q5710.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2010
or
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from _____ to
_____
|
Commission
File Number: 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
Number)
|
|
|
500
12th
Avenue South, Nampa, Idaho |
83651 |
(Address of
principal executive offices) |
(Zip
Code) |
|
|
Registrant’s
telephone number, including area code: |
(208)
466-4634 |
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
[X] No [ ]
Indicate
by check mark whether the registrant 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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions 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 Exchange Act).
Yes
[ ] No [X]
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: Common Stock, $.01 par
value per share, 16,687,760 shares outstanding as of May 4, 2010.
HOME
FEDERAL BANCORP, INC.
FORM
10-Q
TABLE
OF CONTENTS
PART I – FINANCIAL
INFORMATION
|
ITEM
1. FINANCIAL STATEMENTS
|
2 |
|
CONSOLIDATED
BALANCE SHEETS
|
2 |
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
3 |
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(LOSS)
|
4 |
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
5 |
|
SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
7 |
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
15 |
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
33 |
|
ITEM
4. CONTROLS AND PROCEDURES
|
34 |
PART II –
OTHER INFORMATION
|
ITEM
1. LEGAL PROCEEDINGS
|
34 |
|
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
35 |
|
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
|
35 |
|
ITEM
4. REMOVED AND RESERVED
|
36 |
|
ITEM
5. OTHER INFORMATION
|
36 |
Item
1. Financial Statements
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data) (Unaudited)
|
March
31,
2010
|
|
September
30,
2009
|
|
ASSETS
|
|
|
|
|
Cash
and due from depository institutions
|
$106,041
|
|
$ 46,783
|
|
Federal
funds sold
|
22,840
|
|
3,170
|
|
Cash
and cash equivalents
|
128,881
|
|
49,953
|
|
Investment
securities available for sale, at fair value
|
155,615
|
|
169,320
|
|
Loans
held for sale
|
2,180
|
|
862
|
|
Loans
receivable, net of allowance for loan losses
of $27,779
|
|
|
|
|
and
$28,735
|
479,098
|
|
510,629
|
|
Accrued
interest receivable
|
2,422
|
|
2,781
|
|
Property
and equipment, net
|
26,459
|
|
20,462
|
|
Bank
owned life insurance
|
12,225
|
|
12,014
|
|
Federal
Home Loan Bank of Seattle (“FHLB”) stock, at cost
|
10,326
|
|
10,326
|
|
Real
estate and other property owned
|
13,564
|
|
18,391
|
|
FDIC
indemnification receivable, net
|
16,030
|
|
30,038
|
|
Other
assets
|
5,304
|
|
3,123
|
|
TOTAL
ASSETS |
$852,104
|
|
$827,899
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Deposit
accounts:
|
|
|
|
|
Noninterest-bearing
demand deposits
|
$ 64,968
|
|
$ 68,155
|
|
Interest-bearing
demand deposits
|
204,382
|
|
176,049
|
|
Savings
deposits
|
48,651
|
|
41,757
|
|
Certificates
of deposit
|
236,899
|
|
228,897
|
|
Total
deposit accounts
|
554,900
|
|
514,858
|
|
Advances
by borrowers for taxes and insurance
|
1,052
|
|
1,132
|
|
Interest
payable
|
556
|
|
553
|
|
FHLB
advances and other borrowings
|
75,298
|
|
84,737
|
|
Deferred
compensation
|
5,353
|
|
5,260
|
|
Deferred
tax liability, net
|
5,331
|
|
5,571
|
|
Other
liabilities
|
2,566
|
|
6,123
|
|
Total
liabilities
|
645,056
|
|
618,234
|
|
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:
|
|
|
|
|
17,460,311
issued, 16,687,760 outstanding March 31, 2010
|
|
|
|
|
17,445,311
issued, 16,698,168 outstanding September 30, 2009
|
167
|
|
167
|
|
Additional
paid-in capital
|
151,776
|
|
150,782
|
|
Retained
earnings
|
60,823
|
|
64,483
|
|
Unearned shares issued to employee stock ownership plan
|
(9,178 |
) |
(9,699
|
) |
Accumulated
other comprehensive income
|
3,460
|
|
3,932
|
|
Total
stockholders’ equity
|
207,048
|
|
209,665
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$852,104
|
|
$827,899
|
|
|
|
|
|
|
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share data) (Unaudited)
|
Three
Months Ended
March
31,
|
|
Six
Months Ended
March
31,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Interest
and dividend income:
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
$
7,033
|
|
$
6,806
|
|
$14,136
|
|
$13,919
|
|
Investment
securities
|
1,618
|
|
2,123
|
|
3,352
|
|
4,328
|
|
Other
interest and dividends
|
87
|
|
1
|
|
136
|
|
11
|
|
Total
interest and dividend income
|
8,738
|
|
8,930
|
|
17,624
|
|
18,258
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
Deposits
|
1,674
|
|
1,742
|
|
3,348
|
|
3,760
|
|
FHLB
advances and other borrowings
|
762
|
|
1,228
|
|
1,593
|
|
2,793
|
|
Total
interest expense
|
2,436
|
|
2,970
|
|
4,941
|
|
6,553
|
|
Net
interest income
|
6,302
|
|
5,960
|
|
12,683
|
|
11,705
|
|
Provision
for loan losses
|
2,375
|
|
1,060
|
|
3,075
|
|
4,635
|
|
Net
interest income after provision for loan losses
|
3,927
|
|
4,900
|
|
9,608
|
|
7,070
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
Service
charges and fees
|
2,146
|
|
1,892
|
|
4,410
|
|
4,001
|
|
Gain
on sale of loans
|
125
|
|
407
|
|
308
|
|
597
|
|
Increase
in cash surrender value of bank owned life insurance
|
104
|
|
104
|
|
211
|
|
210
|
|
Other,
net
|
94
|
|
(58
|
)
|
415
|
|
(2
|
) |
Total
noninterest income
|
2,469
|
|
2,345
|
|
5,344
|
|
4,806
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
4,689
|
|
3,779
|
|
9,306
|
|
7,354
|
|
Occupancy
and equipment
|
980
|
|
729
|
|
2,044
|
|
1,499
|
|
Data
processing
|
797
|
|
577
|
|
1,597
|
|
1,119
|
|
Advertising
|
282
|
|
197
|
|
542
|
|
445
|
|
Postage
and supplies
|
177
|
|
146
|
|
343
|
|
283
|
|
Professional
services
|
505
|
|
299
|
|
984
|
|
634
|
|
Insurance
and taxes
|
480
|
|
306
|
|
1,038
|
|
461
|
|
Provision
for losses on real estate and other property owned
|
1,290
|
|
161
|
|
2,091
|
|
161
|
|
Other
|
360
|
|
377
|
|
698
|
|
649
|
|
Total
noninterest expense
|
9,560
|
|
6,571
|
|
18,643
|
|
12,605
|
|
Income
(loss) before income taxes
|
(3,164
|
)
|
674
|
|
(3,691
|
)
|
(729
|
) |
Income
tax expense (benefit)
|
(1,233
|
)
|
198
|
|
(1,451
|
)
|
(404
|
) |
Income
(loss) before extraordinary item
|
(1,931
|
)
|
476
|
|
(2,240
|
)
|
(325
|
) |
Extraordinary
gain on acquisition, less income taxes of $195
|
305
|
|
-
|
|
305
|
|
-
|
|
Net
income (loss)
|
$ (1,626
|
)
|
$ 476
|
|
$ (1,935
|
)
|
$ (325
|
) |
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share before extraordinary item:
|
|
|
|
|
|
|
|
|
Basic
|
$(0.12 |
) |
$0.03 |
|
$(0.14
|
) |
$(0.02 |
) |
Diluted
|
(0.12 |
) |
0.03 |
|
(0.14
|
) |
(0.02 |
) |
Earnings
(loss) per common share after extraordinary item:
|
|
|
|
|
|
|
|
|
Basic
|
$(0.10 |
) |
$0.03 |
|
$(0.12
|
) |
$(0.02 |
) |
Diluted
|
(0.10 |
) |
0.03 |
|
(0.12
|
) |
(0.02 |
) |
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
15,481,827
|
|
15,740,0644
|
|
15,464,699
|
|
15,936,796
|
|
Diluted
|
15,481,827
|
|
15,776,330
|
|
15,464,699
|
|
15,936,796
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share:
|
$
0.055
|
|
$
0.055
|
|
$
0.110
|
|
$
0.110
|
|
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(LOSS)
(In
thousands, except share data) (Unaudited)
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Retained |
|
|
Unearned
Shares
Issued
to
Employee
Stock
Ownership
Plan
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
(“ESOP”)
|
|
|
Income
(Loss)
|
|
|
Total
|
|
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 gain 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,458 |
|
Balance
at September 30, 2009
|
|
|
16,698,168 |
|
|
|
167 |
|
|
|
150,782 |
|
|
|
64,483 |
|
|
|
(9,699 |
) |
|
|
3,932 |
|
|
|
209,665 |
|
Restricted
stock forfeited, net of new issuance
|
|
|
(25,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP
shares committed to be released
|
|
|
|
|
|
|
|
|
|
|
193 |
|
|
|
|
|
|
|
521 |
|
|
|
|
|
|
|
714 |
|
Exercise
of stock options
|
|
|
15,000 |
|
|
|
|
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161 |
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
624 |
|
Tax
adjustment from equity compensation plans
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
Dividends
paid
($0.11
per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,725 |
) |
|
|
|
|
|
|
|
|
|
|
(1,725 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before extraordinary item
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,240 |
) |
|
|
|
|
|
|
|
|
|
|
(2,240 |
) |
Extraordinary
gain, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
305 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized holding gain on securities available for sale, net
of taxes of $(304)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(472 |
) |
|
|
(472 |
) |
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,407 |
) |
Balance
at March 31, 2010
|
|
|
16,687,760 |
|
|
$ |
167 |
|
|
$ |
151,776 |
|
|
$ |
60,823 |
|
|
$ |
(9,178 |
) |
|
$ |
3,460 |
|
|
$ |
207,048 |
|
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands) (Unaudited)
|
Six
Months Ended
March
31,
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
Net
loss
|
$ (1,935
|
)
|
$ (325
|
) |
Adjustments
to reconcile net loss to cash provided by operating
activities:
|
|
|
|
|
Depreciation
and amortization
|
1,023
|
|
871
|
|
Net
amortization of premiums and discounts on investments
|
206
|
|
7
|
|
Loss
on sale of fixed assets and repossessed assets
|
33
|
|
51
|
|
ESOP
shares committed to be released
|
714
|
|
460
|
|
Share-based
compensation
|
624
|
|
417
|
|
Provision
for loan losses
|
3,075
|
|
4,635
|
|
Provision
for losses on real estate and other property owned
|
2,091
|
|
161
|
|
Accrued
deferred compensation expense, net
|
94
|
|
34
|
|
Net
deferred loan fees
|
4
|
|
(2
|
) |
Deferred
income tax benefit
|
65
|
|
(2,137
|
) |
Net
gain on sale of loans
|
(308
|
)
|
(597
|
) |
Proceeds
from sale of loans held for sale
|
13,068
|
|
32,950
|
|
Originations
of loans held for sale
|
(14,078
|
)
|
(35,071
|
) |
Net
decrease in value of mortgage servicing rights
|
-
|
|
31
|
|
Increase
in cash surrender value of bank owned life insurance
|
(211
|
)
|
(210
|
) |
Change
in assets and liabilities:
|
|
|
|
|
Interest
receivable
|
359
|
|
263
|
|
Other
assets
|
(3,512
|
)
|
429
|
|
Interest
payable
|
3
|
|
(124
|
) |
Other
liabilities
|
(3,540
|
)
|
1,542
|
|
Net
cash (used) provided by operating activities
|
(2,225
|
)
|
3,385
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
Proceeds
from repayments of mortgage-backed securities available for
sale
|
21,485
|
|
14,717
|
|
Purchases
of mortgage-backed securities available for sale
|
(6,720
|
)
|
(465
|
) |
Purchase
of securities available for sale
|
(8,042
|
)
|
-
|
|
Proceeds
from maturities and calls of securities available for sale
|
6,000
|
|
-
|
|
Maturity
of certificate of deposit
|
-
|
|
5,000
|
|
Sale
of mortgage servicing rights
|
-
|
|
1,676
|
|
Reimbursement
of loan losses under loss share agreement
|
15,317
|
|
-
|
|
Purchases
of property and equipment
|
(7,059
|
)
|
(1,941
|
) |
Net
decrease in loans
|
22,101
|
|
11,455
|
|
Proceeds
from sale of fixed assets and real estate and other property
owned
|
9,113
|
|
510
|
|
Net
cash provided by investing activities
|
52,195
|
|
30,952
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
Net
increase in deposits
|
40,042
|
|
3,643
|
|
Net
decrease in advances by borrowers for taxes and insurance
|
(81
|
)
|
(77
|
) |
Proceeds
from FHLB advances
|
-
|
|
18,000
|
|
Repayment
of FHLB advances
|
(10,890
|
)
|
(51,063
|
) |
Net
proceeds from other borrowings
|
1,451
|
|
-
|
|
Proceeds
from exercise of stock options
|
161
|
|
353
|
|
Repurchases
of common stock
|
-
|
|
(7,895
|
) |
Dividends
paid
|
(1,725
|
)
|
(1,742
|
) |
Net
cash provided (used) by financing activities
|
28,958
|
|
(38,781
|
) |
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
78,928
|
|
(4,444
|
) |
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
49,953
|
|
23,270
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$128,881
|
|
$
18,826
|
|
|
|
|
|
|
(Continued)
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(In
thousands) (Unaudited)
|
Six
Months Ended
March
31,
|
|
2010
|
|
2009
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
Cash
paid (received) during the period for:
|
|
|
|
Interest
|
$4,938
|
|
$6,678
|
Taxes
|
(700
|
)
|
2,285
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
Acquisition
of real estate and other assets in settlement of loans
|
6,327
|
|
$5,635
|
Fair
value adjustment to securities available for sale, net of
taxes
|
(472
|
)
|
4,203
|
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 - Basis of Presentation
The
consolidated financial statements presented in this quarterly report include the
accounts of Home Federal Bancorp, Inc., a Maryland corporation (the “Company”),
and its wholly-owned subsidiary, Home Federal Bank (the “Bank”), which is
headquartered in Nampa, Idaho. The financial statements of the Company have been
prepared in conformity with U.S. generally accepted accounting principles for
interim financial information and are unaudited. All significant intercompany
transactions and balances have been eliminated. In the opinion of the Company’s
management, all adjustments consisting of normal recurring adjustments necessary
for a fair presentation of the financial condition and results of operations for
the interim periods included herein have been made. Operating results for the
six month period ended March 31, 2010, are not necessarily indicative of the
results that may be expected for the year ending September 30,
2010.
