q101231.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended December 31, 2008
or
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from _____ to
_____
|
Commission
File Number: 000-52995
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)
|
I.D.
Number)
|
|
|
500
12th Avenue
South, Nampa,
Idaho
|
83651
|
(Address of
principal executive offices)
|
(Zip
Code)
|
|
|
Registrant’s
telephone number, including area code:
|
(208)
466-4634
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X]
No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
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 Exchange Act).
Yes [ ] No [X]
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: Common Stock, $.01 par
value per share, 17,383,931 shares outstanding as of February 2,
2009.
HOME
FEDERAL BANCORP, INC.
FORM
10-Q
TABLE
OF CONTENTS
PART
1 -
|
FINANCIAL
INFORMATION |
|
|
|
|
|
Item 1 -
|
Financial
Statements |
Page
|
|
|
Consolidated
Balance Sheets as
of
December 31,
2008 and September 30, 2008 |
1 |
|
|
Consolidated
Statements of Income for the Three
Months
ended December
31, 2008 and 2007 |
2
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity and
Comprehensive Income for the Three
Months
ended
December 31, 2008
|
3
|
|
|
Consolidated
Statements of Cash Flows for the Three
Months ended December 31,
2008 and 2007 |
4
|
|
|
Selected Notes to
Interim Consolidated Financial Statements |
5
|
|
|
|
|
Item 2
-
|
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations
|
12
|
|
|
|
Item 3 -
|
Quantitative and
Qualitative Disclosures About Market Risk |
24
|
|
|
|
|
Item 4 -
|
Controls and
Procedures |
25
|
|
|
|
|
PART II
-
|
OTHER
INFORMATION |
|
|
|
|
|
Item 1 -
|
Legal
Proceedings |
25
|
|
|
|
|
Item
1A - Risk
Factors |
25
|
|
|
|
|
Item 2
-
|
Unregistered Sales
of Equity Securities and Use of Proceeds |
26
|
|
|
|
|
Item 3
-
|
Defaults Upon Senior
Securities |
26
|
|
|
|
|
Item 4 -
|
Submission of
Matters to a Vote of Security Holders |
26
|
|
|
|
|
Item 5
-
|
Other
Information |
27
|
|
|
|
|
Item 6
-
|
Exhibits |
27
|
|
|
|
|
SIGNATURES |
28
|
Item
1. Financial Statements
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data) (Unaudited)
|
December
31,
2008
|
|
September
30,
2008
|
|
|
|
|
ASSETS
|
|
|
|
Cash
and amounts due from depository institutions
|
$ 17,412
|
|
$ 23,270
|
Certificate
of deposit in correspondent bank
|
-
|
|
5,000
|
Mortgage-backed
securities available for sale, at fair value
|
188,237
|
|
188,787
|
Federal
Home Loan Bank of Seattle (“FHLB”) stock, at cost
|
9,591
|
|
9,591
|
Loans
receivable, net of allowance for loan losses
of $8,027
|
|
|
|
and
$4,579
|
466,169
|
|
459,813
|
Loans
held for sale
|
2,267
|
|
2,831
|
Accrued
interest receivable
|
2,534
|
|
2,681
|
Property
and equipment, net
|
16,073
|
|
15,246
|
Mortgage
servicing rights, net
|
-
|
|
1,707
|
Bank
owned life insurance
|
11,696
|
|
11,590
|
Real
estate and other property owned
|
1,352
|
|
650
|
Deferred
tax asset
|
-
|
|
1,770
|
Other
assets
|
2,802
|
|
2,134
|
TOTAL
ASSETS
|
$718,133
|
|
$725,070
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
Deposit
accounts:
|
|
|
|
Noninterest-bearing
demand deposits
|
$ 41,187
|
|
$ 41,398
|
Interest-bearing
demand deposits
|
134,148
|
|
127,714
|
Savings
deposits
|
27,589
|
|
26,409
|
Certificates
of deposit
|
174,475
|
|
177,404
|
Total
deposit accounts
|
377,399
|
|
372,925
|
Advances
by borrowers for taxes and insurance
|
721
|
|
1,386
|
Interest
payable
|
486
|
|
552
|
Deferred
compensation
|
5,230
|
|
5,191
|
FHLB
advances
|
124,574
|
|
136,972
|
Deferred
tax liability, net
|
310
|
|
-
|
Other
liabilities
|
1,965
|
|
2,857
|
Total
liabilities
|
510,685
|
|
519,883
|
|
|
|
|
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
|
|
174
|
Dec. 31, 2008 – 17,445,311 issued, 17,392,289 outstanding
|
|
|
|
Sept. 30, 2008 – 17,412,449 issued, 17,374,161 outstanding
|
|
|
|
Additional
paid-in capital
|
157,813
|
|
157,205
|
Retained
earnings
|
58,118
|
|
59,813
|
Unearned shares issued to employee stock ownership plan
(“ESOP”)
|
(10,378)
|
|
(10,605)
|
Accumulated
other comprehensive income (loss)
|
1,721
|
|
(1,400)
|
Total
stockholders’ equity
|
207,448
|
|
205,187
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$718,133
|
|
$725,070
|
|
|
|
|
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except share data) (Unaudited)
|
Three
Months Ended
December
31,
|
|
|
2008
|
|
2007
|
|
Interest
and dividend income:
|
|
|
|
|
Loan
interest
|
$
7,113
|
|
$
8,076
|
|
Investment
interest
|
43
|
|
264
|
|
Mortgage-backed
security interest
|
2,205
|
|
1,943
|
|
FHLB
dividends
|
(33)
|
|
19
|
|
Total
interest and dividend income
|
9,328
|
|
10,302
|
|
Interest
expense:
|
|
|
|
|
Deposits
|
2,018
|
|
3,214
|
|
FHLB
advances
|
1,565
|
|
2,032
|
|
Total
interest expense
|
3,583
|
|
5,246
|
|
Net
interest income
|
5,745
|
|
5,056
|
|
Provision
for loan losses
|
3,575
|
|
287
|
|
Net
interest income after provision for loan losses
|
2,170
|
|
4,769
|
|
Noninterest
income:
|
|
|
|
|
Service
charges and fees
|
2,109
|
|
2,232
|
|
Gain
on sale of loans
|
190
|
|
185
|
|
Increase
in cash surrender value of bank owned life insurance
|
106
|
|
104
|
|
Loan
servicing fees
|
69
|
|
127
|
|
Mortgage
servicing rights, net
|
(31)
|
|
(68)
|
|
Other
|
18
|
|
45
|
|
Total
noninterest income
|
2,461
|
|
2,625
|
|
Noninterest
expense:
|
|
|
|
|
Compensation
and benefits
|
3,575
|
|
3,699
|
|
Occupancy
and equipment
|
770
|
|
711
|
|
Data
processing
|
542
|
|
522
|
|
Advertising
|
248
|
|
287
|
|
Postage
and supplies
|
137
|
|
150
|
|
Professional
services
|
335
|
|
212
|
|
Insurance
and taxes
|
155
|
|
85
|
|
Other
|
272
|
|
217
|
|
Total
noninterest expense
|
6,034
|
|
5,883
|
|
Income
(loss) before income taxes
|
(1,403)
|
|
1,511
|
|
Income
tax expense (benefit)
|
(602)
|
|
564
|
|
NET
INCOME (LOSS)
|
$ (801)
|
|
$ 947
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
Basic
|
$(0.05)
|
|
$0.06(1)
|
|
Diluted
|
(0.05)
|
|
0.06(1)
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
Basic
|
16,129,352
|
|
16,738,289(1)
|
|
Diluted
|
16,129,352
|
|
16,762,906(1)
|
|
|
|
|
|
|
Dividends
declared per share:
|
$0.055
|
|
$0.048(1)
|
|
(1)
Earnings per share, average shares outstanding, and dividends per share have
been adjusted to reflect the impact of the second-step conversion and
reorganization of Home Federal Bancorp, Inc., which occurred on December 19,
2007.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
|
(In
thousands, except share data) (Unaudited)
|
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
|
15,232,243
|
$152
|
$
59,613
|
$58,795
|
$
(3,698)
|
$(2,225)
|
$112,637
|
|
|
|
|
|
|
|
|
Second
Step Conversion(1)
|
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) (2) (3)
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
Restricted
stock issued, net of
forfeitures
|
(14,734)
|
|
|
|
|
|
-
|
ESOP
shares committed to be
released
|
|
|
27
|
|
227
|
|
254
|
Exercise
of stock options
|
32,862
|
|
353
|
|
|
|
353
|
Share-based
compensation
|
|
|
228
|
|
|
|
228
|
Dividends
paid
($0.055
per share)
|
|
|
|
(894)
|
|
|
(894)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
(801)
|
|
|
(801)
|
Other
comprehensive
income:
|
|
|
|
|
|
|
|
Change
in unrealized
holding loss on
securities available for
sale, net of taxes
|
|
|
|
|
|
3,121
|
3,121
|
Comprehensive
income
|
|
|
|
|
|
|
2,320
|
Balance
at Dec. 31, 2008
|
17,392,289
|
$174
|
$157,813
|
$58,118
|
$(10,378)
|
$
1,721
|
$207,448
|
(1)
|
The
total effect on equity accounts from the second-step 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 the second-step conversion,
etc.
|
(2)
|
Home
Federal MHC waived its receipt of dividends on the 8,979,246 shares that
it owned.
|
(3)
|
Dividends
per share have been adjusted to reflect the impact of the second-step
conversion of Home Federal Bancorp, Inc., which occurred on December 19,
2007.
|
See
accompanying notes.
