k1009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[X]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
Fiscal Year Ended September
30, 2009
or
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number: 001-33795
HOME FEDERAL BANCORP,
INC.
(Exact
name of registrant as specified in its charter)
Maryland
|
68-0666697
|
|
(State or other
jurisdiction of incorporation
or
organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
|
|
500 12th Avenue
South, Nampa,
Idaho
|
83651
|
|
(Address of
principal executive offices) |
(Zip
Code)
|
|
|
|
|
Registrant’s
telephone number, including area code: |
(208)
466-4634
|
|
|
|
|
Securities
registered pursuant to Section 12(b) of the Act: |
|
|
|
|
|
Common
Stock, par value $.01 per share
|
Nasdaq Global Select
Market |
|
(Title of Each Class) |
(Name
of Each Exchange on Which Registered)
|
|
|
|
Securities
registered pursuant to Section 12(g) of the Act: |
None
|
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes [ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes[ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).Yes [ ] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
[ ] Accelerated
filer
[X] Non-accelerated
filer
[ ] Smaller
reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
As of
December 4, 2009, there were 16,698,168 shares of the registrant’s common stock
outstanding. The aggregate market value of the voting stock held by
nonaffiliates of the registrant based on the closing sales price of the
registrant's common stock as quoted on The Nasdaq Global Select Market on March
31, 2009, was approximately $142,400,319 (16,311,606 shares at $8.73 per
share).
DOCUMENTS
INCORPORATED BY REFERENCE
Part II
and Part III - Portions of the Registrant’s definitive Proxy Statement for its
2010 Annual Meeting of Stockholders.
HOME
FEDERAL BANCORP, INC.
2009
ANNUAL REPORT ON FORM 10-K
TABLE
OF CONTENTS
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Page
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PART I.
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Item 1
- |
Business |
2
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Item 1A
- |
Risk
Factors |
43
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Item 1B
- |
Unresolved Staff
Comments |
53
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|
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Item 2
- |
Properties |
54
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Item 3
- |
Legal
Proceedings |
56
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Item 4
- |
Submission of
Matters to a Vote of Security Holders |
56
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PART II.
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Item 5
- |
Market
for Registrant’s Common Equity, Related Stockholder Matters
and
Issuer Purchases of Equity Securities
|
56
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|
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Item 6
- |
Selected Financial
Data |
59
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Item 7
- |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
61
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|
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Item 7A
- |
Quantitative and
Qualitative Disclosures About Market Risk |
89
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Item 8
- |
Financial Statements
and Supplementary Data |
90
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Item 9
- |
Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure |
130
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Item
9A- |
Controls and
Procedures |
130
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Item 9B
- |
Other
Information |
130
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PART
III.
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Item 10
- |
Directors, Executive
Officers and Corporate Governance |
130
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Item 11
- |
Executive
Compensation |
131
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|
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Item 12
- |
Security
Ownership of Certain Beneficial Owners and Management and
Related
Stockholder Matters
|
131
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|
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|
Item 13
- |
Certain
Relationships and Related Transactions, and Director
Independence |
131
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|
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Item 14
- |
Principal Accounting
Fees and Services |
131
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|
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PART
IV.
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|
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Item 15
– |
Exhibits, Financial
Statement Schedules |
132
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Forward-Looking
Statements
“Safe
Harbor” statement under the Private Securities Litigation Reform Act of 1995:
This Form 10-K contains forward-looking statements, which can be identified by
the use of words such as “believes,” “expects,” “anticipates,” “estimates” or
similar expressions. Forward-looking statements include:
§
|
statements
of our goals, intentions and
expectations;
|
§
|
statements
regarding our business plans, prospects, growth and operating
strategies;
|
§
|
statements
regarding the quality of our loan and investment portfolios;
and
|
§
|
estimates
of our risks and future costs and
benefits.
|
These
forward-looking statements are subject to significant risks and uncertainties.
Actual results may differ materially from those contemplated by the
forward-looking statements due to, among others, the following
factors:
§
|
the
credit risks of lending activities, including changes in the level and
trend of loan delinquencies and write-offs and changes in our allowance
for loan losses and provision for loan losses that may be impacted by
deterioration in the housing and commercial real estate
markets;
|
§
|
changes
in general economic conditions, either nationally or in our market
areas;
|
§
|
changes
in the levels of general interest rates, and the relative differences
between short and long term interest rates, deposit interest rates, our
net interest margin and funding
sources;
|
§
|
fluctuations
in the demand for loans, the number of unsold homes, land and other
properties and fluctuations in real estate values in our market
areas;
|
§
|
secondary
market conditions for loans and our ability to sell loans in the secondary
market;
|
§
|
results
of examinations of us by the Office of Thrift Supervision or other
regulatory authorities, including the possibility that any such regulatory
authority may, among other things, require us to increase our reserve for
loan losses, write-down assets, change our regulatory capital position or
affect our ability to borrow funds or maintain or increase deposits, which
could adversely affect our liquidity and
earnings;
|
§
|
our
compliance with regulatory enforcement
actions;
|
§
|
legislative
or regulatory changes that adversely affect our business including changes
in regulatory policies and principles, or the interpretation of
regulatory capital or other rules;
|
§
|
our
ability to attract and retain
deposits;
|
§
|
further
increases in premiums for deposit
insurance;
|
§
|
our
ability to control operating costs and
expenses;
|
§
|
the
use of estimates in determining fair value of certain of our assets, which
estimates may prove to be incorrect and result in significant declines in
valuation;
|
§
|
difficulties
in reducing risks associated with the loans on our balance
sheet;
|
§
|
staffing
fluctuations in response to product demand or the implementation of
corporate strategies that affect our workforce and potential associated
charges;
|
§
|
computer
systems on which we depend could fail or experience a security
breach;
|
§
|
our
ability to retain key members of our senior management
team;
|
§
|
costs
and effects of litigation, including settlements and
judgments;
|
§
|
our
ability to successfully integrate any assets, liabilities, customers,
systems, and management personnel we may in the future acquire into our
operations and our ability to realize related revenue synergies and cost
savings within expected time frames and any goodwill charges related
thereto;
|
§
|
increased
competitive pressures among financial services
companies;
|
§
|
changes
in consumer spending, borrowing and savings
habits;
|
§
|
the
availability of resources to address changes in laws, rules, or
regulations or to respond to regulatory
actions;
|
§
|
our
ability to pay dividends on our common
stock;
|
§
|
adverse
changes in the securities markets;
|
§
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inability
of key third-party providers to perform their obligations to
us;
|
§
|
changes
in accounting policies and practices, as may be adopted by the financial
institution regulatory agencies or the Financial Accounting Standards
Board, including additional guidance and interpretation on accounting
issues and details of the implementation of new accounting methods;
and
|
§
|
other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing, products and services and the other
risks described elsewhere in this prospectus and the incorporated
documents.
|
Some of
these and other factors are discussed in this Annual Report on Form 10-K under
the caption “Risk Factors” and elsewhere in this document and in the documents
incorporated by reference herein. Such developments could have an adverse impact
on our financial position and our results of operations.
Any of
the forward-looking statements that we make in this annual report and in other
public statements we make may turn out to be wrong because of inaccurate
assumptions we might make, because of the factors illustrated above or because
of other factors that we cannot foresee. Because of these and other
uncertainties, our actual future results may be materially different from the
results indicated by these forward-looking statements and you should not rely on
such statements.
PART
I
Item 1.
Business
Organization
Home
Federal Bancorp, Inc. (“old Home Federal Bancorp”) was organized as a federally
chartered stock corporation at the direction of Home Federal Savings and Loan
Association of Nampa (“Association”) in connection with its mutual holding
company reorganization (“Reorganization”). On December 6, 2004, the Association
completed the Reorganization and minority stock offering. In connection with the
Reorganization, the Association converted to a federally chartered stock savings
bank and changed its name to Home Federal Bank (the “Bank”). Old Home Federal
Bancorp sold 40.06% of its outstanding shares of common stock (6,083,500 shares)
to the public and issued 59.04% of its outstanding shares of common stock
(8,979,246 shares) to Home Federal MHC, the mutual holding company parent of old
Home Federal Bancorp. In connection with the Reorganization, old Home Federal
Bancorp received $53.6 million in net proceeds after deducting expenses, and
issued an additional 146,004 shares and $365,010 in cash to the Home Federal
Foundation, Inc. (the “Foundation”), a charitable foundation established as part
of the Reorganization.
On May
11, 2007, the Boards of Directors of Home Federal MHC, old Home Federal Bancorp,
Inc., and Home Federal Bank adopted a Plan of Conversion and Reorganization (the
“Conversion”) pursuant to which Home Federal Bank reorganized from the mutual
holding company structure to the stock holding company structure. Pursuant to
the terms of the Plan, Home Federal MHC converted to a federal interim stock
savings bank and simultaneously merged with and into Home Federal Bank, with
Home Federal Bank as the survivor. Additionally, Home Federal Bancorp, Inc.
converted to a federal interim stock savings bank and simultaneously merged with
and into Home Federal Bank, with Home Federal Bank as the survivor. Home Federal
Bank then formed a new stock holding company, Home Federal Bancorp, Inc. (“we”,
“us”, the “Company” or “Home Federal Bancorp”), that serves as the holding
company for Home Federal Bank. Home Federal Bancorp, Inc., is a Maryland
corporation. The conversion was completed on December 19, 2007.
As part
of the Conversion, a total of 9,384,000 new shares of the Company were sold at
$10 per share in subscription, community and syndicated community offerings
through which the Company received proceeds of approximately $87.8 million, net
of offering costs of approximately $5.9 million. The Company contributed $48.0
million or approximately 50% of the net proceeds to the Bank in the form of a
capital contribution. The Company loaned $8.2 million to the Bank’s Employee
Stock Ownership Plan (the “ESOP”) and the ESOP used those funds to acquire
816,000 shares of the Company’s common stock at $10 per share. As part of the
Conversion, shares of outstanding common stock of the old Home Federal Bancorp
were exchanged for 1.136 shares of the Company’s common stock. No fractional
shares were issued. Instead, cash was paid to stockholders at a rate of $10 per
share for any fractional shares that would otherwise be issued. The exchange
resulted in an additional 853,133 outstanding shares of the Company for a total
of 17,326,169 outstanding shares as of the closing of the Conversion on December
19, 2007.
The
Conversion was accounted for as reorganization in corporate form with no change
in the historical basis of the Company’s assets, liabilities or stockholders’
equity. All references to the number of shares outstanding, including references
for purposes of calculating per share amounts, are restated to give retroactive
recognition to the exchange ratio applied in the Conversion.
On August
7, 2009, the Bank entered into a purchase and assumption agreement with loss
share with the Federal Deposit Insurance Corporation (“FDIC”) to assume all of
the deposits (excluding nearly all brokered deposits) and certain assets of
Community First Bank, a full service commercial bank, headquartered in
Prineville, Oregon (the “Acquisition”). Community First Bank operated eight
locations in central Oregon. Home Federal Bank assumed approximately
$142.8 million of the deposits of Community First Bank. Additionally,
Home Federal Bank purchased approximately $142.3 million in loans and $12.9
million of real estate and other repossessed assets (“REO”). The
loans and REO purchased are covered by a loss share agreement between the FDIC
and Home Federal Bank which affords the Bank significant
protection. Under the loss sharing agreement, Home Federal Bank will
share in the losses on assets covered under the agreement (referred to as
covered assets). The FDIC has agreed to reimburse Home Federal Bank
for 80% of losses up to $34.0 million, and 95% of losses that exceed that
amount. In addition, Home Federal Bank also purchased cash and cash
equivalents and investment securities of Community
First
Bank valued at $37.7 million at the date of the Acquisition, and assumed $18.3
million in Federal Home Loan Bank advances and other borrowings. This
acquisition was accounted for as a purchase under Financial Accounting Standard
(“FAS”) No. 141, “Business Combinations,” with the assets acquired and
liabilities assumed recorded at their respective fair values.
Business
Activities
Home
Federal Bancorp’s business activity is the ownership of the outstanding capital
stock of Home Federal Bank and investment management of the offering proceeds
retained from the Reorganization and the Conversion. Home Federal Bancorp
neither owns nor leases any property but instead uses the premises, equipment
and other property of Home Federal Bank with the payment of appropriate
management fees, as required by applicable law and regulations. In the future,
Home Federal Bancorp may acquire or organize other operating subsidiaries;
however, there are no current plans to do so. Home Federal Bancorp has no
significant assets, other than cash and cash equivalents, mortgage-backed
securities and all of the outstanding shares of Home Federal Bank, and no
significant liabilities.
Home
Federal Bank was founded in 1920 as a building and loan association and
reorganized as a federal mutual savings and loan association in 1936. Home
Federal Bank’s deposits are insured by the FDIC up to applicable legal limits
under the Deposit Insurance Fund. The Bank has been a member of the Federal Home
Loan Bank ("FHLB") System since 1937. Home Federal Bank’s primary regulator is
the Office of Thrift Supervision (“OTS”).
We are in
the business of attracting deposits from consumers and businesses in our market
areas and utilizing those deposits to originate loans. We offer a wide range of
loan products to meet the credit needs of our customers. Historically, lending
activities have been primarily directed toward the origination of residential
and commercial real estate loans. Residential real estate lending activities
have been primarily focused on first mortgages on owner occupied, one-to-four
family residential properties. The Bank now originates nearly all of its
one-to-four family residential loans for sale in the secondary
market.
The Board
of Directors and the management team have undertaken efforts to change the
Company’s strategy from that of a traditional thrift to a full-service community
bank. This transition includes a reduced reliance on one-to-four family loans
originated for the Bank’s portfolio. As a result, the Bank’s lending activities
have expanded in recent years to include commercial business lending, including
commercial real estate and builder finance. While continuing our commitment to
residential lending through our secondary market program, management expects
commercial lending to become increasingly important for the
Company.
At
September 30, 2009, the Company had total assets of $827.9 million, net loans of
$510.6 million, deposit accounts of $514.9 million and stockholders’ equity of
$209.7 million.
Operating
Lines
Home
Federal Bancorp’s sole subsidiary is Home Federal Bank. Management has
determined that the Bank, as a whole, is the sole reporting unit and that no
reportable operating segments exist other than Home Federal Bank.
Market
Area
Home
Federal Bank currently has operations in two distinct market
areas. The Bank’s primary market area is the Boise, Idaho,
metropolitan statistical area (“MSA”) and surrounding communities, together
known as the Treasure Valley region of southwestern Idaho, including Ada,
Canyon, Elmore and Gem counties. The Acquisition resulted in the Bank’s entrance
to the Tri-County Region of Central Oregon, including the counties of Crook,
Deschutes and Jefferson. In total we have 23 full-service banking
offices, one loan center, 24 automated teller machines and Internet banking
services. Included in our 23 full-service banking offices were five Wal-Mart
in-store branch locations at September 30, 2009. However, in the fourth quarter
of fiscal year 2009 we announced our intent to close two of those Wal-Mart
in-store locations in October 2009 and to open two full-service locations in
Boise and Meridian, Idaho, in October and November 2009,
respectively. For more information, see "Item 2.
Properties."
The
following table summarizes key economic and demographic information about these
market areas:
|
|
Idaho
|
|
|
Oregon
|
|
|
National
|
|
|
|
Canyon
|
|
|
Ada
|
|
|
Gem
|
|
|
Elmore
|
|
|
Deschutes
|
|
|
Crook
|
|
|
Jefferson
|
|
|
U.S.
|
|
Median
household
income
|
|
$ |
48,904 |
|
|
$ |
63,612 |
|
|
$ |
44,033 |
|
|
$ |
45,691 |
|
|
$ |
53,995 |
|
|
$ |
43,781 |
|
|
$ |
45,610 |
|
|
$ |
54,719 |
|
Change
2000 – 2009
|
|
|
36.4 |
% |
|
|
37.8 |
% |
|
|
27.9 |
% |
|
|
29.6 |
% |
|
|
29.5 |
% |
|
|
24.5 |
% |
|
|
27.3 |
% |
|
|
29.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Population
|
|
|
188,496 |
|
|
|
390,996 |
|
|
|
17,455 |
|
|
|
29,540 |
|
|
|
166,648 |
|
|
|
24,799 |
|
|
|
22,156 |
|
|
|
|
|
Change
2000 – 2009
|
|
|
43.4 |
% |
|
|
29.9 |
% |
|
|
14.9 |
% |
|
|
1.41 |
% |
|
|
44.4 |
% |
|
|
29.3 |
% |
|
|
16.6 |
% |
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unemployment
rate(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
2009
|
|
|
10.6 |
% |
|
|
9.1 |
% |
|
|
10.4 |
% |
|
|
7.7 |
% |
|
|
13.5 |
% |
|
|
16.1 |
% |
|
|
12.9 |
% |
|
|
9.5 |
% |
September
2008
|
|
|
5.6 |
% |
|
|
4.5 |
% |
|
|
5.5 |
% |
|
|
4.8 |
% |
|
|
4.8 |
% |
|
|
4.8 |
% |
|
|
4.8 |
% |
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
industry deposits(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
2009
|
|
$ |
1,509 |
|
|
$ |
6,644 |
|
|
$ |
144 |
|
|
$ |
402 |
|
|
$ |
2,823 |
|
|
$ |
259 |
|
|
$ |
136 |
|
|
|
|
|
June
2008
|
|
|
1,467 |
|
|
|
6,244 |
|
|
|
145 |
|
|
|
355 |
|
|
|
2,191 |
|
|
|
271 |
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
Federal Bank’s
deposit
market share
June
2009
|
|
|
14.0 |
% |
|
|
2.1 |
% |
|
|
20.6 |
% |
|
|
6.3 |
% |
|
|
2.7 |
% |
|
|
34.4 |
% |
|
|
11.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Not seasonally adjusted
|
|
(2)
In millions. Includes deposits in credit unions
|
|
Source:
FDIC, SNL Financial, Bureau of Labor Statistics
|
|
Southwest Idaho
Region. Within Idaho, Home Federal Bank maintains its largest branch
presence in Ada County with eight locations, followed by Canyon County with five
offices, including Home Federal Bank’s corporate headquarters in Nampa. As of
June 30, 2009, the Bank had a 5.02% market share of the FDIC-insured deposits in
these two counties, ranking it fifth among all insured depository institutions
in these counties, according to the FDIC. The two remaining Idaho branches are
located in Elmore and Gem counties.
The local
economy is primarily urban with Boise, the state capital of Idaho, being the
most populous of the markets that the Bank serves, followed by Nampa, the
state's second largest city. Nearly 40% of the state’s population lives and
works in the four counties of Ada, Canyon, Elmore and Gem that are served by
Home Federal Bank.
The
regional economy is well diversified with government, healthcare, manufacturing,
high technology, call centers and construction providing sources of employment.
In addition, agriculture and related industries continue to be key components of
the economy in southwestern Idaho. Generally, sources of employment are
concentrated in Ada and Canyon counties and include the headquarters of Micron
Technology, J.R. Simplot Company and Boise Cascade, LLC. Other major employers
include Hewlett-Packard, Supervalu, two regional medical centers and Idaho state
government agencies. Boise is also home to Boise State University, the state's
largest university.
The
Treasure Valley has enjoyed strong population growth over the last five years,
which led to an increase in residential community developments. Historically,
the unemployment rate has been lower than the national rate. The current
economic slowdown, which has been led by significant deterioration in
residential home sales, has caused acceleration in unemployment in the Treasure
Valley. This slowdown has created an over-supply of speculative construction and
land development projects. During the build-up of residential construction,
commercial real estate construction accelerated and many speculative
construction commercial projects, as well as existing commercial buildings, are
now vacant, contributing to falling property values. Continued deterioration in
the local economy may result in additional losses in the Bank’s loan portfolio,
restrict management’s ability to execute the Company’s growth plans or impact
the Bank’s liquidity due to a shrinking deposit base. See “Risk
Factors” under Item 1A of this Annual Report Form 10-K.
Central Oregon
Region. Within Oregon, Home Federal Bank operates eight branches, six in
Deschutes County and one each in Crook and Jefferson Counties. As of
June 30, 2009, these eight branches served a 5.81% market share of the
FDIC-insured deposits in these counties, which ranks it fifth overall for the
three counties in Oregon in which
the Bank
operates. Central
Oregon has become a year-round destination resort for visitors and tourists
worldwide offering premiere skiing, golfing, fishing, hiking, museums, biking,
kayaking, festivals and world-class destination resorts. The largest communities
in the Central Oregon region are Bend, Redmond and Prineville.
While
much smaller than the Southwest Idaho market, Central Oregon’s economy is
primarily driven by healthcare, government, tourism and other service
industries. St. Charles Medical Center in Bend is the largest private employer
with over 3,000 employees and Les Schwab Tires Centers, headquartered in Central
Oregon, employs 1,500 people. Call centers and resorts are also in the top ten
employers in the region.
Central
Oregon has experienced rapid population growth and significant new construction
has occurred over the last five years as the region’s natural beauty and resorts
gained greater renown. Commercial and residential real estate values increased
rapidly as construction of retail centers and new residential developments
maintained pace with population growth. The median home price in Bend and
Redmond rose 70% between April 2005 and April 2007 when values peaked. However,
the economic slowdown nationally has reduced spending on vacations and tourism
traffic in the region, resulting in very high unemployment. Additionally,
commercial real estate vacancies in the region rose quickly and the median home
prices in September 2009 have fallen 50% from their peak.
Operating
Strategy
Management’s
operating strategy centers on the continued development into a full service,
community-oriented bank from a traditional savings and loan business model. Our
goal is to continue to enhance our franchise value and earnings through
controlled growth in our banking operations, especially lending to small to
medium-sized businesses, while maintaining the community-oriented customer
service and sales focus that has characterized our success to date. In order to
be successful in this objective and increase stockholder value, we are committed
to the following strategies:
Continue
Growing in Our Existing Markets. We believe there is a large customer
base in our markets that are dissatisfied with the service received from larger
regional banks. By offering quicker decision making in the delivery of banking
products and services, offering customized products where appropriate, and
providing customer access to our senior managers, we hope to distinguish
ourselves from larger, regional banks operating in our market
areas.
Actively Search for Appropriate
Acquisitions. In order to enhance our ability to deliver products and
services in our existing markets and to expand into surrounding markets, we
intend to search for acquisition opportunities. We expect to bid on failed bank
transactions facilitated by the FDIC. We purchased loans and certain assets and
assumed certain deposits and liabilities of a failed bank headquartered in
Prineville, Oregon, in August 2009. The acquisition was consummated through a
loss sharing agreement with the FDIC that provides significant credit loss
mitigation and protection of our capital. However, the long-term success of such
transactions is dependent upon our ability to integrate the operations of the
acquired businesses. We will also consider whole bank acquisitions through
market transactions that provide the potential for significant earnings growth
and franchise value enhancement. However, such a transaction would be unlikely
to occur due to the current economic environment and the favorable protection
offered in an FDIC-assisted acquisition.
Expand
Our Product Offerings. We intend to continue our emphasis on originating
commercial lending products that diversify our loan portfolio by increasing the
percentage of assets consisting of higher-yielding commercial real estate and
commercial business loans with higher risk adjusted returns, shorter maturities
and more sensitivity to interest rate fluctuations, while still providing high
quality loan products for single-family residential borrowers. We also intend to
selectively add products to provide diversification of revenue sources and to
capture our customers’ full relationship by cross selling our loan and deposit
products and services to our customers. We are planning a conversion of our core
processing system in the fourth quarter of fiscal 2010, which we believe will
significantly enhance and expand our commercial banking applications and
products.
Focus
on our Branch Utilization. Branch expansion has played a significant role
in our ability to grow loans, deposits and customer relationships in the past.
We have now increased our focus on branch efficiency and deployment. In fiscal
year 2008, we opened two full-service banking offices to replace a Wal-Mart
banking office and another small office in order to better deliver the products
and services we now offer. We recently completed
construction of two full
service banking offices in Boise and Meridian, Idaho, that opened in October and
November 2009, respectively, that replaced two Wal-Mart banking offices in
Meridian and Nampa, Idaho.
Increase
Our Core Transaction Deposits. A fundamental part of our overall strategy
is to improve both the level and the mix of deposits that serve as a funding
base for asset growth. By growing demand deposit accounts and other transaction
accounts, we intend to reduce our reliance on higher-cost certificates of
deposit and borrowings such as advances from the Federal Home Loan Bank of
Seattle. In order to expand our core deposit franchise, we are focusing on
introducing additional products and services to obtain money market and time
deposits by bundling them with other consumer and small business services.
Business deposits are being pursued by the introduction of cash management
products and by specific targeting of small business customers.
Hire
Experienced Employees With a Customer Service Focus. Our ability to
continue to attract and retain banking professionals with strong business
banking and service skills, community relationships and significant knowledge of
our markets is key to our success. We believe that by focusing on hiring
experienced bankers who are established in their communities, we enhance our
market position and add profitable growth opportunities. We emphasize to our
employees the importance of delivering exemplary customer service and seeking
opportunities to build further relationships with our customers. Our goal is to
compete by relying on the strength of our customer service and relationship
banking approach.
Develop
and Nurture an Internal Management Culture Which is Driven by a Focus on
Profitability, Productivity and Accountability for Results and Which Responds
Proactively to the Challenge of Change. The primary method for
reinforcing our culture is the comprehensive application of our “Pay for
Performance” total compensation program. Every employee has clearly defined
accountabilities and performance standards that tie directly or indirectly to
our profitability. All incentive compensation is based on specific profitability
measures, sales volume goals or a combination of specific profitability measures
and individual performance goals. This approach encourages all employees to
focus on our profitability and has created an environment that embraces new
products, services and delivery systems. However, we also recognize that our
compensation program, particularly incentive and other variable pay plan, must
be structured and administered in a manner that provides incentive for achieving
our goals as to growth while not encouraging disproportionate or excessive risk
taking.
Lending
Activities
General. Historically, our
principal lending activity has consisted of the origination of loans secured by
first mortgages on owner-occupied, one-to-four family residences and loans for
the construction of one-to-four family residences. We also originate consumer
loans, with an emphasis on home equity loans and lines of credit. Commensurate
with our transformation from a traditional thrift to a full-service community
bank, we have been offering commercial real estate loans and to a lesser extent,
multi-family loans. While we intend to increase our commercial and small
business loans, a substantial portion of our loan portfolio is currently secured
by real estate, either as primary or secondary collateral.
At
September 30, 2009, the maximum amount of credit that we could have extended to
any one borrower and the borrower's related entities under applicable
regulations was $23.4 million. Our internal policy limits loans to one borrower
and the borrower's related entities to 80% of the regulatory limit, or $18.7
million. At September 30, 2009, the Company had no borrowing relationship with
outstanding balances in excess of this amount. Our largest single borrower
relationship at September 30, 2009 included four commercial real estate loans
and a home equity line of credit totaling $5.3 million. The second
largest lending relationship included five commercial real estate loans totaling
$5.0 million. Our third largest borrower relationship is a single
loan secured by commercial real estate for $4.9 million. The fourth
largest lending relationship was two commercial acquisition and development
loans and a letter of credit totaling $4.7 million. The fifth largest
lending relationship included four commercial real estate secured loans totaling
$4.6 million. All of these loans, including those made to
corporations, have personal guarantees in place as an additional source of
repayment and are secured by property or assets in our primary market
area. These loans were performing according to their terms at
September 30, 2009.
Our
Senior Management Loan Committee, which consists of the Bank’s Chief Executive
Officer, the Executive Vice President/Commercial Banking and the Senior Vice
President/Chief Credit Officer, is authorized to approve loans to one borrower
or a group of related borrowers of up to $5.0 million in the
aggregate. The single loan limit for this committee is also $5.0
million. Loan requests in excess of $5.0 million are presented to the
Loan Committee
of the
Board of Directors for review and approval. The entire board comprises that
committee. We will apply our organic loan policy, including our underwriting
standards, to loans we originate in Central Oregon. None of the loans we
acquired, which are subject to a loss share agreement with the FDIC, however,
were originated pursuant to underwriting standards that were comparable to those
that will be applied to new loans in the future.
The
following table provides a comparison of our loan portfolios as of September 30,
2009 and 2008, detailing loans purchased in the Acquisition, net of fair value
purchase adjustments, and loans existing in our organic portfolio:
|
September
30,
|
|
|
2009
|
|
2008
|
|
|
Acquired(1)
|
|
Organic
|
|
Total
|
|
Total
|
|
|
(in
thousands)
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
$ 8,537
|
|
$169,774
|
|
$178,311
|
|
$210,501
|
|
Multi-family
residential
|
6,270
|
|
10,016
|
|
16,286
|
|
8,477
|
|
Commercial
|
61,601
|
|
151,870
|
|
213,471
|
|
151,733
|
|
Total
real estate
|
76,408
|
|
331,660
|
|
408,068
|
|
370,711
|
|
|
|
|
|
|
|
|
|
|
Real
Estate Construction:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
3,128
|
|
7,743
|
|
10,871
|
|
13,448
|
|
Multi-family
residential
|
1,521
|
|
8,896
|
|
10,417
|
|
920
|
|
Commercial
and land development
|
17,230
|
|
9,914
|
|
27,144
|
|
18,674
|
|
Total
real estate construction
|
21,879
|
|
26,553
|
|
48,432
|
|
33,042
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Home
equity
|
6,728
|
|
46,640
|
|
53,368
|
|
52,954
|
|
Automobile
|
1,188
|
|
1,176
|
|
2,364
|
|
1,903
|
|
Other
consumer
|
1,850
|
|
1,884
|
|
3,734
|
|
1,370
|
|
Total
consumer
|
9,766
|
|
49,700
|
|
59,466
|
|
56,227
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
18,313
|
|
5,943
|
|
24,256
|
|
5,385
|
|
Gross loans
|
126,366
|
|
413,856
|
|
540,222
|
|
465,365
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan fees
|
(1
|
)
|
(857
|
)
|
(858
|
)
|
(973
|
)
|
Allowance
for loan losses(2)
|
(16,812
|
)
|
(11,923
|
)
|
(28,735
|
)
|
(4,579
|
)
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
$109,553
|
|
$401,076
|
|
$510,629
|
|
$459,813
|
|
_________________________________
(1)
|
Loans
purchased in the Acquisition on August 7,
2009
|
(2)
|
An
allowance for loan losses was not recorded on $40.4 million of loans
purchased in the Acquisition that were subject to accounting under
Accounting Standards Codification (“ASC”) Topic 310-30, “Loans and Debt
Securities Acquired with Deteriorated Credit Quality.” A fair value
adjustment of $14.3 million was recorded directly to the loan balances
that were subject to ASC 310-30. An allowance for loan losses was recorded
on all other loans purchased in the
Acquisition
|
Loan Portfolio Analysis. The
following table sets forth the composition of the Company’s loan portfolio by
type of loan at the dates indicated:
|
|
At
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential (1)
|
$ |
178,311 |
|
|
|
33.01 |
% |
|
$ |
210,501 |
|
|
|
45.23 |
% |
|
$ |
249,545 |
|
|
|
51.55 |
% |
|
$ |
293,640 |
|
|
|
57.88 |
% |
|
$ |
252,126 |
|
|
|
58.00 |
% |
Multi-family
residential
|
|
|
16,286 |
|
|
|
3.01 |
|
|
|
8,477 |
|
|
|
1.82 |
|
|
|
6,864 |
|
|
|
1.42 |
|
|
|
7,049 |
|
|
|
1.39 |
|
|
|
5,454 |
|
|
|
1.25 |
|
Commercial
|
|
|
213,471 |
|
|
|
39.52 |
|
|
|
151,733 |
|
|
|
32.61 |
|
|
|
133,823 |
|
|
|
27.64 |
|
|
|
125,401 |
|
|
|
24.72 |
|
|
|
116,432 |
|
|
|
26.78 |
|
Total
real estate
|
|
|
408,068 |
|
|
|
75.54 |
|
|
|
370,711 |
|
|
|
79.66 |
|
|
|
390,232 |
|
|
|
80.61 |
|
|
|
426,090 |
|
|
|
83.99 |
|
|
|
374,012 |
|
|
|
86.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
10,871 |
|
|
|
2.01 |
|
|
|
13,448 |
|
|
|
2.89 |
|
|
|
20,545 |
|
|
|
4.24 |
|
|
|
23,678 |
|
|
|
4.67 |
|
|
|
14,421 |
|
|
|
3.32 |
|
Multi-family
residential
|
|
|
10,417 |
|
|
|
1.93 |
|
|
|
920 |
|
|
|
0.20 |
|
|
|
1,770 |
|
|
|
0.37 |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,427 |
|
|
|
0.33 |
|
Commercial
and land development
|
|
|
27,144 |
|
|
|
5.02 |
|
|
|
18,674 |
|
|
|
4.01 |
|
|
|
21,899 |
|
|
|
4.52 |
|
|
|
16,344 |
|
|
|
3.22 |
|
|
|
7,470 |
|
|
|
1.72 |
|
Total
real estate construction
|
|
|
48,432 |
|
|
|
8.96 |
|
|
|
33,042 |
|
|
|
7.10 |
|
|
|
44,214 |
|
|
|
9.13 |
|
|
|
40,022 |
|
|
|
7.89 |
|
|
|
23,318 |
|
|
|
5.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
53,368 |
|
|
|
9.88 |
|
|
|
52,954 |
|
|
|
11.38 |
|
|
|
42,990 |
|
|
|
8.88 |
|
|
|
34,143 |
|
|
|
6.73 |
|
|
|
28,558 |
|
|
|
6.57 |
|
Automobile
|
|
|
2,364 |
|
|
|
0.44 |
|
|
|
1,903 |
|
|
|
0.41 |
|
|
|
2,173 |
|
|
|
0.45 |
|
|
|
3,245 |
|
|
|
0.64 |
|
|
|
4,576 |
|
|
|
1.05 |
|
Other
consumer
|
|
|
3,734 |
|
|
|
0.69 |
|
|
|
1,370 |
|
|
|
0.29 |
|
|
|
1,405 |
|
|
|
0.29 |
|
|
|
1,300 |
|
|
|
0.26 |
|
|
|
1,530 |
|
|
|
0.35 |
|
Total
consumer
|
|
|
59,466 |
|
|
|
11.01 |
|
|
|
56,227 |
|
|
|
12.08 |
|
|
|
46,568 |
|
|
|
9.62 |
|
|
|
38,688 |
|
|
|
7.63 |
|
|
|
34,664 |
|
|
|
7.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
24,256 |
|
|
|
4.49 |
|
|
|
5,385 |
|
|
|
1.16 |
|
|
|
3,122 |
|
|
|
0.64 |
|
|
|
2,480 |
|
|
|
0.49 |
|
|
|
2,759 |
|
|
|
0.63 |
|
|
|
|
540,222 |
|
|
|
100.00 |
% |
|
|
465,365 |
|
|
|
100.00 |
% |
|
|
484,136 |
|
|
|
100.00 |
% |
|
|
507,280 |
|
|
|
100.00 |
% |
|
|
434,753 |
|
|
|
100.00 |
% |
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan fees
|
|
|
858 |
|
|
|
|
|
|
|
973 |
|
|
|
|
|
|
|
1,030 |
|
|
|
|
|
|
|
1,241 |
|
|
|
|
|
|
|
927 |
|
|
|
|
|
Allowance
for loan losses
|
|
|
28,735 |
|
|
|
|
|
|
|
4,579 |
|
|
|
|
|
|
|
2,988 |
|
|
|
|
|
|
|
2,974 |
|
|
|
|
|
|
|
2,882 |
|
|
|
|
|
Loans
receivable, net
|
|
$ |
510,629 |
|
|
|
|
|
|
$ |
459,813 |
|
|
|
|
|
|
$ |
480,118 |
|
|
|
|
|
|
$ |
503,065 |
|
|
|
|
|
|
$ |
430,944 |
|
|
|
|
|
(1)
|
Does
not include loans held for sale of $862,000, $2.8 million, $4.9 million,
$4.1 million, and $5.5 million, at September 30, 2009, 2008, 2007, 2006,
and 2005, respectively.
|
The
following table shows the composition of the Company’s loan portfolio by fixed
and adjustable rate loans at the dates indicated:
|
|
At
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
FIXED
RATE LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
111,533 |
|
|
|
20.65 |
% |
|
$ |
134,772 |
|
|
|
28.96 |
% |
|
$ |
159,099 |
|
|
|
32.87 |
% |
|
$ |
188,102 |
|
|
|
37.08 |
% |
|
$ |
199,352 |
|
|
|
45.86 |
% |
Multi-family
residential
|
|
|
3,501 |
|
|
|
0.65 |
|
|
|
1,947 |
|
|
|
0.42 |
|
|
|
1,993 |
|
|
|
0.41 |
|
|
|
2,055 |
|
|
|
0.41 |
|
|
|
2,119 |
|
|
|
0.48 |
|
Commercial
|
|
|
31,521 |
|
|
|
5.83 |
|
|
|
20,125 |
|
|
|
4.32 |
|
|
|
21,345 |
|
|
|
4.41 |
|
|
|
19,236 |
|
|
|
3.79 |
|
|
|
16,303 |
|
|
|
3.74 |
|
Total
real estate
|
|
|
146,555 |
|
|
|
27.13 |
|
|
|
156,844 |
|
|
|
33.70 |
|
|
|
182,437 |
|
|
|
37.69 |
|
|
|
209,393 |
|
|
|
41.28 |
|
|
|
217,774 |
|
|
|
50.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
285 |
|
|
|
0.05 |
|
|
|
1,370 |
|
|
|
0.29 |
|
|
|
1,488 |
|
|
|
0.31 |
|
|
|
16,797 |
|
|
|
3.31 |
|
|
|
3,391 |
|
|
|
0.78 |
|
Multi-family
residential
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Commercial
and land development
|
|
|
5,267 |
|
|
|
0.97 |
|
|
|
2,973 |
|
|
|
0.64 |
|
|
|
5,102 |
|
|
|
1.05 |
|
|
|
5,967 |
|
|
|
1.18 |
|
|
|
1,838 |
|
|
|
0.42 |
|
Total
real estate construction
|
|
|
5,552 |
|
|
|
1.02 |
|
|
|
4,343 |
|
|
|
0.93 |
|
|
|
6,590 |
|
|
|
1.36 |
|
|
|
22,764 |
|
|
|
4.49 |
|
|
|
5,229 |
|
|
|
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
12,248 |
|
|
|
2.27 |
|
|
|
17,239 |
|
|
|
3.71 |
|
|
|
14,860 |
|
|
|
3.07 |
|
|
|
9,723 |
|
|
|
1.92 |
|
|
|
4,903 |
|
|
|
1.13 |
|
Automobile
|
|
|
2,364 |
|
|
|
0.44 |
|
|
|
1,903 |
|
|
|
0.41 |
|
|
|
2,173 |
|
|
|
0.45 |
|
|
|
3,245 |
|
|
|
0.64 |
|
|
|
4,576 |
|
|
|
1.05 |
|
Other
consumer
|
|
|
3,203 |
|
|
|
0.59 |
|
|
|
1,370 |
|
|
|
0.29 |
|
|
|
1,405 |
|
|
|
0.29 |
|
|
|
1,300 |
|
|
|
0.26 |
|
|
|
1,530 |
|
|
|
0.35 |
|
Total
consumer
|
|
|
17,815 |
|
|
|
3.30 |
|
|
|
20,512 |
|
|
|
4.41 |
|
|
|
18,438 |
|
|
|
3.81 |
|
|
|
14,268 |
|
|
|
2.82 |
|
|
|
11,009 |
|
|
|
2.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
7,200 |
|
|
|
1.33 |
|
|
|
1,543 |
|
|
|
0.34 |
|
|
|
1,073 |
|
|
|
0.22 |
|
|
|
622 |
|
|
|
0.12 |
|
|
|
1,091 |
|
|
|
0.25 |
|
Total
fixed rate loans
|
|
$ |
177,122 |
|
|
|
32.78 |
% |
|
$ |
183,242 |
|
|
|
39.38 |
% |
|
$ |
208,538 |
|
|
|
43.08 |
% |
|
$ |
247,047 |
|
|
|
48.71 |
% |
|
$ |
235,103 |
|
|
|
54.06 |
% |
(table continues on following
page)
(table continued from previous
page)
|
|
At
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
ADJUSTABLE
RATE LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
66,778 |
|
|
|
12.36 |
% |
|
$ |
75,729 |
|
|
|
16.27 |
% |
|
$ |
90,446 |
|
|
|
18.68 |
% |
|
$ |
105,538 |
|
|
|
20.80 |
% |
|
$ |
52,774 |
|
|
|
12.14 |
% |
Multi-family
residential
|
|
|
12,785 |
|
|
|
2.36 |
|
|
|
6,530 |
|
|
|
1.40 |
|
|
|
4,871 |
|
|
|
1.01 |
|
|
|
4,994 |
|
|
|
0.98 |
|
|
|
3,335 |
|
|
|
0.77 |
|
Commercial
|
|
|
181,950 |
|
|
|
33.69 |
|
|
|
131,608 |
|
|
|
28.29 |
|
|
|
112,478 |
|
|
|
23.23 |
|
|
|
106,165 |
|
|
|
20.93 |
|
|
|
100,129 |
|
|
|
23.04 |
|
Total
real estate
|
|
|
261,513 |
|
|
|
48.41 |
|
|
|
213,867 |
|
|
|
45.96 |
|
|
|
207,795 |
|
|
|
42.92 |
|
|
|
216,697 |
|
|
|
42.71 |
|
|
|
156,238 |
|
|
|
35.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
10,586 |
|
|
|
1.96 |
|
|
|
12,078 |
|
|
|
2.60 |
|
|
|
19,057 |
|
|
|
3.93 |
|
|
|
6,881 |
|
|
|
1.36 |
|
|
|
11,030 |
|
|
|
2.54 |
|
Multi-family
residential
|
|
|
10,417 |
|
|
|
1.93 |
|
|
|
920 |
|
|
|
0.20 |
|
|
|
1,770 |
|
|
|
0.37 |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,427 |
|
|
|
0.33 |
|
Commercial
and land development
|
|
21,877 |
|
|
|
4.05 |
|
|
|
15,701 |
|
|
|
3.37 |
|
|
|
16,797 |
|
|
|
3.47 |
|
|
|
10,377 |
|
|
|
2.04 |
|
|
|
5,632 |
|
|
|
1.30 |
|
Total
real estate construction
|
|
|
42,880 |
|
|
|
7.94 |
|
|
|
28,699 |
|
|
|
6.17 |
|
|
|
37,624 |
|
|
|
7.77 |
|
|
|
17,258 |
|
|
|
3.40 |
|
|
|
18,089 |
|
|
|
4.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
41,120 |
|
|
|
7.61 |
|
|
|
35,715 |
|
|
|
7.67 |
|
|
|
28,130 |
|
|
|
5.81 |
|
|
|
24,420 |
|
|
|
4.81 |
|
|
|
23,655 |
|
|
|
5.44 |
|
Automobile
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Other
consumer
|
|
|
531 |
|
|
|
0.10 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Total
consumer
|
|
|
41,651 |
|
|
|
7.71 |
|
|
|
35,715 |
|
|
|
7.67 |
|
|
|
28,130 |
|
|
|
5.81 |
|
|
|
24,420 |
|
|
|
4.81 |
|
|
|
23,655 |
|
|
|
5.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
17,056 |
|
|
|
3.16 |
|
|
|
3,842 |
|
|
|
0.82 |
|
|
|
2,049 |
|
|
|
0.42 |
|
|
|
1,858 |
|
|
|
0.37 |
|
|
|
1,668 |
|
|
|
0.38 |
|
Total adjustable rate loans
|
|
|
363,100 |
|
|
|
67.22 |
|
|
|
282,123 |
|
|
|
60.62 |
|
|
|
275,598 |
|
|
|
56.92 |
|
|
|
260,233 |
|
|
|
51.29 |
|
|
|
199,650 |
|
|
|
45.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
540,222 |
|
|
|
100.00 |
% |
|
|
465,365 |
|
|
|
100.00 |
% |
|
|
484,136 |
|
|
|
100.00 |
% |
|
|
507,280 |
|
|
|
100.00 |
% |
|
|
434,753 |
|
|
|
100.00 |
% |
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan fees
|
|
|
858 |
|
|
|
|
|
|
|
973 |
|
|
|
|
|
|
|
1,030 |
|
|
|
|
|
|
|
1,241 |
|
|
|
|
|
|
|
927 |
|
|
|
|
|
Allowance
for loan losses
|
|
|
28,735 |
|
|
|
|
|
|
|
4,579 |
|
|
|
|
|
|
|
2,988 |
|
|
|
|
|
|
|
2,974 |
|
|
|
|
|
|
|
2,882 |
|
|
|
|
|
Loans
receivable, net
|
|
$ |
510,629 |
|
|
|
|
|
|
$ |
459,813 |
|
|
|
|
|
|
$ |
480,118 |
|
|
|
|
|
|
$ |
503,065 |
|
|
|
|
|
|
$ |
430,944 |
|
|
|
|
|
One-to-four Family Residential Real
Estate Lending. We originate both fixed-rate loans and adjustable-rate
loans in our residential lending program. Generally, these loans are originated
to meet the requirements of Fannie Mae and Freddie Mac for sale in the secondary
market. We do from time to time, however, retain some of these loans in our loan
portfolio to meet asset and liability management objectives.
We
generally underwrite our one-to-four family loans based on the applicant's
employment, debt to income levels, credit history and the appraised value of the
subject property. Generally, we lend up to 80% of the lesser of the appraised
value or purchase price for one-to-four family residential loans. In situations
where we grant a loan with a loan-to-value ratio in excess of 80%, we generally
require private mortgage insurance in order to reduce our exposure to 80% or
less. Properties securing our one-to-four family loans are generally appraised
by independent fee appraisers who have been approved by us. We require our
borrowers to obtain title and hazard insurance, and flood insurance, if
necessary, in an amount equal to the regulatory maximum.
At
September 30, 2009, $27.8 million, or 15.6%, of our one-to-four family
residential mortgages consisted of loans for non-owner occupied properties. This
consisted of $4.7 million of loans on second homes and $23.1 million of loans
for investment. Non-owner occupied loans secured by one to two units are
generally made with loan-to-value ratios of up to 80% and non-owner occupied
loans secured by three units or more are generally made with loan-to-value
ratios of up to 75%. In situations where we grant a loan with a loan-to-value
ratio in excess of 80%, we generally require private mortgage insurance in order
to reduce our exposure to 80% or less. As of September 30, 2009, delinquent
non-owner occupied loans made up 3.1% of total non-owner occupied residential
mortgages. Delinquent owner-occupied properties were 2.4% of total
owner-occupied residential mortgages.
In an
effort to provide financing for low-to-moderate income and first-time buyers, we
participate in the Idaho Housing and Finance Association's Single Family
Mortgage Program. The Idaho Housing and Finance Association is a non-profit
organization that provides housing resources to low-to-moderate income families
through various below market housing programs. The program is designed to meet
the needs of qualified borrowers in the low-to-moderate income brackets. The
program has established income limits based on family size and sales price
limits for both existing and new construction. We offer residential mortgage
loans through this program to qualified individuals and originate the loans
using modified underwriting guidelines. All of these loans have private mortgage
insurance on the portion of the principal amount that exceeds 80% of the
appraised value of the property. Approximately $2.8 million of loans were sold
to the Idaho Housing and Finance Association in the year ended September 30,
2009.
We did
not develop a nontraditional mortgage program with subprime or Alt-A loans or
other products with non-standard features. None of our one-to-four family
residential mortgage loans has negative amortization or payment-option
features.
Real Estate Construction. We
have been an active originator of real estate construction loans in our market
area for many years, but the recent contraction in construction projects and
increases in speculative construction project vacancies has caused us to reduce
focus in this line of business until the construction market improves. At
September 30, 2009, our construction and land development loans amounted to
$48.4 million, or 9.0%, of the total loan portfolio. Of this amount,
approximately $21.9 million of construction and land development loans were
purchased in the Acquisition, net of fair value and credit loss adjustments, and
are subject to a loss share agreement with the FDIC.
The
following table shows the composition of the construction loan portfolio at the
dates indicated:
|
|
At
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
One-to-four
family residential:
|
|
|
|
|
|
|
Speculative
|
|
$ |
6,352 |
|
|
$ |
11,324 |
|
Owner
occupied
|
|
|
4,519 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
Multi-family
residential
|
|
|
10,417 |
|
|
|
920 |
|
|
|
|
|
|
|
|
|
|
Commercial
real estate:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
7,332 |
|
|
|
6,181 |
|
Land
development loans
|
|
|
19,812 |
|
|
|
12,493 |
|
Total
construction and land development
|
|
$ |
48,432 |
|
|
$ |
33,042 |
|
During
the year ended September 30, 2009, we directly originated $12.5 million of
short-term builder construction loans to fund the construction of one-to-four
family residential properties. Most loans originated by us are
written with maturities of up to one year, have interest rates that are tied to
The Wall Street Journal
Prime rate plus a margin, and are subject to periodic rate adjustments tied to
the movement of the prime rate. All builder/borrower loans are underwritten to
the same standards as other commercial loan credits, requiring minimum debt
service coverage ratios and established cash reserves to carry projects through
construction completion and sale of the project. The maximum loan-to-value ratio
on both pre-sold and speculative projects originated by us is 80%.
We
originate construction and site development loans to contractors and builders
primarily to finance the construction of single-family homes and subdivisions,
which homes typically have an average price ranging from $150,000 to $400,000.
Loans to finance the construction of single-family homes and subdivisions are
generally offered to experienced builders in our primary market areas. The
maximum loan-to-value limit applicable to construction and site development
loans is 80% and 70%, respectively, of the appraised market value upon
completion of the project. Maturity dates for residential construction loans are
largely a function of the estimated construction period of the project, and
generally do not exceed 36 months for residential subdivision development loans.
Substantially all of our residential construction loans have adjustable rates of
interest based on the Wall
Street Journal prime rate and during the term of construction, the
accumulated interest is added to the principal of the loan through an interest
reserve. At September 30, 2009, our largest subdivision development loan had a
commitment for $2.6 million and an outstanding principal balance of $996,000.
This loan was secured by a first mortgage lien and was performing according to
its original terms at September 30, 2009. At September 30, 2009, the average
outstanding principal balance of subdivision loans to contractors and developers
was $872,000.
We also
make construction loans for commercial development projects. These projects
include multi-family, apartment, retail, office/warehouse and office buildings.
These loans generally have an interest-only phase during construction, and
generally convert to permanent financing when construction is completed.
Disbursement of funds is at our sole discretion and is based on the progress of
construction. The maximum loan-to-value limit applicable to these loans is 80%
of the appraised post-construction value.
We
originate land loans to local contractors and developers for the purpose of
holding the land for future development. These loans are secured by a first lien
on the property, are limited to 50% of the lower of the acquisition price or the
appraised value of the land, and generally have a term of up to two years with
an interest rate based on the
Wall Street Journal prime rate. Our land loans are generally
secured by property in our primary market areas. We require title insurance and,
if applicable, a hazardous waste survey reporting that the land is free of
hazardous or toxic waste.
Our
construction and land development loans are based upon estimates of costs and
value associated with the completed project. These estimates may be inaccurate.
Construction and land development lending involves additional risks when
compared with permanent residential lending because funds are advanced upon the
security of the project, which is of uncertain value prior to its completion.
Because of the uncertainties inherent in estimating construction costs, as well
as the market value of the completed project and the effects of governmental
regulation of
real
property, it is relatively difficult to evaluate accurately the total funds
required to complete a project and the related loan-to-value ratio. This type of
lending also typically involves higher loan principal amounts and is often
concentrated with a small number of builders. These loans often involve the
disbursement of substantial funds with repayment substantially dependent on the
success of the ultimate project and the ability of the borrower to sell or lease
the property or obtain permanent take-out financing, rather than the ability of
the borrower or guarantor to repay principal and interest. If our appraisal of
the value of a completed project proves to be overstated, we generally require
cash curtailments or additional collateral to support the
shortfall.
Commercial and Multi-Family Real
Estate Lending. Multi-family and commercial real estate loans generally
are priced at a higher rate of interest than one-to-four family residential
loans. Typically, these loans have higher loan balances, are more difficult to
evaluate and monitor, and involve a greater degree of risk than one-to-four
family residential loans. Often payments on loans secured by multi-family or
commercial properties are dependent on the successful operation and management
of the property; therefore, repayment of these loans may be affected by adverse
conditions in the real estate market or the economy. We generally require and
obtain loan guarantees from financially capable parties based upon the review of
personal financial statements. If the borrower is a corporation, we generally
require and obtain personal guarantees from the corporate principals based upon
a review of their personal financial statements and individual credit
reports.
We target
individual multi-family and commercial real estate loans to small and mid-size
owner occupants and investors between $500,000 and $2.0 million; however, we can
by policy originate loans to one borrower up to 80% of our regulatory limit. As
of September 30, 2009, the maximum we could lend to any one borrower based on
this limit was $18.7 million. Commercial real estate loans are primarily secured
by office and warehouse space, professional buildings, retail sites, industrial
facilities and churches located in the our primary market areas.