Certain
information and note disclosures normally included in the Company’s annual
consolidated financial statements have been condensed or omitted. Therefore,
these consolidated financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes included in the
Annual Report on Form 10-K for the year ended September 30, 2009 (“2009 Form
10-K”), filed with the Securities and Exchange Commission (“SEC”) on December
14, 2009.
Note
2 - Critical Accounting Estimates and Related Accounting Policies
The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements. Changes in these estimates and assumptions are considered reasonably
possible and may have a material impact on the consolidated financial
statements, and thus actual results could differ from the amounts reported and
disclosed herein. The Company considers the allowance for loan losses, loans
acquired with deteriorated credit quality, the indemnification asset due from
the Federal Deposit Insurance Corporation (“FDIC”), deferred income taxes and
valuation of real estate owned to be critical accounting estimates.
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, incurred losses inherent in 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. 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 loss estimates. 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 takes into consideration probable, incurred losses that are inherent
within the loan portfolio but have not been specifically identified. The general
allowance is determined by applying historical loss percentages 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 that may increase or
decrease those historical loss percentages
such as
changes in underwriting standards and unemployment rates. As a result of the
imprecision in calculating inherent and incurred losses, a range is estimated
for 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.
Loans Acquired with Deteriorated
Credit Quality. Accounting Standards Codification Topic (“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,
management determined the value of the loan portfolio based on work provided by
an appraiser. Factors considered in the valuation were the type of loan and
related collateral, projected cash flows for the loans, which was primarily the
liquidation value of the collateral, the classification status of the loan and
current discount rates. At March 31, 2010, a majority of these loans were valued
based on the estimated fair value 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 the FDIC to acquire certain assets and assume certain liabilities of a
failed financial institution. The loans, foreclosed real estate and other
repossessed property purchased are covered by a loss sharing agreement between
the FDIC and the Bank that provides the Bank significant protection against
losses on these covered assets. Under this agreement, the FDIC will reimburse
the Bank for 80% of the first $34.0 million of losses. The FDIC will reimburse
the Bank for 95% of 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 for
five years for other loans.
Management
has estimated the amount of losses inherent in the covered assets purchased in
the acquisition 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 value of 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.
Deferred income taxes.
Deferred income taxes are computed using the asset and liability approach as
prescribed by ASC 740.
Under this method, a deferred tax asset or liability is determined based on the
currently enacted tax rates applicable to the period in which the differences
between the financial statement carrying amounts and tax basis of the existing
assets and liabilities are expected to be reported in the Company’s income tax
returns.
Real Estate Owned. Real
estate properties acquired through, or in lieu of, loan foreclosure (“REO”) 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 and could
adversely affect our financial condition and profitability.
Note
3 - Acquisition
On August
7, 2009, the Bank entered into a purchase and assumption agreement with loss
share with the FDIC to assume all of the deposits (excluding nearly all brokered
deposits) and liabilities and to purchase certain assets of Community First
Bank, a full service commercial bank, headquartered in Prineville, Oregon (the
“Acquisition”). The Bank assumed approximately $142.8 million of deposits
through the Acquisition. Additionally, the Bank purchased approximately $142.3
million in loans and $12.9 million of real estate and other repossessed assets
subject to the loss share agreement on covered assets as described above in Note
2. The 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. The Company accounts for the Bank’s loss sharing agreement with the
FDIC as an indemnification asset. The transaction did not generate any
goodwill.
Note
4 - Earnings (Loss) Per Share
The
Company has granted stock compensation awards with non-forfeitable dividend
rights, which are considered participating securities. As such, earnings per
share is computed using the two-class method as required by ASC 260-10-45. Basic
earnings per common share is computed by dividing net income allocated to common
stock by the weighted average number of common shares outstanding during the
period which excludes the participating securities. Diluted earnings per common
share includes the dilutive effect of additional potential common shares from
stock compensation awards, but excludes awards considered participating
securities. 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 (loss)
per share for the periods indicated:
|
|
Three
Months Ended
March
31,
|
|
|
Six
Months Ended
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands, except share and per share data)
|
|
Net income (loss)
|
|
$ |
(1,626 |
) |
|
$ |
476 |
|
|
$ |
(1,935 |
) |
|
$ |
(325 |
) |
Allocated to participating securities
|
|
|
24 |
|
|
|
(4 |
) |
|
|
32 |
|
|
|
2 |
|
Net
loss allocated to common shareholders
|
|
|
(1,602 |
) |
|
|
472 |
|
|
|
(1,903 |
) |
|
|
(327 |
) |
Extraordinary
gain, net of taxes
|
|
|
305 |
|
|
|
- |
|
|
|
305 |
|
|
|
- |
|
Net
loss allocated to common stock before
extraordinary gain
|
|
$ |
(1,907 |
) |
|
$ |
472 |
|
|
$ |
(2,208 |
) |
|
$ |
(327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding, including shares considered
participating
securities
|
|
|
15,721,805 |
|
|
|
15,622,777 |
|
|
|
15,723,760 |
|
|
|
16,085,614 |
|
Less: Average participating securities
|
|
|
(239,978 |
) |
|
|
(117,287 |
) |
|
|
(259,061 |
) |
|
|
(148,818 |
) |
Weighted average shares
|
|
|
15,481,827 |
|
|
|
15,505,490 |
|
|
|
15,464,699 |
|
|
|
15,936,796 |
|
Net effect of dilutive restricted stock
|
|
|
- |
|
|
|
36,266 |
|
|
|
- |
|
|
|
- |
|
Weighted average shares and common stock
equivalents
|
|
|
15,481,827 |
|
|
|
15,541,756 |
|
|
|
15,464,699 |
|
|
|
15,936,796 |
|
Basic earnings (loss) per common share before
extraordinary
item
|
|
$ |
(0.12 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.02 |
) |
Basic earnings (loss) per common share after
extraordinary
item
|
|
|
(0.10 |
) |
|
|
(0.03 |
) |
|
|
(0.12 |
) |
|
|
(0.02 |
) |
Diluted earnings (loss) per common share
before extraordinary
item
|
|
|
(0.12 |
) |
|
|
(0.03 |
) |
|
|
(0.14 |
) |
|
|
(0.02 |
) |
Diluted earnings (loss) per common share
after extraordinary item
|
|
|
(0.10 |
) |
|
|
(0.03 |
) |
|
|
(0.12 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
excluded from the calculation due to
their anti-dilutive effect on EPS
|
|
|
873,324 |
|
|
|
547,942 |
|
|
|
873,324 |
|
|
|
547,942 |
|
Note
5 - Investment securities
Investment
securities available for sale consisted of the following at the dates
indicated:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government-
sponsored enterprises (“GSE”)
|
|
$ |
4,562 |
|
|
$ |
43 |
|
|
$ |
- |
|
|
$ |
4,605 |
|
Obligations
of states and political
subdivisions
|
|
|
1,520 |
|
|
|
10 |
|
|
|
(13 |
) |
|
|
1,517 |
|
Mortgage-backed
securities, GSE-issued
|
|
|
143,247 |
|
|
|
5,790 |
|
|
|
(31 |
) |
|
|
149,006 |
|
Mortgage-backed
securities, private label
|
|
|
509 |
|
|
|
- |
|
|
|
(22 |
) |
|
|
487 |
|
Total
|
|
$ |
149,838 |
|
|
$ |
5,843 |
|
|
$ |
(66 |
) |
|
$ |
155,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
Obligations
of U.S. GSE
|
|
$ |
4,089 |
|
|
$ |
42 |
|
|
$ |
(4 |
) |
|
$ |
4,127 |
|
Mortgage-backed
securities, GSE-issued
|
|
|
158,065 |
|
|
|
6,529 |
|
|
|
- |
|
|
|
164,594 |
|
Mortgage-backed
securities, private label
|
|
|
612 |
|
|
|
- |
|
|
|
(13 |
) |
|
|
599 |
|
Total
|
|
$ |
162,766 |
|
|
$ |
6,571 |
|
|
$ |
(17 |
) |
|
$ |
169,320 |
|
Mortgage-backed
securities are comprised of fixed and variable-rate residential
mortgages.
The fair
value of impaired securities, the amount of unrealized losses and the length of
time these unrealized losses existed for the periods indicated were as
follows:
|
|
Less
than 12 months
|
|
|
12
months or longer
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
(in
thousands)
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of states and
political subdivisions
|
|
$ |
759 |
|
|
$ |
(13 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
759 |
|
|
$ |
(13 |
) |
Mortgage-backed
securities, GSE-issued
|
|
|
2,092 |
|
|
|
(31 |
) |
|
|
- |
|
|
|
- |
|
|
|
2,092 |
|
|
|
(31 |
) |
Mortgage-backed
securities,
private label
|
|
|
487 |
|
|
|
(22 |
) |
|
|
- |
|
|
|
- |
|
|
|
487 |
|
|
|
(22 |
) |
|
|
$ |
3,338 |
|
|
$ |
(66 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,338 |
|
|
$ |
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. GSE
|
|
$ |
2,015 |
|
|
$ |
(4 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,015 |
|
|
$ |
(4 |
) |
Mortgage-backed
securities, GSE-issued
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Mortgage-backed
securities,
private label
|
|
|
- |
|
|
|
- |
|
|
|
599 |
|
|
|
(13 |
) |
|
|
599 |
|
|
|
(13 |
) |
|
|
$ |
2,015 |
|
|
$ |
(4 |
) |
|
$ |
599 |
|
|
$ |
(13 |
) |
|
$ |
2,614 |
|
|
$ |
(17 |
) |
Management
has evaluated these securities and has determined that the decline in fair value
is not other than temporary. These securities have contractual maturity dates
and management believes it is reasonably probable that principal and interest
balances on these securities will be collected based on the performance,
underwriting, credit support and vintage of the loans underlying the securities.
However, continued deteriorating economic conditions may result in degradation
in the performance of the loans underlying these securities in the
future. The Company has
the
ability and intent to hold these securities for a reasonable period of time for
a forecasted recovery of the amortized cost. The Company does not intend to sell
these securities and it is not likely that the Company would be required to sell
securities in an unrealized position before recovery of its cost
basis.