3
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands) (Unaudited)
|
Three
Months Ended
December
31,
|
|
2008
|
|
2007
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
income (loss)
|
$ (801)
|
|
$ 947
|
Adjustments
to reconcile net income (loss) to cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization
|
442
|
|
397
|
Net
amortization (accretion) of premiums and discounts on
investments
|
2
|
|
(10)
|
Loss
on sale of fixed assets and repossessed assets
|
63
|
|
-
|
ESOP
shares committed to be released
|
254
|
|
207
|
Equity
compensation expense
|
228
|
|
255
|
Provision
for loan losses
|
3,575
|
|
287
|
Accrued
deferred compensation expense, net
|
39
|
|
179
|
Net
deferred loan fees
|
171
|
|
(18)
|
Net
gain on sale of loans
|
(190)
|
|
(185)
|
Proceeds
from sale of loans held for sale
|
10,476
|
|
13,895
|
Originations
of loans held for sale
|
(9,817)
|
|
(11,864)
|
Net
decrease in value of mortgage servicing rights
|
31
|
|
68
|
Net
increase in value of bank owned life insurance
|
(106)
|
|
(104)
|
Change
in assets and liabilities:
|
|
|
|
Interest
receivable
|
148
|
|
(212)
|
Other
assets
|
(673)
|
|
1,110
|
Interest
payable
|
(66)
|
|
(56)
|
Other
liabilities
|
(894)
|
|
(1,153)
|
Net
cash provided by operating activities
|
2,882
|
|
3,743
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Proceeds
from maturity of mortgage-backed securities available for
sale
|
6,215
|
|
5,778
|
Purchases
of mortgage-backed securities available for sale
|
(465)
|
|
-
|
Maturity
of investment in certificate of deposit
|
5,000
|
|
-
|
Sale
of mortgage servicing rights
|
1,676
|
|
|
Purchases
of property and equipment
|
(1,269)
|
|
(598)
|
Net
(increase) decrease in loans
|
(10,956)
|
|
2,099
|
Proceeds
from sale of fixed assets and repossessed assets
|
188
|
|
128
|
Net
cash provided by investing activities
|
389
|
|
7,407
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Net
increase in deposits
|
4,474
|
|
363
|
Net
decrease in advances by borrowers for taxes and insurance
|
(665)
|
|
(833)
|
Proceeds
from FHLB advances
|
18,030
|
|
5,300
|
Repayment
of FHLB advances
|
(30,428)
|
|
(22,392)
|
Net
proceeds from stock issuance and exchange pursuant to second step
conversion
|
-
|
|
88,454
|
Proceeds
from exercise of stock options
|
353
|
|
147
|
Dividends
paid
|
(893)
|
|
(324)
|
Net
cash (used) provided by financing activities
|
(9,129)
|
|
70,715
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(5,858)
|
|
81,865
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
23,270
|
|
20,588
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$
17,412
|
|
$102,453
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
Cash
paid during the period for:
|
|
|
|
Interest
|
$3,648
|
|
$5,302
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
Acquisition
of real estate and other assets in settlement of loans
|
947
|
|
312
|
Fair
value adjustment to securities available for sale, net of
taxes
|
3,121
|
|
1,522
|
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 - Basis of Presentation
The
consolidated financial statements presented in this quarterly report include the
accounts of Home Federal Bancorp, Inc., a Maryland corporation (the “Company”),
and its wholly-owned subsidiary, Home Federal Bank (the “Bank”). The
financial statements of the Company have been prepared in conformity with
accounting principles generally accepted in the United States of America for
interim financial information and are unaudited. All significant
intercompany transactions and balances have been eliminated. In the
opinion of the Company’s management, all adjustments consisting of normal
recurring adjustments necessary for a fair presentation of the financial
condition and results of operations for the interim periods included herein have
been made. Operating results for the three month period ended December 31, 2008,
are not necessarily indicative of the results that may be expected for the year
ending September 30, 2009.
The
Company was formed as the new stock holding company for 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 (the
“Conversion”). 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 (“Old Home Federal”), and Old Home Federal 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
Old Home Federal ceased to exist and were replaced by the Company as the
successor to Old Home Federal. See Note 3 below for additional
information regarding the Conversion.
Certain
information and note disclosures normally included in the Company’s annual
consolidated financial statements have been condensed or omitted. Therefore,
these consolidated financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes included in the
Annual Report on Form 10-K for the year ended September 30, 2008 (“2008 Form
10-K”), filed with the Securities and Exchange Commission (“SEC”) on December
15, 2008.
Note
2 - Critical Accounting Estimates and Related Accounting Policies
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements. Changes in these
estimates and assumptions are considered reasonably possible and may have a
material impact on the consolidated financial statements, and thus actual
results could differ from the amounts reported and disclosed
herein. The Company considers the allowance for loan losses, and
deferred income taxes to be critical accounting estimates.
Allowance for loan losses.
The procedures for assessing the adequacy of the allowance for loan losses
reflect evaluation of credit risk after careful consideration and interpretation
of relevant information. In developing this assessment, management must rely on
estimates and exercise judgment regarding matters where the ultimate outcome is
unknown such as economic factors, developments affecting companies in specific
industries and issues with respect to single borrowers. The allowance for loan
losses is maintained at a level that management believes to be the best estimate
of probable, incurred losses inherent in the loan portfolio at the balance sheet
dates presented. Depending on changes in circumstances, future assessments of
credit risk may yield materially different results, which may require an
increase or a decrease in the allowance for loan losses.
Deferred income taxes.
Deferred income taxes are computed using the asset and liability approach as
prescribed in Statement of Financial Accounting Standards (“SFAS”) No. 109,
Accounting for Income
Taxes. Under this method, a deferred tax asset or liability is
determined based on the currently enacted tax rates applicable to the period in
which the differences between the financial statement carrying amounts and tax
basis of the existing assets and liabilities are expected to be reported in the
Company’s income tax returns.
Note
3 –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. 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 of the offering 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 Old Home Federal
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 Consolidated Balance Sheets, are restated to give retroactive
recognition to the exchange ratio applied in the Conversion.
Note
4 – Income Taxes
On
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 December 31, 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 on income tax liabilities as of
December 31, 2008. It is the Company’s policy to record interest and
penalties as a component of income tax expense.
Note
5 - Earnings (Loss) Per Share
Earnings
(Loss) 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 the 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 awarded
under the Company’s 2005 Stock Option and Incentive Plan (“SOP”) and from
assumed vesting of shares awarded but not released under the Company’s 2005
Recognition and Retention Plan (“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 EPS for the
periods indicated:
|
|
|
Three
Months Ended
December
31,
|
|
2008
|
|
2007
|
|
(in
thousands, except share and per share data)
|
Basic
EPS:
|
|
|
|
Net
income (loss)
|
$ (801)
|
|
$ 947
|
Weighted-average
common shares outstanding
|
16,129,352
|
|
16,738,289
|
Basic EPS
|
$
(0.05)
|
|
$
0.06
|
|
|
|
|
Diluted
EPS:
|
|
|
|
Net
income (loss)
|
$ (801)
|
|
$ 947
|
|
|
|
|
Weighted-average
common shares outstanding
|
16,129,352
|
|
16,738,289
|
Net effect of dilutive RRP awards
|
-
|
|
24,617
|
Weighted-average
common shares outstanding
and common stock equivalents
|
16,129,352
|
|
16,762,906
|
Diluted EPS
|
$
(0.05)
|
|
$
0.06
|
During
the three months ended December 31, 2008 and 2007, there were 573,544 and
655,240 options excluded from the calculation of EPS as their effect was
anti-dilutive.
