture with certificates of deposit accounting
for 47.6% of the deposit portfolio while interest and noninterest-bearing
checking, savings and money market accounts comprise the balance of total
deposits. We rely on marketing activities, convenience, customer service and the
availability of a broad range of competitively priced deposit products and
services to attract and retain customer deposits.
Deposits. With the exception
of our Health Savings Accounts, substantially all of our depositors are
residents of the State of Idaho. Deposits are attracted from within our market
area through the offering of a broad selection of deposit instruments, including
checking accounts, money market deposit accounts, savings accounts and
certificates of deposit with a variety of rates and terms to maturity. Deposit
account terms vary according to the minimum balance required, the time periods
the funds must remain on deposit and the interest rate, among other
factors.
At
September 30, 2008, we had $54.5 million of jumbo ($100,000 or more)
certificates of deposit, which are primarily from local customers, representing
14.6% of total deposits at that date. At September 30, 2008, we had no brokered
certificates of deposit.
Deposit Activities. The
following table sets forth the total deposit activities of Home Federal Bank for
the periods indicated.
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
|
|
|
|
|
Beginning
balance
|
$404,609
|
|
$430,281
|
|
$396,325
|
Net
deposits before interest credited
|
(42,230)
|
|
(38,025)
|
|
24,203
|
Interest
credited
|
10,546
|
|
12,353
|
|
9,753
|
Net
increase (decrease) in deposits
|
(31,684)
|
|
(25,672)
|
|
33,956
|
Ending
balance
|
$372,925
|
|
$404,609
|
|
$430,281
|
Time Deposits by Rates. The
following table sets forth the time deposits in Home Federal Bank classified by
rates as of the dates indicated.
|
At
September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
|
|
|
|
|
0.00
- 0.99%
|
$ 11
|
|
$ 374
|
|
$ 268
|
1.00
- 1.99
|
--
|
|
5
|
|
341
|
2.00
- 2.99
|
49,598
|
|
2,257
|
|
17,924
|
3.00
- 3.99
|
54,669
|
|
24,012
|
|
57,055
|
4.00
- 4.99
|
55,050
|
|
63,632
|
|
75,300
|
5.00
- 5.99
|
16,234
|
|
123,617
|
|
74,728
|
6.00
- 8.99
|
1,842
|
|
1,294
|
|
8,108
|
Total
|
$177,404
|
|
$215,191
|
|
$233,724
|
Time Deposits by Maturities.
The following table sets forth the amount and maturities of time deposits
at September 30, 2008.
|
Amounts
Due
|
|
Less
Than
1 Year
|
|
1-2
Years
|
|
2-3
Years
|
|
3-4
Years
|
|
After
4 Years
|
|
Total
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
– 1.99%
|
$ 11
|
|
$ --
|
|
$ --
|
|
$ --
|
|
$ --
|
|
$ 11
|
|
2.00
- 2.99
|
42,948
|
|
1,521
|
|
90
|
|
5,039
|
|
--
|
|
49,598
|
|
3.00
- 3.99
|
42,387
|
|
8,718
|
|
1,892
|
|
871
|
|
801
|
|
54,669
|
|
4.00
- 4.99
|
37,094
|
|
12,195
|
|
3,082
|
|
1,506
|
|
1,173
|
|
55,050
|
|
5.00
- 5.99
|
9,433
|
|
2,983
|
|
2,685
|
|
1,127
|
|
6
|
|
16,234
|
|
6.00
- 8.99
|
1,450
|
|
277
|
|
9
|
|
106
|
|
--
|
|
1,842
|
|
Total
|
$133,323
|
|
$25,694
|
|
$7,758
|
|
$8,649
|
|
$1,980
|
|
$177,404
|
|
The
following table sets forth information concerning our time deposits and other
deposits at September 30, 2008.
|
|
|
|
|
|
|
|
|
Weighted
Average
Interest
Rate
|
|
Original
Term
|
|
Category
|
|
Amount,
in
thousands
|
|
Percentage
of
Total Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.84%
|
|
N/A
|
|
Savings
deposits
|
|
$26,409
|
|
7.08%
|
0.40
|
|
N/A
|
|
Interest-bearing
demand deposits
|
|
55,450
|
|
14.87
|
--
|
|
N/A
|
|
Noninterest-bearing
demand deposits
|
|
41,398
|
|
11.10
|
1.66
|
|
N/A
|
|
Money
market accounts
|
|
51,142
|
|
13.71
|
0.91
|
|
N/A
|
|
Health
savings accounts
|
|
21,122
|
|
5.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
|
|
3.38
|
|
1-12
months
|
|
Fixed
term, fixed rate
|
|
98,087
|
|
26.30
|
4.24
|
|
13-24
months
|
|
Fixed
term, fixed rate
|
|
41,938
|
|
11.25
|
4.14
|
|
25-36
months
|
|
Fixed
term, fixed rate
|
|
8,758
|
|
2.35
|
4.28
|
|
37-60
months
|
|
Fixed
term, fixed rate
|
|
28,439
|
|
7.63
|
4.81
|
|
Over
60 months
|
|
Fixed
term, fixed rate
|
|
182
|
|
0.05
|
|
|
|
|
Total
certificates of deposit
|
|
177,404
|
|
47.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$372,925
|
|
100.00%
|
The
following table indicates the amount of jumbo certificates of deposit by time
remaining until maturity as of September 30, 2008. Jumbo certificates of deposit
are certificates in amounts of $100,000 or more.
Maturity
Period
|
|
Certificates
of Deposit of
$100,000
or
More
|
|
|
(in
thousands)
|
|
|
|
Three
months or less
|
|
$17,478
|
Over
three through six months
|
|
10,468
|
Over
six through twelve months
|
|
13,234
|
Over
twelve months
|
|
13,342
|
Total
|
|
$54,522
|
|
|
|
Deposit Flow. The following
table sets forth the balances of deposits in the various types of accounts
offered by Home Federal Bank at the dates indicated.
|
At
September 30,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
Amount
|
Percent
Of
Total
|
Increase/
(Decrease)
|
|
Amount
|
Percent
Of
Total
|
Increase/
(Decrease)
|
|
Amount
|
Percent
Of
Total
|
Increase/
(Decrease)
|
|
|
(in
thousands)
|
|
Savings
deposits
|
$
26,409
|
7.08%
|
$
3,293
|
|
$
23,116
|
5.71%
|
$
(539)
|
|
$
23,655
|
5.50%
|
$
(1,564)
|
|
Demand
deposits
|
96,848
|
25.98
|
(281)
|
|
97,129
|
24.01
|
(11,413)
|
|
108,542
|
25.22
|
(247)
|
|
Money
market accounts
|
51,142
|
13.71
|
5,441
|
|
45,701
|
11.30
|
12,278
|
|
33,423
|
7.77
|
1,902
|
|
Health
savings accounts
|
21,122
|
5.66
|
(2,350)
|
|
23,472
|
5.80
|
(7,465)
|
|
30,937
|
7.19
|
(2,394)
|
|
Fixed
rate certificates that mature in the year ending:
Within
1 year
|
133,323
|
35.75
|
(39,261)
|
|
172,584
|
42.65
|
(15,877)
|
|
188,461
|
43.80
|
81,444
|
|
After
1 year, but within 2 years
|
25,694
|
6.89
|
647
|
|
25,047
|
6.19
|
(3,360)
|
|
28,407
|
6.60
|
(34,295)
|
|
After
2 years, but within 5 years
|
18,212
|
4.88
|
847
|
|
17,365
|
4.29
|
768
|
|
16,597
|
3.86
|
(10,346)
|
|
After
5 years
|
175
|
0.05
|
(20)
|
|
195
|
0.05
|
(64)
|
|
259
|
0.06
|
5
|
|
Other
certificates of deposit
|
--
|
--
|
--
|
|
--
|
--
|
--
|
|
--
|
--
|
(549)
|
|
Total
|
$372,925
|
100.00%
|
$(31,684)
|
|
$404,609
|
100.00%
|
$(25,672)
|
|
$430,281
|
100.00%
|
$33,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings. We use
advances from the FHLB of Seattle to meet short-term deposit withdrawal
requirements and also to provide longer term funding to better match the
duration of selected loan and investment maturities. As one of our capital
management strategies, we have and may use borrowings from the FHLB to fund the
purchase of investment securities and origination of loans in order to increase
our net interest income when attractive opportunities exist.
As a
member of the FHLB, we are required to own its capital stock. Advances are made
individually under various terms pursuant to several different credit programs,
each with its own interest rate and range of maturities. We maintain a committed
credit facility with the FHLB that provides for immediately available advances
up to an aggregate of 40% of the Bank’s total assets, or $270.4 million as of
September 30, 2008. At September 30, 2008, our outstanding advances from the
FHLB totaled $137.0 million, with additional borrowing capacity of $133.4
million. Our advances with the FHLB are collateralized by our FHLB stock and
through a blanket pledge on our first lien one- to four-family residential real
estate loan portfolio and our securities portfolio.
The
following table sets forth information regarding our borrowings at the end of
and during the periods indicated. The table includes both long- and short-term
borrowings.
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands)
|
Maximum
amount of borrowing outstanding at any month end:
FHLB
advances
|
$181,000
|
|
$223,000
|
|
$214,000
|
|
|
|
|
|
|
Approximate
average borrowings outstanding:
FHLB
advances
|
158,000
|
|
202,000
|
|
191,000
|
Approximate
weighted average rate paid on:
FHLB
advances
|
4.60%
|
|
4.49%
|
|
4.20%
|
|
At
September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands)
|
Balance
outstanding at end of period:
FHLB
advances
|
$136,972
|
|
$180,730
|
|
$210,759
|
Weighted
average rate at end of period on:
FHLB
advances
|
4.68%
|
|
4.55%
|
|
4.36%
|
At
September 30, 2008, we also had a $10.0 million federal funds line available for
use through a national commercial bank. We also had access to the Federal
Reserve Bank’s discount window. No funds were drawn on either facility at
September 30, 2008.
Competition
We face
intense competition in originating loans and in attracting deposits within our
targeted geographic market. We compete by leveraging our full service delivery
capability comprised of 15 convenient branch locations, including five branches
located inside Wal-Mart Superstores offering extended banking hours, call center
and Internet banking, and consistently delivering high-quality, individualized
service to our customers that result in a high level of customer satisfaction.
Our key competitors are U.S. Bank, Wells Fargo, Key Bank and JPMorgan Chase
(formerly Washington Mutual). These competitors control approximately 47% of the
deposit market with $3.9 billion of the $8.2 billion in total deposits in our
market areas as of June 30, 2008. Aside from these traditional competitors,
credit unions, insurance companies and brokerage firms are an increasingly
competing challenge for consumer deposit relationships.
Our
competition for loans comes principally from mortgage bankers, commercial banks,
credit unions and finance companies. Several other financial institutions,
including those previously mentioned, have greater resources than we do and
compete with us for lending business in our targeted market area. Among the
advantages of some of these institutions are their ability to make larger loans,
finance extensive advertising campaigns, access lower cost funding sources and
allocate their investment assets to regions of highest yield and demand. This
competition for the origination of loans may limit our future growth and
earnings prospects.
Subsidiaries
and Other Activities
Home
Federal Bank has one wholly-owned subsidiary, Idaho Home Service Corporation,
which was established in 1981 as Home Service Corporation for the purpose of
facilitating various business activities. Since 2000, Idaho Home Service
Corporation has been inactive.
Personnel
At
September 30, 2008, we had 201 full-time equivalent employees. Our employees are
not represented by any collective bargaining group. We believe our relationship
with our employees is good.
Internet
Website
We
maintain a website with the address www.myhomefed.com. The information contained
on our website is not included as a part of, or incorporated by reference into,
this Annual Report on Form 10-K. Other than an investor’s own Internet access
charges, we make available free of charge through our website our Annual Report
on Form 10-K, Proxy Statements, quarterly reports on Form 10-Q and current
reports on Form 8-K, and amendments to these reports, as soon as reasonably
practicable after we have electronically filed such material with, or furnished
such material to, the Securities and Exchange Commission. We have also posted
our code of ethics and board committee charters on this site.
HOW
WE ARE REGULATED
The
following is a brief description of certain laws and regulations which are
applicable to Home Federal Bancorp and Home Federal Bank. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere in this annual report, does not purport to be complete and
is qualified in its entirety by reference to the applicable laws and
regulations. Legislation is introduced from time to time in the United States
Congress that may affect our operations. In addition, the regulations governing
us may be amended from time to time by the respective regulators. Any such
legislation or regulatory changes in the future could adversely affect us. We
cannot predict whether any such changes may occur.
Regulation
and Supervision of Home Federal Bank
General.
Home Federal Bank, as a federally chartered savings institution, is
subject to extensive regulation, examination and supervision by the Office of
Thrift Supervision, as its primary federal regulator, and the Federal Deposit
Insurance Corporation (“FDIC”), as its deposit insurer. Home Federal Bank is a
member of the Federal Home Loan Bank System and its deposit accounts are insured
up to applicable limits by the Deposit Insurance Fund administered by the FDIC.
Home Federal Bank must file reports with the Office of Thrift Supervision and
the FDIC concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions such
as mergers with, or acquisitions of, other financial institutions. There are
periodic examinations by the Office of Thrift Supervision and, under certain
circumstances, the FDIC to evaluate Home Federal Bank’s safety and soundness and
compliance with various regulatory requirements. This regulatory structure is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the Office of Thrift Supervision, the FDIC
or Congress, could have a material adverse impact on Home Federal Bancorp and
Home Federal Bank and their operations.
Home
Federal Bancorp, as a savings and loan holding company, is required to file
certain reports with, and is subject to examination by, and otherwise must
comply with the rules and regulations of the Office of Thrift Supervision. Home
Federal Bancorp is also subject to the rules and regulations of the Securities
and Exchange Commission under the federal securities laws.
Recent
Legislative and Regulatory Initiatives to Address Financial and Economic
Crises. The
Congress, Treasury Department and the federal banking regulators, including the
FDIC, have taken broad action since early September to address volatility in the
U.S. banking system.
In
October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was
enacted. The EESA authorizes the Treasury Department to purchase from
financial institutions and their holding companies up to $700 billion in
mortgage loans, mortgage-related securities and certain other financial
instruments, including debt and equity securities issued by financial
institutions and their holding companies in a troubled asset relief program
(”TARP”).
The
purpose of TARP is to restore confidence and stability to the U.S. banking
system and to encourage financial institutions to increase their lending to
customers and to each other. The Treasury Department has allocated
$250 billion towards the TARP Capital Purchase Program (“CPP”). Under
the CPP, Treasury will purchase debt or equity securities from participating
institutions. The TARP also will include direct purchases or
guarantees of troubled asset of financial institutions. Participants
in the CPP are subject to executive compensation limits and are encouraged to
expand their lending and mortgage loan modifications. We did not apply for
government assistance through the Capital Purchase Program under the U.S.
Treasury Department’s TARP. We believe our high capital level and liquid balance
sheet provides us flexibility in today's environment to execute our growth plans
without TARP capital.
EESA also
increased FDIC deposit insurance on most accounts from $100,000 to
$250,000. This increase is in place until the end of 2009 and is not
covered by deposit insurance premiums paid by the banking industry.
Following
a systemic risk determination, the FDIC established a Temporary Liquidity
Guarantee Program (“TLGP”) on October 14, 2008. The TLGP includes the
Transaction Account Guarantee Program, which provides unlimited deposit
insurance coverage through December 31, 2009 for noninterest-bearing transaction
accounts (typically business checking accounts) and certain funds swept into
noninterest-bearing savings accounts (“TAGP”). Institutions
participating in the TAGP pay a 10 basis points fee (annualized) on the balance
of each covered account in excess of $250,000, while the extra deposit insurance
is in place. The TLGP also includes the Debt Guarantee Program, under
which the FDIC guarantees certain senior unsecured debt of FDIC-insured
institutions and their holding companies (“DGP”). The unsecured debt
must be issued on or after October 14, 2008 and not later than June 30, 2009,
and the guarantee is effective through the earlier of the maturity date or June
30, 2012. The DGP coverage limit is generally 125% of the eligible
entity’s eligible debt outstanding on September 30, 2008 and scheduled to mature
on or before June 30, 2009 or, for certain insured institutions, 2% of their
liabilities as of September 30, 2008. Depending on the term of the
debt maturity, the nonrefundable DGP fee ranges from 50 to 100 basis points
(annualized) for covered debt outstanding until the earlier of maturity or June
30, 2012. The TAGP and DGP are in effect for all eligible entities,
unless the entity opted out on or before December 5, 2008. We elected
to continue to participate in the TAGP, but did not participate in the DGP
component.
Office
of Thrift Supervision. The Office of Thrift Supervision has extensive
authority over the operations of savings institutions. As part of this
authority, Home Federal Bank 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
Office of Thrift Supervision also has extensive enforcement authority over all
savings institutions and their holding companies, including Home Federal Bank
and Home Federal Bancorp. This enforcement authority includes, among other
things, the ability to assess civil money penalties, issue cease-and-desist or
removal orders and initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
Office of Thrift Supervision. Except under certain circumstances, public
disclosure of final enforcement actions by the Office of Thrift Supervision is
required.
In
addition, the investment, lending and branching authority of Home Federal Bank
also are prescribed by federal laws, which prohibit Home Federal Bank from
engaging in any activities not permitted by these laws. For example, no savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the Office of Thrift Supervision. Federal savings
institutions are also generally authorized to branch nationwide. Home Federal
Bank is in compliance with the noted restrictions.
All
savings institutions are required to pay assessments to the Office of Thrift
Supervision to fund the agency’s operations. The general assessments, paid on a
semi-annual basis, are determined based on the savings institution’s total
assets, including consolidated subsidiaries. Home Federal Bank’s Office of
Thrift Supervision assessment for the fiscal year ended September 30, 2008 was
$162,000.
Home
Federal Bank’s general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 2008,
Home
Federal Bank’s lending limit under this restriction was $22.7 million and, at
that date, Home Federal Bank’s largest single loan to one borrower was $5.1
million, which was performing according to its original terms.
The
Office of Thrift Supervision, as well as the other federal banking agencies, has
adopted guidelines establishing safety and soundness standards on such matters
as loan underwriting and documentation, asset quality, earnings standards,
internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution that fails to comply
with these standards must submit a compliance plan.
Federal
Home Loan Bank System. Home Federal Bank is a member of the Federal Home
Loan Bank of Seattle, which is one of 12 regional Federal Home Loan Banks that
administer the home financing credit function of savings institutions. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the Federal Home Loan Bank System. It
makes loans or advances to members in accordance with policies and procedures,
established by the board of directors of the Federal Home Loan Bank, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the Federal Home Loan Bank are required to be fully secured by sufficient
collateral as determined by the Federal Home Loan Bank. In addition, all
long-term advances are required to provide funds for residential home financing.
At September 30, 2008, Home Federal Bank had $137.0 million of outstanding
advances from the Federal Home Loan Bank of Seattle under an available credit
facility of $270.4 million, which is limited to available collateral. See
Business – Sources of Funds – Borrowings.
As a
member, Home Federal Bank is required to purchase and maintain stock in the
Federal Home Loan Bank of Seattle. At September 30, 2008, Home Federal Bank had
$9.6 million in Federal Home Loan Bank stock, which was in compliance with this
requirement.
Under
federal law, the Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of Federal Home
Loan Bank dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of Federal Home
Loan Bank stock in the future. A reduction in value of Home Federal Bank’s
Federal Home Loan Bank stock may result in a corresponding reduction in Home
Federal Bank’s capital.
Federal
Deposit Insurance Corporation. Home Federal
Bank’s deposits are insured up to applicable limits by the Deposit Insurance
Fund of the Federal Deposit Insurance Corporation (“FDIC”). The Deposit
Insurance Fund is the successor to the Bank Insurance Fund and the Savings
Association Insurance Fund, which were merged effective March 31, 2006. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the
insurance fund. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the Office of Thrift Supervision an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices or is
in an unsafe or unsound condition.
The FDIC
recently amended its risk-based assessment system for 2007 to implement
authority granted by the Federal Deposit Insurance Reform Act of 2005, which was
enacted in 2006 (“Reform Act”). Under the revised system, insured institutions
are assigned to one of four risk categories based on supervisory evaluations,
regulatory capital levels and certain other factors. An institution’s assessment
rate depends upon the category to which it is assigned. Risk category I, which
contains the least risky depository institutions, is expected to include more
than 90% of all institutions. Unlike the other categories, Risk Category I
contains further risk differentiation based on the Federal Deposit Insurance
Corporation’s analysis of financial ratios, examination component ratings and
other information. At September 30, 2008, assessment rates were determined by
the Federal Deposit Insurance Corporation and ranged from five to seven basis
points for the healthiest institutions (Risk Category I) to 43 basis points of
assessable deposits for the riskiest (Risk Category IV).
The FDIC
is proposing additional changes to these risk categories and the insurance
premium assessment rates. As of November 8, 2008, the proposed rule would add
surcharges to the insurance assessment rates for institutions with higher
exposure to unsecured debt, secured liabilities and brokered deposits. If the
rule is made final and enacted,
Risk
Category I base assessments would be 10 to 14 basis points with surcharges
taking the total base assessment rate to as high as 21 basis points. Risk
Category IV institutions could be assessed rates as high as 77.5 basis
points.
The
Reform Act also provided for a one-time credit for eligible institutions based
on their assessment base as of December 31, 1996. Subject to certain limitations
with respect to institutions that are exhibiting weaknesses, credits can be used
to offset assessments until exhausted. Home Federal Bank’s one-time credit was
$239,869, the remainder of which was utilized during fiscal year
2008.
The
Reform Act provided the FDIC with authority to adjust the Deposit Insurance Fund
ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to the
prior statutorily fixed ratio of 1.25%. The ratio, which is viewed by the
Federal Deposit Insurance Corporation as the level that the fund should achieve,
was established by the agency at 1.25% for 2007. The Reform Act also provided
for the possibility that the Federal Deposit Insurance Corporation may pay
dividends to insured institutions once the Deposit Insurance Fund reserve ratio
equals or exceeds 1.35% of estimated insured deposits. At September 30, 2008,
this ratio had fallen below 1.15%, which necessitated the proposed adjustment to
the assessment rates mentioned above.
A
significant increase in insurance premiums would likely have an adverse effect
on the operating expenses and results of operations of Home Federal Bank. There
can be no prediction as to what insurance assessment rates will be in the
future, although a change in the assessment rates is proposed to go into effect
in January 2009, which, if enacted, will increase Home Federal Bank’s assessment
rate from 5 basis points to approximately 10 basis points per dollar insured.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the Office of Thrift
Supervision. Management of Home Federal Bank is not aware of any practice,
condition or violation that might lead to termination of Home Federal Bank’s
deposit insurance.
In
response to the financial liquidity and credit crisis that started in July 2007
and deteriorated through 2008, the FDIC increased the coverage limit of
insurable deposits to $250,000 from $100,000 and, in coordination with the U.S.
Treasury Department, implemented the Temporary Liquidity Guarantee Program in
October 2008. See “Recent Legislative and
Regulatory Initiatives to Address Financial and Economic Crises”
above for
additional discussion.
In
addition to the assessment for deposit insurance, institutions are required to
make payments on bonds issued in the late 1980s by the Financing Corporation to
recapitalize a predecessor deposit insurance fund. This payment is established
quarterly and during the fiscal year ended September 30, 2008, averaged 0.01
basis points of assessable deposits.
Capital
Requirements. The Office of Thrift Supervision’s capital regulations
require federal savings institutions to meet three minimum capital standards: a
1.5% tangible capital to total assets ratio, a 4% leverage ratio (3% for
institutions receiving the highest rating on the CAMELS examination rating
system) and an 8% risk-based capital ratio. In addition, the prompt corrective
action standards discussed below also establish, in effect, a minimum 2%
tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMELS system) and, together with the risk-based
capital standard itself, a 4% Tier 1 risk-based capital standard. The Office of
Thrift Supervision regulations also require that, in meeting the tangible,
leverage and risk-based capital standards, institutions must generally deduct
investments in and loans to subsidiaries engaged in activities as principal that
are not permissible for a national bank.
The
risk-based capital standard requires federal savings institutions to maintain
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, recourse obligations, residual
interests and direct credit substitutes, are multiplied by a risk-weight factor
of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation
based on the risks believed inherent in the type of asset. Core (Tier 1) capital
is defined as common stockholders’ equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance
for loan
and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core
capital.
The
Office of Thrift Supervision also has authority to establish individual minimum
capital requirements in appropriate cases upon a determination that an
institution’s capital level is or may become inadequate in light of the
particular circumstances. At September 30, 2008, Home Federal Bank exceeded each
of these capital requirements.
Prompt
Corrective Action. The Office of Thrift Supervision is required to take
certain supervisory actions against undercapitalized savings institutions, the
severity of which depends upon the institution’s degree of undercapitalization.
Generally, an institution that has a ratio of total capital to risk-weighted
assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets
of less than 4%, or a ratio of core capital to total assets of less than 4% (3%
or less for institutions with the highest examination rating) is considered to
be “undercapitalized.” An institution that has a total risk-based capital ratio
less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is
less than 3% is considered to be “significantly undercapitalized” and an
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be “critically undercapitalized.” Subject to a narrow exception,
the Office of Thrift Supervision is required to appoint a receiver or
conservator for a savings institution that is “critically undercapitalized.”
Office of Thrift Supervision regulations also require that a capital restoration
plan be filed with the Office of Thrift Supervision within 45 days of the date a
savings institution receives notice that it is “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized.” In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. “Significantly undercapitalized” and “critically undercapitalized”
institutions are subject to more extensive mandatory regulatory actions. The
Office of Thrift Supervision also could take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
At
September 30, 2008, Home Federal Bank was categorized as “well capitalized”
under the prompt corrective action regulations of the Office of Thrift
Supervision.
Qualified
Thrift Lender Test. All savings institutions, including Home Federal
Bank, are required to meet a qualified thrift lender (“QTL”) test to avoid
certain restrictions on their operations. This test requires a savings
institution to have at least 65% of its total assets, as defined by regulation,
in qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. As an alternative, the savings institution may
maintain 60% of its assets in those assets specified in Section 7701(a)(19) of
the Internal Revenue Code. Under either test, such assets primarily consist of
residential housing related loans and investments.
A savings
institution that fails to meet the QTL is subject to certain operating
restrictions and may be required to convert to a national bank charter. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered “qualified thrift investments.” As of
September 30, 2008, Home Federal Bank maintained 83.6% of its portfolio assets
in qualified thrift investments and, therefore, met the qualified thrift lender
test.
Limitations
on Capital Distributions. Office of Thrift Supervision regulations impose
various restrictions on savings institutions with respect to their ability to
make distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. Generally, savings institutions, such as Home Federal Bank, that before
and after the proposed distribution are well-capitalized, may make capital
distributions during any calendar year equal to up to 100% of net income for the
calendar year-to-date plus retained net income for the two preceding years.
However, an institution deemed to be in need of more than normal supervision by
the Office of Thrift Supervision may have its dividend authority restricted by
the Office of Thrift Supervision. Home Federal Bank may pay dividends to Home
Federal Bancorp in accordance with this general authority.
Savings
institutions proposing to make any capital distribution need not submit written
notice to the Office of Thrift Supervision prior to such distribution unless
they are a subsidiary of a holding company or would not remain well-capitalized
following the distribution. Savings institutions that do not, or would not meet
their current minimum capital requirements following a proposed capital
distribution or propose to exceed these net income limitations,
must
obtain Office of Thrift Supervision approval prior to making such distribution.
The Office of Thrift Supervision may object to the distribution during that
30-day period based on safety and soundness concerns.
Activities
of Savings Institutions and their Subsidiaries. When a savings
institution establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that it controls, the savings institution must
notify the FDIC and the Office of Thrift Supervision 30 days in advance and
provide the information each agency may, by regulation, require. Savings
institutions also must conduct the activities of subsidiaries in accordance with
existing regulations and orders.
The
Office of Thrift Supervision may determine that the continuation by a savings
institution of its ownership control of, or its relationship to, the subsidiary
constitutes a serious risk to the safety, soundness or stability of the
institution or is inconsistent with sound banking practices or with the purposes
of the Federal Deposit Insurance Act. Based upon that determination, the FDIC or
the Office of Thrift Supervision has the authority to order the savings
institution to divest itself of control of the subsidiary. The FDIC also may
determine by regulation or order that any specific activity poses a serious
threat to the Depositors Insurance Fund. If so, it may require that no member of
the Depositors Insurance Fund engage in that activity directly.
Transactions
with Affiliates. Home Federal Bank’s authority to engage in transactions
with “affiliates” is limited by Office of Thrift Supervision regulations and by
Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal
Reserve Board’s Regulation W. The term “affiliates” for these purposes generally
means any company that controls or is under common control with an institution.
Home Federal Bancorp and its non-savings institution subsidiaries are affiliates
of Home Federal Bank. In general, transactions with affiliates must be on terms
that are as favorable to the institution as comparable transactions with
non-affiliates. In addition, certain types of transactions are restricted to an
aggregate percentage of the institution’s capital. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from an
institution. In addition, savings institutions are prohibited from lending to
any affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The
Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to
its executive officers and directors. However, there is a specific exception for
loans by a depository institution to its executive officers and directors in
compliance with federal banking laws. Under such laws, Home Federal Bank’s
authority to extend credit to executive officers, directors and 10% stockholders
(“insiders”), as well as entities such persons control, is limited. The law
restricts both the individual and aggregate amount of loans Home Federal Bank
may make to insiders based, in part, on Home Federal Bank’s capital position and
requires certain board approval procedures to be followed. Such loans must be
made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. There is an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. There are additional restrictions
applicable to loans to executive officers.
Community
Reinvestment Act. Under the Community Reinvestment Act, every Federal
Deposit Insurance Corporation-insured institution has a continuing and
affirmative obligation consistent with safe and sound banking practices to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the
Community Reinvestment Act. The Community Reinvestment Act requires the Office
of Thrift Supervision, in connection with its examination of Home Federal Bank,
to assess the institution’s record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications,
such as a merger or the establishment of a branch, by Home Federal Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the Office of Thrift Supervision. Due to the heightened attention being given
to the Community Reinvestment Act in the past few years, Home Federal Bank may
be required to devote additional funds for investment and lending in its local
community. Home Federal Bank was examined for Community Reinvestment Act
compliance and received a rating of “Outstanding” in its latest
examination.
Enforcement.
The Office of Thrift Supervision has primary enforcement responsibility
over savings institutions and has the authority to bring action against all
“institution-affiliated parties,” including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse
effect on
an insured institution. Formal enforcement action may range from the issuance of
a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or $1.1 million per day in especially egregious cases. The Federal Deposit
Insurance Corporation has the authority to recommend to the Director of the
Office of Thrift Supervision that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the Director, the
Federal Deposit Insurance Corporation has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Standards
for Safety and Soundness. As required by statute, the federal banking
agencies have adopted Interagency Guidelines prescribing Standards for Safety
and Soundness. The guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the Office of Thrift
Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, it may require the institution to submit an
acceptable plan to achieve compliance with the standard.
Environmental
Issues Associated with Real Estate Lending. The Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”), a federal
statute, generally imposes strict liability on all prior and present “owners and
operators” of sites containing hazardous waste. However, Congress asked to
protect secured creditors by providing that the term “owner and operator”
excludes a person whose ownership is limited to protecting its security interest
in the site. Since the enactment of the CERCLA, this “secured creditor
exemption” has been the subject of judicial interpretations which have left open
the possibility that lenders could be liable for cleanup costs on contaminated
property that they hold as collateral for a loan. To the extent that legal
uncertainty exists in this area, all creditors, including Home Federal Bank,
that have made loans secured by properties with potential hazardous waste
contamination (such as petroleum contamination) could be subject to liability
for cleanup costs, which costs often substantially exceed the value of the
collateral property.
Privacy
Standards. The Gramm-Leach-Bliley Financial Services Modernization Act of
1999 (“GLBA”), modernized the financial services industry by establishing a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms and other financial service providers. Home Federal
Bank is subject to Office of Thrift Supervision regulations implementing the
privacy protection provisions of the GLBA. These regulations require Home
Federal Bank to disclose its privacy policy, including identifying with whom it
shares “non-public personal information,” to customers at the time of
establishing the customer relationship and annually thereafter.
Anti-Money
Laundering and Customer Identification. Congress enacted the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) in response to the
terrorist events of September 11, 2001. The USA Patriot Act gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. Since its enactment, Congress
has refined certain expiring provisions of the USA Patriot Act.
Regulation
and Supervision of Home Federal Bancorp
General.
Home Federal Bancorp, Inc., is a Maryland corporation. It is required to
file reports with the Office of Thrift Supervision and is subject to regulation
and examination by the Office of Thrift Supervision. In addition, the Office of
Thrift Supervision has enforcement authority over the Company and any
non-savings institution subsidiaries. This permits the Office of Thrift
Supervision to restrict or prohibit activities that it determines to be a
serious risk to the Bank. This regulation is intended primarily for the
protection of the depositors and not for the benefit of stockholders of the
Company.
Home
Federal Bancorp is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Generally, companies that become savings and
loan holding companies following the May 4, 1999 grandfather date in the
Gramm-Leach-Bliley Act of 1999 may engage only in the activities permitted for
financial institution holding companies under the law for multiple savings and
loan holding companies.
Acquisition
of Control. Under the federal Change in Bank Control Act and the Savings
and Loan Holding Company Act, a notice or application must be submitted to the
Office of Thrift Supervision if any person (including
a
company), or group acting in concert, seeks to acquire “control” of a savings
and loan holding company or savings association. An acquisition of control can
occur upon the acquisition of 10% or more of the voting stock of a savings and
loan holding company or savings institution or as otherwise defined by the
Office of Thrift Supervision. The Office of Thrift Supervision has 60 days from
the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effects of the acquisition. Any company that so acquires control
would then be subject to regulation as a savings and loan holding
company.