As of
March 31, 2010 and September 30, 2009, the Bank pledged investment securities
for the following obligations:
|
|
March
31, 2010
|
|
|
September
30, 2009
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
FHLB
borrowings
|
|
$ |
59,065 |
|
|
$ |
61,516 |
|
|
$ |
66,104 |
|
|
$ |
68,900 |
|
Treasury,
tax and loan funds at the
Federal Reserve Bank
|
|
|
3,940 |
|
|
|
4,169 |
|
|
|
4,523 |
|
|
|
4,767 |
|
Repurchase
agreements
|
|
|
7,747 |
|
|
|
8,145 |
|
|
|
3,338 |
|
|
|
3,459 |
|
Deposits
of municipalities and pubic units
|
|
|
3,469 |
|
|
|
3,661 |
|
|
|
5,074 |
|
|
|
5,354 |
|
Total
|
|
$ |
74,221 |
|
|
$ |
77,491 |
|
|
$ |
79,039 |
|
|
$ |
82,480 |
|
Note
6 - Loans Receivable
Loans
receivable are summarized by collateral type as follows:
|
|
March
31, 2010
|
|
|
September
30, 2009
|
|
|
|
Balance
|
|
|
Percent
of
Total
|
|
|
Balance
|
|
|
Percent
of
Total
|
|
|
|
(dollars
in thousands)
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
161,451 |
|
|
|
31.80 |
% |
|
$ |
178,311 |
|
|
|
33.01 |
% |
Multi-family
residential
|
|
|
16,636 |
|
|
|
3.28 |
|
|
|
16,286 |
|
|
|
3.01 |
|
Commercial
|
|
|
214,876 |
|
|
|
42.33 |
|
|
|
213,471 |
|
|
|
39.52 |
|
Total
real estate
|
|
|
392,963 |
|
|
|
77.41 |
|
|
|
408,068 |
|
|
|
75.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
|
|
8,532 |
|
|
|
1.68 |
|
|
|
10,871 |
|
|
|
2.01 |
|
Multi-family
residential
|
|
|
6,471 |
|
|
|
1.27 |
|
|
|
10,417 |
|
|
|
1.93 |
|
Commercial
and land development
|
|
|
25,362 |
|
|
|
5.00 |
|
|
|
27,144 |
|
|
|
5.02 |
|
Total
real estate construction
|
|
|
40,365 |
|
|
|
7.95 |
|
|
|
48,432 |
|
|
|
8.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
50,138 |
|
|
|
9.87 |
|
|
|
53,368 |
|
|
|
9.88 |
|
Automobile
|
|
|
1,801 |
|
|
|
0.35 |
|
|
|
2,364 |
|
|
|
0.44 |
|
Other
consumer
|
|
|
3,273 |
|
|
|
0.64 |
|
|
|
3,734 |
|
|
|
0.69 |
|
Total
consumer
|
|
|
55,212 |
|
|
|
10.86 |
|
|
|
59,466 |
|
|
|
11.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
19,199 |
|
|
|
3.78 |
|
|
|
24,256 |
|
|
|
4.49 |
|
|
|
|
507,739 |
|
|
|
100.00 |
% |
|
|
540,222 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan fees
|
|
|
(862 |
) |
|
|
|
|
|
|
(858 |
) |
|
|
|
|
Allowance
for loan losses
|
|
|
(27,779 |
) |
|
|
|
|
|
|
(28,735 |
) |
|
|
|
|
Loans receivable,
net
|
|
$ |
479,098 |
|
|
|
|
|
|
$ |
510,629 |
|
|
|
|
|
Note
7 – Allowance for Loan Losses
Activity
in the allowance for loan losses for the three and six month periods ended March
31, 2010 and 2009, was as follows:
|
|
Three
Months Ended
March
31,
|
|
|
Six
Months Ended
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
28,141 |
|
|
$ |
8,027 |
|
|
$ |
28,735 |
|
|
$ |
4,579 |
|
Provision
for loan losses
|
|
|
2,375 |
|
|
|
1,060 |
|
|
|
3,075 |
|
|
|
4,635 |
|
Losses
on loans charged-off
|
|
|
(2,821 |
) |
|
|
(1,778 |
) |
|
|
(4,185 |
) |
|
|
(1,908 |
) |
Recoveries
on loans charged-off
|
|
|
84 |
|
|
|
24 |
|
|
|
154 |
|
|
|
27 |
|
Ending
balance
|
|
$ |
27,779 |
|
|
$ |
7,333 |
|
|
$ |
27,779 |
|
|
$ |
7,333 |
|
The
following table summarizes impaired loans at March 31, 2010, and September 30,
2009:
|
|
March
31,
2010
|
|
|
September
30,
2009
|
|
|
|
(in
thousands)
|
|
Impaired
loans with related specific allowance
|
|
$ |
13,362 |
|
|
$ |
7,131 |
|
Impaired
loans with no related allowance
|
|
|
13,664 |
|
|
|
6,657 |
|
Total
impaired loans
|
|
$ |
27,026 |
|
|
$ |
13,788 |
|
|
|
|
|
|
|
|
|
|
Specific
allowance on impaired loans
|
|
$ |
2,442 |
|
|
$ |
1,516 |
|
Loans
acquired with deteriorating credit quality were previously included in the
impaired loans with no related allowance totals in the above
table. Those balances were $22.4 million and $26.2 million as of
March 31, 2010 and September 30, 2009, respectively.
Troubled
debt restructurings totaled $8.7 million and $11.9 million at March 31, 2010 and
September 30, 2009, respectively.
Note
8 – Fair Value Measurement
ASC 820
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.
The
following table summarized the Company’s financial assets that were measured at
fair value on a recurring basis at March 31, 2010 and September 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
(in
thousands)
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government-
sponsored enterprises (“GSE”)
|
|
$ |
4,605 |
|
|
|
- |
|
|
$ |
4,605 |
|
|
|
- |
|
Obligations
of states and political
subdivisions
|
|
|
1,517 |
|
|
|
- |
|
|
|
1,517 |
|
|
|
- |
|
Mortgage-backed
securities, GSE issued
|
|
|
149,006 |
|
|
|
- |
|
|
|
149,006 |
|
|
|
- |
|
Mortgage-backed
securities, private label
|
|
|
487 |
|
|
|
|
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government-
sponsored enterprises
|
|
$ |
4,127 |
|
|
|
- |
|
|
$ |
4,127 |
|
|
|
- |
|
Mortgage-backed
securities, GSE issued
|
|
|
164,594 |
|
|
|
- |
|
|
|
164,594 |
|
|
|
- |
|
Mortgage-backed
securities, private label
|
|
|
599 |
|
|
|
|
|
|
|
599 |
|
|
|
|
|
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 assets that were measured at
fair value on a non-recurring basis at March 31, 2010 and September 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Level
1
|
|
|
Level
2 |
|
|
Level
3 |
|
|
(in
thousands)
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$10,776
|
|
|
-
|
|
|
-
|
|
|
$10,776
|
Real
estate owned
|
|
13,564
|
|
|
-
|
|
|
-
|
|
|
13,564
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$5,699
|
|
|
-
|
|
|
-
|
|
|
$5,699
|
Real
estate owned
|
|
18,391
|
|
|
-
|
|
|
-
|
|
|
18,391
|
Impaired
loans, which are measured for impairment using the fair value of the collateral
at March 31, 2010, had a carrying amount of $13.2 million, net of specific
valuation allowances totaling $2.4 million.
The
specific valuation allowance required a provision of $1.6 million and $207,000
during the quarters ended March 31, 2010 and March 31, 2009, respectively, and a
provision of $2.4 million and $954,000 for the six month periods ended March 31,
2010, and March 31, 2009, respectively.
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 assets measured and carried at fair value.
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.
The
estimated fair values of the Company’s financial instruments at March 31, 2010
were as follows:
|
|
March
31, 2010
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair
Value
|
|
|
|
(in
thousands)
|
|
Financial
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
128,881 |
|
|
$ |
128,881 |
|
Investment
securities
|
|
|
155,615 |
|
|
|
155,615 |
|
Loans
held for sale
|
|
|
2,180 |
|
|
|
2,180 |
|
Loans
receivable, net
|
|
|
479,098 |
|
|
|
481,529 |
|
FHLB
stock
|
|
|
10,326 |
|
|
|
N/A |
|
Accrued
interest receivable
|
|
|
2,422 |
|
|
|
2,422 |
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
Demand
and savings deposits
|
|
$ |
318,001 |
|
|
$ |
318,001 |
|
Certificates
of deposit
|
|
|
236,899 |
|
|
|
241,719 |
|
FHLB
advances and other borrowings
|
|
|
75,298 |
|
|
|
78,732 |
|
Advances
by borrowers for taxes and
insurance
|
|
|
1,052 |
|
|
|
1,052 |
|
Accrued
interest payable
|
|
|
556 |
|
|
|
556 |
|
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.
Investment
Securities: The Company’s investment securities available for sale
consist primarily of securities issued by U.S. Government sponsored enterprises
that 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.
Loans held for
sale: The carrying amount approximates fair value.
FHLB
stock: The determination of fair value of FHLB stock was impractical due
to restrictions on the transferability of the stock.
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.
Accrued interest
receivable: The carrying amount approximates fair value.
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.
Accrued interest
payable: The carrying amount approximates fair value.
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 March 31, 2010 and 2009, were
insignificant.
Note
9 –FDIC Indemnification Receivable
The
following table details the calculation of the FDIC indemnification asset at
March 31, 2010 (in thousands):
Balance
of covered assets
|
|
$ |
115,286 |
|
|
|
|
Estimated
losses on covered assets:
|
|
|
|
|
|
|
|
Loans
|
|
|
19,565 |
|
|
|
|
Real estate and other
repossessed assets
|
|
|
362 |
|
|
|
|
Reimbursable
expenses
|
|
|
450 |
|
|
|
|
Estimated losses on covered
assets
|
|
$ |
20,377 |
|
|
|
|
|
|
|
|
|
|
|
|
80%
loss threshold under loss share agreement
|
|
$ |
34,000 |
|
|
|
|
Cumulative
losses claimed through March 31, 2010
|
|
|
19,147 |
|
|
|
|
Remaining 80% loss
threshold
|
|
$ |
14,853 |
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
losses at 80% rate
|
|
$ |
14,853 |
|
|
|
|
Estimated
recovery at 80% rate
|
|
|
|
|
|
$ |
11,882 |
|
|
|
|
|
|
|
|
|
|
Estimated
losses at 95% rate
|
|
|
5,524 |
|
|
|
|
|
Estimated
recovery at 95% rate
|
|
|
|
|
|
|
5,248 |
|
|
|
|
|
|
|
|
17,130 |
|
Less:
Net present value discount
|
|
|
|
|
|
|
(1,100 |
) |
Total
|
|
$ |
20,377 |
|
|
$ |
16,030 |
|
Activity
in the FDIC indemnification receivable for the six month period ended March 31,
2010, was as follows:
|
|
Reimbursement
rate
|
|
|
Amount
|
|
|
|
|
|
Net
|
|
|
|
|
80% |
|
|
|
95% |
|
|
Receivable
|
|
|
Discount
|
|
|
Receivable
|
|
|
|
(in
thousands)
|
|
Balance
at September 30, 2009
|
|
$ |
34,000 |
|
|
$ |
4,405 |
|
|
$ |
31,385 |
|
|
$ |
(1,347 |
) |
|
$ |
30,038 |
|
Payments
from FDIC for losses on covered assets
|
|
|
(19,147 |
) |
|
|
|
|
|
|
(15,318 |
) |
|
|
|
|
|
|
(15,318 |
) |
Adjustment
for estimated losses over threshold
|
|
|
|
|
|
|
1,119 |
|
|
|
1,063 |
|
|
|
|
|
|
|
1,063 |
|
Discount
accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247 |
|
|
|
247 |
|
Balance
at March 31, 2010
|
|
|
14,853 |
|
|
|
5,524 |
|
|
|
17,130 |
|
|
|
(1,100 |
) |
|
|
16,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
receivable from the FDIC have been estimated at 80% of losses on covered assets
(acquired loans and REO) up to $34.0 million. Reimbursable losses in excess of
$34.0 million have been estimated at 95% of the amount recoverable from the
FDIC.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking
Statements and “Safe Harbor” statement under the Private Securities Litigation
Reform Act of 1995
This
report contains forward-looking statements, which can be identified by the use
of words such as “believes,” “intends,” “expects,” “anticipates,” “estimates” or
similar expressions. Forward-looking statements include, but are not
limited to:
·
|
statements
of our goals, intentions and
expectations;
|
·
|
statements
regarding our business 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;
|
·
|
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 as detailed from time to time in our filings with the SEC,
including our 2009 Form 10-K and subsequently filed Quarterly Reports on
Form 10-Q. 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 quarterly 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. The Company undertakes no obligation to publish revised
forward-looking statements to reflect the occurrence of unanticipated events or
circumstances after the date hereof. These risks
could cause our actual results for fiscal year 2010 and beyond to differ
materially from those expressed in any forward-looking statements by or on
behalf of us, and could negatively affect the Company’s financial condition,
liquidity and operating and stock price performance.