Note
6 - Mortgage-Backed Securities
Mortgage-backed
securities available for sale consisted of the following:
|
December
31, 2008
|
(in
thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Issued
by U.S. Government sponsored
enterprises
|
$181,992
|
|
$3,936
|
|
$ (192)
|
|
$185,736
|
Other
|
3,376
|
|
-
|
|
(875)
|
|
2,501
|
Total
|
$185,368
|
|
$3,936
|
|
$(1,067)
|
|
$188,237
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
Issued
by U.S. Government sponsored
enterprises
|
$187,730
|
|
$669
|
|
$(2,669)
|
|
$185,730
|
Other
|
3,390
|
|
-
|
|
(333)
|
|
3,057
|
Total
|
$191,120
|
|
$669
|
|
$(3,002)
)
|
|
$188,787
|
The fair
value of temporarily impaired securities, the amount of unrealized losses and
the length of time these unrealized losses existed as of December 31, 2008 were
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
|
$13,391
|
|
$(192)
|
|
$2,502
|
|
$(875)
|
|
$15,893
|
|
$(1,067)
|
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. The declines in value are on securities that have
contractual maturity dates and, at December 31, 2008, management believes
it is reasonably probable that principal and interest balances on those
securities will be collected based on the performance, underwriting and vintage
of the loans underlying the temporarily-impaired securities. However, continued
deteriorating economic conditions may result in degradation in the performance
of the loans underlying those securities in the future. The Company has the
ability and intent to hold the temporarily-impaired securities for a reasonable
period of time for a forecasted recovery of the amortized cost.
As of
December 31, 2008, the Bank had pledged mortgage-backed securities with an
amortized cost of $78.2 million and a fair value of $80.2 million as collateral
for FHLB advances. Mortgage-backed securities with an amortized cost
of $5.5 million and a fair value of $5.7 million at December 31, 2008, 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. As of September 30, 2008, and December 31, 2008, there was no
balance owed by the Company through the Federal Reserve Bank discount
window.
Note
7 - Loans Receivable
Loans
receivable are summarized as follows:
|
December
31, 2008
|
|
September
30, 2008
|
|
Balance
|
|
Percent
of Total
|
|
Balance
|
|
Percent
of
Total
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
Real
Estate:
|
|
|
|
|
|
|
|
One-
to four-family residential
|
$203,336
|
|
42.83%
|
|
$210,302
|
|
45.22%
|
Multi-family
residential
|
9,361
|
|
1.97
|
|
8,477
|
|
1.82
|
Commercial
|
159,012
|
|
33.46
|
|
151,733
|
|
32.62
|
Total
real estate
|
371,709
|
|
78.26
|
|
370,512
|
|
79.66
|
|
|
|
|
|
|
|
|
Real
Estate Construction:
|
|
|
|
|
|
|
|
One-
to four-family residential
|
12,907
|
|
2.72
|
|
13,448
|
|
2.89
|
Multi-family
residential
|
-
|
|
-
|
|
920
|
|
0.20
|
Commercial
and land development
|
27,340
|
|
5.75
|
|
18,674
|
|
4.01
|
Total
real estate construction
|
40,247
|
|
8.47
|
|
33,042
|
|
7.10
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
Home
equity
|
53,743
|
|
11.31
|
|
52,954
|
|
11.38
|
Automobile
|
1,750
|
|
0.37
|
|
1,903
|
|
0.41
|
Other
consumer
|
1,295
|
|
0.26
|
|
1,370
|
|
0.29
|
Total
consumer
|
56,788
|
|
11.94
|
|
56,227
|
|
12.08
|
|
|
|
|
|
|
|
|
Commercial
business
|
6,304
|
|
1.33
|
|
5,385
|
|
1.16
|
|
475,048
|
|
100.00%
|
|
465,166
|
|
100.00%
|
|
|
|
|
|
|
|
|
Premium
on purchased loans
|
197
|
|
|
|
199
|
|
|
Deferred
loan fees
|
(1,049)
|
|
|
|
(973)
|
|
|
Allowance
for loan losses
|
(8,027)
|
|
|
|
(4,579)
|
|
|
Loans
receivable, net
|
$466,169
|
|
|
|
$459,813
|
|
|
Note
8 – Mortgage Servicing Rights
On August
28, 2008, Home Federal Bank entered into a binding agreement with another bank
whereby the 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
was completed on December 16, 2008.
The Bank
now originates nearly all of its one- to four-family loans for sale in the
secondary market with servicing released. As a result, the Bank will not record
new capitalized servicing rights.
The
following table lists the classes of servicing rights and the activities in the
balance of each class for the periods indicated:
|
|
Three
Months Ended
December
31,
|
Servicing
Right Classes
|
|
2008
|
|
2007
|
|
|
(in
thousands)
|
One-
to four-family residential loans:
|
|
|
|
|
Beginning
Balance
|
|
$1,703
|
|
$2,033
|
Adjustments
to fair value
|
|
-
|
|
(66)
)
|
Sale
of servicing rights
|
|
(1,703)
)
|
|
-
-
|
Ending
Balance
|
|
$ -
-
|
|
$1,967
|
|
|
|
|
|
Commercial
real estate loans:
|
|
|
|
|
Beginning
Balance
|
|
$
4 4
|
|
$ 14
|
Adjustments
to fair value
|
|
(4)
|
|
(2)
|
Ending
Balance
|
|
$
- -
|
|
$ 12
|
The
amount of contractually specified servicing fees for one- to four-family
residential loans for the three months ended December 31, 2008 and 2007, was
$69,000 and $127,000, respectively. 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.
Note
9 – Fair Value Measurement
SFAS No.
157 defines fair value, establishes a consistent framework for measuring fair
value and expands disclosure requirements about fair value
measurements. SFAS No. 157, among other things, requires the Company
to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect the
Company’s market assumptions. These two types of inputs create the
following fair value hierarchy:
·
|
Level
1 – Quoted prices for identical instruments in active
markets.
|
·
|
Level
2 – Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant
value drivers are observable.
|
·
|
Level
3 – Instruments whose significant value drivers are
unobservable.
|
The
following table summarized the Company’s financial instruments that were
measured at fair value on a recurring basis at December 31, 2008:
|
December
31, 2008
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$188,237
|
|
|
$ -
|
|
|
$188,237
|
|
|
$ -
|
Additionally,
certain assets are measured at fair value on a non-recurring
basis. These adjustments to fair value generally result from the
application of lower-of-cost-or-market accounting or write-downs of individual
assets due to impairment. The following table summarizes the
Company’s financial instruments that were measured at fair value on a
non-recurring basis at December 31, 2008:
|
December
31, 2008
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$11,724
|
|
|
$ -
|
|
|
$ -
|
|
|
$11,724
|
Impaired
loans which are measured for impairment using the fair value of the collateral
at December 31, 2008, had a carrying amount of $11.7 million, net of valuation
allowances totaling $2.4 million, resulting in an additional provision for loan
losses of $747,000 during the first quarter of fiscal 2009.
The
Company used the following methods and significant assumptions to estimate fair
value:
Securities: The
Company’s securities available for sale primarily consist of mortgage backed
securities issued by U.S. Government sponsored enterprises and trade in active
markets. These securities are included under Level 2 because there
may or may not be daily trades in each of the individual securities and because
the valuation of these securities may be based on instruments that are not
exactly identical to those owned by the Company.
Impaired
loans: A loan is considered impaired when, based upon
currently known information, it is deemed probable that the Company will be
unable to collect all amounts due as scheduled according to the original terms
of the agreement. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan’s effective interest
rate or, as a practical expedient, based on the loan’s observable market price
or the fair value of collateral, if the loan is collateral
dependent. Impaired loans, which are collateral dependent, are
included in the table above.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking
Statements
This
report contains forward-looking statements, which can be identified by the use
of words such as “believes,” “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 plan, 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 as a result of, among others, the
following factors:
·
|
general
economic conditions, including real estate values, either nationally or in
the Company’s market area, that are worse than
expected;
|
·
|
changes
in the interest rate environment that reduce the Company’s 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;
|
·
|
legislative
or regulatory changes that adversely affect the Company’s
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.
|
These
factors should be considered in evaluating the forward-looking statements, and
undue reliance should not be placed on such statements. The Company
undertakes no obligation to publish revised forward-looking statements to
reflect the occurrence of unanticipated events or circumstances after the date
hereof.