We have
offered both fixed and adjustable-rate loans on multi-family and commercial real
estate loans, although most of these loans are now originated with adjustable
rates with amortization terms up to 25 years and maturities of up to 10 years.
Commercial and multi-family real estate loans are originated with rates that
generally adjust after an initial period ranging from three to five years and
are generally priced utilizing the applicable FHLB borrowing rate plus an
acceptable margin. Prepayment penalty structures are applied for each rate lock
period.
The
maximum loan-to-value ratio for commercial and multi-family real estate loans is
generally 75% on purchases and refinances. We require appraisals of all
properties securing commercial and multi-family real estate loans. Appraisals
are performed by independent appraisers designated by us or by our staff
appraiser. We require our commercial and multi-family real estate loan borrowers
with outstanding balances in excess of $500,000 to submit annual financial
statements and rent rolls on the subject property. We also inspect the subject
property at least every three to five years if the loan balance exceeds
$250,000. We generally require a minimum pro forma debt coverage ratio of 1.25
times for loans secured by commercial and multi-family properties.
These
loans typically involve higher principal amounts than other types of loans, and
repayment is dependent upon income generated, or expected to be generated, by
the property securing the loan in amounts sufficient to cover operating expenses
and debt service, which may be adversely affected by changes in the economy or
local market conditions. For example, if the cash flow from the borrower’s
project is reduced as a result of leases not being obtained or renewed, the
borrower’s ability to repay the loan may be impaired. Commercial and
multi-family mortgage loans also expose a lender to greater credit risk than
loans secured by residential real estate because the collateral securing these
loans typically cannot be sold as easily as residential real estate. In
addition, many of our commercial and multifamily real estate loans are not fully
amortizing and contain large balloon payments upon maturity. Such balloon
payments may require the borrower to either sell or refinance the underlying
property in order to make the payment, which may increase the risk of default or
non-payment. If we foreclose on a commercial and multi-family real estate loan,
our holding period for the collateral typically is longer than for one-to-four
family residential mortgage loans because there are fewer potential purchasers
of the collateral. Additionally, commercial and multi-family real estate loans
generally have relatively large balances to single borrowers or related groups
of borrowers. Accordingly, if we make any errors in judgment in the
collectability of our commercial and multi-family real estate loans, any
resulting charge-offs may be larger on a per loan basis than those incurred with
our residential or consumer loan portfolios.
Consumer Lending. To a much
lesser degree than commercial and residential loans, we offer a variety of
consumer loans to our customers, including home equity loans and lines of
credit, savings account loans, automobile loans, recreational vehicle loans and
personal unsecured loans. Generally, consumer loans have shorter terms to
maturity and higher interest rates than mortgage loans. The maximum term we
offer on automobile loans is 72 months and is applicable to new and one year old
cars and light trucks. In addition, we offer loan terms of up to 120 months on
motor homes, and qualifying travel trailers and boats. All automobile loans are
risk priced based on the percentage of cost, or established value, being
financed. Consumer loans are made with both fixed and variable interest rates
and with varying terms.
At
September 30, 2009, the largest component of the consumer loan portfolio
consisted of home equity loans and lines of credit. Home equity loans are made
for, among other purposes, the improvement of residential properties, debt
consolidation and education expenses. The majority of these loans are secured by
a first or second mortgage on residential property. The maximum loan-to-value
ratio is 80%, when taking into account both the balance of the home equity loan
and the first mortgage loan. Home equity lines of credit allow for a ten-year
draw period, plus an additional ten year repayment period, and the interest rate
is tied to the Prime rate as published in The Wall Street Journal, and
may include a margin.
Consumer
loans entail greater risk than do residential first-lien mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles, and in second-lien loans such
as home equity lines of credit in markets where residential property values have
declined significantly since fiscal year 2007. In these cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount that can be recovered on these loans.
These risks are not as prevalent with respect to our consumer loan portfolio
because a large percentage of the portfolio consists of home equity loans and
lines of credit that are underwritten in a manner such that they result in
credit risk that is substantially similar to one-to-four family residential
mortgage loans. Nevertheless, home equity loans and lines of credit have greater
credit risk than one-to-four family residential mortgage loans because they are
secured by mortgages subordinated to the existing first mortgage on the
property, which we may or may not hold. In addition, we do not have private
mortgage insurance coverage for these loans. We do not actively participate in
wholesale or brokered home equity loan origination.
Commercial Business Lending.
As part of our strategic plan, we are focusing on increasing the
commercial business loans that we originate, including lines of credit, term
loans and letters of credit. These loans are typically secured by collateral and
are used for general business purposes, including working capital financing,
equipment financing, capital investment and general investment. Loan terms vary
from one to seven years. The interest rates on such loans are generally floating
rates indexed to the Wall
Street Journal Prime rate plus a margin.
Commercial
business loans typically have shorter maturity terms and higher interest spreads
than real estate loans, but generally involve more credit risk because of the
type and nature of the collateral. We are focusing our efforts on small to
medium-sized, privately-held companies with local or regional businesses that
operate in our market area. Our commercial business lending policy includes
credit file documentation and analysis of the borrower’s background, capacity to
repay the loan, the adequacy of the borrower’s capital and collateral, as well
as an evaluation of other conditions affecting the borrower. Analysis of the
borrower’s past, present and future cash flows is also an important aspect of
our credit analysis. We generally obtain personal guarantees on our commercial
business loans.
Repayment
of our commercial business loans is often dependent on the cash flows of the
borrower, which may be unpredictable, and the collateral securing these loans
may fluctuate in value. Our commercial business loans are originated primarily
based on the identified cash flow of the borrower and secondarily on the general
liquidity and secondary cash flow support of the borrower. Advance ratios
against collateral provide additional support to repay the loan. Most often,
this collateral consists of accounts receivable, inventory or equipment. Credit
support provided by the borrower for most of these loans and the probability of
repayment is based on the liquidation of the pledged collateral and enforcement
of a personal guarantee, if any. As a result, in the case of loans secured by
accounts
receivable,
the availability of funds for the repayment of these loans may be substantially
dependent on the ability of the borrower to collect amounts due from its
customers. The collateral securing other loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the
business.
Loan Maturity and Repricing.
The following table sets forth certain information at September 30, 2009,
regarding the dollar amount of loans maturing or repricing in our portfolio
based on their contractual terms to maturity or next repricing date, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity are reported as
due in one year or less. Loan balances do not include undisbursed loan proceeds,
unearned discounts, unearned income and allowance for loan losses.
|
|
Within
1
Year
|
|
|
After
1
Year
Through
3
Years
|
|
|
After
3
Years
Through
5
Years
|
|
|
After
5
Years
Through
10
Years
|
|
|
Beyond
10
Years
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
21,076 |
|
|
$ |
40,243 |
|
|
$ |
10,124 |
|
|
$ |
44,867 |
|
|
$ |
62,001 |
|
|
$ |
178,311 |
|
Multi-family
residential
|
|
|
5,536 |
|
|
|
5,874 |
|
|
|
1,841 |
|
|
|
1,086 |
|
|
|
1,949 |
|
|
|
16,286 |
|
Commercial
|
|
|
54,628 |
|
|
|
82,986 |
|
|
|
53,590 |
|
|
|
21,298 |
|
|
|
969 |
|
|
|
213,471 |
|
Total
real estate
|
|
|
81,240 |
|
|
|
129,103 |
|
|
|
65,555 |
|
|
|
67,251 |
|
|
|
64,919 |
|
|
|
408,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
10,871 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
10,871 |
|
Multi-family
residential
|
|
|
10,417 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
10,417 |
|
Commercial
and land development
|
|
25,746 |
|
|
|
1,162 |
|
|
|
231 |
|
|
|
5 |
|
|
|
-- |
|
|
|
27,144 |
|
Total
real estate construction
|
|
|
47,034 |
|
|
|
1,162 |
|
|
|
231 |
|
|
|
5 |
|
|
|
-- |
|
|
|
48,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
41,131 |
|
|
|
30 |
|
|
|
247 |
|
|
|
1,107 |
|
|
|
10,853 |
|
|
|
53,368 |
|
Automobile
|
|
|
143 |
|
|
|
676 |
|
|
|
826 |
|
|
|
465 |
|
|
|
254 |
|
|
|
2,364 |
|
Other
consumer
|
|
|
1,178 |
|
|
|
766 |
|
|
|
441 |
|
|
|
534 |
|
|
|
815 |
|
|
|
3,734 |
|
Total
consumer
|
|
|
42,452 |
|
|
|
1,472 |
|
|
|
1,514 |
|
|
|
2,106 |
|
|
|
11,922 |
|
|
|
59,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
15,128 |
|
|
|
4,145 |
|
|
|
2,147 |
|
|
|
2,193 |
|
|
|
643 |
|
|
|
24,256 |
|
Total
loans receivable
|
|
$ |
185,854 |
|
|
$ |
135,882 |
|
|
$ |
69,447 |
|
|
$ |
71,555 |
|
|
$ |
77,484 |
|
|
$ |
540,222 |
|
The
following table sets forth the dollar amount of all loans maturing or repricing
more than one year after September 30, 2009, which have fixed interest rates and
have floating or adjustable interest rates:
|
|
Floating
or
Adjustable
Rate
|
|
|
Fixed
Rates
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
47,836 |
|
|
$ |
109,399 |
|
|
$ |
157,235 |
|
Multi-family
residential
|
|
|
8,801 |
|
|
|
1,949 |
|
|
|
10,750 |
|
Commercial
|
|
|
135,315 |
|
|
|
23,528 |
|
|
|
158,843 |
|
Total
real estate
|
|
|
191,952 |
|
|
|
134,876 |
|
|
|
326,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Multi-family
residential
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Commercial
and land development
|
|
|
881 |
|
|
|
517 |
|
|
|
1,398 |
|
Total
real estate construction
|
|
|
881 |
|
|
|
517 |
|
|
|
1,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
-- |
|
|
|
12,237 |
|
|
|
12,237 |
|
Automobile
|
|
|
-- |
|
|
|
2,221 |
|
|
|
2,221 |
|
Other
consumer
|
|
|
-- |
|
|
|
2,556 |
|
|
|
2,556 |
|
Total
consumer
|
|
|
-- |
|
|
|
17,014 |
|
|
|
17,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
3,305 |
|
|
|
5,823 |
|
|
|
9,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans receivable
|
|
$ |
196,138 |
|
|
$ |
158,230 |
|
|
$ |
354,368 |
|
Loan Solicitation and Processing.
As part of our commercial banking strategy, we are focusing our efforts
in increasing the amount of our direct originations commercial business loans,
followed by commercial and multi-family real estate loans and to a lesser extent
construction loans to builders and developers. Residential real estate loans are
solicited through media advertising, direct mail to existing customers and by
realtor referrals. Loan originations are further supported by lending services
offered through our internet website, advertising, cross-selling and through our
employees' community service.
Upon
receipt of a loan application from a prospective borrower, we obtain a credit
report and other data to verify specific information relating to the applicant's
employment, income and credit standing. An appraisal of the real estate offered
as collateral is undertaken by a licensed appraiser we have retained and
approved.
Mortgage
loan applications are initiated by loan officers and are required to be approved
by our underwriting staff who has appropriately delegated lending authority.
Loans that exceed the underwriter’s lending authority must be approved by one or
more members of the Management Loan Committee. We require title insurance on
real estate loans as well as fire and casualty insurance on all secured loans
and on home equity loans and lines of credit where the property serves as
collateral.
Loan Originations, Servicing,
Purchases and Sales. During the year ended September 30, 2009, our total
loan originations were $163.3 million. The majority of all first lien
residential mortgages are sold to the secondary market at the time of
origination. During the year ended September 30, 2009, we sold $68.8 million to
the secondary market including $2.7 million in loans originated in fiscal year
2008. The remaining $66.1 million of loans represents 97.6% of total current
year one-to-four family residential loan originations. Our secondary market
relationships have been major correspondent banks. The increase in
loans sold during 2009 was a result of the low interest rate environment that
existed during fiscal 2009.
One-to-four
family home loans are generally originated in accordance with the guidelines
established by Freddie Mac and Fannie Mae, with the exception of our special
community development loans under the Community
Reinvestment
Act. We utilize the Freddie Mac Loan Prospector and Fannie Mae Desktop
Underwriter automated loan systems to underwrite the majority of our residential
first mortgage loans (excluding community development loans). The remaining
loans are underwritten by designated real estate loan underwriters internally in
accordance with standards as provided by our Board-approved loan policy. The
underwriting criteria we use on loans that are not sold to investors and
retained in our portfolio are at least as stringent as those we use for the
loans we sell.
Nearly
all of our one-to-four family home loans are sold into the secondary market with
servicing released. Loans are generally sold on a non-recourse
basis. On August 28, 2008, Home Federal Bank entered into a binding
agreement with another bank whereby Home Federal Bank sold 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 in the first quarter of the fiscal year
ended September 30, 2009.
The
following table shows total loans originated, purchased, sold and repaid during
the periods indicated:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Loans
originated:
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential (1)
|
|
$ |
67,701 |
|
|
$ |
48,114 |
|
|
$ |
96,254 |
|
Multi-family
residential
|
|
|
74 |
|
|
|
1,819 |
|
|
|
2,000 |
|
Commercial
|
|
|
32,477 |
|
|
|
47,662 |
|
|
|
23,598 |
|
Total
real estate
|
|
|
100,252 |
|
|
|
97,595 |
|
|
|
121,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
12,530 |
|
|
|
17,853 |
|
|
|
41,529 |
|
Multi-family
residential
|
|
|
-- |
|
|
|
-- |
|
|
|
1,770 |
|
Commercial
and land development
|
|
|
12,266 |
|
|
|
14,152 |
|
|
|
18,266 |
|
Total
real estate construction
|
|
|
24,796 |
|
|
|
32,005 |
|
|
|
61,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
15,265 |
|
|
|
35,339 |
|
|
|
32,136 |
|
Automobile
|
|
|
192 |
|
|
|
894 |
|
|
|
654 |
|
Other
consumer
|
|
|
2,643 |
|
|
|
3,104 |
|
|
|
3,264 |
|
Total
consumer
|
|
|
18,100 |
|
|
|
39,337 |
|
|
|
36,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business, including advances on lines of credit
|
|
|
20,106 |
|
|
|
21,352 |
|
|
|
5,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans originated
|
|
|
163,254 |
|
|
|
190,289 |
|
|
|
224,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans purchased in Acquisition
|
|
|
129,162 |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
(68,801 |
) |
|
|
(47,968 |
) |
|
|
(96,370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
repayments
|
|
|
(130,669 |
) |
|
|
(161,575 |
) |
|
|
(149,714 |
) |
Transfer
to real estate owned
|
|
|
(19,513 |
) |
|
|
(1,394 |
) |
|
|
(857 |
) |
Increase
(decrease) in other items, net
|
|
|
(24,586 |
) |
|
|
(1,730 |
) |
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in loans receivable and loans held for
sale
|
|
$ |
48,847 |
|
|
$ |
(22,378 |
) |
|
$ |
(22,162 |
) |
________
(1)
|
Includes
originations of loans held for sale of $66.8 million, $45.9 million, and
$97.2 million for the years ended September 30, 2009, 2008 and 2007,
respectively.
|
Loan Origination and Other Fees.
In some instances, we receive loan origination fees on real estate
related products. Loan fees generally represent a percentage of the principal
amount of the loan, and are paid by the borrower. Accounting standards require
that certain fees received, net of certain origination costs, be deferred and
amortized over the contractual life of the loan. Net deferred fees or costs
associated with loans that are prepaid or
sold are
recognized as income at the time of prepayment. We had $858,000 of net deferred
loan fees and costs as of September 30, 2009.
Asset
Quality
The
objective of our loan review process is to determine risk levels and exposure to
loss. The depth of review varies by asset types, depending on the nature of
those assets. While certain assets may represent a substantial investment and
warrant individual reviews, other assets may have less risk because the asset
size is small, the risk is spread over a large number of obligors or the
obligations are well collateralized and further analysis of individual assets
would expand the review process without measurable advantage to risk assessment.
Asset types with these characteristics may be reviewed as a total portfolio on
the basis of risk indicators such as delinquency (consumer and residential real
estate loans) or credit rating. A formal review process is conducted on
individual assets that represent greater potential risk. A formal review process
is a total reevaluation of the risks associated with the asset and is documented
by completing an asset review report. Certain real estate-related assets must be
evaluated in terms of their fair market value or net realizable value in order
to determine the likelihood of loss exposure and, consequently, the adequacy of
valuation allowances.
We define
a loan as being impaired when, based on current information and events, it is
probable that we will be unable to collect all amounts due under the contractual
terms of the loan agreement. Large groups of smaller balance homogenous loans
such as consumer secured loans, residential mortgage loans and consumer
unsecured loans are collectively evaluated for potential loss. All other loans
are evaluated for impairment on an individual basis. Accounting Standards
Codification Topic (“ASC”) 310-30 “Loans and Debt Securities Acquired with
Deteriorated Credit Quality,” applies to a loan with evidence of deterioration
of credit quality since origination, acquired by completion of a transfer for
which it is probable, at acquisition, that the investor will be unable to
collect all contractually required payments receivable. We determined that a
significant number of the loans acquired were impaired and subject to ASC
310-30.
We
generally assess late fees or penalty charges on delinquent loans of five
percent of the monthly principal and interest amount. The borrower is given a 10
to 15-day grace period to make the loan payment depending on loan type. When a
borrower fails to make a required payment when it is due, we institute
collection procedures. The first notice is mailed to the borrower on the day
following the expiration of the grace period requesting payment and assessing a
late charge. Attempts to contact the borrower by telephone generally begin upon
the 15th day of delinquency. If a satisfactory response is not obtained,
continual follow-up contacts are attempted until the loan has been brought
current. Before the 60th day of delinquency, attempts to interview the borrower
are made to establish the cause of the delinquency, whether the cause is
temporary, the attitude of the borrower toward the debt and a mutually
satisfactory arrangement for curing the default.
The Board
of Directors is informed monthly as to the number and dollar amount of loans
that are delinquent by more than 30 days, and is given information regarding
classified assets.
If a
borrower is chronically delinquent and all reasonable means of obtaining
payments have been exercised, we will seek to recover any collateral securing
the loan according to the terms of the security instrument and applicable law.
In the event of an unsecured loan, we will either seek legal action against the
borrower or refer the loan to an outside collection agency.
Our
determination of the initial fair value of loans purchased in the Acquisition
involved a high degree of judgment and complexity. The carrying value of the
acquired loans reflects management’s best estimate of the amount to be realized
from the acquired loan portfolio. However, the amounts we actually
realize on these loans could differ materially from the carrying value reflected
in these financial statements, based upon the timing of collections on the
acquired loans in future periods, underlying collateral values and the ability
of borrowers to continue to make payments.
Because
of the loss sharing agreement with the FDIC on these assets, we do not expect
that we will incur any excessive losses. Under the loss sharing agreement, our
share of the first $34.0 million of losses on the $155.2 million of covered
assets (defined as loans and other real estate owned purchased in the
Acquisition) is 20%, and thus only $6.8 million in losses could possibly be
realized by the Company on that first tranche of losses. Any loss on covered
assets in excess of the $34.0 million tranche will be limited to 5%, and thus
another $6.1 million in
losses
could possibly be realized by the Company. Therefore, we estimate that our
exposure related to the assets covered under the loss sharing agreement is $12.9
million. This scenario is based upon no principal being collected from the
borrowers on any of the covered assets but does not consider our share of
incremental expenses to maintain foreclosed assets. As of September 30, 2009,
the allowance for loan losses on acquired loans and fair value adjustments on
loans subject to accounting under ASC 310-30 reflect that we estimated total
losses on the acquired portfolio to be $38.4 million at that date and that our
share of those losses totaled $7.0 million. As such, we believe our total
additional loss exposure on covered assets to be $5.9 million (i.e., $12.9
million total losses less the $7.0 million of loss reserves and fair value
adjustments net of the FDIC indemnification asset) under the loss scenario
discussed above.
Delinquent Loans. The
following table shows our delinquent loans by the type of loan and number of
days delinquent as of September 30, 2009:
|
|
Loans
Delinquent For:
|
|
|
Total
|
|
|
|
60-89
Days
|
|
|
Over
90 Days
|
|
|
Delinquent
Loans
|
|
|
|
Number
of
Loans
|
|
|
Principal
Balance
Loans
|
|
|
Number
of
Loans
|
|
|
Principal
Balance
Loans
|
|
|
Number
of
Loans
|
|
|
Principal
Balance
Loans
|
|
|
|
(dollars
in thousands)
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
9 |
|
|
$ |
1,062 |
|
|
|
32 |
|
|
$ |
4,740 |
|
|
|
41 |
|
|
$ |
5,802 |
|
Multi-family
residential
|
|
|
1 |
|
|
|
201 |
|
|
|
-- |
|
|
|
-- |
|
|
|
1 |
|
|
|
201 |
|
Commercial
|
|
|
4 |
|
|
|
1,684 |
|
|
|
17 |
|
|
|
6,755 |
|
|
|
21 |
|
|
|
8,439 |
|
Total
real estate
|
|
|
14 |
|
|
|
2,947 |
|
|
|
49 |
|
|
|
11,495 |
|
|
|
63 |
|
|
|
14,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
1 |
|
|
|
481 |
|
|
|
4 |
|
|
|
830 |
|
|
|
5 |
|
|
|
1,311 |
|
Multi-family
residential
|
|
|
-- |
|
|
|
-- |
|
|
|
1 |
|
|
|
932 |
|
|
|
1 |
|
|
|
932 |
|
Commercial
and land development
|
|
7 |
|
|
|
3,538 |
|
|
|
14 |
|
|
|
4,372 |
|
|
|
21 |
|
|
|
7,910 |
|
Total
real estate construction
|
|
|
8 |
|
|
|
4,019 |
|
|
|
19 |
|
|
|
6,134 |
|
|
|
27 |
|
|
|
10,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
14 |
|
|
|
489 |
|
|
|
6 |
|
|
|
225 |
|
|
|
20 |
|
|
|
714 |
|
Automobile
|
|
|
3 |
|
|
|
9 |
|
|
|
-- |
|
|
|
-- |
|
|
|
3 |
|
|
|
9 |
|
Other
consumer
|
|
|
8 |
|
|
|
19 |
|
|
|
-- |
|
|
|
-- |
|
|
|
8 |
|
|
|
19 |
|
Total
consumer
|
|
|
25 |
|
|
|
517 |
|
|
|
6 |
|
|
|
225 |
|
|
|
31 |
|
|
|
742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
4 |
|
|
|
387 |
|
|
|
9 |
|
|
|
2,270 |
|
|
|
13 |
|
|
|
2,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
51 |
|
|
$ |
7,870 |
|
|
|
83 |
|
|
$ |
20,124 |
|
|
|
134 |
|
|
$ |
27,994 |
|
Nonperforming Assets.
Nonperforming assets include nonaccrual loans, loans delinquent 90 days
or more and still accruing, real estate acquired through foreclosure and loans
that are not delinquent but exhibit weaknesses that have evidenced doubt as to
our ability to collect all contractual principal and interest and have been
classified as impaired under ASC Topic 310-10-35. As a result, nonperforming
loans and nonperforming assets were higher in balance than total delinquent
loans at September 30, 2009. When a loan becomes 90 days delinquent, we place
the loan on nonaccrual status; accordingly, we have no accruing loans that are
contractually past due 90 days or more.
As of
September 30, 2009, nonaccrual loans totaled $38.5 million, or 7.13% of total
loans. Nonaccrual loans covered under the loss share agreement with
the FDIC totaled $26.7 million, or 4.95% of total loans, at September 30,
2009. Organic nonaccrual
loans totaled $11.8 million, or 2.18% of total loans.
The
following table sets forth information with respect to our nonperforming assets
and troubled debt restructurings within the meaning of ASC Topic 310-10-35 for
the periods indicated. During the periods presented, there were no accruing
loans that were contractually past due 90 days or more. There were $4.6 million
of troubled debt restructurings at September 30, 2009 that were not delinquent
or in nonperforming status.
|
|
At
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(dollars
in thousands)
|
|
Loans
accounted for on a non-accrual basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
10,617 |
|
|
$ |
1,518 |
|
|
$ |
588 |
|
|
$ |
358 |
|
|
$ |
388 |
|
Multi-family
residential
|
|
|
1,753 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Commercial
|
|
|
10,750 |
|
|
|
100 |
|
|
|
407 |
|
|
|
-- |
|
|
|
-- |
|
Total
real estate
|
|
|
23,120 |
|
|
|
1,618 |
|
|
|
995 |
|
|
|
358 |
|
|
|
388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
2,764 |
|
|
|
3,787 |
|
|
|
436 |
|
|
|
-- |
|
|
|
-- |
|
Multi-family
residential
|
|
|
932 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Commercial
and land development
|
|
|
7,915 |
|
|
|
4,204 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Total
real estate construction
|
|
|
11,611 |
|
|
|
7,991 |
|
|
|
436 |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
502 |
|
|
|
306 |
|
|
|
100 |
|
|
|
30 |
|
|
|
79 |
|
Automobile
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
5 |
|
Other
consumer
|
|
|
42 |
|
|
|
10 |
|
|
|
-- |
|
|
|
-- |
|
|
|
6 |
|
Total
consumer
|
|
|
544 |
|
|
|
316 |
|
|
|
100 |
|
|
|
30 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
3,217 |
|
|
|
20 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Total
loans
|
|
|
38,492 |
|
|
|
9,945 |
|
|
|
1,531 |
|
|
|
388 |
|
|
|
478 |
|
Accruing
loans which are contractually past due 90
days or more
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Total
of nonaccrual and 90 days past due loans
|
|
|
38,492 |
|
|
|
9,945 |
|
|
|
1,531 |
|
|
|
388 |
|
|
|
478 |
|
Repossessed
assets
|
|
|
412 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Real
estate owned
|
|
|
17,979 |
|
|
|
650 |
|
|
|
549 |
|
|
|
-- |
|
|
|
534 |
|
Total
nonperforming assets
|
|
$ |
56,883 |
|
|
$ |
10,595 |
|
|
$ |
2,080 |
|
|
$ |
388 |
|
|
$ |
1,012 |
|
Nonperforming assets covered by
loss share and
included above(1)
|
|
$ |
34,224 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Troubled
debt restructurings
|
|
$ |
11,933 |
|
|
$ |
812 |
|
|
$ |
35 |
|
|
$ |
11 |
|
|
$ |
322 |
|
Allowance
for loan loss on nonperforming loans
|
|
|
1,803 |
|
|
|
1,733 |
|
|
|
66 |
|
|
|
-- |
|
|
|
7 |
|
Classified
assets included in nonperforming assets
|
|
|
38,492 |
|
|
|
10,152 |
|
|
|
1,666 |
|
|
|
388 |
|
|
|
1,000 |
|
Allowance
for loan loss on classified assets
|
|
|
2,483 |
|
|
|
1,767 |
|
|
|
191 |
|
|
|
46 |
|
|
|
64 |
|
Nonaccrual
and accruing loans 90 days or more past
due
as a percentage of loans receivable
|
|
|
7.13 |
% |
|
|
2.14 |
% |
|
|
0.32 |
% |
|
|
0.08 |
% |
|
|
0.11 |
% |
Nonaccrual
and accruing loans 90 days or more past
due
as a percentage of total assets
|
|
|
4.65 |
% |
|
|
1.37 |
% |
|
|
0.22 |
% |
|
|
0.05 |
% |
|
|
0.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets as a percentage of total assets
|
|
|
6.87 |
% |
|
|
1.46 |
% |
|
|
0.29 |
% |
|
|
0.05 |
% |
|
|
0.15 |
% |
Loans
receivable, net
|
|
$ |
510,629 |
|
|
$ |
459,813 |
|
|
$ |
480,118 |
|
|
$ |
503,065 |
|
|
$ |
430,944 |
|
Interest
foregone on nonaccrual loans(2)
|
|
|
1,366 |
|
|
|
182 |
|
|
|
36 |
|
|
|
11 |
|
|
|
5 |
|
Total
assets
|
|
|
827,899 |
|
|
|
725,070 |
|
|
|
709,954 |
|
|
|
761,292 |
|
|
|
689,577 |
|
(1)
|
Includes
real estate owned and other repossessed assets of $7.5 million, after fair
value purchase adjustments
|
(2)
|
If
interest on the loans classified as nonaccrual had been accrued, interest
income in these amounts would have been recorded on nonaccrual
loans.
|
The
following table summarizes nonperforming and impaired loans and real estate
owned at September 30, 2009 and 2008:
|
|
2009
|
|
|
2008
|
|
|
|
Acquired
|
|
|
Organic
|
|
|
|
|
|
Organic
|
|
|
|
ASC 310-30(1)
|
|
|
Other
|
|
|
Portfolio
|
|
|
Total
|
|
|
Portfolio
|
|
(in thousands)
|
|
Land
acquisition and
development
|
|
$ |
6,985 |
|
|
$ |
- |
|
|
$ |
623 |
|
|
$ |
7,608 |
|
|
$ |
4,204 |
|
One-to-four
family construction
|
|
|
481 |
|
|
|
- |
|
|
|
2,283 |
|
|
|
2,764 |
|
|
|
3,787 |
|
Commercial
real estate
|
|
|
10,974 |
|
|
|
42 |
|
|
|
2,725 |
|
|
|
13,741 |
|
|
|
100 |
|
One-to-four
family residential
|
|
|
5,020 |
|
|
|
|
|
|
|
6,100 |
|
|
|
11,120 |
|
|
|
1,824 |
|
Other
|
|
|
2,763 |
|
|
|
443 |
|
|
|
53 |
|
|
|
3,259 |
|
|
|
30 |
|
Total
nonperforming loans
|
|
$ |
26,223 |
|
|
$ |
485 |
|
|
$ |
11,784 |
|
|
$ |
38,492 |
|
|
$ |
9,945 |
|
Real
estate and other repossessed
assets
|
|
|
|
|
|
$ |
7,516 |
|
|
$ |
10,875 |
|
|
$ |
18,391 |
|
|
$ |
650 |
|
Total
nonperforming assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
56,883 |
|
|
$ |
10,595 |
|
__________________________
(1)
Presented at estimated fair value, net of fair value adjustments of $14.3
million
Real Estate Owned and Other
Repossessed Assets. Real estate we acquire as a result of foreclosure or
by deed-in-lieu of foreclosure is classified as real estate owned until it is
sold. When the property is acquired, it is recorded at the lower of its cost,
which is the unpaid principal balance of the related loan plus foreclosure
costs, or the fair market value of the property less selling costs. Other
repossessed collateral, including autos, are also recorded at the lower of cost
(i.e., the unpaid principal balance plus repossession costs) or fair market
value. As of September 30, 2009, we had $18.4 million in real estate owned with
$7.5 million, after fair value purchase adjustments, subject to the loss share
agreement with the FDIC.
Troubled Debt Restructurings.
According to generally accepted accounting principles, we are required to
account for certain loan modifications or restructuring as a "troubled debt
restructuring." In general, the modification or restructuring of a
debt is considered a troubled debt restructuring if we, for economic or legal
reasons related to a borrower's financial difficulties, grant a concession to
the borrower that we would not otherwise consider. As of September 30, 2009, we
had 35 restructured loans with an aggregate balance of $11.9
million.
Classified Assets. Federal
regulations provide for the classification of lower quality loans and other
assets, such as debt and equity securities, as substandard, doubtful or loss. An
asset is considered substandard if it is inadequately protected by the current
net worth, liquidity and paying capacity of the borrower or any collateral
pledged. Substandard assets include those characterized by the distinct
possibility that we will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all the weaknesses inherent in
those classified substandard with the added characteristic that the weaknesses
present make collection or liquidation in full highly questionable and
improbable on the basis of currently existing facts, conditions and values.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted.
When we
classify problem assets as either substandard or doubtful, we may establish a
specific allowance in an amount we deem prudent and approved by the Bank’s
Classified Asset Committee to address the risk specifically or we may allow the
loss to be addressed in the general allowance. Members of the Classified Asset
Committee include the Bank’s Chief Executive Officer and Chief Credit Officer as
well as the Bank’s internal loan review director and other members of management
in our Credit Administration department. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
specifically allocated to particular problem assets. When an insured institution
classifies problem assets as a loss, it is required to charge off such assets in
the period in which they are deemed uncollectible. Assets that do not currently
expose us to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are required to be designated
as special mention. Our determination as to the classification of our assets and
the amount of our valuation allowances is subject to review by the OTS, which
can order the establishment of additional loss allowances.
In
connection with the filing of periodic reports with the OTS and in accordance
with our classification of assets policy, we regularly review the problem assets
in our portfolio to determine whether any assets require classification in
accordance with applicable regulations. On the basis of our review of our
assets, as of September 30, 2009, we had classified assets of $49.6 million. The
total amount of classified assets represented 23.7% of equity capital and 6.0%
of total assets as of September 30, 2009. The increase in classified assets from
prior year detailed in the table below was primarily due to troubled loans
purchased in the Acquisition. The increase in classified loans in our organic
portfolio occurred primarily in our commercial real estate and construction and
land development portfolios. As of September 30, 2009, there were 20 impaired
loans included in classified assets. The aggregate amounts of classified assets
at the dates indicated were as follows:
|
|
At
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Classified
assets:
|
|
|
|
|
|
|
Doubtful
|
|
$ |
43 |
|
|
$ |
-- |
|
Substandard
|
|
|
49,545 |
|
|
|
9,988 |
|
Total
|
|
$ |
49,588 |
|
|
$ |
9,988 |
|
|
|
|
|
|
|
|
|
|
Classified
assets included in nonperforming loans
|
|
$ |
38,492 |
|
|
$ |
9,945 |
|
Specific
allowance for loan loss on classified assets
|
|
|
1,516 |
|
|
|
1,767 |
|
Classified
assets subject to loss share agreement
|
|
|
27,558 |
|
|
|
-- |
|
Potential Problem Loans.
Potential problem loans are loans that do not yet meet the criteria for
placement on non-accrual status, but known information about possible credit
problems of the borrowers causes management to have doubts as to the ability of
the borrowers to comply with present loan repayment terms. This may result in
the future inclusion of such loans in the non-accrual loan category. As of
September 30, 2009, the aggregate amount of potential problem loans was $11.0
million, which includes loans that were rated “Substandard under the Bank’s risk
grading process but were not impaired or on non-accrual status. The
$11.0 million balance includes $8.6 million in loans secured by commercial real
estate, $681,000 in one-to-four family residential real estate loans,
$1.7 million in real estate construction and land development loans, and $42,000
of non real estate commercial loans.
The
following table summarizes the distribution of the allowance for loan losses by
loan category. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management’s judgment,
should be charged-off. The allowance consists of specific and general
components. The specific component relates to loans that are individually
classified as impaired. The general component covers non-classified loans and is
based on historical loss experience adjusted for current economic and other
factors described more fully below.
|
At
September 30,
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
(dollars
in thousands)
|
|
Loan Balance
|
Amount by Loan Category
|
Percent of Loans in Loan Category to Total Loans
|
|
Loan Balance
|
Amount
by Loan Category
|
Percent
of
Loans
in
Loan Category
to Total Loans
|
|
Loan Balance
|
Amount
by Loan Category
|
Percent
of
Loans
in
Loan Category
to Total Loans
|
|
Loan Balance
|
Amount
by Loan Category
|
Percent
of
Loans
in
Loan Category
to Total Loans
|
|
Loan Balance
|
Amount
by Loan Category
|
Percent
of
Loans
in
Loan Category
to Total Loans
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
$178,311
|
$ 3,781
|
32.98%
|
|
$210,501
|
$ 849
|
45.23%
|
|
$249,545
|
$ 840
|
51.55%
|
|
$293,640
|
$ 873
|
57.88%
|
|
$252,126
|
$ 784
|
58.00%
|
Multi-family
residential
|
16,286
|
589
|
3.02
|
|
8,477
|
70
|
1.82
|
|
6,864
|
60
|
1.42
|
|
7,049
|
61
|
1.39
|
|
5,454
|
61
|
1.25
|
Commercial
|
213,471
|
11,717
|
39.53
|
|
151,733
|
1,345
|
32.61
|
|
133,823
|
1,205
|
27.64
|
|
125,401
|
1,087
|
24.72
|
|
116,432
|
1,297
|
26.78
|
Total
real estate
|
408,068
|
16,087
|
75.53
|
|
370,711
|
2,264
|
79.66
|
|
390,232
|
2,105
|
80.61
|
|
426,090
|
2,021
|
83.99
|
|
374,012
|
2,142
|
86.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
10,871
|
2,147
|
2.01
|
|
13,448
|
610
|
2.89
|
|
20,545
|
188
|
4.24
|
|
23,678
|
290
|
4.67
|
|
14,421
|
241
|
3.32
|
Multi-family
residential
|
10,417
|
78
|
1.93
|
|
920
|
11
|
0.20
|
|
1,770
|
23
|
0.37
|
|
--
|
--
|
--
|
|
1,427
|
18
|
0.33
|
Commercial
and land development
|
27,144
|
6,492
|
5.03
|
|
18,674
|
1,029
|
4.01
|
|
21,899
|
245
|
4.52
|
|
16,344
|
294
|
3.22
|
|
7,470
|
132
|
1.72
|
Total
real estate
|
48,432
|
8,717
|
8.97
|
|
33,042
|
1,650
|
7.10
|
|
44,214
|
455
|
9.13
|
|
40,022
|
584
|
7.89
|
|
23,318
|
391
|
5.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
53,368
|
2,896
|
9.88
|
|
52,954
|
529
|
11.38
|
|
42,990
|
311
|
8.88
|
|
34,143
|
243
|
6.73
|
|
28,558
|
192
|
6.57
|
Automotive
|
2,364
|
21
|
0.44
|
|
1,903
|
29
|
0.41
|
|
2,173
|
35
|
0.45
|
|
3,245
|
58
|
0.64
|
|
4,576
|
79
|
1.05
|
Other
consumer
|
3,734
|
290
|
0.69
|
|
1,370
|
28
|
0.29
|
|
1,405
|
37
|
0.29
|
|
1,300
|
32
|
0.26
|
|
1,530
|
39
|
0.35
|
Total
consumer
|
59,466
|
3,207
|
11.01
|
|
56,227
|
586
|
12.08
|
|
46,568
|
383
|
9.62
|
|
38,688
|
333
|
7.63
|
|
34,664
|
310
|
7.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
24,256
|
724
|
4.49
|
|
5,385
|
79
|
1.16
|
|
3,122
|
45
|
0.64
|
|
2,480
|
36
|
0.49
|
|
2,759
|
39
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
$540,222
|
$28,735
|
100.00%
|
|
$465,365
|
$4,579
|
100.00%
|
|
$484,136
|
$2,988
|
100.00%
|
|
$507,280
|
$2,974
|
100.00%
|
|
$434,753
|
$2,882
|
100.00%
|
The
following table sets forth an analysis of our allowance for loan losses at the
dates and for the periods indicated:
|
Year
Ended September 30,
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
(in
thousands)
|
Allowance
at beginning of period
|
$4,579
|
|
$2,988
|
|
$2,974
|
|
$2,882
|
|
$2,637
|
Provisions
for loan losses
|
16,085
|
|
2,431
|
|
409
|
|
138
|
|
456
|
Addition
to allowance due to acquisition
|
16,811
|
|
--
|
|
--
|
|
--
|
|
--
|
Transfer
to unfunded commitments
|
--
|
|
--
|
|
(192)
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
122
|
|
--
|
|
--
|
|
--
|
|
--
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Commercial
|
--
|
|
--
|
|
--
|
|
--
|
|
2
|
Total
real estate
|
122
|
|
--
|
|
--
|
|
--
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
15
|
|
--
|
|
--
|
|
--
|
|
--
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Commercial
and land development
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Total
real estate construction
|
15
|
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
Home
equity
|
88
|
|
--
|
|
--
|
|
--
|
|
12
|
Automobile
|
5
|
|
9
|
|
4
|
|
12
|
|
--
|
Other
consumer
|
7
|
|
15
|
|
12
|
|
12
|
|
9
|
Total
consumer
|
100
|
|
24
|
|
16
|
|
24
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
1
|
|
--
|
|
--
|
|
--
|
|
--
|
Total
recoveries
|
238
|
|
24
|
|
16
|
|
24
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
(1,571)
|
|
(665)
|
|
(73)
|
|
--
|
|
--
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Commercial
|
(919)
|
|
--
|
|
--
|
|
--
|
|
(56)
|
Total
real estate
|
(2,490)
|
|
(665)
|
|
(73)
|
|
--
|
|
(56)
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
(1,464)
|
|
--
|
|
(91)
|
|
--
|
|
--
|
Multi-family
residential
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Commercial
and land development
|
(2,987)
|
|
--
|
|
--
|
|
--
|
|
--
|
Total
real estate construction
|
(4,451)
|
|
--
|
|
(91)
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
Home
equity
|
(1,751)
|
|
(137)
|
|
--
|
|
(3)
|
|
(19)
|
Automobile
|
(9)
|
|
(23)
|
|
--
|
|
(3)
|
|
(22)
|
Other
consumer
|
(83)
|
|
(39)
|
|
(36)
|
|
(33)
|
|
(51)
|
Total
consumer
|
(1,843)
|
|
(199)
|
|
(36)
|
|
(39)
|
|
(92)
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
(194)
|
|
--
|
|
(19)
|
|
(31)
|
|
(86)
|
|
|
|
|
|
|
|
|
|
|
Total
charge-offs
|
(8,978)
|
|
(864)
|
|
(219)
|
|
(70)
|
|
(234)
|
Net
charge-offs
|
(8,740)
|
|
(840)
|
|
(203)
|
|
(46)
|
|
(211)
|
Balance
at end of period
|
$28,735
|
|
$4,579
|
|
$2,988
|
|
$2,974
|
|
$2,882
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percentage
of
total loans outstanding at the end of the period
|
5.32%
|
|
0.98%
|
|
0.62%
|
|
0.59%
|
|
0.67%
|
Net
charge-offs as a percentage of average
loans
outstanding during the period
|
1.87%
|
|
0.18%
|
|
0.04%
|
|
0.01%
|
|
0.05%
|
Allowance
for loan losses as a percentage of nonaccrual and
90
days or more past due loans at end of period
|
74.65%
|
|
46.04%
|
|
195.17%
|
|
766.49%
|
|
602.97%
|
Management
reviews the loan losses on a monthly basis and establishes the provision for
loan losses based on the risk composition of the loan portfolio, delinquency
levels, loss experience, economic conditions, bank regulatory examination
results, seasoning of the loan portfolios and other factors related to the
collectibility of the loan portfolio The allowance is increased by the provision
for loan losses, which is charged against current period operating results and
decreased by the amount of actual loan charge-offs, net of
recoveries.
In
estimating our allowance for loan losses, we consider our historical loss ratios
as a basis for our general loss reserve. We then adjust those historical loss
rates after consideration of current internal and external environmental
factors. We consider economic indicators that may correlate to higher, or lower,
loss ratios in the current environment compared to our historical loss
experience. These external factors include trends in unemployment, levels of
foreclosures and bankruptcy filings, vacancy rates and peer bank delinquency
levels, as well as several other economic factors in our market area. Internal
factors include changes in underwriting criteria or policies, management
turnover and the results of our internal loan review processes and audits.
Further, we estimate a range of losses in each loan portfolio. We then
subjectively select a level of allowance for loan loss within those ranges that
best reflects our estimate of the Bank’s loss exposure. Classified assets that
are not impaired are assigned an estimated loss percentage at a higher rate than
nonclassified assets as these loans, by their nature, represent a higher
likelihood of incurred loss. If management determines the repayment of an
impaired loan is dependent upon the liquidation of collateral, an updated
appraisal is requested. Management in some situations may use the appraiser’s
“quick sale” value rather than the full appraised value, with each further
reduced by estimated costs to sell.
As noted
earlier, ASC 310-30 applies to a loan with evidence of deterioration of credit
quality since origination, acquired by completion of a transfer for which it is
probable, at acquisition, that the investor will be unable to collect all
contractually required payments receivable. For loans accounted for under ASC
310-30, we determined the value of the loan portfolio based on work provided by
an appraiser. Factors considered in the valuation were projected cash
flows for the loans, type of loan and related collateral, classification status
and current discount rates. Loans were grouped together according to
similar characteristics and were treated in the aggregate when applying various
valuation techniques. We also estimated the amount of credit losses
that were expected to be realized for the loan portfolio primarily by estimating
the liquidation value of collateral securing loans on non-accrual status or
classified as substandard or doubtful. At September 30, 2009, a majority of
these loans were valued based on the liquidation value of the underlying
collateral, because the expected cash flows are primarily based on the
liquidation of the underlying collateral. Certain amounts related to the ASC
310-30 loans are preliminary estimates and adjustments in future quarters may
occur up to one year from the date of acquisition.
An
allowance for loan losses was established for loans purchased in the Acquisition
that are not accounted for under ASC 310-30. In developing this allowance, we
had to 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. We
used loss history for Community First Bank, the failed bank, and adjusted those
loss rates for current economic factors and known and estimated real estate
devaluations. At the time of the Acquisition, we applied SFAS No. 141, “Business
Combinations,” which was superseded by SFAS No. 141(R). We were not permitted to
adopt SFAS No. 141(R) prior to its effective date for the Company, which was
October 1, 2009, because of our September 30 fiscal year. As such, we
established an allowance for loan losses in accordance with industry practice
under FAS No. 141.
Management
believes the allowance for loan losses as of September 30, 2009, and the fair
value adjustments under ASC 310-30 represent our best estimate of probable
incurred losses inherent in our loan portfolio at that date. While we believe
the estimates and assumptions used in our determination of the allowance are
reasonable, there can be no assurance that such estimates and assumptions will
not be proven incorrect in the future, or that the actual amount of future
provisions will not exceed the amount of past provisions or that any increased
provision that may be required will not adversely impact our financial condition
and results of operations. In addition, the determination of the amount of Home
Federal Bank’s allowance for loan losses is subject to review by bank
regulators, as part of the routine examination process, which may result in the
establishment of additional reserves based upon their judgment of information
available to them at the time of their examination.
The
following table provides certain information with respect to our allowance for
loan losses, including charge-offs, recoveries and selected ratios for the
periods indicated:
|
|
At
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions
for loan losses
|
|
$ |
16,085 |
|
|
$ |
2,431 |
|
|
$ |
409 |
|
|
$ |
138 |
|
|
$ |
456 |
|
Allowance
for loan losses
|
|
|
28,735 |
|
|
|
4,579 |
|
|
|
2,988 |
|
|
|
2,974 |
|
|
|
2,882 |
|
Allowance
for loan losses as a percentage of
total loans outstanding at the end of the period
|
|
|
5.32 |
% |
|
|
0.98 |
% |
|
|
0.62 |
% |
|
|
0.59 |
% |
|
|
0.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses included above
allocated to loans covered by loss share
agreement
|
|
$ |
16,812 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Allowance
for loan losses on covered assets as a
percentage of loans covered by loss share
agreement
|
|
|
13.30 |
% |
|
|
-- |
% |
|
|
-- |
% |
|
|
-- |
% |
|
|
-- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs
|
|
$ |
8,740 |
|
|
$ |
840 |
|
|
$ |
203 |
|
|
$ |
46 |
|
|
$ |
211 |
|
Total
of nonaccrual and 90 days past due loans
|
|
|
38,492 |
|
|
|
9,945 |
|
|
|
1,531 |
|
|
|
388 |
|
|
|
478 |
|
Nonaccrual
and 90 days or more past due loans
as a percentage of loans receivable
|
|
|
7.13 |
% |
|
|
2.14 |
% |
|
|
0.32 |
% |
|
|
0.08 |
% |
|
|
0.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, gross
|
|
$ |
540,222 |
|
|
$ |
465,364 |
|
|
$ |
484,136 |
|
|
$ |
507,281 |
|
|
$ |
434,753 |
|
Loans
covered by loss share agreement
|
|
|
126,366 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Investment
Activities
General. OTS regulations
permit the Bank and the Company to invest in various types of liquid assets,
including U.S. Treasury obligations, securities of U.S. Government-sponsored
enterprises, certificates of deposit of federally-insured banks and savings
associations, banker's acceptances, repurchase agreements and federal funds.
Subject to various restrictions, we also may invest a portion of our assets in
commercial paper and corporate debt securities.
Our
investment policies are designed to provide and maintain adequate liquidity and
to generate favorable rates of return without incurring undue interest rate or
credit risk. The investment policies generally limit investments to Treasury
notes, mortgage-backed securities, obligations of U.S. government sponsored
enterprises, municipal bonds, certificates of deposit and marketable corporate
debt obligations. Investment in mortgage-backed securities includes those issued
or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. In 2008, Freddie Mac
and Fannie Mae were placed into conservatorship under the U.S. Treasury
Department. As a result, these securities are now backed by the full faith and
credit of the U.S. government. We do not own direct obligations of Freddie Mac
or Fannie Mae in the form of preferred or common stock or subordinated debt
obligations.
From time
to time, investment levels may be increased or decreased depending upon yields
available on investment alternatives and management's projections as to the
demand for funds to be used in loan originations, deposits and other
activities.
Investments. Our investment
securities had a fair value of $169.3 million and a $162.8 million amortized
cost at September 30, 2009. Our investments portfolio consisted of $4.1 million
in obligations of U.S. government sponsored enterprises and $165.2 million in
mortgage-backed securities. The mortgage-backed securities were
primarily comprised of Fannie Mae and Freddie Mac mortgage-backed
securities.
The
following table sets forth the composition of our investment securities
portfolios at the dates indicated:
|
|
At
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(dollars
in thousands)
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government Sponsored Enterprises (“GSE”)
|
|
$ |
4,089 |
|
|
$ |
4,127 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie
Mae
|
|
|
70,888 |
|
|
|
73,769 |
|
|
|
101,626 |
|
|
|
100,602 |
|
|
|
68,019 |
|
|
|
66,477 |
|
Freddie
Mac
|
|
|
85,131 |
|
|
|
88,742 |
|
|
|
86,104 |
|
|
|
85,128 |
|
|
|
94,484 |
|
|
|
92,394 |
|
Ginnie
Mae
|
|
|
2,046 |
|
|
|
2,083 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Private
label
|
|
|
612 |
|
|
|
599 |
|
|
|
3,390 |
|
|
|
3,057 |
|
|
|
3,464 |
|
|
|
3,387 |
|
Total
available for sale
|
|
$ |
162,766 |
|
|
$ |
169,320 |
|
|
$ |
191,120 |
|
|
$ |
188,787 |
|
|
$ |
165,967 |
|
|
$ |
162,258 |
|
At
September 30, 2009, we believe that it is more likely than not that the Company
has the ability and intent to hold the securities with a fair value less than
amortized cost until their value has recovered to amortized cost.
The table
below sets forth information regarding the amortized cost, weighted average
yields and maturities or periods to repricing of our investment portfolio at
September 30, 2009:
|
|
Amount
Due or Repricing within:
|
|
|
|
1
Year or Less
|
|
|
Over
1 to 5 Years
|
|
|
Over
5 to 10 Years
|
|
|
Over
10 Years
|
|
|
Totals
|
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
(1)
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield(1)
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
(1)
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
(1)
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
(1)
|
|
|
|
(dollars
in thousands)
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government Sponsored
Enterprises
|
|
$ |
-- |
|
|
|
-- |
% |
|
$ |
3,024 |
|
|
|
0.72 |
% |
|
$ |
1,065 |
|
|
|
4.06 |
% |
|
$ |
-- |
|
|
|
-- |
% |
|
$ |
4,089 |
|
|
|
1.59 |
% |
Mortgage-backed securities
|
|
|
25,138 |
|
|
|
3.14 |
|
|
|
8,498 |
|
|
|
3.72 |
|
|
|
26,232 |
|
|
|
4.50 |
|
|
|
98,809 |
|
|
|
4.68 |
|
|
|
158,677 |
|
|
|
4.35 |
|
Total
available for sale
|
|
$ |
25,138 |
|
|
|
3.14 |
% |
|
$ |
11,522 |
|
|
|
2.93 |
% |
|
$ |
27,297 |
|
|
|
4.48 |
% |
|
$ |
98,809 |
|
|
|
4.68 |
% |
|
$ |
162,766 |
|
|
|
4.29 |
% |
________
(1)
|
Interest
and dividends are reported on a tax-equivalent basis. At September 30,
2009, the Company held no tax-exempt investment securities. For available
for sale securities carried at fair value, the weighted average yield is
computed using amortized cost.
|
The
following table sets forth certain information with respect to each category
which had an aggregate book value in excess of 10% of our total equity at the
date indicated.
|
|
At
September 30, 2009
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
Available
for sale:
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
Fannie
Mae
|
|
$ |
70,888 |
|
|
$ |
73,769 |
|
Freddie
Mac
|
|
|
85,131 |
|
|
|
88,742 |
|
Federal Home Loan Bank Stock.
As a member of the FHLB of Seattle, the Bank is required to own its
capital stock. The amount of stock the Bank holds is based on percentages
specified by the FHLB of Seattle on outstanding advances. The redemption of any
excess stock the Bank holds is at the discretion of the FHLB of Seattle. At
September 30, 2009, the carrying value of FHLB stock was $10.3
million.