Background
and Overview
Home
Federal Bank (the “Bank”) was founded in 1920 as a building and loan association
and reorganized as a federal mutual savings and loan association in
1936. On December 6, 2004, the Bank converted to stock form and
reorganized into the two-tiered mutual holding company form of organization and
formed Home Federal MHC and Home Federal Bancorp, Inc. (“Old Home Federal”). On
May 11, 2007, the Boards of Directors of Old Home Federal, Home Federal MHC and
the Bank adopted a Plan of Conversion and Reorganization (the “Plan”) pursuant
to which the Bank reorganized from the mutual holding company structure to the
stock holding company structure. As a result of that transaction, Home Federal
Bank formed a new stock holding company, Home Federal Bancorp, Inc. (“we”, “us”,
the “Company”), that serves as the holding company for Home Federal Bank. Home
Federal Bancorp, Inc., is a Maryland corporation. The Conversion was completed
on December 19, 2007.The Company’s common stock is traded on the NASDAQ Global
Select Market under the symbol “HOME” and is included in the U.S. Russell 2000®
Index.
The Bank
is a community-oriented financial institution dedicated to serving the financial
service needs of consumers and businesses within its market area. The
Bank’s primary business is attracting deposits from the general public and using
these funds to originate loans. The Bank emphasizes the origination
of commercial business loans, commercial real estate loans, construction and
residential development loans, consumer loans and loans secured by first
mortgages on owner-occupied residential real estate. As a result of a
comprehensive and continuing review of its strategic business plan, the Company
continues to expand its commercial and small business banking programs,
including a variety of loan and deposit products.
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,
including loans and REO of Community First Bank, a full service commercial bank,
headquartered in Prineville, Oregon (the “Acquisition”). Home Federal Bank
acquired seven banking office locations in central Oregon. 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. The Acquisition has been incorporated prospectively in the Company’s
financial statements. Therefore, year over year results of operations may not be
comparable. Additionally, only 54 days of operations from the Acquisition are
included in the fourth quarter of fiscal 2009, which impacts linked quarter
comparisons. In certain areas of this discussion and analysis, we have
separately disclosed the impact of the Acquisition on the financial condition
and results of operations of the Company.
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. We refer to this market as the “Idaho Region.”
The Acquisition resulted in the Bank’s entrance to the Tri-County Region of
Central Oregon, including the counties of Crook, Deschutes and
Jefferson. We refer to this market as the “Central Oregon Region.” In
total, we have 22 full-service banking offices, one loan center, 23 automated
teller machines and Internet banking services.
The
following summarizes key activities of the Company during the second fiscal
quarter ended March 31, 2010:
§
|
Deposits
increased $32.4 million for the linked quarter with core deposits
(checking, money market and savings accounts) increasing $20.5
million
|
§
|
Net
interest income increased 6% over the second quarter of fiscal
2009
|
§
|
Cash
and cash equivalents increased significantly from the linked
quarter
|
§
|
Gross
loans declined $19.1 million as lending opportunities meeting our criteria
remain difficult to obtain
|
§
|
Nonperforming
assets increased $1.2 million to $64.0
million
|
§
|
Provision
for loan losses totaled $2.4 million while net charge-offs totaled $2.7
million
|
§
|
Valuation
adjustments and taxes on real estate owned totaled $1.4
million
|
▪ |
The
Bank received $5.9 million in reimbursed losses from the FDIC on assets
covered under the loss share
agreement
|
The
current economic and interest rate environments continue to challenge our
organic growth plans, although we have achieved significant deposit growth in
fiscal year 2010. While total assets increased during the second quarter of
fiscal year 2010, a diminished supply of creditworthy lending opportunities
contributed to a decrease in outstanding loan balances. Cash and amounts due
from depository institutions increased significantly. We have conserved cash
balances as a liquidity cushion to support the potential acquisition of a failed
institution. Alternative investments to loans are also unattractive as
investment securities offer very low yields within our credit and interest rate
risk tolerances.
Consistent
with our stated strategy to transform the Company’s balance sheet, 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. We did incur growth in certificates of deposit during the second
quarter of fiscal year 2010, although $9.3 million of the $11.9 million growth
in certificates of deposit occurred in a 30-day deposit account used by
commercial customers as a short-term investment vehicle. We believe we have
priced and delivered this product as an alternative to daily investment sweep
deposits.
While we
were successful in selling some foreclosed real estate during the quarter,
continued deterioration in commercial real estate loans resulted in an increase
in nonperforming assets during the quarter ended March 31,
2010. Nonperforming commercial real estate loans increased in both markets as
vacancies continued to rise, particularly in our Idaho Region. We continue to
see retail stores closing after December 31, 2009, and expect delinquencies in
our commercial real estate loan portfolio to rise, which may lead to additional
loan losses. We recorded a provision for loan losses of $2.4 million during the
second quarter of fiscal year 2010 primarily due to the increase in
nonperforming loans and because of the continued declines in commercial real
estate values. We also increased our general reserve for a pool of residential
loans we purchased from Countrywide Financial (now Bank of America) in fiscal
year 2006. Delinquencies in that portfolio have increased to 24% at March 31,
2010.
The
economic environment in our markets of Southwestern Idaho and Central Oregon
continues to be weak with unemployment rates exceeding national levels and with
reduced prospects for economic growth over the next 12 months. We believe that
meaningful organic growth in loans will be difficult to achieve in the short
term. Therefore, we continue to review and pursue FDIC-assisted acquisitions in
order to take advantage of the unique opportunity these acquisitions present to
grow the organization with quantifiable credit risk exposure. The Board and
Management of the Company have identified the intermountain region between Salt
Lake City and the Cascade Mountain range as the initial primary target market
for organic and acquisitive growth. We believe several institutions may be
placed into FDIC receivership in this region and we intend to participate in
auctions of failed institutions that provide attractive franchise expansion.
Nonetheless, we can provide no assurance that any of these opportunities will
materialize or, if they do, that the Bank will be the successful bidder for a
failed institution (See “Part II – Other Information, Item 1A – Risk
Factors”).
Critical
Accounting Estimates and Related Accounting Policies
Note 2 to
the consolidated financial statements in this Quarterly Report on Form 10-Q
provides a description of critical accounting policies and significant estimates
in the financial statements that should be considered in conjunction with the
reading of this discussion and analysis.
Comparison
of Financial Condition at March 31, 2010, and September 30, 2009
For the
six months ended March 31, 2010, total assets increased $24.2
million. The changes in total assets were primarily concentrated in
the following asset categories:
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
March
31,
2010
|
|
|
Balance
at September 30,
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
Cash
and amounts due from depository
institutions
|
|
$ |
128,881 |
|
|
$ |
49,953 |
|
|
$ |
78,928 |
|
|
|
158.0 |
% |
Investments
available for sale, at fair value
|
|
|
155,615 |
|
|
|
169,320 |
|
|
|
(13,705 |
) |
|
|
(8.1 |
) |
Loans
receivable, net of allowance for loan
losses
|
|
|
479,098 |
|
|
|
510,629 |
|
|
|
(31,531 |
) |
|
|
(6.2 |
) |
FDIC
indemnification receivable, net
|
|
|
16,030 |
|
|
|
30,038 |
|
|
|
(14,008 |
) |
|
|
(46.6 |
) |
Cash and amounts due from depository
institutions. Cash and amounts due from depository institutions increased
$78.9 million to $128.9 million at March 31, 2010, from $50.0 million at
September 30, 2009. Significant deposit growth funded the increase in
cash with deposits increasing $40.0 million during the six months ended March
31, 2010. We also received $15.3 million in reimbursements from
losses incurred on acquired assets during the six months ended March 31, 2010,
under the loss share agreement with the FDIC. In addition, cash increased due to
principal repayments on one-to-four family residential mortgages and mortgage
backed securities exceeding loan originations and purchases of mortgage backed
securities. We used some cash to pay maturing borrowings from the
FHLB during fiscal year 2010. We continue to hold excess levels of cash as a
result of the very low interest rate environment, which makes medium-term
investments unattractive, and to provide increased flexibility for potential
acquisitions.
Investments. Investments
decreased $13.7 million to $155.6 million at March 31, 2010, from $169.3 million
at September 30, 2009. The decrease was primarily the result of
principal repayments exceeding the purchases of securities during the six months
ended March 31, 2010. Principal reduction totaled $27.5 million for
the six months ended March 31, 2010.
Nearly
all of our investment securities are issued by U.S. Government sponsored
enterprises, primarily Fannie Mae and Freddie Mac. While the U.S. Government has
affirmed its support for government sponsored enterprises and the obligations
and mortgage-backed securities they issued, significant deterioration in the
financial strength of Fannie Mae, Freddie Mac or mortgage-backed security
insurers or actions by the U.S. Government to modify the structure of these
government enterprises may have a material effect on the valuation and
performance of our mortgage-backed securities portfolio in future
periods.
FHLB Stock. At March 31, 2010,
the Bank held $10.3 million of common stock in the FHLB. This security is
reported at par value, which represents the Bank’s cost. The FHLB has reported a
capital deficiency under the regulations of the Federal Housing Finance Agency
(the “FHFA”), its primary regulator. As a result, the FHLB has stopped paying a
dividend and has suspended the repurchase and redemption of outstanding common
stock until its retained earnings deficiency is reclaimed.
The FHLB
has stated 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, we have not recorded an "other than temporary
impairment" on our 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 would impair the Bank’s ability to meet liquidity
demands.
Loans. Net loans receivable
decreased $31.5 million to $479.1 million at March 31, 2010, from $510.6 million
at September 30, 2009. One-to-four family residential mortgage loans
decreased $18.9 million as we originate
conventional
one-to-four family residential loans primarily for sale in the secondary market.
As a result, the residential loan portfolio will likely continue to decline as
new loans are not added to the portfolio. Consumer loans decreased $4.4 million
to $54.7 million as of March 31, 2010. Commercial real estate,
multifamily and acquisition and development loans decreased $9.2 million to
$290.7 million at March 31, 2010, from $299.9 million at September 30, 2009. We
plan to continue our emphasis on commercial and small business banking products
although the slowing economy has reduced growth opportunities for businesses in
our primary markets, thereby limiting our ability to generate new loans meeting
our investment objectives and criteria.
Asset Quality. Net loan
charge-offs totaled $2.7 million during the quarter ended March 31, 2010,
compared to $1.3 million during the quarter ended December 31, 2009, and $4.3
million for the quarter ended September 30, 2009. Loans delinquent 30
to 89 days totaled $10.7 million at March 31, 2010, including $4.4 million of
delinquent loans covered by the loss share agreement with the FDIC, as compared
to $7.9 million at September 30, 2009. The following table summarizes
loans delinquent 30 to 89 days:
|
|
March
31,
|
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Land
acquisition and development
|
|
$ |
1,641 |
|
|
$ |
3,537 |
|
One-to-four
family construction
|
|
|
155 |
|
|
|
481 |
|
Commercial
real estate
|
|
|
4,233 |
|
|
|
1,886 |
|
One-to-four
family residential
|
|
|
3,705 |
|
|
|
1,551 |
|
Other
|
|
|
965 |
|
|
|
415 |
|
Total loans delinquent 30 to 89
days
|
|
$ |
10,699 |
|
|
$ |
7,870 |
|
The
allowance for loan losses was $27.8 million, or 5.47%, of gross loans at March
31, 2010, compared to $28.7 million, or 5.32% of gross loans at September 30,
2009. At March 31, 2010, we recorded an allowance of $15.7 million on loans
purchased in the Acquisition and an allowance of $12.1 million on loans in the
Idaho Region loan portfolio. Approximately $2.4 million of the allowance for
loan losses on the Idaho Region portfolio is allocated to nonperforming
loans.
Loans
that were troubled on the date of the Acquisition were recorded at fair value
under 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 $22.4 million at March 31, 2010. 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. However, our
inability to perform specific requirements under the purchase and assumption
agreement with the FDIC or to properly service and manage the workout of
troubled loans in the loss share portfolio may result in certain loans losing
eligibility for reimbursement of losses under the loss share
agreement.