Limitations
on Transactions with Affiliates. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a mutual holding company context, the mutual holding
company and mid-tier holding company of a savings institution (such as Home
Federal Bancorp) and any companies which are controlled by such holding
companies are affiliates of the savings institution. Generally, Section 23A
limits the extent to which the savings institution or its subsidiaries may
engage in “covered transactions” with any one affiliate to an amount equal to
10% of the institution’s capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus. Section 23B applies to “covered transactions” as
well as certain other transactions and requires that all transactions be on
terms substantially the same, or at least as favorable, to the savings
institution as those provided to a non-affiliate. The term “covered transaction”
includes the making of loans to, purchase of assets from and issuance of a
guarantee to an affiliate and similar transactions. Section 23B transactions
also include the provision of services and the sale of assets by a savings
institution to an affiliate. In addition to the restrictions imposed by Sections
23A and 23B, Section 11 of the Home Owners’ Loan Act prohibits a savings
institution from (1) making a loan or other extension of credit to an affiliate,
except for any affiliate which engages only in certain activities which are
permissible for bank holding companies or (2) purchasing or investing in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the savings institution.
In
addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions
on loans to executive officers, directors and principal stockholders. Under
Section 22(h), loans to a director, executive officer or greater than 10%
stockholder of a savings institution, and certain affiliated interests, may not
exceed, together with all other outstanding loans to such person and affiliated
interests, the savings institution’s loans to one borrower limit (generally
equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons unless the loans are made pursuant to a benefit or
compensation program that (1) is widely available to employees of the
institution, and (2) does not give preference to any director, executive officer
or principal stockholder, or certain affiliated interests, over other employees
of the savings institution. Section 22(h) also requires prior board approval for
certain loans. In addition, the aggregate amount of extensions of credit by a
savings institution to all insiders cannot exceed the institution’s unimpaired
capital and surplus. Furthermore, Section 22(g) places additional restrictions
on loans to executive officers. At September 30, 2007, Home Federal Bank was in
compliance with these restrictions.
Restrictions
on Acquisitions. Except under limited circumstances, savings and loan
holding companies are prohibited from acquiring, without prior approval of the
Director of the Office of Thrift Supervision, (1) control of any other savings
institution or savings and loan holding company or substantially all the assets
thereof or (2) more than 5% of the voting shares of a savings institution or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company’s stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The
Director of the Office of Thrift Supervision may only approve acquisitions
resulting in the formation of a multiple savings and loan holding company which
controls savings institutions in more than one state if: (1) the multiple
savings and loan holding company involved controls a savings institution which
operated a home or branch office located in the state of the institution to be
acquired as of March 5, 1987; (2) the acquirer is authorized to acquire control
of the savings institution pursuant to the emergency acquisition provisions of
the Federal Deposit Insurance Act; or (3) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings
institutions).
Federal
Securities Laws. Home Federal Bancorp’s common stock is registered with
the Securities and Exchange Commission under Section 12(b) of the Securities
Exchange Act of 1934, as amended, and is subject to information, proxy
solicitation, insider trading restrictions and other requirements under the
Securities Exchange Act of 1934.
Sarbanes-Oxley
Act of 2002. Home Federal Bancorp, as a public company, is subject to the
Sarbanes-Oxley Act of 2002. Sarbanes Oxley implements a broad range of corporate
governance and accounting measures for public companies designed to promote
honesty and transparency in corporate America and better protect investors from
corporate wrongdoing. The Sarbanes-Oxley Act of 2002 was signed into law by
President Bush on July 30, 2002, in response to public concerns regarding
corporate accountability in connection with several accounting scandals. The
stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility,
to provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities
laws.
The
Sarbanes-Oxley Act includes very specific additional disclosure requirements and
new corporate governance rules, requires the Securities and Exchange Commission
and securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules and mandates further studies of certain
issues by the Securities and Exchange Commission and the Comptroller
General.
TAXATION
Federal
Taxation
General. The Company is
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to the Company.
Because
the Company owns 100% of the issued and outstanding capital stock of the Bank,
the Company and the Bank are members of an affiliated group within the meaning
of Section 1504(a) of the Internal Revenue Code, of which group the Company is
the common parent corporation. As a result of this affiliation, the Bank is
included in the filing of a consolidated federal income tax return with the
Company. The parties agree to compensate each other for their individual share
of the consolidated tax liability and/or any tax benefits provided by them in
the filing of the consolidated federal income tax return.
Method
of Accounting. For federal income tax purposes, the Company currently
reports its income and expenses on the accrual method of accounting and uses a
fiscal year ending on September 30 for filing its federal income tax
return.
Minimum
Tax. The Internal Revenue Code imposes an alternative minimum tax at a
rate of 20% on a base of regular taxable income plus certain tax preferences,
called alternative minimum taxable income. The alternative minimum tax is
payable to the extent such alternative minimum taxable income is in excess of an
exemption amount. Net operating losses can offset no more than 90% of
alternative minimum taxable income. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years. Home
Federal Bank has not been subject to the alternative minimum tax, nor does it
have any such amounts available as credits for carryover.
Net
Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. At September 30, 2008, Home
Federal Bank had no net operating loss carryforwards for federal income tax
purposes.
Corporate
Dividends-Received Deduction. Home Federal Bancorp may eliminate from its
income dividends received from Home Federal Bank as a wholly-owned subsidiary of
new Home Federal Bancorp if it elects to file a consolidated return with Home
Federal Bank. The corporate dividends-received deduction is 100%, or 80%, in the
case of dividends received from corporations with which a corporate recipient
does not file a consolidated tax return,
depending
on the level of stock ownership of the payer of the dividend. Corporations which
own less than 20% of the stock of a corporation distributing a dividend may
deduct 70% of dividends received or accrued on their behalf.
State
Taxation
Idaho.
Home Federal Bancorp and Home Federal Bank are subject to the general
corporate tax provisions of the State of Idaho. Idaho’s state corporate income
taxes are generally determined under federal tax law with some modifications.
Idaho taxable income is taxed at a rate of 7.6%. These taxes are reduced by
certain credits, primarily the Idaho investment tax credit in the case of Home
Federal Bank.
EXECUTIVE OFFICERS OF THE
REGISTRANT
The
following table sets forth certain information with respect to the executive
officers of the Company and the Bank.
Name
|
Age
as of
September
30, 2008
|
Position
|
Company
|
Bank
|
|
|
|
|
Len
E. Williams
|
49
|
Director,
President and Chief
Executive
Officer
|
Director,
President and Chief
Executive
Officer
|
|
|
|
|
Eric
S. Nadeau
|
37
|
Executive
Vice President,
Treasurer,
Secretary, and Chief
Financial
Officer
|
Executive
Vice President, Treasurer,
Secretary,
and Chief Financial
Officer
|
|
|
|
|
Steven
E. Emerson
|
38
|
--
|
Executive
Vice President and Chief
Lending
Officer
|
|
|
|
|
Steven
K. Eyre
|
47
|
--
|
Executive
Vice President of
Consumer
Banking
|
|
|
|
|
Cindy
L. Bateman
|
47
|
--
|
Senior
Vice President and
Commercial
Banking Team Lead
|
The
business experience of each executive officer for at least the past five years
is set forth below.
Len E. Williams joined Home
Federal Bank as President in September 2006 and was appointed as a director of
Home Federal Bank and Home Federal Bancorp in April 2007. Mr. Williams has 30
years of commercial banking experience serving in many regional and national
leadership roles. Prior to joining Home Federal Bank, Mr. Williams was Senior
Vice President and Head of Business Banking with Fifth Third Bank. He was
charged with creating and growing the business line and providing leadership
over the company’s business banking personnel, processes and products. Form 1987
to 2005, he held several management positions with Key Bank, including President
of Business Banking from 2003 to 2005 and President of the Colorado District
from 1999 to 2003. His prior experience includes regional corporate and
commercial banking leadership responsibility. Mr. Williams is a member of the
Board of Directors of the Boise Metro Chamber of Commerce and has served as
chairman of Junior Achievement and Boys and Girls Clubs. Mr. Williams holds an
M.B.A. from the University of Washington and is a graduate of the Pacific Coast
Banking School.
Eric S. Nadeau joined the
Company in June 2008 as Executive Vice President, Treasurer, Corporate Secretary
and Chief Financial Officer of Home Federal Bancorp, Inc., and Home Federal
Bank. He was most recently employed by Camco Financial Corporation in Cambridge,
Ohio, as its Chief Financial Officer. From January 2003 until February 2006 he
was the Chief Financial Officer of Ohio Legacy Corp, and its subsidiary, Ohio
Legacy Bank, N.A. His previous experience includes financial management
positions with telecommunications and construction equipment companies. Mr.
Nadeau was employed by Crowe Horwath from 1993 to 1998 where he provided audit,
tax and consulting services to financial institutions in the Midwest. Mr. Nadeau
is a certified public accountant and
received
his Bachelor of Science in Business Administration from the Richard T. Farmer
School of Business at Miami University in Oxford, Ohio.
Steven
D. Emerson is Executive Vice President and Chief Lending Officer of Home
Federal Bank. Mr. Emerson joined Home Federal Bank as Senior Vice President and
Chief Lending Officer on December 1, 2006. He has over 16 years of experience in
commercial banking primarily in the Treasure Valley. He previously
served as Vice President and Senior Commercial Lender for Farmers and Merchants
Bank, a local community bank, during 2006. Prior to his employment with Farmers
and Merchants Bank, Mr. Emerson served in several positions with Key Bank from
2000 to 2006, including President of the Cincinnati, Ohio market. Mr. Emerson
holds an M.B.A. from Northwest Nazarene University. Mr. Emerson is
active with the Better Business Bureau, Certified Development Company, Boise
Kiwanis and the March of Dimes.
Steven
K. Eyre is
Executive Vice President/Consumer Banking of Home Federal Bank. Mr. Eyre
previously served as Market Executive, Business Banking, for Bank of America in
upstate New York, and has more than 24 years of banking experience. From
1987 to 2006, he held several management positions with Key Bank in Salt Lake
City, UT, and Albany, New York, including Regional Executive, Consumer Banking
from 2003 to 2006 in Albany, New York. Mr. Eyre holds a Bachelor of Arts in
Finance from the University of Utah and is a graduate of the Pacific Coast
Banking School. Mr. Eyre is active with the Boy Scouts of America and is a
former Board of Trustee member of the Utah Bankers Association.
Cindy
L. Bateman is Senior Vice President and Chief Credit Officer of Home
Federal Bank. Ms. Bateman joined Home Federal Bank in March 2007. Ms Bateman was
previously employed by Key Bank from 2002 until 2007 having served as Senior
Vice President and District Business Leader. Having started her career with
First Security Bank of Idaho in 1983 in the Management Training program, she has
held various positions in Credit Administration and Commercial and Business
Banking. Ms. Bateman holds a B.B.A. in Finance from Idaho State University and
an M.B.A. from the University of Washington. She currently serves on the Boards
of Directors of Financial Women International and as President for the Idaho
Shakespeare Festival.
Item 1A. Risk
Factors
Our
business, and an investment in our common stock, involves risks. Summarized
below are the risk factors which we believe are material to our business and
could negatively affect our operating results, financial condition and the
trading value of our common stock. Other risks factors, not currently known to
us, or that we currently deem to be immaterial or unlikely, also could adversely
affect our business. In assessing the following risk factors, you should also
refer to the other information contained in this Annual Report on Form 10-K and
our other filings with the Securities and Exchange Commission.
Our
business is subject to general economic risks that could adversely impact our
results of operations and financial condition and changes in economic
conditions. Particularly, a further economic slowdown in the
Treasure Valley, could hurt our business.
Our
business is directly and indirectly affected by market conditions, trends in
industry and finance, legislative and regulatory changes, and changes in
governmental monetary and fiscal policies and inflation, all of which are beyond
our control. In 2007, the housing and real estate sectors experienced an
economic slowdown that has continued into 2008.
Further
deterioration in economic conditions, in particular within our primary market
area in the Treasure Valley real estate markets, could result in the
following consequences, among others, any of which could hurt our business
materially:
§
|
loan
delinquencies may increase;
|
§
|
problem
assets and foreclosures may
increase;
|
§
|
demand
for our products and services may decline;
and
|
§
|
collateral
for loans made by us, especially real estate, may decline in value, in
turn reducing a customer’s borrowing power and reducing the value of
assets and collateral securing our
loans.
|
Recent
negative developments in the financial industry and credit markets may continue
to adversely impact our financial condition and results of
operations.
Negative
developments beginning in the latter half of 2007 in the sub-prime mortgage
market and the securitization markets for such loans, together with the general
economic downturn, have resulted in uncertainty in the financial markets and a
general economic downturn, which have continued in 2008. Many lending
institutions, including us, have experienced increases in delinquent and
nonperforming loans, including construction and land loans, multifamily loans,
commercial loans and consumer loans. Moreover, competition among depository
institutions for deposits and quality loans has increased significantly. In
addition, the values of real estate collateral supporting many construction and
land, commercial, multifamily, other commercial loans and home mortgages have
declined and may continue to decline. Bank and holding company stock prices have
been negatively affected, as has the ability of banks and holding companies to
raise capital or borrow in the debt markets compared to recent years. These
conditions may have a material adverse effect on our financial condition and
results of operations. In addition, as a result of the foregoing factors, there
is a potential for new federal or state laws and regulations regarding lending
and funding practices and liquidity standards, and bank regulatory agencies are
expected to be very aggressive in responding to concerns and trends identified
in examinations, including the expected issuance of formal enforcement orders.
Continued negative developments in the financial industry and the impact of new
legislation in response to those developments could restrict our business
operations, including our ability to originate or sell loans, and adversely
impact our results of operations and financial condition.
Difficult
market conditions have adversely affected the Company’s industry.
Dramatic
declines in the housing market over the past year, with falling home prices and
increasing foreclosures and unemployment, have negatively impacted the credit
performance of real estate related loans and resulted in significant write-downs
of asset values by financial institutions. These write-downs, initially of
asset-backed securities but spreading to other securities and loans, have caused
many financial institutions to seek additional capital, to reduce or eliminate
dividends, to merge with larger and stronger institutions and, in some cases, to
fail. Reflecting concern about the stability of the financial markets generally
and the strength of counterparties, many lenders and institutional investors
have reduced or ceased providing funding to borrowers, including to other
financial institutions. This market turmoil and tightening of credit have led to
an increased level of commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility and widespread reduction of business
activity generally. The resulting economic pressure on consumers and lack of
confidence in the financial markets has already adversely affected our business,
financial condition and results of operations. Market developments may affect
consumer confidence levels and may cause adverse changes in payment patterns,
causing increases in delinquencies and default rates, which may impact our
charge-offs and provision for credit losses. A worsening of these conditions
would likely exacerbate the adverse effects of these difficult market conditions
on us and others in the financial institutions industry.
Recently
enacted legislation and other measures undertaken by the Treasury, the Federal
Reserve and other governmental agencies to help stabilize the U.S. financial
system or improve the housing market may not be successful.
On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (the “EESA”), which, among other measures, authorized
the Treasury Secretary to establish the Troubled Asset Relief Program (“TARP”).
EESA gives broad authority to the Treasury Department to purchase, manage,
modify, sell and insure the troubled mortgage related assets that triggered the
current economic crisis as well as other “troubled
assets.” EESA includes additional provisions directed at
bolstering the economy, including:
§
|
Authority
for the Federal Reserve to pay interest on depository institution
balances;
|
§
|
Mortgage
loss mitigation and homeowner
protection;
|
§
|
Temporary
increase in Federal Deposit Insurance Corporation insurance coverage from
$100,000 to $250,000 through December 31, 2009;
and
|
§
|
Authority
to the Securities and Exchange Commission (the “SEC”) to suspend
mark-to-market accounting requirements for any issuer or class of category
of transactions.
|
Pursuant
to the TARP, the Treasury Department has the authority to, among other things,
invest up to $700 billion (of which $250 billion is currently available) through
a capital purchase program, pursuant to which it proposes to provide access to
capital to financial institutions through a standardized program to acquire
preferred stock (accompanied by warrants) from eligible financial institutions
that will serve as Tier 1 capital. This program may be extended to other
nonfinancial companies. We did not apply for government assistance
through the Capital Purchase Program under the U.S. Treasury Department’s TARP.
We believe our high capital level and liquid balance sheet provides us
flexibility in today's environment to execute our growth plans without TARP
capital.
EESA also
contains a number of significant employee benefit and executive compensation
provisions, some of which apply to employee benefit plans generally, and others
which impose on financial institutions that participate in the TARP program
restrictions on executive compensation. EESA followed, and has been followed by,
numerous actions by the Federal Reserve, Congress, Treasury, the SEC and others
to address the current liquidity and credit crisis that has followed the
sub-prime meltdown that commenced in 2007. These measures include homeowner
relief that encourage loan restructuring and modification; the establishment of
significant liquidity and credit facilities for financial institutions and
investment banks; the lowering of the federal funds rate, including a 100 basis
point decrease in October 2008; emergency action against short selling
practices; a temporary guaranty program for money market funds; the
establishment of a commercial paper funding facility to provide back-stop
liquidity to commercial paper issuers; and coordinated international efforts to
address illiquidity and other weaknesses in the banking sector.
In
addition, the Internal Revenue Service has issued an unprecedented wave of
guidance in response to the credit crisis, including a relaxation of limits on
the ability of financial institutions that undergo an “ownership change” to
utilize their pre-change net operating losses and net unrealized built-in
losses. The relaxation of these limits may make significantly more attractive
the acquisition of financial institutions whose tax basis in their loan
portfolios significantly exceeds the fair market value of those
portfolios.
On
October 14, 2008, the FDIC announced the establishment of a temporary liquidity
guarantee program to provide full deposit insurance for all non-interest bearing
transaction accounts and guarantees of certain newly issued senior unsecured
debt issued by FDIC-insured institutions and their holding
companies. Insured institutions are automatically covered by this
program for the period commencing October 14, 2008 and will continue to be
covered as long as they do not opt out of the program by December 5,
2008. We elected to participate in the transaction account guarantee
program, but we will not participate in the debt guarantee
component.
The
actual impact that EESA and such related measures undertaken to alleviate the
credit crisis will have generally on the financial markets, including the
extreme levels of volatility and limited credit availability currently being
experienced is unknown. The failure of such measures to help stabilize the
financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit or the trading price of our
common stock.
Our
business strategy includes significant growth plans, and our financial condition
and results of operations could be negatively affected if we fail to grow or
fail to manage our growth effectively.
We intend
to continue pursuing a significant growth strategy for our business. Our growth
initiatives are based upon recruiting experienced personnel to lead such
initiatives, and, accordingly, the failure to identify and retain such personnel
would place significant limitations on our ability to execute our growth
strategy. In addition, achieving our growth targets requires us to attract
customers that currently have banking relationships with other financial
institutions in our market, thereby increasing our share of the market. To the
extent we expand our lending beyond our current market area, we could incur
additional risk related to those new market areas. We cannot assure that we will
be able to expand our market presence in our existing markets or successfully
enter new markets or that any such expansion will not adversely affect our
profitability. If we do not manage our growth effectively, we may not be able to
achieve our business plan, and our business, profitability and prospects could
be harmed. Also, if our growth occurs more slowly than anticipated or declines,
our profitability could be materially adversely affected.
Our
ability to successfully grow will depend on a variety of factors, including our
ability to attract and retain experienced bankers, the continued availability of
desirable business opportunities, the competitive responses from
other
financial institutions in our market area and our ability to manage our growth.
While we believe we have the executive management resources and internal systems
in place to successfully manage our future growth, growth opportunities may not
be available or we might not successfully manage our growth.
The
building of market share through our branching strategy could cause our expenses
to increase faster than revenues.
We intend
to continue to build market share through our branching strategy. We are
planning two new branches that we intend to open within the next 12 months in
addition to a recently constructed office that opened in October 2008. There are
costs involved in opening branches and new branches generally require a period
of time to generate sufficient revenues to offset these costs, especially in
areas in which we do not have an established presence. Accordingly, any new
branch may negatively impact our earnings for some period of time until the
branch reaches certain economies of scale. Our expenses could be further
increased if we encounter delays in the opening of any of our new branches.
Finally, there is a risk that our new branches will not be successful even after
they have been established.
We
are highly dependent on key individuals and a number of the members of executive
and senior management have been with the Company for less than three
years.
Consistent
with our policy of focusing on select growth initiatives we are highly dependent
on the continued services of a limited number of our executive officers and key
management personnel. The loss of services of any of these individuals may have
a material adverse impact on our operations because other officers may not have
the experience and expertise to readily replace these individuals.
The
senior management team of Home Federal Bancorp in place at the time of the
mutual holding company reorganization in December 2007 had worked together for a
number of years and, until recently, virtually all of them had worked for us for
five years or more. Daniel L. Stevens, the previous President and Chief
Executive Officer of the Company since 1995, retired on September 30, 2008, but
in January 2008 transitioned the roles of President and Chief Executive Officer
to Len E. Williams, who joined us in late 2006. Mr. Stevens continues to serve
as Chairman of the Board of Directors. Eric S. Nadeau, our current Chief
Financial Officer, joined Home Federal Bancorp in June 2008, replacing Robert E.
Schoelkoph, who had been with us for 29 years before his retirement in October
2008. The individual who served as Chief Lending Officer since 1993 retired in
October 2007 and was replaced by Steven D. Emerson, our Executive Vice President
of Commercial Banking and Chief Lending Officer, who has been with us since
December 2006. Steven K. Eyre serves as
our Executive Vice President of Consumer Banking and joined the
management team in December 2007. Additionally, our Senior Vice President of
Operations and Technology and our Chief Credit Officer joined us in September 2007 and
March 2007, respectively.
We
believe we have in place qualified individuals and have provided for an orderly
transition. Changes in key personnel and their responsibilities may be
disruptive to our business and could have a material adverse effect on our
business, financial condition and profitability. Moreover, our anticipated
growth is expected to place increased demands on our human resources and will
require the recruitment of additional middle management personnel. The
competition to hire experienced banking professionals is also intense. If we are
unable to attract qualified banking professionals, our expansion plans could be
delayed or curtailed and our business, financial condition, and profitability
may be adversely affected.
Fluctuations
in interest rates could reduce our profitability and affect the value of our
assets.
Like
other financial institutions, we are subject to interest rate risk. Our primary
source of income is net interest income, which is the difference between
interest earned on loans and investments and the interest paid on deposits and
borrowings. We expect that we will periodically experience imbalances in the
interest rate sensitivities of our assets and liabilities and the relationships
of various interest rates to each other. Over any defined period of time, our
interest-earning assets may be more sensitive to changes in market interest
rates than our interest-bearing liabilities, or vice versa. In addition, the
individual market interest rates underlying our loan and deposit products (e.g.,
prime) may not change to the same degree over a given time period. In any event,
if market interest rates should move
contrary
to our position, our earnings may be negatively affected. In addition, loan
volume and quality and deposit volume and mix can be affected by market interest
rates. Changes in levels of market interest rates could materially affect our
net interest spread, asset quality, origination volume, and overall
profitability.
We
principally manage interest rate risk by managing our volume and mix of our
earning assets and funding liabilities. In a changing interest rate environment,
we may not be able to manage this risk effectively. If we are unable to manage
interest rate risk effectively, our business, financial condition and results of
operations could be materially harmed.
Our
business is subject to various lending risks which could adversely impact our
results of operations and financial condition.
Our
business strategy centers on the continued transition to commercial banking
activities in order to expand our net interest margin. Consistent with this
strategy, we are working to further reduce the percentage of our assets that are
lower-yielding residential loans and mortgage-backed securities and to increase
the percentage of our assets consisting of construction and land development,
commercial and multi-family real estate and commercial business loans that have
higher risk-adjusted returns. Our increasing focus on these types of lending
will continue to increase our risk profile relative to traditional thrift
institutions as we continue to implement our business strategy for the following
reasons:
Our
increased emphasis on commercial lending may expose us to increased lending
risks.
Our
business strategy is focused on the expansion of commercial and small business
lending, with continued emphasis on commercial real estate, construction and
land development loans. These types of lending activities, while potentially
more profitable than single-family residential lending, are generally more
sensitive to regional and local economic conditions, making loss levels more
difficult to predict. Collateral evaluation and financial statement analysis in
these types of loans requires a more detailed analysis at the time of loan
underwriting and on an ongoing basis. A decline in real estate values would
reduce the value of the real estate collateral securing our loans and increase
the risk that we would incur losses if borrowers defaulted on their loans. In
addition, these loans generally expose a lender to greater risk of non-payment
and loss than one- to four-family residential mortgage loans because repayment
of the loans often depends on the successful operation of the property and the
income stream of the borrowers. Further, such loans typically involve larger
loan balances to single borrowers or groups of related borrowers compared to
one- to four family residential mortgage loans. Also, many of our commercial
borrowers have more than one loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to
a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan. Accordingly, when
there are defaults and losses on these types of loans, they are often larger on
a per loan basis than those for permanent single-family or consumer loans. A
secondary market for most types of commercial real estate and construction loans
is not readily liquid, so we have less opportunity to mitigate credit risk by
selling part or all of our interest in these loans.
Repayment of our
commercial business loans is often dependent on the cash flows of the borrower,
which may be unpredictable, and the collateral securing these loans may
fluctuate in value.
While commercial business loans comprise a small percentage of our loan
portfolio, we intend to significantly expand these types of loans. Our
commercial business loans are primarily made based on the identified cash flow
of the borrower and secondarily on the underlying collateral provided by the
borrower. Most often, this collateral consists of accounts receivable, inventory
or equipment. Credit support provided by the borrower for most of these loans
and the probability of repayment is based on the liquidation of the pledged
collateral and enforcement of a personal guarantee, if any exists. As a result,
in the case of loans secured by accounts receivable, the availability
of funds for the repayment of these loans may be substantially dependent on the
ability of the borrower to collect amounts due from it customers. The collateral
securing other loans may depreciate over time, may be difficult to appraise and
may fluctuate in value based on the success of the business.
Our commercial and
multi-family real estate loans involve higher principal amounts than other loans
and repayment of these loans may be dependent on factors outside our control or
the control of our borrowers. Accordingly,
if we
make any
errors in judgment in the collectibility of our commercial and multi-family real
estate loans, any resulting charge-offs may be larger on a per loan basis than
those incurred with our residential or consumer loan portfolios.
The
credit risk related to commercial and multi-family real estate loans is
considered to be greater than the risk related to one- to four-family
residential or consumer loans because the repayment of commercial and
multifamily real estate loans typically is dependent on the income stream of the
real estate securing the loan as collateral and the successful operation of the
borrower’s business, which can be significantly affected by conditions in the
real estate markets or in the economy. For example, if the cash flow from the
borrower’s project is reduced as a result of leases not being obtained or
renewed, the borrower’s ability to repay the loan may be impaired. In addition,
many of our commercial and multi-family real estate loans are not fully
amortizing and contain large balloon payments upon maturity. These balloon
payments may require the borrower to either sell or refinance the underlying
property in order to make the balloon payment.
Because
our loans are concentrated to borrowers in our market area, a downturn in the
local economy or a decline in local real estate values could cause increases in
nonperforming loans, which could hurt our profits.
The
majority of our borrowers and depositors are individuals and businesses located
and doing business in the Boise and surrounding metropolitan area. Adverse
economic conditions in our market area could reduce our growth rate, affect the
ability of our customers to repay their loans and generally affect our financial
condition and results of operations. Conditions such as inflation, recession,
unemployment, high interest rates, short money supply, scarce natural resources,
international disorders, terrorism and other factors beyond our control may
adversely affect our profitability. We do not have the ability of a larger
institution to spread the risks of unfavorable local economic conditions across
a large number of diversified economies. Any sustained period of increased
payment delinquencies, foreclosures or losses caused by adverse market or
economic conditions in the State of Idaho could adversely affect the value of
our assets, revenues, profitability and financial condition. Moreover, we may
not benefit from any market growth or favorable economic conditions in our
primary market areas if they do occur.
If
the value of real estate in the Boise metropolitan area were to decline
materially, a significant portion of our loan portfolio could become
under-collateralized, which could have a material adverse effect on Home Federal
Bank.
Substantially
all of our loans secured by real property and concentrated in the State of
Idaho. A continued decline in local economic conditions could adversely affect
the values of our real estate collateral. As a result, we have a greater risk of
loan defaults and losses in the event of an economic downturn in our market area
as adverse economic changes may have a negative effect on the ability of our
borrowers to make timely repayment of their loans. Consequently, a decline in
local economic conditions may have a greater effect on our earnings and capital
than on the earnings and capital of larger financial institutions whose real
estate loan portfolios are geographically diverse. If we are required to
liquidate a significant amount of collateral during a period of reduced real
estate values to satisfy the debt, our financial condition and profitability
could be adversely affected.
Further
declines in the housing market in the Treasure Valley may result in significant
losses in our construction and land development loan portfolio
We make
land purchase, lot development and real estate construction loans to individuals
and builders, primarily for the construction of residential properties and, to a
lesser extent, commercial and multi-family real estate projects. We will
originate these loans whether or not the collateral property underlying the loan
is under contract for sale. Residential real estate construction loans include
single-family tract construction loans for the construction of entry level
residential homes.
Our
construction and land development loans are based upon estimates of costs and
values associated with the completed project, which may be inaccurate.
Construction and land development lending involves additional risks when
compared with permanent residential lending because funds are advanced upon the
security of the project, which is of uncertain value prior to its completion.
Because of the uncertainties inherent in estimating construction costs, as well
as the market value of the completed project and the effects of governmental
regulation of real
property,
it is relatively difficult to evaluate accurately the total funds required to
complete a project and the related loan-to-value ratio. This type of lending
also typically involves higher loan principal amounts and is often concentrated
with a small number of builders. These loans often involve the disbursement of
substantial funds with repayment primarily dependent on the success of the
ultimate project and the ability of the borrower to sell or lease the property
or obtain permanent take-out financing, rather than the ability of the borrower
or guarantor to repay principal and interest. If our appraisal of the value of a
completed project proves to be overstated, we may have inadequate security for
the repayment of the loan upon completion of construction of the project and may
incur a loss. Our ability to continue to originate a significant amount of
construction loans is dependent on the continued strength of the housing market
in the Treasure Valley Region of Southwest Idaho. Further, if we lost our
relationship with one or more of our larger borrowers building in these counties
or there is a decline in the demand for new housing in these counties, it is
expected that the demand for construction loans would decline, our liquidity
would substantially increase and our net income would be adversely
affected.
If
our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings and capital levels could be reduced.
We make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans. In determining the amount of the allowance for loan losses, we review
our loans and our loss and delinquency experience, and evaluate economic
conditions. Management recognizes that significant new growth in loan
portfolios, new loan products and the refinancing of existing loans can result
in portfolios comprised of unseasoned loans that may not perform in a historical
or projected manner. If our assumptions are incorrect, our allowance for loan
losses may not be sufficient to cover actual losses, resulting in additions to
our allowance. Material additions to our allowance could materially decrease our
net income. In addition, bank regulators periodically review our allowance for
loan losses and may require us to increase our provision for loan losses or
recognize additional loan charge-offs. Any increase in our allowance for loan
losses or loan charge-offs as required by these regulatory authorities could
have a material adverse effect on our financial condition and
profitability.
We seek to mitigate the
risks inherent in our loan portfolio by adhering to specific underwriting
practices. Although we believe that our underwriting criteria
are appropriate for the various kinds of loans we make, we may incur losses on
loans that meet our underwriting criteria, and these losses may exceed the
amounts set aside as reserves in our allowance for loan losses.
We
are subject to extensive regulation which could adversely affect our
business.
Our
operations are subject to extensive regulation by federal, state and local
governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of our operations. Because our business is highly regulated, the laws, rules and
regulations applicable to it are subject to regular modification and change.
Regulatory authorities have extensive discretion in their supervisory and
enforcement activities, including the imposition of restrictions on our
operations, the classification of our assets and determination of the level of
our allowance for loan losses. Any change in this regulation and oversight,
whether in the form of regulatory policy, regulations, legislation or
supervisory action, may have a material impact on our operations or otherwise
materially and adversely affect our business, financial condition, prospects or
profitability.
Federal
and state governments could adopt laws responsive to the current credit
conditions that would adversely affect our ability to collect on
loans.
Federal
or state governments might adopt legislation or regulations reducing the amount
that our customers are required to pay under existing loan contracts or limit
our ability to foreclose on collateral.
Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition.
Liquidity
is essential to our business. An inability to raise funds through deposits,
borrowings, the sale of loans and other sources could have a substantial
negative effect on our liquidity. Our access to funding sources in amounts
adequate to finance our activities on terms that are acceptable to us could be
impaired by factors that affect us specifically or the financial services
industry or economy in general. Factors that could detrimentally impact our
access to liquidity sources include a decrease in the level of our business
activity as a result of a downturn in the markets in which our loans are
concentrated, or adverse regulatory action against us. Our ability to borrow
could also be impaired by factors that are not specific to us, such as a
disruption in the financial markets or negative views and expectations about the
prospects for the financial services industry in light of the recent turmoil
faced by banking organizations and the continued deterioration in credit
markets.
Concern
of customers over deposit insurance may cause a decrease in deposits at the
Bank.
With
recent increased concerns about bank failures, customers increasingly are
concerned about the extent to which their deposits are insured by the FDIC.
Customers may withdraw deposits from the Bank in an effort to ensure that the
amount they have on deposit at the Bank is fully insured. Decreases in deposits
may adversely affect our funding costs and net income.
If
external funds are not available, this could adversely impact our growth and
future prospects.
We rely
on deposits and Federal Home Loan Bank advances to fund our operations. Although
we have historically been able to replace maturing deposits if desired, we might
not be able to replace such funds in the future if our financial condition or
market conditions were to change. Although we consider the sources of existing
funds adequate for our current liquidity needs, we may seek additional brokered
deposits or debt in the future to achieve our long-term business objectives.