Bank-Owned Life Insurance. We
have purchased bank-owned life insurance policies ("BOLI") to offset employee
benefit costs. At September 30, 2009, we had a $12.0 million investment in
“general account” life insurance contracts. The potential death benefits as of
September 30, 2009 were $23.2 million. All of the insurance companies that
issued the policies in the Bank’s BOLI portfolio had investment grade ratings by
Standard & Poor’s and A.M Best at September 30, 2009.
Deposit
Activities and Other Sources of Funds
General. Deposits
are the major source of our funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. Borrowings from the FHLB of
Seattle are used to supplement the availability of funds from other sources and
also as a source of term funds to assist in the management of interest rate
risk.
Changes
in our deposit composition reflect our strategy to reduce reliance on
certificates of deposit with certificates of deposit accounting for 44.5% of the
deposit portfolio at September 30, 2009, compared to 47.6% at September 30,
2008. Interest-bearing and noninterest-bearing checking, savings and money
market accounts comprise the balance of total deposits, which we believe have
greater stability and higher profitability than certificates of deposit. We rely
on marketing activities, convenience, customer service and the availability of a
broad range of competitively priced deposit products and services to attract and
retain customer deposits.
Deposits. With the exception
of our Health Savings Accounts, which totaled $21.2 million at September 30,
2009, substantially all of our depositors are residents and businesses located
in the states of Idaho and Oregon. Deposits are attracted from within our market
areas through the offering of a broad selection of deposit instruments,
including checking accounts, money market deposit accounts, savings accounts and
certificates of deposit with a variety of rates and terms to maturity. Deposit
account terms vary according to the minimum balance required, the time periods
the funds must remain on deposit and the interest rate, among other
factors.
At
September 30, 2009, we had $83.5 million of jumbo ($100,000 or more)
certificates of deposit, which are primarily from local customers, representing
16.2% of total deposits at that date. At September 30, 2009, we had $100,000 of
brokered certificates of deposit, which were assumed in the
Acquisition.
Our
deposit pricing philosophy is to generally maintain deposit rates at levels that
are competitive with other local financial institutions. Historically, we have
been able to retain a significant amount of deposits as they mature. However,
recent deterioration in credit quality and capital levels at many of our
competitors have limited their sources of wholesale funding, which has resulted
in a highly price-competitive market for retail certificates of deposit. These
rates currently exceed alternative costs of borrowings and are high compared to
historical spreads to U.S. Treasury note rates. Additionally, since loan demand
has slowed in 2009, we have 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.
Deposit Activities. The
following table sets forth the total deposit activities of Home Federal Bank for
the periods indicated:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
372,925 |
|
|
$ |
404,609 |
|
|
$ |
430,281 |
|
Deposits
assumed in the Acquisition,
at fair value
|
|
|
143,459 |
|
|
|
-- |
|
|
|
-- |
|
Net
change in deposits before interest
credited
|
|
|
(8,309 |
) |
|
|
(42,230 |
) |
|
|
(38,025 |
) |
Interest
credited
|
|
|
6,783 |
|
|
|
10,546 |
|
|
|
12,353 |
|
Net
increase (decrease) in deposits
|
|
|
141,933 |
|
|
|
(31,684 |
) |
|
|
(25,672 |
) |
Ending
balance
|
|
$ |
514,858 |
|
|
$ |
372,925 |
|
|
$ |
404,609 |
|
Time Deposits by Rate. The
following table sets forth the time deposits in Home Federal Bank classified by
rates as of the dates indicated:
|
|
|
At
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
- 0.99%
|
|
|
$ |
9,906 |
|
|
$ |
11 |
|
|
$ |
374 |
|
|
1.00
- 1.99
|
|
|
|
71,921 |
|
|
|
-- |
|
|
|
5 |
|
|
2.00
- 2.99
|
|
|
|
68,327 |
|
|
|
49,598 |
|
|
|
2,257 |
|
|
3.00
- 3.99
|
|
|
|
42,898 |
|
|
|
54,669 |
|
|
|
24,012 |
|
|
4.00
- 4.99
|
|
|
|
27,389 |
|
|
|
55,050 |
|
|
|
63,632 |
|
|
5.00
- 5.99
|
|
|
|
7,544 |
|
|
|
16,234 |
|
|
|
123,617 |
|
|
6.00
- 8.99
|
|
|
|
912 |
|
|
|
1,842 |
|
|
|
1,294 |
|
Total
|
|
|
$ |
228,897 |
|
|
$ |
177,404 |
|
|
$ |
215,191 |
|
Time Deposits by Maturity. The
following table sets forth the amount and maturities of time deposits at
September 30, 2009:
|
|
|
Amounts
Due
|
|
|
|
|
|
|
|
1-2
|
|
|
|
|
|
3-4
|
|
|
After
|
|
|
Total
|
|
|
|
|
(in
thousands)
|
|
|
0.00 – 1.99%
|
|
|
$ |
72,731 |
|
|
$ |
7,087 |
|
|
$ |
103 |
|
|
$ |
1,906 |
|
|
$ |
-- |
|
|
$ |
81,827 |
|
|
2.00
- 2.99
|
|
|
|
42,241 |
|
|
|
16,744 |
|
|
|
7,141 |
|
|
|
1,692 |
|
|
|
509 |
|
|
|
68,327 |
|
|
3.00
- 3.99
|
|
|
|
24,083 |
|
|
|
4,385 |
|
|
|
2,648 |
|
|
|
2,501 |
|
|
|
9,281 |
|
|
|
42,898 |
|
|
4.00
- 4.99
|
|
|
|
18,860 |
|
|
|
3,668 |
|
|
|
1,631 |
|
|
|
1,828 |
|
|
|
1,402 |
|
|
|
27,389 |
|
|
5.00
- 5.99
|
|
|
|
3,264 |
|
|
|
2,928 |
|
|
|
1,346 |
|
|
|
5 |
|
|
|
1 |
|
|
|
7,544 |
|
|
6.00
- 8.99
|
|
|
|
790 |
|
|
|
9 |
|
|
|
113 |
|
|
|
-- |
|
|
|
-- |
|
|
|
912 |
|
Total
|
|
|
$ |
161,969 |
|
|
$ |
34,821 |
|
|
$ |
12,982 |
|
|
$ |
7,932 |
|
|
$ |
11,193 |
|
|
$ |
228,897 |
|
The
following table sets forth information concerning our time deposits and other
deposits at September 30, 2009:
|
|
|
|
|
|
|
|
|
Weighted
Average
Interest
Rate
|
|
Original
Term
|
|
Category
|
|
Amount,
in
thousands
|
|
Percentage
of
Total
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.65%
|
|
N/A
|
|
Savings
deposits
|
|
$ 41,757
|
|
8.11%
|
0.56
|
|
N/A
|
|
Interest-bearing
demand deposits
|
|
78,393
|
|
15.23
|
--
|
|
N/A
|
|
Noninterest-bearing
demand deposits
|
|
68,155
|
|
13.24
|
1.00
|
|
N/A
|
|
Money
market accounts
|
|
76,408
|
|
14.84
|
0.91
|
|
N/A
|
|
Health
savings accounts
|
|
21,248
|
|
4.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of
Deposit
|
|
|
|
|
1.97
|
|
1-12
months
|
|
Fixed
term, fixed rate
|
|
113,840
|
|
22.10
|
2.92
|
|
13-24
months
|
|
Fixed
term, fixed rate
|
|
59,798
|
|
11.61
|
3.65
|
|
25-36
months
|
|
Fixed
term, fixed rate
|
|
10,174
|
|
1.98
|
3.77
|
|
37-60
months
|
|
Fixed
term, fixed rate
|
|
42,096
|
|
8.18
|
2.35
|
|
Over
60 months
|
|
Fixed
term, fixed rate
|
|
2,989
|
|
0.58
|
|
|
|
|
Total
certificates of deposit
|
|
228,897
|
|
44.45
|
|
|
|
|
Total
deposits
|
|
$ 514,858
|
|
100.00%
|
The
following table indicates the amount of jumbo certificates of deposit by time
remaining until maturity as of September 30, 2009. Jumbo certificates of deposit
are certificates in amounts of $100,000 or more:
Maturity
Period
|
|
Certificates
of
Deposit
of
$100,000
or
More
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Three
months or less
|
|
$ |
23,893 |
|
Over
three through six months
|
|
|
16,573 |
|
Over
six through twelve months
|
|
|
18,109 |
|
Over
twelve months
|
|
|
24,963 |
|
Total
|
|
$ |
83,538 |
|
|
|
|
|
|
Deposit Flow. The following
table sets forth the balances of deposits in the various types of accounts
offered by Home Federal Bank at the dates indicated:
|
At
September 30,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
Amount
|
|
Percent
Of
Total
|
|
Increase/
(Decrease)
|
|
Amount
|
|
Percent
Of
Total
|
|
Increase/
(Decrease)
|
|
Amount
|
|
Percent
Of
Total
|
|
Increase/
(Decrease)
|
|
|
(dollars
in thousands)
|
|
Savings
deposits
|
$41,757
|
|
8.11
|
%
|
$15,348
|
|
$26,409
|
|
7.08
|
% |
$3,293
|
|
$23,116
|
|
5.71
|
% |
$(539)
|
|
Demand
deposits
|
146,548
|
|
28.47
|
|
49,700
|
|
96,848
|
|
25.98
|
|
(281
|
)
|
97,129
|
|
24.01
|
|
(11,413)
|
|
Money
market accounts
|
76,408
|
|
14.84
|
|
25,266
|
|
51,142
|
|
13.71
|
|
5,441
|
|
45,701
|
|
11.30
|
|
12,278
|
|
Health
savings accounts
|
21,248
|
|
4.13
|
|
126
|
|
21,122
|
|
5.66
|
|
(2,350
|
)
|
23,472
|
|
5.80
|
|
(7,465)
|
|
Fixed
rate certificates
that
mature in the year
ending:
Within
1 year
|
161,969
|
|
31.46
|
|
28,646
|
|
133,323
|
|
35.75
|
|
(39,261
|
)
|
172,584
|
|
42.65
|
|
(15,877)
|
|
After
1 year, but
within 2 years
|
34,821
|
|
6.76
|
|
9,127
|
|
25,694
|
|
6.89
|
|
647
|
|
25,047
|
|
6.19
|
|
(3,360)
|
|
After
2 years, but
within 5 years
|
31,890
|
|
6.19
|
|
13,678
|
|
18,212
|
|
4.88
|
|
847
|
|
17,365
|
|
4.29
|
|
768
|
|
After
5 years
|
217
|
|
0.04
|
|
42
|
|
175
|
|
0.05
|
|
(20
|
)
|
195
|
|
0.05
|
|
(64)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$514,858
|
|
100.00
|
% |
$141,933
|
|
$372,925
|
|
100.00
|
% |
$(31,684
|
)
|
$404,609
|
|
100.00
|
% |
$(25,672)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings. We use
advances from the FHLB of Seattle to meet short-term deposit withdrawal
requirements and also to provide longer term funding to better match the
duration of selected loan and investment maturities. As one of our capital
management strategies, we have and may use borrowings from the FHLB to fund the
purchase of investment securities and origination of loans in order to increase
our net interest income when attractive opportunities exist.
As a
member of the FHLB, we are required to own its capital stock. Advances are made
individually under various terms pursuant to several different credit programs,
each with its own interest rate and range of maturities. We maintain a committed
credit facility with the FHLB that provides for immediately available advances
up to an aggregate of 40% of the Bank’s total assets. At September 30, 2009, our
outstanding advances from the FHLB totaled $82.9 million, with additional
borrowing capacity of $134.4 million. Our advances with the FHLB are
collateralized by our FHLB stock and through a blanket pledge on our first lien
one-to-four family residential real estate loan portfolio and our securities
portfolio.
The FHLB
of Seattle has reported a risk-based capital deficiency under the regulations of
the Federal Housing Finance Agency (“FHFA”), its primary regulator. As a result,
the FHLB has stopped paying a dividend and stated that it would suspend the
repurchase and redemption of outstanding common stock until its retained
earnings deficiency was reclaimed. The Bank is continually monitoring this
issue. The FHLB has communicated to its members, including us, that it believes
the calculation of risk-based capital under the current rules of the FHFA
significantly overstates the market and credit risk of the FHLB’s private label
mortgage backed securities in the current market environment and that it has
enough capital to cover the risks reflected in the FHLB’s balance sheet. As a
result, the Bank has not recorded an other-than-temporary impairment on its
investment in FHLB stock. However, continued deterioration in the FHLB’s
financial position may result in impairment in the value of those securities, or
the requirement that the Bank contribute additional funds to recapitalize the
FHLB, or reduce the Bank’s ability to borrow funds from the FHLB, which may
impair the Bank’s ability to meet liquidity demands.
Other
borrowings include securities sold under obligations to repurchase, also known
as repurchase agreements. We originate repurchase agreements directly with our
commercial and retail customers and collateralize these borrowings with
securities issued by U.S. Government sponsored enterprises. Other
borrowings were $1.8 million at September 30, 2009.
The
following table sets forth information regarding our borrowings at the end of
and during the periods indicated. The table includes both long- and short-term
borrowings:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars
in thousands)
|
|
Maximum
amount of borrowings
outstanding at any month end
|
|
$ |
137,000 |
|
|
$ |
181,000 |
|
|
$ |
223,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
average borrowings
outstanding
|
|
|
112,000 |
|
|
|
158,000 |
|
|
|
202,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
weighted average rate paid on
FHLB advances and other borrowings
|
|
|
4.39 |
% |
|
|
4.60 |
% |
|
|
4.49 |
% |
|
|
At
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars
in thousands)
|
|
Balance
outstanding at end of period:
FHLB
advances and other borrowings
|
|
$ |
84,737 |
|
|
$ |
136,972 |
|
|
$ |
180,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average rate at end of period on:
FHLB
advances and other borrowings
|
|
|
4.00 |
% |
|
|
4.68 |
% |
|
|
4.55 |
% |
At
September 30, 2009, we also had access to the Federal Reserve Bank of San
Francisco’s discount window. No funds were drawn on this facility at September
30, 2009.
Competition
We face
intense competition in originating loans and in attracting deposits within our
targeted geographic markets. We compete by leveraging our full service delivery
capability comprised of 23 convenient branch locations, including five branches
located inside Wal-Mart Superstores offering extended banking hours, call center
and Internet banking, and consistently delivering high-quality, individualized
service to our customers that result in a high level of customer satisfaction.
Our key competitors are U.S. Bank, Wells Fargo, Key Bank and JPMorgan Chase.
These competitors control approximately 56% of the deposit market with $4.2
billion of the $7.5 billion in FDIC-insured deposits in our market areas as of
June 30, 2009. Aside from these traditional competitors, credit unions,
insurance companies and brokerage firms are an increasingly competing challenge
for consumer deposit relationships.
Our
competition for loans comes principally from mortgage bankers, commercial banks,
credit unions and finance companies. Several other financial institutions,
including those previously mentioned, have greater resources than us and compete
with us for lending business in our targeted market areas. Among the advantages
of some of these institutions are their ability to make larger loans, finance
extensive advertising campaigns, access lower cost funding sources and allocate
their investment assets to regions of highest yield and demand. This competition
for the origination of loans may limit our future growth and earnings
prospects.
Subsidiaries
and Other Activities
Home
Federal Bank is the only subsidiary of Home Federal Bancorp, Inc., and has one
wholly-owned subsidiary of its own, Idaho Home Service Corporation, which was
established in 1981 as Home Service Corporation for the purpose of facilitating
various business activities. Since 2000, Idaho Home Service Corporation has been
inactive.
Personnel
At
September 30, 2009, we had 266 full-time equivalent employees. Our employees are
not represented by any collective bargaining group. We believe our relationship
with our employees is good.
Internet
Website
We
maintain a website with the address www.myhomefed.com. The information contained
on our website is not included as a part of, or incorporated by reference into,
this Annual Report on Form 10-K. Other than an investor’s own Internet access
charges, we make available free of charge through our website our Annual Report
on Form 10-K, Proxy Statements, quarterly reports on Form 10-Q and current
reports on Form 8-K, and amendments to these reports, as soon as reasonably
practicable after we have electronically filed such material with, or furnished
such material to, the Securities and Exchange Commission. We have also posted
our code of ethics and board committee charters on this site.
HOW
WE ARE REGULATED
The
following is a brief description of certain laws and regulations which are
applicable to Home Federal Bancorp and Home Federal Bank. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere in this annual report, does not purport to be complete and
is qualified in its entirety by reference to the applicable laws and
regulations. Legislation is introduced from time to time in the United States
Congress that may affect our operations. In addition, the regulations governing
us may be amended from time to time by the respective regulators. Any such
legislation or regulatory changes in the future could adversely affect us. We
cannot predict whether any such changes may occur.
Regulation
and Supervision of Home Federal Bank
General.
Home Federal Bank, as a federally chartered savings association, is
subject to extensive regulation, examination and supervision by the Office of
Thrift Supervision, as its primary federal regulator, and the Federal Deposit
Insurance Corporation as its deposit insurer. Home Federal Bank is a member of
the Federal Home Loan Bank System and its deposit accounts are insured up to
applicable limits by the Deposit Insurance Fund administered by the FDIC. Home
Federal Bank must file reports with the Office of Thrift Supervision and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the Office of Thrift Supervision and, under certain
circumstances, the FDIC to evaluate Home Federal Bank’s safety and soundness and
compliance with various regulatory requirements. This regulatory structure is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the Office of Thrift Supervision, the FDIC
or Congress, could have a material adverse impact on Home Federal Bancorp and
Home Federal Bank and their operations.
Office
of Thrift Supervision. In addition to the
authority of the Office of Thrift Supervision and the authority of the FDIC to
conduct examinations, the Office of Thrift Supervision also has extensive
enforcement authority over all savings associations, including Home Federal
Bank. This enforcement authority includes, among other things, the
ability to assess civil money penalties, issue cease-and-desist or removal
orders and initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the Office of Thrift
Supervision. Except under certain circumstances, public disclosure of final
enforcement actions by the Office of Thrift Supervision is
required.
The
investment, lending and branching authority of Home Federal Bank is prescribed
by federal laws and it is prohibited from engaging in any activities not
permitted by these laws. For example, no savings association may
invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real estate property may not exceed 400% of total
capital, except with the approval of the Office of Thrift
Supervision. Federal savings associations are also generally
authorized to branch nationwide. Home Federal Bank is in compliance
with the noted restrictions.
All
savings associations are required to pay assessments to the Office of Thrift
Supervision to fund the agency’s operations. The general assessments, paid on a
semi-annual basis, are determined based on the savings association’s total
assets, including consolidated subsidiaries. Home Federal Bank’s Office of
Thrift Supervision assessment for the fiscal year ended September 30, 2009 was
$161,000.
Home
Federal Bank’s general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 2009, Home Federal Bank’s lending limit under this restriction was
$23.4 million and, at that date, Home Federal Bank’s largest aggregate of loans
to one borrower was $5.3 million, which were performing according to their
original terms.
The
Office of Thrift Supervision, as well as the other federal banking agencies, has
adopted guidelines establishing safety and soundness standards on such matters
as loan underwriting and documentation, asset quality, earnings standards,
internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution that fails to comply
with these standards must submit a compliance plan.
Federal
Home Loan Bank System. Home Federal Bank is a member of the Federal Home
Loan Bank of Seattle, which is one of 12 regional Federal Home Loan Banks that
administer the home financing credit function of savings associations. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the Federal Home Loan Bank System. It
makes loans or advances to members in accordance with policies and procedures,
established by the board of directors of the Federal Home Loan Bank, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the Federal Home Loan Bank are required to be fully secured by sufficient
collateral as determined by the Federal Home Loan Bank. In addition, all
long-term advances are required to provide funds for residential home financing.
At September 30, 2009, Home Federal Bank had $82.9 million of outstanding
advances from the Federal Home Loan Bank of Seattle under an available credit
facility of $217.4 million, which is limited to available collateral. See
Business – Deposit Activities and Other Sources of Funds –
Borrowings.
As a
member, Home Federal Bank is required to purchase and maintain stock in the
Federal Home Loan Bank of Seattle. At September 30, 2009, Home Federal Bank had
$10.3 million in Federal Home Loan Bank stock, which was in compliance with this
requirement.
Under
federal law, the Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings associations and to contribute to housing
programs through direct loans or interest subsidies on advances targeted for
community investment and low-to-moderate income housing projects. These
contributions have affected adversely the level of Federal Home Loan Bank
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of Federal Home Loan Bank stock
in the future. A reduction in value of Home Federal Bank’s Federal Home Loan
Bank stock may result in a corresponding reduction in Home Federal Bank’s
capital.
Federal
Deposit Insurance Corporation. Home Federal Bank
is a member of the Deposit Insurance Fund (“DIF”), which is administered by the
FDIC.
Deposits
are insured up to the applicable limits by the FDIC, backed by the full faith
and credit of the United States Government. Under new legislation,
during the period from October 3, 2008 through December 31, 2013, the basic
deposit insurance limit is $250,000, instead of the $100,000 limit in effect
previously.
The FDIC
assesses deposit insurance premiums on each FDIC-insured institution quarterly
based on annualized rates for one of four risk categories applied to its
deposits subject to certain adjustments. Each institution is assigned to one of
four risk categories based on its capital, supervisory ratings and other
factors. Well capitalized institutions that are financially sound with only a
few minor weaknesses are assigned to Risk Category I. Risk Categories II, III
and IV present progressively greater risks to the DIF. Under FDIC’s risk-based
assessment rules, effective April 1, 2009, the initial base assessment rates
prior to adjustments range from 12 to 16 basis points for Risk Category I,
and are 22 basis points for Risk Category II, 32 basis points for
Risk Category III, and 45 basis points for Risk Category IV. Initial
base assessment rates are subject to adjustments based on an institution’s
unsecured debt, secured liabilities and brokered deposits, such that the total
base assessment rates after adjustments range from 7 to 24 basis
points
for Risk Category I, 17 to 43 basis points for Risk Category II, 27 to 58 basis
points for Risk Category III, and 40 to 77.5 basis points for Risk Category
IV. Rates increase uniformly by 3 basis points effective January 1,
2011.
In
addition to the regular quarterly assessments, as a result of losses and
projected losses attributed to failed institutions, the FDIC imposed a special
assessment of 5 basis points on the amount of each depository institution’s
assets reduced by the amount of its Tier 1 capital (not to exceed 10 basis
points of its assessment base for regular quarterly premiums) as of June 30,
2009, which was collected on September 30, 2009, and totaled
$251,000.
As a
result of a decline in the reserve ratio (the ratio of the net worth of the DIF
to estimated insured deposits) and concerns about expected failure costs and
available liquid assets in the DIF, the FDIC has adopted a rule requiring each
insured institution to prepay on December 30, 2009 the estimated amount of its
quarterly assessments for the fourth quarter of 2009 and all quarters through
the end of 2012 (in addition to the regular quarterly assessment for the third
quarter which is due on December 30, 2009). The prepaid amount is
recorded as an asset with a zero risk weight and the institution will continue
to record quarterly expenses for deposit insurance. For purposes of
calculating the prepaid amount, assessments are measured at the institution’s
assessment rate as of September 30, 2009, with a uniform increase of 3 basis
points effective January 1, 2011, and are based on the institution’s assessment
base for the third quarter of 2009, with growth assumed quarterly at annual rate
of 5%. If events cause actual assessments during the prepayment
period to vary from the prepaid amount, institutions will pay excess assessments
in cash or receive a rebate of prepaid amounts not exhausted after collection of
assessments due on June 13, 2013, as applicable. Collection of the
prepayment does not preclude the FDIC from changing assessment rates or revising
the risk-based assessment system in the future. The rule includes a
process for exemption from the prepayment for institutions whose safety and
soundness would be affected adversely. Home Federal Bank estimates this
prepayment of assessments will result in a cash payment of $2.4 million in
December 2009.
The FDIC
estimates that the reserve ratio will reach the designated reserve ratio of
1.15% by 2017 as required by statute.
The FDIC
may terminate the deposit insurance of any insured depository institution,
including Home Federal Bank, if it determines after a hearing that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC. It also may
suspend deposit insurance temporarily during the hearing process for the
permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management of Home Federal Bank is not aware of any
practice, condition or violation that might lead to termination of its deposit
insurance.
Capital
Requirements.
The Office of Thrift Supervision’s capital regulations require federal
savings associations to meet three minimum capital standards, which are ratios
of capital to assets: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for
institutions receiving the highest rating on the CAMELS examination rating
system) and an 8% total risk-based capital ratio. The leverage ratio is the
ratio of Tier 1 (core) capital to assets. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMELS system), a 4% Tier 1 risk-based capital
standard, and an 8% total risk-based capital ratio. The Office of Thrift
Supervision regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank. The Office of Thrift Supervision also has
authority to establish individual minimum capital requirements in appropriate
cases upon a determination that an institution’s capital level is or may become
inadequate in light of the particular circumstances.
For the
purposes of risk-based capital standards, all assets, including certain
off-balance sheet assets, recourse obligations, residual interests and direct
credit substitutes, are multiplied by a risk-weight factor of 0% to 100%,
assigned by the Office of Thrift Supervision capital regulation based on the
risks believed inherent in the type of asset. Assets covered under a loss share
agreement with the FDIC and the FDIC indemnification asset are assigned a 20%
risk-weight factor. Tier 1 (core) capital is defined as common stockholders’
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus and minority interests in equity accounts of
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and credit card
relationships.
Total risk-based capital is the sum of Tier 1 capital and supplementary
capital. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of Tier 1 capital. At September 30, 2009, Home Federal Bank
exceeded each of these capital requirements.
Prompt
Corrective Action. The Office of Thrift Supervision is required to take
certain supervisory actions against undercapitalized savings associations, the
severity of which depends upon the institution’s degree of undercapitalization.
Generally, an institution that has a ratio of total capital to risk-weighted
assets of less than 8%, a ratio of Tier 1capital to risk-weighted assets of less
than 4%, or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
“undercapitalized.” An institution that has a total risk-based capital ratio
less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is
less than 3% is considered to be “significantly undercapitalized” and an
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be “critically undercapitalized.” Subject to a narrow exception,
the Office of Thrift Supervision is required to appoint a receiver or
conservator for a savings association that is “critically undercapitalized.”
Office of Thrift Supervision regulations also require that a capital restoration
plan be filed with the Office of Thrift Supervision within 45 days of the date a
savings association receives notice that it is “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized.” In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. “Significantly undercapitalized” and “critically undercapitalized”
institutions are subject to more extensive mandatory regulatory actions. The
Office of Thrift Supervision also could take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
At September 30, 2009,
Home Federal Bank was categorized as “well capitalized” under the prompt
corrective action regulations of the Office of Thrift Supervision with a Tier 1
capital ratio of 19.61%, a total risk-based capital ratio of 34.89%, and a
Tier 1 risk-based capital ratio of 33.57%.
The Office of Thrift Supervision defines “well capitalized” to mean that
an institution has a Tier 1 capital ratio of at least 5.0%, a total risk-based
capital ratio of at least 10.0% and a Tier 1 risk-based capital ratio of at
least 6.0%, and is not subject to a written agreement, order or directive
requiring it to maintain any specific capital measure. An “adequately
capitalized” institution is one that does not meet the definition of “well
capitalized” and has a Tier 1 capital ratio of at least 4.0%, a total risk-based
capital ratio of at least 8.0% and Tier 1 risk-based capital ratio of at least
4.0%. The Office of Thrift Supervision may reclassify an institution
to a lower capital category based on various supervisory criteria. An
“adequately capitalized” institution is subject to restrictions on deposit rates
under the FDIC’s brokered deposit rule which covers, in some circumstances,
deposits solicited directly by the institution.
Qualified
Thrift Lender Test. All savings associations, including Home Federal
Bank, are required to meet a qualified thrift lender (“QTL”) test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its total assets, as defined by regulation,
in qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. As an alternative, the savings association may
maintain 60% of its assets in those assets specified in Section 7701(a)(19) of
the Internal Revenue Code. Under either test, such assets primarily consist of
residential housing related loans and investments.
A savings
association that fails to meet the QTL is subject to certain operating
restrictions and may be required to convert to a bank charter. The holding company of
such an institution may be required to register as, and become subject to the
capital requirement and activities restrictions applicable to, a bank holding
company. As of September 30, 2009, Home Federal Bank maintained 78.25% of
its portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test.
Limitations
on Capital Distributions. Office of Thrift Supervision regulations impose
various restrictions on savings associations with respect to their ability to
make distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. Generally, savings associations, such as Home Federal Bank, that before
and after the proposed distribution are well-
capitalized,
may make capital distributions during any calendar year equal to up to 100% of
net income for the calendar year-to-date plus retained net income for the two
preceding years. However, an institution deemed to be in need of more than
normal supervision by the Office of Thrift Supervision may have its dividend
authority restricted by the Office of Thrift Supervision. Home Federal Bank may
pay dividends to Home Federal Bancorp in accordance with this general
authority.
Savings
associations proposing to make any capital distribution need not submit written
notice to the Office of Thrift Supervision prior to such distribution unless
they are a subsidiary of a holding company or would not remain well-capitalized
following the distribution. Savings associations that do not, or would not meet
their current minimum capital requirements following a proposed capital
distribution or propose to exceed these net income limitations, must obtain
Office of Thrift Supervision approval prior to making such distribution. The
Office of Thrift Supervision may object to the distribution during that 30-day
period based on safety and soundness concerns.
Temporary Liquidity Guarantee
Program. Following a systemic risk determination, the FDIC
established its Temporary Liquidity Guarantee Program (“TLGP”) in October
2008. Under the interim rule for the TLGP, there are two parts to the
program: the Debt Guarantee Program (“DGP”) and the Transaction Account
Guarantee Program (“TAGP”). Eligible entities generally are
participants unless they exercised opt out rights in a timely
fashion.
For the
DGP, eligible entities are generally US bank holding companies, savings and loan
holding companies, and FDIC-insured institutions. Under the DGP, the
FDIC guarantees new senior unsecured debt certain convertible debt of an
eligible entity issued not later than October 31, 2009. Home Federal Bancorp and
Home Federal Bank opted out of the DGP.
For the
TAGP, eligible entities are FDIC-insured institutions. Under the TAGP, the FDIC
provides unlimited deposit insurance coverage for noninterest-bearing
transaction accounts (typically business checking accounts), NOW accounts
bearing interest at 0.50% or less, and certain funds swept into
noninterest-bearing savings accounts. Other NOW accounts and money
market deposit accounts are not covered. TAGP coverage lasts until December 31,
2009 and, unless the participant has opted out of the extension period, during
the extension period of January 1, 2010 through June 30, 2010. Participating
institutions pay fees of 10 basis points (annualized) on the balance of each
covered account in excess of $250,000 during the period through December 31,
2009. During the extension period, such fees are 15 basis points for
institutions in Risk Category I, 20 basis points for those in Risk Category II
and 25 basis points for those in Risk Categories III and IV (Risk Categories are
those assigned for deposit insurance purposes. Home Federal Bank elected to
participate in the TAGP and elected to extend its participation until June 30,
2010.
Activities
of Savings Associations and their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that it controls, the savings association must
notify the FDIC and the Office of Thrift Supervision 30 days in advance and
provide the information each agency may, by regulation, require. Savings
associations also must conduct the activities of subsidiaries in accordance with
existing regulations and orders.
The
Office of Thrift Supervision may determine that the continuation by a savings
association of its ownership control of, or its relationship to, the subsidiary
constitutes a serious risk to the safety, soundness or stability of the
institution or is inconsistent with sound banking practices or with the purposes
of the Federal Deposit Insurance Act. Based upon that determination, the FDIC or
the Office of Thrift Supervision has the authority to order the savings
association to divest itself of control of the subsidiary. The FDIC also may
determine by regulation or order that any specific activity poses a serious
threat to the Depositors Insurance Fund. If so, it may require that no member of
the Depositors Insurance Fund engage in that activity directly.
Transactions
with Affiliates and Insiders. Home Federal Bank’s authority to engage in
transactions with “affiliates” is limited by Office of Thrift Supervision
regulations and by Sections 23A and 23B of the Federal Reserve Act as
implemented by the Federal Reserve Board’s Regulation W. The term “affiliates”
for these purposes generally means any company that controls or is under common
control with an institution. Home Federal Bancorp and its non-savings
association subsidiaries are affiliates of Home Federal Bank. Federally insured savings
associations are subject, with certain exceptions, to restrictions on extensions
of credit to their parent holding companies or other affiliates, on investments
in the stock or other securities of affiliates and on the taking of such stock
or securities as collateral from any borrower. In general, transactions
with affiliates must be on terms that are
as
favorable to the institution as comparable transactions with non-affiliates. In
addition, certain types of transactions are restricted to an aggregate
percentage of the institution’s capital. Collateral in specified amounts must
usually be provided by affiliates in order to receive loans from an institution.
In addition, savings associations are prohibited from lending to any affiliate
that is engaged in activities that are not permissible for bank holding
companies and no savings association may purchase the securities of any
affiliate other than a subsidiary. In addition, these
institutions are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or the providing of any property or
service. An institution deemed to be in “troubled condition” must
file a notice with the OTS and obtain its non-objection to any transaction with
an affiliate (subject to certain exemptions).
The
Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to
its executive officers and directors. However, there is a specific exception for
loans by a depository institution to its executive officers and directors in
compliance with federal banking laws. Under such laws, Home Federal Bank’s
authority to extend credit to executive officers, directors and 10% stockholders
(“insiders”), as well as entities such persons control, is limited. The law
restricts both the individual and aggregate amount of loans Home Federal Bank
may make to insiders based, in part, on Home Federal Bank’s capital position and
requires certain board approval procedures to be followed. Such loans must be
made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. There is an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. There are additional restrictions
applicable to loans to executive officers.
Community
Reinvestment Act. Under the Community Reinvestment Act, every Federal
Deposit Insurance Corporation-insured institution has a continuing and
affirmative obligation consistent with safe and sound banking practices to help
meet the credit needs of its entire community, including low–to-moderate income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the
Community Reinvestment Act. The Community Reinvestment Act requires the Office
of Thrift Supervision, in connection with its examination of Home Federal Bank,
to assess the institution’s record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications,
such as a merger or the establishment of a branch, by Home Federal Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the Office of Thrift Supervision. Due to the heightened attention being given
to the Community Reinvestment Act in the past few years, Home Federal Bank may
be required to devote additional funds for investment and lending in its local
community. Home Federal Bank was examined for Community Reinvestment Act
compliance and received a rating of “Outstanding” in its latest
examination.
Environmental
Issues Associated with Real Estate Lending. The Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”), a federal
statute, generally imposes strict liability on all prior and present “owners and
operators” of sites containing hazardous waste. However, Congress asked to
protect secured creditors by providing that the term “owner and operator”
excludes a person whose ownership is limited to protecting its security interest
in the site. Since the enactment of the CERCLA, this “secured creditor
exemption” has been the subject of judicial interpretations which have left open
the possibility that lenders could be liable for cleanup costs on contaminated
property that they hold as collateral for a loan. To the extent that legal
uncertainty exists in this area, all creditors, including Home Federal Bank,
that have made loans secured by properties with potential hazardous waste
contamination (such as petroleum contamination) could be subject to liability
for cleanup costs, which costs often substantially exceed the value of the
collateral property.
Privacy
Standards. The Gramm-Leach-Bliley Financial Services Modernization Act of
1999 (“GLBA”), modernized the financial services industry by establishing a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms and other financial service providers. Home Federal
Bank is subject to Office of Thrift Supervision regulations implementing the
privacy protection provisions of the GLBA. These regulations require Home
Federal Bank to disclose its privacy policy, including identifying with whom it
shares “non-public personal information,” to customers at the time of
establishing the customer relationship and annually thereafter.
Other Consumer Protection Laws and
Regulations. Home Federal Bank is subject to a broad array of
federal and state consumer protection laws and regulations that govern almost
every aspect of its business relationships with
consumers. While
the list set forth below is not exhaustive, these include the Truth-in-Lending
Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited
Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act,
the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the
Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to
Financial Privacy Act, the Home Ownership and Equity Protection Act, the
Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection
Act, the Check Clearing for the 21st Century Act, laws governing flood
insurance, laws governing consumer protections in connection with the sale of
insurance, federal and state laws prohibiting unfair and deceptive business
practices, and various regulations that implement some or all of the
foregoing. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits, making loans, collecting loans, and
providing other services. Failure to comply with these laws and
regulations can subject Home Federal Bank to various penalties, including but
not limited to, enforcement actions, injunctions, fines, civil liability,
criminal penalties, punitive damages, and the loss of certain contractual
rights.
The
Americans with Disabilities Act requires employers with 15 or more employees and
all businesses operating “commercial facilities” or “public accommodations” to
accommodate disabled employees and customers. The Americans with
Disabilities Act has two major objectives: (i) to prevent discrimination against
disabled job applicants, job candidates and employees, and (ii) to provide
disabled persons with ready access to commercial facilities and public
accommodations. Commercial facilities, such as Home Federal Bank,
must ensure that all new facilities are accessible to disabled persons, and in
some instances may be required to adapt existing facilities to make them
accessible.
Regulation
and Supervision of Home Federal Bancorp
General.
Home Federal
Bancorp, Inc., is a Maryland corporation and the sole shareholder of Home
Federal Bank. Under federal law, Home Federal Bancorp is a nondiversified
unitary savings and loan holding company and is registered with
the Office of Thrift Supervision. Generally, companies like
Home Federal Bancorp that become savings and loan holding companies following
the May 4, 1999 grandfather date in the Gramm-Leach-Bliley Act of 1999 may
engage only in the activities permitted for financial institution holding
companies and
certain activities previously permitted under the law for multiple
savings and loan holding companies.
As a registered savings
and loan holding company, Home Federal Bancorp is required to file
reports with the Office of Thrift Supervision and is subject to regulation and
examination by the Office of Thrift Supervision. In addition, the Office of
Thrift Supervision has examination and enforcement authority over the Company
and any of its non-savings association subsidiaries. This regulatory authority
permits the Office of Thrift Supervision to restrict or prohibit activities that
it determines to be a serious risk to Home Federal Bank and provides protection
of the depositors of Home Federal Bank rather than benefitting the stockholders
of Home Federal Bancorp. Home Federal Bancorp is also subject to the rules and
regulations of the Securities and Exchange Commission under the federal
securities laws.
Acquisition
of Control. Under the federal Change in Bank Control Act and the Savings
and Loan Holding Company Act, a notice or application must be submitted to the
Office of Thrift Supervision if any person (including a company), or group
acting in concert, seeks to acquire “control” of a savings and loan holding
company or savings association. An acquisition of control can occur upon the
acquisition of 10% or more of the voting stock of a savings and loan holding
company or savings association or as otherwise defined by the Office of Thrift
Supervision. In
connection with a proposed acquisition of control, the Office of Thrift
Supervision takes into consideration certain factors, including the financial
and managerial resources of the acquirer and the anti-trust effects of the
acquisition. Any company that acquires control will then be subject to
regulation as a savings and loan holding company.
Restrictions
on Acquisitions. Except under limited circumstances, savings and loan
holding companies are prohibited from acquiring, without prior approval of the
Director of the Office of Thrift Supervision, (1) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof or (2) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company’s stock, may acquire control of any savings association, other than
a subsidiary savings association, subsidiary of such holding
company or of any other savings and loan holding company.
The
Director of the Office of Thrift Supervision may approve acquisitions resulting
in the formation of a multiple savings and loan holding company which controls
savings associations in more than one state if: (1) the multiple savings and
loan holding company involved controls a savings association which operated a
home or branch office located in the state of the institution to be acquired as
of March 5, 1987; (2) the acquirer is authorized to acquire control of the
savings association
or to operate a home or branch office in the relevant additional state or states
pursuant to the emergency acquisition provisions of the Federal Deposit
Insurance Act; or (3) the statutes of the state in which the institution to be
acquired is located specifically permits a savings
association chartered by such state to be acquired by a savings association
chartered by the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings
associations).
Federal
Securities Laws. Home Federal Bancorp’s common stock is registered with
the Securities and Exchange Commission under Section 12(b) of the Securities
Exchange Act of 1934, as amended, and is subject to information, proxy
solicitation, insider trading restrictions and other requirements under the
Securities Exchange Act of 1934.
Sarbanes-Oxley
Act of 2002. Home Federal Bancorp, as a public company, is subject to the
Sarbanes-Oxley Act of 2002. Sarbanes Oxley implements a broad range of corporate
governance and accounting measures for public companies designed to promote
honesty and transparency in corporate America and better protect investors from
corporate wrongdoing. The Sarbanes-Oxley Act of 2002 was signed into law by
President Bush on July 30, 2002, in response to public concerns regarding
corporate accountability in connection with several accounting scandals. The
stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility,
to provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities
laws.
TAXATION
Federal
Taxation
General. The Company is
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to the Company.
Because
the Company owns 100% of the issued and outstanding capital stock of the Bank,
the Company and the Bank are members of an affiliated group within the meaning
of Section 1504(a) of the Internal Revenue Code, of which group the Company is
the common parent corporation. As a result of this affiliation, the Bank is
included in the filing of a consolidated federal income tax return with the
Company. The parties agree to compensate each other for their individual share
of the consolidated tax liability and/or any tax benefits provided by them in
the filing of the consolidated federal income tax return.
Method
of Accounting. For federal income tax purposes, the Company currently
reports its income and expenses on the accrual method of accounting and uses a
fiscal year ending on September 30 for filing its federal income tax
return.
Minimum
Tax. The Internal Revenue Code imposes an alternative minimum tax at a
rate of 20% on a base of regular taxable income plus certain tax preferences,
called alternative minimum taxable income. The alternative minimum tax is
payable to the extent such alternative minimum taxable income is in excess of an
exemption amount. Net operating losses can offset no more than 90% of
alternative minimum taxable income. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years. Home
Federal Bank has not been subject to the alternative minimum tax, nor does it
have any such amounts available as credits for carryover.
Net
Operating Loss Carryovers. At September 30, 2009, Home Federal Bank had
no net operating loss carryforwards or carrybacks for federal income tax
purposes.
Corporate
Dividends-Received Deduction. Home Federal Bancorp may eliminate from its
income dividends received from Home Federal Bank as a wholly-owned subsidiary of
new Home Federal Bancorp if it elects to file a consolidated return with Home
Federal Bank. The corporate dividends-received deduction is 100%, or 80%, in the
case of dividends received from corporations with which a corporate recipient
does not file a consolidated tax return, depending on the level of stock
ownership of the payer of the dividend. Corporations which own less than 20% of
the stock of a corporation distributing a dividend may deduct 70% of dividends
received or accrued on their behalf.
State
Taxation
Home
Federal Bancorp and Home Federal Bank are subject to the general corporate tax
provisions of the states of Oregon and Idaho. State corporate income taxes are
generally determined under federal tax law with some modifications. Taxable
income is taxed at a rate of 7.6% and 6.6% in Idaho and Oregon, respectively.
These taxes are reduced by certain credits, primarily the Idaho investment tax
credit in the case of Home Federal Bank.
Home
Federal Bancorp also is subject to the corporate tax provisions of the state of
Maryland.
EXECUTIVE OFFICERS OF THE
REGISTRANT
The
following table sets forth certain information with respect to the executive
officers of the Company and the Bank.
Name
|
Age
as of
September
30,
2009
|
Position
|
Company
|
Bank
|
|
|
|
|
Len
E. Williams
|
50
|
Director,
President and Chief Executive Officer
|
Director,
President and Chief
Executive
Officer
|
|
|
|
|
Eric
S. Nadeau
|
38
|
Executive
Vice President,
Treasurer,
Secretary, and Chief
Financial
Officer
|
Executive
Vice President, Treasurer,
Secretary,
and Chief Financial
Officer
|
|
|
|
|
Steven
K. Eyre
|
48
|
--
|
President
– Oregon Region
|
|
|
|
|
Steven
E. Emerson
|
39
|
--
|
Executive
Vice President,
Commercial
Banking Team Lead –
Idaho
Region
|
|
|
|
|
Cindy
L. Bateman
|
48
|
--
|
Senior
Vice President and Chief Credit
Officer
|
The
business experience of each executive officer for at least the past five years
is set forth below.
Len E. Williams joined Home
Federal Bank as President in September 2006 and was appointed as a director of
Home Federal Bank and Home Federal Bancorp in April 2007. Mr.
Williams was appointed Chief Executive Officer of the bank and President and
Chief Executive Officer of the Company in January 2008. Mr. Williams
has over 30 years of commercial banking experience serving in many regional and
national leadership roles. Prior to joining Home Federal Bank, Mr. Williams was
Senior Vice President and Head of Business Banking with Fifth Third Bank. He was
charged with creating and growing the business line and providing leadership
over the company’s business banking personnel, processes and products. From 1987
to 2005, he held several management positions with Key Bank, including President
of Business Banking from 2003 to 2005 and President of the Colorado District
from 1999 to 2003. His prior experience includes regional corporate and
commercial banking leadership responsibility. Mr. Williams is a member of the
Board of Directors of the Boise Metro Chamber of Commerce and has served as
chairman of Junior Achievement and Boys and Girls Clubs. Mr. Williams holds an
M.B.A. from the University of Washington and is a graduate of the Pacific Coast
Banking School.
Eric S. Nadeau joined the
Company in June 2008 as Executive Vice President, Treasurer, Corporate Secretary
and Chief Financial Officer of Home Federal Bancorp, Inc., and Home Federal
Bank. He was most recently employed by Camco Financial Corporation in Cambridge,
Ohio, as its Chief Financial Officer. From January 2003 until February 2006 he
was the Chief Financial Officer of Ohio Legacy Corp, and its subsidiary, Ohio
Legacy Bank, N.A. His previous experience includes financial management
positions with telecommunications and construction equipment companies. Mr.
Nadeau was employed by Crowe Horwath from 1993 to 1998 where he provided audit,
tax and consulting services to financial institutions in the Midwest. Mr. Nadeau
is a certified public accountant and received his Bachelor of Science in
Business Administration from the Richard T. Farmer School of Business at Miami
University in Oxford, Ohio.
Steven
D. Emerson is Executive Vice President and Commercial Banking Team Lead
for the Idaho Region of Home Federal Bank. Mr. Emerson joined Home Federal Bank
as Senior Vice President and Chief Lending Officer on December 1, 2006. He has
over 17 years of experience in commercial banking primarily in the Treasure
Valley. He previously served as Vice President and Senior Commercial
Lender for Farmers and Merchants Bank, a former local community bank, during
2006. Prior to his employment with Farmers and Merchants Bank, Mr. Emerson
served in several positions with Key Bank from 2000 to 2006, including President
of the Cincinnati, Ohio market. Mr. Emerson holds an M.B.A. from Northwest
Nazarene University. Mr. Emerson has been active with the Better
Business Bureau, Certified Development Company, Boise Kiwanis and the March of
Dimes.
Steven
K. Eyre has
been the President of the Central Oregon Region of Home Federal Bank since
October 2009. Mr. Eyre was Executive Vice President/Consumer Banking of Home
Federal Bank until his appointment in October 2009. Mr. Eyre previously served
as Market Executive, Business Banking, for Bank of America in upstate New
York, and has more than 25 years of banking experience. From 1987 to 2006, he
held several management positions with Key Bank in Salt Lake City, UT, and
Albany, New York, including Regional Executive, Consumer Banking from 2003 to
2006 in Albany, New York. Mr. Eyre holds a Bachelor of Arts in Finance from the
University of Utah and is a graduate of the Pacific Coast Banking School. Mr.
Eyre is active with the Boy Scouts of America and is a former Board of Trustee
member of the Utah Bankers Association.
Cindy
L. Bateman is Senior Vice President and Chief Credit Officer of Home
Federal Bank. Ms. Bateman joined Home Federal Bank in March 2007. Ms Bateman was
previously employed by Key Bank from 2002 until 2007 having served as Senior
Vice President and District Business Leader. Having started her career with
First Security Bank of Idaho in 1983 in the Management Training program, she has
held various positions in Credit Administration and Commercial and Business
Banking. Ms. Bateman holds a B.B.A. in Finance from Idaho State University and
an M.B.A. from the University of Washington. She currently serves as President
for the Idaho Shakespeare Festival and formerly served as a director of
Financial Women International.
Item 1A. Risk
Factors
Our
business, and an investment in our common stock, involves risks. Summarized
below are the risk factors which we believe are material to our business and
could negatively affect our operating results, financial condition and the
trading value of our common stock. Other risks factors, not currently known to
us, or that we currently deem to be immaterial or unlikely, also could adversely
affect our business. In assessing the following risk factors, you should also
refer to the other information contained in this Annual Report on Form 10-K and
our other filings with the Securities and Exchange Commission.
The
current economic recession in the market areas we serve may continue to
adversely impact our earnings and could increase the credit risk associated with
our loan portfolio.
Substantially
all of our loans are to businesses and individuals in the states of Idaho and
Oregon. A continuing decline in the economies of the markets in which we
operate, could have a material adverse effect on our business, financial
condition, results of operations and prospects. In particular, Idaho
and Oregon have experienced substantial home price declines and increased
foreclosures and have experienced above average unemployment rates.
A further
deterioration in economic conditions in the market areas we serve could result
in the following consequences, any of which could have a materially adverse
impact on our business, financial condition and results of
operations:
§
|
loan
delinquencies, problem assets and foreclosures may
increase;
|
§
|
demand
for our products and services may
decline;
|
§
|
collateral
for loans made may decline further in value, in turn reducing customers’
borrowing power, reducing the value of assets and collateral associated
with existing loans; and
|
§
|
the
amount of our low-cost or non-interest bearing deposits may
decrease.
|
Negative
developments in the financial industry and credit markets may continue to
adversely impact our financial condition and results of operations.
Negative
developments beginning in the latter half of 2007 in the sub-prime mortgage
market and the securitization markets for such loans, together with the general
economic downturn, have resulted in uncertainty in the financial markets and a
general economic downturn. In addition, as a consequence of the recession in the
United States, business activity across a wide range of industries face serious
difficulties due to the lack of consumer spending and the extreme lack of
liquidity in the global credit markets. Unemployment has also increased
significantly. As a result of these economic crises, many lending institutions,
including us, have experienced increases in delinquent and nonperforming loans,
including construction and land loans, multifamily loans, commercial loans and
consumer loans. Moreover, competition among depository institutions for deposits
and quality loans has increased significantly. In addition, the values of real
estate collateral supporting many loans have declined and may continue to
decline. Bank and holding company stock prices have been negatively affected, as
has the ability of banks and holding companies to raise capital or borrow in the
debt markets compared to recent years. These conditions may have a material
adverse effect on our financial condition and results of operations. In
addition, as a result of the foregoing factors, there is a potential for new
federal or state laws and regulations regarding lending and funding practices
and liquidity standards, and bank regulatory agencies have been very aggressive
in responding to concerns and trends identified in examinations, including the
expected issuance of formal enforcement orders. In this regard, the U.S.
Department of the Treasury (the "U.S. Treasury") has announced that more
rigorous regulatory capital and liquidity standards for banks should be
established by December 31, 2010 and implemented by December 31, 2012,
but no specific measures have yet been published.
Continued
negative developments in the financial industry and the impact of new
legislation in response to those developments could restrict our business
operations, including our ability to originate or sell loans, and may adversely
impact our results of operations and financial condition. Overall, during the
past year, the general business environment has had a negative effect on our
business, and there can be no assurance that the environment will improve in the
near term. Until there is a sustained improvement in conditions, we expect our
business, financial condition and results of operations to be negatively
affected.
Legislation
and measures undertaken by the Treasury, the Federal Reserve and other
governmental agencies to help stabilize the U.S. financial system or improve the
housing market may not be successful.
On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (the “EESA”), which, among other measures, authorized
the Treasury Secretary to establish the Troubled Asset Relief Program (“TARP”).
EESA gives broad authority to the Treasury Department to purchase, manage,
modify, sell and insure the troubled mortgage related assets that triggered the
current economic crisis as well as other “troubled assets.”
Pursuant
to the TARP, the Treasury Department has the authority to, among other things,
invest up to $700 billion through a capital purchase program, pursuant to which
may provide access to capital to financial institutions. This program may be
extended to other nonfinancial companies. We did not apply for
government assistance through the
Capital
Purchase Program under the U.S. Treasury Department’s TARP. We believe our high
capital level and liquid balance sheet provides us flexibility in today's
environment to execute our growth plans without TARP capital.
EESA
followed, and has been followed by, numerous actions by the Federal Reserve,
Congress, Treasury, the SEC and others to address the current liquidity and
credit crisis that has followed the sub-prime meltdown that commenced in 2007.
These measures include homeowner relief that encourage loan restructuring and
modification; the establishment of significant liquidity and credit facilities
for financial institutions and investment banks; the lowering of the federal
funds rate to a target of 0.00% to 0.25%; action against short selling
practices; a temporary guaranty program for money market funds; the
establishment of a commercial paper funding facility to provide back-stop
liquidity to commercial paper issuers; and coordinated international efforts to
address illiquidity and other weaknesses in the banking sector.