Nonperforming
assets, which include all loans past due greater than 90 days, loans on
nonaccrual status and real estate and other property owned, totaled $64.0
million at March 31, 2010, compared to $56.9 million at September 30, 2009. The
delinquency table above includes $2.7 million, and $5.1 million of loans that
were placed on nonaccrual status at March 31, 2010, and September 30, 2009,
respectively, which are also included in the table below that summarizes total
nonperforming loans (including nonaccrual and impaired loans) and real estate
owned:
|
|
March 31, 2010
|
|
|
September 30, 2009
|
|
(in
thousands)
|
|
Covered
Assets
|
|
|
Legacy
Portfolio
|
|
|
Total
|
|
|
Covered
Assets
|
|
|
Legacy
Portfolio
|
|
|
Total
|
|
Acquisition
and development
|
|
$ |
7,382 |
|
|
$ |
1,641 |
|
|
$ |
9,023 |
|
|
$ |
6,985 |
|
|
$ |
623 |
|
|
$ |
7,608 |
|
One-to-four
family construction
|
|
|
740 |
|
|
|
828 |
|
|
|
1,568 |
|
|
|
481 |
|
|
|
2,283 |
|
|
|
2,764 |
|
Commercial
real estate
|
|
|
16,163 |
|
|
|
9,993 |
|
|
|
26,156 |
|
|
|
11,016 |
|
|
|
2,725 |
|
|
|
13,741 |
|
One-to-four
family residential
|
|
|
3,413 |
|
|
|
7,546 |
|
|
|
10,959 |
|
|
|
5,020 |
|
|
|
5,971 |
|
|
|
10,991 |
|
Other
|
|
|
2,689 |
|
|
|
50 |
|
|
|
2,739 |
|
|
|
3,206 |
|
|
|
182 |
|
|
|
3,388 |
|
Total
nonperforming loans
|
|
|
30,387 |
|
|
|
20,058 |
|
|
|
50,445 |
|
|
|
26,708 |
|
|
|
11,784 |
|
|
|
38,492 |
|
Real
estate owned and other property owned
|
|
|
5,547 |
|
|
|
8,017 |
|
|
|
13,564 |
|
|
|
7,516 |
|
|
|
10,875 |
|
|
|
18,391 |
|
Total
nonperforming assets
|
|
$ |
35,934 |
|
|
$ |
28,075 |
|
|
$ |
64,009 |
|
|
$ |
34,224 |
|
|
$ |
22,659 |
|
|
$ |
56,883 |
|
Troubled
debt restructurings that were not included in the delinquency or nonperforming
asset tables above totaled $1.4 million and $4.6 million at March 31, 2010, and
September 30, 2009, respectively. All troubled debt restructurings are
considered to be impaired loans, but may not necessarily be placed on nonaccrual
status.
Appraisals
on loans secured by consumer real estate are updated when the loan becomes 120
days past due, or earlier if circumstances indicate the borrower will be unable
to repay the loan under the terms of the note. Additionally, appraisals are
updated if the borrower requests a modification to their loan. On commercial
business loans, appraisals are updated upon a determination that the borrower
will be unable to repay the loan according to the terms of the note or upon a
notice of default, whichever is earlier. Appraisals are updated on all loan
types immediately prior to a foreclosure sale and quarterly thereafter once the
collateral title has been transferred to the Bank.
Real
estate and other repossessed assets decreased $4.8 million or 26.2% to $13.6
million compared to $18.4 million as of September 30, 2009. At March 31, 2010,
real estate owned and other repossessed assets was comprised of $8.0 million of
land development and speculative one-to-four family construction projects, $3.6
million of commercial real estate, and $2.0 million of one-to-four family
residential properties.
In fiscal
year 2006, the Bank purchased approximately $38.8 million of residential real
estate loans from Countrywide Financial, now Bank of America, who continues to
service the loans. Balances on the portfolio totaled $19.5 million at March 31,
2010. The majority of the portfolio balance is secured by properties outside of
the state of Idaho and delinquencies and foreclosures are at levels
significantly higher than similar loans on properties in our primary market
area. At March 31, 2010, this portfolio had $3.1 million of nonperforming loans
that are reported in the table above. The total reserve allocated to loans in
this loan portfolio was $2.6 million at March 31, 2010, or 13.1% of the balance
of loans outstanding on that date.
As a
result of the uncertainty surrounding the severity and possible length of the
downturn in the commercial real estate market, we have increased the general
reserve component of the allowance for loan losses. We believe such an increase
in the allowance for loan losses is prudent and appropriate and that the
allowance for loan losses reflects our best estimate of probable, known and
estimable losses inherent in the loan portfolio at March 31, 2010. However,
additional information may later come to our attention later, evidencing losses
in excess of the amounts estimated, which may negatively affect earnings in the
future.
Property and equipment. We did
not acquire banking locations in Central Oregon at the same time as the closing
of the Acquisition. We had a period of time after the August 7, 2009,
transaction date to review the banking facilities of the failed institution and
obtain appraisals of the banking offices and their contents. After our review,
we decided to purchase two banking offices in Redmond and Bend, Oregon, and to
assume the lease agreements on five of the
other
banking offices in the first quarter of fiscal year 2010. 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.
One of
the assets offered in the Acquisition was a 49% nonvoting interest in a real
estate partnership. Prineville Bancorporation, the parent company of the failed
bank, was the owner of the remaining 51% and sole voting interest of the
partnership. The partnership owned three of the banking offices that Community
First Bank leased from the partnership. We assumed these leases, as described
above. We acquired the remaining interest in the partnership in March 2010
through a transaction with Prineville Bancorporation whereby we now own the
three banking facilities we previously leased from the partnership after the
Acquisition. Also in March 2010, the FDIC made an adjustment to the purchase
price of the 49% interest in the partnership we purchased in the Acquisition,
which resulted in an after tax extraordinary gain of $305,000 during the quarter
ended March 31, 2010.
FDIC indemnification
receivable. As part of the Acquisition, the Company 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 FDIC
indemnification receivable declined $14.0 million to $16.0 million from
September 30, 2009, primarily due to payments for reimbursements for loan
charge-offs and other reimbursable expenses.
Deposits. Deposits increased
$40.0 million, or 7.8%, to $554.9 million at March 31, 2010, from $514.9 million
at September 30, 2009, primarily as a result of core deposit growth. There was a
$32.0 million increase in core deposits and an increase of $8.3 million in
certificates of deposit. Nearly all of the increase in certificates of deposit
was attributable to a 30 day certificate product used by commercial customers as
a short-term investment account.
The
following table details the composition of the deposit portfolio and changes in
deposit balances:
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
March
31,
2010
|
|
|
Balance
at
September
30,
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
$ |
64,969 |
|
|
$ |
68,155 |
|
|
$ |
(3,187 |
) |
|
|
(4.7 |
)% |
Interest-bearing
demand
|
|
|
93,493 |
|
|
|
78,393 |
|
|
|
15,100 |
|
|
|
19.3 |
|
Health
savings account
|
|
|
22,613 |
|
|
|
21,248 |
|
|
|
1,366 |
|
|
|
6.4 |
|
Money
market
|
|
|
88,275 |
|
|
|
76,408 |
|
|
|
11,867 |
|
|
|
15.5 |
|
Savings
|
|
|
48,651 |
|
|
|
41,757 |
|
|
|
6,894 |
|
|
|
16.5 |
|
Certificates
of deposit
|
|
|
236,899 |
|
|
|
228,897 |
|
|
|
8,002 |
|
|
|
3.5 |
|
Total
deposit accounts
|
|
$ |
554,900 |
|
|
$ |
514,858 |
|
|
$ |
40,042 |
|
|
|
7.8 |
% |
Borrowings. FHLB advances and
other borrowings decreased $9.4 million, or 11.1%, to $75.3 million at March 31,
2010, from $84.7 million at September 30, 2009. Excess cash and principal
payment proceeds from mortgage-backed securities and residential loan portfolios
were used to repay FHLB advances as they matured.
Deferred Income Taxes. The
Company had a net deferred tax liability of $5.3 million and $5.6 million at
March 31, 2010, and September 30, 2009, respectively. There was approximately
$305,000 of a decline which was due in part to the change in the unrealized gain
on the investment securities’ available for sale as of March 31, 2010. The other
component of the change in deferred taxes was due to the adjustment to the fair
market value of the acquisition and the extraordinary gain, net of
tax.
Equity. Stockholders’ equity
decreased $2.6 million, or 1%, to $207.0 million at March 31, 2010, compared to
$209.7 million at September 30, 2009. Dividends paid during the six months ended
March 31, 2010 reduced retained earnings $1.7 million. In addition, the net loss
year to date also decreased equity. The Company’s book value per
share as of March 31, 2010, was $12.41 per share based upon 16,687,760
outstanding shares of common stock.
Comparison
of Operating Results for the Three Months Ended March 31, 2010, and March 31,
2009
Net loss
for the three months ended March 31, 2010, was $1.6 million, or $0.10 per
diluted share, compared to net income of $476,000, or $0.03 per diluted share,
for the three months ended March 31, 2009. Net loss for the quarter ended March
31, 2010, included a $305,000 after-tax extraordinary gain related to final
resolution of a partial ownership in a partnership originally acquired as part
of the Acquisition. Total revenue for the quarter ended March 31, 2010, which
consists of net interest income before the provision for loan losses plus
noninterest income, increased $466,000 or 5.6% to $8.8 million from $8.3 million
for the same period of the prior year.
The
efficiency ratio increased to 109.00% for the quarter ended March 31, 2010,
compared to 79.12% for the same quarter a year ago due mainly to increased
expenses associated with troubled assets not covered under the loss share
agreement and the additional burden of operating two core processing systems,
including certain back-office operations assumed in the Acquisition. The
conversion and consolidation of both platforms is anticipated to occur in the
fourth quarter of fiscal year 2010.
Net Interest Income. Net
interest income increased $342,000, or 5.7%, to $6.3 million for the three
months ended March 31, 2010, from $6.0 million for the three months ended March
31, 2009. The increase in net interest income was due to both the Acquisition as
well as the lower rates paid on deposits in the quarter just ended than in the
same period a year ago, which offset lower yields in the loan portfolio. Fair
value amortization of purchased loans and assumed deposits decreased interest
income and interest expense by $243,000 and $105,000, respectively, during the
second quarter of fiscal year 2010. The Company’s net interest margin decreased
31 basis points to 3.29% for the quarter ended March 31, 2010, compared to 3.60%
in the year ago period. The increase in nonperforming loans purchased in the
Acquisition is reducing the average yield earned on the loan portfolio. In
addition, cash balances continued to increase which also exerted downward
pressure on the net interest margin due to the low yield earned on this excess
cash.
The
following table sets forth the impacts to the Company’s net interest income from
changes in balances of interest earning assets and interest bearing liabilities
as well as changes in interest rates. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). Changes attributable to both rate and
volume, which cannot be segregated, are allocated proportionately to the changes
in rate and volume.
|
|
Three
Months Ended March 31, 2010
Compared
to Three Months Ended
March 31,
2009
|
|
|
|
Increase
(Decrease) Due to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
|
$ |
(540 |
) |
|
$ |
810 |
|
|
$ |
270 |
|
Loans
held for sale
|
|
|
(2 |
) |
|
|
(41 |
) |
|
|
(43 |
) |
Interest-bearing
deposits in other banks
|
|
|
2 |
|
|
|
37 |
|
|
|
39 |
|
Investment
securities, available for sale
|
|
|
- |
|
|
|
47 |
|
|
|
47 |
|
Mortgage-backed
securities
|
|
|
(152 |
) |
|
|
(353 |
) |
|
|
(505 |
) |
Total
net change in income on interest-earning assets
|
|
$ |
(692 |
) |
|
$ |
500 |
|
|
$ |
(192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
(9 |
) |
|
$ |
25 |
|
|
$ |
16 |
|
Interest-bearing
demand deposits
|
|
|
31 |
|
|
|
42 |
|
|
|
73 |
|
Money
market accounts
|
|
|
(28 |
) |
|
|
78 |
|
|
|
50 |
|
Certificates
of deposit
|
|
|
(590 |
) |
|
|
383 |
|
|
|
(207 |
) |
Total deposits
|
|
|
(596 |
) |
|
|
528 |
|
|
|
(68 |
) |
FHLB
advances
|
|
|
(71 |
) |
|
|
(395 |
) |
|
|
(466 |
) |
Total
net change in expense on interest-bearing liabilities
|
|
$ |
(667 |
) |
|
$ |
133 |
|
|
$ |
(534 |
) |
Total
increase in net interest income
|
|
|
|
|
|
|
|
|
|
$ |
342 |
|
Interest and Dividend
Income. Total interest and dividend income for the three
months ended March 31, 2010, decreased $192,000, or 2.2%, to $8.7 million, from
$8.9 million for the three months ended March 31, 2009. The decrease
during the quarter was attributable to a decrease on yields earned on interest
earning assets, which more than offset the effect of higher levels of interest
earning assets.