Background
and Overview
Home
Federal Bank (the “Bank”) was founded in 1920 as a building and loan association
and reorganized as a federal mutual savings and loan association in
1936. On December 6, 2004, the Bank converted to stock form and
reorganized into the two-tiered mutual holding company form of organization and
formed Home Federal MHC and Home Federal Bancorp, Inc. (“Old Home Federal”). In
connection with that transaction, old Home Federal sold 40.00% of its
outstanding shares of common stock (6,083,500 shares) to the public and issued
59.04% of its outstanding shares of common stock (8,979,246 shares) to Home
Federal MHC, the mutual holding company parent of Old Home
Federal. In connection with that transaction, Old Home Federal also
established and capitalized the Home Federal Foundation (“Foundation”) for the
purpose of supporting charitable organizations and activities that enhance the
quality of life for residents within the Bank’s market area. The Foundation was
capitalized with a $1.8 million one-time contribution, which consisted of
146,004 shares of its common stock and $365,010 in cash.
On May
11, 2007, the Boards of Directors of Old Home Federal, Home Federal MHC and the
Bank adopted a Plan of Conversion and Reorganization (the “Plan”) pursuant to
which the Bank reorganized from the mutual holding company structure to the
stock holding company structure. As a result of that transaction, Home Federal
Bank formed a new stock holding company, Home Federal Bancorp, Inc. (“we”, “us”,
the “Company”), 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.
Pursuant
to the terms of the Plan, shares of outstanding common stock of Old Home Federal
were exchanged for 1.136 shares of the Company’s common stock. Cash was paid in
lieu of fractional shares. The Conversion was approved by the Bank’s
members, the Company’s stockholders (including the approval of a majority of the
shares held by persons other than Home Federal MHC) and regulatory
agencies. The Company’s common stock is traded on the NASDAQ Global
Select Market under the symbol “HOME” and is included in the America’s Community
Bankers NASDAQ Index and the U.S. Russell 2000® Index.
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. The Bank emphasizes the origination
of commercial business loans, commercial real estate loans, construction and
residential development loans, consumer loans and loans secured by first
mortgages on owner-occupied residential real estate. As a result of a
comprehensive and continuing review of its strategic business plan, the Company
continues to expand its commercial and small business banking programs,
including a variety of loan and deposit products.
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
capital. Home Federal Bank maintains its largest branch presence in
Ada County with eight locations, followed by Canyon County with five branches,
including the Company’s corporate headquarters in Nampa. The two
remaining branches are located in Elmore and Gem Counties.
The
following items summarize the financial performance of the Company and the key
strategic initiatives undertaken by management during the Company’s first
quarter of fiscal year 2009:
§
|
A
$3.6 million provision for loan losses contributed to a net loss of
($801,000), or ($0.05) per diluted share as economic conditions in the
Treasure Valley continued to deteriorate as a result of rising
unemployment, bankruptcies and foreclosures and declining real estate
values;
|
§
|
The
Company’s efficiency ratio improved to 73.5% for the quarter ended
December 31, 2008, compared to 76.6% for the same quarter a year
ago;
|
§
|
A
new banking office was opened in Boise, which was effectively a relocation
and upgrade of an older facility;
|
§
|
The
Bank broke ground on its sixteenth banking
office;
|
§
|
Nonperforming
and delinquent loans increased significantly as unemployment and real
estate pressures continued to increase in the Boise metropolitan
statistical area;
|
§
|
The
slowdown in consumer spending negatively impacted the Bank’s fee
income;
|
§
|
The
Bank began execution of its small business growth strategy by hiring
leadership for its newly formed Small Business Banking
Group;
|
§
|
The
sale of the Bank’s mortgage servicing rights asset was completed;
and,
|
§
|
The
Bank maintained its strong capital position with a total risk-based
capital ratio of 31.3% at
|
Critical
Accounting Estimates and Related Accounting Policies
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 losses that are inherent within the portfolio but have
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 turnover, which 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. Additionally, future events may evidence additional losses that were
unknown at the time management estimated the allowance, which may require an
increase in the allowance for loan losses in future periods.
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.
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 December 31, 2008 and September 30, 2008
Assets. For the
three months ended December 31, 2008, total assets decreased $6.9
million. The increases and decreases were primarily concentrated in
the following asset categories:
|
|
|
Increase
(decrease)
|
|
|
|
|
|
|
|
|
|
Balance
at
December
31,
2008
|
|
Balance
at
September
30,
2008
|
|
Amount
|
|
Percent
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
Cash
and amounts due from depository institutions
|
$
17,412
|
|
$
23,270
|
|
$(5,858)
|
|
(25.2)%
|
Mortgage-backed
securities, at fair value
|
188,237
|
|
188,787
|
|
(550)
|
|
(0.3)
|
Loans
receivable, net
|
466,169
|
|
459,813
|
|
6,356
|
|
1.4
|
Cash and
amounts due from depository institutions decreased $5.9 million to $17.4 million
at December 31, 2008, from $23.3 million at September 30, 2008. The
decrease was primarily attributable to excess cash being used to pay off
maturing borrowings from the Federal Home Loan Bank of Seattle (the
“FHLB”).
Securities. The fair value of
mortgage-backed securities was virtually unchanged at $188.2 million at December
31, 2008, compared to $188.8 million at September 30, 2008. This was
due to the significant increase in the value of the mortgage-backed securities
portfolio as market interest rates declined and spreads on mortgage securities
narrowed during the quarter first quarter of fiscal 2009. At December
31, 2008, the unrealized gain on the portfolio was $2.9 million compared to an
unrealized loss of $2.3 million at September 30. 2008. This increase
in the value of the securities portfolio nearly offset the reduction in
outstanding balances from repayments of $6.2 million. Principal reductions of
mortgage-backed securities were higher in the first quarter of fiscal 2009
compared to the first quarter of fiscal 2008 as mortgage rates were
significantly lower in the current year, increasing the number of mortgage loan
refinancings in the first quarter of fiscal 2009.
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.
Non-agency,
also referred to as “private label,” mortgage-backed securities had a fair value
of $2.5 million at December 31, 2008, compared to their amortized cost of $3.4
million. The securities carried a rating of ‘AAA’ by Moody’s and Standard &
Poor’s at that date. The value of private label mortgage-backed securities have
fallen and have been more volatile than securities issued by
government-sponsored enterprises due to the deterioration of the national
residential loan market. Management has reviewed the delinquency status and
average collateral coverage of the loans pooled in the private label securities
portfolio and has concluded the securities were not other than temporarily
impaired at December 31, 2008. However, continued deterioration in the economy
and rapid increases in unemployment may result in a change in the performance
expectation for these securities in the future, which may negatively impact the
Company’s earnings.
At
December 31, 2008, the Company did not own collateralized debt obligations or
trust preferred securities.
FHLB Stock. At December 31,
2008, the Bank held $9.6 million of common stock in the FHLB of Seattle. This
security is reported at par value, which represents the Bank’s cost. The FHLB of
Seattle recently announced that it would report a risk-based capital deficiency
under the regulations of the Federal Housing Finance Agency (the “FHFA”), its
primary regulator, as of December 31, 2008, and as a result would not pay a
dividend for the fourth calendar quarter of 2008 and that it would suspend the
repurchase and redemption of outstanding common stock.
The FHLB
of Seattle has communicated to the Company that they believe the calculation of
risk-based capital under the current rules of the FHFA significantly overstates
the market risk of the FHLB’s private-label mortgage-backed securities in the
current market environment and that they have enough capital to cover the risks
reflected in the FHLB’s balance sheet. As a result, the Company has not recorded
an "other than temporary impairment" on its investment in FHLB stock. However,
continued deterioration in the FHLB of Seattle’s financial position may result
in impairment in the value of those securities, the requirement that the Bank
contribute additional funds to recapitalize the FHLB of Seattle, or reduce the
Bank’s ability to borrow funds from the FHLB of Seattle, impairing the Bank’s
ability to meet liquidity demands.
Loans. Net loans receivable
increased $6.4 million to $466.2 million at December 31, 2008, from $459.8
million at September 30, 2008. One- to four-family residential
mortgage loans decreased $7.0 million as the Company sold a majority of the
one-to four-family loans that were originated. Consumer loans increased $560,000
to $56.8 million as of December 31, 2008. Consistent with the
Company’s strategic plan, commercial, multifamily and acquisition and
development loans increased $16.3 million to $214.9 million at December 31, 2008
from $198.6 million at September 30, 2008.
