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 June 30, 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 August 6,
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
|
16 |
|
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
|
36 |
|
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES
|
36 |
|
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)
|
June
30,
2010
|
|
|
September
30,
2009
|
|
ASSETS
|
|
|
|
|
|
Cash
and due from depository institutions
|
$161,735
|
|
|
$ 46,783
|
|
Federal
funds sold
|
8,500
|
|
|
3,170
|
|
Cash
and cash equivalents
|
170,235
|
|
|
49,953
|
|
Investment
securities available for sale, at fair value
|
163,650
|
|
|
169,320
|
|
Loans
held for sale
|
2,494
|
|
|
862
|
|
Loans
receivable, net of allowance for loan losses
of $17,872
|
|
|
|
|
|
and
$28,735
|
456,879
|
|
|
510,629
|
|
Accrued
interest receivable
|
2,330
|
|
|
2,781
|
|
Property
and equipment, net
|
27,122
|
|
|
20,462
|
|
Bank
owned life insurance
|
12,330
|
|
|
12,014
|
|
Federal
Home Loan Bank of Seattle (“FHLB”) stock, at cost
|
10,326
|
|
|
10,326
|
|
Real
estate and other property owned
|
12,308
|
|
|
18,391
|
|
FDIC
indemnification receivable, net
|
7,607
|
|
|
30,038
|
|
Other
assets
|
3,941
|
|
|
3,123
|
|
TOTAL
ASSETS
|
$869,222
|
|
|
$827,899
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Deposit
accounts:
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
$ 70,718
|
|
|
$ 68,155
|
|
Interest-bearing
demand deposits
|
225,128
|
|
|
176,049
|
|
Savings
deposits
|
51,304
|
|
|
41,757
|
|
Certificates
of deposit
|
227,729
|
|
|
228,897
|
|
Total
deposit accounts
|
574,879
|
|
|
514,858
|
|
Advances
by borrowers for taxes and insurance
|
518
|
|
|
1,132
|
|
Interest
payable
|
560
|
|
|
553
|
|
FHLB
advances and other borrowings
|
73,536
|
|
|
84,737
|
|
Deferred
compensation
|
5,395
|
|
|
5,260
|
|
Deferred
tax liability, net
|
2,714
|
|
|
5,571
|
|
Other
liabilities
|
5,788
|
|
|
6,123
|
|
Total
liabilities
|
663,390
|
|
|
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 June 30, 2010
|
|
|
|
|
|
17,445,311
issued, 16,698,168 outstanding September 30, 2009
|
167
|
|
|
167
|
|
Additional
paid-in capital
|
152,272
|
|
|
150,782
|
|
Retained
earnings
|
58,019
|
|
|
64,483
|
|
Unearned
shares issued to employee stock ownership plan
|
(8,917
|
) |
|
(9,699
|
) |
Accumulated
other comprehensive income
|
4,291
|
|
|
3,932
|
|
Total
stockholders’ equity
|
205,832
|
|
|
209,665
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$869,222
|
|
|
$827,899
|
|
|
|
|
|
|
|
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share data) (Unaudited)
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Interest
and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
$6,918
|
|
|
$ 6,418
|
|
|
$21,054
|
|
|
$20,337
|
|
Investment
securities
|
1,479
|
|
|
1,983
|
|
|
4,831
|
|
|
6,311
|
|
Other
interest and dividends
|
104
|
|
|
9
|
|
|
240
|
|
|
20
|
|
Total
interest and dividend income
|
8,501
|
|
|
8,410
|
|
|
26,125
|
|
|
26,668
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
1,781
|
|
|
1,629
|
|
|
5,129
|
|
|
5,389
|
|
FHLB
advances and other borrowings
|
792
|
|
|
1,068
|
|
|
2,385
|
|
|
3,861
|
|
Total
interest expense
|
2,573
|
|
|
2,697
|
|
|
7,514
|
|
|
9,250
|
|
Net
interest income
|
5,928
|
|
|
5,713
|
|
|
18,611
|
|
|
17,418
|
|
Provision
for loan losses
|
3,300
|
|
|
3,450
|
|
|
6,375
|
|
|
8,085
|
|
Net
interest income after provision for loan losses
|
2,628
|
|
|
2,263
|
|
|
12,236
|
|
|
9,333
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and fees
|
2,325
|
|
|
2,008
|
|
|
6,735
|
|
|
6,009
|
|
Gain
on sale of loans
|
125
|
|
|
416
|
|
|
433
|
|
|
1,013
|
|
Increase
in cash surrender value of bank owned life insurance
|
105
|
|
|
107
|
|
|
316
|
|
|
317
|
|
Other,
net
|
341
|
|
|
80
|
|
|
756
|
|
|
78
|
|
Total
noninterest income
|
2,896
|
|
|
2,611
|
|
|
8,240
|
|
|
7,417
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
4,660
|
|
|
3,594
|
|
|
13,966
|
|
|
10,948
|
|
Occupancy
and equipment
|
979
|
|
|
804
|
|
|
3,023
|
|
|
2,303
|
|
Data
processing
|
929
|
|
|
654
|
|
|
2,526
|
|
|
1,773
|
|
Advertising
|
233
|
|
|
211
|
|
|
775
|
|
|
656
|
|
Postage
and supplies
|
173
|
|
|
126
|
|
|
516
|
|
|
409
|
|
Professional
services
|
391
|
|
|
236
|
|
|
1,375
|
|
|
870
|
|
Insurance
and taxes
|
423
|
|
|
783
|
|
|
1,461
|
|
|
1,244
|
|
Provision
for losses on real estate and other property owned
|
418
|
|
|
367
|
|
|
2,509
|
|
|
528
|
|
Other
|
462
|
|
|
239
|
|
|
1,160
|
|
|
888
|
|
Total
noninterest expense
|
8,668
|
|
|
7,014
|
|
|
27,311
|
|
|
19,619
|
|
Loss
before income taxes
|
(3,144
|
) |
|
(2,014
|
) |
|
(6,835
|
) |
|
(2,869
|
) |
Income
tax benefit
|
(1,203
|
) |
|
(894
|
) |
|
(2,654
|
) |
|
(1,298
|
) |
Loss
before extraordinary item
|
(1,941
|
) |
|
(1,246
|
) |
|
(4,181
|
) |
|
(1,571
|
) |
Extraordinary
gain on acquisition, less income taxes of $195
|
-
|
|
|
-
|
|
|
305
|
|
|
-
|
|
Net
loss
|
$(1,941
|
) |
|
$ (1,246
|
) |
|
$ (3,876
|
) |
|
$ (1,571
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share before extraordinary item:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$ (0.12
|
) |
|
$ (0.08
|
) |
|
$ (0.27
|
) |
|
$ (0.10
|
) |
Diluted
|
(0.12
|
) |
|
(0.08
|
) |
|
(0.27
|
) |
|
(0.10
|
) |
Loss
per common share after extraordinary item:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$ (0.12
|
) |
|
$ (0.08
|
) |
|
$ (0.25
|
) |
|
$ (0.10
|
) |
Diluted
|
(0.12
|
) |
|
(0.08
|
) |
|
(0.25
|
) |
|
(0.10
|
) |
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
15,543,199
|
|
|
15,352,714
|
|
|
15,491,203
|
|
|
15,742,102
|
|
Diluted
|
15,543,199
|
|
|
15,352,714
|
|
|
15,491,203
|
|
|
15,742,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share:
|
$ 0.055
|
|
|
$ 0.055
|
|
|
$ 0.165
|
|
|
$ 0.165
|
|
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 Capital
|
Retained
Earnings
|
Unearned
Shares
Issued
to
Employee
Stock
Ownership
Plan
(“ESOP”)
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
|
Shares
|
|
Amount
|
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
|
) |
|
(70)
|
|
|
|
(70)
|
ESOP
shares committed to be released
|
|
|
|
351
|
|
782
|
|
1,133
|
Exercise
of stock options
|
15,000
|
|
|
161
|
|
|
|
161
|
Share-based
compensation
|
|
|
|
1,032
|
|
|
|
1,032
|
Tax
adjustment from equity compensation plans
|
|
|
|
16
|
|
|
|
16
|
Dividends
paid
($0.165
per share)
|
|
|
|
|
(2,588)
|
|
|
(2,588)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
Loss
before extraordinary item
|
|
|
|
|
(4,181)
|
|
|
(4,181)
|
Extraordinary
gain, net of tax
|
|
|
|
|
305
|
|
|
305
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Change
in unrealized holding gain on securities available for sale, net
of taxes of $225
|
|
|
|
|
|
|
359
|
359
|
Comprehensive
loss
|
|
|
|
|
|
|
|
(3,517)
|
Balance
at June 30, 2010
|
16,687,760
|
|
$167
|
$152,272
|
$58,019
|
$ (8,917)
|
$ 4,291
|
$205,832
|
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands) (Unaudited)
|
Nine
Months Ended
June
30,
|
|
|
2010
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
Net
loss
|
$ (3,876
|
)
|
$ (1,571
|
) |
Adjustments
to reconcile net loss to cash provided by operating
activities:
|
|
|
|
|
Depreciation
and amortization
|
1,541
|
|
1,294
|
|
Net
amortization of premiums and discounts on investments
|
336
|
|
9
|
|
(Gain)
Loss on sale of fixed assets and repossessed assets
|
(161
|
)
|
82
|
|
Gain
on sale of securities available for sale
|
-
|
|
(51
|
) |
ESOP
shares committed to be released
|
1,133
|
|
691
|
|
Share-based
compensation
|
962
|
|
730
|
|
Provision
for loan losses
|
6,375
|
|
8,085
|
|
Provision
for losses on real estate and other property owned
|
2,509
|
|
552
|
|
Accrued
deferred compensation expense, net
|
135
|
|
28
|
|
Net
deferred loan fees
|
(58
|
)
|
(77
|
) |
Deferred
income tax benefit
|
(3,082
|
)
|
(2,598
|
) |
Net
gain on sale of loans
|
(433
|
)
|
(1,013
|
) |
Proceeds
from sale of loans held for sale
|
19,239
|
|
56,151
|
|
Originations
of loans held for sale
|
(20,439
|
)
|
(57,371
|
) |
Net
decrease in value of mortgage servicing rights
|
-
|
|
105
|
|
Increase
in cash surrender value of bank owned life insurance
|
(316
|
)
|
(316
|
) |
Change
in assets and liabilities:
|
|
|
|
|
Interest
receivable
|
451
|
|
472
|
|
Other
assets
|
2,135
|
|
368
|
|
Interest
payable
|
7
|
|
(182
|
) |
Other
liabilities
|
(319
|
)
|
154
|
|
Net
cash provided by operating activities
|
6,139
|
|
5,542
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
Proceeds
from repayments of mortgage-backed securities available for
sale
|
30,298
|
|
26,931
|
|
Proceeds
from sales of mortgage-backed securities available for
sale
|
2,637
|
|
1,203
|
|
Purchases
of mortgage-backed securities available for sale
|
(16,388
|
)
|
(2,734
|
) |
Purchase
of securities available for sale
|
(19,128
|
)
|