The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income:
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Yield
|
|
|
Average
Balance
|
|
|
Yield
|
|
|
(Decrease)
in Interest and Dividend
Income
from
2009
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net of deferred fees/costs
|
|
$ |
515,835 |
|
|
|
5.44 |
% |
|
$ |
458,105 |
|
|
|
6.00 |
% |
|
$ |
270 |
|
Loans
held for sale
|
|
|
1,044 |
|
|
|
4.91 |
|
|
|
4,386 |
|
|
|
5.76 |
|
|
|
(43 |
) |
Interest
bearing deposits in other banks
|
|
|
80,042 |
|
|
|
0.20 |
|
|
|
4,855 |
|
|
|
0.68 |
|
|
|
39 |
|
Investment
securities, available for sale
|
|
|
8,054 |
|
|
|
2.33 |
|
|
|
- |
|
|
|
- |
|
|
|
47 |
|
Mortgage-backed
securities
|
|
|
152,063 |
|
|
|
4.26 |
|
|
|
184,491 |
|
|
|
4.60 |
|
|
|
(505 |
) |
FHLB
stock
|
|
|
10,326 |
|
|
|
- |
|
|
|
9,591 |
|
|
|
- |
|
|
|
- |
|
Total
interest-earning assets
|
|
$ |
767,364 |
|
|
|
4.55 |
% |
|
$ |
661,428 |
|
|
|
5.40 |
% |
|
$ |
(192 |
) |
The yield
on loans fell to 5.44% in the second quarter of fiscal year 2010 due to the
extremely low interest rate environment that has persisted for over a year and
the impact of nonaccrual loans. Foregone interest income on nonaccrual loans was
approximately $745,000 during the quarter ended March 31, 2010. While most of
our adjustable-rate loans contain floors, which mitigates some of the decline in
our yield attributable to the low interest rate environment, new loans
originated during fiscal year 2010 as well as portfolio loans repricing during
the current year continue to drive down the average yield on the loan portfolio.
In addition, the significant amount of interest-bearing deposits in other banks
yielding an average of 20 basis points is also a major factor in reducing the
overall yield on interest earning assets.
Interest
Expense. Interest expense decreased $534,000, or 18.0%, to
$2.4 million for the three months ended March 31, 2010, from $3.0 million for
the three months ended March 31, 2009. While the average balance of
total interest-bearing liabilities increased $90.4 million, or 20.1%, to $539.6
million for the three months ended March 31, 2010, from $449.2 million for the
three months ended March 31, 2009, our overall interest expense
decreased. The average rate on certificates of deposit decreased from
3.32% to 2.15% and was a significant factor in the decrease. The
$38.6 million reduction in average outstanding FHLB borrowings was also a
significant factor in the decrease.
The
following table details average balances, cost of funds and the change in
interest expense:
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
(Decrease)
in Interest
Expense
from
2009
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
45,542 |
|
|
|
0.63 |
% |
|
$ |
30,642 |
|
|
|
0.73 |
% |
|
$ |
16 |
|
Interest-bearing
demand deposits
|
|
|
109,365 |
|
|
|
0.63 |
|
|
|
80,404 |
|
|
|
0.50 |
|
|
|
73 |
|
Money
market deposits
|
|
|
82,277 |
|
|
|
1.01 |
|
|
|
52,567 |
|
|
|
1.20 |
|
|
|
50 |
|
Certificates
of deposit
|
|
|
227,284 |
|
|
|
2.15 |
|
|
|
171,870 |
|
|
|
3.32 |
|
|
|
(207 |
) |
FHLB
advances
|
|
|
75,135 |
|
|
|
4.06 |
|
|
|
113,692 |
|
|
|
4.32 |
|
|
|
(466 |
) |
Total
interest-bearing liabilities
|
|
$ |
539,603 |
|
|
|
1.81 |
% |
|
$ |
449,175 |
|
|
|
2.64 |
% |
|
$ |
(534 |
) |
Provision for Loan
Losses. We recorded a provision for loan losses of $2.4
million for the quarter ended March 31, 2010, as a result of our analysis of the
loan portfolio. A provision for loan losses of $1.1 million was recorded for the
same quarter of the prior year. The provision in the second quarter
of fiscal year 2010 was mainly due to continued signs of stress in the
commercial real estate portfolio of the Idaho Region, about which we have
expressed concerns over the last three quarters. We also increased our
estimation of losses in the Bank of America purchased residential loan pool
described above.
While we
believe the estimates and assumptions used in our determination of the adequacy
of the allowance are reasonable, there can be no assurance that such estimates
and assumptions will not be proven incorrect in the future, or that the actual
amount of future provisions will not exceed the amount of past provisions or
that any increased provision that may be required will not adversely impact the
Company’s financial condition and results of operations. In addition,
the determination of the amount of the allowance for loan losses is subject to
review by bank regulators, as part of the routine examination process, which may
result in the establishment of additional reserves based upon their judgment of
information available to them at the time of their examination.
The
provision for loan losses is impacted by the types of loans and the risk factors
associated with each loan type in the Bank’s portfolio. As the Bank increases
its commercial and commercial real estate loan portfolios, the Bank anticipates
it will increase its allowance for loan losses based upon the higher risk
characteristics associated with commercial and commercial real estate loans
compared with one-to-four family residential loans, which have historically
comprised the majority of the Bank’s loan portfolio.
The
following table details selected activity associated with the allowance for loan
losses:
|
|
At
or For the Three Months
Ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars
in thousands)
|
|
Provision
for loan losses
|
|
$ |
2,375 |
|
|
$ |
1,060 |
|
Net
charge-offs
|
|
|
2,737 |
|
|
|
1,754 |
|
Allowance
for loan losses
|
|
|
27,779 |
|
|
|
7,333 |
|
Allowance
for loan losses as a percentage of gross loans receivable at the end
of the period
|
|
|
5.47 |
% |
|
|
1.64 |
% |
Nonperforming loans
|
|
$ |
50,445 |
|
|
$ |
14,590 |
|
Allowance
for loan losses as a percentage of nonperforming loans at the end of
the period
|
|
|
55.07 |
% |
|
|
50.26 |
% |
Nonaccrual
and 90 days or more past due loans as a percentage of loans
receivable at the end of the period
|
|
|
9.94 |
|
|
|
3.26 |
|
Loans
receivable, net
|
|
$ |
479,098 |
|
|
$ |
439,170 |
|
Noninterest
Income. Noninterest income increased $124,000, or 5.3%, to
$2.5 million for the three months ended March 31, 2010, from $2.3 million for
the three months ended March 31, 2009. Other income increased from
the year-ago period, including increases in rental income and accretable income,
partially offset by an increase in losses on sale of REO properties. Other
income included $87,000 associated with the accretion of the present value
component of the FDIC indemnification asset. These increases in other
income were offset by an aggregate loss on sale of REO properties for the
quarter of $71,000. Lastly, gain on sale of loans decreased $282,000 or 69.3%
due to a significant drop in residential mortgage loan production in the quarter
just ended compared to the year ago period. While mortgage rates continue to be
very low compared to historical averages, we have found fewer customers have
been eligible for financing due to declines in creditworthiness or declines in
the value of their homes. We hired a new vice president to oversee our mortgage
banking line of business in April 2010 and to develop a stronger business
development program for our mortgage team.
While
service charges and fees increased $254,000 from the prior year primarily due to
the deposit accounts assumed in the Acquisition, service charges and fees
declined from the linked quarter due to seasonal declines in overdraft activity
as the second fiscal quarter has typically been the lowest quarter for overdraft
fee income each fiscal year. We expect revenue from overdraft fees to continue
to decline as the deposit portfolio strategically is shifted away from
low-balance, high overdraft accounts to higher-balance, relationship accounts.
We also expect overdraft fee income to decline as a result of newly promulgated
regulations.
The
following table provides a detailed analysis of the changes in components of
noninterest income:
|
|
Three
Months Ended
March
31,
|
|
|
Increase
(decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
Service
fees and charges
|
|
$ |
2,146 |
|
|
$ |
1,892 |
|
|
$ |
254 |
|
|
|
13.4 |
% |
Gain
on sale of loans
|
|
|
125 |
|
|
|
407 |
|
|
|
(282 |
) |
|
|
(69.3 |
) |
Increase
in cash surrender value
of bank owned life insurance
|
|
|
104 |
|
|
|
104 |
|
|
|
- |
|
|
|
0.0 |
|
Loan
servicing fees
|
|
|
21 |
|
|
|
(15 |
) |
|
|
36 |
|
|
|
240.0 |
|
Other
|
|
|
73 |
|
|
|
(43 |
) |
|
|
116 |
|
|
|
269.8 |
|
Total
noninterest income
|
|
$ |
2,469 |
|
|
$ |
2,345 |
|
|
$ |
124 |
|
|
|
5.3 |
% |
Noninterest
Expense. Noninterest expense increased $3.0 million, or 45.5%,
to $9.6 million for the three months ended March 31, 2010, from $6.6 million for
the three months ended March 31, 2009.
The
following table provides a detailed analysis of the changes in components of
noninterest expense:
|
|
Three
Months Ended
March
31,
|
|
|
Increase
(decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$ |
4,689 |
|
|
$ |
3,779 |
|
|
$ |
910 |
|
|
|
24.1 |
% |
Occupancy
and equipment
|
|
|
980 |
|
|
|
729 |
|
|
|
251 |
|
|
|
34.4 |
|
Data
processing
|
|
|
797 |
|
|
|
577 |
|
|
|
220 |
|
|
|
38.1 |
|
Advertising
|
|
|
282 |
|
|
|
197 |
|
|
|
85 |
|
|
|
43.2 |
|
Professional
services
|
|
|
505 |
|
|
|
299 |
|
|
|
206 |
|
|
|
68.9 |
|
Insurance
and taxes
|
|
|
480 |
|
|
|
306 |
|
|
|
174 |
|
|
|
56.9 |
|
Provision
for REO
|
|
|
1,290 |
|
|
|
161 |
|
|
|
1,129 |
|
|
|
701.2 |
|
Other
|
|
|
537 |
|
|
|
523 |
|
|
|
14 |
|
|
|
2.7 |
|
Total
noninterest expense
|
|
$ |
9,560 |
|
|
$ |
6,571 |
|
|
$ |
2,989 |
|
|
|
45.5 |
% |
Noninterest
expenses were higher in all categories compared to the year ago period due to
the Acquisition and the costs associated with maintaining two back offices. The
Bank will continue to operate separate back offices in the Idaho and Central
Oregon Regions until a full conversion and integration to a new core application
platform is completed, which is anticipated in the fourth quarter of fiscal year
2010.
Compensation
and benefits increased $1.0 million from the year ago period primarily as a
result of personnel added in the Acquisition. Occupancy and equipment expenses
were also higher in the second quarter of fiscal year 2010 from the year ago
period due to the Acquisition.
Costs
associated with troubled loans and real estate owned significantly exceeded the
year ago levels. Included in these costs are items such as legal fees incurred
throughout the foreclosure process, overdue property taxes paid on real estate
owned upon foreclosure, and insurance premiums on real estate owned. In
addition, the provision for real estate owned increased $1.1 million during the
second quarter of fiscal year 2010 compared to the same period of the prior year
as a result of quarterly valuation assessments performed on a significantly
higher number of foreclosed properties.
Income Tax Benefit. The
Company recorded an income tax benefit of $1.0 million for the three months
ended March 31, 2010, including the tax expense associated with the
extraordinary gain. Net loss before income taxes was ($1.6 million) for the
three months ended March 31, 2010, compared to net income of $476,000 for the
three months ended March 31, 2009.
Comparison
of Operating Results for the Six Months ended March 31, 2010, and March 31,
2009
Net loss
for the six months ended March 31, 2010, was ($1.9 million), or ($0.12) per
diluted share after the $305,000 after tax extraordinary gain discussed above,
compared to a net loss of ($325,000), or ($0.02) per diluted share, for the six
months ended March 31, 2009. Total revenue for the six months ended March 31,
2010, which consisted of net interest income before the provision for loan
losses plus noninterest income, increased $1.5 million or 9.2% to $18.0 million
compared to $16.5 million for the same period of the prior year. The Company’s
efficiency ratio increased to 103.4% for the six months ended March 31, 2010,
compared to 76.3% for the same period of the prior year due to both the
increased costs associated with the elevated level of troubled loans and real
estate owned compared to the year ago period as well as due to the
Acquisition.