Loans
delinquent 30 to 89 days, which included $4.5 million of loans on nonaccrual
status, totaled $10.7 million at December 31, 2008, compared to $6.5 million at
September 30, 2008, and $5.3 million at December 31, 2007. Non-
performing
assets, which includes all loans on nonaccrual status, impaired loans and other
real estate owned, totaled $18.4 million at December 31, 2008, compared to $10.6
million at September 30, 2008, and $2.3 million at December 31, 2007. The
allowance for loan losses was $8.0 million, or 1.69%, of gross loans at December
31, 2008, compared to $4.6 million, or 0.98% of gross loans at September 30,
2008, and $3.0 million, or 0.63% of gross loans at December 31,
2007.
The
following table summarizes loans delinquent 30 to 89 days at December 31, 2008,
and September 30, 2008:
|
December
31,
|
|
September
30,
|
|
2008
|
|
2008
|
|
(in
thousands)
|
Land
acquisition and development
|
$ 2,268
|
|
$1,150
|
One-
to four-family construction
|
1,376
|
|
241
|
Commercial
real estate
|
2,313
|
|
3,094
|
One-
to four-family residential
|
4,545
|
|
1,836
|
Other
|
188
|
|
190
|
Total loans delinquent 30 to 89
days
|
$10,690
|
|
$6,511
|
When a
loan becomes 90 days delinquent, the Bank places the loan on nonaccrual status.
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. Generally, an impaired loan is also
placed on nonaccrual status, regardless of delinquency. As a result, some loans
that are not 90 days or more past due may be in nonaccrual status if it is
considered impaired. The delinquency table above includes $4.5 million of loans
that have been placed on nonaccrual status at December 31, 2008, which are also
included in the table below that summarizes total nonperforming loans (including
nonaccrual and impaired loans) at December 31, 2008, and September 30,
2008:
|
December
31, 2008
|
|
September
30, 2008
|
|
Balance
|
|
Loss Reserve
|
|
Balance
|
|
Loss Reserve
|
|
(in
thousands)
|
Land
acquisition and development
|
$ 4,330
|
|
$ 936
|
|
$3,975
|
|
$ 916
|
One-
to four-family construction
|
5,389
|
|
832
|
|
4,239
|
|
596
|
Commercial
real estate
|
3,071
|
|
273
|
|
-
|
|
-
|
One-
to four-family residential
|
4,240
|
|
713
|
|
1,701
|
|
219
|
Other
|
4
|
|
-
|
|
30
|
|
2
|
Total nonperforming and impaired
loans
|
$17,034
|
|
2,754
|
|
$9,945
|
|
1,733
|
General
loss reserve
|
|
|
5,273
|
|
|
|
2,846
|
|
|
|
$8,027
|
|
|
|
$4,579
|
The
Treasure Valley economy continues to deteriorate as unemployment rose
quickly during the quarter from 4.80% in September 2008 to an estimated 6.50% in
December 2008. New home and commercial real estate construction has come to a
standstill as excess inventory in the residential and commercial real
estate markets continues to put stress on property values. The pending
closure of retail locations as a result of reduced consumer spending will
exacerbate the problem.
The
Company is just beginning to place properties into foreclosure and sale and
management believes the Treasure Valley is at the beginning of a downturn
in the commercial real estate market. As a result of this uncertainty,
management recorded a significant provision for loan losses during the quarter
ended December 31, 2008, in order to increase the general reserve component of
the allowance for loan losses. While the $2.4 million provision for loan losses
for the full fiscal year of 2008 and the $3.6 million provision recorded during
the first quarter of fiscal 2009 exceeds the level of net charge-offs during
those periods, management believes such an increase in the allowance for loan
losses is prudent and appropriate and that the allowance for loan losses
reflects management’s best estimate of probable, known and estimable losses
inherent in the loan portfolio at December 31, 2008. However, additional
information
may later come to management’s attention, evidencing losses in excess of the
amounts estimated, which may negatively affect earnings in the
future.
Last
year, management realigned the Credit Administration Department and appointed a
Chief Credit Officer, reporting directly to the Chief Executive Officer, in
anticipation of this environment. The Bank also recently hired a senior workout
professional to increase the Credit Administration Department’s
resources.
Nearly
all of the Company’s loans are secured by collateral located in the
Treasure Valley or southern Idaho. In 2005, the Bank purchased
approximately $38.8 million of residential real estate loans from Countrywide
Financial, now Bank of America, who continues to service the loans. Balances on
the portfolio totaled $24.1 million at December 31, 2008. Approximately 91% of
the portfolio balance is secured by properties outside of the state of Idaho and
delinquencies and foreclosures are rising quickly in that portfolio. At December
31, 2008, loans in this portfolio that were delinquent over 30 days totaled $2.2
million, or 9%, of the portfolio, including $1.9 million of nonperforming loans
that are reported in the table above. The total reserve allocated to loans in
the Countrywide portfolio was $1.3 million at December 31, 2008, or 5% of
the balance outstanding on that date.
Deposits. Deposits
increased $4.5 million, or 1.2%, to $377.4 million at December 31, 2008, from
$372.9 million at September 30, 2008, primarily as a result of interest-bearing
demand deposits. The increase in interest-bearing demand deposits was
primarily attributed to growth in money market accounts as the Bank continued
its emphasis on deposit products associated with a full-service commercial
bank. The decrease in certificates of deposit was due to choosing not
to match rates offered by local competitors that in many cases exceeded the
Bank’s cost of alternative funding sources. The Bank had no brokered deposits at
December 31, 2008, or September 30, 2008. The following table details the
composition of the deposit portfolio and changes in deposit
balances:
|
|
|
Increase
(decrease)
|
|
|
|
|
|
|
|
|
|
Balance
at
December
31,
2008
|
|
Balance
at
September
30,
2008
|
|
Amount
|
|
Percent
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
$ 41,187
|
|
$ 41,398
|
|
$ (211)
|
|
(0.5)%
|
Interest-bearing
demand deposits
|
134,148
|
|
127,714
|
|
6,434
|
|
5.0
|
Savings
deposits
|
27,589
|
|
26,409
|
|
1,180
|
|
4.5
|
Certificates
of deposit
|
174,475
|
|
177,404
|
|
(2,929)
)
|
|
(1.7)
|
Total
deposit accounts
|
$377,399
|
|
$372,925
|
|
$4,474
|
|
1.2%
|
Approximately
76% of the certificates of deposit portfolio at December 31, 2008, are scheduled
to mature within 12 months. While this presents an opportunity to reduce the
cost of interest bearing deposits in the current low interest rate environment,
the significant level of maturities of certificates also places a burden on the
Company’s liquidity if management is unable to retain the maturating
balances.
Borrowings. FHLB
advances decreased $12.4 million, or 9.1%, to $124.6 million at December 31,
2008, from $137.0 million at September 30, 2008. We used excess cash
and principal payment proceeds from our mortgage-backed securities and
residential loan portfolios to reduce our advances as they
matured. The Bank uses FHLB advances as an alternative funding source
to deposits, manage funding costs, reduce interest rate risk, and to leverage
the balance sheet.
Deferred Income Tax
Asset/Liability. The Company had a deferred tax asset of $1.8
million at September 30, 2008 versus a deferred tax liability of $310,000 at
December 31, 2008. This change primarily resulted from a shift from
an unrealized loss on the Company’s mortgage-backed securities’ portfolio as of
September 30, 2008 to an unrealized gain as of December 31, 2008, as interest
rates fell and spreads narrowed, increasing the value of the securities
portfolio during the quarter.
Equity. Stockholders’
equity increased $2.3 million, or 1.1%, to $207.4 million at December 31, 2008,
from $205.2 million at September 30, 2008. Significant activity among
equity accounts over the past three months include the
allocation
of earned ESOP shares, equity compensation and the exercise of stock options
totaling $835,000, and a $3.1 million increase in the value of securities
available for sale, net of taxes, offset by a net loss for the quarter of
$801,000 and $893,000 in cash dividends paid to stockholders.
Comparison
of Operating Results for the Three Months Ended December 31, 2008, and December
31, 2007
Net loss
for the three months ended December 31, 2008 was $801,000, or $0.05 per diluted
share, compared to net income of $947,000, or $0.06 per diluted share, for the
three months ended December 31, 2007. Earnings per share for the
prior period have been adjusted to reflect the impact of the Conversion and
reorganization of the Company. Total revenue for the quarter ended December 31,
2008, which consisted of net interest income before the provision for loan
losses plus noninterest income, increased $525,000, or 7%, to $8.2 million,
compared to $7.7 million for the quarter ended December 31, 2007. However, total
revenue for the first quarter of fiscal 2009 declined $344,000, or 4%, from the
linked fourth quarter of fiscal 2008. The Company’s efficiency ratio improved to
73.5% for the quarter ended December 31, 2008, compared to 76.6% for the same
quarter a year ago as an increase in net interest income outpaced slowing
service charge and fee income coupled with a slight increase in noninterest
expenses.