In
addition, in early 2009, the U.S. Treasury announced its Financial Stability
Plan to ameliorate the current credit crisis, and President Obama signed into
law the American Recovery and Reinvestment Act (the "ARRA").
The
purpose of these legislative and regulatory actions is to stabilize the U.S.
banking system, improve the flow of credit and foster an economic
recovery. The regulatory and legislative initiatives described above,
however, may not have their desired effects. If market volatility resumes or
economic conditions fail to improve or worsen, our business, financial condition
and results of operations could be materially and negatively
affected.
Our
business strategy includes significant growth plans, and our financial condition
and results of operations could be negatively affected if we fail to grow or
fail to manage our growth effectively.
We intend
to continue pursuing a significant growth strategy for our business, including
FDIC-assisted acquisitions of failed financial institutions. Our growth
initiatives are based upon recruiting experienced personnel to lead such
initiatives, and, accordingly, the failure to identify and retain such personnel
would place significant limitations on our ability to execute our growth
strategy. In addition, achieving our growth targets requires us to attract
customers that currently have banking relationships with other financial
institutions in our market, thereby increasing our share of the market. To the
extent we expand our lending beyond our current market area, we could incur
additional risk related to those new market areas. We cannot assure that we will
be able to expand our market presence in our existing markets or successfully
enter new markets or that any such expansion will not adversely affect our
profitability. If we do not manage our growth effectively, we may not be able to
achieve our business plan, and our business, profitability and prospects could
be harmed. Also, if our growth occurs more slowly than anticipated or declines,
our profitability could be materially adversely affected.
Our
ability to successfully grow will depend on a variety of factors, including our
ability to attract and retain experienced bankers, the continued availability of
desirable business opportunities, the competitive responses from other financial
institutions in our market area and our ability to manage our growth. In this
regard, future growth opportunities may not be available or we might not
successfully manage our growth.
We
are highly dependent on key individuals and a number of the members of executive
and senior management have been with the Company for less than three
years.
Consistent
with our policy of focusing on select growth initiatives we are highly dependent
on the continued services of a limited number of our executive officers and key
management personnel. The loss of services of any of these individuals may have
a material adverse impact on our operations because other officers may not have
the experience and expertise to readily replace these individuals.
We
believe we have in place qualified individuals and have provided for an orderly
transition. Changes in key personnel and their responsibilities may be
disruptive to our business and could have a material adverse effect on our
business, financial condition and profitability. Moreover, our anticipated
growth is expected to place increased demands on our human resources and will
require the recruitment of additional middle management personnel. The
competition to hire experienced banking professionals is also intense. If we are
unable to attract qualified banking professionals, our expansion plans could be
delayed or curtailed and our business, financial condition, and profitability
may be adversely affected.
Fluctuations
in interest rates could reduce our profitability and affect the value of our
assets.
Like
other financial institutions, we are subject to interest rate risk. Our primary
source of income is net interest income, which is the difference between
interest earned on loans and investments and the interest paid on deposits and
borrowings. We expect that we will periodically experience imbalances in the
interest rate sensitivities of our assets and liabilities and the relationships
of various interest rates to each other. Over any defined period of time, our
interest-earning assets may be more sensitive to changes in market interest
rates than our interest-bearing liabilities, or vice versa. In addition, the
individual market interest rates underlying our loan and deposit products (e.g.,
the Wall Street Journal Prime rate) may not change to the same degree over a
given time period. In any event, if market interest rates should move contrary
to our position, our earnings may be negatively affected. In addition, loan
volume and quality and deposit volume and mix can be affected by market interest
rates. Changes in levels of market interest rates could materially affect our
net interest spread, asset quality, origination volume, and overall
profitability.
We
principally manage interest rate risk by managing our volume and mix of our
earning assets and funding liabilities. In a changing interest rate environment,
we may not be able to manage this risk effectively. If we are unable to manage
interest rate risk effectively, our business, financial condition and results of
operations could be materially harmed.
Our
business is subject to various lending risks which could adversely impact our
results of operations and financial condition.
Our
business strategy centers on the continued transition to commercial banking
activities in order to expand our net interest margin. Consistent with this
strategy, we are working to further reduce the percentage of our lower-yielding
assets such as residential loans and mortgage-backed securities and to increase
the percentage of our assets consisting of construction and land development,
commercial and multi-family real estate and commercial business loans that have
higher risk-adjusted returns. Our increasing focus on these types of lending
will continue to increase our risk profile relative to traditional thrift
institutions as we continue to implement our business strategy for the following
reasons:
Our loan portfolio possesses
increased risk due to our increasing percentage of commercial real estate and
commercial business loans.
At
September 30, 2009, our loan portfolio included $254.0 million of commercial and
multifamily real estate loans and commercial business loans, or approximately
47.0% of our total loan portfolio. We have been increasing, and
intend to continue to increase, our origination of these types of loans in
fiscal 2010. The credit risk related to these types of loans is
considered to be greater than the risk related to one-to-four family residential
loans because the repayment of commercial real estate loans and commercial
business loans typically is dependent on the successful operations and income
stream of the borrowers’ business and the real estate securing the loans as
collateral, which can be significantly affected by economic
conditions. Some of this risk is mitigated by the fact that
approximately $86.2 million, or 33.9%, of $254.0 million of commercial and
multifamily real estate loans and commercial business loans are loans that we
acquired in the Community First Bank transaction and are covered by our
loss-sharing agreement with the FDIC for that transaction.
Several
of our borrowers have more than one commercial real estate loan outstanding with
us. Consequently, an adverse development with respect to one loan or one credit
relationship can expose us to significantly greater risk of loss compared to an
adverse development with respect to a one-to-four family residential
mortgage loan. Finally, if we foreclose on a commercial real estate
loan, our holding period for the collateral, if any, typically is longer than
for one-to-four family residential mortgage loan because there are fewer
potential purchasers of the collateral. Since we plan to continue to
increase our originations of these loans, it may be necessary to increase the
level of our allowance for loan losses due to the increased risk characteristics
associated with these types of loans. Any increase to our allowance
for loan losses would adversely affect our
earnings. In addition, these loans
generally carry
larger balances to
single borrowers or related groups
of borrowers than
one-to-four family loans. Any delinquent payments or
the failure to repay these loans would hurt our earnings.
A
large percentage of our loan portfolio is secured by real estate, in particular
commercial real estate. Continued deterioration in the real estate
markets or other segments of our loan portfolio could lead to additional losses,
which could have a material negative effect on our financial condition and
results of operations.
As a
result of increased levels of residential and commercial delinquencies and
declining real estate values, which reduce the customer's borrowing power and
the value of the collateral securing the loan, we have experienced increasing
levels of charge-offs and provisions for loan losses. Continued increases in
delinquency levels or continued declines in real estate values, which cause our
loan-to-value ratios to increase, could result in additional charge-offs and
provisions for loan losses. This could have a material negative effect on our
business and results of operations.
Our construction loans are based upon
estimates of costs and value associated with the complete project. These
estimates may be inaccurate.
We make
land purchase, lot development and real estate construction loans to individuals
and builders, primarily for the construction of residential properties and, to a
lesser extent, commercial and multi-family real estate projects. We will
originate these loans whether or not the collateral property underlying the loan
is under contract for sale. Residential real estate construction loans include
single-family tract construction loans for the construction of entry level
residential homes.
Construction
lending can involve a higher level of risk than other types of lending because
funds are advanced partially based upon the value of the project, which is
uncertain prior to the project's completion. Because of the uncertainties
inherent in estimating construction costs as well as the market value of a
completed project and the effects of governmental regulation of real property,
our estimates with regards to the total funds required to complete a project and
the related loan-to-value ratio may vary from actual results. As a result,
construction loans often involve the disbursement of substantial funds with
repayment dependent, in part, on the success of the ultimate project and the
ability of the borrower to sell or lease the property or refinance the
indebtedness. This risk has been compounded by the current slowdown
in both the residential and the commercial real estate markets, which has
negatively affected real estate values and the ability of our borrowers to
liquidate properties or obtain adequate refinancing. If our estimate
of the value of a project at completion proves to be overstated, we may have
inadequate security for repayment of the loan and we may incur a
loss.
Repayment of our commercial loans is
often dependent on the cash flows of the borrower, which may be unpredictable,
and the collateral securing these loans may fluctuate in
value.
We make
our commercial loans primarily based on the identified cash flow of the borrower
and secondarily on the underlying collateral provided by the borrower.
Collateral securing commercial loans may depreciate over time, be difficult to
appraise and fluctuate in value. In addition, in the case of loans secured by
accounts receivable, the availability of funds for the repayment of these loans
may be substantially dependent on the ability of the borrower to collect the
amounts due from its customers. Accordingly, we make our commercial loans
primarily based on the historical and expected cash flow of the borrower and
secondarily on underlying collateral provided by the borrower.
Because
our loans are concentrated to borrowers in our market area, a downturn in the
local economy or a decline in local real estate values could cause increases in
nonperforming loans, which could hurt our profits.
The
majority of our borrowers and depositors are individuals and businesses located
and doing business in the Boise, Idaho and Bend, Oregon, metropolitan areas and
surrounding rural markets. Adverse economic conditions in our market area could
reduce our growth rate, affect the ability of our customers to repay their loans
and generally affect our financial condition and results of operations.
Conditions such as inflation, recession, unemployment, high interest rates,
short money supply, scarce natural resources, international disorders, terrorism
and other factors beyond our control may adversely affect our profitability. We
do not have the ability of a larger institution to spread
the risks
of unfavorable local economic conditions across a large number of diversified
economies. Any sustained period of increased payment delinquencies, foreclosures
or losses caused by adverse economic conditions in our markets could adversely
affect the value of our assets, revenues, profitability and financial condition.
Moreover, we may not benefit from any market growth or favorable economic
conditions in our primary market areas if they do occur.
If
the value of real estate in our market areas continue to decline, a significant
portion of our loan portfolio could become under-collateralized, which could
have a material adverse effect on Home Federal Bank.
The
United States, including our primary banking markets, have experienced weakening
economic conditions and declines in housing prices and real estate values in
general. Our loan portfolio contains significant amounts of loans secured by
residential and commercial real estate. We have experienced increases
in non-performing assets, net charge-offs and provisions for credit losses as a
result of continuing deterioration of the housing markets, increasing financial
stress on consumers and weakening economic conditions. We expect
continued economic weakness for most of calendar years 2009 and
2010. This environment could lead to increased levels of
non-performing assets, net charge-offs and provision for credit losses compared
to previous periods.
Substantially
all of our loans secured by real property and concentrated in southwestern Idaho
and central Oregon. A continued decline in local economic conditions could
adversely affect the values of our real estate collateral. As a result, we have
a greater risk of loan defaults and losses in the event of an economic downturn
in our market area as adverse economic changes may have a negative effect on the
ability of our borrowers to make timely repayment of their loans. Consequently,
a decline in local economic conditions may have a greater effect on our earnings
and capital than on the earnings and capital of larger financial institutions
whose real estate loan portfolios are geographically diverse. If we are required
to liquidate a significant amount of collateral during a period of reduced real
estate values to satisfy the debt, our financial condition and profitability
could be adversely affected.
If
our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings and capital levels could be reduced.
We make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans. In determining the amount of the allowance for loan losses, we review
our loans and our loss and delinquency experience, and evaluate economic
conditions. Management recognizes that significant new growth in loan
portfolios, new loan products and the refinancing of existing loans can result
in portfolios comprised of unseasoned loans that may not perform in a historical
or projected manner. If our assumptions are incorrect, our allowance for loan
losses may not be sufficient to cover actual losses, resulting in additions to
our allowance. Material additions to our allowance could materially decrease our
net income. In addition, bank regulators periodically review our allowance for
loan losses and may require us to increase our provision for loan losses or
recognize additional loan charge-offs. Any increase in our allowance for loan
losses or loan charge-offs as required by these regulatory authorities could
have a material adverse effect on our financial condition and
profitability.
Although we believe
that our underwriting criteria are appropriate for the various kinds of loans we
make, we may incur losses on loans that meet our underwriting criteria, and
these losses may exceed the amounts set aside as reserves in our allowance for
loan losses.
The
weakened housing market may result in a decline in fair value of
REO.
In recent
months we have foreclosed on certain real estate development and commercial real
estate loans and have taken possession of several residential subdivision
properties as well as single family residential properties. REO is initially
recorded at its estimated fair value less costs to sell. Because of the weak
housing market and declining property values, we may incur losses to write-down
REO to new fair values or losses from the final sale of properties. Moreover,
our ability to sell REO properties is affected by public perception that banks
are inclined to
accept
large discounts from market value to quickly liquidate properties. Write-downs
on REO or an inability to sell REO properties will have a material adverse
effect on our results of operations and financial condition.
We
are subject to extensive regulation which could adversely affect our
business.
Our
operations are subject to extensive regulation by federal, state and local
governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of our operations. Because our business is highly regulated, the laws, rules and
regulations applicable to it are subject to regular modification and change.
Regulatory authorities have extensive discretion in their supervisory and
enforcement activities, including the imposition of restrictions on our
operations, the classification of our assets and determination of the level of
our allowance for loan losses. Any change in this regulation and oversight,
whether in the form of regulatory policy, regulations, legislation or
supervisory action, may have a material impact on our operations or otherwise
materially and adversely affect our business, financial condition, prospects or
profitability.
Our
federal thrift charter may be eliminated under the federal government’s
Financial Regulatory Reform Plan. Congress has proposed legislation
that would significantly change the regulation of banks and thrifts, including
the consolidation of the Office of the Comptroller of the Currency, which
currently charters and supervises nationally chartered banks, and the Office of
Thrift Supervision, which supervises federally chartered thrift and thrift
holding companies, such as Home Federal Bancorp, Inc., and Home Federal
Bank. In addition, under the legislative proposal, the thrift
charter, under which Home Federal Bank is organized, would be
eliminated. If the proposal is finalized, Home Federal Bank and Home
Federal Bancorp, Inc. may be subject to a new charter. There is no
assurance as to how this new charter, or the supervision by the new regulatory
agency, will affect our operations going forward.
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.
The FHLB
of Seattle announced that it did not meet minimum regulatory capital
requirements for the quarter ended September 30, 2009 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
September 30, 2009, we held $10.3 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
September 30, 2009, we held $31.2 million 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, in a correspondent bank account or
on hand in branch office vaults.
At
September 30, 2009, 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 September 30, 2009, we
were in compliance with collateral requirements and $134.4 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.
Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition, growth and prospects.
Liquidity
is essential to our business. An inability to raise funds through deposits,
borrowings, the sale of loans and other sources could have a substantial
negative effect on our liquidity. We rely on customer deposits and advances from
the FHLB of Seattle (“FHLB”), the Federal Reserve Bank of San Francisco ("FRB")
and other borrowings to fund our operations. Although we have historically been
able to replace maturing deposits and advances if desired, we may not be able to
replace such funds in the future if, among other things, our financial
condition, the financial condition of the FHLB or FRB, or market conditions
change. Our access to funding sources in amounts adequate to finance our
activities or the terms of which are acceptable could be impaired by factors
that affect us specifically or the financial services industry or economy in
general - such as a disruption in the financial markets or negative views and
expectations about the prospects for the financial services industry in light of
the recent turmoil faced by banking organizations and the continued
deterioration in credit markets. Factors that could detrimentally impact our
access to liquidity sources include a decrease in the level of our business
activity as a result of a downturn in the Idaho or Oregon markets where our
loans are concentrated or adverse regulatory action against us.
Our
financial flexibility will be severely constrained if we are unable to maintain
our access to funding or if adequate financing is not available to accommodate
future growth at acceptable interest rates. Although we consider our sources of
funds adequate for our liquidity needs, we may seek additional debt in the
future to achieve our long-term business objectives. Additional borrowings, if
sought, may not be available to us or, if available, may not be available on
reasonable terms. If additional financing sources are unavailable, or are not
available on reasonable terms, our financial condition, results of operations,
growth and future prospects could be materially adversely
affected. Finally, if we are required to rely more heavily on more
expensive funding sources to support future growth, our revenues may not
increase proportionately to cover our costs.
Concern
of customers over deposit insurance may cause a decrease in deposits at the
Bank.
With
recent increased concerns about bank failures, customers increasingly are
concerned about the extent to which their deposits are insured by the FDIC.
Additionally, the Deposit Insurance Fund has been depleted due to the rise in
bank failures in 2009. While the FDIC has access to a line of credit with the
U.S. Treasury Department and has recently assessed a prepayment requirement of
2010, 2011 and 2012 annual deposit insurance premiums on financial institutions,
customers may withdraw deposits from the Bank in an effort to ensure that the
amount they have on deposit at the Bank is fully insured. Decreases in deposits
may adversely affect our funding costs and net income.
Increases
in deposit insurance premiums and special FDIC assessments will hurt
our earnings.
Beginning
in late 2008, the economic environment caused higher levels of bank failures,
which dramatically increased FDIC resolution costs and led to a significant
reduction in the Deposit Insurance Fund. As a result, the FDIC has significantly
increased the initial base assessment rates paid by financial institutions for
deposit insurance. The base assessment rate was increased by seven basis points
(seven cents for every $100 of deposits) for the first quarter of 2009.
Effective April 1, 2009, initial base assessment rates were changed to
range from 12 basis points to 45 basis points across all risk categories with
possible adjustments to these rates based on certain debt-related components.
These increases in the base assessment rate have increased our deposit insurance
costs and negatively impacted our earnings. In addition, in May 2009, the FDIC
imposed a special assessment on all insured institutions due to recent bank and
savings association failures. The emergency assessment amounts to five basis
points on each institution’s assets minus Tier 1 capital as of June 30,
2009, subject to a maximum equal to 10 basis points times the institution’s
assessment base.
In
addition, the FDIC may impose additional emergency special assessments, of up to
five basis points per quarter on each institution’s assets minus Tier 1
capital if necessary to maintain public confidence in federal deposit
insurance or as a result of deterioration in the Deposit Insurance Fund reserve
ratio due to institution failures. The latest date possible for imposing any
such additional special assessment is December 31, 2009, with collection on
March 30, 2010. Any additional emergency special assessment imposed by the
FDIC will hurt our earnings. Additionally, as a potential alternative
to special assessments, in September 2009, the FDIC proposed a rule that would
require financial institutions to prepay its estimated quarterly risk-based
assessment for the fourth quarter of
2009 and
for all of 2010, 2011 and 2012. This proposal would not immediately
impact our earnings as the payment would be expensed over time.
We
operate in a highly regulated environment and may be adversely affected by
changes in laws and regulations, including changes that may restrict our ability
to foreclose on single-family home loans and offer overdraft
protection.
We are
subject to extensive examination, supervision and comprehensive regulation by
the OTS and the FDIC. Banking regulations are primarily intended to protect
depositors' funds, federal deposit insurance funds, and the banking system as a
whole, and not holders of our common stock. These regulations affect our lending
practices, capital structure, investment practices, dividend policy, and growth,
among other things. Congress and federal regulatory agencies continually review
banking laws, regulations, and policies for possible changes. Changes to
statutes, regulations, or regulatory policies, including changes in
interpretation or implementation of statutes, regulations, or policies, could
affect us in substantial and unpredictable ways. Such changes could subject us
to additional costs, limit the types of financial services and products we may
offer, restrict mergers and acquisitions, investments, access to capital, the
location of banking offices, and/or increase the ability of non-banks to offer
competing financial services and products, among other things. Failure to comply
with laws, regulations or policies could result in sanctions by regulatory
agencies, civil money penalties and/or reputational damage, which could have a
material adverse effect on our business, financial condition and results of
operations. While we have policies and procedures designed to prevent any such
violations, there can be no assurance that such violations will not
occur.
New
legislation proposed by Congress may give bankruptcy courts the power to reduce
the increasing number of home foreclosures by giving bankruptcy judges the
authority to restructure mortgages and reduce a borrower’s payments. Property
owners would be allowed to keep their property while working out their debts.
Other similar
bills placing additional temporary moratoriums on foreclosure sales or otherwise
modifying foreclosure procedures to the benefit of borrowers and the detriment
of lenders may be enacted by either Congress or the States of Idaho and Oregon
in the future. These laws may further restrict our collection efforts on
one-to-four single-family loans. Additional legislation proposed or under
consideration in Congress would give current debit and credit card holders the
chance to opt out of an overdraft protection program and limit overdraft fees
which could result in additional operational costs and a reduction in our
non-interest income.
Further,
our regulators have significant discretion and authority to prevent or remedy
unsafe or unsound practices or violations of laws by financial institutions and
holding companies in the performance of their supervisory and enforcement
duties. In this regard, banking regulators are considering additional
regulations governing compensation which may adversely affect our ability to
attract and retain employees. On June 17, 2009, the Obama Administration
published a comprehensive regulatory reform plan that is intended to modernize
and protect the integrity of the United States financial system. The President’s
plan contains several elements that would have a direct effect on Home Federal
Bancorp and Home Federal Bank. Under the reform plan, the federal thrift charter
and the OTS would be eliminated and all companies that control an insured
depository institution must register as a bank holding company. Draft
legislation would require Home Federal Bank to become a national bank or adopt a
state charter and require Home Federal Bancorp to register as a bank holding
company. Registration as a bank holding company would represent a significant
change as significant differences currently exist between savings and loan
holding company and bank holding company supervision and regulation. For
example, the Federal Reserve imposes leverage and risk-based capital
requirements on bank holding companies whereas the OTS does not impose any
capital requirements on savings and loan holding companies. The reform plan also
proposes the creation of a new federal agency, the Consumer Financial Protection
Agency that would be dedicated to protecting consumers in the financial products
and services market. The creation of this agency could result in new regulatory
requirements and raise the cost of regulatory compliance. In addition,
legislation stemming from the reform plan could require changes in regulatory
capital requirements and compensation practices. If implemented, the
foregoing regulatory reforms may have a material impact on our operations.
However, because the legislation needed to implement the President’s reform plan
has not been introduced, and because the final legislation may differ
significantly from the legislation proposed by the Administration, we
cannot determine the specific impact of regulatory reform at this
time.
Our
litigation related costs might continue to increase.
The Bank
is subject to a variety of legal proceedings that have arisen in the ordinary
course of the Bank’s business. In the current economic environment the Bank’s
involvement in litigation has increased significantly, primarily as a result of
defaulted borrowers asserting claims in order to defeat or delay foreclosure
proceedings. The Bank believes that it has meritorious defenses in legal actions
where it has been named as a defendant and is vigorously defending these suits.
Although management, based on discussion with litigation counsel, believes that
such proceedings will not have a material adverse effect on the financial
condition or operations of the Bank, there can be no assurance that a resolution
of any such legal matters will not result in significant liability to the Bank
nor have a material adverse impact on its financial condition and results of
operations or the Bank’s ability to meet applicable regulatory requirements.
Moreover, the expenses of pending legal proceedings will adversely affect the
Bank’s results of operations until they are resolved. There can be no assurance
that the Bank’s loan workout and other activities will not expose the Bank to
additional legal actions, including lender liability or environmental
claims.
We
face strong competition from other financial institutions, financial service
companies and other organizations offering services similar to those offered by
us, which could limit our growth and profitability.
We face
direct competition from a significant number of financial institutions, many
with a state-wide or regional presence, and in some cases a national presence,
in both originating loans and attracting deposits. Competition in originating
loans comes primarily from other banks, mortgage companies and consumer finance
institutions that make loans in our primary market areas. We also face
substantial competition in attracting deposits from other banking institutions,
money market and mutual funds, credit unions and other investment
vehicles.
In
addition, banks with larger capitalization and non-bank financial institutions
that are not governed by bank regulatory restrictions have large lending limits
and are better able to serve the needs of larger customers. Many of these
financial institutions are also significantly larger and have greater financial
resources than us, have been in business for a long period of time and have
established customer bases and name recognition.
We
compete for loans principally on the basis of interest rates and loan fees, the
types of loans we originate and the quality of service we provide to borrowers.
Our ability to attract and retain deposits requires that we provide customers
with competitive investment opportunities with respect to rate of return,
liquidity, risk and other factors. To effectively compete, we may have to pay
higher rates of interest to attract deposits, resulting in reduced
profitability. If we are not able to effectively compete in our market area, our
profitability may be negatively affected, potentially limiting our ability to
pay dividends. The greater resources and deposit and loan products offered by
some of our competitors may also limit our ability to increase our
interest-earning assets.
We
continually encounter technological change, and we may have fewer resources than
many of our competitors to continue to invest in technological
improvements.
The
financial services industry is undergoing rapid technological changes, with
frequent introductions of new technology-driven products and services. The
effective use of technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. Our future success
will depend, in part, upon our ability to address the needs of our clients by
using technology to provide products and services that will satisfy client
demands for convenience, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to
invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or be successful in
marketing these products and services to our customers.
We intend
to undertake a conversion to a new core processing application in the fourth
quarter of fiscal year 2010. We will also convert the banking platform assumed
in the Acquisition. After the conversions, all banking offices will operate on
the same platform. Core processing conversions entail substantial operational
risk and if we fail to successfully convert customer accounts, our liquidity may
be significantly impaired due to customers closing their deposit accounts and
our earnings may be negatively impacted.
If
we fail to maintain an effective system of internal control over financial
reporting, we may not be able to accurately report our financial results or
prevent fraud, and, as a result, investors and depositors could lose confidence
in our financial reporting, which could materially adversely affect our
business, the trading price of our common stock and our ability to attract
additional deposits.
In
connection with the enactment of the Sarbanes-Oxley Act of 2002 (“Act”) and the
implementation of the rules and regulations promulgated by the SEC, we document
and evaluate our internal control over financial reporting in order to satisfy
the requirements of Section 404 of the Act. This requires us to prepare an
annual management report on our internal control over financial reporting,
including among other matters, management’s assessment of the effectiveness of
internal control over financial reporting and an attestation report by our
independent auditors addressing these assessments. If we fail to identify and
correct any deficiencies in the design or operating effectiveness of our
internal control over financial reporting or fail to prevent fraud, current and
potential shareholders and depositors could lose confidence in our internal
controls and financial reporting, which could materially adversely affect our
business, financial condition and results of operations, the trading price of
our common stock and our ability to attract additional deposits.
Failure
to comply with the terms of the loss share agreement with the FDIC may result in
significant losses.
On August
7, 2009, Home Federal Bank entered into a definitive purchase and assumption
agreement with the FDIC, pursuant to which Home Federal assumed certain
deposits, excluding nearly all brokered deposits, and certain assets of
Community First Bank, a commercial bank headquartered in Prineville, Oregon.
Home Federal also entered into a loss sharing agreement with the
FDIC. Under the loss sharing agreement, Home Federal will share in
the losses on assets covered under the purchase and assumption
agreement. The FDIC has agreed to reimburse Home Federal for 80% of
losses up to $34.0 million, and 95% of losses that exceed that
amount.
The
purchase and assumption agreement and the loss sharing agreement have specific,
detailed and cumbersome compliance, servicing, notification and reporting
requirements. Our failure to comply with the terms of the agreements or to
properly service the loans and REO under the requirements of the loss share
agreement may cause individual loans or large pools of loans to lose eligibility
for loss share payments from the FDIC. This could result in material losses that
are currently not anticipated.
Item 1B. Unresolved Staff
Comments
None.
Item 2.
Properties
At
September 30, 2009, we conducted business out of 23 full service banking offices
and one loan center. Seven of the locations are owned, seven locations are
leased and two locations are owned with the land being leased. At September 30,
2009, the net book value of our investment in properties and equipment was $20.5
million. The net book value of the data processing and computer equipment
utilized by us at September 30, 2009 was $311,000.
The
following table sets forth certain information relating to our offices as of
September 30, 2009.
Location
|
|
Leased
or
Owned
|
|
Lease
Expiration
Date
|
|
Square
Footage
|
ADMINISTRATIVE
OFFICE
500
12th
Avenue South
Nampa,
Idaho 83651 (1)
(2)
|
|
Owned
|
|
N/A
|
|
34,014
|
|
|
|
|
|
|
|
BRANCH
OFFICES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Downtown Boise (2)
800
West State Street
Boise,
Idaho 83703
|
|
Leased
|
|
August
2010
|
|
3,500
|
|
|
|
|
|
|
|
Parkcenter (2)
871
East Parkcenter Boulevard
Boise,
Idaho 83706
|
|
Owned
|
|
N/A
|
|
4,500
|
Meridian (2)
55
East Franklin Road
Meridian,
Idaho 83642
|
|
Owned
|
|
N/A
|
|
4,000
|
Caldwell (2)
923
Dearborn
Caldwell,
Idaho 83605
|
|
Owned
|
|
N/A
|
|
4,500
|
Mountain Home (2)
400
North 3rd East
Mountain
Home, Idaho 83647
|
|
Owned
|
|
N/A
|
|
2,600
|
Emmett (2)
250
South Washington Avenue
Emmett,
Idaho 83617
|
|
Owned
|
|
N/A
|
|
2,600
|
Boise (3)
8300
West Overland Road
Boise,
Idaho 83709
|
|
Leased
|
|
March
2011
|
|
695
|
Meridian (3)(4)
4051
East Fairview Avenue
Meridian,
Idaho 83642
|
|
Leased
|
|
February
2011
|
|
695
|
Garden City (3)
7319
West State Street
Boise,
Idaho 83714
|
|
Leased
|
|
August
2012
|
|
695
|
Idaho Center (3)(4)
5875
E. Franklin Road
Nampa,
Idaho 83687
|
|
Leased
|
|
December
2011
|
|
710
|
Eagle (2)
100
E. Riverside Dr.
Eagle,
Idaho 83616
|
|
Owned
|
|
N/A
|
|
4,500
|
Karcher (2)
1820
Caldwell Blvd
Nampa,
Idaho 83651
|
|
Owned
|
|
June
2015
|
|
3,800
|
(table
continues on next page)
|
(table
continued from previous page)
|
Location
|
|
Leased
or
Owned
|
|
Lease
Expiration
Date
|
|
Square
Footage
|
Nampa (3)
2100
12th Avenue Road
Nampa,
Idaho 83651
|
|
Leased
|
|
August
2010
|
|
695
|
Ustick(2)
10440
W. Ustick
Boise,
ID 83706
|
|
Owned
|
|
N/A
|
|
4,200
|
Bend Greenwood (2)
671
NE Greenwood
Bend,
OR 97701
|
|
Lease(5)
|
|
October
2012
|
|
2,600
|
Bend
Mill Quarter
606
NW Arizona Ave.
Bend,
OR 97701
|
|
Lease(6)
|
|
N/A
|
|
4,000
|
Madras (2)
1150
SE Hwy 97
Madras,
OR 97741
|
|
Lease(5)
|
|
January
2041
|
|
4,500
|
La
Pine
51366
South Hwy 97
La
Pine, OR 97739
|
|
Lease(5)
|
|
December
2023
|
|
3,500
|
Prineville (2)
555
NW Third
Prineville,
OR 97754
|
|
Lease(5)
|
|
August
2037
|
|
12,860
|
Terrebonne
8222
N Hwy 97
Terrebonne,
OR 97760
|
|
Lease(5)
|
|
August
2012
|
|
2,800
|
Redmond
821
SW 6th
St.
Redmond,
OR 97756
|
|
Lease(6)
|
|
N/A
|
|
7,800
|
Franklin
Crossing
50
NW Franklin Ave. Suite 478
Bend,
OR 97701
|
|
Lease(7)
|
|
N/A
|
|
5,000
|
LOAN
OFFICE:
|
|
|
|
|
|
|
Blackeagle
1307
Maplegrove
Boise,
Idaho 83709
|
|
Leased
|
|
August
2010
|
|
4,310
|
________
(2)
|
Drive-up
ATM available
|
(4)
|
Closed
in October 2009
|
(5)
|
At
September 30, 2009, Home Federal Bank was leasing the banking office from
the FDIC as Receiver for Community First Bank. Home Federal assumed the
lease on this property in November
2009
|
(6)
|
At
September 30, 2009, Home Federal Bank was leasing the banking office from
the FDIC as Receiver for Community First Bank. Home Federal agreed to
purchase this property from the FDIC in November
2009
|
(7)
|
At
September 30, 2009, Home Federal Bank was leasing the banking office from
the FDIC as Receiver for Community First Bank. Home Federal closed this
location in November 2009
|
We
recently completed construction of two branches in Boise and Meridian, Idaho,
that opened in October and November, 2009, respectively. In
conjunction with the opening of these new branches, two in-store Wal-Mart
branches were closed as noted above.
Item 3. Legal
Proceedings
From time
to time we are involved as a plaintiff or defendant in various legal actions
arising in the normal course of business. We do not anticipate incurring any
material liability as a result of such litigation, nor do we expect any material
impact on our financial position, results of operations or cash
flows.
Item 4. Submission of
Matters to a Vote of Security Holders
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended
September
30, 2009.
PART
II
Item 5. Market for the Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Home
Federal Bancorp’s common stock is currently listed on the NASDAQ Global Market
under the symbol “HOME,” and there is an established market for such common
stock. As of December 4, 2009, there were approximately 924 stockholders of
record, excluding persons or entities that hold stock in nominee or "street
name" accounts with brokers.
The
following table sets forth the high and low trading prices for Home Federal
Bancorp common stock, as reported by The Nasdaq Stock Market LLC, and cash
dividends paid for each quarter during the fiscal years ended September 30, 2009
and 2008:
Fiscal Year Ended
September 30, 2009
|
High
|
|
Low
|
|
Cash
Dividends
Paid
|
Quarter
Ended December 31, 2008
|
$12.34
|
|
$ 9.28
|
|
$0.055
|
Quarter
Ended March 31, 2009
|
11.10
|
|
7.01
|
|
0.055
|
Quarter
Ended June 30, 2009
|
11.48
|
|
8.87
|
|
0.055
|
Quarter
Ended September 30, 2009
|
12.00
|
|
10.06
|
|
0.055
|
Fiscal Year Ended
September 30, 2008
|
High
|
|
Low
|
|
Cash
Dividends
Paid
|
Quarter
Ended December 31, 2007(1)
|
$12.83
|
|
$ 9.76
|
|
$0.048
|
Quarter
Ended March 31, 2008
|
12.10
|
|
10.00
|
|
0.055
|
Quarter
Ended June 30, 2008
|
12.00
|
|
9.70
|
|
0.055
|
Quarter
Ended September 30, 2008
|
12.75
|
|
9.81
|
|
0.055
|
(1)
|
The
information prior to December 17, 2007 (the effective date of the
Conversion from the mutual holding company form) presented in the table
relates to the Company’s predecessor, which was also named Home Federal
Bancorp. The share price and dividends per share have been adjusted for
periods prior to December 31, 2007, to give effect for the
Conversion.
|
Dividends
Home
Federal Bancorp has paid quarterly cash dividends since the quarter ended June
30, 2005. The dividend rate and the continued payment of dividends depends on a
number of factors, including our capital requirements, our financial condition
and results of operations, tax considerations, statutory and regulatory
limitations and general
economic
conditions. No assurance can be given that we will continue to pay dividends or
that they will not be reduced in the future.
Dividend
payments by us may depend upon dividends received by the Company from the Bank.
Under federal regulations, the amount of dividends the Bank may pay is dependent
upon its capital position and recent net income. Generally, if the Bank
satisfies its regulatory capital requirements, it may make dividend payments up
to the limits prescribed in the Office of Thrift Supervision regulations.
However, institutions that have converted to a stock form of ownership may not
declare or pay a dividend on, or repurchase any of, its common stock if the
effect thereof would cause the regulatory capital of the institution to be
reduced below the amount required for the liquidation account.
Equity
Compensation Plan Information
The
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting under the section captioned “Equity Compensation Plan Information” is
incorporated herein by reference.
Issuer
Purchases of Equity Securities
The
following table provides information about purchases of common stock by the
Company during the quarter ended September 30, 2009:
Issuer
Purchases of Equity
Securities
|
Period
of Repurchase |
|
Total
Number of
Shares
Purchased
|
|
Average
Price
Paid Per Share
|
|
Total
Number of
Shares
Purchased
as
Part of
Publicly
Announced
Plans
or
Programs
|
|
Maximum
Number
of Shares
that
May Yet Be
Purchased
Under
the
Program
|
July 1 – July 31, 2009
|
|
--
|
|
$ --
|
|
--
|
|
--
|
August 1 – August 31, 2009
|
|
--
|
|
--
|
|
--
|
|
--
|
September
1 – September 30, 2009
|
|
--
|
|
--
|
|
--
|
|
834,900
|
On July
27, 2009 the Company announced a stock repurchase of up to 834,900 shares of its
outstanding common stock, representing approximately 5% of outstanding shares on
that date. During the quarter ended March 31, 2009, the Company repurchased
867,970 shares of its common stock, which completed the common stock repurchase
plan announced on December 23, 2008.
Performance
Graph
The
following graph compares the cumulative total stockholder return on the
Company’s common stock with the cumulative total return on the Russell 2000
Index and the SNL Thrift Index. Stock prices prior to December 19, 2007, the
effective date of the Conversion, relate to old Home Federal Bancorp. In
connection with the Conversion, old Home Federal Bancorp ceased to exist. As a
result, the Company believes that the SNL Thrift Index best reflects the
performance of Home Federal Bancorp, Inc, compared to similarly-structured
institutions no longer includes the SNL Thrift MHC Index in the performance
graph. The graph assumes that total return includes the reinvestment of all
dividends, and that the value of the investment in Home Federal Bancorp’s common
stock and each index was $100 on December 7, 2004, the initial day of trading
for Home Federal Bancorp’s common stock. Historical stock prices are not
necessarily indicative of future stock performance.
|
Period
Ended
|
Index
|
12/07/04
|
09/30/05
|
09/30/06
|
09/30/07
|
09/30/08
|
09/30/09
|
Home
Federal Bancorp, Inc.
|
100.00
|
102.54
|
127.49
|
110.64
|
122.72
|
112.43
|
Russell
2000
|
100.00
|
107.84
|
118.54
|
133.16
|
113.88
|
103.01
|
SNL
Thrift Index
|
100.00
|
100.10
|
116.52
|
106.34
|
54.77
|
41.95
|
Item 6. Selected Financial
Data
The
following table sets forth certain information concerning the consolidated
financial position and results of operations at and for the dates indicated and
has been derived from our audited consolidated financial statements. The
information below is qualified in its entirety by the detailed information
included elsewhere herein and should be read along with “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Item 8. Financial Statements and Supplementary Data.”
|
|
At
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
FINANCIAL
CONDITION DATA:
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
827,899 |
|
|
$ |
725,070 |
|
|
$ |
709,954 |
|
|
$ |
761,292 |
|
|
$ |
689,577 |
|
Investment
securities, available for sale
|
|
|
169,320 |
|
|
|
188,787 |
|
|
|
162,258 |
|
|
|
12,182 |
|
|
|
14,830 |
|
Investment
securities, held to maturity
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
183,279 |
|
|
|
180,974 |
|
Loans
receivable, net (1)
|
|
|
510,629 |
|
|
|
459,813 |
|
|
|
480,118 |
|
|
|
503,065 |
|
|
|
430,944 |
|
Loans
held for sale
|
|
|
862 |
|
|
|
2,831 |
|
|
|
4,904 |
|
|
|
4,119 |
|
|
|
5,549 |
|
Total
deposits
|
|
|
514,858 |
|
|
|
372,925 |
|
|
|
404,609 |
|
|
|
430,281 |
|
|
|
396,325 |
|
FHLB
advances and other borrowings
|
|
|
84,737 |
|
|
|
136,972 |
|
|
|
180,730 |
|
|
|
210,759 |
|
|
|
175,932 |
|
Stockholders’
equity
|
|
|
209,665 |
|
|
|
205,187 |
|
|
|
112,637 |
|
|
|
107,869 |
|
|
|
101,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
OPERATING
DATA:
|
|
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
$ |
35,827 |
|
|
$ |
40,583 |
|
|
$ |
42,638 |
|
|
$ |
39,913 |
|
|
$ |
33,910 |
|
Interest
expense
|
|
|
11,977 |
|
|
|
17,935 |
|
|
|
21,336 |
|
|
|
16,917 |
|
|
|
12,231 |
|
Net
interest income
|
|
|
23,850 |
|
|
|
22,648 |
|
|
|
21,302 |
|
|
|
22,996 |
|
|
|
21,679 |
|
Provision
for loan losses
|
|
|
16,085 |
|
|
|
2,431 |
|
|
|
409 |
|
|
|
138 |
|
|
|
456 |
|
Net
interest income after provision for loan losses
|
|
|
7,765 |
|
|
|
20,217 |
|
|
|
20,893 |
|
|
|
22,858 |
|
|
|
21,223 |
|
Noninterest
income
|
|
|
9,291 |
|
|
|
10,490 |
|
|
|
11,281 |
|
|
|
11,201 |
|
|
|
10,128 |
|
Noninterest
expense
|
|
|
28,971 |
|
|
|
24,439 |
|
|
|
23,636 |
|
|
|
24,037 |
|
|
|
23,158 |
|
Income
(loss) before income taxes
|
|
|
(11,915 |
) |
|
|
6,268 |
|
|
|
8,538 |
|
|
|
10,022 |
|
|
|
8,193 |
|
Income
tax expense (benefit)
|
|
|
(4,750 |
) |
|
|
2,263 |
|
|
|
3,267 |
|
|
|
3,810 |
|
|
|
2,910 |
|
Income
(loss) before extraordinary item
|
|
|
(7,165 |
) |
|
|
4,005 |
|
|
|
5,271 |
|
|
|
6,212 |
|
|
|
5,283 |
|
Extraordinary
item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on acquisition, less income tax of $9,756
|
|
|
15,291 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Net
income
|
|
$ |
8,126 |
|
|
$ |
4,005 |
|
|
$ |
5,271 |
|
|
$ |
6,212 |
|
|
$ |
5,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share (EPS)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS before extraordinary item
|
|
$ |
(0.46 |
) |
|
$ |
0.25 |
|
|
$ |
0.32 |
|
|
$ |
0.38 |
|
|
$ |
0.32 |
|
Basic
EPS of extraordinary item
|
|
|
0.98 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Basic
EPS after extraordinary item
|
|
|
0.52 |
|
|
|
0.25 |
|
|
|
0.32 |
|
|
|
0.38 |
|
|
|
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS before extraordinary item
|
|
|
(0.46 |
) |
|
|
0.25 |
|
|
|
0.31 |
|
|
|
0.38 |
|
|
|
0.32 |
|
Diluted
EPS of extraordinary item
|
|
|
0.98 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Diluted
EPS after extraordinary item
|
|
|
0.52 |
|
|
|
0.25 |
|
|
|
0.31 |
|
|
|
0.38 |
|
|
|
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share(2):
|
|
|
0.220 |
|
|
|
0.213 |
|
|
|
0.194 |
|
|
|
0.189 |
|
|
|
0.088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
DATA:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Number
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans outstanding
|
|
|
2,404 |
|
|
|
2,443 |
|
|
|
2,967 |
|
|
|
3,389 |
|
|
|
3,236 |
|
Deposit
accounts
|
|
|
97,893 |
|
|
|
66,366 |
|
|
|
68,874 |
|
|
|
70,373 |
|
|
|
73,013 |
|
Full
service offices
|
|
|
23 |
|
|
|
15 |
|
|
|
15 |
|
|
|
14 |
|
|
|
15 |
|
________
(1)
|
Net
of allowance for loan losses, loans in process and deferred loan
fees.
|
(2)
|
Earnings
per share and dividends declared per share have been adjusted to reflect
the impact of the second-step conversion and reorganization of the
Company, which occurred on December 19,
2007.
|
|
|
At
or For the Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
KEY
FINANCIAL RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets (1)
|
|
|
1.12 |
% |
|
|
0.54 |
% |
|
|
0.71 |
% |
|
|
0.85 |
% |
|
|
0.82 |
% |
Return
on average equity (2)
|
|
|
4.01 |
|
|
|
2.16 |
|
|
|
4.75 |
|
|
|
5.90 |
|
|
|
5.69 |
|
Dividend
payout ratio (3)
|
|
|
42.53 |
|
|
|
74.56 |
|
|
|
23.52 |
|
|
|
19.72 |
|
|
|
10.68 |
|
Equity-to-assets
ratio (4)
|
|
|
27.98 |
|
|
|
24.94 |
|
|
|
14.94 |
|
|
|
14.47 |
|
|
|
14.38 |
|
Interest
rate spread (5)
|
|
|
2.69 |
|
|
|
2.25 |
|
|
|
2.40 |
|
|
|
2.79 |
|
|
|
3.15 |
|
Net
interest margin (6)
|
|
|
3.50 |
|
|
|
3.21 |
|
|
|
3.03 |
|
|
|
3.33 |
|
|
|
3.57 |
|
Efficiency
ratio (7)
|
|
|
87.42 |
|
|
|
73.75 |
|
|
|
72.46 |
|
|
|
70.21 |
|
|
|
72.81 |
|
Noninterest
income/operating revenue (8)
|
|
|
28.03 |
|
|
|
31.70 |
|
|
|
34.40 |
|
|
|
32.60 |
|
|
|
31.80 |
|
Average
interest-earning assets to
average
interest-bearing liabilities
|
|
|
146.02 |
|
|
|
137.83 |
|
|
|
120.71 |
|
|
|
122.32 |
|
|
|
121.07 |
|
Noninterest
expense as a
percent
of average total assets
|
|
|
4.00 |
|
|
|
3.28 |
|
|
|
3.17 |
|
|
|
3.29 |
|
|
|
3.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 (core) capital
(to
tangible assets)
|
|
|
19.61 |
% |
|
|
21.66 |
% |
|
|
13.56 |
% |
|
|
11.77 |
% |
|
|
12.00 |
% |
Total
risk-based capital
(to
risk-weighted assets)
|
|
|
34.89 |
|
|
|
32.84 |
|
|
|
21.38 |
|
|
|
19.46 |
|
|
|
20.46 |
|
Tier
1 risk-based capital
(to
risk-weighted assets)
|
|
|
33.57 |
|
|
|
32.18 |
|
|
|
20.69 |
|
|
|
18.82 |
|
|
|
19.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
and 90 days or more past due loans
as
a percent of total loans
|
|
|
7.13 |
% |
|
|
2.14 |
% |
|
|
0.32 |
% |
|
|
0.08 |
% |
|
|
0.11 |
% |
Nonperforming
assets as a percent of total assets
|
|
|
6.87 |
|
|
|
1.46 |
|
|
|
0.29 |
|
|
|
0.05 |
|
|
|
0.15 |
|
Allowance
for losses as a percent
of
gross loans receivable
|
|
|
5.32 |
|
|
|
0.98 |
|
|
|
0.62 |
|
|
|
0.59 |
|
|
|
0.67 |
|
Allowance
for losses as a percent
of
nonperforming loans
|
|
|
74.65 |
|
|
|
46.04 |
|
|
|
195.17 |
|
|
|
766.49 |
|
|
|
602.97 |
|
Net
charge-offs to average outstanding loans
|
|
|
1.87 |
|
|
|
0.18 |
|
|
|
0.04 |
|
|
|
0.01 |
|
|
|
0.05 |
|
________
(1)
|
Net
income divided by average total
assets.
|
(2)
|
Net
income divided by average equity.
|
(3)
|
Dividends
paid to stockholders, excluding shares held by Home Federal MHC, divided
by net income.
|
(4)
|
Average
equity divided by average total assets.
|
(5) |
Difference
between weighted average yield on interest-earning assets and weighted
average rate on interest-bearing liabilities.
|
(6) |
Net
interest margin, otherwise known as net yield on interest-earning assets,
is calculated as net interest income divided by average interest-earning
assets.
|
(7)
|
Noninterest
expense divided by the sum of net interest income and noninterest
income.
|
(8)
|
Operating
revenue is defined as the sum of net interest income and noninterest
income.
|
Item 7.
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statements
“Safe
Harbor” statement under the Private Securities Litigation Reform Act of 1995:
This Form 10-K contains forward-looking statements, which can be identified by
the use of words such as “believes,” “expects,” “anticipates,” “estimates” or
similar expressions. Forward-looking statements include:
§
|
statements
of our goals, intentions and
expectations;
|
§
|
statements
regarding our business plans, prospects, growth and operating
strategies;
|
§
|
statements
regarding the quality of our loan and investment portfolios;
and
|
§
|
estimates
of our risks and future costs and
benefits.
|
These
forward-looking statements are subject to significant risks and uncertainties.
Actual results may differ materially from those contemplated by the
forward-looking statements due to, among others, the following
factors:
§
|
the
credit risks of lending activities, including changes in the level and
trend of loan delinquencies and write-offs and changes in our allowance
for loan losses and provision for loan losses that may be impacted by
deterioration in the housing and commercial real estate
markets;
|
§
|
changes
in general economic conditions, either nationally or in our market
areas;
|
§
|
changes
in the levels of general interest rates, and the relative differences
between short and long term interest rates, deposit interest rates, our
net interest margin and funding
sources;
|
§
|
fluctuations
in the demand for loans, the number of unsold homes, land and other
properties and fluctuations in real estate values in our market
areas;
|
§
|
secondary
market conditions for loans and our ability to sell loans in the secondary
market;
|
§
|
results
of examinations of us by the Office of Thrift Supervision or other
regulatory authorities, including the possibility that any such regulatory
authority may, among other things, require us to increase our reserve for
loan losses, write-down assets, change our regulatory capital position or
affect our ability to borrow funds or maintain or increase deposits, which
could adversely affect our liquidity and
earnings;
|
§
|
our
compliance with regulatory enforcement
actions;
|
§
|
legislative
or regulatory changes that adversely affect our business including changes
in regulatory policies and principles, or the interpretation of
regulatory capital or other rules;
|
§
|
our
ability to attract and retain
deposits;
|
§
|
further
increases in premiums for deposit
insurance;
|
§
|
our
ability to control operating costs and
expenses;
|
§
|
the
use of estimates in determining fair value of certain of our assets, which
estimates may prove to be incorrect and result in significant declines in
valuation;
|
§
|
difficulties
in reducing risks associated with the loans on our balance
sheet;
|
§
|
staffing
fluctuations in response to product demand or the implementation of
corporate strategies that affect our workforce and potential associated
charges;
|
§
|
computer
systems on which we depend could fail or experience a security
breach;
|
§
|
our
ability to retain key members of our senior management
team;
|
§
|
costs
and effects of litigation, including settlements and
judgments;
|
§
|
our
ability to successfully integrate any assets, liabilities, customers,
systems, and management personnel we may in the future acquire into our
operations and our ability to realize related revenue synergies and cost
savings within expected time frames and any goodwill charges related
thereto;
|
§
|
increased
competitive pressures among financial services
companies;
|
§
|
changes
in consumer spending, borrowing and savings
habits;
|
§
|
the
availability of resources to address changes in laws, rules, or
regulations or to respond to regulatory
actions;
|
§
|
our
ability to pay dividends on our common
stock;
|
§
|
adverse
changes in the securities markets;
|
§
|
inability
of key third-party providers to perform their obligations to
us;
|
§
|
changes
in accounting policies and practices, as may be adopted by the financial
institution regulatory agencies or the Financial Accounting Standards
Board, including additional guidance and interpretation on accounting
issues and details of the implementation of new accounting methods;
and
|
§
|
other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing, products and services and the other
risks described elsewhere in this prospectus and the incorporated
documents.
|
Some of
these and other factors are discussed in this Annual Report on Form 10-K under
the caption “Risk Factors” and elsewhere in this document and in the documents
incorporated by reference herein. Such developments could have an adverse impact
on our financial position and our results of operations.
Any of
the forward-looking statements that we make in this annual report and in other
public statements we make may turn out to be wrong because of inaccurate
assumptions we might make, because of the factors illustrated above or because
of other factors that we cannot foresee. Because of these and other
uncertainties, our actual future results may be materially different from the
results indicated by these forward-looking statements and you should not rely on
such statements.
GENERAL
Our
primary source of pre-tax income is net interest income. Net interest income is
the difference between interest income, which is the income that we earn on our
loans and investments, and interest expense, which is the interest that we pay
on our deposits and borrowings. Changes in levels of interest rates affect our
net interest income. We intend to diversify the mix of our assets by reducing
the percentage of our assets that are lower-yielding residential loans and
mortgage-backed securities and increasing the percentage of our assets
consisting of commercial loans that we believe have higher risk-adjusted
returns.
Our
operating expenses consist primarily of compensation and benefits, occupancy and
equipment, data processing, advertising, postage and supplies, professional
services and deposit insurance premiums. Compensation and benefits consist
primarily of the salaries and wages paid to our employees, non-cash expense
related to our employee stock ownership plan (“ESOP”), payroll taxes, expenses
for retirement and other employee benefits. Occupancy and equipment expenses,
which are the fixed and variable costs of building and equipment, consist
primarily of lease payments, taxes, depreciation charges, maintenance and costs
of utilities.
Our
results of operations may also be affected significantly by general and local
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities. See “Item 1A. Risk
Factors" in this Annual Report on Form 10-K for additional discussion on the
potential impacts of these items.