Net Interest Income. Net
interest income increased $978,000, or 8.4%, to $12.7 million for the six months
ended March 31, 2010, from $11.7 million for the six months ended March 31,
2009. The increase was mainly attributable to the Acquisition and a decrease in
interest expense. Lower interest rates as well as lower outstanding borrowings
in the current year than in the year ago period primarily drove the decrease in
interest expense.
The
Company’s net interest margin decreased 15 basis points to 3.33% for the six
months ended March 31, 2010, from 3.48% for the same period last year. Higher
rates of nonperforming assets and an increase in excess cash when compared to
the year ago period were primarily responsible for the decrease.
The
following table sets forth the impacts to the Company’s net interest income from
changes in balances of interest earning assets and interest bearing liabilities
as well as changes in interest rates. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). Changes attributable to both rate and
volume, which cannot be segregated, are allocated proportionately to the changes
in rate and volume.
|
|
Six
Months Ended March 31, 2010
Compared
to Six Months Ended
March
31, 2009
|
|
|
|
Increase
(Decrease) Due to
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
|
$ |
(642 |
) |
|
$ |
914 |
|
|
$ |
272 |
|
Loans
held for sale
|
|
|
(7 |
) |
|
|
(48 |
) |
|
|
(55 |
) |
Interest-bearing
deposits in other banks
|
|
|
(3 |
) |
|
|
56 |
|
|
|
53 |
|
Investment
securities, available for sale
|
|
|
(2 |
) |
|
|
41 |
|
|
|
39 |
|
Mortgage-backed
securities
|
|
|
(350 |
) |
|
|
(626 |
) |
|
|
(976 |
) |
FHLB
stock
|
|
|
33 |
|
|
|
- |
|
|
|
33 |
|
Total
net change in income on interest-
earning assets
|
|
$ |
(971 |
) |
|
$ |
337 |
|
|
$ |
(634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
(7 |
) |
|
$ |
36 |
|
|
$ |
29 |
|
Interest-bearing
demand deposits
|
|
|
41 |
|
|
|
81 |
|
|
|
122 |
|
Money
market accounts
|
|
|
(36 |
) |
|
|
92 |
|
|
|
56 |
|
Certificates
of deposit
|
|
|
(865 |
) |
|
|
246 |
|
|
|
(619 |
) |
Total deposits
|
|
|
(867 |
) |
|
|
455 |
|
|
|
(412 |
) |
FHLB
advances
|
|
|
(218 |
) |
|
|
(982 |
) |
|
|
(1,200 |
) |
Total
net change in expense on interest-
bearing liabilities
|
|
$ |
(1,085 |
) |
|
$ |
(527 |
) |
|
$ |
(1,612 |
) |
Total
increase in net interest income
|
|
|
|
|
|
|
|
|
|
$ |
978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Dividend
Income. Total interest and dividend income for the six months
ended March 31, 2010, decreased $634,000, or 3.5%, to $17.6 million, from $18.3
million for the six months ended March 31, 2009. Despite the increase
in the average balance of interest-earning assets of $88.5 million, interest
income dropped due to the decrease in yields earned on interest-earning assets
of 79 basis points.
The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income:
|
|
Six
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Yield
|
|
|
Average
Balance
|
|
|
Yield
|
|
|
(Decrease)
in Interest and Dividend
Income
from
2009
|
|
|
|
(dollars
in thousands)
|
|
Loans
receivable, net of
deferred
fees/costs
|
|
$ |
524,589 |
|
|
|
5.38 |
% |
|
$ |
465,072 |
|
|
|
5.95 |
|
|
$ |
272 |
|
Loans
held for sale
|
|
|
1,329 |
|
|
|
5.02 |
|
|
|
3,191 |
|
|
|
5.51 |
|
|
|
(55 |
) |
Interest-bearing
deposits in other
banks
|
|
|
61,769 |
|
|
|
0.22 |
|
|
|
8,040 |
|
|
|
0.37 |
|
|
|
53 |
|
Investment
securities, available for
sale
|
|
|
6,999 |
|
|
|
1.94 |
|
|
|
2,280 |
|
|
|
2.54 |
|
|
|
39 |
|
Mortgage-backed
securities
|
|
|
156,737 |
|
|
|
4.28 |
|
|
|
185,085 |
|
|
|
4.68 |
|
|
|
(976 |
) |
FHLB
stock
|
|
|
10,326 |
|
|
|
- |
|
|
|
9,591 |
|
|
|
(0.69 |
) |
|
|
33 |
|
Total
interest-earning assets
|
|
$ |
761,749 |
|
|
|
4.63 |
% |
|
$ |
673,259 |
|
|
|
5.42 |
% |
|
$ |
(634 |
) |
Interest Expense. Interest
expense decreased $1.6 million, or 24.6%, to $4.9 million for the six months
ended March 31, 2010, from $6.6 million for the six months ended March 31, 2009.
The average balance of total interest-bearing liabilities increased $73.6
million to $533.5 million for the six months ended March 31, 2010, from $459.9
million for the six months ended March 31, 2009. However, the decrease in the
average cost of interest bearing liabilities of 100 basis points resulted in a
lower interest expense for the six months ended March 31, 2010, than for the
year ago period.
The
following table details average balances, cost of funds and the change in
interest expense:
|
|
Six
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
(Decrease)
in Interest
Expense
from
2009
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
43,974 |
|
|
|
0.65 |
% |
|
$ |
28,950 |
|
|
|
0.78 |
% |
|
$ |
29 |
|
Interest-bearing
demand
deposits
|
|
|
106,538 |
|
|
|
0.62 |
|
|
|
78,991 |
|
|
|
0.52 |
|
|
|
122 |
|
Money
market deposits
|
|
|
79,723 |
|
|
|
1.04 |
|
|
|
53,932 |
|
|
|
1.33 |
|
|
|
56 |
|
Certificates
of deposit
|
|
|
226,386 |
|
|
|
2.18 |
|
|
|
174,574 |
|
|
|
3.53 |
|
|
|
(619 |
) |
FHLB
advances
|
|
|
76,834 |
|
|
|
4.15 |
|
|
|
123,416 |
|
|
|
4.53 |
|
|
|
(1,200 |
) |
Total
interest-bearing liabilities
|
|
$ |
533,455 |
|
|
|
1.85 |
% |
|
$ |
459,863 |
|
|
|
2.85 |
% |
|
$ |
(1,612 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan
Losses. A provision for loan losses of $3.1 million was
recorded as a result of our analysis of the loan portfolio for the six months
ended March 31, 2010, compared to a provision for loan losses of $4.6 million
for the same period of the prior year.
The
following table details selected activity associated with the allowance for loan
losses:
|
|
At
or For the Six Months
Ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars
in thousands)
|
|
Provision
for loan losses
|
|
$ |
3,075 |
|
|
$ |
4,635 |
|
Net
charge-offs
|
|
|
4,031 |
|
|
|
1,881 |
|
Allowance
for loan losses
|
|
|
27,779 |
|
|
|
7,333 |
|
Allowance
for loan losses as a percentage of gross loans receivable at the end
of the period
|
|
|
5.47 |
% |
|
|
1.64 |
% |
Nonperforming loans
|
|
$ |
50,445 |
|
|
$ |
14,590 |
|
Allowance
for loan losses as a percentage of nonperforming loans at the end
of
the period
|
|
|
55.07 |
% |
|
|
50.26 |
% |
Nonaccrual
and 90 days or more past due loans as a percentage of loans
receivable at the end of the period
|
|
|
9.94 |
|
|
|
3.26 |
|
Loans
receivable, net
|
|
$ |
479,098 |
|
|
$ |
439,170 |
|
Noninterest Income.
Noninterest income increased $538,000, or 11.2%, to $5.3 million for the six
months ended March 31, 2010, from $4.8 million for the six months ended March
31, 2009. The increase was primarily attributable to increases of $409,000 and
$404,000 in service charges and fees and other income offset by a decrease in
gain on sale of loans of $289,000. The increase in service charges and fees
reflects the increased number of accounts assumed in the Acquisition. The
increase in other income is due to rental income and accretable income. The
number of real estate owned properties for which we are receiving rent has
increased significantly from the year ago period. Accretable income related to
the FDIC indemnification receivable of $247,000 was also recorded in the six
month period in 2010.
The
following table provides a detailed analysis of the changes in components of
noninterest income:
|
|
Six
Months Ended
March
31,
|
|
|
Increase
(decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
Service
fees and charges
|
|
$ |
4,410 |
|
|
$ |
4,001 |
|
|
$ |
409 |
|
|
|
10.2 |
% |
Gain
on sale of loans
|
|
|
308 |
|
|
|
597 |
|
|
|
(289 |
) |
|
|
(48.4 |
) |
Increase
in cash surrender value
of bank owned life insurance
|
|
|
211 |
|
|
|
210 |
|
|
|
1 |
|
|
|
0.5 |
|
Loan
servicing fees
|
|
|
36 |
|
|
|
54 |
|
|
|
(18 |
) |
|
|
(33.3 |
) |
Mortgage
servicing rights, net
|
|
|
- |
|
|
|
(31 |
) |
|
|
31 |
|
|
|
100.0 |
|
Other
|
|
|
379 |
|
|
|
(25 |
) |
|
|
404 |
|
|
|
1,616.0 |
|
Total
noninterest income
|
|
$ |
5,344 |
|
|
$ |
4,806 |
|
|
$ |
538 |
|
|
|
11.2 |
% |
Noninterest Expense.
Noninterest expense increased $6.0 million, or 47.9%, to $18.6 million for the
six months ended March 31, 2010, from $12.6 million for the six months ended
March 31, 2009. Noninterest expenses were higher compared to the year ago period
due to the Acquisition. Among noninterest expense categories, the most
significant increases from the year ago periods include provision for real
estate owned, professional services, and insurance and taxes. These increases
are directly related to the costs associated with working through troubled
assets.
The
following table provides a detailed analysis of the changes in components of
noninterest expense:
|
|
Six
Months Ended
March
31,
|
|
|
Increase
(decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$ |
9,306 |
|
|
$ |
7,354 |
|
|
$ |
1,952 |
|
|
|
26.5 |
% |
Occupancy
and equipment
|
|
|
2,044 |
|
|
|
1,499 |
|
|
|
545 |
|
|
|
36.4 |
|
Data
processing
|
|
|
1,597 |
|
|
|
1,119 |
|
|
|
478 |
|
|
|
42.7 |
|
Advertising
|
|
|
542 |
|
|
|
445 |
|
|
|
97 |
|
|
|
21.8 |
|
Professional
services
|
|
|
984 |
|
|
|
634 |
|
|
|
350 |
|
|
|
55.2 |
|
Insurance
and taxes
|
|
|
1,038 |
|
|
|
461 |
|
|
|
577 |
|
|
|
125.2 |
|
Provision
for REO
|
|
|
2,091 |
|
|
|
161 |
|
|
|
1,930 |
|
|
|
1,198.8 |
|
Other
|
|
|
1,041 |
|
|
|
932 |
|
|
|
109 |
|
|
|
11.7 |
|
Total
noninterest expense
|
|
$ |
18,643 |
|
|
$ |
12,605 |
|
|
$ |
6,038 |
|
|
|
47.9 |
% |
Income Tax Expense
(Benefit). The Company recorded an income tax benefit of $1.5
million for the six months ended March 31, 2010, including the tax expense
associated with the extraordinary gain. Net loss before income taxes
was $3.7 million for the six months ended March 31, 2010, compared to a net loss
of $729,000 for the six months ended March 31, 2009.
Liquidity,
Commitments and Capital Resources
Liquidity. We actively analyze
and manage liquidity with the objectives of maintaining an adequate level of
liquidity and to ensure the availability of sufficient cash flows to support
loan growth, fund deposit withdrawals, fund operations and satisfy other
financial commitments. See the "Consolidated Statements of Cash Flows" contained
in Item 1 - Financial Statements, included herein.
The
primary sources of funds are customer deposits, loan repayments, loan sales,
maturing investment securities, and FHLB advances. These sources of funds are
used to make loans, acquire investment securities and other assets, and fund
continuing operations. While maturities and the scheduled amortization of loans
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by the level of interest rates, economic conditions and
competition. We believe our current liquidity position and anticipated operating
results are sufficient to fund known, existing commitments and activity
levels.
Liquidity
is essential to our business and 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 with financial
institutions, primarily the Federal Reserve Bank of San Francisco or the FHLB of
Seattle. On a longer-term basis, we maintain a strategy of investing in
securities and loans.