Additional funds, if sought, may not be available to us or, if available, may
not be available on favorable terms. If additional financing sources are
unavailable or are not available on reasonable terms, our growth and future
prospects could be adversely affected.
FDIC
insurance premiums may increase materially.
The FDIC
insures deposits at FDIC insured financial institutions, including Home Federal
Bank. The FDIC charges the insured financial institutions premiums to maintain
the Deposit Insurance Fund at a certain level. Current economic conditions have
increased bank failures and expectations for further failures, in which case the
FDIC ensures payments of deposits up to insured limits from the Deposit
Insurance Fund. In October 2008, the FDIC issued a proposed rule that would
increase premiums paid by insured institutions and make other changes to the
assessment system. Increases in deposit insurance premiums could adversely
affect our net income.
We
face strong competition from other financial institutions, financial service
companies and other organizations offering services similar to those offered by
us, which could limit our growth and profitability.
We face
direct competition from a significant number of financial institutions, many
with a state-wide or regional presence, and in some cases a national presence,
in both originating loans and attracting deposits. Competition in originating
loans comes primarily from other banks, mortgage companies and consumer finance
institutions that make loans in our primary market areas. We also face
substantial competition in attracting deposits from other banking institutions,
money market and mutual funds, credit unions and other investment
vehicles.
In
addition, banks with larger capitalization and non-bank financial institutions
that are not governed by bank regulatory restrictions have large lending limits
and are better able to serve the needs of larger customers. Many of these
financial institutions are also significantly larger and have greater financial
resources than us, have been in business for a long period of time and have
established customer bases and name recognition.
We
compete for loans principally on the basis of interest rates and loan fees, the
types of loans we originate and the quality of service we provide to borrowers.
Our ability to attract and retain deposits requires that we provide customers
with competitive investment opportunities with respect to rate of return,
liquidity, risk and other factors.
To
effectively compete, we may have to pay higher rates of interest to attract
deposits, resulting in reduced profitability. If we are not able to effectively
compete in our market area, our profitability may be negatively affected,
potentially limiting our ability to pay dividends. The greater resources and
deposit and loan products offered by some of our competitors may also limit our
ability to increase our interest-earning assets.
We
continually encounter technological change, and we may have fewer resources than
many of our competitors to continue to invest in technological
improvements.
The
financial services industry is undergoing rapid technological changes, with
frequent introductions of new technology-driven products and services. The
effective use of technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. Our future success
will depend, in part, upon our ability to address the needs of our clients by
using technology to provide products and services that will satisfy client
demands for convenience, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to
invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or be successful in
marketing these products and services to our customers.
If
we fail to maintain an effective system of internal control over financial
reporting, we may not be able to accurately report our financial results or
prevent fraud, and, as a result, investors and depositors could lose confidence
in our financial reporting, which could materially adversely affect our
business, the trading price of our common stock and our ability to attract
additional deposits.
In
connection with the enactment of the Sarbanes-Oxley Act of 2002 (“Act”) and the
implementation of the rules and regulations promulgated by the SEC, we document
and evaluate our internal control over financial reporting in order to satisfy
the requirements of Section 404 of the Act. This requires us to prepare an
annual management report on our internal control over financial reporting,
including among other matters, management’s assessment of the effectiveness of
internal control over financial reporting and an attestation report by our
independent auditors addressing these assessments. If we fail to identify and
correct any deficiencies in the design or operating effectiveness of our
internal control over financial reporting or fail to prevent fraud, current and
potential shareholders and depositors could lose confidence in our internal
controls and financial reporting, which could materially adversely affect our
business, financial condition and results of operations, the trading price of
our common stock and our ability to attract additional deposits.
Item 1B. Unresolved Staff
Comments
None.
Item 2.
Properties
At
September 30, 2008, we had 15 full service banking offices and one loan center.
Seven of the locations are owned, seven locations are leased and two locations
are owned with the land being leased. At September 30, 2008, the net book value
of our investment in properties and equipment was $15.2 million. The net book
value of the data processing and computer equipment utilized by us at September
30, 2008 was $450,000.
The
following table sets forth certain information relating to our offices as of
September 30, 2008.
Location
|
|
Leased
or
Owned
|
|
Lease
Expiration
Date
|
|
Square
Footage
|
ADMINISTRATIVE
OFFICE
500
12th
Avenue South
Nampa,
Idaho 83651 (1)
(2)
|
|
Owned
|
|
N/A
|
|
34,014
|
|
|
|
|
|
|
|
BRANCH
OFFICES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Downtown Boise (2)
800
West State Street
Boise,
Idaho 83703
|
|
Leased
|
|
August
2010
|
|
3,500
|
Parkcenter (2)
871
East Parkcenter Boulevard
Boise,
Idaho 83706
|
|
Owned
|
|
N/A
|
|
4,500
|
Fairview (2)
10443
Fairview Avenue
Boise,
Idaho 83704
|
|
Building
owned
Land
leased
|
|
June
2070
|
|
2,500
|
Meridian (2)
55
East Franklin Road
Meridian,
Idaho 83642
|
|
Owned
|
|
N/A
|
|
4,000
|
Caldwell (2)
923
Dearborn
Caldwell,
Idaho 83605
|
|
Owned
|
|
N/A
|
|
4,500
|
Mountain Home (2)
400
North 3rd East
Mountain
Home, Idaho 83647
|
|
Owned
|
|
N/A
|
|
2,600
|
Emmett (2)
250
South Washington Avenue
Emmett,
Idaho 83617
|
|
Owned
|
|
N/A
|
|
2,600
|
Boise (3)
8300
West Overland Road
Boise,
Idaho 83709
|
|
Leased
|
|
March
2011
|
|
695
|
Meridian (3)
4051
East Fairview Avenue
Meridian,
Idaho 83642
|
|
Leased
|
|
February
2011
|
|
695
|
Garden City (3)
7319
West State Street
Boise,
Idaho 83714
|
|
Leased
|
|
August
2012
|
|
695
|
Idaho Center (3)
5875
E. Franklin Road
Nampa,
Idaho 83687
|
|
Leased
|
|
December
2011
|
|
710
|
Eagle (2)
100
E. Riverside Dr.
Eagle,
Idaho 83616
|
|
Owned
|
|
N/A
|
|
4,500
|
(table
continues on next page)
|
(table
continued from previous page)
|
Location
|
|
Leased
or
Owned
|
|
Lease
Expiration
Date
|
|
Square
Footage
|
Karcher (2)(4)
1820
Caldwell Blvd
Nampa,
Idaho 83651
|
|
Building
owned Land leased
|
|
June
2015
|
|
3,800
|
Nampa (3)
2100
12th Avenue Road
Nampa,
Idaho 83651
|
|
Leased
|
|
August
2010
|
|
695
|
|
|
|
|
|
|
|
LOAN
OFFICE:
|
|
|
|
|
|
|
Blackeagle
1307
Maplegrove
Boise,
Idaho 83709
|
|
Leased
|
|
August
2010
|
|
4,310
|
________
(1) Includes
home office
(2)
Drive-up ATM available
(3) Wal-Mart
locations
At
September 30, 2008, we were in the process of constructing a banking office in
Boise, Idaho. This office was completed in October 2008 and the Fairview Office
was closed at that time. Additionally, on November 24, 2008, we exercised our
purchase option under our ground lease related to our Karcher Office. The
purchase price was $825,000.
Item 3. Legal
Proceedings
From time
to time we are involved as a plaintiff or defendant in various legal actions
arising in the normal course of business. We do not anticipate incurring any
material liability as a result of such litigation, nor do we expect any material
impact on our financial position, results of operations or cash
flows.
Item 4. Submission of
Matters to a Vote of Security Holders
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended
September
30, 2008.
PART
II
Item
5. Market for the Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Home
Federal Bancorp’s common stock is currently listed on the NASDAQ Global Market
under the symbol “HOME,” and there is an established market for such common
stock. As of November 21, 2008, there were approximately 1,028 stockholders of
record, excluding persons or entities that hold stock in nominee or "street
name" accounts with brokers.
The
following table sets forth the high and low trading prices for Home Federal
Bancorp common stock, as reported by The Nasdaq Stock Market LLC, and cash
dividends paid for each quarter during the fiscal years ended September 30, 2008
and 2007. The information prior to December 19, 2007 (the effective date of the
Conversion), presented in
the table
relates to old Home Federal Bancorp, the Company’s predecessor. The share price
and dividends per share have been adjusted for periods prior to December 31,
2007, to give effect for the Conversion.
Fiscal Year Ended September 30,
2008
|
High
|
|
Low
|
|
Cash
Dividends
Paid
|
Quarter
Ended December 31, 2007
|
$12.83
|
|
$ 9.76
|
|
$0.048
|
Quarter
Ended March 31, 2008
|
12.10
|
|
10.00
|
|
0.055
|
Quarter
Ended June 30, 2008
|
12.00
|
|
9.70
|
|
0.055
|
Quarter
Ended September 30, 2008
|
12.75
|
|
9.81
|
|
0.055
|
Fiscal Year Ended September 30,
2007
|
High
|
|
Low
|
|
Cash
Dividends
Paid
|
Quarter
Ended December 31, 2006
|
$15.77
|
|
$13.65
|
|
$0.048
|
Quarter
Ended March 31, 2007
|
15.57
|
|
12.34
|
|
0.048
|
Quarter
Ended June 30, 2007
|
15.67
|
|
12.79
|
|
0.048
|
Quarter
Ended September 30, 2007
|
14.74
|
|
11.12
|
|
0.048
|
Dividends
Home
Federal Bancorp has paid quarterly cash dividends since the quarter ended June
30, 2005. We intend to continue to pay cash dividends on a quarterly basis. We
currently expect that the level of future cash dividends per share will be
substantially consistent with the current amount of dividends per share paid by
Home Federal Bancorp. However, the dividend rate and the continued payment of
dividends will depend on a number of factors, including our capital
requirements, our financial condition and results of operations, tax
considerations, statutory and regulatory limitations and general economic
conditions. No assurance can be given that we will continue to pay dividends or
that they will not be reduced in the future.
Dividend
payments by us may depend upon dividends received by the Company from the Bank.
Under federal regulations, the amount of dividends the Bank may pay is dependent
upon its capital position and recent net income. Generally, if the Bank
satisfies its regulatory capital requirements, it may make dividend payments up
to the limits prescribed in the Office of Thrift Supervision regulations.
However, institutions that have converted to a stock form of ownership may not
declare or pay a dividend on, or repurchase any of, its common stock if the
effect thereof would cause the regulatory capital of the institution to be
reduced below the amount required for the liquidation account.
Equity
Compensation Plan Information
The
information contained in the Company’s Proxy Statement for the 2009 Annual
Meeting under the section captioned “Equity Compensation Plan Information” is
incorporated herein by reference.
Issuer
Purchases of Equity Securities
As of
September 30, 2008, the Company had not announced a plan to repurchase shares of
the Company's common stock. The Company did not purchase any of its outstanding
common stock during the fourth quarter of the year ended September 30,
2008.
Performance
Graph
The
following graph compares the cumulative total stockholder return on the
Company’s common stock with the cumulative total return on the Russell 2000
Index, the SNL Thrift MHCs Index, and the SNL Thrift Index. Stock prices prior
to December 19, 2007, the effective date of the Conversion, relate to old Home
Federal Bancorp. In connection with the Conversion, old Home Federal Bancorp
ceased to exist. As a result, the Company believes that the SNL Thrift Index
best reflects the performance of Home Federal Bancorp, Inc, compared to
similarly-structured institutions and in future years will no longer include the
SNL Thrift MHC Index in the performance graph. The graph assumes that total
return includes the reinvestment of all dividends, and that the value of the
investment in Home Federal Bancorp’s common stock and each index was $100 on
December 7, 2004, the initial day of trading for Home Federal Bancorp’s common
stock. Historical stock prices are not necessarily indicative of future stock
performance.
Total Return Performance
|
Period
Ending
|
|
Index |
12/07/04
|
09/30/05
|
09/30/06
|
09/30/07
|
09/30/08
|
Home Federal
Bancorp, Inc. |
100.00
|
102.54
|
127.49
|
110.64
|
122.72
|
Russell
2000 |
100.00
|
107.84
|
118.54
|
133.16
|
113.88
|
SNL Thrift
MHCs Index |
100.00
|
99.62
|
126.84
|
134.16
|
137.56
|
SNL
Thrift Index
|
100.00
|
100.10
|
116.52
|
106.34
|
54.77
|
Item 6. Selected Financial
Data
The
following table sets forth certain information concerning the consolidated
financial position and results of operations at and for the dates indicated and
has been derived from our audited consolidated financial statements. The
information below is qualified in its entirety by the detailed information
included elsewhere herein and should be read along with “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Item 8. Financial Statements and Supplementary Data.”
|
At
September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
FINANCIAL
CONDITION DATA:
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$725,070
|
|
$709,954
|
|
$761,292
|
|
$689,577
|
|
$743,867
|
Mortgage-backed
securities, available for sale
|
188,787
|
|
162,258
|
|
12,182
|
|
14,830
|
|
871
|
Mortgage-backed
securities, held to maturity
|
--
|
|
--
|
|
183,279
|
|
180,974
|
|
96,595
|
Loans
receivable, net (1)
|
459,813
|
|
480,118
|
|
503,065
|
|
430,944
|
|
392,634
|
Loans
held for sale
|
2,831
|
|
4,904
|
|
4,119
|
|
5,549
|
|
3,577
|
Total
deposits
|
372,925
|
|
404,609
|
|
430,281
|
|
396,325
|
|
343,087
|
FHLB
advances
|
136,972
|
|
180,730
|
|
210,759
|
|
175,932
|
|
122,797
|
Stockholders’
equity
|
205,187
|
|
112,637
|
|
107,869
|
|
101,367
|
|
45,097
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
OPERATING
DATA:
|
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
$40,583
|
|
$42,638
|
|
$39,913
|
|
$33,910
|
|
$27,512
|
Interest
expense
|
17,935
|
|
21,336
|
|
16,917
|
|
12,231
|
|
9,650
|
Net
interest income
|
22,648
|
|
21,302
|
|
22,996
|
|
21,679
|
|
17,862
|
Provision
for loan losses
|
2,431
|
|
409
|
|
138
|
|
456
|
|
900
|
Net
interest income after provision for loan losses
|
20,217
|
|
20,893
|
|
22,858
|
|
21,223
|
|
16,962
|
Noninterest
income
|
10,490
|
|
11,281
|
|
11,201
|
|
10,128
|
|
8,982
|
Noninterest
expense
|
24,439
|
|
23,636
|
|
24,037
|
|
23,158
|
|
18,576
|
Income
before income taxes
|
6,268
|
|
8,538
|
|
10,022
|
|
8,193
|
|
7,368
|
Income
tax expense
|
2,263
|
|
3,267
|
|
3,810
|
|
2,910
|
|
2,684
|
Net
income
|
$ 4,005
|
|
$ 5,271
|
|
$ 6,212
|
|
$ 5,283
|
|
$ 4,684
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$0.25
|
|
$0.32
|
|
$0.38
|
|
$0.32
|
|
nm(2)
|
Diluted
|
0.25
|
|
0.31
|
|
0.38
|
|
0.32
|
|
nm(2)
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share:
|
0.213
|
|
0.194
|
|
0.189
|
|
0.088
|
|
nm(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
Number
of: |
|
|
|
|
|
|
|
|
|
Real
estate loans outstanding |
2,443
|
|
2,967
|
|
3,389
|
|
3,236
|
|
3,081
|
Deposit
accounts |
66,366
|
|
68,874
|
|
70,373
|
|
73,013
|
|
75,565
|
Full
service offices |
15
|
|
15
|
|
14
|
|
15
|
|
14
|
________
|
(1) Net
of allowance for loan losses, loans in process and deferred loan
fees.
|
|
(2) Per
share information is not meaningful. Old Home Federal Bancorp did not
complete its minority stock offering until December 6, 2004 and did not
have any outstanding shares prior to that
date.
|
|
At
or For the Year Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
KEY
FINANCIAL RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
Return
on average assets (1)
|
0.54%
|
|
0.71%
|
|
0.85%
|
|
0.82%
|
|
0.93%
|
Return
on average equity (2)
|
2.16
|
|
4.75
|
|
5.90
|
|
5.69
|
|
10.47
|
Dividend
payout ratio (3)
|
74.56
|
|
23.52
|
|
19.72
|
|
10.68
|
|
--
|
Equity-to-assets
ratio (4)
|
24.94
|
|
14.94
|
|
14.47
|
|
14.38
|
|
8.86
|
Interest
rate spread (5)
|
2.25
|
|
2.40
|
|
2.79
|
|
3.15
|
|
3.55
|
Net
interest margin (6)
|
3.21
|
|
3.03
|
|
3.33
|
|
3.57
|
|
3.84
|
Efficiency
ratio (7)
|
73.75
|
|
72.46
|
|
70.21
|
|
72.81
|
|
69.20
|
Noninterest
income/operating revenue (8)
|
31.70
|
|
34.40
|
|
32.60
|
|
31.80
|
|
33.50
|
Average
interest-earning assets to
average
interest-bearing liabilities
|
137.83
|
|
120.71
|
|
122.32
|
|
121.07
|
|
113.62
|
Noninterest
expense as a
percent
of average total assets
|
3.28
|
|
3.17
|
|
3.29
|
|
3.59
|
|
3.68
|
|
|
|
|
|
|
|
|
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
Tier
1 (core) capital
(to
tangible assets)
|
21.66%
|
|
13.56%
|
|
11.77%
|
|
12.00%
|
|
6.01%
|
Total
risk-based capital
(to
risk-weighted assets)
|
32.84
|
|
21.38
|
|
19.46
|
|
20.46
|
|
12.76
|
Tier
1 risk-based capital
(to
risk-weighted assets)
|
32.18
|
|
20.69
|
|
18.82
|
|
19.75
|
|
12.05
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
Nonaccrual
and 90 days or more past due loans
as
a percent of total loans
|
2.16%
|
|
0.32%
|
|
0.08%
|
|
0.11%
|
|
0.16%
|
Nonperforming
assets as a percent of total assets
|
1.46
|
|
0.29
|
|
0.05
|
|
0.15
|
|
0.10
|
Allowance
for losses as a percent
of
gross loans receivable
|
0.98
|
|
0.62
|
|
0.59
|
|
0.67
|
|
0.67
|
Allowance
for losses as a percent
of
nonperforming loans
|
46.04
|
|
195.17
|
|
766.49
|
|
602.97
|
|
432.30
|
Net
charge-offs to average outstanding loans
|
0.18
|
|
0.04
|
|
0.01
|
|
0.05
|
|
0.03
|
________
(1)
|
Net
income divided by average total
assets.
|
(2)
|
Net
income divided by average equity.
|
(3)
|
Dividends
paid to stockholders, excluding shares held by Home Federal MHC, divided
by net income.
|
(4)
|
Average
equity divided by average total
assets.
|
(5) |
Difference
between weighted average yield on interest-earning assets and weighted
average rate on interest-bearing liabilities. |
(6)
|
Net
interest margin, otherwise known as net yield on interest-earning assets,
is calculated as net interest income divided by average interest-earning
assets. |
(7)
|
The
efficiency ratio is noninterest expense divided by the sum of net interest
income and noninterest income.
|
(8)
|
Operating
revenue is defined as the sum of net interest income and noninterest
income.
|
Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING
STATEMENTS
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) contains forward-looking statements, which can be
identified by the use of words such as “believes,” “intends,” “expects,”
“anticipates,” “estimates” or similar expressions. Forward-looking statements
include, but are not limited to:
|
•
|
statements
of our goals, intentions and
expectations;
|
|
•
|
statements
regarding our business plans, prospects, growth and operating
strategies;
|
|
•
|
statements
regarding the quality of our loan and investment portfolios;
and
|
|
•
|
estimates
of our risks and future costs and
benefits.
|
These
forward-looking statements are subject to significant risks and uncertainties.
Actual results may differ materially from those contemplated by the
forward-looking statements due to, among others, the following
factors:
|
•
|
general
economic conditions, including real estate values, either nationally or in
our market area, that are worse than
expected;
|
|
•
|
changes
in the interest rate environment that reduce our interest margins or
reduce the fair value of financial
instruments;
|
|
•
|
the
credit risk of lending activities, including risks related to construction
and development lending and commercial and small business
banking;
|
|
•
|
changes
in the level and trend of loan delinquencies and
write-offs;
|
|
•
|
results
of examinations by banking
regulators;
|
|
•
|
increased
competitive pressures among financial services
companies;
|
|
•
|
changes
in consumer spending, borrowing and savings
habits;
|
|
•
|
our
ability to successfully manage our
growth;
|
|
•
|
changes
in the value of mortgage servicing
rights;
|
|
•
|
legislative
or regulatory changes that adversely affect our
business;
|
|
•
|
adverse
changes in the securities markets;
and
|
|
•
|
changes
in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Public Company Accounting Oversight Board or the
Financial Accounting Standards
Board.
|
Any of
the forward-looking statements that made in the MD&A, this annual report and
in other public statements we make may turn out to be wrong because of
inaccurate assumptions we might make, because of the factors illustrated above
or because of other factors that we cannot foresee. Because of these and other
uncertainties, our actual future results may be materially different from the
results indicated by these forward-looking statements and you should not rely on
such statements.
GENERAL
Home
Federal Bancorp, Inc. (“Company”), is the parent company of Home Federal Bank
(“Bank”), a community-based financial institution primarily serving the Boise,
Idaho, and surrounding metropolitan area known as the Treasure Valley region of
southwestern Idaho. We serve Ada, Canyon, Elmore and Gem counties through our 15
full-service banking offices and one loan center. We are in the business of
attracting deposits from the public and utilizing those deposits to originate
loans. We offer a wide range of loan products to meet the demands of our
customers. Historically, lending activities have been primarily directed toward
the origination of residential and commercial real estate loans. Real estate
lending activities have been primarily focused on first mortgages on owner
occupied, and one- to four-family residential properties. To an increasing
extent in recent years, lending activities have also included the origination of
residential and commercial construction and land development loans and home
equity
loans. While continuing our commitment to residential lending, management
expects commercial lending, including commercial real estate, builder finance
and commercial business lending, to become increasingly important activities for
us.
Our
primary source of pre-tax income is net interest income. Net interest income is
the difference between interest income, which is the income that we earn on our
loans and investments, and interest expense, which is the interest that we pay
on our deposits and borrowings. Changes in levels of interest rates affect our
net interest income. We intend to diversity the mix of our assets by reducing
the percentage of our assets that are lower-yielding residential loans and
mortgage-backed securities and increasing the percentage of our assets
consisting of commercial loans that we believe have higher risk-adjusted
returns.
Our
operating expenses consist primarily of compensation and benefits, occupancy and
equipment, data processing, advertising, postage and supplies, professional
services and deposit insurance premiums. Compensation and benefits consist
primarily of the salaries and wages paid to our employees, non-cash expense
related to our employee stock ownership plan (“ESOP”), payroll taxes, expenses
for retirement and other employee benefits. Occupancy and equipment expenses,
which are the fixed and variable costs of building and equipment, consist
primarily of lease payments, taxes, depreciation charges, maintenance and costs
of utilities.
Our
results of operations may also be affected significantly by general and local
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities. See “Item 1A. Risk
Factors" in this Annual Report on Form 10-K for additional discussion on the
potential impacts of these items.
OVERVIEW
The
fiscal year ended September 30, 2008, was a year of unprecedented change for our
Company. Not only did we undertake significant internal reorganization, we
endured, and are continuing to deal with, the most damaging national financial
crisis in over 80 years.
The
following list summarizes the key internal strategic initiatives undertaken by
management during fiscal 2008:
§
|
In
December 2007, shareholders approved the Conversion of old Home Federal
Bancorp, which was reorganized from the mutual holding company structure
to the stock holding company
structure;
|
§
|
A
new management team was put in place, including the Chief Executive
Officer, Chief Financial Officer, Chief Lending Officer, Consumer Banking
Officer, Chief Information Officer and Chief Credit
Officer
|
§
|
We
opened a branch in Nampa, Idaho, and nearly completed the construction of
another branch in Boise, which was opened in October
2008;
|
§
|
We
executed on our strategy to (a) increase commercial and consumer loans and
reduce our reliance on one- to four- family residential loans, and (b)
increase core deposits and reduce our reliance on high-cost certificates
of deposit and borrowings;
|
§
|
We
reorganized our credit administration and mortgage banking teams to
improve loan portfolio and credit risk management and to improve
efficiency in our mortgage program;
and,
|
§
|
We
hired several commercial lenders, including leaders specializing in
commercial real estate, commercial business loans and builder
finance.
|
To expand
on our initiatives, we continued to execute and manage our long-term strategic
plan during fiscal 2008, which is to diversify the balance sheet by increasing
our commercial, commercial real estate (“CRE”) and consumer loan portfolios and
improve our funding mix by reducing borrowings and increasing core
deposits.
The
following table summarizes our progress during the year:
(dollars
in thousands)
|
September
30, 2008
|
|
September
30, 2007
|
|
Balance
|
|
Mix
|
|
Balance
|
|
Mix
|
Loans,
end of period:
|
|
|
|
|
|
|
|
1-4
and multifamily residential
|
$233,346
|
|
50.1%
|
|
$278,724
|
|
57.6%
|
Consumer
and home equity
|
56,227
|
|
12.1
|
|
46,568
|
|
9.6
|
Land
development
|
18,674
|
|
4.0
|
|
21,899
|
|
4.5
|
Commercial
and commercial real estate
|
157,118
|
|
33.8
|
|
136,945
|
|
28.3
|
|
|
|
|
|
|
|
|
Funding,
fiscal year average:
|
|
|
|
|
|
|
|
Checking
|
$114,473
|
|
20.9%
|
|
$127,834
|
|
20.6%
|
Savings
|
24,194
|
|
4.4
|
|
23,397
|
|
3.8
|
Money
market
|
58,698
|
|
10.7
|
|
39,908
|
|
6.4
|
Total
core deposits
|
197,365
|
|
36.0
|
|
191,139
|
|
30.9
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
193,002
|
|
35.2
|
|
226,522
|
|
36.6
|
FHLB
borrowings
|
157,549
|
|
28.8
|
|
201,911
|
|
32.6
|
We have
found that deposit growth continues to be challenging. According to the Federal
Deposit Insurance Corporation, total deposits in Idaho fell 2.6% between June
2007 and June 2008. Competition for deposits continues to put upward pressure on
marginal funding costs, despite falling market rates in the second half of
fiscal 2008. Many large regional and national banks are encountering significant
liquidity pressures because of their loan losses and their inability to access
debt and capital markets. An increase in bank failures in calendar 2008 has
resulted in concern among many depositors about the safety of their deposit
accounts. These factors are exacerbating an already competitive environment for
deposits, pushing deposit rate spreads over Treasury not yields significantly
higher than historical trends. Often, we encounter competitors offering
certificate of deposit rates that are higher than FHLB advance rates. This
validates our strategic plan to reduce our reliance on term funding. During
fiscal 2008, we were able to increase core deposits by 3.3%. However, we allowed
$77.9 million of certificate accounts and FHLB advances to mature rather than to
retain high-cost funding.
While we
are disappointed that the total balances of our loan and deposit portfolios
declined during the year, we recognize that the nation is experiencing the most
disruptive economic environment for financial services companies in decades.
According to the Federal Reserve Bank, national levels of consumer debt
increased at a rate of 6.71% annually from June 2000 to June 2007 and debt
service as a percentage of disposable income rose to over 18.1% in the second
quarter of 2007 from 15.4% in the second quarter of 2000. Exotic mortgage
products, led by subprime, Alt-A, and “option payment” loan programs, placed
previously unqualified borrowers into homes they could not afford. The increase
in home demand as a result of this dubious increase in the number of “qualified”
borrowers pushed home values higher. In an effort to meet demand, homebuilders
accelerated the acquisition and development of residential subdivision projects
at inflated prices. As interest rates increased between fiscal years 2005 and
2007, commodity prices such as oil and corn skyrocketed. As a result, the
consumer debt burden and cost of living increase brought a seven-year boom in
housing to an abrupt end in the second half of 2007. The fallout in 2008 from
this meltdown includes hundreds of billions of dollars in loan losses for
financial institutions, a national economy that has begun to contract, the
failure or Federal government seizure of several large financial institutions
and investment banks, and over a trillion dollars of capital funds being
committed to the financial services industry by the U.S. Treasury.
We did
not develop a nontraditional mortgage program with subprime loans or other
products with exotic features. None of our one- to four-family residential
mortgage loans has negative amortization features. As a result of this
disciplined approach, we have been able to avoid the significant losses many
other banks have incurred. Nonetheless, the severity and pervasiveness of the
current crisis has impacted us indirectly. The overinvestment in land
development projects and overbuild of speculative residential homes has begun to
depress home prices in the Treasure Valley. The downturn in the national and
local economy is causing rapid increases in unemployment in our market areas,
which results in increasing foreclosure and bankruptcy rates. The unemployment
rate in the Boise City-Nampa MSA increased from 2.2% in September 2007 to 4.8%
in September 2008 as a result of nearly 10,000 job losses during that period.
While all of these indicators are well below national levels, we recognize the
Treasure Valley is a small market MSA and the loss of one or two significant
employment sources could have a dire effect on the local economy.
The
increase in our nonperforming loans occurred primarily in our land development
and speculative construction loan portfolios. While our exposure to land
development is limited as a percentage of our loan portfolio, the uncertainty of
land values and the length of time that may be needed to sell or develop the
lots has, in our estimation, significantly impaired the collectable balance of
some of these loans. While our commercial and commercial real estate portfolios
performed well during 2008, the severity of the economic downturn could cause
the performance of these loans to deteriorate rapidly. To prepare for such an
outcome, our credit
administration and loss mitigation teams were realigned to report
directly to the President and Chief Executive Officer and we appointed a Chief
Credit Officer who is independent of the lending team. We will closely monitor
our commercial loan portfolio as we anticipate the likelihood of further
economic stress.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
This
MD&A, as well as disclosures found elsewhere in this Annual Report on Form
10-K, are based upon the Company’s consolidated financial statements, which are
prepared in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”). The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. Several factors are
considered in determining whether or not a policy is critical in the preparation
of financial statements. These factors include, among other things, whether the
estimates are significant to the financial statements, the nature of the
estimates, the ability to readily validate the estimates with other information
including third parties or available prices, and sensitivity of the estimates to
changes in economic conditions and whether alternative accounting methods may be
utilized under US GAAP.
Management
has identified several accounting policies that, due to the judgments, estimates
and assumptions inherent in those policies, are critical to an understanding of
our financial statements. These policies relate to the determination of the
allowance for loan losses and the associated provision for loan losses, the fair
market value of capitalized mortgage servicing rights, as well as deferred
income taxes and the associated income tax expense. Management reviews the
allowance for loan losses for adequacy on a quarterly basis and establishes a
provision for loan losses that it believes is sufficient for the loan portfolio
growth expected and the loan quality of the existing portfolio. The carrying
value of the capitalized mortgage servicing rights is also assessed on a
quarterly basis. Income tax expense and deferred income taxes are calculated
using an estimated tax rate and are based on management’s and our tax advisor’s
understanding of our effective tax rate and the tax code. These estimates are
reviewed by our independent auditor on an annual basis and by our regulators
when they examine Home Federal Bank.
Allowance for Loan Losses.
Management recognizes that losses may occur over the life of a loan and
that the allowance for loan losses must be maintained at a level necessary to
absorb specific losses on impaired loans and probable losses inherent in the
loan portfolio. Management assesses the allowance for loan losses on a quarterly
basis by analyzing several factors including delinquency rates, charge-off rates
and the changing risk profile of the Bank’s loan portfolio, as well as local
economic conditions such as unemployment rates, bankruptcies and vacancy rates
of business and residential properties.
The
Company believes that the accounting estimate related to the allowance for loan
losses is a critical accounting estimate because it is highly susceptible to
change from period to period, requiring management to make assumptions about
probable incurred losses inherent in the loan portfolio at the balance sheet
date. The impact of a sudden large loss could deplete the allowance and require
increased provisions to replenish the allowance, which would negatively affect
earnings.
The
Company’s methodology for analyzing the allowance for loan losses consists of
specific allocations on significant individual credits and a general allowance
amount, including a range of losses. The specific allowance component is
determined when management believes that the collectibility of an individually
reviewed loan has been impaired and a loss is probable. The general allowance
component relates to assets with no well-defined deficiency or weakness and
takes into consideration loss that is inherent within the portfolio but has not
been identified. The general allowance is determined by applying a historical
loss percentage to various types of loans with similar characteristics and
classified loans that are not analyzed specifically. Adjustments are made to
historical loss percentages to reflect current economic and internal
environmental factors, such as changes in underwriting standards and management,
that may increase or decrease those loss factors. As a result of the imprecision
in
calculating
inherent and potential losses, a range is added to the general allowance to
provide an allowance for loan losses that is adequate to cover losses that may
arise as a result of changing economic conditions and other qualitative factors
that may alter historical loss experience.
The
allowance is increased by the provision for loan losses, which is charged
against current period operating results and decreased by the amount of actual
loan charge-offs, net of recoveries.
The
Company also estimates a reserve related to unfunded loan commitments. In
assessing the adequacy of the reserve, the Company uses a similar approach used
in the development of the allowance for loan losses. The reserve for unfunded
loan commitments is included in other liabilities on the Consolidated Balance
Sheets. The provision for unfunded commitments is charged to noninterest
expense.
Mortgage Servicing Rights.