On August
7, 2009, the Bank entered into a purchase and assumption agreement with loss
share with the Federal Deposit Insurance Corporation (“FDIC”) to assume all of
the deposits (excluding brokered deposits) and certain assets of Community First
Bank, a full service commercial bank, headquartered in Prineville, Oregon (the
“Acquisition”). Community First Bank operated eight locations in central
Oregon. Home Federal Bank assumed approximately $142.8 million of the
deposits of Community First Bank. Additionally, Home Federal Bank
purchased approximately $142.3 million in loans and $12.9 million of real estate
and other repossessed assets (“REO”). The loans and REO purchased are
covered by a loss share agreement between the FDIC and Home Federal which
affords Home Federal Bank significant protection. Under the loss
sharing agreement, Home Federal will share in the losses on assets covered under
the agreement (referred to as covered assets). The FDIC has agreed to
reimburse Home Federal Bank for 80% of losses up to $34.0 million, and 95% of
losses that exceed that amount. In addition, Home Federal also
purchased cash and cash equivalents and investment securities of Community First
Bank valued at $37.7 million, and assumed $18.3 million in Federal Home Loan
Bank advances and other borrowings.
OVERVIEW
Historic
change continued to be the theme for Home Federal Bancorp, Inc. in fiscal year
2009. While the local and national economies continued to deteriorate, the
management team searched for opportunities to prudently deploy and leverage the
capital raised in fiscal year 2008 in connection with the second-step conversion
from a mutual holding company. We were able to leverage the Company’s capital,
as well as to bolster capital, without diluting existing shareholders by
undertaking an FDIC-assisted acquisition of the failed Community First Bank in
Prineville, Oregon on August 7, 2009 (the “Acquisition”). See “Business –
Organization” under Part I, Item 1. of this Form 10-K for additional information
regarding the Acquisition. We believe the current distressed banking
climate provides a unique opportunity to participate in FDIC-assisted
acquisitions in the Pacific Northwest, particularly in the intermountain region
between Salt Lake City and the Cascade Mountains in western Washington and
Oregon. Management is monitoring a number of troubled institutions in this
market area for additional acquisition opportunities in an effort to enhance our
franchise value and provide increasing returns to the Company’s
shareholders.
The
FDIC-assisted acquisition of the assets and liabilities of Community First Bank
in Central Oregon was attractive to management for a variety of reasons,
including the ability to expand into complementary markets on the outer rim of
the Company’s targeted growth markets, the ability to compete against banks in
Community First Bank’s markets based on Home Federal Bank’s relative capital
strength as several banks in these markets are under regulatory order and are
less than well-capitalized, and the attractiveness of immediate core deposit
growth with low cost of funds. While management believes the Central Oregon
region will increase the Company’s earnings, fiscal 2010 expenses
will be
higher than expected over the long-term as the Bank will not centralize the
Central Oregon operations, particularly information technology systems, until
the fourth quarter of fiscal 2010 when the entire Bank’s core system
applications are expected to be converted to a new platform. In the short-term,
our primary focus in the Central Oregon region is aggregating core deposits and
mitigating losses on troubled assets.
The
following list summarizes the key internal strategic initiatives undertaken by
management during fiscal 2009:
§
|
The
Bank acquired a failed commercial bank with FDIC-assistance and recorded
an extraordinary gain of $15.3 million, net of
taxes;
|
§
|
The
Bank opened a branch in Boise, Idaho, and substantially completed the
construction of two branches in Boise and Meridian, Idaho, which were
opened in October and November 2009,
respectively;
|
§
|
Two
Wal-Mart banking offices were closed as management continued to revise its
branching strategy in favor of constructing full-service, free-standing
banking offices;
|
§
|
The
Bank sold its mortgage servicing rights
portfolio;
|
§
|
The
Bank launched a new checking account product that is expected to increase
core deposit balances and generate interchange
income;
|
§
|
A
total of 867,970 shares of the Company’s common stock were
repurchased;
|
§
|
Management
executed on its strategy to increase core deposits and reduce reliance on
high-cost certificates of deposit and borrowings;
and,
|
§
|
A
team of seasoned bankers was hired to build small business deposit
relationships in the Bank’s markets and to participate in Small Business
Administration lending programs.
|
The
following items summarize the key factors affecting performance of the Company
during fiscal year 2009:
§
|
Economic
conditions in the Treasure Valley continued to deteriorate as a result of
rising unemployment, bankruptcies and foreclosures and declining real
estate values, which resulted in rising levels of nonperforming assets and
the need for an additional provision for loan
losses;
|
§
|
Deteriorating
asset quality and declining valuations of foreclosed real estate assets
resulted in a significant provision for loan losses and increased
operating expenses through valuation allowances, maintenance and property
tax expenses on foreclosures;
|
§
|
Net
interest margin expanded due to declining funding costs and continued
deleveraging of low-spread assets and
liabilities;
|
§
|
The
slowdown in consumer spending reduced fee income;
and
|
§
|
The
Bank maintained its strong capital position with a total risk-based
capital ratio of 34.9% at
|
The
current economic and interest rate environments continue to challenge our
organic growth plans. A lack of demand for loans, or more importantly a
diminished supply of creditworthy lending opportunities, as well as an increase
in residential loan refinancing, limited the our ability to increase outstanding
organic loan balances. Alternative investments are also unattractive
as investment securities offer very low yields within management’s credit and
interest rate risk tolerances. Some competitor financial institutions are
offering deposit rates that exceed the Company’s wholesale borrowing costs.
Therefore, excluding the impact of the deposits assumed in the Acquisition,
certificate of deposit balances have declined as some customers chose to move
their maturing certificate of deposit balances to competitors in search of
higher returns.
Consistent
with our stated business strategy, we reduced fixed-term borrowing balances with
the Federal Home Loan Bank of Seattle (“FHLB”) and continued to focus on growing
core deposits, defined as non-maturity deposits such as checking, savings and
money market accounts, which we believe will increase the franchise value of the
Company and improve profitability by reducing interest rate sensitivity and
high-cost borrowing balances. Core deposit relationships should also increase
revenue through service and interchange fee income. In response to recent
declines in nonsufficient fund and interchange income and to execute the
strategy of increasing core deposit balances, the Bank launched a new checking
account, the “Ultimate Checking Account,” during the third quarter of fiscal
2009. We believe this will result in higher checking account balances and
provide an incentive for customers to use their check cards more frequently,
which should result in higher interchange income.
The overall increase in
nonperforming loans from September 30, 2008, to September 30, 2009, occurred
primarily as a result of the FDIC-assisted acquisition. However, our
Idaho organic portfolio also had increases in
nonperforming
assets during the year. Commercial real estate loans in the Treasure Valley are
now being pressured as property vacancies continue to climb and the slowdown in
consumer spending is causing many independent and national retailers to close
stores or reduce inventory. The Bank’s Credit Administration Department is also
spending considerable time reviewing home equity lines of credit and, in some
cases, suspending lines at their current balances in order to mitigate future
loan losses. Due to these factors and an increase in loan losses, the Bank
recorded a loan loss provision of $16.1 million during fiscal 2009.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
This
Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
as well as disclosures found elsewhere in this Annual Report on Form 10-K, are
based upon the Company’s consolidated financial statements, which are prepared
in accordance with accounting principles generally accepted in the United States
of America (“US GAAP”). The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. Several factors are considered in
determining whether or not a policy is critical in the preparation of financial
statements. These factors include, among other things, whether the estimates are
significant to the financial statements, the nature of the estimates, the
ability to readily validate the estimates with other information including third
parties or available prices, and sensitivity of the estimates to changes in
economic conditions and whether alternative accounting methods may be utilized
under US GAAP.
Management
has identified several accounting policies that, due to the judgments, estimates
and assumptions inherent in those policies, are critical to an understanding of
our financial statements. These policies relate to the determination of the
allowance for loan losses, including the evaluation of impaired loans, and the
associated provision for loan losses, valuation of real estate owned, as well as
deferred income taxes and the associated income tax expense. Management reviews
the allowance for loan losses for adequacy on a quarterly basis and establishes
a provision for loan losses that it believes is sufficient for the loan
portfolio growth expected and the loan quality of the existing portfolio. The
carrying value of real estate owned is also assessed on a quarterly basis.
Income tax expense and deferred income taxes are calculated using an estimated
tax rate and are based on management’s and our tax advisor’s understanding of
our effective tax rate and the tax code. These estimates are reviewed by our
independent auditor on an annual basis and by our regulators when they examine
Home Federal Bank.
Allowance for Loan Losses.
Management recognizes that losses may occur over the life of a loan and
that the allowance for loan losses must be maintained at a level necessary to
absorb specific losses on impaired loans and probable losses inherent in the
loan portfolio. Management assesses the allowance for loan losses on a quarterly
basis by analyzing several factors including delinquency rates, charge-off rates
and the changing risk profile of the Bank’s loan portfolio, as well as local
economic conditions such as unemployment rates, bankruptcies and vacancy rates
of business and residential properties.
The
Company believes that the accounting estimate related to the allowance for loan
losses is a critical accounting estimate because it is highly susceptible to
change from period to period, requiring management to make assumptions about
probable incurred losses inherent in the loan portfolio at the balance sheet
date. The impact of a sudden large loss could deplete the allowance and require
increased provisions to replenish the allowance, which would negatively affect
earnings.
The
Company’s methodology for analyzing the allowance for loan losses consists of
specific allocations on significant individual credits and a general allowance
amount, including a range of losses. The specific allowance component is
determined when management believes that the collectibility of an individually
reviewed loan has been impaired and a loss is probable. The general allowance
component relates to assets with no well-defined deficiency or weakness and
takes into consideration loss that is inherent within the portfolio but has not
been identified. The general allowance is determined by applying a historical
loss percentage to various types of loans with similar characteristics and
classified loans that are not analyzed specifically. Adjustments are made to
historical loss percentages to reflect current economic and internal
environmental factors such as changes in underwriting standards and unemployment
rates that may increase or decrease those loss factors. As a result of the
imprecision in calculating inherent and potential losses, a range is added to
the general allowance to provide an allowance for loan losses that is adequate
to cover losses that may arise as a result of changing economic conditions and
other qualitative factors that may alter historical loss
experience.
The
allowance is increased by the provision for loan losses, which is charged
against current period operating results and decreased by the amount of actual
loan charge-offs, net of recoveries.
The
Company also estimates a reserve related to unfunded loan commitments. In
assessing the adequacy of the reserve, the Company uses a similar approach used
in the development of the allowance for loan losses. The reserve for unfunded
loan commitments is included in other liabilities on the Consolidated Balance
Sheets. The provision for unfunded commitments is charged to noninterest
expense.
Loans Acquired with Deteriorated
Credit Quality. Accounting Standards Codification (“ASC”) Topic 310-30
applies to a loan with evidence of deterioration of credit quality since
origination, acquired by completion of a transfer for which it is probable, at
acquisition, that the investor will be unable to collect all contractually
required payments receivable. For loans accounted for under ASC 310-30,
management determined the value of the loan portfolio based on work provided by
an appraiser. Factors considered in the valuation were projected cash
flows for the loans, type of loan and related collateral, classification status
and current discount rates. Loans were grouped together according to
similar characteristics and were treated in the aggregate when applying various
valuation techniques. Management also estimated the amount of credit
losses that were expected to be realized for the loan portfolio primarily by
estimating the liquidation value of collateral securing loans on non-accrual
status or classified as substandard or doubtful. At September 30, 2009, a
majority of these loans were valued based on the liquidation value of the
underlying collateral, because the expected cash flows are primarily based on
the liquidation of the underlying collateral. Certain amounts related to the ASC
310-30 loans are preliminary estimates and are highly subjective. Adjustments in
future quarters may occur up to one year from the date of
acquisition.
FDIC Indemnification Asset. On
August 7, 2009, the Bank entered into a purchase and assumption agreement with
loss share with the FDIC. The loans and REO purchased under the purchase and
assumption agreement are covered by a loss share agreement between the FDIC and
Home Federal Bank which affords the Bank significant protection. This
agreement covers realized losses on loans and foreclosed real estate purchased
from the FDIC. Under this agreement, the FDIC will reimburse Home
Federal Bank for 80% of the first $34.0 million of losses. The FDIC
will reimburse Home Federal Bank 95% on realized losses that exceed $34.0
million. Realized losses covered by the loss sharing agreement
include loan contractual balances (and related unfunded commitments that were
acquired), accrued interest on loans for up to 90 days, the book value of
foreclosed real estate acquired, and certain direct costs, less cash or other
consideration received by Home Federal Bank.
This
agreement extends for ten years for one-to-four family real estate loans and for
five years for other loans. The value of this loss sharing agreement
was considered in determining fair values of loans and foreclosed real estate
acquired.
Management
has estimated the amount of losses inherent in the acquired loan and foreclosed
real estate portfolios and the amounts that would be receivable from the FDIC
upon a loss event. The Bank cannot submit claims of loss until certain events
occur, as defined under the purchase and assumption agreement. As such, the
indemnification asset is subject to a high degree of uncertainty and estimation
as to the timing of the losses and subsequent recovery of a portion of those
losses under the loss sharing agreement.
Real Estate Owned. Real estate
properties acquired through, or in lieu of, loan foreclosure are initially
recorded at the lesser of the outstanding loan balance or the fair value at the
date of foreclosure minus estimated costs to sell. Any valuation adjustments
required at the time of foreclosure are charged to the allowance for loan
losses. After foreclosure, the properties are carried at the lower of carrying
value or fair value less estimated costs to sell. Any subsequent valuation
adjustments, operating expenses or income, and gains and losses on disposition
of such properties are recognized in current operations. The valuation allowance
is established based on our historical realization of losses and adjusted for
current market trends.
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 ASC Topic 740, “Income Taxes.” Under
this method, a deferred tax asset or liability is determined based on the
enacted tax rates that will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in an institution’s income tax returns.
The deferred tax provision for the year is equal to the net change in the net
deferred tax asset from the beginning to the end of the year, less amounts
applicable to the
change in
value related to investments available for sale. The effect on deferred taxes of
a change in tax rates is recognized as income in the period that includes the
enactment date. The primary differences between financial statement income and
taxable income result from depreciation expense, mortgage servicing rights, loan
loss reserves, deferred compensation, mark to market adjustments on our
available for sale securities, and dividends received from the Federal Home Loan
Bank of Seattle. Deferred income taxes do not include a liability for pre-1988
bad debt deductions allowed to thrift institutions that may be recaptured if the
institution fails to qualify as a bank for income tax purposes in the
future.
COMPARISON
OF FINANCIAL CONDITION AT SEPTEMBER 30, 2009, AND SEPTEMBER 30,
2008
Total
assets increased $102.8 million, or 14.2%, to $827.9 million at September 30,
2009, from $725.1 million at September 30, 2008. The increase was primarily a
result of the acquisition of $189.8 million of the assets of Community First
Bank on August 7, 2009, partially offset by decreases over the year in organic
loans and mortgage backed securities. Total liabilities increased
$98.4 million, or 18.9%, to $618.2 million primarily due to the $174.5 million
in assumed liabilities via the acquisition less the reduction in FHLB and other
borrowings of $52.2 million from the year ago period.
Assets. The increases and
decreases in total assets were primarily concentrated in the following asset
categories:
|
|
|
|
|
Increase
/ (Decrease)
|
|
|
|
Balance
at September 30,
2009
|
|
|
Balance
at September 30, 2008
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
Cash
and amounts due from
depository institutions
|
|
$ |
49,953 |
|
|
$ |
23,270 |
|
|
$ |
26,683 |
|
|
|
114.7 |
% |
Investment
securities,
available
for sale
|
|
|
169,320 |
|
|
|
188,787 |
|
|
|
(19,467 |
) |
|
|
(10.3 |
) |
Loans
receivable, net of
allowance for loan losses
|
|
|
510,629 |
|
|
|
459,813 |
|
|
|
50,816 |
|
|
|
11.1 |
|
Cash and amounts due from depository
institutions. The higher cash balance at September 30, 2009, is due to a
combination of the Acquisition as well as the current economic
conditions. Total cash acquired in the Acquisition was $22.1
million. The current economic conditions, including the low interest
rate environment, are presenting challenges in the deployment of this cash as
the number of credit worthy borrowers has decreased substantially and locating
short-term securities that provide an attractive return has also proven
difficult. Additionally, we have conserved cash balances as liquidity support
for the possible acquisition of a troubled institution that may not have
adequate liquidity.
Securities. Included in assets
acquired in the Acquisition was $15.6 million in
investments. However, overall securities were down for the year as
cash flows received from mortgage-backed securities were principally used
throughout the year to retire term FHLB borrowings as they matured. In addition,
$11.6 million in securities were sold during the year ended September 30, 2009,
with $6.2 million of those sales related to the sale of securities purchased in
the acquisition that did not meet our investment policy.
Nearly
all of the Company’s mortgage-backed securities were 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.
At
September 30, 2009, we held one private label security with a fair value of
$599,000 which carried a Moody’s rating of A1. Management has reviewed the
delinquency status, credit support and collateral coverage of the loans pooled
in this security and has concluded it was not other than temporarily impaired at
September 30, 2009.
Loans. Loans receivable, net,
increased $50.8 million to $510.6 million at September 30, 2009, from $459.8
million at September 30, 2008. The fair value of loans acquired through the
acquisition was $109.6 million as of September
30, 2009,
net of an allowance for loan losses of $16.8 million. The organic
loan portfolio declined $58.7 million with one-to-four family residential loans
decreasing $40.7 million and construction and consumer loans decreasing $6.5
million in each portfolio.
The
reduction of one-to-four family residential loans is consistent with our
strategy to reduce the portfolio’s concentration in those loans in favor of
increasing the mix of commercial and commercial real estate loans in order to
improve interest rate sensitivity and net interest margin. Additionally,
commercial lending relationships often translate to more profitable deposit
relationships. We began selling nearly all new one-to-four family loan
originations in the secondary market in 2006.
As mentioned
earlier, the economic recession has significantly slowed business activity and
reduced opportunities to provide commercial lending solutions. Commercial real
estate vacancies in our markets have increased. Additionally, the Bank’s
concentration in commercial real estate loans is nearing our internal policy
limits while commercial business loans are only half of our internal goals. As a
result, we are concerned that the Bank will not be able to grow the loan
portfolio through fiscal 2010.
Allowance for loan losses. The
allowance for loan losses increased to $28.7 million at September 30, 2009, from
$4.6 million at September 30, 2008. At September 30, 2009, we recorded an
allowance of $16.8 million on loans purchased in the Acquisition and an
allowance of $11.9 million on our organic loan portfolio. All of the allowance
on acquired loans is considered a “general allowance” available for allocation
to any loan, although the calculation of the allowance was performed on each
pool component in the acquired loan portfolio. Approximately $1.7 million of the
$11.9 million allowance for loan losses on our organic portfolio is allocated
directly to nonperforming loans. The remaining $10.2 million represents a
general reserve reflecting our best estimate of inherent losses at September 30,
2009.
Loans
that were troubled on the date of the Acquisition were recorded at fair value
under Accounting Standards Codification Topic (“ASC”) 310-30, which means an
allowance for loan losses is not reported separately on the balance sheet. Loans
accounted for under ASC 310-30 reported in loans on the balance sheet totaled
$26.4 million at September 30, 2009, which represents gross receivable balances
of $40.6 million, net of fair value adjustments for estimated credit losses of
$14.1 million. Because of the loss sharing agreement with the FDIC on these
assets, we do not expect to incur excessive future losses on the acquired loan
portfolio. See “Asset Quality” on page 19 of this Form 10-K for additional
discussion on the loss share agreement and our estimate of losses under the
agreement.
The
estimated loss percentage on all of the pools in our organic loan portfolio
increased at September 30, 2009 from September 30, 2008. We experienced
significant losses in our construction and development loan portfolio as well as
large losses in our home equity line of credit portfolio; each of these pools
saw large increases in the loss estimates at the end of fiscal year 2009 as a
result. We also increased our loss estimates for commercial real estate loans as
we are beginning to see signs of stress in the Treasure Valley and expect to
realize losses in this portfolio in 2010.
We also
have a pool of residential real estate loans that were purchased from
Countrywide Bank (now Bank of America) who continues to service the loans.
Balances on the portfolio totaled $21.9 million at September 30, 2009. Over 90%
of the portfolio balance is secured by properties outside of our primary market
areas, including distressed markets such as California and Arizona, and
delinquencies and foreclosures have risen quickly in that portfolio. At
September 30, 2009, approximately 18% of the loans in this portfolio were
delinquent over 30 days. The total loss reserve allocated to loans in this loan
portfolio was $1.3 million at September 30, 2009.
Property and equipment.
Property and equipment increased $5.2 million as a result of the
construction of two new branches in Boise and Meridian, Idaho, that opened in
October and November, 2009, respectively. At September 30, 2009, the
Bank had five branches in Wal-Mart supermarkets. However, we closed two in-store
branches in conjunction with the opening of these new banking offices. We have
reduced the number of in-store branches in recent years and opened free-standing
full-service banking office that better provide the range of products and
services now being offered by the Bank.
We did
not acquire banking locations in Central Oregon at the same time as the closing
of the acquisition. Under the purchase and assumption agreement with the FDIC,
we had a period of time after the transaction date, which was August 7, 2009, to
review the eight banking facilities of the failed institution and obtain
appraisals of the banking
office
and their contents. In late November 2009, we informed the FDIC of our intent to
close one of the banking offices in Bend, Oregon, to purchase two banking
offices in Redmond and Bend, and to assume the lease agreements on five of the
other banking offices. The value of the purchased banking offices totaled $4.7
million and the contents of all seven of the assumed locations totaled
approximately $412,000.
We do not
intend to construct new banking offices in the near future as growth in the
Treasure Valley and Central Oregon has slowed. Rather, we will seek acquisition
opportunities to complement and leverage the Bank’s existing
footprint.
Mortgage servicing rights. In
August 2008, the Bank entered into an agreement to sell its mortgage servicing
rights to another financial institution since we now sell nearly all one-to-four
family loan originations in the secondary market with servicing released. The
placement of Fannie Mae and Freddie Mac into the conservatorship of the Federal
government, in addition to sweeping changes in the secondary market, caused
uncertainty about the future value of the mortgage servicing rights asset.
Lastly, the rapid deterioration of the real estate market and the increase in
foreclosures in the Treasure Valley raised concern among management that
resources would be diverted to resolving foreclosed assets for loans owned by
others and away from the mitigation of loan losses and the workout of troubled
loans in our own portfolio. The sale of the mortgage servicing rights was
completed in the first quarter of fiscal 2009.
Bank owned life insurance. The
value of bank owned life insurance increased $424,000 to $12.0 million. The
policy premiums are invested in six insurance companies, each of which had a
rating of at least ‘A’ by Standard & Poor’s and A.M. Best. We continue to
monitor the financial performance, capital levels and financial ratings of the
companies that have issued the Bank’s “general account” life insurance
policies.
Real estate and other property owned.
Real estate and other property owned (“REO”) increased $17.7 million
during fiscal year 2009 due to the significant increase in foreclosures and the
Acquisition. REO in our Central Oregon market totaled $7.5 million at September
30, 2009, net of fair value purchase adjustments. Total REO was comprised of
$11.5 million of land development and speculative one-to-four family
construction projects, $5.9 million of commercial real estate, $631,000 of
one-to-four family residential properties, and $412,000 of other repossessed
assets at September 30, 2009.
Deferred taxes. As of
September 30, 2009, the net deferred tax liability balance was $5.6 million
versus a net deferred tax asset of $1.8 million at September 30, 2008. The
difference is mainly due to the $9.8 million deferred tax liability that was
recorded in connection with the Acquisition representing the fair value
adjustments on the loans and deposits acquired, as well as the excess of the
purchase discount over the net assets acquired.
FDIC indemnification receivable.
As part of the purchase and assumption agreement for the Acquisition, we
entered into a loss sharing agreement with the FDIC. This agreement
covers realized losses on loans and foreclosed real estate purchased in the
Acquisition. Under this agreement, the FDIC will reimburse Home
Federal Bank for 80% of the first $34.0 million of realized losses and 95% on
realized losses that exceed $34.0 million. The loss share agreement does not
extend to our organic loan portfolio and does not cover loans we originate in
the Central Oregon market after August 7, 2009.
Deposits. Deposits increased
$141.9 million, or 38.1%, to $514.9 million at September 30, 2009, from $372.9
million at September 30, 2008 mainly due to the $143.5 million in deposits
assumed in the Acquisition.
The
following table details the changes in deposit accounts:
|
|
|
|
|
Increase
/ (Decrease)
|
|
|
|
Balance
at September 30,
2009
|
|
|
Balance
at September 30,
2008
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
$ |
68,155 |
|
|
$ |
41,398 |
|
|
$ |
26,757 |
|
|
|
64.6 |
% |
Interest-bearing
demand
|
|
|
78,393 |
|
|
|
55,450 |
|
|
|
22,943 |
|
|
|
41.4 |
|
Health
savings accounts
|
|
|
21,248 |
|
|
|
21,122 |
|
|
|
126 |
|
|
|
0.6 |
|
Money
market
|
|
|
76,408 |
|
|
|
51,142 |
|
|
|
25,266 |
|
|
|
49.4 |
|
Savings
|
|
|
41,757 |
|
|
|
26,409 |
|
|
|
15,348 |
|
|
|
58.1 |
|
Certificates
of deposit
|
|
|
228,897 |
|
|
|
177,404 |
|
|
|
51,493 |
|
|
|
29.0 |
|
Total
deposit accounts
|
|
$ |
514,858 |
|
|
$ |
372,925 |
|
|
$ |
141,933 |
|
|
|
38.1 |
% |
The
following table details our organic and acquired market deposit portfolios at
September 30, 2009:
|
|
September
30, 2009
|
|
|
|
(in
thousands)
|
|
|
|
Acquired
|
|
|
Organic
|
|
|
Total
|
|
Noninterest-bearing
demand
|
|
$ |
26,123 |
|
|
$ |
42,032 |
|
|
$ |
68,155 |
|
Interest-bearing
demand
|
|
|
16,188 |
|
|
|
62,205 |
|
|
|
78,393 |
|
Health
savings accounts
|
|
|
-- |
|
|
|
21,248 |
|
|
|
21,248 |
|
Money
market
|
|
|
20,510 |
|
|
|
55,898 |
|
|
|
76,408 |
|
Savings
|
|
|
5,324 |
|
|
|
36,433 |
|
|
|
41,757 |
|
Certificates
of deposit
|
|
|
68,319 |
|
|
|
160,578 |
|
|
|
228,897 |
|
Total
deposit accounts
|
|
$ |
136,464 |
|
|
$ |
378,394 |
|
|
$ |
514,858 |
|
The
balance of deposits assumed in the Acquisition as of the acquisition date of
August 7, 2009, included $68.0 million in demand and savings deposits and $75.5
million in certificates of deposit. Since the acquisition date through September
30, 2009, core deposit balances in the Central Oregon region have increased
approximately $200,000 while the certificate of deposit balances declined $6.5
million, or 8.7%, as we are now offering rates on certificates of deposit that
are lower than the rates that were being offered by the failed institution.
Management in the Central Oregon region continues to focus on retaining and
growing core deposits (checking, savings and money market
accounts).
We
believe increasing core deposits and reducing reliance on certificates of
deposits is an important component in the strategy to transform the balance
sheet toward a commercial bank. The investment in free-standing full-service
banking offices, reduced reliance on in-store branches, and changes made in the
management team and organizational alignment of the Bank’s retail banking
program will help increase core deposit accounts, despite the significant
challenges in our markets. Additionally, we hired several small business bankers
and a commercial deposit officer in fiscal 2009 to develop a more effective
commercial and small business deposit program.
Our
deposit portfolio includes a concentration of low-cost health savings accounts.
Health savings accounts totaled $21.2 million and $21.1 million at September 30,
2009 and 2008, respectively. Nearly all of these accounts are originated through
broker relationships throughout the United States. We have limited control over
these accounts as they are not local to our operating markets. Additionally,
changes in tax law or the structure of health savings accounts could cause the
balances to be withdrawn.
Interest-bearing
checking accounts grew $22.9 million, with $6.8 million of that growth occurring
organically. We attribute this growth to a new checking account offered in early
calendar 2009 that offers a higher interest rate on balances up to $25,000 as
long as the customer meets certain qualifiers each month that are intended to
increase interchange fee income and reduce noninterest expense. At September 30,
2009, account balances in this product totaled $10.2 million with approximately
55% of that balance being new account relationships. We intend to launch this
product in the Central Oregon region in the second quarter of fiscal year
2010.
Borrowings. Federal Home Loan
Bank advances and other borrowings decreased $52.2 million, or 38.1%, to $84.7
million at September 30, 2009, from $137.0 million at September 30, 2008. We
used principal payment proceeds from our mortgage-backed securities and
residential loan portfolios to reduce our advances as they matured. FHLB
borrowings with a fair value of $19.0 million assumed in the Acquisition were
paid off prior to September 30, 2009.
We have
$19.2 million of FHLB advances maturing in fiscal 2010 and intend to reduce
outstanding advance balances as they mature as we had excess liquidity at
September 30, 2009. We had $134.4 million of borrowing capacity available at the
Federal Home Loan Bank of Seattle at September 30, 2009.
Equity. Stockholders’ equity
increased $4.5 million, or 2.2%, to $209.7 million at September 30, 2009, from
$205.2 million at September 30, 2008. The extraordinary gain associated with the
acquisition was the primary cause for the increase in stockholders’
equity. The gain was offset by the repurchase of stock during the
quarter ended March 31, 2009. In addition, dividends and a loss from
operations in fiscal 2009 reduced retained earnings while a lower interest rate
environment at September 30, 2009, increased the unrealized gain on securities
by $5.3 million, net of tax, compared to September 30, 2008.
We
completed the share repurchase program announced in December 2008 by buying
867,970 shares, or 5%, of the Company’s common stock. We announced another 5%
repurchase plan in July 2009, which authorizes us to repurchase up to 834,900
additional shares. No shares have been repurchased under the July 2009 program
and we do not anticipate purchasing shares at a price higher than the Company’s
book value per share. We believe the preservation of capital is critical to
executing our acquisition strategy.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2009, AND SEPTEMBER 30
2008
General. Net income for the
year ended September 30, 2009 was $8.1 million, or $0.52 per diluted share,
compared to net income of $4.0 million, or $0.25 per diluted share, for the year
ended September 30, 2008. Net income for the fiscal year ended September 30,
2009 included a $15.3 million after-tax extraordinary gain related to our FDIC-
assisted acquisition of the former Community First Bank headquartered in
Prineville, Oregon.
Net Interest Income. Net
interest income increased $1.2 million, or 5.3%, to $23.9 million for the year
ended September 30, 2009, from $22.6 million for the year ended September 30,
2008. The increase in net interest income was primarily attributable to lower
interest expense on deposits due to aggressive reductions in interest rates
initiated by the Federal Reserve during the early part of fiscal
2009. Our net interest margin increased 29 basis points to 3.50% for
the year ended September 30, 2009, from 3.21% for the same period last year. The
improvement in the net interest margin is primarily attributable to the decrease
in interest expense as rates have decreased significantly from the prior
year.
The
following table sets forth the results of balance sheet growth and changes in
interest rates to our net interest income. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). Changes attributable to both rate and
volume, which cannot be segregated, are allocated proportionately to the changes
in rate and volume.
|
|
Year
Ended September 30, 2009
Compared
to September 30, 2008
Increase
(Decrease) Due to
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
|
$ |
(2,585 |
) |
|
$ |
(556 |
) |
|
$ |
(3,141 |
) |
Loans
held for sale
|
|
|
(4 |
) |
|
|
7 |
|
|
|
3 |
|
Interest
bearing deposits in other banks
|
|
|
(646 |
) |
|
|
(282 |
) |
|
|
(928 |
) |
Investment
securities, available for sale
|
|
|
-- |
|
|
|
7 |
|
|
|
7 |
|
Mortgage-backed
securities
|
|
|
(304 |
) |
|
|
(217 |
) |
|
|
(521 |
) |
Federal
Home Loan Bank stock
|
|
|
(174 |
) |
|
|
(2 |
) |
|
|
(176 |
) |
Total
net change in income on interest-earning assets
|
|
$ |
(3,713 |
) |
|
$ |
(1,043 |
) |
|
$ |
(4,756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
3 |
|
|
$ |
56 |
|
|
$ |
59 |
|
Interest-bearing
demand deposits
|
|
|
(35 |
) |
|
|
(2 |
) |
|
|
(37 |
) |
Money
market accounts
|
|
|
(689 |
) |
|
|
(69 |
) |
|
|
(758 |
) |
Certificates
of deposit
|
|
|
(2,397 |
) |
|
|
(476 |
) |
|
|
(2,873 |
) |
Total
deposits
|
|
|
(3,118 |
) |
|
|
(491 |
) |
|
|
(3,609 |
) |
Federal
Home Loan Bank advances
|
|
|
(315 |
) |
|
|
(2,034 |
) |
|
|
(2,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net change in expense on interest-bearing
liabilities
|
|
$ |
(3,433 |
) |
|
$ |
(2,525 |
) |
|
$ |
(5,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
increase in net interest income
|
|
|
|
|
|
|
|
|
|
$ |
1,202 |
|
Interest and Dividend Income.
Total interest and dividend income for the year ended September 30, 2009
decreased $4.8 million, or 11.7%, to $35.8 million, from $40.6 million for the
same period of the prior year. The decrease during the period was primarily
attributable to the decrease in yield on interest-earning assets to 5.26% from
5.75% in the prior year. This decrease in interest and dividend income is the
result of lower overall interest rates during the current year compared to prior
year. In addition, nonaccrual loans are significantly higher than in the prior
year, which resulted in foregone interest income of approximately $1.3 million.
The yield on our loan portfolio declined to 5.85% in fiscal year 2009 compared
to 6.40% in fiscal year 2008.
The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income for the years
ended September 30, 2009 and 2008:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Yield
|
|
|
Average
Balance
|
|
|
Yield
|
|
|
(Decrease)
in interest and dividend
income
|
|
|
|
(dollars
in thousands)
|
|
Loans
receivable, net of deferred
fees/costs
|
|
$ |
468,205 |
|
|
|
5.85 |
% |
|
$ |
477,053 |
|
|
|
6.40 |
% |
|
$ |
(3,141 |
) |
Loans
held for sale
|
|
|
3,176 |
|
|
|
5.65 |
|
|
|
2,811 |
|
|
|
6.27 |
|
|
|
3 |
|
Interest
bearing deposits in other banks
|
|
|
18,391 |
|
|
|
0.27 |
|
|
|
30,753 |
|
|
|
3.18 |
|
|
|
(928 |
) |
Investment
securities, available for
sale
|
|
|
1,503 |
|
|
|
2.79 |
|
|
|
1,243 |
|
|
|
2.82 |
|
|
|
7 |
|
Mortgage-backed
securities
|
|
|
179,729 |
|
|
|
4.57 |
|
|
|
184,343 |
|
|
|
4.74 |
|
|
|
(521 |
) |
FHLB
stock
|
|
|
9,760 |
|
|
|
(0.34 |
) |
|
|
9,591 |
|
|
|
1.49 |
|
|
|
(176 |
) |
Total
interest-earning assets
|
|
$ |
680,764 |
|
|
|
5.26 |
% |
|
$ |
705,794 |
|
|
|
5.75 |
% |
|
$ |
(4,756 |
) |
At
September 30, 2009, approximately 67.2% of our gross loans were adjustable rate,
compared to 60.6% at September 30, 2008. At September 30, 2009, approximately
32.4% of our adjustable-rate loans are tied to the Prime rate, as published in
The Wall Street
Journal.
Interest Expense. Interest
expense decreased $6.0 million, or 33.2%, to $12.0 million for the year ended
September 30, 2009 from $17.9 million for the year ended September 30, 2008. The
decrease was due to both declines in the average balance of total
interest-bearing liabilities and cost of funds to $466.2 million and 2.57% from
$512.1 million and 3.50% for the years ended September 30, 2009 and September
30, 2008, respectively. The decline in interest-bearing liabilities
was concentrated in certificates of deposit and borrowings. Capitalized interest
expense related to the construction of banking offices for the year ended
September 30, 2009, was $56,000.
The
following table details average balances, cost of funds and the change in
interest expense for the year ended September 30, 2009 and 2008:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
(Decrease)
in Interest
Expense
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
33,513 |
|
|
|
0.70 |
% |
|
$ |
24,194 |
|
|
|
0.73 |
% |
|
$ |
59 |
|
Interest-bearing
demand
deposits
|
|
|
83,651 |
|
|
|
0.53 |
|
|
|
78,618 |
|
|
|
0.61 |
|
|
|
(37 |
) |
Money
market deposits
|
|
|
55,692 |
|
|
|
1.21 |
|
|
|
58,698 |
|
|
|
2.44 |
|
|
|
(758 |
) |
Certificates
of deposit
|
|
|
181,774 |
|
|
|
3.15 |
|
|
|
193,002 |
|
|
|
4.45 |
|
|
|
(2,873 |
) |
FHLB
advances
|
|
|
111,573 |
|
|
|
4.39 |
|
|
|
157,549 |
|
|
|
4.60 |
|
|
|
(2,349 |
) |
Total
interest-bearing liabilities
|
|
$ |
466,203 |
|
|
|
2.57 |
% |
|
$ |
512,061 |
|
|
|
3.50 |
% |
|
$ |
(5,958 |
) |
Approximately
$162.0 million and $25.9 million of certificates of deposit and FHLB advances,
respectively, are scheduled to mature during fiscal 2010.
Provision for Loan Losses. A
provision for loan losses of $16.1 million was recorded in connection with our
analysis of losses in the loan portfolio for the year ended September 30, 2009,
compared to a provision for loan losses of $2.4 million for the same period of
2008. The increase in the provision takes into account the increase in
classified assets, nonperforming loans and loan losses during fiscal 2009 as
well as the current downturn in the real estate market, internal changes in our
lending and underwriting policies and the general economy.
We
consider the allowance for loans losses at September 30, 2009, to be our best
estimate of probable incurred losses inherent in the loan portfolio as of that
date based on the assessment of the above-mentioned factors affecting the loan
portfolio. While we believe the estimates and assumptions used in the
determination of the allowance are reasonable, there can be no assurance that
such estimates and assumptions will not be proven incorrect in the future, or
that the actual amount of future provisions will not exceed the amount of past
provisions or that any increased provision that may be required will not
adversely impact our financial condition and results of operations. In addition,
the determination of the amount of our allowance for loan losses is subject to
review by bank regulators, as part of the routine examination process, which may
result in the establishment of additional reserves based upon their judgment of
information available to them at the time of their examination.
The
following table details selected activity associated with the allowance for loan
losses for the years ended September 30, 2009 and 2008:
|
|
At
or For the Year
Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars
in thousands)
|
|
Provision
for loan losses
|
|
$ |
16,085 |
|
|
$ |
2,431 |
|
Net
charge-offs
|
|
|
8,740 |
|
|
|
840 |
|
Allowance
for loan losses
|
|
|
28,735 |
|
|
|
4,579 |
|
Allowance
for loan losses as a percentage of gross loans
receivable at the end of the period
|
|
|
5.32 |
% |
|
|
0.98 |
% |
Allowance
for loan losses as a percentage of
nonperforming loans at the end of the period
|
|
|
74.65 |
% |
|
|
46.04 |
% |
Nonperforming
loans
|
|
$ |
38,492 |
|
|
$ |
9,945 |
|
Nonaccrual
and 90 days or more past due loans as a
percentage of loans receivable at the end of the period
|
|
|
7.13 |
% |
|
|
2.14 |
% |
Loans
receivable, net
|
|
$ |
510,629 |
|
|
$ |
459,813 |
|
Noninterest Income.
Noninterest income decreased $1.4 million, or 12.9%, to $9.3 million for the
year ended September 30, 2009 from $10.7 million for the year ended September
30, 2008.
The
following table provides a detailed analysis of the changes in components of
noninterest income:
|
|
Year
Ended
September
30,
|
|
|
Increase
/ (Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
fees and charges
|
|
$ |
8,302 |
|
|
$ |
9,077 |
|
|
$ |
(775 |
) |
|
|
(8.5 |
)% |
Gain
on sale of loans
|
|
|
1,218 |
|
|
|
764 |
|
|
|
454 |
|
|
|
59.4 |
|
Increase
in cash surrender value of
bank owned life insurance
|
|
|
424 |
|
|
|
421 |
|
|
|
3 |
|
|
|
0.7 |
|
Loan
servicing fees
|
|
|
68 |
|
|
|
484 |
|
|
|
(416 |
) |
|
|
(86.0 |
) |
Mortgage
servicing rights, net
|
|
|
(31 |
) |
|
|
(340 |
) |
|
|
309 |
|
|
|
(90.9 |
) |
Prepayment
on FHLB borrowings,
net
|
|
|
(498 |
) |
|
|
-- |
|
|
|
(498 |
) |
|
|
-- |
|
Loss
on sale of securities, net
|
|
|
(203 |
) |
|
|
-- |
|
|
|
(203 |
) |
|
|
-- |
|
Other
|
|
|
11 |
|
|
|
256 |
|
|
|
(245 |
) |
|
|
(95.7 |
) |
Total
noninterest income
|
|
$ |
9,291 |
|
|
$ |
10,662 |
|
|
$ |
(1,371 |
) |
|
|
(12.9 |
)% |
The
increase in the gain on sale of loans is a reflection of the low interest rate
environment that has persisted for the majority of fiscal 2009. The low interest
rate environment attributed to the significant increase in residential mortgage
refinancings completed during fiscal 2009 as mortgage rates fell below 5.00% for
most of the year. Loans originated for sale in the secondary market
increased $20.9 million, or 45.5%, in 2009 compared to fiscal 2008.
During
fiscal 2009, service fees and charges decreased 8.5% to $8.3
million. Nonsufficient fund (“NSF”) fee income decreased $814,000 or
12.0% from the year ago period. However this decline in NSF income
was partially offset by a $336,000 decline in check losses. A continued weak
economy may result in declines in consumer spending, which may reduce fee income
due to the decline in the number of checking account and debit card
transactions. Additionally, banking regulators and Congress are proposing
legislation that could materially change our overdraft protection products and
reduce the fees we can assess when customers overdraw their checking
accounts.
Checking
fee income represents a larger percentage of our total revenues that many of our
peers due to a deposit gathering strategy implemented many years ago that we
have begun to change. Historically, the Bank focused on high-transaction,
low-balance “free checking” accounts that would result in high NSF fee income.
We changed our strategy on deposit aggregation in 2006 to focus on building
deeper relationships with our depositors that may result in fewer accounts with
higher, more stable balances and less fee income. However, we believe these
customers
improve
the Bank’s franchise value and provide a stable, low-cost funding source for
loans, which results in higher net interest income. We have also launched a
checking account, mentioned earlier, that is structured to improve interchange
fee income as a result of higher debit card usage. We believe this will offset
some of the lost NSF fee income, but nonetheless, our revenues may be
significantly reduced as a result of regulatory changes beyond our control in
fiscal year 2010.
We
incurred a $498,000 prepayment penalty on the early extinguishment of $19.0
million in FHLB borrowings assumed in the Acquisition. In addition, a
$203,000 loss on the sale of securities was incurred during the year, which
included an $184,000 loss on the sale of a private label collateralized mortgage
obligation that was sold in order to reduce credit risk exposure. A portion of
the securities sold included securities obtained in the Acquisition that were
not consistent with our investment policy.
Noninterest Expense.
Noninterest expense increased $4.4 million, or 17.7%, to $29.0 million for the
year ended September 30, 2009 from $24.6 million for the year ended September
30, 2008. The efficiency ratio, which is the percentage of noninterest expense
to net interest income plus noninterest income, increased to 87.4% for the year
ended September 30, 2009, compared to 73.9% for the year ended September 30,
2008. The increase in the efficiency ratio is primarily due to the combination
of increased expenses associated with troubled assets as well as events related
to the Acquisition. Noninterest expenses related to the Acquisition totaled
$197,000 and general operating expenses in the Central Oregon region totaled
$762,000, together comprising $959,000 of the increase in overall noninterest
expense in fiscal year 2009.
The
following table provides a detailed analysis of the changes in components of
noninterest expense:
|
|
Year
Ended
September
30,
|
|
|
Increase
/ (Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$ |
15,918 |
|
|
$ |
15,211 |
|
|
$ |
707 |
|
|
|
4.6 |
% |
Occupancy
and equipment
|
|
|
3,214 |
|
|
|
3,007 |
|
|
|
207 |
|
|
|
6.9 |
|
Data
processing
|
|
|
2,483 |
|
|
|
2,198 |
|
|
|
285 |
|
|
|
13.0 |
|
Advertising
|
|
|
913 |
|
|
|
1,043 |
|
|
|
(130 |
) |
|
|
(12.5 |
) |
Professional
services
|
|
|
1,460 |
|
|
|
788 |
|
|
|
672 |
|
|
|
85.3 |
|
Insurance
and taxes
|
|
|
1,541 |
|
|
|
533 |
|
|
|
1,008 |
|
|
|
189.1 |
|
Provision
for REO
|
|
|
1,129 |
|
|
|
172 |
|
|
|
957 |
|
|
|
556.4 |
|
Other
|
|
|
2,313 |
|
|
|
1,659 |
|
|
|
654 |
|
|
|
39.4 |
|
Total
noninterest expense
|
|
$ |
28,971 |
|
|
$ |
24,611 |
|
|
$ |
4,360 |
|
|
|
17.7 |
% |
Compensation and benefits.
Compensation and benefits increased $707,000 or 4.7% to $15.9 million for the
year ended September 30, 2009 from $15.2 million for the same period a year ago.
The largest factor in the increase was compensation which increased $504,000 or
5% due to the combination of annual merit increases as well as the additional
compensation expenses incurred related to the Acquisition totaling $498,000. We
currently estimate the Acquisition will add $3.0 million of compensation expense
in fiscal 2010 as we plan to operate a separate operation and information
technology system for the Central Oregon region until we consolidate to a new
technology platform in the fourth quarter of fiscal 2010. Incentive expense
increased $369,000 due to bonuses related to the Acquisition in fiscal 2009.
These increases were offset by ESOP expenses which decreased $260,000 or 21% due
to lower stock prices on average in fiscal 2009 than in fiscal
2008.
Professional services. The
increase in professional services was twofold. A $279,000 increase in
legal expenses from the prior year was due to both the Acquisition and the
significant increase in troubled assets. External audit expenses
increased $274,000 as a change in accounting methodology related to the timing
of the recording of external audit expenses caused a one-time reduction in such
expenses in fiscal 2008.
Insurance and taxes. The
additional expense incurred for insurance and taxes is directly correlated to
the current economic climate. Property taxes increased $333,000
mainly due to the payment of overdue property taxes on foreclosed
property. FDIC assessment expense increased $651,000 as the FDIC
dramatically increased assessment rates as well as levied a one-time special
assessment fee during fiscal 2009.
Provision for REO. The
increase in provision for REO is directly related to the significant increase in
REO balances from the prior year. The REO balance increased from
$650,000 as of September 30, 2008 to $18.4 million as of September 30,
2009. On a quarterly basis, all REO is evaluated and their respective
carrying balances are adjusted downward if warranted. The $1.1
million of provision for REO expense represents additional adjustments downward
in the carrying value of REO subsequent to foreclosure.
Income Tax Expense (Benefit).
Income tax benefit from continuing operations was $4.8 million based on a
pre-tax loss from operations of $11.9 million. This compares to
income tax expense in the prior year of $2.3 million based on $6.3 million in
pre-tax income. The extraordinary gain realized in fiscal 2009 was
$15.3 million, net of $9.8 million in taxes.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2008, AND SEPTEMBER 30
2007
General. Net income for the
year ended September 30, 2008 was $4.0 million, or $0.25 per diluted share,
compared to net income of $5.3 million, or $0.31 per diluted share, for the year
ended September 30, 2007. The decrease in net income during fiscal 2008 was
primarily due to a $2.0 million increase in the provision for loan losses,
before the effect of income taxes. A $791,000 decline in noninterest income,
primarily due to lower loan sale gains, and an $803,000 increase in noninterest
expense offset a margin-driven increase in net interest income of $1.3
million.
Net Interest Income. Net
interest income increased $1.3 million, or 6.3%, to $22.6 million for the year
ended September 30, 2008, from $21.3 million for the year ended September 30,
2007. The increase in net interest income was primarily attributable to a lower
balance of certificates of deposit and FHLB advances made possible by the
Conversion proceeds.
Our net
interest margin increased 18 basis points to 3.21% for the year ended September
30, 2008, from 3.03% for the same period last year. The improvement in the net
interest margin is primarily attributable to the increase in interest earning
assets that resulted from the proceeds of the Conversion completed on December
19, 2007. In addition, decreases in interest expense and a shift in the loan
portfolio toward higher yielding commercial loans from residential mortgage
loans also contributed to the increase in the margin in 2008.
The
following table sets forth the results of balance sheet growth and changes in
interest rates to our net interest income. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). Changes attributable to both rate and
volume, which cannot be segregated, are allocated proportionately to the changes
in rate and volume.
|
|
Year
Ended September 30, 2008
Compared
to September 30, 2007
Increase
(Decrease) Due to
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
|
$ |
(1,094 |
) |
|
$ |
(1,713 |
) |
|
$ |
(2,807 |
) |
Loans
held for sale
|
|
|
(7 |
) |
|
|
(53 |
) |
|
|
(60 |
) |
Investment
securities, including interest-bearing
deposits in other banks
|
|
|
(183 |
) |
|
|
850 |
|
|
|
667 |
|
Mortgage-backed
securities
|
|
|
(142 |
) |
|
|
192 |
|
|
|
50 |
|
Federal
Home Loan Bank stock
|
|
|
95 |
|
|
|
-- |
|
|
|
95 |
|
Total
net change in income on interest-earning assets
|
|
$ |
(1,331 |
) |
|
$ |
(724 |
) |
|
$ |
(2,055 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
70 |
|
|
$ |
4 |
|
|
$ |
74 |
|
Interest-bearing
demand deposits
|
|
|
(10 |
) |
|
|
(77 |
) |
|
|
(87 |
) |
Money
market accounts
|
|
|
(276 |
) |
|
|
492 |
|
|
|
216 |
|
Certificates
of deposit
|
|
|
(297 |
) |
|
|
(1,500 |
) |
|
|
(1,797 |
) |
Total
deposits
|
|
|
(513 |
) |
|
|
(1,081 |
) |
|
|
(1,594 |
) |
Federal
Home Loan Bank advances
|
|
|
258 |
|
|
|
(2,065 |
) |
|
|
(1,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net change in expense on interest-bearing liabilities
|
|
$ |
(255 |
) |
|
$ |
(3,122 |
) |
|
$ |
(3,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
increase in net interest income
|
|
|
|
|
|
|
|
|
|
$ |
1,346 |
|
Interest and Dividend Income.
Total interest and dividend income for the year ended September 30, 2008
decreased $2.1 million, or 4.8%, to $40.6 million, from $42.6 million for the
same period of the prior year. The decrease during the period was primarily
attributable to the decrease in yield on interest-earning assets to 5.75% from
6.06% in the prior year. This decrease in interest and dividend income is the
result of lower overall interest rates during the current year compared to prior
year. We believe the effect of the shift in the loan portfolio toward commercial
loans from residential mortgage loans, which are lower yielding, helped to
mitigate further declines in interest income.
The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income for the years
ended September 30, 2008 and 2007:
|
|
Year
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Yield
|
|
|
Average
Balance
|
|
|
Yield
|
|
|
(Decrease)
in interest and dividend
income
|
|
|
|
(dollars
in thousands)
|
|
Loans
receivable, net of deferred
fees/costs
|
|
$ |
477,053 |
|
|
|
6.40 |
% |
|
$ |
503,478 |
|
|
|
6.62 |
% |
|
$ |
(2,807 |
) |
Loans
held for sale
|
|
|
2,811 |
|
|
|
6.27 |
|
|
|
3,652 |
|
|
|
6.46 |
|
|
|
(60 |
) |
Investment
securities, available for
sale, including interest-bearing
deposits in other banks
|
|
|
31,996 |
|
|
|
3.16 |
|
|
|
6,645 |
|
|
|
5.19 |
|
|
|
667 |
|
Mortgage-backed
securities
|
|
|
184,343 |
|
|
|
4.74 |
|
|
|
180,309 |
|
|
|
4.82 |
|
|
|
50 |
|
FHLB
stock
|
|
|
9,591 |
|
|
|
1.49 |
|
|
|
9,591 |
|
|
|
0.50 |
|
|
|
95 |
|
Total
interest-earning assets
|
|
$ |
705,794 |
|
|
|
5.75 |
% |
|
$ |
703,675 |
|
|
|
6.06 |
% |
|
$ |
(2,055 |
) |
At
September 30, 2008, approximately 60.6% of our gross loans were adjustable rate,
compared to 56.9% at September 30, 2007. At September 30, 2008, approximately
15.1% of our adjustable-rate loans are tied to the Prime rate, as published in
The Wall Street
Journal.