Net Interest
Income. Net interest income increased $689,000, or 13.6%, to
$5.7 million for the three months ended December 31, 2008, from $5.1 million for
the three months ended December 31, 2007. The increase in net
interest income is primarily attributable to a decrease in interest
expense. Current rates paid on deposits are significantly lower
than in the prior year. In addition, Federal Home Loan Bank borrowing
balances are lower than in the same period of the prior year as maturing
advances have been repaid with excess liquidity.
The
Company’s net interest margin increased 40 basis points to 3.37% for the quarter
ended December 31, 2008, from 2.97% for the same quarter 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 Company’s second step conversion and stock offering completed on
December 19, 2007, while the increase in net interest income is attributable to
decreases in interest expense also contributed to the increase in the margin in
2008.
The
following table sets forth the impacts to the Company’s net interest income from
changes in balances of interest earning assets and interest bearing liabilities
as well as changes in interest rates. 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.
|
Three
Months Ended December 31, 2008
Compared
to Three Months Ended
December 31,
2007
|
|
Increase
(Decrease) Due to
|
|
|
|
Rate
|
|
Volume
|
|
Total
|
|
(in
thousands)
|
Interest-earning
assets:
|
|
|
|
|
|
Loans
receivable, net
|
$(772)
|
|
$(178)
|
|
$ (950)
|
Loans
held for sale
|
(3)
|
|
(10)
|
|
(13)
|
Investment
securities, including interest-
bearing deposits in other banks
|
(127)
|
|
(94)
|
|
(221)
|
Mortgage-backed
securities
|
(35)
|
|
297
|
|
262
|
FHLB
stock
|
(52)
|
|
-
|
|
(52)
|
Total
net change in income on interest-
earning assets
|
$(989)
|
|
$ 15
|
|
$ (974)
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
Savings
deposits
|
$ 11
|
|
$ 9
|
|
$ 20
|
Interest-bearing
demand deposits
|
(42)
|
|
-
|
|
(42)
|
Money
market accounts
|
(289)
|
|
30
|
|
(259)
|
Certificates
of deposit
|
(517)
|
|
(398)
|
|
(915)
|
Total
deposits
|
(837)
|
|
(359)
|
|
(1,196)
|
FHLB
advances
|
48
|
|
(515)
|
|
(467)
|
Total
net change in expense on interest-
bearing liabilities
|
$(789)
|
|
$(874)
|
|
$(1,663)
|
Total
increase in net interest income
|
|
|
|
|
$ 689
|
Interest and Dividend
Income. Total interest and dividend income for the three
months ended December 31, 2008, decreased $974,000, or 9.5%, to $9.3 million,
from $10.3 million for the three months ended December 31, 2007. The
decrease during the quarter was primarily attributable to a decrease on yields
earned on interest earning assets.
The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income:
|
Three
Months Ended December 31,
|
|
2008
|
|
2007
|
|
Increase/
|
|
Average
Balance
|
|
Yield
|
|
Average
Balance
|
|
Yield
|
|
(Decrease)
in
Interest
and
Dividend
Income
from
2007
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits in other
banks
|
$ 12,207
|
|
1.41%
|
|
$ 24,429
|
|
4.32%
|
|
$(221)
|
Mortgage-backed
securities
|
185,666
|
|
4.75
|
|
160,705
|
|
4.84
|
|
262
|
Loans
receivable, net
|
471,888
|
|
6.00
|
|
482,780
|
|
6.66
|
|
(950)
|
Loans
held for sale
|
2,022
|
|
5.76
|
|
2,675
|
|
6.25
|
|
(13)
|
FHLB
stock
|
9,591
|
|
(1.38)
|
|
9,591
|
|
0.79
|
|
(52)
|
Total
interest-earning assets
|
$681,374
|
|
5.48%
|
|
$680,180
|
|
6.06%
|
|
$(974)
|
The
decline in the yield on interest-bearing deposits in other banks reflects the
significantly lower short-term interest rate environment in the first quarter of
fiscal 2009 compared to the first quarter of fiscal 2008. Mortgage-backed
securities were purchased during the first quarter of last fiscal year using
proceeds from the Conversion at yields lower than the portfolio average, thereby
comparatively reducing the overall yield in the first quarter of
2009.
The yield
on loans fell to 6.00% in the first quarter of 2009 as a result of the decrease
in the Wall Street Journal Prime rate from 4.00% at the beginning of the quarter
to 3.25% at the end of the quarter. The Prime rate averaged 7.65% during the
same quarter last year. Additionally, the significant increase in loans on
nonaccrual status during the first quarter of 2009 reduced interest income by
approximately $90,000.
As
discussed earlier, the FHLB of Seattle announced during the first quarter of
fiscal 2009 that they would not pay a dividend to shareholders for the quarter
ended September 30, 2008. As a result, the Bank reversed the accrued dividend
during the quarter ended December 31, 2008, resulting in a negative effective
yield.
Interest
Expense. Interest expense decreased $1.7 million, or 31.7%, to
$3.6 million for the three months ended December 31, 2008 from $5.2 million for
the three months ended December 31, 2007. The average balance of
total interest-bearing liabilities decreased $72.5 million, or 13.4%, to $470.3
million for the three months ended December 31, 2008 from $542.8 million for the
three months ended December 31, 2007. The decrease in interest
expense in 2008 was mainly due to reductions in the outstanding balances of FHLB
advances and certificates of deposit, as well as a significantly lower interest
rate environment in the first quarter of fiscal 2009 compared to the first
quarter of fiscal 2008.
The
following table details average balances, cost of funds and the change in
interest expense:
|
Three
Months Ended December 31,
|
|
2008
|
|
2007
|
|
Increase/
|
|
Average
Balance
|
|
Cost
|
|
Average
Balance
|
|
Cost
|
|
(Decrease)
in Interest
Expense
from
2007
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
$ 27,294
|
|
0.84%
|
|
$ 22,607
|
|
0.65%
|
|
$ 20
|
Interest-bearing
demand deposits
|
77,609
|
|
0.55
|
|
77,847
|
|
0.77
|
|
(42)
|
Money
market deposits
|
55,268
|
|
1.45
|
|
51,641
|
|
3.56
|
|
(259)
|
Certificates
of deposit
|
177,219
|
|
3.73
|
|
213,930
|
|
4.80
|
|
(915)
|
FHLB
advances
|
132,929
|
|
4.71
|
|
176,794
|
|
4.60
|
|
(467)
|
Total
interest-bearing liabilities
|
$470,319
|
|
3.05%
|
|
$542,819
|
|
3.87%
|
|
$(1,663)
|
The cost
of savings deposits increased due to product disintermediation during the first
quarter of 2009 as customers shifted their balances to a higher-yielding savings
product. The decline in the cost of all other interest-bearing deposits reflects
the significantly lower interest rate environment in fiscal 2009 compared to the
first quarter of fiscal 2008. The cost of FHLB advances increased as advances
maturing during the quarter ended December 31, 2008, carried a lower average
rate than the portfolio average.
Provision for Loan
Losses. A provision for loan losses of $3.6 million was
established in connection with an analysis of the loan portfolio for the quarter
ended December 31, 2008, compared to a provision for loan losses of $287,000 for
the same quarter of the prior year. The increase in the provision
reflects the increase in nonperforming loans during the three months ended
December 31, 2008, and the high level of economic uncertainty in the Treasure
Valley. Management increased the specific allocation of the allowance for loan
losses for some impaired loans. Additionally, the estimated loss rates and the
range of losses were increased during the quarter ended December 31, 2008, as
the Treasure Valley and national economies continued to deteriorate
rapidly.
While
management believes the estimates and assumptions used in its determination of
the adequacy 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 the Company’s
financial condition and results of operations. In addition, the
determination of the amount of the 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.
Standard
provisions for loan losses are established based upon the type of loan and the
risk factors associated with that loan type. As the Bank increases
its commercial loan portfolio, the Bank anticipates it will increase its
allowance for loan losses based upon the higher risk characteristics associated
with commercial loans compared with one- to four- family residential loans,
which have historically comprised the majority of the Bank’s loan
portfolio.