-
|
|
Proceeds
from maturities and calls of securities available for sale
|
8,500
|
|
-
|
|
Maturity
of certificate of deposit
|
-
|
|
5,000
|
|
Sale
of mortgage servicing rights
|
-
|
|
1,602
|
|
Reimbursement
of loan losses under loss share agreement
|
19,455
|
|
-
|
|
Purchases
of property and equipment
|
(8,229
|
)
|
(3,088
|
) |
Net
decrease in loans
|
39,990
|
|
23,910
|
|
Proceeds
from sale of fixed assets and real estate and other property
owned
|
11,229
|
|
1,090
|
|
Net
cash provided by investing activities
|
68,364
|
|
53,914
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
Net
increase in deposits
|
60,021
|
|
3,071
|
|
Net
decrease in advances by borrowers for taxes and insurance
|
(614
|
)
|
(797
|
) |
Proceeds
from FHLB advances
|
-
|
|
18,000
|
|
Repayment
of FHLB advances
|
(15,390
|
)
|
(67,582
|
) |
Net
proceeds from other borrowings
|
4,189
|
|
1,501
|
|
Proceeds
from exercise of stock options
|
161
|
|
353
|
|
Repurchases
of common stock
|
-
|
|
(7,895
|
) |
Dividends
paid
|
(2,588
|
)
|
(2,599
|
) |
Net
cash provided (used) by financing activities
|
45,779
|
|
(55,948
|
) |
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
120,282
|
|
(3,508
|
) |
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
49,953
|
|
23,270
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$170,235
|
|
$ 26,778
|
|
|
|
|
|
|
(Continued)
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(In
thousands) (Unaudited)
|
Nine
Months Ended
June
30,
|
|
2010
|
|
2009
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
Cash
paid during the period for:
|
|
|
|
Interest
|
$7,507
|
|
$9,433
|
Taxes
|
430
|
|
2,545
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
Acquisition
of real estate and other assets in settlement of loans
|
$11,045
|
|
$9,682
|
Fair
value adjustment to securities available for sale, net of
taxes
|
359
|
|
3,804
|
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
nine month period ended June 30, 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
Company’s 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, real estate values 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 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 June 30, 2010, a majority of these loans were valued
based on the estimated fair value of the underlying collateral. Amounts related
to the ASC 310-30 loans are estimates and are highly subjective.
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.
For
additional information regarding the acquisition described above, see Note 3 to
the Consolidated Financial Statements. Subsequent to June 30, 2010,
the Bank entered into another FDIC-assisted acquisition with loss
share. See Note 10 to the Consolidated Financial
Statements.
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 of Community First Bank
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 (“EPS”) 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 loss per share for
the periods indicated:
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands, except share and per share data)
|
|
Net
loss
|
|
$ |
(1,941 |
) |
|
$ |
(1,246 |
) |
|
$ |
(3,876 |
) |
|
$ |
(1,571 |
) |
Allocated
to participating securities
|
|
|
26 |
|
|
|
16 |
|
|
|
60 |
|
|
|
22 |
|
Net
loss allocated to common shareholders
|
|
|
(1,915 |
) |
|
|
(1,230 |
) |
|
|
(3,816 |
) |
|
|
(1,549 |
) |
Extraordinary
gain, net of taxes
|
|
|
- |
|
|
|
- |
|
|
|
305 |
|
|
|
- |
|
Net
loss allocated to common stock before
extraordinary gain
|
|
$ |
(1,915 |
) |
|
$ |
(1,230 |
) |
|
$ |
(4,121 |
) |
|
$ |
(1,549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
outstanding,
including shares considered
participating securities
|
|
|
15,754,145 |
|
|
|
15,556,198 |
|
|
|
15,734,164 |
|
|
|
15,981,920 |
|
Less: Average
participating securities
|
|
|
(210,946 |
) |
|
|
(203,484 |
) |
|
|
(242,961 |
) |
|
|
(239,818 |
) |
Weighted
average shares
|
|
|
15,543,199 |
|
|
|
15,352,714 |
|
|
|
15,491,203 |
|
|
|
15,742,102 |
|
Net
effect of dilutive restricted stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Weighted
average shares and common stock
equivalents
|
|
|
15,543,199 |
|
|
|
15,352,714 |
|
|
|
15,491,203 |
|
|
|
15,742,102 |
|
Basic
loss per common share before
extraordinary item
|
|
$ |
(0.12 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.10 |
) |
Basic
loss per common share after
extraordinary item
|
|
|
(0.12 |
) |
|
|
(0.08 |
) |
|
|
(0.25 |
) |
|
|
(0.10 |
) |
Diluted
loss per common share before
extraordinary item
|
|
|
(0.12 |
) |
|
|
(0.08 |
) |
|
|
(0.27 |
) |
|
|
(0.10 |
) |
Diluted
loss per common share after
extraordinary
item
|
|
|
(0.12 |
) |
|
|
(0.08 |
) |
|
|
(0.25 |
) |
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
excluded from the calculation due to
their
anti-dilutive effect on EPS
|
|
|
873,324 |
|
|
|
946,364 |
|
|
|
873,324 |
|
|
|
946,364 |
|
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)
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government-
sponsored enterprises (“GSE”)
|
|
$ |
13,142 |
|
|
$ |
101 |
|
|
$ |
(6 |
) |
|
$ |
13,237 |
|
Obligations
of states and political
subdivisions
|
|
|
1,516 |
|
|
|
22 |
|
|
|
(7 |
) |
|
|
1,531 |
|
Mortgage-backed
securities, GSE-issued
|
|
|
141,368 |
|
|
|
7,226 |
|
|
|
(169 |
) |
|
|
148,425 |
|
Mortgage-backed
securities, private label
|
|
|
487 |
|
|
|
- |
|
|
|
(30 |
) |
|
|
457 |
|
Total
|
|
$ |
156,513 |
|
|
$ |
7,349 |
|
|
$ |
(212 |
) |
|
$ |
163,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. GSE
|
|
$ |
1,011 |
|
|
$ |
(6 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,011 |
|
|
$ |
(6 |
) |
Obligations
of states and
political subdivisions
|
|
$ |
762 |
|
|
$ |
(7 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
762 |
|
|
$ |
(7 |
) |
Mortgage-backed
securities,
GSE-issued
|
|
|
7,246 |
|
|
|
(169 |
) |
|
|
- |
|
|
|
- |
|
|
|
7,246 |
|
|
|
(169 |
) |
Mortgage-backed
securities,
private label
|
|
|
456 |
|
|
|
(30 |
) |
|
|
- |
|
|
|
- |
|
|
|
456 |
|
|
|
(30 |
) |
|
|
$ |
9,475 |
|
|
$ |
(212 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
9,475 |
|
|
$ |
(212 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
June 30, 2010, and September 30, 2009, the Bank pledged investment securities
for the following obligations:
|
|
June
30, 2010
|
|
|
September
30, 2009
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
FHLB
borrowings
|
|
$ |
54,398 |
|
|
$ |
57,888 |
|
|
$ |
66,104 |
|
|
$ |
68,900 |
|
Treasury,
tax and loan funds at the Federal Reserve Bank
|
|
|
4,073 |
|
|
|
4,340 |
|
|
|
4,523 |
|
|
|
4,767 |
|
Repurchase
agreements
|
|
|
7,394 |
|
|
|
7,890 |
|
|
|
3,338 |
|
|
|
3,459 |
|
Deposits
of municipalities and pubic units
|
|
|
18,280 |
|
|
|
19,358 |
|
|
|
5,074 |
|
|
|
5,354 |
|
Total
|
|
$ |
84,145 |
|
|
$ |
89,476 |
|
|
$ |
79,039 |
|
|
$ |
82,480 |
|
Note
6 - Loans Receivable
Loans
receivable are summarized by collateral type as follows:
|
|
June
30, 2010
|
|
|
September
30, 2009
|
|
|
|
Balance
|
|
|
Percent
of
Total
|
|
|
Balance
|
|
|
Percent
of
Total
|
|
|
|
(dollars
in thousands)
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
152,636 |
|
|
|
32.10 |
% |
|
$ |
178,311 |
|
|
|
33.01 |
% |
Multi-family
residential
|
|
|
12,789 |
|
|
|
2.69 |
|
|
|
16,286 |
|
|
|
3.01 |
|
Commercial
|
|
|
204,674 |
|
|
|
43.03 |
|
|
|
213,471 |
|
|
|
39.52 |
|
Total
real estate
|
|
|
370,099 |
|
|
|
77.82 |
|
|
|
408,068 |
|
|
|
75.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
|
|
7,647 |
|
|
|
1.61 |
|
|
|
10,871 |
|
|
|
2.01 |
|
Multi-family
residential
|
|
|
4,351 |
|
|
|
0.91 |
|
|
|
10,417 |
|
|
|
1.93 |
|
Commercial
and land development
|
|
|
22,996 |
|
|
|
4.84 |
|
|
|
27,144 |
|
|
|
5.02 |
|
Total
real estate construction
|
|
|
34,994 |
|
|
|
7.36 |
|
|
|
48,432 |
|
|
|
8.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
48,502 |
|
|
|
10.20 |
|
|
|
53,368 |
|
|
|
9.88 |
|
Automobile
|
|
|
1,774 |
|
|
|
0.37 |
|
|
|
2,364 |
|
|
|
0.44 |
|
Other
consumer
|
|
|
2,607 |
|
|
|
0.55 |
|
|
|
3,734 |
|
|
|
0.69 |
|
Total
consumer
|
|
|
52,883 |
|
|
|
11.12 |
|
|
|
59,466 |
|
|
|
11.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
17,575 |
|
|
|
3.70 |
|
|
|
24,256 |
|
|
|
4.49 |
|
Gross loans
|
|
|
475,551 |
|
|
|
100.00 |
% |
|
|
540,222 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan fees
|
|
|
(800 |
) |
|
|
|
|
|
|
(858 |
) |
|
|
|
|
Allowance
for loan losses
|
|
|
(17,872 |
) |
|
|
|
|
|
|
(28,735 |
) |
|
|
|
|
Loans receivable,
net
|
|
$ |
456,879 |
|
|
|
|
|
|
$ |
510,629 |
|
|
|
|
|
Note
7 – Allowance for Loan Losses
Activity
in the allowance for loan losses for the three and nine month periods ended June
30, 2010 and 2009, was as follows:
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
27,779 |
|
|
$ |
7,333 |
|
|
$ |
28,735 |
|
|
$ |
4,579 |
|
Provision
for loan losses
|
|
|
3,300 |
|
|
|
3,450 |
|
|