Interest Expense. Interest
expense decreased $3.4 million, or 15.9%, to $17.9 million for the year ended
September 30, 2008 from $21.3 million for the year ended September 30, 2007. The
decrease was due to both declines in the average balance of total
interest-bearing liabilities and cost of funds to $512.1 million and 3.50% from
$582.9 million and 3.66% for the years ended September 30, 2008 and September
30, 2007, respectively. The decline in interest-bearing liabilities
was concentrated in certificates of deposit and borrowings. Capitalized interest
expense related to the construction of banking offices for the year ended
September 30, 2008, was $24,000.
The
following table details average balances, cost of funds and the change in
interest expense for the year ended September 30, 2008 and 2007:
|
|
Year
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
(Decrease)
in Interest
Expense
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
24,194 |
|
|
|
0.73 |
% |
|
$ |
23,397 |
|
|
|
0.44 |
% |
|
$ |
74 |
|
Interest-bearing
demand
deposits
|
|
|
78,618 |
|
|
|
0.61 |
|
|
|
91,198 |
|
|
|
0.62 |
|
|
|
(87 |
) |
Money
market deposits
|
|
|
58,698 |
|
|
|
2.44 |
|
|
|
39,908 |
|
|
|
3.04 |
|
|
|
216 |
|
Certificates
of deposit
|
|
|
193,002 |
|
|
|
4.45 |
|
|
|
226,522 |
|
|
|
4.59 |
|
|
|
(1,797 |
) |
FHLB
advances
|
|
|
157,549 |
|
|
|
4.60 |
|
|
|
201,911 |
|
|
|
4.49 |
|
|
|
(1,807 |
) |
Total
interest-bearing liabilities
|
|
$ |
512,061 |
|
|
|
3.50 |
% |
|
$ |
582,936 |
|
|
|
3.66 |
% |
|
$ |
(3,401 |
) |
Approximately
$133.3 million and $76.9 million of certificates of deposit and FHLB advances,
respectively, are scheduled to mature during fiscal 2009. Treasury rates were
significantly lower at the end of fiscal 2008 compared to the start of the
fiscal year and short-term Treasury bill rates were near historical lows at the
end of the year. However, the current financial crisis has caused rates on FHLB
advances and certificates of deposit to be high compared to historical spreads
above Treasury rates. This widening of spreads is due to depositor concerns
about the stability of financial institutions and investor concerns about the
survivability of Federal Home Loan Banks, thereby creating a higher risk premium
for deposits and advances. We currently anticipate our certificates to reprice
at rates slightly lower than their current costs, which would reduce interest
expense, but we cannot be certain that lower market and Treasury rates will
necessarily result in lower funding costs in fiscal 2009.
Provision for Loan Losses. A
provision for loan losses of $2.4 million was recorded in connection with our
analysis of losses in the loan portfolio for the year ended September 30, 2008,
compared to a provision for loan losses of $409,000 for the same period of 2007.
The increase in the provision takes into account the increase in classified
assets during fiscal 2008 as well as the current downturn in the real estate
market, internal changes in management and the general economy.
The
following table details selected activity associated with the allowance for loan
losses for the years ended September 30, 2008 and 2007:
|
|
At
or For the Year
Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars
in thousands)
|
|
Provision
for loan losses
|
|
$ |
2,431 |
|
|
$ |
409 |
|
Net
charge-offs
|
|
|
840 |
|
|
|
203 |
|
Allowance
for loan losses
|
|
|
4,579 |
|
|
|
2,988 |
|
Allowance
for loan losses as a percentage of gross loans
receivable at the end of the period
|
|
|
0.98 |
% |
|
|
0.62 |
% |
Allowance
for loan losses as a percentage of
nonperforming loans at the end of the period
|
|
|
46.04 |
% |
|
|
195.17 |
% |
Nonperforming
loans
|
|
$ |
9,945 |
|
|
$ |
1,531 |
|
Nonaccrual
and 90 days or more past due loans as a
percentage of loans receivable at the end of the period
|
|
|
2.14 |
% |
|
|
0.32 |
% |
Loans
receivable, net
|
|
$ |
459,813 |
|
|
$ |
480,118 |
|
Noninterest Income.
Noninterest income decreased $619,000, or 5.5%, to $10.7 million for the year
ended September 30, 2008 from $11.3 million for the year ended September 30,
2007, as the gain on sale of loans decreased $655,000 or 46.2%.
The
following table provides a detailed analysis of the changes in components of
noninterest income:
|
|
Year
Ended
September
30,
|
|
|
Increase
/ (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
fees and charges
|
|
$ |
9,077 |
|
|
$ |
9,308 |
|
|
$ |
(231 |
) |
|
|
(2.5 |
)% |
Gain
on sale of loans
|
|
|
764 |
|
|
|
1,419 |
|
|
|
(655 |
) |
|
|
(46.2 |
) |
Increase
in cash surrender value of
bank owned life insurance
|
|
|
421 |
|
|
|
405 |
|
|
|
16 |
|
|
|
4.0 |
|
Loan
servicing fees
|
|
|
484 |
|
|
|
549 |
|
|
|
(65 |
) |
|
|
(11.8 |
) |
Mortgage
servicing rights, net
|
|
|
(340 |
) |
|
|
(445 |
) |
|
|
105 |
|
|
|
23.6 |
|
Other
|
|
|
256 |
|
|
|
45 |
|
|
|
211 |
|
|
|
468.9 |
|
Total
noninterest income
|
|
$ |
10,662 |
|
|
$ |
11,281 |
|
|
$ |
(619 |
) |
|
|
(5.5 |
)% |
The
decrease in the gain on sale of loans is a reflection of the significant slowing
in the local residential real estate market as loans originated for sale in the
secondary market declined $51.3 million, or 52.7%, in 2008 compared to fiscal
2007. We undertook an organizational realignment of our mortgage banking
department in the third quarter of 2008 to improve efficiency and reduce
delivery time.
During
fiscal 2008, interchange, debit card and checking account service fee income
increased 3.2% to $8.9 million, while check losses increased $347,000 to
$963,000, offsetting the fee increase. Income from health savings accounts,
which are also reported in service fees and charges, declined $76,000 to
$269,000 during fiscal 2008.
Noninterest Expense.
Noninterest expense increased $975,000, or 4.1%, to $24.6 million for the year
ended September 30, 2008 from $23.6 million for the year ended September 30,
2007. The efficiency ratio increased to 73.7% for the year ended September 30,
2008, compared to 72.5% for the year ended September 30, 2007.
The
following table provides a detailed analysis of the changes in components of
noninterest expense:
|
|
Year
Ended
September
30,
|
|
|
Increase
/ (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$ |
15,211 |
|
|
$ |
14,249 |
|
|
$ |
962 |
|
|
|
6.8 |
% |
Occupancy
and equipment
|
|
|
3,007 |
|
|
|
2,871 |
|
|
|
136 |
|
|
|
4.7 |
|
Data
processing
|
|
|
2,198 |
|
|
|
2,097 |
|
|
|
101 |
|
|
|
4.8 |
|
Advertising
|
|
|
1,043 |
|
|
|
1,427 |
|
|
|
(384 |
) |
|
|
(26.9 |
) |
Other
|
|
|
3,152 |
|
|
|
2,992 |
|
|
|
160 |
|
|
|
5.3 |
|
Total
noninterest expense
|
|
$ |
24,611 |
|
|
$ |
23,636 |
|
|
$ |
975 |
|
|
|
4.1 |
% |
Compensation and benefits.
Compensation and benefits increased $962,000 or 6.8% to $15.2 million for the
year ended September 30, 2008 from $14.2 million for the same period a year ago.
The largest factor in the increase was the ESOP. At the completion of the
Conversion in December 2007, additional shares were added to the ESOP and were
the main contributor to the $435,000 or 54.9% increase in ESOP-related expense
for the year ended September 30, 2008.
We also
hired several commercial lending officers throughout fiscal 2008, with most of
them joining the Company during the fourth quarter of fiscal 2008. However, we
continue to closely monitor personnel costs as we employed 201 full-time
equivalents at September 30, 2008, compared to 223 at September 30, 2007 and 240
at September 30, 2006.
Incentive
compensation totaled $359,000 in 2008 compared to $140,000 in 2007 while
commissions were $190,000 lower in 2008 due to lower loan production. The Board
decided to award a discretionary bonus to non-executive employees in fiscal
2008. The executive officers of the Company, including the end-of-year Chief
Executive Officer and Chief Financial Officer as well as the executive vice
presidents of commercial and consumer banking, did not receive incentive income
during fiscal 2008. The incentive award in fiscal 2007 was lower as no award was
granted on the basis of the Company’s financial performance. Some incentive
compensation was awarded to non-management employees in 2007 related to
individual performance above expectations.
Advertising. Advertising
expense decreased $384,000 or 26.9%. The amount of dollars spent on advertising
dropped for a time coinciding with the portion of the year when the position of
Director of Marketing was vacant.
Occupancy and Equipment and Data
Processing. We launched a stand-alone full-service office in early fiscal
2008 as a replacement for an in-store branch that was closed.
Income Tax Expense (Benefit).
Income tax expense decreased $1.0 million, or 30.7%, to $2.3 million for
the year ended September 30, 2008 from $3.3 million for the same period a year
ago. Income before income taxes decreased $2.3 million, or 26.6%, to $6.3
million for the year ended September 30, 2008 compared to $8.5 million for the
year ended September 30, 2007. Our combined federal and state effective income
tax rate for the current period was 36.1% compared to 38.3% for the same period
of the prior year. The decrease was due to both an increase in the net downward
adjustment of book net income before taxes due to book/tax differences to arrive
at taxable net income as well as a decrease in overall book net income before
taxes.
AVERAGE
BALANCES, INTEREST AND AVERAGE YIELDS/COST
The
following table sets forth for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin, and the ratio of average interest-earning assets to average
interest-bearing liabilities. Average balances have been calculated using the
average of daily balances during the period. Interest and dividends are reported
on a tax-equivalent basis. During the time periods presented, we did not own any
tax-exempt investment securities.
|
Year
Ended September 30,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
Average Balance
|
|
Interest
And
Dividends
|
|
Yield/
Cost
|
|
Average
Balance
|
|
Interest
And
Dividends
|
|
Yield/
Cost
|
|
Average
Balance
|
|
Interest
And
Dividends
|
|
Yield/
Cost
|
|
|
(dollars
in thousands)
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net (1)
|
$468,205
|
|
$27,369
|
|
5.85
|
%
|
$477,053
|
|
$30,510
|
|
6.40
|
%
|
$503,478
|
|
$
33,317
|
|
6.62
|
%
|
Loans
held for sale
|
3,176
|
|
179
|
|
5.65
|
|
2,811
|
|
176
|
|
6.27
|
|
3,652
|
|
236
|
|
6.46
|
|
Interest
bearing deposits in
other banks
|
18,391
|
|
49
|
|
0.27
|
|
30,753
|
|
977
|
|
3.18
|
|
6,645
|
|
345
|
|
5.19
|
|
Investment
securities,
available for sale
|
1,503
|
|
42
|
|
2.79
|
|
1,243
|
|
35
|
|
2.82
|
|
--
|
|
--
|
|
--
|
|
Mortgage-backed
securities
|
179,729
|
|
8,221
|
|
4.57
|
|
184,343
|
|
8,742
|
|
4.74
|
|
180,309
|
|
8,692
|
|
4.82
|
|
FHLB
stock
|
9,760
|
|
(33
|
)
|
(0.34
|
)
|
9,591
|
|
143
|
|
1.49
|
|
9,591
|
|
48
|
|
0.50
|
|
Total
interest-earning
assets
|
680,764
|
|
$35,827
|
|
5.26%
|
|
705,794
|
|
$40,583
|
|
5.75
|
%
|
703,675
|
|
$
42,638
|
|
6.06
|
%
|
Noninterest
earning assets
|
43,982
|
|
|
|
|
|
38,627
|
|
|
|
|
|
38,672
|
|
|
|
|
|
Total
assets
|
$724,746
|
|
|
|
|
|
$744,421
|
|
|
|
|
|
$742,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
$ 33,513
|
|
$ 236
|
|
0.70
|
%
|
$ 24,194
|
|
$ 177
|
|
0.73
|
%
|
$ 23,397
|
|
$ 103
|
|
0.44
|
%
|
Interest-bearing
demand deposits
|
83,651
|
|
445
|
|
0.53
|
|
78,618
|
|
482
|
|
0.61
|
|
91,198
|
|
569
|
|
0.62
|
|
Money
market accounts
|
55,692
|
|
672
|
|
1.21
|
|
58,698
|
|
1,430
|
|
2.44
|
|
39,908
|
|
1,214
|
|
3.04
|
|
Certificates
of deposit
|
181,774
|
|
5,723
|
|
3.15
|
|
193,002
|
|
8,596
|
|
4.45
|
|
226,522
|
|
10,393
|
|
4.59
|
|
Total
deposits
|
354,630
|
|
7,076
|
|
2.00
|
|
354,512
|
|
10,685
|
|
3.01
|
|
381,025
|
|
12,279
|
|
3.22
|
|
FHLB
advances
|
111,573
|
|
4,901
|
|
4.39
|
|
157,549
|
|
7,250
|
|
4.60
|
|
201,911
|
|
9,057
|
|
4.49
|
|
Total
interest-bearing
liabilities
|
466,203
|
|
$11,977
|
|
2.57
|
%
|
512,061
|
|
$17,935
|
|
3.50
|
%
|
582,936
|
|
$21,336
|
|
3.66
|
%
|
Noninterest-bearing
liabilities
|
55,779
|
|
|
|
|
|
46,725
|
|
|
|
|
|
48,493
|
|
|
|
|
|
Total
liabilities
|
521,982
|
|
|
|
|
|
558,786
|
|
|
|
|
|
631,429
|
|
|
|
|
|
Stockholders’
equity
|
202,764
|
|
|
|
|
|
185,635
|
|
|
|
|
|
110,918
|
|
|
|
|
|
Total
liabilities and equity
|
$724,746
|
|
|
|
|
|
$744,421
|
|
|
|
|
|
$742,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
$23,850
|
|
|
|
|
|
$22,648
|
|
|
|
|
|
$21,302
|
|
|
|
Interest
rate spread
|
|
|
2.69
|
%
|
|
|
|
|
2.25
|
%
|
|
|
|
|
2.40
|
%
|
|
|
Net interest margin (2)
|
|
|
3.50
|
|
|
|
|
|
3.21
|
|
|
|
|
|
3.03
|
|
|
|
Ratio
of average interest-
earning assets to average interest-bearing liabilities
|
|
|
146.02
|
|
|
|
|
|
137.83
|
|
|
|
|
|
120.71
|
|
|
|
(1)
|
Non-accrual
loans are included in the average balance. Loan fees are included in
interest income on loans and are
insignificant.
|
(2) |
Net
interest margin, otherwise known as yield on interest earning assets, is
calculated as net interest income divided by average interest-earning
assets.
|
The
following table sets forth (on a consolidated basis) for the periods and at the
dates indicated, the weighted average yields earned on our assets, the weighted
average interest rates paid on our liabilities, together with the net yield on
interest-earning assets:
|
At
September
30,
|
|
Year
Ended September 30,
|
|
2009
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
Weighted
average yield on:
|
|
|
|
|
|
|
|
Loans
receivable, net
|
6.20%
|
|
5.85%
|
|
6.40%
|
|
6.62%
|
Loans
held for sale
|
5.15
|
|
5.65
|
|
6.26
|
|
6.46
|
Interest
bearing deposits in other banks
|
0.04
|
|
0.27
|
|
3.18
|
|
5.19
|
Investment
securities, available for sale
|
3.09
|
|
2.79
|
|
2.82
|
|
--
|
Mortgage-backed
securities
|
4.27
|
|
4.57
|
|
4.74
|
|
4.82
|
Federal
Home Loan Bank stock
|
0.00
|
|
(0.34)
|
|
1.49
|
|
0.50
|
Total
interest-earning assets
|
5.37
|
|
5.26
|
|
5.75
|
|
6.06
|
|
|
|
|
|
|
|
|
Weighted
average rate paid on:
|
|
|
|
|
|
|
|
Savings
deposits
|
0.96
|
|
0.70
|
|
0.73
|
|
0.44
|
Interest-bearing
demand deposits
|
0.59
|
|
0.53
|
|
0.61
|
|
0.62
|
Money
market accounts
|
1.00
|
|
1.21
|
|
2.44
|
|
3.04
|
Certificates
of deposit
|
2.63
|
|
3.15
|
|
4.45
|
|
4.59
|
Total
deposits
|
1.74
|
|
2.00
|
|
3.01
|
|
3.22
|
Federal
Home Loan Bank advances
|
4.00
|
|
4.39
|
|
4.60
|
|
4.49
|
Total
interest-bearing liabilities
|
2.10
|
|
2.57
|
|
3.50
|
|
3.66
|
|
|
|
|
|
|
|
|
Interest
rate spread (spread between
weighted average rate on all interest-
earning assets and all interest-bearing
liabilities)
|
3.27
|
|
2.69
|
|
2.25
|
|
2.40
|
|
|
|
|
|
|
|
|
Net
interest margin (net interest income
as
a percentage of average interest-
earning assets)
|
N/A
|
|
3.50
|
|
3.21
|
|
3.03
|
|
|
|
|
|
|
|
|
RATE/VOLUME
ANALYSIS
The
following table sets forth the effects of changing rates and volumes on our net
interest income. Information is provided with respect to: (1) effects on
interest income attributable to changes in volume (changes in volume multiplied
by prior rate); and (2) effects on interest income attributable to changes in
rate (changes in rate multiplied by prior volume). Changes attributable to both
rate and volume, which cannot be segregated, are allocated proportionately to
the changes in rate and volume.
|
Year
Ended September 30, 2009
Compared
to Year Ended
September
30, 2008
Increase
(Decrease) Due to
|
|
Year
Ended September 30, 2008
Compared
to Year Ended
September
30, 2007
Increase
(Decrease) Due to
|
|
Rate
|
|
Volume
|
|
Total
|
|
Rate
|
|
Volume
|
|
Total
|
|
(dollars
in thousands)
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
$
(2,585)
|
|
$(556)
|
|
$(3,141)
|
|
$
(1,094)
|
|
$(1,713)
|
|
$(2,807)
|
Loans
held for sale
|
(4)
|
|
7
|
|
3
|
|
(7)
|
|
(53)
|
|
(60)
|
Interest
bearing deposits in other
banks
|
(646)
|
|
(282)
|
|
(928)
|
|
(183)
|
|
850
|
|
667
|
Investment
securities, available for
sale
|
--
|
|
7
|
|
7
|
|
--
|
|
--
|
|
--
|
Mortgage-backed
securities
|
(304)
|
|
(217)
|
|
(521)
|
|
(142)
|
|
192
|
|
50
|
Federal
Home Loan Bank stock
|
(174)
|
|
(2)
|
|
(176)
|
|
95
|
|
--
|
|
95
|
Total
net change in income on interest-
earning assets
|
$(3,713)
|
|
$(1,043)
|
|
$(4,756)
|
|
$(1,331)
|
|
$(724)
|
|
$(2,055)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
$ 3
|
|
$ 56
|
|
$ 59
|
|
$ 70
|
|
$ 4
|
|
$ 74
|
Interest-bearing
demand deposits
|
(35)
|
|
(2)
|
|
(37)
|
|
(10)
|
|
(77)
|
|
(87)
|
Money
market accounts
|
(689)
|
|
(69)
|
|
(758)
|
|
(276)
|
|
492
|
|
216
|
Certificates
of deposit
|
(2,397)
|
|
(476)
|
|
(2,873)
|
|
(297)
|
|
(1,500)
|
|
(1,797)
|
Total
deposits
|
(3,118)
|
|
(491)
|
|
(3,609)
|
|
(513)
|
|
(1,081)
|
|
(1,594)
|
Federal
Home Loan Bank advances
|
(315)
|
|
(2,034)
|
|
(2,349)
|
|
258
|
|
(2,065)
|
|
(1,807)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net change in expense on interest-bearing liabilities
|
$(3,433)
|
|
$(2,525)
|
|
$(5,958)
|
|
$(255)
|
|
$(3,122)
|
|
$(3,401)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
increase in net interest income
|
|
|
|
|
$1,202
|
|
|
|
|
|
$1,346
|
Interest
expense for the year ended September 30, 2009 was reduced by $56,000. This
amount represents that portion of interest attributed to borrowings related to
construction of branches that was capitalized.
ASSET
AND LIABILITY MANAGEMENT AND MARKET RISK
General.
Our Board of Directors has established an asset and liability management
policy to guide management in maximizing net interest rate spread by managing
the differences in terms between interest-earning assets and interest-bearing
liabilities while maintaining acceptable levels of liquidity, capital adequacy,
interest rate sensitivity, changes in net interest income, credit risk and
profitability. The policy includes the use of an Asset Liability Management
Committee whose members include certain members of senior management. The
Committee’s purpose is to communicate, coordinate and manage our asset/liability
positions consistent with our business plan and Board-approved policies, as well
as to price savings and lending products, and to develop new
products.
The Asset
Liability Management Committee meets to review various areas
including:
§
|
interest
rate risk sensitivity;
|
§
|
change
in net interest income
|
§
|
current
market opportunities to promote specific
products;
|
§
|
historical
financial results;
|
§
|
projected
financial results; and
|
The
Committee also reviews current and projected liquidity needs. As part of its
procedures, the Asset Liability Management Committee regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and market value of portfolio equity, which is defined as
the net present value
of an
institution’s existing assets, liabilities and off-balance sheet instruments,
and evaluating such impacts against the maximum potential change in market value
of portfolio equity that is authorized by the Board of Directors.
Our
Risk When Interest Rates Change. The rates of interest we earn on assets
and pay on liabilities generally are established contractually for a period of
time. Market interest rates change over time. Our loans generally have longer
maturities than our deposits. Accordingly, our results of operations, like those
of other financial institutions, are impacted by changes in interest rates and
the interest rate sensitivity of our assets and liabilities. The risk associated
with changes in interest rates and our ability to adapt to these changes is
known as interest rate risk and is our most significant market
risk.
In recent
years, we primarily have utilized the following strategies in our efforts to
manage interest rate risk:
§
|
we
have increased our originations of shorter term loans and particularly,
construction and land development loans and home equity
loans;
|
§
|
we
have structured our borrowings with maturities that match fund our loan
and investment portfolios;
|
§
|
we
have attempted, where possible, to extend the maturities of our deposits
which typically fund our long-term assets;
and
|
§
|
we
have invested in securities with relatively short anticipated lives,
generally three to five years.
|
How We
Measure the Risk of Interest Rate Changes. We measure our interest rate
sensitivity on a quarterly basis utilizing an internal model. Management uses
various assumptions to evaluate the sensitivity of our operations to changes in
interest rates. Although management believes these assumptions are reasonable,
the interest rate sensitivity of our assets and liabilities on net interest
income and the market value of portfolio equity could vary substantially if
different assumptions were used or actual experience differs from such
assumptions. The assumptions we use are based upon proprietary and market data
and reflect historical results and current market conditions. These assumptions
relate to interest rates, prepayments, deposit decay rates and the market value
of certain assets under the various interest rate scenarios. An independent
service was used to provide decay rates and market rates of interest and certain
interest rate assumptions to determine prepayments and maturities of real estate
loans, investments and borrowings. Time deposits are modeled to reprice to
market rates upon their stated maturities. We assumed that non-maturity deposits
can be maintained with rate adjustments not directly proportionate to the change
in market interest rates. In the past, we have demonstrated that the
tiering structure of our deposit accounts during changing rate environments
results in relatively low volatility and less than market rate changes in our
interest expense for deposits. Our deposit accounts are tiered by balance and
rate, whereby higher balances within an account earn higher rates of interest.
Therefore, deposits that are not very rate sensitive (generally, lower balance
tiers) are separated from deposits that are rate sensitive (generally, higher
balance tiers).
When
interest rates rise, we generally do not have to raise interest rates
proportionately on less rate sensitive accounts to retain these deposits. These
assumptions are based upon an analysis of our customer base, competitive factors
and historical experience. The following table shows the change in our net
portfolio value at September 30, 2009, that would occur upon an immediate change
in interest rates based on our assumptions, but without giving effect to any
steps that we might take to counteract that change. The net portfolio value is
calculated based upon the present value of the discounted cash flows from assets
and liabilities. The difference between the present value of assets and
liabilities is the net portfolio value and represents the market value of equity
for the given interest rate scenario. Net portfolio value is useful for
determining, on a market value basis, how much equity changes in response to
various interest rate scenarios. Large changes in net portfolio value reflect
increased interest rate sensitivity and generally more volatile earnings
streams.
|
|
Net
Portfolio Value (“NPV”)
|
|
Net
Portfolio as % of
Portfolio
Value of Assets
|
Basis
Point
Change
in Rates
|
|
Amount
|
|
$
Change (1)
|
|
%
Change
|
|
NPV
Ratio (2)
|
|
%
Change
(3)
|
|
Asset
Market
Value
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
$
214,742
|
|
$(15,165)
|
|
(6.60)%
|
|
27.03%
|
|
(0.51)%
|
|
$794,613
|
200
|
|
217,099
|
|
(12,807)
|
|
(5.57)
|
|
26.95
|
|
(0.59)
|
|
805,524
|
100
|
|
221,710
|
|
(8,197)
|
|
(3.57)
|
|
27.08
|
|
(0.46)
|
|
818,749
|
Base
|
|
229,907
|
|
--
|
|
--
|
|
27.54
|
|
--
|
|
834,835
|
-100
|
|
231,482
|
|
1,576
|
|
0.69
|
|
27.36
|
|
(0.18)
|
|
846,047
|
-200
|
|
227,482
|
|
(2,424)
|
|
(1.05)
|
|
26.58
|
|
(0.96)
|
|
855,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Shock
NPV Ratio
|
|
|
|
|
|
27.54
|
|
|
|
|
Post-Shock
NPV Ratio
|
|
|
|
|
|
26.95
|
|
|
|
|
Static
Sensitivity Measure – decline in NPV Ratio
|
|
|
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
Maximum
|
|
|
|
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________
(1)
|
Represents
the increase (decrease) of the estimated net portfolio value at the
indicated change in interest rates compared to the base net portfolio
value.
|
(2)
|
Calculated
as the estimated net portfolio value divided by the portfolio value of
total assets.
|
(3)
|
Calculated
as the increase (decrease) of the net portfolio value ratio assuming the
indicated change in interest rates over the base net portfolio value
ratio.
|
The
following table illustrates the change in net interest income at September 30,
2009, that would occur in the event of an immediate change in interest rates,
but without giving effect to any steps that might be taken to counter the effect
of that change in interest rates:
Basis
Point
|
|
|
Net
Interest Income
|
|
Change
in Rates
|
|
|
Amount
|
|
|
$
Change (1)
|
|
|
%
Change
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
$ |
29,301
|
|
|
$ |
2,002 |
|
|
|
7.33% |
|
|
200
|
|
|
|
28,565 |
|
|
|
1,266 |
|
|
|
4.64
|
|
|
100
|
|
|
|
27,848 |
|
|
|
548 |
|
|
|
2.01
|
|
Base
|
|
|
|
27,300 |
|
|
|
-- |
|
|
Base
|
|
|
-100
|
|
|
|
27,002 |
|
|
|
(298) |
|
|
|
(1.09)
|
|
|
-200
|
|
|
|
26,076 |
|
|
|
(1,224) |
|
|
|
(4.48)
|
|
________
(1)
|
Represents the decrease of the
estimated net interest income at the indicated change in interest rates
compared to net interest income assuming no change in interest
rates.
|
We use
certain assumptions in assessing our interest rate risk. These assumptions
relate to interest rates, loan prepayment rates, deposit decay rates and the
market values of certain assets under differing interest rate scenarios, among
others. The table above also includes projected balances for loans and deposits,
actual results for which may be materially different from those
estimates.
As with
any method of measuring interest rate risk, shortcomings are inherent in the
method of analysis presented in the foregoing tables. For example, although
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in the market interest rates. Also,
the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable rate mortgage loans, have features that restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, if interest
rates
change, expected rates of prepayments on loans and early withdrawals from
certificates of deposit could deviate significantly from those assumed in
calculating the table.
LIQUIDITY
AND COMMITMENTS
We are
required to have sufficient cash flow in order to maintain liquidity to ensure a
safe and sound operation. Historically, we have maintained cash flow above the
minimum level believed to be adequate to meet the requirements of normal
operations, including potential deposit outflows. On a quarterly basis, we
review and update cash flow projections to ensure that adequate liquidity is
maintained.
Our
primary sources of funds are from customer deposits, loan repayments, loan
sales, maturing investment securities and advances from the Federal Home Loan
Bank of Seattle. These funds, together with retained earnings and equity, are
used to make loans, acquire investment securities and other assets, and fund
continuing operations. While maturities and the scheduled amortization of loans
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by the level of interest rates, economic conditions and
competition. We believe that our current liquidity position is sufficient to
fund all of our existing commitments.
Liquidity
management is both a daily and long-term function of business management. Excess
liquidity is generally invested in short-term investments such as overnight
deposits or mortgage-backed securities. On a longer-term basis, we maintain a
strategy of investing in loans. At September 30, 2009, the total approved loan
origination commitments outstanding was $7.8 million. At the same date, unused
lines of credit were $46.2 million.
We use
our sources of funds primarily to meet ongoing commitments, to pay maturing
certificates of deposit and savings withdrawals, to fund loan commitments and to
maintain our portfolio of mortgage-backed securities and investment
securities.
Certificates
of deposit scheduled to mature in one year or less at September 30, 2009,
totaled $162.0 million, which represented 70.8% of our certificates of deposit
portfolio at September 30, 2009. Management’s policy is to generally maintain
deposit rates at levels that are competitive with other local financial
institutions. Historically, the Bank has been able to retain a significant
amount of deposits as they mature. However, recent deterioration in credit
quality and capital levels at many of our competitors have limited their sources
of wholesale funding, which has resulted in a highly price-competitive market
for retail certificates of deposit. These rates currently exceed alternative
costs of borrowings and are high compared to historical spreads to U.S. Treasury
note rates. Additionally, since loan demand has slowed, we have been reluctant
to offer rates in excess of wholesale borrowing costs. This has resulted in some
deposit runoff as customers are moving their maturing balances to competitors at
a higher pace than the Bank has historically experienced. Nonetheless, we
believe the Company has adequate resources to fund all loan commitments through
FHLB advances, loan repayments, maturing investment securities, and the sale of
mortgage loans in the secondary markets. We had the ability at September 30,
2009, to borrow an additional $134.4 million from the Federal Home Loan Bank of
Seattle. We are also approved at the Discount Window of the Federal Reserve Bank
of San Francisco and could use that facility as a funding source to meet
commitments and for liquidity purposes.
We
measure our liquidity based on our ability to fund our assets and to meet
liability obligations when they come due. Liquidity (and funding) risk occurs
when funds cannot be raised at reasonable prices, or in a reasonable time frame,
to meet our normal or unanticipated obligations. We regularly monitor the mix
between our assets and our liabilities to manage effectively our liquidity and
funding requirements.
Our
primary source of funds is our deposits. When deposits are not available to
provide the funds for our assets, we use alternative funding sources. These
sources include, but are not limited to: cash management from the Federal Home
Loan Bank of Seattle, wholesale funding, brokered deposits, federal funds
purchased and dealer repurchase agreements, as well as other short-term
alternatives. Alternatively, we may also liquidate assets to meet our funding
needs.
We are
highly dependent on the FHLB of Seattle to provide the primary source of
wholesale funding for immediate liquidity and borrowing needs. The
failure of the FHLB of Seattle or the FHLB system in general may materially
impair our ability to meet our growth plans or to meet short and long term
liquidity demands. However, our
mortgage
backed securities are marketable and could be sold to obtain cash to meet
liquidity demands should our access to FHLB funding be impaired.
We do not
originate loans under a forward commitment with investors in the secondary
market. Many financial institutions encountered liquidity impairment as loans
that they securitized for resale were met with an abrupt absence of purchasers.
As a result, cash flow was restricted and caused significant contraction in
liquidity. Should we encounter a reduction in demand for loans in the secondary
market, we can simply discontinue the origination of such loans.
CONTRACTUAL
OBLIGATIONS
Through
the normal course of operations, we have entered into certain contractual
obligations. Our obligations generally relate to funding of operations through
deposits and borrowings as well as leases for premises. Lease terms generally
cover a five-year period, with options to extend, and are
non-cancelable.
At
September 30, 2009, scheduled maturities of contractual obligations were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
1
Year
|
|
|
After
1 year through 3
Years
|
|
|
After
3
through
5
Years
|
|
|
Beyond
|
|
|
Total
Balance
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
161,969 |
|
|
$ |
47,803 |
|
|
$ |
18,908 |
|
|
$ |
217 |
|
|
$ |
228,897 |
|
Federal
Home Loan Bank advances and
other borrowings
|
|
|
25,887 |
|
|
|
32,150 |
|
|
|
25,700 |
|
|
|
1,000 |
|
|
|
84,737 |
|
Repurchase
agreements
|
|
|
1,797 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,797 |
|
Deferred
compensation (1)
|
|
|
255,957 |
|
|
|
511,914 |
|
|
|
511,914 |
|
|
|
3,979,863 |
|
|
|
5,259,648 |
|
Operating
leases
|
|
|
559 |
|
|
|
422 |
|
|
|
236 |
|
|
|
3,052 |
|
|
|
4,269 |
|
Total
contractual obligations
|
|
$ |
446,169 |
|
|
$ |
592,289 |
|
|
$ |
556,758 |
|
|
$ |
3,984,132 |
|
|
$ |
5,579,348 |
|
(1) –
Disclosed at the 9/30/09 present value of estimated payments assuming all future
vesting conditions are met.
OFF-BALANCE
SHEET ARRANGEMENTS
We are
party to financial instruments with off-balance sheet risk in the normal course
of business in order to meet the financing needs of our customers. These
financial instruments generally include commitments to originate mortgage,
commercial and consumer loans, and involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. Our maximum exposure to credit loss in the event of nonperformance by the
borrower is represented by the contractual amount of those instruments. Because
some commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. We use the same
credit policies in making commitments as we do for on-balance sheet instruments.
Collateral is not required to support commitments.
Undisbursed
balances of loans closed include funds not disbursed but committed for
construction projects. Unused lines of credit include funds not disbursed, but
committed to, home equity, commercial and consumer lines of credit.
Commercial letters of credit are
conditional commitments issued by us to guarantee the performance of a customer
to a third party. Those guarantees are primarily used to support public and
private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. Collateral is required in instances where we deem it
necessary.
The
following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of September 30, 2009:
|
|
Contract
or
Notional
Amount
|
|
|
|
(in
thousands)
|
|
Commitments
to originate loans:
|
|
|
|
Fixed
rate
|
|
$ |
2,824 |
|
Adjustable
rate
|
|
|
4,949 |
|
Undisbursed
balance of loans
|
|
|
5,252 |
|
Unused
lines of credit
|
|
|
46,184 |
|
Total
|
|
$ |
59,209 |
|
CAPITAL
Consistent
with our goal to operate a sound and profitable financial organization, we
actively seek to maintain a “well capitalized” institution in accordance with
regulatory standards. Home Federal Bank’s total equity capital was $153.5
million at September 30, 2009, or 19.9%, of total assets on that date. As of
September 30, 2009, we exceeded all regulatory capital requirements. Our
regulatory capital ratios at September 30, 2009 were as follows: Tier 1 capital
19.6%; Tier 1 (core) risk-based capital 33.6%; and total risk-based capital
34.9%. The regulatory capital requirements to be considered well capitalized are
5%, 6% and 10%, respectively. See “How We Are Regulated – Regulation and
Supervision of Home Federal Bank – Capital Requirements” and Note 14 to the
Consolidated Financial Statements under Item 8 to this Annual Report on Form
10-K.
We did
not apply for government assistance through the Capital Purchase Program under
the U.S. Treasury Department’s Troubled Asset Relief Program (“TARP”). We
believe our high capital level and liquid balance sheet provides us flexibility
in today's environment to execute our growth plans without TARP
capital.
IMPACT
OF INFLATION AND CHANGING PRICES
The
Consolidated Financial Statements and related financial data presented herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America. These principles generally require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. The primary impact of inflation is
reflected in the increased cost of our operations. As a result, interest rates
generally have a more significant impact on a financial institution’s
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services. In a period of rapidly rising interest rates, the liquidity
and maturity structures of our assets and liabilities are critical to the
maintenance of acceptable performance levels.
The
principal effect of inflation on earnings, as distinct from levels of interest
rates, is in the area of noninterest expense. Expense items such as employee
compensation, employee benefits and occupancy and equipment costs may be subject
to increases as a result of inflation. An additional effect of inflation is the
possible increase in dollar value of the collateral securing loans that we have
made. Our management is unable to determine the extent, if any, to which
properties securing loans have appreciated in dollar value due to
inflation.
Deflation,
or a decrease in overall prices from one period to the next, could have a
negative impact on the Company’s operations and financial condition.
Deflationary periods impute a higher borrowing cost to debtors as the purchasing
power of a dollar increases with time. This may decrease the demand for loan
products offered by the Bank.
Inflation
also indirectly impacts the Company through the pressure it may place on
consumer and commercial borrowers. For example, as commodity prices rose rapidly
during calendar year 2008, national delinquency rates on loans increased as the
cost of gasoline and food significantly eroded disposable income available to
consumers. As a
result,
they were unable to service their debt obligations as a greater share of their
income was used to meet ordinary daily expenditures.
RECENT
ACCOUNTING PRONOUNCEMENTS
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles – a replacement of FASB Statement No. 162.
With the issuance of SFAS 168, the FASB Accounting Standards Codification
(“Codification”) became the single source of authoritative U.S. accounting and
reporting standards applicable for all nongovernmental entities, with the
exception of guidance issued by the SEC. This change is effective for financial
statements issued for interim or annual periods ending after September 15, 2009.
Updates to the Codification are promulgated through an Accounting Standards
Update (“ASU”). The Codification does not modify existing GAAP or any guidance
issued by the SEC. GAAP accounting standards used to populate the Codification
are superseded, with the exception of certain standards yet to be codified as of
September 30, 2009, including SFAS 166 and 167 described
subsequently.
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets, an amendment of FASB Statement No. 140, and SFAS No. 167, Amendments to
FASB Interpretation No. 46(R). These Statements modify the accounting for
transfers of financial assets and the determination of what entities must be
consolidated, and will have a significant effect on securitizations and
special-purpose entities. We will adopt these Statements effective January 1,
2010, as required. Management is evaluating the impact these Statements may have
on the Company’s financial statements.
ASC 855
includes new guidance on subsequent events that became effective for the second
quarter of 2009. The definition of subsequent events was modified and entities
are required to disclose the date through which subsequent events have been
evaluated and the basis for that date. Adoption of this guidance was not
significant to the Company’s financial statements.
ASC 260
includes new guidance which clarifies that unvested share-based payment awards
with rights to receive nonforfeitable dividends are participating securities and
should be included in the computation of earnings per share. This new guidance
is effective for the Company on October 1, 2009 and will require retrospective
application to earnings per share information.
ASC 320
includes amended other-than-temporary impairment (“OTTI”) guidance in GAAP for
debt securities to make the guidance more operational and to improve the
presentation and disclosure of OTTI on debt and equity securities in the
financial statements. It provides for the bifurcation of OTTI into
(i) amounts related to credit losses, which are recognized through earnings, and
(ii) amounts related to all other factors that are recognized as a component of
other comprehensive income. The provisions of ASC 320-10-65 were
effective for the Company’s interim period ended on June 30, 2009.
ASC 805
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and the goodwill acquired. The standard also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. ASC 805 is effective
for fiscal years beginning after December 15, 2008, or October 1, 2009, for the
Company. The acquisition described in Note 2 was accounted for under SFAS No.
141 as the Company was not permitted to adopt ASC 805 early.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
The
information contained under “Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset and Liability Management
and Market Risk” of this Annual Report on Form 10-K is incorporated herein by
reference.
Item 8.
Financial
Statements and Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Management’s Annual
Report on Internal Control Over Financial Reporting |
91
|
|
|
Report of
Independent Registered Public Accounting Firm |
92
|
|
|
Consolidated Balance
Sheets as of September 30, 2009 and 2008 |
94
|
|
|
Consolidated
Statements of Income For the Years Ended
September 30, 2009, 2008 and 2007
|
95
|
|
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income For
the
Years
Ended September 30, 2009, 2008 and 2007
|
96
|
|
|
Consolidated
Statements of Cash Flows For the Years Ended
September
30, 2009, 2008 and 2007
|
98 |
|
|
Selected Notes to
Consolidated Financial Statements |
100
|
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Home Federal Bancorp, Inc. (the "Company") is responsible for
establishing and maintaining adequate internal control over financial reporting,
as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The
Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
This
process includes policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions of the Company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements, and can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Furthermore, because of changes in
conditions, the effectiveness of internal control may vary over
time.
The
Company's management, with the participation of the Chief Executive Officer and
Chief Financial Officer, assessed the effectiveness of the Company's internal
control over financial reporting as of September 30, 2009. Management's
assessment was based on criteria described in the Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). This assessment excluded the internal control over
financial reporting of Community First Bank the operations of which were
acquired on August 7, 2009, through a purchase and assumption agreement between
the Company’s subsidiary, Home Federal Bank, and the Federal Deposit Insurance
Corporation as Receiver for Community First Bank. The assets acquired
constituted approximately 18.8% of total assets reported on the Company’s
consolidated balance sheet as of September 30, 2009. Based on that assessment,
the Company's management concluded that the Company's internal control over
financial reporting was effective as of September 30, 2009.
Management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of September 30, 2009 has been audited by Moss Adams LLP, the
Company's independent registered public accounting firm who audits the Company's
consolidated financial statements. The Report of Independent Registered Public
Accounting Firm also excludes the internal control over financial reporting of
Community First Bank and expresses an unqualified opinion on the effectiveness
of the Company's internal control over financial reporting as of September 30,
2009.
/s/ Len E.
Williams
|
/s/ Eric S.
Nadeau
|
Len
E. Williams |
Eric
S. Nadeau |
President
and |
Executive
Vice President and |
Chief
Executive Officer
|
Chief
Financial Officer |
Dated:
December 11, 2009
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Home
Federal Bancorp, Inc. and Subsidiary
Nampa,
Idaho
We have
audited the accompanying consolidated balance sheets of Home Federal Bancorp,
Inc. and Subsidiary (the Company) as of September 30, 2009 and 2008, and the
related consolidated statements of income, changes in stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended September 30, 2009. We also have audited the Company’s internal
control over financial reporting as of September 30, 2009, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Controls over Financial Reporting.
Our responsibility is to express an opinion on these financial statements and an
opinion on the Company’s internal control over financial reporting based on our
audits.
We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
As
described in Management’s Report on Internal Control over Financial Reporting,
management has excluded Community First Bank from its assessment of internal
control over financial reporting as of September 30, 2009 because its operations
were acquired through a purchase and assumption agreement between the Company’s
subsidiary, Home Federal Bank, and the Federal Deposit Insurance Corporation as
Receiver for Community First Bank on August 7, 2009. We have also excluded
Community First Bank from our audit of internal control over financial
reporting. The assets acquired constituted approximately 18.8% of total assets
reported on the Company’s consolidated balance sheet as of September 30,
2009.
A
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
Company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the Company;
and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could
have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Home Federal
Bancorp, Inc. and Subsidiary as of September 30, 2009 and 2008,
and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2009, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, Home Federal Bancorp, Inc. and Subsidiary maintained, in all material
respects, effective internal control over financial reporting as of
September 30, 2009, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
/s/Moss Adams
LLP
Spokane,
Washington
December
11, 2009
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
|
|
September
30,
2009
|
|
|
September
30,
2008
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and amounts due from depository institutions
|
|
$ |
49,953 |
|
|
$ |
23,270 |
|
Certificate
of deposit in correspondent bank
|
|
|
-- |
|
|
|
5,000 |
|
Investments
available for sale, at fair value
|
|
|
169,320 |
|
|
|
188,787 |
|
Federal
Home Loan Bank stock, at cost
|
|
|
10,326 |
|
|
|
9,591 |
|
Loans
receivable, net of allowance for loan losses
of $28,735
|
|
|
|
|
|
|
|
|
and
$4,579
|
|
|
510,629 |
|
|
|
459,813 |
|
Loans
held for sale
|
|
|
862 |
|
|
|
2,831 |
|
Accrued
interest receivable
|
|
|
2,781 |
|
|
|
2,681 |
|
Property
and equipment, net
|
|
|
20,462 |
|
|
|
15,246 |
|
Mortgage
servicing rights, net
|
|
|
-- |
|
|
|
1,707 |
|
Bank
owned life insurance
|
|
|
12,014 |
|
|
|
11,590 |
|
Real
estate and other property owned
|
|
|
18,391 |
|
|
|
650 |
|
Deferred
tax asset
|
|
|
-- |
|
|
|
1,770 |
|
FDIC
indemnification receivable, net
|
|
|
30,038 |
|
|
|
-- |
|
Other
assets
|
|
|
3,123 |
|
|
|
2,134 |
|
TOTAL
ASSETS
|
|
$ |
827,899 |
|
|
$ |
725,070 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Deposit
accounts
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
$ |
68,155 |
|
|
$ |
41,398 |
|
Interest-bearing
demand deposits
|
|
|
176,049 |
|
|
|
127,714 |
|
Savings
deposits
|
|
|
41,757 |
|
|
|
26,409 |
|
Certificates
of deposit
|
|
|
228,897 |
|
|
|
177,404 |
|
Total
deposit accounts
|
|
|
514,858 |
|
|
|
372,925 |
|
Advances
by borrowers for taxes and insurance
|
|
|
1,132 |
|
|
|
1,386 |
|
Interest
payable
|
|
|
553 |
|
|
|
552 |
|
Deferred
compensation
|
|
|
5,260 |
|
|
|
5,191 |
|
Federal
Home Loan Bank advances and other borrowings
|
|
|
84,737 |
|
|
|
136,972 |
|
Deferred
tax liability
|
|
|
5,571 |
|
|
|
-- |
|
Other
liabilities
|
|
|
6,123 |
|
|
|
2,857 |
|
Total
liabilities
|
|
|
618,234 |
|
|
|
519,883 |
|
COMMITMENTS
AND CONTINGENCIES (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
167 |
|
|
|
174 |
|
Sept. 30, 2009 – 17,445,311 issued, 16,698,168 outstanding
|
|
|
|
|
|
|
|
|
Sept. 30, 2008 – 17,412,449 issued, 17,374,161 outstanding
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
150,782 |
|
|
|
157,205 |
|
Retained
earnings
|
|
|
64,483 |
|
|
|
59,813 |
|
Unearned
shares issued to ESOP |
|
|
(9,699 |
) |
|
|
(10,605 |
) |
Accumulated
other comprehensive income (loss)
|
|
|
3,932 |
|
|
|
(1,400 |
) |
Total
stockholders’ equity
|
|
|
209,665 |
|
|
|
205,187 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
827,899 |
|
|
$ |
725,070 |
|
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
|
|
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except share and per share data)
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income:
|
|
|
|
|
|
|
|
|
|
Loan
interest
|
|
$ |
27,548 |
|
|
$ |
30,686 |
|
|
$ |
33,553 |
|
Mortgage-backed
securities interest
|
|
|
8,221 |
|
|
|
8,742 |
|
|
|
8,692 |
|
Other
interest and dividends
|
|
|
58 |
|
|
|
1,155 |
|
|
|
393 |
|
Total
interest and dividend income
|
|
|
35,827 |
|
|
|
40,583 |
|
|
|
42,638 |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,076 |
|
|
|
10,685 |
|
|
|
12,279 |
|
Federal
Home Loan Bank borrowings
|
|
|
4,901 |
|
|
|
7,250 |
|
|
|
9,057 |
|
Total
interest expense
|
|
|
11,977 |
|
|
|
17,935 |
|
|
|
21,336 |
|
Net
interest income
|
|
|
23,850 |
|
|
|
22,648 |
|
|
|
21,302 |
|
Provision
for loan losses
|
|
|
16,085 |
|
|
|
2,431 |
|
|
|
409 |
|
Net
interest income after provision for loan losses
|
|
|
7,765 |
|
|
|
20,217 |
|
|
|
20,893 |
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and fees
|
|
|
8,302 |
|
|
|
9,077 |
|
|
|
9,308 |
|
Gain
on sale of loans
|
|
|
1,218 |
|
|
|
764 |
|
|
|
1,419 |
|
Increase in cash surrender value of bank owned life
insurance
|
|
|
424 |
|
|
|
421 |
|
|
|
405 |
|
Loan
servicing fees
|
|
|
68 |
|
|
|
484 |
|
|
|
549 |
|
Prepayment
penalty on borrowings
|
|
|
(498 |
) |
|
|
-- |
|
|
|
-- |
|
Gain
(loss) on sale of securities
|
|
|
(203 |
) |
|
|
-- |
|
|
|
4 |
|
Mortgage
servicing rights, net
|
|
|
(31 |
) |
|
|
(340 |
) |
|
|
(445 |
) |
Other
|
|
|
11 |
|
|
|
256 |
|
|
|
41 |
|
Total
noninterest income
|
|
|
9,291 |
|
|
|
10,662 |
|
|
|
11,281 |
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
15,918 |
|
|
|
15,211 |
|
|
|
14,249 |
|
Occupancy
and equipment
|
|
|
3,214 |
|
|
|
3,007 |
|
|
|
2,871 |
|
Data
processing
|
|
|
2,483 |
|
|
|
2,198 |
|
|
|
2,097 |
|
Advertising
|
|
|
913 |
|
|
|
1,043 |
|
|
|
1,427 |
|
Postage
and supplies
|
|
|
574 |
|
|
|
617 |
|
|
|
650 |
|
Professional
services
|
|
|
1,460 |
|
|
|
788 |
|
|
|
856 |
|
Insurance
and taxes
|
|
|
1,541 |
|
|
|
533 |
|
|
|
429 |
|
Provision
for REO
|
|
|
1,129 |
|
|
|
172 |
|
|
|
-- |
|
Other
|
|
|
1,739 |
|
|
|
1,042 |
|
|
|
1,057 |
|
Total
noninterest expense
|
|
|
28,971 |
|
|
|
24,611 |
|
|
|
23,636 |
|
Income
(loss) before income taxes
|
|
|
(11,915 |
) |
|
|
6,268 |
|
|
|
8,538 |
|
Income
tax expense (benefit)
|
|
|
(4,750 |
) |
|
|
2,263 |
|
|
|
3,267 |
|
Income
(loss) before extraordinary item
|
|
|
(7,165 |
) |
|
|
4,005 |
|
|
|
5,271 |
|
Extraordinary
gain on acquisition, less income tax of $9,756
|
|
|
15,291 |
|
|
|
-- |
|
|
|
-- |
|
Net income
|
|
$ |
8,126 |
|
|
$ |
4,005 |
|
|
$ |
5,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share before extraordinary item:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.46 |
) |
|
$ |
0.25 |
(1) |
|
$ |
0.32 |
(1) |
Diluted
|
|
|
(0.46 |
) |
|
|
0.25 |
(1) |
|
|
0.31 |
(1) |
Earnings
per common share after extraordinary item:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.52 |
|
|
$ |
0.25 |
(1) |
|
$ |
0.32 |
(1) |
Diluted
|
|
|
0.52 |
|
|
|
0.25 |
(1) |
|
|
0.31 |
(1) |
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,651,250 |
|
|
|
16,233,200 |
(1) |
|
|
16,602,082 |
(1) |
Diluted
|
|
|
15,651,250 |
|
|
|
16,252,747 |
(1) |
|
|
16,767,219 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share:
|
|
$ |
0.220 |
|
|
$ |
0.213 |
(1) |
|
$ |
0.194 |
(1) |
(1)
Earnings per share, average shares outstanding, and dividends per share have
been adjusted to reflect the impact of the Conversion which occurred on December
19, 2007.