An
inability to raise funds through deposits, borrowings, the sale of loans and
other sources could have a substantial negative effect on liquidity. Our access
to funding sources in amounts adequate to finance the Company’s activities on
acceptable terms could be impaired by factors that affect the Company and the
Bank, specifically, or within the financial services industry or the economy in
general. Factors that could detrimentally impact our access to liquidity sources
include adverse regulatory action, a disruption in the financial markets or
negative views and expectations about the prospects for the financial services
industry in light of the turmoil faced by banking organizations and the
continued deterioration in credit markets.
At March
31, 2010, certificates of deposit were $236.9 million, or 43.0% of total
deposits, including $149.8 million that are scheduled to mature by March 31,
2011. Recent disruptions in the credit markets have resulted in a
highly price-competitive market for certificates of deposit. Some rates offered
by competitors currently exceed alternative costs of borrowings and are high
compared to historical spreads to U.S. Treasury note rates. Nonetheless, we
believe the Company has adequate resources to fund all loan commitments through
FHLB advances, loan repayments, and maturing investment securities.
At March
31, 2010, the Bank maintained a line of credit with the FHLB of Seattle equal to
40% of total assets to the extent the Bank provides qualifying collateral and
holds sufficient FHLB stock. At March 31, 2010, the Bank was in compliance with
the collateral requirements and $129.4 million of the line of credit was
available. The Bank is highly dependent on the FHLB of Seattle to provide the
primary source of wholesale funding for immediate liquidity and borrowing needs.
The failure of the FHLB of Seattle or the FHLB system in general, may materially
impair the Company’s ability to meet our growth plans or to meet short and
long-term liquidity demands. However, the Company’s mortgage backed securities
are marketable and could be sold to obtain cash to meet liquidity demands should
access to FHLB funding be impaired. Additionally, the Bank could access funding
from the Discount Window at the Federal Reserve Bank of San Francisco or through
the origination of out of market brokered deposits.
As noted
earlier, we have increased our liquidity by holding significant levels of excess
cash. We have been reluctant to invest much of this cash in securities due to
unattractive returns in the fixed-income market and anticipated increases in
interest rates in the near term. We also anticipate bidding on failing
institutions, which may have illiquid balance sheets. Additionally, the FDIC
recently changed the bidding procedures for failing institutions. These changes
may require us to outlay cash if net assets acquired exceed liabilities assumed.
Previously, a cash payment by an acquiring institution was not
required.
Off-Balance Sheet
Arrangements. The Bank is party to financial instruments with off-balance
sheet risk in the normal course of business in order to meet the financing needs
of the Bank’s customers. These financial instruments generally include
commitments to originate mortgage, commercial and consumer loans, and involve to
varying degrees, elements of credit and interest rate risk in excess of amounts
recognized in the consolidated balance sheets. The Bank’s maximum exposure to
credit loss in the event of nonperformance by the borrower is represented by the
contractual amount of those instruments. Because some commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The same credit policies are used in making
commitments as are used for on-balance sheet instruments. Collateral is required
in instances where deemed necessary.
Undisbursed
balances of loans closed include funds not disbursed but committed for
construction projects. Unused lines of credit include funds not disbursed, but
committed for, home equity, commercial and consumer lines of
credit.
Commercial
letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Those guarantees are primarily used
to support public and private borrowing arrangements. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
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 and has not had to
repurchase any loans sold to investors or a U.S. Government-sponsored
enterprise. Accordingly, no contingent liability is recorded in the financial
statements. However, past performance may not be representative of future
performance on sold loans and the Bank may be required to perform under such
repurchase obligations, which may result in losses in the future.
The
following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of March 31,
2010:
|
|
Contract
or
Notional
Amount
|
|
|
|
(in
thousands)
|
|
Commitments
to originate loans:
|
|
|
|
Fixed
rate
|
|
$ |
2,373 |
|
Adjustable
rate
|
|
|
3,415 |
|
Undisbursed
balance of loans closed
|
|
|
8,379 |
|
Unused
lines of credit
|
|
|
40,615 |
|
Commercial
letters of credit
|
|
|
504 |
|
Total
|
|
$ |
55,286 |
|
Capital. Consistent with the Bank’s
goal to operate a sound and profitable financial organization, efforts are
ongoing to actively seek to maintain a “well capitalized” institution in
accordance with regulatory standards. The Bank’s total regulatory capital was
$149.0 million at March 31, 2010, or 18.8%, of total assets on that date. As of
March 31, 2010, the Bank exceeded all regulatory capital requirements. The
Bank’s regulatory capital ratios at March 31, 2010, were as follows: Tier 1
capital 18.8%; Tier 1 (core) risk-based capital 32.5%; and total risk-based
capital 33.8%. The applicable regulatory capital requirements to be considered
well capitalized are 5%, 6% and 10%, respectively.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
The
Company’s Board of Directors has established an asset and liability management
policy to guide management in maximizing net interest spread by managing the
differences in terms between interest-earning assets and interest-bearing
liabilities while maintaining acceptable levels of liquidity, capital adequacy,
interest rate sensitivity, credit risk and profitability. The Asset/Liability
Management Committee, consisting of certain members of senior management,
communicate, coordinate and manage asset/liability positions consistent with the
business plan and Board-approved policies, as well as to price savings and
lending products, and to develop new products.
One of
the Bank’s primary financial objectives is to generate ongoing profitability.
The Bank’s profitability depends primarily on its net interest income, which is
the difference between the income it receives on its loan and investment
portfolio and its cost of funds, which consists of interest paid on deposits and
borrowings. The rates the Company earns on assets and pays on liabilities
generally are established contractually for a period of time. Market interest
rates change over time. The Bank’s loans generally have longer maturities than
the deposits. Accordingly, the Company’s results of operations, like those of
other financial institutions, are affected by changes in interest rates and the
interest rate sensitivity of assets and liabilities. The Bank measures its
interest rate sensitivity on a quarterly basis using an internal
model.
In recent
years, the Company has primarily utilized the following strategies in its
efforts to manage interest rate risk:
·
|
Reduced
our reliance on long-term, fixed-rate one-to-four family residential loans
by originating nearly all of these loans for sale in the secondary
market;
|
·
|
Increased
originations of adjustable-rate commercial and commercial real estate
loans;
|
·
|
Reduced
our reliance on higher-rate certificates of deposit and FHLB borrowings by
focusing on core deposit growth, including checking and savings accounts
that are less-sensitive to interest rate changes and have longer average
lives than certificates of deposit.
|
Management
employs various strategies to manage the Company’s interest rate sensitivity
including: (1) selling long-term fixed-rate mortgage loans in the secondary
market; (2) borrowing intermediate to long-term funds at fixed rates from the
FHLB; (3) originating commercial and consumer loans at shorter maturities or at
variable rates; (4) originating adjustable rate mortgage loans; (5)
appropriately modifying loan and deposit pricing to capitalize on the then
current market opportunities; and (6) increasing lower cost core deposits, such
as savings and checking accounts. At March 31, 2010, the Company had no
off-balance sheet derivative financial instruments, and the Bank did not
maintain a trading account for any class of financial instruments or engage in
hedging activities or purchase
high risk
derivative instruments. Furthermore, the Company is not subject to foreign
currency exchange rate risk or commodity price risk.
There has
not been any material change in the market risk disclosures contained in the
Company’s 2009 Form 10-K.
Item 4. Controls
and Procedures
(a)
Evaluation of Disclosure Controls and Procedures.
An
evaluation of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was
carried out under the supervision and with the participation of the Company’s
Chief Executive Officer, Chief Financial Officer, and other members of the
Company’s management team as of the end of the period covered by this quarterly
report. The Company’s Chief Executive Officer and Chief Financial
Officer concluded that as of March 31, 2010, the Company’s disclosure controls
and procedures were effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the Act is (i)
accumulated and communicated to the Company’s management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms.
(b)
Changes in Internal Controls.
There
have been no changes in the Company’s internal control over financial reporting
(as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter
ended March 31, 2010, that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting. A number of internal control procedures were, however,
modified during the quarter in conjunction with the Bank's internal control
testing. The Company also continued to implement suggestions from its
internal auditor and independent auditors to strengthen existing
controls.
The
Company intends to continually review and evaluate the design and effectiveness
of its disclosure controls and procedures and to improve its controls and
procedures over time and to correct any deficiencies that it may discover in the
future. The goal is to ensure that senior management has timely access to all
material financial and non-financial information concerning the Company's
business. While the Company believes the present design of its
disclosure controls and procedures is effective to achieve its goal, future
events affecting its business may cause the Company to modify its disclosure
controls and procedures. The Company does not expect that its
disclosure controls and procedures and internal control over financial reporting
will prevent every error or instance of fraud. A control procedure,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control procedure are
met. Because of the inherent limitations in all control procedures,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns in controls or
procedures can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any control procedure is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions; over time, controls become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control procedure, misstatements due to error or
fraud may occur and not be detected.
PART II - OTHER
INFORMATION
Item
1. Legal Proceedings
From time
to time, the Company is engaged in legal proceedings in the ordinary course of
business, none of which are currently considered to have a material impact on
the Company’s financial position or results of operations.
Item
1A. Risk Factors
Significant
legal actions could subject us to substantial uninsured
liabilities.
We are
from time to time subject to claims related to our operations. These claims and
legal actions, including supervisory actions by our regulators, could involve
large monetary claims and significant defense costs. Substantial legal liability
or significant regulatory action against us could have material adverse
financial effects or cause significant reputational harm to us, which in turn
could seriously harm our business prospects. We may be exposed to substantial
uninsured liabilities, which could adversely affect our results of operations
and financial condition.
If
our regulators deem it appropriate, they can take regulatory actions that could
increase the cost of our services or reduce fee income and impact our ability to
compete for new business or bid on failing institutions.
The
Company and its subsidiaries are subject to the supervision and regulation of
regulators, including the Office of Thrift Supervision, the FDIC and the SEC. As
such the Company is subject to a wide variety of laws and regulations. As part
of their supervisory process, which includes periodic examinations and
continuous monitoring, the regulators have the authority to impose restrictions
or conditions on our activities and the manner in which we manage the
organization. These actions could impact the organization in a variety of ways,
including subjecting us to monetary fines, restricting our ability to pay
dividends, precluding mergers or acquisitions including FDIC-assisted
transactions, limiting our ability to offer certain products or services, or
imposing additional capital requirements. Recent changes in overdraft fee
regulations could have a significant impact on our total revenue due to declines
in overdraft fee income. Additionally, the U.S. Congress is currently
considering sweeping regulatory changes in the financial services industry,
including the elimination of our current primary regulator. There can be no
assurances as to how this new regulatory structure will affect our operations if
enacted.
A
legislative proposal has been introduced that would eliminate the Office of
Thrift Supervision, Home Federal Bank and Home Federal Bancorp’s primary federal
regulator, which would require Home Federal Bancorp to become a bank holding
company.
Legislation
has been introduced in the United States Senate and House of Representatives
that would implement sweeping changes to the current bank regulatory
structure. The House Bill (H.R. 4173) would eliminate our
current primary federal regulator, the Office of Thrift Supervision, by merging
it into the Comptroller of the Currency (the primary federal regulator for
national banks). The proposed legislation would authorize the
Comptroller of the Currency to charter mutual and stock savings banks and mutual
holding companies, which would be under the supervision of the Division of
Thrift Supervision of the Comptroller of the Currency. The proposed
legislation would also establish a Financial Services Oversight Council and
grant the Board of Governors of the Federal Reserve System exclusive authority
to regulate all bank and thrift holding companies. As a result, Home
Federal Bancorp would become a holding company subject to supervision by the
Federal Reserve Board as opposed to the Office of Thrift Supervision, and would
become subject to the Federal Reserve’s regulations, including holding company
capital requirements, that Home Federal Bancorp is not currently subject to as a
savings and loan holding company. In addition, compliance with new
regulations and being supervised by one or more new regulatory agencies could
increase our expenses.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Item 3. Defaults
Upon Senior Securities
Not
applicable.
Item 4. Removed
and Reserved
Not
applicable.
Item 5. Other
Information
Not
applicable.
Item
6. Exhibits
|
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)
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act *
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act *
|
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act
*
|
______
(1)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated 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
|
* Filed herewith
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Home Federal
Bancorp, Inc. |
|
|
|
|
|
|
Date: May 10,
2010 |
/s/ Len E. Williams |
|
Len E.
Williams |
|
President
and |
|
Chief Executive
Officer |
|
(Principal Executive
Officer) |
|
|
|
|
|
|
Date: May 10,
2010 |
/s/ Eric S. Nadeau |
|
Eric S.
Nadeau |
|
Executive Vice
President and |
|
Chief Financial
Officer |
|
(Principal Financial
and Accounting Officer) |
EXHIBIT
INDEX
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
|