|
6,375 |
|
|
|
8,085 |
|
Losses
on loans charged-off
|
|
|
(4,127 |
) |
|
|
(2,616 |
) |
|
|
(8,312 |
) |
|
|
(4,524 |
) |
Recoveries
on loans charged-off
|
|
|
130 |
|
|
|
99 |
|
|
|
284 |
|
|
|
126 |
|
Adjustment
to original purchase accounting
|
|
|
(9,210 |
) |
|
|
- |
|
|
|
(9,210 |
) |
|
|
- |
|
Ending
balance
|
|
$ |
17,872 |
|
|
$ |
8,266 |
|
|
$ |
17,872 |
|
|
$ |
8,266 |
|
Statement of Financial Accounting Standards No. 141
permits an allocation period for the identification and valuation of assets and
liabilities acquired in a business combination. The identification and
reclassification of loans subject to ASC 310-30 was also included in the
allocation period review. The following table summarizes as of September 30,
2009, loans originally identified under the scope of ASC 310-30 and loans subsequently
identified under the scope of 310-30 during the allocation period. Balances have
been reclassified to match current loan
classifications:
As of September 30,
2009 |
Loans originally
reported under ASC
|
|
|
Additional
loans identified under ASC
|
|
(in
thousands)
|
|
Balance
|
|
Discount
|
|
Additional
Adjustments
|
|
Estimated
Fair
Value
|
|
|
Balance
|
|
Discount
|
|
Estimated
Fair
Value
|
Acquisition,
development and
construction loans
|
$11,446
|
|
$(3,980)
|
|
$(2,801)
|
|
$ 4,665
|
|
|
$ 4,759
|
|
$(1,351)
|
|
$ 3,408
|
Commercial
real estate loans
|
16,481
|
|
(5,507)
|
|
(483)
|
|
10,491
|
|
|
9,491
|
|
(1,535)
|
|
7,956
|
One-to-four
family loans
|
8,017
|
|
(2,997)
|
|
(100)
|
|
4,920
|
|
|
225
|
|
(191)
|
|
34
|
Other
loans
|
4,529
|
|
(1,766)
|
|
(1,280)
|
|
1,483
|
|
|
734
|
|
(640)
|
|
94
|
Ending
balance
|
$40,473
|
|
$(14,250)
|
|
$(4,664)
|
|
$21,559
|
|
|
$15,209
|
|
$(3,717)
|
|
$11,492
|
The
following table summarizes impaired loans at June 30, 2010, and September 30,
2009:
|
|
June
30,
2010
|
|
|
September
30,
2009
|
|
|
|
(in
thousands)
|
|
Impaired
loans with related specific allowance
|
|
$ |
16,300 |
|
|
$ |
7,131 |
|
Impaired
loans with no related allowance
|
|
|
9,943 |
|
|
|
6,657 |
|
Total
impaired loans
|
|
$ |
26,243 |
|
|
$ |
13,788 |
|
|
|
|
|
|
|
|
|
|
Specific
allowance on impaired loans
|
|
$ |
5,710 |
|
|
$ |
1,516 |
|
Troubled
debt restructurings totaled $7.0 million and $11.9 million at June 30, 2010 and
September 30, 2009, respectively, and are included in the impaired loan
disclosures above.
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 June 30, 2010 and September 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
(in
thousands)
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government-sponsored enterprises (“GSE”)
|
|
$ |
13,237 |
|
|
|
- |
|
|
$ |
13,237 |
|
|
|
- |
|
Obligations
of states and political subdivisions
|
|
|
1,531 |
|
|
|
- |
|
|
|
1,531 |
|
|
|
- |
|
Mortgage-backed
securities, GSE issued
|
|
|
148,425 |
|
|
|
- |
|
|
|
148,425 |
|
|
|
- |
|
Mortgage-backed
securities, private label
|
|
|
457 |
|
|
|
|
|
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. GSE
|
|
$ |
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 June 30, 2010 and September 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
(in
thousands)
|
|
June
30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
10,590 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
10,590 |
|
Real
estate owned
|
|
|
9,595 |
|
|
|
- |
|
|
|
- |
|
|
|
9,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
5,699 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5,699 |
|
Real
estate owned
|
|
|
11,781 |
|
|
|
- |
|
|
|
- |
|
|
|
11,781 |
|
Impaired
loans, which are measured for impairment using the fair value of the collateral
at June 30, 2010, had a carrying amount of $16.3 million, net of specific
valuation allowances totaling $5.7 million. The
impact on earnings as a result of write-downs to REO was $418,000 and $367,000
for the three months ended June 30, 2010 and 2009 and $2.5 million and $528,000
for the nine months ended June 30, 2010 and 2009.
The
specific valuation allowance required a provision of $3.3 million and $1.6
million during the quarters ended June 30, 2010 and June 30, 2009, respectively,
and a provision of $5.7 million and $2.6 million for the nine month periods
ended June 30, 2010, and June 30, 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 incurred and are not included in the fair value
estimate.
The
estimated fair values of the Company’s financial instruments at June 30, 2010,
were as follows:
|
|
June
30, 2010
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair
Value
|
|
|
|
(in
thousands)
|
|
Financial
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
170,235 |
|
|
$ |
170,235 |
|
Investment
securities
|
|
|
163,650 |
|
|
|
163,650 |
|
Loans
held for sale
|
|
|
2,494 |
|
|
|
2,494 |
|
Loans
receivable, net
|
|
|
456,879 |
|
|
|
465,337 |
|
FDIC indemnification receivable, net
|
|
|
7,607 |
|
|
|
7,607 |
|
FHLB
stock
|
|
|
10,326 |
|
|
|
N/A |
|
Accrued
interest receivable
|
|
|
2,330 |
|
|
|
2,330 |
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
Demand
and savings deposits
|
|
$ |
347,150 |
|
|
$ |
347,150 |
|
Certificates
of deposit
|
|
|
227,729 |
|
|
|
233,463 |
|
FHLB
advances and other borrowings
|
|
|
73,536 |
|
|
|
76,895 |
|
Advances
by borrowers for taxes and insurance
|
|
|
518 |
|
|
|
518 |
|
Accrued
interest payable
|
|
|
560 |
|
|
|
560 |
|
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.
Advances by
borrowers for taxes and insurance: The carrying amount approximates fair
value.
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 June 30, 2010 and 2009, were
insignificant.
Note 9 –FDIC Indemnification
Receivable
Activity in the FDIC indemnification
receivable for the nine month period ended June 30, 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
|
|
|
(24,319 |
) |
|
|
- |
|
|
|
(19,455 |
) |
|
|
- |
|
|
|
(19,455 |
) |
Adjustment for net reduction in
estimated losses
|
|
|
- |
|
|
|
(3,477 |
) |
|
|
(3,303 |
) |
|
|
- |
|
|
|
(3,303 |
) |
Discount
accretion
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
327 |
|
|
|
327 |
|
Balance at June 30,
2010
|
|
$ |
9,681 |
|
|
$ |
928 |
|
|
$ |
8,627 |
|
|
$ |
(1,020 |
) |
|
$ |
7,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Note
10 – Subsequent Event
On July
30, 2010, the Company announced the Bank’s purchase and assumption of certain
assets and liabilities of LibertyBank in Eugene, Oregon, in a transaction
facilitated by the FDIC. Based on preliminary financial information, the
acquisition by the Bank includes approximately $388 million of assets, including
$94 million of cash and securities and $266 million of loans and leases.
Deposits assumed in the acquisition total approximately $675 million, which
includes all insured and uninsured deposits. Other real estate owned acquired in
the transaction totaled approximately $21 million. The transaction also includes
the purchase of other assets and liabilities. The Bank anticipates an additional
cash settlement of approximately $314 million due to the assumption of net
liabilities by Home Federal Bank. All balances above are subject to final
closing and pro forma adjustments to the balance sheet accounts of LibertyBank
as of July 30, 2010, and are subject to change.
The Bank
acquired the assets of LibertyBank at a discount of $29.9 million and the
deposit liabilities at a deposit premium of 1.0%. The purchased loans, excluding
consumer and deposit secured loans, and real estate owned are covered by a loss
share agreement between the FDIC and Home Federal Bank. Under the loss share
agreement, the FDIC has agreed to cover 80% of the losses on the disposition of
the loans and real estate owned. The Bank also acquired the operations of
Commercial Equipment Lease Corporation, a commercial leasing subsidiary of
LibertyBank. The leases of the subsidiary are included as covered assets under
the loss share agreement.
In
addition to deepening its presence in Central Oregon, Home Federal Bank will now
operate in Lane, Josephine, Jackson, and Multnomah counties in Oregon, including
the communities of Eugene, Grants Pass and Medford, Oregon. The Bank will also
have a branch and commercial loan production office in
Portland.
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 (the “OTS”) 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 the
recently enacted financial reform legislation and 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 acquire from our merger and
acquisition activities into our operations, our ability to retain
customers and employees and our ability to realize related revenue
synergies and cost savings within expected time frames and any goodwill
charges related thereto;
|
· |
the
possibility that the expected benefits from the FDIC-assisted acquisitions
will not be realized;
|
· |
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.