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In
thousands, except share data)
|
Common Stock
|
Additional
Paid-In
Capital
|
Retained
Earnings
|
Unearned
Shares
Issued
to
Employee
Stock
Ownership
Plan
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
|
Shares
|
Amount
|
Balance
at September 30, 2006
|
15,169,114
|
$ 152
|
$ 57,222
|
$ 54,805
|
$ (4,134)
|
$ (176)
|
$
107,869
|
Restricted
stock issued, net of forfeitures
|
(6,924) )
|
|
|
|
|
|
--
|
ESOP
shares committed to be released
|
|
|
357
|
|
436
|
|
793
|
Exercise
of stock options
|
70,053
|
|
854
|
|
|
|
854
|
Share-based
compensation expense
|
|
|
1,036
|
|
|
|
1,036
|
Excess
tax benefits from equity compensation plans
|
|
|
144
|
|
|
|
144
|
Dividends
paid ($0.194 per share)(1)(2)
|
|
|
|
(1,281)
|
|
|
(1,281)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
5,271
|
|
|
5,271
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
Change
in unrealized holding loss on securities available for sale, net of taxes
of $(67)
|
|
|
|
|
|
(100)
|
(100)
|
Unrealized
holding loss resulting from transfer of securities from held to maturity
to available for sale, net of taxes of $(1,299)
|
|
|
|
|
|
(1,949)
|
(1,949)
|
Comprehensive
income:
|
|
|
|
|
|
|
3,222
|
Balance
at September 30, 2007
|
15,232,243
|
152
|
59,613
|
58,795
|
(3,698)
|
(2,225)
|
112,637
|
|
|
|
|
|
|
|
|
(continues
on next page)
|
|
|
|
|
|
|
|
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Continued)
(In
thousands, except share data)
|
Common Stock
|
Additional
Paid-In
Capital
|
Retained
Earnings
|
Unearned
Shares
Issued to
Employee
Stock
Ownership
Plan
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
|
|
Shares
|
Amount
|
Balance
at September 30, 2007
(balance
carried forward)
|
|
|
15,232,243 |
|
|
|
152 |
|
|
|
59,613 |
|
|
|
58,795 |
|
|
|
(3,698 |
) |
|
|
(2,225 |
) |
|
|
112,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Step Conversion
|
|
|
2,073,619 |
|
|
|
21 |
|
|
|
95,938 |
|
|
|
|
|
|
|
(8,160 |
) |
|
|
|
|
|
|
87,799 |
|
Dissolution
of Mutual Holding Company
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
Restricted
stock issued, net of forfeitures
|
|
|
13,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-- |
|
ESOP
shares committed to be released
|
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
1,253 |
|
|
|
|
|
|
|
1,230 |
|
Exercise
of stock options
|
|
|
54,797 |
|
|
|
1 |
|
|
|
605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606 |
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,022 |
|
Dividends
paid ($0.213 per share)(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,987 |
) |
|
|
|
|
|
|
|
|
|
|
(2,987 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,005 |
|
|
|
|
|
|
|
|
|
|
|
4,005 |
|
Other comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding loss
on securities available for sale, net of taxes of
$550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
825 |
|
|
|
825 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,830 |
|
Balance
at September 30, 2008
|
|
|
17,374,161 |
|
|
|
174 |
|
|
|
157,205 |
|
|
|
59,813 |
|
|
|
(10,605 |
) |
|
|
(1,400 |
) |
|
|
205,187 |
|
Restricted
stock issued, net of
forfeitures
|
|
|
159,115 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP
shares committed to be released
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
906 |
|
|
|
|
|
|
|
969 |
|
Exercise
of stock options
|
|
|
32,862 |
|
|
|
|
|
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353 |
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
1,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,088 |
|
Treasury
shares purchased
|
|
|
(867,970 |
) |
|
|
(9 |
) |
|
|
(7,888 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,897 |
) |
Dividends
paid ($0.220 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,456 |
) |
|
|
|
|
|
|
|
|
|
|
(3,456 |
) |
Tax
adjustment from equity compensation plans
|
|
|
|
|
|
|
|
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before extraordinary item
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,165 |
) |
|
|
|
|
|
|
|
|
|
|
(7,165 |
) |
Extraordinary
gain, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,291 |
|
|
|
|
|
|
|
|
|
|
|
15,291 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized holding loss on securities available for sale, net
of taxes of $3,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,210 |
|
|
|
5,210 |
|
Adjustment
for realized losses, net of taxes of $81:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122 |
|
|
|
122 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,623 |
|
Balance
at September 30, 2009
|
|
|
16,698,168 |
|
|
$ |
167 |
|
|
$ |
150,782 |
|
|
$ |
64,483 |
|
|
$ |
(9,699 |
) |
|
$ |
3,932 |
|
|
$ |
209,665 |
|
(1) Home
Federal MHC waived its receipt of dividends on the 8,979,246 shares that it
owned.
(2)
Dividends per share have been adjusted to reflect the impact of the Conversion,
which occurred on December 19, 2007.
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
8,126 |
|
|
$ |
4,005 |
|
|
$ |
5,271 |
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,716 |
|
|
|
1,699 |
|
|
|
1,712 |
|
Net
amortization (accretion) of premiums and discounts on
investments
|
|
|
45 |
|
|
|
(19 |
) |
|
|
(62 |
) |
Loss
on sale of fixed assets and repossessed assets
|
|
|
178 |
|
|
|
144 |
|
|
|
2 |
|
Loss
(Gain) on sale of securities available for sale
|
|
|
203 |
|
|
|
-- |
|
|
|
(4 |
) |
Extraordinary
gain on acquisition
|
|
|
(25,047 |
) |
|
|
-- |
|
|
|
-- |
|
ESOP
shares committed to be released
|
|
|
969 |
|
|
|
1,230 |
|
|
|
793 |
|
Equity
compensation expense
|
|
|
1,088 |
|
|
|
1,022 |
|
|
|
1,036 |
|
Provision
for loan losses
|
|
|
16,085 |
|
|
|
2,431 |
|
|
|
409 |
|
Valuation
allowance on real estate and other property owned
|
|
|
1,129 |
|
|
|
-- |
|
|
|
-- |
|
Accrued
deferred compensation expense, net
|
|
|
69 |
|
|
|
676 |
|
|
|
640 |
|
Net
deferred loan fees
|
|
|
(115 |
) |
|
|
132 |
|
|
|
81 |
|
Deferred
income tax (benefit) expense
|
|
|
3,787 |
|
|
|
(1,075 |
) |
|
|
(535 |
) |
Excess
tax benefit from equity compensation plans
|
|
|
-- |
|
|
|
-- |
|
|
|
(144 |
) |
Net
gain on sale of loans
|
|
|
(1,218 |
) |
|
|
(764 |
) |
|
|
(1,419 |
) |
Proceeds
from sale of loans held for sale
|
|
|
70,019 |
|
|
|
48,543 |
|
|
|
97,503 |
|
Originations
of loans held for sale
|
|
|
(66,833 |
) |
|
|
(45,895 |
) |
|
|
(97,154 |
) |
Net
decrease in value of mortgage servicing rights
|
|
|
-- |
|
|
|
340 |
|
|
|
445 |
|
Net
increase in value of bank owned life insurance
|
|
|
(424 |
) |
|
|
(422 |
) |
|
|
(405 |
) |
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
receivable
|
|
|
847 |
|
|
|
123 |
|
|
|
222 |
|
Other
assets
|
|
|
(341 |
) |
|
|
176 |
|
|
|
(801 |
) |
Interest
payable
|
|
|
(242 |
) |
|
|
(179 |
) |
|
|
(240 |
) |
Other
liabilities
|
|
|
1,402 |
|
|
|
(2,274 |
) |
|
|
331 |
|
Net
cash provided by operating activities
|
|
|
11,443 |
|
|
|
9,893 |
|
|
|
7,681 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturity of mortgage-backed securities held to
maturity
|
|
|
-- |
|
|
|
-- |
|
|
|
13,094 |
|
Principal
repayments and maturities of securities
available
for sale
|
|
|
38,564 |
|
|
|
31,123 |
|
|
|
15,013 |
|
Purchase
of mortgage-backed securities available for sale
|
|
|
(2,734 |
) |
|
|
(56,257 |
) |
|
|
(2,102 |
) |
Maturity
of (investment in) certificate of deposit
|
|
|
5,000 |
|
|
|
(5,000 |
) |
|
|
-- |
|
Proceeds
from sale of securities available for sale
|
|
|
10,947 |
|
|
|
-- |
|
|
|
3,848 |
|
Purchase
of securities available for sale
|
|
|
(3,037 |
) |
|
|
-- |
|
|
|
-- |
|
Sale
of mortgage servicing rights
|
|
|
1,707 |
|
|
|
-- |
|
|
|
-- |
|
Purchases
of property and equipment
|
|
|
(6,912 |
) |
|
|
(4,643 |
) |
|
|
(1,181 |
) |
Net
decrease in loans
|
|
|
31,749 |
|
|
|
17,000 |
|
|
|
22,190 |
|
Net
of cash received from acquisition
|
|
|
22,078 |
|
|
|
-- |
|
|
|
-- |
|
Proceeds
from sale of fixed assets and repossessed assets
|
|
|
2,121 |
|
|
|
759 |
|
|
|
172 |
|
Net
cash provided (used) by investing activities
|
|
|
99,483 |
|
|
|
(17,018 |
) |
|
|
51,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continues
on next page)
|
|
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(In
thousands)
|
|
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
decrease in deposits
|
|
|
(1,526 |
) |
|
|
(31,684 |
) |
|
|
(25,672 |
) |
Net
decrease in advances by borrowers for taxes and insurance
|
|
|
(254 |
) |
|
|
(219 |
) |
|
|
(528 |
) |
Proceeds
from Federal Home Loan Bank borrowings
|
|
|
23,100 |
|
|
|
68,215 |
|
|
|
153,860 |
|
Repayment
of Federal Home Loan Bank borrowings
|
|
|
(96,063 |
) |
|
|
(111,973 |
) |
|
|
(183,889 |
) |
Proceeds
from other borrowings
|
|
|
1,500 |
|
|
|
-- |
|
|
|
-- |
|
Proceeds
from exercise of stock options
|
|
|
353 |
|
|
|
606 |
|
|
|
854 |
|
Repurchases
of common stock
|
|
|
(7,897 |
) |
|
|
-- |
|
|
|
-- |
|
Excess
tax benefit from equity compensation plans
|
|
|
-- |
|
|
|
-- |
|
|
|
144 |
|
Dividends
paid
|
|
|
(3,456 |
) |
|
|
(2,987 |
) |
|
|
(1,281 |
) |
Net
proceeds from stock issuance and exchange pursuant
to
second step conversion
|
|
|
-- |
|
|
|
87,849 |
|
|
|
-- |
|
Net
cash (used) provided by financing activities
|
|
|
(84,243 |
) |
|
|
9,807 |
|
|
|
(56,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
26,683 |
|
|
|
2,682 |
|
|
|
2,203 |
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
23,270 |
|
|
|
20,588 |
|
|
|
18,385 |
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$ |
49,953 |
|
|
$ |
23,270 |
|
|
$ |
20,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
11,976 |
|
|
$ |
18,115 |
|
|
$ |
21,576 |
|
Income
taxes
|
|
|
2,545 |
|
|
|
3,535 |
|
|
|
3,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of real estate and other assets in settlement of loans
|
|
$ |
19,513 |
|
|
$ |
1,394 |
|
|
$ |
703 |
|
Fair
value adjustment to securities available for sale,
net
of taxes
|
|
|
5,332 |
|
|
|
825 |
|
|
|
(100 |
) |
Transfer
of securities from held to maturity to available for sale
|
|
|
-- |
|
|
|
-- |
|
|
|
171,668 |
|
Fair
value adjustment to securities available for sale,
net
of taxes as a result of transferring securities from held to
maturity to available for sale
|
|
|
-- |
|
|
|
-- |
|
|
|
(1,949 |
) |
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Summary of Significant Accounting Policies
Nature of Business and
Reorganization. Home Federal Bancorp, Inc. (the “Company”), was formed as
the new stock holding company for Home Federal Bank (the “Bank”) in connection
with the Company’s conversion from a mutual holding company structure to a stock
holding company structure, which was completed on December 19, 2007
(“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 Bancorp”), which was a subsidiary of Home
Federal MHC, a federally-chartered mutual holding company. The Bank formed Home
Federal MHC in December 2004. As a result of the Conversion, Home Federal MHC
and old Home Federal Bancorp ceased to exist and were replaced by the Company as
the successor to old Home Federal Bancorp.
As part
of the Conversion, a total of 9,384,000 new shares of the Company were sold at
$10 per share in subscription, community and syndicated community offerings
through which the Company received proceeds of approximately $87.8 million, net
of offering costs of approximately $5.9 million. The Company contributed $48.0
million or approximately 50% of the net proceeds to the Bank in the form of a
capital contribution. The Company loaned $8.2 million to the Bank’s Employee
Stock Ownership Plan (the “ESOP”) and the ESOP used those funds to acquire
816,000 shares of the Company’s common stock at $10 per share. As part of the
Conversion, shares of outstanding common stock of old Home Federal Bancorp were
exchanged for 1.136 shares of the Company’s common stock. No fractional shares
were issued. Instead, cash was paid to stockholders at $10 per share for any
fractional shares that would otherwise be issued. The exchange resulted in an
additional 852,865 outstanding shares of the Company for a total of 17,325,901
outstanding shares as of the closing of the Conversion, after giving effect to
the redemption of fractional shares.
The
Conversion was accounted for as a reorganization in corporate form with no
change in the historical basis of the Company’s assets, liabilities and equity.
All references to the number of shares outstanding, with the exception of those
reported on the Balance Sheet, are restated to give retroactive recognition to
the exchange ratio applied in the Conversion.
The Bank
was founded in 1920 as a building and loan association and reorganized as a
federal mutual savings and loan association in 1936. The Bank is a
community-oriented financial institution dedicated to serving the financial
service needs of consumers and businesses within its market area. The Bank’s
primary business is attracting deposits from the general public and using these
funds to originate loans. It emphasizes the origination of loans secured by
first mortgages on owner-occupied, residential real estate, residential
development and construction, and commercial real estate. To a lesser extent, it
originates other types of real estate loans, commercial business loans and
consumer loans.
Home
Federal Bank currently has operations in two distinct market
areas. The Boise, Idaho, and surrounding area known as the Treasure
Valley region of southwestern Idaho, which includes Ada, Canyon, Elmore, and Gem
counties and the Tri-County Region of Central Oregon including the counties of
Deschutes, Crook and Jefferson. In total the Bank has 23 full-service
banking offices, one loan center, 24 automated teller machines and Internet
banking services.
Home
Federal Bank has one wholly-owned subsidiary, Idaho Home Service Corporation,
which was established in 1981 as Home Service Corporation for the purpose of
facilitating various business activities. Since 2000, Idaho Home Service
Corporation has been inactive.
In
preparing these financial statements, the Company has evaluated events and
transactions for potential recognition or disclosure through December 11, 2009,
the date the financial statements were available to be issued.
Principles of Consolidation.
The consolidated financial statements of the Company include the accounts of the
Company, the Bank and its wholly-owned subsidiary, Idaho Home Service
Corporation. All intercompany transactions and balances have been eliminated in
consolidation.
Use of Estimates in the Preparation
of Financial Statements. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
certain assets and liabilities as of the date of the statement of financial
condition and certain revenues and expenses for the period. Actual results could
differ, either positively or negatively, from those estimates. Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for loan losses, the
evaluation of impaired loans, loans acquired with deteriorated credit quality,
the FDIC indemnification asset, the valuation of real estate and other property
owned (“REO”) as well as deferred income taxes.
Management
believes that the allowance for loan losses reflects the best estimate of
probable incurred losses inherent in the loan portfolio at the balance sheet
dates presented and that the valuation of REO and computation of deferred taxes
are proper. While management uses currently available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company’s
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgments of information available to
them at the time of their examination.
Cash and Cash Equivalents. For
the purposes of reporting cash flows, the Company has defined cash and cash
equivalents as those amounts included in the consolidated balance sheet caption
Cash and amounts due from depository institutions. Cash and cash equivalents,
including interest-bearing deposits, are on deposit with other banks and
financial institutions in amounts that periodically exceed the federal insurance
limit. Management believes that its risk of loss associated with such balances
is minimal due to the financial strength of the banks and financial
institutions. The Company has not experienced any losses in such
accounts.
Cash on Hand and in Banks. The
Company is required to maintain an average reserve balance with the Federal
Reserve Bank, or maintain such reserve in cash on hand. The amount of this
required reserve balance at September 30, 2009 and 2008 was $5.4 million and
$1.8 million, respectively.
Securities Available for Sale.
Available for sale securities consist of mortgage-backed securities and
obligations of U.S. Government Sponsored Enterprises. Unrealized holding gains
and losses, net of tax, on available for sale securities are reported as a net
amount in a separate component of equity until realized. Gains and losses on the
sale of available for sale securities are determined using the
specific-identification method and are included in earnings.
Declines
in the fair value of individual available for sale securities below their cost
that are other than temporary result in write-downs of the individual securities
to their fair value. In estimating other than temporary losses, management
considers, among other things, (1) the length of time and the extent to which
the fair value has been less than cost, (2) the financial condition and near
term prospectus of the issuer, and (3) the Company’s ability and intent to hold
the security for a period of time sufficient to allow for any anticipated
recovery in fair value. Any such write-downs would be included in earnings as
realized losses. Management believes that all unrealized losses on investment
securities at September 30, 2009 and 2008 are temporary.
Federal Home Loan Bank (“FHLB”)
Stock. As a member of the FHLB of Seattle, the Bank is required to
maintain a minimum level of investment in capital stock of the FHLB based on
specific percentages of its outstanding FHLB advances, total assets and
mortgages. The Bank's investment in FHLB of Seattle stock is carried at par
value ($100 per share), which reasonably approximates its fair value. The Bank
may request redemption at par value of any stock in excess of the amount the
Bank is required to hold. FHLB stock is restricted as to purchase, sale, and
redemption.
Loans Held for Sale. Mortgage
loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated market value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
Loan
commitments related to the origination of mortgage loans held for sale and the
corresponding sales contracts are considered derivative instruments as defined
by Accounting Standards Codification Topic (“ASC”) 815, “Derivatives and
Hedging.” If material, these derivatives are recognized on the consolidated
balance sheet in other assets and other liabilities at fair value.
Loans Receivable and Allowance for
Loan Losses. The Bank grants commercial, real estate, and consumer loans
to customers. A substantial portion of the loan portfolio is represented by
commercial real estate and residential real estate loans. The ability of the
Bank’s debtors to honor their contracts is dependent upon the real estate market
and/or general economic conditions in the Bank’s market area.
Loans are
stated at the amount of unpaid principal, adjusted for deferred loan fees and
related costs and an allowance for loan losses. Interest on loans is calculated
by using the simple interest method on daily balances of the principal amount
outstanding. Interest income is accrued on the unpaid balance. Loan origination
fees, net of certain direct origination costs, are deferred and recognized as an
adjustment of the related loan yield using the interest method.
The
accrual of interest on loans is discontinued at the time the loan is 90 days
delinquent, or in the opinion of management, the collection of interest is
questionable. Thereafter, no interest is taken into income unless received in
cash or until such time as the borrower demonstrates the ability to resume
payments of principal and interest.
Premiums
and discounts on purchased loans are amortized over the estimated life of the
loans as an adjustment to yield using the interest method.
A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for non-homogeneous loan types and larger
balance homogeneous loan types by either the present value of expected future
cash flows discounted at the loan’s effective interest rate, the loan’s
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Management
believes the allowance for loan losses represents the best estimate of probable
incurred losses inherent in our loan portfolio. The allowance is based upon a
periodic review of loans which includes consideration of actual net loan loss
experience, changes in the size and character of the loan portfolio,
identification of individual problem situations that may affect the borrower's
ability to pay, and an evaluation of current economic conditions. Loan losses
are recognized through charges to the allowance.
Troubled Debt Restructuring.
Loans occasionally may be restructured to provide a reduction or deferral
of interest or principal payments. This generally occurs when the financial
condition of a borrower deteriorates to the point where the borrower needs to be
given temporary or permanent relief from the original contractual terms of the
loan. A loan restructured in a troubled debt restructuring is an
impaired loan and is accounted for as such.
Real Estate and Other Property
Owned. Real estate and other property owned acquired through foreclosure,
lien, judgments or deeds in lieu of foreclosure are stated at the lower of cost
or estimated fair market value less selling costs. When the property is
acquired, any excess of the loan balance over the estimated net realizable value
is charged to the reserve for loan losses. Holding costs, subsequent write-downs
to estimated fair market value less selling costs, if any, or any disposition
gains or losses are included in noninterest income and expenses. Costs of
development and improvement of the property are capitalized if the costs are
determined to be recoverable.
Property and Equipment.
Properties and equipment are stated at cost, less accumulated depreciation and
amortization. Leasehold improvements are amortized over the term of the lease or
the estimated useful life of the
improvements,
whichever is less. Depreciation and amortization are generally computed using
the straight-line method for financial statement purposes over the following
estimated useful lives and lease periods:
Buildings
and leasehold improvements
|
15-40
years
|
Furniture,
equipment, and automobiles
|
3-12
years
|
The
normal costs of maintenance and repairs are charged to expense as
incurred.
FDIC Indemnification Asset. On
August 7, 2009, the Bank entered into a purchase and assumption agreement with
the Federal Deposit Insurance Corporation (“FDIC”) in connection with a failed
bank. See Note 2 for additional information on this transaction. The loans and
REO purchased from the FDIC are covered by a loss share agreement between the
FDIC and the Bank which affords the Bank significant
protection. Under this agreement, the FDIC will reimburse Home
Federal Bank for 80% of the first $34.0 million of losses and 95% on realized
losses that exceed $34.0 million. Realized losses covered by the loss
sharing agreement include loan contractual balances (and related unfunded
commitments that were acquired), accrued interest on loans for up to 90 days,
the book value of foreclosed real estate acquired, and certain direct costs,
less cash or other consideration received by Home Federal
Bank. Management has estimated the amount of losses inherent in the
acquired loan and foreclosed real estate portfolios and the amounts that would
be receivable from the FDIC upon a loss event. The Bank cannot submit claims of
loss until certain events occur, as defined under the purchase and assumption
agreement. As such, the indemnification asset is subject to a high degree of
uncertainty and estimation as to the timing of the losses and subsequent
recovery of a portion of those losses under the loss sharing
agreement.
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 ASC Topic 740, “Income Taxes.” Under this method, a deferred tax asset or
liability is determined based on the enacted tax rates that will be in effect
when the differences between the financial statement carrying amounts and tax
basis of existing assets and liabilities are expected to be reported in the
Company’s income tax returns. The deferred tax provision for the year is equal
to the net change in the net deferred tax liability from the beginning to the
end of the year, less amounts applicable to the change in value related to
investments available for sale. The effect on deferred taxes of a change in tax
rates is recognized as income in the period that includes the enactment
date.
ASC 740
requires recognition and measurement of uncertain tax positions using a
"more-likely-than-not" approach. The Company analyzed its tax
positions, including the permanent and temporary differences as well as the
major components of income and expense, and determined that it had no uncertain
tax positions that would rise to the level of having a material effect on its
financial statements at September 30, 2009 and 2008. It is the
Company’s policy to record interest and penalties as a component of the
provision for income taxes.
Comprehensive Income:
Accounting principles generally require that recognized revenue, expenses,
gains, and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as separate components of the equity section of the
statement of financial condition, such items, along with net income are
components of comprehensive income.
The
components of other comprehensive income and related tax effects are as
follows:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Unrealized
holding gain (loss) on available for sale securities
|
|
$ |
9,089 |
|
|
$ |
1,376 |
|
|
$ |
(3,411 |
) |
Reclassification
adjustment for gain realized in income
|
|
|
(203 |
) |
|
|
-- |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain (loss)
|
|
|
8,886 |
|
|
|
1,376 |
|
|
|
(3,415 |
) |
Tax
effect
|
|
|
(3,554 |
) |
|
|
(551 |
) |
|
|
1,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) net of tax
|
|
$ |
5,332 |
|
|
$ |
825 |
|
|
$ |
(2,049 |
) |
Advertising Costs. Advertising
costs are expensed as incurred. Advertising expense for the years ended
September 30, 2009, 2008, and 2007, was $913,000, $1.0 million, and $1.4 million
respectively.
Recent Accounting
Pronouncements. In June 2009, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168,
The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles – a replacement of FASB Statement No. 162.
With the issuance of SFAS 168, the FASB Accounting Standards Codification
(“Codification”) became the single source of authoritative U.S. accounting and
reporting standards applicable for all nongovernmental entities, with the
exception of guidance issued by the SEC. This change is effective for financial
statements issued for interim or annual periods ending after September 15, 2009.
Updates to the Codification are promulgated through an Accounting Standards
Update (“ASU”). The Codification does not modify existing GAAP or any guidance
issued by the SEC. GAAP accounting standards used to populate the Codification
are superseded, with the exception of certain standards yet to be codified as of
September 30, 2009, including SFAS 166 and 167 described
subsequently.
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets, an amendment of FASB Statement No. 140, and SFAS No. 167, Amendments to
FASB Interpretation No. 46(R). These Statements modify the accounting for
transfers of financial assets and the determination of what entities must be
consolidated, and will have a significant effect on securitizations and
special-purpose entities. We will adopt these Statements effective January 1,
2010, as required. Management is evaluating the impact these Statements may have
on the Company’s financial statements.
ASC 855
includes new guidance on subsequent events that became effective for the second
quarter of 2009. The definition of subsequent events was modified and entities
are required to disclose the date through which subsequent events have been
evaluated and the basis for that date. Adoption of this guidance was not
significant to the Company’s financial statements.
ASC 260
includes new guidance which clarifies that unvested share-based payment awards
with rights to receive nonforfeitable dividends are participating securities and
should be included in the computation of earnings per share. This new guidance
is effective for the Company on October 1, 2009 and will require retrospective
application to earnings per share information.
ASC 320
includes amended other-than-temporary impairment (“OTTI”) guidance in GAAP for
debt securities to make the guidance more operational and to improve the
presentation and disclosure of OTTI on debt and equity securities in the
financial statements. It provides for the bifurcation of OTTI into
(i) amounts related to credit losses, which are recognized through earnings, and
(ii) amounts related to all other factors that are recognized as a component of
other comprehensive income. The provisions of ASC 320-10-65 were
effective for the Company’s interim period ended on June 30, 2009.
ASC 805
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and the goodwill acquired. The standard also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. ASC 805 is effective
for fiscal years beginning after December 15, 2008, or October 1, 2009, for the
Company. The acquisition described in Note 2 was accounted for under SFAS No.
141 as the Company was not permitted to adopt ASC 805 early.
Stock-Based Compensation. The Company’s stockholders
have approved long-term stock-based benefit plans that enable the Company to
grant stock options, stock appreciation rights and restricted stock awards to
employees and directors. ASC 718, Compensation – Stock Compensation requires
the recognition of compensation costs relating to share based payment
transactions in the financial statements. The Company has elected the modified
prospective application method of reporting, which provides for no restatement
of prior periods and no cumulative adjustment to equity accounts. Prior to the
ASC 718 the Company elected to account for its stock-based compensation plans
using the intrinsic value-based method of recognizing compensation costs
outlined in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and adopted the disclosure-only provisions under SFAS No.
123.
Earnings per share (“EPS”) data: The Company
displays basic and diluted EPS in the Consolidated Statements of Income. Basic
EPS is computed by dividing net income or loss by the weighted average number of
shares outstanding during the period. Unallocated shares relating to the ESOP
are deducted in the calculation of weighted average shares outstanding. Diluted
EPS is computed by dividing net income or loss by the diluted weighted average
shares outstanding, which includes common stock equivalent shares outstanding
using the treasury stock method, unless such shares are anti-dilutive. Common
stock equivalents include stock options and restricted stock
awards.
Employee Stock Ownership Plan
(“ESOP”). The Company accounts for its ESOP in accordance with ASC
718-40, Employee Stock
Ownership Plans. Dividends on allocated shares are recorded as a
reduction of retained earnings and paid to plan participants or distributed to
participants' accounts. As shares are released, compensation expense is recorded
equal to the then current market price of the shares and the shares become
available for earnings per share calculations. The Company records cash
dividends on unallocated shares as a reduction of debt or accrued
interest.
Concentrations of Credit Risk.
The Bank accepts deposits and grants credit primarily within the
Treasure Valley region of southwestern Idaho and the tri-country region of
central Oregon. The Bank has a diversified loan portfolio and grants consumer,
residential, commercial, and construction real estate loans, and is not
dependent on any industry or group of customers. Although the Bank has a
diversified loan portfolio, a substantial portion of its loans are
real-estate-related. The ability of the Bank's debtors to honor their contracts
is dependent upon the real estate and general economic conditions in the area.
The Bank also regularly monitors real-estate related loans that include terms
that may give rise to a concentration of credit risk, including high
loan-to-value loans and interest-only loans.
Reclassifications. Certain
reclassifications have been made to prior year’s financial statements in order
to conform to the current year presentation. The reclassifications had no effect
on previously reported net income or equity.
Note
2 – Acquisition
On August
7, 2009, the Bank entered into an agreement with the Federal Deposit Insurance
Corporation (“FDIC”) and acquired certain assets and assumed certain liabilities
of Community First Bank, a full service community bank that was formerly
headquartered in Prineville, Oregon (“Acquisition”). The results of operations
includes the impact of the Acquisition from the acquisition date through
September 30, 2009.
The
Acquisition consisted of assets with a fair value of $189.8 million and
liabilities with a fair value of $174.5 million. The following table summarizes
the estimated fair values of the assets acquired and liabilities assumed at the
date of the acquisition:
|
|
August
7, 2009
|
|
|
|
(in
thousands)
|
|
Cash
|
|
$ |
8,146 |
|
Due
from banks
|
|
|
9,372 |
|
Federal
Funds Sold
|
|
|
4,560 |
|
Investment
securities
|
|
|
15,634 |
|
Loans
receivable, net of discount of $13,173, and
allowance
for loan losses of $16,812
|
|
|
112,350 |
|
Real
estate and other repossessed assets
|
|
|
7,363 |
|
FDIC
indemnification asset
|
|
|
30,038 |
|
Federal
Home Loan Bank of Seattle stock
|
|
|
735 |
|
Accrued
interest receivable
|
|
|
947 |
|
Other
assets
|
|
|
659 |
|
Total Assets
Acquired
|
|
$ |
189,804 |
|
|
|
|
|
|
Demand,
money market and savings deposit accounts
|
|
$ |
67,971 |
|
Certificates
of deposit
|
|
|
75,488 |
|
Advances
from Federal Home Loan Bank of Seattle and other
borrowings
|
|
|
19,228 |
|
Accrued
interest payable
|
|
|
243 |
|
Other
liabilities
|
|
|
1,827 |
|
Deferred
taxes
|
|
|
9,756 |
|
Total Liabilities
Assumed
|
|
|
174,513 |
|
|
|
|
|
|
Net Assets
Acquired
|
|
$ |
15,291 |
|
In
addition to the assets purchased and liabilities assumed, the Bank and the FDIC
entered into a loss sharing agreement. This agreement covers realized
losses on loans and foreclosed real estate. Under this agreement, the
FDIC will reimburse the Bank for 80% of the first $34.0 million of realized
losses on covered assets and 95% on realized losses that exceed
$34.0 million. Realized losses covered by the loss sharing
agreement include loan contractual balances (and related unfunded commitments
that were acquired), accrued interest on loans for up to 90 days, the book
value of foreclosed real estate acquired, and certain direct costs, less cash or
other consideration received by the Bank. This agreement extends for
ten years for one-to-four family real estate loans and REO and for five
years for all other loans and REO. The reimbursable losses from the
FDIC are based on the book value of the relevant loans and foreclosed assets as
determined by the FDIC as of the date of the acquisition, August 7,
2009.
The
expected reimbursements under the loss sharing agreement were recorded as an
indemnification asset at their estimated fair value of $30.0 million on the
acquisition date. Based upon the acquisition date preliminary fair
values estimate of the net assets acquired, no goodwill was
recorded. The Acquisition resulted in a pre-tax gain of $25.0
million, which was classified as an extraordinary gain in the Company’s
Consolidated Statement of Operations for the year ended September 30, 2009, net
of income taxes. Due to the difference in tax bases of the assets
acquired and liabilities assumed, the Company recorded a deferred tax liability
of $9.7 million, resulting in an after-tax gain of $15.3 million.
The
determination of the initial fair value of loans purchased in the Acquisition
and the initial fair value of the related FDIC indemnification asset involves a
high degree of judgment and complexity. The carrying value of the acquired loans
and the FDIC indemnification asset reflect management’s best estimate of the
amount to be realized on each of these assets. The Company determined the
estimated fair value of the assumed assets and liabilities in accordance with
SFAS No. 141, Business
Combinations. However, the amount the Company realizes on
these assets could differ materially from the carrying value reflected in these
financial statements, based upon the timing of collections on the acquired loans
in future periods. Because of the loss sharing agreement with the
FDIC on these assets, the Company does not expect to incur any excessive losses.
To the extent the actual values realized for the acquired loans are different
from the estimate, the FDIC indemnification asset will generally be impacted in
an offsetting manner due to the loss sharing support from the FDIC.
In its
assumption of the deposit liabilities, the Company believed that the customer
relationships associated with these deposits have intangible value. The Company
applied ASC 350, Intangibles –
Goodwill and Other, which prescribes the accounting for goodwill and
other intangible assets, such as core deposit intangibles. The
Company determined the fair value of a core deposit intangible asset was
approximately $2.1 million. In determining the valuation amount,
deposits were analyzed based on factors such as type of deposit, deposit
retention, interest rates and age of deposit relationships. In accordance with
the provisions of SFAS No. 141, the Company allocated the excess of fair value
of net assets acquired over cost to the fair value of the core deposit
intangible asset, thus reducing the carrying value of the intangible asset to
zero.
ASC
310-30 Loans and Debt
Securities Acquired with Deteriorated Credit, applies to a loan with
evidence of deterioration of credit quality since origination, acquired by
completion of a transfer for which it is probable, at acquisition, that the
investor will be unable to collect all contractually required payments
receivable. On the acquisition date, the preliminary estimate of the
contractually required principal payments receivable for all loans subject to
ASC 310-30 was $40.4 million and the estimated fair value of these loans was
$26.2 million. These amounts were determined based upon the estimated
remaining life of the underlying loans, which include the effects of estimated
prepayments. At August 7, 2009, a majority of these loans were valued
based on the current liquidation value of the underlying collateral, because the
expected cash flows are primarily based on the liquidation of underlying
collateral. ASC 310-30 prohibits carrying over or creating an allowance for loan
losses upon initial recognition; therefore, no allowance for loan losses was
reported on the balance sheet for these loans at September 30,
2009.
The
Company has omitted the pro forma disclosures required for a business
combination because there are no historical financial statements for the
selected assets acquired and liabilities assumed of Community First
Bank
Note
3 – Fair Value Measurement
ASC 820,
Fair Value Measurements and
Disclosures, defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure requirements about fair value
measurements. The Company attempts 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 September 30, 2009:
|
September
30, 2009
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
(in
thousands)
|
Securities
available for sale
|
|
$169,320
|
|
|
--
|
|
|
$169,320
|
|
|
--
|
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 September 30, 2009:
|
September
30, 2009
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
(in
thousands)
|
Impaired
loans
|
|
$31,922
|
|
|
--
|
|
|
--
|
|
|
$31,922
|
Real
estate owned
|
|
18,391
|
|
|
--
|
|
|
--
|
|
|
18,391
|
Impaired
loans, which are measured for impairment using the fair value of the collateral
at September 30, 2009, had a carrying amount of $33.4 million, net of specific
valuation allowances totaling $1.5 million and a $14.2 million fair value
adjustment on $40.4 million of loans purchased in the Acquisition and accounted
for under ASC 310-30. The specific valuation allowance required a provision of
$1.5 million during the year ended September 30, 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 that are collateral dependent and have
experienced a write-down in carrying value or have a recognized valuation
allowance are included in the table above. Impaired loans whose fair value
exceeds the carrying value are excluded from the table above as these loans do
not represent financial assets measured and carried at fair value.
Real estate
owned: Fair value for real estate owned is determined by obtaining
appraisals on the properties. The fair value under such appraisals is determined
by using an income, cost or comparable sales valuation technique. The fair value
is then reduced by management’s estimate for the direct costs expected to be
incurred in order to sell the property. Holding costs or maintenance expenses
are recorded as period costs when occurred and are not included in the fair
value estimate
Note
4 – Securities
The
Company’s investment policies are designed to provide and maintain adequate
liquidity and to generate favorable rates of return without incurring undue
interest rate or credit risk. The investment policies generally limit
investments to mortgage-backed securities, U.S. Government and agency
securities, municipal bonds, certificates of deposit and marketable corporate
debt obligations.
Investment
securities available for sale consisted of the following at September 30, 2009
and 2008:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
September 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government-
sponsored enterprises
|
|
$ |
4,089 |
|
|
$ |
42 |
|
|
$ |
(4 |
) |
|
$ |
4,127 |
|
Mortgage-backed
securities
|
|
|
158,677 |
|
|
|
6,529 |
|
|
|
(13 |
) |
|
|
165,193 |
|
|
|
$ |
162,766 |
|
|
$ |
6,571 |
|
|
$ |
(17 |
) |
|
$ |
169,320 |
|
September 30,
2008:
|
|
|
|
Mortgage-backed
securities
|
|
$ |
191,120 |
|
|
$ |
669 |
|
|
$ |
(3,002 |
) |
|
$ |
188,787 |
|
The
contractual maturities of investment securities available for sale are shown
below. Expected maturities may differ from contractual maturities because
borrowers have the right to prepay obligations without prepayment
penalties.
|
|
September
30, 2009
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$ |
6 |
|
|
$ |
6 |
|
Due
after one year through five years
|
|
|
5,139 |
|
|
|
5,184 |
|
Due
after five years through ten years
|
|
|
27,297 |
|
|
|
28,781 |
|
Due
after ten years
|
|
|
130,324 |
|
|
|
135,349 |
|
Total
|
|
$ |
162,766 |
|
|
$ |
169,320 |
|
For the
years ended September 30, 2009, 2008, and 2007, proceeds from sales of
securities available for sale amounted to $10.9 million, $0, and $3.8 million,
respectively. Gross realized gains for the years ended September 30, 2009, 2008,
and 2007 were $121,000, $0, and $4,000 respectively. Gross realized losses for
the years ended September 30, 2009, 2008, and 2007 were $324,000, $0, and $0
respectively. All gain and losses were included in other noninterest
income on the Consolidated Statements of Income.
The fair
value of securities with unrealized losses, the amount of unrealized losses and
the length of time these unrealized losses existed as of September 30, 2009 are
as follows:
|
|
Less
than 12 months
|
|
|
12
months or longer
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
(in
thousands)
|
|
Obligations
of U.S.
Government
Sponsored
Enterprises
|
|
$ |
2,015 |
|
|
$ |
(4 |
) |
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
2,015 |
|
|
$ |
(4 |
) |
Mortgage-backed
securities
|
|
|
-- |
|
|
|
-- |
|
|
|
599 |
|
|
|
(13 |
) |
|
|
599 |
|
|
|
(13 |
) |
|
|
$ |
2,015 |
|
|
$ |
(4 |
) |
|
$ |
599 |
|
|
$ |
(13 |
) |
|
$ |
2,614 |
|
|
$ |
(17 |
) |
Management
has evaluated these securities and has determined that the decline in the value
is not other than temporary and not related to the underlying credit quality of
the issuers or an industry specific event. The declines in value are on
securities that have contractual maturity dates and future principal payments
that will be sufficient to recover the current amortized cost of the securities.
The Company has the ability and intent to hold the securities for a reasonable
period of time for a forecasted recovery of the amortized cost.
As of
September 30, 2009, the Bank had pledged mortgage-backed securities with an
amortized cost of $66.1 million and a fair value of $68.9 million as collateral
for FHLB advances. In addition, as of September 30, 2009, three mortgage-backed
securities with a combined amortized cost of $4.5 million and a fair value of
$4.8 million were pledged to the Federal Reserve Bank as collateral for treasury
tax and loan funds held by the Bank and for borrowings from the discount
window. The Bank also had mortgage-backed securities with an
amortized cost of $3.3 million and fair value of $3.5 million pledged as
collateral for repurchase agreements. Mortgage-backed securities with a combined
amortized cost of $5.1 million and a fair value of $5.4 million were pledged as
collateral for public funds.
Note
5 – Loans Receivable
Loans
receivable are summarized as follows at September 30, 2009 and
2008:
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Real
Estate:
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
178,311 |
|
|
$ |
210,501 |
|
Multi-family
residential
|
|
|
16,286 |
|
|
|
8,477 |
|
Commercial
|
|
|
213,471 |
|
|
|
151,733 |
|
Total
real estate
|
|
|
408,068 |
|
|
|
370,711 |
|
|
|
|
|
|
|
|
|
|
Real
Estate Construction:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
10,871 |
|
|
|
13,448 |
|
Multi-family
residential
|
|
|
10,417 |
|
|
|
920 |
|
Commercial
and land development
|
|
|
27,144 |
|
|
|
18,674 |
|
Total
real estate construction
|
|
|
48,432 |
|
|
|
33,042 |
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
53,368 |
|
|
|
52,954 |
|
Automobile
|
|
|
2,364 |
|
|
|
1,903 |
|
Other
consumer
|
|
|
3,734 |
|
|
|
1,370 |
|
Total
consumer
|
|
|
59,466 |
|
|
|
56,227 |
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
24,256 |
|
|
|
5,385 |
|
|
|
|
540,222 |
|
|
|
465,365 |
|
|
|
|
|
|
|
|
|
|
Deferred
loan fees
|
|
|
(858 |
) |
|
|
(973 |
) |
Allowance
for loan losses
|
|
|
(28,735 |
) |
|
|
(4,579 |
) |
Loans
receivable, net
|
|
$ |
510,629 |
|
|
$ |
459,813 |
|
The
majority of residential mortgage loans are pledged as collateral for FHLB
advances (see Note 9).
The
interest rates on loans at September 30, 2009, fall into the following
fixed and variable components
(in
thousands):
Fixed
rates
|
|
$ |
177,122 |
|
Variable
rates
|
|
|
363,100 |
|
Total
loans receivable
|
|
$ |
540,222 |
|
The
contractual maturity of loans receivable at September 30, 2009, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to prepay loans with or without prepayment
penalties.
|
|
Within
1
Year
|
|
|
One
Year
To
5 Years
|
|
|
After
5
Years
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
2,938 |
|
|
$ |
5,096 |
|
|
$ |
170,277 |
|
|
$ |
178,311 |
|
Multi-family
residential
|
|
|
1,753 |
|
|
|
3,938 |
|
|
|
10,595 |
|
|
|
16,286 |
|
Commercial
|
|
|
19,393 |
|
|
|
23,367 |
|
|
|
170,711 |
|
|
|
213,471 |
|
Total
real estate
|
|
|
24,084 |
|
|
|
32,401 |
|
|
|
351,583 |
|
|
|
408,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
10,159 |
|
|
|
712 |
|
|
|
-- |
|
|
|
10,871 |
|
Multi-family
residential
|
|
|
10,417 |
|
|
|
-- |
|
|
|
-- |
|
|
|
10,417 |
|
Commercial
and land development
|
|
|
19,424 |
|
|
|
7,269 |
|
|
|
451 |
|
|
|
27,144 |
|
Total
real estate construction
|
|
|
40,000 |
|
|
|
7,981 |
|
|
|
451 |
|
|
|
48,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
272 |
|
|
|
6,079 |
|
|
|
47,017 |
|
|
|
53,368 |
|
Automobile
|
|
|
143 |
|
|
|
1,502 |
|
|
|
719 |
|
|
|
2,364 |
|
Other
consumer
|
|
|
647 |
|
|
|
1,207 |
|
|
|
1,880 |
|
|
|
3,734 |
|
Total
consumer
|
|
|
1,062 |
|
|
|
8,788 |
|
|
|
49,616 |
|
|
|
59,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
13,168 |
|
|
|
5,659 |
|
|
|
5,429 |
|
|
|
24,256 |
|
Total
loans receivable
|
|
$ |
78,314 |
|
|
$ |
54,829 |
|
|
$ |
407,079 |
|
|
$ |
540,222 |
|
An
analysis of the changes in the allowance for loan losses is as
follows:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
4,579 |
|
|
$ |
2,988 |
|
|
$ |
2,974 |
|
Provision
for loan losses
|
|
|
16,085 |
|
|
|
2,431 |
|
|
|
409 |
|
Increase
due to acquisition
|
|
|
16,811 |
|
|
|
-- |
|
|
|
-- |
|
Charge
offs, net
|
|
|
(8,978 |
) |
|
|
(864 |
) |
|
|
(219 |
) |
Transfer
to unfunded commitments
|
|
|
-- |
|
|
|
-- |
|
|
|
(192 |
) |
Recoveries
|
|
|
238 |
|
|
|
24 |
|
|
|
16 |
|
Ending
balance
|
|
$ |
28,735 |
|
|
$ |
4,579 |
|
|
$ |
2,988 |
|
Impaired
loan information is as follows:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans with related specific allowance
|
|
$ |
7,131 |
|
|
$ |
9,215 |
|
|
$ |
833 |
|
Impaired
loans with no related allowance
|
|
|
27,327 |
|
|
|
266 |
|
|
|
2,076 |
|
Total
impaired loans
|
|
$ |
34,458 |
|
|
$ |
9,481 |
|
|
$ |
2,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
allowance on impaired loans
|
|
$ |
1,516 |
|
|
$ |
1,729 |
|
|
$ |
78 |
|
Average
balance of impaired loans
|
|
|
8,297 |
|
|
|
4,041 |
|
|
|
356 |
|
Included
in the impaired loans with no related allowance total for 2009 in the above
table are $26.2 million of impaired loans purchased in the
Acquisition. At the time of acquisition, these loans were written
down $14.2 million to their estimated fair value, which was also determined to
be their initial investment value. As such, there is no related
allowance associated with these loans. See Note 2 of these Notes to Consolidated
Financial Statements for additional information on the acquisition.
No
interest income was recognized on impaired loans while they were impaired during
the years ended September 30, 2009, 2008 and 2007. As of September 30, 2009,
2008 and 2007, the Company had no accruing loans that were contractually past
due 90 days or more.
Note
6 – 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:
|
|
Year
Ended
September
30,
|
|
Servicing
Right Classes
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
One-to-four
family residential loans:
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,703 |
|
|
$ |
2,033 |
|
|
$ |
2,468 |
|
Additions
for new mortgage
servicing
rights capitalized
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Adjustments
to fair value
|
|
|
-- |
|
|
|
(330 |
) |
|
|
(435 |
) |
Write-up
(impairment)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Sale
of servicing rights
|
|
|
(1,703 |
) |
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
- |
|
|
$ |
1,703 |
|
|
$ |
2,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
4 |
|
|
$ |
14 |
|
|
$ |
24 |
|
Additions
for new mortgage
servicing rights capitalized
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Adjustments
to fair value
|
|
|
(4 |
) |
|
|
-- |
|
|
|
(10 |
) |
Amortization
of servicing rights
|
|
|
-- |
|
|
|
(10 |
) |
|
|
-- |
|
Ending
balance
|
|
$ |
-- |
|
|
$ |
4 |
|
|
$ |
14 |
|
The
amount of contractually specified servicing fees for one-to-four family
residential loans was $68,000, $484,000 and $549,000, for the years ended
September 30, 2009, 2008 and 2007 respectively. The servicing fees for
one-to-four family residential loans are recorded in “Loan Servicing Fees” on
the Consolidated Statements of Income. The amount of contractually specified
servicing fees for commercial real estate loans, as well as late fees and other
ancillary fees earned for the periods indicated were immaterial in
amount.
Note
7 - Property and Equipment
Property
and equipment at September 30, 2009 and 2008 are summarized as
follows:
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
5,159 |
|
|
$ |
3,254 |
|
Buildings
and leasehold improvements
|
|
|
12,461 |
|
|
|
11,020 |
|
Construction
in progress
|
|
|
4,760 |
|
|
|
1,938 |
|
Furniture
and equipment
|
|
|
9,918 |
|
|
|
9,335 |
|
Automobiles
|
|
|
114 |
|
|
|
90 |
|
Total
cost
|
|
|
32,412 |
|
|
|
25,637 |
|
Less
accumulated depreciation and amortization
|
|
|
(11,950 |
) |
|
|
(10,391 |
) |
Net book value
|
|
$ |
20,462 |
|
|
$ |
15,246 |
|
Repairs
and maintenance are charged against income as incurred; major remodels and
improvements are capitalized. Depreciation and amortization charged against
operations for the years ended September 30, 2009, 2008 and 2007, was $1.7
million each year. Capitalized interest expense related to construction of
banking offices for the year ended September 30, 2009, was $56,421.
In
November 2009, the Bank notified the FDIC of its intent to purchase two banking
offices in Redmond and Bend, Oregon, under a purchase option available in the
purchase and assumption agreement for the Acquisition. The purchase price for he
land and buildings totaled $4.7 million. Additionally the Bank agreed to
purchase furniture and equipment in these banking offices and in five other
banking office that are leased. The total purchase price of the furniture and
equipment was approximately $412,000.
Note
8 - Deposit Accounts
Deposit
information by type and weighted average rates are summarized as
follows:
|
|
|
|
|
|
|
|
|
Rate
|
|
|
September
30,
2009
|
|
|
Rate
|
|
|
September
30,
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
|
0.65 |
% |
|
$ |
41,757 |
|
|
|
0.84 |
% |
|
$ |
26,409 |
|
Demand
deposits
|
|
|
0.55 |
|
|
|
244,204 |
|
|
|
0.75 |
|
|
|
169,112 |
|
|
|
|
|
|
|
|
285,961 |
|
|
|
|
|
|
|
195,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
|
0.00-0.99 |
|
|
|
9,906 |
|
|
|
0.00-0.99 |
|
|
|
11 |
|
|
|
|
1.00-1.99 |
|
|
|
71,921 |
|
|
|
1.00-1.99 |
|
|
|
-- |
|
|
|
|
2.00-2.99 |
|
|
|
68,327 |
|
|
|
2.00-2.99 |
|
|
|
49,598 |
|
|
|
|
3.00-3.99 |
|
|
|
42,898 |
|
|
|
3.00-3.99 |
|
|
|
54,669 |
|
|
|
|
4.00-4.99 |
|
|
|
27,389 |
|
|
|
4.00-4.99 |
|
|
|
55,050 |
|
|
|
|
5.00-5.99 |
|
|
|
7,544 |
|
|
|
5.00-5.99 |
|
|
|
16,234 |
|
|
|
|
6.00-8.99 |
|
|
|
912 |
|
|
|
6.00-6.99 |
|
|
|
1,842 |
|
Total
certificates of deposit
|
|
|
|
|
|
|
228,897 |
|
|
|
|
|
|
|
177,404 |
|
Total
deposits
|
|
|
|
|
|
$ |
514,858 |
|
|
|
|
|
|
$ |
372,925 |
|
Scheduled
maturities of certificates of deposits are as follows during the fiscal years
presented:
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Fiscal
year ending September 30,
|
|
|
|
|
|
|
2009
|
|
$ |
-- |
|
|
$ |
133,323 |
|
2010
|
|
|
161,969 |
|
|
|
25,694 |
|
2011
|
|
|
34,821 |
|
|
|
7,758 |
|
2012
|
|
|
12,982 |
|
|
|
8,649 |
|
2013
|
|
|
7,932 |
|
|
|
1,805 |
|
2014
|
|
|
10,976 |
|
|
|
-- |
|
Thereafter
|
|
|
217 |
|
|
|
175 |
|
|
|
$ |
228,897 |
|
|
$ |
177,404 |
|
At
September 30, 2009 and 2008, certificates of deposits of $100,000 or greater
were $83.5 million and $54.5 million, respectively. We had brokered
certificates of deposit at September 30, 2009 and 2008 of $100,000 and $0,
respectively.
Interest
expense by type of deposit account is summarized as follows:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
236 |
|
|
$ |
177 |
|
|
$ |
103 |
|
Demand
deposits
|
|
|
1,116 |
|
|
|
1,912 |
|
|
|
1,783 |
|
Certificates
of deposit
|
|
|
5,724 |
|
|
|
8,596 |
|
|
|
10,393 |
|
Total
|
|
$ |
7,076 |
|
|
$ |
10,685 |
|
|
$ |
12,279 |
|
Accrued
interest on deposit accounts at September 30, 2009 and 2008 was $188,000 and $0,
respectively.
Note
9 - Federal Home Loan Bank Advances and other borrowings
The Bank
has the ability to borrow up to 40% of its total assets from the FHLB of
Seattle, limited by available collateral. Advances are collateralized by all
FHLB stock owned by the Bank, deposits with the FHLB of Seattle, and certain
residential mortgages and mortgage-backed securities. The outstanding balances
on FHLB advances at September 30, 2009 and 2008 were $82.9 million and $137.0
million, respectively, with interest rates ranging from 0.68% to 5.26% as of
September 30, 2009.
Other
borrowings include securities sold under obligations to repurchase (“repurchase
agreements”) originated directly with commercial and retail customers. These
borrowings are collateralized with securities issued by U.S. Government
sponsored enterprises. Repurchase agreements totaled $1.8 million and $0 at
September 30, 2009 and 2008, respectively and had an average rate of 1.90% at
September 30, 2009. All repurchase agreements mature in 2010.