Mortgage servicing rights represent the present value of the future loan
servicing fees from the right to service loans for others. The most critical
accounting policy associated with mortgage servicing is the methodology used to
determine the fair value of capitalized mortgage servicing rights, which
requires the development of a number of estimates, the most critical of which
are the mortgage loan prepayment rate assumptions. The mortgage loan prepayment
rate assumptions are significantly impacted by interest rates. In general,
during periods of falling interest rates, the mortgage loans prepay faster and
the value of mortgage servicing asset declines. Conversely, during periods of
rising rates, the value of mortgage servicing rights generally increases due to
slower rates of prepayments. The Company performs a quarterly review of mortgage
servicing rights to assess changes in value. This review may include an
independent appraisal by an outside party of the fair value of the mortgage
servicing rights.
In August
2008, the Bank entered into an agreement to sell its mortgage servicing rights
to another financial institution. The value of our mortgage servicing rights was
reduced to the estimated purchase price at September 30, 2008. The sale is
expected to be finalized on October 31, 2008, with the transfer of servicing to
be complete by December 16, 2008. After the transfer, we will no longer service
loans for others as we now sell residential mortgage loans in the secondary
market with servicing released to the investor.
Deferred Income Taxes.
Deferred income taxes are reported for temporary differences between
items of income or expense reported in the financial statements and those
reported for income tax purposes. Deferred taxes are computed using the asset
and liability approach as prescribed in SFAS No. 109, Accounting for Income
Taxes. Under this method, a deferred tax asset or liability is determined based
on the enacted tax rates that will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in an institution’s income tax returns.
The deferred tax provision for the year is equal to the net change in the net
deferred tax asset from the beginning to the end of the year, less amounts
applicable to the change in value related to investments available for sale. The
effect on deferred taxes of a change in tax rates is recognized as income in the
period that includes the enactment date. The primary differences between
financial statement income and taxable income result from depreciation expense,
mortgage servicing rights, loan loss reserves, deferred compensation, mark to
market adjustments on our available for sale securities, and dividends received
from the Federal Home Loan Bank of Seattle. Deferred income taxes do not include
a liability for pre-1988 bad debt deductions allowed to thrift institutions that
may be recaptured if the institution fails to qualify as a bank for income tax
purposes in the future.
COMPARISON
OF FINANCIAL CONDITION AT SEPTEMBER 30, 2008, AND SEPTEMBER 30,
2007
Total
assets increased $15.1 million, or 2.1%, to $725.1 million at September 30, 2008
from $710.0 million at September 30, 2007. The increase was primarily a result
of the $87.8 million in net proceeds received from the Conversion completed in
December 2007, which was partially offset by a decrease in deposits and
borrowings during this same period of $31.7 million and $43.8 million,
respectively. Total liabilities decreased $77.4 million, or 13.0%, to $519.9
million.
Assets. For the year ended
September 30, 2008, total assets increased $15.1 million. The increases and
decreases were primarily concentrated in the following asset
categories:
|
|
|
Increase
/ (Decrease)
|
|
Balance
at September 30,
2008
|
|
Balance
at September 30, 2007
|
|
Amount
|
|
Percent
|
|
(in
thousands)
|
Cash
and amounts due from depository institutions
|
$ 23,270
|
|
$ 20,588
|
|
$ 2,682
|
|
13.0%
|
Mortgage-backed
securities, available for sale
|
188,787
|
|
162,258
|
|
26,529
|
|
16.4
|
Loans
receivable, net of allowance for loan losses
|
459,813
|
|
480,118
|
|
(20,305)
|
|
(4.2)
|
Cash and amounts due from depository
institutions. The higher cash balance at September 30, 2008, is due to a
portion of the proceeds from the Company’s Conversion being invested in
overnight funds and cash equivalents. In June 2008, the Company invested $5.0
million of excess cash in a certificate of deposit issued by the FHLB, which is
scheduled to mature in December 2008. As discussed in greater detail below,
competitive pricing for deposits has resulted in the runoff of some deposit
balances, which was funded with some of the net proceeds received from the
Conversion.
Securities. Mortgage-backed
securities increased $26.5 million to $188.8 million at September 30, 2008, from
$162.3 million at September 30, 2007. A significant portion of the proceeds from
the Conversion were invested in mortgage-backed securities resulting in the
increase. Repayments of principal totaled $31.1 million for the year ended
September 30, 2008. Management decided to purchase mortgage-backed securities in
order to quickly invest Conversion funds and to provide liquidity in future
periods to fund loan growth with proceeds from principal
repayments.
Nearly
all of the Company’s mortgage-backed securities are issued by U.S.
Government-sponsored enterprises, primarily Fannie Mae and Freddie Mac. While
the U.S. Government has recently affirmed its support for government-sponsored
enterprises and the mortgage-backed securities they issued, significant
deterioration in the financial strength of Fannie Mae, Freddie Mac or
mortgage-backed security insurers may have a material effect on the valuation
and performance of the Company’s mortgage-backed securities portfolio in future
periods. The Company does not own preferred stock issued by Fannie Mae or
Freddie Mac.
Non-agency,
also referred to as “private label,” mortgage-backed securities had a fair value
of $3.1 million at September 30, 2008, compared to their amortized cost of $3.4
million at September 30, 2008. The securities carried a rating of ‘AAA’ by
Moody’s and Standard & Poor’s at that date. While spreads on all
mortgage-backed securities, when compared to Treasury notes, have widened since
June 2007, the value of private label mortgage-backed securities have fallen
more and have been more volatile than securities issued by government-sponsored
enterprises due to the deterioration of the national residential loan market. We
have reviewed the delinquency status and average collateral coverage of the
loans pooled in our private label securities portfolio and have concluded the
securities were not other than temporarily impaired at September 30,
2008.
Loans. Loans receivable, net,
decreased $20.3 million to $459.8 million at September 30, 2008, from $480.1
million at September 30, 2007. One-to four-family residential loans decreased
$39.0 million as we sold nearly all of the one-to four-family loans that we
originated. Consumer loans increased $9.7 million, led by a $10.0 million
increase in home equity lines of credit and second mortgage loans. Commercial
and commercial real estate loans increased $20.2 million to $157.1 million at
September 30, 2008. We continue to make progress in building our commercial and
small business banking programs, including the addition of an experienced
commercial banking team to expand our existing commercial lending program. We
will also emphasize other commercial banking activities, including business
banking, cash management and other products associated with a full-service
commercial bank. Construction loans decreased $11.1 million to $33.0 million at
September 30, 2008, which reflects the significant slowdown in residential
development in 2008.
Property and equipment.
Property and equipment increased $2.9 million as a result of the opening
of a newly constructed banking office in Nampa, Idaho, during fiscal 2008 and
the construction of another office in Boise. At September 30, 2008, we had five
branches in Wal-Mart supermarkets compared to six at September 30, 2007. We
closed one in-store branch in fiscal 2008 in conjunction with the opening of the
new banking office in Nampa. The banking office in Boise that was in process of
construction at September 30, 2008, was opened in October 2008, at which time we
closed our existing Fairview Office and relocated those customers to the new
office. We plan to open two additional branches on Eagle Road in Boise and
Meridian, Idaho, in late 2009; therefore, we anticipate continued increases in
property and equipment as we implement our growth strategy.
Bank owned life insurance. The
value of bank owned life insurance increased $422,000 to $11.6 million. The
policy premiums are invested in six insurance companies, each of which had a
rating of at least ‘AA-’ by Standard & Poor’s and an ‘A+’ rating by A.M.
Best. These insurance companies have reported immaterial exposure to AIG and
Lehman Brothers, two firms who have encountered significant hardship in the
current economy. Nonetheless, we continue to closely watch the performance of
the companies that have issued our life insurance policies.
Mortgage servicing rights. In
August 2008, we entered into an agreement to sell our mortgage servicing rights
to another financial institution. The value of mortgage servicing rights at
September 30, 2008, reflects the estimated purchase price for the servicing
portfolio. We decided to sell our servicing rights as any loans we now sell in
the secondary market are sold with servicing released. The placement of Fannie
Mae and Freddie Mac into the conservatorship of the Federal government, in
addition to sweeping changes in the secondary market, caused uncertainty about
the future value of this asset. Lastly, the rapid deterioration of the real
estate market and the increase in foreclosures in the Treasure Valley raised
concern among management that resources would be diverted to resolving
foreclosed assets for loans owned by others and away from the mitigation of loan
losses and the workout of troubled loans in our own portfolio. The sale of the
mortgage servicing rights is expected to be consummated on October 31, 2008,
with the transfer of all servicing to be completed by December 16, 2008. After
the transfer, the Bank will no longer service one- to four- family loans for
investors.
Deferred taxes. The net
deferred tax asset increased $525,000 to $1.8 million at September 30, 2008. The
increase was primarily due to increases in the tax assets related to deferred
compensation and the allowance for loan losses, offset somewhat by a lower
unrealized loss on securities in 2008.
Deposits. Deposits decreased
$31.7 million, or 7.8%, to $372.9 million at September 30, 2008, from $404.6
million at September 30, 2007. Certificates of deposit accounted for the
majority of the decrease in total deposits during the period as we chose not to
match rates offered by local competitors that in some cases exceeded our
alternative funding sources. At September 30, 2008, we held no brokered
certificates of deposit.
The
following table details the changes in deposit accounts:
|
|
|
Increase
/ (Decrease)
|
|
Balance
at September 30,
2008
|
|
Balance
at September 30, 2007
|
|
Amount
|
|
Percent
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
$ 41,398
|
|
$ 38,643
|
|
$2,755
|
|
7.1%
|
Interest-bearing
demand
|
76,572
|
|
81,958
|
|
(5,386)
|
|
(6.6)
|
Money
market
|
51,142
|
|
45,701
|
|
5,441
|
|
11.9
|
Savings
|
26,409
|
|
23,116
|
|
3,293
|
|
14.2
|
Certificates
of deposit
|
177,404
|
|
215,191
|
|
(37,787)
|
|
(17.6)
|
Total
deposit accounts
|
$372,925
|
|
$404,609
|
|
$(31,684)
|
|
(7.8)%
|
As noted
earlier, we believe that increasing core deposits and reducing our reliance on
certificates of deposits is an important component in our strategy to transform
the balance sheet toward a commercial bank. We believe our investment in
free-standing full-service banking offices, reduced reliance on in-store
branches, and changes made in the management team and organizational alignment
of our retail banking program will help us increase core deposit accounts,
despite the significant challenges in our markets. Additionally, we intend to
hire several small business
account
managers and a commercial deposit officer in fiscal 2009 to develop a more
effective business deposit program.
Our
savings account portfolio includes a concentration of low-cost health savings
accounts. Health savings accounts totaled $21.1 million and $23.5 million at
September 30, 2008 and 2007, respectively, with an average interest rate of
0.90% and 1.10%, respectively. Nearly all of these accounts are originated
through broker relationships throughout the United States. We have limited
control over these accounts as they are not local to our operating markets.
Additionally, changes in tax law or the structure of health savings accounts
could cause the balances to be withdrawn.
Borrowings. Federal Home Loan
Bank advances decreased $43.8 million, or 24.2%, to $137.0 million at September
30, 2008, from $180.7 million at September 30, 2007. We used principal payment
proceeds from our mortgage-backed securities and residential loan portfolios to
reduce our advances as they matured. We have $76.9 million of FHLB advances
maturing in fiscal 2009 and intend to reduce outstanding advance balances as
they mature. However, we recognize that if we are successful in originating
commercial and consumer loans at a faster rate than our mortgage loan portfolio
is decreasing, we may need to reissue advances to grow assets if we cannot fund
those loans with deposit growth. We had $133.4 million of borrowing capacity
available at the Federal Home Loan Bank of Seattle and an additional $10.0
million available under a federal funds purchased line with our correspondent
bank.
Equity. Stockholders’ equity
increased $92.6 million, or 82.2%, to $205.2 million at September 30, 2008, from
$112.6 million at September 30, 2007. The increase was primarily attributable to
the $87.8 million in net proceeds received from the Conversion. We sold
approximately 9.4 million shares of stock in subscription, community and
syndicated community offerings and issued approximately 7.1 million additional
shares of its stock in exchange for the previously outstanding shares of old
Home Federal Bancorp.
A portion
of the offering proceeds were used to make a loan to the Company’s employee
stock ownership plan, which purchased 816,000 shares of the Company’s common
stock for an aggregate cost of $8.2 million. In addition, other significant
activity among equity accounts over the past twelve months included $4.0 million
in net income, the allocation of earned employee stock ownership plan shares,
equity compensation and the exercise of stock options totaling $2.4 million, and
an $825,000 decrease in unrealized losses on securities available for sale,
offset by $3.0 million in cash dividends paid to stockholders.
We are
prohibited from implementing a common stock repurchase program until 12 months
following the completion of the Conversion. The anniversary date of the
Conversion is December 19, 2008. The Board of Directors and management will
consider all relevant factors, including alternative access to capital,
regulatory capital requirements, leverage opportunities and possible additional
loan losses in deciding whether to implement a stock repurchase program to
ensure that a repurchase program does not impede our ability to execute our
growth plan. Repurchased shares may be reissued under the Company’s equity
incentive and recognition and retention plans or as consideration in a strategic
acquisition.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2008, AND SEPTEMBER 30
2007
General. Net income for the
year ended September 30, 2008 was $4.0 million, or $0.25 per diluted share,
compared to net income of $5.3 million, or $0.31 per diluted share, for the year
ended September 30, 2007. The decrease in net income during fiscal 2008 was
primarily due to a $2.0 million increase in the provision for loan losses,
before the effect of income taxes. A $791,000 decline in noninterest income,
primarily due to lower loan sale gains, and an $803,000 increase in noninterest
expense offset a margin-driven increase in net interest income of $1.3
million.
Net Interest Income. Net
interest income increased $1.3 million, or 6.3%, to $22.6 million for the year
ended September 30, 2008, from $21.3 million for the year ended September 30,
2007. The increase in net interest income was primarily attributable to a lower
balance of certificates of deposit and FHLB advances made possible by the
Conversion proceeds.
Our net
interest margin increased 18 basis points to 3.21% for the year ended September
30, 2008, from 3.03% for the same period last year. The improvement in the net
interest margin is primarily attributable to the increase in interest earning
assets that resulted from the proceeds of the Conversion completed on December
19, 2007. In
addition,
decreases in interest expense and a shift in the loan portfolio toward higher
yielding commercial loans from residential mortgage loans also contributed to
the increase in the margin in 2008.
The
following table sets forth the results of balance sheet growth and changes in
interest rates to our net interest income. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). Changes attributable to both rate and
volume, which cannot be segregated, are allocated proportionately to the changes
in rate and volume.
|
Year
Ended September 30, 2008
Compared
to September 30, 2007
Increase
(Decrease) Due to
|
|
Rate
|
|
Volume
|
|
Total
|
|
(in
thousands)
|
Interest-earning
assets:
|
|
|
|
|
|
Loans
receivable, net
|
$(1,094)
|
|
$(1,713)
|
|
$(2,807)
|
Loans
held for sale
|
(7)
|
|
(53)
|
|
(60)
|
Investment
securities, including interest-bearing deposits in other
banks
|
(183)
|
|
850
|
|
667
|
Mortgage-backed
securities
|
(142)
|
|
192
|
|
50
|
Federal
Home Loan Bank stock
|
95
|
|
--
|
|
95
|
Total
net change in income on interest-earning assets
|
$(1,331)
|
|
$(724)
|
|
$(2,055)
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
Savings
deposits
|
$ 70
|
|
$ 4
|
|
$ 74
|
Interest-bearing
demand deposits
|
(10)
|
|
(77)
|
|
(87)
|
Money
market accounts
|
(276)
|
|
492
|
|
216
|
Certificates
of deposit
|
(297)
|
|
(1,500)
|
|
(1,797)
|
Total
deposits
|
(513)
|
|
(1,081)
|
|
(1,594)
|
Federal
Home Loan Bank advances
|
258
|
|
(2,065)
|
|
(1,807)
|
Total
net change in expense on interest-bearing liabilities
|
$(255)
|
|
$(3,122)
|
|
$(3,401)
|
Total
increase (decrease) in net interest income
|
|
|
|
|
$1,346
|
Interest and Dividend Income.
Total interest and dividend income for the year ended September 30, 2008
decreased $2.1 million, or 4.8%, to $40.6 million, from $42.6 million for the
same period of the prior year. The decrease during the period was primarily
attributable to the decrease in yield on interest-earning assets to 5.75% from
6.06% in the prior year. This decrease in interest and dividend income is the
result of lower overall interest rates during the current year compared to prior
year. We believe the effect of the shift in the loan portfolio toward commercial
loans from residential mortgage loans, which are lower yielding, helped to
mitigate further declines in interest income.
The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income for the years
ended September 30, 2008 and 2007.
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
Increase/
|
|
Average
Balance
|
|
Yield
|
|
Average
Balance
|
|
Yield
|
|
(Decrease)
in interest and dividend income
|
|
(in
thousands)
|
Loans
receivable, net of deferred fees/costs
|
$477,053
|
|
6.40%
|
|
$503,478
|
|
6.62%
|
|
$(2,807)
|
Loans
held for sale
|
2,811
|
|
6.27
|
|
3,652
|
|
6.46
|
|
(60)
|
Investment
securities, available for sale,
including interest-bearing
deposits in other banks
|
31,996
|
|
3.16
|
|
6,645
|
|
5.19
|
|
667
|
Mortgage-backed
securities
|
184,343
|
|
4.74
|
|
180,309
|
|
4.82
|
|
50
|
FHLB
stock
|
9,591
|
|
1.49
|
|
9,591
|
|
0.50
|
|
95
|
Total
interest-earning assets
|
$705,794
|
|
5.75%
|
|
$703,675
|
|
6.06%
|
|
$(2,055)
|
At
September 30, 2008, approximately 60.6% of our gross loans were adjustable rate,
compared to 56.9% at September 30, 2007. At September 30, 2008, approximately
15.1% of our adjustable-rate loans are tied to the Prime rate, as published in
The Wall Street
Journal.
Interest Expense. Interest
expense decreased $3.4 million, or 15.9%, to $17.9 million for the year ended
September 30, 2008 from $21.3 million for the year ended September 30, 2007. The
decrease was due to both declines in the average balance of total
interest-bearing liabilities and cost of funds to $512.1 million and 3.50% from
$582.9 million and 3.66% for the years ended September 30, 2008 and September
30, 2007, respectively. The decline in interest-bearing liabilities
was concentrated in certificates of deposit and borrowings. Capitalized interest
expense related to the construction of banking offices for the year ending
September 30, 2008, was $24,000.
The
following table details average balances, cost of funds and the change in
interest expense for the year ended September 30, 2008 and 2007:
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
Increase/
|
|
Average
Balance
|
|
Cost
|
|
Average
Balance
|
|
Cost
|
|
(Decrease)
in Interest Expense
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
$24,194
|
|
0.73%
|
|
$23,397
|
|
0.44%
|
|
$ 74
|
Interest-bearing
demand
deposits
|
78,618
|
|
0.61
|
|
91,198
|
|
0.62
|
|
(87)
|
Money
market deposits
|
58,698
|
|
2.44
|
|
39,908
|
|
3.04
|
|
216
|
Certificates
of deposit
|
193,002
|
|
4.45
|
|
226,522
|
|
4.59
|
|
(1,797)
|
FHLB
advances
|
157,549
|
|
4.60
|
|
201,911
|
|
4.49
|
|
(1,807)
|
Total
interest-bearing liabilities
|
$512,061
|
|
3.50%
|
|
$582,936
|
|
3.66%
|
|
$(3,401)
|
Approximately
$133.3 million and $76.9 million of certificates of deposit and FHLB advances,
respectively, are scheduled to mature during fiscal 2009. Treasury rates were
significantly lower at the end of fiscal 2008 compared to the start of the
fiscal year and short-term Treasury bill rates were near historical lows at the
end of the year. However, the current financial crisis has caused rates on FHLB
advances and certificates of deposit to be high compared to historical spreads
above Treasury rates. This widening of spreads is due to depositor concerns
about the stability of financial institutions and investor concerns about the
survivability of Federal Home Loan Banks, thereby
creating
a higher risk premium for deposits and advances. We currently anticipate our
certificates to reprice at rates slightly lower than their current costs, which
would reduce interest expense, but we cannot be certain that lower market and
Treasury rates will necessarily result in lower funding costs in fiscal
2009.
Provision for Loan Losses. A
provision for loan losses of $2.4 million was recorded in connection with our
analysis of losses in the loan portfolio for the year ended September 30, 2008,
compared to a provision for loan losses of $409,000 for the same period of 2007.
The increase in the provision takes into account the increase in classified
assets during fiscal 2008 as well as the current downturn in the real estate
market, internal changes in management and the general economy. We do not
originate or purchase one- to four-family subprime loans or nontraditional
mortgage products with exotic features such as negative amortization or option
payments.
We
consider the allowance for loans losses at September 30, 2008, to be our best
estimate of probable credit losses inherent in the loan portfolio as of that
date based on the assessment of the above-mentioned factors affecting the loan
portfolio. While we believe the estimates and assumptions used in the
determination of the allowance are reasonable, there can be no assurance that
such estimates and assumptions will not be proven incorrect in the future, or
that the actual amount of future provisions will not exceed the amount of past
provisions or that any increased provision that may be required will not
adversely impact our financial condition and results of operations. In addition,
the determination of the amount of our allowance for loan losses is subject to
review by bank regulators, as part of the routine examination process, which may
result in the establishment of additional reserves based upon their judgment of
information available to them at the time of their examination.
The
following table details selected activity associated with the allowance for loan
losses for the years ended September 30, 2008 and 2007:
|
At
or For the Year
Ended
September 30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
Provision
for loan losses
|
$ 2,431
|
|
$ 409
|
Net
charge-offs
|
840
|
|
203
|
Allowance
for loan losses
|
4,579
|
|
2,988
|
Allowance
for loan losses as a percentage of gross
loans receivable at the end of the period
|
0.98%
|
|
0.62%
|
Allowance
for loan losses as a percentage of
nonperforming loans at the end of the period
|
46.04%
|
|
195.17%
|
Nonperforming
loans
|
$ 9,945
|
|
$1,531
|
Nonaccrual
and 90 days or more past due loans as a
percentage of loans receivable at the end of the
period
|
2.16%
|
|
0.32%
|
Loans
receivable, net
|
$459,813
|
|
$480,118
|
Noninterest Income.
Noninterest income decreased $791,000, or 7.0%, to $10.5 million for the year
ended September 30, 2008 from $11.3 million for the year ended September 30,
2007, as the gain on sale of loans decreased $655,000 or 46.2%.
The
following table provides a detailed analysis of the changes in components of
noninterest income:
|
Year
Ended
September
30,
|
|
Increase
/ (Decrease)
|
|
2008
|
|
2007
|
|
Amount
|
|
Percent
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Service
fees and charges
|
$
9,077
|
|
$
9,308
|
|
$
(231)
|
|
(2.5)%
|
Gain
on sale of loans
|
764
|
|
1,419
|
|
(655)
|
|
(46.2)
|
Increase
in cash surrender value
of
bank owned life insurance
|
421
|
|
405
|
|
16
|
|
4.0
|
Loan
servicing fees
|
484
|
|
549
|
|
(65) )
|
|
(11.8)
|
Mortgage
servicing rights, net
|
(340)
|
|
(445)
|
|
105
|
|
23.6
|
Other
|
84
|
|
45
|
|
39
|
|
86.7
|
Total
noninterest income
|
$10,490
|
|
$11,281
|
|
$
(791)
|
|
(7.0)%
|
The
decrease in the gain on sale of loans is a reflection of the significant slowing
in the local residential real estate market as loans originated for sale in the
secondary market declined $51.3 million, or 52.7%, in 2008 compared to fiscal
2007. We undertook an organizational realignment of our mortgage banking
department in the third quarter of 2008 to improve efficiency and reduce
delivery time.
During
fiscal 2008, interchange, debit card and checking account service fee income
increased 3.2% to $8.9 million, while check losses increased $347,000 to
$963,000, offsetting the fee increase. Income from health savings accounts,
which are also reported in service fees and charges, declined $76,000 to
$269,000 during fiscal 2008. Further deterioration in the economy may
result in declines in consumer spending, which may reduce fee income due to the
decline in the number of checking account and debit card
transactions.
As noted
earlier, we entered into an agreement to sell our mortgage servicing rights to
another financial institution. We anticipate this sale will be consummated
during December 2008, which is the first quarter of fiscal 2009. After the sale
is complete, we will no longer receive servicing fee income or amortize the
servicing rights asset. These amounts resulted in net revenue of $144,000 and
$104,000 during 2008 and 2007, respectively.
Noninterest Expense.
Noninterest expense increased $803,000, or 3.4%, to $24.4 million for the year
ended September 30, 2008 from $23.6 million for the year ended September 30,
2007. The efficiency ratio, which is the percentage of noninterest expense to
net interest income plus noninterest income, increased to 73.7% for the year
ended September 30, 2008, compared to 72.5% for the year ended September 30,
2007. By definition, a lower efficiency ratio would be an indication that we are
more efficiently utilizing resources to generate net interest income and other
fee income.
The
following table provides a detailed analysis of the changes in components of
noninterest expense:
|
Year
Ended
September
30,
|
|
Increase
/ (Decrease)
|
|
2008
|
|
2007
|
|
Amount
|
|
Percent
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
$15,211
|
|
$14,249
|
|
$ 962
|
|
6.8%
|
Occupancy
and equipment
|
3,007
|
|
2,871
|
|
136
|
|
4.7
|
Data
processing
|
2,198
|
|
2,097
|
|
101
|
|
4.8
|
Advertising
|
1,043
|
|
1,427
|
|
(384)
|
|
(26.9)
|
Other
|
2,980
|
|
2,992
|
|
(12)
|
|
0.4
|
Total
noninterest expense
|
$24,439
|
|
$23,636
|
|
$ 803
|
|
3.4%
|
Compensation and benefits.
Compensation and benefits increased $962,000 or 6.8% to $15.2 million for the
year ended September 30, 2008 from $14.2 million for the same period a year ago.
The largest factor in the increase was the ESOP. At the completion of the
Conversion in December 2007, additional shares were added to the ESOP and
were the
main contributor to the $435,000 or 54.9% increase in ESOP-related expense for
the year ended September 30, 2008.
We also
hired several commercial lending officers throughout fiscal 2008, with most of
them joining the Company during the fourth quarter of fiscal 2008. However, we
continue to closely monitor personnel costs as we employed 201 full-time
equivalents at September 30, 2008, compared to 223 at September 30, 2007 and 240
at September 30, 2006.
Incentive
compensation totaled $359,000 in 2008 compared to $140,000 in 2007 while
commissions were $190,000 lower in 2008 due to lower loan production. The Board
decided to award a discretionary bonus to non-executive employees in fiscal
2008. The executive officers of the Company, including the end-of-year Chief
Executive Officer and Chief Financial Officer as well as the executive vice
presidents of commercial and consumer banking, did not receive incentive income
during fiscal 2008. The incentive award in fiscal 2007 was lower as no award was
granted on the basis of the Company’s financial performance. Some incentive
compensation was awarded to non-management employees in 2007 related to
individual performance above expectations.
Advertising. Advertising
expense decreased $384,000 or 26.9%. The amount of dollars spent on advertising
dropped for a time coinciding with the portion of the year when the position of
Director of Marketing was vacant. We anticipate advertising expense will
increase slightly in 2009 as we plan to launch three banking offices during the
year – one in October 2008 and two more in the third calendar quarter of 2009 –
and we increase our visibility in the marketplace through various
media.
Occupancy and equipment and data
processing. We anticipate occupancy and equipment and data processing
expenses will increase modestly in fiscal 2009 due to the aforementioned
increase in banking offices. We launched a stand-alone full-service office in
early fiscal 2008 as a replacement for an in-store branch that was
closed.
Other expense. We anticipate a
significant increase in premiums for FDIC insurance during fiscal 2009. While
still in a considerable state of uncertainty, guidance as of September 30, 2008,
implied a 94% increase in the assessment rate applied to insurable deposits for
Home Federal Bank starting in the second fiscal quarter (first calendar quarter)
of 2009. For part of 2008 and most of fiscal 2007, we were able to reduce our
FDIC insurance assessment by a credit provided to nearly all financial
institutions in conjunction with the merger of the Bank Insurance fund and the
Savings Association Insurance Fund into the Deposit Insurance Fund, which is
administered by the FDIC.
As a part
of the federal government’s attempt to strengthen the economic environment, the
FDIC increased the insurable balance of deposits from $100,000 to $250,000 until
December 31, 2009. Additionally, the FDIC will permit institutions to
voluntarily pay a 10 basis points insurance premium in addition to the regular
assessment in order to provide unlimited balance coverage on noninterest-bearing
deposit accounts and interest bearing checking accounts that yield less than
0.50% annually. On December 5, 2008, we elected to continue to participate in
the transaction account guarantee program.
Income Tax Expense. Income tax
expense decreased $1.0 million, or 30.7%, to $2.3 million for the year ended
September 30, 2008 from $3.3 million for the same period a year ago. Income
before income taxes decreased $2.3 million, or 26.6%, to $6.3 million for the
year ended September 30, 2008 compared to $8.5 million for the year ended
September 30, 2007. Our combined federal and state effective income tax rate for
the current period was 36.1% compared to 38.3% for the same period of the prior
year. The decrease was due to both an increase in the net downward adjustment of
book net income before taxes due to book/tax differences to arrive at taxable
net income as well as a decrease in overall book net income before
taxes.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2007, AND SEPTEMBER 30,
2006
General. Net income for the
year ended September 30, 2007 was $5.3 million, or $0.36 per diluted share,
compared to net income of $6.2 million, or $0.43 per diluted share, for the year
ended September 30, 2006.
Net Interest Income. Net
interest income decreased $1.7 million, or 7.4%, to $21.3 million for the year
ended September 30, 2007, from $23.0 million for the year ended September 30,
2006. The decrease in net interest income
was
primarily attributable to a lower net interest margin, despite an overall
increase in average interest-earning assets and interest-bearing liabilities in
2007 versus 2006.
Our net
interest margin decreased 30 basis points to 3.03% for the year ended September
30, 2007, from 3.33% for the same period last year. The cost of interest bearing
liabilities increased 66 basis points to 3.66% for the fiscal year from 3.00%
for the same period of the prior year. The decline in the net interest margin
reflects the relatively flat yield curve that currently exists, as the cost of
shorter-term deposits and borrowed funds increased more rapidly than the yield
on longer-term assets
The
following table sets forth the results of balance sheet growth and changes in
interest rates to our net interest income attributable to changes in rate and
volume:
|
Year
Ended September 30, 2007
Compared
to September 30, 2006
Increase
/ (Decrease) Due to
|
|
|
Rate
|
|
Volume
|
|
Total
|
|
|
(in
thousands)
|
Interest-earning
assets:
|
|
|
|
|
|
|
Loans
receivable, net
|
$1,276
|
|
$2,098
|
|
$ 3,374
|
|
Loans
held for sale
|
11
|
|
(7)
|
|
4
|
|
Investment
securities, including interest-bearing
deposits in other banks
|
30
|
|
175
|
|
205
|
|
Mortgage-backed
securities
|
130
|
|
(1,036)
|
|
(906)
|
|
Federal
Home Loan Bank stock
|
48
|
|
--
|
|
48
|
|
|
|
|
|
|
|
|
Total
net change in income on interest-earning assets
|
$1,495
|
|
$1,230
|
|
$ 2,725
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
Savings
deposits
|
$ 55
|
|
$ (3)
|
|
$ 52
|
|
Interest-bearing
demand deposits
|
137
|
|
(34)
|
|
103
|
|
Money
market accounts
|
519
|
|
161
|
|
680
|
|
Certificates
of deposit
|
2,232
|
|
298
|
|
2,530
|
|
Total
deposits
|
2,943
|
|
422
|
|
3,365
|
|
Federal
Home Loan Bank advances
|
568
|
|
486
|
|
1,054
|
|
Total
net change in expense on interest-bearing
liabilities
|
$3,511
|
|
$ 908
|
|
$ 4,419
|
|
|
|
|
|
|
|
|
Total
increase (decrease) in net interest income
|
|
|
|
|
$(1,694)
|
|
Interest and Dividend Income.
Total interest and dividend income for the year ended September 30, 2007
increased $2.7 million, or 6.8%, to $42.6 million, from $39.9 million for the
same period of the prior year. The increase during the period was primarily
attributable to the $14.0 million, or 2.0%, increase in the average balance of
interest-earning assets and an increase in the yield on interest-earning assets
to 6.06% from 5.79% as a result of the general increase in interest rates and
changes in our loan portfolio mix.
The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income for the years
ended September 30, 2007 and 2006.
|
Year
Ended September 30,
|
|
2007
|
|
2006
|
|
Increase/
|
|
Average
Balance
|
|
Yield
|
|
Average
Balance
|
|
Yield
|
|
(Decrease)
in Interest and Dividend Income from 2006
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net of deferred fees/costs
|
$503,478
|
|
6.62%
|
|
$471,291
|
|
6.35%
|
|
$ 3,374
|
Loans
held for sale
|
3,652
|
|
6.46
|
|
3,771
|
|
6.15
|
|
4
|
Investment
securities, available for sale, including interest-bearing deposits in
other banks
|
6,645
|
|
5.19
|
|
3,197
|
|
4.38
|
|
205
|
Mortgage-backed
securities
|
180,309
|
|
4.82
|
|
201,838
|
|
4.76
|
|
(906)
|
FHLB
stock
|
9,591
|
|
0.50
|
|
9,591
|
|
--
|
|
48
|
Total
interest-earning assets
|
$703,675
|
|
6.06%
|
|
$689,688
|
|
5.79%
|
|
$ 2,725
|
Interest Expense. Interest
expense increased $4.4 million, or 26.1%, to $21.3 million for the year ended
September 30, 2007 from $16.9 million for the year ended September 30, 2006. The
average balance of total interest-bearing liabilities increased $19.1 million,
or 3.4%, to $582.9 million for the year ended September 30, 2007 from $563.8
million for the year ended September 30, 2006. The increase was primarily a
result of growth in certificates of deposit, money market accounts, and
additional FHLB advances. As a result of general market rate increases, the
average cost of funds for total interest-bearing liabilities increased 66 basis
points to 3.66% for the year ended September 30, 2007 compared to 3.00% for the
year ended September 30, 2006.