On July 30, 2010, the Bank entered into a purchase and assumption
with loss share with the FDIC to assume all of the deposits and acquire certain
assets of LibertyBank, headquartered in Eugene, Oregon (the “LibertyBank Acquisition”).
For additional information regarding the LibertyBank Acquisition, see Note 10 of
the Selected Notes to Consolidated Financial Statements.
In
addition to deepening its presence in Central Oregon, Home Federal Bank will now
operate in Lane, Josephine, Jackson, and Multnomah counties in Oregon, including
the communities of Eugene, Grants Pass and Medford, Oregon. The Bank will also
have a branch and commercial loan production office in Portland.
At June
30, 2010, Home Federal Bank had operations in two distinct market areas
including 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 addition to deepening its presence in Central
Oregon, as a result of the LibertyBank Acquisition completed on July 30, 2010,
the Bank will now operate in Lane, Josephine, Jackson, and Multnomah counties in
Oregon, including the communities of Eugene, Grants Pass and Medford, Oregon.
The Bank will also have a branch and commercial loan production office in
Portland. In total, we currently have
37
full-service banking offices
The
following summarizes key activities of the Company during the third fiscal
quarter ended June 30, 2010:
§
|
Deposits
increased $20.0 million for the linked quarter with core deposits
(checking, money market and savings accounts) increasing $29.1
million
|
§
|
Cash
and cash equivalents increased significantly from the linked
quarter
|
§
|
Gross
loans declined $32.1 million from the linked quarter as lending
opportunities meeting our criteria remain difficult to
obtain
|
§
|
Nonperforming
assets decreased $3.4 million to $60.6
million
|
§
|
Provision
for loan losses totaled $3.3 million while net charge-offs totaled $4.0
million
|
§
|
Valuation
adjustments on real estate owned totaled
$418,000
|
§
|
The
Bank received $4.1 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 third 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 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.
While we
were successful in reducing nonperforming assets during the quarter,
delinquencies in our commercial real estate loan portfolio rose, which may lead
to future increases in nonperforming loans and assets. We recorded a provision
for loan losses of $3.3 million during the third quarter of fiscal year 2010
primarily due to the increases in specific reserves in our commercial real
estate portfolio as property values continue to decline.
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.
Recent
Legislation Impacting the Financial Services Industry
On
July 21, 2010, sweeping financial regulatory reform legislation entitled
the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank
Act”) was signed into law. The Dodd-Frank Act implements far-reaching changes
across the financial regulatory landscape, including provisions that, among
other things, will:
§
|
On
July 21, 2011 (unless extended for up to six additional months), transfer
the responsibilities and authority of the OTS to supervise and examine
federal thrifts, including the Bank, to the Office of the Comptroller of
the Currency, and transfer the responsibilities and authority of the OTS
to supervise and examine savings and loan holding companies, including the
Company, to the Board of Governors of the Federal Reserve System (the
“Federal Reserve Board”).
|
§
|
Centralize
responsibility for consumer financial protection by creating a new agency
within the Federal Reserve Board, the Bureau of Consumer Financial
Protection, with broad rulemaking, supervision and enforcement authority
for a wide range of consumer protection laws that would apply to all banks
and thrifts. Smaller financial institutions, including the Bank, will be
subject to the supervision and enforcement of their primary federal
banking regulator with respect to the federal consumer financial
protection laws.
|
§
|
Require
new capital rules and apply the same leverage and risk-based capital
requirements that apply to insured depository institutions to savings and
loan holding companies beginning July 21,
2015.
|
§
|
Require
the federal banking regulators to seek to make their capital requirements
countercyclical, so that capital requirements increase in times of
economic expansion and decrease in times of economic
contraction.
|
§
|
Provide
for new disclosure and other requirements relating to executive
compensation and corporate
governance.
|
§
|
Make
permanent the $250,000 limit for federal deposit insurance and provide
unlimited federal deposit insurance until January 1, 2013, for
noninterest-bearing demand transaction accounts at all insured depository
institutions.
|
§
|
Effective
July 21, 2011, repeal the federal prohibitions on the payment of interest
on demand deposits, thereby permitting depository institutions to pay
interest on business transaction and other
accounts.
|
§
|
Require
all depository institution holding companies to serve as a source of
financial strength to their depository institution subsidiaries in the
event such subsidiaries suffer from financial
distress.
|
Many
aspects of the Dodd-Frank Act are subject to rulemaking and will take effect
over several years, making it difficult to anticipate the overall financial
impact on the Company and the financial services industry more generally. The
elimination of the prohibition on the payment of interest on demand deposits
could materially increase our interest expense, depending our competitors’
responses.
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 June 30, 2010, and September 30, 2009
For the
nine months ended June 30, 2010, total assets increased $41.3
million. The changes in total assets were primarily concentrated in
the following asset categories:
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
June
30,
2010
|
|
|
Balance
at September 30,
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
Cash
and amounts due from depository
institutions
|
|
$ |
170,235 |
|
|
$ |
49,953 |
|
|
$ |
120,282 |
|
|
|
240.8 |
% |
Investments
available for sale, at fair value
|
|
|
163,650 |
|
|
|
169,320 |
|
|
|
(5,670 |
) |
|
|
(3.3 |
) |
Loans
receivable, net of allowance for loan
losses
|
|
|
456,879 |
|
|
|
510,629 |
|
|
|
(53,750 |
) |
|
|
(10.5 |
) |
FDIC
indemnification receivable, net
|
|
|
7,607 |
|
|
|
30,038 |
|
|
|
(22,431 |
) |
|
|
(74.7 |
) |
Cash and amounts due from depository
institutions. Cash and amounts due from depository institutions increased
$120.3 million to $170.2 million at June 30, 2010, from $50.0 million at
September 30, 2009. Significant deposit growth funded the increase in
cash with deposits increasing $60.0 million during the nine months ended June
30, 2010. We also received $19.5 million in reimbursements from
losses incurred on acquired assets during the nine months ended June 30, 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 $5.7 million to $163.7 million at June 30, 2010, from $169.3 million
at September 30, 2009. The decrease was primarily the result of the
sum of principal repayments and securities called exceeding the purchases of
securities during the nine months ended June 30, 2010. Principal
reductions and called securities totaled $38.8 million for the nine months ended
June 30, 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 June 30, 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 $53.8 million to $456.9 million at June 30, 2010, from $510.6 million
at September 30, 2009. One-to-four family residential mortgage loans decreased
$25.7 million as we currently
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 $6.6 million to $52.8 million as of June 30, 2010. Commercial real
estate loans, real estate construction loans and commercial loans declined a
combined $28.9 million to $257.2 million. 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 $4.0 million during the quarter ended June 30, 2010,
compared to $2.8 million during the quarter ended March 31, 2010, and $1.4
million for the quarter ended December 31, 2009. Loans delinquent 30 to 89 days
totaled $12.3 million at June 30, 2010, including $6.9 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:
|
|
June
30,
|
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Land
acquisition and development
|
|
$ |
515 |
|
|
$ |
3,537 |
|
One-to-four
family construction
|
|
|
419 |
|
|
|
481 |
|
Commercial
real estate
|
|
|
3,579 |
|
|
|
1,886 |
|
One-to-four
family residential
|
|
|
2,049 |
|
|
|
1,551 |
|
Multi-family |
|
|
3,911 |
|
|
|
- |
|
Consumer
and other
|
|
|
1,799 |
|
|
|
415 |
|
Total loans delinquent 30 to 89
days
|
|
$ |
12,272 |
|
|
$ |
7,870 |
|
The
allowance for loan losses was $17.9 million, or 3.76%, of gross loans at June
30, 2010, compared to $28.7 million, or 5.32% of gross loans at September 30,
2009. At June 30, 2010, $3.2 million of the recorded allowance was on loans
purchased in the Acquisition and $14.7 million on loans in the Idaho Region loan
portfolio. Approximately $5.7 million of the allowance for loan losses on the
Idaho Region portfolio is allocated to nonperforming loans.
Since the
Acquisition, the Company has continued to review preliminary estimates of fair
values of loans purchased in the Acquisition. During this allocation period,
management obtained information on additional loans that evidence credit
impairment on the date of the Acquisition. Additionally, management updated the
preliminary fair values of loans previously identified as purchased impaired
loans on the date of acquisition. These adjustments reduced the preliminary
estimated fair values of purchased impaired loans. Lastly, management updated
preliminary estimated loss rates for loans acquired, which resulted in a
reduction in the allowance for loan losses. The adjustment in the allowance for
loan losses on purchased loans resulted in a reduction in the FDIC
indemnification receivable due to lower loss estimates, which was offset
somewhat by the reduction in estimated fair values of purchased impaired loans.
The difference between the allowance for loan losses adjustment and the
reduction in the FDIC indemnification receivable resulted in other income due to
fair value adjustments of $278,000 during the quarter ended June 30, 2010.
Should loans purchased in the Acquisition deteriorate further, the Company may
be required to record a provision for loan losses and increase the allowance for
loan losses in future periods.