The
Bank’s borrowings consisted of the following during the years ended September
30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Maximum
outstanding at any month end
|
|
$ |
137,000 |
|
|
$ |
181,000 |
|
Average
outstanding
|
|
|
112,000 |
|
|
|
158,000 |
|
|
|
|
|
|
|
|
|
|
Weighted
average interest rates
|
|
|
|
|
|
|
|
|
For
the period
|
|
|
4.39 |
% |
|
|
4.60 |
% |
At
end of period
|
|
|
4.00 |
|
|
|
4.68 |
|
Scheduled
maturities of the Company’s borrowings are as follows during the fiscal years
presented:
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
Interest
Rates
|
|
|
Amount
|
|
|
Average
Interest
Rates
|
|
|
Amount
|
|
|
|
(dollars
in thousands)
|
|
Fiscal
Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
-- |
% |
|
$ |
-- |
|
|
|
4.60 |
% |
|
$ |
76,882 |
|
2010
|
|
|
3.26 |
|
|
|
25,887 |
|
|
|
4.69 |
|
|
|
15,240 |
|
2011
|
|
|
4.20 |
|
|
|
12,050 |
|
|
|
5.16 |
|
|
|
8,050 |
|
2012
|
|
|
4.35 |
|
|
|
20,100 |
|
|
|
4.91 |
|
|
|
15,100 |
|
2013
|
|
|
4.30 |
|
|
|
23,700 |
|
|
|
4.62 |
|
|
|
18,700 |
|
2014
|
|
|
4.83 |
|
|
|
2,000 |
|
|
|
-- |
|
|
|
-- |
|
Thereafter
|
|
|
4.83 |
|
|
|
1,000 |
|
|
|
4.83 |
|
|
|
3,000 |
|
Total
|
|
|
|
|
|
$ |
84,737 |
|
|
|
|
|
|
$ |
136,972 |
|
Included
in the Bank’s borrowing capacity with the FHLB is a cash management advance
account. The outstanding balance of this overnight borrowing included in the
tables above was $4.9 million and $0 at September 30, 2009 and 2008,
respectively, and carried a variable interest rate of 0.68% at September 30.
2009.
Note
10 - Employee Retirement Plans
401(k) Plan. The
Company has a 401(k) retirement plan covering substantially all of its
employees. The Company matches 50% of employee contributions up to the
employee’s first 10% contributed to the Plan. For the years ended September 30,
2009, 2008, and 2007, total Company contributions were $251,000, $237,000, and
$214,000, respectively.
Salary Continuation Plan. As
a supplement to the 401(k) retirement plan, the Company has adopted a Salary
Continuation Plan pursuant to agreements with certain executive officers of the
Company and its subsidiaries. Under the Salary Continuation Plan, an executive
will be entitled to a stated annual benefit for a period of 15 years (i) upon
retirement from the Company after attaining age 65, or (ii) upon attaining age
65 if his or her employment had been previously terminated due to disability. In
the event the executive dies while in active service, the Company shall pay the
beneficiary the normal retirement projected benefit for a period of 15 years
commencing with the month following the executive’s death. At September 30,
2009, this death benefit contingency totaled $6.8 million and is not reported on
the consolidated balance sheet. In the event the executive dies after
age 65, but before receiving the full 15 years of annual benefits, the remaining
payments shall be paid to his or her beneficiaries. Upon termination of
employment, the annual benefit amount is 50% of the officer’s average final 36
months base salary. Benefits under the Plan vest over ten years. Upon early
retirement, the Company shall pay the executive the vested accrual balance as of
the end of the month prior to the early retirement date. The Company will pay
the early retirement benefit in 180 equal installments.
The
accrued liability for the salary continuation plan was $2.3 million and $2.3
million at September 30, 2009 and 2008, respectively. The amounts
recognized in compensation expense were $141,000, $389,000 and $403,000 for the
years ended September 30, 2009, 2008 and 2007, respectively.
Deferred
Incentive Compensation. The Company has deferred incentive compensation
agreements with certain former executive officers and certain members of the
Board of Directors. Under the agreements, the Company is obligated to provide
payments for each such former executive and board member or his beneficiaries
during a period of fifteen or ten years after the death, disability, or
retirement of the executive or board member. Until October 1, 2006,
the plan provided an incentive award percentage determined by reference to Home
Federal’s return on assets and return on equity for the year. The
resulting amount was set aside in an unfunded deferral account for participants.
Although the incentive award has been discontinued, members of the Board of
Directors may still elect to defer all or a part of their directors’ fees into
the deferral account under the plan. The
deferral accounts are
credited
annually with an interest credit that is based on the growth rate of Home
Federal Bank’s net worth in Home Federal, subject to a maximum of 12% per
year.
The
Company accrues annual interest on the unfunded liability under the plan based
upon a formula relating to the change in retained earnings of the Bank, which
amounted to 11.56%, 5.79%, and 8.50% for the years ended September 30, 2009,
2008 and 2007, respectively. The accrued liability for the deferred incentive
compensation agreements was $2.4 million and $2.3 million at September 30,
2009 and 2008, respectively. The amounts recognized in compensation expense were
$152,000, $189,000, and $124,000 for the years ended September 30, 2009,
2008, and 2007, respectively.
Director Retirement Plan. Home
Federal Bancorp adopted a director retirement plan, effective January 1, 2005,
that replaced prior plans. The plan is an unfunded nonqualified retirement plan
for directors. Upon the later of attaining age 72 or termination of
service, the director will receive an annual benefit equal to 50 percent of the
fees paid to the director for the preceding year, payable in monthly
installments over 15 years. The accrued benefit vests at a rate of 10 percent
per year, except in the event of disability, in which case the vested percentage
is 100 percent. If the director terminates service within 24 months following a
change in control, he will receive 100 percent of his accrued benefit, plus a
change in control benefit equal to 2.99 times his prior years directors fees.
Change in control payments are subject to reduction to avoid excise taxes under
Section 280G of the Internal Revenue Code. In the event a director dies before
termination of service, his beneficiary would receive his projected benefit,
which is the final benefit the director would have received had he attained age
72, assuming a 4% annual increase in the directors’ fees. In the event the
director dies after separation from service, but before receiving the full 15
years of annual benefits, the remaining payments shall be paid to his or her
beneficiaries. In-service distributions are permitted in limited
circumstances.
The
accrued liability for the director retirement plans was $588,000 and $572,000 at
September 30, 2009 and 2008, respectively. The amounts recognized in
compensation expense were $53,000, $84,000, and $51,000 for the years ended
September 30, 2009, 2008, and 2007, respectively.
The
Company’s deferred compensation agreements and supplemental executive retirement
plans are unfunded plans and have no plan assets. The following table reconciles
the accumulated liability for the benefit obligation of these contracts. The
benefit obligation represents the net present value of future payments to
individuals under the agreements.
|
|
Year
ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Beginning
balance
|
|
$ |
5,191 |
|
|
$ |
4,515 |
|
Benefit
expense
|
|
|
400 |
|
|
|
710 |
|
Benefit
payments
|
|
|
(331 |
) |
|
|
(34 |
) |
Ending
Balance
|
|
$ |
5,260 |
|
|
$ |
5,191 |
|
Note 11 - Stock-Based
Compensation
At
September 30, 2009, the Company maintained multiple long-term stock-based
benefit plans that enable the Company to grant stock options, stock appreciation
rights and restricted stock awards to employees and directors. The plans include
the 2005 Stock Option Plan, the 2005 Recognition and Retention Plan, and the
2008 Equity Incentive Plan. The plans were approved by shareholders in 2005 and
2009.
Restricted Stock Awards. The
Company grants restricted stock awards to promote the long-term interests of the
Company and its stockholders by providing restricted stock as a means for
attracting and retaining directors and key employees. The maximum number of
restricted shares that may be awarded under the plans is 692,143. The fair value
of restricted stock awards are accrued ratably as compensation expense over the
vesting period of the award. The amounts recognized in compensation expense were
$703,000, $657,000, and $640,000 for the years ended September 30, 2009, 2008,
and 2007 respectively. As of September 30, 2009, restricted stock awards of
459,460 shares of common stock were outstanding. The Company has an aggregate of
232,685 restricted shares available for future issuance.
Restricted
stock activity is summarized in the following table:
|
|
Number
of Shares
|
|
|
Weighted
Average
Fair
Value
at
Date of
Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at September 30, 2006
|
|
|
293,606 |
|
|
$ |
11.31 |
|
Vested
|
|
|
(58,723 |
) |
|
|
11.31 |
|
Granted
|
|
|
5,680 |
|
|
|
15.34 |
|
Forfeited
|
|
|
(29,800 |
) |
|
|
11.18 |
|
Nonvested
at September 30, 2007
|
|
|
210,763 |
|
|
|
11.44 |
|
Vested
|
|
|
(56,471 |
) |
|
|
11.40 |
|
Granted
|
|
|
30,858 |
|
|
|
11.98 |
|
Nonvested
at September 30, 2008
|
|
|
185,150 |
|
|
|
11.54 |
|
Vested
|
|
|
(53,188 |
) |
|
|
11.39 |
|
Granted
|
|
|
183,000 |
|
|
|
9.39 |
|
Forfeited
|
|
|
(23,884 |
) |
|
|
11.42 |
|
Nonvested
at September 30, 2009
|
|
|
291,078 |
|
|
$ |
10.23 |
|
Stock Option Awards. The
Company grants stock options to promote the long-term interests of the Company
and its stockholders by providing an incentive to directors and key employees
who contribute to the operating success of the Company. The maximum number of
stock options and stock appreciation rights that may be issued under the plans
is 1,730,356. The exercise price of each option equals the fair market value of
the Company’s stock on the date of grant. The options typically vest over five
years and expire ten years from the date of grant. The Company has an aggregate
of 601,584 stock options available for future issuance.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model that uses the assumptions noted in the
following table. The risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant. The expected life of options granted represents the
period of time that options granted are expected to be outstanding. Expected
volatilities are based on historical volatility of the Company’s stock. Expected
forfeiture rate is the estimated forfeiture rate based upon the circumstances of
the individuals that received stock options. Expected dividends represent the
Company’s estimated annual dividend rate over the expected life.
|
Risk
Free
Interest
Rate
|
|
Expected
Life
(yrs)
|
|
Expected
Volatility
|
|
Expected
Forfeiture
Rate
|
|
Expected
Dividend
Yield
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted in 2007
|
4.57%
|
|
7.50
|
|
17.43%
|
|
--
|
|
2.00%
|
Options
granted in 2008
|
3.85
|
|
7.50
|
|
25.41
|
|
--
|
|
2.02
|
Options
granted in 2009
|
2.48
|
|
7.50
|
|
34.04
|
|
--
|
|
2.01
|
Stock
option activity is summarized in the following table:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
765,495 |
|
|
$ |
11.33 |
|
|
$ |
2.15 |
|
Granted
|
|
|
28,400 |
|
|
|
15.34 |
|
|
|
3.57 |
|
Forfeited
|
|
|
(85,848 |
) |
|
|
10.80 |
|
|
|
1.91 |
|
Exercised
|
|
|
(79,580 |
) |
|
|
10.74 |
|
|
|
1.83 |
|
Outstanding
at September 30, 2007
|
|
|
628,467 |
|
|
|
11.65 |
|
|
|
2.29 |
|
Granted
|
|
|
83,875 |
|
|
|
11.28 |
|
|
|
3.11 |
|
Forfeited
|
|
|
(13,546 |
) |
|
|
10.74 |
|
|
|
1.83 |
|
Exercised
|
|
|
(56,420 |
) |
|
|
10.76 |
|
|
|
1.85 |
|
Outstanding
at September 30, 2008
|
|
|
642,376 |
|
|
|
11.71 |
|
|
|
2.44 |
|
Granted
|
|
|
456,998 |
|
|
|
9.39 |
|
|
|
2.99 |
|
Forfeited
|
|
|
(120,148 |
) |
|
|
10.81 |
|
|
|
1.91 |
|
Exercised
|
|
|
(32,862 |
) |
|
|
10.74 |
|
|
|
1.83 |
|
Outstanding
at September 30, 2009
|
|
|
946,364 |
|
|
$ |
10.72 |
|
|
$ |
2.79 |
|
Options
outstanding at September 30, 2009 were as follows:
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Range
of
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
Number
Outstanding
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 9.07-9.39
|
|
9.6
|
|
456,998
|
$
9.39
|
$ 928,666
|
|
--
|
$
--
|
$ --
|
10.09-10.74
|
|
6.1
|
|
223,114
|
10.66
|
170,343
|
|
161,451
|
10.72
|
113,578
|
11.05-11.31
|
|
7.4
|
|
59,080
|
11.20
|
12,944
|
|
25,448
|
11.26
|
4,066
|
12.76
|
|
8.1
|
|
19,153
|
12.76
|
--
|
|
3,831
|
12.76
|
--
|
13.32-13.47
|
|
6.9
|
|
159,619
|
13.40
|
--
|
|
88,322
|
13.41
|
--
|
15.34
|
|
7.2
|
|
28,400
|
15.34
|
--
|
|
11,360
|
15.34
|
--
|
|
|
|
|
946,364
|
|
$1,111,953
|
|
290,412
|
|
$117,644
|
Cash
proceeds received from the exercise of stock options were $353,000 and $607,000
for the years ended September 30, 2009 and 2008 respectively. The total
intrinsic value of stock options exercised were $6,000 and $66,000 for the years
ended September 30, 2009 and 2008 respectively. The amounts recognized in
compensation expense were $385,000, $366,000, and $396,000 for the years ended
September 30, 2009, 2008, and 2007 respectively. Tax benefits related to stock
option exercises were $5,000, $43,000 and $55,000 for the years ended September
30, 2009, 2008 and 2007 respectively. It is the Company’s general policy to
issue new shares for the exercise of stock options.
As of
September 30, 2009, the compensation expense yet to be recognized for
stock-based awards that have been awarded but not vested was as
follows:
|
|
Stock
Options
|
|
|
Restricted
Stock
|
|
|
Total
Awards
|
|
|
|
(in
thousands)
|
|
2010
|
|
$ |
494 |
|
|
$ |
907 |
|
|
$ |
1,401 |
|
2011
|
|
|
399 |
|
|
|
438 |
|
|
|
837 |
|
2012
|
|
|
323 |
|
|
|
371 |
|
|
|
694 |
|
2013
|
|
|
291 |
|
|
|
355 |
|
|
|
646 |
|
2014
|
|
|
159 |
|
|
|
200 |
|
|
|
359 |
|
Total
|
|
$ |
1,666 |
|
|
$ |
2,271 |
|
|
$ |
3,937 |
|
Note 12 - Employee Stock Ownership
Plan
In
connection with the minority stock offering in 2004, the Company established an
ESOP for the benefit of its employees. The ESOP covers all employees with at
least one year and 1000 hours of service. Shares are released for allocation at
the discretion of the Board of Directors. In 2004, the Company issued 566,137
shares of common stock to the ESOP in exchange for a ten-year note of
approximately $5.0 million. These shares are expected to be released over a
ten-year period. In 2007, the ESOP acquired an additional 816,000 shares of the
Company’s common stock in exchange for a fifteen-year note of approximately $8.2
million. These shares are expected to be released over a fifteen-year period. As
shares are released from collateral, the Company will report compensation
expense equal to the average market price of the shares. ESOP
compensation expense included in salaries and benefits was $969,000, $1.2
million, and $793,000 for the years ended September 30, 2009, 2008, and 2007,
respectively. Dividends on allocated ESOP shares reduce retained earnings;
dividends on unallocated ESOP shares reduce principal or interest on the ESOP
loan.
ESOP
share activity is summarized in the following table:
|
|
|
|
|
|
|
Unllocated
ESOP
Shares
|
|
|
|
Fair
Value
of
Unallocated
Shares
|
|
|
|
Allocated
and
Released
Shares
|
|
|
|
Total
ESOP
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2006
|
|
|
452,909 |
|
|
$ |
6,199,600 |
|
|
|
113,228 |
|
|
|
566,137 |
|
Allocation
on September 30, 2007
|
|
|
(56,614 |
) |
|
|
|
|
|
|
56,614 |
|
|
|
-- |
|
Balance
at September 30, 2007
|
|
|
396,295 |
|
|
|
4,643,200 |
|
|
|
169,842 |
|
|
|
566,137 |
|
ESOP
shares issued in December
2007
|
|
|
816,000 |
|
|
|
|
|
|
|
-- |
|
|
|
816,000 |
|
Allocation
on September 30, 2008
|
|
|
(97,414 |
) |
|
|
|
|
|
|
97,414 |
|
|
|
-- |
|
Balance
at September 30, 2008
|
|
|
1,114,881 |
|
|
|
14,214,733 |
|
|
|
267,256 |
|
|
|
1,382,137
|
|
Allocation
on September 30, 2009
|
|
|
(111,014 |
) |
|
|
|
|
|
|
111,014 |
|
|
|
-- |
|
Balance
at September 30, 2009
|
|
|
1,003,867 |
|
|
$ |
14,214,733 |
|
|
|
378,270 |
|
|
|
1,382,137 |
|
From the
inception of the ESOP through September 30, 2009, 33,907 shares have been taken
out of the ESOP via distributions to former employees. At September
30, 2009, a total of 1,348,230 shares remained in the ESOP.
Note
13 – Commitments and Contingencies
Lease
commitments:
The
Company has entered into noncancelable operating leases for land and buildings
that require future minimum rental payments in excess of one year as of
September 30, 2009. Certain lease payments may be adjusted periodically in
accordance with changes in the Consumer Price Index.
At
September 30, 2009, the Bank was leasing eight banking offices from FDIC in
connection with the Acquisition. Under the purchase and assumption agreement for
the Acquisition, the Bank had a 90-day option to purchase banking offices and
assumed leased facilities. In November 2009, the Bank informed the FDIC that the
Bank intended to assume the leases on five of the banking offices, to purchase
two banking offices and to close another by November 30, 2009. The annualized
payments on the leases to be assumed by the Bank are included in the table
below. See Note 7 for information on facilities to be purchased.
The
estimated future minimum annual rental payments, exclusive of taxes and other
charges, are summarized as follows:
|
|
Year
ending
September
30,
|
|
|
|
(in
thousands)
|
|
2010
|
|
$ |
555 |
|
2011
|
|
|
219 |
|
2012
|
|
|
201 |
|
2013
|
|
|
120 |
|
2014
|
|
|
116 |
|
Thereafter
|
|
|
3,052 |
|
Total
|
|
$ |
4,263 |
|
Total
rent expense for the years ended September 30, 2009, 2008, and 2007, was
$501,000, $509,000, and $463,000, respectively.
Commitments
to extend credit:
In the
normal course of business, the Company makes various commitments and incurs
certain contingent liabilities that are not presented in the accompanying
financial statements. The commitments and contingent liabilities include various
guarantees and commitments to extend credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the agreement. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Because many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed necessary
by the Company upon extension of the credit, is based on management’s credit
evaluation of the borrower. Collateral held varies but may include securities,
accounts receivable, inventory, fixed assets, and/or real estate properties. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding.
At
September 30, 2009 and 2008, commitments to extend credit were as
follows:
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Unfunded
commitments under lines of credit
and
letters of credit
|
|
$ |
46,184 |
|
|
$ |
42,470 |
|
Undisbursed
balance of loans closed
|
|
|
5,252 |
|
|
|
8,197 |
|
Commitments
to originate loans:
|
|
|
|
|
|
|
|
|
Fixed
rate
|
|
|
2,824 |
|
|
|
6,768 |
|
Adjustable
rate
|
|
|
4,949 |
|
|
|
11,924 |
|
Total
commitments
|
|
$ |
59,209 |
|
|
$ |
69,359 |
|
The
Company estimates a reserve related to unfunded loan commitments. In assessing
the adequacy of the reserve, the Company uses a similar approach used in the
development of the allowance for loan losses. At September 30, 2009, the reserve
for unfunded loan commitments was $581,000, which was included in other
liabilities on the Consolidated Balance Sheets.
Most of
the Bank’s business activity is with customers located in the States of Idaho
and Oregon. Loans to one borrower are generally limited, by federal banking
regulation, to 15% of the Bank's regulatory capital. As of September 30, 2009
and 2008, the Bank had no individual industry concentrations of credit
risk.
In
connection with certain asset sales, the Bank typically makes representations
and warranties about the underlying assets conforming to specified guidelines.
If the underlying assets do not conform to the specifications, the Bank may have
an obligation to repurchase the assets or indemnify the purchaser against loss.
These representations and warranties are most applicable to the residential
mortgages sold in the secondary market. The Bank believes that the
potential for loss under these arrangements is remote. Accordingly, no
contingent liability is recorded in the financial statements.
Note
14 - Related Party Transactions
In the
normal course of business, the Company makes loans to its executive officers,
directors and companies affiliated with these individuals. It is management’s
opinion that loans to the Company’s officers and directors have been made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated parties and
have not involved more than normal risk of collectibility. An analysis of
activity with respect to loans receivable from directors, executive officers and
their affiliates is as follows:
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
60 |
|
|
$ |
872 |
|
Principal
advances
|
|
|
-- |
|
|
|
-- |
|
Principal
repayments
|
|
|
-- |
|
|
|
(192 |
) |
Other
changes
|
|
|
(60 |
) |
|
|
(620 |
) |
Balance,
end of year
|
|
$ |
-- |
|
|
$ |
60 |
|
“Other
changes” in the table above for fiscal year 2009 refers to a loan to an employee
who retired during the year. ”Other changes” in fiscal year 2008
refers to a loan to an employee whose status was changed from an executive
officer to a non-executive officer during the year.
The
Company also accepts deposits from its executive officers, directors, and
affiliated companies on substantially the same terms as unrelated parties. The
aggregate dollar amounts of these deposits were $888,000 and $1.2 million at
September 2009 and 2008, respectively.
Note
15 - Capital Requirements
The Bank
is subject to various regulatory capital requirements administered by its
primary federal regulator, the Office of Thrift Supervision (“OTS”). Failure to
meet the minimum regulatory capital requirements can initiate certain mandatory
and possible additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines involving quantitative measures of the Bank’s assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classifications under the prompt
corrective action guidelines are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios of total risk-based capital and Tier 1
capital to risk-weighted assets (as defined in the regulations), Tier 1 capital
to adjusted total assets (as defined), and tangible capital to adjusted total
assets (as defined). As of September 2009, the Bank meets all of the capital
adequacy requirements to which it is subject.
The
actual and required minimum capital amounts and ratios of the Bank are presented
in the following table:
|
Actual
|
|
For
Capital Adequacy
Purposes
|
|
To
Be Well Capitalized
Under
Prompt Corrective
Action
Provisions
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
(dollars
in thousands)
|
September 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk-based capital (to
risk-weighted assets)
|
$155,976
|
|
34.89%
|
|
$35,768
|
|
≥
8.0%
|
|
$
44,709
|
|
≥
10.0%
|
Tier
1 risk-based capital (to
risk-weighted assets)
|
150,112
|
|
33.57
|
|
17,884
|
|
≥
4.0
|
|
26,826
|
|
≥ 6.0
|
Tier
1 (core) capital
|
150,235
|
|
19.61
|
|
30,641
|
|
≥
4.0
|
|
38,302
|
|
≥ 5.0
|
Tangible
capital (to tangible
assets)
|
150,235
|
|
19.61
|
|
15,321
|
|
≥
2.0
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk-based capital (to
risk-weighted assets)
|
$149,803
|
|
32.84%
|
|
$36,491
|
|
≥
8.0%
|
|
$
45,614
|
|
≥
10.0%
|
Tier
1 risk-based capital (to
risk-weighted assets)
|
146,783
|
|
32.18
|
|
18,245
|
|
≥
4.0
|
|
27,368
|
|
≥ 6.0
|
Tier
1 (core) capital
|
146,854
|
|
21.66
|
|
27,116
|
|
≥
4.0
|
|
33,895
|
|
≥ 5.0
|
Tangible
capital (to tangible
assets)
|
146,854
|
|
21.66
|
|
13,558
|
|
≥
2.0
|
|
N/A
|
|
N/A
|
The
following table is a reconciliation of the Bank’s capital, calculated according
to generally accepted accounting principles, to total Tier 1
capital:
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Equity
|
|
$ |
153,525 |
|
|
$ |
146,058 |
|
Other
comprehensive income – unrealized loss
(gain) on securities
|
|
|
(3,290 |
) |
|
|
967 |
|
Mortgage
servicing rights, net
|
|
|
-- |
|
|
|
(171 |
) |
Total
Tier 1 capital
|
|
$ |
150,235 |
|
|
$ |
146,854 |
|
OTS
regulations place certain restrictions on dividends paid by the Bank to the
Company. Generally, savings associations, such as the Bank, that before and
after the proposed distribution are well-capitalized, may make capital
distributions during any calendar year equal to up to 100% of net income for the
year-to-date plus retained net income for the two preceding years. Savings
associations proposing to make any capital distribution need not submit written
notice to the OTS prior to such distribution unless they are a subsidiary of a
holding company or would not remain well-capitalized following the
distribution.
Note
16 - Income Taxes
The
extraordinary gain realized from the Acquisition is presented on the
consolidated statement of income net of applicable state and federal income
taxes. The following table presents income tax expense (benefit) included in the
consolidated statement of income for the year ended September 30,
2009:
|
|
2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Income
tax benefit from loss on continuing operations
|
|
$ |
(4,750 |
) |
Income
tax expense attributable to extraordinary gain
|
|
|
9,756 |
|
Total income tax expense
included in the consolidated
statement of income
|
|
$ |
5,006 |
|
Income
tax expense consisted of the following:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
1,005 |
|
|
$ |
3,004 |
|
|
$ |
3,461 |
|
State
|
|
|
214 |
|
|
|
334 |
|
|
|
485 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,306 |
|
|
|
(873 |
) |
|
|
(557 |
) |
State
|
|
|
481 |
|
|
|
(202 |
) |
|
|
(122 |
) |
Income
tax expense
|
|
$ |
5,006 |
|
|
$ |
2,263 |
|
|
$ |
3,267 |
|
Income
tax expense differs from that computed at the statutory corporate tax rate as
follows:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income tax at statutory rates
|
|
$ |
(4,032 |
) |
|
$ |
2,131 |
|
|
$ |
2,904 |
|
State
income taxes, net of federal benefit
|
|
|
624 |
|
|
|
275 |
|
|
|
410 |
|
Federal
income tax component of extraordinary gain
on
FDIC transaction
|
|
|
8,516 |
|
|
|
-- |
|
|
|
-- |
|
Effect
of permanent differences
|
|
|
(102 |
) |
|
|
(143 |
) |
|
|
(47 |
) |
Income
tax expense (benefit)
|
|
$ |
5,006 |
|
|
$ |
2,263 |
|
|
$ |
3,267 |
|
The tax
effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities consist of the following:
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Deferred
tax asset:
|
|
|
|
|
|
|
Deferred
compensation
|
|
$ |
2,079 |
|
|
$ |
2,025 |
|
Unrealized
loss on securities available for sale
|
|
|
-- |
|
|
|
933 |
|
Allowance
for loan losses
|
|
|
11,419 |
|
|
|
1,853 |
|
Equity
compensation
|
|
|
577 |
|
|
|
446 |
|
Accrued
expenses
|
|
|
180 |
|
|
|
179 |
|
REO
adjustments
|
|
|
490 |
|
|
|
-- |
|
Other
|
|
|
564 |
|
|
|
316 |
|
Total
deferred tax asset
|
|
|
15,309 |
|
|
|
5,752 |
|
Deferred
tax liability:
|
|
|
|
|
|
|
|
|
Fixed
asset basis
|
|
|
(313 |
) |
|
|
(484 |
) |
Deferred
loan costs
|
|
|
(334 |
) |
|
|
(442 |
) |
Prepaid
expenses
|
|
|
(143 |
) |
|
|
(161 |
) |
Mortgage
servicing rights
|
|
|
-- |
|
|
|
(666 |
) |
FHLB
stock dividends
|
|
|
(1,835 |
) |
|
|
(1,838 |
) |
Purchase
accounting adjustments
|
|
|
(9,801 |
) |
|
|
-- |
|
Deferred
tax gain on purchase price allocation
|
|
|
(5,817 |
) |
|
|
-- |
|
Unrealized
gain on securities available for sale
|
|
|
(2,621 |
) |
|
|
-- |
|
Other
|
|
|
(16 |
) |
|
|
(391 |
) |
Total
deferred tax liability
|
|
|
(20,880 |
) |
|
|
(3,982 |
) |
Net
deferred tax asset (liability)
|
|
$ |
(5,571 |
) |
|
$ |
1,770 |
|
Included
in retained earnings at September 30, 2009 and 2008 is approximately $2.1
million in bad debt reserves for which no deferred income tax liability has been
recorded. This amount represents allocations of income to bad debt
deductions for tax purposes only. Reduction of these reserves for purposes other
than tax bad debt losses or adjustments arising from carryback of net operating
losses would create income for tax purposes, which would be subject to the
then-current corporate income tax rate. The unrecorded deferred
liability on this amount was approximately $818,000 at September 30, 2009 and
2008.
The
Company determined that it was not required to establish a valuation allowance
for deferred tax assets in accordance with ASC 740, Accounting for Income Taxes,
since it is more likely than not that the deferred tax asset will be realized
through carryback to taxable income in prior years, future reversals of existing
taxable temporary differences, and, to a lesser extent, future taxable income.
The Company's net deferred tax asset is recorded in the consolidated financial
statements as a separate component of the consolidated balance sheet - Deferred
tax liability.
At
September 30, 2009 and September 30, 2008, the Company had no ASC 740-10
unrecognized tax benefits. The Company does not expect the total amount of
unrecognized tax benefits to significantly increase within the next twelve
months.
The
Company and the Bank are subject to U.S. federal income tax as well as an income
tax in the states of Idaho and Oregon.
Note
17 – Earnings Per Share
Earnings
per share (“EPS”) is computed using the basic and diluted weighted average
number of common shares outstanding during the period. Basic EPS is computed by
dividing the Company’s net income or loss by the weighted average number of
common shares outstanding for the period. Diluted EPS is computed by dividing
net income or loss by diluted weighted average shares outstanding, which include
common stock equivalent shares outstanding using the treasury stock method,
unless such shares are anti-dilutive. Common stock equivalents arise from
assumed conversion of outstanding stock options and from assumed vesting of
shares awarded but not released under the Company’s RRP plan. ESOP shares are
not considered outstanding for earnings per share purposes until they are
committed to be released.
The
following table presents the computation of basic and diluted earnings per share
for the periods indicated:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before extraordinary item
|
|
$ |
(7,165 |
) |
|
$ |
4,005 |
|
|
$ |
5,271 |
|
Extraordinary
gain, net of tax
|
|
|
15,291 |
|
|
|
-- |
|
|
|
-- |
|
Net
income
|
|
|
8,126 |
|
|
|
4,005 |
|
|
|
5,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
15,651,250 |
|
|
|
16,233,200 |
|
|
|
16,602,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS before extraordinary item
|
|
$ |
(0.46 |
) |
|
$ |
0.25 |
|
|
$ |
0.32 |
|
Basic
EPS of extraordinary item
|
|
|
0.98 |
|
|
|
-- |
|
|
|
-- |
|
Basic
EPS after extraordinary item
|
|
|
0.52 |
|
|
|
0.25 |
|
|
|
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
15,651,250 |
|
|
|
16,233,200 |
|
|
|
16,602,082 |
|
Net
effect of dilutive stock options
|
|
|
-- |
|
|
|
-- |
|
|
|
104,598 |
|
Net
effect of dilutive RRP awards
|
|
|
-- |
|
|
|
19,547 |
|
|
|
60,539 |
|
Weighted-average
common shares outstanding and common stock equivalents
|
|
|
15,651,250 |
|
|
|
16,252,747 |
|
|
|
16,767,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS before extraordinary item
|
|
$ |
(0.46 |
) |
|
$ |
0.25 |
|
|
$ |
0.31 |
|
Diluted
EPS of extraordinary item
|
|
|
0.98 |
|
|
|
-- |
|
|
|
-- |
|
Diluted
EPS after extraordinary item
|
|
|
0.52 |
|
|
|
0.25 |
|
|
|
0.31 |
|
Note
18 - Fair Value of Financial Instruments
The
estimated fair values of the Company’s financial instruments are as
follows:
|
|
At
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair
Value
|
|
|
|
(in
thousands)
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
49,953 |
|
|
$ |
49,953 |
|
|
$ |
23,270 |
|
|
$ |
23,270 |
|
Investments
|
|
|
4,127 |
|
|
|
4,127 |
|
|
|
5,000 |
|
|
|
4,993 |
|
Mortgage-backed
securities
available for sale
|
|
|
165,193 |
|
|
|
165,193 |
|
|
|
188,787 |
|
|
|
188,787 |
|
Loans
held for sale
|
|
|
862 |
|
|
|
862 |
|
|
|
2,831 |
|
|
|
2,831 |
|
Loans
receivable
|
|
|
540,222 |
|
|
|
517,438 |
|
|
|
465,364 |
|
|
|
469,989 |
|
FHLB
stock
|
|
|
10,326 |
|
|
|
10,326 |
|
|
|
9,591 |
|
|
|
9,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
and savings deposits
|
|
|
285,961 |
|
|
|
285,961 |
|
|
|
195,521 |
|
|
|
195,521 |
|
Certificates
of deposit
|
|
|
228,897 |
|
|
|
232,753 |
|
|
|
177,404 |
|
|
|
177,550 |
|
FHLB
advances
|
|
|
84,737 |
|
|
|
85,272 |
|
|
|
136,972 |
|
|
|
143,219 |
|
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
Cash
and cash equivalents:
The
carrying amount approximates fair value.
Mortgage-backed
securities available for sale:
The fair
values of mortgage-backed securities are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans
held for sale:
The
carrying amount approximates fair value.
FHLB
stock:
The
carrying value of FHLB stock approximates fair value based on the respective
redemption provisions.
Loans
receivable:
Fair
values for all performing loans are estimated using a discounted cash
flow analysis, utilizing interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. In addition,
the fair value reflects the decrease in loan values as estimated in the
allowance for loan losses calculation.
Deposits:
The fair
value of demand deposits, savings accounts and certain money market deposits is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit are estimated using discounted cash flow
analysis using the rates currently offered for deposits of similar remaining
maturities.
FHLB
advances:
The fair
value of the borrowings is estimated by discounting the future cash flows using
the current rate at which similar borrowings with similar remaining maturities
could be made.
Off-balance-sheet
instruments:
Fair
values of off-balance-sheet lending commitments are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the borrower’s credit standing. The fair value of
the fees at September 30, 2009 and 2008 were insignificant.
Note
19 - Parent Only Financial Information
Home Federal Bancorp was formed to
serve as the stock holding company for the Bank. The following are the condensed
financial statements for Home Federal Bancorp (parent company
only):
HOME
FEDERAL BANCORP, INC.
PARENT-ONLY
BALANCE
SHEETS
(In
thousands)
|
|
September
30,
2009
|
|
|
September
30,
2008
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and amounts due from depository institutions
|
|
$ |
31,285 |
|
|
$ |
19,707 |
|
Certificate
of deposit in correspondent bank
|
|
|
-- |
|
|
|
5,000 |
|
Mortgage-backed
securities available for sale, at fair
value
|
|
|
23,892 |
|
|
|
33,385 |
|
Investment
in the Bank
|
|
|
154,990 |
|
|
|
146,058 |
|
Other
assets
|
|
|
85 |
|
|
|
1,055 |
|
TOTAL
ASSETS
|
|
$ |
210,252 |
|
|
$ |
205,205 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
$ |
587 |
|
|
$ |
18 |
|
Stockholder’s
equity
|
|
|
209,665 |
|
|
|
205,187 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
$ |
210,252 |
|
|
$ |
205,205 |
|
|
|
|
|
|
|
|
|
|
HOME
FEDERAL BANCORP, INC.
PARENT-ONLY
STATEMENTS OF INCOME
(In
thousands)
|
|
Year
Ended
September
30,
2009
|
|
|
Year
Ended
September
30,
2008
|
|
|
Year
Ended
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
Cash
dividends from bank
|
|
$ |
5,500 |
|
|
$ |
-- |
|
|
$ |
-- |
|
Investment
interest
|
|
|
34 |
|
|
|
526 |
|
|
|
95 |
|
Mortgage-backed
security interest
|
|
|
1,344 |
|
|
|
1,220 |
|
|
|
768 |
|
Other
income
|
|
|
127 |
|
|
|
347 |
|
|
|
108 |
|
Total
income
|
|
|
7,005 |
|
|
|
2,093 |
|
|
|
971 |
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
services
|
|
|
260 |
|
|
|
124 |
|
|
|
125 |
|
Other
|
|
|
332 |
|
|
|
1,443 |
|
|
|
220 |
|
Total
expense
|
|
|
592 |
|
|
|
1,567 |
|
|
|
345 |
|
Income
before income taxes and equity in undistributed
earnings of the Bank
|
|
|
6,413 |
|
|
|
526 |
|
|
|
626 |
|
Income
tax expense
|
|
|
346 |
|
|
|
100 |
|
|
|
188 |
|
INCOME
OF PARENT COMPANY
|
|
|
6,067 |
|
|
|
426 |
|
|
|
438 |
|
Equity
in undistributed earnings of the Bank
|
|
|
2,059 |
|
|
|
3,579 |
|
|
|
4,833 |
|
NET
INCOME
|
|
$ |
8,126 |
|
|
$ |
4,005 |
|
|
$ |
5,271 |
|
HOME
FEDERAL BANCORP, INC.
PARENT-ONLY
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year
Ended September 30,
2009
|
|
|
Year
Ended
September
30,
2008
|
|
|
Year
Ended
September
30,
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
8,126 |
|
|
$ |
4,005 |
|
|
$ |
5,271 |
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed earnings of the Bank
|
|
|
(2,059 |
) |
|
|
(3,579 |
) |
|
|
(4,833 |
) |
Net
amortization of premiums on investments
|
|
|
34 |
|
|
|
29 |
|
|
|
15 |
|
ESOP
shares committed to be released
|
|
|
870 |
|
|
|
1,090 |
|
|
|
436 |
|
Net
loss on sale of investment securities
|
|
|
165 |
|
|
|
-- |
|
|
|
-- |
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
(970 |
) |
|
|
(20 |
) |
|
|
(102 |
) |
Other
liabilities
|
|
|
141 |
|
|
|
(41 |
) |
|
|
(8 |
) |
Net
cash provided by operating activities
|
|
|
6,307 |
|
|
|
1,484 |
|
|
|
779 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturity of mortgage-backed securities
held to maturity
|
|
|
-- |
|
|
|
-- |
|
|
|
854 |
|
Proceeds
from sale and maturity of mortgage-backed
securities available for sale
|
|
|
11,083 |
|
|
|
4,715 |
|
|
|
2,298 |
|
Purchase
of mortgage-backed securities available for
sale
|
|
|
-- |
|
|
|
(22,123 |
) |
|
|
(2,102 |
) |
Maturity
of (investment in) certificate of deposit
|
|
|
5,000 |
|
|
|
(5,000 |
) |
|
|
-- |
|
Loan
originations and principal collections, net
|
|
|
188 |
|
|
|
4 |
|
|
|
3 |
|
Net
cash provided (used) by investing activities
|
|
|
16,271 |
|
|
|
(22,404 |
) |
|
|
1,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(3,456 |
) |
|
|
(2,987 |
) |
|
|
(1,281 |
) |
Repurchase
of common stock
|
|
|
(7,897 |
) |
|
|
-- |
|
|
|
-- |
|
Investment
in subsidiary
|
|
|
-- |
|
|
|
(48,345 |
) |
|
|
-- |
|
Net
proceeds from stock issuance and exchange
pursuant to second step conversion
|
|
|
-- |
|
|
|
87,849 |
|
|
|
-- |
|
Proceeds
from exercise of stock options
|
|
|
353 |
|
|
|
606 |
|
|
|
854 |
|
Net
cash (used) provided by financing activities
|
|
|
(11,000 |
) |
|
|
37,123 |
|
|
|
(427 |
) |
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
11,578 |
|
|
|
16,203 |
|
|
|
1,405 |
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF
PERIOD
|
|
|
19,707 |
|
|
|
3,504 |
|
|
|
2,099 |
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$ |
31,285 |
|
|
$ |
19,707 |
|
|
$ |
3,504 |
|
Note 20 – Selected
Quarterly Financial Data (unaudited)
(In
thousands, except share data)
|
|
Quarter
Ended
|
|
|
|
December
31,
2008
|
|
|
March
31,
2009
|
|
|
June
30,
2009
|
|
|
September
30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
$ |
9,328 |
|
|
$ |
8,930 |
|
|
$ |
8,410 |
|
|
$ |
9,159 |
|
Interest
expense
|
|
|
3,583 |
|
|
|
2,970 |
|
|
|
2,697 |
|
|
|
2,727 |
|
Net interest
income
|
|
|
5,745 |
|
|
|
5,960 |
|
|
|
5,713 |
|
|
|
6,432 |
|
Provision
for loan losses
|
|
|
3,575 |
|
|
|
1,060 |
|
|
|
3,450 |
|
|
|
8,000 |
|
Non-interest
income
|
|
|
2,461 |
|
|
|
2,345 |
|
|
|
2,611 |
|
|
|
1,874 |
|
Non-interest
expense
|
|
|
6,034 |
|
|
|
6,571 |
|
|
|
7,014 |
|
|
|
9,352 |
|
Income
(loss) before income taxes
|
|
|
(1,403 |
) |
|
|
674 |
|
|
|
(2,140 |
) |
|
|
(9,046 |
) |
Income
tax expense (benefit)
|
|
|
(602 |
) |
|
|
198 |
|
|
|
(894 |
) |
|
|
(3,452 |
) |
Net
income (loss) before extraordinary
item
|
|
|
(801 |
) |
|
|
476 |
|
|
|
(1,246 |
) |
|
|
(5,594 |
) |
Extraordinary
gain, net of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
15,291 |
|
Net income
(loss)
|
|
$ |
(801 |
) |
|
$ |
476 |
|
|
$ |
(1,246 |
) |
|
$ |
9,697 |
|
Basic
EPS before extraordinary item(1)
|
|
$ |
(0.05 |
) |
|
$ |
0.03 |
|
|
$ |
(0.08 |
) |
|
$ |
(0.36 |
) |
Basic
EPS of extraordinary item(1)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
0.99 |
|
Basic
EPS after extraordinary item(1)
|
|
|
(0.05 |
) |
|
|
0.03 |
|
|
|
(0.08 |
) |
|
|
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS before extraordinary item(1)
|
|
|
(0.05 |
) |
|
|
0.03 |
|
|
|
(0.08 |
) |
|
|
(0.36 |
) |
Diluted
EPS of extraordinary item(1)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
0.99 |
|
Diluted
EPS after extraordinary item(1)
|
|
|
(0.05 |
) |
|
|
0.03 |
|
|
|
(0.08 |
) |
|
|
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
|
|
December
31,
2007
|
|
|
March
31,
2008
|
|
|
June
30,
2008
|
|
|
September
30,
2008
|
|
Interest
and dividend income
|
|
$ |
10,302 |
|
|
$ |
10,459 |
|
|
$ |
10,093 |
|
|
$ |
9,730 |
|
Interest
expense
|
|
|
5,246 |
|
|
|
4,682 |
|
|
|
4,181 |
|
|
|
3,826 |
|
Net
interest income
|
|
|
5,056 |
|
|
|
5,777 |
|
|
|
5,912 |
|
|
|
5,903 |
|
Provision
for loan losses
|
|
|
287 |
|
|
|
378 |
|
|
|
652 |
|
|
|
1,114 |
|
Non-interest
income
|
|
|
2,625 |
|
|
|
2,483 |
|
|
|
2,735 |
|
|
|
2,647 |
|
Non-interest
expense
|
|
|
5,883 |
|
|
|
6,424 |
|
|
|
6,174 |
|
|
|
5,958 |
|
Income
before income taxes
|
|
|
1,511 |
|
|
|
1,458 |
|
|
|
1,820 |
|
|
|
1,479 |
|
Income
tax expense
|
|
|
564 |
|
|
|
513 |
|
|
|
702 |
|
|
|
484 |
|
Net
income
|
|
$ |
947 |
|
|
$ |
945 |
|
|
$ |
1,119 |
|
|
$ |
994 |
|
Basic
earnings per share (1)
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.07 |
|
|
$ |
0.06 |
|
Diluted
earnings per share (1)
|
|
|
0.06 |
|
|
|
0.06 |
|
|
|
0.07 |
|
|
|
0.06 |
|
_______
(1)
|
The
sum of quarterly earnings per share may vary from annual earnings per
share due to rounding.
|
Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
During
the fiscal years ended September 30, 2009 and 2008, there were no disagreements
with Moss Adams LLP, the Company’s independent registered public accounting
firm, and Moss Adams LLP issued unqualified opinions on the Company’s financial
statements as of and for the years then ended.
Item 9A. Controls and
Procedures
Evaluation of Disclosure
Controls and Procedures: An evaluation of the Company’s
disclosure controls and procedures (as defined in Section 13a-15(e) of the
Exchange Act) was carried out under the supervision and with the participation
of the Company’s Chief Executive Officer, Chief Financial Officer and several
other members of the Company’s senior management as of the end of the period
covered by this annual report. The Company’s Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures as in effect as of September 30, 2009, are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Exchange Act is (i) accumulated and communicated to the
Company’s management (including the Chief Executive Officer and Chief Financial
Officer) in a timely manner, and (ii) recorded, processed, summarized and
reported within the time periods specified in the Security and Exchange
Commission’s rules and forms.
Management's Annual Report
on Internal Control Over Financial Reporting and Auditor’s
Attestation: The “Management's Annual Report on Internal
Control Over Financial Reporting” included in Item 8 of this Annual Report on
Form 10-K is incorporated herein by reference.
Attestation Report of the
Registered Public Accounting Firm: The “Report of Independent Registered
Public Accounting Firm” included in Item 8 of this Annual Report on Form 10-K is
incorporated herein by reference.
Changes in Internal
Controls: There have been no changes in our internal control
over financial reporting (as defined in 13a-15(f) of the Exchange Act) that
occurred during the quarter ended September 30, 2009, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. A number of internal control procedures were, however,
modified during the quarter in conjunction with the Bank's internal control
testing and the acquisition of Community First Bank, as described in Note 2 to
the financial statements in Item 8 of this Annual Report on Form
10-K.
Item 9B. Other
Information
There was
no information to be disclosed by the Company in a report on Form 8-K during the
fourth quarter of fiscal 2009 that was not so disclosed.
PART
III
Item 10. Directors,
Executive Officers and Corporate Governance
DIRECTORS
The
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting under the sections captioned “Proposal 1 – Election of Directors” and
“Meetings and Committees of the Board of Directors and Corporate Governance
Matters” are incorporated herein by reference.
EXECUTIVE
OFFICERS
See the
information under the section captioned “Executive Officers of the Registrant”
under “Part I - Item 1. Business” in this Annual Report on Form
10-K.
COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting under the section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance” is incorporated herein by reference.
AUDIT
COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
The
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting under the section captioned “Meetings and Committees of the Board of
Directors and Corporate Governance Matters” is incorporated herein by
reference.
CODE
OF ETHICS
We have a
Code of Ethics for our officers (including its senior financial officers),
directors and employees. The Code of Ethics requires our officers, directors and
employees to maintain the highest standards of professional conduct. A copy of
our Code of Ethics was filed as an exhibit to the Annual Report on Form 10-K for
the fiscal year ended September 30, 2004 and is available on our website at
www.myhomefed.com/ir.
Item 11. Executive
Compensation
The
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting under the section captioned “Directors’ Compensation” and “Executive
Compensation” are incorporated herein by reference.
Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
Equity Compensation Plan
Information
Plan
category
|
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
(a)
|
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
|
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
column
(a))
(c)
|
|
Equity
compensation plans approved by security holders:
2005 Stock Option
Plan
2005 Recognition and Retention
Plan
2008 Stock Equity Incentive
Plan(1)
|
|
|
492,366
--
453,998
|
|
|
|
$11.95
--
9.39
|
|
|
|
171,806
62,175
600,288
|
|
Equity
compensation plans not approved by security holders:
None.
|
|
|
-- |
|
|
|
$
-- |
|
|
|
-- |
|
Total
|
|
|
946,364 |
|
|
|
$ 10.72 |
|
|
|
834,269 |
|
_______
(1)
|
Includes
429,778 stock options and 170,510 shares of restricted stock in column
(c).
|
The
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting under the section captioned ”Security Ownership of Certain Beneficial
Owners and Management” is incorporated herein by reference.
Item 13. Certain
Relationships and Related Transactions, and Director
Independence
The
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting under the section captioned “Meetings and Committees of the Board of
Directors and Corporate Governance Matters” are incorporated herein by
reference.
Item 14. Principal
Accounting Fees and Services
The
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting under the sections captioned “Proposal 2 – Ratification of the
Appointment of the Independent Registered Public Accounting Firm” are
incorporated herein by reference.
PART
IV
Item 15. Exhibits and
Financial Statement Schedules
(a) Financial
Statements
See Index to Consolidated Financial
Statements on page 90.
(b) Financial
Statement Schedules
All
financial statement schedules are omitted because they are not applicable or not
required, or because the required information is included in the Consolidated
Financial Statements or the Notes thereto or in Part I, Item 1.
|
2.1
|
Purchase
and Assumption Agreement for Community First Bank
Transaction(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 Bancorp, Inc. with Len
E. Williams(8)
|
|
10.2
|
Amended
Severance Agreement with Eric S. Nadeau(8)
|
|
10.3
|
Amended
Severance Agreement with Steven D. Emerson(8)
|
|
10.4
|
Amended
Severance Agreement with Steven K. Eyre(8)
|
|
10.5
|
Form
of Home Federal Bank Employee Severance Compensation Plan
(3)
|
|
10.6
|
Form
of Director Indexed Retirement Agreement entered into by Home Federal
Savings and Loan Association of Nampa with each of its Directors
(2)
|
|
10.7
|
Form
of Director Deferred Incentive Agreement entered into by Home Federal
Savings and Loan Association of Nampa with each of its Directors
(2)
|
|
10.8
|
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)
|
|
10.9
|
Form
of Amended and Restated Salary Continuation Agreement entered into by Home
Federal Savings and Loan Association of Nampa with Daniel L. Stevens
(2)
|
|
10.10
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Savings and Loan Association of Nampa with Len E.
Williams(8)
|
|
10.11
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Savings and Loan Association of Nampa with Eric S.
Nadeau(8)
|
|
10.12
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Savings and Loan Association of Nampa with Steven D.
Emerson(8)
|
|
10.13
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Savings and Loan Association of Nampa with Steven K.
Eyre(8)
|
|
10.14
|
2005
Stock Option and Incentive Plan approved by stockholders on June 23, 2005
and Form of Incentive Stock Option Agreement and Non-Qualified Stock
Option Agreement (4)
|
|
10.15
|
2005
Recognition and Retention Plan approved by stockholders on June 23, 2005
and Form of Award Agreement (4)
|
|
10.15
|
Form
of new Director Retirement Plan entered into by Home Federal Bank with
each of its Directors (5)
|
|
10.16
|
Transition
Agreement with Daniel L. Stevens (6)
|
|
10.17
|
2008
Equity Incentive Plan (7)
|
|
11
|
Statement
regarding computation of per share earnings (9)
|
|
14
|
Code
of Ethics (10)
|
|
21
|
Subsidiaries
of the Registrant *
|
|
23
|
Consent
of Independent Registered Public Accounting Firm *
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act *
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act *
|
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act
*
|
______
*
|
Filed
herewith |
(1)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated August
7, 2009. |
(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 Quarterly Report on Form 10-Q for the
quarter ended December 31, 2008
|
(4)
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-8
(333-127858)
|
(5)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated October
21, 2005
|
(6)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated August
21, 2006
|
(7)
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-8
(333-157540)
|
(8)
|
Filed
as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2009
|
(9)
|
Reference
is made to Note 17 – Earnings Per Share in the Selected Notes to
Consolidated Financial Statements under Item 8
herein
|
(10)
|
Registrant
elects to satisfy Regulation S-K §229.406(c) by posting its Code of
Ethics on its website at.www.myhomefed.com under the heading “Investor
Relations.”
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto, duly authorized.
|
HOME FEDERAL
BANCORP, INC. |
|
|
|
|
|
|
Date: December
11, 2009 |
/s/Len
E. Williams |
|
Len E.
Williams |
|
President
and |
|
Chief Executive
Officer |
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURES
|
TITLE
|
DATE
|
|
|
/s/
Len E. Williams
|
President,
Chief Executive Officer
|
December
11, 2009
|
Len
E. Williams
|
and
Director
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Eric S. Nadeau
|
Chief
Financial Officer
|
December
11, 2009
|
Eric
S. Nadeau
|
(Principal
Financial and Accounting Officer)
|
|
|
/s/
Brad Little
|
Director
|
December
11, 2009
|
Brad
Little
|
|
|
/s/
Charles Hedemark
|
Director
|
December
11, 2009
|
N.
Charles Hedemark
|
|
|
/s/
Richard J. Navarro
|
Director
|
December
11, 2009
|
Richard
J. Navarro
|
|
|
/s/
James R. Stamey
|
Director
|
December
11, 2009
|
James
R. Stamey
|
|
|
/s/
Robert A. Tinstman
|
Director
|
December
11, 2009
|
Robert
A. Tinstman
|
|
|
|
|
|
|
|
|
/s/
Daniel L. Stevens
|
Chairman
|
December
11, 2009
|
Daniel
L. Stevens
|
|
|
EXHIBIT
INDEX
21
|
Subsidiaries
of the Registrant
|
23
|
Consent
of Independent Registered Public Accounting Firm
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley
Act
|