The
following table details average balances, cost of funds and the change in
interest expense for the year ended September 30, 2007 and 2006:
|
Year
Ended September 30,
|
|
2007
|
|
2006
|
|
Increase/
|
|
Average
Balance
|
|
Cost
|
|
Average
Balance
|
|
Cost
|
|
(Decrease)
in Interest Expense from 2006
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
$23,397
|
|
0.44%
|
|
$24,863
|
|
0.21%
|
|
$ 52
|
Interest-bearing
demand
deposits
|
91,198
|
|
0.62
|
|
97,916
|
|
0.48
|
|
103
|
Money
market deposits
|
39,908
|
|
3.04
|
|
31,875
|
|
1.68
|
|
680
|
Certificates
of deposit
|
226,522
|
|
4.59
|
|
218,496
|
|
3.60
|
|
2,530
|
FHLB
advances
|
201,911
|
|
4.49
|
|
190,684
|
|
4.20
|
|
1,054
|
Total
interest-bearing liabilities
|
$582,936
|
|
3.66%
|
|
$563,834
|
|
3.00%
|
|
$ 4,419
|
Provision for Loan Losses. A
provision for loan losses of $409,000 was recorded by management in connection
with its analysis of the loan portfolio for the year ended September 30, 2007,
compared to a provision for loan losses of $138,000 recorded for the same period
of 2006. The $271,000 increase in the provision takes into account increased
activity within classified assets as well as the current downturn in the real
estate market.
Prior to
March 31, 2007, the allowance for loan losses included the estimated loss from
unfunded loan commitments. The preferred accounting method is to separate the
unfunded loan commitments from the disbursed loan amounts and record the
unfunded loan commitment portion as a liability. At September 30, 2007, the
reserve for unfunded loan commitments was $138,000, which was included in other
liabilities on the Consolidated Balance Sheet. Combining the $138,000 liability
for unfunded commitments with the allowance for loan losses provides an
allowance of $3.1 million, or 0.65% of gross loans at September 30, 2007,
compared to $3.0 million, or 0.59% at September 30, 2006.
The
following table details selected activity associated with the allowance for loan
losses for the years ended September 30, 2007 and 2006.
|
At
or For the Year
Ended
September 30,
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
|
|
|
Provision
for loan losses
|
$ 409
|
|
$ 138
|
Net
charge-offs
|
203
|
|
46
|
Allowance
for loan losses
|
2,988
|
|
2,974
|
Allowance
for loan losses as a percentage of gross
loans receivable at the end of the period
|
0.62%
|
|
0.59%
|
Allowance
for loan losses as a percentage of
nonperforming loans at the end of the period
|
195.17%
|
|
766.49%
|
Nonperforming
loans
|
$ 1,531
|
|
$ 388
|
Nonaccrual
and 90 days or more past due loans as a
percentage of loans receivable at the end of the period
|
0.32%
|
|
0.08%
|
Loans
receivable, net
|
$480,118
|
|
$503,065
|
Noninterest Income.
Noninterest income increased $80,000, or 0.7%, to $11.3 million for the year
ended September 30, 2007 from $11.2 million for the year ended September 30,
2006. While overall noninterest income was flat, gain on sale of loans increased
$363,000 or 34.4%. This increase in noninterest income was offset by
a $266,000 or 148.6% decrease in the value of the mortgage servicing
asset. We currently sell a majority of the one-to four-family residential loans
we originate. For the year ended September 30, 2006, a larger percentage of the
residential mortgage loans originated were held in the loan portfolio. For the
year ended September 30, 2007 we had a $150,000 write down of the value of the
mortgage servicing rights.
The
following table provides a detailed analysis of the changes in components of
noninterest income:
|
Year
Ended
September
30,
|
|
Increase
/ (Decrease)
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Service
fees and charges
|
$9,308
|
|
$9,384
|
|
$ (76)
|
|
(0.8)%
|
Gain
on sale of loans
|
1,419
|
|
1,056
|
|
363
|
|
34.4
|
Increase
in cash surrender value
of bank owned life insurance
|
405
|
|
383
|
|
22
|
|
5.7
|
Loan
servicing fees
|
549
|
|
620
|
|
(71) )
|
|
(11.5)
|
Mortgage
servicing rights, net
|
(445)
|
|
(179)
|
|
(266)
|
|
(148.6)
|
Other
|
45
|
|
(63)
|
|
108
|
|
171.4
|
Total
noninterest income
|
$11,281
|
|
$11,201
|
|
$ 80
|
|
0.7%
|
Noninterest Expense.
Noninterest expense decreased $401,000, or 1.7%, to $23.6 million for the year
ended September 30, 2007 from $24.0 million for the year ended September 30,
2006.
The
following table provides a detailed analysis of the changes in components of
noninterest expense.
|
Year
Ended
September
30,
|
|
Increase
/ (Decrease)
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
$14,249
|
|
$15,081
|
|
$(832)
|
|
(5.5)%
|
Occupancy
and equipment
|
2,871
|
|
2,759
|
|
112
|
|
4.1
|
Data
processing
|
2,097
|
|
1,802
|
|
295
|
|
16.4
|
Advertising
|
1,427
|
|
986
|
|
441
|
|
44.7
|
Other
|
2,992
|
|
3,409
|
|
(417)
|
|
(12.2)
|
Total
noninterest expense
|
$23,636
|
|
$24,037
|
|
$(401)
|
|
(1.7)%
|
Compensation
and benefits decreased $832,000 or 5.5% to $14.2 million for the year ended
September 30, 2007 from $15.1 million for the same period a year ago. The
decrease was primarily attributable to a decreased incentive payout in the
current year. In addition, full-time equivalent employees have decreased from
240 as of September 30, 2006 to 223 as of September 30, 2007. Advertising costs
increased $441,000 or 44.7%, primarily as a result of marketing costs related to
a debit card rewards program and a business banking campaign that were initiated
during the current fiscal year. Other noninterest expenses decreased $417,000
primarily as a result of costs incurred in the prior fiscal year related to the
conversion of the core processing system and professional costs associated with
the initial year of Sarbanes-Oxley compliance.
Our
efficiency ratio was 72.5% for the year ended September 30, 2007 compared to
70.3% for the year ended September 30, 2006. The increase in efficiency ratio
was primarily attributable to a $1.7 million, or 7.4% decrease in net interest
income.
Income Tax Expense. Income tax
expense decreased $543,000, or 14.3%, to $3.3 million for the year ended
September 30, 2007 from $3.8 million for the same period a year ago. Income
before income taxes decreased $1.5 million, or 14.8%, to $8.5 million for the
year ended September 30, 2007 compared to $10.0 million for the year ended
September 30, 2006. Our combined federal and state effective income tax rate for
the current period was 38.3% compared to 38.0% for the same period of the prior
year.
AVERAGE
BALANCES, INTEREST AND AVERAGE YIELDS/COST
The
following table sets forth for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin, and the ratio of average interest-earning assets to average
interest-bearing liabilities. Average balances have been calculated using the
average of daily balances during the period. Interest and dividends are reported
on a tax-equivalent basis. During the time periods presented, we did not own any
tax-exempt investment securities.
|
Year
Ended September 30,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
Average
Balance
|
|
Interest
And
Dividends
|
|
Yield/
Cost
|
|
Average
Balance
|
|
Interest
And
Dividends
|
|
Yield/
Cost
|
|
Average
Balance
|
|
Interest
And
Dividends
|
|
Yield/
Cost
|
|
|
(in
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net (1)
|
$477,053
|
|
$30,510
|
|
6.40%
|
|
$503,478
|
|
$
33,317
|
|
6.62%
|
|
$471,291
|
|
$29,943
|
|
6.35%
|
|
Loans
held for sale
|
2,811
|
|
176
|
|
6.26
|
|
3,652
|
|
236
|
|
6.46
|
|
3,771
|
|
232
|
|
6.15
|
|
Investment
securities,
including interest-
bearing deposits in other
banks
|
31,996
|
|
1,012
|
|
3.16
|
|
6,645
|
|
345
|
|
5.19
|
|
3,197
|
|
140
|
|
4.38
|
|
Mortgage-backed
securities
|
184,343
|
|
8,742
|
|
4.74
|
|
180,309
|
|
8,692
|
|
4.82
|
|
201,838
|
|
9,598
|
|
4.76
|
|
FHLB
stock
|
9,591
|
|
143
|
|
1.49
|
|
9,591
|
|
48
|
|
0.50
|
|
9,591
|
|
--
|
|
--
|
|
Total
interest-earning
assets
|
705,794
|
|
$40,583
|
|
5.75%
|
|
703,675
|
|
$
42,638
|
|
6.06%
|
|
689,688
|
|
$39,913
|
|
5.79%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
earning assets
|
38,627
|
|
|
|
|
|
38,672
|
|
|
|
|
|
38,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$744,421
|
|
|
|
|
|
$742,347
|
|
|
|
|
|
$727,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
$24,194
|
|
$177
|
|
0.73%
|
|
$ 23,397
|
|
$ 103
|
|
0.44%
|
|
$ 24,863
|
|
$ 51
|
|
0.21%
|
|
Interest-bearing
demand
deposits
|
78,618
|
|
482
|
|
0.61
|
|
91,198
|
|
569
|
|
0.62
|
|
97,916
|
|
466
|
|
0.48
|
|
Money
market accounts
|
58,698
|
|
1,430
|
|
2.44
|
|
39,908
|
|
1,214
|
|
3.04
|
|
31,875
|
|
534
|
|
1.68
|
|
Certificates
of deposit
|
193,002
|
|
8,596
|
|
4.45
|
|
226,522
|
|
10,393
|
|
4.59
|
|
218,496
|
|
7,863
|
|
3.60
|
|
Total
deposits
|
354,512
|
|
10,685
|
|
3.01
|
|
381,025
|
|
12,279
|
|
3.22
|
|
373,150
|
|
8,914
|
|
2.39
|
|
FHLB
advances
|
157,549
|
|
7,250
|
|
4.60
|
|
201,911
|
|
9,057
|
|
4.49
|
|
190,684
|
|
8,003
|
|
4.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing
liabilities
|
512,061
|
|
$17,935
|
|
3.50%
|
|
582,936
|
|
$21,336
|
|
3.66%
|
|
563,834
|
|
$16,917
|
|
3.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities
|
46,725
|
|
|
|
|
|
48,493
|
|
|
|
|
|
58,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
558,786
|
|
|
|
|
|
631,429
|
|
|
|
|
|
622,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
185,635
|
|
|
|
|
|
110,918
|
|
|
|
|
|
105,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
$744,421
|
|
|
|
|
|
$742,347
|
|
|
|
|
|
$727,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
$22,648
|
|
|
|
|
|
$21,302
|
|
|
|
|
|
$22,996
|
|
|
|
Interest
rate spread
|
|
|
2.25%
|
|
|
|
|
|
2.40%
|
|
|
|
|
|
2.79%
|
|
|
|
Net
interest margin (2)
|
|
|
3.21
|
|
|
|
|
|
3.03
|
|
|
|
|
|
3.33
|
|
|
|
Ratio
of average interest-
earning assets to average
interest-bearing liabilities
|
|
|
137.83
|
|
|
|
|
|
120.71
|
|
|
|
|
|
122.32
|
|
|
|
________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Non-accrual
loans are included in the average balance. Loan fees are included in
interest income on loans and are
insignificant.
|
(2)
|
Net
interest margin, otherwise known as yield on interest earning assets, is
calculated as net interest income divided by average interest-earning
assets.
|
The
following table sets forth (on a consolidated basis) for the periods and at the
dates indicated, the weighted average yields earned on our assets, the weighted
average interest rates paid on our liabilities, together with the net yield on
interest-earning assets.
|
At
September
30,
|
|
Year
Ended September 30,
|
|
2008
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
Weighted
average yield on:
|
|
|
|
|
|
|
|
Loans
receivable, net
|
6.26%
|
|
6.40%
|
|
6.62%
|
|
6.35%
|
Loans
held for sale
|
6.15
|
|
6.26
|
|
6.46
|
|
6.15
|
Investment
securities, including
interest-bearing deposits in other
banks
|
1.62
|
|
3.16
|
|
5.19
|
|
4.38
|
Mortgage-backed
securities
|
4.68
|
|
4.74
|
|
4.82
|
|
4.76
|
Federal
Home Loan Bank stock
|
1.49
|
|
1.49
|
|
0.50
|
|
--
|
Total
interest-earning assets
|
5.62
|
|
5.75
|
|
6.06
|
|
5.79
|
|
|
|
|
|
|
|
|
Weighted
average rate paid on:
|
|
|
|
|
|
|
|
Savings
deposits
|
0.84
|
|
0.73
|
|
0.44
|
|
0.21
|
Interest-bearing
demand deposits
|
0.54
|
|
0.61
|
|
0.62
|
|
0.48
|
Money
market accounts
|
1.63
|
|
2.44
|
|
3.04
|
|
1.68
|
Certificates
of deposit
|
3.77
|
|
4.45
|
|
4.59
|
|
3.60
|
Total
deposits
|
2.46
|
|
3.01
|
|
3.22
|
|
2.39
|
Federal
Home Loan Bank advances
|
4.68
|
|
4.60
|
|
4.49
|
|
4.20
|
Total
interest-bearing liabilities
|
3.11
|
|
3.50
|
|
3.66
|
|
3.00
|
|
|
|
|
|
|
|
|
Interest
rate spread (spread between
weighted average rate on all interest-
earning assets and all interest-bearing
liabilities)
|
2.51
|
|
2.25
|
|
2.40
|
|
2.79
|
|
|
|
|
|
|
|
|
Net
interest margin (net interest income
(expense) as a percentage of average
interest-earning assets)
|
N/A
|
|
3.21
|
|
3.03
|
|
3.33
|
|
|
|
|
|
|
|
|
RATE/VOLUME
ANALYSIS
The
following table sets forth the effects of changing rates and volumes on our net
interest income. Information is provided with respect to: (1) effects on
interest income attributable to changes in volume (changes in volume multiplied
by prior rate); and (2) effects on interest income attributable to changes in
rate (changes in rate multiplied by prior volume). Changes attributable to both
rate and volume, which cannot be segregated, are allocated proportionately to
the changes in rate and volume.
|
Year
Ended September 30, 2008
Compared
to Year Ended
September
30, 2007
Increase
(Decrease) Due to
|
|
Year
Ended September 30, 2007
Compared
to Year Ended
September
30, 2006
Increase
(Decrease) Due to
|
|
Rate
|
|
Volume
|
|
Total
|
|
Rate
|
|
Volume
|
|
Total
|
|
(in
thousands)
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
$
(1,094)
|
|
$(1,713)
|
|
$(2,807)
|
|
$1,276
|
|
$2,098
|
|
$3,374
|
Loans
held for sale
|
(7)
|
|
(53)
|
|
(60)
|
|
11
|
|
(7)
|
|
4
|
Investment
securities, including
interest-bearing deposits in other
banks
|
(183)
|
|
850
|
|
667
|
|
30
|
|
175
|
|
205
|
Mortgage-backed
securities
|
(142)
|
|
192
|
|
50
|
|
130
|
|
(1,036)
|
|
(906)
|
Federal
Home Loan Bank stock
|
95
|
|
--
|
|
95
|
|
48
|
|
--
|
|
48
|
Total
net change in income on interest-
earning assets
|
$(1,331)
|
|
$(724)
|
|
$(2,055)
|
|
$1,495
|
|
$1,230
|
|
$2,725
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
$ 70
|
|
$ 4
|
|
$ 74
|
|
$ 55
|
|
$ (3)
|
|
$ 52
|
Interest-bearing
demand deposits
|
(10)
|
|
(77)
|
|
(87)
|
|
137
|
|
(34)
|
|
103
|
Money
market accounts
|
(276)
|
|
492
|
|
216
|
|
519
|
|
161
|
|
680
|
Certificates
of deposit
|
(297)
|
|
(1,500)
|
|
(1,797)
|
|
2,232
|
|
298
|
|
2,530
|
Total
deposits
|
(513)
|
|
(1,081)
|
|
(1,594)
|
|
2,943
|
|
422
|
|
3,365
|
Federal
Home Loan Bank advances
|
258
|
|
(2,065)
|
|
(1,807)
|
|
568
|
|
486
|
|
1,054
|
Total
net change in expense on
interest-bearing liabilities
|
$(255)
|
|
$(3,122)
|
|
$(3,401)
|
|
$3,511
|
|
$908
|
|
$4,419
|
Total
increase (decrease) in net
interest income
|
|
|
|
|
$1,346
|
|
|
|
|
|
$(1,694)
|
Interest
expense for the year ended September 30, 2008 was reduced by $24,000. This
amount represents that portion of interest attributed to borrowings related to
construction of branches.
ASSET
AND LIABILITY MANAGEMENT AND MARKET RISK
General.
Our Board of Directors has established an asset and liability management
policy to guide management in maximizing net interest rate spread by managing
the differences in terms between interest-earning assets and interest-bearing
liabilities while maintaining acceptable levels of liquidity, capital adequacy,
interest rate sensitivity, changes in net interest income, credit risk and
profitability. The policy includes the use of an Asset Liability Management
Committee whose members include certain members of senior management. The
Committee’s purpose is to communicate, coordinate and manage our asset/liability
positions consistent with our business plan and Board-approved policies, as well
as to price savings and lending products, and to develop new
products.
The Asset
Liability Management Committee meets to review various areas
including:
§
|
interest
rate risk sensitivity;
|
§
|
change
in net interest income
|
§
|
current
market opportunities to promote specific
products;
|
§
|
historical
financial results;
|
§
|
projected
financial results; and
|
The
Committee also reviews current and projected liquidity needs. As part of its
procedures, the Asset Liability Management Committee regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and market value of portfolio equity, which is defined as
the net present value of an institution’s existing assets, liabilities and
off-balance sheet instruments, and evaluating such impacts against the maximum
potential change in market value of portfolio equity that is authorized by the
Board of Directors.
Our
Risk When Interest Rates Change. The rates of interest we earn on assets
and pay on liabilities generally are established contractually for a period of
time. Market interest rates change over time. Our loans generally have longer
maturities than our deposits. Accordingly, our results of operations, like those
of other financial institutions, are impacted by changes in interest rates and
the interest rate sensitivity of our assets and liabilities. The risk associated
with changes in interest rates and our ability to adapt to these changes is
known as interest rate risk and is our most significant market
risk.
In recent
years, we primarily have utilized the following strategies in our efforts to
manage interest rate risk:
§
|
we
have increased our originations of shorter term loans and particularly,
construction and land development loans and home equity
loans;
|
§
|
we
have structured our borrowings with maturities that match fund our loan
and investment portfolios;
|
§
|
we
have attempted, where possible, to extend the maturities of our deposits
which typically fund our long-term assets;
and
|
§
|
we
have invested in securities with relatively short anticipated lives,
generally three to five years.
|
How We
Measure the Risk of Interest Rate Changes. We measure our interest rate
sensitivity on a quarterly basis utilizing an internal model. Management uses
various assumptions to evaluate the sensitivity of our operations to changes in
interest rates. Although management believes these assumptions are reasonable,
the interest rate sensitivity of our assets and liabilities on net interest
income and the market value of portfolio equity could vary substantially if
different assumptions were used or actual experience differs from such
assumptions. The assumptions we use are based upon proprietary and market data
and reflect historical results and current market conditions. These assumptions
relate to interest rates, prepayments, deposit decay rates and the market value
of certain assets under the various interest rate scenarios. An independent
service was used to provide market rates of interest and certain interest rate
assumptions to determine prepayments and maturities of loans, investments and
borrowings. Time deposits are modeled to reprice to market rates upon their
stated maturities. We assumed that non-maturity deposits can be maintained with
rate adjustments not directly proportionate to the change in market interest
rates. Our historical deposit decay rates were used, which are substantially
lower than market decay rates. In the past, we have demonstrated that the
tiering structure of our deposit accounts during changing rate environments
results in relatively low volatility and less than market rate changes in our
interest expense for deposits. Our deposit
accounts
are tiered by balance and rate, whereby higher balances within an account earn
higher rates of interest. Therefore, deposits that are not very rate sensitive
(generally, lower balance tiers) are separated from deposits that are rate
sensitive (generally, higher balance tiers).
When
interest rates rise, we generally do not have to raise interest rates
proportionately on less rate sensitive accounts to retain these deposits. These
assumptions are based upon an analysis of our customer base, competitive factors
and historical experience. The following table shows the change in our net
portfolio value at September 30, 2008, that would occur upon an immediate change
in interest rates based on our assumptions, but without giving effect to any
steps that we might take to counteract that change. The net portfolio value is
calculated based upon the present value of the discounted cash flows from assets
and liabilities. The difference between the present value of assets and
liabilities is the net portfolio value and represents the market value of equity
for the given interest rate scenario. Net portfolio value is useful for
determining, on a market value basis, how much equity changes in response to
various interest rate scenarios. Large changes in net portfolio value reflect
increased interest rate sensitivity and generally more volatile earnings
streams.
|
|
Net
Portfolio Value (“NPV”)
|
|
Net
Portfolio as % of
Portfolio
Value of Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis
Point
Change
in Rates
|
|
Amount
|
|
$
Change (1)
|
|
%
Change
|
|
NPV
Ratio (2)
|
|
%
Change (3)
|
|
Asset
Market Value
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
$
139,363
|
|
$(25,218)
|
|
(15.32)%
|
|
21.87%
|
|
(2.16)%
|
|
$637,370
|
200
|
|
147,720
|
|
(16,861)
|
|
(10.24)
|
|
22.63
|
|
(1.40)
|
|
652,691
|
100
|
|
155,716
|
|
(8,865)
|
|
(5.39)
|
|
23.30
|
|
(0.73)
|
|
668,436
|
Base
|
|
164,581
|
|
--
|
|
--
|
|
24.03
|
|
--
|
|
684,816
|
-100
|
|
171,971
|
|
7,390
|
|
4.49
|
|
24.57
|
|
.54
|
|
699,988
|
-200
|
|
172,929
|
|
8,348
|
|
5.07
|
|
24.36
|
|
.33
|
|
709,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Shock
NPV Ratio
|
|
|
|
|
|
24.03
|
|
|
|
|
Post-Shock
NPV Ratio
|
|
|
|
|
|
22.63
|
|
|
|
|
Static
Sensitivity Measure – decline in NPV Ratio
|
|
|
|
1.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
Maximum
|
|
|
|
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________
(1)
|
Represents
the increase (decrease) of the estimated net portfolio value at the
indicated change in interest rates compared to the base net portfolio
value.
|
(2)
|
Calculated
as the estimated net portfolio value divided by the portfolio value of
total assets.
|
(3)
|
Calculated
as the increase (decrease) of the net portfolio value ratio assuming the
indicated change in interest rates over the base net portfolio value
ratio.
|
The
following table illustrates the change in net interest income at September 30,
2008, that would occur in the event of an immediate change in interest rates,
but without giving effect to any steps that might be taken to counter the effect
of that change in interest rates.
Basis
Point
|
|
Net
Interest Income
|
Change
in Rates
|
|
Amount
|
|
$
Change (1)
|
|
%
Change
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
300
|
|
$22,718
|
|
$ (398)
|
|
(1.72)%
|
200
|
|
22,893
|
|
(222)
|
|
(0.96)
|
100
|
|
23,008
|
|
(107)
|
|
(0.46)
|
Base
|
|
23,115
|
|
--
|
|
Base
|
-100
|
|
23,557
|
|
442
|
|
1.91
|
-200
|
|
22,656
|
|
(459)
|
|
(1.99)
|
________
(1)
|
Represents
the decrease of the estimated net interest income at the indicated change
in interest rates compared to net interest income assuming no change in
interest rates.
|
We use
certain assumptions in assessing our interest rate risk. These assumptions
relate to interest rates, loan prepayment rates, deposit decay rates and the
market values of certain assets under differing interest rate scenarios, among
others. The table above also includes projected balances for loans and deposits,
actual results for which may be materially different from those
estimates.
As with
any method of measuring interest rate risk, shortcomings are inherent in the
method of analysis presented in the foregoing tables. For example, although
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in the market interest rates. Also,
the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable rate mortgage loans, have features that restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, if interest
rates change, expected rates of prepayments on loans and early withdrawals from
certificates of deposit could deviate significantly from those assumed in
calculating the table.
LIQUIDITY
AND COMMITMENTS
We are
required to have sufficient cash flow in order to maintain liquidity to ensure a
safe and sound operation. Historically, we have maintained cash flow above the
minimum level believed to be adequate to meet the requirements of normal
operations, including potential deposit outflows. On a quarterly basis, we
review and update cash flow projections to ensure that adequate liquidity is
maintained.
Our
primary sources of funds are from customer deposits, loan repayments, loan
sales, maturing investment securities and advances from the Federal Home Loan
Bank of Seattle. These funds, together with retained earnings and equity, are
used to make loans, acquire investment securities and other assets, and fund
continuing operations. While maturities and the scheduled amortization of loans
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by the level of interest rates, economic conditions and
competition. We believe that our current liquidity position is sufficient to
fund all of our existing commitments.
Liquidity
management is both a daily and long-term function of business management. Excess
liquidity is generally invested in short-term investments such as overnight
deposits or mortgage-backed securities. On a longer-term basis, we maintain a
strategy of investing in loans. At September 30, 2008, the total approved loan
origination commitments outstanding amounted to $18.7 million. At the same date,
unused lines of credit were $41.8 million.
We use
our sources of funds primarily to meet ongoing commitments, to pay maturing
certificates of deposit and savings withdrawals, to fund loan commitments and to
maintain our portfolio of mortgage-backed securities and investment
securities.
Certificates
of deposit scheduled to mature in one year or less at September 30, 2008,
totaled $133.3 million, which represented 75.2% of our certificates of deposit
portfolio at September 30, 2008. Management’s policy is to generally maintain
deposit rates at levels that are competitive with other local financial
institutions. Historically, the Bank has been able to retain a significant
amount of deposits as they mature. However, recent disruptions in the credit
markets have resulted in a highly price-competitive market for certificates of
deposit. These rates currently exceed alternative costs of borrowings and are
high compared to historical spreads to U.S. Treasury note rates. Additionally,
since loan demand has slowed in 2008, Management has been reluctant to offer
rates in excess of wholesale borrowing costs. This has resulted in some deposit
runoff as customers are moving their maturing balances to competitors at a
higher pace than the Bank has historically experienced. Nonetheless, management
believes the Company has adequate resources to fund all loan commitments through
FHLB advances, loan repayments, maturing investment securities, and the sale of
mortgage loans in the secondary markets. We had the ability at September 30,
2008, to borrow an additional $133.4 million from the Federal Home Loan Bank of
Seattle and $10.0 million thorough a federal funds purchased facility with our
correspondent bank. We are also approved at the Discount Window of the Federal
Reserve Bank of San Francisco and could use that facility as a funding source to
meet commitments and for liquidity purposes.
We
measure our liquidity based on our ability to fund our assets and to meet
liability obligations when they come due. Liquidity (and funding) risk occurs
when funds cannot be raised at reasonable prices, or in a reasonable time
frame, to
meet our normal or unanticipated obligations. We regularly monitor the mix
between our assets and our liabilities to manage effectively our liquidity and
funding requirements.
Our
primary source of funds is our deposits. When deposits are not available to
provide the funds for our assets, we use alternative funding sources. These
sources include, but are not limited to: cash management from the Federal Home
Loan Bank of Seattle, wholesale funding, brokered deposits, federal funds
purchased and dealer repurchase agreements, as well as other short-term
alternatives. Alternatively, we may also liquidate assets to meet our funding
needs.
We are
highly dependent on the FHLB of Seattle to provide the primary source of
wholesale funding for immediate liquidity and borrowing needs. The
failure of the FHLB of Seattle, or the FHLB system in general, may materially
impair our ability to meet our growth plans or to meet short and long term
liquidity demands. However, our mortgage backed securities are
marketable and could be sold to obtain cash to meet liquidity demands should our
access to FHLB funding be impaired.
We do not
originate loans under a forward commitment with investors in the secondary
market. Many financial institutions encountered liquidity impairment as loans
that they securitized for resale were met with an abrupt absence of purchasers.
As a result, cash flow was restricted and caused significant contraction in
liquidity. Should we encounter a reduction in demand for loans in the secondary
market, we can simply discontinue the origination of such loans.
CONTRACTUAL
OBLIGATIONS
Through
the normal course of operations, we have entered into certain contractual
obligations. Our obligations generally relate to funding of operations through
deposits and borrowings as well as leases for premises. Lease terms generally
cover a five-year period, with options to extend, and are
non-cancelable.
At
September 30, 2008, scheduled maturities of contractual obligations were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Within
1
Year
|
|
After
1 year
through
3
Years
|
|
After
3
through
5
Years
|
|
Beyond
|
|
Total
Balance
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
$133,323
|
|
$ 33,452
|
|
$10,454
|
|
$ 175
|
|
$177,404
|
Federal
Home Loan Bank advances
|
76,882
|
|
23,290
|
|
33,800
|
|
3,000
|
|
136,972
|
Operating
leases
|
474
|
|
639
|
|
203
|
|
1,676
|
|
2,992
|
Total
contractual obligations
|
$210,679
|
|
$ 57,381
|
|
$44,457
|
|
$4,851
|
|
$317,368
|
OFF-BALANCE
SHEET ARRANGEMENTS
We are
party to financial instruments with off-balance sheet risk in the normal course
of business in order to meet the financing needs of our customers. These
financial instruments generally include commitments to originate mortgage,
commercial and consumer loans, and involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. Our maximum exposure to credit loss in the event of nonperformance by the
borrower is represented by the contractual amount of those instruments. Because
some commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. We use the same
credit policies in making commitments as we do for on-balance sheet instruments.
Collateral is not required to support commitments.
Undisbursed
balances of loans closed include funds not disbursed but committed for
construction projects. Unused lines of credit include funds not disbursed, but
committed to, home equity, commercial and consumer lines of credit.
Commercial letters of credit are
conditional commitments issued by us to guarantee the performance of a customer
to a third party. Those guarantees are primarily used to support public and
private borrowing arrangements. The
credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers. Collateral is required in instances where we deem it
necessary.
The
following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of September 30, 2008:
|
Contract
or
Notional
Amount
|
|
(in
thousands)
|
Commitments
to originate loans:
|
|
Fixed
rate
|
$ 6,768
|
Adjustable
rate
|
11,924
|
Undisbursed
balance of loans closed
|
8,197
|
Unused
lines of credit
|
42,470
|
Total
|
$ 69,359
|
CAPITAL
Consistent
with our goal to operate a sound and profitable financial organization, we
actively seek to maintain a “well capitalized” institution in accordance with
regulatory standards. Home Federal Bank’s total equity capital was $146.1
million at September 30, 2008, or 21.6%, of total assets on that date. As of
September 30, 2008, we exceeded all regulatory capital requirements. Our
regulatory capital ratios at September 30, 2008 were as follows: Tier 1 capital
21.7%; Tier 1 (core) risk-based capital 32.2%; and total risk-based capital
32.8%. The regulatory capital requirements to be considered well capitalized are
5%, 6% and 10%, respectively. See “How We Are Regulated – Regulation and
Supervision of Home Federal Bank – Capital Requirements” and Note 13 to the
Consolidated Financial Statements under Item 8 to this Annual Report on Form
10-K.
In
December 2007, we raised $87.8 million of proceeds from the sale of common stock
through the Conversion. We did not apply for government assistance through the
Capital Purchase Program under the U.S. Treasury Department’s Troubled Asset
Relief Program (“TARP”). We believe our high capital level and liquid balance
sheet provides us flexibility in today's environment to execute our growth plans
without TARP capital.
IMPACT
OF INFLATION AND CHANGING PRICES
The
Consolidated Financial Statements and related financial data presented herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America. These principles generally require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. The primary impact of inflation is
reflected in the increased cost of our operations. As a result, interest rates
generally have a more significant impact on a financial institution’s
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services. In a period of rapidly rising interest rates, the liquidity
and maturity structures of our assets and liabilities are critical to the
maintenance of acceptable performance levels.
The
principal effect of inflation on earnings, as distinct from levels of interest
rates, is in the area of noninterest expense. Expense items such as employee
compensation, employee benefits and occupancy and equipment costs may be subject
to increases as a result of inflation. An additional effect of inflation is the
possible increase in dollar value of the collateral securing loans that we have
made. Our management is unable to determine the extent, if any, to which
properties securing loans have appreciated in dollar value due to
inflation.
Deflation,
or a decrease in overall prices from one period to the next, could have a
negative impact on the Company’s operations and financial condition.
Deflationary periods impute a higher borrowing cost to debtors as
the
purchasing power of a dollar increases with time. This may decrease the demand
for loan products offered by the Bank.
Inflation
also indirectly impacts the Company through the pressure it may place on
consumer and commercial borrowers. As commodity prices rose rapidly during late
calendar 2007 and for most of calendar year 2008, national delinquency rates on
loans increased as the cost of gasoline and food significantly eroded disposable
income available to consumers. As a result, they were unable to service their
debt obligations as a greater share of their income was used to meet ordinary
daily expenditures.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board issued SFAS No. 157,
“Fair Value Measurements.” The statement provides enhanced guidance for
measuring assets and liabilities using fair value and applies whenever other
standards require or permit assets or liabilities to be measured at fair value.
SFAS No. 157 also requires expanded disclosure of items that are measured at
fair value, the information used to measure fair value, and the effect of fair
value measurements on earnings. The Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and is not
expected to have a significant impact on our consolidated financial condition or
results of operations.