The
following table details selected activity associated with the allowance for loan
losses:
|
At
or For the Three Months
Ended
December 31,
|
|
2008
|
|
2007
|
|
(dollars
in thousands)
|
Provision
for loan losses
|
$ 3,575
|
|
$ 287
|
Net
charge-offs
|
127
|
|
260
|
Allowance
for loan losses
|
8,027
|
|
3,015
|
Allowance
for loan losses as a percentage of gross loans receivable
|
1.69%
|
|
0.63%
|
Nonperforming
loans
|
$ 17,034
|
|
$ 1,656
|
Allowance
for loan losses as a percentage of nonperforming loans
|
47.12%
|
|
182.07%
|
Nonaccrual
and 90 days or more past due loans as a percentage of gross loans
receivable
|
3.58
|
|
0.34
|
Loans
receivable, net
|
$466,169
|
|
$477,446
|
Noninterest
Income. Noninterest income decreased $164,000, or 6.3%, to
$2.5 million for the three months ended December 31, 2008 from $2.6 million for
the three months ended December 31, 2007. The decrease was primarily
attributable to a $123,000 decrease in service charges and fees, reflecting the
continuing slowdown in consumer spending and the resulting decline in the number
of checking and debit card transactions.
The
following table provides a detailed analysis of the changes in components of
noninterest income:
|
Three
Months Ended
December
31,
|
|
Increase
(decrease)
|
|
2008
|
|
2007
|
|
Amount
|
|
Percent
|
|
(dollars
in thousands)
|
Service
fees and charges
|
$2,109
|
|
$2,232
|
|
$(123)
|
|
(5.5)%
|
Gain
on sale of loans
|
190
|
|
185
|
|
5
|
|
2.7
|
Increase
in cash surrender value
of bank owned life insurance
|
106
|
|
104
|
|
2
|
|
1.9
|
Loan
servicing fees
|
69
|
|
127
|
|
(58))
)
|
|
(45.7)
|
Mortgage
servicing rights, net
|
(31)
|
|
(68)
|
|
37
|
|
54.4
|
Other
|
18
|
|
45
|
|
(27)
|
|
(60.0)
|
Total
noninterest income
|
$2,461
|
|
$2,625
|
|
$(164)
)
|
|
(6.3)%
|
Noninterest
Expense. Noninterest expense increased $151,000, or 2.6%, to
$6.0 million for the three months ended December 31, 2008 from $5.9 million for
the three months ended December 31, 2007. The following table provides a
detailed analysis of the changes in components of noninterest
expense:
|
Three
Months Ended
December
31,
|
|
Increase
(decrease)
|
|
2008
|
|
2007
|
|
Amount
|
|
Percent
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
$3,575
|
|
$3,699
|
|
$(124)
)
|
|
(3.4)%
|
Occupancy
and equipment
|
770
|
|
711
|
|
59
|
|
8.3
|
Data
processing
|
542
|
|
522
|
|
20
|
|
3.8
|
Advertising
|
248
|
|
287
|
|
(39)
|
|
(13.6)
|
Other
|
899
|
|
664
|
|
235
|
|
35.4
|
Total
noninterest expense
|
$6,034
|
|
$5,883
|
|
$
151
|
|
2.6%
|
Compensation
and benefits declined 3.4% in the first quarter of 2009 compared to the year-ago
period primarily due to the absence of an accrual for incentive compensation
during the quarter ended December 31, 2008, and a reduction in retirement
benefit expense in the current quarter. Occupancy and equipment expense was
higher in the first quarter of fiscal 2009 as the Bank opened two stand-alone
banking offices during fiscal 2008.
The
increase in other noninterest expense in the first quarter of 2009 includes
increases in professional fees related to the Company’s fiscal year end, which
was September 30, 2008, and legal expenses related to foreclosures and the
workout of troubled loans. Additionally, Federal Deposit Insurance Corporation
premiums were higher in the first quarter of fiscal 2009 as the Company was able
to apply some credits to the assessment in 2008. Additionally, management
expects deposit insurance premiums to increase further during fiscal 2009 as a
result of recent FDIC-imposed increases in the assessment rates, which are
scheduled to commence during the Company’s second quarter of fiscal
2009.
Income Tax Expense
(Benefit). The Company recorded an income tax benefit of
$(602,000) for the three months ended December 31, 2008. Net loss before income
taxes was ($1.4) million for the three months ended December 31, 2008 compared
to net income of $1.5 million for the three months ended December 31,
2007.
Liquidity,
Commitments and Capital Resources
Liquidity. The
Company actively analyzes and manages the Bank’s liquidity with the objectives
of maintaining an adequate level of liquidity and to ensure the availability of
sufficient cash flows to support loan growth, fund deposit withdrawals, fund
operations and satisfy other financial commitments. See the
"Consolidated Statements of Cash Flows" contained in Item 1 - Financial
Statements, included herein.
The
primary sources of funds are customer deposits, loan repayments, loan sales,
maturing investment securities, and FHLB advances. These sources of
funds are used to make loans, acquire investment securities and other assets,
and fund continuing operations. While maturities and the scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by the level of interest rates,
economic conditions and competition. Management believes that the
Company’s current liquidity position and forecasted operating results are
sufficient to fund all of the Bank’s existing commitments.
Liquidity
is essential to the Company’s business. An inability to raise funds through
deposits, borrowings, the sale of loans and other sources could have a
substantial negative effect on liquidity. The Company’s access to funding
sources in amounts adequate to finance the Bank’s activities on acceptable terms
could be impaired by factors that affect the Company and the Bank specifically
or within the financial services industry or economy in general. Factors that
could detrimentally impact the Company’s access to liquidity sources include
adverse regulatory action against us, 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.
At
December 31, 2008, certificates of deposit amounted to $174.5 million, or 46.2%
of total deposits, including $123.5 million that are scheduled to mature by
December 31, 2009. 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 continues to slow, 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.
At
December 31, 2008, the Bank maintained a line of credit with the FHLB of Seattle
equal to 40% of total assets to the extent the Bank provides qualifying
collateral and holds sufficient FHLB stock. At December 31, 2008, the
Bank was in compliance with the collateral requirements and $149.0 million of
the line of credit was available. The Bank is 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 the Company’s ability to meet
our growth plans or to meet short and long term liquidity
demands. However, the Company’s mortgage backed securities are
marketable and could be sold to obtain cash to meet liquidity demands should
access to FHLB funding be impaired. Additionally, the Bank could access funding
from its correspondent bank through a federal funds line of credit, the Discount
Window at the Federal Reserve Bank of San Francisco or through the origination
of out of market brokered deposits.
Off-Balance Sheet
Arrangements. The Bank is party to financial instruments with
off-balance sheet risk in the normal course of business in order to meet the
financing needs of the Bank’s 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. The Bank’s
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. The same credit policies are used in making commitments
as are used for on-balance sheet instruments. Collateral is required
in instances where deemed necessary.
Undisbursed
balances of loans closed include funds not disbursed but committed for
construction projects. Unused lines of credit include funds not
disbursed, but committed for, home equity, commercial and consumer lines of
credit.
Commercial
letters of credit are conditional commitments issued 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.
The
following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of December
31, 2008:
|
|
|
Contract
or
Notional
Amount
|
|
(in
thousands)
|
Commitments
to originate loans:
|
|
Fixed
rate
|
$11,385
|
Adjustable
rate
|
5,505
|
Undisbursed
balance of loans closed
|
9,883
|
Unused
lines of credit
|
40,704
|
Commercial
letters of credit
|
829
|
Total
|
$68,306
|
Capital. Consistent with the Bank’s
goal to operate a sound and profitable financial organization, efforts are
ongoing to actively seek to maintain a “well capitalized” institution in
accordance with regulatory standards. The Bank’s total regulatory capital was
$140.8 million at December 31, 2008, or 20.6%, of total assets on that date. As
of December 31, 2008, the Bank exceeded all regulatory capital requirements. The
Bank’s regulatory capital ratios at December 31, 2008 were as follows: Tier 1
capital 20.6%; Tier 1 (core) risk-based capital 30.0%; and total risk-based
capital 31.3%. The applicable regulatory capital requirements to be considered
well capitalized are 5%, 6% and 10%, respectively.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
The
Company’s Board of Directors has established an asset and liability management
policy to guide management in maximizing net interest spread by managing the
differences in terms between interest-earning assets and interest-bearing
liabilities while maintaining acceptable levels of liquidity, capital adequacy,
interest rate sensitivity, credit risk and profitability. The
Asset/Liability Management Committee, consisting of certain members of senior
management, communicate, coordinate and manage asset/liability positions
consistent with the business plan and Board-approved policies, as well as to
price savings and lending products, and to develop new products.