Loans
that exhibited evidence of credit deterioration 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 Consolidated Balance Sheets. 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 $60.6
million at June 30, 2010, compared to $56.9 million at September 30, 2009. The
delinquency table above includes $5.8 million, and $5.1 million of loans that
were placed on nonaccrual
status at June 30, 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:
|
|
June 30, 2010
|
|
|
September 30, 2009
|
|
(in
thousands)
|
|
Covered
Assets
|
|
|
Legacy
Portfolio
|
|
|
Total
|
|
|
Covered
Assets
|
|
|
Legacy
Portfolio
|
|
|
Total
|
|
Acquisition
and development
|
|
$ |
7,936 |
|
|
$ |
3,378 |
|
|
$ |
11,314 |
|
|
$ |
6,985 |
|
|
$ |
623 |
|
|
$ |
7,608 |
|
One-to-four
family construction
|
|
|
347 |
|
|
|
446 |
|
|
|
793 |
|
|
|
481 |
|
|
|
2,283 |
|
|
|
2,764 |
|
Commercial
real estate
|
|
|
15,049 |
|
|
|
8,907 |
|
|
|
23,956 |
|
|
|
11,016 |
|
|
|
2,725 |
|
|
|
13,741 |
|
One-to-four
family residential
|
|
|
2,244 |
|
|
|
5,879 |
|
|
|
8,123 |
|
|
|
5,020 |
|
|
|
5,971 |
|
|
|
10,991 |
|
Other
|
|
|
2,105 |
|
|
|
1,985 |
|
|
|
4,090 |
|
|
|
3,206 |
|
|
|
182 |
|
|
|
3,388 |
|
Total
nonperforming loans
|
|
|
27,681 |
|
|
|
20,595 |
|
|
|
48,276 |
|
|
|
26,708 |
|
|
|
11,784 |
|
|
|
38,492 |
|
Real
estate owned and other
property owned
|
|
|
6,291 |
|
|
|
6,017 |
|
|
|
12,308 |
|
|
|
7,516 |
|
|
|
10,875 |
|
|
|
18,391 |
|
Total
nonperforming assets
|
|
$ |
33,972 |
|
|
$ |
26,612 |
|
|
$ |
60,584 |
|
|
$ |
34,224 |
|
|
$ |
22,659 |
|
|
$ |
56,883 |
|
Certain
loan modifications or restructurings are accounted for as "troubled debt
restructurings." In general, the modification or restructuring of a
debt is considered a troubled debt restructuring if we, for economic or legal
reasons related to a borrower's financial difficulties, grant a concession to
the borrower that we would not otherwise consider. Troubled debt restructurings
that were not included in the delinquency or nonperforming asset tables above
totaled $1.5 million and $4.6 million at June 30, 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.
Potential
problem loans are loans that do not yet meet the criteria for placement on
non-accrual status, but known information about possible credit problems of the
borrowers causes management to have doubts as to the ability of the borrowers to
comply with present loan repayment terms. This may result in the future
inclusion of such loans in the non-accrual loan category. As of June 30, 2010,
the aggregate amount of potential problem loans was $21.1 million, which
includes loans that were rated “Substandard” under the Bank’s risk grading
process but were not impaired or on non-accrual 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 $6.1 million or 33.1% to $12.3
million compared to $18.4 million as of September 30, 2009. At June 30, 2010,
real estate owned and other repossessed assets was comprised of $6.9 million of
land development and speculative one-to-four family construction projects, $3.4
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 $18.2 million at June 30,
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
areas. At June 30, 2010, this portfolio had $3.5 million of nonperforming loans
that are reported in the table above. The total reserve allocated to loans in
this loan portfolio was $2.3 million at June 30, 2010, or 12.8% of the balance
of loans outstanding on that date.
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 $22.4
million to $7.6 million from September 30, 2009, primarily due to payments for
reimbursements for loan charge-offs and other reimbursable expenses. In
addition, during the quarter ended June 30, 2010, an assessment was performed on
the preliminary estimated fair values of loans acquired in the
acquisition. This resulted in a reduction in the receivable of $5.3
million.
Deposits.
Deposits increased $60.0 million, or 11.7%, to $574.9 million at June 30, 2010,
from $514.9 million at September 30, 2009, entirely as a result of core deposit
growth. There was a $61.2 million increase in core deposits and a decrease of
$1.2 million in certificates of deposit.
The
following table details the composition of the deposit portfolio and changes in
deposit balances:
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
June
30,
2010
|
|
|
Balance
at September 30,
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
$ |
70,718 |
|
|
$ |
68,155 |
|
|
$ |
2,563 |
|
|
|
3.8 |
% |
Interest-bearing
demand
|
|
|
97,860 |
|
|
|
78,393 |
|
|
|
19,467 |
|
|
|
24.8 |
|
Health
savings account
|
|
|
22,666 |
|
|
|
21,248 |
|
|
|
1,418 |
|
|
|
6.7 |
|
Money
market
|
|
|
104,602 |
|
|
|
76,408 |
|
|
|
28,194 |
|
|
|
36.9 |
|
Savings
|
|
|
51,304 |
|
|
|
41,757 |
|
|
|
9,547 |
|
|
|
22.9 |
|
Certificates
of deposit
|
|
|
227,729 |
|
|
|
228,897 |
|
|
|
(1,168 |
) |
|
|
(0.5 |
) |
Total
deposit accounts
|
|
$ |
574,879 |
|
|
$ |
514,858 |
|
|
$ |
60,021 |
|
|
|
11.7 |
% |
A
significant contributor to growth in our money market accounts during the
quarter is attributable to a new relationship with a public unit in our Central
Oregon Region. Total growth in deposits our Central Oregon Region was $18.1
million during the third quarter of fiscal 2010. We continue to incur growth in
interest-bearing checking accounts due to our Ultimate Checking Account
product.
Borrowings. FHLB advances and
other borrowings decreased $11.2 million, or 13.2%, to $73.5 million at June 30,
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 $2.7 million and $5.6 million at
June 30, 2010, and September 30, 2009, respectively. Most of the change in
deferred taxes was due to the adjustment to the fair market value of the
acquisition, a decrease in the FDIC indemnification asset and an extraordinary
gain, net of tax.
Equity. Stockholders’ equity
decreased $3.8 million, or 1.8%, to $205.8 million at June 30, 2010, compared to
$209.7 million at September 30, 2009. Dividends paid during the nine months
ended June 30, 2010 reduced retained earnings $2.6 million. In addition, the net
loss year to date also decreased equity. The Company’s book value per
share as of June 30, 2010, was $12.33 per share based upon 16,687,760
outstanding shares of common stock.
Comparison
of Operating Results for the Three Months Ended June 30, 2010, and June 30,
2009
Net loss
for the three months ended June 30, 2010, was $1.9 million, or $0.12 per diluted
share, compared to a net loss of $1.2 million, or $0.08 per diluted share, for
the three months ended June 30, 2009. Total revenue for the quarter ended June
30, 2010, which consists of net interest income before the provision for loan
losses plus noninterest income, increased $500,000 or 6.0% to $8.8 million from
$8.3 million for the same period of the prior year.
The
efficiency ratio increased to 98.23% for the quarter ended June 30, 2010,
compared to 84.26% 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. The Company will
face similar added costs in the fourth quarter of 2010 and future periods with
respect to the back-office operations assumed in the LibertyBank acquisition
until the completion of the conversion and consolidation of LibertyBank’s
operations into the Company’s.
Net Interest
Income. Net interest income increased $215,000, or 3.8%, to $5.9 million
for the three months ended June 30, 2010, from $5.7 million for the three months
ended June 30, 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 $232,000 and $66,000,
respectively, during the third
quarter of fiscal year 2010. The Company’s net interest margin decreased 60
basis points to 2.93% for the quarter ended June 30, 2010, compared to 3.53% in
the year ago period. Cash balances continued to increase, which exerted downward
pressure on the net interest margin due to the low yield earned on this excess
cash. The increase in nonperforming loans purchased in the Acquisition is also
reducing the average yield earned on the loan portfolio compared to fiscal year
2009.
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 June 30, 2010
Compared
to Three Months Ended
June 30,
2009
|
|
|
|
Increase
(Decrease) Due to
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
|
$ |
(340 |
) |
|
$ |
871 |
|
|
$ |
531 |
|
Loans
held for sale
|
|
|
1 |
|
|
|
(32 |
) |
|
|
(31 |
) |
Interest-bearing
deposits in other banks
|
|
|
(1 |
) |
|
|
49 |
|
|
|
48 |
|
Investment
securities, available for sale
|
|
|
- |
|
|
|
47 |
|
|
|
47 |
|
Mortgage-backed
securities
|
|
|
(206 |
) |
|
|
(298 |
) |
|
|
(504 |
) |
Total
net change in income on interest-earning assets
|
|
$ |
(546 |
) |
|
$ |
637 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
(2 |
) |
|
$ |
24 |
|
|
$ |
22 |
|
Interest-bearing
demand deposits
|
|
|
63 |
|
|
|
55 |
|
|
|
118 |
|
Money
market accounts
|
|
|
(30 |
) |
|
|
108 |
|
|
|
78 |
|
Certificates
of deposit
|
|
|
(461 |
) |
|
|
395 |
|
|
|
(66 |
) |
Total
deposits
|
|
|
(430 |
) |
|
|
582 |
|
|
|
152 |
|
FHLB
advances
|
|
|
(27 |
) |
|
|
(249 |
) |
|
|
(276 |
) |
Total
net change in expense on interest-bearing liabilities
|
|
$ |
(457 |
) |
|
$ |
333 |
|
|
$ |
(124 |
) |
Total
increase in net interest income
|
|
|
|
|
|
|
|
|
|
$ |
215 |
|
Interest and Dividend
Income. Total interest and dividend income for the three
months ended June 30, 2010, increased
$91,000, or 1.1%, to $8.5 million, from $8.4 million for the three months ended
June 30, 2009. The increase during the quarter was
attributable to higher levels of interest earning assets, which was
offset somewhat by a decrease in the yield earned on interest earning
assets.
The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income:
|
|
Three
Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Yield
|
|
|
Average
Balance
|
|
|
Yield
|
|
|
(Decrease)
in Interest and Dividend
Income
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net of deferred fees/costs
|
|
$ |
500,090 |
|
|
|
5.52 |
% |
|
$ |
437,762 |
|
|
|
5.82 |
% |
|
$ |
531 |
|
Loans
held for sale
|
|
|
1,747 |
|
|
|
4.89 |
|
|
|
4,372 |
|
|
|
4.84 |
|
|
|
(31 |
) |
Interest
bearing deposits in other banks
|
|
|
139,727 |
|
|
|
0.16 |
|
|
|
20,252 |
|
|
|
0.18 |
|
|
|
48 |
|
Investment
securities, available for sale
|
|
|
9,616 |
|
|
|
1.96 |
|
|
|
- |
|
|
|
- |
|
|
|
47 |
|
Mortgage-backed
securities
|
|
|
147,286 |
|
|
|
4.02 |
|
|
|
175,522 |
|
|
|
4.52 |
|
|
|
(504 |
) |
FHLB
stock
|
|
|
10,326 |
|
|
|
- |
|
|
|
9,591 |
|
|
|
- |
|
|
|
- |
|
Total
interest-earning assets
|
|
$ |
808,792 |
|
|
|
4.20 |
% |
|
$ |
647,499 |
|
|
|
5.20 |
% |
|
$ |
91 |
|
The
average yield on loans fell to 5.52% in the third 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 $783,000 during the quarter ended June 30, 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, subject
to the risk of borrowers refinancing their loans elsewhere, 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 16 basis points is also a major factor in reducing the
overall yield on interest earning assets.