On
February 15, 2007, the Financial Accounting Standards Board issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities.” The
statement permits entities to choose to measure selected financial assets and
liabilities at fair value, with changes in fair value recorded in earnings. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge
accounting provisions. The statement is effective as of the beginning of an
entity’s first fiscal year beginning after November 15, 2007 and is not expected
to have a significant impact on our consolidated financial condition or results
of operations. An entity may elect to early adopt as of the beginning of a
fiscal year that begins on or before November 15, 2007.
In
December 2007, the FASB issued SFAS No. 141 (Revised), Business
Combinations. SFAS No. 141(R) establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and the goodwill
acquired. The standard also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
The
information contained under “Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset and Liability Management
and Market Risk” of this Annual Report on Form 10-K is incorporated herein by
reference.
Item 8. Financial Statements and
Supplementary Data
Index
to Consolidated Financial Statements
|
|
Page
# |
|
|
|
Management’s
Annual Report on Internal Control Over Financial Reporting |
|
83 |
|
|
|
Report
of Independent Registered Public Accounting Firm |
|
84 |
|
|
|
Consolidated
Balance Sheets as of September 30, 2008 and 2007 |
|
86 |
|
|
|
Consolidated Statements of Income
For the Years Ended
September 30, 2008,
2007 and 2006
|
|
87
|
|
|
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income For the
Years
Ended September 30, 2008, 2007 and 2006
|
|
88
|
|
|
|
Consolidated
Statements of Cash Flows For the Years Ended
September
30, 2008, 2007 and 2006
|
|
90
|
|
|
|
Selected
Notes to Consolidated Financial Statements |
|
92 |
Management's
Annual Report on Internal Control Over Financial Reporting
The
management of Home Federal Bancorp, Inc. (the "Company") is responsible for
establishing and maintaining adequate internal control over financial reporting,
as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The
Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
This
process includes policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions of the Company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements, and can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Furthermore, because of changes in
conditions, the effectiveness of internal control may vary over
time.
The
Company's management, with the participation of the Chief Executive Officer and
Chief Financial Officer, assessed the effectiveness of the Company's internal
control over financial reporting as of September 30, 2008. Management's
assessment was based on criteria described in the Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). Based on that assessment, the Company's management
concluded that the Company's internal control over financial reporting was
effective as of September 30, 2008.
Management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of September 30, 2008 has been audited by Moss Adams LLP, the
Company's independent registered public accounting firm who audits the Company's
consolidated financial statements. The Report of Independent Registered
Accounting Firm expresses an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting as of September 30,
2008.
/s/ Len E.
Williams
|
/s/ Eric S.
Nadeau
|
Len
E. Williams |
Eric
S. Nadeau |
President
and |
Executive
Vice President and |
Chief
Executive Officer |
Chief
Financial Officer |
|
|
|
|
Dated:
December 12, 2008
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Home
Federal Bancorp, Inc. and Subsidiary
Nampa,
Idaho
We have
audited the accompanying consolidated balance sheets of Home Federal Bancorp,
Inc. and Subsidiary (the Company) as of September 30, 2008 and 2007, and the
related consolidated statements of income, changes in stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended September 30, 2008. We also have audited the Company’s internal
control over financial reporting as of September 30, 2008, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Controls over Financial Reporting.
Our responsibility is to express an opinion on these financial statements and an
opinion on the Company's internal control over financial reporting based on our
audits.
We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A Company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Home Federal
Bancorp, Inc. and Subsidiary as of September 30, 2008 and 2007, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, Home
Federal Bancorp, Inc. maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2008, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
/s/Moss Adams LLP
Spokane,
Washington
December
12, 2008
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
|
September
30,
2008
|
|
September
30, 2007
|
ASSETS
|
|
|
|
Cash
and amounts due from depository institutions
|
$ 23,270
|
|
$ 20,588
|
Certificate
of deposit in correspondent bank
|
5,000
|
|
--
|
Mortgage-backed
securities available for sale, at fair value
|
188,787
|
|
162,258
|
FHLB
stock, at cost
|
9,591
|
|
9,591
|
Loans
receivable, net of allowance for loan losses
of $4,579
|
|
|
|
and
$2,988
|
459,813
|
|
480,118
|
Loans
held for sale
|
2,831
|
|
4,904
|
Accrued
interest receivable
|
2,681
|
|
2,804
|
Property
and equipment, net
|
15,246
|
|
12,364
|
Mortgage
servicing rights, net
|
1,707
|
|
2,047
|
Bank
owned life insurance
|
11,590
|
|
11,168
|
Real
estate and other property owned
|
650
|
|
549
|
Deferred
tax asset
|
1,770
|
|
1,245
|
Other
assets
|
2,134
|
|
2,318
|
TOTAL
ASSETS
|
$725,070
|
|
$709,954
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
LIABILITIES
|
|
|
|
Deposit
accounts
|
|
|
|
Noninterest-bearing
demand deposits
|
$ 41,398
|
|
$ 38,643
|
Interest-bearing
demand deposits
|
127,714
|
|
127,659
|
Savings
deposits
|
26,409
|
|
23,116
|
Certificates
of deposit
|
177,404
|
|
215,191
|
Total
deposit accounts
|
372,925
|
|
404,609
|
Advances
by borrowers for taxes and insurance
|
1,386
|
|
1,605
|
Interest
payable
|
552
|
|
731
|
Deferred
compensation
|
5,191
|
|
4,515
|
FHLB
advances
|
136,972
|
|
180,730
|
Other
liabilities
|
2,857
|
|
5,127
|
Total
liabilities
|
519,883
|
|
597,317
|
STOCKHOLDERS’
EQUITY
|
|
|
|
Serial
preferred stock, $.01 par value; 10,000,000 authorized,
|
|
|
|
issued
and outstanding, none
|
--
|
|
--
|
Common
stock, $.01 par value; 90,000,000 authorized,
|
|
|
|
issued
and outstanding:
|
174
|
|
152
|
Sept.
30, 2008 – 17,412,449 issued, 17,374,161 outstanding
|
|
|
|
Sept.
30, 2007 – 15,278,803 issued, 15,232,243 outstanding
|
|
|
|
Additional
paid-in capital
|
157,205
|
|
59,613
|
Retained
earnings
|
59,813
|
|
58,795
|
Unearned
shares issued to ESOP
|
(10,605)
|
|
(3,698)
|
Accumulated
other comprehensive loss
|
(1,400)
|
|
(2,225)
|
Total
stockholders’ equity
|
205,187
|
|
112,637
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$725,070
|
|
$709,954
|
|
|
|
|
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
|
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except share and per share data)
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Interest
and dividend income:
|
|
|
|
|
|
Loan
interest
|
$30,686
|
|
$33,553
|
|
$30,175
|
Investment
interest
|
1,012
|
|
345
|
|
140
|
Mortgage-backed
securities interest
|
8,742
|
|
8,692
|
|
9,598
|
FHLB
dividends
|
143
|
|
48
|
|
--
|
Total
interest and dividend income
|
40,583
|
|
42,638
|
|
39,913
|
Interest
expense:
|
|
|
|
|
|
Deposits
|
10,685
|
|
12,279
|
|
8,914
|
FHLB
advances
|
7,250
|
|
9,057
|
|
8,003
|
Total
interest expense
|
17,935
|
|
21,336
|
|
16,917
|
Net
interest income
|
22,648
|
|
21,302
|
|
22,996
|
Provision
for loan losses
|
2,431
|
|
409
|
|
138
|
Net
interest income after provision for loan losses
|
20,217
|
|
20,893
|
|
22,858
|
Noninterest
income:
|
|
|
|
|
|
Service
charges and fees
|
9,077
|
|
9,308
|
|
9,384
|
Gain
on sale of loans
|
764
|
|
1,419
|
|
1,056
|
Increase
in cash surrender value of bank owned life insurance
|
421
|
|
405
|
|
383
|
Loan
servicing fees
|
484
|
|
549
|
|
620
|
Mortgage
servicing rights, net
|
(340)
|
|
(445)
|
|
(179)
|
Other
|
84
|
|
45
|
|
(63)
|
Total
noninterest income
|
10,490
|
|
11,281
|
|
11,201
|
Noninterest
expense:
|
|
|
|
|
|
Compensation
and benefits
|
15,211
|
|
14,249
|
|
15,081
|
Occupancy
and equipment
|
3,007
|
|
2,871
|
|
2,759
|
Data
processing
|
2,198
|
|
2,097
|
|
1,802
|
Advertising
|
1,043
|
|
1,427
|
|
986
|
Postage
and supplies
|
617
|
|
650
|
|
811
|
Professional
services
|
788
|
|
856
|
|
917
|
Insurance
and taxes
|
533
|
|
429
|
|
431
|
Other
|
1,042
|
|
1,057
|
|
1,250
|
Total
noninterest expense
|
24,439
|
|
23,636
|
|
24,037
|
Income
before income taxes
|
6,268
|
|
8,538
|
|
10,022
|
Income
tax expense
|
2,263
|
|
3,267
|
|
3,810
|
NET
INCOME
|
$4,005
|
|
$ 5,271
|
|
$ 6,212
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
Basic
|
$0.25(1)
|
|
$0.32(1)
|
|
$0.38(1)
|
Diluted
|
0.25(1)
|
|
0.31(1)
|
|
0.38(1)
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
Basic
|
16,233,200(1)
|
|
16,602,082(1)
|
|
16,454,940(1)
|
Diluted
|
16,252,747(1)
|
|
16,767,219(1)
|
|
16,494,468(1)
|
|
|
|
|
|
|
Dividends
declared per share:
|
$0.213(1)
|
|
$0.194(1)
|
|
$0.189(1)
|
|
(1)
Earnings per share, average shares outstanding, and dividends per share have
been adjusted to reflect the impact of the Conversion which occurred on December
19, 2007.
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(In
thousands, except share data)
|
Common
Stock
|
Additional
Paid-In Capital
|
Retained
Earnings
|
Unearned
Shares
Issued
to
Employee
Stock
Ownership
Plan
|
Accumulated
Other
Comprehensive
Loss
|
Total
|
Shares
|
Amount
|
Balance
at Sept. 30, 2005
|
14,910,658
|
$149
|
$56,115
|
$
49,818
|
$(4,550)
|
$(165)
|
$101,367
|
Restricted
stock issued, net of forfeitures
|
258,456
|
3
|
(3)
|
|
|
|
--
|
ESOP
shares committed to be released
|
|
|
265
|
|
416
|
|
681
|
Share-based
compensation expense
|
|
|
845
|
|
|
|
845
|
Dividends
paid
($0.189
per share) (1) (2)
|
|
|
|
(1,225)
|
|
|
(1,225)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
6,212
|
|
|
6,212
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
Change
in unrealized holding loss on securities available for sale, net of
taxes
|
|
|
|
|
|
(11)
|
(11)
|
Comprehensive
income:
|
|
|
|
|
|
|
6,201
|
Balance
at Sept. 30, 2006
|
15,169,114
|
152
|
57,222
|
54,805
|
(4,134)
|
(176)
|
107,869
|
Restricted
stock issued, net of forfeitures
|
(6,924)
|
|
|
|
|
|
--
|
ESOP
shares committed to be released
|
|
|
357
|
|
436
|
|
793
|
Exercise
of stock options
|
70,053
|
|
854
|
|
|
|
854
|
Share-based
compensation expense
|
|
|
1,036
|
|
|
|
1,036
|
Excess
tax benefits from equity compensation plans
|
|
|
144
|
|
|
|
144
|
Dividends
paid
($0.194
per share) (1) (2)
|
|
|
|
(1,281)
|
|
|
(1,281)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
5,271
|
|
|
5,271
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
Change
in unrealized holding loss on securities available for sale, net of
taxes
|
|
|
|
|
|
(100)
|
(100)
|
Unrealized
holding loss resulting from transfer of securities from held to maturity
to available for sale, net of taxes
|
|
|
|
|
|
(1,949)
|
(1,949)
|
Comprehensive
income:
|
|
|
|
|
|
|
3,222
|
Balance
at Sept. 30, 2007
|
15,232,243
|
152
|
59,613
|
58,795
|
(3,698)
|
(2,225)
|
112,637
|
(continued
on next page)
|
|
|
|
|
|
|
|
See
accompanying
notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Continued)
(In
thousands, except share data)
|
Common
Stock
|
Additional
Paid-In Capital
|
Retained
Earnings
|
Unearned
Shares
Issued
to
Employee
Stock
Ownership
Plan
|
Accumulated
Other
Comprehensive
Loss
|
Total
|
|
Shares
|
Amount
|
Balance
at Sept. 30, 2007
(balance
carried forward)
|
15,232,243
|
152
|
59,613
|
58,795
|
(3,698)
|
(2,225)
|
112,637
|
|
|
|
|
|
|
|
|
Second
Step Conversion(3)
|
2,073,619
|
21
|
95,938
|
|
(8,160)
|
|
87,799
|
Dissolution
of Mutual Holding Company
|
|
|
50
|
|
|
|
50
|
Restricted
stock issued, net of forfeitures
|
13,502
|
|
|
|
|
|
--
|
ESOP
shares committed to be released
|
|
|
(23)
|
|
1,253
|
|
1,230
|
Exercise
of stock options
|
54,797
|
1
|
605
|
|
|
|
606
|
Share-based
compensation
|
|
|
1,022
|
|
|
|
1,022
|
Dividends
paid
($0.213)
per share) (1) (2)
|
|
|
|
(2,987)
|
|
|
(2,987)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
4,005
|
|
|
4,005
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
Change
in unrealized holding loss on securities available for sale, net
of taxes
|
|
|
|
|
|
825
|
825
|
Comprehensive
income:
|
|
|
|
|
|
|
4,830
|
Balance
at Sept. 30, 2008
|
17,374,161
|
$174
|
$157,205
|
$59,813
|
$(10,605)
|
$(1,400)
|
$205,187
|
(1)
Home Federal MHC waived its receipt of dividends on the 8,979,246 shares that it
owned.
(2)
Dividends per share have been adjusted to reflect the impact of the
Conversion, which occurred on December 19, 2007.
(3)
|
The
total effect on equity accounts from the Conversion has changed from the
December 31, 2007 reported numbers due to
adjustments such as true-up of total new shares
issued in relation to conversion once total affect of fractional shares
was
known, payment of additional expenses related to conversion,
etc.
|
See
accompanying
notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
$
4,005
|
|
$
5,271
|
|
$
6,212
|
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
1,699
|
|
1,712
|
|
1,640
|
|
Net
accretion of premiums and discounts on investments
|
(19)
|
|
(62)
|
|
(90)
|
|
Loss
on sale of fixed assets and repossessed assets
|
144
|
|
2
|
|
137
|
|
Gain
on sale of securities available for sale
|
--
|
|
(4)
|
|
--
|
|
ESOP
shares committed to be released
|
1,230
|
|
793
|
|
681
|
|
Equity
compensation expense
|
1,022
|
|
1,036
|
|
845
|
|
Provision
for loan losses
|
2,431
|
|
409
|
|
138
|
|
Accrued
deferred compensation expense, net
|
676
|
|
640
|
|
826
|
|
Net
deferred loan fees
|
132
|
|
81
|
|
541
|
|
Deferred
income tax benefit
|
(1,075)
|
|
(535)
|
|
(397)
|
|
Excess
tax benefit from equity compensation plans
|
--
|
|
(144)
|
|
--
|
|
Net
gain on sale of loans
|
(764)
|
|
(1,419)
|
|
(1,056)
|
|
Proceeds
from sale of loans held for sale
|
48,543
|
|
97,503
|
|
82,416
|
|
Originations
of loans held for sale
|
(45,895)
|
|
(97,154)
|
|
(80,144)
|
|
Net
decrease in value of mortgage servicing rights
|
340
|
|
445
|
|
179
|
|
Net
increase in value of bank owned life insurance
|
(422)
|
|
(405)
|
|
(383)
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
Interest
receivable
|
123
|
|
222
|
|
(567)
|
|
Other
assets
|
176
|
|
(801)
|
|
(674)
|
|
Interest
payable
|
(179)
|
|
(240)
|
|
(699)
|
|
Other
liabilities
|
(2,274)
|
|
331
|
|
(1,652)
|
|
Net
cash provided by operating activities
|
9,893
|
|
7,681
|
|
7,953
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds
from maturity of mortgage-backed securities held to
maturity
|
--
|
|
13,094
|
|
28,065
|
|
Purchase
of mortgage-backed securities held to maturity
|
--
|
|
--
|
|
(30,259)
|
|
Proceeds
from sale and maturity of mortgage-backed securities available for
sale
|
31,123
|
|
15,013
|
|
2,609
|
|
Purchase
of mortgage-backed securities available for sale
|
(56,257)
|
|
(2,102)
|
|
--
|
|
Investment
in certificate of deposit
|
(5,000)
|
|
--
|
|
--
|
|
Proceeds
from sale of securities available for sale
|
--
|
|
3,848
|
|
--
|
|
Purchases
of property and equipment
|
(4,643)
|
|
(1,181)
|
|
(2,447)
|
|
Net
decrease/(increase) in loans
|
17,000
|
|
22,190
|
|
(33,827)
|
|
Purchased
loans
|
--
|
|
--
|
|
(38,782)
|
|
Purchase
of bank owned life insurance
|
--
|
|
--
|
|
(281)
|
|
Proceeds
from sale of fixed assets and repossessed assets
|
759
|
|
172
|
|
529
|
|
Net
cash (used) provided by investing activities
|
(17,018)
|
|
51,034
|
|
(74,393)
|
|
|
|
|
|
|
|
|
(continues
on next page)
|
|
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CASH FLOWS (Continued)
(In
thousands)
|
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Net
(decrease)/increase in deposits
|
(31,684)
|
|
(25,672)
|
|
33,956
|
Net
decrease in advances by borrowers for taxes and insurance
|
(219)
|
|
(528)
|
|
(1,765)
|
Proceeds
from FHLB advances
|
68,215
|
|
153,860
|
|
253,425
|
Repayment
of FHLB advances
|
(111,973)
|
|
(183,889)
|
|
(218,599)
|
Proceeds
from exercise of stock options
|
606
|
|
854
|
|
--
|
Excess
tax benefit from equity compensation plans
|
--
|
|
144
|
|
--
|
Dividends
paid
|
(2,987)
|
|
(1,281)
|
|
(1,225)
|
Net
proceeds from stock issuance and exchange pursuant to second step
conversion
|
87,849
|
|
--
|
|
--
|
Net
cash provided (used) by financing activities
|
9,807
|
|
(56,512)
|
|
65,792
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
2,682
|
|
2,203
|
|
(648)
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
20,588
|
|
18,385
|
|
19,033
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$23,270
|
|
$ 20,588
|
|
$18,385
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
Interest
|
$18,115
|
|
$21,576
|
|
$17,617
|
Income
taxes
|
3,535
|
|
3,800
|
|
4,226
|
|
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
Acquisition
of real estate and other assets in settlement of loans
|
$1,394
|
|
$ 703
|
|
$ 2
|
Fair
value adjustment to securities available for sale,
net
of taxes
|
825
|
|
(100)
|
|
(11)
|
Transfer
of securities from held to maturity to available for sale
|
--
|
|
171,668
|
|
--
|
Fair
value adjustment to securities available for sale,
net
of taxes as a result of transferring securities from held to
maturity
to available for sale
|
--
|
|
(1,949)
|
|
--
|
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Summary of Significant Accounting Policies
Nature of Business and
Reorganization. Home Federal Bancorp, Inc. (the “Company”), was formed as
the new stock holding company for Home Federal Bank (the “Bank”) in connection
with the Bank’s Conversion from the mutual holding company structure to the
stock holding company structure, which was completed on December 19, 2007. Prior
to the completion of the Conversion, the Bank was the subsidiary of Home Federal
Bancorp, Inc., a federally-chartered stock mid-tier holding company
(“Mid-Tier”), and the Mid-Tier was a subsidiary of Home Federal MHC, a
federally-chartered mutual holding company. The Bank formed the mutual holding
company structure in December 2004. As a result of the Conversion, Home Federal
MHC and the Mid-Tier ceased to exist and were replaced by the Company as the
successor to the Mid-Tier. All references to the number of shares outstanding,
including references for purposes of calculating per share amounts, are restated
to give retroactive recognition to the exchange ratio applied in the
Conversion. See Note 19 below for additional information regarding
the Conversion.
The Bank
was founded in 1920 as a building and loan association and reorganized as a
federal mutual savings and loan association in 1936. The Bank is a
community-oriented financial institution dedicated to serving the financial
service needs of consumers and businesses within its market area. The Bank’s
primary business is attracting deposits from the general public and using these
funds to originate loans. It emphasizes the origination of loans secured by
first mortgages on owner-occupied, residential real estate, residential
development and construction, and commercial real estate. To a lesser extent, it
originates other types of real estate loans, commercial business loans and
consumer loans.
The Bank
serves the Treasure Valley region of southwestern Idaho, which includes Ada,
Canyon, Elmore and Gem Counties, through its 15 full-service banking offices and
one loan center. Nearly 40% of the state’s population lives and works in the
four counties served by Home Federal Bank. Ada County has the largest population
and includes the city of Boise, the state capitol. Home Federal Bank maintains
its largest branch presence in Ada County with eight locations, followed by
Canyon County with five offices, including the Company’s corporate headquarters
in Nampa. The two remaining branches are located in Elmore and Gem
Counties.
Home
Federal Bank has one wholly-owned subsidiary, Idaho Home Service Corporation,
which was established in 1981 as Home Service Corporation for the purpose of
facilitating various business activities. Since 2000, Idaho Home Service
Corporation has been inactive.
Principles of Consolidation.
The consolidated financial statements of the Company include the accounts of the
Company, the Bank and its wholly-owned subsidiary, Idaho Home Service
Corporation. All intercompany transactions and balances have been eliminated in
consolidation.
Use of Estimates in the Preparation
of Financial Statements. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
certain assets and liabilities as of the date of the statement of financial
condition and certain revenues and expenses for the period. Actual results could
differ, either positively or negatively, from those estimates. Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for loan losses, the fair
market value of capitalized mortgage servicing rights, as well as deferred
income taxes.
Management
believes that the allowance for loan losses reflects the best estimate of
probable incurred losses inherent in the loan portfolio at the balance sheet
dates presented and that the valuation of mortgage servicing assets and
computation of deferred taxes are proper. While management uses currently
available information to recognize losses on loans and impairment of mortgage
servicing assets, future additions to the allowance and future impairments may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company’s allowance for loan losses and valuation of
mortgage servicing assets. Such agencies may require the Company to recognize
additions to the
allowance
or an impairment of mortgage servicing assets based on their judgments of
information available to them at the time of their examination.
Cash and Cash Equivalents. For
the purposes of reporting cash flows, the Company has defined cash and cash
equivalents as those amounts included in the consolidated balance sheet caption
Cash and amounts due from depository institutions. Cash and cash equivalents,
including interest-bearing deposits, are on deposit with other banks and
financial institutions in amounts that periodically exceed the federal insurance
limit. Management believes that its risk of loss associated with such balances
is minimal due to the financial strength of the banks and financial
institutions. The Company has not experienced any losses in such
accounts.
Cash on Hand and in Banks. The
Company is required to maintain an average reserve balance with the Federal
Reserve Bank, or maintain such reserve in cash on hand. The amount of this
required reserve balance at September 30, 2008 and 2007 was $1.8 million and
$1.6 million, respectively.
Securities Held to Maturity.
Securities for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for premiums and discounts that
are recognized in interest income using methods that approximate the interest
method over the period to maturity. Securities held to maturity consists only of
mortgage-backed securities.
Securities Available for Sale.
Available for sale securities consist of mortgage-backed securities,
which are not classified as trading securities or as held to maturity
securities.
Unrealized
holding gains and losses, net of tax, on available for sale securities are
reported as a net amount in a separate component of equity until realized. Gains
and losses on the sale of available for sale securities are determined using the
specific-identification method and are included in earnings.
Declines
in the fair value of individual held to maturity and available for sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. In estimating
other-than-temporary losses, management considers, among other things, (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near term prospectus of the issuer, and (3) the
Company’s ability and intent to hold the security for a period of time
sufficient to allow for any anticipated recovery in fair value. Any such
write-downs would be included in earnings as realized losses. Management
believes that all unrealized losses on investment securities at September 30,
2008 and 2007 are temporary.
FHLB Stock. As a member of the
FHLB of Seattle, the Bank is required to maintain a minimum level of investment
in capital stock of the FHLB based on specific percentages of its outstanding
FHLB advances, total assets and mortgages. The Bank's investment in FHLB of
Seattle stock is carried at par value ($100 per share), which reasonably
approximates its fair value. The Bank may request redemption at par value of any
stock in excess of the amount the Bank is required to hold. FHLB stock is
restricted as to purchase, sale, and redemption.
Loans Held for Sale. Mortgage
loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated market value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
Loan
commitments related to the origination of mortgage loans held for sale and the
corresponding sales contracts are considered derivative instruments as defined
by SFAS 133 (as amended). Pursuant to that Statement, they are recognized on the
consolidated balance sheet in other assets and other liabilities at fair
value.
Loans Receivable and Allowance for
Loan Losses. The Bank grants commercial, real estate, and consumer loans
to customers. A substantial portion of the loan portfolio is represented by
commercial real estate and residential real estate loans made primarily to
borrowers in Idaho. The ability of the Bank’s debtors to honor their contracts
is dependent upon the real estate market and/or general economic conditions in
the Bank’s market area.
Loans are
stated at the amount of unpaid principal, adjusted for deferred loan fees and
related costs and an allowance for loan losses. Interest on loans is calculated
by using the simple interest method on daily balances of the principal amount
outstanding. Interest income is accrued on the unpaid balance. Loan origination
fees, net of certain
direct
origination costs, are deferred and recognized as an adjustment of the related
loan yield using the interest method.
The
accrual of interest on loans is discontinued at the time the loan is 90 days
delinquent, or in the opinion of management, the collection of interest is
questionable. Thereafter, no interest is taken into income unless received in
cash or until such time as the borrower demonstrates the ability to resume
payments of principal and interest.
Premiums
and discounts on purchased loans are amortized over the estimated life of the
loans as an adjustment to yield using the interest method.
A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for nonhomogeneous loan types and larger
balance homogeneous loan types by either the present value of expected future
cash flows discounted at the loan’s effective interest rate, the loan’s
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Management
believes the allowance for loan losses represents our best estimate of known and
unknown but probable, incurred losses inherent in our loan portfolio. The
allowance is based upon a periodic review of loans which includes consideration
of actual net loan loss experience, changes in the size and character of the
loan portfolio, identification of individual problem situations that may affect
the borrower's ability to pay, and an evaluation of current economic conditions.
Loan losses are recognized through charges to the allowance.
Real Estate Acquired in Settlement of
Loans. Real estate acquired through foreclosure or deeds in lieu of
foreclosure is stated at the lower of cost or estimated fair market value less
selling costs. When the property is acquired, any excess of the loan balance
over the estimated net realizable value is charged to the reserve for loan
losses. Holding costs, subsequent write-downs to estimated fair market value
less selling costs, if any, or any disposition gains or losses are included in
noninterest income and expenses. Costs of development and improvement of the
property are capitalized.
Property and Equipment.
Properties and equipment are stated at cost, less accumulated depreciation and
amortization. Leasehold improvements are amortized over the term of the lease or
the estimated useful life of the improvements, whichever is less. Depreciation
and amortization are generally computed using the straight-line method for
financial statement purposes over the following estimated useful lives and lease
periods:
Buildings
and leasehold improvements
|
15-40
years
|
Furniture,
equipment, and automobiles
|
3-12
years
|
The
normal costs of maintenance and repairs are charged to expense as
incurred.
Mortgage Servicing Rights.
Retained mortgage servicing rights are measured at fair values as of the date of
the sale of the underlying loan. In addition, mortgage servicing rights are
carried in the balance sheet at fair value and the changes in fair value are
reported in earnings in the period in which the change occurs. Fair values are
estimated using discounted cash flows based on current market interest rates.
The Company utilizes an independent third party to assist in assessing the fair
value of the servicing rights.
Fees
earned for servicing mortgage loans are reported as income when the related
mortgage loan payments are collected. Loan servicing costs are charged to
expense as incurred.
Income Taxes. Deferred income
taxes are reported for temporary differences between items of income or expense
reported in the financial statements and those reported for income tax purposes.
Deferred taxes are computed using
the asset
and liability approach as prescribed in SFAS No. 109, Accounting for Income
Taxes. Under this method, a deferred tax asset or liability is determined based
on the enacted tax rates that will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in the Company’s income tax returns. The
deferred tax provision for the year is equal to the net change in the net
deferred tax liability from the beginning to the end of the year, less amounts
applicable to the change in value related to investments available for sale. The
effect on deferred taxes of a change in tax rates is recognized as income in the
period that includes the enactment date.
At
October 1, 2007, the Company adopted Financial Accounting Standards Board
("FASB") Interpretation No. 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"). FIN 48 requires recognition and measurement
of uncertain tax positions using a "more-likely-than-not"
approach. The Company’s approach to adopting FIN 48 consisted of an
examination of its financial statements, its income tax provision, and its
federal and state income tax returns. The Company analyzed its tax
positions including the permanent and temporary differences as well as the major
components of income and expense.
As of
October 1, 2007, and September 30, 2008, the Company did not believe that it had
any uncertain tax positions that would rise to the level of having a material
effect on its financial statements. In addition, the Company had no
accrued interest or penalties as of October 1, 2007 or September 30,
2008. It is the Company’s policy to record interest and penalties as
a component of income tax expense. The adoption of this accounting
standard did not have a material impact on the Company’s financial position or
results of operations.
Comprehensive Income:
Accounting principles generally require that recognized revenue, expenses,
gains, and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as separate components of the equity section of the
statement of financial condition, such items, along with net income are
components of comprehensive income.
The
components of other comprehensive income and related tax effects are as
follows:
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
|
Unrealized
holding gain (loss) on available for sale securities
|
$1,376
|
|
$(3,411)
|
|
$(19)
|
Reclassification
adjustment for gain realized in income
|
--
|
|
4
|
|
--
|
|
|
|
|
|
|
Net
unrealized gain (loss)
|
1,376
|
|
(3,415)
|
|
(19)
|
Tax
effect
|
(551)
|
|
1,366
|
|
8
|
|
|
|
|
|
|
Unrealized
gain (loss) net of tax
|
$ 825
|
|
$(2,049)
|
|
$(11)
|
Advertising Costs. Advertising
costs are expensed as incurred. Advertising expense for the years ended
September 30, 2008, 2007, and 2006, was $1.0 million, $1.4 million and $1.0
million respectively.
Recent Accounting
Pronouncements. In
September 2006, the Financial Accounting Standards Board issued SFAS No. 157,
“Fair Value Measurements.” The statement provides enhanced guidance for
measuring assets and liabilities using fair value and applies whenever other
standards require or permit assets or liabilities to be measured at fair value.
SFAS No. 157 also requires expanded disclosure of items that are measured at
fair value, the information used to measure fair value, and the effect of fair
value measurements on earnings. The Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and is not
expected to have a significant impact on our consolidated financial condition or
results of operations.
On
February 15, 2007, the Financial Accounting Standards Board issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities.” The
statement permits entities to choose to measure selected financial assets and
liabilities at fair value, with changes in fair value recorded in earnings. The
objective is to improve
financial
reporting by providing entities with the opportunity to mitigate volatility in
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. The statement is effective
as of the beginning of an entity’s first fiscal year beginning after November
15, 2007 and is not expected to have a significant impact on our consolidated
financial condition or results of operations. An entity may elect to early adopt
as of the beginning of a fiscal year that begins on or before November 15,
2007.
In
December 2007, the FASB issued SFAS No. 141 (Revised), Business
Combinations. SFAS No. 141(R) establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and the goodwill
acquired. The standard also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008.
Stock-Based Compensation. On June 23, 2005,
stockholders approved long-term stock-based benefit plans that enable the
Company to grant stock options, stock appreciation rights and restricted stock
awards to employees and directors. As of October 1, 2005, the Company adopted
SFAS No. 123(R), Share Based Payment, which requires the recognition of
compensation costs relating to share based payment transactions in the financial
statements. The Company has elected the modified prospective application method
of reporting, which provides for no restatement of prior periods and no
cumulative adjustment to equity accounts. Prior to the adoption of SFAS No.
123(R), the Company elected to account for its stock-based compensation plans
using the intrinsic value-based method of recognizing compensation costs
outlined in APB Opinion No. 25, Accounting for Stock Issued to Employees, and
adopted the disclosure-only provisions under SFAS No. 123, Accounting for
Stock-Based Compensation.
Earnings per share (“EPS”) data: The Company
displays basic and diluted EPS in the Consolidated Statements of Income. Basic
EPS is computed by dividing net income or loss by the weighted average number of
shares outstanding during the period. Unallocated shares relating to the ESOP
are deducted in the calculation of weighted average shares outstanding. Diluted
EPS is computed by dividing net income or loss by the diluted weighted average
shares outstanding, which includes common stock equivalent shares outstanding
using the treasury stock method, unless such shares are anti-dilutive. Common
stock equivalents include stock options and restricted stock
awards.
Employee Stock Ownership Plan.
The Company accounts for its ESOP in accordance with the AICPA SOP 93-6, Employer's Accounting for Employee
Stock Ownership Plans. Dividends on allocated shares are recorded as a
reduction of retained earnings and paid to plan participants or distributed to
participants' accounts. As shares are released, compensation expense is recorded
equal to the then current market price of the shares and the shares become
available for earnings per share calculations. The Company records cash
dividends on unallocated shares as a reduction of debt or accrued
interest.
Concentrations of Credit Risk.