One of
the Bank’s primary financial objectives is to generate ongoing
profitability. The Bank’s profitability depends primarily on its net
interest income, which is the difference between the income it receives on its
loan and investment portfolio and its cost of funds, which consists of interest
paid on deposits and borrowings. The rates the Company earns on
assets and pays on liabilities generally are established contractually for a
period of time. Market interest rates change over
time. The Bank’s loans generally have longer maturities than the
deposits. Accordingly, the Company’s results of operations, like
those of other financial institutions, are affected by changes in interest rates
and the interest rate sensitivity of assets and liabilities. The Bank
measures its interest rate sensitivity on a quarterly basis using an internal
model.
Management
employs various strategies to manage the Company’s interest rate sensitivity
including: (1) selling long-term fixed-rate mortgage loans in the secondary
market; (2) borrowing intermediate to long-term funds at fixed rates from the
FHLB; (3) originating commercial and consumer loans at shorter maturities or at
variable rates; (4) originating adjustable rate mortgage loans; (5)
appropriately modifying loan and deposit pricing to capitalize on the then
current market opportunities; and (6) increasing lower cost core deposits, such
as savings and checking accounts. At December 31, 2008, the Company had no
off-balance sheet derivative financial instruments, and the Bank did not
maintain a trading account for any class of financial instruments or engage in
hedging activities or purchase high risk derivative
instruments. Furthermore, the Company is not subject to foreign
currency exchange rate risk or commodity price risk.
There has
not been any material change in the market risk disclosures contained in the
Company’s 2008 Form 10-K.
Item 4. Controls
and Procedures
(a)
Evaluation of Disclosure Controls and Procedures.
An
evaluation of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was
carried out under the supervision and with the participation of the Company’s
Chief Executive Officer, Chief Financial Officer, and other members of the
Company’s management team as of the end of the period covered by this quarterly
report. The Company’s Chief Executive Officer and Chief Financial
Officer concluded that as of December 31, 2008, the Company’s disclosure
controls and procedures were effective in ensuring that the information required
to be disclosed by the Company in the reports it files or submits under the Act
is (i) accumulated and communicated to the Company’s management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms.
(b)
Changes in Internal Controls.
There
have been no changes in the Company’s internal control over financial reporting
(as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter
ended December 31, 2008, that have materially affected, or is reasonably likely
to materially affect, the Company’s internal control over financial
reporting. A number of internal control procedures were, however,
modified during the quarter in conjunction with the Bank's internal control
testing. The Company also continued to implement suggestions from its
internal auditor and independent auditors 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 financial and 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 every error or instance of 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.
PART II - OTHER
INFORMATION
Item 1. Legal
Proceedings
From time
to time, the Company is engaged in legal proceedings in the ordinary course of
business, none of which are currently considered to have a material impact on
the Company’s financial position or results of operations.
Item 1A. Risk
Factors
Other
than discussed in the following paragraph, we believe there have been no
significant changes in risk factors compared to the factors identified in our
2008 Form 10-K.
The
failure of the Federal Home Loan Bank (“FHLB”) of Seattle or the national
Federal Home Loan Bank System may have a material negative impact on our
earnings and liquidity.
Recently,
the FHLB of Seattle announced that it did not meet minimum regulatory capital
requirements for the quarter ended September 30, 2008, and that it did not
expect to comply with those requirements at December 31, 2008, due to the
deterioration in the market value of their mortgage-backed securities portfolio.
As a result, the FHLB of Seattle cannot pay a dividend on their common stock and
it cannot repurchase or redeem common stock. While the FHLB of Seattle has
announced it does not anticipate that additional capital is immediately
necessary, nor does it believe that its capital level is inadequate to support
realized losses in the future, the FHLB of Seattle could require its members,
including Home Federal Bank, to contribute additional capital in order to return
the FHLB of Seattle to compliance with capital guidelines.
At
December 31, 2008, we held $9.6 million of common stock in the FHLB of Seattle.
Should the FHLB of Seattle fail, we anticipate that our investment in the FHLB’s
common stock would be “other than temporarily” impaired and may have no
value.
At
December 31, 2008, we held $926,000 of cash on deposit with the FHLB of Seattle.
At that date, all other cash and cash equivalents were held on deposit at the
Federal Reserve Bank of San Francisco, or on hand in branch office
vaults.
At
December 31, 2008, we maintained a line of credit with the FHLB of Seattle equal
to 40% of total assets to the extent Home Federal Bank provides qualifying
collateral and holds sufficient FHLB stock. At December 31, 2008, we
were in compliance with collateral requirements and $149.0 million of the line
of credit was available for additional borrowings. 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 access to FHLB
funding be impaired. Additionally, we could access funding from our
correspondent bank through a federal funds line of credit, the Discount Window
at the Federal Reserve Bank of San Francisco or through the origination of out
of market brokered deposits.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
(c)
|
Stock
Repurchases. On December 23, 2008, the Company’s Board
of Directors approved a 5% share repurchase program, which authorized
management to repurchase up to 867,970 shares of the Company’s outstanding
common stock. No shares were repurchased between October 1, 2008, and
December 31, 2008.
|
Item 3. Defaults
Upon Senior Securities
Not
applicable.
Item
4. Submission of Matters to a Vote of Security
Holders
Not
applicable.
Item 5. Other
Information
Not
applicable.
Item
6. Exhibits
2.1
|
Plan
of Conversion and Reorganization (1)
|
3.1
|
Articles
of Incorporation of the Registrant (2)
|
3.2
|
Bylaws
of the Registrant (2)
|
10.1
|
Amended
Employment Agreement entered into by Home Federal Bank with Len E.
Williams (9)
|
10.2
|
Employment
Agreement entered into by Home Federal Bancorp, Inc. with Len E. Williams
(9)
|
10.3
|
Amended
Employment Agreement entered into by Home Federal Bank with Daniel L.
Stevens (9)
|
10.4
|
Amended
Employment Agreement entered into by Home Federal Bancorp, Inc. with
Daniel L. Stevens (9)
|
10.5
|
Form
of Amended Severance Agreement for Executive Officers
(7)
|
10.6
|
Form
of Amended Severance Agreement for new Executive Officers
(7)
|
10.7
|
Form
of Home Federal Bank Employee Severance Compensation Plan
*
|
10.8
|
Form
of Director Indexed Retirement Agreement entered into by Home Federal
Savings and Loan Association of Nampa with each of its Directors
(2)
|
10.9
|
Form
of Director Deferred Incentive Agreement entered into by Home Federal
Savings and Loan Association of Nampa with each of its Directors
(2)
|
10.10
|
Form
of Split Dollar Agreement entered into by Home Federal Savings and Loan
Association of Nampa with Daniel L. Stevens, N. Charles Hedemark, Fred H.
Helpenstell, M.D., Richard J. Schrandt, James R. Stamey and Robert A.
Tinstman (2)
|
10.11
|
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, and Lynn A. Sander (2)
|
10.12
|
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, and Lynn A. Sander
(2)
|
10.13
|
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 (3)
|
10.14
|
2005
Recognition and Retention Plan approved by stockholders on June 23, 2005
and Form of Award Agreement (3)
|
10.15
|
Form
of new Director Retirement Plan entered into by Home Federal Bank with
each of its Directors (4)
|
10.16
|
Transition
Agreement with Daniel L. Stevens (5)
|
10.17
|
Agreement
Regarding Terms of Employment Offer with Steven K. Eyre
(6)
|
10.18
|
Agreement
Regarding Terms of Employment Offer with Eric S. Nadeau
(8)
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act *
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act *
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act
*
|
______
(1)
|
Filed
as an exhibit to the Registrant’s 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 Registration Statement on Form S-8
(333-127858). |
(4)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated October
21, 2005. |
(5)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated August
21, 2006.
|
(6)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated
November 15, 2007.
|
(7)
|
Filed
as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2007.
|
(8)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated May 15,
2008.
|
(9)
|
Filed
as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2008
|
*
|
Filed
herewith
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Home Federal
Bancorp, Inc.
Date: February 6,
2009
/s/
Len E. Williams
Len E. Williams
President and
Chief Executive Officer
(Principal Executive Officer)
Date: February 6,
2009
/s/
Eric S. Nadeau
Eric S. Nadeau
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT
INDEX
10.7
|
Form
of Home Federal Bank Employee Severance Compensation
Plan
|
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
|