Interest
Expense. Interest expense decreased $124,000, or 4.6%, to $2.6
million for the three months ended June 30, 2010, from $2.7 million for the
three months ended June 30, 2009. While the average balance of total
interest-bearing liabilities increased $135.1 million, or 30.6%, to $576.1
million for the three months ended June 30, 2010, from $441.0 million for the
three months ended June 30, 2009, our overall interest expense
decreased. The average rate on certificates of deposit decreased from
3.10% to 2.18% and was a significant factor in the decrease. The
$23.9 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 June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
(Decrease)
in Interest
Expense
from
2009
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
49,886 |
|
|
|
0.65 |
% |
|
$ |
35,173 |
|
|
|
0.67 |
% |
|
$ |
22 |
|
Interest-bearing
demand deposits
|
|
|
119,869 |
|
|
|
0.73 |
|
|
|
83,319 |
|
|
|
0.48 |
|
|
|
118 |
|
Money
market deposits
|
|
|
96,989 |
|
|
|
0.88 |
|
|
|
49,731 |
|
|
|
1.09 |
|
|
|
78 |
|
Certificates
of deposit
|
|
|
232,603 |
|
|
|
2.18 |
|
|
|
172,146 |
|
|
|
3.10 |
|
|
|
(66 |
) |
FHLB
advances
|
|
|
76,786 |
|
|
|
4.13 |
|
|
|
100,667 |
|
|
|
4.24 |
|
|
|
(276 |
) |
Total
interest-bearing liabilities
|
|
$ |
576,133 |
|
|
|
1.79 |
% |
|
$ |
441,036 |
|
|
|
2.45 |
% |
|
$ |
(124 |
) |
Provision for Loan
Losses. We recorded a provision for loan losses of $3.3
million for the quarter ended June 30, 2010, as a result of our analysis of the
loan portfolio. A provision for loan losses of $3.5 million was recorded for the
same quarter of the prior year. The provision in the third 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 detailed
in prior
filings. Vacancies in commercial real estate properties continue to increase in
our markets and unemployment
rates remain near or above national levels. The decline in economic activity and
oversupply of commercial real estate is resulting in lower property values and
the risk of greater delinquencies and loan losses in the future.
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
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars
in thousands)
|
|
Provision
for loan losses
|
|
$ |
3,300 |
|
|
$ |
3,450 |
|
Net
charge-offs
|
|
|
3,997 |
|
|
|
2,517 |
|
Allowance
for loan losses
|
|
|
17,872 |
|
|
|
8,266 |
|
Allowance
for loan losses as a percentage of gross loans receivable at the end
of the period
|
|
|
3.76 |
% |
|
|
1.93 |
% |
Nonperforming loans
|
|
$ |
48,276 |
|
|
$ |
16,462 |
|
Allowance
for loan losses as a percentage of nonperforming loans at the end of
the period
|
|
|
37.02 |
% |
|
|
50.21 |
% |
Nonaccrual
and 90 days or more past due loans as a percentage of loans
receivable at the end of the period
|
|
|
10.15 |
|
|
|
3.85 |
|
Loans
receivable, net
|
|
$ |
456,879 |
|
|
$ |
418,198 |
|
Noninterest
Income. Noninterest income increased $285,000, or 10.9%, to
$2.9 million for the three months ended June 30, 2010, from $2.6 million for the
three months ended June 30, 2009. Service charges and fees increased
$317,000 or 15.8% from the same period of the prior year. The
increase was primarily due to the deposit accounts acquired in the
Acquisition. We expect revenue from overdraft fees 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 regulations that took effect July 1, 2010,
which prohibit a financial institution from automatically enrolling customers in
overdraft protection programs and ATM and one-time debit card transactions
unless a consumer consents, or opts in, to the overdraft service.
Within
other income, $80,000 of accretable income from the FDIC indemnification
receivable was recorded for the quarter, which was offset by loss on sale of
REOs of $195,000. In addition, a one-time income item of $278,000
related to the revaluation of assets acquired in the Acquisition was recorded in
the quarter just ended. Lastly, gain on sale of loans decreased
$291,000 or 70.0% 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.
The
following table provides a detailed analysis of the changes in components of
noninterest income:
|
|
Three
Months Ended
June
30,
|
|
|
Increase
(decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
Service
charges and fees
|
|
$ |
2,325 |
|
|
$ |
2,008 |
|
|
$ |
317 |
|
|
|
15.8 |
% |
Gain
on sale of loans
|
|
|
125 |
|
|
|
416 |
|
|
|
(291 |
) |
|
|
(70.0 |
) |
Increase
in cash surrender value
of bank owned life insurance
|
|
|
105 |
|
|
|
107 |
|
|
|
(2 |
) |
|
|
(1.9 |
) |
Loan
servicing fees
|
|
|
16 |
|
|
|
- |
|
|
|
16 |
|
|
|
n/a |
|
Other
|
|
|
325 |
|
|
|
80 |
|
|
|
245 |
|
|
|
306.3 |
|
Total
noninterest income
|
|
$ |
2,896 |
|
|
$ |
2,611 |
|
|
$ |
285 |
|
|
|
10.9 |
% |
Noninterest
Expense. Noninterest expense increased $1.7 million, or 23.6%,
to $8.7 million for the three months ended June 30, 2010, from $7.0 million for
the three months ended June 30, 2009.
The
following table provides a detailed analysis of the changes in components of
noninterest expense:
|
|
Three
Months Ended
June
30,
|
|
|
Increase
(decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$ |
4,660 |
|
|
$ |
3,594 |
|
|
$ |
1,066 |
|
|
|
29.7 |
% |
Occupancy
and equipment
|
|
|
979 |
|
|
|
804 |
|
|
|
175 |
|
|
|
21.8 |
|
Data
processing
|
|
|
929 |
|
|
|
654 |
|
|
|
275 |
|
|
|
42.1 |
|
Advertising
|
|
|
233 |
|
|
|
211 |
|
|
|
22 |
|
|
|
10.4 |
|
Professional
services
|
|
|
391 |
|
|
|
236 |
|
|
|
155 |
|
|
|
65.7 |
|
Insurance
and taxes
|
|
|
423 |
|
|
|
783 |
|
|
|
(360 |
) |
|
|
(46.0 |
) |
Provision
for REO
|
|
|
418 |
|
|
|
367 |
|
|
|
51 |
|
|
|
13.9 |
|
Other
|
|
|
635 |
|
|
|
365 |
|
|
|
270 |
|
|
|
74.0 |
|
Total
noninterest expense
|
|
$ |
8,668 |
|
|
$ |
7,014 |
|
|
$ |
1,654 |
|
|
|
23.6 |
% |
Noninterest
expenses were higher in nearly all categories compared to the year ago period
primarily 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. Noninterest expenses are expected to remain at
higher levels in the near term as a result of similar costs to be incurred in
connection with the LibertyBank Acquisition.
The
decrease in insurance and taxes from the prior year was due to the payment of a
one-time special assessment by the Federal Deposit Insurance Corporation of
$250,000 as well as significant past due property taxes due on property
foreclosed on in the quarter ending June 30, 2009.
Income Tax Benefit. The
Company recorded an income tax benefit of $1.2 million for the three months
ended June 30, 2010. Net loss before income taxes was $3.1 million for the three
months ended June 30, 2010, compared to a net loss of $2.0 million for the three
months ended June 30, 2009.
Comparison
of Operating Results for the Nine Months ended June 30, 2010, and June 30,
2009
Net loss
for the nine months ended June 30, 2010, was $3.9 million, or $0.25 per diluted
share. This year to date loss included a $305,000 after-tax
extraordinary gain recorded in the second quarter related to final resolution of
a partial ownership in a partnership originally acquired as part of the
Acquisition. Net loss for the nine months ended June 30, 2009, was $1.6 million,
or $0.10 per diluted share. Total revenue for the nine months ended June 30,
2010,
which
consisted of net interest income before the provision for loan losses plus
noninterest income, increased $2.0 million or 8.1% to $26.9 million compared to
$24.8 million for the same period of the prior year. The Company’s efficiency
ratio increased to 101.71% for the nine months ended June 30, 2010, compared to
79.00% 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 $1.2 million, or 6.9%, to $18.6 million for the nine
months ended June 30, 2010, from $17.4 million for the nine months ended June
30, 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 30 basis points to 3.19% for the nine
months ended June 30, 2010, from 3.49% 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.
|
|
Nine
Months Ended June 30, 2010
Compared
to Nine Months Ended June 30, 2009
|
|
|
|
Increase
(Decrease) Due to
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
|
$ |
(374 |
) |
|
$ |
1,180 |
|
|
$ |
806 |
|
Loans
held for sale
|
|
|
- |
|
|
|
(89 |
) |
|
|
(89 |
) |
Interest-bearing
deposits in other banks
|
|
|
- |
|
|
|
96 |
|
|
|
96 |
|
Investment
securities, available for sale
|
|
|
- |
|
|
|
91 |
|
|
|
91 |
|
Mortgage-backed
securities
|
|
|
(555 |
) |
|
|
(925 |
) |
|
|
(1,480 |
) |
FHLB
stock
|
|
|
32 |
|
|
|
1 |
|
|
|
33 |
|
Total
net change in income on interest-
earning assets
|
|
$ |
(897 |
) |
|
$ |
354 |
|
|
$ |
(543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
- |
|
|
$ |
52 |
|
|
$ |
52 |
|
Interest-bearing
demand deposits
|
|
|
104 |
|
|
|
136 |
|
|
|
240 |
|
Money
market accounts
|
|
|
(19 |
) |
|
|
153 |
|
|
|
134 |
|
Certificates
of deposit
|
|
|
(858 |
) |
|
|
172 |
|
|
|
(686 |
) |
Total
deposits
|
|
|
(773 |
) |
|
|
513 |
|
|
|
(260 |
) |
FHLB
advances
|
|
|
(249 |
) |
|
|
(1,227 |
) |
|
|
(1,476 |
) |
Total
net change in expense on interest-
bearing liabilities
|
|
$ |
(1,022 |
) |
|
$ |
(714 |
) |
|
$ |
(1,736 |
) |
Total
increase in net interest income
|
|
|
|
|
|
|
|
|
|
$ |
1,193 |
|
Interest and Dividend
Income. Total interest and dividend income for the nine months
ended June 30, 2010, decreased $543,000, or 2.0%, to $26.1 million, from $26.7
million for the nine months ended June 30, 2009. Despite the increase
in the average balance of interest-earning assets of $112.8 million, interest
income dropped due to the decrease in yields earned on interest-earning assets
of 87 basis points.