The Bank accepts deposits and grants credit primarily within the
Treasure Valley region of southwestern Idaho, which includes Ada, Canyon,
Elmore and Gem Counties. The Bank has a diversified loan portfolio and
grants consumer, residential, commercial, and construction real estate loans,
and is not dependent on any industry or group of customers. Although the Bank
has a diversified loan portfolio, a substantial portion of its loans are
real-estate-related. The ability of the Bank's debtors to honor their contracts
is dependant upon the real estate and general economic conditions in the area.
The Bank also regularly monitors real-estate related loans that include terms
that may give rise to a concentration of credit risk, including high
loan-to-value loans and interest-only loans.
Reclassifications. Certain
reclassifications have been made to prior year’s financial statements in order
to conform with the current year presentation. The reclassifications had no
effect on previously reported net income or equity.
Note
2 – Securities
Our
investment policies are designed to provide and maintain adequate liquidity and
to generate favorable rates of return without incurring undue interest rate or
credit risk. The investment policies generally limit investments to
mortgage-backed securities, U.S. Government and agency securities, municipal
bonds, certificates of deposit and marketable corporate debt
obligations.
During
the quarter ended June 30, 2007, the Company transferred its entire portfolio of
held to maturity mortgage- backed securities to available for sale to meet the
additional liquidity needs associated with increasing commercial banking
activities. As a result, mortgage-backed securities with an amortized cost,
gross unrealized gains and gross unrealized losses of $171.7 million, $228,000
and $3.5 million, respectively were transferred to the available for sale
category. As part of its liquidity management, the Company does not intend to
classify any securities as held to maturity in the foreseeable
future.
Mortgage-backed
securities available for sale consisted of the following:
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
(in
thousands)
|
September
30, 2008:
|
|
|
|
|
|
|
|
U.S.
Government-sponsored enterprises
|
$187,730
|
|
$669
|
|
$(2,669)
|
|
$185,730
|
Other
|
3,390
|
|
-
|
|
(333)
|
|
3,057
|
|
$191,120
|
|
$669
|
|
$(3,002)
|
|
$188,787
|
September 30,
2007:
|
|
U.S.
Government-sponsored enterprises
|
$162,503
|
|
$191
|
|
$(3,823)
|
|
$158,871
|
Other
|
3,464
|
|
-
|
|
(77)
|
|
3,387
|
|
$165,967
|
|
$191
|
|
$(3,900)
|
|
$162,258
|
The
contractual maturities of mortgage-backed securities available for sale are
shown below. Expected maturities may differ from contractual maturities because
borrowers have the right to prepay obligations without prepayment
penalties.
|
September
30, 2008
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Due
within one year
|
$ 26
|
|
$ 26
|
Due
after one year through five years
|
47
|
|
49
|
Due
after five years through ten years
|
29,249
|
|
28,911
|
Due
after ten years
|
161,798
|
|
159,801
|
Total
|
$191,120
|
|
$188,787
|
For the
years ended September 30, 2008, 2007, and 2006, proceeds from sales of
securities available for sale amounted to $0, $3.8 million, and $0 respectively.
Gross realized gains for the years ended September 30, 2008, 2007, and 2006 were
$0, $4,000, and $0 respectively. There were no gross realized losses for the
years ended September 30, 2008, 2007, and 2006, respectively. All gain and
losses were included in other noninterest income on the Consolidated Statements
of Income.
The fair
value of temporarily impaired securities, the amount of unrealized losses and
the length of time these unrealized losses existed as of September 30, 2008 are
as follows:
|
Less
than 12 months
|
|
12
months or longer
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
(in
thousands)
|
Mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
securities,
available
|
|
|
|
|
|
|
|
|
|
|
|
for
sale
|
$121,626
|
|
$(2,166)
|
|
$17,699
|
|
$(836)
|
|
$139,325
|
|
$(3,002)
|
Management
has evaluated these securities and has determined that the decline in the value
is temporary and not related to the underlying credit quality of the issuers or
an industry specific event. The declines in value are on securities that have
contractual maturity dates and future principal payments that will be sufficient
to recover the current amortized cost of the securities. The Company has the
ability and intent to hold the securities for a reasonable period of time for a
forecasted recovery of the amortized cost.
As of
September 30, 2008, the Bank had pledged mortgage-backed securities with an
amortized cost of $80.5 million and a fair value of $79.6 million as collateral
for FHLB advances. In addition, as of September 30, 2008, two mortgage-backed
securities with a combined amortized cost of $5.7 million and a fair value of
$5.7 million were pledged to the Federal Reserve Bank as collateral for treasury
tax and loan funds held by the Bank and for borrowings from the discount
window.
Note
3 – Loans Receivable
Loans
receivable are summarized as follows:
|
September
30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
Real
Estate:
|
|
|
|
One-
to four-family residential
|
$210,302
|
|
$249,316
|
Multi-family
residential
|
8,477
|
|
6,864
|
Commercial
|
151,733
|
|
133,823
|
Total
real estate
|
370,512
|
|
390,003
|
|
|
|
|
Real
Estate Construction:
|
|
|
|
One-
to four-family residential
|
13,448
|
|
20,545
|
Multi-family
residential
|
920
|
|
1,770
|
Commercial
and land development
|
18,674
|
|
21,899
|
Total
real estate construction
|
33,042
|
|
44,214
|
|
|
|
|
Consumer:
|
|
|
|
Home
equity
|
52,954
|
|
42,990
|
Automobile
|
1,903
|
|
2,173
|
Other
consumer
|
1,370
|
|
1,405
|
Total
consumer
|
56,227
|
|
46,568
|
|
|
|
|
Commercial
business
|
5,385
|
|
3,122
|
|
465,166
|
|
483,907
|
|
|
|
|
Premium
on purchased loans
|
199
|
|
229
|
Deferred
loan fees
|
(973)
|
|
(1,030)
|
Allowance
for loan losses
|
(4,579)
|
|
(2,988)
|
Loans
receivable, net
|
$459,813
|
|
$480,118
|
The
majority of residential mortgage loans are pledged as collateral for FHLB
advances (see Note 7).
The
interest rates on loans at September 30, 2008, fall into the following
fixed and variable components
(in
thousands):
Fixed
rates
|
$183,242
|
Variable
rates
|
282,123
|
Total
loans receivable
|
$465,365
|
The
contractual maturity of loans receivable at September 30, 2008, are shown
below (in thousands). Expected maturities will differ from contractual
maturities because borrowers may have the right to prepay loans with or without
prepayment penalties.
|
Within
1
Year
|
|
One
Year
To
5 Years
|
|
After
5
Years
|
|
Total
|
|
(in
thousands)
|
Real
estate:
|
|
|
|
|
|
|
|
One-
to four-family residential
|
$ 31
|
|
$ 4,255
|
|
$206,215
|
|
$210,501
|
Multi-family
residential
|
--
|
|
--
|
|
8,477
|
|
8,477
|
Commercial
|
3,896
|
|
5,805
|
|
142,032
|
|
151,733
|
Total
real estate
|
3,927
|
|
10,060
|
|
356,724
|
|
370,711
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
One-
to four-family residential
|
13,448
|
|
--
|
|
--
|
|
13,448
|
Multi-family
residential
|
920
|
|
--
|
|
--
|
|
920
|
Commercial
and land development
|
12,266
|
|
6,408
|
|
--
|
|
18,674
|
Total
real estate construction
|
26,634
|
|
6,408
|
|
--
|
|
33,042
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
Home
equity
|
348
|
|
3,876
|
|
48,730
|
|
52,954
|
Automobile
|
39
|
|
1,485
|
|
379
|
|
1,903
|
Other
consumer
|
265
|
|
1,083
|
|
22
|
|
1,370
|
Total
consumer
|
652
|
|
6,444
|
|
49,131
|
|
56,227
|
|
|
|
|
|
|
|
|
Commercial
business
|
2,877
|
|
2,305
|
|
203
|
|
5,385
|
Total
loans receivable
|
$34,090
|
|
$25,217
|
|
$406,058
|
|
$465,365
|
An
analysis of the changes in the allowance for loan losses is as
follows:
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
|
|
|
|
|
Beginning
balance
|
$2,988
|
|
$2,974
|
|
$2,882
|
Provision
for loan losses
|
2,431
|
|
409
|
|
138
|
Charge
offs
|
(864)
|
|
(219)
|
|
(70)
|
Transfer
to unfunded commitments
|
--
|
|
(192)
|
|
--
|
Recoveries
|
24
|
|
16
|
|
24
|
Ending
balance
|
$4,579
|
|
$2,988
|
|
$2,974
|
Impaired
loan information is as follows:
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
|
|
|
|
|
Impaired
loans with related allowance
|
$9,215
|
|
$833
|
|
$
--
|
Impaired
loans with no related allowance
|
266
|
|
2,076
|
|
--
|
Total
impaired loans
|
$9,481
|
|
$2,909
|
|
--
|
|
|
|
|
|
|
Specific
allowance on impaired loans
|
$1,729
|
|
$ 78
|
|
$
--
|
Average
balance of impaired loans
|
4,041
|
|
356
|
|
14
|
No
interest income was recognized on impaired loans as of September 30, 2008, 2007
and 2006. As of September 30, 2008, 2007, and 2006, the Company had no accruing
loans that were contractually past due 90 days or more. The Company is not
committed to lend additional funds to debtors whose loans have been
modified.
Note
4 – Mortgage Servicing Rights
Mortgage
servicing rights represent the fair value of the future loan servicing fees from
the right to service loans for others. The unpaid principal balances of loans
serviced at September 30, 2008, 2007 and 2006 were $167.0 million, $190.0
million and $216.7 million, respectively. Loans serviced for others are not
included in the consolidated statements of financial condition. In general,
during periods of falling interest rates, mortgage loans prepay faster and the
value of the mortgage servicing rights declines. Conversely, during periods of
rising rates, the value of the mortgage servicing rights generally increases as
a result of slower rates of prepayments. The Company does not use derivatives to
hedge fluctuations in the fair value of the servicing rights.
As of
October 1, 2006, the Company adopted SFAS No. 156, Accounting for Servicing of
Financial Assets, to measure mortgage servicing rights using the fair
value method. As a result, the Company measures each class of mortgage servicing
rights at fair value at each reporting date, and reports changes in fair value
in earnings in the period in which the change occurs. Prior to the adoption of
SFAS No. 156, the Company elected to account for its mortgage servicing rights
using the amortization method previously required by SFAS No. 140.
The
Company has identified two classes of mortgage servicing assets based upon the
nature of the collateral, interest rate mechanism and nature of the loan. The
Company uses an independent third party to periodically assist in valuing the
residential mortgage servicing rights using information such as anticipated
prepayment speeds, discount rates and servicing fees associated with the type of
loans sold. The mortgage servicing rights associated with commercial loans,
which represent an immaterial portion of total mortgage servicing rights, are
evaluated internally on a periodic basis.
Upon the
change from the amortization method to fair value accounting under SFAS
No. 156, the calculation of amortization and the assessment of impairment
were discontinued. Those measurements have been replaced by adjustments to fair
value that encompass market-driven valuation changes. Under the fair value
method, the changes in fair value are reported in “Mortgage servicing rights,
net” on the Consolidated Statements of Income.
The
amount of contractually specified servicing fees for one- to four-family
residential loans were $484,000, $549,000, and $620,000, for the years ended
September 30, 2008, 2007 and 2006 respectively. The servicing fees for one- to
four-family residential loans are recorded in “Loan Servicing Fees” on the
Consolidated Statements of Income. The amount of contractually specified
servicing fees for commercial real estate loans, as well as late fees and other
ancillary fees earned for the periods indicated, were immaterial in
amount.
The
following table lists the classes of servicing rights, activities in the balance
of each class and fees earned for the periods indicated:
|
Year
Ended
September
30,
|
Servicing
Right Classes
|
2008
|
|
2007
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
One-
to four-family residential loans:
|
|
|
|
|
|
Beginning
Balance
|
$2,033
|
|
$2,468
|
|
$2,615
|
Additions
for new mortgage servicing rights capitalized
|
-
|
|
-
|
|
153
|
Adjustments
to fair value
|
(330)
|
|
(435)
|
|
(437)
|
Write-up
(impairment)
|
-
|
|
-
|
|
137
|
Ending
Balance
|
$1,703
|
|
$2,033
|
|
$2,468
|
|
|
|
|
|
|
Commercial
real estate loans:
|
|
|
|
|
|
Beginning
Balance
|
$ 14
|
|
$ 24
|
|
$ 56
|
Additions
for new mortgage servicing rights capitalized
|
-
|
|
-
|
|
-
|
Adjustments
to fair value
|
-
|
|
(10)
|
|
-
|
Amortization
of servicing rights
|
(10)
|
|
-
|
|
(32)
|
Ending
Balance
|
$ 4
|
|
$ 14
|
|
$ 24
|
On August
28, 2008, Home Federal Bank entered into a binding agreement with another bank
whereby Home Federal Bank would sell its remaining servicing rights. The
purchase price was 1.02% of the unpaid principal balance of all loans in the
servicing portfolio, except for those loans that are 60 days or more past due,
in litigation, in bankruptcy or in foreclosure as of October 31, 2008. The
transfer is to be completed by December 16, 2008. At September 30, 2008, our
residential loan servicing portfolio was $167.0 million.
Note
5 - Properties and Equipment
Properties
and equipment at September 30, 2008 and 2007 are summarized as
follows:
|
September
30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
|
|
|
|
Land
|
$
3,254
|
|
$
2,875
|
Buildings
and leasehold improvements
|
11,020
|
|
9,810
|
Construction
in progress
|
1,938
|
|
561
|
Furniture
and equipment
|
9,335
|
|
8,964
|
Automobiles
|
90
|
|
74
|
Total
cost
|
25,637
|
|
22,284
|
Less
accumulated depreciation and amortization
|
(10,391)
|
|
(9,920)
|
Net
book value
|
$15,246
|
|
$12,364
|
Repairs
and maintenance are charged against income as incurred; major remodels and
improvements are capitalized. Depreciation and amortization charged against
operations for the years ended September 30, 2008, 2007, and 2006, was $1.7
million, $1.6 million and $1.6 million, respectively.
Capitalized
interest expense related to construction of banking offices for the year ending
September 30, 2008, was $23,564.
Note
6 - Deposit Accounts
Deposit
information by type and weighted average rates are summarized as
follows:
|
|
|
|
|
Rate
|
|
September
30,
2008
|
|
Rate
|
|
September
30,
2007
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Savings
deposits
|
0.84%
|
|
$ 26,409
|
|
0.64%
|
|
$ 23,116
|
Demand
deposits
|
0.75
|
|
169,112
|
|
1.34
|
|
166,302
|
|
|
|
195,521
|
|
|
|
189,418
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
0.00-0.99
|
|
11
|
|
0.00-0.99
|
|
374
|
|
1.00-1.99
|
|
-
|
|
1.00-1.99
|
|
5
|
|
2.00-2.99
|
|
49,598
|
|
2.00-2.99
|
|
2,257
|
|
3.00-3.99
|
|
54,669
|
|
3.00-3.99
|
|
24,012
|
|
4.00-4.99
|
|
55,050
|
|
4.00-4.99
|
|
63,632
|
|
5.00-5.99
|
|
16,234
|
|
5.00-5.99
|
|
123,617
|
|
6.00-8.99
|
|
1,842
|
|
6.00-6.99
|
|
1,294
|
Total
certificates of deposit
|
|
|
177,404
|
|
|
|
215,191
|
Total
deposits
|
|
|
$372,925
|
|
|
|
$ 404,609
|
Scheduled
maturities of certificates of deposits are as follows during the fiscal years
presented:
|
September
30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
Fiscal
year ending September 30,
|
|
|
|
2008
|
$ --
|
|
$172,584
|
2009
|
133,323
|
|
25,047
|
2010
|
25,694
|
|
10,575
|
2011
|
7,758
|
|
5,349
|
2012
|
8,649
|
|
1,441
|
2013
|
1,805
|
|
--
|
Thereafter
|
175
|
|
195
|
|
$177,404
|
|
$215,191
|
At
September 30, 2008 and 2007, certificates of deposits of $100,000 or greater
were $54.5 million and $64.9 million, respectively. We had no
brokered certificates of deposit at September 30, 2008 or 2007.
Interest
expense by type of deposit account is summarized as follows:
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
|
|
|
|
|
Savings
deposits
|
$ 177
|
|
$ 103
|
|
$ 51
|
Demand
deposits
|
1,912
|
|
1,783
|
|
1,000
|
Certificates
of deposit
|
8,596
|
|
10,393
|
|
7,863
|
Total
|
$10,685
|
|
$12,279
|
|
$ 8,914
|
There was
no accrued interest on deposit accounts at September 30, 2008 or
2007.
Note
7 - Federal Home Loan Bank Advances
The Bank
has the ability to borrow up to 40% of its total assets from the FHLB of
Seattle, limited by available collateral. Advances are collateralized by all
FHLB stock owned by the Bank, deposits with the FHLB of Seattle, and certain
residential mortgages and mortgage-backed securities. The outstanding balances
on FHLB advances at September 30, 2008 and 2007 were $137.0 million and $180.7
million, respectively, with interest rates ranging from 3.56% to 5.33% as of
September 30, 2008.
The
Bank’s borrowings consisted of the following:
|
September
30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
FHLB
advances
|
|
|
|
Maximum
outstanding at any month end
|
$181,000
|
|
$223,000
|
Average
outstanding
|
158,000
|
|
202,000
|
|
|
|
|
Weighted
average interest rates
|
|
|
|
For
the period
|
4.60%
|
|
4.49%
|
At
end of period
|
4.68
|
|
4.55
|
|
|
|
|
Scheduled
maturities of the fixed rate FHLB borrowings are as follows during the fiscal
years presented:
|
September
30,
|
|
2008
|
|
2007
|
|
Average
Interest
Rates
|
|
Amount
|
|
Average
Interest
Rates
|
|
Amount
|
|
(in
thousands)
|
Fiscal
Year:
|
|
|
|
|
|
|
|
2008
|
--%
|
|
$ --
|
|
4.14%
|
|
$43,758
|
2009
|
4.60
|
|
76,882
|
|
4.60
|
|
76,882
|
2010
|
4.69
|
|
15,240
|
|
4.69
|
|
15,240
|
2011
|
5.16
|
|
8,050
|
|
5.16
|
|
8,050
|
2012
|
4.91
|
|
15,100
|
|
4.91
|
|
15,100
|
2013
|
4.62
|
|
18,700
|
|
--
|
|
--
|
Thereafter
|
4.83
|
|
3,000
|
|
4.64
|
|
21,700
|
Total
|
|
|
$136,972
|
|
|
|
$180,730
|
Included
in the Bank’s borrowing capacity with the FHLB is a cash management advance
account. No amounts were drawn under the cash management advance account at
September 30, 2008 or 2007.
Note
8 - Employee Retirement Plans
401(k) Plan. The
Company has a 401(k) retirement plan covering substantially all of its
employees. The Company matches 50% of employee contributions up to the
employee’s first 10% contributed to the Plan. For the years ended September 30,
2008, 2007, and 2006, total Company contributions were $237,000, $214,000 and
$192,000, respectively.
Salary Continuation Plan. As
a supplement to the 401(k) retirement plan, the Company has adopted a Salary
Continuation Plan pursuant to agreements with certain executive officers of the
Company and its subsidiaries. Under the Salary Continuation Plan, an executive
will be entitled to a stated annual benefit for a period of 15 years (i) upon
retirement from the Company after attaining age 65, or (ii) upon attaining age
65 if his or her employment had been previously terminated due to disability. In
the event the executive dies while in active service, the Company shall
pay the
beneficiary the normal retirement projected benefit for a period of 15 years
commencing with the month following the executive’s death. In the event the
executive dies after age 65, but before receiving the full 15 years of annual
benefits, the remaining payments shall be paid to his or her beneficiaries. Upon
termination of employment, the annual benefit amount is 50% of the officer’s
average final 36 months base salary. Benefits under the Plan vest over ten
years. Upon early retirement, the Company shall pay the executive the vested
accrual balance as of the end of the month prior to the early retirement date.
The Company shall pay the early retirement benefit in 180 equal
installments.
The
accrued liability for the salary continuation plan was $2.3 million and $1.9
million at September 30, 2008 and 2007, respectively. The amounts
recognized in compensation expense were $389,000, $403,000 and $311,000 for the
years ended September 30, 2008, 2007, and 2006, respectively.
Deferred Incentive
Compensation. The Company has deferred incentive compensation agreements
with certain former executive officers and the Board of Directors. Under the
agreements, the Company is obligated to provide payments for each such former
executive and board member or his beneficiaries during a period of fifteen or
ten years after the death, disability, or retirement of the executive or board
member. The estimated present value of future benefits to be paid is being
accrued over the period from the effective date of the agreement until the
expected retirement dates of the participants. Participants are not permitted to
contribute compensation into this plan.
The
Company accrues annual interest on the unfunded liability under the plan based
upon a formula relating to the change in retained earnings, which amounted to
5.79%, 8.50%, and 12.0% for the years ended September 30, 2008, 2007 and 2006,
respectively. The accrued liability for the deferred incentive compensation
agreements was $2.3 million and $2.1 million at September 30, 2008 and
2007, respectively. The amounts recognized in compensation expense were
$189,000, $124,000, and $422,000 for the years ended September 30, 2008,
2007, and 2006, respectively.
Director Retirement Plan. Home
Federal Bancorp adopted a director retirement plan, effective January 1, 2005,
that replaced prior plans. The plan is an unfunded nonqualified retirement plan
for directors. Upon the later of attaining age 72 or termination of
service, the director will receive an annual benefit equal to 50 percent of the
fees paid to the director for the preceding year, payable in monthly
installments over 15 years. The accrued benefit vests at a rate of 10 percent
per year, except in the event of disability, in which case the vested percentage
is 100 percent. If the director terminates service within 24 months following a
change in control, he will receive 100 percent of his accrued benefit, plus a
change in control benefit equal to 2.99 times his prior years directors fees.
Change in control payments are subject to reduction to avoid excise taxes under
Section 280G of the Internal Revenue Code. In the event a director dies before
termination of service, his beneficiary would receive his projected benefit,
which is the final benefit the director would have received had he attained age
72, assuming a 4% annual increase in the directors’ fees. In the event the
director dies after separation from service, but before receiving the full 15
years of annual benefits, the remaining payments shall be paid to his or her
beneficiaries. In-service distributions are permitted in limited
circumstances.
The
accrued liability for the director retirement plans was $572,000 and $513,000 at
September 30, 2008 and 2007, respectively. The amounts recognized in
compensation expense were $84,000, $51,000 and $50,000 for the years ended
September 30, 2008, 2007, and 2006, respectively.
The
Company’s deferred compensation agreements and supplemental executive retirement
plans are unfunded plans and have no plan assets. The following table reconciles
the accumulated liability for the benefit obligation of these contracts. The
benefit obligation represents the net present value of future payments to
individuals under the agreements.
|
Year
ended September 30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
Beginning
balance
|
$4,515
|
|
$3,875
|
Benefit
expense
|
710
|
|
660
|
Benefit
payments
|
(34)
|
|
(20)
|
Ending
Balance
|
$5,191
|
|
$4,515
|
Note 9 - Stock-Based
Compensation
On June
23, 2005, stockholders approved long-term stock-based benefit plans that enable
the Company to grant stock options, stock appreciation rights and restricted
stock awards to employees and directors. As of October 1, 2005, the Company
adopted SFAS No. 123(R), Share
Based Payment, which requires the recognition of compensation costs
relating to share based payment transactions in the financial statements. The
Company has elected the modified prospective application method of reporting,
which provides for no restatement of prior periods and no cumulative adjustment
to equity accounts. Prior to the adoption of SFAS No. 123(R), the Company
elected to account for its stock-based compensation plans using the intrinsic
value-based method of recognizing compensation costs outlined in APB Opinion No.
25, Accounting for Stock
Issued to Employees, and adopted the disclosure-only provisions under
SFAS No. 123, Accounting for
Stock-Based Compensation.
Recognition and Retention Plan
(“RRP”). The purpose of the RRP is to promote the long-term interests of
the Company and its stockholders by providing restricted stock as a means for
attracting and retaining directors and key employees. The maximum number of
shares that may be awarded under the RRP is 338,633. The fair value of
restricted stock awards are accrued ratably as compensation expense over the
vesting period of the award. The amounts recognized in compensation expense were
$657,000, $640,000, and $617,000 for the years ended September 30, 2008, 2007,
and 2006 respectively. As of September 30, 2008, restricted stock awards of
300,344 shares of common stock were outstanding. The Company has an aggregate of
38,291 restricted shares available for future issuance under the
RRP.
Restricted
stock activity is summarized in the following table:
|
Number
of Shares
|
|
Weighted
Average
Fair
Value
at
Date of
Grant
|
|
|
|
|
Nonvested
at September 30, 2005
|
--
|
|
$ --
|
Granted
|
307,152
|
|
11.31
|
Forfeited
|
(13,546)
|
|
12.70
|
Nonvested
at September 30, 2006
|
293,606
|
|
11.31
|
Vested
|
(58,723)
|
|
11.31
|
Granted
|
5,680
|
|
15.34
|
Forfeited
|
(29,800)
|
|
11.18
|
Nonvested
at September 30, 2007
|
210,763
|
|
11.44
|
Vested
|
(56,471)
|
|
11.40
|
Granted
|
30,858
|
|
11.98
|
Nonvested
at September 30, 2008
|
185,150
|
|
$11.54
|
Stock Option and Incentive Plan
(“SOP”). The Company implemented the SOP to promote the long-term
interests of the Company and its stockholders by providing an incentive to
directors and key employees who contribute to the operating success of the
Company. The maximum number of stock options and stock appreciation rights that
may be issued under the SOP is 846,580. The exercise price of each option equals
the fair market value of the Company’s stock on the date of grant. The options
typically vest over five years and expire ten years from the date of grant. The
Company has an aggregate of 54,658 stock options available for future issuance
under the SOP.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model that uses the assumptions noted in the
following table. The risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant. The expected life of options granted represents the
period of time that options granted are expected to be outstanding. Expected
volatilities are based on historical volatility of the Company’s stock. Expected
forfeiture rate is the estimated forfeiture rate based upon the circumstances of
the individuals that
received
stock options. Expected dividends represent the Company’s estimated annual
dividend rate over the expected life.
|
Risk
Free
Interest
Rate
|
|
Expected
Life (yrs)
|
|
Expected
Volatility
|
|
Expected
Forfeiture Rate
|
|
Expected
Dividend Yield
|
|
|
|
|
|
|
|
|
|
|
Options
granted in 2006
|
4.72%
|
|
7.50
|
|
16.76%
|
|
--%
|
|
2.00%
|
Options
granted in 2007
|
4.57
|
|
7.50
|
|
17.43
|
|
--
|
|
2.00
|
Options
granted in 2008
|
3.85
|
|
7.50
|
|
25.41
|
|
--
|
|
2.02
|
Stock
option activity is summarized in the following table:
|
Number
of
Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average
Fair
Value
|
|
|
|
|
|
|
Outstanding
at September 30, 2005
|
660,332
|
|
$10.74
|
|
$1.83
|
Granted
|
205,059
|
|
12.94
|
|
3.02
|
Forfeited
|
(99,896)
|
|
10.74
|
|
1.83
|
Exercised
|
--
|
|
--
|
|
--
|
Outstanding
at September 30, 2006
|
765,495
|
|
11.33
|
|
2.15
|
Granted
|
28,400
|
|
15.34
|
|
3.57
|
Forfeited
|
(85,848)
|
|
10.80
|
|
1.91
|
Exercised
|
(79,580)
|
|
10.74
|
|
1.83
|
Outstanding
at September 30, 2007
|
628,467
|
|
11.65
|
|
2.29
|
Granted
|
83,875
|
|
11.28
|
|
3.11
|
Forfeited
|
(13,546)
|
|
10.74
|
|
1.83
|
Exercised
|
(56,420)
|
|
10.76
|
|
1.85
|
Outstanding
at September 30, 2008
|
642,376
|
|
$11.71
|
|
$2.44
|
Options
outstanding at September 30, 2008 were as follows:
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Range
of Exercise Price
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
Number
Outstanding
|
Weighted
Average
Exercise Price
|
Aggregate
Intrinsic
Value
|
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
$10.09-10.74
|
|
7.0
|
|
364,803
|
$10.69
|
$751,960
|
|
207,724
|
$10.74
|
$417,643
|
11.05-11.71
|
|
8.5
|
|
64,080
|
11.24
|
96,720
|
|
13,632
|
11.31
|
19,608
|
12.76
|
|
9.1
|
|
25,475
|
12.76
|
--
|
|
--
|
--
|
--
|
13.32-13.47
|
|
7.9
|
|
159,618
|
13.40
|
--
|
|
34,048
|
13.47
|
--
|
15.34
|
|
8.2
|
|
28,400
|
15.34
|
--
|
|
5,680
|
15.34
|
--
|
|
|
|
|
642,376
|
|
$848,680
|
|
261,084
|
|
$437,251
|
Cash
proceeds received from the exercise of stock options were $607,000 and $854,000
for the years ended September 30, 2008 and 2007 respectively. The total
intrinsic value of stock options exercised were $66,000 and $339,000 for the
years ended September 30, 2008 and 2007 respectively. The amounts recognized in
compensation expense were $366,000, $396,000 and $228,000 for the years ended
September 30, 2008, 2007, and 2006 respectively. Tax benefits related to stock
option exercises were $43,000 and $55,000 for the years ended September 30, 2008
and 2007 respectively. It is the Company’s general policy to issue new shares
for the exercise of stock options.
As of
September 30, 2008, the compensation expense yet to be recognized for
stock-based awards that have been awarded but not vested is as
follows:
|
Stock
Options
|
|
Restricted
Stock
|
|
Total
Awards
|
|
(in
thousands)
|
2009
|
$325
|
|
$ 692
|
|
$1,017
|
2010
|
267
|
|
692
|
|
959
|
2011
|
134
|
|
95
|
|
229
|
2012
|
57
|
|
27
|
|
84
|
2013
|
21
|
|
10
|
|
31
|
Total
|
$804
|
|
$1,516
|
|
$2,320
|
Note 10 - Employee Stock Ownership
Plan
In
connection with the minority stock offering in 2004, the Company established an
ESOP for the benefit of its employees. The ESOP covers all employees with at
least one year and 1000 hours of service. Shares are released for allocation at
the discretion of the Board of Directors. In 2004, the Company issued 566,137
shares of common stock to the ESOP in exchange for a ten-year note of
approximately $5.0 million. These shares are expected to be released over a
ten-year period. In 2007, the ESOP acquired an additional 816,000 shares of the
Company’s common stock in exchange for a fifteen-year note of approximately $8.2
million. These shares are expected to be released over a fifteen-year period. As
shares are released from collateral, the Company will report compensation
expense equal to the average market price of the shares. ESOP
compensation expense included in salaries and benefits was $1.2 million,
$793,000 and $681,000 for the years ended September 30, 2008, 2007, and 2006,
respectively. Dividends on allocated ESOP shares reduce retained earnings;
dividends on unallocated ESOP shares reduce principal or interest on the ESOP
loan.
ESOP
share activity is summarized in the following table:
|
Unallocated
ESOP
Shares
|
|
Fair
Value
of
Unallocated
Shares
|
|
Allocated
and
Released Shares
|
|
Total
ESOP
Shares
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2005
|
509,523
|
|
$5,696,300
|
|
56,614
|
|
566,137
|
|
Allocation
on September 30, 2006
|
(56,614)
|
|
|
|
56,614
|
|
--
|
|
Balance
at September 30, 2006
|
452,909
|
|
6,199,600
|
|
113,228
|
|
566,137
|
|
Allocation
on September 30, 2007
|
(56,614)
|
|
|
|
56,614
|
|
--
|
|
Balance
at September 30, 2007
|
396,295
|
|
4,643,200
|
|
169,842
|
|
566,137
|
|
ESOP
shares issued in December 2007
|
816,000
|
|
|
|
--
|
|
816,000
|
|
Allocation
on September 30, 2008
|
(111,014)
|
|
|
|
111,014
|
|
--
|
|
Balance
at September 30, 2008 (unaudited)
|
1,101,281
|
|
14,041,333
|
|
280,856
|
|
1,382,137
|
|
From the
inception of the ESOP through September 30, 2008, 22,376 shares have been taken
out of the ESOP via distributions to former employees. At September
30, 2008, a total of 1,359,761 shares remained in the ESOP.
Note
11 – Commitments and Contingencies
Lease
commitments:
The
Company has entered into noncancelable operating leases for land and buildings
that require future minimum rental payments in excess of one year as of
September 30, 2008. Certain lease payments may be adjusted periodically in
accordance with changes in the Consumer Price Index. The estimated future
minimum annual rental payments, exclusive of taxes and other charges, are
summarized as follows:
|
Year
ending
September
30,
|
|
(in
thousands)
|
2009
|
$ 474
|
2010
|
453
|
2011
|
186
|
2012
|
122
|
2013
|
81
|
Thereafter
|
1,676
|
Total
|
$ 2,992
|
Total
rent expense for the years ended September 30, 2008, 2007, and 2006, was
$509,000, $463,000 and $434,000, respectively. The Company also leases office
space to others on a month-to-month basis. Total rental income was $33,000,
$33,000 and $34,000 for the years ended September 30, 2008, 2007, and 2006,
respectively.
Commitments
to extend credit:
In the
normal course of business, the Company makes various commitments and incurs
certain contingent liabilities that are not presented in the accompanying
financial statements. The commitments and contingent liabilities include various
guarantees and commitments to extend credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the agreement. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Because many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed necessary
by the Company upon extension of the credit, is based on management’s credit
evaluation of the borrower. Collateral held varies but may include securities,
accounts receivable, inventory, fixed assets, and/or real estate properties. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding.