The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income:
|
|
Nine
Months Ended June 30,
|
|
|
|
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
|
|
$ |
516,454 |
|
|
|
5.42 |
% |
|
$ |
455,969 |
|
|
|
5.90 |
|
|
$ |
806 |
|
Loans
held for sale
|
|
|
1,437 |
|
|
|
5.47 |
|
|
|
3,585 |
|
|
|
5.47 |
|
|
|
(89 |
) |
Interest-bearing
deposits in other
banks
|
|
|
87,755 |
|
|
|
0.17 |
|
|
|
12,111 |
|
|
|
0.19 |
|
|
|
96 |
|
Investment
securities, available for
sale
|
|
|
7,871 |
|
|
|
2.15 |
|
|
|
1,520 |
|
|
|
3.16 |
|
|
|
91 |
|
Mortgage-backed
securities
|
|
|
153,587 |
|
|
|
4.19 |
|
|
|
181,898 |
|
|
|
4.63 |
|
|
|
(1,480 |
) |
FHLB
stock
|
|
|
10,326 |
|
|
|
- |
|
|
|
9,591 |
|
|
|
(0.46 |
) |
|
|
33 |
|
Total
interest-earning assets
|
|
$ |
777,430 |
|
|
|
4.48 |
% |
|
$ |
664,674 |
|
|
|
5.35 |
% |
|
$ |
(543 |
) |
Interest Expense. Interest
expense decreased $1.7 million, or 18.8%, to $7.5 million for the nine months
ended June 30, 2010, from $9.3 million for the nine months ended June 30, 2009.
The average balance of total interest-bearing liabilities increased $94.1
million to $547.7 million for the nine months ended June 30, 2010, from $453.6
million for the nine months ended June 30, 2009. However, the decrease in the
average cost of interest bearing liabilities of 89 basis points resulted in a
lower interest expense for the nine months ended June 30, 2010, than for the
year ago period.
The
following table details average balances, cost of funds and the change in
interest expense:
|
|
Nine
Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
(Decrease)
in Interest
Expense
from
2009
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
45,938 |
|
|
|
0.65 |
% |
|
$ |
31,024 |
|
|
|
0.73 |
% |
|
$ |
52 |
|
Interest-bearing
demand
deposits
|
|
|
110,982 |
|
|
|
0.66 |
|
|
|
80,434 |
|
|
|
0.51 |
|
|
|
240 |
|
Money
market deposits
|
|
|
85,478 |
|
|
|
0.98 |
|
|
|
52,532 |
|
|
|
1.26 |
|
|
|
134 |
|
Certificates
of deposit
|
|
|
228,458 |
|
|
|
2.18 |
|
|
|
173,765 |
|
|
|
3.39 |
|
|
|
(686 |
) |
FHLB
advances
|
|
|
76,818 |
|
|
|
4.14 |
|
|
|
115,833 |
|
|
|
4.44 |
|
|
|
(1,476 |
) |
Total
interest-bearing liabilities
|
|
$ |
547,674 |
|
|
|
1.83 |
% |
|
$ |
453,588 |
|
|
|
2.72 |
% |
|
$ |
(1,736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan
Losses. A provision for loan losses of $6.4 million was
recorded as a result of our analysis of the loan portfolio for the nine months
ended June 30, 2010, compared to a provision for loan losses of $8.1 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 Nine Months
Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars
in thousands)
|
|
Provision
for loan losses
|
|
$ |
6,375 |
|
|
$ |
8,085 |
|
Net
charge-offs
|
|
|
8,061 |
|
|
|
4,398 |
|
Allowance
for loan losses
|
|
|
17,872 |
|
|
|
8,266 |
|
Allowance
for loan losses as a percentage of gross loans receivable at the end
of the period
|
|
|
3.76 |
% |
|
|
1.93 |
% |
Nonperforming loans
|
|
$ |
48,276 |
|
|
$ |
16,462 |
|
Allowance
for loan losses as a percentage of nonperforming loans at the end of
the period
|
|
|
37.02 |
% |
|
|
50.21 |
% |
Nonaccrual
and 90 days or more past due loans as a percentage of loans
receivable at the end of the period
|
|
|
10.15 |
|
|
|
3.85 |
|
Loans
receivable, net
|
|
$ |
456,879 |
|
|
$ |
418,198 |
|
Noninterest Income.
Noninterest income increased $823,000, or 11.1%, to $8.2 million for the nine
months ended June 30, 2010, from $7.4 million for the nine months ended June 30,
2009. The increase was primarily attributable to increases of $726,000 and
$678,000 in service charges and fees and other income offset by a decrease in
gain on sale of loans of $580,000. 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 a combination of $327,000 in accretable
income from the FDIC indemnification receivable, a $131,000 increase in rental
income compared to the previous year, $278,000 of other income related to the
revaluation of loans acquired in the Acquisition offset by a $168,000 increase
compared to the prior year in loss on sale of REOs. Residential loan volume was
significantly below prior year levels resulting in lower gain on sale of
loans.
The
following table provides a detailed analysis of the changes in components of
noninterest income:
|
|
Nine
Months Ended
June
30,
|
|
|
Increase
(decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
Service
charges and fees
|
|
$ |
6,735 |
|
|
$ |
6,009 |
|
|
$ |
726 |
|
|
|
12.1 |
% |
Gain
on sale of loans
|
|
|
433 |
|
|
|
1,013 |
|
|
|
(580 |
) |
|
|
(57.3 |
) |
Increase
in cash surrender value
of bank owned life insurance
|
|
|
316 |
|
|
|
317 |
|
|
|
(1 |
) |
|
|
(0.3 |
) |
Loan
servicing fees
|
|
|
52 |
|
|
|
54 |
|
|
|
(2 |
) |
|
|
(3.7 |
) |
Mortgage
servicing rights, net
|
|
|
- |
|
|
|
(31 |
) |
|
|
31 |
|
|
|
n/a |
|
Other
|
|
|
704 |
|
|
|
55 |
|
|
|
649 |
|
|
|
1,180.0 |
|
Total
noninterest income
|
|
$ |
8,240 |
|
|
$ |
7,417 |
|
|
$ |
823 |
|
|
|
11.1 |
% |
Noninterest Expense.
Noninterest expense increased $7.7 million, or 39.2%, to $27.3 million for the
nine months ended June 30, 2010, from $19.6 million for the nine months ended
June 30, 2009. Noninterest expenses were higher compared to the year ago period
primarily due to the Acquisition. Among noninterest expense categories, the most
significant increases from the year ago periods include provision for real
estate owned and professional services. 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:
|
|
Nine
Months Ended
June
30,
|
|
|
Increase
(decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$ |
13,966 |
|
|
$ |
10,948 |
|
|
$ |
3,018 |
|
|
|
27.6 |
% |
Occupancy
and equipment
|
|
|
3,023 |
|
|
|
2,303 |
|
|
|
720 |
|
|
|
31.3 |
|
Data
processing
|
|
|
2,526 |
|
|
|
1,773 |
|
|
|
753 |
|
|
|
42.5 |
|
Advertising
|
|
|
775 |
|
|
|
656 |
|
|
|
119 |
|
|
|
18.1 |
|
Professional
services
|
|
|
1,375 |
|
|
|
870 |
|
|
|
505 |
|
|
|
58.1 |
|
Insurance
and taxes
|
|
|
1,461 |
|
|
|
1,244 |
|
|
|
217 |
|
|
|
17.4 |
|
Provision
for REO
|
|
|
2,509 |
|
|
|
528 |
|
|
|
1,981 |
|
|
|
375.2 |
|
Other
|
|
|
1,676 |
|
|
|
1,297 |
|
|
|
379 |
|
|
|
29.2 |
|
Total
noninterest expense
|
|
$ |
27,311 |
|
|
$ |
19,619 |
|
|
$ |
7,692 |
|
|
|
39.2 |
% |
Income Tax
Benefit. The Company recorded an income tax benefit of $2.5
million for the nine months ended June 30, 2010, including the tax expense
associated with the extraordinary gain. Net loss before income taxes
was $6.8 million for the nine months ended June 30, 2010, compared to a net loss
of $2.9 million for the nine months ended June 30, 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 June
30, 2010, certificates of deposit were $227.7 million, or 39.6% of total
deposits, including $134.4 million that are scheduled to mature by June 30,
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 June
30, 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 June 30, 2010, the Bank was in compliance with
the collateral requirements and $122.0 million of the line of credit was
available. The Bank is highly dependent on the FHLB of Seattle to provide the
primary source of wholesale funding for immediate liquidity and borrowing needs.
The failure of the FHLB of Seattle or the FHLB system in general, may materially
impair the Company’s ability to meet our growth plans or to meet short and
long-term liquidity demands. However, the Company’s mortgage backed securities
are marketable and could be sold to obtain cash to meet liquidity demands should
access to FHLB funding be impaired. Additionally, the Bank could access funding
from 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 done so due to the very low interest rate environment, which makes
medium-term investments unattractive, to maintain additional liquidity in the
currently uncertain economic environment and to provide increased flexibility
for potential acquisitions. We anticipate a cash payment from the FDIC for
approximately $314 million in August 2010 from the LibertyBank acquisition. We
intend to invest this increase in cash in short and medium-term U.S. GSE
securities but maintain a higher than normal level of cash due to the reasons
mentioned above.
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 significant loss under these arrangements is remote. However, the
Bank has recorded losses totaling $65,000 in connection with these arrangements
during the current fiscal year. 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 experience material losses
in the future.