At
September 30, 2008 and 2007, commitments to extend credit were as
follows:
|
September
30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
|
|
|
|
Unfunded
commitments under lines of credit and letters of credit
|
$42,470
|
|
$37,386
|
Undisbursed
balance of loans closed
|
8,197
|
|
10,324
|
Commitments
to originate loans:
|
|
|
|
Fixed
rate
|
6,768
|
|
9,229
|
Adjustable
rate
|
11,924
|
|
5,743
|
Total
commitments
|
$69,359
|
|
$62,682
|
The
Company estimates a reserve related to unfunded loan commitments. In assessing
the adequacy of the reserve, the Company uses a similar approach used in the
development of the allowance for loan losses. At September 30, 2008, the reserve
for unfunded loan commitments was $170,000, which was included in other
liabilities on the Consolidated Balance Sheets.
Most of
the Bank’s business activity is with customers located in the State of Idaho.
Loans to one borrower are generally limited, by federal banking regulation, to
15% of the Bank's regulatory capital. As of September 30, 2008 and 2007, the
Bank had no individual industry concentrations of credit risk.
In
connection with certain asset sales, the Bank typically makes representations
and warranties about the underlying assets conforming to specified guidelines.
If the underlying assets do not conform to the specifications, the Bank may have
an obligation to repurchase the assets or indemnify the purchaser against loss.
As of September 30, 2008, loans under warranty totaled $167.0 million, which
substantially represents the unpaid principal balance of the Company's
residential mortgage loans serviced for investors. The Bank believes that the
potential for loss under these arrangements is remote. Accordingly, no
contingent liability is recorded in the financial statements.
Note
12 - Related Party Transactions
In the
normal course of business, the Company makes loans to its executive officers,
directors and companies affiliated with these individuals. It is management’s
opinion that loans to the Company’s officers and directors have been made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated parties and
have not involved more than normal risk of collectibility. An analysis of
activity with respect to loans receivable from directors, executive officers and
their affiliates is as follows:
|
September
30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
|
|
|
|
Beginning
balance
|
$872
|
|
$919
|
Principal
advances
|
--
|
|
--
|
Principal
repayments
|
(192)
|
|
(47)
|
Other
changes
|
(620)
|
|
--
|
Balance,
end of year
|
$ 60
|
|
$872
|
“Other
changes” in the table above refers to a loan to an employee whose status was
changed from an executive officer during the year.
The
Company also accepts deposits from its executive officers, directors, and
affiliated companies on substantially the same terms as unrelated parties. The
aggregate dollar amounts of these deposits were $1.2 million and $1.4 million at
September 2008 and 2007, respectively.
Note
13 - Capital Requirements
The Bank
is subject to various regulatory capital requirements administered by its
primary federal regulator, the Office of Thrift Supervision (“OTS”). Failure to
meet the minimum regulatory capital requirements can initiate certain mandatory
and possible additional discretionary actions by regulators, that if undertaken,
could have a direct material effect on the Bank and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines involving quantitative measures of the Bank’s assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classifications under the prompt
corrective action guidelines are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios of total risk-based capital and Tier 1
capital to risk-weighted assets (as defined in the regulations), Tier 1 capital
to adjusted total assets (as defined), and tangible capital to adjusted total
assets (as defined). As of September 2008, the Bank meets all of the capital
adequacy requirements to which it is subject.
The
actual and required minimum capital amounts and ratios are presented in the
following table:
|
Actual
|
|
For
Capital Adequacy
Purposes
|
|
To
Be Well Capitalized Under Prompt Corrective Action
Provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
(in
thousands)
|
September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk-based capital (to risk-weighted assets)
|
$149,803
|
|
32.84%
|
|
$36,491
|
|
≥
8.0%
|
|
$45,614
|
|
≥
10.0%
|
Tier
1 (core) capital
|
146,854
|
|
21.66
|
|
27,116
|
|
≥
4.0
|
|
33,895
|
|
≥
5.0
|
Tangible
capital (to tangible assets)
|
146,854
|
|
21.66
|
|
13,558
|
|
≥
2.0
|
|
N/A
|
|
N/A
|
Tier
1 risk-based capital (to risk-weighted assets)
|
146,783
|
|
32.18
|
|
18,245
|
|
≥
4.0
|
|
27,368
|
|
≥
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk-based capital (to risk-weighted assets)
|
$96,805
|
|
21.38%
|
|
$36,224
|
|
≥
8.0%
|
|
$45,280
|
|
≥
10.0%
|
Tier
1 (core) capital
|
93,736
|
|
13.56
|
|
27,654
|
|
≥
4.0
|
|
34,568
|
|
≥ 5.0
|
Tangible
capital (to tangible assets)
|
93,736
|
|
13.56
|
|
13,827
|
|
≥
2.0
|
|
N/A
|
|
N/A
|
Tier
1 risk-based capital (to risk-weighted assets)
|
93,678
|
|
20.69
|
|
18,112
|
|
≥
4.0
|
|
27,168
|
|
≥
6.0
|
The
following table is a reconciliation of the Bank’s capital, calculated according
to generally accepted accounting principles, to total Tier 1
capital:
|
September
30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
|
|
|
|
Equity
|
$146,058
|
|
$91,908
|
Other
comprehensive income – unrealized loss on securities
|
967
|
|
2,033
|
Mortgage
servicing rights, net
|
(171)
|
|
(205)
|
Total
Tier 1 capital
|
$146,854
|
|
$93,736
|
OTS
regulations place certain restrictions on dividends paid by the Bank to the
Company. Generally, savings institutions, such as the Bank, that before and
after the proposed distribution are well-capitalized, may make capital
distributions during any calendar year equal to up to 100% of net income for the
year-to-date plus retained net income for the two preceding years. Savings
institutions proposing to make any capital distribution need not submit written
notice to the OTS prior to such distribution unless they are a subsidiary of a
holding company or would not remain well-capitalized following the
distribution.
Note
14 - Income Taxes
The
provision for income tax expense consisted of the following:
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands)
|
Current
tax expense
|
|
|
|
|
|
Federal
|
$3,004
|
|
$3,461
|
|
$3,723
|
State
|
334
|
|
485
|
|
484
|
Deferred
tax benefit
|
|
|
|
|
|
Federal
|
(873)
|
|
(557)
|
|
(316)
|
State
|
(202)
|
|
(122)
|
|
(81)
|
Income
tax expense
|
$2,263
|
|
$3,267
|
|
$3,810
|
The
provision for income tax expense differs from that computed at the statutory
corporate tax rate as follows:
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
|
|
|
|
|
Federal
income tax at statutory rates
|
$2,131
|
|
$2,904
|
|
$3,407
|
State
income taxes, net of federal benefit
|
275
|
|
410
|
|
450
|
Effect
of permanent differences
|
(143)
|
|
(47)
|
|
(47)
|
Income
tax expense
|
$2,263
|
|
$3,267
|
|
$3,810
|
The tax
effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities consist of the following:
|
September 30,
|
|
2008
|
|
2007
|
|
(in
thousands)
|
Deferred
tax asset:
|
|
|
|
Deferred
compensation
|
$
2,160
|
|
$
1,878
|
Unrealized
loss on securities available for sale
|
933
|
|
1,484
|
Allowance
for loan losses
|
1,976
|
|
1,301
|
Equity
compensation
|
476
|
|
373
|
Accrued
expenses
|
191
|
|
186
|
Other
|
16
|
|
32
|
Total
deferred tax asset
|
5,752
|
|
5,254
|
Deferred
tax liability:
|
|
|
|
Fixed
asset basis
|
(516)
|
|
(365)
|
Deferred
loan costs
|
(471)
|
|
(532)
|
Prepaid
expenses
|
(172)
|
|
(139)
|
Mortgage
servicing rights
|
(710)
|
|
(851)
|
FHLB
stock dividends
|
(1,960)
|
|
(1,960)
|
Other
|
(153)
|
|
(162)
|
Total
deferred tax liability
|
(3,982)
|
|
(4,009)
|
Net
deferred tax asset
|
$
1,770
|
|
$
1,245
|
Included
in retained earnings at September 2008 and 2007 is approximately $2.1 million in
bad debt reserves for which no deferred income tax liability has been recorded.
This amount represents allocations of income to bad debt deductions for tax
purposes only. Reduction of these reserves for purposes other than tax bad debt
losses or adjustments arising from carryback of net operating losses would
create income for tax purposes, which would be subject to the then-current
corporate income tax rate. The unrecorded deferred liability on this amount was
approximately $900,000 at September 2008 and 2007.
Note
15 – Earnings Per Share
Earnings
per share (“EPS”) is computed using the basic and diluted weighted average
number of common shares outstanding during the period. Basic EPS is computed by
dividing the Company’s net income or loss by the weighted average number of
common shares outstanding for the period. Diluted EPS is computed by dividing
net income or loss by diluted weighted average shares outstanding, which include
common stock equivalent shares outstanding using the treasury stock method,
unless such shares are anti-dilutive. Common stock equivalents arise from
assumed conversion of outstanding stock options and from assumed vesting of
shares awarded but not released under the Company’s RRP plan. ESOP shares are
not considered outstanding for earnings per share purposes until they are
committed to be released.
The
following table presents the computation of basic and diluted earnings per share
for the periods indicated:
|
Year
Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
thousands, except share data)
|
Basic
earnings per share:
|
|
|
|
|
|
Net
income
|
$4,005
|
|
$5,271
|
|
$6,212
|
Weighted-average
common shares outstanding
|
16,233,200
|
|
16,602,082
|
|
16,454,940
|
Basic
earnings per share
|
$0.25
|
|
$0.32
|
|
$0.38
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
Net
income
|
$4,005
|
|
$5,271
|
|
$6,212
|
Weighted-average
common shares outstanding
|
16,233,200
|
|
16,602,082
|
|
16,454,940
|
Net
effect of dilutive stock options
|
--
|
|
104,598
|
|
--
|
Net
effect of dilutive RRP awards
|
19,547
|
|
60,539
|
|
39,528
|
Weighted-average
common shares outstanding and common stock equivalents
|
16,252,747
|
|
16,767,219
|
|
16,494,468
|
Diluted
earnings per share
|
$0.25
|
|
$0.31
|
|
$0.38
|
Note
16 - Fair Value of Financial Instruments
The
estimated fair values of the Company’s financial instruments are as
follows:
|
At
September 30,
|
|
2008
|
|
2007
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
|
(in
thousands)
|
Financial
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
23,270
|
|
$
23,270
|
|
$
20,588
|
|
$
20,588
|
Investment
in certificate of deposit
|
5,000
|
|
4,993
|
|
--
|
|
--
|
Mortgage-backed
securities available for sale
|
188,787
|
|
188,787
|
|
162,258
|
|
162,258
|
Loans
held for sale
|
2,831
|
|
2,831
|
|
4,904
|
|
4,904
|
Loans
receivable, net
|
459,813
|
|
469,989
|
|
480,118
|
|
487,754
|
FHLB
stock
|
9,591
|
|
9,591
|
|
9,591
|
|
9,591
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
Demand
and savings deposits
|
195,521
|
|
195,521
|
|
189,418
|
|
189,418
|
Certificates
of deposit
|
177,404
|
|
177,550
|
|
215,191
|
|
215,576
|
FHLB
advances
|
136,972
|
|
143,219
|
|
180,730
|
|
181,598
|
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
Cash
and cash equivalents:
The
carrying amount approximates fair value.
Mortgage-backed
securities available for sale:
The fair
values of mortgage-backed securities are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans
held for sale:
The
carrying amount approximates fair value.
Federal
Home Loan Bank stock:
The
carrying value of FHLB stock approximates fair value based on the respective
redemption provisions.
Loans
receivable:
For
variable-rate loans that re-price frequently and have no significant change in
credit risk, fair values are based on carrying values. Fair values for
commercial real estate and commercial loans with maturities beyond one year are
estimated using a discounted cash flow analysis, utilizing interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loans with maturities less than one year are estimated to have a
fair value equal to the carrying value. Fair values for impaired loans are
estimated using discounted cash flow analysis or underlying collateral values,
where applicable.
Deposits:
The fair
value of demand deposits, savings accounts and certain money market deposits is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit maturing beyond one year is estimated
using discounted cash flow analysis using the rates currently offered for
deposits of similar remaining maturities. Certificates with maturities less than
one year are valued at carrying values.
FHLB
advances:
The fair
value of the borrowings is estimated by discounting the future cash flows using
the current rate at which similar borrowings with similar remaining maturities
could be made.
Off-balance-sheet
instruments:
Fair
values of off-balance-sheet lending commitments are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the borrower’s credit standing. The fair value of
the fees at September 30, 2008 and 2007 were insignificant.
Note
17 - Parent Only Financial Information
Home Federal Bancorp was formed to
serve as the stock holding company for the Bank. The following are the condensed
financial statements for Home Federal Bancorp (parent company
only):
HOME
FEDERAL BANCORP, INC.
PARENT-ONLY BALANCE
SHEETS
(In
thousands)
|
September
30,
2008
|
|
September
30,
2007
|
ASSETS
|
|
|
|
Cash
and amounts due from depository institutions
|
$ 19,707
|
|
$ 3,504
|
Certificate
of deposit in correspondent bank
|
5,000
|
|
--
|
Mortgage-backed
securities available for sale, at fair value
|
33,385
|
|
16,405
|
Investment
in the Bank
|
146,058
|
|
91,908
|
Other
assets
|
1,055
|
|
879
|
TOTAL
ASSETS
|
$205,205
|
|
$112,696
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Other
liabilities
|
$ 18
|
|
$ 59
|
Stockholder’s
equity
|
205,187
|
|
112,637
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$205,205
|
|
$112,696
|
|
|
|
|
HOME
FEDERAL BANCORP, INC.
PARENT-ONLY STATEMENTS OF
INCOME
(In
thousands)
|
Year
Ended
September
30,
2008
|
|
Year
Ended
September
30,
2007
|
|
Year
Ended
September
30,
2006
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
Investment
interest
|
$ 526
|
|
$ 95
|
|
$ 36
|
Mortgage-backed
security interest
|
1,220
|
|
768
|
|
773
|
Other
income
|
347
|
|
108
|
|
119
|
Dividend
income from the Bank
|
--
|
|
--
|
|
--
|
Total
income
|
2,093
|
|
971
|
|
928
|
Expense:
|
|
|
|
|
|
Professional
services
|
124
|
|
125
|
|
156
|
Other
|
1,443
|
|
220
|
|
228
|
Total
expense
|
1,567
|
|
345
|
|
384
|
Income
before income taxes and equity in undistributed earnings in the
Bank
|
526
|
|
626
|
|
544
|
Income
tax expense
|
100
|
|
188
|
|
154
|
INCOME
OF PARENT COMPANY
|
426
|
|
438
|
|
390
|
EQUITY
IN UNDISTRIBUTED INCOME OF THE BANK
|
3,579
|
|
4,833
|
|
5,822
|
NET
INCOME
|
$4,005
|
|
$5,271
|
|
$6,212
|
HOME
FEDERAL BANCORP, INC.
PARENT-ONLY
STATEMENTS OF CASH FLOWS
(In
thousands)
|
Year
Ended
September
30,
2008
|
|
Year
Ended
September
30,
2007
|
|
Year
Ended
September
30,
2006
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income
|
$
4,005
|
|
$ 5,271
|
|
$ 6,212
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
Equity
in undistributed earnings of the Bank
|
(3,579)
|
|
(4,833)
|
|
(5,822)
|
Net
amortization of premiums on investments
|
29
|
|
15
|
|
17
|
Provision
for deferred income taxes
|
--
|
|
--
|
|
343
|
ESOP
shares committed to be released
|
1,090
|
|
436
|
|
416
|
Change
in assets and liabilities:
|
|
|
|
|
|
Other
assets
|
(20)
|
|
(102)
|
|
218
|
Other
liabilities
|
(41)
|
|
(8)
|
|
--
|
Net
cash provided by operating activities
|
1,484
|
|
779
|
|
1,384
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Proceeds
from maturity of mortgage-backed securities held to
maturity
|
--
|
|
854
|
|
1,810
|
Proceeds
from maturity of mortgage-backed securities available for
sale
|
4,715
|
|
2,298
|
|
1,250
|
Purchase
of mortgage-backed securities available for sale
|
(22,123)
|
|
(2,102)
|
|
--
|
Investment
in certificate of deposit
|
(5,000)
|
|
--
|
|
--
|
Loan
originations and principal collections, net
|
4
|
|
3
|
|
3
|
Net
cash provided (used) by investing activities
|
(22,404)
|
|
1,053
|
|
3,063
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Dividends
paid
|
(2,987)
|
|
(1,281)
|
|
(1,225)
|
Intercompany
borrowing, net
|
--
|
|
--
|
|
(1,300)
|
Investment
in subsidiary
|
(48,345)
|
|
--
|
|
--
|
Net
proceeds from stock issuance and exchange pursuant to second step
conversion
|
87,849
|
|
--
|
|
--
|
Proceeds
from exercise of stock options
|
606
|
|
854
|
|
--
|
Net
cash provided (used) by financing activities
|
37,123
|
|
(427)
|
|
(2,525)
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
16,203
|
|
1,405
|
|
1,922
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
3,504
|
|
2,099
|
|
177
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$19,707
|
|
$3,504
|
|
$ 2,099
|
Note 18 – Selected
Quarterly Financial Data (unaudited)
(In
thousands, except share data)
|
Quarter
Ended
|
|
December
31,
2007
|
|
March
31,
2008
|
|
June
30,
2008
|
|
September
30,
2008
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
$10,302
|
|
$10,459
|
|
$10,092
|
|
$9,730
|
Interest
expense
|
5,246
|
|
4,682
|
|
4,181
|
|
3,826
|
Net
interest income
|
5,056
|
|
5,777
|
|
5,912
|
|
5,903
|
Provision
for loan losses
|
287
|
|
378
|
|
652
|
|
1,114
|
Non-interest
income
|
2,625
|
|
2,483
|
|
2,735
|
|
2,647
|
Non-interest
expense
|
5,883
|
|
6,424
|
|
6,174
|
|
5,958
|
Income
before income taxes
|
1,511
|
|
1,458
|
|
1,820
|
|
1,479
|
Income
tax expense
|
564
|
|
513
|
|
702
|
|
484
|
Net
income
|
$ 947
|
|
$ 945
|
|
$1,119
|
|
$994
|
Basic
earnings per share (1)
|
$0.06
|
|
$0.06
|
|
$0.07
|
|
$0.06
|
Diluted
earnings per share (1)
|
0.06
|
|
0.06
|
|
0.07
|
|
0.06
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
December
31,
2006
|
|
March
31,
2007
|
|
June
30,
2007
|
|
September
30,
2007
|
Interest
and dividend income
|
$10,872
|
|
$10,738
|
|
$10,650
|
|
$10,378
|
Interest
expense
|
5,373
|
|
5,377
|
|
5,338
|
|
5,248
|
Net
interest income
|
5,499
|
|
5,361
|
|
5,312
|
|
5,130
|
Provision
for loan losses
|
71
|
|
--
|
|
--
|
|
338
|
Non-interest
income
|
2,883
|
|
2,761
|
|
2,982
|
|
2,564
|
Non-interest
expense
|
6,246
|
|
6,094
|
|
5,794
|
|
5,411
|
Income
before income taxes
|
2,065
|
|
2,028
|
|
2,500
|
|
1,945
|
Income
tax expense
|
796
|
|
787
|
|
934
|
|
750
|
Net
income
|
$
1,269
|
|
$
1,241
|
|
$
1,566
|
|
$
1,195
|
Basic
earnings per share (1)
|
$0.09
|
|
$0.09
|
|
$0.11
|
|
$0.08
|
Diluted
earnings per share (1)
|
0.09
|
|
0.08
|
|
0.11
|
|
0.08
|
_______
|
(1) Quarterly
earnings per share may vary from annual earnings per share due to
rounding.
|
Note
19 – Conversion and Reorganization
The
Company is a Maryland corporation that was formed as the new stock holding
company for Home Federal Bank in connection with the Conversion, which was
completed on December 19, 2007.
As part
of the Conversion, a total of 9,384,000 new shares of the Company were sold at
$10 per share in subscription, community and syndicated community offerings
through which the Company received proceeds of approximately $87.8 million, net
of offering costs of approximately $5.9 million. The Company contributed $48.0
million or approximately 50% of the net proceeds to the Bank in the form of a
capital contribution. The Company loaned $8.2 million to the Bank’s Employee
Stock Ownership Plan (the “ESOP”) and the ESOP used those funds to acquire
816,000 shares of the Company’s common stock at $10 per share. As part of the
Conversion, shares of outstanding common stock of the Mid-Tier were exchanged
for 1.136 shares of the Company’s common stock. No fractional shares were
issued. Instead, cash was paid to stockholders at $10 per share for any
fractional shares that would otherwise be issued. The exchange resulted in an
additional 852,865 outstanding shares of the Company for a total of 17,325,901
outstanding shares as of the closing of the Conversion on December 19, 2007,
after giving effect to the redemption of fractional shares.
The
Conversion was accounted for as a reorganization in corporate form with no
change in the historical basis of the Company’s assets, liabilities and equity.
All references to the number of shares outstanding, with the exception of those
reported on the Balance Sheet, are restated to give retroactive recognition to
the exchange ratio applied in the Conversion.
Item
9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
Not
applicable.
Item 9A.
Controls and Procedures
Evaluation of Disclosure
Controls and Procedures: An evaluation of the Company’s
disclosure controls and procedures (as defined in Section 13a-15(e) of the
Exchange Act) was carried out under the supervision and with the participation
of the Company’s Chief Executive Officer, Chief Financial Officer and several
other members of the Company’s senior management as of the end of the period
covered by this annual report. The Company’s Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures as in effect as of September 30, 2008, are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Exchange Act is (i) accumulated and communicated to the
Company’s management (including the Chief Executive Officer and Chief Financial
Officer) in a timely manner, and (ii) recorded, processed, summarized and
reported within the time periods specified in the Security and Exchange
Commission’s rules and forms.
Management's Annual Report
on Internal Control Over Financial Reporting and Auditor’s
Attestation: The Company's management is responsible for
establishing and maintaining adequate internal control over financial reporting
(as defined in Rule 13a-15(f) of the Exchange Act). As required by Rule
13a-15(c) of the Exchange Act, management has evaluated the effectiveness of the
Company's internal control over financial reporting. Our independent auditor
also attested to, and reported on, management's assessment of the effectiveness
of internal control over financial reporting. Management's Annual Report on
Internal Control Over Financial Reporting, as well as the Report of Independent
Registered Public Accounting Firm, which contains the auditor’s attestation on
our internal control over financial reporting, are included in this Annual
Report on Form 10-K in “Part II, Item 8. Financial Statements and Supplementary
Data.”
Changes in Internal
Controls: There have been no changes in our internal control
over financial reporting (as defined in 13a-15(f) of the Exchange Act) that
occurred during the quarter ended September 30, 2008, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. A number of internal control procedures were, however,
modified during the year in conjunction with the Bank's internal control testing
and conversion to a new core processing system. The Company also continued to
implement suggestions from its internal auditor and independent auditor on ways
to strengthen existing controls.
The
Company intends to continually review and evaluate the design and effectiveness
of its disclosure controls and procedures and to improve its controls and
procedures over time and to correct any deficiencies that it may discover in the
future. The goal is to ensure that senior management has timely access to all
material non-financial information concerning the Company's business. While the
Company believes the present design of its disclosure controls and procedures is
effective to achieve its goal, future events affecting its business may cause
the Company to modify its disclosure controls and procedures. The Company does
not expect that its disclosure controls and procedures and internal control over
financial reporting will prevent all error and fraud. A control procedure, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control procedure are met.
Because of the inherent limitations in all control procedures, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns in controls or procedures can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control. The design of any control procedure is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals
under all
potential future conditions; over time, controls become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control procedure, misstatements due to error or fraud may occur
and not be detected.
Item 9B. Other
Information
There was
no information to be disclosed by the Company in a report on Form 8-K during the
fourth quarter of fiscal 2008 that was not so disclosed.
PART
III
Item 10.
Directors, Executive Officers and Corporate Governance
DIRECTORS
The
information contained in the Company’s Proxy Statement for the 2009 Annual
Meeting under the sections captioned “Proposal 1 – Election of Directors” and
“Meetings and Committees of the Board of Directors and Corporate Governance
Matters” are incorporated herein by reference.
EXECUTIVE
OFFICERS
See the
information under the section captioned “Executive Officers of the Registrant”
under “Part I - Item 1. Business” in this Annual Report on Form
10-K.
COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The
information contained in the Company’s Proxy Statement for the 2009 Annual
Meeting under the section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance” is incorporated herein by reference.
CORPORATE
GOVERNANCE
The
information contained in the Company’s Proxy Statement for the 2009 Annual
Meeting under the section captioned “Meetings and Committees of the Board of
Directors and Corporate Governance Matters” is incorporated herein by
reference.
CODE
OF ETHICS
We have a
Code of Ethics for our officers (including its senior financial officers),
directors and employees. The Code of Ethics requires our officers, directors and
employees to maintain the highest standards of professional conduct. A copy of
our Code of Ethics was filed as an exhibit to the Annual Report on Form 10-K for
the fiscal year ended September 30, 2004 and is available on our website at
www.myhomefed.com.
Item 11.
Executive Compensation
The
information contained in the Company’s Proxy Statement for the 2009 Annual
Meeting under the section captioned “Directors’ Compensation” and “Executive
Compensation” are incorporated herein by reference.
Item 12.
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Equity Compensation Plan
Information
The
information contained in the Company’s Proxy Statement for the 2009 Annual
Meeting under the section captioned “Equity Compensation Plan Information” and
“Security Ownership of Certain Beneficial Owners and Management” are
incorporated herein by reference.
Item 13. Certain
Relationships and Related Transactions, and Director
Independence
The
information contained in the Company’s Proxy Statement for the 2009 Annual
Meeting under the section captioned “Meetings and Committees of the Board of
Directors and Corporate Governance Matters” are incorporated herein by
reference.
Item 14.
Principal Accounting Fees and Services
The
information contained in the Company’s Proxy Statement for the 2009 Annual
Meeting under the sections captioned “Proposal 2 – Ratification of the
Appointment of the Independent Registered Public Accounting Firm” are
incorporated herein by reference.
PART
IV
Item 15.
Exhibits and Financial Statement Schedules
(a) Financial
Statements
See Index to Consolidated Financial Statements on page 82.
(b) Financial
Statement Schedules
All financial statement schedules are omitted because they are not applicable or
not required, or because the
required information is included in the Consolidated Financial Statements or the
Notes thereto or in Part I, Item 1.
2.1
|
Plan
of Conversion and Reorganization (1)
|
3.1
|
Articles
of Incorporation of the Registrant (2)
|
3.2
|
Amended
and Restated Bylaws of the Registrant (3)
|
10.1
|
Form
of Employment Agreement for President and Chief Executive Officer with
Home Federal Bank (2)
|
10.2
|
Form
of Employment Agreement for President and Chief Executive Officer with
Home Federal Bancorp, Inc. (2)
|
10.3
|
Form
of Severance Agreement for Executive Officers (2)
|
10.4
|
Form
of Home Federal Savings and Loan Association of Nampa Employee Severance
Compensation Plan (2)
|
10.5
|
Form
of Director Indexed Retirement Agreement entered into by Home Federal
Savings and Loan Association of Nampa with each of its Directors
(2)
|
10.6
|
Form
of Director Deferred Incentive Agreement entered into by Home Federal
Savings and Loan Association of Nampa with each of its Directors
(2)
|
10.7
|
Form
of Executive Deferred Incentive Agreement, and amendment thereto, entered
into by Home Federal Savings and Loan Association of Nampa with Daniel L.
Stevens, Robert A. Schoelkoph, Roger D. Eisenbarth, Lynn A. Sander and
Karen Wardwell (2)
|
10.8
|
Form
of Amended and Restated Salary Continuation Agreement entered into by Home
Federal Savings and Loan Association of Nampa with Daniel L. Stevens, Len
E. Williams, Steven E. Emerson, Robert A. Schoelkoph, Roger D. Eisenbarth,
Lynn A. Sander and Karen Wardwell (2)
|
10.9
|
2005
Stock Option and Incentive Plan approved by stockholders on June 23, 2005
and Form of Incentive Stock Option Agreement and Non-Qualified Stock
Option Agreement (4)
|
10.10
|
2005
Recognition and Retention Plan approved by stockholders on June 23, 2005
and Form of Award Agreement (4)
|
10.11
|
Form
of new Director Retirement Plan entered into by Home Federal Bank with
each of its Directors (5)
|
10.12
|
Transition
Agreement with Daniel L. Stevens (6)
|
10.13
|
Agreement
Regarding Terms of Employment Offer with Len E. Williams
(6)
|
10.14
|
Employment
Agreement entered into by Home Federal Bank with Len E. Williams
(7)
|
10.15
|
Agreement
Regarding Terms of Employment Offer with Steven K. Eyre
(8)
|
11
|
Statement
regarding computation of per share earnings (9)
|
14
|
Code
of Ethics (10)
|
21
|
Subsidiaries
of the Registrant *
|
23
|
Consent
of Independent Registered Public Accounting Firm *
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley
Act
|
______
* Filed
herewith
(1)
Filed as
an exhibit to the Registrant’s Current Report on Form 8-K dated May 11,
2007.
(2)
Filed as
an exhibit to the Registrant's Registration Statement on Form S-1
(333-146289).
(3)
Filed as
an exhibit to the Registrant’s Current Report on Form 8-K dated October 19,
2007.
(4)
Filed as
an exhibit to the Registrant’s Registration Statement on Form S-8
(333-127858).
(5)
Filed as
an exhibit to the Registrant’s Current Report on Form 8-K dated October 21,
2005.
(6) Filed as
an exhibit to the Registrant’s Current Report on Form 8-K dated August 21,
2006.
(7) Filed as
an exhibit to the Registrant’s Current Report on Form 8-K dated November 6,
2006.
(8) Filed as
an exhibit to the Registrant’s Current Report on Form 8-K dated November 15,
2007.
(9)
Reference is made to Note 15 - Earnings Per Share in the
Selected Notes to Consolidated Financial Statements under Item 8 herein.
(10) Registrant elects to satisfy
Regulation S-K §229.406(c) by posting its Code of Ethics on its website at
www.myhomefed.com under the heading "Investor Relations".
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto, duly authorized.
HOME FEDERAL
BANCORP, INC.
Date: December
12,
2008
/s/ Len E.
Williams
Len E. Williams
President and
Chief Executive Officer
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURES
|
TITLE
|
DATE
|
|
|
/s/
Len E. Williams
|
President,
Chief Executive Officer
|
December
12, 2008
|
Len
E. Williams
|
and
Director
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Eric S. Nadeau
|
Chief
Financial Officer
|
December
12, 2008
|
Eric
S. Nadeau
|
(Principal
Financial and Accounting Officer)
|
|
|
/s/
Fred H. Helpenstell
|
Director
|
December
12, 2008
|
Fred
H. Helpenstell, M.D.
|
|
|
/s/
Charles Hedemark
|
Director
|
December
12, 2008
|
N.
Charles Hedemark
|
|
|
/s/
Richard J. Navarro
|
Director
|
December
12, 2008
|
Richard
J. Navarro
|
|
|
/s/
James R. Stamey
|
Director
|
December
12, 2008
|
James
R. Stamey
|
|
|
/s/
Robert A. Tinstman
|
Director
|
December
12, 2008
|
Robert
A. Tinstman
|
|
|
|
|
|
|
|
|
/s/
Daniel L. Stevens
|
Chairman
|
December
12, 2008
|
Daniel
L. Stevens
|
|
|
EXHIBIT
INDEX
21
|
Subsidiaries
of the Registrant
|
23
|
Consent
of Independent Registered Public Accounting Firm
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley
Act
|
Exhibit
21
|
Subsidiaries
of the Registrant
|
|
Parent
|
Home
Federal Bancorp, Inc.
|
|
|
|
|
Subsidiaries
|
Percentage
Owned
|
|
State
or Other
Jurisdiction
of
Incorporation
or
Organization
|
Home
Federal Bank
|
100%
|
|
United
States
|
Idaho
Home Service Corporation (1)
|
100%
|
|
Idaho
|
________
(1)
|
This
corporation is a wholly owned subsidiary of Home Federal
Bank.
|
Exhibit
31.1
Certification
Required
by
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Len E.
Williams, certify that:
1.
|
I
have reviewed this Annual Report on Form 10-K of Home Federal Bancorp,
Inc.;
|
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation financial statements for external purposes
in accordance with generally accepted accounting
principles;
|
|
|
|
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|
|
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
|
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
|
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
|
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date: December
12,
2008 /s/ Len E. Williams
Len E. Williams
President and Chief Executive Officer
Exhibit
31.2
Certification
Required
by
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Eric
S. Nadeau, certify that:
1.
|
I
have reviewed this Annual Report on Form 10-K of Home Federal Bancorp,
Inc.;
|
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
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(a)
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Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
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(b)
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Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation financial statements for external purposes
in accordance with generally accepted accounting
principles;
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(c)
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Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
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(d)
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Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
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5.
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The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
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(a)
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All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
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(b)
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Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
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Date: December
12,
2008 /s/ Eric S.
Nadeau
Eric S. Nadeau
Executive Vice President and
Chief Financial Officer
Exhibit
32
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF
HOME FEDERAL BANCORP, INC.
PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The
undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and in connection with this Annual Report on Form 10-K, that:
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(1)
|
the
report fully complies with the requirements of Sections 13(a) and 15(d) of
the Securities Exchange Act of 1934, as amended, and
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(2)
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the
information contained in the report fairly presents, in all material
respects, the Company's financial condition and results of
operations.
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/s/ Len E.
Williams
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/s/ Eric S.
Nadeau
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Len
E.
Williams Eric
S. Nadeau
President
and Executive
Vice President and
Chief
Executive
Officer Chief
Financial Officer
Date:
December 12, 2008