The
following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of June 30,
2010:
|
|
Contract
or
Notional
Amount
|
|
|
|
(in
thousands)
|
|
Commitments
to originate loans:
|
|
|
|
Fixed
rate
|
|
$ |
1,017 |
|
Adjustable
rate
|
|
|
8,748 |
|
Undisbursed
balance of loans closed
|
|
|
4,506 |
|
Unused
lines of credit
|
|
|
40,151 |
|
Commercial
letters of credit
|
|
|
767 |
|
Total
|
|
$ |
55,189 |
|
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
$147.6 million at June 30, 2010, or 18.2%, of total assets on that date. As of
June 30, 2010, the Bank exceeded all regulatory capital requirements. The Bank’s
regulatory capital ratios at June 30, 2010, were as follows: Tier 1 capital
18.2%; Tier 1 (core) risk-based capital 34.0%; and total risk-based capital
35.3%. The applicable regulatory capital requirements to be considered well
capitalized are 5%, 6% and 10%, respectively.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
The
Company’s Board of Directors has established an asset and liability management
policy to guide management in maximizing net interest spread by managing the
differences in terms between interest-earning assets and interest-bearing
liabilities while maintaining acceptable levels of liquidity, capital adequacy,
interest rate sensitivity, credit risk and profitability. The Asset/Liability
Management Committee, consisting of certain members of senior management,
communicate, coordinate and manage asset/liability positions consistent with the
business plan and Board-approved policies, as well as to price savings and
lending products, and to develop new products.
One of
the Bank’s primary financial objectives is to generate ongoing profitability.
The Bank’s profitability depends primarily on its net interest income, which is
the difference between the income it receives on its loan and investment
portfolio and its cost of funds, which consists of interest paid on deposits and
borrowings. The rates the Company earns on assets and pays on liabilities
generally are established contractually for a period of time. Market interest
rates change over time. The Bank’s loans generally have longer maturities than
its 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 June 30, 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 June 30, 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 June 30, 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
On June
25, 2010, a borrower of the Bank filed a Complaint and Demand for Jury Trial in
Canyon County, Idaho, asserting a claim against the Bank for alleged
breach of contract, breach of the covenant of good faith and fair dealing and
violation of the Uniform Commercial Code in connection with a borrowing
agreement between the borrower and the Bank. No specific dollar amount of
damages was specified in the Complaint, however the
borrower is
seeking an award of damages sufficient to compensate the borrower for the
foreseeable damages caused by the Bank’s alleged breaches as described above,
including, but not limited to, lost profits, business devastation damages, the
loss of goodwill and reputation in the business community and injury to its
credit standing. The Bank believes the claims are without merit and
intends to vigorously defend
against these
claims. In the opinion of management, based on currently available information,
the resolution of this legal action is not expected to have a material adverse
effect on the Company’s financial position or results of operations.
Item 1A. Risk
Factors
Recently enacted legislation could
have a material adverse impact on us.
On
July 21, 2010, the President signed into law the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank Act”), which, among other
things, imposes new restrictions and an expanded framework of regulatory
oversight for financial institutions and their holding companies. Under the Dodd
Frank-Act, the Bank’s primary regulator, the OTS, will be eliminated and
existing federal thrifts, including the Bank, will be subject to regulation and
supervision by the Office of Comptroller of the Currency. Savings and
loan holding companies, including the Company, will be regulated by the Federal
Reserve Board, which will have the authority to promulgate new regulations
governing the Company that will impose additional capital requirements and may
result in additional restrictions on investments and other holding company
activities. These transfers of regulatory authority will occur on July 21, 2011,
unless extended for up to an additional six months. The Dodd-Frank
Act also creates a new consumer financial protection bureau that will have the
authority to promulgate rules intended to protect consumers in the financial
products and services market. The creation of this bureau could result in new
regulatory requirements and raise the cost of regulatory compliance. One year
after the date of its enactment, the Dodd-Frank Act eliminates the federal
prohibitions on paying interest on demand deposits, thus allowing businesses to
have interest bearing checking accounts. Depending on our competitors’
responses, this change could materially increase our interest
expense. Additional provisions of the Dodd-Frank Act are described in
this report under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations-Recent Legislation Impacting the Financial Services
Industry.”
Many
aspects of the Dodd-Frank Act are subject to rulemaking and will take effect
over several years, making it difficult to anticipate the overall financial
impact on us. However, compliance with this new law and its
implementing regulations is expected to result in additional operating costs
that could have a material adverse effect on our financial condition and results
of operations.
Our
strategy of pursuing acquisitions exposes us to financial, execution and
operational risks that could adversely affect us.
We are
pursuing a strategy of supplementing organic growth by acquiring other financial
institutions or their businesses that we believe will help us fulfill our
strategic objectives and enhance our earnings. There are risks associated with
this strategy, however, including the following:
·
|
We
may be exposed to potential asset quality issues or unknown or contingent
liabilities of the banks, businesses, assets and liabilities we acquire.
If these issues or liabilities exceed our estimates, our results of
operations and financial condition may be materially negatively
affected;
|
·
|
Prices
at which acquisitions can be made fluctuate with market conditions. We
have experienced times during which acquisitions could not be made in
specific markets at prices we considered acceptable and expect that we
will experience this condition in the
future;
|
·
|
The
acquisition of other entities generally requires integration of systems,
procedures and personnel of the acquired entity into our company to make
the transaction economically successful. This integration process is
complicated and time consuming and can also be disruptive to the customers
of the acquired business. If the integration process is not conducted
successfully and with minimal effect on the acquired business and its
customers, we may not realize the anticipated economic benefits of
particular acquisitions within the expected time frame, and we may lose
customers or employees of the acquired business. We may also experience
greater than anticipated customer losses even if the integration process
is successful. These risks
|
|
are present in our
recently completed FDIC-assisted transaction involving our assumption of
deposits and the acquisition of assets of LibertyBank ; |
· |
To
finance an acquisition, we may borrow funds, thereby increasing our
leverage and diminishing our liquidity, or raise additional capital, which
could dilute the interests of our existing stockholders;
and
|
· |
We
have completed two significant acquisitions during the past year that
enhanced our rate of growth. We may not be able to continue to
sustain our past rate of growth or to grow at all in the
future.
|
Failure
to comply with the terms of the loss share agreements with the FDIC may result
in significant losses.
On August
7, 2009, Home Federal Bank entered into a definitive purchase and assumption
agreement with the FDIC, pursuant to which Home Federal assumed certain
deposits, excluding nearly all brokered deposits, and certain assets of
Community First Bank, a commercial bank headquartered in Prineville, Oregon.
Home Federal also entered into a loss sharing agreement with the
FDIC. Under the loss sharing agreement, Home Federal will share in
the losses on assets covered under the purchase and assumption
agreement. The FDIC has agreed to reimburse Home Federal for 80% of
losses up to $34.0 million, and 95% of losses that exceed that
amount.
On July
30, 2010, Home Federal Bank entered into a definitive purchase and assumption
agreement with the FDIC, pursuant to which Home Federal assumed the deposits and
acquired certain assets of LibertyBank, headquartered in Eugene, Oregon. Home
Federal also entered into a loss sharing agreement with the
FDIC. Under the loss sharing agreement, Home Federal will share in
the losses on assets covered under the purchase and assumption
agreement. The FDIC has agreed to reimburse Home Federal for 80% of
losses incurred on covered loans and other real estate owned
The
purchase and assumption agreements and the loss sharing agreements have
specific, detailed and cumbersome compliance, servicing, notification and
reporting requirements. Our failure to comply with the terms of the agreements
or to properly service the loans and REO under the requirements of the loss
share agreements may cause individual loans or large pools of loans to lose
eligibility for loss share payments from the FDIC. This could result in material
losses that are currently not anticipated.
Item
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)
|
2.2
|
Purchase
and Assumption Agreement for LibertyBank Transaction(2)
|
3.1
|
Articles
of Incorporation of the Registrant (3)
|
3.2
|
Bylaws
of the Registrant (3)
|
10.1 |
Amended
Employment Agreement entered into by Home Federal Bancorp, Inc. with Len
E. Williams(9)
|
10.2 |
Amended
Severance Agreement with Eric S. Nadeau(9)
|
10.3 |
Amended
Severance Agreement with Steven D. Emerson(9)
|
10.4 |
Form
of Home Federal Bank Employee Severance Compensation Plan
(4)
|
10.5
|
Form
of Director Indexed Retirement Agreement entered into by Home Federal
Savings and Loan Association of Nampa with each of its Directors
(3)
|
10.6
|
Form
of Director Deferred Incentive Agreement entered into by Home Federal
Savings and Loan Association of Nampa with each of its Directors
(3)
|
10.7
|
Form
of Executive Deferred Incentive Agreement, and amendment thereto, entered
into by Home Federal Savings and Loan Association of Nampa with Daniel L.
Stevens, Robert A. Schoelkoph, and Lynn A. Sander (3)
|
10.8
|
Form
of Amended and Restated Salary Continuation Agreement entered into by Home
Federal Savings and Loan Association of Nampa with Daniel L. Stevens
(3)
|
10.9
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Savings and Loan Association of Nampa with Len E.
Williams(9)
|
10.10
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Bank with Eric S. Nadeau(9)
|
10.11
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Savings and Loan Association of Nampa with Steven D.
Emerson(9)
|
10.12
|
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 (5)
|
10.13
|
2005
Recognition and Retention Plan approved by stockholders on June 23, 2005
and Form of Award Agreement (5)
|
10.14
|
Form
of new Director Retirement Plan entered into by Home Federal Bank with
each of its Directors (6)
|
10.15
|
Transition
Agreement with Daniel L. Stevens (7)
|
10.16
|
2008
Equity Incentive Plan (8)
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act *
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act *
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act
*
|
______
(1)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated August
7, 2009
|
(2)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated July
30, 2009
|
(3)
|
Filed
as an exhibit to the Registrant's Registration Statement on Form S-1
(333-146289)
|
(4)
|
Filed
as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2008
|
(5)
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-8
(333-127858)
|
(6)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated October
21, 2005
|
(7)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated August
21, 2006
|
(8)
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-8
(333-157540)
|
(9)
|
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: August 9,
2010 |
/s/ Len E.
Williams
|
|
Len E.
Williams |
|
President
and |
|
Chief Executive
Officer |
|
(Principal Executive
Officer) |
|
|
|
|
Date: August 9,
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
|